CBSE Class 11

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 6 Trial Balance and Rectification of Errors Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Trial Balance and Rectification of Errors NCERT Solutions for Class 11 Accountancy Chapter 6

Trial Balance and Rectification of Errors Questions and Answers Class 11 Accountancy Chapter 6

Test Your Understanding – I

Question 1.
Indicate against each amount whether it is a debit or a credit balance, and prepare a trial balance as at March 31, 2005 based on the following balance.
Accounts Title — Amount (Rs.)
Capital — 1,00,000
Drawings — 16,000
Machinery — 20,000
Sales — 2,00,000
Purchases — 2,10,000
Sales return — 20,000
Purchases return — 10,000
Wages — 40,000
Goodwill — 60,000
Interest received — 15,000
Discount allowed — 6,000
Bank overdraft — 22,000
Bank loan — 90,000
Debtors :
Nathu — 55,000
Roopa — 20,000
Creditors :
Reena — 35,000
Ganesh — 25,000
Cash — 54,000
Stock on April 01, 2004 16,000
Answer:
Accounts Title Debit or Credit Balance
(1) Capital — Credit
(2) Drawings — Debit
(3) Machinery — Debit
(4) Sales — Credit
(5) Purchases — Debit
(6) Sales return — Debit
(7) Purchases return — Credit
(8) Wages — Debit
(9) Goodwill — Debit
(10) Interest received — Credit
(11) Discount allowed — Debit
(12) Bank overdraft — Credit
(13) Bank loan — Credit
(14) Debtors — Debit
(15) Credito — Debit
(17) Stock on April 01, 2004 — Debit

Test Your Understanding -II

Record the rectification entry for the following transactions :

Question 1.
Credit sales to Rajni Rs. 5,000 recorded in Purchases book :
This is an error of commission
State the wrong entry recorded in the book of accounts :
Correct effect should have been:
The rectification entry will be:
Answer:

Question 2.
Furniture purchased from MIs. Rao Furnishings for Rs. 80(H) was entered into the purchases book.
This is the error of principle .
State the wrong entry recorded in the book of accounts:
Correct effect should have been :
The rectification entry will be:
Answer:

Question 3.
Cash sales to Radhika Rs. 15,000 was shown as receipt of commission in the cash book.
This is the error of principle
State the wrong entry recorded in the book of accounts :
Correct effect should have been :
The rectification entry will be :
Answer:

Question 4.
Cash received from Karim Rs. 6,000 posted to Nadeem.
This is the error of principle
State the wrong entry recorded in the book of accounts :
Correct effect should have been :
The rectification entry will be:
Answer:

Test Your Understanding -III

Show the effect through Journal entries :
1. Credit sales to Mohan Rs. 10,000 were posted to his account as Rs. 12,000
This is an error of commission The wrong effect has been :
Correct effect should have been :
Tite rectification entry wilt be :

2. Cash paid to Neha Rs. 2,000 was not posted to her account. This is an error of omission
The wrong elect has been :
The correct effect should have been:
The rectification entry will be:

3. Sales returns from Megha Rs. 1,600 were posted to her account as Rs. 1,000.
This is an error of commission
The wrong effect has been :
The rectification entry will be:
Answer:

4. Depreciation written off on furniture Rs. 1,500 was not posted to depreciation account.
This is an error of commission
The wrong effect has been :
The correct effect should have been:
The rectification entry will be:
Answer:

Test Your Understanding -IV

Tick the Correct Answer :

Question 1.
Agreement of trial balance is affected by :
(a) one sided errors only
(b) two sided errors only
(c) both (a) and (b)
(d) none of the above
Answer:
(c) both (a) and (b).

Question 2.
Which of the following is not an error of principle?
(a) Purchase of furniture debited to purchases account.
(b) Repairs on the overhauling of second hand machinery purchased debited to repairs account.
(c) Cash received from Manoj posted to Saroj.
(d) Sale of old car credited to sales account.
Answer:
(c) Cash received from Manoj posted to Saroj.

Question 3.
Which of the following is not an error of commission?
(a) Overcasting of sales book.
(b) Credit sales to Ramesh Rs. 5,000 credited to his account.
(c) Wrong balancing of machinery account.
(d) Cash sales not recorded in cash book.
Answer:
(d) Cash sales not recorded in cash book.

Question 4.
Which of the following errors will be rectified through suspense account?
(a) Sales return book undercast by Rs. 1,000.
(b) Sales return by Madhu Rs. 1,000 not recorded.
(c) Sales return by Madhu Rs. 1,000 recorded as Rs. 100.
(d) Sales return by Madhu Rs. 1,000 recorded through purchases return book
Answer:
(a) Sales return book undercast by Rs. 1,000.

Question 5.
If the trial balance agrees, it implies that:
(a) there is no error in the books.
(b) there may be two sided errors in the book.
(c) there may be one sided error in the books.
(d) there may be both two sided and one sided errors in the books.
Answer:
(b) there may be two sided errors in the book.

Question 6.
If suspense account does not balance off even after rectification of errors it implies that:
(a) there are some one sided errors only in the books yet to be located.
(b) there are no more errors yet to be located.
(c) there are some two sided errors only yet to be located.
(d) there may be both one sided errors and two sided errors yet to be located.
Answer:
(a) there are some one sided errors only in the books yet to be located.

Question 7.
If wages paid for installation of new machinery is debited to wages account, it is :
(a) an error or commission.
(b) an error of principle,
(c) a compensating error.
(d) an error of omission.
Answer:
(b) an error of principle

Question 8.
Trial balance is :
(a) an account.
(b) a statement.
(c) a subsidiary book.
(d) a principal book.
Answer:
(b) a statement.

Question 9.
A trial balance is prepared :
(a) after preparation financial statement.
(b) after recording transactions in subsidiary books.
(c) after posting to ledger is complete.
(d) after posting to ledger is complete and accounts have been balanced.
Answer:
(d) after posting to ledger is complete and accounts have been balanced.

Short Answer Type Questions

Question 1.
State the meaning of Trial Balance?
Answer:
Meaning o Trial Balance : All the businessmen after completion of postings from Journal or Subsidiary Books to the Ledger, want to verify accuracy of the posting. For this purpose a statement is prepared wherein the balances of all the accounts in the Ledger are incorporated.

The statement so prepared is called ‘Trial Balance’. Accounts show ing debit balances are put on the debit side of the trial balance and the accounts showing credit balances are put on its credit  side. If the total of the debit side of the trial balance is equal to that of its credit side, it is presumed that the posting to the ledger is accurate.

The reason for agreement of the trial balance is that under the double entry system, each transaction is recorded two times. once on the debit side of an account and again on the credit side of another account. Thus, the total of all the entries on the debit side of all the accounts must be equal to the total of all the entries on the credit side of all the accounts. If the total of both the sides of a trial balance are equal, it is proved that the books are atleast arithmetically correct.

Definitions of Trial Balance :
According to Carter, “Trial Balance is the list of debit and credit balances, taken out from ledger. It also includes the balances of cash and bank taken from cash book.”

According to William Pickles, “The statement prepared with the help of ledger balances, at the end of financial year (or at any other date) to find out whether debit total agrees with credit total is called Trial Balance.”

Question 2.
Give two examples of errors of principle.
Answer:
Errors of Principle – When some fundamental principle of accountancy is violated while recording a transaction, the error is termed as error of principle. These errors are committed in those cases where a proper distinction between capital and revenue items is not made, i.e., a capital expenditure is treated as a revenue expenditure or vice- versa.

These errors may be of two types :
(a) When a capital expenditure is treated as revenue expenditure –
For example, if the purpose of furniture is treated as an ordinary purchase and is thus debited to purchase account instead of furniture account, it will be an error of principle. Similarly, if amount spent on the extension of building is debited to repairs account instead of building account, it is also an error of principle.

(b) When a revenue expenditure is treated as capital expenditure – For example, if the amount spent on the repair of an old machinery is debited to machinery account instead of repairs account.

Question 3.
Give two examples of errors of commission.
Answer:
Errors of Commission – If a wrong amount is entered either in the journal or in the subsidiary books, the Trial Balance will tally because the same amount (though wrong) will be posted in both the accounts affected by the transaction.

For example, sale of goods to Ram on credit of Rs. 420 has been entered in the Journal as Rs. 240. When the entry is posted to Ledger, double entry will be completed with Rs. 240, Ram being debited with 240, and sales account being credited with Rs. 240. In spite of the inaccuracy in both the accounts, the Trial Balance will tally.

Examples are purchase book is under-cast be Rs. 2,000 or the sales book is over-cast by Rs. 3,000. Errors that do not effect the Trial Balance are purchase being recorded as Rs. 1,000 instead of Rs. 10,000 or purchase being recorded in sales book.

Question 4.
What are the methods of preparing Trial Balance?
Answer:
Preparation of a Trial Balance – A Trial Balance may be prepared at any time, say, at the end of every month, quarter, half-year or year. Usually it is prepared at the end of the accounting period, as a preparation of Final Account. It may be noted it is always prepared to verify the arithemetical accuracy of the ledger accounts before the particular date and not for a particular period.

There are two methods used for the preparation of Trial Balance :
(i) Balance Method
(ii) Total Amount Method

(i) Balance Method – In order to prepare a trial balance under this method, all the accounts showing debit balances in the ledger are put on the debit side of the trial balance and the accounts showing credit balance are put on its credit side. If, however, and account shows no balance, i.e., the debit and credit totals of an account are equal, the account is not included in the trial balance. After this, the debit and credit columns of the trial balance are totalled and if the total is equal, it is said that the trial balance has tallied. It may be noted that a trial balance under this method can be prepared only when all the ledger accounts have been balanced

(ii) Total Amount Method – Under this method, the total amount of debit side of each ledger account is put on the debit side of the trial balance. It may be noted that a trial balance under this method can be prepared immediately after the completion of posting to the ledger.

Question 5.
What are the steps taken by an accountant to locate the errors in the trial balance?
Answer:
Steps to locate or detect the errors – If the trial balance does nottally, steps must be taken to locate the errors which are causing discrepancy. The following steps may be taken, one after another, to locate the error :
Steps –
(1) Recheck the totals of both the debit and credit columns of the trial balance.

(2) The exact figure of difference in the trial balance should be ascertained. After this, the subsidiary books should be gone through to see if any item of that amount remains unposted. For example, if the difference is of Rs. 6,800, all the entries of Rs. 6,800 should be scanned to ensure that they have been duly posted,

(3) The difference should be halved to find out of some figure equal to half the difference has been posted on the wrong side of an account thereby making the difference double. For example, if the total of debit side of the trial balance exceeds by Rs. 6,800, it is possible that a credit item of Rs. 3,400 may have been posted to the debit side of the ledger account.

(4) The difference in,the trial balance should be divided by 9. If the difference is completely divisible, it can be a mistake of transposition of figures. For example, if the figure of 47 is written as 74, the different is of Rs. 27. This figure is completely divisible by 9. Likewise, if‘0’ is added against a figure, the difference will also be divisible by 9. For example, if the figure of 13 is written 130, the difference Rs. 117 which is completely divisible by 9.

(5) In case, the difference is in a round figure, say Rs. 1, Rs. 10, Rs. 100 etc. there will be a possibility of wrong totalling or wrong carry forwards of the totals of a subsidiary book or there will be an error in the balancing of an account. Flence. the totalling and balancing must be checked.

(6) Check with the help of the ledger whether the balance of each and every account including the balancing must be checked.

(7) Check whether all the closing balances from the previous year’s balance sheet have been correctly carried forward and recorded in respective, ledger accounts.

(8) Check the figures which are not clearly written.

(9) If the difference is of a very big amount, it is just possible that the balance of a certain ledger account may not have been included in the trial balance. This can be detected by comparing the trial balance of the current year with that of the previous year. Also, if the figures of accounts under the same head show abnormal variation, the account should be rechecked to find out the cause of variation.

(10) If, in spite of all the above efforts, there is still a difference in the trial balance, a complete checking of the postings of all the entries will be necessary. A check mark (✓) should be placed at the right of each amount to show that the item has been checked. It should also be checked that the totals of the subsidiary books have been posted to the relevant accounts in the ledger.

Question 6.
What is suspense account? Is it necessary that is suspense account will balance off after ratification of errors detected by the accountant? If not, then what happens to the balance still remaining in suspense account?
Answer:
Meaning of suspense account – Sometimes, in spite of best efforts of an accountant, all the errors are not located and the trial balance does not tally, In such a situation, to avoid the delay in the preparation of final accounts, the difference in the trial balance is placed to a newly opened account known as “Suspense Account” and the trial balance tallies. If the debit side of the trial balance exceeds the credit side, the difference will be put on the credit side of the suspense account. After including the balance of suspense account in the trial balance, it will appear to be tallied.

Later, when the errors are located, the rectification entries will be passed with the help of the suspense account. Therefore, when all the errors have been located and rectified the suspense account will automatically stand closed. If suspense account still shows a balance, it will be taken in the balance sheet – on the assets side if it shows a debit balance or on the liabilities side if it shows a credit balance.

Question 7.
What kinds of errors would cause difference in the trial balance. Also list examples that would not be revealed by trial balance.
Answer:
Types of Errors : All errors may be classified into the following two categories :
(1) Errors affecting trial balance (or errors disclosed by trial balance).
(2) Errors not affecting trial balance (or errors not disclosed by trial balance).

(1) Errors affecting trial balance (or errors disclosed by trial balance) – If the trial balance does not tally, it will indicate that certain errors have been committed which have affected the agreement of the trial balance. The accountant will then proceed to find out the errors and ultimately the errors will be located. Such errors are called ‘errors disclosed by trial balance’ or ‘errors which affect the agreement of trial balance.’ Until such errors are rectified, the trial balance will not agree. Some of the examples of such errors are as follows :

(i) Wrong Casting – If the total of the cash book or some other subsidiary book is wrong, the trial balance will not tally. For example, the total of the purchase book has been added Rs. 7,000 in excess. When this total will be posted to the debit side of the purchase account, it will also show an excess debit of Rs. 7,000 and hence, the trial balance will not tally.

(ii) Posting to the wrong side – If instead of posting an amount on the debit side of an account, it is posted on the credit side, or vice versa, the trial balance will not tally. For example, goods for Rs. 6,000 have been purchased from Gopal. If instead of posting the amount on the credit side of Gopal’s account it is posted to his debit, the debit side of the trial balance will exceed by Rs. 8.000.

(iii) Posting of wrong amount – The trial balance will not tally if the posting in an account is made with an incorrect amount. For example, goods for Rs. 800 have been purchased from Mahendra. If it has been correctly entered in the purchase book but while posting to Mahendra’s credit, the amount posted is Rs. 80 instead of Rs. 800, the trial balance will not tally.

(iv) Omission of posting of one side of an entry – For example, if Rs. 600 have been received from Geeta and correctly entered in the cash book, but if it is omitted to be posted on the credit side of Geeta’s account, the trial balance will not tally.

(v) Double posting in a single account – For example, if Rs. 900 have been received from Shyam Lai and correctly entered in the cash book, but if it is posted twice on the credit side of Shyam Lai’s account, the trial balance will not tally.

(vi) Errors of posting in wrong account – If, while posting from the books of original entry, posting is made to a wrong account but on the correct side, the error will not affect the agreement of trial balance. If, for example, goods are sold to Ram on credit but Shyam’s account is debited in place of Ram’s account in ledger, the trial balance would tally in spite of errors in both the accounts.

(2) Errors not affecting trial balance (or errors not disclosed by trial balance)
Examples of errors not revealed by the trial balance are the following :

• Errors of Omission
• Errors of Commission
• Compensating errors
• Errors of Principles.

Question 8.
State the limitations of Trial Balance.
Answer:
Main objective of preparing a trial balance is to check the accuracy of the accounts. However, the equality of debits and credits of trial balance does not mean that there are absolutely no errors in the books of accounts. There may be number of errors which may remain undetected in spite of the agreement of a trial balance. As such, it is true that “Trial Balance is not a conclusive proof of the accuracy of book of accounts”. There are certain errors which do not affect, the agreement of the trial balance. Such errors are also called limitations of trial balance: These are the following errors :

• Errors of Omission
• Errors of Commission .
• Compensating errors
• Errors of Principles
• Errors of posting in wrong account.

Sometimes in spite of best efforts of an accountant, all the errors are not located and the trial balance does not tally. So, the trial balance has certain limitations.

Long Answer Type Questions

Question 1.
Describe the purpose for the preparation of Trial Balance.
Answer:
The following are the purposes of preparing a trial balance :
(1) To ascertain the arithmetical accuracy of the ledger accounts.
(2) To help in locating errors.
(3) To obtain a summary of the ledger accounts.
(4) To help in the preparation of final accounts.

(1) To ascertain the arithmetical accuracy of the ledger accounts –
The trial balance provides a useful check upon the ledger postings. If a trial balance tallies, it is proved that the posting to the ledger accounts is correct. In other words, it ensures that both the aspects of each transaction have been posted into the ledger, i.e., debit aspects have been posted on the debit side and the corresponding credit aspects on the credit side.

(2) To help in locating errors – If a trial balance does not tally, it indicates that some errors have occurred and the accountant will then proceed to locate such errors. Even a small difference in the trial balance is to be given the same importance and attention as a large difference because it may be possible that there may be a number of errors which have of setted the effect of one another, resulting in a small composite difference.

(3) To obtain a summary of the ledger accounts – A trial balance serves as a summary of all the ledger accounts. Scanning the trial balance enables one to know the assets, liabilities, expenses, incomes etc.

(4) To help in the preparation of final accounts – As the trial balance contains the list of all the ledger accounts, it provides a basis for further processing of accounting data, i.e., preparation of final accounts namely, Trading and Profit & Loss Account and a Balance Sheet.

Question 2.
Explain errors of principle and give two examples with measures to rectify them.
Answer:
Errors of Principle – If any of the generally accepted accounting principles is violated or ignored, errors resulting from such violation are known as errors of principle. An error of principle may occur due to incorrect classification of expenditure or receipts between capital and revenue.

For example, amount spent on additions to the buildings should be treated as capital expenditure and must be debited to the assets account. Instead, if this amount is debited to maintenance and repairs account, it is treated as a revenue expense. This is an error of principle.

Similarly, if a credit purchases of machinery is recorded in purchase book is an example of error of principle, or rent paid to landlord is recorded in cash book posted or recorded in journal proper.

Two examples of errors of principles are as under :
(1) When an account has wrongly been debited in place of another account.
Example : Machinery purchased for Rs. 9,000 has been debited to Purchases A/c.
Solution : This error affects the two accounts in the following manner –

While rectifying this mistake Machinery A/c will be debited because it was not debited earlier and the Purchases A/c will be credited because it was wrongly debited.

III. By comparing the correct entry and the wrong entry it will be ascertained that Machinery A/c should be debited and the Purchases A/c should be credited, as it has been w rongly debited earlier.

(2) When an account has wrongly been credited in place of another account.
Example : Rs. 8,000 being the sale proceeds of old furniture has been credited to Sales A/c.
Solution : This error affects the two accounts in the following manner –

While rectifying this mistake Sales A/c will be debited because it has been,credited by mistake and the Furniture A/c will be credited because it was credited earlier.


III. By comparing the correct entry and the wrong’ entry it will be ascertained that Sales A/c should be debited because it has been wrongly credited earlier and Furniture account should be credited. Rectifying entry which must be passed now.

Question 3.
Explain the errors of commission and give tw o examples with measures to rectify them.
Answer:
Errors of Commission – The errors committed due to wrong posting of transactions, wrong totalling or balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of the amount in the books of original entry, etc. For example, Mohan paid Rs. 15,000 to Gopal Traders (a supplier of goods). This tansactions was correctly recorded in the cash book, but Gopal Trader’s account was debited with Rs. 1,500 only. This is an error of commission as it is an error of clerical nature and reflected in trial balance.

Two examples of errors of commission may be cited as follows :
(1) When there is a short debit in one account and a short credit in anoher account.
Example : Goods purchased from Sahil for Rs. 4,000 was entered in Purchase Book as Rs. 400 only.
Solution : Effect of error –

While rectifying this mistake Purchases A/c will be debited by Rs. 3,600 because there will be a short debit in Purchases A/c and Sahil’s A/c will be credited because it has been credited by a lesser amount.

(2) When there is an excess debit in one account and an excess credit in another account.
Example : Goods sold to Rakesh for Rs. 3,800 on credit was recorded in Sales Book as Rs. 8,300.
Solution : Effect of error

While rectifying this mistake Rakesh will be credited by Rs. 4,500 because it has been ‘excess debited’ by a similar amount and Sales A/c will be debited by Rs. 4,500 because it has been ‘excess credited’ by a similar amount.

Notes :
(1) Students can adopt any of the two methods discussed as above, because rectifying entry in both the methods will be similar.
(2) In the examination the students should pass only the rectifying entries.

Question 4.
What are the different types of errors that are usually f committed in recording business transactions.
Answer:
From the rectification point of view, all errors can be „ classified into the following two categories (types) :
(A) Two-sided Errors
(B) One-sided Errors

(A) Two-sided Errors – Errors which affect two accounts simultaneously are called two-sided errors. Such errors may  include the following types of errors :

• Omission to pass an entry in the book of original records,
• Wrong recording of a transaction in the books of original records,
• Posting to the wrong account, and
• Errors of principle.

All these errors are rectified by passing a journal entry, one account being debited and the other account being credited. Following rules should be observed while passing entries to rectify the two – sided errors –

• The account showing an excess debit should be credited in the rectifying entry.
• The account showing a short debit should be debited in the rectifying entry.
• The account showing an excess credit should be debited in the rectifying entry.
• The account showing a short credit should be credited in the rectifying entry.

These four rules as enumerated above can be explained by the examples given below –
(I) Machinery purchased for Rs. 10,000 has been wrongly debited to purchase A/c.
Solution :
Machinery’ in the account is short by rs. 10,000 while the purchase also shown excess by Rs. 10,000 may be rectified as follows :

(Being purchase of machinery wrongly debited to purchase account)

(II) Rs. 8,000 being the sale proceeds of old furniture has been credited to sales account.
Solution :
In this error furniture account is short by Rs. 8,000 while the Sales A/c exceeds by Rs. 8,000 may be rectified as under :

(Being sale of old furniture wrongly credited to Sales A/c)

(III) Good purchased from Roshan for Rs. 9,000 was entered in the purchase book as Rs. 900 only.
Solution :
In the above error purchase account is short by Rs. 8,100, while Roshan’s A/c is also short by Rs. 8,100 may be rectified as under :

(Being good purchased from Roshan for Rs. 9,000 wrongly entered as Rs. 900)

(IV) Goods sold to Ravi for Rs. 360 on credit was recorded in the sales book as Rs. 620.
Solution :
The effect of error is that Ravi’s A/c is exceed by Rs. 360, while Sales A/c is also exceed by Rs. 360 may be rectified as under :

(Being sale to Ravi for Rs. 360 wrongly entered as Rs. 620)

(B) One-sided Errors – These errors affect only one account. If, for
example, a sum of Rs. 9,000 given to Rakesh is correctly entered ‘ in the cash book but omitted to be recorded to the debit of Rakesh, the error is known as one-sided error as it exist in the account of Rakesh only. Such types of errors occur in the following cases :
(i) When a subsidiary book is under cast or overcast.
(ii) When the posting to an account is omitted.
(iii) When the posting is made on the wrong side of an account.
(iv) When the posting is made from the wrong amount.

Answer: 5.
As an accountant of a company, you are disappointed to learn that the totals in your new trial balance are not equal. After going through a careful analysis, you have discovered only one error. Specifically, the balance of the Office Equipment A/c has a debit balance of Rs. 15,600 on the trial balance. However, you have figured out that a correctly recorded credit purchase of pen-drive for Rs. 3,500 was posted from the journal to the ledger with Rs. 3,500 debit to Office Equipment and another Rs. 3,500 debit to creditors accounts. Answer each of the following questions and present the amount of any misstatament :
(a) Is the balance of the office equipment account overstated, understated, or correctly stated in the trial balance?
(b) Is the balance of the creditors account overstated, understated or correctly stated in the trial balance?
(c) Is the debit column total of the trial balance overstated, understated, or correctly stated?
(d) Is the credit column total of the trial balance overstated, understated, or correctly stated?
(e) If the debit column total of the trial balance is Rs. 2,40,000 before correcting the error, what is the total of credit column.
Answer:
In the above problem, the total of trial balance are not equal. A purchase of pen-drive, an item of stationary wrongly debited of office equipment for Rs. 3,500 and also debit of supplier’s account due to which the following errors take place.
(a) The balance of office equipment account is overstated as the cost of pen-drive wrongly debited to office equipment account.
(b) The balance of creditors or supplier a liability is understated as debited by the amount of pen-drive for Rs. 3,500.
(c) The debit side of trial balance is overstated due to addition in the value of office equipment for Rs. 3,500 by wrongly debited amount of pen-drive.
(d) The credit side of trial balance is understated as the amount of creditors or supplier’s decreased by the amount Rs. 3,500.
(e) In case of debit column total of trial balance shows Rs. 2,40,000 before correcting the error, the total of credit side of trial balance is less by Rs. 3,500 (i.e. Rs. 2,36,500).

Numerical Questions

Question 1.
Rectify the following errors :
(i) Credit sales to Mohan Rs. 7,000 were not recorded.
(ii) Credit purchases from Rohan Rs. 9,000 were not recorded.
(iii) Goods returned to Rakesh Rs. 4,000 were not recorded.
(iv) Goods returned from Mahesh Rs. 1,000 were not recorded.
Answer:
These are the errors of omission –

Question 2.
Rectify the following errors :
(i) Credit sales to Mohan Rs. 7,000 were recorded as Rs. 700.
(ii) Credit purchases from Rohan Rs. 9,000 were recorded as Rs. 900.
(iii) Goods returned to Rakesh Rs. 4,000 were recorded as Rs. 400.
(iv) Goods returned from Mahesh Rs. 1,000 were recorded as Rs. 100.
Answer:
These are the errors of commission and rectified to the following manner

Question 3.
Rectify the following errors :
(i) Credit sales to Mohan Rs. 7,000 were recorded as Rs. 7,200.
(ii) Credit purchases from Rohan Rs. 9,000 were recorded as Rs. 9,900.
(iii) Goods returned to Rakesh Rs. 4,000 were recorded as Rs. 4,040.
(iv) Goods returned from Mahesh Rs. 1,000 were recorded as Rs. 1,600.
Answer:

Question 4.
Rectify the following errors :
(i) Salary paid Rs. 5,000 was debited to employee’s personal account.
(ii) Rent paid Rs. 4,000 was posted to landlord’s personal account.
(iii) Goods withdrawn by proprietor for personal use Rs. 1,000 were debited to sundry expenses account.
(iv) Cash received from Kohli Rs. 2,000 was posted to Kapur’s account.
(v) Cash paid to Babu Rs. 1,500 was posted to Sabu’s account.
Answer:

Question 5.
Rectify the following errors :
(i) Credit sales to Mohan Rs. 7,000 were recorded in Purchases Books.
(ii) Credit purchases from Rohan Rs. 900 were recorded in Sales Books.
(iii) Goods returned to Rakesh Rs. 4,000 were recorded in the Sales Return Books.
(iv) Goods returned from Mahesh Rs. 1,000 were recorded in Purchases Return Books.
(v) Goods returned from Nahesh Rs. 2,000 were recorded in Purchases Books.
Answer:

Question 6.
Rectify the following errors :
(i) Sales Book overcast by Rs. 700.
(ii) Purchases Book overcast by Rs. 500.
(iii) Sales Returns Book overcast by Rs. 300.
(iv) Purchase Returns Book overcast by Rs. 200.
Answer:

Question 7.
Rectify the following errors :
(i) Sales Book undercast by Rs. 300.
(ii) Purchases Book undercast by Rs. 400.
(iii) Returns Inwards Book undercast by Rs. 200.
(iv) Returns Outward Book undercast by Rs. 100.
Answer:

Question 8.
Rectify the following errors and ascertain the amount of difference in trial balance by preparing suspense account:
(a) Credit sales to Mohan Rs. 7,000 were not posted.
(b) Credit purchases from Rohan Rs. 9,000 were not posted.
(c) Goods returned to Rakesh Rs. 4,000 were not posted.
(d) Goods returned from Mahesh Rs. 1,000 were not posted.
(e) Cash paid to Ganesh Rs. 3,000 was not posted.
(f) Cash sales Rs. 2,000 were not posted.
Answer:

Note :
In order to match the balance of suspense account, it has been assumed that all errors given in the question are errors of partial commission.

