CBSE Class 11

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 12 Applications of Computers in Accounting Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Applications of Computers in Accounting NCERT Solutions for Class 11 Accountancy Chapter 12

Applications of Computers in Accounting Questions and Answers Class 11 Accountancy Chapter 12

Short Answer Type Questions

Question 1.
State the different elements of a computer system.
Answer:
A computer system consist of the following six elements :
(1) Hardware
(2) Software
(3) People
(4) Procedures
(5) Data
(6) Connectivity.

(1) Hardware – Hardware of computer systems includes Input Devices, C.P.U., Output Devices and Secondary Storage Components. Input devices includes keyboard, mouse, joystick, touch screen, scanner, voice input system, magnetic ink character reader, bar code reader etc.

C.P.U. is Central Processing Unit, which has three units i.e. storage unit, control unit, arithmetic logic unit. Storage unit has two types of memory RAM (Random Access Memory) arid ROM (Read Only Memory).

Output devices includes monitor or Visual Display Unit (VDU), printers and voice response system. Secondary storage devices includes hard disk, floppy disk, compact disk and DVD.

(2) Software – A set of programmes, which is used to work with hardware is called its software. There are six types of software which are following :

• Operating System
• Utility Software
• Application Software
• Language Processors
• System Software
• Connectivity Software

(i) Operating System : It is an important programme to start a computer and make them user interactive. For e.g. Window XP, Unix etc.

(ii) Utility Software : These are pre-written programmes to provide procedures*commonly required by all applications.

(iii) Application Software: These are user oriented programmes designed and developed for performing certain specified tasks.

(iv) Language Processors : It checks for language syntax and finally translate the source programme into machine language.

(v) System Software : It controls the operations of the computer. It helps in controlling the internal functions of a computer.

(vi) Connectivity Software : These are helpful in creating and controlling a connection Between a computer and a server.

(3) People – Those who interact with the computer are called live¬ware of the computer system. They are most important part of the computer system.

• System Analysts : They design the data processing system.
• Operators : Those who operates the computer.
• Programmers : They write programmes to implement the data processing system design.

(4) Procedures- The various operations performed in acertain way in order to‘achieved some desired results.
Types of procedures
(i) Software-oriented : Procedures that provides set of instructions required for using the software of a computer system.
(ii) Hardware-oriented : Procedures that provides a set of information about the various components of the computer system.
(iii) Internal procedure — It helps in sequencing the working or operations of each sub-system of computer system.

(5) Data – Data are facts and may consist of number, text, picture, maps, etc. A computer stores, processes, classifies, organises and retrieves data as and when required, in order to provide information which is required for taking decisions.

(6) Connectivity – It refers to the way in which a computer system is connected to other electronic devices and link-ups such as satellite link, internet, telephone lines etc.

Question 2.
List the distinctive advantages of a computer system over a manual system.
Answer:
Computer is a electronic machine in which a lot of information or data can be stored so that data can be used in future. It has good memory and any part of the information stored in it can be recalled as and when required. It can also perform various calculation at a very high speed. For e.g. if a human being takes say 5 minutes to do some calculations, a computer can easily do it in part of a second.

Advantages of Computer System over a Manual System :

(1) Speed— It refers to the amount of time taken for accomplishing a task. Computer require far less time than human beings in performing a task. Human beings takes second or minute as unit of time whereas computer has such a fast speed that the relevant unit of time is fraction of a second.

(2) Accuracy – Manual system can never be perfect, it can make some mistakes always but the computers are extremely accurate. This operations are error free. Most of the errors in computer system occur because of bad programming, erroneous data and deviation from procedures. These errors are caused by manual system and not by computer system.

(3) Reliability – A man may feel mental and physical fatigue after long working hours but a computer never get tired like a human being. It can work continuously and does not suffer from lack of concentration and can perform the jobs of repetitive nature any number of times, in exactly the same way.

(4) Versatility – Manual system also has the versatile nature but in comparison with computer it is very less. Computer is capable of performing a wide variety of tasks of different nature, at the same time. It can be used in business, industry, scientific, statistical, technological, communication and so on. Human being can do only limited number of tasks.

(5) Storage or Memory – In comparison of manual system, computer system has large memory. It can store any volume of information or data for being processed. It can be stored in it on permanent basis. The information stored in it can also be recalled at any time when required.

(6) Scientific System – A computer operates scientifically and never gets emotional while solving the problems like human being. Thus, it is clear from the above discussion that computer systems out perform the manual system.

Question 3.
Draw block diagram showing the main components of a computer.
Answer:
The main components of a computer system are :
(1) Input Unit
(2) Central Processing System
(3) Output Unit.
These are the essential building blocks of a computer system :

Block diagram of main components of computer system

Question 4.
Give three examples of a transaction processing system.
Answer:
Transaction processing system serves the organisation at the operational level for which it records the daily routine transactions which are very important to conduct business.
Examples of transaction processing system :

(1) Payroll Application – Earlier they were used to run on a computer system with punched card using batch processing. Now-a-days, they are running using terminals and online processings.

(2) ATMs – Automatic Teller Machines use a number of specialised computer programmes to handle bank transactions.

(3) Order Processing – It collects and process order from customer through mail or telephone or staff. Once order taken invoicing, A/c receivable and stock control processing applications are started.

Question 5.
State the relationship between information and decision.
Answer:
An organisation is a collection of various interdependent decision-making units that works to achieve the common organisational goal. Every organisation performs the same function i.e. accepting the input and providing them into output.

Information is one of the most important resources in today’s growing business environment. And most of the growing business houses are heavily investing in information systems. Every organisation depends upon its information system for the purpose of decision making. All organisations pursue same objectives through the process of allocation of resources, which is accomplished through the process of managerial decision-making. Information facilitates decision regarding allocation of resources and assists an organisation to achieve its objectives.

An organisation has various types of information system at various organisational levels :
(i) ESS i.e. Executive Support System – It help in making decisions at the strategic level through advanced graphics and communications.

(ii) MIS i.e. Management Information System – These are the information systems at the management level of an organisation that serve the functions of planning, controlling and decision-making by providing routine summary and exception reports.

(iii) DSS i.e. Decision Support System – This information system is at the organisational management level that combine data and analysis reports to support the decision.

(iv) TPS i.e. Transactions Processing System – These information systems serve at the operational level. They perform and record the daily routine transactions which are necessary to conduct the business.

Question 6.
What is Accounting Information System?
Answer:
Accounting information system is one of the most important information system used by the management in taking decisions. Accounting information when contained in a computerised environment is caifed accounting information system, It is a system that performs the enterprises accounting applications by processing high volume of data.

It is widely used in profit as well as non-profit organizations because the accounting information that it provides is used not only by the accounts department but also by other departments like production department, human resource department, marketing and sales department, manufacturing department etc.

An accounting information system gathers data describing the organisations activities, maintains a detailed financial record of the organisations operations, transforms the data into information and makes the information available to users both inside and outside the organisation. Accounting information system processes the data of the enterprise, ft collects the data, transforms the data into information and makes the information available to the user.

An Accounting Information System is a system of collecting, processing, summarising and reporting information about a business organisation in monetary terms.

Features of Accounting Information System :
1. AIS helps in classifying and manipulating the transaction of an organisation.
2. AIS generates reports for the outsiders for meeting Government requirement, for accounting standard authorities, tax authorities etc.
3. AIS generates reports for the management for decision making.
4. AIS is helpful in producing budget forecasts etc.
5. AIS is helpful in maintaining accounting information as per law.
6. AIS can easily be manipulated, so it is required to keep a highly safe and secure environment to ensure its safety.
Accounting Information System performs four processing tasks :

• Data Collection
• Data Manipulation
• Data Storage
• Document Preparations.
• 

Question 7.
State the various essential features of an accounting report.
Answer:
Data when processed becomes information i.e. firstly data is collected from various sources and then manipulated in such a way as to provide certain information. When the related information is summarised to meet a particular need, it is called as a report. ‘Hie level and extent of report varies according to the level it is submitted and the type of decision to be based upon it. A report must be effective, efficient and helpful in the decision-making.
The essential features of an accounting report are following :
(i) Relevance
(ii) Timeliness
(iii) Accuracy
(iv) Completeness
(v) Summarisation
(i) Relevance – To be useful, report must be relevant to the decision¬making needs of user. Report has the quality of relevance. When it influences the economic decision of the user by helping them to evaluate past, present or future events or confirming or correcting their past evaluation.

(ii) Timeliness – Reports must be finitely to have any usefulness for decision makers. If there is undue delay in reporting, it may lose its relevance. To provide report on timely basis, it may often be necessary to report before al I aspects of transaction or other events are known.

(iii) Accuracy – To be-reliable and useful in decision making process a resort must be accurate i.e. it is free from error or bias or subjectivity. It must represent true and fair description neutrally.

(iv) Completeness – To be reliable, a report must be complete within the bounds of materiality and cost. An omission can cause report to be false or misleading and thus unreliable and deficient in terms of its relevance.

(v) Summarisation – Report must be brief and comprehensive so that user can use its information timely for decision-making purpose.

Question 8.
Name three components of a Transaction Processing System.
Answer:
Transaction Processing System (TPS) serve the organisation at the operational level to perform and record the daily routine transaction which are very important to conduct business. Every transaction processing system has three components :
(1) Input
(2) Processing
(3) Output.

(1) Input includes the data collection and data entry.
(2) Processing includes data editing, data validation, data manipulation and data storage.
(3) Output includes information and reporting.
Information Technology or Computer System works on principle GIGO i.e. Garbage in-Garbage out, so, it is necessary that the input is accurate, complete and authorised. This ca.i be done by automating the input.

Question 9.
Give examples of .the relationship between a Human Resource Information System and MIS.
Answer:
MIS i.e. Management Information System – MIS is a system that provides the information necessary to take decision and manage or control an organisation effectively. This system can be used at many levels by management i.e. Operational, Tactical and Strategic. It has many other sub-systems like Accounting Information System, Human Resource Information System, Manufacturing Information System etc.

Human Resource Information System – People are the most valuable assets and resources of the organisation. Human Resource Information System keeps the records of the manpower that works for the organisation. It keeps the full and complete records of all from owner to worker of the organisation.

Relationship between a Human Resource Information System and MIS – The business process in the Human

Resources Department involve the following activities :

• Details of the worker.
• Number of days they work.
• How long they work.
• Number of workers required.
• Number of workers for promotion.
• Any difficulties in working conditions.
• Particular problem of any worker.
• Training of workers.
• Wages to workers.
• Other facilities required by workers etc.

The MIS therefore includes :

• Give sanctions for the facilities.
• Give sanctions for the wage payment.
• Appoint the workers required.
• Do the promotion.
• Improves the working conditions.
• Arrange the training.
• Try to solve the problems of workers.

Long Answer Type Questions

Question 1.
‘An organisation is a collection of interdependent decision-making units that exists to pursue organisational objectives.’ In the light of this statement, explain the relationship between information and decision. Also explain the role of Transaction Processing System in facilitating the decision-making process in business organisation.
Answer:
‘An organisation is a collection of interdependent decision¬making units that exists to pursue organisational objectives.’ Every organisation performs the same functions i.e. accepting the input and providing them into output.

Information is one of the most important resource in today’s growing business environment. And most of the growing business houses are heavily investing in information systems. Every organisation depends upon its information system for the purpose of decision making.

All organisations pursue some objectives through the process of allocation of resources, which is accomplished through the. process of managerial decision-making. Information system facilitates decision regarding allocation of resources and assists an organisation to achieve its goals.

An organisation has various types of information system at various organisational levels:
(i) ESS Le. Executive Support System – It help in making decisions at the strategic level through advanced graphics and communications.

(ii) MIS Le. Management Information System – These are the information systems at the management level of an organisation that serve the functions of planning, controlling and decision-making by providing routine summary and exception reports.

(iii) DSS Le. Decision Support System – This information system is at the organisational management level that combines data and analysis report to support the decision.

(iv) TPS Le. Transactions Processing System – These information systems serve at the operational level. They perform and record the daily routine transactions which are very important to run the business.

Role of Transactions Processing System in decision-making process in Business Organisation – Transaction Processing System process the transaction The purpose of TPS is to record, process, validate and store transactions this occurs in the various fields of the business organisation for subsequent-retrieval for decision-making purpose. The transactions may be internal or external. Infernal transactions may be occurred when stores supplies materials for production. However, when sales department, sales goods to the market, external transaction occurs. TPS follows six steps in processing a transaction.

• Collection and Entry of Data – Data must be collected and entered into the system through input devices before it is processed.
• Validation of Data – It ensures the reliability and accuracy of input data by comparing with stored data. It checks for correction and if some error are found it corrects.
• Manipulation of Data – It performs the calculations for the transactions.
• Storage of Data – Processed actions are stored in transaction database.
• Information – Stored data is processed using the query facility to produced desired information.
• Output or Report Generation – Lastly reports can be prepared on the basis of the information content according to decision usefulness of report.

TPS accepts complete transaction as input stores and retrieves the accounting data for processing as and when required for generating an accounting report as output.

TPS helps in decision-making of business organisation by processing entire accumulated data to generate the desired results according to decision requirement. As we know that TPS serve the organisation at the operational level and record and process the daily routine transactions.

For decision-making these daily routine transactions are very important. TPS can provide instant report for management for decision-making like Stock Statement, Trial Balance, Trading and Profit & Loss Account, Balance Sheet, Value Added Tax (VAT), Payroll Reports etc.

It becomes very easy for the management to take decision when it has all the reports in its hand. So, we can say the TPS provides great help for’decision-making for business organisation-

Question 2.
Explain using examples, the relationship between the organisational MIS and the other functional information system in an organisation. Describe how AIS receives and provides information to other functional MIS.
Answer:
A management information system is an information system that generates, accurate, timely and organised information to help managers make decision, control process, solve problems, supervise activities and track progress. It provides information necessary’ to take decision and manage an organisation effectively.

Management information system has a link with all the functional information system in an organisation like Accounting Information System, Manufacturing Information System, Human Resource Information System, Financial Information System, Marketing Information System etc.

All the functional information system in an organisation that provides the information regarding their departments to management information system and receives the orders and instructions about the decision taken by the management. The following diagram shows the relationship between organisational was and the other functional information system in an organisation :

The diagram shown above entails the five widely recognised functional areas of management of an organisation. An organisation operates in a given environment surrounded by the Government, society, suppliers and customers. The informational needs emerges from the business processes stratified into functional areas. MIS receives and provide information to the various sub-system of the organisation.

Accounting information system is an important sub-system of the MIS. It provides and receives information to the other functional MIS. Following examples illustrate the relationship and data interface between AIS and various sub-components of MIS.

I. Relationship between AIS, Manufacturing Information System and Human Resource Information System –

The above diagram depicts how these three departments are related to each other. The human resource department sends a list and details of workers to the accounts and manufacturing departments. The manufacturing department send a report of level of production achieved by each worker and other deductions to be made from their wages to the accounts department as well as human resource department.

The accounts department on receiving such reports make its own calculations and make the payment to the workers. It also sends the report of same to both the department i.e. HR department and manufacturing departments to monitor the performance of the workers.

II. Relationship between AIS and Marketing Information
System – Market and Sales Department performs following activities :
(i) Inquiry Process
(ii) Creating Contacts
(iii) Order Taking
(iv) Dispatching Goods
(v) Billing.

Accounting sub-system transaction cycle includes :
(i) Processing of Sales Order
(ii) Credit Authorisation
(iii) Keeping Custody of Goods
(iv) Stock Position
(v) Dispatch Details
(vi) Accounts Receivable etc.

III. Relationship between AIS and Manufacturing Information System – Production department perform following activities:
(i) Preparing plans, schedules
(ii) Issue of material requisition forms
(iii) Issue of job cards
(iv) Issue of stock
(v) Handling of vendor invoices
(vi) Payment to vendors/suppliers.

Accounting sub-system transaction cycle includes :
(i) Processing of purchases order
(ii) Advance payment
(iii) Stock updation
(iv) Accounts payable etc.

Question 3.
‘An accounting report is essential a report which must be able to fulfill certain basic criteria/ Explain. List the various types of accounting reports.
Answer:
Data means facts which may be numeric, textual, pictorial or vocal. On the other hand, information refers to processed data placed in a meaningful context for the users. Processing converts data into information. When all related information is summarised to meet a particular need, it is called as report.

The context and design of the report varies according to the level it is submitted and the type of decision to made on the basis of the report. A report must be efficient, effective, accurate and relevant. It should be helpful in taking decisions. An accounting report is essential a report which must be able to fulfil contain basic criteria, which are following:
(1) Relevance
(2) Completeness
(3) Accuracy
(4) Timeliness
(5) Summarisation.

(1) Relevance – To be useful, report must be relevant to the decision-making needs of user. Report has the quality of relevance. When it influences the economic decision of the user by helping them to evaluate past, present or future events or confirming or correcting their past evaluation.

(2) Completeness – To be reliable, a report must be complete within the bounds of materiality and cost. An omission can cause report to be false or misleading and thus unreliable and deficient in terms of its relevance.

(3) Accuracy – To be reliable and useful in decision-making process, a report must be accurate i.e. it is free from error or bias or subjectivity. It must represent true and fair description neutrally.

(4) Timeliness – Reports must be timely to have any usefulness for decision makers. If there is undue delay in reporting, it may lose its relevance. To provide report on timely basis, it may often be necessary to report before all aspects of transaction or other events are known.

(5) Summarisation – Report must be brief and comprehensive so that user can use its information timely for decision-making purpose.

The following four steps are taken in designing the accounting report:
(1) Defining Objectives – The objectives of the report must be defined clearly. It must specify, who are the user and the decision to be based on the report.

(2) Structure of the Report – The report should be complete and must be presented in a clear style.

(3) Querying with the Database – The report must specify the various information queries which are helpful in interacting with the database.

(4) Finalising the Report – It must have complete ending with proper suggestions of its study.

Various types of accounting reports – The report may be routine report or specific report. For example, ledger is a routine report whereas a report generated to show the accounts of particular customer is a specific reports. Different reports serve different purposes.

(1) Demand Reports – Report generated on the demand of the management. For example, Stock Valuation Report, Bad Debts Reports for a given period etc.

(2) Supplier Reports – Report generated as per the need of the management. Presenting various aspects of the suppliers. For example. Purchase analysis, Vendor analysis report etc.

(3) Customer Reports – Reports generated as per need of the management depicting the top customer, list of faulty customer, list of bulk customer etc.

(4) Exception Reports – Reports generated for some specific condition or exceptions. For example, Stock Status Report, Over-Stocked Status etc.

(5) Responsibility Reports – The various reports prepared by managers responsible. For example, report regarding different aspects of sales to be submitted by the sales manager.

(6) Summary Reports – It is a summarised report of all the activities of an organisation. For example, Balance Sheet, Trial Balance etc.

Question 4.
Describe the various elements of a computer system and explain the distinctive features of a computer system and manual system.
Answer:
The dictionary meaning of computer is “an electronic calculating machine”. This meaning of computer does not reflect upon the true capabilities of a computer. A computer is a very versatile machine capable of performing diversified functions at an incredibly fast speed with accuracy.

It converts raw data into meaningful information. The data is fed into the computer and in case of need it can be retrieved and converted into output.

A computer is an electronic machine which operates on given instruction and processes the input data, to convert it into some output.

Thus, a computer is an electronic device, in which a lot of information or data can be stored so that the data can be used in future. It can also performs various calculations at very high speed.

Elements of Computer System – A computer system is a combination of six elements :

(1) Hardware – Hardware is the physical component of the computer system. It may be classified under the following categories :

(i) Input Devices : Input devices are those devices which are used to enter data into the computer system. It is further classified as follows:

• Keyboard
• Mouse
• Joystick
• Touch Screen
• Scanner
• Magnetic Ink Character Reader (MICR)
• Bar Code Reader (BCR).

(ii) C.P.U. (Central Processing Unit) – It is the main part of the computer hardware. It is referred to as the brain of the computer. This part of the computer enrolls all the functions of the computer.

C.P.U. is divided into three parts :

• Control Unit
• Arithmetical and Logic Unit (ALU)
• Memory Unit.

Control Unit – It controls the working of the computer and ascertains whether or not the computer is functioning as per the commands given to it by the user. It is located in between the Memory Unit and Arithmetic and Logic Unit. The data can be transferred between them through this unit.

ALU – This unit verify the accuracy of data received for the memory unit and to transfer the same back to the main memory of the computer. This unit performs all arithmetical and logical functions.

Memory Unit – This unit stores data, calculations and results into it and in case of need it sends the data to ALU in the form of output. The capacity of memory is measured in terms of bytes, kilobytes, megabytes and gigabytes.

1 Kilobyte KB = 1024 Bytes
1 Megabyte MB = 1024 × 1024 Bytes
1 Gigabyte GB = 1024 × 1024 × 1024 Bytes
1 Terabyte TB = 1024 Gigabyte.

(iii) Output Devices – Output diveces are those devices which are used which produced the processed results in readable and understandable form. It is further classified as follows:

• Monitor or Visual Display Unit (VDU)
• Printers
• Voice Response System.

(iv) Secondary Storage Devices – To avoid the data loss we need to save it on same storage device. Floppy disk or hard disk are generally used as storage mediums. These storage devices are called secondary storage devices.

• Hard Disk
• Floppy Disk
• Compact Disk
• DVD

(2) Software – A set of programmes, which is used to work with hardware is called its software. There are six types of software which are following:
(i) Operating System Software
(ii) Utility Software
(iii) Application Software
(iv) Language Processors
(v) System Software
(vi) Connectivity Software.

(i) Operating System Software-It is an important programme to start a computer and make them user interactive.
For example, Window XP, Unix etc.
(ii) Utility Software : There are pre-written programmes to provide procedures commonly required by all applications.
(iii) Application Software : These are user-oriented programmes designed and developed for performing certain specified tasks.
(iv) Language Processors : It checks for language syntax and finally translate the source programme into machine language.
(v) System Software : It controls the operations of the computer. It helps in controlling the internal functions of a computer.
(vi) Connectivity Software : These are helpful in creating and controlling a connection between a computer and a server.

(3) People – Those who interact with the computer are called live ware of the computer system. They are the most important part of the computer system.
System Analysts : They design the data processing system.
Operators : Those who operates the computer.
Programmers : They write programmes to implement the data processing system design.

(4) Procedures – The various operations performed in a certain way in order to achieved some desired results.
Types of procedures
(i) Software-oriented : Procedures that provides set of instructions required for using the software of a computer system.
(ii) Hardware-oriented : Procedures that provides a set of information about the. various components of the computer system.
(iii) Internal procedure – It helps in sequencing the working or operations of each sub-system of computer system.

(5) Data – Data are facts and may consist of number, text, picture, maps, etc. A computer stores, processes, classifies, organises and retrieves data as and when required, in order to provide information which is required for taking decisions.

(6) Connectivity – It refers to the way in which a computer system is connected to other electronic devices and link ups such as satellite link, internet, telephone lines etc.

Distinctive features of a computer system and manual system – Computers are very fast and accurate in performing the work. Computers have left behind the humans in all fields except in thinking and making self-decisions.

(1) Speed – The speed to perform certain work is very fast in comparison to manual system. It can do millions of calculations in one second.

(2) Decision-Making – Computer system has not any decision¬making power of its own, it can only work on instructions given by human beings whereas manual system has good decision¬making power.

