2014.

Q.8. Define Double entry book keeping system, Discuss its advantages and disadvantages.

Every business transaction causes at least two changes in the financial position of a business concern
at the same time - hence, both the changes must be recorded in the
books of accounts. This concept is explained on Analysis of Business Transaction
page. Otherwise, the books of accounts will remain incomplete and the result
ascertained therefore will be inaccurate.
For example, we buy machinery for $100,000. Obviously, it is a business transaction.
It has brought two changes - machinery increases by $100,000 and cash decreases by
an equal amount. While recording this transaction in the books of accounts, both the
changes must be recorded. In accounting language these two changes are termed as "a
debit change" and "a credit change" The detail about these terms is given under the
topic account. Thus we see that for every transaction there will be two entries - one
debit entry and another credit entry.
For each debit there will be a corresponding credit entry of an equal amount.
Conversely, for every credit entry there will be a corresponding debit entry of an equal
amount. So, the system under which both the changes in a transaction are recorded
together - one change is debited, while the other change is credited with an equal
amount - is known as double entry system.
Locus Pacioli, an Italian wrote a first book on double entry system in 1494. It is
regarded as the best and the only scientific method of accounting system universally
accepted throughout the world. It has been built on well defined rules and principles
which is the foundation of modern accountancy.
The fundamental principle of double entry system lies in analyzing the two changes
(parties) involved in business transactions and properly recording of both the changes
in the books of accounts. There is no exception to this principle. If a complete picture
of the transactions is to be reflected through books of accounts, the double entry
system must be duly observed. Otherwise the books of accounts will fail to provided
complete information and the very objective of accounting will be defeated.
Successive Processes of the Double Entry System:
Following are the successive processes of the double entry system:
Journal:
First of all, transactions are recorded in a book known as journal. Read more about
journal.
Ledger:
In the second process, the transactions are classified in a suitable manner and recorded
in another book known as ledger. Read more about ledger.

In the third process, the arithmetical accuracy of the books of account is tested by
means of trial balance. Read more about trial balance.
Final Accounts:
In the fourth and final process the result of the full year's working is determined
through final accounts.
Advantages:
Double entry system is acknowledged as the best method of accounting in the modern
world. Following are the main advantages of double entry system:
Under this method both the aspects of each and every transaction are recorded. So it is
possible to keep complete account.
Since both the aspects of a transaction are recorded, for each debit there must be a
corresponding credit of an equal amount. Therefore, total debits must be equal to total
credits. In fact, it is possible to verify the arithmetical accuracy of the books of
accounts by ascertaining whether the two sides become equal or not through a process
known as trial balance.
Under this system profit and loss account can be prepared easily by taking together all
the accounts relating to income or revenue and expenses or losses and thereby the
result of the business can be ascertained.
A balance sheet can be prepared by taking together all the accounts relating to assets
and liabilities and thereby the financial position of the business can be assessed.
Under this system mistakes and deflections can be detected - this exerts a moral
pressure on the accountant and his staff.
Under this system necessary statistics are easily available so that the management can
take appropriate decision and run the business efficiently.
All the necessary details about a transaction can be obtained quickly and easily.
The total amount owed by debtors and the total amount owed to creditors can be
ascertained easily.
Sale, purchase of goods, stock, revenue, expenses and profit or loss of different years
can be compared and the success or failure of the business measured. Thereafter the
causes of failure can be found out and necessary remedial measures taken to ensure
success of the business.

Disadvantages:
Despite so may advantages of the system, double entry system has some disadvantages
which are as follows:
Under this method each transaction is recorded in books in two stages (journal and
ledger) and two sides (debit and credit). This results in increase of number and size of
books of account and creation of complications.
It involves time, labor and money. So it is not possible for small concerns to keep
accounts under this system.
It requires expert knowledge to keep accounts under this system.
As the system is complex, there is greater possibility of committing errors and
mistakes.
It is clear from the above discussion that the advantages of double entry system far
outweigh its disadvantages. So, it is regarded as the best system in the modern world