Question 9.
Rectify the following errors and as certain the amount of difference in trial balance by preparing suspense account.
(a) Credit sales to Mohan Rs. 7,000 were posted as Rs. 9,000.
(b) Credit purchases from Rohan Rs. 9,000 were posted as Rs. 6,000.
(c) Goods returned to Rakesh Rs. 4,000 were posted as Rs. 5,000.
(d) Goods returned from Mahesh Rs. 1,000 were posted as Rs. 3,000.
(e) Cash sales of Rs. 2,000 were posted as Rs. 200.
Answer:

Note : In order to match answer with that of the answer given in the book it has been assumed that all the errors mentioned in the question are that of partial omission.

Question 10.
Rectify the following errors :
(a) Credit sales to Mohan Rs. 7,000 were posted to Karan.
(b) Credit purchases from Rohan Rs. 9,000 were posted to Gobind.
(c) Goods returned to Rakesh Rs. 4,000 were posted to Naresh.
(d) Goods returned from Mahesh Rs. 1,000 were posted to Manish.
(e) Cash sales Rs. 2,000 were posted to commission account.
Answer:

Question 11.
Rectify the following errors assuming that a suspense account was opened. Ascertain the difference in trial balance.
(a) Credit sales to Mohan Rs. 7,000 were posted to the credit of his account.
(b) Credit purchases from Rohan Rs. 9,000 were posted to the debit of his account as Rs. 6,000.
(c) Goods returned to Rakesh Rs. 4,000 were posted to the credit of his account.
(d) Goods returned from Mahesh Rs. 1,000 were posted to the debit of his account as Rs. 2,000.
(e) Cash sales of Rs. 2,000 were posted to the debit of sales account as Rs. 5,000.
(Ans. : Difference in trial balance Rs. 3,000 excess debit)
Answer:

Question 12.
Rectify the following errors assuming that a suspense account was opened. Ascertain the difference in trial balance.
(a) Credit sales to Mohan Rs. 7,000 were posted to Karan as Rs. 5,000.
(b) Credit purchases from Rohan Rs. 9,000 were posted to the debit of Gobind as Rs. 10,000.
(c) Good returned to Rakesh Rs. 4,000 were posted to the credit of Naresh as Rs. 3,000.
(d) Goods returned from Mahesh Rs. 1,000 were posted to the debit of Manish as Rs. 2,000.
(e) Cash sales Rs. 2,000 were posted to Commission account as Rs. 200.
(Ans. : Difference in trial balance Rs. 14,800 excess debit)
Answer:

Question 13.
Rectify the following errors assuming that a suspense account was opened. Ascertain the difference in trial balance.
(a) Credit sales to Mohan Rs. 7,000 were recorded in Purchase Book. However, Mohan’s account was correctly debited.
(b) Credit purchases from Rohan Rs. 9,000 were recorded in Sales Books. However, Rohan’s account was correctly credited.
(c) Goods returned to Rakrsh Rs. 4,000 were recorded in Sales Returns Book. However, Rakesh’s account was correctly debited.
(d) Goods returned from Mahesh Rs. 1,000 were recorded through Purchase Returns Book. However, Mahesh’s account was correctly credited.
(e) Goods returned to Naresh Rs. 2,000 were recorded . through Purchase Returns Book. However, Naresh’s account was correctly debited.
(Ans.: Difference in trial balance Rs. 6,000 excess debit)
Answer:

Question 14.
Rectify the following errors –
(a) Furniture purchased for Rs. 10,000 wrongly debited to purchases account.
(b) Machinery purchased on credit from Raman for Rs.
20,0 was recorded through purchases book.
(c) Repairs on machinery Rs. 1,400 debited to machinery account.
(d) Repairs on overhauling of secondhand machinery purchased Rs. 2,000 was debited to repair account.
(e) Sale of old machinery at book value of Rs. 3,000 was credited to sales account.
Answer:

Question 15.
Rectify the following errors assuming that suspension account was opened. Ascertain the difference in trial balance.
(a) Furniture purchased for Rs. 10,000 wrongly debited to purchase account as Rs. 4,000.
(b) Machinery purchased on credit from Raman for Rs.
20,0 recorded through Purchases Book as Rs. 6,000.
(c) Repairs on machinery Rs. 1,400 debited to machinery account as Rs. 2,400.
(d) Repairs on overhauling of secondhand machinery purchased Rs. 2,000 was debited to Repairs account as Rs. 200.
(e) Sale of old machinery at book value Rs. 3,000 was credited to sales account as Rs. 5,000.
(Ans.: Difference in trial balance Rs. 8,800 excess credit.)
Answer:



Question 16.
Rectify the following errors :
(a) Depreciation provided on machinery Rs. 4,000 was not posted.
(b) Bad debts written off Rs. 5,000 were not posted.
(c) Discount allowed to a debtor Rs. 100 on receiving cash from him was not posted.
(d) Discount allowed to a debtor Rs. 100 on receiving cash from him was not posted to discount account.
(e) Bill receivable for Rs. 2,000 received from a debtor was not posted.
Answer:

Question 17.
Rectify the following errors :
(a) Depreciation provided on machinery Rs. 4,000 was posted as Rs. 400.
(b) Bad debts written off Rs. 5,000 were posted as Rs. 6,000.
(c) Discount allowed to a debtor Rs. 100 on receiving cash from him was posted as Rs. 60.
(d) Goods withdrawn by proprietor for personal use Rs. 800 were posted as Rs. 300.
(e) Bill receivable for Rs. 2,000 received from a debtor was posted as Rs. 3,000.
Answer:

Question 18.
Rectify the following errors assuming that suspension account was opened. Ascertain the difference in trial balance.
(a) Depreciation provided on machinery Rs. 4,000 was not posted to depreciation account.
(b) Bad debts written off Rs. 5,000 were not posted to debotrs account.
(c) Discount allowed to a debtor Rs. 100 on receiving cash from him was not posted to discount allowed account.
(d) Goods withdrawn by proprietor for personal use Rs. 800 were not posted to drawings accounts.
(e) Bill receivable for Rs. 2,000 received from to debtor was not posted to bills receivable account.
Answer:

Question 19.
Trial balance of Anju did not agree. It showed an excess credit of Rs. 6,000. He put the difference to suspense account. He discovered the following errors :
(a) Cash received from Ravish Rs. 8,000 posted to his account as Rs. 6,000.
(b) Returns inwards book overcast by Rs. 1,000.
(c) Total of sales book Rs. 10,000 was not posted to sales account.
(d) Credit purchases from Nanak Rs. 7,000 were recorded in sales book. However, Nanak’s account was correctly credited.
(e) Machinery purchased for Rs. 10,000 was posted to purchases account as Rs. 5,000.
Rectify the errors and prepare Suspense Account.
(Ans. : Total of Suspense Account Rs. 19,000)
Ans.

Question 20.
Trial balance of Raju showed an excess debit of Rs. 10,000. He put the difference to suspense account and discovered the following errors :
(a) Depreciation written off the furniture Rs. 6,000 was not posted to furniture account.
(b) Credit sales to Rupam Rs. 10,000 were recorded as Rs. 7,000
(c) Purchases book undercast by Rs. 2,000.
(d) Cash sales to Rana Rs. 5,000 were not posted.
(e) Old machinery sold for Rs. 7,000 was credited to sales account.
(f) Discount received Rs. 800 from Kanan on paying cash to him was not posted.
Rectify the errors and prepare Suspense A/c.
(Ans.: Balance carried forward in suspense account Rs. 1,000 credit.)
Answer:

Question 21.
Trial balance of Madan did not agree and he put the difference to suspense account. He discovered the following errors :
(a) Sales returns book overcast Rs. 800.
(b) Purchases return to Sahu Rs. 2,000 were not posted.
(c) Goods purchased on credit from Narula Rs. 4,000 though taken into stock, but no entry was passed in the book.
(d) Installation charges on new machinery purchased Rs. 500 were debited to sundry expenses account as Rs. 50.
(e) Rent paid for residential accommodation of Madan (the proprietor) Rs. 1,400 was debited to Rent A/c as Rs. 1,000.
Rectify the errors and prepare suspense account to ascertain the difference in trial balance.
(Ans.: Difference in trial balance Rs. 2,050 excess credit.)
Answer:

Question 22.
Trial balance of Kohli did not agree and showed an excess debit of Rs. 16,300. He put the difference to a suspense account and discovered the following errors :
(a) Cash received from Rajat Rs. 5,000 was posted to the debit of Kamal as Rs. 6,000.
(b) Salaries paid to an employee Rs. 2,000 were debited to his personal account as Rs. 1,200.
(c) Goods withdrawn by the proprietor for personal use Rs. 1,000 were credited to sales account as Rs. 1,600.
(d) Depreciation provided on machinery Rs. 3,000 was posted to machinery account as Rs. 300.
(e) Sale of old car for Rs. 10,000 was credited to sales account as Rs. 6,000.
Rectify the errors and prepare suspense account.
(Ans: Total of suspense account: Rs. 17,700.)
Ans.

Question 23.
Give journal entries to rectify the following errors assuming that suspense account had been opened :
(a) Goods distributed as free sample Rs. 5,000 were not recorded.
(b). Goods withdrawn for personal use by the proprietor Rs. 2,000 were not recorded in the books.
(c) Bill receivable received from a debtor Rs. 6000 was not posted to his account.
(d) Total to returns inwards book Rs. 1,200 was posted to returns outwards account.
(e) Discount allowed to Reema Rs. 700 on receiving cash from her was recorded in the books as Rs. 70.
(Ans.: Difference in trial balance Rs. 3,600 excess debit.)
Answer:

Question 24.
Trial balance of Khatau did not agree. 11e put the difference to Suspense account and discovered tile following
errors :
(a) Credit safes to Manas Rs. 16,000 were recorded in the purchases book as Rs. 10,000 and posted to the debit of Manas as Rs. 1,000.
(b) Furniture purchased from Noor Rs. 6,000 was recorded through purchases book as Rs. 6000 and posted to the debit of Noor Rs. 2,000.
(c) Good returned to Rai Rs. 3,000 recorded through the sales book as Rs. 1,000.
(d) Old machinery sold for Rs. 2,000 to Manish recorded through sales book as Rs. 1,809 and posted to the credit of Manish as Rs. 1,200.
(e) Total of returns inwards book Rs. 2,800 posted to purchase account.
Rectify the above errors and prepare suspense account to ascertain the difference in trial balance.
(Ans.: Diffcrence in trial balance Rs. 15,000 excess debit.)
Answer:

Question 25.
Trial balance of.John did not agree. He put the difference to suspense account and discovered the following errors
(a) In the sales book for the month of January total of page no. 2 was carried forward to page no.3 as Rs. 1,000 instead of Rs. 1,200 and total of page no. 6 was carried forward to page no. 7 as Rs. 5,600 instead of Rs. 5,000.
(b) Wages paid for installation of machinery Rs. 500 was posted to wages account as Rs. 50.
(c) Machinery purchased from R & Co. for Rs. 10.000 on credit was entered in purchase book as Rs. 6,000 and
posted there from to R & Co. as Rs. IMOO.
(d) Credit sales to Mohan Rs. 5,000 were recorded in purchases book.
(e) Goods returned to Ram Rs. 1,000 were recorded in sales book.
(f) Credit purchases from S & So. for Rs. 6,000 were recorded in sales book. However, S & Co. was correctly credited.
(g) Credit purchases from M & Co. Rs. 6,000 were recorded in sales book as Rs. 2.000 and posted there from to the credit of M & Co. as Rs. lq000.
(h) Credit sales to Ranian Rs. 4,000 posted to the credit of Raghvan as Rs. 1,000.
(I) Bill receivable for Rs. 1,600 from Noor was dishonoured and posted to debit of allowances account.
(j) Cash paid to Mani Rs. 5.000 against our acceptance was debited to Manu.
(k) Old furniture sold for Rs. 3,000 was posted to sales account as Rs. 1,000.
(1) Depreciation provided on furniture Rs. 800 was not posted.
(m) Material Rs. 10,000 and wages Rs. 3,000 were used for construction of building. NO adjustment was ma(Ie in the books.
Rectify the errors and Iwelarc suspense to ascertain (the difference in trial balance.
(Ans.: Difference in trial  Rs. 13,850 excess credit.)
Answer:

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 5 Bank Reconciliation Statement Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Bank Reconciliation Statement NCERT Solutions for Class 11 Accountancy Chapter 5

Bank Reconciliation Statement Questions and Answers Class 11 Accountancy Chapter 5

Test Your Understanding – I

I. Read the following transactions and identify the cause of difference on the basis of time gap or errors made by business firm/bank.
Put a sign (✓) for the correct cause.

Answer:
1. Time gap
2. Errors made by business/bank
3. Time gap
4. Time gap
5. Time gap

II. Fill in the blanks :
(i) Passbook is a copy of …………. as it appears in the ledger of the bank.
(ii) When money is withdrawn from the bank, the bank …………. the account of the customer.
(iii) Normally, the cash book shows a debit balance, passbook ……….. shows balance.
(iv) Favourable balance as per the cash book means …………… balance in the bank column of the cash book.
(v) If the cash book balance is taken as starting point the items which make the cash book balance smaller than the passbook must be ………….. for the purpose of reconciliation.
(vi) If the passbook shows a favourable balance and if it is taken as the starting point for the purpose of bank reconciliation statement then cheques issued but not presented-for payment should be …………… to find out cash balance.
(vii) When the cheques are not presented for payment, favourable balance as per the cash book ………… is than that of the passbook.
(viii) When a banker collects the bills and credits the account passbook overdraft shows balance.
(ix) If the overdraft as per the passbook is taken as the starting point, the cheques issued but not presented are to be ………….. in the bank reconciliation statement.
(x) When the passbook balance is taken as the starting point items which makes the passbook balance ……………. than the balance in the cash book must be deducted for the purpose of reconciliation.
Answer:
(i) customer account
(ii) debit
(iii) credit
(iv) debit
(v) added
(vi) deducted
(vii) lower/less
(viii) less/lower
(ix) added
(x) higher

Test Your Understanding -II

Select the Correct Answer :

Question 1.
A bank reconciliation statement is prepared by :
(a) Creditors
(b) Bank
(c) Account holder in a bank
(d) Debtors
Answer:
(c) Account holder in a bank

Question 2.
A bank reconciliation statement is prepared with the balance :
(a) Passbook
(b) Cash book
(c) Both passbook and cash book
(d) None of these
Answer:
(c) Both passbook and cash book

Question 3.
Passbook is a copy of:
(a) Customer account
(b) Bank column of cash book
(c) Cash column of cash book
(d) Receipts and payments
Answer:
(a) Customer account

Question 4.
Unfavourable bank balance means :
(a) Credit balance in passbook
(b) Credit balance in cash book
(c) Debit balance in cash book
(d) None of these
Answer:
(b) Credit balance in cash book

Question 5.
Favourable bank balance means :
(a) Credit balance in the cash book
(b) Credit balance in passbook
(c) Debit balance in the cash book
(d) Both (b) and (c)
Answer:
(d) Both (b) and (c)

Question 6.
A bank reconciliation statement is mainly prepared for :
(a) Reconcile the cash balance of the cash book
(b) Reconcile the difference between the bank balance shown by the cash book and bank passbook
(c) Both (a) and (b)
(d) None of these
Answer:
(b) Reconcile the difference between the bank balance shown by the cash book and bank passbook

Test Your Understanding -III

State whether each of the following statements is True or False.
1. Passbook is the statement of account of the customer maintained by the bank.
2. A business firm periodically prepares a bank reconciliation
statement to reconcile the bank balance as per the cash book with the passbook as these two show different balances for various reasons. ’
3. Cheques issued but not presented for payment will reduce the balance as per the passbook.
4. Cheques deposited but not collected will result in increasing the balance of the cash book when compared to passbook.
5. Overdraft as per the passbook is less than the overdraft as per cash book when there are cheques deposited but not collected by the banker.
6. The debit balance of the bank account as per the cash book should be equal to the credit balance of the account of the business in the books of the bank.
7. Favourable bank balance as per the cash book will be less than the bank passbook balance when there are unpresented cheques for payment.
8. Direct collections received by the bank on behalf of the customers would increase the balance as per the bank passbook when compared to the balance as per the cash book.
9. When payments made by the bank as per the standing instructions of the customer, the balance in the passbook will be more when compared to the cash book.
Answer:
1. True
2. True
3. False
4. True
5. False
6. True
7. True
8. True
9. False

Short Answer Type Questions

Question 1.
State the need for the preparation of a bank reconciliation statement.
Answer:
Need and Importance of Bank Reconciliation Statement –
It is essential to prepare a bank reconciliation statement due to the
following reasons :
(1) A bank reconciliation statement locates the errors or omissions that may have been committed either on the part of the customer or the bank. The error so detected can be rectified accordingly.

(2) By preparing a bank reconciliation statement, the customer becomes sure of the correctness of the bank balance shown by the cash book. It helps him in making the further transactions with the bank. For example, suppose the cash book shows a bank balance of Rs. 20,000, whereas the balance shown by the pass book is Rs. 15,000. By reconciling the two, it is disclosed that cheques for Rs. 5,000 were deposited into the bank but have not
been collected so far (or some of these have been dishonoured). In such a case, further cheques will be issued by assuming the bank balance of Rs. 15,000 only.

(3) A reconciliation statement facilitates the preparation of a revised cash book. For example, the entries relating to bank charges, interest allowed or charged by the bank, direct payment by the bank on our behalf etc. will be recorded in the pass book but for which there is no entry in the cash book, such entries will now be recorded in the cash book as well.

(4) Periodic preparation of this statement reduces the chances of embezzlement by the staff of the firm or even that of the bank. For example, if a cashier merely makes an entry in the cash book but does not deposit the cash and cheques into the bank, it will be disclosed by preparing a bank reconciliation statement.

(5) A reconciliation statement helps in revealing the unnecessary delay in the collection of cheques by the bank.

(6) It also helps in keeping a track of cheques which have been sent to the bank for collection.

Question 2.
What is bank overdraft?
Answer:
Meaning of Bank Overdraft -Generally, cash book balance shows that there is enough money in the bank, but businesses sometimes have overdraft at the bank.

Overdraft are where the bank account becomes negative and the businesses in effect have to borrow from the bank. It is also known as cash book (credit) balance, while preparing bank reconciliation statement. An overdraft is treated as negative figure on a bank reconciliation statement.

The items added and deducted from overdraft balance of cash book are as follows :

Items to be added :
(i) Cheque sent to bank for collection but not yet credited by the bank or dishonoured.
(ii) Direct payment made by the bank on behalf on customers.
(iii) Cheque issued but omitted to be recorded.
(iv) Debit made by bank for bank cheques, interest on overdraft and any other payment made.

Items to be deducted :
(i) Cheque issued but not yet presented for payment.
(ii) Amount directly deposited by customers in our bank.
(iii) Interest and divided collected by the bank.

Question 3.
Briefly explain the statement “Wrongly deposited by the bank” with the help of an example.
Answer:
Differences caused by errors – Sometime the difference between the two balances may be accounted for due to wrong entries made by businessman or bank. Errors committed by bank in recording the transactions –
Omission or wrong recording of transactions relating to cheques deposited and wrong totalling etc. committed by the bank, while position entries in the pass book also cause differences between pass book and cash book balance. Bank cheques debited by the bank in firm’s currect account is an example of such error.

Omission or wrong recording of transactions relating to cheques issued, cheques deposited and wrong totalling etc. committed by the firm while recording entries in the cash book cause differences between pass book and cash book balance.

Question 4.
State briefly the causes of difference occurred due to time lag.
Answer:
Causes of differences due to time lag – The factors or causes affecting time gap in recording the transaction related either payments or receipts includes the followings :

(1) Cheque issued by the bank but not yet presented for payment – When cheques are issued by the firm to suppliers the creditors are immediately entered in cash book but it may happen that those may not be presented for payment by the receiving parties. This reduces the bank balance in the cash book. Generally, there is a time lag between issue and presentation of cheques etc.

(2) Cheque paid into bank but not yet collected – This increases the bank balance in the cash book, however, bank credits the customer’s account only when the amount of cheques are actually realised. This leads to a cause of difference between the bank balance shown by cash book and balance shown by the bank pass book.

(3) Amounts directly’deposited in the bank account – In such a case, bank records the receipts in firm’s account directly, but the firm remains unaware of the payment. Firm makes entries in the bank column of cash book only after receiving information in this region from the banks which cause a difference in the balance of pass book and cash book.

(4) Direct debits made by bank on behalf of customer – Sometimes, bank deducts directly from customer’s account the amount of interest on overdraft; incidental charges etc. As a result, the balance as per pass book will be more than the balance as per cash book.

(5) Direct payments made by bank on behalf of customers – Bank sometimes make payments regularly on the instruction of customer to third parties like telephone bills, insurance premium, rent, taxes etc. As a result, the balance as per bank pass book would be less than that of cash book.

(6) Cheques deposited dishonoured – Cheques or bills of exchange drawn by the same is debited to customer’s account by the bank. Firm’s book will not carry that entry as the information is not available to the firm immediately. As a result, the balance as per pass book would be less than the cash book.

Question 5.
Briefly explain the term ‘favourable balance as per cash book’,
Answer:
The debit balance as per cash book means the balance of deposits held at the bank. This is also called credit balance as per pass book. Such a balance exists when the deposits made by the firm are more than its withdrawals. It indicates the favourable balance as per cash book.
Dealing with favourable balances – In case of favourable balance of cash book, the following amounts are deducted :
(i) Cheque deposited but not yet collected.
(ii) Cheque deposited into bank but dishonoured.
(iii) Direct payment made by the bank on behalf of customers.
(iv) Debits made by the bank for commission, bank charges etc.
(v) Cheque issued but omitted to be recorded in cash book. Items to be added

Following amounts are to be added while favourable balance as per cash book is given in the problem :
(i) Cheque issued but not yet presented for payment.
(ii) Credit made by the bank for interest.
(iii) Amount directly deposited by the customers in bank account.
(iv) Interest and dividend collected by the bank.
(v) Cheques paid into the bank but omitted to be recorded in the cash book.

Question 6.
Enumerate the steps to ascertain the correct cash book balance.
Answer:
Various items that normally cause the difference between the pass book balance and the cash book balance because of the reason that they have not been recorded in the cash book. Such entries should be recorded in the cash book and they having been recorded in it.

cash book gives the corrected cash book balance which is known as Aufurted (Corrected) cash book balance. Following steps should be taken for preparing corrected cash book.

(1) Entries in respect of items that appear in pass book – Bank cheques, interest charged on overdraft, interest allowed by bank, dividend, interest, direct payment by bank under the standing instructions of customers are the claims appeared only in pass book are rectified.

(2) Rectifying entries in respect of errors committed in cash book – Cheque issued but recorded in cash, wrong amount over or undercast of bank column, error in balancing the bank column are adjusted in cash book.
Bank Reconciliation Statement with correct cash book is prepared to correct the below-mentioned causes of disagreement:
(i) Cheque issued but not yet presented for payment.
(ii) Cheque deposited but not yet credited by bank.
(iii) Cheque issued but not yet sent to payee.
(iv) Cheque received and recorded in bank column but not sent to bank for collection,
(v) Wrong entry in the pass book.

Long Answer Type Questions

Question 1.
What is a bank reconciliation statement? Why it is prepared?
Answer:
Meaning of bank reconciliation statement – Usually, all the firms open a current account with a bank and in order to record the transactions entered into with the bank, maintain a Bank Column in the Cash Book. Bank also opens a separate account for each firm in its ledger and enters all the transactions in it. Periodically, bank supplies a copy of the firm’s account in its ledger to the firm for information. This copy of the firm’s account supplied by the bank is called bank pass book or bank statement.

Since all the transactions entered with the bank are recorded in both the books, there should be no difference between the balance shown by the cash book and the pass book. The balance of the two books must tally with each other, because when the money is deposited into the bank, the firm enters it on the debit side of the bank column of the cash book and at the same time bank also enters it on the credit side of the firm’s account maintained by the bank. On the other hand, when money is withdrawn from the bank, firm enters it on the credit side of the bank column of cash book and at the same time bank also enters it on the debit side of the firm’s account in its books.

Hence, all the entries recorded on the debit side of the cash book must tally with the entries recorded on the credit side of the pass book and conversely, all the entries recorded on the credit side of the cash book must tally with the entries recorded on the debit side of the pass book. Therefore, at any time, the bank balance shown by the cash book must tally with the balance shown by the pass book.

However, sometimes it so happens, that these two balances do not tally. This is, because on a certain date it is possible that there may be some entries which may have been recorded in the cash book but not in the pass book and vice versa. A statement is therefore prepared to identify the reasons of the difference and to reconcile the balances of the two books. Such a statement is called ‘Bank Reconciliation Statement’.

Definition – “Bank reconciliation statement is a statement prepared mainly to reconcile the difference between the ‘Bank Balance’ shown by the Cash Book and Bank Pass Book.”

Procedure of preparing Bank Reconciliation Statement – A Reconciliation statement is prepared when an account holder gets the duly completed pass book from the bank. Immediately on receiving the pass book, he tallies in case of any difference, items appearing in the pass book are checked and ticked with the items appearing in the cash book. Unticked items in both the books will be the points of difference.

There will be noted on a piece of paper and then, with the help of these causes of difference, a statement of reconciliation will be prepared. A bank reconciliation statement can be prepared by taking the balance either as per cash book or as per pass book as a starting point. If the statement is started with the balance as per bank column of the cash book, the answer arrived at the end will be the balance as per pass book. Alternatively, if the statement is started with the balance as per pass book, the answer arrived at in the end will be the balance as per cash book.