(3) Accuracy – Manual system can never be perfect, it can make some mistake often but the computers are extremely accurate. Their operations are error free.

(4) Memory – In comparison of manual system, a computer system has large memory. It can store any volume of information or data for being processed. It can be stored in it on permanent basis.

(5) Follow-up of Instruction – Computer system can perform only those functions for which it instructed but in manual system follow-up of instruction is not very’ good.

(6) Versatility – Computer system is more versatile than manual system.

(7) Reliability – A man may feel mental and physical fatigue after long working hours but a computer never get tired like a human being. It can work continuously and does not suffer from lack of concentration and can perform the jobs of repetitive nature any number of times in exactly the same way.

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 11 Accounts from Incomplete Records Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Accounts from Incomplete Records NCERT Solutions for Class 11 Accountancy Chapter 11

Accounts from Incomplete Records Questions and Answers Class 11 Accountancy Chapter 11

Test Your Understanding – I

Tick the correct answer :

Question 1.
Incomplete record mechanism of book keeping is :
(a) Scientific
(b) Unscientific
(c) Unsystematic
(d) Both (b) and (c)
Answer:
(b) Unscientific

Question 2.
Opening capital is ascertained by preparing :
(a) Total debtor’s account
(b) Total creditor’s account
(c) Cash account
(d) Opening statement of affairs
Answer:
(d) Opening statement of affairs

Question 3.
Credit purchase, during the year is ascertained by preparing :
(a) Total creditor’s account
(b) Total debtor’s account
(c) Cash account
(d) Opening statement of affairs
Answer:
(a) Total creditor’s account

Question 4.
If Opening capital is Rs. 60,000, drawings Rs. 5,000, capital introduced during the period Rs. 10,000, closing capital Rs. 90,000. The value of profit earned during the period will be:
(a) Rs. 20,000
(b) Rs. 25,000
(c) Rs. 30,000
(d) Rs. 40,000
Answer:
(b) Rs. 25,000

Test Your Understanding – II

Write the correct word(s) :
1. Credit sales can be ascertained as the balancing figure in the ………….. account.
2. Excess of over ………….. represents loss sustained during the period.
3. To ascertain the profit, closing capital is to be adjusted by deducting …………..and adding
4. Incomplete records are generally used by …………..
Answer:
1. total debtor’s
2. opening capital, closing capital
3. additional capital introduced, drawings during the year
4. small traders.

Short Answer Type Questions

Question 1.
State the meaning of incomplete records.
Answer:
Meaning of Incomplete Records – Accounting records which are not prepared in accordance with the principle of double entry are known as ‘Incomplete Records’. In other words, any accounting records which fall short of complete double entry are called incomplete records. Sometimes, it is also termed as ‘Single Entry System’.

But it is not correct to describe this system as ‘Single Entry System’ because in Single Entry System only the personal aspects of a transaction is recorded and the real and nominal aspects are left entirely unrecorded,
whereas “incomplete records refer to maintaining of only those records which are essential. In other words, under the incomplete records some of the subsidiary books and some ledger accounts are not maintained which otherwise are essential under the double entry system.’

“Single Entry System is a method or a variety of methods, employed for the recording of transaction, which ignore the two fold aspects and consequently fails to provide the businessman with the information necessary for him to be able to ascertain the position.” – Carter

“A system of book-keeping in which, as a rule only records of cash and of personal accounts are maintained, it is always incomplete double entry system, varying with circumstances.” – Kohler

In nutshell, it is a method or a variety of methods employed for the recording of transactions, which ignore the two-fold aspect and consequently fails to provide the businessman with the information necessary for him to be able to ascertain the position. It is a system which is developed by certain business houses who for their convenience and more practical approach, reject the rules of the double entry system and maintaine only the bare essential records.

Generally, business transactions are recorded on the basis of double entry system are not followed for recording business transactions. When double entry’ system is not followed for maintaining records, these records are termed as incomplete records. Many authors describe it as Single Entry System.

However, Singe Entry System is a misnomer because there is no such system of maintaining accounting records. It is rather a mechanism of maintaining records in which rules of double entry system are not followed completely. There is partial observance of rules of double entry system in this system.

In this recording is done according to convenience and needs of business entities and there is no uniformity in maintenance of records by different entities. This system differ from concern to concern. In this, only records of cash and of personal accounts are maintained. It is always incomplete double entry system, varying with circumstances,

Question 2.
What are the possible reasons for keeping incomplete records?
Answer:
The possible reasons for keeping incomplete records are following:
(1) The businessman may be ignorant of the seperate legal entity.
(2) The businessman may be ignorant of the double entry accounting principle.
(3) The businessman may not intentionally maintain proper accounts to evade taxation.
(4) Destruction of the books of accounts due to fire, flood, etc.

Question 3.
Distinguish between statement of affairs and balance sheet.
Answer:
Difference between Statement of Affairs and Balance Sheet:

Question 4.
What practical difficulties ate encountered by a trader due to incompleteness of accounting records?
Answer:
The following practical difficulties are encountered by a trader due to incompleteness of accounting records :
(1) Unscientific – Absence of systematic recording of both aspects of a transaction under this, makes it unscientific.

(2) No trial balance or arithmetical accuracy of accounts cannot be checked – Dual aspects of a transaction is not recorded under this system. As a result, trial balance cannot be prepared from the accounting records maintained. Hence, arithmetical accuracy of accounting records cannot be checked.

(3) True profits cannot be known – Nominal accounts are not maintained and therefore it is not possible to prepare trading account and Profit & Loss Account to calculate gross profit and net profit respectively. Although the amount of net profit is determinable but the absence of details of revenue, other income, expenses and losses affect sound decision making.

(4) True financial position cannot be determined – As all the assets and liabilities and depreciation are not recorded, Balance Sheet cannot be prepared and thus the true financial position cannot be ascertained.

(5) Difficult to make planning and decision making – In the absence of reliable information about nominal and real accounts, effective planning and control over expenses, assets etc. are not possible.

(6) Not recognized by tax authorities – Accounts maintained based on this system are not accepted by sale-tax and income-tax authorities.

(7) Interfirm comparison not possible – Because of variation in accounting procedure and rules, comparison of two or more business is not possible.

Long Answer Type Questions

Question 1.
What is meant by a ‘Statement of Affairs’? How can the profit or loss of a trader be ascertained with the help of a statement of affairs?
Answer:
Statement of affairs – A statement of affairs is a statement of assets and liabilities of a business as on a particular date. Under this method profit is ascertained by comparing the capital at the beginning and capital at the end of the accounting period and necessary adjustments are made for drawings, fresh additional capital, drawings and interest on capital. The following steps are followed to ascertained the profit or loss :
(1) Prepare a Statement of Affairs at the beginning (if not given) of the accounting period to ascertain the Opening Capital.
(2) Ascertain drawings and capital introduced during the year.
(3) Prepare a Statement of Affairs at the end of the accounting period to ascertain the Closing Capital (capital at the end) or prepare statement for ascertaining the closing capital before making certain adjustments.
Format of Statement of Affairs Statement of Affairs of as on

(4) Prepare a Statement of Profit with the help of the following formula:
Net Profit = Capital at the end
Add: Drawings
Less : Additional Capital introduced
Less: Opening Capital
Statement of profit is usually prepared as follows :

If it is desired to calculate profit before certain adjustments separately the Statement of Profit should be prepared as follows :

(5) Prepare Balance Sheet/Received or Final Statements of Affairs at the end after adjusting depreciation, provision for bad and doubtful debts etc.

Question 2.
“Is it possisble to prepare the profit and loss account and the balance sheet from the incomplete books of accounts kept by a trader? Do you agree? Explain.
Answer:
Yes, it is possible to prepare the Profit & Loss Account and the Balance Sheet from the incomplete books of accounts kept by a trader by “conversion method” and calculating missing figure and preparing final accounts.
While converting incomplete accounts into double entry, the following procedure should be adopted :

(1) Opening Statement of Affairs – A statement of affairs as at the beginning of the year should be prepared to find out capital in the beginning.

(2) Cash Book – For this purpose, first of all, a summary of all the cash transactions must be prepared. It should give information about all the important items and transactions, like total cash received from customers, total payment to creditors, purchase of furniture, totals for various expenses (salaries, wages, rent, etc.) The summary will begin with the opening cash and bank balance and must also show the cash in hand and the bank balance at the end of the year. Cash sales will be shown separately in the summary.

Quite often this book shows a missing figure of cash or bank balance in the beginning or at the end as the case may be. Expenses and gains can also be ascertained from the summary of the Cash Book which may be called Receipts and Payment Account. Expenses will be on the payments side and gains on the receipts sides.

The amount must be adjusted for outstanding and prepaid items and then only shown in the Profit & Loss Account. One should remember that the summary of the Cash Book will also reveal purchases of fixed assets and investments, repayments of loans, sale of fixed assets and loans taken by the firm. These do not concern the profit and loss account; the relevant balance sheet items will be adjusted.

The depreciation on fixed assets must be calculated (this information will not be available from the cash book) and debited in the Profit & Loss Accounts it must, of course, be deducted from the asset concerned when the balance sheet is prepared.

(3) Other Accounts – Then prepare
(i) Total Debtor’s Account,
(ii) Total Creditor’s Account,
(iii) Bills Receivable Account, and
(iv) Bills Payable Account. Those accounts help in finding out the balances of personal accounts, the amount of credit sales and credit purchases and any other relevant information.

(4) Total Sales and Total Purchases – Calculate total sales by adding credit and cash sales. Similarly, calculate total purchases by adding credit and cash purchases.

(5) Final Accounts – Now, prepare Trading Account, Profit & Loss Account and Balance Sheet from the various information given in the question and from the computation made as above.

Question 3.
Explain how the following may be ascertained from incomplete records :
(a) Opening capital and closing capital
(b) Credit sales and credit purchases
(c) Payment to creditors and collection from debtors
(d) Closing balance of cash.
Answer:
(a) Ascertaining Opening Capital and Closing Capital – Opening and closing capital can be ascertained by preparing a statement of affairs at the beginning of the accounting period and at the end of the accouning period respectively. ‘


(b) Ascertain Credit Sales and Purchases – Credit sales and credit purchases can be ascertain by preparing Total Debtor’s Account and Total Creditor’s Account respectively.

(c) Ascertain Payment to Creditors and Collection from Debtors – Collection from Debtors can be ascertained from Total Debtors Account or Cash and Bank Account Summary. Payments to Creditors can be ascertained from Total Creditors Account or Cash and Bank Account Summary.

(d) Ascertain Closing Balance of Cash – Closing balance of cash can be ascertained from Cash and Bank Account Summary.

Numerical Questions

Ascertainment of profit or loss by statement of affairs method

Question 1.
Following information is given below, prepare the statement of profit or loss :
Capital at the end of the year — 5,00,000
Capital in the beginning of the year — 7,50,000
Drawings made during the period — 3,75,000
Additional Capital introduced — 50,000
Answer :

Net Prorfit = Capital at end – Capital at beginning + Drawings during the year – Capital introduced during the year
= Rs. 5,00,000 – Rs. 7,50,000 + Rs. 3,75,000 – Rs. 50,000 = Rs. 75,000.

Question 2.
Manveer started his business on January 1,2011 with a capital of Rs. 4,50,000. On December 31, 2011 his position was as under:
Cash — 99,000
Bills Receivable — 75,000
Plant 48,000
Land and Building 1,80,000
Furniture 50,000
He owned Rs. 45,000 from his friend Susheel on that date. He withdrew Rs. 8,000 per month for his household purposes. Ascertain his profit or loss for the year ended December 31,2011. Solution :
Opening Capital Given = Rs. 4,50,000
Answer :

Or
Net Prorfit = Capital at end – Capital at beginning + Drawings during the year
= Rs. 4,07,000 – Rs. 4,50,000 + Rs. 96,000 = Rs. 53,000.

Question 3.
From the information given below to ascertain the profit for the year :
Capital at the beginning of the year — 70,000
Additional capital introduced during the year — 17,500
Stock — 59,500
Sundry debtors — 25,900
Business premises — 8,600
Machinery — 2,100
Sundry creditors — 33,400
Drawing made during the year — 26,400
Answer:

Or
Net Prorfit = Capital at end – Capital at beginning + Drawing during the year – Capital introduced during the year
= Rs. 62,700 – Rs. 70,000 + Rs. 26,400 – Rs. 17,500 = Rs. 1,600.

Question 4.
From the following information, calculate Capital at the beginning :
Capital at the end of the year — Rs. 4,00,000
Drawings made during the year — Rs.60,000
Fresh Capital intorduce during the year — Rs.1,00,000
Profit of the current year — Rs.80,000
Solution :
Capital at the beginning = Capital at the end + Drawing during the year – Fresh Capital introduced – Profit of the current year = Rs. 4.00,000 + Rs. 60,000 – Rs. 1,00,000 – Rs. 80,000 = Rs. 2,80,000.

Question 5.
Following information is given below, calculate the closing capital:

Calculation of profit or loss and ascertainment of statement of affairs at the end of the year
(Opening balance is given).
Answer:
..

Net Profit = Closing Capital – Opening Capital = Rs. 20,000 – Rs. 22,000 = – (Rs. 2,000)
Net Loss = Rs. 2,000.

Question 6.
Mrs. Anu started firm with a capital of Rs. 4,00,000 on 1st July, 2011. She borrowed from her friends a sum of Rs. 1,00,000 @ 10% per annum (interest paid) for business and brought a further amount to capital Rs. 75,000 on Dec. 31,2011, her position was :
Cash — Rs 30,000
Stock — Rs 4,70,000
Debtors — Rs 3,50,000
Creditors — Rs 3,00,000
She withdrew Rs. 8,000 per month for the year. Calculate profit or loss for the year and show your working clearly.
Solution :
Opening Capital on July 1,2011 = Rs. 4,00,000
Accounting period = 6 months


Or
Net Profit = Capital at the end – Capital at the beginning + Drawing during the year – Capital introduced during the year
= Rs. 4,50,000 – Rs. 4,00,000 + Rs. 48,000 – Rs. 75,000 = Rs. 23,000.

Question 7.
Mr. Arnav docs not keep proper records of his business, he provided following information, you are required to prepare a statement showing the profit or loss for the year.
Capital at the beginning of the year — Rs15,00,000
Bills Receivable — Rs 60,000
Cash in hand — Rs 80,000
Furniture — Rs 9,00,000
Building — Rs 10,00,000
Creditors — Rs 6,00,000
Stock in trade — Rs 2,00,000
Further capital introd uced — Rs 3,20,000
Drawings made during the period — Rs 80,000
Ascertainment of statement of affairs at the beginning and at end of the year and calculation of profit or loss.
Answer:

Or
Net Profit = Capital at the end – Capital at the beginning + Drawing during the year – Capital introduced during the year
= Rs. 16,40,000 – Rs. 15,00,000 + Rs. 80,000-Rs. 3,20,000 = -(Rs. 1,00,000)
Net Loss = Rs. 1,00,000.

Question 8.
Mr. Akshat keeps his books on incomplete records, following information is given below :


During the year he withdrew Rs. 45,000 and introduced Rs.25,000 as further capital in the business compute the profit or loss of the business.
Answer:
Drawing during the year = Rs. 45,000
Additional Capital = Rs. 25,000

Net Profit = Capita! at the end – Capital at the beginning + Drawing during the year – Capital introduced during the year
= Rs. 1,74,000 – Rs. 1,32,500 + Rs. 45,000 – Rs. 25,000 = Rs. 61,500.

Question 9.
Gopal does not keep proper books of account. Following information is given below :

During the year he introduced Rs. 20,000 and withdrew Rs. 12,000 from the business. Prepare the statement of profit or loss on the basis of given information.
Answer:

Or
Net Profit = Capital at the end – Capital at the beginning Drawing during the year – Capital introduced during the year
= Rs. 1,76,000 – Rs. 1,30,500 + Rs. 12,000 – Rs. 20,000 = Rs. 37,500.

Question 10.
Mr. Muneesh maintains his books of accounts from incomplete records. His books provide the information :

He withdrew Rs. 300 per month for personal expenses. He sold his investment of Rs. 16,000 at 2% premium and introduced that amount into business.
Answer:
Statement of Affairs of Mr. Muneesh as at Jan. 1,2011



Or
Net Profit = Capital at the end – Capital in beginning + Drawing during the year – Capital introduced during the year = Rs. 56,400 – Rs. 33,900 + Rs. 3,600 – Rs. 16,320 = Rs. 9,780.

Question 11.
Mr. Girdhari Lai does not keep full double entry records. His balance as on January 1,2012 is as :

His position at the end of the year is :
Cash in hand — Rs 7,000
Stock — Rs 8,600
Debtors — Rs 23,800
Furniture — Rs 15,000
Plant — Rs 20,350
Bills payable — Rs 20,200
Creditors — Rs 15,000
He withdrew Rs. 500 per month out of which he spent Rs. 1,500 for business purpose. Prepare the statement of profit or loss.
Answer:


Or
Net Profit = Capital at the end-Capital at the beginning Drawing during the year – Capital introduced during the year = Rs. 39,550 – Rs. 40,000 + Rs. 4,500 – 0 = Rs. 4,050
Net Profit is Rs. 4,050.

Question 12.
Mr. Ashok does not keep his books properly. Following information is available from his books :

Drawing during the year Rs. 1,500 x 7 months = Rs. 10,500 Rs. 4,500 x 5 months = Rs. 22,500
Total drawing = Rs. 33,000 Statement of Profit for the year ended Dec. 31,2011
Answer:

Net Loss = Rs. 60,900.
Or
Net Profit = Capital attheend-Capitai in the beginning + Drawing during the year – Capital introduced during the year
= – (Rs. 25,000) + Rs. 33,000 – Rs. 18.900 – Rs. 50,000 = – (Rs. 60,900)
Net Loss = Rs. 60,900.

Question 13.
Krishna Kulkarni has not kept proper books of accounts, prepare the statement of profit or loss for the year ending December 31, 2005 from the following information :

The following adjustments were made :
(a) Krishna withdrew cash Rs. 5,000 per mouth for private use.
(b) Depreciation @ 5% on car and furniture @ 10%.
(c) Outstanding Rent Rs. 6,000.
(d) Fresh Capital introduced during the year Rs. 30,000.
Answer:

Question 14.
M/s Saniya Sports Equipment does not keep proper records. From the following information find out profit or loss and also prepare balance sheet for the year ended December 31, 2011 :

Drawing Rs. 10,000 p.m. for personal use, fresh capital introduced during the year Rs. 2,00,000. A bad debts of Rs. 2,000 and a provision of 5% is to be made on debtors, outstanding salary Rs. 2,400, prepaid insurance Rs. 700, depreciation charged on fhrnifure and machine @ 10% p.a.
Answer:

Ascertainment of Missing Figures

Question 15.
From the following information calculate the amount to be paid to creditors :
Sundry creditors as on March 31,2011 — Rs 1,80,425
Discount received — Rs 26,000
Discount allowed — Rs 24,000
Return outwards — Rs 37,200
Return inward — Rs 32,200
Bills accepted — Rs 1,99,000
Bills endorsed to creditors — Rs 26,000
Creditors as on April 1, 2006 — Rs 2,09,050
Total purchases — Rs 8,97,000
Cash purchases — Rs 1,40,000
Answer:

Question 16.
Find out the credit purchases from the following :
Balance of creditors April 1,2010 — Rs 45,000
Balance of creditors March 31,2011 — Rs 36,000
Cash paid to creditors — Rs 1,80,000
Cheque issued to creditors — Rs 60,000
Cash purchases — Rs 75,000
Discount received from creditors — Rs 5,400
Discount allowed — Rs 5,000
Bills payable given to creditors — Rs 12,750
Return outwards — Rs 7500
Bills payable dishonoured — Rs 3,000
Bills receivable endorsed to creditors — Rs 4,500
Bills receivable endorsed to creditors dishonoured 1,800 Return inwards — Rs 3,700

Question 17.
From the following information calculate total purchases
Creditors Jan. 1, 2011 — Rs 30,000
Creditors Dec. 31, 2011 — Rs 20,000
Opetiing balance of bills payable — Rs 25,000
Closing balance of bills payable — Rs 35,000
Cash paid to creditors — Rs 1,5 1,000
Bills discharged — Rs 44,500
Cash purchases — Rs 1,29,000
Return outwards — Rs 6,000
Answer:

Total Purchases = Credit Purchases + Cash Purchases
= Rs. 2,01,500 + Rs. 1,29,000
= Rs. 3,30,500.

Question 18.
The following information is given :
Opening creditors — Rs 60,000
Cash paid to creditors — Rs 30,000
Closing creditors — Rs 36,000
Returns Inward — Rs 13,000
Bill matured — Rs 27,000
Bill dishonoured — Rs 8,000
Purchases return — Rs 12,000
Discount allowed — Rs 5,000
Calculate credit purchases during the year.
Answer:
Dr. Total Creditors A/c Cr.

Question 19.
From the following calculate the amount of bills accepted during the year :
Bills payable as on April 1, 2011 — Rs 1,80,000
Bills payable as on March 31, 2012 — Rs 2,20,000
Bills payable dishonoured during the year — Rs 28,000
Bills payable honoured during the year — Rs 50,000
Answer:

Question 20.
Find out the amount of bills matured during the year on the basis of information given below :
Bills payable dishonoured — Rs 37,000
Closing balance of bills payable — Rs 85,000
Opening balance of bills payable — Rs 70,000
Bills payable accepted — Rs 90,000
Cheque dishonoured — Rs 23,000
Answer:

Question 21.
Prepare the bills payable account from the following and find out missing figure if any :
Bills accepted — Rs. 1,05,000
Discount received — Rs 17,000
Purchases returns — Rs 9,000
Return inwards — Rs 12,000
Cash paid to accounts payable — Rs 50,000
Bills receivable endorsed to creditors — Rs 45,000
Bills dishonoured — Rs 17,000
Bad debts — Rs 14,000
Balance of accounts payable (closing) — Rs 85,000
Credit purchases — Rs 2,15,000
Answer:

Question 22.
Calculate the amount of bills receivable during the year.
Opening balance of bills receivable — Rs 75,000
Bill dishonoured — Rs 25,000
Bills collected (honoured) — Rs 130,000
Bills receivable endorsed to creditors — Rs 15,000
Closing balance of bills receivable — Rs 65,000
Answer:

Bills receivable during the year = Rs. 1,60,000.

Question 23.
Calculate the amount of bills receivable dishonoured from the following information :
Opening balance of bills receivable — Rs 1,20,000
Bills collected (honoured) — Rs 1,85,000
Bills receivable endorsed — Rs 22,800
Closing balance of bills receivable — Rs 50,700
Bills receivable received — Rs 1,50,000
Answer:

Bills receivable dishonoured = Rs. 11,500.

Question 24.
From the details given below, find out the credit sales and total sales:
Opening debtors — Rs 45000
Closing debtors — Rs 56000
Discount allowed — Rs 2.500
Sales returns — Rs 8,500
Irrecoverable account — Rs 4,000
Bills receivable received — Rs 12,000
Bills receivable dishonoured — Rs 3,000
Cheque dishonoured — Rs 7,700
Cash sales — Rs 80,000
Cash received from debtors — Rs 230,000
Cheque received from debtors — Rs 25,000
Solution:

Credit sale during the year = Rs. 2,82,300.
Total Sales = Credit Sales + Cash Sales
= Rs. 2,82,300 + Rs. 80,000
= Rs. 3,62,300.

