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Financial Accounting

BBA (203)


WINTER 2014-2015


ROLL NO. : - 1405010610

Q1. Accounting refers to a systematic knowledge of accounting. It

explains the objectives of accounting and explain the categories of

Ans: Objectives of Accounting:

1 Systematic recording of all business events or transactions and

subsequent position to ledger, to finally prepare financial
statements profits and loss account and balance sheet.

2 Recording the results to management, shareholders, creditors,

bankers, investors etc.

3 Satisfying the statutory requirements, especially Registrar of

Companies (ROC), Security Exchange Board of India (SEBI)
and government in order to protect the interest public.

4 Protecting the properties of business by recording them on the

date of acquisition and showing their accounts in the balance

5 Planning, controlling and decision making functions become

easy where books of accounts are maintained properly. This
helps in internal control y holding concerned persons
responsible for any errors, lapses or under performance.
Categories of Users:

Internal Users:

These are the persons who manage the business, i.e. management
at the top, middle and lower levels. Their requirements of Information
are different because they make different types of decisions. The top
level is more concerned with planning, the middle level is concerned
equally with planning and control and the lower level is concerned
more with controlling operations. Information is supplied on different

Example: cash resources, sales estimates, results of operations, financial

position, etc.

External Users:

The main sources of information for external users are annual reports
of business organizations. They not only state the financial position
and performance but also give the auditor’s report, director’s report
and other information. Investors and creditors are the external users
having direct interest. Planning and controlling operations, employees
and Trade Unions would like to know general operations, stability and
profitability of the firm, customers are interested to know the source of
future purchase, after sale services and finally Government and
regulatory authorities are responsible to regulate business activities
and to collect tax.

Examples: Tax authorities, regulatory agencies, customers, labour unions,

trade associations.

Q2. Mayur, Veer and Prakash are partners sharing profits and losses
in ratio of 2:1. Their Balance sheet was as follows:

Balance sheet of Mayur, Veer and Prakash as on December 31st,


Liabilities Amount Assets Amount

Creditors 10,000 Cash in Hand 7,000
Bills payable 7,000 Machinery 13,000
Stock 26,000
Capitals: Debtors 26,000
Mayur 40,000 Investment 15,000

Veer 30,000 Building 20,000

Prakash 20,000 90,000

Total 1,07,000 Total 1,07,000

Prakash has expired on 01.01.2009 and as a result the assets are

revalued and liabilities reassessed as follows:

i) Create a Provision for doubtful debt on debtors at Rs. 800.

ii) Building and investment are appreciated by 10%.
iii) Machinery is depreciated by 5%.
iv) Creditors were overestimated by Rs. 500.
v) Goodwill of the firm valued at Rs. 27,000.

The balance due to Prakash will be transferred to his executor’s loan

accounts which carry an interest of 10% p.a. Prepare necessary
ledger accounts and show the balance sheet of new firm after

Ans: Revaluation Accounts

Particular Amount Particular Amount

To provision for bad debts 800 By building 2000
To machinery 650 By investment 1500
To capital a/c By creditors 500
Mayur’s capital a/c 1275
Veer’s capital a/c 638
Prakash’s capital a/c 637 2550
4000 4000

Capital Accounts

Particular Mayur Veer Prakash Particular Mayur Veer Prakash

To Prakash’s a/c 6,000 3,000 By Balance b/d 40,000 30,000 20,000
By Mayur’s a/c 6,000
To balance c/d 35,275 27,638 By Veer’s a/c 3,000
To Prakash 29,637 By P&L a/c 1,275 638 637
Executor’s Loan
41,275 30,638 29,637 41,275 30,638 29,637

Balance Sheet of New Firm as on 31st December, 2008

Liabilities Amount Assets Amount

Creditors Cash in Hand
Bills payable Debtors 26,000
Less: Provision 800 25,200
Mayur’s a/c 35,275 Building 22,000
Veer’s a/c 27,638
Prakash’s 29,637 Investment 16,500
executor’s loan
Machinery 13,000
Less: Depreciation 650 12,350
Stock 26,000
1,09,050 1,09,050

Q3. Final Accounts are prepared at the end of the accounting year
with various adjustments. Explain the feature and objectives of final

Ans: Objectives of Final Accounts.