The balance as per cash book may be either debit or credit and similarly the balance as per pass book may also be either debit or credit

1. (a) Dr. Balance as per cash book indicates that the trader has so muchq balance of deposit at the bank.
(b) Cr. Balance as per cash book indicates the amount which has been withdrawn in excess of the deposits. Credit Balance as per cash book is also called ‘Overdraft Balance as per Cash Book’.

2. (a) Cr. Balance as per pass book indicates that the trader has so much balance of deposit at the bank.
(b) Dr. Balance as per pass book indicates the amount which has been withdrawn in excess of the deposits. Debit Balance
as per pass book is also called ‘Overdraft as per Pass Book’. Method of preparing a bank reconciliation statement from each of the above balances is explained below :

Method of preparing Bank Reconciliation Statement by Debit Balance of Bank Column of Cash Book – Entries on account of which the debit balance of the cash book is lesser in comparison to the credit balance of the pass book will be added while preparing a bank reconciliation statement and vice versa.

Items to be added :
(1) Cheques issued but not yet presented for payment – When a businessman issues cheques to its creditors, he immediately enters them on the credit side of his cash book. It reduces the balance of his cash book but the pass book balance will remain the same because the cheques have not been presented for payment in the bank. As such, the cheques should be added to the balance of the cash book in order to make it equal to the pass book balance.

(2) Credit made by the bank for interest – When the bank allows interest to a customer, the bank credit the customer’s account with the amount of such interest. It increases the pass book balance but the balance of the cash book will be the same, as there is no entry of interest in the cash book. Hence, it should be added to the cash book balance.

(3) Amount directly deposited by the customers in our bank account – Such deposits must have increased the balance of the pass book but the cash book will show an unchanged balance. Therefore, this amount should be added to the cash balance.

(4) Interest and dividend collected by the bank – The bank must have credited these amounts to the customer’s account. As such, the pass book balance must have increased whereas the cash book will show an unchanged balance. Therefore, this amount should be added to the cash balance.

(5) Cheques paid into the bank but omitted to be recorded in the cash book – Bank must have credited these cheques in the customer’s account, but as there is no entry in the cash book it shows a lesser balance. Hence, the amounts should be added to the cash book balance.

Items to be deducted :
(1) Cheques sent to the bank for collection but not yet credited by the bank – When the cheques were deposited into bank, entry must have been made on the debit side of the cash book. The balance as per cash book must hace increased but the bank will not enter them unless they have been collected. As such, the cash book will show an increased balance in comparison to the pass book. Hence, the amount will be deducted while preparing a bank reconciliation statement.

(2) Cheques sent to the bank for collection but dishonoured by the bank – Such cheques must also have been entered on the debit side of the cash book but there will be no entry in the pass book, as the cheques have dishonoured. As a result, the cash book will show an increased balance in comparison to the pass book. Therefore, the cash book balance will be deducted in order to make it equal to the pass book,balance.

(3) Direct payment made by the bank on behalf of customers – The bank makes payment for insurance premium, rent etc. and debits the customer’s account. As such, the pass book balance is reduced whereas the cash book balance remains the same. Hence, this amount should be deducted from the balance of the cash book.

(4) Debits made by the bank for commission and charges etc. – It also reduces the pass book balance whereas the cash book balance remains the same. Hence, the amount of bank commission and charges should be deducted from the balance of the cash book.

(5) Cheques issued but omitted to be recorded in the cash book – The bank, while making payment of these cheques, will debit the customer’s account. Hence, the balance of the pass book will be reduced, whereas the cash book balance will remain unchanged. i. e. increased as compared to pass book. Hence, the amount of such cheques should be deducted from the cash book balance.

Question 2.
Explain the reasons on account of which the balance shown by the bank pass book does not agree with the balance as shown by the bank column of the cash book.
Answer:
Causes or reasons for difference – The difference may arise on account of the following causes or reasons :
(i) Cheques issued but not yet presented for payment – Whenevei a cheque is issued for payment, the entry in the cash book is made immediately. But the entry will be made by the bank only when the cheque is presented for payment. There will, thus, be a gap of some days between the entry in the cash book and in the pass book. And, if the bank reconciliation statement is prepared on a date between the issue of cheque and its presentation to bank for payment, a difference will arise.

Let us clear this point with the help of an example. Suppose, a customer issued a cheuqe of Rs. 2,000 on December 27, 2011 which is presented to the bank of January 2, 2012. The customer will record it in the cash book on December 27, 2011 whereas the bank will record it in the pass book on January 2, 2012 only. On December 31, 2011, the cash book balance will be less by Rs. 2,000 due to this reason.

(ii) Cheques paid into the bank not yet cleared – As soon as cheques are sent to the bank, entries are recorded in the bank column on the debit side of the cash book. But usually banks credit the customer’s account when they have received the payment from the bank concerned – in other words, when the cheques have been cleared.

Again there will be some gap between the depositing of the cheques and the credit give by the bank. For example, the customer deposited a cheque of Rs. 1,000 into the bank of March 30, 2005 which is collected by the bank on April 4, 2005 only. Now, if the balances on March 31,2005 are compared, the cash book will be higher by Rs. 1,000.

(iii) Interest allowed by the bank – If the bank has allowed interest to the’customer, the entry will normally be made in the customer’s account and later shown in the pass book. The customer usually comes to know of the amount of the interest by persuing the pass book and only then he makes the relevant entry in the cash book.

(iv) Interest and expenses charged by the bank – Like (iii) above, the interest charged by the bank and the amount of the bank charged are entered in the customer’s account and later in the pass book. The customer makes the required entries in his cash book only after he sees the pass book.

(v) Interest and dividends collected by the bank Sometimes investments are left with the bank in safe custody. The bank itself .sees to it that the interest or the dividend is collected on the due dates and are credited in the customer’s accounts. The bank sends the necessary information to this effect to the customers. Naturally, the customers record it in their cash book either on receiving such information from the bank or noticing it from their pass books. The entries in the pass book and in the cash book may thus be on different dates.

(vi) Direct payment by the bank – The bank may be given standing instructions for certain payments such as for insurance premium. When the bank makes such payments, it immediately debits the customer’s account. In this case also the customer may come to know of the payment only on seeing the pass book. The entries in the pass book and in the cash book may thus be on different dates.

(vii) Direct payment into the bank by a customer – If such a payment is received by the bank, it will be entered in the customer’s account and also in the pass book. The account holder may come to know of the amount on some later date only when he sees the pass book.

(viii) Dishonour of a bill discounted with the bank – If the bank is not able to receive payment on promissory notes discounted by it. it will debit the customer’s account together with any charges that it may have incurred. The customer will naturally make the entry only when he sees the pass book. But till such entry is passed, the balances shown by cash book and pass book would differ.

(ix) Errors committed – It may be possible that while recording the transactions in the cash book, a cheque of Rs. 1,000 deposited into the bank is recorded as Rs. 10,000. Similarly, the bank may also commit mistake while recording the transactions in the pass book. For example, a cheque collected on behalf of Mohan is entered in the account of Mahesh. Such errors would also lead to differences in the balances between the cash book and the pass book.

Question 3.
Explain the process of preparing bank reconciliation statement with amended cash balance
Answer:
Preparation of Bank Reconciliation Statement with Adjusted Cash Book Balance – Bank account having been reconciled – will show the items that have caused difference between the balances of cash book and bank statement.

Few of these differences may be because of the reason that entries have not been recorded in the cash book. Such entries should be recorded in the cash book and they having been recorded in the cash book gives the new cash book balance which is known as Adjusted Cash Book Balance. Bank Reconciliation Statement is thereafter prepared on the basis of amended adjusted cash book balance.

Adjusted cash book balance is ascertained by passing :
(i) Entries in respect of items that appear in pass book (e.g., bank charges, interest charged on overdraft, interest allowed by bank, dividend/interest/bills receivable directly collected by bank, direct payment by bank under the standing instructions of customers).

(ii) Rectifying entries in respect of errors committed in the cash book, (e.g., cheque issued but recorded in cash on discount column, cheques issued recorded in bank column with wrong amount, over as under cost of bank column, error in balancing the bank column, errors in carrying forward of bank balance).

By rectifying the above items, the balance shown by cash book is known as corrected or adjustment cash book balance. Following example may be given for the amended cash book.

Javed’s cash book on 30th June, 2005 showed an overdraft balance of Rs. 10,100 on his account No. 1 at the bank. On checking it is found that-
(i) Cheque issued amounting Rs. 6,200 had not been presented to the bank for payment.
(ii) Cheque for Rs. 1,600 entered in cash book and paid into the bank had not been credited by the bank.
(iii) The receipt side of cash book had. been undercast by Rs. 800.
(iv) Bank cheque of 150 entered in the bank statement had not been entered in the cash book.
(v) A cheque for Rs. 4,200 drawn on the account No. 1 had been checked by bank in qrror to the account No. 2.
(vi) A dividend of Rs. 500 paid direct to the bank had not been entered in the cash book.
(vii) A cheque of Rs. 1,200 received from customer paid into bank dishonoured and shown as such by the bank but no entry for dishonour had been made in the cash book.

You are required :
(a) To make necessary adjustments to be made in the cash book, and
(b) to prepare bank reconciliation statement for the account No. 1 as at 30th June, 2005.

Solution : In the books of Javed

Numerical Questions

Question 1.
From the following particulars, prepare a bank reconciliation statement as on March 31,2005.
(i) Balance as per cash book Rs. 3,200.
(ii) Cheque issued but not presented for payment Rs. 1,800.
(iii) Cheques deposited but not collected upto March 31,2005 Rs. 2,000.
(iv) Bank charges debited by Bank Rs. 150.
(Ans. Balance as per pass book Rs. 2,850.)
Answer:

Question 2.
On March 31, 2005 the cash book showed a balance of Rs, 3,700 as cash at bank, but the bank pass book made up to same date showed that cheques for Rs. 700, Rs. 300 and Rs. 180 respectively had not presented for payment, also cheque amounting to Rs. 1,200 deposited into the account had not been credited. Prepare a bank reconciliation statement.
(Ans. Balance as per pass book Rs. 3,680.)
Answer:

Question 3.
The cash book shows a bank balance of Rs. 7,800 on
comparing the cash book with pass book the following discrepancies were noted :
(a) Cheque deposited in bank but not credited — Rs. 3,000
(b) Cheque issued but not yet present for payment — Rs. 1,500
(c) Insurances premium paid by the bank — Rs. 2,000
(d) Bank interest credited by the bank — Rs. 400
(e) Bank charges — Rs. 100
(f) Directly deposited by a customer — Rs. 4,000
(Ans. Balance as per pass book Rs. 8,600.)
Answer:

Question 4.
Bank balance of Rs. 40,000 showed by the cash book of Atul on December 31,2005. It was found that three cheques of Rs. 2,000, Rs. 5,000 and Rs. 8,000 deposited in the month of December were not credited in the pass book till January 2,2005. Two cheques of Rs. 7,000 and Rs. 8,000 issued on December 28, were not presented for payment till January 3, 2005, in addition to bank had credited the Atul for Rs. 325 as interest and had debited him
Rs. 50 as bank charged for which there were not correspondence entries in cash book. Prepare a Bank Reconciliation Statement as on December 31, 2005.
(Ans. Balance as per pass book Rs. 40,275.)
Solution :

Question 5.
On comparing the cash book with pass book of Naman it is find that on March 31,2005 bank balance of Rs. 40,960 showed by the cash book differs from the bank balance. It is found that:
(a) Bank charges Rs. 100 on March 31,2005 are not entered in the cash book.
(b) On March 21, 2005, a debtor paid Rs. 2,000 into the company’s bank is settlement of his account, but no entry was made in the cash book of the company in respect of this.
(c) Cheques totalling Rs. 12,980 were issued by the company and duly recorded in the cash book before March 31, 2005 but had not been presented at the bank for payment until after that date. after that date.
(d) A bill for Rs. 6,900 discounted with the bank is entered in the cash book with recording the discount charge of Rs. 800.
(e) Rs. 3,520 is entered in the cash book as paid into bank on March 31, 2005 but not credited by the bank until the following day.
(f) No entry has been made in the cash book to record the dishonoured on March 15, 2005 of a cheque for Rs. 650 received from Bhanu. Prepare a reconciliation statement as on March 31, 2005.
(Ans. Balance as per pass book Rs. 50,870.)
Answer:

Question 6.
Prepare bank reconciliation statement as on December 31, 2004. On December 31, 2004 the pass book of Mr. Himanshu showed a balance of Rs. 7,000.
(a) Cheque of Rs. 1,000 directly deposited by a customer.
(b) The bank has credited Mr. Himanshu for Rs. 700 as interest.
(c) Cheques for Rs. 3,000 were issued during the month of December but of these cheques for Rs. 1,000 were not presented in the month of December.
(Ans. Balance as per cash book Rs. 4,300.)
Solution :

Question 7.
From the following particulars prepare a bank reconciliation statement showing the balance as per cash book on December 31,2005.
(a) Two cheques of Rs. 2,000 and Rs. 5,000 were paid into bank in October, 2005 but were not credited by the bank in the month of December.
(b) A cheque of Rs. 800 which was received from a customer was entered in the bank column of the cash book in December 2004 but was omitted to be banked in December 2004.
(c) Cheques for Rs. 10,000 were issued into bank in January 2005 but not debited by the bank on December 31,2005.
(d) Interest on investment Rs. 1,000 collected by bank appeared in the pass book. Balance as per Pass Book was Rs. 50,000.
(Ans. Balance as per cash book Rs. 46,800.)
Solution :

Question 8.
Balance as per pass book is 3,000 of Mr. Kumar.
(a) Cheque paid into bank but not yet cleared
Ram Kuhiar Rs. 1,000
Kishore Kumar Rs. 500

(b) Bank charges Rs. 300

(c) Cheque issued but not presented
Hameed Rs.2,000
Kapoor Rs. 500

(d) Interest entered in the pass book but not entered in the cash book Rs. 100
Prepare a bank reconciliation statement.
(Ans. Balance as per cash book Rs. 2,200.)
Answer:

Question 9.
The pass book of Mr. Mohit current account showed a credit balance of Rs. 20,000 on dated December 31,2004. Prepare a Bank Reconciliation Statement with the following information :
(i) A cheque of Rs. 400 drawn on his saving account has been shown on current account.
(ii) He issued two cheques of Rs. 300 and Rs. 500 on December 25, but first cheque was presented for payment.
(iii) One cheque issued by Mr. Mohit of Rs. 500 on December 25, but it was not presented for payment whereas it was recorded twice in the cash book.
(Ans. Balance as per cash book Rs. 18,900.)
Answer:

Question 10.
On 1 January 2005, Rakesh had an overdraft of Rs. 8,000 as showed by his cash book. Cheques amounting to Rs. 2,000 had been paid in by him but were not collected by the bank by 1 January 2005. He issued-cheques of Rs. 800 which were not presented to the bank for payment upto that day. There was a debit in his passbook of Rs. 60 for interest and Rs. 100 for bank charges. Prepare Bank Reconciliation Statement for comparing both the balance. ’(Ans. Overdraft as per pass book Rs. 9,360.)
Answer:

Question 11.
Prepare bank reconciliation statement.
(i) Overdraft shown as per cash book on December 31,2005 — Rs. 10,000.
(ii) Bank charges for the above period also debited in the pass book — Rs. 100.
(iii) Interest on overdraft for six months ending December 31,2005 Rs. 380 debited in the pass book.
(iv) Cheques issued but not in cashed prior to December 31, 2005 amounted to — Rs. 2,150.
(v) Interest on investment collected by the bank and credited . in the pass book — Rs. 600.
(iv) Cheques paid into bank but not cleared before December 31, 2005 were — Rs. 1,100.
(Ans. Overdraft as per pass book Rs. 8,830.)
Solution :

Question 12.
Kumar find that the bank balance shown by his cash book on December 31,2005 is Rs. 90,600 (credit) but the pass book shows a difference due to the following reasons :
A cheque (post dated) for Rs. 1,000 has been debited in the bank column of the cash book but it could not have been presented in any case. A cheque of Rs. 8,000 drawn in favour of Manohar has not yet been presented for payment. Cheques totalling of Rs. 1,500 deposited in bank have not yet been collected and cheque for Rs. 5,000 has been dishonoured.
(Ans. Overdraft as per pass book Us. 90.100.)
Answer :

Question 13.
On 31st December 2005, the book on Mittat Bros showed an overdraft of Rs. 6,920. From the following particulars make out a Bank Reconciliation Statement and ascertain the
balance as per pass book:
(1) Debited by bank for Rs. 200 on account of interest on overdraft and Rs. 50 on account of charges for collecting bills.
(2) Cheques drawn but not cashed before December 31,005 for Rs. 4,000.
(3) The bank has collected interest and has credited Rs. 600 in pass book
(4) A bill receivable for Rs. 700 previously discounted with the bank had been dishonoured and debited in the pass ‘book.
(5) Cheques paid into bank but not collected and credited before December 31, 2005 amounted Rs. 6,000.
(Ans, Overdraft as per pass book Rs. 9,270.)
Answer:

Question 14.
Prepare Bik Reconciliation statement of shri Bhandari as on December 3l, 2005.
(i) The payment of cheques Rs. 550 was recorded twice in the pass book.
(ii) Withdrawal column of the pass book undercast by Rs. 200.
(iii) A cheque of Rs. 200 has been debited in the bank column of the cash book but’it was not sent to bank at all.
(iv) A cheque of Rs. 300 debited to bank account of the cash book had been omitted to be banked.
(v) Rs. 500 in respect of dishonoured cheque were entered in the pass book but not in the cash book.
Overdraft as per pass book is Rs. 20,000.
(Ans. Overdraft as per cash book Rs. 18650.)
Answer:
Bank Reconciliation Statement as on December 31,2005

Question 15.
overdraft shown by tie pass book of,Mr. Muni is Rs. 20,000. Prepare Bank Reconciliation Statement on dated December 31,2005.
(i) Bank charges debited as er pass book Rs. 500.
(ii) Cheques recorded in tasb book but not sent to the bank for collection Rs.2O0
(iii) Received a payment dirçctly from customer Rs. 4,600.
(iv) Cheque issued but not presented for payment Rs. 6,980.
(v) Jntelest credited by pass book Rs. 100.
(vi) LIC paid by bank Rs. 2,500.
(vii) Cheques deposited with the bank but not collected Rs. 3,500.
(Ans. Overdraft as per cash book Rs. 22,680.)
Answer:

Question 16.
Raghav & Co. have two bank accounts – Account No. I and Account No. II. From the following particulars relating to Account No. I, find out the balance on that account on December 31, 2005 according to the cash book of the firm.
(i) Cheques paid into bank prior to December 31,2005 but not credited until after that date for Rs. 10,000.
(ii) Transfer of funds from Account No. II to Account No. I recorded by the bank on December 31,2005 but entered in the cash book after that date for Rs. 8,000.
(iii) Cheques issued prior to December 31, 2005 but not presented until after that date for Rs. 7,429.
(iv) Bank charges debited by bank not entered in the cash book for Rs. 200.
(v) Interest debited by the bank not entered in the cash book Rs. 580.
(vi) Overdraft as per pass book Rs. 18,990.
(Ans. Overdraft as per cash book Rs. 23,639.)
Answer:

Question 17.
Prepare a Bank Reconciliation Statement from the following particulars and shows the balance as per cash book :
(i) Balance as per pass book on December 31, 2005 overdrawn Rs. 20,000.
(ii) Interest on bank overdraft not entered in the cash book Rs. 2,000.
(iii) Rs. 200 insurance premium paid by bank has not been entered in the cash book.
(iv) Cheques drawn in the last week of December 2005, but not cleared till date for Rs. 3,000 and Rs. 3,500.
(v) Cheques deposited into bank on November 2005, but yet to be credited on dated December 31,2005 Rs. 6,000.
(vi) Wrongly debited by bank Rs. 500.
(Ans. Overdraft as per cash book Rs. 17,800.)
Solution :

Question 18.
The pass book of Mr. Randhir showed an overdraft of Rs. 40,950 on March 31,2005.
Prepare Bank Reconciliation Statement on March 31,2005.
(i) Out of cheques amounting to Rs. 8,000 drawn by Mr. Randhir on March 27 a cheque for Rs. 3,000 was encashed on April 3.
(ii) Credited by bank with Rs. 3,800 for interest collected by them, but the amount is not entered in the cash book.
(iii) Rs. 10,900 paid in by Mr. Randhir in cash and by cheques on Mnrch 31, cheques amounting to Rs. 3,800 were collected on April 7.
(iv) A cheque of Rs. 780 credited in the pass book on March 28 being dishonoured in debited again in the pass book on April 01, 2005. There was no entry in the cash book about the dishonour of the cheque until April 15.
(Ans. Overdraft as per cash book Rs. 36,350.)
Solution:

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 4 Recording of Transactions 2 Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Recording of Transactions 2 NCERT Solutions for Class 11 Accountancy Chapter 4

Recording of Transactions 2 Questions and Answers Class 11 Accountancy Chapter 4

Test Your Understanding – I

Select the Correct Answer :
(a) When a firm maintains a cash book, it need not maintain :
(i) Journal Proper
(ii) Purchases (journal) book
(iii) Sales (journal) book
(iv) Bank and cash account in the ledger
Answer:
(iv) Bank and cash account in the ledger

(b) Double column cash book records :
(i) All transactions
(ii) Cash and bank transactions
(iii) Only cash transactions
(iv)Only credit transactions
Answer:
(ii) Cash and bank transactions

(c) Goods purchased on cash are recorded in the :
(i) Purchases (journal) book
(ii) Sales (journal) book
(iii) Cash book
(iv) Purchases return (journal) book
Answer:
(iii) Cash book

(d) Cash book does not record transaction of:
(i) Cash nature
(ii) Credit nature
(iii) Cash and credit nature
(iv) None of these
Answer:
(ii) Credit nature

(e) Total of these transactions is posted in purchase account:
(i) Purchase of furniture
(ii) Cash and credit purchase
(iii) Purchases return
(iv) Purchase of stationary
Answer:
(ii) Cash and credit purchase

(f) The periodic total of sales return journal is posted to :
(i) Sales account
(ii) Goods account
(iii) Purchases return account
(iv) Sales return account
Answer:
(iv) Sales return account

(g) Credit balance of bank account in cash book shows :
(i) Overdraft
(ii) Cash deposited in our bank
(iii) Cash withdrawn from bank
(iv) None of these
Answer:
(i) Overdraft

(h) The periodic total of purchases return journal is posted to :
(i) Purchase account
(ii) Profitand loss account
(iii) Purchase returns account
(iv) Furniture account
Answer:
(iii) Purchase returns account

(i) Balancing of account means :
(i) Total of debit side
(ii) Total of credit side
(iii) Difference in total of debit & credit
(iv) None of these
Answer:
(iii) Difference in total of debit & credit

Test Your Understanding – II

Question 1.
Fill in the Correct Words :
(a) Cash book is a ……………….. journal.
(b) In Journal proper, only ……………… discount is recorded.
(c) Return of goods purchased on credit to the suppliers will be entered in ……………… Journal.
(d) Assets sold on credit are entered in ………………
(e) Double column cash book records transaction relating to ……………… and ………………
(f) Total of the debit side of cash book is ……………… than the credit side.
(g) Cash book does not| record the ……………… transactions.
(h) In double column cash book ……………… transactions are also recorded.
(i) Credit balance shown by a bank column in cash book is
(j) The amount paid to the petty cashier at the beginning of a period is known as ……………… amount.
(k) In purchase book goods purchased on ……………… are recorded.
Answer:
(a) Subsidiary
(b) Cash
(c) Purchases Return
(d) Journal Proper
(e) Cash, Bank
(f) More
(g) Credit
(h) Bank
(i) Overdraft
(j) Imprest
(k) Credit

Question 2.
State whether the following statements are True or False :
(a) Journal is a book of secondary entry.
(b) One debit account and more than one credit account in a entry is called compound entry.
(c) Assets sold, on credit are entered in sales journal.
(d) Cash and credit purchases are entered in purchase journal.
(e) Cash sales are entered in sales journal.
(f) Cash book records transactions relating to receipts and payments.
(g) Ledger is a subsidiary book.
(h) Petty cash book is a book having record of big payments.
(i) Cash received is entered on the debit side of cash book.
(j) Transaction recorded both on debit and credit side of cash book is known as contra entry.
(k) Balancing of account means total of debit and credit side.
(l) Credit purchase of machine is entered in purchase journal.
Answer:
(a) False
(b) True
(c) False
(d) False
(e) False
(f) True
(g) True
(h) False
(i) True
(j) True
(k) False
(l) False

Short Answer Type Questions

Question 1.
Briefly state how the Cash Book is both journal and a ledger.
Answer:
Practically, it is difficult to record all the transactions in only one books of prime entry.
For convenience, the journal is divided into number of subsidiary books. The cash transactions relating to
receipts and payments from journal are recorded in cash book.

The number of cash transactions in a business is generally large and, therefore, it becomes convenient to have a separate cash book, to record such transaction. Cash Book is a Special Journal. Cash transactions firstly are recorded in cash books and on the basis of such a record, ledger accounts are prepared. Therefore, the cash book is a subsidiary book. But, the cash book itself serves as the cash account and bank account.

As a matter of fact, balances are entered in the Trial Balance directly. The cash book, therefore, is part of ledger also. Hence, it is treated as the Principal Book. The cash book is, thus both a subsidiary book and a principal book i.e. Journal and Ledger both.

Question 2.
What is the purpose of Contra Entry?
Answer:
Some transactions are recorded in two-column cash book which relates to both cash and bank i.e. balance of one will decrease and other will increase due to such transactions or vice versa. Such transactions are entered on both the sides of cash book. Such entries are known as Contra Entries. The purpose of entering contra transactions is the entry of both cash and bank transaction on receipt and payment side in two situations

• Cash is withdrawn from bank for business use, and
• Cash is deposited into bank.

When cash is withdrawn from bank for business purpose, cash balance is increased and the bank balance is reduced. In the debit side, cash column is increased and in the credit side, bank column is reduced. In the L.F.
Column (Ledger Folio Column) the letter ‘C should be written for contra transaction. When cash is deposited into bank, it increases the bank balance and reduces the cash balance. Hence it affects the Cash and Bank columns of cash book.

Question 3.
What are special Purpose Books?
Answer:
Special Purpose Books: In cash book, only cash transactions are recorded, whereas non-cash transactions are recorded in other special purpose subsidiary books. The special purpose books are the following:

• Purchase Book
• Sales Book
• Purchase Return Book
• Sales Return Book
• Bills Receivable Book
• Bills Payable Book
• Journal Proper

It is not necessary to prepare for every business to prepare all these special purpose books but any books out of the above may be kept by the business depending upon the usefulness.

All credit purchases of goods are recorded in purchase book in which the firm is dealing. All credit sales of goods are recorded in sales book also known as Sales Day Book, the Book to record the return of goods purchased on credit is known as Return Outward Book. Sales Return Book is used to record the.return of goods sold to customers on credit basis.