Question 25.
From the following information, prepare the bills receivable account and total debtors account for the year ended December 31,2011:
Opening balance of debtors — Rs. 1,80,000
Opening balance of bills receivable — Rs. 55,000
Cash sales made during the year — Rs. 95,000
Credit sales made during the year — Rs. 14,50,000
Return inwards — Rs. 78,000
Cash received from debtors — Rs. 10,25,000
Discount allowed to debtors — Rs. 55,000
Bills receivable endorsed to creditors — Rs. 60,000
Cash receivable (bills matured) — Rs. 80,500
Irrecoverable amount — Rs. 10,000
Closing balance of bills receivable on Dec. 31,2011 — Rs. 75,500
Answer:

Closing balance of debtors = Rs. 3,01,000 Bills received = Rs. 1,61,000.

Question 26.
Prepare the suitable accounts and find out the missing figure if any :
Opening balance of debtors — Rs. 14,00,000
Opening balance of bills receivable — Rs. 7,00,000
Closing balance of bills receivable — Rs. 3,50,000
Cheque dishonoured — Rs. 27,000
Cash received from debtors — Rs. 10,75,000
Cheque received and deposited in the bank — Rs. 8,25,000
Discount allowed — Rs. 37,500
Irrecoverable amount — Rs. 17,500
Returns inwards — Rs. 28,000
Bills receivable received from customers — Rs. 1,05,000
Bills receivable matured — Rs. 2,80,000
Bills discounted — Rs. 65,000
Bills endorsed to creditors — Rs. 70,000
Answer:

Question 27.
From the following information ascertain the opening balance of sundry debtors and closing balance of sundry creditors :
Opening stock — Rs. 30,000
Closing stock — Rs. 25,000
Opening creditors — Rs. 50,000
Closing debtors — Rs. 75,000
Discount allowed by creditors — Rs. 1,500
Discount allowed to customers , — Rs. 2,500
Cash paid to creditors — Rs. 1,35,000
Bills payable accepted during the period — Rs. 30,000
Bills receivable received during the period — Rs. 75,000
Cash received from customers — Rs. 2,20,000
Bills receivable dishonoured — Rs.3,500
Purchases — Rs. 2,95,000
The rate of gross profit is 25% on selling price and out of the total sales Rs. 85,000 was for cash sales.
Answer :

Working Notes :
Cost of Goods Sold = Opening Stock + Purchases – Closing Stock
= Rs. 30,000 + Rs. 2,95.000 – Rs. 25,000
= Rs 3,00,000.

Question 28.
Mrs. Bhavana keeps her books by single entry system. You’re required to prepare final accounts of her business for the year ended December 31,2005. Her records relating to cash receipts and cash payments for the above period showed the following particulars:


All her sales and purchases were on credit. Provide depreciation on plant and building by 10% and machinery by 5%, make a provision for bad debts by 5%.
Answer :

(a) Provision on debtors
5% on 85,000 = Rs. 4,250

(b) Depreciation on
Plant 10% of 1,00,000 = Rs. 10,000
Machinery 5% of 50,000 = Rs. 2,500
Land & Building 10% of 2,50,000 = Rs. 25,000.

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 10 Financial Statements 2 Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Financial Statements 2 NCERT Solutions for Class 11 Accountancy Chapter 10

Financial Statements 2 Questions and Answers Class 11 Accountancy Chapter 10

Test Your Understanding

Tick the correct answer :

Question 1.
Rahul’s trial balance provide you the following information :
Debtors — Rs. 80,000
Bad debts — Rs. 2,000
Provision for bad debts — Rs. 4,000
It is desired to maintain a provision for bad debts of Rs. 1,000.
State the amount to be debited/credited in Profit & Loss A/c.
(a) Rs. 5,000 (Debit)
(b) Rs. 3,000 (Debit)
(c) Rs. 1,000 (Credit)
(d) None of these
Answer:
(c) Rs. 1,000 (Credit)

Question 2.
If the rent of one month is still to be paid the adjustment entry will be :
(a) Debit outstanding rent account and Credit rent account.
(b) Debit profit and loss account and Credit rent account.
(c) Debit rent account and Credit profit and loss account.
(d) Debit rent account and Credit outstanding rent account.
Answer:
(d) Debit rent account and Credit outstanding rent account.

Question 3.
If the rent received in advance Rs. 2,000. The adjustment entry will be :
(a) Debit profit and loss account and Credit rent account.
(b) Debit rent account Credit rent received in advance account.
(c) Debit rent received in advance account and Credit rent account.
(d) None of these
Answer:
(b) Debit rent account Credit rent received in advance account.

Question 4.
If the opening capital is Rs. 50,000 as on April 1, 2005 and additional capital introduced Rs. 10,000 on January 1,2006. Interest charge on capital 10% p.a. The amount of interest on capital shown in profit and loss account as on March 31, 2006 will be:
(a) Rs. 5,250
(b) Rs. 6,000
(c) Rs. 4,000
(d) Rs. 3,000
Answer:
(a) Rs. 5,250

Question 5.
If the insurance premium paid Rs. 1,000 and prepaid insurance Rs. 300. The amount of insurance premium shown in profit and loss account will be :
(a) Rs. 1,300
(b) Rs. 1,000
(c) Rs. 300
(d) Rs. 700
Answer:
(d) Rs. 700

Short Answer Type Questions

Question 1.
Why is it necessary to record the adjusting entries in the preparation of final accounts?
Answer:
In order to ascertain the true profit or loss of the business for a particular year, it is necessary that all expenses and incomes relating to that year are taken into consideration. For example, if we want to as certain the net profit for the year ended on 31 st December and rent for the month of December has not yet been paid, it would be proper to include such rent along with the other expenses of the year.

Similarly, it often happens that certain incomes like interest dividend, commission etc. are earned but not received during the year. Adjustment for such incomes must be made in the current year itself, so that the Profit & Loss Account may disclose the correct amount of net profit or loss and the Balance Sheet may present the true financial position of the business. Simply stated, while preparing Final Account it must be detected whether there is a transaction.

(i) which has been omitted to be recorded in the books, or
(ii) which has been wrongly recorded in the books, or
(iii) of which only one aspect has been recorded in the books. Entries passed for such transactions are called ‘adjustment entries’.

The necessity of Adjustments –
(1) To ascertain the true net profit or loss of the business.
(2) To ascertain the true financial position of the business.
(3) To make a record of the transactions omitted from the books.
(4) To rectify the errors committed in the books of accounts.
(5) To make a record of such expenses which have accrued but have not been paid.
(6) To make a record of such incomes which have accrued but have not been received.
(7) To provide for depreciation and other provisions.

Question 2.
What is meant by closing stock? Show its treatment in final accounts?
Answer:
Closing Stock – The amount of goods unsold at the end of the year is called Closing Stock. It is valued at Cost Price or Market Price, whichever is less. For example, certain goods were purchased for Rs. 1,00,000 but at present its market value is Rs. 1,20,000. It will be valued at Rs. 1,00,000 and not at Rs. 1,20,000.

But suppose, if the market price of the same goods is Rs. 90,000 then it will be v alued at Rs. 90,000 and not Rs. 1,00,000. The basic principle underlying the valuation of closing stock is that anticipated losses should be taken into account, but all unrealized gains should be ignored.

Closing Stock is incorporated in the books by means of the following entry –
Closing Stock A/c — Dr.
To Trading A/c
(Being closing stock transferred to Trading A/c)

Treatment in Final Accounts – Generally, the closing stock is given outside the Trial Balance. This is so because closing stock is valued at the end of the year after the accounts have been closed. As such, Closing Stock will be shown at two places, i.e., on the credit side of the Trading A/c and on the Assets side of Balance Sheet.

If the Closing Stock appears inside the Trial Balance, it will be shown only on the Assets side of the Balance Sheet. Because this means that the entry to incorporate the closing stock in the books has already been passed and it has already teen deducted out of ‘ Purchases Account’ given in the Trial Balance.

Question 3.
State the meaning of:
(a) Outstanding Expenses
(b) Prepaid Expenses
(c) Income Received in Advance
(d) Accrued Income.
Answer:
(a) Outstanding Expenses – This term refers to those expenses which have become due during the accounting period for which the final accounts have been prepared but have not yet been paid. As they are the expenses of the current year, so they must be debited and charged from the profit and loss account of the current year. The expenses remained unpaid so far during the current year, so they are the liability of the firm.

This happens particularly regarding those expenses which accure from day to day business operations but which are recorded only when they are paid. Example of such expenses are rent, salaries, wages, interest, etc. Some of these expenses may remain unpaid at the end of the accounting period and, therefore, no entry might have been passed in the books of account. For example, the firm pays Rs. 6,000 wages per month to its workers.

Wages are paid on the first day of every month i.e.. wages for the month of March, 2005 will be paid in the month of April, 2005. The accounting period ends on 31 st March, 2005 and only 11 months wages have been actually paid up to this date. Wages for the month of March 2005 is still to be paid. It is outstanding. In order to ascertain the true profit or loss made during the accounting year ending 31 st March, 2005, it is necessary that such outstanding expenses are taken into account.

The following journal entry will be passed in case of such outstanding expenses:

Wages Account is a nominal account and, therefore, it should be charged to the Profit & Loss Account, while the Outstanding Wages Account is a personal account representing the person to whom the wages have to be paid. It is, therefore, shown in the Balance Sheet on the liabilities side.

(b) Prepaid Expenses – There are, however, several items of expenses that are usually paid in advance, e.g., fire insurance, telephone charges, etc., and at the time at balancing it is found that the whole of the period covered by the amount already spent has not yet expired. The proposition of the amount paid which relates to the next period is, therefore, to be carried forward to the next year.

These expenses are deducted in the Profit & Loss A/c and shown as Assets in the Balance Sheet. For example, a trader spent Rs. 4,000 on advertisement for two years. Rs. 2,000 will be prepaid expenses.

Following journal entry will be passed :

(Being the transer of prepaid advertisement to Advertisement A/c)

(c) Income Received in Advance – Sometimes the businessman receives some amount in advance which is more than what he should have received in the current year for a particular item. Such an amount is a liability for him. For example, Rajender Gupta, has to receive Rs. 1,200 as Rent during the year from his tenant, but the tenant paid Rs. 1,500, Rs. 300 has been in advance which is concerned with the next year. Thus in the Profit & Loss A/c it will be shown as Rent received in advance on credit side and in the Balance Sheet it will be shown as Liability. Its adjustments will be as follows :

(Being rent received in advance brought into books)

(d) Accrued Income – Sometimes it so happens that a trader earns an income but does not receive it up to the time of preparation of Final Accounts. Such an income is called income earned but not received or Accrued Income. For example, the trader receives an annual rent of Rs. 3,00 on his building but up to the time of preparation of Final Accounts he has received only Rs. 2,500.

He is still entitled to receive Rs. 500 more. An adjustment is necessity for this amount before the final accounts are prepared otherwise the net profit will be reduced by Rs. 500. This amount is shown on the credit side of Profit & Loss A/c and on the Assets side of the Balance Sheet. Its journal entry will be as follows :

Question 4.
Give the performa of income statement and balance in vertical form.
Answer:
The performa of income statement and balance sheet in vertical form are as follows :


Under the vertical presentation, the Balance Sheet will appear as follows :
.

Question 5.
Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts?
Answer:
Generally, some of the businessman’s money remains unpaid by his customers. It is that all the customers are not dishonest, but nobody knows of the future. A customer may become bankrupt, may become dishonest or may even die. His estates may not be able to pay the businessman’s debt.

The amount not recovered is called Bad Debt. It is shown on the debit side of the Profit & Loss A/c. At the end of the year before closing the books of accounts the trader maintains a Reserve for Bad Debts on his Debtors. Belov/ the Trial Balance it is given that Reserve be maintained on Debtors.

This amount of Reserve is added in the amount of Bad Debts and shown on the debit side of the Profit & Loss A/c and deducted from the amount of Sundry Debtors. Bad Debt is written in the Trial Balance and so shown only once i.e., in the Profit & Loss A/c but the Reserve is given in the adjustments, it is shown at two places, in the Profit & Loss A/c and in the Balance Sheet.

It is not necessary that the whole of the Reserve is utilised in writing off the Bad Debts. The amount thus unutilised from the Reserve for Bad Debts is carried forward to the next year. It shows a credit balance. So, it is shown as Old Reserve on the credit side of the Profit & Loss A/c.

Note : The amount of Bad Debts is added to the amount of Bad Debts Reserve given in the Trial Balance and then shown on the Debit side of the Profit & Loss A/c. If a credit balance of Old Bad Debts Reserve is also given in the Trial Balance it is deducted from the above total. But if the Old Reserve is more than the sum of Bad Debts and New Reserve the balance is shown on the credit side of the Profit & Loss A/c.

Question 6.
What adjusting entries would you record for the following :
(a) Depreciation
(b) Discount on debtors
(c) Interest on capital
(d) Manager’s commission
Answer:
(a) Depreciation – An asset purchased does not remain of the same value with the passage of time. Its value depreciates after sometimes. Its utility also declines. The value of a particular asset decreases because of the following reasons :

(i) The value of an asset decreases with the passage of time. If you buy a chair and want to sell it after a year it will not fetch the same price for which you had bought it. This particularly applies to plants and machinery.

(ii) Sometimes the value of an asset falls due to some new inventions. For example, a better machine is invented which can work more in the same time. This would reduce the value of the old machine.

(iii) Sometimes the value of an asset comes down due to a-change in fashion.

(iv) If an asset is out of use for a long time, its value depreciates. It is necessary to value the asset properly. Entry for the depreciation Depreciation is shown on the debit side of Profit & Loss A/c and also deducted from the asset in the Balance Sheet.

(b) Discount on debtors – It is a normal practice in the business to allow cash discount to those debtors from whom the payment is received promptly or within a fixed period. Discount thus allowed will be an expense of the business and is therefore debited to the Profit & Loss Account.

Since there will be certain debtors who will make easily payment in the next accounting year and will be allowed such discount, a provision for such discount is created in the current year itself. The process of creating a provision for discount. is the same as for the provision for doubtful debts.

The following entry will be passed for this purpose :
Profit & Loss A/c — Dr.
To Provision for Discount on Debtors A/c (Being provision for discount created on good debtors)
Treatment in Final Accounts – Such provisions is shown on the debit side of the Profit & Loss Account and is also deducted from Sundry Debtors on the Assets side of the Balance Sheet.

(c) Interest on capital – Usually, in order to ascertain the true efficiency of the business, interest at a normal rate is charged on the capital invested by the proprietor in the business. Profits remaining after charging such interest may be considered as the real profits earned by the business enterprise.

Capital invested by the proprietor is treated as a loan to the business earning interest at a fixed rate. If this amount had not been invested in the business, it would even then have earned some interest outside. As such, the proprietor wants interest for his capital and profit for the risk undertaken by him.

For example, if 6% interest is to be allowed on the capital of Rs. 1,00,000, the adjusting entry for this will be as follows :
Adjustment Entry –
Interest on Capital A/c — Dr. 6,000
To Capital A/c — ………………… — 6,000
(Being Interest allowed on capital)
Treatment in Final Account – Interest on capital is an expense for the business and hence it is shown on the debit side of Profit & Loss Accounts. At the same time, it is a gain to the proprietor and hence is added to his capital.

(d) Manager’s commission – Sometimes, the manager is entitled to a commission on profit which is usually calculated as a fixed percentage of profits. Suppose the profit earned by the firm is Rs. 80,000 without considering the commission which is at 5%. The commission will be then Rs. 4,000. The profit will be reduced to Rs. 76,000. As the amount of commission Rs. 4,000 is still to be paid and, therefore, should be treated as an outstanding expense. Accordingly, the entry is :
Profit & Loss A/c — Dr.
To Commission payable or Outstanding commission A/c
Commission payable is a current liability and is shown in the Balance Sheet.

Sometimes, however, the commission is to be calculated on profits remaining finally after the commission. If the rate of the commission is 5% then the profit remaining after the commission should be Rs. 100: the profit before the commission should be Rs. 105. That is in this case the commission of Rs. 5 should be out of every Rs. 105 of profit before the commission. The formula to calculate the commission in such a case is
\(\frac{\text { Percentage of the commission }}{100+\text { Percentage of the commission }} \times \begin{array}{c}
\text { Net Profit before } \\
\text { charging the commission }
\end{array}\)
If the profit before commission is Rs. 80,000 and the manager is entitled to a commission of 5% after deducting the commission, the amount will be Rs. 3,810, Rs. 80,000  5/105. This amount of commission can be verified also. The profit after the commission is Rs. 76,190 and Rs. 3,810 is 5% of this figure. One can see that to calculate it at 5% of Rs. 80,000 will be wrong since Rs. 4,000 is not 5% of Rs. 76,000.

Question 7.
What is meant by provision for discount on debtors?
Answer:
It is a normal practice in the business to allow cash discount to those debtors from whom the payment is recei ved promptly or within a fixed period. Discount thus allowed will be an expenses of the business and is therefore debited to the Profit & Loss Account.

Since there will be certain debtors who will make early payment in the next accounting year and will be allowed such discount, a provision for such discount is created in the current year itself. The process of creating a provision for discount is the same as for the provision for doubtful debts.

The following entry will be passed for this purpose :
Profit & Loss A/c — Dr.
To Provision for Discount on Debtors A/c

Treatment in Final Accounts – Such provision is shown on the debit side of the Profit & Loss Account and is aiso deducted from Sundry Debtors on the Assets side of the Balance Sheet. It should be noted that discount will be allowed only to those debtors who will make prompt payment. As such, the provision for discount is calculated on good debtors left after deducting further bad debts given in adjustments and the provision for doubtful debts required to be made at the end of year.

In other words, first of all, further bad debts given in adjustments will be deducted from Debtors and than provision for doubtful debts will be calculated on the balance of Debtors and lastly, provision for discount will be calculated on the remaining amount of Debtors.

Question 8.
Give the journal entries for the following adjustments :
(a) Outstanding salary Rs. 3,500.
(b) Rent unpaid for one month at Rs. 6,000 per annum.
(c) Insurance prepaid for a quarter at Rs. 16,000 per annum.
(d) Purchase of furniture costing Rs. 7,000 entered in the purchases books.
Answer:

Long Answer Type Questions

Question 1.
What are adjusting entries? Why are they necessary for preparing final accounts?
Answer:
In order to ascertain the true profit or loss of the business for a particular year, it is necessary that all expenses and income relating to that year are taken into consideration. For example, if we want to ascertain the net profit for the year ended on 31 st December and rent for the month of December has not yet been paid, it would be proper to include such rent along with the other expenses Of the year.

Similarly, it often happens that certain income, like interest, dividend, commission etc. are earned but not received during the year. Adjustment for such incomes must be made in the current year itself, so that the profit and loss account may disclose the correct amount of net profit or loss and the Balance Sheet may present the true financial position of the business. Simply stated, while preparing Final Accounts it must be detected whether there is a transaction

(i) which has been omitted to be recorded in the books, or
(ii) which has been wrongly recorded in the books, or
(iii) of which only one aspect has been recorded in the books. Entries passed for such transactions are called ‘adjustment entries’.

The necessity of Adjustment-
(1) To make a record of such incomes which have accrued but have not been received.
(2) To make a record of such expefr§es which have accrued but have not been paid.
(3) To rectify the errors committed in the books of accounts.
(4) To make a record of the transactions omitted from the books.
(5) To ascertain the true net profit and loss of the business.
(6) To ascertain the true financial position of the business.
(7) To provide for depreciation and other provisions.

Suppose, a firm closes its books on 31st March and rent for the month of March has not yet been paid. This amount has to be paid in any case; the expenses has been incurred. Therefore, it would be proper to include the rent for this month along with other expenses of the year.

Take another example, insurance premium has been paid for twelve months beginning 1 st October. It is apparent that insurance protection will be available for six months this year and for six months next year. Half of the premium therefore, should be treated as expenses of the next year.

In a firm there are number of transactions related to expenses and incomes which have to be adjusted. If such items are not adjusted or brought into current years books of account, the final accounts w ill not reveal the true and fair picture of the result. At such items which need to be brought into books of account at the time of preparing final accounts are called ‘adjustments’. Journal entries are passed to effect the required adjustments these entries are known as adjusting entries.

Question 2.
What is meant by provision for doubtful debts? How are the relevant accounts prepared and what journal entries are recorded in final accounts? How is the amount for provision for doubtful debts calculated?
Answer:
Even after deducting the amount of actual bad-debts from the Debtors, the list of Debtors at the end of the year may include some debts which are either bad or doubtful. As the amount of actual loss on account of current year bad-debts would be known only in the next year when the amount is realised from Debtors, a provision is created to cover any possible loss on account of bad-debts likely to occur in future.

Such a provision is created at a fixed percentage on Debtors every’ year and is called ‘Provision for Bad and Doubtful Debts’. The term ‘Provision’ should be used instead of‘Reserve’ because the aim is not to strengthen die financial position of the business but to cover an expected future loss.

Treatment in Final Accounts – The amount of Provision for Doubtul Debts on the one hand, is shown on the debit side of the Profit & Loss Account and on the other hand, is deducted from Sundry Debtors on the assets side of tire Balance Sheet, so that the Debtors may appear at their realisable value in the Balance Sheet .

In the above illustration, the provision of Rs. 3,000 created in 2005 will be carried forward to the next year and will be shown on the credit side of the Trial Balance of the year 2006. This provision of Rs. 3,000 is termed as ‘New Provision’ in the year 2005 and the same provision of Rs. 3,000 will be termed as ‘Old Provision’ in the year 2006. In 2006 when the bad-debts actually occur, the bad-debts will be net from this old provision. At the end of2006, a fresh provision (New Provision) is made again on the amount of Debtors of a fixed percentage.

The amount of bad-debts is added to the amount of New Provision on the debit side of Profit & Loss Accounts and the amount of Old Provision will be deducted from the total of the two. The amount of Old Provision will be given on the credit side of the Trial Balance or in other words, the amount of provision which is given on the credit side of the Trial Balance will be treated as Old Provision.

As the New Provision is given in adjustments, it will also be deducted from Debtors on the assets side of Balance Sheet in order to complete its double entry.

Example :

Question 3.
Show the treatment of prepaid expenses, depreciation, closing stock at the time of preparation of final accounts :
(a) when given inside the trial balance?
(b) When given outside the trial balance?
Answer:
(a) When the following items given inside the Trial Balance :
(i) Prepaid expenses :
Treatment In :
Profit & Loss A/c : No entry Balance Sheet:
Shown on the Assets side as a current asset.

(ii) Depreciation :
Treatment In :
Profit & Loss A/c :
Shown on the Debit side of Profit & Loss Account Balance Sheet: No entry

(iii) Closing Stock :
Treatment In :
Profit & Loss A/c : No entry Balance Sheet:
Shown on. the Assets side as a current asset.

(b) When the following items given outside the Trial Balance :
(i) Prepaid Expenses :
Adjusting Entry :
Prepaid Expenses A/c — Dr.
To Expenses A/c Adjusting In :
Trading A/c :
Deduct from the concerned item on the debit side
or
Profit & Loss A/c :
Deduct from the concerned item on the debit side.
Balance Sheet:
Shown on the assets side.

