Name Roll Number Learning Centre Subject Assignment No Date of Submission

AAGJA KETANKUMAR DAHYABHAI 510821891 02798 Accounting Principles & Practice BT0048-01 23/10/2009

1. Briefly explain the functions of accounting.

schedules. analyze or estimate the cost. According to the Institute of Chartered Accountants of England and Wales “Any form of accounting which enables a business to be conducted more efficiently can be regarded as management accounting”. accounting data are communicated in a proper form and manner. The work of classification is done in ledger. Planning and controlling operations 2. etc. diagrams. recording and analysis of the transactions of a business in a subjective manner according to the nature of expenditure so as to enable the presentation at periodic intervals. Explain the three branches of accounting. There are three main branches of accounting. Analyzing and Interpreting – Analyzing and interpreting means re – arranging the summarized data in the financial statements and explaining the significance of those data in a manner that the end users can make decisions about the financial conditions and profitability of the business concern. In short cost accounting is that branch of accounting which is mainly concerned with costing information. It consists in recording the day-to-day transactions in journal and subsidiary books. 4. 5. Summarizing – The classified data is summarized in the form of trial balance. organizing. Dealing with Financial Transactions – It records only those transactions and events in terms of money. Decision making on special matters and 3.1. profitability and performance of individual products. directing and controlling more efficiently. graphs. profit and loss account and balance sheet. 3. It is the accounting. Other transactions are not recorded in the books of accounts. of statement of profit or loss of the business and on a specified date its financial state of affairs (AICPA). funds flow and cash flow statements. which are of financial character. but also additional information in the form of ratios. Management accounting is a system of accounting which is concerned with internal reporting of information to management for – 1. Shilling Law has broadly defined cost accounting as the body of concepts. such as planning. viz. Classifying – It is concerned with the systematic analysis of the recorded transactions with a view to group transactions of similar nature. 2. In short it is the preparation and presentation of financial statements like profit and loss account and the balance sheet. 6. Therefore accounting reports are prepared which include not only income statement and balance sheet. Formulating long range plans . In short it is that accounting which is concerned with the profit or loss of the business for a particular period and the financial position of the business as on a particular date.  Financial Accounting  Management Accounting and  Cost Accounting Financial Accounting consists of the classification. Communicating – After analysis and interpretation. methods and procedures used to measure. departments and other segments of the operations of a business concern. They help in ascertaining the operational efficiency and the financial strength of a business organization. which is useful to the management for purpose of cost ascertainment and cost control. which provides necessary information to the management for discharging its functions. Recording – It is the basic function and concerned with recording of all business transactions in a systematic manner. 2.

The single entry system is an "informal" record keeping system. payment of any expense. Single entry is not a complete accounting system. (b) Credit Transaction: A credit transaction is a business transaction where the payment or the receipt of money is postponed to a future date. with receipts listed as deposits and expenses listed as cheques or withdrawals. A cheque book. for example is a single entry bookkeeping system. because the two aspects of cash and every transaction are not recorded in the books of accounts. 2. accounts receivable and accounts payable. This system is an incomplete system of book-keeping. . It is a simple method of recording business transactions. which is not a complete double entry system. this system is called single entry system. receipt of any income. 3. Advantages: 1. It is less costly when compared with double entry system and suitable for small business concerns. Purchase of goods for cash. are examples of cash transactions. ready) payment or receipt of cash. but it shows income and expense in sufficient detail for tax purposes. Business transactions are classified into four types. Purchase of goods on credit. There is no direct linkage between income and the balance sheet. sale of goods on credit. a single-entry system is similar to a checkbook register and is characterized by the fact that there is only a single line entered in the journal for each transaction. As only one aspect is recorded for most of the transactions. For each transaction. To understand and appreciate the advantages of double entry. each transaction is recorded in one column of an account as either a positive or a negative amount in order to represent the receipt or disbursement of cash. Single Entry System: Most of financial accounting is based on double-entry bookkeeping. 4. This system focuses on the business' profit and loss statement and not on its balance sheet..e. and external suppliers of capital. you record a daily and a monthly summary of business incomes and a monthly summary of business expenses. sale of goods for cash. 2. With the single-entry system. etc. significant assets. only one entry is made. In its most basic form. Because of these drawbacks. Briefly explain the types of business transaction. purchase of an asset for cash.What is single entry system? What are the advantages and disadvantages of Single entry system? 3. It does not track asset and liability accounts such as inventory. sale of an asset for cash. It facilitates the calculation of income but not of financial position. 4. (a) Cash Transaction: A cash transaction refers to any business transaction which involves immediate (i. a single-entry system is not practical for many organizations such as those having many thousands of transactions in a reporting period. lending of money. In a simple checkbook. it is worthwhile to examine the simpler single-entry bookkeeping system. Disadvantages: 1.. Single-entry system of book-keeping refers to any system of book-keeping. borrowing of money. These must be tracked separately. Under this system errors may go undetected and often are identified only through bank reconciliation statement.