Bills Receivable Book is prepared to record to Bills of exchange drawn on debtors or customer for credit side indicating that he would pay the amount written therein in the bill of exchange on the expiry of period of bill.Bills Payable Books is a record of bills accepted by the firm from creditors.

Lastly, the journal proper is a residuary book in which only those transactions are recorded which cannot be recorded in any of the above special purpose book. Example, the purchase of machinery which is an asset will be recorded in the journal proper.

Question 4.
What is Petty’ Cash Book? How it is prepared?
Answer:
Petty Cash Book : In a business besides large payments, a number of small paymets, such as for conveyance, stationery, cartage, etc., have to be made. If all these payments are recorded in the cash book, it will become unwieldy. Also the main cashier will be overburdened with work.

Therefore, it is useful for firms to appoint a person as “Petty Cashier” and to entrust the task of making small payments, says, below Rs. 250, to him. Of course, he will be reimbursed for the payments made. Later, on an analysis, the respective accounts may be debited.

Petty cash books will have one column to record receipts of cash (which will be only from the main cashier) and other columns to record payments of various types. The totals of the various columns will show why payments have been made and then the relevant accounts can be debited. A specimen of petty cash books is given below:

While maintaining a petty cash book, the following points should be noted:
(i) The amount fixed for petty cash should be sufficient for the likely small payments for a relatively short period, say, for a week or a fortnight or a month.
(ii) The reimbursement should be made only when the petty cashier prepares a statement showing total payments supported by vouchers, i.e., documentary evidence and should be limited to the amount of actual disbursements.
(iii) The vouchers should be filed in order.
(iv) No payment should be made without proper authorization. Also payments above a certain specified limit should be made only by the main cashier or with his consent only.
(v) The petty cashier should be allowed to receive only reimbursement.
In the petty cash book, the extreme left-hand column records receipts of total cash fora specific period. The money columns towards the right hand show total payments for various purposes. A column is usually provided for “Sundaries” to record infrequent payments. The Sundaries column is later analysed. At the end of the week or the fortnight, the petty cash book is balanced. The method of balancing is the same as for the simple cash book.

Question 5.
Explain the meaning of posting of Journal Entries.
Answer:
Meaning of Posting of Journal Entries : Posting is the process of transferring entries from Journal or Subsidiary’ Books to the Ledger. The following rules should be observed while posting entries in the Ledger:
(1) All transactions relating to an account should be entered at one place. In other words, two separate accounts should not be opened for posting transactions relating to the same account. If there are two customers with similar names, their accounts should be distinguished by writing their address against their names, say the Account of Prakash (Delhi) and the Account of Prakash (Chandigarh)

(2) The word ‘To’ is used before the accounts which appears on the debit side of an account. Similarly, the word ‘By’ is used before the accounts which appear on the credit side of an account.

(3) If an account has been debited in the Journal entry, the posting in the Ledger should also be made on the debit side of such account. In the Particulars column, the name of the other account which has been credited in the journal entry should be written for reference.

(4) If an account has been credited in the Journal entry, the posting in the Ledger should also be made on the credit side of such account. In the Particulars column, the name of the other account which has been debited in the journal entry should be written for reference.

(5) Similar amount which has been posted on the debit side of an account should also be posted on the credit side of another account.

(6) It is not necessary’ to write the word ‘ A/c’ after the personal accounts.

Example: On 1st August 2004, sold goods for cash Rs. 8,000. Pass Journal entry and post it into Ledger.
Solution:

Question 6.
Define the purpose of maintaining subsidiary Journal.
Answer:
Role or purpose of subsidiary Journal may be cleared from the following :
Role of Journal Proper in Practical System of Book-keeping :
By now, the students are familiar with the journal. They also know that:

• Cash transactions are recorded in the cash book;
• Credit purchases of goods or materials are recorded in the purchases book;
• Credit sales of goods are recorded in the sales book
• Returns from customers are recorded in the sales book ;and
• Returns to suppliers are entered in the purchases returns book.

Similarly, bills transactions will be entered in a separate books called the bills receivable books or the bills payable book, if these are maintained by the firm. Apart from the above transactions, there are some other entries also which have to be recorded. For them, the proper place is the journal proper. In fact, if there is no special books meant to record a transaction, it will be recorded in the journal proper. The role of the journal proper is, thus, usually restricted to the following types of entries:
(i) Opening Entries (In the Chapter – Journalizing)
(ii) Closing Entries (In the Chapter – Final Accounts)
(iii) Rectification Entries (Rectification of Errors)
(iv) Transfer Entries (Amount is transferred from one account to another)
(v) Adjustment Entries like:
Outstanding expenses, prepaid expenses, interest on capital, depreciation etc.

Question 7.
What is the difference between return inward and return outwards?
Answer:
Sales Returns Book or Returns Inward Book
If customers frequently return the goods sold to them, it would be convenient to record returns in a separate book called the ‘Sales Returns Book’ or the ‘Returns Inward Book’. The ruling of the book is similar to the Purchases or the Sales Book and entries are also made in the same manner. The following, with assumed figures, is a specimen of returns inward book :

Purchases Returns or Returns Outward Book
Such a book conveniently records returns of goods or materials purchased to the suppliers – if, however, the returns are infrequent, it may be sufficient to record the transactions in the journal. The ruling of the Purchase Returns or Returns Outward Book is similar to that of the Purchases Book. Entries are also similarly made. This is clear from the illustrations given below :

When the goods are returned, a debit note is prepared and sent to the supplier with the returned goods. A debit note contains the name of the party to whom the goods have been returned, details of the goods returned and reasons for the goods returned.

When the goods are received back, a credit note is prepared in duplicate containing the details relating to the name of customers, details relating to the name of customers, details of the goods received back and the amount of return. A credit note is also sent when a sale invoice is overcharged by mistake or sale invoice is overcost.

Question 8.
What do you understand by ledger folio?
Answer:
Meaning of Ledger Folio (L.F.) : All entries from the Journal are later posted into the ledger accounts. The page number of folio number of the ledger account where the posting has been made from the journal is recorded in the L.F. column of the journal. Suppose, a machine is purchased and posted at page No. 60 of the ledger, in the column of L.F. the number of page i.e. 60 should be written.

Followings are the advantages of writing the Ledger folio (L.F.):
(i) It shows whether an entry has been posted or not. If the page number of the ledger does not appear against an entry, it will indicate that the entry has not been posted to the ledger so far.

(ii) Page number written in the L.F. column in journal is indicative of the page number of ledger where such posting has been made. It helps in understanding and checking the ledger posting at a glance in future.

(iii) In case, the Trial Balance is not called, the posting of each entry can be checked with the help of L.F. column

Question 9.
What is the difference between Trade Discount and cash Discount?
Answer:
Discount
Discount is of two types :
(1) Trade Discount, and
(2) Cash Discount

(1) Trade Discount : The discount allowed by a seller to its customers at a fixed percentage on the listed price of goods is termed as Trade discount. No separate entry is passed for the Trade discount, as it is deducted from the cash memo or invoice of the goods. For example, if a trader sells goods of the list price of Rs. 20,000 at 20% trade discount for cash, the entry will be:

If the goods sold at trade discount are returned by the customer, the amount of trade discount is again deducted from the list price of the returned goods.

(2) Cash Discount : This discount is allowed to the customers for making prompt payment. In other words, cash discount is allowed only it the customer makes the payment within a fixed period. Such discount motivates the customer to make the payment at the earliest.

As the discount is allowed at the time of making payment, so the entry for cash discount is recorded alongwith the entry for payment. Discount is a nominal account and as such, it is debited when it is allowed to a customer and credited when it is received.

Difference between Trade Discount and Cash Discount

Sometimes, a customer is allowed both the discounts, i.e., trade discount as well as cash discount. In such a case, first trade discount is to be deducted from the price of the goods and then, cash discount is to be calculated on the balance of the amount.

For example, if a trader sells goods of the list price of Rs. 40,000 at 10% trade discount and 2% cash discount, the net amount will be calculated as under :

Question 10.
What is process of preparing Ledger from a Journal?
Answer:
Ledger is h book or register containing summarised and classified form of transactions. Ledger is the most important book of account. It is a principal book of account. Personal account in ledger show how much money the firm owes to its creditors and the amount it has to take from the debtors. The real account show the value of properties and value of stock. Nominal accounts reflect the source of income and also amount spent on various items.

The Process of transferring the information of Journal to the ledger is called posting. The amount of Debit side in journal is written on the left hand side of the account in the particulars column, the name of the account which is to be credited is written, preceded by the word “To”.

Question 11.
What do you understand by Imprest System in Petty Cash Book?
Answer:
Imprest System of Petty Cash Book : Under this system, the petty cashier is given a definite sum, say Rs. 800, at the beginning of a certain period. This amount is called ‘imprest amount’. The petty cashier goes on paying all petty ,expenses out of this imprest amount and records them in the petty cash book maintained by him. At the end of the given period, say after a month, the petty cashier submits the account to the main cashier who, after having examined the petty cash book, reimburses the amount actually spent by the petty cashier.

Thus, on the first day of the next month, the petty cashier after including the balance already left with him, is found again with the same cash balance which he held on the first day of the preceding month. For instance, Rs. 800 are advanced to the petty cashier on 1st Jan.

If petty cashier spends Rs. 460 by the end of Jan.he will be again given Rs. 460 so that after including Rs. 340 which he has already got with him, he will again restart with the original amount of Rs. 800 on the first day of Feb. This system of petty cash books is called the Imprest System, because imprest means ‘advance made to a certain person’.

A good imprest system should have the following essentials :
(1) The petty cashier should obtain proper receipts for all the payments made by him. All these receipts should be arranged date-wise and numbered so that these maybe checked up easily by the main cashier when he takes reimbursement of the amount spent by him.
(2) The petty cashier should himself prepare proper vouchers for those expenses for which proper receipts cannot be obtained. He should get these vouchers sanctioned from a proper authority.
(3) There should be an upper limit of the amount of a single payment by the petty cashier. Payment above this limit should be made only by the main cashier.
(4) Petty cashier should get the reimbursement of the amount spent by him only from the main cashier.
(5) Petty Cashier should not be entitled to received any cash coming from outside the business.
(6) Great care should be taken while fixing the amount of imprest. It should be sufficient, to cover the petty expenses for the month.

Advantages of the Imprest System :

(1) Control over Misappropriation : Since the imprested sum is small, it does not provide a temptation either to the petty cashier or to other staff to misappropriate it.

(2) Control over Petty Expenses : Petty expenses are kept within the limits of imprest since the petty cashier can never spend more than the available petty cash with him.

(3) Control Exercised by Main Cashier : Main Cashier keeps a close watch on the amount refunded to the petty cashier from time to time. Hence, extravagance, if any, will be revealed.

(4) Lesser Chance of Misuse of Cash by Petty Cashier : At any time, the amount of Cash in hand plus the total value of vouchers which have not been reimbursed must equal the imprest amount. The existence of this simple check reduces the chance of misuse of cash by petty cashier.

(5) Advantageous to Petty Cashier : Imprest system is advantageous to petty cashier also because his liability to account for money spent can never exceed the imprest amount. Moreover, since his accounts are checked at regular intervals, says, weekly or monthly, he is not required to account for transactions which occurred in the far distant past.

Long Answer Type Questions

Question 1.
Explain the need for drawing up the special books.
Answer:
Need and Importance – The basic objective of accounting is to ascertain as to (I) how much amount is due from each customer or how much amount the firm has to pay to each supplier; (II) how much is the amount of purchase and sale during a particular period; (III) how much amount has been spent on each head of expenditure and how much amount has been earned on account of each head of income.

The journal fails to provide us the above informations because it is only a chronological record of the daily transactions of a business. Transactions of the same nature are not recorded at one place in the Journal. For example, in order to know on a particular date, the amount due from Sunil & Co., the various transactions pertaining to them will have to be sorted out from Journal or Subsidiary Books and will have to be collected at one place.

From sales book the amount of sales made to them on each date will have to be ascertained, from sales return books the amount of goods returned by them will have to be ascertained, from cash book the amount received from them on different dates will have to be ascertained and even the some information may be omitted to be collected from various books. But in the Ledger all the transactions pertaining to Surender Mohan & Company will be posted at one place in an account opened in their name, which will provide a complete picture of all the transactions relating to them at a glance.

As such, the Ledger is a very useful book and is of the utmost importance in any enterprise. Hence, the Ledger is called the ‘Principal Book’. It is also called the book of final entry because the transactions which are first entered in Journal or Subsidiary Books are finally incorporated in the Ledger.

Advantages of ledger
(1) All accounts are opened on separate pages in this book. Hence, all the transactions pertaining to an account are collected at one place in the Ledger. As such, by looking at the balance of that account, one can understand the collective effect of all such transactions at any point of time.
(2) Any type of information relating to the business can be easily obtained from the Ledger, such as (1) how much amount each customer owes to the firm; (II) how much amount the first owes to each creditor; (III) how much is the amount of purchase and sales during a particular period; (IV) how much amount has been paid or received on account of various items; and (V) what is the ultimate position of assets and capital.
(3) A trial balance can be prepared with the help of ledger balances which helps in ascertaining the arithmetical accuracy of the accounts.
(4) A trading and profit and loss account can only be prepared with the help of ledger balances.
(5) A balance sheet can also be prepared with the help of ledger balances which depict the financial position of the business.

Question 2.
What is Cash Book? Explain the types of cash book.
Answer:
Cash book is a summary of cash receipts and payments. All cash receipts are recorded in the debit side and all cash payments are recorded in the credit side. All transactions are recorded chronologically.

Types of Cash Book
Cash Book may be classified into three types :
(i) Single Column Cash Book
(ii) Two Column or Double Column Cash Book
(iii) Three Column Cash Book

(i) Single column Cash Book: In this type of cash book, a single Amount column on each side records the receipts and payments. The left hand side records receipts of cash and the right hand side the payments.
Following is the specimen:

(ii) Double Column Cash Book (Bank and Discount Column) :
In case of transactions involving cash there is always a’risk of embezzlement of cash by the employees. For the purpose of minimising this risk some businessmen follow the policy of depositing all Cash receipts into the bank on daily basis and making all payments by the issue of cheques. Such a Cash Book is also known as Bank Cash Book.

Following rules are observed for preparing such a book :
1. All receipts whether in Cash or by Cheque are to be recorded on the debit side of this book in bank column. It is assumed that all cheques received are sent to the bank for collection on the same day.
2. All payments are to be recorded on the credit side of this book in the bank column.
3. If cheque sent for collection is dishonoured, it is recorded on the credit side of this book in bank column. If some discount was allowed on receipt of such a cheque, the discount allowed must also be withdrawn. However, the discount withdrawn should not be entered in the discount column on Credit side of Cash book because the total of this column is posted to the Discount Received Account. The entry for withdrawing the discount should be passed through Journal Proper. The entry will be:
Debtor’s A/c — Dr.
To Discount Allowed A/c
4. Bank charges are also recorded on the credit side in bank column.
5. For small payments like postage, telegrams, conveyance, stationery etc., which cannot be paid by cheque, a separate book is maintained called ‘Petty Cash Book’.

(iii) Three Column Cash Book : A column for discount when added to the existing two column cash book it is known as’Three- Colurnn Cash Book’. The columns for discount is not balanced but each side are totalled. The total so ascertained is posted to Discount Account, total of discount column on the credit side of cash book is posted to the credit of Discount Received Account and total of discount column on the debit side of cash book is posted to the debit of Discount Allowed Account. It may be noted that Three Column Cash Book is not within the course and hence, has not been discussed in detail.

Question 3.
What is Contra Entry? How can you deal this entry while preparing Double Column Cash Book?
Answer:
Contra Entries : When cash is deposited into the hank or when cash is withdrawn from the bank for use in the office, each such transaction affects both ‘Cash Column’ as well as ‘Bank Column’ and the transaction is therefore, recorded on both sides of the cash book.

Such entries, the double entry of which is complete in the Cash Book itself, are called “Contra entries”.
(1) Cash deposited into Bank : When cash is deposited into the bank, it increases the bank balance and reduces the cash balance. Hence, it affects the Cash Column as well as the Bank Column. As such the same amount is recorded on the debit side as well as on the credit side. On the Dr. side ‘To Cash A/c’ is written and the amount is recorded in the bank column. On the Cr. side ‘By Bank A/c’ is written and the l amount is recorded in the Cash Column

Debit Bank A /c (As bank is receiving the Cash i.e., Debit the receiver) Credit Cash A/c (As cash is going out)
For example, if we deposit Rs. 2,000 into the bank, it will be recorded in the cash book as follows
Double Column Cash Book (with Cash and Bank Columns)

(2) Cash withdrawn from Bank for office use : In this case, the cash balance is increased and the bank balance is reduced. On the Dr. side ‘To Bank A/c’is written and the amount is recorded in Cash Column. On the Cr. side ‘By Cash A/c’ is written, and the amount is recorded in Bank Column.
Debit Cash A/c (As cash is coming in)
Credit Bank A/c (As bank is the giver, i.e., credit the giver) For example, if we withdraw Rs. 2,500 from the bank, it will be recorded in the cash book as follows :

Contra entries are not required to be posted to ledger as their double entry is complete in the Cash Book itself. Cash Book itself serves as the cash account and bank account. In order to indicate that these entries are not to be posted to the ledger, the word ‘C’, which stand for contra, is written on both the sides in ‘L.F.’ Column. The word Contra means ‘opposite’ or ‘against’.

(3) Receipt of Cheque and Bank Draft: ‘
(A) Cheques received from customers and deposited into bank the same day : These are entered in Bank Column on the debit side.

(B) Cheques received from customers but not deposited into bank the same day : These are treated as cash, and entered in Cash Column on the debit side.

Contra Entry : When these cheques are actually deposited with ‘ the bank on a future date, a contra entry, as in the case of cash deposited in the bank, will be passed.

Question 4.
What is Petty Cash Book? Write the advantages of Petty Cash Book.
Answer:
Petty Cash Book : In every business, of whatever size, a large number of small payments such as for postage, stationery, bus fare, taxi fare, cartage etc., have to be made. These payments are generally repetitive in nature. If all these payments are made by the cashier and are recorded in the main cash books the cashier will be overburdened with the work and the cash books will also become very bulky. To avoid this, it is usual to appoint an employee as ‘Petty Cashier’. He is entrusted with the task of making small payments, say, below Rs. 50 and records them in a separate book, called Petty Cash Book.

Advantages Of Petty Cash Book

(1) Saving of Time and Labour: As petty cashier handles the work of making all petty expenses and recording them as well, a lot of time and energy of the main cashier is saved. He is to record only the total of such expenses and that too only once, at the end of each month.

(2) Easiness in Posting: Only the total of each head of expense is posted into the Ledger. As such, a lot of space is saved and the posting becomes very convenient.

(3) Easiness in preparing the Cash Book: As the number of small payments in every business is quite large and as these are recorded in the petty cash books itself, the main cash book is not overburdened and can be more easily totalled.

(4) Control on Petty Expenses : The main cashier keeps checking the petty cash book from time to time and a proper check is put on any unnecessary expenditure.

(5) Lesser chances of fraud : Petty cashier obtains a receipt are duly signed by the main cashier while reimbursing the amount to the petty cashier. As such, it minimises the chance of fraud.

(6) Simple Method : The maintenance of petty cash book does not require any specialised knowledge of accounting.

(7) Comparative Study is Possible : Results of one year may be compared with those of previous years and reasons for the change may be ascertained.

(8) Help Management in Decision-Making : The management may obtain good information for its work, specially in making decisions.

(9) No Scope of Fraud : The firm is saved from frauds and misappropriations since full information about all assets and liabilities will be available. It is because of these advantages that the double entry system has been used extensively in all countries. One should read the advantages again after he has studied ‘Final Accounts’.

Question 5.
Describe the advantages of sub-divided the Journal.
Answer:
Journal can be sub-divided into various subsidiary books in order to record various transactions. The various books like cash book, purchase book, sales book, purchase return and sales return journal and journal proper are special books maintained for recording all cash and credit transactions in order to prepare profit and loss account and Balance-sheet to know the financial position of the business.

Cash book is a record of all receipts and payments of cash transactions. Credit transactions are recorded in various subsidiary books. After Balance is prepared and final accounts are prepared with the help of Trial Balance.

Following benefits may be derived from sub-dividing the journal :
(i) It saves time and cost as the volume of transactions are so large in recording in journal that it convey no meaning. By classifying the various transactions into books of original entry, make meaning and draws certain conclusion.

(ii) It provides profitability and earning capacity of the business firm. By sub-dividing the journal, the ultimate object of preparing trading, profit and loss account and financial position provides the profitability of the business firm.

Question 6.
What do you understand by Balancing of account?
Answer:
Balancing of Accounts : After completing the posting of all transactions, accounts are balanced every year or after a certain period. Balancing of account means the two sides of account are totalled and the difference in total of the two sides is written in the side whose total is short.

For example, if total of credit side is more than the debit side of any account the difference of amount will be recorded as Balance c/d on debit side and vice-versa on the credit side. If the total of debit side of any account is greater, that account will reveal debit balance and if total of credit side of any accounts is more it will show credit balance. The total of debit and credit side of some account may be equal, those accounts will not show any balance.

Types of Accounts that are Balanced : Normally, Personal Accounts and Real Accounts are balanced. Nominal Accounts are not balanced but are closed by transfer to Trading and Profit and Loss Account.


(1) Cash deposited into Bank : When cash is deposited into the bank, it increases the bank balance and reduces the cash balance.
Debit Bank A /c — Dr
To Cash A/c
(For cash deposited into bank)

(2) Cash withdrawn from Bank for office use : In this case, the cash balance is increased and the bank balance is reduced.
To Cash A/c — Dr
To Bank A/c
(for cash is withdrawn for office use)

(3) Cheque Received froiti customers and deposited into bank the same day and not deposited the same day : If cheques received are deposited on the same day in the bank are entered in bank column on the debit side, but, if cheques are sent to bank on later date, these are treated as cash and entered in cash column on debit side. When these cheques are actually deposited with the bank on future date, the Contra Entry like cash deposited will be passed.

(4) Payment by Cheque : As soon as we issue a cheque to someone, it will be immediately recorded on the credit site in Bank Column so that we may be acquainted of the True balance at the bank.

(5) Dishonour of a Cheque : If a cheque, received from a customer and deposited into Bank for collection is dishonoured, an entry will be made on the credit side of the Cash Book by entering the amount of the dishonoured cheque in the bank column. In particulars column, the name of the customer will be entered. For example, a cheque for Rs. 2.000 received from Ram Kumar is dishonoured, it will be recorded on the credit side as, “By Ram Kumar” and the amount will be entered in Bank Column.

(6) Cash Discount: In a Cash Book having Cash Bank Columns, the amount of discount is recorded in journal. For example, Rs. 4,800 are received from Yuvraj Singh in full settlement of his account of Rs.5,000. In such a case Rs. 4,800 will be recorded in Cash Book and the discount of Rs.200 will be recorded in Journal as follows :

Balancing :
(1) Debit side of cash column will always exceed the credit column and as such the balance will be shown on the credit side by writing the words, ‘By Balance c/d’.

(2) Usually the bank columns are balanced just like the cash columns. However, the bank column may show either a debit balance or a credit balance. If it shows« credit balance, it is called overdraft. Overdraft is a situation when cash withdrawn from the bank exceeds the amount deposited into the bank. In such a case, the total of the credit side of bank column will be bigger than the total of the debit side. The difference will be written on the debit side as “To Balance c/d”. At the beginning of the next month the balance will be shown as “By Balance b/d”.

Some important transactions :
(1) Amount withdrawn for personal use : Amount withdrawn from bank for the personal use of the proprietor is not a contra transaction, ft will affect only the bank column of the cash book. As it reduces the bank balance, it will be recorded on the credit side of cash book as ‘By Drawings A/c’ and the amount will be written in the bank column.

(2) Endorsement of a Cheque : Sometimes, a cheque received from a customer is not deposited into bank, but it may be given to some other peson, i.e., endorsed. When the cheque was received, it must have been entered in the cash column on the debit side On endorsement, it will be entered in the cash column on the credit side.

(3) Bank Charges : Bank usually charges some amount for the services rendered to its cumtomers. Such charges will be recorded on the credit side as ‘By Bank Charges’ and the amount will be recorded in the bank column.

(4) Bank Charges on dishonoured cheques : Expenses charged by the bank on dishonoured cheques will be added into the amount of dishonoured cheque itself.

(5) Amount directly deposited by a customer into our Bank A/c : When the information of such a deposit is received by the trader, it will be recorded on the debit side of the cash book and the amount will be entered in the bank column.

(6) (i) Interest allowed by bank: Interest allowed (credited) by the bank increases the balance at bank. The entry ‘ for such interest is, therefore, recorded on the debit side in bank column.

(ii) Interest charged by bank: When interest is charged (debited) by the bank on the amount of bank overdraft, the entry is recorded on the credit side in bank column.

(7) Discounting of Bill Receivable (B/R) from Bank : If a bill receivable is discounted from a bank, the entry for discount deducted by the bank is passed in the journal proper 1 and the net proceeds is entered in the Bank Column on the debit side.

Numerical Questions

Question 1.
Simple Cash Book
Enter the following transactions in a simple cash book for the year December 2005:
01 Cash in hand — 12,000
05 Cash received from Bhanu — 4,000
07 Rent Paid — 2,000
10 Purchase goods Murari for cash — 6,000
15 Sold goods for cash — 9,000
18 Purchase Stationery — 300
22 Cash paid to Rahul on account — 2,000
28 Paid Salary — 1,000
30 Paid Rent — 500
[Ans. Cash in hand Rs. 13,200]
Answer:

Question 2.
Record the following transaction in Simple Cash Book for the year November 2005
01 Cash in hand — 12,500
04 Cash paid to Hari — 600
07 Purchase goods — 800
12 Cash received from Amit — 1,960
16 Sold Goods for cash — 800
20 Paid to Manish — 590
25 PaidCartage — 100
31 Paid Salary — 1,000
[Ans. Cash in hand Rs. 12,170]
Answer:

Question 3.
Enter the following transaction in Simple Cash Book the year December 2005 :
01 Cash hand — 7,750
06 Paid to Sonu — 45
08 Purchased Goods — 600
15 Received cash from Parkash — 960
20 Cash sales — 500
25 Paid to S.Kumar — 1,200
30 Paid rent — 600
[Ans. Cash in hand Rs. 6,765)]
Answer:

Question 4.
Bank Column Cash Book
Record the following transactions in a Bank Column Cash Book for the year December 2005 :
01 Started Business with cash — Rs. 80,000
04 Deposited in Bank — Rs. 50,000
10 Received Cash from Rahul — Rs. 1,000
15 Bought goods for cash — Rs. 8,000
22 Bought goods by Cheque — Rs. 10,000
25 Paid to Shyam by Cash — Rs. 20,000
30 Drew from Bank for office use — Rs. 2,000
31 Rent paid by Cheque — Rs. 1,000
[Ans. Cash in hand Rs. 5,000 : Cash at Bank Rs. 37,000]
Answer:

Question 5.
Prepare a Double Column Cash Book with the help of following information for the year December 2005 :
1 Started business with Cash — Rs. 1,20,000
3 Cash paid into Bank — Rs. 50,000
5 Purchased Goods from Sushmita — Rs. 20,000
6 Sold goods to Dinker and received a Cheque — Rs. 20,000
10 Paid to Sushmita cash — Rs. 20,000
14 Cheque received on December 6, 2005 deposited into bank — Rs. 20,000
18 Sold goods to Rani — Rs. 12,000
20 Cartage paid in cash — Rs. 500
22 Received Cash from Rani — Rs. 12,000
27 Commission received — Rs. 5,000
30 Drew Cash for Personal Use — Rs. 2,000
[Ans. Cash in hand Rs. 64,500 : Cash at Bank Rs. 70,000]
Answer:

Note: No entries will be passed for Dec. 05, and Dec. 18 as these transactions are non-cash transactions.