(ii) Depreciation :
Adjusting Entry :
Depreciation A/c Dr.
To Assets A/c Adjustment In :
Trading A/c : No Entry Profit & Loss A/c :
Shown on the debit side.
Balance Sheet:
Deduct from the concerned asset on the assets side.

(iii) Closing Stock:
Adjusting Entry :
Closing Stock A/c Dr.
To Trading A/c Adjustment In :
Trading A/c :
Add to the credit side.
Profit & Loss A/c : No entry Balance Sheet:
Shown on the assets side.

Numerical Questions

Question 1.
Prepare a Trading and Profit & Loss Account for the year ending December 31, 2010, from the balance extracted from M/s Rahul Sons. Also prepare a Balance Sheet at the end of the year.


Adjustments :
(1) Commission received in advance Rs. 1,000.
(2) Rent receivable Rs. 2,000.
(3) Salary outstanding Rs. 1,000 and insurance prepaid Rs. 800.
(4) Further bad debts Rs. 1,000 and provision for bad debts @ 5% on debtors and discount on debtors @ 2%.
(5) Closing stock Rs. 32,000.
(6) Depreciation on building @ 6% p.a.
Answer:

Question 2.
Prepare a Trading and Profit & Loss Account of M/s Green Club Ltd. for the year ending December 31,2010 from the following figures taken from his trial balances :

Adjustments:
(1) Depreciation charged on machinery @ 5%. p.a.
(2) Further bad debts Rs. 1,500. discount on debtor @5%
and make a provision on debtors @6%.
(3) Wages prepaid Rs. 1,000.
(f) Interest on investment @ 5% p.a.
(5) Closing stock 10,000.
Answer:

Question 3.
The following balances has been extracted from the trial of M/s Runway Shine Ltd. Prepare a Trading and Profit & Loss Account and a Balance Sheet as on December 31,2010.

Adjustments :
(1) Further had debts Rs. 1,000. Discount on debtors Rs. 500 and make a provision on debtors @. 5%.
(2) Interest received on investment @ 5%.
(3) ages and ¡nterest outstanding Rs. 1oo and Rs. 200 respectively
(4) Depreciation charged on motor car @ 5% p.a.
(5) Closing stock Rs. 32,500.
Answer:

Question 4.
The following balances have been extracted from the trial of M/s Haryana Chemical Ltd. You are required to prepare a Trading and Profit & Loss Account and Balance Sheet as on December 31, 2010 from the given information :

Adjustments :
(1) Closing stock was valued at the end of the year Rs. 40,000.
(2) Salary amounting Rs. 500 and trade expense Rs. 300 are due.
(3) Depreciation charged on building and machinery are @ 4% and @ 5% respectively.
(4) Make a provision of @ 5% on sundry debtors.
Solution :

Question 5.
From the following information prepare Trading and Profit & Loss Account of M/s Indian Sports House for the year ending December 31, 2011:

Adjustments :
(1) Closing Stock was Rs. 45.000.
(2) Provision for bad debts is to be maintained (a 2% on debtors.
(3) Depreciation charged on : furniture and fixture a 5%, plant and machinery @ 6% and motor car @ 10%.
(4) A machine of Rs. 30,000 was purchased on July 1,2011.
(5) The manager is entitle to a commission of @ 10% of the net profit after charging such commission.
Answer:

Question 6.
Prepare the Trading and Profit & Loss Account and a Balance Sheet of M/s Shine Ltd. from the following particulars :


Adjustments :
(1) Closing stock was valued Rs. 35,000.
(2) Depreciation charged on furniture and fixture @ 5%.
(3) Further bad dbets Rs. 1,000. Make a provision for bad debts @ 5% on sundry debtors.
(4) Depreciation charged on motor car @ 10%.
(5) Interest on drawing @ 6%.
(6) Rent, rates and taxes was outstanding Rs. 200.
(7) Discount on debtors 2%.
Answer:

Question 7.
Following balances have been extracted from the Trial Balance of M/s Keshav Electronics Ltd. You are required to prepare the Trading and Profit & Loss Account and a Balance Sheet as on December 31,2011.

The following additional information is available :
(1) Stock on December 31,2011 was Rs. 30,000.
(2) Depreciation is to be charged on building at 5% and motor van at 10%.
(3) Provision for doubtful debts is to be maintained at 5% on Sundry Debtors.
(4) Unexpired insurance was Rs. 600.
(5) The Manager is entitled to a commission @ 5% on net profit before charging such commission.
Answer:

Question 8.
From the following balances extracted from the books of Raga Ltd. prepare a Trading and Profit & Loss Account for the year ended December 31,2011 and a Balance Sheet as on that date :

The additional information is as under :
(1) Closing stock was valued at the end of the year Rs. 20,000.
(2) Depreciation on plant and machinery charged at 5% and land and building at 10%.
(3) Discount on debtors at 3%.
(4) Make a provision at 5% on debtors for bad debts.
(5) Salary outstanding was Rs. 100 and Wages prepaid was Rs. 40.
(6) The manager is entitled a commission of 5% on net profit after charging such commission
Answer:

Question 9.
From the following balances of M/s Jyoti Exports, prepare Trading and Profit & Loss Account for the year ended March 31,2012 and Balance Sheet as on this date :

Closing stock Rs. 10,000.
(1) To provision for bad debts is to be maintained at 5 percent on sundry debtors.
(2) Wages amounting to Rs. 500 and salary amounting to Rs. 350 are outstanding.
(3) Factory rent prepaid Rs. 100.
(4) Depreciation charged on Plant and Machinery @ 5% and Building @ 10%.
(5) Outstanding insurance Rs. 100.
Answer:

Question 10.
The following balance have been extracted from the books of M/s Green House for the year ended December 31, 2010, prepare Trading and Profit & Loss Account and Balance Sheet as on this date.

Adjustments :
(a) Machinery is depreciated at 10% and buildings depreciated at 6%.
(b) Interest on capital @ 4%.
(c) Outstanding wages Rs. 50.
(d) Closing stock Rs. 50,000.
Answer:

Question 11.
From the following balances extracted from the book of M/s Manju Chawla on March 31, 2010. You are requested to prepare the Trading and Profit & Loss Account and a Balance Sheet as on this date :

Closing stock was Rs. 2,000.
(a) Interest on drawing @ 7% and interest on capital @ 5%.
(b) Land and Machinery is depreciated at 5%.
(c) Interest on investment @ 6%.
(d) Unexpired rent Rs. 100.
(e) Charge 5% depreciation on furniture.
Answer:

Question 12.
The following balances were extracted from the books of M/s Panchsheel Garments on December 31, 2010.

Prepare the Trading and Profit & Loss Account for the year ended December 31,2010 and a Balance Sheet as on that date.
(a) Unexpired insurance Rs. 1,000.
(b) Salary due but not paid Rs. 1,800.
(c) Wages outstanding Rs. 200.
(d) Interest on capital 5%.
(e) Scooter is depreciated @ 5%.
(f) Furniture is depreciated @ 10%.
Answer:

Question 13.
Prepare the Trading and Profit & Loss Account and Balance Sheet of M/s Control Device India on December 31,2012 from the following balance as on that date :

Closing stock was valued Rs. 20,000.
(a) Interest on capital @ 10%.
(b) Interest on drawings @ 5%.
(c) Wages outstanding Rs. 50.
(d) Outstanding salary Rs. 20.
(e) Provide a depreciation @ 5% on plant and machinery. (0 Make a 5% provision on debtors.
Answer :

Question 14.
The following balances appeared in the trial balance of M/s Kapil Traders as on March 31,2012
Sundry debtors — Rs 30,500
Bad debts — Rs 500
Provision bad debts — Rs 2,000
The partners of the firm agreed to records the following adjustments in the books of the firm : Further bad debts Rs. 300. Maintain provision for bad debts 10%. Show the following adjustments in the Bad Debts Account, Provision Account, Debtors Account, Profit & Loss Account Balance Sheet.
Answer :

Question 15.
Prepare the Bad Debts Account, Provison for Account, Profit & Loss Account and Balance Sheet from the following information as on December 31,2011.
Debtors — 80,000
Bad debts — 2,000
Provision for bad debts — 5,000
Bad debts Rs. 500 Provision on debtors @ 3%.
Answer:

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 9 Financial Statements 1 Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Financial Statements 1 NCERT Solutions for Class 11 Accountancy Chapter 9

Financial Statements 1 Questions and Answers Class 11 Accountancy Chapter 9

Test Your Understanding -I

I. State True or False :

(i) Gross profit is total revenue.
(ii) In trading and profit and loss account, opening stock appears on the debit side because it forms the part of the cost of sales for the current accounting year.
(iii) Rent, rates and taxes is an example of direct expenses.
(iv) If the total of the credit side of the profit and loss account is more
Answer:
(i) True
(ii) True
(iii) False
(iv) True

II. Match the items given under ‘A’ with the correct items under B’:

A – B

(i) Closing stock is credited to — (a) Trial balance
(ii) Accuracy of book of account is tested by — (b) Trading account
(iii) On returning the goods to seller, the buyer sends — (c) Credit note
(iv) The financial position is determined by — (d) Balance sheet by
(v) On receiving the returned goods from the buyer, the seller sends — (e) Debit note from the buyer, the seller sends
Answer:
(i) (b) Trading account
(ii) (a) Trial balance
(iii) (e) Debit note
(iv) (d) Balance sheet
(v) (c) Credit note

Test Your Understanding -II

Choose the correct option in the following questions :
1. The financial statements consist of:
(i) Trial balance
(ii) Profit and Loss account
(iii) Balance sheet
(iv) (i) & (iii)
Answer:
(iv) (i) & (iii)

2. ‘ Choose the correct chronological order of ascertainment of the following profits from the profit and loss account:
(i) Operating Profit, Net Profit, Gross Profit
(ii) Operating Profit, Gross Profit, Net Profit
(iii) Gross Profit, Operating Profit, Net Profit
(iv) Gross Profit, Net Profit, Operating Profit
Answer:
(iii) Gross Profit, Operating Profit, Net Profit

3. While calculating operating profit, the following are not taken into account.
(i) Normal transactions
(ii) Abnormal items
(iii) Expenses of a purely financial nature
(iv) (ii) & (iii)
(v) (i) & (iii)
Answer:
(iii) Expenses of a purely financial nature

4. Which of the following is correct: ‘
(i) Operating profit = Operating profit – Non-operating expenses – Non-operating incomes
(ii) Operating profit = Net profit + Non-operating expenses + Non-operating incomes
(iii) Operating profit = Net profit + Non-operating expenses – Non-operating incomes
(iv) Operating profit = Net profit – Non-operating expenses + Non-operating incomes
Answer:
(iii) Operating profit = Net profit + Non-operating expenses – Non-operating incomes

Short Answer Type Questions

Question 1.
What are the objectives of preparing financial statements?
Answer:
When the business enterprise satisfy itself with the agreement of trial balance, then they proceeds to prepare the financial statement for their business. Now they are interested to know whether they have earned profit or incurred losses during the accounting period.

They also want to ascertain the business position at the end of the accounting period. For this purpose they prepare financial statements which are also called Final accounts. It is the last phase of accounting process. In our system of accounting, financial statements include Balance Sheet, Trading Account, Profit and Loss Account and explanatory schedules and notes.

The main objectives of financial statement r§ to communicate financial position and performance of the business entities to the users of accounts. Financial position of a business entity is indicated through Balance Sheet and performance is indicated through Trading and Profit and Loss Account. ‘

Main Objectives :
(1) To determine profit or loss of business.
(2) To know the financial position of business.
(3) To get information by the management from financial statement to plan and control business operations.
(4) To ascertain the earning capacity and growth aspects of the business.
(5) To know the solvency of the business.
(6) To determine the tax liability.

Question 2.
What is the purpose of preparing trading and profit and loss account?
Answer:
Trading Account – Trading Account is the first part of the financial statements. The trading account is designed to show the gross profit on sale of goods. The trading account contains the transactions of the trader relating to the commodities in which he deals, throughout the accounting period. All expenses either related to purchase of raw material or production or manufacturing are charged to the Trading A/c i.e. Debited to Trading A/c.

It is prepared to find out Gross Profit or Gross Loss. If the sales are more than purchases and expenses the result is Gross Profit and vice-versa. Its main components are sales, services rendered and cost of such sales or services rendered. Trading account provides the data for comparison, analysis and planning for future growth.

The main purpose for preparing trading account are following :
(1) It gives the information about the Gross Profit. Figures of different years compared and plans for future growth.
(2) Ratio of different materials or items with the Gross Profit helps businessman to improve its administration.
(3) Comparison of cost of goods sold with sales help trader to ascertain the price of the goods.
(4) Precautionary measure can be taken to avoid possible losses by analysing the items of direct expenses.

Profit and Loss Account – Profit and Loss Account is the second part of the financial statement. Businessman is more interested in knowing his net income or net profit, which increases the owner’s equity. Net profit represents the excess of gross profit plus other revenue income over indirect expense.

These indirect expenses are not shown in the trading account. In the debit side of Profit and Loss Account the indirect expenses are shown whereas in the credit side revenue incomes. If the debit side is less than credit side, it would be net profit and if the credit side is less than debit side it would be net loss.

‘A Profit and Loss Account is an account into which all gains and losses are collected in order to ascertain the excess of gain over the losses or vice-versa.” – Prof. Carter
The main purpose for preparing profit and loss account are following:
(1) To ascertain the net profit of business at the end of the accounting period.
(2) To compare the net profit of business of different years.
(3) To plan to increase the net profit of business.
(4) Proper allocation of net profit among the partners or parties interested in business.

Question 3.
Explain the concept of cost of goods sold?
Answer:
Cost of goods sold = Opening stock + Net purchases + Direct expenses – Closing stock.
Cost of goods sold implies what is the cost of goods sold during the year. It include only the direct expenses, not the indirect expenses. It is that cost which include the cost of raw materials and all the direct expenses like factory rent, wages, carriage, freight inward etc. It is also ascertained by following method :
Cost of goods sold = Net sales – Gross profit

Cost of goods sold include :
Opening stock that refers the closing stock of previous year.
Net purchases – This refers to the goods or raw materials purchased for resale or for manufacture. It include both cash and credit purchases. It can be ascertained by deducting purchase returns from the total purchases. It does not include the purchase of assets. It only include the purchase of goods for the purpose of resale.

Direct expenses – Direct expenses are those expenses which are incurred on the goods purchased till they are brought to the place of business for sale. For example wages, wages and salary, power, factory rent, freight inward, import duty, power and fuel, carriage, carriage inward etc.

Closing stock – The stock of goods remained unsold during the year. It means only raw material or unsold finished’ goods of those things which are traded by the firm.

Net sales – Net sales is sales returns deducted from the total sale. Cost of goods sold helps the trader to ascertain the price of goods and to plan to reduce them to increase his gross profit.

Question 4.
What is a balance sheet? What are its characteristics?
Answer:
Balance Sheet : The statement of assets and liabilities is known as Balance Sheet. It is a statement which sets out the assets, liabilities and capital of an entity as at a certain date. It is prepared as at a certain date and not for a period. It is prepared after the preparation of Profit and Loss Account. The total of the assets side must be equal to the total of the liabilities side i.e. the two sides of the Balance Sheet must be equal. If they are not equal, there is certainly an error somewhere.

“A Balance Sheet is an itemised list of the assets, liabilities and proprietorship of a business of on individual at a certain date.’’ – Freeman

“Balance Sheet is a screen picture of the financial position of a going business at a certain moment.” – Francis R. Stead

“A list of balances in the assets and liability accounts. This list depicts the position of assets and liabilities of a specific business at a specific point of time.”

– Committee on Terminology of American Institute of Certified Public Accountant (AICPA) . It is the report about the properties owned by the enterprise and the claims of the creditors and owner against these properties. Thus, Balance Sheet is a statement prepared with a view to measure the exact fianancial position of a business on a certain date. „ Characteristics of Balance Sheet

(1) Statement not an account – The balance sheet is a statement and not an account. It has no debit or credit side and as such the words ‘To’ and ‘By’ are not used before the names of the account written therein. It is part of final accounts and prepared with the help of accounts. Yet it is not an account but a statement.

(2) Prepared on a particular date – Balance Sheet is prepared on a particular date. It shows the position at that date and not for a period.

(3) Summary of personal and real accounts – A balance sheet is a summary of the personal and real accounts. Debit of all personal and real accounts are transferred to the assets side and the credit balance of all personal and real accounts are transferred to the liabilities side.

(4) Total of both side should be equal-The totals of liabilities and assets always are equal. If total are not equal, there must be some error.

(5) Financial position of the business – It shows the financial position of the business concern.

(6) What firm own and owes – It shows what the firm owes to outsiders and also what others owe to the firm.

Question 5.
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 white washing 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 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 four years.
Answer:
Capital expenditure consists of expenditure the benefit of which is not fully utilized in one accounting period but spread over several periods. It is the amount spent by an enterprise on purchase of fixed assets that are used in the business to earn income and are not intended for resale. Any expenditure which is undertaken for the purpose of increasing profits either
(i) by way of increasing earning capacity or
(ii) by decreasing cost.
Revenue expenditure consists of expenditure which are incurred in one accounting period, the benefit of which is consumed in the same period. It is the amount spent on running of a business. Those expenditure which are not capital expenditure are known as revenue expenditure. They are incurred to maintain the earning capacity of the business, whereas capital expenditure are incurred for improving the earning capacity of the business.
The distinction between Capital Expenditure and Revenue Expenditure

(a) Expenditure incurred on repairs and white washing at the time of purchase of an old building in ordertomake it usable. Capital Expenditure
(b) Expenditure incurred to provide one more exit in a cinema hall in compliance with government order. Capital Expenditure
(c) Registration fees paid at the time of purchase of a building.
Capital Expenditure
(d) Expenditure incurred in the maintenance of a tea garden which will produce tea after four years. Capital Expenditure
(e) Depreciation charged on a plant. Revenue Expenditure
(f) The expenditure incurred in erecting a platform on which a machine will be fixed. Capital Expenditure
(g) Advertising expenditure, the benefits of which will last four years. Deferred Revenue Expenditure

Question 6.
What is an operating profit?
Answer:
Operating Profit (EBIT) – Profit earned through the normal operations i.e. dealing with business only not any other activity. Operating profit is the excess of operating revenue over operating expenses.

It is arrived at by deducting the operating e.penses from gross profit. Operating expenses are those expenses which are related to the main activities of the business. They include office and administrative expenses and selling and distribution expenses, discount etc.
Operating Profit = Net Sales – Operating Cost = Net Sales – (Cost of goods sold + Administration and office expenses + Selling and distribution Expenses)
Or
Operating Profit = Net Profit + Non-operating Expenses – Non-operating Incomes
Where Net Sales = Cash Sales + Credit Sales – Sales Return

Long Answer Type Questions

Question 1.
What are financial statements? What information do they provide?
Answer:
Meaning of financial statements – Financial statements are those statements which reports the profitability and the financial position of the business at the end of the accounting period. At the end of the accounting period, financial statements are prepared to determine profit or loss and to know the financial position of the business. The statements are presented to users of accounting information for decision making.

The term financial statements includes at least two basic statements which are as under :
(i) Income statement (or Trading and Profit and Loss Account) which shows results of business operations during the accounting period and

(ii) Statement of financial position (or Balance Sheet) which shows financial position of an enterprise at a specified point of time.

Preparation of financial statements is the last phase of the accounting process. ‘The financial statements provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and the income statement, showing the result of operations during a certain period.’’ – John N. Myer

When the business enterprise satisfy itself with the agreement of Trial Balance, then they proceeds to prepare the financial statements for their business. The main objective of financial statement is to communicate financial position and performance of the business entities to the user of accounts. Financial position of a business entity is indicated through Balance Sheet and performance is indicated through Trading and Profit and Loss Account. They help to ascertain the profit and loss occurring during the accounting period and the financial position of the business.

Information provided by the financial statement to the different users:
(1) Management – The financial statements help the management in assessing the profitability of various activities and various departments. On their basis, the management can review the progress of the business and take decisions for controlling the non-profitable activities.

(2) Investors – Shareholders or proprietors of the business are not generally involved in day-to-day working, they come to know the results of operations and financial position of the business only through the financial statements. They can assess the short-term and long-term financial soundness and earning capacity of the business with the help of financial statements.

(3) Potential Investors – Financial statements help them to know financial position, earning capacity and its prospects for growth of the business. Financial statements help them in making an assessment about how safe their investments will be.

(4) Short-term Creditors – Financial statements help them to assess whether the enterprise will be able to pay their debts when they fall due and may decide to extend, maintain or restrict the credit allowed to the enterprise.

(5) Long-term Creditors – Financial statements provide information to them about (i) whether enterprise will be able to pay the interests consistently and (ii) whether the company will be able to pay their debts when due. On this basis they may also decide to extend, maintain or restrict the loans extended to the enterprise.

(6) Government – Financial statements provide information to Government to study the profit margins of various industries to announce or withdraw various concessions and to increase or decrease the excise duty. It also give information to regulate the activities of the enterprise, determine policy, compilation of national income statistics.

(7) Employees – Financial statements gives information about the profit earned by the enterprises so that they can judge as to how much bonus and increase in their wages.

(8) Tax Authorities – Financial statements provides information to the Income Tax Authorities and Sales Tax Authorities about the income earned and sale of the enterprises respectively. It helps them to assessment of the Income Tax and Sales Tax.

Question 2.
What are the closing entries? Give four examples of closing entries?
Answer:
Closing entries – The preparation of trading and profit and loss account requires that the balance of accounts of all concerned items are transferred to it for its compilation. The entries required for such transfer are termed as closing entries. The entries that are to be recorded in the journal for preparing the Trading and Profit and Loss Account, that is for transferring the various accounts to those two accounts, are known as closing entries.
Closing entries relating to Trading Account:
(1) Closing entry for those accounts which are to be transferred to Dr. side of
Trading Account –
Trading A/c Dr.
To Opening Stock A/c
To Purchases A/c
To Wages A/c
To Carriage Inwards A/c
To Freight A/c
To Power, Fuel and Gas A/c
To Factory Rent A/c
To Duty on Purchases A/c
To Wages and Salaries A/c
To Factpry Lighting A/c
To All other direct expenses A/c (Being the transfer of above accounts to the Dr. side of Trading A/c)

(2) Closing entry for those accounts which are to be transferred to the Cr. side of Trading A/c –
Sales A/c — Dr.
Closing Stock — Dr.
To Trading A/c
(Being the transfer of above account to the Cr. side of Trading A/c)

(3) If the credit side of the Trading Account exceeds the debit, the difference will be Gross Profit.
The Gross Profit will be transferred to the credit side of Profit and Loss Account –
Trading A/c — Dr.
To Profit and Loss A/c
(Being transfer of Gross Profit to the Profit and Lyss A/c)

(4) If the debit side of Trading Account exceeds the credit, the difference will be Gross Loss. It is transferred to debit side of
Profit and Loss A/c
Trading A/c — Dr.
To Profit and Loss A/c
(Being Gross Loss transferred to Profit and Loss A/c)

Closing entires related to Profit and Loss Account:
(1) Accounts of various indirect expenses and losses are transferred to the debit side of Profit and Loss Account – Profit and Loss A/c Dr.
To Salaries A/c
To Rent, Rates and Taxes A/c
To Printing A/c
To Stationary A/c
To Postage and Telegrams A/c
To General Expenses A/c
To All other indirect expenses A/c – (Being the transfer of nominal accounts showing — Dr.
balances to the debit side of Profit and Loss A/c)

(2) Balances of all the accounts of incomes and gain will be transferred to the credit side of Profit and Loss Account –
Interest Received A/c — Dr
Commission Received A/c – Dr
Rent Received A/c – Dr
Apprentice Premium A/c – Dr
Income from other sources A/c – Dr
Miscellaneous Receipts A/c – Dr
To Profit and Loss A/c – Dr
(Being transfer of nominal accounts showing Cr. balances to the credit side of Profit and Loss A/c)

(3) If the credit side of Profit and Loss Account exceeds the debit the difference will be the Net Profit.
Net Profit transferred to the Capital Account –
Profit and Loss A/c — Dr.
To Capital A/c
(For the transfer of net profit to capital A/c)

(4) If the debit side of Profit and Loss Account exceeds the credit, the difference will be the Net Loss.
Net Loss transferred to the Capital Account –
Capital A/c — Dr.
To Profit and Loss A/c (For the transfer of net loss to Capital A/c)

Question 3.
Discuss the need of preparing a Balance Sheet.
Answer:
Balance Sheet is a component of financial statement that shows balance of liabilities, equities and assets of a business entity as on a particular date. Balance Sheet is not an account. Balance of liabilities, equities and assets are not closed by transferring to Balance Sheet, balance of those accounts are simply carried forward to the next accounting period. Balance Sheet displays the liabilities, equities and assets position generally at the end of accounting period.

