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Answer Paper

Principles & Practice of Accounting Duration:60

Details: Test – 2 (CH-2) Marks: 30

Instructions:

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ANS 1

L.F. Dr Cr.

Suspense A/c Dr. 50

To Expenses A/c 50

(Being the mistake in totaling of Expenses A/c, rectified)

Suspense A/c Dr. 100

To Sales A/c 100

(Being the mistake in totaling of Sales A/c, rectified)

Suspense A/c Dr. 225

To Purchase A/c 225

(Being the mistake in posting from Day book to ledger rectified)

Sales Returns A/c Dr. 100

To Suspense A/c 100

(Being the sales return from a party not posted to “Sales

Returns” now rectified)

Trade Payable A/c Dr. 500

To Purchases A/c 500

(Being the payments made to supplier wrongly posted to

purchases now rectified)

Trade Receivables a/c Dr. 100

To Suspense A/c 100

(Being the sales wrongly credited to Customer’s Account now

rectified)

Suspense Account

Particulars Amount Particulars Amount

To Expenses A/c 50 By Difference in Trial balance 150

To Sales A/c 100 By Trade payables 225

To Balance c/d 425 By Sales Returns A/c 100

By Trade Receivables 100

575 575

By Balance b/d 425

Since the Suspense Account does not balance, it is clear that all the errors have not been
traced. As a result of the above corrections the Net Profit will be :

Particulars Rs. Rs.

Mistake in totaling in “Expenses” 50

Mistake in totaling in “Sales” 100

Mistake in posting from day book to Ledger under 225

“Purchases

Mistake in wrongly debiting the Purchase A/c 500

Omission in positing under “Sales Returns” 100

875 100

Net Increase 775

As a result of these adjustments, the Profits will be increased by Rs 775 in the books of
accounts of A Co. Ltd. for the year.

Or

Profits Less Add

Expenses 50

Sales A/c 100

Purchases A/c 225

Sales Return A/c (100)

Purchases A/c 500

(100) 875

Net Profit to be added is = 875-100 = 775

Suspense A/c

Particulars Amount Particulars Amount

To Expenses A/c 50 By Balance b/d 150

To Sales A/c 100 By Sales Return A/c 100

To Purchases A/c 225 By Trade Receivables 100

By Balance c/d 25

375 375

(5 Marks)

ANS 2

Trial Balance as on 31st March, 2022

Heads of Accounts Dr. (Rs.) Cr. (Rs.)

Provision for Doubtful Debts – 250

Cash credit account (Bank overdraft) – 1,654

Capital – 4,591

Trade payables – 1,637

Dues from customers 2,983 –

Discount Received – 252

Discount allowed 733 –

Drawings 1,200 –

Office furniture 2,155 –

Carriage inward 829 –

Purchases 10,923 –

Returns Inward 330 –

Rent & Rates 314 –

Salaries 2,520 –

Inventory* 2,418 –

Provision for Depreciation on Furniture – 364

Sales – 16,882

Suspense Account (Balancing figure) 1,225

Total 25,630 25,630

*considering as opening inventory

(5 Marks)

ANS 3

Receipts Date V.no. Particulars Total Conveyance Cartage Stationery Postage Wages Sundries
2021 &
telegrams
20,000 1-Apr To Cash
2-Apr 1 By 500 500
Conveyance
3-Apr 2 By Cartage 2500 2500
4-Apr 3 By Postage 500 500
and
 Telegrams

5-Apr 4 By Wages 600 600

5-Apr 5 By 400 400

Stationery
6-Apr 6 By Repairs 1500 1500
to
machines
6-Apr 7 By 100 100
Conveyance
7-Apr 8 By cartage 400 400

7-Apr 9 By Postage 700 700

and
Telegrams
8-Apr 10 By Cartage 3000 3000
9-Apr 11 By 2000 2000
Stationery
10- 12 By Sundry 5000 5000
Apr expenses
17,200 600 5900 2400 1200 600 6500
By Balance 2,800
c/d
20,000 20,000
2,800
17,200 11- To Cash
Apr

(5 Marks)

ANS 4: The basic considerations in distinction between capital and revenue expenditures are:

(a) Nature of For a trader dealing in furniture, purchase of furniture is revenue

business expenditure but for any other trade, the purchase of furniture
 should be treated as capital expenditure and shown in the balance
sheet as asset. Therefore, the nature of business is a very important
criterion in separating expenditure between capital and revenue.

