SEMESTER

II
COURSE CODE & NAME
DBB1202 – FINANCIAL ACCOUNTING

Question 1(a)
Bookkeeping is a process of recording and organizing all the business transactions that have
occurred in the course of business.  Bookkeeping is an integral part of accounting and largely
focuses on recording day-to-day financial transactions of the business.
All the financial transactions such as sales earned revenue, payment of taxes, earned interest,
payroll and other operational expenses, loans investments etc. are recorded in books of
accounts.

The way the bookkeeping is managed determines the accuracy of the overall accounting
process that has been followed by the business. Thus, bookkeeping ensures that the record of
financial transactions are up-to-date and more importantly, accurate

Parameter of
Bookkeeping Accounting
Comparison

Bookkeeping is related to the

Accounting is the process wherein the company’s
recording, measuring, and
Definition financial data is summarized, and a report is prepared
identifying the financial data of a
for the same.
company.

Management doesn’t take any

Management decides upon financial decisions after
Management financial decisions by analyzing the
reading the summary report obtained by accounting.
records of bookkeeping.

To store and organize the financial To analyze the financial data and make future
Purpose
data of a company financial decisions accordingly. 

The financial statement is not

Financial The financial statement is prepared using accounting
prepared using the information
statement information.
obtained from bookkeeping.

Bookkeeping doesn’t need the

bookkeeper to have any special An accountant needs special skills to record, interpret,
Skills
skill set to handle and manage the and analyze the financial data to prepare reports.
financial records.

Accounting uses the record from bookkeeping to

Analysis No analysis is carried.
analyze the financial data to prepare reports.
 Question 1(b)

Accounting principles are the rules that an organization follows when reporting financial
information. A number of basic accounting principles have been developed through
common usage. They form the basis upon which the complete suite of accounting
standards have been built. The best-known of these principles are as follows:

 Accrual principle. This is the concept that accounting transactions should be recorded in
the accounting periods when they actually occur, rather than in the periods when there
are cash flows. This is the foundation of the accrual basis of accounting. It is important
for the construction of financial statements that show what actually happened in an
accounting period, rather than being artificially delayed or accelerated by the associated
cash flows.

 Conservatism principle. This is the concept that you should record expenses and
liabilities as soon as possible, but to record revenues and assets only when you are sure
that they will occur. This introduces a conservative approach to the financial statements
that may yield lower reported profits, since revenue and asset recognition may be
delayed for some time. Conversely, this principle tends to encourage the recordation of
losses earlier, rather than later.

 Consistency principle. This is the concept that, once you adopt an accounting principle
or method, you should continue to use it until a demonstrably better principle or method
comes along. Not following the consistency principle means that a business could
continually jump between different accounting treatments of its transactions that makes
its long-term financial results extremely difficult to discern.

 Going concern principle. This is the concept that a business will remain in operation for
the foreseeable future. This means that you would be justified in deferring the
recognition of some expenses, such as depreciation, until later periods. Otherwise, you
would have to recognize all expenses at once and not defer any of them.

 Matching principle. This is the concept that, when you record revenue, you should
record all related expenses at the same time. Thus, you charge inventory to the cost of
goods sold at the same time that you record revenue from the sale of those inventory
items. This is a cornerstone of the accrual basis of accounting.
Question 2(a)
SNO Particulars L.F Debit Credit
1 Cash AC Dr. 1,00,000
Goods Dr. 80,000
Furniture Dr. 65,000
To Bank Loan 40,000
To Captial 2,05,000
(Being business commenced with cash, goods, and
capital)
3 Bank(SBI) Ac Dr. 50,000
To Cash 50,000
(Being bank account opened by depositing 50,000)
7 Goods Ac Dr. 20,000
To Discount 400
To Amit and Co. 19,600
(Being goods purchased on credit from Amit and
co. worth 20,000 at 2% trade discount)
9 Cash Ac Dr. 65,000
To Sales 65,000
(Being cash sales made)
10 Ashish and Co. Dr 24,250
Discount Dr. 750
To sales 25,000
(Being sales made on credit to ashish and co. worth
25,000 giving 3% trade discount)
14 Profit and Loss Ac Dr. 500
Bank AC Dr.(Insurance) 1000
To Goods 1500
(Being goods worth 1500 destroyed by fire and
claim of 1000 received )
15 Amit and co. 19,600
To Cash 18,800
 To Discount 800
26 Shares(HDFC) Dr. 15,000
To Bank Ac 15,000
(Being shares purchased for 15,000)
29 Rent Ac Dr. 2,000
To Bank Ac 2,000
(Being Rent paid)
30 Bank Ac Dr. 9700
Badebts Ac Dr. 14,550
To Ashish and Co. 24,250
(Being 40% recovered from Ashish and Co. due to
insolvency)