It is sheet of balance of ledger accounts which are still open after the transfer of all nominal accounts to the Trading and Profit and Loss Account. Balance of all the personal and real accounts are grouped as assets and liabilities. Liabilities are shown on the left side of the Balance Sheet and assets on the right side.

“A business form showing what is owed and what the proprietor is worth, is called a Balance Sheet.” – Kurlson
“The Balance Sheet is statement prepared with a view’ to measure the exact financial position of a business on a certain fixed date.” – J.R. Balliboi

“The Balance Sheet is a statement at a particular date showing on one side the trader’s property and possessions and on the other hand the liabilities.” -A. Palmer

Need of preparing a “Balance Sheet :
(1) The main objective of preparing a Balance Sheet is to ascertain the true financial position of the business at a particular point of time.
(2) It gives information about the exact amount of capital at the end of the year and the addition or deduction made into it in the current year.
(3) It helps in ascertaining the nature and cost of various assets of the business such as the amount of closing stock, amount owing from debtors, amount of fictitious assets etc.
(4) It helps in ascertaining the nature and amount of various liabilities of the business.
(5) It helps in preparing the opening entries at the beginning of the next year.
(6) It helps in finding out whether the firm is solvent or not. The firm is solvent if the assets exceeds the external liabilities. It would be insolvent if opposite is the case.

Question 4.
What is meant by Grouping and Marshalling of assets and liabilities. Explain the ways in which a balance sheet may be marshalled.
Answer:
Grouping and Marshalling of assets and liabilities – The assets and liabilities shown in the Balance Sheet are properly grouped and presented in a particular order. The term ‘grouping’ means showing the items of similar nature under common heading for example, the amount owing from various customers will be shown under the heading “Sundry Debtors’. ‘Marshalling’ is the arrangement of various assets and liabilities in a proper order.

‘Marshalling’ of Balance Sheet can be made in two ways :
(1) In order of liquidity-According to this method, an asset which is most easily convertible into cash such as cash in hand is written first and then will follow those assets which are comparatively less easily convertible, so that the least liquid assets such as goodwill, is shown last. In the same way, those liabilities which are to be paid at the earliest will be written first. In other words, current liabilities are written first of all, then fixed or long-term liabilities and lastly, the proprietor’s capital.

Proforma of a Balance Sheet in the order of liquidity will be as follows :

(2) In order of permanance – This method is just opposite to the first method. Assets which are most difficult to be converted into cash such as Goodwill are written first and the assets which are most liquid such as cash in hand are written last. Those liabilities which are to be paid last, will be written first. The proprietor’s capital is written first of all, then fixed or long-term liabilities and lastly the current liabilities. Proformance of a Balance sheet in order of permanance will be as follows:

Notes:
(i) The total of Balance Sheet of both sides is always equal.
(ii) Prepaid expenses are treated as current assets. Though cash cannot be realised from prepaid expenses, the sendee will be available against these without further payment.

Numerical Questions

Question 1.
From the following balances taken from the hooks of Simmi and Vimmi Ltd. for the year ending March 31, 2011, calculate the gross profit.
Closing Stock — 2,50,000
Net sales during the year — 40,00,000
Net purchases during the year — 15,00,000
Opening stock — 15,00,000
Direct expenses — 80,000
Solution:
Gross Profit = Net Sales – Cost of Goods Sold
Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock

Cost of Goods Sold = Rs. 15,00,000 + Rs. 15,00,000 + Rs. 80,000 – Rs. 2,50,000
= Rs. 28,30,000
Gross Profit = Rs. 40,00,000 – Rs. 28,30,000 = Rs. 11,70,000.

Question 2.
From the following balances extracted from the books of M/s. Ahuja and Nanda, calculate the amount of:
(a) Cost of goods available for sale
(b) Cost of goods sold during the year
(c) Gross profit
Opening stock — 25,000
Credit purchases — 7,50,000
Cash purchases — 3,00,000
Credit sales — 12,00,000
Cash sales — 4,00,000
Wages — 1,00,000
Salaries — 1,40,000
Closing stock — 30,000
Sales return — 50,000
Purchases return — 10,000
Answer:
(a) Cost of goods available for sale = Opening Stock + Net Purchases + Direct Expenses
Net Purchases = Cash Purchases + Credit purchases – Purchases Return
Net Purchases = Rs. 3,00,000 + Rs. 7,50,000 – Rs. 10,000 = Rs. 10,40,000
Direct Expenses = Wages = Rs. 1,00,000
Cost of goods available for sale = Rs. 25,000 + Rs. 10,40,000
+ Rs. 1,00,000 = Rs. 11,65,000.

(b) Cost of goods sold during the year = Opening Stock + Net Purchases + Direct Expenses – Closing Stock
= Rs. 25,000 + Rs. 10,40,000 + Rs. 1,00,000 – Rs. 30,000 = Rs. 11,35,000.
(c) Gross Profit = Net Sales – Cost of goods sold
Net Sales = Cash Sales + Credit Sales – Sales Returns
= Rs. 12,00,000 + Rs. 4,00,000 – Rs. 50,000 = Rs. 15,50,000
Gross Profit =Rs. 15,50,000-Rs. 11,35,000 = Rs. 4,15,000.

Question 3.
Calculate the amount of gross profit and operating profit on the basis of the following balances extracted from the books of M/s. Rajiv & Sons for the year ending March 31,2011.
Opening stock — 50,000
Net sales — 11,00,000
Net purchases — 6,00,000
Direct expenses — 60,000
Administration expenses — 45,000
Selling and distribution expenses — 65,000
Loss due to fire — 20,000
Closing stock — 70,000
Answer:
Gross Profit = Net Sales – Cost of Goods Sold Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock
Cost of Goods Sold = Rs. 50,000 + Rs. 6,00,000 + Rs. 60,000 – Rs. 70,000′
= Rs. 6,40,000
Gross Profit = Rs. 11,00,000 – Rs. 6,40,000 = Rs. 4,60,000
Operating Profit = Net Sales – Operating Cost
= Net Sales – (Cost of goods sold + Administration and office expenses + Selling and Distribution expenses)
Rs. 11,00,000 – (Rs. 6,40,000 TRS. 45,000 + Rs. 65,000)
= Rs. 3,50,000.

Question 4.
Operating profit earned by M/s. Arora & Sachdeva in 2005-06 was Rs. 17,00,000. Its non-operating incomes were Rs. 1,50,000 and non-operating expenses were Rs. 3,75,000. Calculate the amount of net profit earned by the firm.
Answer:
Operating Profit = Net Profit + Non-operating expenses – Non-operating incomes
Net Profit = Operating Profit – Non-operating expenses + Non-operating incomes
= Rs. 17.00,000 – Rs. 3,75,000 + Rs. 1,50,000
= Rs. 14,75.000.

Question 5.
The following are the extracts from the trial balance of M/s. Bhola & Sons as on March 31,2011

(only relevant items)
Closing stock as on date was valued at Rs. 3,00,000.
You are required to record the necessary journal entries and show how the above items will appear in the trading and profit and loss account and balance sheet of M/s. Bhola & Sons.
Answer:

Question 6.
Prepare trading and profit and loss account and balance sheet as on March 31,2011 :


Answer:

Question 7.
The following trial balance is extracted from the books of M/s. Ram on March 31,2011. You are required to prepare trading and Profit and Loss Account and the Balance Sheet as on date :

Answer:

Question 8.
The following is the trial balance of Manju Chawla on March 31, 2011. You are required to prepare Trading and Profit and Loss Account and a Balance Sheet as on date :

Note: Students please note that there is a difference of Rs. 700 in debit side of trial balance, which should be shown on the Assets side of the Balance Sheet as ‘Suspense Account
Answer:

Question 9.
The following is the trial balance of Mr. Deepak as on March 31,2011. You are required to prepare trading account, profit and loss account and a balance sheet as on date :
Answer:

Question 10.
Prepare trading and profit and loss account and balance sheet from the following particulars as on March 31,2011.

Answer:

Question 11.
From the following trial balance of Mr. A. Lai, prepare trading, profit and loss account and balance sheet as on March 31, 2011 :

Answer:

Question 12.
Prepare trading and profit and loss account and balance sheet of M/s. Royal Traders from the following balances as on March 31,2011:


Answer:

Question 13.
Prepare trading and profit and loss account from the following particulars of M/s. Neema Traders on March 31,2011 :

Answer:

Question 14.
From the following balances of M/s. Nilu Sarees as on March 31, 2011 prepare trading and profit and loss account and balance sheet as on date :

Answer:

Question 15.
Prepare trading and profit and loss acount of M/s. Sports Equipments for the year ended March 31, 2011 and balance sheet as on that date :

Answer:

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 8 Bills of Exchange Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Bills of Exchange NCERT Solutions for Class 11 Accountancy Chapter 8

Bills of Exchange Questions and Answers Class 11 Accountancy Chapter 8

Test Your Understanding – I

Write ‘True’ or ‘False’ against each statement regarding a bill of exchange :
1. A bill of exchange must be accepted by the payee.
2. A bill of exchange is drawn by the creditor.
3. A bill of exchange is drawn for all cash transaction.
4. A bill payable on demand is called Time bill.
5. A person to whom payment is to be made in a bill or exchange is . called payee.
6. A negotiable instrument does not require the signature of its maker.
7. The hundi payable at sight is called Darshani hiindi.
8. A negotiable instrument is not freely transferable.
9. Stamping of promissory note is not mandatory.
10. The time of payment of a-negotiable instrument need not be certain.
Answer :
1. False
2. True
3. False
4. False
5. True
6. False
7. False
8. False
9. False
10. True

Test Your Understanding – II

Fill in the blanks with suitable word(s) :
1. The person to whom the amount mentioned in the promissory is payable is known as ……………
2. Transfer of a negotiable instrument to another person by signing on it, is known as ……………
3. In a promissory note, the person who makes the promise to pay is called as ……………
4. A person who endorses the promissory note in favour of another is known as ……………
Answer :
1. Promisee
2. Endorsement
3. Promissor
4. Endorser

Test Your Understanding – III

Fill in the blanks :
1. A bill of exchange is a …………… instrument.
2. A bill of exchange is drawn by the …………… upon his ……………
3. A promissory note is drawn by …………… in favour of his ……………
4. There are …………… parties to a bill of exchange.
5. There are …………… parties to a promissory note.
6. Drawer and cannot be the same parties in case of a bill of exchange,
7. Bill of exchange in Indian language is called ……………
8 ………….. days of grace are added in terms of the bill to calculate the date of its
Answer :
1. negotiable
2. drawer, drawee
3. debtor, creditor
4. three
5. two
6. drawee
7. Hundi
8. Three, maturity

Short Answer Type Questions

Question 1.
Name any two types of commonly used negotiable instruments.
Answer:
In modern times a very large number of business transactions are made on credit basis. In case of credit sale of goods, the purchaser usually promises to make payment after a certain period. In such a case, the seller would like to get a written undertaking from the buyer to get the payment after a fixed period.

As such, the seller prepares a document in which he puts in writing all the terms and conditions relating to sale of goods such as amount required to be paid; date of payment; place of payment; and the like. The Buyer puts his signatures on the document and it is known as ‘Bill of Exchange’.

As such, the bills of exchange are instruments of credit which facilitate the credit sale of goods. In India, these are known as ‘Hundis’ which are written in Indian languages and have been in use from the time immemorial. In western countries, the names used for such instruments are ‘Bills of Exchange’ and ‘Promissory Notes’.

The same names are now being increasingly used in India too. All such instruments are governed by Indian Negotiable Instruments Act. 1881. Two commonly used negotiable instruments are Bills of Exchange and Promissory Notes under Negotiable Instruments Act. 1881.

Question 2.
Write two points of distinction between Bills of Exchange and Promissory Notes.
Answer:
Distinction between Bill of Exchange and Promissory Notes –

Question 3.
State any four essential features of bills of exchange.
Answer:
Characteristics or Features of Bills of Exchange – The main characteristics of bill of exchange :
1. A bill of exchange must be in writing.
2. It must contain an order (and not a request) to make payment.
3. The order must be unconditional.
4. The amount of bill of exchange must be definite.
5. The date of payment must be a fixed one.
6. It must be signed by the maker (drawer) of the bill.
7. It must be signed by the acceptor (drawee).
8. The amount mentioned in the bill is payable either on demand or on the expiry of a fixed period.
9. The amount is payable either to the bearer of the bill or to a ‘ specified person or to his order.
10. It bears stamps according to its amount or is drafted on a stamped paper of the court.

Question 4.
State the three parties involved in a bill of exchange.
Answer:
Parites to a Bill of Exchange – There are three parties to a bill of exchange :
1. Diavver: He is the seller or creditor entitled to receive money from someone. He writes or draws the bill and is known as drawer. The bill of exchange is signed by the drawer of the bill.

2. Drawee or Acceptor : He is the purchaser or the debtor on whom the bills drawn and who is liable to pay the amount mentioned in the bill. He accepts to pay the amount by writing the word “Accepted” on the bill and then signs it.

3. Payee : The person to whom the payment is to be made is called payee. The drawer himself or a third party may be the payee of the bill. The drawer will be the payee of the bill, if he retains the bill till the date of maturity and receives the payment. The Bank may also be the payee of the bill if the bills is discounted from the bank. In case the bill is endorsed by the drawer to a third part}, the third party known as endorsee will be the payee of the bill. As such, the drawer himself or the bank or the endorsee may be the payee of the bill.

Question 5.
What is meant by maturity of bill of exchange.
Answer:
Date of Maturity and Days of Grace – The date on which the payment of the bill become due is called the ‘due date’ or ‘date of maturity’. In other words, the date on which the duration of the bill comes to an. end is called the due date. While calculating the due date of the bill, it is compulsory to add three days to the period of the bill. These three days are called ‘Days of Grace’. For example, if a bill is drawn on 1st July, 1994 and is payable 2 months after date, its maturity date will be 4th September. 1994.

The following points are very significant for calculating the date of maturity :

(1) If a bill falls due in those months in which there is no corresponding day, i.e., 29th, 30th or 31 st dates, its maturity day will be the last date of such month. For example, if a bill was drawn on 30th January, 1994 for one month, it will . become due on 28th February+ 3 days of grace = 3rd March, 1994, because there is no 30th date in February.

(2) Bills drawn on 30th May for one month will both become due on 3rd July.

Question 6.
What is meant by dishonour of a bill of exchange.
Answer:
Dishonour of a bill is a situation when the acceptor refuses to pay the amount of the bill or due to insolvency of the acceptor. If the bill is dishonoured, the party which gave the bill will be debited with the amount of bill and noting charges and the account of bank or the order see will be credited.

(i) In the case of bill is retained by the drawer till maturity and dishonoured on due date, the entry in the books of drawer may
be posted as under – Drawer or Acceptor A/c — Dr.
To Bills Receivable A/c (Amount of Bill)

To Cash A/c (Amount of Noting charges)
(ii) When the bill is discounted with the bank and is dishonoured, the entry will be –
Drawer or Acceptor A/c — Dr.
To Bank A/c (Amount of bill & noting charges)

(iii) When the bill is endorsed and dishonoured, the entry will be
Drawer or Acceptor A/c — Dr.
To Endorsee’s A/c’ (Amount of bill & noting charges)

(iv) When the bill has been sent for collection to bank and is dishonoured
Drawer or Acceptor A/c — Dr.
To Bill for Collection A/c (Amount of bill)
To Bank A/c (Amount of noting charges)

In the books of Drawer or Acceptor if bill is dishonoured, the liability of creditor will be restored.
The following entry is passed –
Bills Payable A/c — Dr. (Amount of bill)
Noting charges A/c — Dr. (Amount of noting charges)
To Creditors A/c (Amount of bill & Noting charges)

Question 7.
Name the parties to a promissory note.
Answer:
Parties to a Promissory Note – There are two parties to a promissory note :
1. Maker: He is the person who writes a promissory note and signs it.
2. Payee : He is the person who is entitled to get the payment.
There is no acceptor in case of a promissory note because the maker himself is liable to pay the amount.

Question 8.
What is meant by acceptance of a Bill of Exchange?
Answer:
Acceptance of a bill of exchange means to give the bill debits the account of receiver and treats the bill as a new type of liability called bills payable to the acceptor. The same shall be bills receivable for the drawer and bill payable for the acceptor or drawer.

When an acceptance of a bill is sent to a creditor, it is considered that his debt has been settled by creating a new liability known as Bills Payable.

Following journal entries are made in the books of acceptor or drawer are made as under –
(i) At the time of Purchase of goods on credit
Purchases A/c — Dr.
To Supplier or Creditor A/c

(ii) At the time of acceptance of bill
Supplier (Creators) A/c — Dr.
To Bills Payable A/c

Question 9.
What is noting charge of a Bill of Exchange?
Answer:
Noting charge meaning – A bill of exchange should be duly presented for payment on the date of its maturity. In case the bill was dishonoured on due date or maturity date, it has got preferably to be noted by Notary Public. For providing this service, a fees is charged which is known as Noting charges.
Notary Public noted the following facts-

• Date, amount and reasons of dishonour,
• If bill is not expressly dishonoured, but refused to pay, the -x reasons for to treat it as dishonoured,
• The amount of noting charges.

Question 10.
What is meant by Renewal of a bill of exchange?
Answer:
Sometimes an acceptor expresses his inability to meet the bill on the due date and requests the holder, or really the drawer, to substitute the old bill with a new one. The purpose is to get an extension of time. If the drawer agrees, the old bill will be cancelled and a new , bill will be drawn and of course.accepted by the drawer. This process is called ‘renewal of bill’.

In such cases there is no need for getting the bill noted since the drawer himself makes a request for cancellation of bill. Normally, for doing this, the-drawer will charge interest for the extension of the time. The amount of interest may be paid in cash or included in the amount of the new bill. The interest will depend on the account of the bill, the rate of interest and the period of the new bill.

Of course, the new bill may not be for the full amount since it is possible that the drawer may receive part of the payment in cash immediately. In that case, interest will be due only on the amount of the new bilk

Question 11.
Give the proforma of Bills Receivable Book.
Answer:
Bills Receivable Book

Question 12.
Give the proforma of a BiIs Payab e Book.
Answer:
The below mentioned is the proforma Bills Payable Book.

Question 13.
What is Retirement of a bill of exchange?
Answer:
If the drawer or the acceptor wishes of pay the amount of the bill before the date of maturity, it is called retiring the bill. Usually Lue holder, in such a case, would be willing to allow deduction because the interest involved. Such a deduction is called a rebate. For tite accptor the rebate will be a gain and for the holder a loss. The entres to be made are accordingly:

In the books of acceptor:
Bills Paahlc A/c — Dr. [The amount of the bill]
To Cash (or rebate) A/c — [The actual amount paid]
To Rebate A/c — [The amount of rebate earned]

In the books of the holder:
Cash A/c — Dr.
Rebate A/c — Dr.
To Bills Receivable A/c

Question 14.
Give the meaning of Rebate.
Answer:
When the drawer makes the payment of the bill before its duc date, it is called retiring the bill. In such case, the holder of the bill usually allows him discount, technically called ‘Rebate’. Such rebate is calculated at a specific rate per annum for the period the payment is being made too early. The rebate is a gain to the party making the payment andan expense to the party receiving the payment.

Question 15.
Give the proforma of Bills of Exchange.
Answer:
Specimen Of A Bill Of Exchange

Long Answer Type Questions

Question 1.
“A bill of exchange must contain an unconditional promise to pay.” Do you agree with this statement?
Answer:
“A Bill of Exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to’pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.” (Section 5 of the Negotiable Instruments Act, 1881).

This means that if a person orders another person to pay certain sum of money to somebody, it will be a bill of exchange the order to pay should be accepted by the person so ordered, to be of real use.

Features of Bills of Exchange –

• A bill of exchange must be in writing.
• It must be dated.
• It must contain an order to a person called ‘drawer’, to pay a certain sum of money (not a vague sum of money).
• The order must be unconditional.
• It is signed by the maker (or drawer) of the bill. .
• The money must be payable to a definite person or to his order or to the bearer.
• It must be for a specified account and specific period.
• To complete a bill, acceptance by the drawer is necessary.
  When drawee gives his acceptance by puttinghis signature, he becomes the acceptor of the bill.

Question 2.
Briefly explain the effects of dishonour and noting of a bill of exchange.
Answer:
Dishonour means a situation when the acceptor of the bill refuses pay the amount or is otherwise unable to do so, say, because of insolvency. In such a case, the holder of the bill can recover the amount from any of the previous endorsers or the drawers. To establish the fact of a proper presentation and dishonour, the bill is generally got noted. The endorsement is made either on the bill or on a separate paper attached to the-bill called ‘allouge’. It is given to a person called notary public, appointed by government. The notary public will present the bill for payment; if payment is received it will be given to the holder; otherwise the fact of dishonour will be noted on the face to the bill. This act is called noting. There is a small charge for service of the notary public payable by the holder; it is called “Noting charges” and may be recovered from the party responsible for the dishonour. Noting will consist of the following –

• That the bill has been dishonoured, in fact;
• The date of the dishonour;
• The reason given, if any, for the dishonour; and
• The charges made by the notary public.

Entries on the Dishonour of a Bill – If the bill dishonoured, the party which gave the bill will be debited with the amount of the bill and noting charges, since it is now responsible. The back or the endorsee will claim payment and therefore their account will be credited.

Drawee’s Books – The entry for the dishonour of the bill in the books of drawee would depend upon the circumstances of each case :

(1) When the bill is retained by the drawer till maturity and dishonoured on due date –
Drawee’s A/c — Dr.
To Bill receivable A/c — [The amount of Bill]
To Cash A/c — [Noting charges]

(2) When the bill is discounted with the bank is dishonoured, the entry will be –
Drawee’s A/c — Dr. [The amount of the Bill
To Bank A/c and noting charges]

(3) When the bill is endorsed to the endorsee and is dishonoured, the entry will be –
Drawee’s A/c — Dr. [The amount of the bill
To Endorsee’s A/c and noting charges]

(4) When the bill is being sent to the bank for collection as is dishonoured –
Drawee of A/c — Dr.
To Bill sent for collection A/c [The amount of Bill]
To Bank A/c [Amount of noting charges]

Note – In all circumstance drawer’s (Acceptor’s) account will be debited to cancel the credit given to him at the time of acceptance of the bill.