Question 6.
Enter the following transactions in Double Column Cash Book of M/s. Ambica Traders for the year November 2005:
01 Commenced business with cash — Rs. 50,000
03 Opened Bank account with ICICI — Rs. 30,000
05 Purchased goods for cash — Rs. 10,000
10 Purchased office Machine for cash — Rs. 5,000
15 Sales goods on credit from Rohan and received cheque — Rs. 7,000
18 Cash sales — Rs. 8,000
20 Rohan’s cheque deposited into bank
22 Paid cartage by cheque Rs. 500
25 Cash withdrawn for personal use — Rs. 2,000
30 Paid rent by cheque — Rs. 1,000
[Ans. Cash in hand Rs. 11,000 : Cash at bank — Rs. 35,500]
Answer:

Question 7.
Prepare Double Column Cash Book from the following information for the year September 2004:
01 Cash in hand — Rs.7,500
Bank overdraft — 3,500
03 Paid wages — 200
05 Cash sales — 7,000
10 Cash deposited into Bank — 4,000
15 Goods purchased and paid by cheque — 2,000
20 Paid rent — 500
25 Drew from Bank for personal use — 400
30 Salary paid — 1,000
[Ans. Cash in hand Rs. 8,800 : Bank overdraft Rs. 1,900]
Answer:

Question 8.
Enter the following transaction in a Double column cash Book of M/s. Mohit Traders for the year January 2005 :
01 Cash in hand — Rs.3,500
Bank Overdraft — 2,300
03 Good purchased for Cash — 1,200
05 Paid Wages — 200
10 Cash Sales — 8,000
15 Deposited into Bank — 6,000
22 Sold goods for cheque which was deposited into bank same day — 2,000
25 Paid rent by cheque — 1,200
28 Drew from bank for personal use — 1,000
31 Bought goods by cheque — 1,000
[Ans. Cash in hand R-s. 6,100 : Casli at bank Rs. 500]
Answer:

Question 9.
Prepare Double Column Cash Book from the following transactions for the year December, 2005 :
01 Cash in hand — Rs.17,500
Cash at Bank — 5,000
03 Purchased goods for cash — 3,000
05 Received cheque from Jasmeet –10,000
08 Sold Goods for Cash — 7,000
10 Jasmeet’s Cheque deposited into Bank
12 Purchased goods and paid by cheque — 20,000
15 Paid Establishment expenses through bank — 1,000
18 Cash Sales — 7,000
20 Deposited into Bank — 10,000
24 Paid Trade Expenses — 500
27 Received Commission by cheque — 6,000
29 Paid Rent — 2,000
30 Withdrew cash for Personal use — 1,200
31 Salarypaid — 6,000
[Ans. Cash in hand Rs. 8,800 : Cash at Bank Rs. 10,000]
Answer:

Question 10 .
M/s. Ruchi Trader started their cash book with the following balances on Dec. 01,2005: Cash in hand Rs. 1,354 and balance at
Bank Account Rs. 7,560. He had the following
transaction in the month of December, 2005. Rs.
3 Cash Sales 2,300
05 Purchased goods, paid by cheque — 6,000
8 Cash Sales — 10,000
12 Paid Trade Expenses — 700
15 Sales goods, received cheque
(Deposited the same day) — 20,000
18 Purchased Motor Car paid by cheque — 15,000
20 Cheque received from Manisha
(Deposited same day) — 10,000
22 Cash Sales — 7,000
25 Manisha’s cheque dishonoured
28 Paid Rent — 2000
29 Paid Telephone Expenses by cheque — 500
31 Cash withdrawn for personal use — 2,000
Prepare Bank Column cash Book
[Ans. Cash in hand Rs. 1 5,954 : Cash at Bank Rs. 6,060]
Answer:

Question 11.
Petty Cash Book
Prepare Petty Cash Book from the following transactions. The imprest system amount is Rs. 2,000.
January — Rs.
01 Paid Cartage — 50
02 STD Charges — 40
02 Bus Fare — 20
03 Postage — 30
04 Refreshment for Employees — 80
06 Courier charges — 30
08 Refreshment of Customers — 50
10 Cartage — 35
15 Taxi fare to Managers — 70
18 Stationery — 65
20 Bus fare — 10
22 Fax Cheques — 30
25 Telegram charges — 35
27 Postage Stamps — 200
29 Repair on furniture — 105
30 Laundry Expenses — 115
31 Miscellaneous Expenses — 100
Answer:

Question 12.
Record the following transactions daring the week ending Dec. 30,2005 with a weekly interest of Rs. 500.
24. Stationery 100
25. Bus Fare 12
25. Cartage 40
26. Taxi fare 80
27. Wages to Casual labour 90
29. Postage 80
[Ans. Cash balance Rs. 98]
Answer:
Preposition of Petty cash book for the month of Dec. 2005.

Other Subsidiary Books

Question 13.
Enter the following transactions in the purchase Journal (Book) of M/s. Gupta Traders of July 2005 :
01 Bought from Rahul Traders as per Invoice No. 20041

40 Registers @ Rs. 60 Each
80 Gel Pens @ Rs. 15 Each
50 Note Books @ Rs. 20 Each
Trade Discount 10%.

15. Bought from Global Stationers as per Invoice No. 1132
40 Ink Pads @ Rs. 8 Each
50 files @ Rs. 10 Each
20 Color Books @ Rs. 20
Each Trade Discount 5%

23. Purchase from Lamba Furniture as per Invoice No. 3201
2 Chairs @ 600 Per Chair
1 Table (a), 1,000 Per Table

25. Bought from Mumbai Traders as per Invoice No. 1111
10 Paper Rim @ Rs. 100 per rim
400 Drawing Sheets @ Rs. 3 Each.
20 Packet Water Color @ Rs. 40 Per Packet.
[Ans. Total of purchase journal 8,299]
Answer:


Furniture purchased from Lamba Traders will not be recorded in the Purchase Book as furniture is not to be considered as goods for M/s- Gupta Traders. This is because M/s Gupta Traders deals in stationery and not in furnitures.

Question 14.
Enter the following Transaction in Sales Journal (Book) of M/s. Bansal Electronics
Sept 01. Sold to Amit Traders as per Bill No. 4321

20 Pocket Radio @ 70 per Radio
2 TV sets B&W (6″) @ 800 per TV

10. Sold to Arun Electronics as per Bill No. 4351
5 TV sets (20″) B&W @ Rs. 3,000 per TV.
2 TV sets (21″) Colour @ Rs. 4,800 per TV.

22. Sold to Handa Electronics as per Bill No. 4399
10 Tape recorders @ Rs. 600 each
5 Walkman @ Rs. 300 each

28. Sold to Harish Trader as per Bill No. 4430
10 Mixer Juicer Grinder @ Rs. 800 each.
[Ans. Total of sales book Rs. 43,100]
Answer:

Question 15.
Prepare a Purchase Return Journal (Book) from the followirg Transaction :
Jan.2006
5 Return Goods to M/s. Kartik Trader for Rs. 1,200
10 Goods Return to Sahil Pvt. Ltd. for Rs. 2,500
17 Goods Return to M/s Kohinour Traders for
List Price Rs. 2,000 less 10% Trade Discount
28 Return Outward to M/s. Handa Traders for Rs. 550
[Ans. Total of purchase returns book Rs. 6,050]
Answer:

Question 16.
Prepare a Return Inward (Journal Book) from the following Transactions of:
M/s. Bansal Electronics for the year November 2005 :
4 M/s. Gupta Trader returns the goods amounted Rs. 1500
10 Goods Return from M/s. Harish Traders for Rs. 800
18 M/s. Rahul Traders return the goods not as per specification for Rs. 1,200
28 Goods Return from Sushil Traders for Rs. 1,000
[Ans. Total of Sales Returns Rs. 4,500]
Answer:

Question 17.
Prepare proper subsidiary Journal (Books) and post to the Ledger from the following Transactions for the month of February 2006 :
1 Goods sold to Sachin — Rs. 5,000
4 Purchase from Kushal Traders for — Rs. 2.480
6 Sold goods to Manish Traders for — Rs. 2.100
7 Sachin Returns the goods for — Rs. 600
8 Returns to Kushal I’raders — Rs. 280
10 Sold to Mukesh — Rs. 3.300
14 Purchase from Kunal Traders for — Rs. 5,200
15 Furniture Purchase from Tarun for — Rs. 3,200
17 BoughtofNaresh — Rs. 4.060
20 Return to Kunal Traders for — Rs. 200
22 Return Inward from Mukesh — Rs. 250
24 Purchase Goods from Kirit & Co. for list price of Rs. 5.700 less 10% Trade Discount
25 Sold to Shri Chand Goods for — Rs. 6,600
less 5% Trade Discount
26 Sold to Ramesh Brothers for — Rs. 4,000
28 Return outwards to Kirit & Co. for — Rs. 1.000
Less 10% Trade Discount
28 Rainesh Brothers Return the goods — Rs. 500
(Total of Sales Book Rs. 20.670. Purchase Book Rs. 16,870)
(Purchase Returns Book Rs. 1 ,380, Sale Returns Book Rs. 1 .350)

Question 18.
The following Balances of ledger of MIs. Marble Traders on 1st April 2006.

Apr.01 Goods sold to Nia nish — Rs. 3,000
Apr.02 Purchase goods from Rarnesh — Rs. 8,000
Apr.03 Received cash froni Rahul in full settlement — Rs. 9,200
Apr.05 Cash received from Himanshu on account — Rs. 4,000
Apr.06 Paid to Ramesh by Cheque — Rs. 6,000
Apr.08 Rent paid by Cheque — Rs. 1,200
Apr.10 Cash received from Manish — Rs. 3,000
Apr.12 Cash Sales — Rs. 6,000
Apr.14 Goods return to Ranwsh — Rs. 1,000
pl5 Cash paid to Ramcsli in full settlement — Rs. 3,700
(Discount received Rs. 300)
Apr.19 Goods Sold to Kushal — Rs. 10,000
Apr.20 Paid Trade Expenses — Rs. 200
Api21 l)rew for personal tise — Rs. 1,000
Api22 Goods return froni Kushal — Rs. 1,200
Apr.24 Cash received from Kushal — Rs. 6,000
Apr.26 Paid for stationery — Rs. 100
Apr.27 Postage charges — Rs. 60
Apr.28 Salary Paid — Rs. 2,500
Api29 Goods purchased from Sheetal Traders — Rs. 7,000
Apr.30 Sold goods to Kirti — Rs. 6,000
Goods purchase from Handa Traders — Rs. 5,000
Journalise the above transactions and post them to the ledger.
[Ans. Total of accounts Balance Debit and Credit Rs. 1,35060]
Answer:

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 3 Recording of Transactions 1 Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Recording of Transactions 1 NCERT Solutions for Class 11 Accountancy Chapter 3

Recording of Transactions 1 Questions and Answers Class 11 Accountancy Chapter 3

Test Your Understanding – I

Question 1.
Double entry accounting requires that:
(i) All transactions that create debits to asset accounts must create credits to liability or capital accounts:
(ii) A transaction that requires a debit to a liability account require a credit to an asset account;
(iii) Every transaction must be recorded with equal debits equal total credits.
Answer:
(iii) Every transaction must be recorded with equal debits equal total credits.

Question 2.
State different kinds of transactions that increase and decrease capital.
Answer:
Capital increases by net profit and fresh capital introduced and decreases by drawings and net loss.

Question 3.
Does debit always mean increase and credit always mean decrease?
Answer:
No

Question 4.
Which of the following answers properly classifies these commonly used accounts:
(1) Building
(2) Wages
(3) Credit sales
(4) Credit purchases
(5) Electricity charges due but not yet paid (outstanding electricity hills)
(6) Godown rent paid in advance (prepaid godown rent)
(7) Sales
(8) Fresh capital introduced
(9) Drawings
(10) Discount paid

Answer:
(ii)

Test Your Understanding -II

State the title of the accounts affected, type of account and the account to be debited and account to be credited
.

Answer:

Test Your Understanding – III
Choose the Correct Answer:

1.The ledger folio column of journal is used to:
(a) Record the date on which amount posted to a ledger account.
(b) Record the number of ledger account to which information is posted.
(c) Record the number of amounts posted to the ledger account.
(d) Record the page number of the ledger account.
Answer:
(d) Record the page number of the ledger account.

2. The journal entry to record the sale of services on credit should include:
(a) Debit to debtors and Credit to capital.
(b) Debit to cash and Credit to debtors.
(c) Debit to Ices income and Credit to debtors.
(d) Debit to debtors and Credit to fees income.
Answer:
(d) Debit to debtors and Credit to fees income.

3. The journal entry to record purchase of equipment for Rs. 2,00.000 cash and a balance of Rs. 8,00,000 due in 30 days include:
(a) Debit equipment for Rs. 2,00,000 and Credit cash Rs. 2,00,000.
(b) Debit equipment for Rs. 10.00,000 and Credit cash Rs. 2.00,000 and creditors Rs. 8,00.000.
(c) Debit equipment Rs. 2,00,000 and Credit debtors Rs. 8.00,000.
(d) Debit equipment Rs. 10,00.000 and Credit cash Rs. 10,00,000.
Answer:
(b) Debit equipment for Rs. 10.00,000 and Credit cash Rs. 2.00,000 and creditors Rs. 8,00.000.

4. When an entry is made in journal:
(a) Assets are listed first.
(b) Accounts to be debited listed first.
(c) Accounts to be credited listed first.
(d) Accounts may be listed in any order.
Answer:
(b) Accounts to be debited listed first.

5. If a transaction is properly analysed and recorded :
(a) Only two accounts will be used to record (lie transaction.
(b) One account will be used to record transaction.
(c) One account balance will increase and another will decrease.
(d) Total amount debited will equals total amount credited.
Answer:
(d) Total amount debited will equals total amount credited.

6. The journal entry to record payment’of monthly bill will include:
(a) Debit monthly bill and Credit capital.
(b) Debit capital and Credit cash.
(c) Debit monthly bill and Credit cash.
(d) Debit monthly bill and Credit creditors.
Answer:
(c) Debit monthly bill and Credit cash.

7. Journal entry to record salaries will include:
(a) Debit salaries Credit cash.
(b) Debit capital Credit cash.
(c) Debit cash Credit salary.
(d) Debit salary’ Credit creditors.
Answer:
(a) Debit salaries Credit cash.

Test Your Understanding – IV

Fill in the blanks:
1. Issued a cheque for Rs.8,000 to pay rent. The account to be debited is ………….
2. Collected Rs. 35,000 from debtors. The account w be credited is …………..
3. Purchased office stationary for Rs. [8.000. The account to be credited is ……………
4. Purchased new machine for Rs. 1,70.000 and issued cheque for the same. The account to be debited is ……………..
5. Issued cheque for Rs. 70.000 to pay otT one of the creditors. The account to be debited is ………….
6. Returned damaged office stationary and received Rs. 50,000. The account to be credited is ……….
7. Provided services for Rs. 65,000 on credit. The account to be debited is ………………
Answer:
1. Rent A/c
2. Debtor’s A/c
3. Cash A/c
4. Machine A/c
5. Creditors A/c
6. Office Stationery A/c
7. Debtors A/c

Test Your Understanding – V

Select Right Answer:
Question 1.
Voucher is prepared for:
(i) Cash received and paid
(ii) Cash/Credit sales
(iii) Cash/Credit purchase
(iv) All of the above
Answer:
(iv) All of the above

Question 2.
Voucher is prepared from:
(i) Documentary evidence
(ii) Journal entry
(iii) Ledger account
(iv) All of the above
Answer:
(i) Documentary evidence

Question 3.
How nian’ sides does an account have?
(i) Two
(ii) Three
(iii) one
(iv) None of These
Answer:
(i) Two

Question 4.
A purchase of machine for cash should be debited to:
(i) Cash account
(ii) Machine account
(iii) Purchase account
(iv) None of these
Answer:
(ii) Machine account

Question 5.
Which of the following is correct?
(i) Liabilities Assets + Capital
(ii) Assets Liabilities — Capital
(iii) Capital = Assets — Liabilities
(iv) Capital Assets + Liabilities.
Answer:
(iii) Capital = Assets — Liabilities

Question 6.
Cash withdrawn by the Proprietor should be credited to:
(i) Drawings account
(ii) Capital account
(iii) Profit and loss account
(iv) Cash account
Answer:
(iv) Cash account

Question 7.
Find title correct statement :
(i) Credit a decrease in assets
(ii) Credit the increase in expenses
(iii) Debit the increase in revenue
(iv) Credit the increase in capital
Answer:
(iv) Credit the increase in capital

Question 8.
The book in which all accounts are maintained is known as:
(i) Cash Book
(ii) Journal
(iii) Purchases Book
(iv) Ledger
Answer:
(iv) Ledger

Question 9.
Recording of transaction in title Journal is called :
(i) Costing
(ii) Posting
(iii) Journalising
(iv) Recording
Answer:
(iii) Journalising

Short Answer Type Questions

Question 1.
Slate the three fundamental steps in accounting process.
Answer:
The fundamental steps of accounting process are as follows:
(i) Financial Transactions
(ii) Recording.
(iii) Classifying.
(iv) Summarizing. and
(v) Analysis and interpretation.

These steps may be explained with the help of following diagram:

Question 2.
Why is the evidence provided by source documents important in accounting?
Answer:
Source Documents : Financial accounting records contain factual financial information and, th .refore, all business transactions should be evidenced by document ary evidence. For example, cash memo showing cash sale, an invoice showing sale of goods in credit, the receipt made out by the payee against cash payment are examples of source documents.

Business document is called the source document and is an evidence in support of a transaction.A source document is the first record prepared for a business transaction and are the basis for entries in the accounting books. On the basis of this record, the accounts are to be debited and credited.

Question 3.
Should a transaction be first recorded in a journal or Ledger? Why?
Answer:
Firstly, all transactions are recorded in journal. Transactions are written, as they occur in a rough books or on various documents. On the basis of the entries made in the rough book or on the basis of source documents, a voucher is prepared indicating the accounts to be debited or credited carefully in a systematic manner.

This is done in a book which is known as journal.Journal is the primary book of accounts in which transactions are originally recorded in chronological order. It is called the book of original entry.

Question 4.
Are debits or credits listed first in journal entries? Are debits and credits intended?
Answer:
When recording each transaction, the total debits amount must equal to the total credits amount. In accounting, the terms debit and credit indicate whether the transactions are to be recorded on the left hand side or right hand side of the account while journalizing the transactions, the amounts debited is written with the word ‘Dr/ In the next line, after leaving a little space, the name of account to be credited is written by the word‘To’.

Question 5.
Why are some accounting systems called double accounting system?
Answer:
Under Double accounting system every business transactions affects two accounts in opposite directions. For example, if the furniture is purchased in the business, furniture is increased whereas the cash is decreased. There can be no transaction in the business which effects only one account or which has only one aspect. As such, both the aspect of every transaction are recorded under this system.

It may, however, be noted that the double entry does not mean that a transaction – One account receiving a benefit is debited and the another account yielding a benefit and to give something to the business is credited. The amount of every transaction is written twice, once as a debit and again as a credit.

For example, Receipt of Rs. 6,000 from Mohan affects two accounts – Cash Account and Mohan’s Account. Cash Account is receiving a benefit and will be debited, whereas Mohan is yielding a benefit, his account will be credited.Double Entry system is based on the principle that “Every debit has a credit and every credit has a debit.”

Question 6.
Give a specimen of an Account.
Answer:
Account: An account is a record of all business transactions relating to a particular person or item. In accounting we keep a separate
record of each individual, asset, liability, expense or income. The place where such a record is maintained is termed as an ‘Account’. Such as the Account of Ghanshyam, the Account of Ram, the Account of Machinery, the account of Salary, the Account of Rent and likewise transactions entered into with Ghanshyam will be recorded in the Account of Ghanshyam and similarly, all transactions relating to Ram will be recorded in the Account of Ram. According to Carter:

“An Account is a ledger record in a summarised form, of all the transactions that have taken place with the particular person or things specified.”

All accounts are divided into two sides. The left side of an account is arbitrarily or traditionally called Debit side and the right side of an account is called Credit side. In the abbreviated form, Debit is written as Dr. and Credit is written as Cr. For example, the transactions relating to cash are recorded in an account, entitled ‘Cash Account’ and its format will be as given below :

The above account resembles English capital letter ‘T’ As such, it is often called ‘T’ shape account. An Account is abbreviated as A/c.

Question 7.
Why are the rules of debit and credit same for both liability and capital?
Answer:
1. Liability Account: When there is an increase in the amount of a liability, such an increase will be recorded on the credit side of the liability account. On the contrary, if there is a reduction in the amount of a liability, it will be recorded on the debit side of the liability account. For example, if a firm borrows Rs. 40,000 from Ashok the account of Ashok will be credited since Rs. 40,000 is now owing to him. When the loan is repaid, the account of Ashok will be debited since the liability no longer exists.

2. Capital Account: An increase in the capital is recorded on the credit side and the decrease in the capital is recorded on the debit side. Suppose, the proprietor introduces the additional capital in the business, the capital account will be credited. Similarly, if the proprietor whithdraws some money for his personal use, i.e, makes drawings, the capital account will be debited.
.
It is concluded that both liabilities and capital account increases the credit side of an account if increased. Similarly, the reduction of both liabilities and capital will be debited in an account.

Question 8.
What is the purpose of posting J.F./L.F. numbers that are entered in the journal at the time entries are posted to the accounts?
Answer:
The purpose of positing L.F. (stands for Ledger Folio) and J.F. (Journal Folio) is the page number of the original posting of transactions in a book known as Journal or Ledger (Primary books). It may further be understood with the help of format.

Form of Journal : the form of the journal is given below :

(L.F. Stands for Ledger Folio)

The columns have been numbered only to make clear how the Journal is written up, otherwise they are not numbered. While journalising, the following points should be noted:

(i) In the first column, the date of transaction is entered and the year is written at the top, then the month and in the narrow part of the column the date of the transaction concerned is entered.

(ii) In the second column, the names of the accounts involved are written in a logical manner. First, the account to be debited is written, with the word “Dr.” written towards the end of the column. In the next line, after leaving a little space, the name of the account to be credited is written preceded by word “To”. (The modem practice is more and more to omit writing of “Dr.” and “To”). Then in the next line the explanation called narration for.the entry together with necessary details is given.

(iii) In the third column, the number of the page in the ledger on which the account is written up is entered. (L.F. is Ledger Folio)

(iv) In the fourth column, the amount or amounts to be debited to the various accounts concerned is entered.

(v) In the fifth column, the amount to be credited to various accounts is entered.

Question 9.
What entry (Debit or Credit) would you make to
(a) Increase revenue
(b) decrease in Expenses
(c) record drawings
(d) record the fresh capital introduced by the owner.
Answer:
(a) Revenue or Income Accounts : All increases in the gains and incomes are recorded on the credit sides of the concerned income account as it leads to increase in the capital. On the contrary, if there is a reduction in any gain or income, the account concerned will be debited, as it leads to decrease in the capital.

(b) Losses or Expenses Accounts : All increases in the losses and expenses are recorded on the debit side of the concerned expenses account as it leads to decrease in the capital. On the contrary, the reduction in expenses is recorded on the credit side.

(c) An increase in the owner’s capital is recorded by crediting the capital account : Suppose, the proprietor introduces additional capital, the capital account will be credited. If the owner withdraws some money, i.e., makes a drawing the capital account will be debited. Journal Entries may be made as under:

(a) In case of Increase in revenue : Suppose rent received on subletting of premises, the journal entry will be passed as under:
Cash A/c — Dr.
To Rent A/c (Being rent received)

(b) Decrease in Expenses : In such situation again the entry will
be made in the credit side, for example insurance prepaid may be recorded as under:
Prepaid Insurance A/c — Dr.
To Insurance A/c
(Being insurnace paid in advance)

(c)Record Drawings: In case of Drawings, capital will be reduced to the amount of Drawings. The journal entry will be as under:
Drawings A/c — Dr.
To Cash/Bank A/c (Being drawings made)

(d) Fresh capital Introduced: While introducing fresh capital, the capital account will be credited. The journal entry is as follows :
Cash A/c — Dr.
To Capital A/c
(Being cash introduced to business as fresh capital)

Question 10.
If a transaction has the effect of decreasing an assest, is the decrease recorded as a debit or as a credit. If the transaction has the effect of decreasing a liability is the decrease recorded as a debit or as a credit.
Answer:
(i) When there is an increase in the amount of an asset, its account is debited; on the contrary, the account will be credited if there is a reduction in the amount of the asset concerned. Let this point be clarified with an example. Suppose, furniture of Rs. 1,800 is purchased, the furniture account will be debited by Rs. 1,800 since the asset has increased by this amount. Suppose, later furniture of Rs. 1,300 is sold, the reduction will be recorded by crediting the furniture account by Rs. 1,300.

(ii) If the amount of liability increases, the increase will be entered on the credit side of the liability account, i.e., the account will be credited. Similarly, a libility account will.be debited if there is a reduction in the amount of the liability. Suppose, a firm borrows Rs. 8,000 from Rakesh. Rakeslfs account will be credited since Rs. 8,000 is now owning to him. If later the loan is repaid, Rakeslfs account will be debited since the liability no longer exists.

(iii) Journal entries at the time of increase or decrease of an Assets may be made as under :
In case of purchase of furniture of Rs. 800 as mentioned above:
Furniture A/c — Dr.
To Cash A/c
(Being assets increased at the time of purchase and debited)

In case of sale of furniture :
Cash A/c — Dr.
To Furniture A/c
(Being furniture sold and credited)

(ii) Journal entries at the time of decreasing and increasing of a liability:
In case of raising a loan :
Cash A/c — Dr.
To Loan A/c
(Being loan raised, liability’ increased and credited)

In case of Repayment of loan:
Loan A/c — Dr.
To Cash A/c
(Being loan paid, liability decreased and debited)

Long Answer Type Questions

Question 1.
Describe the events recorded in accounting systems and the importance of source documents in those systems.
Answer:
Various transactions are made in a business in day to day dealings such as purchase, sale of goods and services, receipts and payments of cash etc. Each business transaction is supported by documentary evidence, such as cash memo for cash transactions, cash receipt, invoice or bill, debit and credit notes, pay-in-slips, cheque, bill of exchange etc.