5. Such an error will not affect the trial balance and the omission will not even be apparent. giving of furniture to the manager in settlement of his salary. pay-in-slips are the documents supporting cheque deposits. it can be said that the account maintained by the bank for its customer is a ‘mirror-version’ of the bank column of the cash book maintained by the customer. When the transaction has been completely omitted in the books of accounts. are examples of credit transactions. receiving of something and giving of something take place simultaneously but there is no exchange of cash. What are the different classifications of error? 1. the balance in the bank column as on a particular date represents the amount of money lying with the bank as on that date. giving of goods for furniture purchased. any unpaid expense etc. if one of the items or aspects of a transaction recorded in a subsidiary book is omitted to be posted from the subsidiary book to a ledger account. So. they should tally.purchase of an asset on credit. A bank reconciliation statement is a statement prepared by a customer to explain the causes responsible for the disagreement between the bank balance as shown by the cash book and the bank balance as shown by the pass book as on a particular date. This type of error can be detected by careful observation On the other hand. there is sometimes a normal discrepancy between account balances. The receipt side of the bank column records cheques deposited in the bank by the business entity in its account as also cheques received by the bank directly on behalf of the business. (d) Non-cash Transaction or Paper Transaction: A non-cash transaction or paper transaction is a business transaction where there is no payment or receipt of cash either immediately or at a future date.. The second category of cheques is recorded in the bank column of the cash book only after getting intimation from the bank.. and. it is an error of complete omission.’ Thus. sale of an asset on credit. The issue side of the bank column records cash withdrawn by the business for its own use as cheques issued to suppliers or others to whom the business owes. are examples of barter transactions. and finds any discrepancies. giving of goods to an employee in settlement of his salaries. Since there are timing differences between when data is entered in the banks systems and when data is entered in the individual's system. What do you mean by Bank reconciliation statement? Banks send statements to their depositors each month. A bank reconciliation statement is a means of checking that your cashbook agrees with your bank statement. 6. if a credit purchase of goods is omitted to be entered in the purchase book. ‘pay-in-slip. etc. . Bank reconciliation compares the information in the bank statement with the company's cash account. Each such customer account records the transactions between the bank and the customer. (c) Barter Transaction: A barter transaction is a business transaction where. But sometimes it is apparent from the balance of an account that an entry has been omitted e. Sale of furniture in exchange of purchase of typewriter. and loss of goods by fire etc. bad debts written off. For example. But in reality these do not tally in most cases. the rent account may show that the rent for the 12 th month has not been paid. no doubt.. interest on loan due to the lender.g. In other wards a form that allows individuals to compare their personal bank account records to the bank's records of the individual's account balance in order to uncover any possible discrepancies. The goal of reconciliation is to determine if the discrepancy is due to error rather than timing. Therefore. the error of omission is one where a transaction has not been recorded in the books of account either wholly or partially. it is an error of complete omission. When a cheque is deposited into the bank for collection it must accompany a receipt known as. Errors of Omission: As the name indicates. Thus. the bank balance as per the cash book as on a particular date should tally with the balance shown by the bank as per the bank statement. The bank column of the cash book shows bank transactions: receipts and payments. Every bank maintains a ledger account for each of its customers. Examples of non-cash or paper transactions are depreciation charged on any fixed asset.