Drawee’s Books – If the bill is dishonoured, the liability to the creditor concerned will be restored. In addition to the amount of the bill, noting charges, if paid for getting the bill noted, will also being payable to the creditors. Therefore, his account should be credited with the amount of bill plus the noting charges, if any. The amount of the bill will be debited to noting charges A/c. The entries will be

Bills Payable A/c — Dr. [The amount, of Bill]
Noting charges A/c — Dr. [Noting charges, if any]
To Creditor’s A/c [Amount of the bill + Noting charges]
(To whom the bill was sent originally)

It is important to note that if the drawee is declared insolvent on “ or before the due date, the bill is discussed to have been dishonoured and all entries for dishonour will have to be passed in the book of the concerned parties as given above.

Question 3.
Explain briefly the procedure of calculating the date of maturity of a bill of exchange. Give examples.
Answer:
The date on which the payment of the bill is due is called the date of maturity or due date. It is calculated by adding 3 days of grace to the date otherwise determined. It is a practice of adding 3 extra days to the period of the bill. These extra days are called days of grace.

Suppose a bill is drawn on the 8th March and is payable 3 months after date. The 3 months will end on 8th June; adding 3 days to the due date Le., 11th June. If the due date falls on a public holiday, the bill will be payable on the proceeding working day; a bill due on 2nd October will be payable on the 1 st October when the due date (last day of grace) is a bank holiday or Sunday and second day of grace is also holiday, the bill is payable on the next day (succeeding) business day. It may be noted that days of grace are not added in case of instruments payable on demand.

While calculating the maturity date of a bill, the following points must be kept in mind :

• Days of grace is not allowed w hen bill is payable ‘on demand’ or‘at sight’.
• When the period of bill is stated in days the calculation of the maturity date will be in days (which includes the date of payment but exclude the date of transaction)
• Example – A bill dated January 1, 2005 is payable 60 days after date. The maturity date of the bill will be March 5, 2005. (30 days of January + 28 days of February + 2 days of March + 3 days of Grace).
• When the period ofthe bill is stated in months, the calculation of maturity date will be in terms of calendar months, ignoring the no. of days in a month.
• Example – A bill dated January 1, 2005 is payable three months after date the maturity date of the bill will be April 4, 2005.
• If the maturity date falls on a day which is a‘Public holiday’ the maturity date shall be of the bill shall be proceeding business day.

Question 4.
Distinguish between the Bill of Exchange and a Promissory Note.
Answer:

Question 5.
Briefly explain the purpose and benefits of retiring a bill of exchange to the debtor and creditor.
Answer:
There are instances when a bill of exchange is arranged to be retired before the due date by mutual understanding between the drawer and the drawee. This happens when the acceptors of the bill has funds at his disposal and makes a request to the drawer holder to accept the payment of the bill before its maturity. If the holder agrees to do so, the bill is said to have been retired.

The Retiring of a bill draws a certain on the bill transactions before the expiry of it’s normal terms. To encourage the retirement of the bill, the holder allows some discounts or rebate on bills for the period between date of retirement and maturity. The rebate is calculated at a certain rate of interest.

The accounting treatment of the retired bill under rebate is similar to accounting treatment when a bill is honoured by the acceptor on the due date in the ordinary course. The only difference between the two releases to the granting of rebate the following journal entries are recorded –

In the books of holder
Our retring the acceptance and rebate allowed
CashA/c — Dr.
Rebate on Bills A/c — Dr.
To Bills Receivables A/c

In the books of acceptor
Bills Payable A/c — Dr.
To Cash A/c
To Rebate on Bills A/c

Question 6.
Explain briefly the purpose and advantages of maintaining of a Bills Receivable Books.
Answer:
When large no. of bills are drawn and accepted, their recording by means of journal entry for every transaction relating to the bills became a very cumbersome and time consuming exercise. It is then advisable to record them separately in special subsidiary books. The bills receivables in the Bills Receivable Books and the bills payables in the Bills Payable Book. The reason for the use of subsidiary books for cash, purchases, sales.

An important point in connection with bill receivable and bills payable books is to record the transactions relating to drawing and acceptance of bills, all other transactions that they only do not record the entire range of transactions relating to the bills. ’

Example – Relating to bills discounting, endorsement, retirement, renewel etc. simply have a passing reference in these books and the entries relating thereto are recorded as usual in the journal. It may be noted that the entry relating to honouring of bills appear in cash book.

Bills Receivable Book – It has been designed as a summary of information regarding a duly accepted bill received by a drawer. All the details of the bill date, acceptor’s name, amount, term, place of payment etc. Ever entered in the bills receivable book for presentation and further reference.

The bill receivable book, like any other subsidiary book is totaled periodically. This total is debited to the “Bills Receivable Account” whereas the account of every individual debtor from whom the bills received is credited in the ledger. The bills receivable account is the account of an asset and would always have a debit balance, this balance on any date would represent the amount of bills receivable unassured and in heard.

Question 7.
Briefly explain the benefits of maintaining a Bills Payable Book and state how is its position done in the ledger.
Answer:
It is maintained like a Bills Receivable Book. It’s meant to record all the details relating to the bill accepted by a person or a party, which are retained for being use in the future, in case of need. The postings from this books are made to the debit of the account of every creditor to whom acceptance has been given and the periodical total of the books are credited to the bills payable account in the ledger.

The Bills Payable A/c representing as does the liability of the acceptor in respect of bills accepted by him, always has a credit balance, if any. The credit balance of this account on any particular date must be the same as the total amount worth of bills payable yet to be presented for payment as ascertained from the Bills Payable Book.

Numerical Questions

Bill met on Maturity

Question 1.
On Jan., 01, 2006 Rao sold goods Rs. 10,000 to Reddy. Half of the payment was made immediately and for the remaining half Rao drew a bill of exchange upon Reddy payable after 30 days. Reddy accepted the bill and returned it to Rao. On the due date Rao presented the bill of Reddy and received the payment. Journalise the above transactions in the books of Rao and prepare Rao’s account in the books of Reddy.
Answer:

Question 2.
On Jan. 01,2006, Shankar purchased goods from Parvati for Rs. 8,000 and immediately drew a promissory note in favour of Parvati payable after 3 months. On the date of maturity of the promissory note, the Government of India declared holiday under the Negotiable Instrument Act 1881. Since, Parvati was unaware about the provision of the law regarding the date of maturity of the bill, she handed over the bill to her lawyer, who duly presented the bill and received the payment. The amount of the bill was handed over by the lawyer to Parvati immediately. Record the neccessary journal entries in the books of Parvati and Shankar.
Answer:

Question 3.
Vishal sold goods for Rs. 7,000 to Manju on Jan. 05,2006 and drew upon her a bill of exchange payable after 2 months. Manju accepted Vishal’s draft and handed over the same to Vishal after acceptance. Vishal immediately discounted the bill with his bank @ 12% p.a. On the due date Manju met her acceptance. Journalise the above transaction in the books of Vishal and Manju. Ans. Journal Entries in the books of Vishal
Answer:

Question 4.
On Feb. 01, 2006 John purchased goods for Rs. 15,000 from Jimmi. He immediately made a payment of Rs. 5,000 by cheque and for the balance accepted the bill of exchange drawn upon him by Jimmi. The bill of exchange was payable after 40 days. Five days before the maturity of the bill, Jimmi sent the same to his bank of collection. The bank duly presented the bill of John on the due date who met the bill. The bank imformed the same to Jimmi. Prepare John’s account in the books of Jimmi and Jimmi account in the books of John.
Answer:

Question 5.
On Jan. 15, 2006 Kartar sold goods for Rs. 30,000 to Bhagwan and drew upon him three bills of exchanges of Rs. 10,000 each payable after one month, two months, and three months, respectively. The first bill was retained by Kartar till its maturity. The second bill was endorsed by him in favour of his creditor Ratna and the third bill was discounted by him immediately @ 6% p.a. All the bills were met by Bhagwan. Journalise the above transactions in the books of Kartar and Bhagwan. Also prepare ledger accounts in books of Kartar and Bhagwan.
Answer:

Question 6.
On Jan. 01,2006, Arun sold goods for Rs. 30,000 to Sunil. 50% of the payment-was made immediately by Sunil on which Arun allowed a cash discount of 2%. For the balance Sunil drew a promissory note in favour of Arun payable after 20 days. Since, the date of maturity of bill was a public holiday, Arun presented the bill on a day, as per the provisions of Negotiable Instrument Act which was met by Sunil. State the date on which the bill was presented by Arun for payment and Journalise the above transactions in the books of Arun and Sunil.
Answer:

Question 7.
Darshan sold goods for Rs. 40,000 to Varun on 8.1.2006 and drew upon him a bill of exchange payable after two months. Varun accepted the bill and returned the same to Darshan. On the due date the bill was met by Varun. Record the necessary journal entries in the books of Darshan and Varun in the following circumstances :
• When the bill was retained by Darshan till the date of its maturity.
• When Darshan immediately discounted the bill @ 6% p.a. with his bank.
• When the bill was endorsed immediately by Darshan in favour of his creditor Suresh.
• When three days before its maturity, the bill was sent by Darshan to his bank for collection.
Answer:
Journal Entries in the books of Darshan


Endorsement/Dishonour/Returning of Bill

Question 8.
Bansal Traders allow a trade discount of 10% on the list price of the goods purchased from them. Mohan Traders, who runs a retail shop made the following purchases from Bansal Traders :

For all the purchases Mohan Traders drew promissory notes in favour of Bansal Traders payable after 30 days. The promissory note for the sale of Dec. 21, 2005 was retained by Bansal Traders with-them till the date of its maturity. The promissory note drawn on 26.12.2005 was discounted by Bansal Traders from their bank at 12% p.a. The promissory note drawn on Dec. 28,2005 was endorsed by Bansal Traders in favour of their creditor Dream Soaps in full settlement of a purchase amounting to Rs. 1,900. On 25.1.2006 Bansal Traders sent the promissory note drawn on Dec. 31, 2005 to their bank for collection. All the promissory notes were met by Mohan Traders. Record the necessary journal entries for the above transactions in the books of Bansal Traders and Mohan Traders and prepare Mohan Traders account in the books of Bansal Traders and Bansal Traders account in the books of Mohan Traders.
Answer:

Question 9.
Narayanan purchased goods for Rs. 25,000 from Ravinderan on Feb. 01, 2006. Ravinderan drew upon Narayanan a bill of exchange for the same amount payable after 30 days. On the due date Narayanan dishonoured his acceptance. Pass the neccessary journal entries in the books of Ravinderan and Narayanan in following cases –
• When the bill was retained by Ravinderan with him till the date of its maturity.
• When the bill was discounted by Ravinderan immediately with his bank (a) 6% p.a.
• When the bill was endorsed to his creditor Ganeshan.
• When the bill was sent by Ravinderan to his bank for collection a few days before its maturity.
Answer:

Question 10.
Ravi sold goods for Rs. 40,000 to Sudershan on Feb. 13, 2006. He drew four bills of exchange upon Sudershan. The first bill was for Rs. 5,000 payable after one month. The second bill was for Rs. 10,000 payable after 40 days; the third bill was for Rs. 12,000 payable after three months and the fourth bills was for the balance amount payable after 19 days. Sudershan accepted all the bills and returned the same to Ravi.

Ravi discounted the first bill with his bank at 6% p.a. He endorsed the second bill to his creditor Mustaq for the full settlement of a debt of Rs. 10,200. The third bill was kept by Ravi with him till the date of maturity. Five days before the maturity of the fourth bill, Ravi sent the bill to his bank for collection. All the four bills were dishonoured by Sudershan on maturity. Sudershan settled Ravi’s claim in cash three days after the dishonour of each bill along with interest @ 12% p.a. for the terms of the bills. You are requested to record the necessary journal entries in the books of Ravi, Sudershan, Mustaq and bank for the above transaction. Also prepare Sudershan’s account and Mustaq’s account in the books of Ravi.
Answer:

Question 11.
On Jan. 01, 2006 Neha sold goods for Rs. 20,000 to Muskan and drew upon her a bill of exchange payable after two months. One month before the maturity of the hill Muskan approached Neha to accept the payment against the bill at a rebate @ 12% p.a. Neha agreed to the request of Muskan and Muskan retired the bill under the agreed rate of rebate. Journalise the above transaction in the books of Neha and Muskan.
Answer:

Question 12.
On Jan. 15, 2006 Raghu sold goods worth Rs. 35,000 to Devendra and drew upto the latter three bills of exchanges. The first bill was for Rs. 5,000 payable after one month, the second bill was for Rs. 20,000 payable after three months and third bill for balance amount for 4 months. Raghu endorsed the first bill in favour of his creditor Dewan in full settlement of a debt of Rs. 5,200. The second bill was discounted by Raghu @ 6% p.a. and the third bill was retained by Raghu till the date of maturity.

Devendra dishonoured the bill on maturity and the bank paid Rs. 30 as noting charges. Four days before the maturity of the third bill Raghu, sent the same for collection to his bank. The third bill was also dishonoured by Devendra and the bank paid Rs. 200 as noting charges. Five days after the dishonour of the bill Devendra paid the entire amount due to Raghu along with interest Rs. 1,000 for this purpose. Devendra obtained a shortterm loan from his bank.

You are requested to record the necessary journal entires in the books of Raghu, Devendra and Dewan and prepare Devendra’s account in Raghu’s books and Raghu’s account in Devendra’s books.
Answer:

.

Note : In this question, there is no information regarding honour of the first bill of Rs. 5,000. Therefore, it has been assumed that the first bill has met on maturity.

Question 13.
Vimal purchased goods Rs. 25,000 from Kamal on Jan. 15, 2006 and accepted a bill of exchange drawn upon him by Kamal payable after two months. On the date of the maturity the bill was duly presented for payment. Vimal dishonoured the bill.
Record the necessary journal entries in the books of Kamal and Vimal when

• The bill was retained by Kamal till the date of its maturity.
• The bill was immediately discounted by Kamal with his bank @ 6% p.a.
• The bill was endorsed by Kamal in favour of his creditor Sharad.
• Five days before its maturity the bill was sent by Kamal to his bank for collection.

Answer:
Journal Entries in the books of Kamal

Question 14.
Abdulla sold goods to Tahir on Jan. 17, 2006 for Rs. 18,000. He drew a bill of exchange for the same amount for 45 days. 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.
Answer:

Question 15.
Asha sold goods worth Rs. 19,000 to Nisha on Mar. 02, 2006. Rs. 4,000 were paid by Nisha immediately and for the balance, she accepted a bill of exchange drawn upon her by Asha payable after three months. Asha discounted the bill immediately with her bank. On the due date Nisha dishonoured the bill and the bank paid Rs. 30 as noting charges. Record the necessary’ entries in the books of Asha and Nisha.
Answer:

Question 16.
On Feb. 02,2006, Verma purchased from Sharma goods forRs. 17,500. Verma paid Rs. 2,500 immediately and for the balance gave a promissory note to Sharma payable after 60 days. Sharma immediately endorsed the promissory note in favour of his creditor.

Gupta for the full settlement of a debt of Rs. 15,400. On the due date of the bill Gupta presented the bill to Verma which the latter dishonoured and Gupta paid Rs. 50 noting charges. On the same date Gupta informed Sharma about the dishonour of the bill. Sharma settled his debt to Gupta by cheque for Rs. 500 which includes noting charges and interest. Varma settled Sharma’s claim by cheque for the same amount.

Record the necessary journal entries in the books of Sharma, Gupta and Verma for the above transaction and prepare Verma’s and Gupta’s account in the books of Sharma. Sharma’s account in the books of Verma. And also Sharma’s account in the books of Gupta.
Answer:

Question 17.
Lilly sold goods to Mathew on 1.3.2006 for Rs. 12,000 and drew upon Mathew a bill of exchange for the same amount payable after two months. Lilly immediately discounted the bill with her bank at 9% p.a. The maturity date of the bill was a non business day (holiday), therefore, Lilly had to present the bill as per the provisions of the Negotiable Instruments Act. 1881. The bill was dishonoured by Mathew and Lilly paid Rs. 45 as noting charges. Mathew settled the claim of Lilly five days after the dishonour of the bill by a cheque, which includes interest @ 12% for the term of the bill. Journalise the above transactions in the books of Lilly and Mathew and prepare Mathew’s account in the books of Lilly and Lilly’s account in the books of Mathew.
Answer:

Question 18.
Kapil purchased goods for Rs. 21,000 from Gaurav on 1.2.2006 and accepted a bill of exchange drawn by Gaurav for the t same amount. The bill was payable after one month. On 25.2.2002  Gaurav sent the bill to his bank for collection. The bill was duly presented by the bank. Kapil dishonoured the bill and the bank paid Rs. 100 as noting charges.
• Record the necessary journal entries for the above transactions in the books of Kapil and Gaurav.
Answer:

Question 19.
On Feb. 14, 2006 Rashmi sold goods Rs. 7,500 to Alka. Alka paid Rs. 500 in cash and for the bank balance accepted a bill of exchange drawn upon her by Rashmi payable after two months. On Apr. 10,2006, Alka approached Rashmi to cancel the bill since she was short of funds. She further requested Rashmi to accept Rs. 2,000 in cash and draw a new bill for the balance including interest Rs. 500. Rashmi accepted Alka’s request and drew a new bill for the amount due payable after 2 months. The bill was accepted by Alka. The new bill was duly met by Alka on maturity. Record the necessary journal entries in the books of Rashmi and Alka and prepared Alka’s account in the books of Rashmi’s and Rashmi’s account in the books of Alka’s.
Answer:

Question 20.
Nikhil sold goods for Rs. 23,000 to Akhil on Dec. 01, 2005. He drew upon Akhil a bill of exchange for the same amount payable after 2 months. Akhil accepted the bill and sent it back to Nikhil. Nikhil discounted the bill immediately with his bank @ 12 p.a. On the due date Akhil dishonoured the bill of exchange and the bank paid Rs. 100 as noting charges. Akhil requested Nikhil to draw a new bill upon him with interest @ 10% p.a. which he agreed. The new’ bill was payable after two months. A week before the maturity of the second bill Akhil requested Nikhil to cancel the second bill. He further requested to accept Rs. 10,000 in cash immediately and drew a third bill upon him including interest of Rs. 500. Nikhil agreed to Akhil’s request. The third bill was payable after one month. Akhil met the third bill on its maturity. Record the necessary journal entries in the books of Nikhil and Akhil and also prepare Akhil’s account in the books of Nikhil and Nikhil’s account in the books of Akhil.
Answer:

Question 21.
On Jan. 01,2006 Vibha sold goods worth Rs. 18,000 to Sudha and drew upon the latter a bill of exchange for the same amount payable after two months. Sudha accepted Vibha’s draft and returned the same to Vibha after acceptance. Vibha endorsed the bill immediately in favour of her creditor Geeta. Five days before the maturity of the bill Sudha requested Vibha to cancel the bill since she was short of funds. She further requested to draw
a new bill upon her including interest of Rs. 200. Vibha accepted Sudha’s request. Vibha took the bill from Geeta by making the payment to her in cash and cancelled the same. Then she drew a new bill upon Sudha as agreed. The new bill was payable after one month. The new bill was duly met by Sudha on maturity. Record the necessary journal entries in the books of Vibha.
Answer:

Question 22.
Following was the position of debtor and creditor of Gautam as on 1.1.2006 :

The following transactions took place in the month of Jan. 2006 :
Jan. 2 Drew on Babu at two months after date at full settlement for Rs. 4,800. Babu accepted the bill returned it on 5.1.2006.
Jan. 4 Babu’s bill discounted for Rs. 4,750.
Jan. 8 Chanderkaia sent promissory note for Rs. 8,000 payable three months after date.
Jan. 10 Promissory note received from Chanderkaia ‘ discounted for Rs. 7,900.
Jan. 12 Accepted Sheiba draft for the amount due payable two months after date.
Jari. 22 Anita sent his promissory note payable after two months.
Jan. 23 Anita’s promissory note endorsed in favour of Manju.
Jan. 25 Accepted Anju’s draft payable after three months.
Jan. 29 Kiran sent Rs. 2,000 in cash and a promissory note for the balance payable after three months.
(Record the above transactions in the proper subsidiary books.)
Answer:

Question 23.
On Jan. 01, 2006 Harsh accepted a month bill for Rs. 10,000 drawn on him by Tanu for letter’s benefit. Tanu discounted the bill on same day @ 8% p.a. On the due date Tanu sent a cheque to Harsh for honour the bill. Harsh duly honoured his acceptance. Record the journal entries in the Books of Tanu and Harsh.
Answer:

Question 24.
Ritesh and Naina were in need of funds temporarily. On August 01,2005 Ritesh drew upon Naina a bill for Rs. 12,000 for 4 months. Naina accepted the bill and returned to Ritesh. Ritesh discounted the Bill @ 8% p.a. Half amount of the discounted hill remitted to Naina. On due date, Ritesh sent the required sum of Naina, who met the bill. Journalise the transaction in the books of both the parties.
Answer:
Journal Entries in the books of Ritesh

Question 25.
On Jan. 01,2006, Bhanu and Naman drew on each other a bill for Rs. 8,000 payable 3 months after the due date for their mutual benefit. On January 02, they discounted with their bank each other’s bill at 5% p.a. on the due date each met his own’s acceptance. Give journal entry in the books of Bhanu and Naman.
Answer:

Question 26.
On Nov. 01, 2005 Sonia drawn a bill on Sunny for Rs. 15,000 for 3 months for mutual accommodation. Sunny accepts the bill and return it to Sonia. Sonia discounted the same with his bankers @ 6% p.a. The proceeds are shared between Sonia and Sunny in the proportion of 2/3rd, 1/3rd respectively. On the due date Sonia remits his proportion to Sunny who fails to meet the bill and as a result Sonia has to meet it. Sunny give a fresh acceptance for the amount due to Sonia plus interest of Rs. 100. Sunny meet his second acceptance on due date. Record the necessary journal entries in the books of Sonia and Sunny.
Answer:

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 7 Depreciation, Provisions and Reserves Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Depreciation, Provisions and Reserves NCERT Solutions for Class 11 Accountancy Chapter 7

Depreciation, Provisions and Reserves Questions and Answers Class 11 Accountancy Chapter 7

Test Your Understanding – I

1. You are looking at the profit and loss account of three business enterprises. You find the term depletion in first case and amortisation in third case. State the type of business of two enterprises are into.
2. A pharmaceutical manufacturer has just developed and registered a patent for a rare medicine. Which term will appear in its profit and loss account regarding the cost of patent written-off.
Answer:
1. Fixed assets, exhaustion of natural resources, specific contracted business.
2. Amortisation.