1. A Final account should reflect true and fair view of the business
affairs of the organization. As these accounts are used by various
constituents of the society/ regulators, they need to reflect true
view of the financial position of the organization.
2. Final accounts are required for measuring the performance of the
business which is indicated by gross profit or gross loss. Final
accounts facilitate the comparison of trading results of the current
year with those of the previous year.
3. Final accounts act as a summary of all transactions, which have
been taking place in business. The final accounts comprise of the
income statement accounts, the balance sheet and the cash flow

Features of Final accounts:

1. Relevant information:
This simply means the information is able to directly influence the
decision making process of the user. Relevance is also measured
in relation to materiality. If an item or event is material, it is
probably relevant to the user of final accounts.

2. Understandability:
In addition to relevance, the users of final accounts will be to make
informed and better decision if they can be able to interpret the
contents of final accounts. Accountants should produce final
accounts information and present it in a form, which can be easily
understood and interpreted by their intended users.

3. Reliable information:
According to IASC’s Conceptual framework, to be reliable,
information must be mutual, that is free from basis. Final accounts
are not neutral, if by the selection or presentation of information,
They influence the making of a decision or judgment in order to
achieve a pre-determined results or income.

4. Comparability:
Final account of the organization must be capable of being linked
with other non-final account within the enterprise. User should also
be able to compare final account of an enterprise through time in
order to assess the trend in performance and financial position. If
possible the entity should apply accounting policies consistently to
ensure meaningful comparison of the results over time.
5. True and Fair view Presentation:
It must exhibit the true and fair view of the financial position of the

Q4. Prepare the Trading, Profit and Loss accounts and Balance sheet
from the following particular as at 31st March 2012.

Trial Balance

Particular Dr. (Rs) Cr. (Rs)

Capital/Drawing 1,400 10,000
Cash in hand 1,500 -
Bank overdraft @ 5% - 2,000
Purchase and Sales 12,000 15,000
Returns 1,000 2,000
Establishments charges 2,500 -
Taxes and Insurance 500 -
Provision for Doubtful - 1,000
Bad Debts 500 -
Sundry Debtors and 5,000 1,850
Commission - 500
Investments 4,000 -
Stock on 1 April 2010 3,000 -
Furniture 600 -
Bills Receivable & Bills 3,000 2,500
Collected Sales Tax - 150
Total 35,000 35,000

Further, you are required to take into consideration the following


a) Salary Rs.100 and taxes Rs.400 are outstanding but

insurance Rs.50 prepaid
b) Commission amounting to Rs.100 has been received in
advance for work to be done next year.
c) Interest accrued on Investments Rs.120.
d) Provision for doubtful Debts is to be maintained at Rs.20%
e) Depreciation on furniture is to be charged at 10% p.a.
f) Stock on 31st March 2012 was valued at Rs.4,500
g) A fire occurred on 25th March 2012 in the godown and stock of
the value of Rs.1, 000 was destroyed. It was fully insured and
the insurance company admitted the clam in full.


Trading and Profit and Loss Account for the period ended 31st March

Particular Amount Particular Amount

To Opening Stock 3,000 By Sales 15,000
Less: Sales Return 1,0000 14,000
To Purchases 12,000 By Closing Stock 4,500
Less: Purchase Return 2,000 10,000
To Gross Profit c/d 6,500
19,500 19,500
To Establishment 2,500 By Gross Profit b/d 6,500
charges paid
Add: Sales Outstanding 100 26,00
To Taxes and Insurance 500 By Commission 500
Add: Outstanding Taxes 400 Less: Unearned
Less: Prepaid 50 850 commission 100 400
To Interest on bank 100 By Interest accrued 210
overdraft on investment
Bad Debts 500 By Claims form 1,000
Add: Closing Provision insurance Company
for Doubtful Debts 1,000
Less: Opening Provision 1,000 500
To Depreciation for
furniture 60
To Abnormal Loss of
stock 1,000
To Net Profit transferred 3,000
to Capital a/c
8,110 8,110