carries forward and balancing of subsidiary books. 10 to A is posted to the debit of B as Rs. as the case maybe. if A’s account was to be debited for Rs. and the purchases book is over-cast by Rs. The error is only in sales account. 7.the error is an error of partial omission. Again. 3. e.320 was entered in the purchase book as Rs. Compensating Errors or off-setting Errors: A compensating error or off-setting error is one which is counter balanced by any other error or errors. and (ii) After the preparation of final accounts. 500 in the month of January. 5. Errors of Commission: Error of commission refers to errors resulting from something. sales book for the month of January Rs. 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. ignoring the outstanding assets and liabilities.g. 5. e. 5. This error may or may not affect the profit and loss account. These errors are most dangerous and are difficult to guard against.230. Such an error may be intentional or unintentional. error of commission is said to have been made. postings. This type of error usually occurs in the process of totalling. 2. Such errors arise when the entries are not recorded according to the fundamental principles of accountancy. 1. 10 while B’s account which was to be debited for Rs. valuation of assets against the principles of book-keeping. 1. if salaries paid to clerks recorded in the cash book is omitted to be posted to salaries account in the ledger. 500". the procedure of rectification. the error is an error of partial omission. 100. Errors rectified within the accounting period The proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed. Normally.g. 10 was debited for Rs.. a purchase invoice for Rs. For example: (i) Sales book under cast by Rs. if being done. which ought not to be done. How do you rectify the error? Stages of correction of accounting errors All types of errors in accounts can be rectified at two stages: (i) Before the preparation of the final accounts.g. But while errors are being rectified before the preparation of final accounts. 4. before the preparation of final accounts is as follows: (a) Correction of errors affecting one side of one account Such errors do not let the trial balance agree as they effect only one side of one account so these can't be corrected with the help of journal entry. For e. we should record on the credit side of sales account 'By under casting of. 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. Such an error will not affect the trial balance and will not be detected easily.I'Explanation:As sales book was under cast . 110 which amount ought to have been debited or a sale of Rs. in certain cases the correction can't be done with the help of journal entry because the errors have been such. 100 but was debited for Rs. e. an over-casting of an account may be counter balanced by the under-casting of another account to the same extent. if correction is required before the preparation of final accounts. both the accounts have been debited for a total sum of Rs. Thus. So required amount is put on debit or credit side of the concerned account.. This type of error will not be detected by the trial balance. 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. wrong allocation of expenditure between capital and revenue.g. in order to correct the sales account.

the balance is calculated and is reversed in the suspense account. On the other hand. of the business for filing the return for sales tax or income tax purposes. Those errors which do not effect the trial balance can't be corrected with the help of suspense account. Errors effecting profit and loss account It is important to note the effect that an en-or shall have on net profit of the firm. 50. In the next accounting period. only credit balance of sales account is less by Rs. In the end. 50 in discount account now. Therefore. 500. 500 has been credited in sales account. he transfers the amount of difference of trial balance to a newly opened 'Suspense Account'. 500 for the reason that Wilson's account was not debited with Rs. 500. the amount will be put on the credit side of the table. as and when the errors are located these are corrected with reference to suspense account. not posted to discount account. so the debit side of discount account has been reduced by the same amount. We should debit Rs. if the suspense account is credited. it means all accounts other than sales account are correct. 500. 500. It means that only mistakes in nominal accounts and goods account will affect the net profit. Error in these accounts will either increase or decrease the net profit. 500 paid to Y. So Rs. we should put double the amount of transaction on the credit side of sales account by writing "By sales to X wrongly debited previously. If the credit side exceeds. For rectifying it. (iil) Goods sold to X wrongly debited in sales account. if it is found that debit total of trial balance was less by Rs. This error is affecting only sales account as the amount which should have been posted on the credit side has been wrongly placed on debit side of the same account. When all the errors are discovered and rectified the suspense account shall be closed automatically. It means that the amount of Rs. which was omitted previously and the discount account shall be corrected. Correction of errors in next accounting period As stated earlier. (ii) Discount allowed to Marshall Rs. If the suspense account is debited in' the rectification entry the amount will be put on the debit side of the table." (iv) Amount of Rs. Correction of errors affecting two sides of two or more accounts As these errors affect two or more accounts. But in certain cases when after considerable search. We should not forget here that only those errors which effect the totals of trial balance can be corrected with the help of suspense account. . For example. While correcting these errors the amount is debited in one account/accounts whereas similar amount is credited to some other account/ accounts. One point to remember here is that only those accounts which are transferred to trading and profit and loss account at the time of preparation of final accounts effect the net profit. not debited to his personal account. Difference in trial balance Trial balance is affected by only errors which are rectified with the help of the suspense account. Effect of Errors of Final Accounts 1. "To cash (omitted to be posted) Rs.by Rs. the following rectifying entry is required to be passed. 500 because of omission to post the amount paid. in order to calculate the difference in suspense account a table will be prepared. rectification of such errors. We shall now write on its debit side. the difference would be put on the debit side of the suspense account. the accountant fails to locate the errors and he is in a hurry to prepare the final accounts. This error of affecting the personal account of Y only and its debit side is less by Rs. that it is advisable to locate and rectify the errors before preparing the final accounts for the year. if being done before the preparation of final accounts can often be done with the help of a journal entry. 50 which should have been debited in discount account has not been debited.