Test Your Understanding – II

State whether the following statements are True or False.
1. Depreciation is a non-cash expense.
2. ‘ Depreciation is also charged on current assets.
3. Depreciation is decline in the market value of tangible fixed assets.
4. The main cause of depreciation is wear and tear caused by its usage.
5. Depreciation must be charged so as to ascertain true profit or loss of the business.
6. Depletion term is used in case of intangible assets.
7. Depreciation provides fund for replacement.
8. When market value of an asset is higher than book value, depreciation is not charged.
9. Depreciation is charged to reduce the value of asset to its market value.
10. If adequate maintenance expenditure is incurred, depreciation need not be charged.
Answer:
1. True
2. False
3. False
4. True
5. True
6. False
7. False
8. False
9. False
10. True

Test Your Understanding – III

There are two dentists Dr. Aggarwal and Dr. Mehta in your locality who are competitors. Both of them have recently bought an equipment for treatment of patients. Dr. Aggarwal has decided to write-off an equal amount of depreciation every year while Dr. Mehta wants to write-off a larger amount in earlier years. They do not know anything about the methods of depreciation. Can you inform them more about the methods of depreciation they are applying even without knowing anything about accounting in formal. Who is more wise in your opinion? Give reasons in support of your answer.
Answer:
Written down value method is more appropriate because this method is suitable for those assets which are affected by technological changes. Moreover, this method is recognised by income tax department.

Test Your Understanding – IV

Basaria Confectioner bought a cold storage plant on July 01,2003 for Rs. 1,00,000. Compare the amount of depreciation charged for first three years using :
1. Rate of depreciation @ 10% on original cost basis;
2. Rate of depreciation @ on written down value basis;
3. Also, plot the computed amount of depreciation on a graph.
Answer:
………………..
………………..
………………..

Test Your Understanding – V

I. State with reasons whether the following statements are True or False:
(i) Making excessive provision for doubtful debts builds up the secret reserve in the business.
(ii) Capital reserves are normally created out of free or distributable profits.
(iii) Dividend equalisation reserve is an example of general . reserve.
(iv) General reserve can be used only for some specific purposes.
(v) ‘Provision’is a charge against profit.
(vi) Reserves are created to meet future expenses or losses the amount of which is not certain.
(vii) Creation of reserve reduces taxable profits of the business.
Answer:
(i) True
(ii) False
(iii) False
(iv) False
(v) True
(vi) False
(vii) False

II. Fill in the correct words :
(i) Depreciation is decline in the value of …………..
(ii) Installation, freight and transport expenses are a part of …………..
(iii) Provision is a ………….. against profit.
(iv) Reserve created for maintaining a stable.rate of dividend is ………….. termed as
Answer :
(i) Assets
(ii) Acquisition cost
(iii) Charge
(iv) Dividend Equilisation Fund

Short Answer Type Questions

Question 1.
What is Depreciation?
Answer:
Depreciation :
Meaning – Depreciation means a fall in the value of an asset. The net result of an asset’s depreciation is that sooner or later the asset will become useless. Every fixed asset is liable to lose its value, once it begins to be used. It would be proper to consider some important definitions of depreciation.

These are :
“The permanent and continuing diminution in the quality, quantity or value of an asset.” – Pickles “Depreciation may be defined as a measure of the exhaustion of the effective life of an asset from any cause during a given period.” – Spicer and Pegler

“Depreciation is the diminution in the intrinsic value of the asset due to use and or lapse of time.” – Institute of Cost and Management Account (ICMA), London Having considered the above definitions, now depreciation can be defined as a part of the cost of fixed asset which has expired on account of its usage and/or the lapse of time, hi other words, it is reduction in the value of a fixed asset.

Here, it is important to note that depreciation is charged on all fixed assets except land/Usually the value of land appreciates over a period. The reason is that unlike other fixed assets like machinery, furniture it does not have finite economic life.

Accounting Concept of Depreciation – Accounting concept of depreciation means to distribute the cost of fixed assets over its estimated life in a reasonable manner. According to this concept, in an accounting period, diminution in the value of assets can be charged to that accounting period. Annual depreciation in the value of assets is like an expense which is due to use of assets in business functions and thus, is a charge optional but compulsory.

If we do not deduct any expense from the income of an accounting period, the ascertained profit will be wrong and will not disclose correct result of the business. As depreciation is also an expense which refers to cost of use of fixed assets, it must be deducted from the incomes of that accounting period. Therefore, there should be a regular provision of annual depreciation.

Question 2.
State briefly the need for providing depreciation.
Answer:
Need for providing depreciation may be explained as follows :
(i) To ascertain the profit or loss properly : The first objective is to ascertain the correct profit or loss. If depreciation is ignored the cost that is occurring (though not being paid for in cash) in respect .of fixed assets will be ignored. The loss will suddenly loom large when the asset becomes useless or valueless.

Looking at it from another point of view, when goods are produced it involves use of fixed assets – the reduction in their value should be treated like another cost for production of the goods. Depreciation should, therefore, be debited to the Profit and Loss Account before profit is ascertained.

(ii) To show a true and fair view of the financial position : Depreciation, if not charged, would result in assets being stated as a higher value. As a result of this, the Position Statement (Balance Sheet) would not present a true and fair view of the financial position.

(iii) To show the asset at its proper value : The third objective is to show the fixed assets in the Balance Sheet at their proper value. To continue show them at cost, when their value has fallen because of wear and tear will be improper it will tantamount to painting a financial picture better than it is. If depreciation is not allowed, the Balance Sheet would fail to show the true financial position. Therefore, depreciation must be accounted for in order to present the assets at their proper value.

(iv) To retain, out of profits, funds for replacment : The fourth objective of depreciation is to retain, out of profits, funds of replacement of assets. The amounts debited in the Profit and Loss Accounts are retained in the business (no payment is made like other expenses).

These are available for replacement of the asset when its life is over. Funds would not be collected for this purpose without accounting for depreciation. One can see that depreciation has an important role to play in ascertaining the profit and portraying the correct financial position and ensuring continuity of business.

Question 3.
What are the causes of depreciation ?
Answer:
Causes of Depreciation – The main causes of depreciation are:
(1) Wear and Tear : Wear and tear is an important cause of depreciation in the case of tangible assets. It is mainly due to use of the assets.

(2) Efflux of Time : Some, assets have a definite life period like a lease; on the expiry of the life the asset will cease to exist. Other assets, like plant and machinery, may not have a definite life; in their case the life is estimated.

(3) Obsolescense ; If a better machine comes in the market, the old machines may have to be scrapped even though they are capable of being used. It is a reduction in usefulness of the asset.

(4) Accidents : Accidental loss may be permanent but is not continuing and gradual. Of the above, only the first two factors are considered as relevant to depreciation. Factors (3) and (4) are considered only when they occur; they do not happen to all assets. It should be noted that when we talk of depreciation, we think only of fixed assets.

Only in a few cases do assets depreciate. Land may go up in value. But usually the value of assets diminishes continuously. This is so even if an asset is not used, mere passage of time is sufficient to reduce the value of the asset.  One unfortunate thing about depreciation is that it is not visible like other expenses till the very end.

In case of other, expenditure is obvious and, hence, everybody provides for such expenses while calculating loss or profit. It is not so with depreciation. Many people do not deduct depreciation from the gross earning to ascertain their net profit simply because there is no payment for it. This is fallacious. Let us make it clear by an example. Suppose ;

(1) A starts a small manufacturing business and buys machinery worth Rs. 20,000;
(2) He does not realise that this machinery is depreciating and, therefore, uses up all ‘profits’ which his business gives;
(3) By the end of ten years, he has earned a net income of Rs. 30,000, without considering depreciation; and
(4) The machinery bought by A is useless at the end of 10th year. It is clear that A’s net income is not Rs. 30,000 but only Rs. 10,000, because out of Rs. 30,000, he must deduct the loss of machinery worth Rs. 20,000. Would it not have been better if he had deducted every year a due proportion of his expenditure on the machinery before ascertaining his profit.

Further, if A has already used up Rs. 30,000, which according to his mistaken idea are his profits for the 10 years, he cannot continue to run his business for his machinery is no longer serviceable unless he raises funds, say, as a loan. If he had provided proper depreciation he would have retained sufficient funds to buy new machinery when the old one became useless. Provision of depreciation, therefore, is necessary first for ascertaining the true profit, and secondly, for retaining funds in the business so that the asset can be replaced (when its life is over) by a new one.

Question 4.
Explain basic factors affecting the amount of depreciation.
Answer:
Basic factors affecting amount of depreciation – For calculating the amount of depreciation, the most important factors are the following:
(i) Original (Historical) cost of asset – Cost will include all expenses incurred like freight and erection charges up to the point the asset is ready for use.

(ii) The estimated residual or scrap value at its life – Residual value is an estimated sale value of the asset at the end of its economic life to the firm. Suppose, a machine is purchased at a cost of Rs. 50,000. It is expected that it will be used for 15 years at the end of which period it will have a scrap value of Rs. 5,000. We must provide a total ‘depreciation’ of Rs. 45,000 in 15 years.

(iii) Estimated effective or commercial life or the legal life whichever is shorter – Physical life is not important, an asset may still exist physically but may not be capable of producing goods at a reasonable cost.

If, for instance, an asset can work for twenty years but is likely to lose its commercial value within ten years, life for the purpose of accounting should be considered as only ten years. Depreciation therefore, should be provided each year so that the book value of the asset is reduced to its estimated scrap value at the end of its useful life.

Question 5.
Distinguish between Straight Line Method and Written Down Value Method (Fixed Instalment Method and Diminishing Balance Method) of calculating depreciation.
Answer:
Difference between Straight Line Method and Written Down Value Method (Fixed Instalment Method and Diminishing Balance Method) :

Question 6.
In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier years. Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair.
Answer:
Straight line method is suitable for assets in which repair charges are less, the possibility of obsolescence is less and scrap value depends upon the time period involved. Written down value method is suitable for assets, which are affected by technological changes and require more repair expenses with the passage of time such as plant
and machinery, motor vehicle etc. In this problem, written down value method is suitable for charging depreciation.

Question 7.
What are the effects of depreciation on profit and loss account and balance sheet?
Answer:
Under straight line method, same amount is charged as depreciation in profit and loss account which makes comparison of profits for different years easy, with the passage of time, work efficiency of asset decrease and repair and maintenance expenses increase.

The total amount charged against profit on account of depreciation will not be uniform throughout the life of the asset, adversely affect the profit and loss account and balance sheet. Written down value method results the equal burden on profit and loss account every year. This method is suitable for fixed assets which lasts for long period, not adversely affects the position of Balance
Sheet.

Question 8.
Distinguish between ‘Provision’ and ‘Reserve’.
Answer:
Difference between Provision and Reserve’:

Question 9.
Give four examples each of ‘Provision’ and ‘Reserve’.
Answer:
Provisions – There are certain expenses or losses which are related to current accounting period but amount of which is not known with certainty because they are not yet recovered. It is necessary to make provision for such losses or expenses. Examples of provisions are :
(i) Provision for Depreciation
(ii) Provision for Bad & Doubtful Debts
(iii) Provision for Taxation
(iv) Provision for Repairs and Renewals

Reserves – When a part of profits will be set aside and retained in the business to provide certain future needs like growth and expansion or to meet future contingencies and known as Reserves.
Examples of reserves are:
(i) Workman Compensation Fund
(ii) General Reserve
(iii) Investment Fluctuation Fund
(iv) Capital Reserve
(v) Dividend Equalization Reserve
(vi) Debenture Redemption Reserve

Question 10.
Distinguish between ‘Revenue Reserve and ‘Capital Reserve’.
Answer:

Question 11.
Give four examples each of ‘Revenue Reserve’ and ‘Capital Reserve’.
Answer:
Revenue Reserves and Capital Reserves :
Revenue Reserves are created out of revenue profits which are available for distribution as dividend. Examples of revenue reserves are :
(i) General Reserves,
(ii) Dividend Equalisation Reserve,
(iii) Debenture Redemption Reserve, and
(iv) Investment Fluctuation Reserve, etc.

Capital Reserves are created out of capital profits and are normally not available for distribution as cash dividend. Examples of capital reserves are :
(i) Profit prior to incorporation,
(ii) Premium on issue of shares or debentures,
(iii) Profits on redemption of debentures,
(iv) Profit on forfeiture of shares,
(v) Profit on sale of fixed assets,
(vi) Capital redemption reserve, and
(vii) Profit on revaluation of fixed assets and liabilities.
It is to be noted that al 1 capital profits should, therefore, be regarded as Capital Reserve.

Question 12.
Distinguish between ‘General Reserve’ and ‘Specific Reserve’.
Answer:
General reserve is the amount that is set aside out of profits which is not created for any specific purpose. It is available for any future contingency or expansion of the business. Such reserve strengthens the financial position of the business. It is to be noted that General Reserve and Contingency Reserve generally mean the same thing.
Specific reserve is that reserve which is created for specific purpose and can be utilised only for that purpose.

For example, Dividend Equalisation Reserve is a specific reserve because it is created to maintain steady rate of dividend. Thus, this reserve will be utilised to keep the dividend up in the year in which the profits are insufficient. Debenture Redemption Fund, Capital Redemption Reserve, Development Rebate Reserve etc., are other examples of specific reserve.

Question 13.
Explain the concept of ‘Secret Reserve’.
Answer:
Secret Reserve – Secret Reserve is a reserve which does not appear in the balance sheet. It may also help to reduce the disclosed profits as also the tax liability. The secret reserve can be merged with profits during the lean period to show improved profits. Secret Reserve is not known to outside state It may be created from the following :
(i) Under valuation of inventories.
(ii) Charging capital expenditure to profit and loss account.
(iii) Showing contingent liabilities as actual liabilities.
(iv) Making excessive provision for bad and doubtful debts.
It is maintained to prevent competition from other firms within reasonable limits.

Long Answer Type Questions

Question 1.
Explain the concept of depreciation. What is the need for changing depreciation and what are the causes of depreciation?
Answer:
Meaning – In every business there are certain assets of a fixed nature that are needed for the conduct of business operations. Some examples of such assets are building, plant and machinery, motor vehicles, furniture, office equipments, etc.

These assets have a definite span of life after the expiry of which the assets will lose their usefulness for the business operations. Fall in the value and utility of such assets due to their constant use and expiry of time is termed as depreciation. In other words, the process of allocation of the cost of a fixed asset over its useful life is known as depreciation.

Definitions – Some of the well-known definitions of depreciation are. given below :
(1) “Depreciation is the gradual and permanent decrease in the value of an asset from any cause.” R. N. Carter
(2) “Depreciation may be defined as the permanent and continuing diminution in the quality, quantity or the value
of an asset.” – William Pickles
(3) “Depreciation is the measure of the exhaustion of the effective life of an asset from any cause during a given period.” – Spicer & Peglar
(4) “It is a matter of common knowledge that all fixed assets such as plant, machinery, building, furniture etc. gradually diminishing value as they get older and become worn out by constant use in the business.” – J.R. Batliboi

Need, Importance or Objects of providing Depreciation :
(1) For ascertaining the true profit or loss – The true profit of a business can be ascertained only when all costs incurred for the purpose of earning revenues have been debited to the Profit-and Loss Account. As the assets are used in earning revenues, the depreciation in the value of an asset is as much an expense as any other, such as wages, salary, rent etc.

(2) For showing the ‘true and fair view’ of the financial position If the depreciation is not charged, the assets will be shown in the Balance Sheet at an amount which is in excess of their true values. As Such, the Balance Sheet will not present ‘the true and fair view’ of the financial position of a business.

(3) To ascertain the accurate cost of production – A depreciation is also an item of expense, the correct cost of production cannot be calculated unless it is also taken into account. Sale price chargeable from customers is determined on the basis of cost of production and hence if the depreciation is not included in cost of production, the sale price will be fixed at lower rates and this in turn will lead to reduced profits.

(4) To provide funds for replacement of assets – Depreciation though debited to Profit & Loss Account, is not paid in cash like other expenses. Hence, the amount of depreciation is retained in the business and is used for the replacement of fixed assets after the expiry of their estimated span of life.

(5) To prevent the distribution of profits out of capital – If the depreciation is not charged, the profit shown by the Profit and Loss Account will be in excess of the actual profits. Such an excess profit may be wholly withdrawn by the proprietor or may be distributed among the shareholders as dividend. Hence, the amount of dividend distributed will also include the amount of depreciation which is actually a part of capital.

(6) For avoiding over payment of Income Tax – If depreciation is not debited to Profit and Loss Account, the net profit shown by it will be in excess of actual profits. Hence, we will also have to pay more income tax.

(7) Other objectives – If the depreciation is not charged, the net profit shown by Profit & Loss Account will exceed the actual profits and as a result:
(i) Employees may demand an increase in wages and bonus
(ii) It may also result in extravagance
(iii) It may lead to increase in competition in that type of business.

Causes of Depreciation – Main causes of depreciation are as follows :
(1) By Constant Use – Due to the constant use of fixed assets in business operations wear and tear arise in them which results in the reduction of their values.

(2) By Expiry of Time – The value of majority of assets decreases with the passage of time even if they are not being put to use in the business. Natural forces such as rain, winds, weather etc. contribute to the deterioration of their values.

(3) By Expiry of Legal Rights – There are certain assets which have a definite span of life such as Lease. For example, if a lease has been obtained for 20 years for Rs. 5,00,000, it will lose 1 /20th, i.e. 25,000 of its value each year whether utilised or not, so that at the end of 20th year its value is reduced to zero.

(4) By Obsolescence – Quite often, due to new inventions and improved techniques the old assets become obsolete and may have to be discarded even if they can be put to use physically.

(5) By Accident – Sometimes a machine may be destroyed due to fire etc. or a vehicle may be damaged due to accident.

(6) By Depletion – Depletion is the decrease in the value of wasting assets such as mines, oil-wells etc. due to their constant working.

(7) By Permanent Fall in Market Price – Though, the fluctuations in the market value of fixed assets are not recorded because such assets are not meant for resale but for use in the business, sometimes the fall in the value of certain fixed assets is treated as depreciation such as permanent fall in the value of investments.

Question 2.
Discuss in detail the Straight Line Method and Written Down Value Method of depreciation. Distinguish between the two and also give situations where they are useful.
Answer:
Straight Line Method This method is also termed as ‘Original Cost Method’ because under this method depreciation is charged at a fixed percentage on the original cost of the asset. The amount of depreciation remains equal from year to year and as such the method is also known as ‘Equal Instalment Method’ or ‘Fixed

Instalment Method’. Under this method, the amount of depreciation is calculated by deducting the scrap value from the original cost of the asset and then by dividing the remaining balance by the number of years of its estimated life.

The depreciation so calculated and charged annually will reduce the originial cost of the asset to zero, or its scrap value, as the case may be, at the end of its estimated life. Under this method, the amount of depreciation is calculated by the following formula:

Yearly Depreciation:
\(\frac{\text { OriginalCost of the Asset-Estimated Scrap Value }}{\text { Estimated Life of the Asset }}\)

For example, if the original cost of the asset is Rs. 1,00,000 and its scrap value is likely to be Rs. 15,000 after its estimated life of 10 years, the depreciation written off will be
\(\frac{1,00,000-15,000}{10}=\text { Rs. } 8,500 \text { every year}\)

Merits :
(1) Simplicity – Calculation of depreciation under this method is very simple and as such the method is widely popular,
(2) Equality of Depreciation Burden – Under this method, equal amount of depreciation is debited to the Profit and Loss Amount of each year. Hence, the burden of depreciation on each year’s net profit is equal.
(3) Assets can be completely written off – Under this method, the book value of an asset can be reduced to zero, which is not possible under some other methods.
(4) Knowledge of Original Cost and Upto-date depreciation

Under this method, the original cost of the asset is shown in the Balance Sheet and the upto-date depreciation is shown as a direct deduction from it. As such the information of Original Cost of the asset and its upto-date depreciation is available at any time. Various assets also maintain their separate identity under this method.

Demerits :
(1) Difficulty in computation – When there are different machines having different life-spans* the computation of depreciation becomes complicated because the depreciation on each machine will have to be calculated separately.

(2) Unequal charge against income — Repair charges go on increasing year by year as the asset becomes older but as the equal depreciation is charged under this method each year, the total burden charged to Profit and Loss Account in respect of depreciation and repairs put together will not be equal each year. The total burden will be lighter in earlier years and heavier during the later years.

(3) Undue pressure in later years – It is a well-known fact that the efficiency and usefulness of a machine is more in the earlier years in comparison to later years. As such, more depreciation should be charged in earlier years in comparison to the later years, whereas, depreciation remains constant from year to year under this method.

(4) Omission of interest factor – This method does not take into ’ consideration the loss of interest on the amount invested in the asset. The amount.would have earned interest, had it been invested outside the business.

(5) Unrealistic to write-off the value of asset to zero – Sometimes, even after the value of an asset is reduced to zero in the books, it continues to be used in the business in actual practice.

(6) Difficulty in the determination of scrap value – It is quite difficult to assess the true scrap value of the asset after a long period, say 10 to 20 years from the date of its installation. Suitability – This method is suitable for those assets which do not require much expenses on repairs and renewals and which have a comparatively shorter life and less cost such as furniture, patents etc.

Accounting Treatment : Following entries are passed in this method :

Written Down Value Method – Under this method, as the value of asset goes on diminishing year after year, the amount of depreciation charged every year also goes on declining. For example, if a machine is purchased for Rs. 20,000 and depreciation is to be charged at 10% p.a. according to ‘Written Down Value Method’, the depreciation will be charged as under :

It will be observed from the above calculations that each year’s depreciation is calculated on the book value of the asset at the beginning of that year, rather than on the original cost. As the value of the asset and also the depreciation charged on it goes on reducing year after year, the method is also known as ‘Reducing Instalment Method’ or ‘Diminishing Balance Method’.

Merits :
(1) Easy calculation — It is easy to calculate the depreciation under this method, even if some new assets are purchased year after year. Different assets are grouped for the purpose of providing depreciation.

(2) Equal charge against income – In this method, the total burden on Profit & Loss Account in respect of depreciation and repairs put together remains almost equal year after year. This is so because in the initial years depreciation is more in comparison to repair charges whereas, in the later years, as the asset gets older, the amount of depreciation goes on decreasing while the expenses on repairs go on increasing, thus keeping the combined charge of depreciation and repairs almost uniform.

(3) No undue pressure in later years – The efficiency,and usefulness of a machine is more in the earlier years than in later years. Hence, the depreciation in first few years should be more in comparison to the later years. This is ensured by adopting the diminishing balance method.

(4) Balance of asset is never written off to zero – This method ensures that the asset is never reduced to zero so that some depreciation, however small, is debited to Profit & Loss Account so long as the asset remains in use.

(5) Approved method by Income Tax Authorities – This method of providing depreciation is permissible under Income Tax regulations.

Demerits :
(1) Asset cannot be completely written off – Under this method, the value of an asset, even if it becomes obsolete and useless, cannot be reduced to zero and some balance, however small, would continue on Asset Account.

(2) Omission of Interest Factors – As with the original cost method, this method also does not take into consideration the loss of interest on the amount.

(3) Difficulty in determining the rate of depreciation – Under this method, the rate of providing depreciation cannot be easily decided. The rate is generally kept higher because it takes a very long time to write an asset down to its scrap value. If the rate of depreciation is kept lower, the asset may become obsolete earlier.

(4) Knowledge of original cost and upto-date depreciation not possible – Under this method, the original cost of various assets is not shown in the Balance Sheet. Sometimes, the assets are grouped in such a way that it becomes difficult to know their specific, identity. The residue balance of some assets may continue in the Balance Sheet even after they have been actually scrapped.

Suitability – This method is very suitable in case of assets having a comparatively long life and which require considerable repairs in the later years when they become older, such as building, plant etc.