Balance Sheet as on 31st March 2012

Liabilities Amount Assets Amount

Bills Payable 25,00 Cash in Hand 1,500
Sundry Creditors 1,850 Bills Receivable 3,000
Sales Tax 150 Insurance Co. 1,000
Outstanding expenses: Investment 4,000
Add: Accrued Interest
210 4,210
Salaries 100 Prepaid Insurance 50
Taxes 400 500
Unearned commission 100 Closing Stock 4500
Bank overdraft 2,000 Sundry Debtors 5,000
Add: Interest on Bank overdraft 100 2,100 Less: Provision 1,000 4,000
Capital: Furniture 600
Less: Depreciation 60 540
Opening Balance 10,000
Add: Net Profit 3,000
Less: Drawings 1,400 11,600
18,800 18,800

Q5. What is Petty Cash book? Solve the below given problem.

On 1st Jan 2009. Ramanathan opened a Bank Account by depositing

Rs. 6000/- in cash. All remittance are to be paid into bank on the
same day on which they are received and all payments are made by
cheques. Enter the following transactions in three column cash book.

Jan 2 Goods sold to Mohan for cash Rs. 250.

Jan 5 Settled Hari’s account for Rs. 200 at a discount of 5%

Jan 7 Received from Shyam a cheque for Rs.725. Discount allowed

Jan 10 Purchased a calculator for Rs. 200. Spent Rs.50 on the cover

Jan 12 Shyam’s cheque was returned dishonoured

Jan 15 Received a money order for Rs.25 from Hari

Jan 20 Shyam settled his account by means of cheque for Rs.755, Rs.5
being for interest charged

Jan 27 Purchased machinery from Rajiv for Rs.5000 and paid him by
means of a bank draft purchased from bank for Rs.5,005

Ans: Meaning of Petty Cash Book

The amount which the main cashier give to the petty cashier to
meet the petty or small cash expenses for a given period is known
as Imprest cash book. The petty cashier submits the petty cash
book along with the supporting vouchers/bills at the end of the

Three Column Cash book

Date Particular L.F Disc. Cash Bank Date Particular L.F Disc. Cash Bank
Jan1 To Capital 6000 Jan1 By bank a/c C 6000
Jan1 To cash C 6000 Jan2 By bank C 250
Jan2 To sales 250 Jan5 By Hari 10 190
Jan2 To Cash C 250 Jan10 By 200
Jan7 To Shyam 25 725 Jan10 By 50
Jan15 To Hari 25 Jan12 By Shyam 25 725
Jan15 To Cash C 25 Jan15 By bank C 25
Jan20 To Shyam 750 Jan27 By 5000
Jan20 To interest 5 By draft 5
Jan31 By balance 1585
25 6275 7755 35 6275 7755
Feb1 To - - 1585

Q6. What are the Errors in Accounting? Explain the classifications of

errors. Write any two examples of one sided errors.

Ans: Errors in Accounting:

1. Errors may arise either while recoding the transactions in the

books of original entry or while writing up the ledger accounts or
while preparing the trial balance.
2. Errors in the books of accounts arise either due to the
negligence or carelessness of the book-keepers in recoding the
transactions in the books of accounts.
3. Errors in accounting mean unintentional mistakes commited by
the book-keepers in the books of accounts.

Classification of Errors:

1. Errors of Omission:

The error of omission is one where a transaction has not been

recorded in the books of account either wholly partially. When
the transaction has been completely omitted in the books of
accounts, it is an error of complete omission.

Partial Omission:

If one of the items or aspects of a transaction recoded in a

subsidiary book is omitted to be posted from the subsidiary
book to a ledger account, the error is an error of partial
2. Errors of Commission:
Error of commission refers to errors resulting from something,
which ought not to be done. In other words, when a transaction
has been recorded but has been wrongly entered in the books
of original entry or posted in the ledger, error of commission is
said to have been made.
3. Errors of Principle:
If a transaction is recorded in the books of account against the
fundamental principle of double entry book keeping the error is
known as error of principle. Such errors arise when the entries
are not recorded according to the fundamental principles of
4. Compensating Errors of off-setting Errors:
A compensating errors or off-setting error is one which is
counter balance by any other error or errors.
5. Errors of Duplication:
Such errors arise when an entry in a book of original entry has
been made twice and has also been posted twice.