These business documents are called source documents and first record of details of a business transaction. Entries in the books are made with the help of these source documents. These documents provide the verifiable objective of accounting by supporting adequate proof of transactions recorded in the books of accounts.

These documents are written and authentic proof of the exactness and correctness of the events or facts recorded in the books of account. These documents are helpful in assessment for tax and serve as legal evidence in case of a dispute.

Question 2.
Describe how debits and credits are used to analyse transactions.
Answer:
Rules of Debit and Credit : Debit and credit are simply additions to or substraction from an account. We have discussed that by deducting the total of liabilities from the total of assets, the amount of capital is ascertained, as is indicated by the accounting equation,

i.e.
Assets = Liabilities + Capital
Or
Assets – Liabilities = Capital

We have also discussed that if there is any change on one side of the equation, there is bound to be a similar change on the other side of the equation or amongst items comprised in it. This is due to dual aspect accect effect of the transactions. It becomes clear from the following illustration:

The rules regarding debit and credit,may be summarised as under;
1. Debit the increase in assets and credit the decrease in assets.
2. Credit the increase in liabilities while make debit all the decrease in liabilities.
3. Debit the decrease in capital and credit the increase in capital.
4. Debit the decrease in income and credit thb increase in incomes.
5. Debit the increase in expenses and losses, and credit the decrease in expenses and losses.

Question 3.
Describe how account are used to record information about the effects of transaction.
Answer:
The process of analysing transactions and recording their effects directly in the accounts is helpful as a learning exercise. However, real accounting system do not record transactions directly in accounts. Firstly, every transaction is recorded in a journal or ledger known as books of original entry. This practice provides a complete record of each transaction in one place and links the debits and credits for each transaction.

After the debits and credits for each transaction are entered in journal book, they are transferred to the individual accounts, known as ledger posting, when this process is completed, it provides a complete and useful interpretation of the transaction or event’s effect in the organisation.

Question 4.
What is journal? Give a specimen of Journal showing at least five entries.
Answer:
Journal is a book of original entry in which transactions are recorded firstly as and when they take place in the business. “The Journal is originally used as a book of original entry of recording transaction in order of date form a memorandum book, classified into debits and credits, in order to facilitate their correct posting in ledger.” – Prof. Carter

Journal provides a date-wise record of all the transactions with details of accounts debited and credited, and the amount of each transaction. A journal records both debit and credit aspects of a transaction on the basis of double entry system of book-keeping.

1. Date : In the first column, the date of transaction is entered. The year and month is also written only once, till they change. The order/sequence of dates and months must be maintained.

2. Paticulars : In this column, Debit the word (Dr.) is written first in the first line. In the second line, the name of account to be credited with the word (Cr.). After each entry, a brief explanation known as narration is also given.The narration
helps to know the reason of the entry and also the reason of debit and credit of a particular account.

3. Ledger Falio (L.F.) : The page number of ledger account where the posting has been made from the journal is recorded in the L.F. column. For example, the posting of furniture A/c of Page no. 38 of the ledger to write 38 in the L.F. column against furniture A/c in journal.

4. Amount Dr.: In this column, the amount of the account being debited is, written.

5. Amount Cr.: In this column, the amount of the account being, credited as written.

Posting of these five entries in the journal: July 2005

• Ram Prasad started business with cash Rs. 1,50,000
• Purchased furniture of cash Rs. 18.000
• Sold goods to Mahesh Rs. 27,000
• Purchase goods from Anuj Rs. 38,000
• Withdraw cash for personal use Rs. 22.000.

These transactions may be entered in the journal in this manner :

Question 5.
Differentiate between source documents and vouchers.
Answer:
Source Documents : Business transactions arc recorded in various documents and papers where they occur in the business. These documents like cash memo, invoice, purchase and sales bill, debit and credit notes, pay-in-slips, cheques, salary slips are known as source documents.

Accounting Vouchers: Accounting vouchers also serves as a source ducument. These vouchers are arranged in a cronological order, serially numbered, kept in a separate file to facilitate the posting. Accounting vouchers record a transaction entailing multiple debits and credits. These vouchers must be kept in safe custody till the audit of the accounts and tax assessments for relevant periods are completed.

Question 6.
Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.
Answer:
Accounting equation signifies the assets and liabilities of a business always remain equal and intact as this equation connotes the fundamental relationship among the figures of Balance-Sheet Equation. It is also termed as statement of assets, liabilities and capital. The claim of owner is known as Capital and the claim of outsiders is known as Liabilities. Assets side is the list of various assets, which the business entity owns. The equality of the assets side and the liabilities side of the balance sheet is intact under accounting equation also known as Balance-Sheet Equation.

Accounting equation may be understood with the help of following example :

• Ramesh started business with a capital of Rs. 6,00,000.
• Opened a bank account with an amount of Rs. 5,20,000.
• Purchased Machinery for business of Rs. 80,000 and a cheque issued on the same day.
• Goods purchased from Somesh for Rs. 60,000.
• Goods costing Rs. 25,000 sold to Pankaj for Rs. 35,000.

The summary of effects of transactions on accounting equation 1-5 in the following analysis table :

Question 7.
Explain the double entry mechanism with an illustrate example.
Answer:
Double entry system affects two accounts in opposite direction. It is based on the principle that ‘Every debit has a credit and every credit has a debit’. Every business transaction has a two-fold effect and that it effects two accounts in opposite directions and if a complete record were to be made of each transaction, it would be necessary to debit one account and credit the other.

Both personal and impersonal accounts (Real and Nominal accounts) are recorded in Double Entry, one account is debited and any other account may be credited.

(i) Rules regarding the recording of Personal Accounts :
Personal accounts relate to an individual, firm, company or an instruction are called personal accounts such as Ramesli’s account, Mphan’s account. Accounts of State Bank of India, Accounts of Delhi Transport Company (DTC), capital account of proprietor. Drawing account etc.

The simple rule for recording a transaction in personal accounts “Debit the receiver and credit the giver Examples:
(i) Paid Rs. 20.000 to Rakesh
(ii) Received Rs. 10,000 from Gopal

Following transactions can be recorded as under:

(ii) Rules regarding the recording of Real Accounts under Double Entry System : The accounts relating to assets whose value can be measured in terms of money are termed as Real Account such as Cash account, Machinery account, Furniture account, Building account and Goodwill account etc. The simple rule for recording of Real Accounts transaction is “Debit what comes in credit what goes out”.
Examples :
(i) Purchased furniture for Rs. 50,000

(ii) Sold Machinery for Rs. 20,000.

Numerical Questions

Question 1.
Prepare accounting equation on the basis of the following:
(a) Harsha started business with cash Rs. 2,00,000
(b) Purchased goods from Naman for cash Rs. 40,000
(c) Sold goods to Bhanu costing Rs. 10,000/- Rs. 12,000
(d) Bought furniture on credit Rs. 7,000
[Ans. Assets = Cash Rs. 1,60,000 + Goods Rs. 30,000 + Debtors
Rs. 12,000 + Furniture Rs. 7,000 = Rs. 2,09,000; Liabilities = Creditors Rs. 7,000 + Capital Rs. 2,02,000
= Rs. 2,09,000)]
Answer:
Accounting Equation may be summarised in the following Transaction Analytical Table.

Question 2.
Prepare Accounting Equation from the following:
(a) Kunal started business with cash Rs. 2,50,000
(b) He purchased furniture for cash Rs. 35,000
(c) He paid commission Rs. 2,000
(d) He purchase goods on credit Rs. 40,000
(e) He sold goods (Costing Rs. 20000/-) for cash Rs. 26,000 [Ans : Assets = Cash Rs. 2.39,000 + Furniture Rs. 35,000 + Goods Rs. 20,000 = Rs. 2,94,000; Liabilities = Creditors Rs. 40,000 + Capital Rs. 2,54,000 = Rs. 2,94.000]
Answer:

Question 3.
Mohit has the following Transactions, prepare accounting equation:
(a) Business Started with cash Rs. 1,75,000
(b) Purchased goods from Rohit Rs. 50,000
(c) Sales Goods on Credit to Manish
(Costing Rs. 17,500/-) Rs. 20,000
(d) Purchase Furniture for office use Rs. 10,000
(e) Cash paid to Rohit in full settlement Rs. 48,500
(f) Cash received from Manish Rs. 20,000
(g) Rent paid Rs. 1,00 0
(h) Cash withdrew for personal use Rs. 3,000
[Ans. Assets = Cash Rs. 1.32,500 + Goods Rs. 32,500 + Furniture Rs. 10,000 = Rs. 1,75.000: Liabilities = Capital 1,75,000)
Answer:

Question 4.
Rohit has the following Transaction :
(a) Commenced business with cash Rs. 1,50,000
(b) Purchased Machinery on credit Rs. 40,000
(c) Purchased goods for cash Rs. 20,000
(d) Purchased car for personal use Rs. 80,000
(e) Paid to creditors in full settlement Rs. 38,000
(f) Sold goods for cash costing Rs. 5,000/- Rs. 4,500
(g) Paid rent Rs. 1,000
(h) Commission received in advance Rs. 2,000
Prepare the Accounting Equation to show the effect of the
above Transactions on the Assets, Liabilities and Capital.
[Ans. Assets = Cash Rs. 17,500 + Machine Rs. 40,000 + Goods Rs. 15,000 = Rs.72,500; Liabilities = Commission Rs. 2,000 + Capital Rs. 70,500 = Rs. 72,500]
Answer:

Question 5.
Use accounting Equation to show the effect of the following transactions of
(a) M/s. Royal Traders:
(b) Started business with cash Rs. 1,20,000
(c) Purchase goods for cash Rs. 10,000
(d) Rent received Rs. 5,000
(e) Salary outstanding Rs. 2,000
(f) Prepaid insurance Rs. 1,000
(g) Received interest Rs. 700
(h) Sold goods for cash (Costing Rs. 5,000) Rs. 7,000
(i) Goods destroyed by fire Rs. 500
[Ans. Assets = Cash Rs. 1,21,700 + Goods Rs. 4,500 + Prepaid Iunsurance Rs. 1,000; Liabilities = Outstanding salary Rs. 2,000 + Capital Rs. 1,25.200]
Answer:

Question 6.
Show that accounting Equation on the basis of the following transaction:
(a) Udit started Business with Cash Goods Rs. 5,00,000 Rs. 1,00,000
(b) Purchase Building for cash Rs. 2,00,000
(c) Purchase goods from Himani Rs. 50,000
(d) Sold goods to Ashu (Cost Rs. 25,000/-) Rs. 36,000
(e) Paid Insurance Premium Rs. 3,000
(f) Rent Outstanding Rs. 5,000
(g) Depreciation on Building Rs. 8,000
(h) Cash withdrawn for personal use Rs. 20,000
(i) Rent received in advance Rs. 5,000
(j) Cash paid to Himani on account Rs. 20,000
(k) Cash received from Ashu Rs. 30,000
[Ans. Assets = Cash Rs. 2,92,000 + Goods Rs. 1,25,000 + Building Rs. 1,92,000 + Debtors Rs. 6,000; Liabilities = Creditors Rs. 30.000 + o/s Rent Rs. 5,000 + Rent Rs. 5,000 +Capital Rs. 5.75,000 = Rs. 6.15,000
Answer:

Question 7.
Show the effect of the following transactions of Assets,
Liabilities and Capital through accounting equation:
(a) Started Business with Cash Rs. 1,20,000
(b) Rent Received Rs. 10,000
(c) Invested in Shares Rs. 50,000
(d) Received Dividend Rs. 5,000
(e) Purchase goods on credit from Ragani Rs. 35,000
(f) Paid cash for household Expenses Rs. 7,000
(g) Sold goods for cash (Costing Rs.10,000) Rs. 14,000
(h) Cash paid to Ragani Rs. 35,000
(i) Deposited into Bank Rs. 20,000
[Ans : Assets = Cash Rs. 37,000 + Shares Rs. 50,000 + Goods Rs. 25,000 + Bank Rs. 20.000 = Rs. 1,32,000]
Answer:

Question 8.
Show the effect of following transaction on the accounting equation:


Answer:

Question 9.
Transactions of M/s Vipin Traders are given below. Prepare Vouchers and show the effects on Assets, Liabilities and Capital with the help of accounting Equation.
(a) Business started with cash Rs. 1,25,000
(b) Purchase goods for Cash (Vide Cash Memo No. 1212) Rs. 50,000
(c) Purchase Furniture from R.K. Furniture (Vide Bill No. 3425) Rs. 10,000
(d) Sold goods to Parul Traders (Costing Rs. 7,000) (Vide Bill No. 5674) Rs. 9,000
(e) Paid Cartage Rs. 100
(f) Cash paid to R.K. Furniture in full settlement Rs. 9,700
(g) Cash sales (Costing Rs. 10,000) Rs. 12,000
(h) Rent received Rs. 4,000
(i) Cash withdrew for personal use Rs. 3000
[Ans : Asset = Cash Rs. 78,200 + Goods Rs. 33,000 + Furniture Rs. 10,000 + Debtors Rs. 9,000 = Rs. 1,30,200; Liabilities = Capital Rs. 1,30.200]
Answer:

Question 10.
Bobby opened a consulting firm and completed these transactions during November, 2005 :
(a) Invested Rs. 4,00,000 cash and office equipment with Rs.1,50,000 in a business called Bobbie Consulting.
(b) Purchased land and a small office building. The land was worth Rs. 3,00,000 and the building worth Rs. 7,00,000. The purchase price was paid with Rs. 2,00,000 cash and a long term note payable for Rs. 8,00,000.
(c) Purchased office supplies on credit for Rs. 12,000.
(d) Bobbie transferred title of motor car to the business. The motor car was worth Rs, 90,000.
(e) Purchased for Rs. 30,000 additional office equipment on credit.
(f) Paid Rs. 7,500 salary to the office manager.
(g) Provided services to a client and collected Rs. 30,000.
(h) Paid Rs. 4,000 for the month’s utilities.
(i) Paid supplier created in transaction (c).
(j) Purchase new office equipment by paying Rs. 93,000 cash and trading in old equipment with a recorded cost of Rs.7,000.
(k) Completed services of a client for Rs. 26,000. This amount is to be paid within 30 days.
(l) Received Rs. 19,000 payment from the client created in transaction (k).
(m) Bobby withdrew’ Rs. 20,000 from the business.
Analyse the above stated transactions and open the following
T-accounts : Cash, client, office supplies, motor car, building, land, long term payables, capital, withdrawals, salary, expense and utilities expense.
Answer:

Analysis of Transactions

(a) Increases Cash, Office equipment (Assets) and Bobby’s Capital (Owner’s equity ).
(b) Increases Land and Building (Assets) and Increases Long Term Loan (Liability).
(c) Increases Stock (Assets) and Creditors (Liabilities).
(d) Increases Motor Car (Assets) and Capital (Owner’s equity).
(e) Increases Office Equipment (Assets) and Creditors (Liabilities).
(f) Decreases Cash (Assets) and Increases Expenses (Expenses).
(g) Increases Cash (Assets) and Increases Sales (Revence).
(h) Decreases Cash (Assets) and Increases (Expenses).
(i) Decreases Cash (Assets) and Creditors (Liabilities).
(j) Decreases Cash, Office Equipment (Assets) and Increases Office Equipment (Assets).
(k) Increases Debtors (Assets) and Sales (Revenue).
(l) Increases Cash (Assets) and Decreases Debtors (Assets).
(m) Decreases Cash (Assets) and own’s equity (Capital).

Journalising

Question 11.
Journalise the following transactions Himanshu : in the Books of
2005 Dec. 01, Business started with cash Rs. 75,000
Dec. 07, Purchase goods for cash Rs. 10.000
Dec. 09, Sold goods to Swati Rs. 5,000
Dec. 12, Purchase furniture
Dec. 18, Cash received from Swati in full Rs. 32,000
settlement Rs. 4,000
Dec. 25. Paid Rent Rs, 1,000
Dec. 30, Paid Salary’ Rs. 1,500
Ans. Journal Entries in the books of Himanshu :
Answer:

Question 12.
Enter the following Transactions in the Journal of Mudit:
2006 Jan. 01 Commenced business with cash Rs. 1,75,000
Building Rs. 1,00,000
Jan. 02 Goods Purchase for Cash Rs. 75,000
Jan. 03 Sold goods to Ramesh Rs. 3.0,000
Jan.04 Paid wages Rs. 500
Jan.06 Sold good for cash Rs. 10,000
Jan. 10 Paid for Trade Expenses Rs. 700
Jan. 12. Cash Received from Ramesh Rs. 29,500
Discount Allowed Rs. 500
Jan.14 Goods purchase from Sudhir Rs. 27,000
Jan. 18 Cartage paid Rs. 1,000
Jan.20 Drew cash for personal use Rs. 5,000
Jan.22 Goods use for house hold Rs. 2,000
Jan. 25 Cash paid to Sudhir Rs. 26,700
Discount received Rs. 300
Answer:

Question 13.
Journalizing the following transactions : 2005
Dec. 01 Hema started business with cash Rs. 1,00,000
Dec. 02 Open a Bank account With SBI Rs. 30,000
Dec. 04 Purchase goods from Ashu Rs. 20,000
Dec. 06 Sold goods to Rahul for Cash Rs. 15,000
Dec. 10 Bought goods from Tara for cash Rs. 40,000
Dec. 13 Sold goods to Suman Rs. 20,000
Dec. 16 Received Cheque from Suman Rs. 19,500
Discount allowed Rs. 500
Dec. 20 Cheque given to Ashu on account Rs. 10,000
Dec. 22 Rent paid by Cheque Rs. 2,000
Dec. 23 Deposited into Bank Rs. 16,000
Dec. 25 Machine Purchased from Parigya Rs. 10,000
Dec. 26 Trade Expenses Rs. 2,000
Dec. 28 Cheque issued to Parigya Rs. 10,000
Dec. 29 Paid Telephone Expenses by Cheque Rs. 1,200
Dec. 31 Paid Salary Rs. 4,500
Ans Journal Entries :
Answer:

Question 14.
Journalise the following transaction in the Books of Harpreet Bros :
(a) Rs. 1,000 due from Rohit are now a bad debts.
(b) Goods worth Rs. 2,000 were used by the proprietor.
(c) Charge depreciation @ 10% p.a for Two month on machine costing Rs. 30,000.
(d) Provide interest on capital of Rs. 1,50,000 at 6% p.a. for 9 months.
(e) Rahul become insolvent, who owed Rs. 2,000 a final dividend of 60 paise in a rupee is received from his estate.
Ans.

Question 15.
Prepare Journal from the transaction given below :
(a) Cash paid for installation of machine Rs. 500
(b) Goods given as charity Rs. 2,000
(c) Interest charge on capital @7% p.a. when total capital were Rs. 70,000
(d) Received Rs. 1,200 of a bad debts written of last year
(e) Goods destroyed by fire Rs. 2,000
(f) Rent outstanding Rs. 1,000
(g) Interest on drawing Rs. 900
(h) Sudhir Kumar who owed me Rs. 3,000 has failed to pay the amount. He pays me a compensation of 45 p. in a rupee.
(i) Commission received in advance Rs. 7,000
Answer:

Question 16.
Journalise the following transactions, post to the ledger : 2005
Nov. 01 Business started with Cash Rs. 1,50,000
Good Rs. 50,000
Nov. 03 Purchase Goods from Harish Rs. 30,000
Nov. 05 Sold goods for cash Rs. 12,000
Nov. 08 Purchase Furniture for cash Rs. 5,000
Nov. 10 Cash Paid to Harish on account Rs. 15,000
Nov. 13 Paid Sundry Expenses Rs. 200
Nov. 15 Cash sales Rs. 15,000
Nov. 18 Deposited into Bank Rs. 5,000
Nov. 20 Drew Cash for personal use Rs. 1,000
Nov. 22 Cash Paid to Harish in full settlement of account Rs. 14,700
Nov. 25 Goods sold to Nitesh Rs. 7,000
Nov. 26 Cartage paid Rs. 200
Nov. 27 Rent Paid Rs. 1,500
Nov. 29 Received cash from Nitesh Rs. 6,800
Discount.given Rs. 200
Nov. 30 Salary Paid Rs. 3,000
[Ans. Total of Debit and credit Rs. 3,16,900]
Answer:

Question 17.
Journalize the following transactions is the journal of M/s Goel Brothers and post to the ledger 2006
Jan. 01 Started Business with Cash Rs. 1,65,000
Jan.02 Open Bank Account in PNB Rs. 80,000
Jan. 04 Goods purchased from Tara Rs. 22,000
Jan. 05 Goods purchases for cash Rs. 30,000
Jan. 08 Goods sold to Naman Rs. 12,000
Jan.10 Cash paid to Tara Rs. 22,000
Jan. 15 Cash received from Naman Rs, 11,700
Discount allowed Rs. 300
Jan.16 Paid Wages Rs. 200
Jan.18 Furniture purchased for office use Rs. 5,000
Jan.20 Withdrawn from bank for personal Rs. 4,000
use
Jan. 22 Issued cheque for Rent Rs. 3,000
Jan.23 Goods issued for house hold purpose Rs. 2,000
Jan.24 Drawn cash from bank for office use Rs. 6,000
Jan.26 Commission received Rs. 1,000
Jan.27 Bank charges Rs. 200
Jan.28 Cheque given for Insurance premium Rs. 3,000
Jan.29 Paid salary Rs. 7,000
Jan.30 Cash Sales Rs. 10,000
[Ans. Total of debit and credit Rs. 3,84,400]
Answer:
Journal entry in the books of M/s.Goel Brothers for the month, of January, 2006.

Question 18.
Give journal entries of M/s. Mohit Traders. Post them the Ledger from the following :
Transactions 2005 August
1. Commenced business with cash Rs.1,10,000
2. Opened bank account with H.D.F.C. Rs. 50,000
3. Purchase furniture Rs. 20,000
7. Bought goods for cash from M/s. Rupa
Traders Rs. 30,000
8. Purchased goods from M/s. Hema Traders Rs. 42,000
10. Sold goods for cash Rs. 30,000
14. Sold goods on credit to M/s. Gupta Traders Rs. 12,000
16. Rent paid Rs. 4,000
18. Paid Trade Expenses Rs. 1,000
20. Received cash from Gupta Traders Rs. 12,000
22. Goods Return to Henia Traders Rs. 2,000
23. Cash paid to Hema Traders Rs. 40,000
25. Bought Postage stamps Rs. 100
30. Paid Salary to Rishabh Rs. 4,000
Ans. Journal Entries in the books of M/s. Mohit Traders for the month of August, 2005.
Answer:

Question 19.
Journalise the following transactions in the Books of the M/s. Bhanu Traders and post them into the Ledger.
2005 Dec.
1. Started Business with Cash Rs. 92,000
2. Deposited into Bank Rs. 60,000
4. Bought goods on credit from Himani Rs. 40,000
6. Purchased goods for cash Rs. 20,000
8. Returned goods to Himani Rs. 4,000
10. Sold goods for cash Rs. 20,000
14. Cheque given to Himani Rs. 36,000
17. Goods sold to M/s. Goyal Traders. Rs. 3,50,000
19. Drew cash from Bank for Personal use Rs. 2,000
21. Goyal Traders returned goods Rs. 3,500
22. Cash deposited into bank Rs. 20,000
26. Cheque Received from Goyal Traders Rs. 31,500
28. Goods given as charity Rs. 2,000
29. Rent paid Rs. 3,000
30. Salary paid Rs. 7,000
31. Office machine purchased for cash Rs. 3,000
Ans. Journal Entries in the books of M/s. Bhanu Traders :
Answer:


Note : For transaction on Dec. 29, 2005, it has been assumed that the rent of Rs. 3,000 is paid through cheque, or the cash account would have shown a credit balance and that is logically not possible.

Question 20.
Journalise the following, transactions in the Book of M/s. Beauti Traders. Also post the in the ledger.
2005 Dec.
1. Started business with cash Rs. 2,00,000
2. Bought office furniture . Rs. 30,000
3. Paid into bank to open an current account Rs. 1,00,000
5. Purchased a Computer and paid by cheque Rs. 2,50,00
6. Bought goods on credit from Ritika Rs. 60,000
8. Cash Sales Rs. 30,000
9. Sold goods to Krishna on credit Rs. 25,000
12. Cash paid to Mansi on account Rs. 30,000
14. Goods returned to Ritika Rs. 2,000
15. Stationery purchased for cash Rs. 3,000
16. Paid wages Rs. 1,000
18. Goods returned by Krishna Rs. 2,000
20. Cheque given to Ritika Rs. 28,000
22. Cash received from Krishna on account Rs. 15,000
24. Insurance premium paid by cheque Rs. 4,000
26. Cheque received from Krishna Rs. 8,000
28. Rent paid by Cheque Rs. 3,000
29. Purchased goods on credit from Meena
Traders Rs. 20,000
30. Cash Sales Rs. 14,000
Answer:
Journal Entries in the Books of M/s. Beauti Traders.

Question 21.
Prepare Journal and post it to ledger of Sanjana.
Cash in hand Rs. 6,000
Cash at bank Rs. 55,000
Stock of good Rs. 40,000
Due to Rohan Rs. 6,000
Due from Tarun Rs. 10,000
3. Solti goods to Karuna Rs. 15,000
4. Cash sales Rs. 10,000
6. Goods sold to Heena Rs. 5,000
8. Purchased goods from Rupali Rs. 30,000
10. Goods returned from Karuna Rs. 2,000
14. Cash received from Karuna Rs. 13,000
15. Cheque given to Rohan Rs. 6,000
16. Cash received from Heena Rs. 3,000
20. Cheque received from Tarun Rs. 10,000
22. Cheque received from Heena Rs. 2,000
25. Cash given to Rupali Rs. 18,000
26. Paid cartage Rs. 1,000
27. Paid salary Rs. 8,000
28. Cash Sale Rs. 7,000
29. Cheque given to Rupali Rs. 12,000
30. Sanjana took goods for Personal use Rs. 4,000
31. Paid General Expense Rs. 500
Answer:
Journal Entries in the books of Sanjana.

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

Theory Base of Accounting NCERT Solutions for Class 11 Accountancy Chapter 2

Theory Base of Accounting Questions and Answers Class 11 Accountancy Chapter 2

Test Your Understanding – I
Choose the Correct Answer.

Question 1.
During the lifetime of an entity accounting produce financial statements in accordance with which basic accounting concept:
(a) Conservation
(b) Matching
(c) Accounting period
(d) None of the above
Answer:
(c) Accounting period

Question 2.
When information about two difference enterprises have been prepared presented in a similar manner the information exhibits the characteristic of:
(a) Verifiability
(b) Relevance
(c) Reliability
(d) None of the above
Answer:
(d) None of the above

Question 3.
A concept that a business enterprise will not be sold or liquidated in the near future is known as :
(a) Going concern
(b) Economic entity
(c) Monetary unit
(d) None of the above
Answer:
(a) Going concern

Question 4.
The primary qualities that make accounting information useful for decision-making are :
(a) Relevance and freedom from bias
(b) Reliability and comparability
(c) Comparability and consistency
(d) None of the above
Answer:
(b) Reliability and comparability.

Test Your Understanding – II
Fill in the correct word :
1. Recognition of expenses in the same period as associated revenues is called ……….. concept.
2. The accounting concept that refers to the tendency of accountants to resolve uncertainty and doubt in favour of understating assets and revenues and overstating liabilities and expenses is known as ………………
3. Revenue is generally recognised at the point of sale denotes the concept of ………………
4. The ……………… concept requires that the same accounting method should be used from one accounting period to the next.
5. The ………………. concept requires that accounting transaction
Answer:
1. Matching
2. Conservatism
3. Revenue Realisation
4. Consistency
5. Objectivity.

Short Answer Type Questions

Question 1.
Why is it necessary for accountants to assume that business entity will remains a going concern.
Answer:
The Going Concern Concept – The Going Concern Concept holds that a business shall continue for an indefinites period and there is no intention to close the business or reduce its size significantly. It is because of this concept that distinction is made between expenditure that will render benefit for a long period and that whose benefit will be exhausted quickly, say, within the year. Of course, if it is certain that the business will exist only for a limited time, the accounting recordwill keep the expected life in view.

On the basis of this assumption; fixed assets are recorded at their original cost and are depreciated in a systematic manner without reference to their market value. An example would be purchase of machinery which would last, say, for the next 10 years. The cost of machinery would be spread on a suitable basis over the next year for ascertaining the profit or los? of each year.

The full cost of the machine would not be treated as an expense in the year itself. In brief, an enterprise is said to be a going concern when there is neither the intention nor the necessity to wind up its affairs or curtail substantially the scale of its operation. In other words, it would continue to operate at its present scale in the foreseeable future.

Question 2.
When should revenue be recognised. Are there exceptions to the general rule.
Answer:
Meaning of Revenue- Revenue is the gross inflow of cash, receivables or other considerations arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by other of enterprise resources yielding interest, royalties and dividends.

Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration.

Meaning of revenue recognition – Revenue recognition means identifying the revenues for a particular accounting period. Revenue recognition is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainty may influence the timing of revenue recognition.

Specific Requirements of AS-9 issued by ICAI – The specific requirements of AS-9 issued by the Institute of Chartered

Accountants of India are as follows :
1. Regarding recognition of revenue from sales – Revenue from sale should be recognised when the following requirements as to performance are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection.

In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled :

• The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and
• No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.

2. Regarding recognition of revenue from service transaction –
Revenue from service transactions should be recognised when the following requirements are satisfied provided that at the time of performance, it is not unreasonable to expect ultimate collection that at the time of performance, it is not unreasonable to expect ultimate collection.

In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates to the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.

Completed service contract method is a method of accounting which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed.

Proportionate completion method is a method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract.

3. Regarding postponement of revenue recognition – If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.

4. Regarding recognition of revenue arising from the use by other of enterprise resources – Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases:

• Interest – On a time proportion basis taking into account the amount outstanding and the rate applicable.
• Royalties – On an accrual basis in accordance with the terms of the relevant agreement.
• Dividends from Investments in shares – When the owner’s right to receive payment is established.

Regarding disclosure – In addition to the disclosures required by Accounting Standard-1 on Disclosure of Accounting Policies (AS-1), an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.

Question 3.
What is the basis of accounting equation?
Answer:
Meaning of Accounting Equation – Accounting equation is based on dual aspect concept. In the dual aspect concept, every business transaction has a two-sided effect that is on the assets and also claims on assets.
The total claims (those of creditors & proprietor’s capital) will equal the total assets of the firm.
The claims known as equities:3
(a) Owner’s capital or equity, and
(b) Liabilities or amounts due to oysteries.

Question 4.
The realisation concept determines when goods sent on credit to customers are to be included in the sales figure for the purpose of computing the profit or loss for the accounting period. Which of the following tends to be used in practice to determine when to include a transaction in the sales figure for the period. When the goods have been :
(a) Dispatched
(b) Invoiced
(c) Delivered
(d) Paid for
Answer:
The Revenue or Realisation Principle – The Revenue of Realisation Principle holds that revenue is considered to have been realised when either in cash or the form of legal obligation to receive the amount has been established. It is to be noted that recognizing revenue and receipt of amount are two separate aspects. Let us understand it with the help of an example. An enterprise sells goods in February 2009 and receives the amount for it in April 2009.

Revenue of this sale shall be recognised in February 2-009, i.e., when the goods are sold. It is so because a legal obligation has been established (upon sale) in February 2009. Taking another example, if an enterprise has received advance in March 2009 for the sale to be made in May 2009, revenue shall be recognised in May 2009, upon sale having been made. (Option B) Invoiced of the goods sent on credit to customer are to be included in the sales figure.

Question 5.
Complete the following work sheet:
(i) If a firm believes that some of its debtors may ‘default’, it should act on this by making sure that all possible losses
(ii) The fact that a business is separate and distinguishable
(iv) The concept states that if straight line method of
depreciation is used in one year, then it should also be used in the next year.
(v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be
increased. Normal accounting procedure is to ignore this because of the
(vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the
(vii) The management of a firm is remarkably incompetent, but the firms accountants cannot take this into account while preparing book of accounts because of concept.
Answer:
(i) Conservation (Prudence)
(ii) Business Entity or Separate Entity
(iii) Dual Aspect
(iv) Consistency
(v) Conservatism
(vi) Realisation
(vii) Money Measurement.

Long Answer Type Questions

Question 1.
The accounting concepts and accounting standards are generally referred to as the essence of financial accounting. Comment.
Answer:
The accounting concepts or assumptions are basic assumptions or fundamental prepositions concerning the economic, political and sociological environment within which accounting must operate.

They are generally accepted set of accounting rules important to follow the generally accepted accounting rules because it will enable the user to understand the financial position of the enterprise better, which otherwise would be impossible. Accounting concepts have been defined as follows :

• The Going Concern Concept
• The Accrual Concept
• The Business or Accounting Entity Concept,
• The Money Measurement Concept, and
• The Accounting Period Concept.

Going Concern Assumption – It is also know as continuity assumption. According to this assumption, the enterprise is normally viewed as a going concern, that is, continuing in N operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation
or of curtailing materially the scale of its operations.

It is because of the going concern assumptions :

• That the assets are classified as current assets and fixed assets.
• The liabilities are classified as short-term liabilities and long term liabilities.
• The unused resources are shown as unutilized costs (or unexpired costs) as against the break-up values as in case of liquidating enterprise. Accordingly, the earning power and not the break-up value evaluates the continuing enterprise.

The Accrual Concept – The Accrual Concept holds that a transaction is recorded at the time when it has taken place and not when the settlement in cash takes place. The concept is particularly important because it recognises the assets, liabilities, incomes and expenses as and when the transactions relating to it are entered into. Under this concept, profit is regarded as earned at the time the goods or services are sold to the customer, i.e., legal title is passed to the customer who, in turn, has an obligation to pay for them.

Similarly, expense is regarded as spent when the goods or services are purchased and an obligation to pay for them has been assumed. For example, Puneet has worked for the month and thus, salary becomes due to him at the month end, which should be recorded in the books of account.

The Business or Accounting Entity Concept-The Business or Accounting entity Concept holds that business is separate from its owners. Transactions, therefore are recorded from the view point of business. The owners being considered separate from business, they are treated as creditors to the extent of their capital. Their account with the business entity is credited or debited when capital is introduced by them or drawings is made.

The Business or Accounting Entity Concept is an useful concept and from it has developed what may be called responsibility accounting. It has made possible to ascertain the results of operations of each department or division of an enterprise.

Money Measurement Assumption – According to this assumption. Only those transactions which are capable of being expressed in term of money are included in the accounting records. In other words, the information which cannot be expressed in terms of money is not included in accounting records. For example, if the sales director is not on speaking terms with the production director, the enterprise is bound to suffer.

Since, monetary measurement of this informations is not possible this fact is not recorded in accounting records. By expressing all transaction in terms of money, the different transactions expressed in different units are brought to a common unit of measurement (i.e., Money). Besides ignoring the non-monetary facts or attributes, this assumption also ignores the changes in the purchasing power of the monetary unit.

In other words, this assumption treats all rupees alike, whether it is a rupee of 1950 or 1999. Hence, now a days, it is considered to provide additional data showing the effect of price level changes on the reported income, assets and liabilities of the business.

The Accounting Period Concept – The accounts of an enterprise are maintained following the Going Concern Concept, i.e., assuming that the business shall continue to operate for an indefinite period. Thus, the period up to which the enterprise will continue to operate and thereafter preparing the accounts become meaningless to the users.

Thus, the life of the ‘enterprise is divided into time intervals termed ‘Accounting Period’, which usually is the ope year. The Accounting Period Concept is important as the users of accounting information can make an assessment of the enterprise at regular intervals.

Question 2.
Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.
Answer:
Consistency Principle – According to this principle, whatever accounting practices (whether logical or not) are selected for a given category of transactions, they should be followed on horizontal basis from one accounting period to another to achieve compatibility, for instance, if the inventory on LIFO basis, should be followed year after year and if a particular asset is depreciated according to WDV method, this method should be followed year after year.

If this principle of consistency is not followed, the intra-firm comparison (i.e., comparison of actual figures of one period with those of another period for the same firm), Inter-firm comparison (i.e., comparison of actual figures of one firm with those of another firm belonging to the same industry) and Pattern comparison-(i.ei, comparison of actual figures of one firm with those of industry to. which the firm belongs) cannot be made.

The consistency should not be confused with mere uniformity or inflexibility and -should not be allowed to become an impediment to the introduction of improved accounting standards. It is not appropriate for an enterprise to leave its accounting policies unchanged when more relevant and reliable alternatives exist.

The user should be informed of the accounting policies employed in the preparation of the financial statements, any change in these policies and the effects of such changes. However, consistency does not prohibit change in accounting policies, such changes which are necessary can be made provided these are fully disclosed while presenting the financial statements and preferable also their effect on the results.

Question 3.
Discuss the concept based on the premise “do not anticipate profits provide for all losses”.
Answer:
The prudence or conservatism concept provide the premise that do not anticipate a profit but provide for all possible losses. The Prudence (Conservation) Principle – The Prudence Principle is many a times described using the phrase “Do not anticipate a profit, and provide for all possible losses”.

The application of this principle ensures that the financial statements present a realistic picture of the state of affairs of the enterprise. In other words, the financial statements do not paint a better picture than what actually is and window dressing of financial statements is avoided.

In effect, the profit should be recognised when it is reasonable sure that it shall be realised and all known liabilities should be accounted for. It is because of this principle that provision is made for doubtful debts, when it is likely that a part of debtors shall not be realised. Similarly, closing stock is values at lower of cost or market value.

It is to be noted that this is an overriding principle over all other principles and whenever there is a clash on application of this principle with any other principle, principle of prudence shall prevail. For example, under the realisation principle, revenue is recognised as soon- as the title of goods is passed to the buyer, i.e., obligation to pay is established. But, it is likely that the amount shall not recovered, partly or fully.

The prudence principle holds that the unrecoverable amount be written off. This principle may be reflecting a generally pessimist attitude adopted by the accountants but is an important way of dealing with uncertain and protecting the interests of creditors against an unwanted distribution of firm’s assets. However, deliberate attempt to underestimate the value of assets should be discouraged as it will lead to hidden profit, called secret reserves.

Question 4.
What is matching concept? Why should a business concern follow this concept?
Answer:
The Matching Principle – The Matching Principle is based on the accrual system.of accounting and related to revenue or realisation principle. In the revenue or realisation principle, revenue is recognised as realised when amount is realised in cash or in the form of legal obligation to receive the amount is established. The matching principle requires that costs be associated with the revenues for the period. The effect of matching principle may. broadly be as follows :
(a) Revenue item, when entered in the Profit and Loss Account all costs, whether paid or not, should be set out on the expense side.

(b) A cost incurred, against which revenue will be earned in the following period should be carried forward to Balance Sheet as an asset to be treated as expense in the period of revenue. Therefore, it becomes necessary to provide for outstanding and prepaid expenses for period costs.

The concept emphasises that expenses incurred in an accounting period should be method with revenue during that period. Revenue is recognised when a sale is completed or service is rendered rather when cash is received. Similarly an expense is recognised not only when cash is paid out but when an asset or service has been used to generate revenue.

Matching concept implies that all revenues earned during an accounting year, whether received during that year, or not and all costs Incurred, whether paid during the year, or not should be taken into account while ascertaining profit or loss for that year.

Question 5.
What is the money measurement concept? Which one factor can make it difficult to compare the monetary value of one year with the monetary value of another year?
Answer:
The Money Measurement Concept – The Money Measurement Concept holds that transactions and events that can be expressed in monetary terms are recorded. In other words, accounting has money as the common denomination in recording and reporting all transactions.

The transactions and events howsoever important they may be, that cannot be measured iii monetary terms such as quality or loyalty of employees of the enterprise, increased competition due to new products or new enterprises are not recorded in accounting. Thus, accounting cannot give a complete state of affairs of the enterprise.

The another important aspect of the concept of money measurement is that the records of the transactions are to be kept not in the physical units but in the monetary unit for example an organisation may, on a particular day, have a factory on a price of land measuring 4 acres, office building containing 15 rooms, 35 personal computers, 50 office chairs and tables a bank balance of Rs. 10 Lakh, raw material of 30 tonnes and 120 containers of finished stock cannot be added to give any meaningful information about the local worth of the business unless and until expressed in monetary value, i.e., rupees.

Money measurement concept is not free from limitations. Because of changes in prices the value of money does not remain the same over a period of time.

The value of rupee today on account of rise in prices is much less than what was, say ten years back. As change in the value of money is not reflected in the books of accounts, the accounting data does not reflect the true and fair view of the affairs of an organisation.

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

Introduction to Accounting NCERT Solutions for Class 11 Accountancy Chapter 1

Introduction to Accounting Questions and Answers Class 11 Accountancy Chapter 1

Test Your Understanding – I

Complete the following sentences with appropriate words :
(a) Information in financial reports is based on ……………. transactions.
(b) Internal users are the …………….of the business entity.
(c) A would most likely use an entities financial report to determine whether or not the business entity is eligible for a loan.
(d) The Internet has assisted in decreasing the …………. in issuing financial reports to users.
(e) …………….users are groups outside the business entity, who uses the information to make decisions about the business entity.
(f) Information is said to be relevant if it is …………
(g) The process of accounting starts with and ends with …………
(h) Accounting measures the business transactions in terms of ………….. units.
(i) Identified and measured economic events should be recording in ……………. order.
Answer:
(a) economic
(b) management/employees
(c) creditor
(d) time-gap
(e) external
(f) free from bias
(g) identifying the transactions, communicating information
(h) monetary
(i) chronological

Test Your Understanding – II

You are a senior accountant of Ramona Enterprises Limited. What three steps would you take to make your company’s financial statements understandable and decision useful?
1. ……………
2. ……………
3. ……………
[Hint : Refer to qualitative characteristics of accounting information] .
Answer:
1. Reliability i.e. verifiability, faithfulness, neutrality
2. Relevance i.e. timeliness
3. Understandability and comparability.

Test Your Understanding – III

Which stakeholder group ……. Would be most interested in
…………….. (a) the VAT and other tax liabilities of the firm .
…………….. (b) the potential for pay awards and bonus deals
…………….. (c) the ethical or environmental activities of the firm
…………….. (d) whether the firm has a long-term future
…………….. (e) profitability and share performance
…………….. (f) the ability of the firm to carry on providing a service or producing a product.
Answer:
(a) Government and tax-authorities
(b) Management
(c) Social responsibility groups or NGO
(d) Lenders
(e) Suppliers and creditors
(d) Customers

Test Your Understanding – IV
Tick the Correct Answer

Question 1.
Which of the following is not a business transaction?
(a) Bought furniture of Rs. 10,000 for business
(b) Paid for salaries of employees Rs. 5,000
(c) Paid sons fees from her personal bank account Rs. 20,000
(d) Paid sons fees from the business Rs. 2,000
Answer:
(c) Paid sons fees from her personal bank account Rs. 20,000

Question 2.
Deepti wants to buy a building for her business today. Which of the following is the relevant data for his decision?
(a) Similar business acquired the required building in 2000 for Rs. 10,00,000
(b) Building cost details of 2003
(c) Building cost details of 1998
(d) Similar building cost in August, 2005 Rs. 25,00,000
Answer:
(a) Similar business acquired the required building in 2000 for Rs. 10,00,000

Question 3.
Which is the last step of accounting as a process of information?
(a) Recording of data in the books of accounts
(b) Preparation of summaries in the form of financial statements
(c) Communication of information
(d) Analysis and interpretation of information
Answer:
(c) Communication of information

Question 4.
Which qualitative characteristics of accounting information is reflected when accounting information is clearly presented?
(a) Understandability
(b) Relevance
(c) Comparability
(d) Reliability
Answer:
(a) Understandability

Question 5.
Use of common unit of measurement and common format of reporting promotes;
(a) Comparability
(b) Understandability
(c) Relevance
(d) Reliability
Answer:
(a) Comparability

Test Your Understanding – V

Mr. Sunrise started a business for buying and selling of stationery “ with Rs. 5,00,000 as an initial investment. Of which he paid Rs. 1,00,000 for furniture. Rs. 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid Rs. 5,000 as their salaries. Out of the stationery bought he sold some stationery for Rs. 1,50,000 for cash and some other stationery for Rs. 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery’ items of Rs. 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost Rs. 30,000 worth of stationery. A part of the’machinery, which cost Rs. 40,000 was sold for Rs. 45,000.

From the above, answer the following :
1. What is the amount of capital with which Mr. Sunrise started business.
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine if the following are assets, liabilities, revenues, expenses or none of the these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner.
Answer:
1. RS. 5,00,000
2. Rs. 1,00,000
3. Rs. 2,00,000
4. Mr. Peace, Rs. 1,50,000
5. Rs. 5,000 (salaries)
6. Rs. 5,000
7. Rs. 30,000
8. Mr. Ravi, Rs. 1,00,000
9. Rs. 35,000
10. Assets – Debtors
Liabilities – Creditors
drawings by the owner Revenue – sales
Expenses – salary to manager, discount to debtors.

Short Answer Type Questions

Question 1.
Define accounting?
Answer:
Accounting – Defined
“Accounting is the art of recording classifying and summarising in a significant manner and in terms of money: transactions and events which are, in part at least, of financial character, and interpreting the results there of ”
– Committee on terminology of the American Institute of Certified Public Accountants

“Accounting is the science of recording and classifying business 1 transactions and events, primarily of a financial character, and the art of making significant summaries, analysis and interpretations of those transactions and events and communicating the results to persons who  must make decisions or form judgement ”. – Smith and Ashbourne

Accounting is a larger concept than book-keeping. Besides the function of book-keeping, accounting involves summarizing, analyzing, interpreting the financial statements and communicating the results to the users of these statements. Accounting is the language of business; it means that an enterprise communicates with the outside world, including the proprietors, through accounting statements. One cannot understand the affairs of an enterprise unless the enterprise prepares financial statements intelligibly.

Question 2.
State what is the end product of financial accounting?
Answer:
The basic purposes of financial accounting are the following :

• Calculating the result of business operations.
• Ascertaining the financial position.
• Communicating the information to the users.

To calculate the results of operations : To measure the financial performance of an enterprise, the results of operations are ascertained by preparing an Income Statement (also called Profit and Loss Account) which shows the matching of current costs with current revenues during a particular accounting period. A systematic record of incomes and expenses facilitates the preparation of the Income statement.

To ascertain the financial position : To evaluate the financial strength and weakness of an enterprise, the financial position is ascertained by preparing a Position Statement (also called Balance Sheet) which shows resources (assets) owned by an enterprise and the sources of financing those resources.

A businessmen wants to know what the business owes to other and what it owns, and what happened to his capital whether the capital has increased, decreased or remained constant. A systematic record of various assets and liabilities facilitates the preparation of a Position statement (also known as Balance Sheet) which answers all these questions.

To communicate the information to the users : Accounting communicates information to internal users and external users. The internal users include all the organisational participants at all levels of management (i.e., top, middle and lower).

Top level management requires information for planning, middle level management requires information for controlling the operations. For internal use, the information is usually provided in the form of reports, for instance Cash Budget Reports, Production Reports, Idle Time Reports, Feedback Reports, Whether to Retain or Replace an Equipment Decision Reports, Project Appraisal Reports, and the like.

Since the external users (e.g., Banks, Creditors) do not have direct access to all the records of an enterprise, they have to rely on financial statements as the source of information. External users are basically interested in the solvency and profitability of an enterprise.

Question 3.
Enumerate main objectives of accounting?
Answer:
The following objectives of accounting may be preceded in brief:
1. Maintenance of Business Records : Accounting is the language in which most of the business transactions (financial) and events are expressed. It is an objective to keep a systematic record of these financial transactions. It embraces proper recording to – transactions, classified under appropriate accounts and summarised 1 into financial statements Income Statement and the Position Statement.

2. Calculation of Profit or Loss : Another objective of accounting is to ascertain the net result of the day-to-day transactions for a period. In other words, to ascertain whether during the period the firm earned a profit or suffered a loss. For this purpose, a statement called the Incomes Statement or the Profit and Loss Account is prepared.

In this account, the revenues resulting from the transactions of the period and the consequent expenses incurred are recorded. A comparison of the period and the consequent expenses incurred are recorded.

A comparison of the two shows whether the business earned a profit or incurred a loss. In addition, information is available about sales; opening and closing stocks of goods and the significant factors leading to the profit or the loss of the business.

Such a profit or loss statement is useful for all parties having stake in business like the management, lenders, investors, the proprietor or the partners or the shareholders, tax authorities and workers, etc. It is so because from its study, the management, can know whether the policies adopted by it were fruitful or not and can decide upon and possible, a change in the selling price or the advertising policy, etc.

Lenders can know from its study whether the firm is likely to earn profits in future also. Investors may also decide on its basis whether or not they should keep their money invested in the firm. Shareholders can make an estimate of the efficiency, success, etc., of the management and may decide accordingly whether to invest or not in the business.

3. Depiction of Financial Position : For a businessman, it is not sufficient only to ascertain the profit & loss; it is also necessary to know the financial health of the firm. For this purpose, a statement listing assets, liabilities and the owner’s capital is prepared. Such a statement is called the Balance Sheet. An illustration of a Balance Sheet is as follows :

Just as a doctor will feel the pulse of a person and know whether he is enjoying good health or not, in the same manner by looking at the Balance Sheet one can know whether the firm is solvent or not. If the assets exceed liabilities, it is solvent. In the other case, it would be insolvent.

4. Provide information to various users : Making the information available to various groups and managers. This function of accounting is to communicate the financial facts about an enterprise to various interested parties like owners, investors, creditors, employees, government-offices, research scholar’s etc. The purpose of it is to enable these parties to take sound and realistic decision.

Question 4.
List any five users who have indirect interest in 7 accounting.
Answer:
Following are the interested parties or users of accounting informations other than the owners of a business :
1. Lenders: Lenders, i.e., the banks and financial institutions provide funds to the business. These funds may be provided at the time of setting-up the business or at a latter stage for the expansion and development. In practice, they lend money only after satisfying themselves about the repaying capacity, i.e., solvency of the ? business concern. Again, they know about this from the financial statements.

2. Managers : Managers have to take many decisions such as the determination of selling price, how can the cost be reduced, how 5 can the selling expenses and other expenses be controlled, etc. These decisions can be taken on the basis of the information available. This information is made available to them by the financial statements.

3. Government: The Government makes use of financial statements for compiling national accounts besides ascertaining the tax liability of the business, timely deposit of statutory and other dues.

4. Employees or Workers : Employees/workers may use the financial statements to know whether their dues like provident fund are being deposited regularly and also whether the bonus is being paid as per law.

5. Researchers : Last but not the least, the financial statements are of immense use to the researchers also undertaking researches in the typical areas like accounting theory, business affairs and practices.

Question 5.
State the nature of accounting information required by long-term lenders?
Answer:
In modem times, banks and financial institutions lend money f to the business; Before providing a loan to a business, they want to judge the repaying capacity of the business. Such information is provided by the accounting alone. Informations regarding the solvency of the financial business are made available only through statements. Financial statements help in assessing the financial capability of the business enterprise and also the expand to which the granting of credit will be safe.

Question 6.
Who are the external users of information regarding accounting?
Answer:
Users of Accounting Information and their Need : The users of accounting information include present and potential investors, management, employees, lenders, suppliers and other trade creditors, customers, government and their agencies and the public. These users use accounting information in order to satisfy some of their varied needs for information.

Question 7.
Enumerate informational needs of management.
Answer:
Management is interested to review the firm’s short-term solvency and long-term solvency, effective utilization of resources and profitability in relation to investments and turnover arid to decide upon the future course of action on the above decisions.

In addition to-the information about the profitability and financial soundness of business, management needs a lot of other informations for the efficient running of the business such as increase or decrease in sales, speed of increase in costs of production etc. All such informations are provided by the accounting which helps the management in planning, decision-making and controlling the business.

Question 8.
Give any three examples of revenues.
Answer:
Revenues are the amounts of the business earned by selling its products or providing services to customers, called sales revenue. Other items of revenue common to many businesses are:

• Commission
• Interest
• Dividends
• Royalties
• Rent received etc.
• Revenue is also called income.

Revenue in accounting is the income of a recurring (regular) nature from any source. It includes the amount received from sale of goods, rent receipt, commission, dividend and interest received. Any capital nature receipt is not a revenue item.

Question 9.
Distinguish between debtors and creditors.
Answer:
Following are the differences between debtors and creditors:

Question 10.
“Accounting information should be comparable.” Do you agree w’ith this statement. Give two reasons. .
Answer:
Comparability : Use must be able to compare the financial statement of an enterprise through time to identify trends in this financial position and performance. Users must also be able to compare the financial statements of different enterprise in order to evaluate their relative financial position, performance and changes in financial position.

Hence the measurement and display of the financial effect of such like transactions and other events must be carried out in a consistent way throughout an enterprise and over time for that enterprise and in a consistent way for different enterprises.

An important implication of this qualitative characteristic is that users be informed of the accounting policies employed in the preparation of financial statements, any changes in those policies and the effects of such changes so that users would be able to identify difference between the accounting policies for like transactions and other various events used by the same enterprise from period to period and by different enterprises, this qualitative characteristic requires pursuance of consistency in choosing accounting policies.

Lack of consistency may disturb the comparability quality of the financial statement information. Mere disclosure of accounting policies and changes therein may not be sufficient. Accordingly, accounting standard on disclosure of accounting policies consider consistency as a fundamental accounting assumption along with accrual, and going concern.

The basic reasons of comparing financial statement of two or more enterprises are the followings:

• Evaluating the financial position of different enterprise.
• Performance and changes in financial position of different firms.
• Accounting policies adopted by different firms.

Question 11.
If the accounting information is not clearly presented, which of the qualitative characteristics of the accounting information is violated?
Answer:
The qualitative characteristics of,both reliability and relevance are required to be followed so that truth and fairness of accounting informations be maintained. These may be explained in brief as follows:
Qualitative characteristics of Accounting information : The fundamental characteristics of the financial statement is truth and fairness. It means, Balance Sheet should give a true and fair view of the state of affairs and whereas the Profit and Loss Account should give the true and correct profit or loss for the period. Besides the above fundamental characteristics there are qualitative characteristics (attributes) that make the information content of the financial statements useful to its users.These are:
(i) Reliability;
(ii) Relevance.
(i) Reliability : An accounting information shall have the quality of reliability if it is free from material errors and also bias. The accounting information even if relevant can be of little use unless it is reliable also. Reliability of the information depends, on :
(a) Neutrality: Neutrality means that the accounting information made available does not suffer from bias. A biased accounting information will be misleading and lead to incorrect analysis and decisions.

(b) Prudence : The accounting information prepared on the principle of prudence (conservatism) means that the accounting information is prepared by providing all prospective losses while leaving all prospective profits. In other words, quality as to reliability increases if the accounting information does not paint a better picture than what actually is.

(c) Completeness : The accounting information given should be complete in all respects as incomplete
information may lead to wrong interpretation.

(d) Substance over form : The accounting information to be meaningful should be governed by the substance of the information and not by its legal form alone.

(ii) Relevance : The accounting information, besides disclosing statutorily required disclosures, should disclose other information, after judging its relevance to the decision making need of its users. For example, interest on borrowings is disclosed without stating the rate of interest. The users, therefore, cannot link interest cost to different types of borrowed funds. In the process, they fail to appreciate rationality of financing decisions. Generally, only the statutorily (legal) required information is disclosed.

The information disclosure requirements are set after a public debate reflecting the views of cross-sections of the users. But what is relevant information in a particular circumstance cannot be generalised and specified. It may be noted that relevance of the information is always guided by the principle of materiality.

Question 12.
The role of accounting has changed over the period of time. Do you agree? Explain.
Answer:
Today’s rapidly changing business environment has forced the accountants to reassess their roles and functions both within the organisation and the society. The role of an accountant has now shifted from that of a mere recorder of transactions to that of the member providing relevant information to the decision-making team. Broadly speaking, accounting today is much more that just book-keeping and the preparation of financial reports.

Accountant are now capable of working in exciting new growth areas such as forensic accounting (solving crimes such as computer hacking and the theft of large amounts of money on the internet), e-commerce (designing web-based payment system), financial planning, environmental account etc.

The realisation comes due to the fact that accounting is capable of providing the kind of information that managers and other interested persons need in order to make better decisions, this aspect of accounting gradually assumed so much importance that it was now been raised to the level of an information system.

As an information system, it collects data and communicates economic information about the organisation to a wide variety of users whose decisions and actions are related to its performance.

Question 13.
Giving examples and explain each of the following accounting terms:
(i) Fixed Assets
(ii) Gains
(iii) Profit
(iv) Revenue
(v) Expenses
(vi) Short-term liability
(vii) Capital
Answer:
Above-mentioned accounting terms may be explained as follows:
(i) Fixed Assets : Fixed assets refer to those assets which are held for the purposes of providing or producing goods or services and those that are not held for resale in the normal course of business. Fixed assets may be classified as follows:

• Tangible fixed assets : refer to those fixed assets which can be seen and touched. For example, Land and Building, Plant & Machinery and Furniture.
• Intangible fixed assets : refer to those fixed assets which cannot be seen and touched. For example, Goodwill, Patent, Trademarks, Copyrights etc.

(ii) Gains : Gains are increases in equity (not assets) from incidental transaction of an entity and from all other transactions and other events and circumstances affecting the entity during the accounting period except those that result from revenues or investment by equity participants. These gains may be operating or non-operating. Example 1 : Profit on sale of marketable securities is usually considered as operating gain.
Example 2 ; Profit on sale of a fixed asset is usually.considered as non-operating gain.

(iii) Profits: The excess of revenue of a period over its related expenses is accounting year profit. It is of two types:

• Net Profit : Net profit means the excess of revenue over expenses.
• Net Loss : Net loss means the excess of expenses and losses over revenue.

(iv) Revenue : The term ‘revenue’ refers to the amount charged for the goods sold or services rendered or permitting others to use enterprise’s resources yielding interest, royalty and dividend. For example, sales, commission earned, interest earned, royalty earned, dividend earned.

(v) Expenses : Expenses are decrease in economic benefits during an accounting period in the form of

• outflow or depletion of assets or
• incurrence of liabilities, that result in decrease in internal equity other relating to contribution from equity participant.

(vi) Liabilities : Liabilities refer to the financial obligations of an
enterprise other than owner’s funds. Liabilities may be broadly classified as follows:

• Current Liabilities/Short term Liabilities: Current liabilities refer to those liabilities which fall due for payment in a relatively short period, (normally, a period of not more than 12 months from the date of the Balance Sheet). For example, Bills payable, Trade Creditors, Outstanding Expenses, Bank. Overdraft and so on.
• Long-term Liabilities : Long-term liabilities refer to those liabilities which do not fall due for payment in a relatively short period. For example, Long-term loans.

(vii) Capital: Capital is the excess of assets over external liabilities. It refers to the amount invested in an enterprise by the proprietor (in case of proprietorship) or partners (in case of a partnership concern). This amount is increased by the amount of profits earned and amount of additional capital introduced and is decreased by the amount of losses incurred and the amount withdrawn (whether in the form of cash.or kind). It represents the owner’s claim on the assets of the enterprise. It is also known as owner’s equity or net assets or net worth.

Question 14.
How will you define revenue, expenses and income?
Answer:
Revenue : Revenue means the amount which, as a result of operations, is added to the capital. ‘Revenue is an inflow of assets which results in an increase in the owner’s equity.’ Examples of revenue are receipts from the sale of goods, rent, income, etc.

Expense : Expense is the amount spent in order to produce and sell the goods and services which produce the revenue. ‘Expenses is the cost of the use of things or services for the purpose of generating revenue.’ Examples are payment of salaries, wages, rent, etc.

Income : Income is the profit earned during a period of time. In other words, the difference between revenue and expense is called income. For example, goods costing Rs. 15,000 are sold for Rs. 21,000 the cost of goods sold, i.e., Rs. 15,000 is expense, the sale of goods, i.e., Rs. 21,000 is revenue and the difference, i.e., Rs. 6,000 is income.
It can, therefore, be expressed as: – Income = Revenue – Expense

Question 15.
What is the primary reason for the business students and other to familiarize themselves with the accounting discipline?
Answer:
In all activities whether business activities or non-business activities used by students of business and other interested groups like schools, colleges, hospitals, libraries, clubs, political parties etc. require accounting knowledge due to monetary transaction involved in these organisations. In other words, wherever money is involved or any economic activity is carried on, accounting is required to account for these economic resources. Accounting serves the basic purpose of information regarding flow of money and funds in the organisation. Following may be the reason for studying the accounting and familiarize with accounting discipline:

• Facilitates to replace memory.
• Facilitate to ascertain net result of operations.
• Facilitates the users to take decisions.
• Helpful in comparative study.
• Control over assets.
• Acts as legal evidence.

Long Answer Type Questions 

Question 1.
Explain the factors which necessitated systematic accounting.
Answer:
Accounting is a systematic process of identifying the transactions of financial nature measuring them in money terms, recording in primary books, classifying, summarizing, analysis and interpreting and finally communicating the results to parties interested in them.

Following are the factors or attributes for systematic accounting records :
1. It records transactions of financial character : Accounting records only those events and transactions which are of financial character. If a transaction has no financial character then it cannot be measured in terms of money and thus, shall not be recorded in the books of account. It is a serious limitation of accounting. For example, a quarrel between the Production Manager and the Sales Manager affects the earnings of the business but it is not recorded because it has no financial character, no economic value and no exchange value.

2. It records transactions in terms of money: Accounting records the transactions by expressing them in terms of money. This makes the transaction more meaningful. For example, if a business has 10 machines, 20 tonnes of raw material, 2 buildings, 20 tables and chairs, 20 fans etc. it is not possible to add them together or know which one is more valuable unless they are expressed in terms of money.

3. It is an art: Accounting is that part of knowledge which enables us to achieve our objective of ascertaining the financial results by recording, classifying and summarising the business transactions.

4. It is an art of recording : Accounting is an art of recording ‘business transactions in the books of account in a systematic
manner soon after the occurrence thereof. Recording is carried out in the book called “Journal”.

This book may be further sub¬divided into various subsidiary books such as Cash Book (for recording cash transactions), Purchases Book (for recording credit purchases of goods), Sales Book (for recording credit sales of goods), Purchases Returns Book (for recording credit purchases returns), etc. The number of subsidiary books to be maintained . depends upon the size and nature of business and type of transactions.

5. It is an art of classifying business transactions : Classifying is the process of grouping of transactions or entries of one nature at one place. This is done by opening accounts in a book called ‘Ledger’, it contains all the accounts of the business. To get the correct idea of the net effect of transactions already recorded in a journal or subsidiary book they are further processed and grouped.

Similar transactions relating to a particular account for a given period are brought together. Then finally they are recorded at one place in a Ledger. For example, cash transactions like cash sales, cash purchases, cash expenses are put in one place in the Ledger under Cash Account.

Transactions pertaining to different persons, whether custonters or suppliers, are recorded separately in the name of each person in the Ledger. Likewise, all expenses under various heads after being recorded in the Journal are classified under separate titles in the Ledger.

6. It is the art of summarising the business data : Summarising is
the art of presenting the classified data (Ledger) in a manner which is understandable and useful to management and other interested parties. This involves preparation of final accounts which includes –

• Trading and Profit and Loss Account, and
• Balance Sheet.

Trading account is prepared for calculating gross profit or gross loss. Gross profit or gross loss is the difference’ between the cost of goods sold and sales. Profit and Loss Account is prepared to ascertain whether during the period the firm earned a profit or suffered a loss. Net profit increases owner’s capital and net loss decreases it.

After Trading and Profit and Loss Account, Balance Sheet is prepared to show the financial position of the business. Some people call it position statement also. The techniques of recording, classifying and summarising the transactions have been explained in detail later in the book.

7. It is helpful in the analysis and interpretation of the results:
For purposes of analysis, the accounting record must be in such a way as to be able to portray the significance of all transactions and events individually and collectively. Thus, the analysis of accounting statements will help the management to judge the performance of business operations and for preparing the future plans.The results of analysis and interpretations are communicated to the proprietor and other interested parties such as creditors, investors, employees, etc.

Question 2.
Describe in brief history of accounting.
Answer:
History and development of Accounting – The history of accounting is as old as civilization. Historical evidences reveal that accounting was 4000 B.C. old in Egypt as treasuries where gold and other valuables were kept. The incharge of treasuries had reported their superiors known as wazirs or Minister. Accounting practices in India could be traced back to a period when twenty three centuries ago, Kautilya. a minister in Chandergupt’s Kingdom wrote a book named Arthashashtra.
Lucas Pacioli, an Italian writer first wrote a book on Double entry in 1494.

This book contains knowledge of business and book-keeping. Contents of the book even relied in current accounting world as the popular terms Debit (Dr.) and Credit (Cr.), while preparing accounts of a business enterprise. These concepts were used in Italian terminology. Debit comes from the Italian word Debito or debeo which means owed to the proprietor, credit comes from the Italian word Credito or credo which means trust or belief in the proprietor.

In explaining double entry system Pacioli wrote that “All entries have to be double entries that is if you make one creditor, you must make some debtor.” He also stated that a merchant’s responsibility include to give glory to God in their enterprise, to be ethical in all business activities and to earn a profit. He discussed the details of memorandum, Journal, ledger and specialised accounting practice. Today the accounting information’s plays a vital role in a business enterprise.

Question 3.
Explain the development and role of accounting.
Answer:
A sound theory is the base for development of any discipline. Accounting assumes importance because the financial statements are useful to a number of users such as owners, investors, creditors, lenders, Government etc. Accounting is the language of business, it means that an enterprise communicates with the outside world, including the proprietors through accounting statements. One cannot understand the affairs of an enterprise unless the enterprise prepares financial statements intelligently.

Following are the reasons assisted in the development of accounting as a separate discipline :
1. Assistance to Management : Accounting, in addition to ascertaining the financial results of operations, also performs the significant function of providing information. The information provided enables the management to arrive at a decision and to do it’s work properly. Such information helps in the following:
(a) Planning : Management would like to estimate the sales, output, expenses, etc. For the following year and also the flow of cash. For this purpose, accounting would enable them to collect the necessary information and make the realistic estimates.

(b) Decision-Making : Management is faced at a times, with a number of problems requiring an appropriate decision. For example: What should be the selling price of goods produced? Should a concession be offered to a special customer and, if so, how much? Should a part be made in the factory or purchase from outside? For making such decisions only accounting can provide the relevant information.

(c) Controlling : Management would like to see that –

• the work is performed according to the plan, and
• the cost incurred is reasonable.

Accounting collects information to help management in this regard. For instance, management would be able to know which department is overspending.

2. Replacement of Memory : No businessman can remember everything about his business since memory has limitations. It is necessary to record transactions in the books of account promptly. This will obviate the necessity of remembering the various transactions since on need, the record will furnish the necessary information.

3. Comparative Study : A systematic record will enable a businessman to compare one year’s results with those of other . years and locate significant factors leading to the change, if any.

4. Settlement of Taxation Liability : If accounts are maintained properly, they will be of great assistance when the firm is assessed to income tax or sales tax.

5. Evidence in Court: Systematic record of transactions is often treated by the Courts as good evidence.

6. Sale of Business : If someone desires to sell his business, the accounts maintained by him will enable the ascertainment of the proper purchase price.

7. Assistance to an Insolvent Person : In case one becomes insolvent, one has to explain many things about the past. Proper accounting helps him to do that.

Question 4.
Define Accounting and state its objectives.
Answer:
Accounting : Accounting refers to the actual process of preparing and presenting the accounts, in other words, it is the art of putting the academic knowledge of accountancy into practice. It covers the following activities :
1. Identifying the transactions and events.
2. Measuring the identified transaction and events in a common measuring unit.
3. Recording the identified and measured transactions and events 1 in Journal.
4. Classifying the recorded transactions and events in ledger.
5. Summarising the classified transactions and events in the form
of Income Statement and Position Statement.
6. Analysing the summarised results,
7. Interpreting the analysed results.
8. Communicating the interpreted information of the interested ‘ parties.

Objectives or Functions of Accounting :
The following are the main objectives, functions or utility of accounting:
(1) To keep systematic record of business transaction : The main objective of accounting is to keep complete record of business transactions according to specified rules. Complete record of business transaction helps to avoid the possibility of omission and fraud. For this purpose, all the business transactions are first of all recorded in Journal or Subsidiary Books and then posted into Ledger.

(2) To calculate profit or loss : The second main objective of accounting is to ascertain the net profit earned or loss suffered on account of business transactions during a particular period for this purpose trading and profit and loss account of the business is prepared at the end of each accounting period. All the items relating to purchases, sales, expenses and revenues (incomes) of the business are recorded in trading and profit & loss account. If the amount of revenue exceeds the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. In addition, a businessman is able to get the following informations by preparing a trading and profit & loss account:

• How much goods have been purchased during a particular period.
• How much goods have been sold during a particular period.
• How much goods have remained unsold and what is its value.
• How much amount has been spent on various heads of expenditure and how much amount has been earned by various heads of revenues.By attaining these informations a businessman can keep effective control on expenditure.

(3) To know the exact reasons leading to net profit or net loss.
(4) To ascertain the financial position of the business : For a businessman, merely ascertaining profit or loss of the business is not sufficient. The businessman must also know the financial health of the business. For this purpose, after preparingthe Profit & Loss Account a statement called ‘Balance Sheet’ is prepared which shows the assets and their values on the one hand and the liabilities and capital on the other hand. A Balance Sheet is actually a screen picture of the financial position of the business. At one glance, one would know the following by looking at the Balance Sheet:

• How much the business has to recover from Debtors.
• How much the business has to pay to Creditors.
• How much the business has in the form of –

(a) Cash in hand
(b) Cash at Bank
(c) Closing Stock, and
(d) Fixed Assets.
(5) To ascertain the progress of the business form year to year.
(6) To prevent and detect errors and frauds.
(7) To provide informations to various parties : Another main objective of accounting is to communicate accounting information to various interested parties like owners, investors, creditors, banks, employees and government authorities etc. The information helps them in taking sound and judicious decisions about the business entity.

Question 5.
Describe the informational needs of external and internal users. .
Answer:
Accounting as an Information System : Accounting is often regarded as the language of business. Since the main aim of a language is to serve as a means of communication, accounting communicates the result of business activities to management, owners, investors, creditors, lenders, Government etc.

Accounting as an information system is a process of identifying, measuring, recording, summarising and communicating the information about business to interested users of such information. Different groups of persons have vested interests in a business organisation. Accounting provides useful information to all these interested parties. Following Parties are interested in Accounting Information :

(1) Management : In addition to the information about the profitability and financial soundness of the business, management needs a lot of other informations for the efficient running of the business such as increase or decrease in sales, speed of increase in the cost of production etc. All such informations are provided by the accounting which helps the management in planning, decision making and controlling the business.

(2) Owners : Owners want to know about the profitability and financial soundness of the business. They also want to know whether the profits are increasing or decreasing. What are the reasons for the increase or decrease in profits? What is the value of fixed assets and floating assets of the business? All such information is provided by accounting.

(3) Investors : Investment of money in a business enterprise involves risk. Hence, those who want to invest money in a business enterprise need, information to judge how safe and rewarding the proposed investment will be. The financial statements, i.e., accounting provides them such information. On the basis of such information they decide whether to become a partner in a firm or whether they should buy, hold or sell the shares of a company..

(4) Creditors: Creditors are the persons who supply goods or services on credit. Before granting credit, creditors want to be satisfied about the creditworthiness of the business enterprise. Financial statements help them in assessing the financial capability of the business enterprise and also the extent upto which the granting of credit will be safe.

(5) Lenders : In modern times, banks and financial institutions lend money to the business. Before providing a loan to a business, they want to judge the repaying capacity of the business. Such information is provided by the accounting alone.

(6) Employees : Employees need information about the profits of a business to assess the ability of the business to pay higher wages and bonuses. They may also use the financial statements to ascertain whether various amounts due to them such as provident fund is being deposited regularly.

(7) Government : The Government is interested in the financial statements of a business on account of assessment of income tax, sales tax, excise duty etc. As such, the Government wants that the accounts are maintained in a true and fair manner.

Question 6.
What do you understand by an Assets and what are different types of assets?
Answer:
Assets: Anything which is in the possession or is the property of a business enterprise including the amounts due to it from others, is called an asset. In other words; anything which will enable a business enterprise to get cash or a benefit in future is an asset. Thus, Cash and Bank balances, Stock, Furniture, Machinery, Land and Building, Bills Receivable, Money owing by Debtors etc., are all assets.
Assets arefuture economic benefits, the rights of which are owned or controlled by an organisation or individual. – Finney & Miller
“Assets are valuable resources owned by a business which are acquired at a measurable money cost. ” – Prof. R.N. Anthony

According to the above definitions there are three main characteristics to an asset:

• The resources must be valuable.
• The resources must be owned by the business.
• The resources must be acquired at a measurable money cost. Assets may be classified into the following categories :

(i) Fixed Assets : Fixed assets refer to those assets which are held for continued use in the business for the purpose of producing goods or services and are not meant for resale. Examples of fixed assets are:
Land and Building, Plant and Machinery, Motor Vehicles, Furniture etc.

(ii) Current Assets : Current assets are those assets which are meant for sale or which the management would want to convert into cash within one year. As such, these assets are also named as ‘short-lived or active assets’. For example, ‘Debtors’ are expected to be converted into cash within a reasonable short period, Stock is continuously sold and Bills receivables are also converted into cash.

According to the Institute of Certified Public Accountants, U.S.A “Current assets include cash and other assets or resources commonly identified as those which are reasonable expected to be realised in cash or sold or consumed during the normal operating cycle of the business.” Although ‘Prepaid Expenses’ will never be realised in Cash, these are also included in Current Assets, since service or benefit will be available against these without further payment.

Current assets are also known as floating assets or circulating assets as the amount and nature of such assets keeps changing continuously. For example, a businessman purchases goods for cash and these goods are sold to X. X becomes our debtors and it means that the stock has been converted into Debtors. Again, if a bill receivable from X, it means that the bills are converted into ‘Bills Receivable’ and after some time Bills Receivable will be converted into cash. It shows that all Current assets are finally converted into Cash.

Current assets are usually shown in the balance sheet in the ‘Liquidity Order’. Liquidity is the facility with which the asset may be converted into cash. Those assets which are most difficult to be converted into cash are written lost. Following are the current assets in order of liquidity : Cash in Hand, Cash at Bank, Bills Receivable, Short-term Investments, Debtors, Stock and Prepaid Expenses.

Out of the above assets, Stock and Investments are shown in the balance sheet at Cost or Market price whichever is less. Bills Receivable and Debtors are shown at the estimated realisable . values and the Cash in Hand and Cash at Bank are shown at the actual figure.

(iii) Tangible and Intangible Assets : Tangible assets are those assets which can be seen and touched. In other words, which have a physical existence such as Land, Building, Plant, Furniture, Stock, Cash etc. Intangible assets are those assets which do not have a physical existence and which cannot be seen or felt.

Examples of such assets are Goodwill, Patents, Trade Marks and Prepaid expenses. Intangible assets are also valuable assets. For example, with the help of patent rights businessman is able to produce goods and his goodwill helps in attracting customers easily. Therefore, the intangible assets help the firm in earning profits as much as the tangible assets.

Question 7.
Explain the meaning of gain and profit. Distinguish between these two terms.
Answer:
Profit : The excess of revenue of a period over its related expenses during an accounting year is called profit. Profit increases the investment of the owners. Surplus of revenue over expenses is also known as Profit. For example, the goods costing Rs. 5,00,000 are sold for Rs. 6,50,000. The sale amount of Rs. 6,50,000 is the revenue and Rs. 5,00,000-cost of goods purchased is the expense and the surplus amount of Rs. 1,50,000 is the accounting profit.

Gain : A profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a Court case, appreciation in the value of assets is known as Gain. For example if a building costing Rs. 5,00,000 is sold for Rs. 6,00,000, Rs. 1,00,000 will be gain on sale of building.

The only difference between Profit and Gain is the source of revenue earned. The profit is the amount of excess of income over expenditure, w’here as the amount of gain is the result of transactions incidental to business other than operating transactions.

Question 8
Explain the qualitative characteristics of accounting information.
Answer:
Qualitative characteristics of financial statements :
Qualitative characteristics are the attributes that make the information provided in financial statements useful to users.

The four principal qualitative characteristics are:

Let us discuss these qualitative characteristics one by one :
1. Understandability : An essential .quality of the information provided in financial statements is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable ‘ diligence.

However, information about complex matters that should be include in the financial statements because of its relevance to the decision-making needs of user should not be excluded merely on the grounds that it may be too difficult for certain users to understand.

2. Relevance : To be useful, information must be relevant to the decision-making need of users. Information has the quality of relevance when it influences the economic decisions of the users by helping them to evaluate past, present or future events or confirming or correcting their past evaluation.

The productive and confirmatory roles of information are interrelated. For example, information about the current level and structure of asset-holding has value to users when they endeavour to predict the ability of the enterprise to take advantage of opportunities and its ability to react to adverse situations.

The same information plays a confirmatoty role in respect of past prediction about, for example, the way in which the enterprise would be structured or the outcome of planned operations.

Materiality: The relevance of information is affected by its nature and materiality. Information is material if its omission or mis-statement could influence the economic decisions of users made on the basis of financial statements. Materiality depends on the size of the item or error judged in the particular circumstance of its omission or mis-statement. Thus, materiality provides a threshold or a cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.

3. Reliability : To be useful, information must also be reliable. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent.

Faithfully that which it either purpose to represent or could reasonable be expected to represent. Information may be relevant but so unreliable in nature or representation that its recognition may be potentially misleading and so it becomes useless.

Reliability of the financial statements is dependent on the following:

(i) Faithful representation : To be reliable, information must represent faithfully the transactions and other events which either purports to represent or could reasonably be expected to repeat. Most financial information is subject to some risk of being less than a faithful representation of that which it purports to portray. This is not due to bias but rather to enhance difficulties either in identifying the transactions or other events to be measured in devising or applying measurements and presentation techniques that can convey messages that correspond with those transaction and events.

(ii) Substance over form : If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely by their legal forms. The substance of transactions or other events is not always consistent with that which is apart from their legal or contrived form.

(iii) Neutrality : To be reliable the information contained in financial statements must be neutral. Financial statements are not neutral if by selective presentation of information, they influence the making of a decision or judgement in order to achieve a predetermined result or outcome.

(iv) Prudence : The preparers of financial statements have to contend with uncertainties that inevitably surround many events and circumstances. Such uncertainties are recognised by the disclosure of their nature and extent and by exercise of prudence in the financial statements. Prudence is the inclusion of a degree of caution.

In the exercise of judgement needed in making the estimate required under conditions of uncertainties so that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or income or deliberate over statement of liabilities or expenses.

(v) Completeness : To be reliable the information in the financial • statements must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus, unreliable and deficient in terms of its relevance.

4. Comparability : Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other’periods, known as intra-firm comparison or with the accounting information that of other enterprises, known as interfirm comparison. It is, therefore, necessary to follow standardised accounting policies consistently to the extent possible.

Accounting measurement and treatment of any transaction depends, to a large extent, on the nature of the enterprise, conditions of the occurrence of transactions and the legal frame work. It is, therefore, difficult to follow one single accounting policy for recording a transaction or an event. To uphold the quality of comparability, it is necessary to disclose the accounting policies followed in relation to all important elements of financial statements. In case the enterprise switch over from one policy to another, the effect of such change should be quantified and disclosed.

In practice, it has also become necessary to achieve an appropriate balance among the qualitative characteristics in order to meet the objective of financial statements. Assessment of the relative importance of the characteristics is a matter of professional judgment.

Question 9.
Describe the role of accountant in the modern world.
Answer:
Role of an accountant in the society: An accountant with his education, training, analytical mind and experience is best qualified . to provide multiple need-based service to the end growing society The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial layout, company legislation and procedures but they can act in the fields relating to financial policies, budgetary policies and even economic principles, the services rendered by accountants to the society include the following:
(a) To maintain the Books of Accounts in a systematic manner
(b) To act as a Statutory Auditor (for example under the Companies Act, Income Tax Act, Co-operative Societies Act)
(c) To act as an Internal Auditor
(d) To act as Social Auditor
(e) To act as Taxation Adviser
(f) To act as Management Accountant
(g) To act as Financial Advisor
(h) To provide Management Consultancy Services
(i) To act as Company Law Advisor
(j) To act as Liquidator
(k) To act as Arbitrator
(l) To act as Receiver
(m) To act as Management Information System Consultant.