Question 2(b)
Date Particulars Disco Cash Bank Date Particulars Discoun Cash Bank
unt t
Jan 1 To Bal B/d 10,000 Jan 1 By Bank Ac 10,000
To Cash Ac 10,00 Jan 2
0
Jan 2 Jan 5 By bank ac 275
To sales 275
To cash Ac Jan 10 By Hari 15 285
275
Jan 7
By
calculator(with
Jan 15 To Shyam 25 Jan 12 250
cover)
725
Jan 15
To Hari 30 Jan 15
25 725
By shyam
Jan 20 To cash Ac
30
Jan 27 30
By bank Ac

To Shyam Jan 27
775
By bank
Jan 31 charges(Bank 250
draft)

By Rajiv
5000

By bal c/d
5295

25 10,305 1180 30 10,305 11805

5

Question 3(a)
 The Trial Balance is not absolute proof of the accuracy of ledger accounts. It is a proof only
of the arithmetical accuracy of the postings. The total of debits may be equal to the total of
credits yet still there may be errors.

Such errors are not disclosed by a trial balance and they are:
1. Errors of Principle:

An error of principle is an error which violates the fundamentals of book-keeping. For

instance, purchase of furniture is debited to Purchase Account, instead of Furniture Account.

These types of errors do not affect the total debits and total credits but affect the principle of

book-keeping.

2. Errors of Omission:

If a transaction is completely omitted, there will be no effect on the Trial Balance. When a

transaction goes completely unrecorded in both aspects or a transaction after being recorded

in the books of primary entry is not at all posted in the ledger, the error is an error of

omission. For instance, if a credit purchase is omitted to be recorded in the Purchase Day

Book, then it will be omitted to be posted both in the Purchase Account and the Supplier’s

Account. This error will not, however, result in the disagreement of Trial Balance.

3. Posting to Wrong Account:

Posting an item to wrong account, but on the correct side. For instance, if a purchase of Rs
500 from Ram has been credited to Raman, instead of Ram and this error will not affect the

agreement of Trial Balance. Thus, Trial Balance will not detect such an error.

4. Error of Amounts in Original Book:

If an invoice for Rs 333is entered in Sales Book as Rs 323, the Trial Balance will come out

correctly, since the debit and credit have been recorded as Rs 323. The arithmetical accuracy

is there, but in fact there is an error.

5. Compensating Errors

If one account in the ledger is debited with Rs 500 less and another account in the ledger is

credited Rs 500 less, these errors cancel themselves. That is, one error is neutralized by

similar error on the opposite side.

 Question 3(b)
Financial statements are quantitative statements, based on numbers. However, the information
they provide to the users have some important qualitative characteristics that enhances the utility
of the same.

Understandability
One of the most important features of a financial statement is that it should be easily understood
by the user. We assume that the user has a basic understanding of finance and accounting. So
the information should be presented in such a manner that he understands and comprehends it.

But no information about materiality or relevance should be left out of the statement because it
is deemed too complex. Even if the information is difficult to understand it must be included if it
is of importance.

Relevance
The financial statements must contain relevant information for them to be useful to the users.
For such users, any information that helps their decision making about investing is useful
information. Such information should help them evaluate past, present or even future events.

The information can be predictive or confirmatory and usually both. Say for example
information about the dividend paid in the last year is valuable information for a potential
investor. Similarly, information about the asset structure of the company can help a user evaluate
the future of a company.

Reliability
The information communicated to the users will be worthless if it is not reliable and trustworthy.
For the information to be reliable it must be error-free and free of any form of material bias.

Say if the information is important but a reliable estimate cannot be made. In such a case the
information can be included in the notes to accounts. So if litigation is ongoing and the company
predicts they will have to pay a fine. However, the amount of the fine is not predictable. This is
important information, so it should be disclosed.

Comparability
Firstly the users should be able to compare the financial statements of an enterprise over a period
of time (a few years). This will enable them to do trend analysis and better understand the
finances of the company. This is important for their investment decision.

Set- II
Question 4(a)
 Trading and profit and loss Account
Particulars Rs. Particulars Rs.

To Opening Stock 3000 By Sales 15000 14,000

To Purchases 12,000 10,000 Sales return (1000)
Purchase return (2000)
To Gross Profit 5500 By Closing stock 4500

18,500 18,500

To Depreciation on Furniture 60 By Gross Profit Ac 5500

To advance commission 100 By Commission 500 400
To Establishment Expenses 2200 Advance (100)
To Tax and Insurance 500
Outstanding 200 650
Prepaid (50)
To Bad debts 500
To Provision for Doubtful 300
debts
To Outstanding salary
100

To Net Profit
1,990

5900 5900

Balance Sheet
 Liabilities Assets
Rs. Rs

Capital 10,000 10,590 Furniture 600 540

Net Profit 1990 Depreciation (60)
Drawings (1400) Closing Stock 4500

CURRENT LIABILITIES Deposit 4000 4200

Outstanding 200
Creditors 2000 Debtors 5000 4000
Bank Overdraft 2000 2300 Old prov. (700)
Outstanding 300 New prov. (300)
Bills payable 2500
Outstanding Salary 100 Bills Receivables 3000
Outstanding tax 200 Cash 1500
Prepaid Insurance 50
Advance Commission 100

17,790 17,790

Question 4(b)
There are many reasons because of which there is always some difference in passbook and
cashbook balances, and some of these are discussed as under :-
1. Cheques issued but not yet presented for payment in the bank
When a cheque is issued to a creditor by the firm, it is immediately recorded on the credit
side of the bank column of the cash book. But the bank will debit the firm’s account only
when this cheque is actually presented to the bank for payment. Generally, there is a gap of
some days between the issue of a cheque and its presentation to the bank.
2. Cheque paid into the bank for collection but not yet credited/collected by the bank
When a firm receives cheques, drafts etc. from its customers, they are immediately deposited
into the bank for collection and an entry is made on the debit side of the bank column of the
cash book. But the bank will credit the firm’s account only when it has actually collected the
payment of these cheques from other banks. Again there will be a gap of some days between
the depositing of the cheques into the bank and credit given by the bank
3. Cheques paid into the bank for collection but dishonoured by the bank
When cheque received from outside parties are deposited with the bank, these are
immediately recorded on the debit side of the bank column of the cash book, but if the
cheques are dishonoured, the bank will not make any entry in the credit of the customer’s
account. As a result, the cash book will show an increased balance in comparison to the
passbook.
4. Interest allowed by the bank
Interest allowed by the bank is credited to the firm, but unless intimation is received by the
firm from the bank to this effect, no entry is recorded in the bank column of the cash book.
The difference in these balances may arise because of the following reasons.
5. Direct payment through bank
An account holder can instruct the bank to make certain payments such as insurance
premium, rent of the shop, electricity and mobile bills, loan instalment, etc. on the behalf.
The bank will debit the party’s account on making the payment.
6. Direct payment into the bank by a customer
If any customer of the firm directly deposits the amount of payment into the bank account of
the firm, then credit entry in the passbook will be recorded by the bank. Unless the
corresponding entry is recorded in the cash book, the balance of cash book and pass book will
differ.

Question 5(a)
A drawer or the seller draws a bill of exchange on the drawee or the purchaser in order to ensure
that the latter will pay him the amount due. However, if the holder or the drawer of the bill of
exchange needs funds or money before the due date or the maturity date of the bill, he may opt
for Discounting of Bills. The drawer may discount the bill with the bank before the due date.
The bank charges discounting charges from the drawer at a certain rate.

Thus, at the time of discounting the bank deposits the net amount after charging such amount of
discount in the account of the holder of the bill.

Example : Suppose, a business man sold goods to Mr.X worth Rs 10,000 on credit but Mr.X
does not have the money to pay today, but he is certain to pay on a later date, after two
months, so the bill is raised stating Mr.X to pay Rs 10,000 after two months. But an urgent
need for funds is required by businessman, and he can’t wait for two months, there by he
 discounts this bill with his bank/Bill discounting company two months before its due date @
15% P.A rate of discount.Now the bank pays the drawer an amount of Rs 9750 afer deducting
an applicable commission of Rs 250.
Question 5(b)
Revaluation Account
Particulars Rs. Particulars Rs.
By Building 18,000
To Plant Ac 14,000 By Car 14,000
To Prov for Debtors 6,000
To Gain Transfer to Partners
capital Account
12,000
Giri – 6000
Nayak – 4000
Vivek – 2000

32,000 32,000
Partner’s Capital Ac
Particulars Giri Nayak Vivek Particulars Giri Nayak Vivek
To Goodwill 30,000 20,000 10,000 By Bal b/d 1,60,000 1,20,000 1,20,000
Ac

To Cash 1,32,000 By Giri 15,000

To Nayak 15,000 5,000 By Vivek 5,000

To Bal c/d 1,63,000 1,24,500 By Gain form 6,000 4,000 2,000

revaluation Ac

By General reserve 12,000 8,000 4,000

 1,78,000 1,52,000 1,26,000 1,78,000 1,52,000 1,26,000

Notes:
1) Nayak will retire and give up his share of 2/6 and will be shared by Giri and
Vivek
2) The Ratio of share will be 3:1, and same is the gaining ratio .
3) Giri and Vivek will bring in 20,000 in ratio 3:1

Question 6(a)
Types of Share Capital of A Company
1. Authorized Share Capital
Authorized Share Capital is the total Capital that a company accepts from its investors by
issuing shares which are mentioned in the official document of the company. It is also called
as Registered Capital or Nominal Capital because with this Capital a company is registered.

2. Issued Share Capital

Issued Share Capital is the part of Authorized Share Capital issued to the public for
subscription. And this Act of issuing Share is called Issuance, allocation or allotment. In a
simple way, you can say that Issued Share Capital is the subset of the Authorized Share
Capital. After the allotment of shares, a subscriber becomes the shareholder.

3. Subscribed Capital
Subscribed Capital is the part of issued Capital which has been taken off by the public. It is
not mandatory that the issued Capital is fully subscribed to by the public. It is that part of the
issued Capital for which the application has been received by the company.

4. Called-Up Capital
Called up Capital is the part of the Subscribed Capital, which includes the amount paid by the
shareholder. The company does not receive the entire amount of Capital at once. It calls upon
the part of subscribed Capital when needed in installments. The remaining part of the
Subscribed Capital is called Uncalled Capital.

5. Paid-Up Capital
The part of Called-up Capital which is paid by the shareholder is called Paid-up Capital. It is
not mandatory that the amount called by the company is paid by the shareholder. The
shareholder may pay half the amount of the called up Capital, which is called as Reserved
Capital.

Question 6(b)
When a company has substantial cash resources, it may like to buy its own shares from the

market particularly when the prevailing rate of its shares in the market is much lower than the

book value or what the company perceives to be its true value.

This mode of purchase is also called ‘Shares Repurchase’. A company can utilize its reserves

to buy-back equity shares for the purpose of increasing value of shares in market. The former

option results in reduction of the paid up capital, and consequently higher earnings and book

value per share. Naturally, the market price of equity goes up.

The reduction in share capital strengthens the promoter’s control and enhances the equity

value for shareholders. 

This enables the promoters to strengthen their control over the shares bought back,

without any investment of their own. In case of treasure operations, there is a diversion of

company’s funds to buy shares and reduction in the value of equity for the shareholders.

The main aim of shares repurchase might be reduce the number of shares in circulation in

order to improve the share price, or simply to return to the shareholders resources no longer

needed by the company.

The shares repurchase may be by way of purchase from the open market or by general tender

offer to all shareholders made by the company to repurchase a fixed amount of its securities

at pre-stated price.

Question 6(c)(i)

Capital Redemption Reserve- Capital redemption reserve account is a type of reserve

maintained by a company limited by shares and as the name suggests this reserve deals with
shares which are redeemable. The shares which are purported to be redeemed are paid out of
the profits of a company. For this purpose, out of the profits, an amount equivalent to the
nominal value of the share supposed to be redeemed is transferred to a reserve. This reserve
is called a capital redemption reserve account.
A capital redemption reserve account can be used to pay any unissued shares of the company
to be issued as fully paid bonus shares to the members of the company. A company buying-
back its own shares by paying out of free reserves or securities premium account must
transfer an amount equivalent to the nominal value of the shares purchased to the capital
redemption reserve account.
Question 6(c)(ii)

Accounting Standard – 3 :
Accounting Standard 3 deals with cash flow statement. This accounting standard accounts for
information about changes in cash and cash equivalents of an entity during a particular
period.
Such information is disclosed in the cash flow statement indicating cash flows from
operating, investing and financing activities during an accounting period.

Cash flow statement is one of the important financial statements prepared along with income

statement and balance sheet. This statement is prepared to provide information regarding the
cash flows of an enterprise.
Such information helps the stakeholders to assess the ability of the enterprise to generate cash
and cash equivalents. This assessment regarding an entity’s ability to generate cash, its timing
and certainty helps the stakeholders in taking various economic decisions.

Every business entity should present its cash flows in a cash flow statement by classifying the
same into operating, investing and financing activities. This classification is important as it
helps the users in assessing the impact of such activities on the financial position as well as
the cash balance of an enterprise.