(b) Recurring nature If the frequency of an expense is quite often in an accounting year
of expenditure then it is said to be an expenditure of revenue nature while non-
recurring expenditure is infrequent in nature and do not occur often
in an accounting year. Monthly salary or rent is the example of
revenue expenditure as they are incurred every month while
purchase of assets is not the transaction done regularly therefore,
classified as capital expenditure unless materiality criteria defines it
as revenue expenditure.

(c) Purpose of Expenses for repairs of machine may be incurred in course of

expenses normal maintenance of the asset. Such expenses are revenue in
nature. On the other hand, expenditure incurred for major repair of
the asset so as to increase its productive capacity is capital in
nature.

(d) Effect on revenue The expenses which help to generate income/revenue in the
generating current period are revenue in nature and should be matched
capacity of against the revenue earned in the current period. On the other
business hand, if expenditure helps to generate revenue over more than one
accounting period, it is generally called capital expenditure.

(e) Materiality of Relative proportion of the amount involved is another important

the amount consideration in distinction between revenue and capital.
involved:

(5 Marks)
ANS 5

Date Particulars L.F. Dr. Cr

AB Ltd. A/c Dr. 3502

Discount Received A/c Dr. 44

To CD Ltd. A/c 3500

To Discount Given A/c 46

(Being Cheque received from AB Ltd. was endorsed to CD Ltd.

However, the cheque was later dishonored)

Sales Return A/c Dr. 230

MN Ltd. A/c Dr. 320

To Purchase A/c 230

To PQ Ltd. A/c 230

To Suspense A/c 90

(Being goods returned by PQ Ltd. were wrongly recorded in

purchase book and from thereon wrongly posted to MN Ltd.)

Bad debts A/c Dr. 505

To Suspense A/c 505

(Being Bad debts written off in Sales Ledger but not yet
recorded in General Ledger, now recorded)
 Repairs A/c Dr. 750

To Purchase A/c 650

To Z Ltd. 100

(Being repair of machinery amounting to Rs 750 wrongly

entered in Inward book as Rs 650)

Goods - in - Transit A/c Dr. 1234

To Trading A/c 1234

(Being goods - in - transit were recorded in books)

Machinery A/c Dr. 79

Suspense A/c Dr. 18

To Freight A/c 97

(Being amount paid on Freight on Machinery amounting to Rs

79 was wrongly debited to Freight A/c as Rs 97)

(5 Marks)

ANS 6

(i) True Cash transactions are straightaway recorded in the Cash Book and on the
basis of such a record, ledger accounts are prepared. Therefore, the Cash
Book is a subsidiary book. But the Cash Book itself serves as the cash account
and the bank account; the balances are entered in the trial balance directly.
The Cash Book therefore, is part of the ledger also. Hence, it has also to be
treated as a principal book. The Cash Book is thus both a subsidiary book and
a principal book
(ii) False It is a capital expenditure, since it has contributed to the revenue earning
capacity of the business over more than one accounting period

(iii) False Trial balance only checks the arithmetical accuracy of the books. Errors of
principle and errors of commission will not affect the agreement of the trial
balance

(iv) False It is revenue expenditure as it is not increasing the benefits but only keeping
the machine in working condition.

(v) True Errors of commission includes errors on account of wrong balancing of an

account , wrong carry forward, wrong totaling etc., whether of subsidiary or
any other books .

(5 Marks)