QUESTION NO. 2 Enumerate the methods of calculating depreciation. Discuss

briefly the merits and demerits of each method.
When a company purchases a fixed asset, it must capitalize this asset in its financial records. A fixed
asset refers to a large, physical asset that the company plans to use for many years in the business
operation. The company determines the total cost of this asset by adding all the costs required to
purchase the asset, including purchase price, legal fees and freight costs. The company expenses a
portion of the total cost each year through depreciation. Several depreciation methods exist, with
various advantages and disadvantages associated with each.
Straight Line
The straight line method involves determining the cost to depreciate and dividing that amount by
the number of years the company expects to use the asset. The advantage of using the straight line
method involves the ease of calculating the annual depreciation amount. The disadvantage of using
the straight line method is that this method does not consider the rate the asset will actually
depreciate in value.
Units of Production
The units of production method involves determining the cost to depreciate and dividing that
amount by the estimated production units the company expects to manufacture over the life of the
asset. The advantages of using the units of production method include the ease of calculating the
annual depreciation amount and that the depreciation is matched to the production quantity. The
disadvantage of using the units of production method is that this method assumes the asset will
depreciate evenly over its productive life.
Declining Balance
The declining balance calculates annual depreciation by calculating a depreciation rate and
multiplying it by the remaining asset value. The advantage of using this method is that it
accelerates the depreciation recorded early in the asset’s life. Another advantage is that the
accelerated depreciation reduces the taxable income and the taxes owed during the early years. A
disadvantage of this method is that the calculation is more complex.
Sum-Of-Years Digits
The sum-of-years digits calculates annual depreciation by calculating a depreciation rate by adding
up the digits for each year in the life of the asset. Each year the company takes the number of years
remaining, divides it by the total digits calculated and multiples this by the asset value. The
advantage of using this method is that it accelerates the depreciation recorded early in the asset’s life.
Another advantage is that the accelerated depreciation reduces the taxable income and the taxes owed
during the early years. A disadvantage of this method is that the calculation is more complex.

Write short notes on: (i) Cash discount and trade

Question 3, 2012.
discount. (ii) Fixed installment method and Diminishing balance
method of depreciation. (iii) Work sheet and income statement. (iv)
Capital expenditures and revenue expenditures
(I)
A trade discount is one that is allowed by the wholesaler to the retailer, calculated on the
list price of the product, whereas cash discount is allowed to stimulate instant payment
of the goods purchased. The main difference between trade discount and cash discount is
that ledger account is opened for a cash discount, but not for a trade discount.
(II)
Fixed installment method
The Straight Line Method of depreciation is also called as Fixed Instalment
Method or Fixed Percentage on Original Cost Method. In this Straight Line method, each
year on every asset an equal amount of money is provided for depreciation until the asset is
reduced to nil or its scrap value at the end of the estimated life of the asset.
This method provides a uniform amount of depreciation on every asset for each year.
Diminishing Balance Method
The Diminishing Balance Method is also known as Reducing Instalment
Method or Written Down Value Method or Declining Balance Method. In this method,
The depreciation is calculated at a certain percentage each year on the value of the asset
which is brought forward from the previous year.
In this method, The depreciation charges in the initial periods or at the beginning period is
higher than those in the later period. i.e the depreciation in the initial periods is higher
when compared to that of the later periods like after 5 years or 10 years although the
depreciation rate is fixed over the years and don’t change. This method is usually adopted
for the assets of plant and machinery.
(III)
Worksheet
An accounting worksheet is a spreadsheet used to prepare accounting information and
reports. Accounting worksheets are most often used in the accounting cycle process to draft
an unadjusted trial balance, adjusting journal entries, adjusted trial balance, and financial
statements.
Income statement
An income statement is one of the three important financial statements used for reporting a
company's financial performance over a specific accounting period, with the other two key
statements being the balance sheet and the statement of cash flows. Also known as the
profit and loss statement or the statement of revenue and expense, the income statement
primarily focuses on company’s revenues and expenses during a particular period.
(IV)
Definition of Capital Expenditure
A capital expenditure is an amount spent to acquire or significantly improve the capacity
or capabilities of a long-term asset such as equipment or buildings. Usually the cost is
recorded in a balance sheet account that is reported under the heading of Property, Plant
and Equipment. The asset's cost (except for the cost of land) will then be allocated
to depreciation expense over the useful life of the asset. The amount of each period's
depreciation expense is also credited to the contra-asset account Accumulated
Depreciation.
Examples of Capital Expenditures
Examples of capital expenditures include the amounts spent to acquire or significantly
improve assets such as land, buildings, equipment, furnishings, fixtures, vehicles. The total
amount spent on capital expenditures during an accounting year is reported under
investment activities on the statement of cash flows.
Definition of Revenue Expenditure
revenue expenditure is an amount that is spent for an expense that will be matched
immediately with the revenues reported on the current period's income statement.
Examples of Revenue Expenditures
Examples of revenue expenditures include the amounts spent on repairs and maintenance,
selling, general and administrative expenses.
Q4. Define accounting. What is the need and importance of accounting?
The system of recording and summarizing business and financial transactions and
analyzing, verifying, and interpreting financial information to interested parties
Need and Importance of Accounting
Accounting can be referred to as the systematic and comprehensive recording of a financial
transaction relating to any business. Also refers to as a process of analyzing, summarizing and
reporting these transactions to the tax collection agencies and oversight agencies.
Accounting helps the management to be able to ascertain the financial position of the business.
With all accounting activities, the final report provided helps management to know the business
position so they can be able to know which direction they are ending.
Accounting is very important and needed for any business transactions. It helps in recording,
classifying and finally summarizing the transactions in a business. This enables coming up with a
well analyzed financial document like balance sheet, trial balance among others when accounting is
done properly within the business transactions.
The Importance Of Accounting
Accounting helps in decision making, planning, and controlling processes. It's with the help of
accounting there will be documents which will be factored in carrying out these processes. Again
with these methodical documents, they help in reduction of theft and frauds.
Availability of accounting in any business transactions ignites the business to run with efficiency,
effectiveness and accuracy manner on all the activities undertaken. This leads to more productions
since the management will make the right decision and proper planning due to the good flow of
transactions in a business.
Importance of Accounting in Business Organization
A business organization involves an individual or a group of people who collaborate so as to
achieve certain commercial goals.
Planning Budget
Budgeting is a core factor in every business. Planning budgets help business to make strategies,
save money and noticing any expenditure exceeding the budgeted amount. To make a budget you
need various previous records. In order for these documents to be available, they must be very well
maintained through accounting since they are the basis of planning and making budgets.
Banks and lenders
In order to get any loan from the financial institution, you must be able to present your financial
status in acceptable order. So in order to make it, you need to have proper accounting system so as
to present various books of records such as profits recorded, assets and liabilities, taxes paid among
others. Financial institutions will scrutinize them carefully before landing to a decision of awarding
loan.
Keeping Records
Every business needs to keep records and act upon them in order to run smoothly. In this case,
accounting plays a big role in keeping records. All records are collected, organized, and interpreted
in order to be communicated to the end users, therefore helping in making an economically viable
decision which will lead to the positive productivity of the business organization.
Decision Making
Any economic or any decision regarding the business organization is made depending on the
financial statement of the organization. A financial statement is as a result of accounting. Without
proper accounting in a business organization, the executives can't make a sounding decision since
they will be operating in blindness hence making it impossible to achieve organization objectives.
Information to Investors
Financial statements and accounts are used to represent the organization to the stakeholders such as
debtors, creditors, government, and investors, customers and employees. Many investors will run
away from your organization if you lack financial records and accounts to presents so as they can
know the business progress.
Reporting Profits
The key objective of any business is to make profits. Every business, being a small or large
organization, must maintain accounting system so as they can ascertain what they are making on
their business transactions. This also enables interested parties to make the decision on the progress
of the business productivity.
Managing and Monitoring Cash Flow
Proper accounting systems will take care of working capital and any other cash requirements
Within the business organization.
Question. # Discuss in details the following accounting concepts: Separate
entity concept Dual aspect’ concept Matching concept Going concern
concept Cost concept Question No.
Separate entity concept
The separate entity concept is the concept that we should always separate the entity from its
owner. The basic assumption is that transactions conducted by businesses are considered
separated from those conducted by its owner. Therefore, it shall be recorded separately from the
book of the business.
Dual aspect’ concept
Dual Aspect Concept, also known as Duality Principle, is a fundamental convention of accounting
that necessitates the recognition of all aspects of an accounting transaction. Dual aspect
concept is the underlying basis for double entry accounting system.
Matching concept
The matching concept is an accounting practice whereby firms recognize revenues and their
related expenses in the same accounting period. Firms report "revenues," that is, along with the
"expenses" that brought them. The purpose of the matching concept is to avoid misstating
earnings for a period.
Going concern concept
The going concern concept is a fundamental principle of accounting. It assumes that during and
beyond the next fiscal period a company will complete its current plans, use its existing assets and
continue to meet its financial obligations. ... This underlying principle is also known as the
continuing concern concept.
Cost Concept
The cost concept is one of the basic underlying guidelines in accounting. It is also known as the
Historical cost principle. The cost principle requires that assets be recorded at the cash amount (or the
equivalent) at the time that an asset is acquired.