Distinction between the two methods :

Question 3.
Describe in detail two methods of recording depreciation. Also give the necessary journal entries.
Answer:
Methods of Recording Depreciation – There are two methods of recording depreciation in the books :
(1) First Method – By Charging to Asset Account – In this case ‘Provision for Depreciation Account’ is not maintained and the depreciation is directly credited to the ‘Asset A/c’. Hence the Asset A/c appears in the ledger at a written down value.

(2) Second Method – By Creating Provision for Depreciation Account – In such a case, the depreciation is credited to ‘Provision for Depreciation A/c’ instead of ‘Asset A/c’ and hence the Asset A/c always appears in the ledger at its original cost. The balance .on the credit side of ‘Provision for Depreciation A/c’ shows the total amount of depreciation accumulated to date. However, when the asset is sold or discarded, the total accumulated depreciation for that asset is transferred to the credit side of the Asset A/c with the help of the following entry :

Provision for Depreciation A/c — Dr.
To Asset A/c

After making the above entry, the balance in the provision for depreciation account will indicate the accumulated depreciation on the assets in service or unsold assets.
First Method :
Entries for charging depreciation to asset account – In this method depreciation is deducted from the depreciable cost of the asset and charges to profit and loss account. Journal Entries are as follows :

(i) For recording purchase of Asset –
Asset A/c — Dr.
To Bank/Vendor A/c

(ii) For deducting depreciation amount –
Depreciation A/c — Dr.
To Asset A/c

(iii) For charging depreciation expenses to Profit and Loss Account –
Profit & Loss A/c –Dr.
To Depreciation A/c
Fixed asset in this method appears at net book value i.e., cost less depreciation.

Second Method :
Journal Entries for creating Provision for Depreciation Account – In this method, a separate, account namely provision for depreciation or accumulated depreciation account is created. Asset account continues to appear at its original cost year after year over its entire life.
Journal Entries

(i) For recording purchase of Asset
Asset A/c — Dr.
To Bank/Vendor A/c

(ii) For creating depreciation amount to provision for depreciation account –
Depreciation A/c — Dr.
To Provision for Depreciation A/c

(iii) For charging depreciation to Profit and Loss Account
Profit & Loss A/c — Dr.
To Depreciation A/c
In the balance sheet, the fixed asset continues to appear at its original cost.

Question 4.
Explain the determinants or factors of the amount of depreciation.
Answer:
Factors determining the amount of depreciation – It is impossible to calculate the actual and true amount of depreciation. It can only be estimated by keeping the following factors into considerations :

(1) Total cost1 of the asset – The cost of a fixed asset is determined . after adding all expenses incurred for bringing the asset to usable condition, such as freight, transit insurance and installation costs etc.

(2) Estimated useful life of asset-Useful life of an asset is estimated in terms of number of years, it can be effectively used for business operations. For example, if a machine can work for 25 years but is likely to become obsolete in 15 years on account of availability of a better type of machine due to improved technology, its useful life will be considered as only 15 years.

(3) Estimated scrap value – It is the estimated sale value of the asset at the end of its useful life. It is also known as residual value or break-up value. For example, a machine is purchased for Rs. 60,000 and Rs. 4,000 are spent on its freight and Rs. 1,000 for installation. It is estimated that its serviceable life will be 10 years at the end of which period it will have a scrap value of Rs. 8,000. Depreciation in this case will be calculated on Rs. 57,000
(i.e., Rs. 60,000 + Rs. 4,000 + Rs. 1,000 – Rs. 8,000). Depreciation charged on this machine will be \(\frac{57,000}{10}\) = Rs. 5,700 every year.

(4) Depreciable cost – Depreciable cost of an asset is equal to its cost tess net residual value of the asset. Suppose in the above problem, the total cost of asset including installation expenses and freight is Rs. 20,000. The depreciable cost will be calculated as Rs. 14,300 (i.e., Rs. 20,000 – Rs. 5,700).
Depreciabe cost is distributed and charged as expense over the estimated useful life of the asset.

Question 5.
Name and explain different types of reserves in detail.
Answer:
Reserves – Reserves mean amounts set aside out of profits and other surplus to meet future uncertainties. In other words, a reserve is meant for meeting any unknown liability or loss in the future.

According to William Pickles, “Reserves mean the amounts set aside out of profits and other surpluses, which are not earmarked in any way to meet any particular liability, known to exist on the date of the Balance Sheet.”

Types of Reserves

Revenue Reserves – These reserves, come into existence out of profits which have been earned in the course of day-to-day business operations. Therefore, the revenue reserves represent undistributed profits and as such are available for the distribution of dividends. Kohler has defined revenue reserves as, “that portion, or any detail thereof, the net worth or total equity of an enterprise representing retained earnings available for withdrawal by proprietors.”

Revenue reserves may be of the following of two types –

(A) General Reserve – Usually, the businessmen do not withdraw the entire profits from the business but retain a part of it in the business to meet unforeseen future uncertainities. Profits so retained in the business for ‘a rainy day’ are known as ‘General Reserve’. Similarly, companies also do not distribute the entire profits as dividends but keep aside a part of it in the form of General Reserve. Such reserves are also termed as Contingency Reserves or Free Reserves because these are not created for any specific puipose and can be freely used for any purpose.

Objectives : General Reserves may be created or utilized for any of the following purposes –
(1) For meeting unforeseen losses.
(2) For the strengthening of financial position of business.
(3) For expansion of business through internal resources or ploughing back of profits.
(4) For equalization of dividends over year, in case of Companies.
It is not compulsory and binding upon the business enterprises to maintain general reserves. Such reserves may be created in the year in which the profits are sufficient and the management thinks it advisable to do so. General Reserves are shown on the liabilities side of the Balance Sheet under the head ‘Owner’s Equity’.

(B) Specific Reserves – Such a reserve is created for a speicfic purpose and can be utilised only for that purpose. Examples of specific reserves are :
(1) Dividend Equalisation Reserve – Such a reserve is created to maintain steady rate of dividend. In the years in which the profits are sufficient, a part of the profit is transferred to such reserve and it is utilised to keep the dividend up in the year in which the profits are insufficient.

(2) Reserve for Replacement of Asset – Such a reserve is created to provide finances for the replacement of an asset at the end of its serviceable life. The amount of annual depreciation charged on assets is only capable of providing the original cost of the asset but the replacement of the asset will require a large sum of money due to the inflationary trend of prices. As such, a ‘reserve for replacement of asset’ is created to provide for the extra amount required for the purchase of the new asset.

For example, if an asset was purchased 10 years ago at a cost of Rs. 10 Lac and if the depreciation has been provided @ 10% on the original cost, it will proide only a sum of Rs. 10 Lac. But, suppose the current price of the asset is Rs. 40 Lac, an additional sum of Rs. 30 Lac will be required for purchasing a new asset. Therefore, the reserve is created for providing this additional sum.

‘Reserve for Replacement of Asset’ is created by annually transferring a certain amount from Profit & Loss Appropriate A/c. Following entry is passed for this purpose :
Profit & Loss Appropriate A/c — Dr.

To Asset Replacement Reserve A/c (Amount transferred out of divisible profits)
The amount of replacement reserve is either kept and utilized in the business itself or is invested in outside securities bearing interest at a pre-determined rate. When this reserve is invested in outside securities it is known as ‘reserve fund’.

Such a reserve is created out of divisible profits. In other words, instead of declaring higher dividends the amount is transferred to replacement reserve. If such a reserve had not been created, the profit would have been distributed as dividend and the amount would have gone outside the business. The amount thus saved is accumulated from year to year and is utilized for the specific purpose of replacement of the asset.

Capital Reserves – In addition to the normal profits, capital profits are also earned in the business from many sources. The reserves created out of such capital profits are known as Capital Reserves. Such reserves generally, are not available for distribution as cash dividend among the shareholders of a company.

Profits received from the following sources are termed as capital profits :
(1) Profits on the sale of fixed assets.
(2) Profits on the revaluation of fixed assets and liabilities.
(3) Premiums received on issue of shares or debentures.
(4) Profit on the purchase of a running business.
(5) Profit prior to the incorporation of a company.
(6) Profit from the reissue of forfeited shares.
(7) Profit on redemption of debentures.

All the capital profits mentioned above should be treated as Capital Reserves.
Capital reserves are used to write off capital losses and for the issue of fully paid bonus shares. Usually, the capital reserves are not available for distribution as dividends. Some capital reserves can however be utilized to distribute dividends subject to fulfilment of the following conditions :
(1) Articles of the company must not prohibit such dividend.
(2) Capital profits must have been realised in cash.
(3) Such profit remains after a fair revaluation of assets and liabilities.
All the same, it would be a prudent policy on the part of the management not to distribute such profits. They should be kept in the business to strengthen its financial position.

Question 6.
What are Provisions? How are they created? Give amounting treatment in case of provision for Doubtful Debts.
Answer:
Provisions – According to the Companies Act the term Provision refers to any of the following amounts :
(a) The amount written off or retained by way of providing for depreciation renewals or diminution in value of assets; or

(b) The amount retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. It should be clearly understood that if the amount of a known liability can be determined with reasonable accuracy, it must be classified as an outright liability and not a provision. Also if any excess provision is made knowingly or intentionally, the amount in excess of the actual need will be treated as reserve.

Examples of Provisions – Provisions are created for the fulfilment of various objectives :
(1) Provision for Depreciation, Repairs and Renewals of assets.
(2) Provision for Taxation.
(3) Provision for Bad and Doubtful Debts.
(4) provision for Discount on Debtors.
(5) Provision for Fluctuations in the value of Investments.

Characteristics or Features of Provision –
(1) Provision is made to meet a known liability.

(2) The liability is known but the amount of such liability cannot be determined with reasonable accuracy. For example, it is almost certain that some debts will prove irrecoverable but the exact amount of bad debts cannot be predicted with certainty.

(3) Provision is a charge against profits and as such reduces the profits of the year in which it is created. The loss when actually occurs will be written off against such provision and thus the profit of the year in which such loss occurs will not be affected.

Purpose or Importance of Provisions :
(1) To ascertain the true net profit of the business – In order to ascertain the true profit of a business it is necessary that all expenses pertaining to that year, whether paid or outstanding, must be debited to Profit and Loss account and a provision should also be made for expenses or liabilities the amount of which cannot be estimated with reasonable accuracy. For example, the provision should be made for doubtful debts, because the amount of such bad debts cannot be estimated very accurately.

(2) To ascertain the true financial position of the business – The Balance Sheet will depict the true and fair view of the financial position of the business only if adequate provision is made for all the anticipated losses and expenses.

(3) To provide for known losses in the future – Funds will be required’to meet the losses and liabilities that are likely to occur in the near future. As such, provisions are made to provide funds for meeting. Those losses such as provision for taxation, provision for repairs, provision for damages likely to arise from a pending suit and such others.

(4) For the equitable distribution of expenses – For example, if a machine is estimated to run for 10 years and the total amount of repairs expected to be incurred during its entire life span is Rs. 20,000, a ‘provision for repairs A/c’ will be created by debiting Rs. 2,000 to each year’s Profit and Loss account. Actual expenses of repairs incurred each year will be debited to this account. Hence, it will put equal burden on the Profit and Loss account of each year in respect of expenses of repairs which will be very fight in the earlier years but definitely heavy in the later years.

Accounting for Provisions – Provision may be created for the following:
(1) Provision for Doubtful Debts
(2) Provision for Discount

Provision for Doubtful Debts – When an amount become irrecoverable from a debtor, the amount is debited to Bad-Debts A/c and credited to the personal account of the debtor. But this is not sufficient. At the end of the year, the list of the debtors may still contain some debts which are doubtful of recovery.

But the actual amount of the bad-debts relating to the current year would only be known in the next accounting year. As such, in order to ascertain the true profit of the current year a provision called Provision for Doubtful Debts is created out of current year’s profits to provide for the possible bad- debts which would be known in the next year.

As the exact amount of possible bad-debts in the next year cannot be ascertained with reasonable accuracy, a provision for doubtful debts is made at a fixed percentage on debtors. Such percentage is fixed on the basis of past experience.

Accounting Treatment – Provision for Doubtful Debts, on the one hand, is shown on the debit side of P & L A/c and on the other hand, is also shown as a deduction from debtors on the assets side of the.Balance Sheet. ‘

In this question the amount of old provision exceeds the total of bad-debts and new provision. Hence, the difference will be written on . the credit side of Profit & Loss Account.

Numerical Questions

Question 1.
On April 01, 2000 M/s Bajrang Marbles purchased a Machine Rs. 2,80,000 and spent Rs. 10,000 on its carriage and Rs. 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be Rs. 20,000.
(a) Prepare Machine account and Depreciation account for the first four years by providing depreciation on Straight Line Method. Accounts are closed, on 31st March every year.
(b) Prepare Machine account, Depreciation account and Provision for Depreciation account (or Accumulated Depreciation account) for the first four years by providing depreciation using Straight Line Method. Accounts are closed on March 31 every year.
Answer:
part-a

part – b

Question 2.
On July 01, 2000, Ashok Ltd. purchased a machine for Rs. 1,08,000 and spent Rs. 12,000 on its installation. At the time of purchase it was estimated that the effective commercial life of the machine will be 12 years and after 12 years its salvage value will be Rs. 12,000. Prepare Machine Account and Depreciation Account in the books of Ashok Ltd. for first three years, if depreciation is written of according to Straight Line Method. The account are closed on 31st December every year.
Answer:

Question 3.
Reliance Ltd. purchased a second hand machine for Rs. 56,000 on October 1,2001 and spent Rs. 28,000 on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for Rs. 6,000 at the end of its useful life of 15 years. Moreover an estimated cost of Rs. 1,000 is expected to be incurred to recover the salvage value of Rs. 6,000. Prepare Machine Account and Provision for depreciation account for the first three years charging depreciation by Fixed Installment Method. Accounts are closed on December 31, every year.
Answer:

Question 4.
Berlia Ltd. purchased a second hand machine for Rs. 56,000 on July 01, 2001 and spent Rs. 24,000 on its repair and installation and Rs. 5,000 for its carriage. On September 01,2002. It purchased another machine forRs. 2,50,000 and spent Rs. 10,000 on its installation.
(a) Depreciation is provided on machinery @ 10% p.a. on original cost method annually on December 31. Prepare Machinery Account and Depreciation Account from the years 2001 to 2004.
(b) Prepare Machinery Account and Depreciation Account from the years 2001 to 2004 if depreciation is provided on machinery @ 10% p.a. on written down value annually on December 31.
Answer:

part – b

Question 5.
Ganga Ltd. purchased a machinery on January 01,2001 for Rs. 5,50,000 and spent Rs. 50,000 on its installation. On September 01,2001 it purchased another machine forRs. 3,70,000. On May 01, 2002 it purchased another machine for Rs. 8,40,000 (including installation expenses). Depreciation was provided on machinery @ 10% p.a. on Original Cost Method annually on 31st December. Prepare :
(a) Machinery account and depreciation account for the year 2001, 2002, 2003 and 2004.
(b) If depreciation is accumulated in provision for depreciation account then prepare Machine Account and Provision for Depreciation Account for the years 2001, 2002, 2003 and 2004.
Answer:
Part (a)

Part (b)

Question 6.
Azad Ltd. purchased furniture on October 01, 2002 for Rs. 4,50,000. On March 01, 2003 it purchased another furniture for Rs. 3,00,000. On July 01, 2004 it sold off the first furniture purchased in 2002 for Rs. 2,25,000. Depreciation is provided at 15% p.a. Prepare Furniture Account and Accumulated Depreciation Account for the years ended on March 31, 2003, March 31, 2004, and March 31, 2005. Also give the above two accounts if furniture Disposal Account is opened.
Answer:

Question 7.
M/s. Lokesh Fabrics purchased a Textile Machine on April 01,2001 for Rs. 1,00,000. On July 01,2002 another machine costing Rs. 2,50,000 was purchased. The machine purchased on April 01, 2001 was sold for Rs. 25,000 on October 01, 2005. The company charges depreciation @ 15% p.a. on straight line method. Prepare Machinery Account and Machinery Disposal Account for the year ended March 31, 2006.
Answer:

Question 8.
The following balances appear in the books of Crystal Ltd. on Jan. 01, 2005 :
Machinery Account on — 15,00,000
Provision for Depreciation Account — 5,50,000
On April 01, 2005 a machinery which was purchased on Jan. 01, 2002 for Rs. 2,00,000 was sold for Rs. 75,000. A new machine was purchased on July 01, 2005 for Rs. 6,00,000. Depreciation is provided on machinery at 20% p.a. on Straight Line Method and books are closed on December 31 every year. Prepare the Machinery Account and Provision for Depreciation Account for the year ending December 31, 2005.
Answer:

Question 9.
M/s. Excel Computers has a debit balance of Rs. 50,000 (original cost Rs. 1,20,000) in computers account on April 01,2000. On July, 01, 2000 it purchased another computer costing Rs. 2,50,000. One more computer was purchased on January 01, 2001 for Rs. 30,000. On April 01, 2004 the computer which has [ purchased on July 01, 2000 became obsolete and was sold for Rs. 20,000. A new version of the IBM computer was purchased on August 01, 2004 for Rs. 80,000. Show Computers Account in the I books of Excel Computers for the years ended on March 31,2001, 2002,2003,2004 and 2005 computer is depreciated @ 10% p.a. on straight line method basis.
Answer:

Question 10.
Carriage Transport Company purchased 5 trucks at the cost of Rs. 2,00,000 each on April 01,2001. The company writes off depreciation @ 20% p.a. on original cost and closes its books on December 31 evey year. On October 01,2003, one of the trucks is involved in an accident and is completely destroyed. Insurance company has agreed to pay Rs. 70,000 in full settlement of the claim. On the same date the company purchased a second hand truck for Rs. 1,00,000 and spent Rs. 20,000 on its overhauling. Prepare Truck Account and Provision for Depreciation Account for the three years ended on 31st December, 2003. Also give Truck Account if Truck Disposal Account is prepared.
Answer:

Question 11.
Saraswati Ltd. purchased a machinery costing Rs. 10,00,000 on January’ 01,2001. A new machinery’ was purchased on 1 May, 2002 for Rs. 15,00,000 and another on July 01, 2004 for Rs. 12,00,000. A part of the machinery which originally cost Rs. 2,00,000 in 2001 was sold for Rs. 75,000 on October 31, 2004. Show the Machinery Account, Provision for Depreciation Account and Machinery Disposal Account for 2001 to 2005 if depreciation is provided at 10% p.a. on original cost and account are closed on December 31 every year.
Answer:

Question 12.
On July 01, 2001 Ashwani purchased a machine for Rs. 2,00,000 on credit. Installation expenses Rs. 25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be Rs. 20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2001 and prepare necessary ledger accounts for first three years.12. On July 01, 2001 Ashwani purchased a machine for Rs. 2,00,000 on credit. Installation expenses Rs. 25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be Rs. 20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2001 and prepare necessary ledger accounts for first three years.
Answer:

Question 13.
On October 01, 2000 a truck was purchased for Rs. 8,00,000 by Laxmi Transport Ltd. Depreciation was provided at 15% p.a. on the diminishing balance basis on this truck. On December 31, 2003 this truck was sold for Rs. 5,00,000. Accounts are closed on 31st March every. Prepare Truck Account for the four years.
Answer:

Question 14.
Kapil Ltd. purchased a machinery’ on July 01,2001 for Rs. 3,50,000. It purchased two additional machines, on April 01, 2002 costing Rs. 1,50,000 and on October 01, 2002 costing Rs. 1,00,000. Depreciation is provided @ 10% p.a. on straight line basis. On January 01,2003, first machinery become useless due to technical changes. This machinery was sold for Rs. 1,00,000. Prepare Machinery Account for four years on the basis of calendar year.14. Kapil Ltd. purchased a machinery’ on July 01,2001 for Rs. 3,50,000. It purchased two additional machines, on April 01, 2002 costing Rs. 1,50,000 and on October 01, 2002 costing Rs. 1,00,000. Depreciation is provided @ 10% p.a. on straight line basis. On January 01,2003, first machinery become useless due to technical changes. This machinery was sold for Rs. 1,00,000. Prepare Machinery Account for four years on the basis of calendar year.
Answer:

Question 15.
On January 01,2001, Satkar Transport Ltd. purchased 3 buses for Rs. 10,00,000 each. On July 01, 2003, one bus was involved in an accident and was completely destroyed and Rs. 7,00,000 were received from the Insurance Company in full settlement. Depreciation is written off @ 15% p.a. on diminishing balance method. Prepare Bus Account from 2001 to 2004. Books are closed on December 31 every year.
Answer:

Question 16.
On October 01, 2001 Juneja Transport Company purchased two trucks for Rs. 10,00,000 each. On July 01, 2003, one truck was involved in an accident and was completely destroyed and Rs. 6,00,000 were received from the Insurance Company in full settlement. On December 31,2003 another truck was involved in an accident and destroyed partially, which was not insured. It was sold off for Rs. 1,50,000. On January 31, 2004 company purchased a fresh truck forRs. 12,00,000. Depreciation is to be provided at 10% p.a. on the written down value every year. The books are closed every’ year on March 31. Give the Truck Account from 2001 to 2004.
Answer:

Question 17.
A Noida based construction company owns 5 cranes and the value of this asset in its books on April 01, 2001 is Rs. 40,00,000. On October 01, 2001 it sold one of its cranes whose value was Rs. 5,00,000 on April 01, 2001 at a 10% profit. On the same day it purchased two cranes for Rs. 4,50,000 each. Prepare Cranes Account. It closes the books on December 31 and provides for depreciation on 10% written down value.
Answer:

Question 18.
Shri Krishan Manufacturing Company purchased 10 machines atRs. 75,000 each on July 01,2000. On October 01,2002, one of the machines got destroyed by fire and an insurance claim of Rs. 45,000 was admitted by the company. On the same date another machine is purchased by company for Rs. 1,25,000. The company writes off 15% p.a. depreciation on written down value basis. The company maintains the calendar year as its financial year. Prepare the machinery account from 2000 to 2003.
Answer:

Question 19.
On January 01, 2000 a Limited Company purchased machinery for Rs. 20,00,000. Depreciation is provided 15% p.a. on Diminishing Balance Method. On March 01, 2002 one fourth of machinery’ was damaged by fire and Rs. 40,000 were received from the Insurance Company in full settlement. On September 01, 2002 another machinery was purchased by the company for Rs. 15,00,000. Write up the Machinery Account from 2000 to 2003. Books are closed on December 31 every year.
Answer:

Question 20.
A plant was purchased on 1st July, 2000 at a cost of Rs. 3,00,000 and Rs. 50,000 were spent on its installation. The depreciation is written off at 15% p.a. on the straight line method. The plant was sold for Rs. 1,50,000 on October 01,2002 and on the same date a new plant was installed at the cost of Rs. 4,00,000 including purchasing value. The accounts are closed on December 31 every year. Show the Machinery Account and Provision for Depreciation Account for 3 years.
Answer:

Question 21.
An extract of Trial Balance from the books of Tahiliani and Sons Enterprises on December 31, 2005 is given below :

Additional Information :
• Bad Debts proved bad but not recorded amounted to Rs. 2,000.
• Provision is to be maintained at 8% of Debtors.
Give necessary accounting entries for writing off the bad debts and creating the provision for doubtful debts account. Also show the necessary account.
Answer: