DRIVE- WINTER 2013

PROGRAM- BBA

SEMESTER- 2

SUBJECT CODE & NAME BBA 203 & FINANCIAL ACCOUNTING

Q1. Journalize the following transactions in the books of Balu.

2004 Rs.

Jan. 1 Commenced business with 25,000

Jan. 2 Goods purchased for cash 15,000

Jan. 3 Paid freight 500

Jan. 7 Goods sold to Raj Kumar on credit 5,000

Jan. 8 Paid for stationery 2,000

Jan.10 Paid for Rent 1,000

Jan.13 Cash received from Mohan Das 15,400

Allowed him discount 600

Jan.15 Paid Premium 4,000

Jan.20 Paid to postage 1,000

Jan.25 Paid for salaries 500

Jan.30 Commission received 1,000

(Preparation of all the journal entries with the correct amount, Narration) 8, 2

Answer:

Dr Cr
Date Particulars L.F. Amount Amount
(Rs.) (Rs.)

2004 Cash A/c ………… Dr. 25,000

Jan.1 To Capital A/c 25,000
(Being Business commenced with cash
of Rs.25, 000)
Jan.2 Purchases A/c ……………… Dr. 15,000
To Cash A/c 15,000
(Being the amount of cash purchases)

500
Jan.3 Freight A/c …...………… Dr.
500
To Cash A/c
(Being the payment for freight)
Jan.7 Raj Kumar’s A/c ……… Dr. 5,000
5,000
To Sales A/c
(Being sale of goods on credit to Mr.
Raj Kumar)

Jan.8 Stationery A/c ….. Dr. 2,000

2,000
To Cash A/c
(Being the payment of stationery)

Jan.10 Rent A/c. ………………… Dr.

1,000 1,000
To Cash A/c
(Being the amount of rent paid)

Jan.13 Cash A/c ……………………… Dr.

15,400
Discount A/c ………………… Dr.
600 16,000
To Mohan Das’s A/c
(Being cash received from Mohan Das)

Jan.15 Premium A/c …………. Dr. 4,000

To Cash A/c
4,000
(Being the payment for premium)

Jan.20 Postage A/c ………… Dr. 1,000

To Cash A/c 1,000
(Being the payment for postage)

Salaries A/c 500

Jan.25 ………………. Dr.
500
To Cash A/c
(Being the payment for salaries)
 1,000
Jan.30 Cash A/c ……………………… Dr.
1,000
To Commission A/c
(Being the receipt of commission)

Total 71,000 71,000

Q2. Accountancy refers to a systematic knowledge of accounting. It explains ‘why to do’ and ‘how
to do’ of various aspects of accounting. Explain the objectives of accounting and explain the
categories of users. (Explanation of accounting objectives, Explanation of categories of users) 5, 5

Answer:

Objectives for Accounting

The basic objective of accounting is to provide full, accurate and meaningful financial information about
the financial activities of a business to all those who have a right and a need to have such information.

The main objectives of accounting include:

 Systematic recording of all business events or transactions and subsequent posting to ledger, to
finally prepare financial statements - profit and loss account and balance sheet.

 Reporting the results to management, shareholders, creditors, bankers, investors, stock brokers,
stock exchanges, employees, government etc.

 Satisfying the statutory requirements, especially Registrar of Companies (ROC), Securities

Exchange Board of India (SEBI), tax authorities (sales tax, excise, customs and income tax) and
government in order to protect the interest of general public.

 Protecting the properties of business by recording them on the date of acquisition and showing
their accounts in the balance sheet.

 Planning, controlling and decision making functions become easy where books of accounts are
maintained properly. This helps in internal control by holding concerned persons responsible for
any errors, lapses or under performance.

 Accounting is a tool for effective planning. Current year’s financial performance becomes the
basis for future predictions and estimations. Since it is a tool for planning, it also acts as a tool for
controlling. Preparation of budgets, cost analysis, tax planning, auditing are some of the functions
of accounting.

Various users of Accounting Information

Different categories of users need different kinds of information for making decisions. These users can be
divided into:
1. Internal Users
2. External Users.
1. 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
aspects, e.g. cash resources, sales estimates, results of operations, financial position, etc.

2. External Users:
All persons other than internal users come in the group of external users. External users can be divided
into two groups:
a. Those having direct interest
b. Those having indirect interest in a business organization.

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. Tax authorities,
regulatory agencies, customers, labour unions, trade associations, stock exchanges, investors, etc., are
indirectly interested in the company’s financial strength, its ability to meet short-term and long-term
obligations, its future earning power, etc., for making various decisions. Investors who are providers of
risk capital would be interested to know the financial health of the firm, Lenders would be interested to
know whether the firm will be able to service the loan, Security analyst, rating agencies and other
information specialists would be interested in assessing the prospective returns of the firm.

Q3. What do you understand by good will? Explain the accounting treatment of goodwill at the
time of admission. Give journal entry for the below problem:

T and S are partners in a firm sharing profit in the ratio 5:3. They admitted G as a new partner for
1/4th share in the profit. G brings Rs.45,000 for her share of goodwill and Rs.1,20,000 for capital.
They have withdrawn the goodwill from the firm. Make journal entries in the books of the firm
after the admission of G. The new profit sharing ratio will be 2:1:1.

(Meaning of good will with the formula, Accounting treatment of goodwill at the time of admission,
Journal entry in the books of T,S and G) 2, 4, 4

Answer: Goodwill-Meaning
Goodwill generally means the reputation of the firm. When a business is doing its operations over a
number of years, it may develop a good name and reputation among the customers or society. In
accounting parlance, it can be called as “Goodwill”.

The goodwill of a firm may earn extra profit for the business over a normal profit, which can be called as
“Super Normal Profit”. Thus, goodwill can be calculated as ….

Goodwill = Super Normal Profit – Normal Profit.

Accounting Treatment of Goodwill at the time of Admission

When a new partner is admitted, he will get a share in profits and the existing partner’s shares getting
reduced. So, he needs to compensate them for the sacrifice they have done. In addition to the capital he
brought, he needs to pay this compensation which may be equal to his share of profits/losses of firm. He
can make this payment either in cash or in kind in the form of goodwill.
As per Accounting Standard 10 (AS-10), goodwill should be recorded in the books only when some
consideration in money has been paid for it. Thus, if a new partner does not bring necessary cash for
goodwill, no goodwill account can be raised in the books. He/she should pay for goodwill in addition to
his/her contribution for capital.

The following points should be noted for this purpose:

1. The amount brought by the new partner as goodwill will be shared by the existing partners in the
sacrificing ratio.

2. In case, if any goodwill account appears in the books, at the time of admission, it will be written off
among the existing partners in the existing ratio.

3. Amount of goodwill withdrawn by existing partners to be divided in the sacrificing ratio.

4. Goodwill account not to be raised in the books, unless otherwise expressly agreed.

Journal entry in the books of T,S and G

Working Note:
Existing Ratio: T- 5/8 and S – 3/8
New Ratio: T- 2/4, S- 1/4 and G – 1/4
Sacrificing Ratio = T- 5/8-2/4 = 1/8; S – 3/8 – ¼ = 1/8
Sacrificing Ratio = 1:1
Books of T, S and G
Bank A/c Dr. 1,65,000
To Goodwill A/c 45,000
To G’s Capital A/c 1,20,000
(Cash brought by G for her share of goodwill and capital)
Goodwill A/c Dr. 45,000
To T’s Capital A/c 30,000
To S’s Capital A/c 15,000
(Goodwill transferred to existing partners’ capital account in their profit sharing ratio)
T’s Capital A/c Dr. 27,500
S’s Capital A/c Dr. 27,500
To Bank A/c 45,000
(Amount of Goodwill is withdrawn by them in the sacrificing ratio)

Q4. Differentiate between trade discount and cash discount.

Enter the following transactions in Sadhana’s simple cash book.

2010 April 1st April Balance of cash in hand Rs.1500

8th April Purchased goods for cash from X for Rs.320

15th April Sold goods for Rs. 480 to Y for cash

20th April Received commission Rs.65

22nd April Paid Commission Rs.55

28th April Paid to Reena on account Rs.715

30th April Paid salary to the office clerk Rs.100 and office rent Rs.60

(Differences between trade discount and cash discount, Preparation of cash book) 5, 5

Answer:

Trade discount Cash discount

1) It is reduction granted by a 1) It is the reduction granted by

supplier from the list price of
goods or services bought
other than for prompt
payment.
2) It is allowed to promote the
sales
3) A separate trade discount
account is not opened in the
ledger because it is shown
by the way of deduction in
the invoice itself.
4) It may vary with the quantity
purchased.
a supplier from the invoice
price in consideration of
immediate payment or
within a specified period
2) It is allowed to encourage
prompt payment
3) Since it is not shown in the
invoice, a separate cash
discount account is opened
in the ledger
4) It may vary with the period
within which the payment is
made.

Cash book
Date Particulars LF Amount Date Particulars LF Amount

2010 Apr 8 By purchases 320

Apr 1 To balance b/d 1,500

15 To sales 480 22 By commission 55

20 To commission 65 28 By shantaram 715

30 By salaries 100
 30 By office rent 60

30 By balance c/d 795

30 Total 2045 Total 2045

May 1 To balance bld 795

Cash Discount:
 It is the reduction granted by a supplier from the invoice price in consideration of immediate
payment or within a specified period
 It is allowed to encourage prompt payment
 Since it is not shown in the invoice, a separate cash discount account is opened in the ledger
 It may vary with the period within which the payment is made.

Q5. Final Accounts are prepared at the end of the accounting year with various adjustments.
Explain the features and objectives of final accounts. (Explanation of objectives of final accounts,
Explanation of features of final accounts) 3, 7

Answer:

Objectives of Final Accounts

A financial statement should reflect true and fair view of the business affairs of the organization. As these
statements are used by various constituents of the society / regulators, they need to reflect true view of the
financial position of the organization.
Financial statements are required for measuring the performance of the business which is indicated by
gross profit or gross loss. Financial statements facilitate the comparison of trading results of the current
year with those of the previous year. International Accounting Standards
Committee (IASC) stated that the objective of financial statements is to provide information about the
enterprise that is useful to a wide range of users in making economic decisions.
Various stakeholders would like to assess the financial performance of the enterprise, its ability to
generate future cash flows. It is almost impossible to make sound decision on above matter if one has no
access to the financial statements. Financial statements act as a summary of all transactions, which have
been taking place in business. The financial statements comprise of the income statement account, the
balance sheet and the cash flow statement. To be of great value to all stakeholders’ financial information
should assist the users of accounts in assessing the financial performance of an enterprise, its financial
position and also its cash flow position.

Features of Final Accounts

Qualitative characteristics of financial statements include:

 Relevance
 Understandability
 Reliability
  Comparability
 True and Fair View/Fair Presentation

The qualitative characteristics of useful financial reporting identifies the types of information that are
likely to be most useful to users in making decisions about the reporting entity on the basis of information
in its financial report. The qualitative characteristics apply equally to the financial information in general
purpose financial reports as well as to the financial information provided in other ways. Financial
information is useful when it is relevant and represents faithfully what it purports to represent. The
usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable.
Relevance and faithful representation are the fundamental qualitative characteristics of useful financial
information. Relevant financial information is capable of making a difference in the decisions made by
users. Financial information is capable of making a difference in decisions if it has predictive value,
confirmatory value, or both. The predictive value and confirmatory value of financial information are
interrelated. Various stakeholders would like to assess the financial performance of the enterprise, its
ability to generate future cash flows. It is almost impossible to make sound decision on above matter if
one has no access to the financial statements.
Financial statements act as a summary of all transactions, which have been
taking place in business. The financial statements comprise of the income statement account, the balance
sheet and the cash flow statement. To be of great value to all stakeholders’ financial information should
assist the users of accounts in assessing the financial performance of an enterprise, its financial position
and also its cash flow position. Materiality is an entity-specific aspect of relevance based on the nature or
magnitude (or both) of the items to which the information relates in the context of an individual entity’s
financial report. General purpose financial reports represent economic phenomena in words and numbers.
To be useful, financial information must not only be relevant, it must also represent faithfully the
phenomena it purports to represent. This fundamental characteristic seeks to maximize the underlying
characteristics of completeness, neutrality and freedom from error. Information must be both relevant and
faithfully represented if it is to be useful. Comparability, verifiability, timeliness and understandability are
qualitative characteristics that enhance the usefulness of information. Comparability enables users to
identify and understand similarities in, and differences among, items. Verifiability helps to assure users
that information represents faithfully the economic phenomena it purports to represent. Verifiability
means that different knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful representation. Timeliness means
that information is available to decision-makers in time to be capable of influencing their decisions.
Classifying, characterizing and presenting information clearly and concisely make it understandable.
While some phenomena are inherently complex and cannot be made easy to understand, to exclude such
information would make financial reports incomplete and potentially misleading. Financial reports are
prepared for users who have a reasonable knowledge of business and economic activities and who review
and analyze the information with diligence. Enhancing qualitative characteristics should be maximized to
the extent necessary. However, enhancing qualitative characteristics (either individually or collectively)
render information useful if that information is irrelevant or not represented faithfully.

Q6. Prepare Trading, Profit and Loss Account and Balance Sheet from the following particulars as
on 31st March 2012.

Trial Balance
Particulars Dr. (Rs) Cr. (Rs)
 Capital / Drawings 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 Debts - 1,000

Bad Debts 500 -

Sundry Debtors and Creditors 5,000 1,850

Commission - 500

Investments 4,000 -

Stock on 1 April 2010 3,000 -

Furniture 600 -

Bills Receivable & Bills payable 3,000 2,500

Collected Sales Tax - 150

Total 35,000 35,000

Further, you are required to take into consideration the following information:

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.210
d) Provision for doubtful Debts is to be maintained at 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 25 th 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 claim in full.
(Calculation of Trading and P/L a/c, Preparation of balance sheet) 5, 5

Answer:

Solution :
Trading and Profit and loss Account for the period ended 31st March
2012
Dr. Cr.

Particulars Rs Particulars Rs

To Opening Stock 3,000 By Sales 15,000

To Purchase 12,000 Less:Sales 1,000 14,000
Returns

Less: Purchases By Closing Stock 4,500

Returns 2,000 10,000 By Abnormal 1,000
Loss of Stock
To Gross Profit c/d 6,500
19,500 19,500
To Establishment 2,500 By Gross Profit 6,500
charges paid b/d

Add: Sales 100 2,600 By Commission 500

outstanding
To Taxes and 500 Less: Unearned 100 400
insurance Comm.

Add: Outstanding 400 By Interest 210

taxes accrued on
investment
900 By Claims form 1,000
insurance Co.
Less: Prepaid 50 850

To Interest on bank 100

overdraft

Bad Debts 500

Add: Closing 1,000

Provision for
Doubtful Debts
1,500
Less: Opening 1,000 500
provision
To Depreciation for 60
furniture
To Abnormal Loss of 1,000
Stock
To Net Profit 3,000
transferred to Capital
A/c
Total 8,110 8,110

Balance Sheet as at 31st March 2012

Particulars Rs Particulars Rs

Bills Payable 2,500 Cash in Hand 1,500

Sundry Creditors 1,850 Bills Receivable 3,000

Sales Tax 150 Insurance Co. 1,000

Outstanding Investment 4,000

expenses:

Salaries 100 Add : Accrued 210 4,210

interest

Taxes 400 500 Prepaid Insurance 50

Unearned 100 Closing Stock 4500

commission

Bank overdraft 2,000 Sundry Debtors 5,000

Add: Interest on Bank 100 2,100 Less: Provision 1,000 4,000

overdraft

Capital : Furniture 600

Opening Balance 10,000 Less: Depreciation 60 540

Add: Net Profit 3,000

13,000

Less:Drawings 1,400 11,600

Total 18,800 18,800