For example. With the rectification of this error. which means the profit will be reduced and losses will be increased.e. It must be an order to pay. The rectification of this error shall have reverse effect. asset or liability account it will affect only balance sheet. the profits will decrease and losses will increase. (iil) Profit will increase or losses will decrease if a nominal account is wrongly credited. i. and when it is rectified the profits will increase and the losses will decrease. If due to any error the profit or losses are affected. and it will increase the profits. and not a request to pay. debtors or creditors of the firm and as a result it will have its impact on balance sheet alone. . it will have its effect on capital account also because profits are credited and losses are debited in the capital account and so the capital shall also increase or decrease. the drawer. The important characteristics of a bill of exchange are: 1. For example. 5. For example. it will affect assets. The order must be signed by the maker. rent paid to landlord but the amount has been debited to personal account of landlord-it will increase the profit as the expense on rent is reduced. Because these items are shown in balance sheet only and balance sheet is prepared after the profit and loss account has been prepared. When the error will be rectified. commission received is omitted to be posted to the credit of commission account.How the errors or their rectification effect the profit-following rules are helpful in understanding it: (i) If because of an error a nominal account has been given some debit the profit will decrease or losses will increase. In rectifying entry the amount shall be transferred to machinery account from machinery repairs account.. bank account. So if there is any error in cash account. Errors effecting balance sheet only If an error is committed in a real or personal account. (il) If because of an error the amount is omitted from recording on the debit side of a nominal account-it results in increase of profits or decrease in losses. 4. For example. machinery is overhauled for Rs. 2. As capital is shown on the liabilities side of balance sheet so any error in nominal account will affect balance sheet as well. 3. Briefly explain the characteristics of Bill of exchange. The order must be unconditional. So we can say that an error in nominal account or goods account effects profit and loss account as well as balance sheet. (iv) Profit will decrease or losses will increase if an account is omitted from posting in the credit side of a nominal or goods account. 10. It must be in writing. 2. This error will increase profits (or reduce losses) when the same error is rectified the amount shall be transferred from sales account to investments account due to which sales will be reduced which will result in decrease in profits (or increase in losses). The order must be for the payment of money only. The order must be directed to a certain person. When the same will be rectified it will increase the profit or reduce the losses.000 but the amount debited to machinery repairs account -this error will reduce the profit. 6. This error will decrease profits (or increase losses) as an income is not credited to profit and loss account. liabilities. it will have reverse effect on profit and loss as an additional income will be credited to profit and loss account so the profit will increase (or the losses will decrease). we will post the necessary amount in rent account which will increase the expenditure on rent and so profits will be reduced. 8. investments were sold and the amount was credited to sales account. When the error is rectified.

and not vague. 9.7. The money must be payable to a certain person mentioned in the instrument or to his order or to the bearer of the instrument. 8. It must bear the required revenue stamp. . The money payable must be certain.

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