Define worksheet. Explain its various columns. Elaborate its importance in the
modern accounting?
An accounting worksheet is a spreadsheet used to prepare accounting information and
reports. Accounting worksheets are most often used in the accounting cycle process to draft an
unadjusted trial balance, adjusting journal entries, adjusted trial balance, and financial statements.
The 10-column worksheet that I am familiar with will have the general ledger account titles in the
first column followed by ten columns of amounts. There will be one debit and one credit column
for each of the following five headings:
1. Trial Balance containing each account's unadjusted balance,
2. Adjustments containing any adjusting entries,
3. Adjusted Trial Balance containing the combination of the unadjusted balance and any
adjustments,
4. Income Statement containing the adjusted balances for the revenue, expense, gain and loss
accounts, and
5. Balance Sheet containing the adjusted balances for the asset, liability and owner's equity
accounts.
Under the Income Statement columns, the difference between the total of the debit column and the
credit column is the amount of net income or net loss. If the total of the credit column is larger than
the total of the debit column, it indicates a positive net income (revenues are greater than
expenses). If the total of the debit column is larger than the total of the credit column it indicates a
net loss (expenses are greater than revenues).
A worksheet is useful for ensuring that accounting entries are derived correctly. ... The unadjusted
trial balance for a reporting period is exported from the accounting software into a spreadsheet, and
then adjusted in the spreadsheet to determine the effects of possible adjusting entries.