Eco 02 Notes

ECO-002[Accountancy] Notes from SUMAYA ACADEMY
ECO-02 NOTES
BLOCK - 1 (UNIT 1)
Q. Name the parties interested in accounting information?

Ans: You have learnt that many people are interested in examining the
financial information provided in the form of a Profit and Loss Account and
a Balance Sheet. This helps them
a) to study the present position of business,
b) to compare its present performance with that of its past years, and
c) to compare its performance with that of similar enterprises.
Now let us see who such parties are and how accounting information is
useful to them.
Internal users: Owners, Management and Employees.

External users: Creditors, Investors, Customers, Tax authorities,
Government, Researchers and General Public.
Q. What are the limitations of accounting?

Ans:
1. They do not record transactions and events which are not of a financial
character. Hence, they do not reveal a complete picture because facts like
quality of human resources, licences possessed, Location advantage,
business contacts, etc. do not find any place in
books of account.
2. The data is historical in nature. The accountants adopt historical cost

as the basis in valuing and reporting all assets and liabilities. They do not
reflect current values. It is quite possible that items like land and buildings
may have much more value than what is stated in the balance sheet.
3. Facts recorded in financial statements are greatly influenced by

accounting conventions and personal judgements. Hence, they do not
reveal the true picture. In many cases, estimates may be used to
determine the value of various items. For example, debtors are estimated
in terms of collectability, inventories are based on marketability, and fixed
assets are based on useful working life. All these estimates are materially
affected by personal judgements.
4. Data provided in the financial statements is insufficient for proper
analysis and decision-making. It only provides information about the
overall profitability of the business. No information is given about the cost
and profitability of different activities.
Q. What do you mean by book-keeping and accounting?
Ans: Book-keeping is thus a narrow term concerned mainly with the
maintenance of the books of account and covers the first four activities
listed in the scope of accounting viz., identifying the transactions and
events to be recorded, measuring them in terms of money, recording them
in the books of prime entry, and posting them into ledger.
Accounting, on the other hand, is concerned with summarising the
recorded data, interpreting the financial results and communicating them
to all interested parties.
In other words, accounting starts where bookkeeping ends. But in
practice, the accountants also direct and review the work of bookkeepers
and therefore the term accounting is generally used in a broader sense
covering all the accounting activities, Thus, Book-keeping is regarded as
a part of accounting.
Q. Short notes on historical concept, business entity concept, money
measurement concept, dual aspect concept.
Ans:
Historical record concept: According to the historical record concept,
we record only those transactions which have actually taken place and
not those which may take place (future transactions). It is because
accounting record presupposes that the transactions are to be identified
and objectively evidenced. This is possible only in the case of past
(actually happened) transactions. The future transactions can hardly be
identified and measured accurately. You also know that all transactions
are to be recorded in chronological (date wise) order. This leads to the
preparation of a historical record of all transactions. It also implies that we
simply record the facts and nothing else.
Business Entity Concept: From the accounting point of view every

business enterprise is an entity separate and distinct from its
proprietor(s)/owner(s).The accounting system gives information only
about the business and not its owner. In other words, we record those
transactions in the books of account which relate only to the business.
The owner's personal affairs (his expenditure on housing, food, clothing,
etc.) will not appear in the books of account of his business. However,
when personal expenditure of the owner is met from business funds it
shall also be recorded in the business books. It will be recorded as
drawings by the proprietor and not as business expenditure.
Money Measurement Concept: Usually, business deals in a variety of

items having different physical units such as kilograms, quintals, tons,
metres, likes, etc. If the sales and purchases of different items are
recorded is terms of their physical units, adding them together will pose
problems. But, if these are recorded in a common denomination, their
total becomes homogeneous and meaningful. therefore, we need a
common unit of measurement. Money does this function. It is adopted all
the common measuring unit for the purpose of accounting. All recording,
therefore, is done in terms of the standard currency of the country where
business is set up. For example, in India it is done in terms of Rupees, in
USA it is done in terms of US Dollars and so on.
Dual Aspect Concept: This is a basic concept of accounting. According

to this concept every business transaction has a two-fold effect. In
commercial context it is a famous dictum that "every receiver is also a
giver and every giver is also a receiver". For example, if you purchase a
machine for Rs. 8,000, you receive machine on the one hand and give Rs.
8,000 on the other. Thus, this transaction has a two-fold effect i.e., (i)
increase in one asset and (ii) decrease in another asset. Similarly, if you
buy goods worth Rs. 500 on credit, it will increase an asset (stock of
goods) on the one hand and increase a liability (creditors) on the other.
Thus, every business transaction involves two aspects: (i) the receiving
aspect, and (ii) the giving aspect, In case of the first example you find that
the receiving aspect is machinery and the giving aspect is cash. In the
second example the receiving aspect is goods and the giving aspect is
the creditor. If complete record of transactions is to be made, it would be
necessary to record both the aspects in books of account. This principle
is the case of double entry book-keeping and if this is strictly followed, it
is called 'Double Entry System of Book-keeping'
Q. What is single entry system?

Ans: Single Entry System does not mean that only one aspect of a
transaction is recorded. It simply refers to incomplete records or the
defective double entry system. Under this system neither all the
transactions are recorded nor all the account books are maintained. In
certain cases, the two aspects of a transaction are duly recorded while in
others only one aspect is recorded. Some transactions are simply ignored,
they are not recorded at all. The Single Entry System is thus a mixture of
double entry, single entry and no entry. The accounts
maintained under this system are incomplete and unsystematic and,
therefore, not reliable. The main defect in this system is that the
arithmetical accuracy of the books of account cannot be checked,
because a trial balance cannot be prepared. It also becomes difficult to
ascertain the correct amount of profit or loss. This system is normally
followed by small business firm.
Q. What is double entry system?

Ans: Under the dual aspect concept you learnt that every business
transaction has two aspects: (i) the receiving aspect, and (ii) the giving
aspect. For example, when you purchase goods for cash, goods come in
and cash goes out. Thus, a transaction affects two items (also called
accounts) at the same time. When you record the transactions in the
books of account of a business, it would be better if you record the effects
relating to both the items. In the above example the items affected are
goods and cash, stock of goods increases and cash decreases. So, we
should record the increase in stock of goods and also the decrease in
cash. This involves two entries, one in Goods Account and the other in
Cash Account. This method of recording business transactions is called
'Double Entry System'. It recognises and records
both the aspects of every transaction. According to this system the
account which involves receiving aspect is debited and the account which
involves giving aspect is credited. Thus, for every debit there will be an
equivalent credit. For this purpose, certain rules have been
framed.
Q. list the rules of accounting.
Ans:
For Personal Accounts: Debit the receiver and credit the giver.
For Real Accounts: Debit what comes in and credit what goes out.
For Nominal Accounts: Debit all expenses and losses and credit all
incomes and gains.
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BLOCK - 1 (UNIT 2)
Q. What is Journal? Draw its format.
Ans: Journal is a daily record of business transactions, It is also called a

'Day Book' and is used for recording all day today transactions in the
order in which they occur. It is a Book of prime entry (also called book of
original entry) because all transactions are recorded first in this book. the
process of recording transaction in the journal is called 'Journalizing' and
the entries made in this book are called 'journal entries'. The proforma of
Journal is as follows:
Q. What is Ledger. Draw its format.
Ans: In this book we open separate accounts for each item and all
transactions related to a particular item as recorded in journal are posted
in the concerned account. For example, all transactions related to a
particular supplier, say Mohan, are posted to Mohan's Account. Similarly,
all cash payments and cash receipts can be posted to Cash Account.
Thus, you will have no problem in knowing the amount due to Mohan or
the balance in Cash Account, and so on.
Proforma of Ledger Book is given below:

Q. What is Trial Balance? Draw its format.
Ans: After posting the journal entries into the ledger and balancing all
accounts, we prepare a statement called Trial Balance. This statement
shows the balances of all the accounts which appear in the ledger. The
debit balances are shown in one column and the credit balances in the
other. It is usually prepared just before preparing the final accounts. me
purpose is to check the arithmetical accuracy of the books of account.
Proforma of Trial Balance:
Q. What is opening entry?
Ans: When an accounting year begins. the previous year's balances in

different accounts are brought forward to the new books of account. This
is done by means of a journal entry-all assets accounts are debited and
all liabilities accounts (including the proprietor's capital account) are
credited. In case the Capital Account balance is not given, it can be
calculated by deducting the other liabilities from the total assets.
BLOCK - 1 (UNIT 3)
Q. What are subsidiary books or special journals? Explain their

advantages.
Ans: We all learnt that all business transactions are first recorded in the
journal and then posted into ledger. In practice, the number of transactions
is so large that it becomes difficult to record all of them in one book of
prime entry. Hence, the journal is sub-divided into a number of special
journals called Subsidiary Books. Each book is used for recording

transactions of one category only. For example, Cash Book is used for
recording all cash transactions, Purchases Book is used for recording all
credit purchases of goods, Sales Book is used for recording all credit sales
of goods, and so on.
In any large business the subsidiary books generally used are as follows:
1. Cash Book: It is used for recording all cash receipts and cash
payments including cash purchases and cash sales.
2. Purchases Journal: It is used for recording all credit purchases of

goods.
3. Sales Journal: It is used for recording all credit sale of goods.
4. Purchases Returns Journal: It is used for recording the returns of

goods to suppliers. It is also known as 'Returns Outwards Book'.
5. Sales Returns Journal: It is used for recording the returns of goods by

customers. It is also known as 'Returns Inwards Book'.
6. Bills Receivable Journal: This book is meant for recording

transactions relating to bills of exchange and promissory notes received
from debtors.
7. Bills Payable Journal: This book is meant for recording bills of

exchange and promissory notes accepted by the business in favour of
creditors.
8. Journal Proper: In this book only, such transactions are recorded

which are not covered, by any of the above-named subsidiary books, for
example, credit purchases of fixed assets, opening entry, rectification
entries, etc.
The advantages of having a number of subsidiary books as listed above

are as follows:
i) Classification of transactions becomes automatic: As there is a separate

book for each type of transactions, the transactions of same nature are
automatically brought at one place. For example, all credit purchases of
goods are recorded in the Purchases Journal and all credit sales are
recorded in the Sales Journal.
ii) Reference becomes easy: If any reference is required, it can be traced

easily by referring to the appropriate subsidiary book. You do not have to
go through all the transactions recorded in the journal.
iii) Facilitate division of work: Sub-division of journal into various

subsidiary books facilitates division of work among many persons. This,
in turn, facilitates prompt recording of transactions and saves a lot of time.
iv) More particulars: More details about the transactions can be given in
subsidiary books than would be possible in one book.
V) Responsibility can be fixed: The work of maintaining a particular book

can be entrusted to a particular person. He will be responsible for keeping
it up-to-date and in order.
vi) Facilitates checking: When the Trial Balance does not agree, the
location of errors will be relatively easy.
Q. What is Bank Reconciliation Statement?

We learnt that the firm records all transactions relating to its bank
Ans:
account in a Three Column Cash Book. All deposits into the bank are
recorded on the debit side of the cash book and all withdrawals from the
bank on the credit side. The bank also maintains the firm's account in its
books. It credits customer's account with all deposits made by him and
debits his account with all withdrawals made by him. The bank provides a
copy of this account to the customer in the form of a bank statement or a
pass book.
By comparing the entries in the cash book with those in the pass book you
can easily ascertain the exact causes of difference between the balance
as per cash book and the balance as per pass book. In order to reconcile
these balances every firm prepares a statement showing all the causes of
differences. This statement is called Bank Reconciliation Statement and
is prepared periodically. The main objective of preparing such a statement
is to account for the difference between the cash book and the pass book
balances and pass the necessary correcting entries in the books of the
firm.
Q. What are the causes of differences in Cash Book And Pass Book?
Ans:
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. Interest and dividend collected by the bank
If the bank collects dividend on shares, interest on investments, etc on

behalf of its customer, it credits the amount in the passbook. This will
increase the balance in the passbook and a difference in the two balances
will exits unless a corresponding entry is recorded in the cash book by the
firm.
6. 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.
7. 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.
8. Errors
There may be errors in the account maintained by the customer or bank.

The two balances, therefore, may not tally.
9. Bank charges and commission charged by the bank
Bank provides several services to its customers. It collects their outstation

cheques, dividends on their shares, pays some expenses on their behalf
etc. bank charges commission in lieu of the services provided to the
customer. Such charges and commission are debited in the passbook but
no entry is recorded in the cash book unless the firm obtains the passbook
from the bank and record these entries. This will cause the difference
between the two balances.
10. Interest on bank overdraft charged by the bank
Generally, the bank allows the overdraft facility to traders on current

accounts. If the bank charges interest on the overdraft, an entry will be
made in the debit side of the passbook but no entry will be recorded in the
cash book unless the firm receives information about the interest charged
by the bank. This causes the difference in the two balances.
Q. What is Bank Overdraft?
Ans: You know when a businessman withdraws from the bank more
money than is available in his account, it is said that he has an overdraft
(an unfavourable balance) in his bank account. It is one of the most
commonly used method of borrowing money from the bank.
BLOCK - 1 (UNIT 4)
Q. What is Purchases Journal? Draw it’s proforma.
Ans: The Purchases Journal (also called Purchases Book) is used for
recording credit purchases of goods and raw-materials. Note that the
credit purchases of fixed assets like furniture, vehicles, etc. are not
recorded in this book. They are to be recorded in Journal proper. The
Purchases Journal is also called 'Purchases Book', 'Purchases Day
Book’, and 'Invoice Book'. The proforma of Purchases Journal is:
Q. What is Sales Journal? Draw it’s proforma.
Ans: The sales Journal is used for recording the credit sales of goods
only. The credit sale of items which do not constitute goods are not to be
recorded in this book. The Sales Journal is also called 'Sales Book' or
'Sales Day Book'.
The ruling of the Sales Journal is similar to that of the Purchases Journal.
The difference is only with regard to the second column. In Purchases
Journal the second column is used for recording the name of the supplier.
But in case of the Sales Journal, it is used for writing the name of the
customer.
Proforma of Sales Journal is:
Q. What is Purchases Returns Journal? Draw it’s proforma.
Ans: In any business, sometimes goods purchased may have to be

returned to the supplier either partly or fully. This may become necessary
when they are found to be defective, damaged in transit, inferior quality,
short weight, received too late, or not in conformity with the order given. If
the number of such returns is small, they can be recorded in the journal
itself. But, if it is large, a separate book called 'Purchases Returns
Journal' should be used for recording these transactions. This book is
also called 'Returns Outwards Journal' or 'Purchases Returns Book'.

The proforma of a Purchases Returns Journal is:
Q. What is Sales Returns Journal? Draw it’s proforma.

Ans: When customers return goods to the business, it is normally
recorded in a separate book called 'Sales Returns Journal'. If, however,
the number of such returns are small, they can be recorded in the Journal
itself. The Sales Returns Journal is also called 'Returns Inwards
Journal' or 'Sales Returns Book'. Its ruling is more or less similar to that
of Purchases Returns Journal. The second column of the Sales Returns
Journal is used for recording the name of the customer and the third
column for credit note number, while in Purchases Returns Journal, they
are used for recording the name of the supplier and debit note number
respectively.
Proforma:
Q. What is Debit Note?

Ans: When goods are returned to the supplier, a statement called 'Debit
Note' is sent to him intimating that his account has been debited on
account of the goods returned. The debit note also contains particulars
and the value of goods returned. It is also prepared in duplicate. The
original is sent to the supplier and the duplicate is retained by the firm.
The entries in the Purchases Returns Journal are made on the basis of
the copies of debit notes issued, the debit notes bear a serial number
which is duly recorded in the third column of the Purchases Returns
Journal.
Q. What is Credit Note?

Ans: When a customer returns goods to the business, a statement called

'Credit Note' is issued to him. It contains particulars and the value of
goods returned by him. The entries in Sales Returns Journal are made
with the help of credit notes issued. While recording the account
of sales returns, you must remember that if the original sales involve some
trade discount, it is also adjusted in the value of goods returned.
Q. What is an Invoice?
Ans: You know when goods are sold on credit, an invoice is given to the
buyer. The seller generally has a bound invoice book which contains
consecutively numbered invoices in duplicate. While the original copy is
given to the buyer, the duplicate remains in the book itself. The entries in
the Sales Journal are made with the help of the duplicate copies of the
invoices issued.
Q. What is Journal Proper?
Ans: We learnt that certain types of transactions which are repetitive and
large in number are recorded in special journals called subsidiary books.
The remaining transactions are to be recorded in the journal itself which
is now called the Journal Proper. As a matter of fact, all events and
transactions for which the firm does not maintain a special journal shall be
recorded in the Journal Proper. The following are the examples of
transactions which shall usually be recorded in Journal Proper.
1. Opening Entry
2. Closing Entries
3. Transfer Entries
4. Adjustment Entries
5. Rectification Entries
6. Miscellaneous Entries
let us now briefly discuss them one by one.
1. Opening Entry: An opening entry is passed in the journal for opening

a new set of accounts. This may be needed at the time of commencement
of business or at the commencement of new accounting year, If a person
commences business only with cash, there is no need to pass a journal
entry. The cash brought in is simply entered in the cash
Book, But, if he also brings some other assets, an opening entry will have
to be recorded in the journal. You will debit the concerned assets accounts
and credit the Capital Account. In case of a running business, an opening
entry is passed at the commencement of the new accounting year to
incorporate the balances of various assets and liabilities brought forward

from the previous year into the current year's books.
2. Closing Entries: At the end of each accounting year, when final

accounts are prepared, the nominal accounts are closed by transferring
them to Trading Account or Profit and Loss Account. The journal entries
passed for this purpose are called 'Closing Entries'.
3 Transfer Entries: When an amount is to be transferred from one

account to another, you have to pass an entry in the Journal Proper in
order to effect the transfer. Such entries are called 'Transfer Entries',
Suppose, you want to transfer proprietor's total drawings made during the
year to his Capital Account. Total drawings appear in Drawings Account
which shows a debit balance. You will transfer this balance to Capital
Account by passing the following entry in the Journal Proper:
Capital Account Dr.
To Drawings Account
(Being Transfer entry)
4. Adjustment Entries: At the time of preparing the final accounts, it

becomes necessary to bring into books of account certain unrecorded
items like closing stock, depreciation on fixed assets, interest on capital,
expenses incurred but not yet paid, income earned but not yet received,
etc. Entries passed in the Journal Proper to record such items are called
'Adjustment Entries'.
5. Rectification Entries: You may commit errors while recording

transactions in various books or while posting, totalling, balancing, etc.
Such errors are generally corrected through entries in Journal Proper and
are known as 'Rectification Entries'.
6. Miscellaneous Entries: If, in addition to the entries mentioned above,

there is any transaction which cannot be recorded in any of the special
journals, it will be entered in the Journal Proper. Examples of such
transactions are:
i) Credit purchases of fixed assets, investments, etc.

ii) Credit sales of fixed assets, investments, etc.
iii) Withdrawal of goods from the business by the owner for his personal
use.
iv) Loss of goods by theft, accident, fire, etc.
v) Special allowances received from suppliers or given to customers.
vi) Endorsement or dishonour of bills.
vii) Writing off bad debts.
BLOCK - 1 (UNIT 5)
Q. What is Credit of Instrument? List them.
Ans: Selling goods on credit has become a very common phenomenon
in business. The producer takes raw material on credit and supplies the
finished goods to the wholesalers on credit. The wholesalers in turn
provide the credit facilities to the retailers. The retailers also sell on credit
to some of the ultimate consumers. Credit may also be granted by a
moneylender, a bank or a financial institution. Credit is generally provided
by obtaining a written document called 'Instrument of Credit'. They serve
as a proof for existence of credit. The most commonly used instruments
of credit are :
i) Bills of Exchange,
ii) Promissory Notes, and
iii) Hundies.
Q. What do you mean by Bills Of Exchange?

Ans: When a seller grants credit to his customers, he would like to have
some written commitment from the buyer to pay the amount on a specified
date, otherwise the payment may not be made on time. Such a written
undertaking generally takes the form of a bill of exchange or a promissory
note. A bill of exchange is drawn by the seller (a creditor) on the buyer (a
debtor) asking him to pay the specified amount after a specified period to
him, or his order, or to a person named in the bill. According to the
Negotiable Instruments Act 1881, a bill of exchange is an instrument in
writing containing an unconditional order, signed by the maker, directing
a person to pay a certain sum of money only to, or to
the order of a certain person, or to the bearer of the instrument.
The above definition makes it clear that there are three parties to a bill of
exchange. They are:
i) Drawer: a person who draws the bill

ii) Drawee: a person who accepts the bill
iii) Payee: a person who is to receive the payment.
Suppose A sells goods to B and draws on him a bill for Rs. 1,000 for two
months payable to C. In this example 'A' is the drawer, 'B' is the drawee
and 'C' is the payee. In most of the cases, however, the drawer himself is
the payee.
Q. What do you mean by Promissory Note?

Ans: As stated earlier a written undertaking by the buyer to make payment
on a specified date can take the form of a bill of exchange or as promissory
note. We learnt that a bill of exchange is drawn by the seller and accepted
by the buyer. A promissory note, on the other hand, is written by the buyer
promising the seller to pay a specified amount after a specified period to
him, or his order.
In case of a promissory note there are only two parties. They are:
i) Maker: A person who makes the note and promises to pay the amount.
ii) Payee: A person who is to receive the amount.
Suppose A sells the goods to B and B writes a promissory note in favour

of A. In this example B is the maker and A is the payee. You should note
that no acceptance is required in case of a promissory note because it is
made by the person who has to make the payment.
Q. What is the difference between Bills of Exchange and Promissory

Note?
Ans:
Q. What is Accommodation of Bills?

Ans: Normally a bill is drawn by the seller on the buyer or by the lender
on the borrower. In other words, a bill is drawn for some debt. Sometimes,
a bill is drawn even when no debt is involved. This is done primarily to
help or accommodate a fellow businessman and is called
an 'accommodation bill'. When such a bills drawn and accepted, the
drawer discounts it with the bank and the money so raised is either fully
utilised by him or shared with the drawee. Before or on the due date, the
drawer remits the amount utilised by him to the drawee and the drawee
then meets the acceptance on the due date by making payment to the
bank with which the bill had been discounted. The parties can also draw
separate bills on each other. In such a situation, each party discounts his
own bill with the bank and utilises the amount. When the bills become due
for payment, they meet their acceptances and settle their accounts.
From the above discussion it is clear that there can be three types of
arrangements in case of accommodation bill. They are as follows:
i) A bill is drawn for accommodation of the drawer only.

ii) A bill is drawn and the proceeds are shared by drawer and drawee.
iii) One bill each is drawn by both the parties on each other i.e., two bills
are drawn.
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BLOCK - 2 (UNIT 1)
Q. Write short notes on:

1. Going Concern Concept
2. Accounting Period Concept
3. Matching Concept
4. Conservatism Concept
5. Consistency Concept
6. Full Disclosure Concept
7. Materiality Concept
Ans:
1. Going Concern Concept:
Normally the business is started with the intention of continuing it
indefinitely or at least for the foreseeable future. The investors lend money
and the creditors supply goods and services with the expectation that the
enterprise would continue for long. Unless there is strong evidence to the
contrary, the enterprise is normally viewed as a going (continuing)
concern. Hence, financial statements are prepared on a going concern
basis and not on liquidation (closure) basis.
2. Accounting Period Concept:

You know the going concern concept assumes that the business will
continue for a long period, almost indefinitely. But the businessmen
cannot postpone the preparation of financial statements indefinitely.
Therefore, he prepares them periodically to find out the profit or loss and
financial position of the business. This will also enable other interested
parties such as owners, investors, creditors, tax authorities to make

periodic assessment of its performance. So, the life of the business
enterprise is divided into what are called 'accounting periods', Profit and
loss and the financial position at the end of each such accounting period
is regularly assessed. Conventionally, duration of the accounting period is
twelve months. It is called an 'accounting year'. Accounting year can be a
calendar year i.e., January 1 to December 31 or any other period of twelve
months, say, April 1 to March 31 or Dewali to Dewali.
3. Matching Concept:
This is called 'Matching of Costs against Revenues Concept'. To work out
profit or loss of an accounting year, it is necessary to bring together all
revenues and costs pertaining to that accounting year. In other words,
expenses incurred in an accounting year should be matched with the
revenues earned during that year. The crux of the problem, therefore, is
that appropriate costs must be matched against appropriate revenues. For
this purpose, first we have to recognise the inflows (revenues) during an
accounting period and the costs incurred in securing those inflows. Then,
the sum of the costs should be deducted from the sum of the revenues to
arrive at the net result of that period.
4. Conservatism Concept:
This is also known as Prudence Concept. This concept tries to ensure that
all uncertainties and risks inherent in business are adequately provided
for, accountants generally prefer understatement of assets or revenues,
and overstatement of liabilities or costs. This is in accordance with the
traditional view which states anticipate no profits but anticipate all losses.
In other words, you should account for profits only when they are actually
realised. But in case of losses, you should take into account
even those losses which may be a remote possibility. That is why the
closing stock is valued at cost price or market price whichever is lower.
Provision for doubtful debts and provision for discounts on debtors are
also made according to this concept.
5. Consistency Concept:
The principle of consistency means conformity from period to period with
unchanging policies and procedures. It means that accounting method
adopted should not be changed from year to year. For example, the
principle of valuing closing stock at cost price or market price whichever
is lower should be followed year after year. Similarly, if depreciation on
fixed assets is provided on straight line basis, it should be followed
consistently year after year. Consistency eliminates personal bias and
helps in achieving comparable results.
6. Full Disclosure Concept:

You know the financial statements are the basic means of communicating
financial information to all interested parties. These statements are the
only source for assessing the performance of the enterprise for investors,
lenders, suppliers, and others. Therefore, financial statements and their
accompanying footnotes should completely disclose all relevant
information of a material nature which relate to the profit and loss and the
financial position of the business. This enables the users of the financial
statements to make correct assessment about the profitability and
financial soundness of the enterprise. It is therefore necessary that the
disclosure should be full,
fair and adequate.
7. Materiality Concept:
This concept is closely related to the Full Disclosure Concept. Full
disclosure does not mean that everything should be disclosed. It only
means that all relevant and material information must be disclosed.
Materiality primarily relates to the relevance and reliability of information.
An item is considered material if there is a reasonable expectation that the
knowledge of it would influence the decision of the users of the
financial statements. All such material information should be disclosed
through the financial statements and the accompanying notes. For
example, commission paid to sole selling agents, if any, should be
disclosed separately in the Profit and Loss Account. Similarly, if there is a
change in the method or rate of depreciation, this fact must be duly
reported in the financial statements.
Q. What are accounting basis? Difference between cash basis and

accrual basis?
Ans: The accounts are prepared by the business either on cash basis or
on accrual basis.
Cash Basis
In the Cash System accounting entries are made on the basis of cash
received or cash paid. In other words, no entry is made when an income
is earned or an expenditure is incurred. It will be recorded in books only
when the amount involved is actually received or paid. Thus, the incomes
earned but not yet received (accrued income) or
the expenses incurred but not yet paid (outstanding expenses) are
completely ignored while preparing the final accounts. For example, rent
for the month of December, 1987 paid in January 1988 will be taken to the
Profit and Loss Account of 1988 even though the expenditure relates to
1987. This leads to incorrect ascertainment of profit or loss of the

business.
Accrual Basis
Under the Accrual System (also called Mercantile System of accounting)
the financial effect of transactions is recorded in the books as and when
they occur and not when the amount involved is received or paid by the
business. This system attempts to relate the revenues and expenses to
the accounting period during which they are actually earned or incurred.
Thus, rent for the month of December, 1987 paid in January, 1988 will be
taken into the Profit and Loss Account of 1987 and not of 1988. This is
more logical because the benefit of expenditure is enjoyed in the year
1987 and not in 1988.
Difference between Cash Basis & Accrual Basis

The main difference between accrual basis of accounting and cash basis
of accounting is the timing of recognition of revenues, gains, expenses
and losses. The objective of accrual accounting is to account for the effect
of transactions and events to the extent their financial effect are
recognisable and measurable in the periods in which they occur. The
adjustments made in the final accounts in respect of outstanding
expenses, prepaid expenses, income received in advance, income
earned but not yet received, etc. are in fact based on accrual accounting.
Q. What is Capital Expenditure and Revenue Expenditure?

Ans:
Capital Expenditure
when the benefit of an expenditure is not exhausted in the year in which
it is incurred but is available over a number of years it is considered as
capital expenditure. The following expenditures are usually treated as
capital expenditures:
1. Any expenditure which results in the acquisition of fixed assets such as

land, buildings, plant and machinery, furniture and fixtures, office
equipment, copyright, etc. You should note that such capital expenditure
includes not only the purchase price of the fixed asset but also the
expenses incurred in connection with their acquisition.
2. Any expenditure incurred on a fixed asset which results in (a) its

expansion, (b) substantial increase in its life, or (c) improvement in its
revenue earning capacity. Improvement in the revenue earning capacity
can be in the form of (i) increased production capacity, (ii) reduced cost of
production, or (iii) increased sales of the firm. Thus, cost of making
additions to buildings and the amount spent on renovation of the old

machinery are also regarded as capital expenditures.
3. Expenditure incurred, during the early years, on development of mines

and land for plantations till they become operational.
4. Cost of experiments which ultimately result in the acquisition of a

patent. The cost of experiments which are not successful is not to be
treated as capital expenditure. It is treated as a deferred revenue
expenditure which is written off within two to three years.
5. Legal charges incurred in connection with acquiring or defending suits

for protecting fixed assets, rights, etc.
Revenue Expenditure
When the benefit of an expenditure is not likely to be available
for more than one year, it is treated as revenue expenditure. So, all
expenses which are incurred during the regular course of business are
regarded as revenue expenditures. The examples of such expenses are:
1. Expenses incurred in day-to-day conduct of the business such as

wages, salaries, rent, postage, stationery, insurance, electricity, etc.
2. Expenditure incurred for buying goods for resale or raw materials for
manufacturing.
3. Expenditure incurred for maintaining the fixed assets such as repairs

and renewals of building, machinery, etc.
4. Depreciation on fixed assets. This can also be termed as revenue loss.
5. Interest on loans borrowed for running the business. You should note
that any I interest on loan paid during the initial period before production
commences, is not 1 treated as revenue expenditure. It is treated as
capital expenditure.
6. Legal charges incurred during the regular course of business such as

legal expenses incurred on collection from debtors, legal charges incurred
on defending a suit for damages, etc.
Q. What do you mean by Deferred Revenue Expenditure?
Ans: Sometimes, certain expenditure which is normally treated as
revenue may be unusually heavy and its benefit is likely to be available
for more than one year. In such a situation, it is considered appropriate to
spread the cost of the expenditure over a number of accounting years.

Hence, it is capitalised and only a portion of the total amount spent is
charged to the Profit and Loss Account of the current year. The
balance is shown as an asset which will be written off during the
subsequent amounting years. Such expenditure is called a Deferred
Revenue Expenditure because its charge to Profit and Loss Account has
been deferred to future years. Some examples of such expenditure are:
1. Expenditure incurred on advertising campaign to introduce a new

product in the market.
2. Expenditure incurred on formation of a new company (preliminary

expenses)
3. Brokerage charges, underwriting commission paid and other expenses

incurred in connection with the issue of shares and debentures.
4. Cost of shifting the plant and machinery to a new site which may involve
dismantling, removing and re-erection of the plant and machinery.
Q. What is Capital Receipt and Revenue Receipt?

Ans:
Receipts refer to amounts received by a business i.e., cash inflows.
Receipts may be classified as Capital Receipts and Revenue Receipts. It
is necessary to note this distinction clearly because only the revenue
receipts are taken to the Profit and Loss Account and not the capital
receipts.
Capital Receipts:
Capital receipts are the amounts received in the form of (a)
additional capital introduced in the business, (b) loans received, and (c)
sale proceeds of fixed assets. You are aware that a loan taken by the
business is repayable sooner or later. Similarly, additional capital received
represents an increase in the proprietor's claim over the business assets.
Thus, these two items represent increase in liabilities of
the business and obviously are not incomes or revenues. These are
capital receipts and should be treated as such. The sale proceeds of a
fixed asset are also treated as a capital receipt because the amount
received is not revenue earned in the normal course of business. The
capital receipts increase the liabilities or reduce the assets. They do not
affect the profit or loss.
Revenue Receipts:
Revenue receipts are the amounts received in the normal and

regular course of business. They take the form of (a) sale proceeds of
goods, and (b) incomes such as interest earned, commission earned, rent
received, etc. These receipts are on account of goods sold or some
services rendered by the business and as such they are not repayable.
All revenue receipts are treated as incomes and shown on the credit side
of the Profit and Loss Account.
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BLOCK - 2 (UNIT 2)
It has practical questions so read unit.
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BLOCK - 2 (UNIT 3)
Q. Write short notes on:
• Outstanding expense/Expenses Accrued
• Prepaid Expenses/Unexpired Expenses
• Accrued Income /outstanding incomes/ incomes earned but not yet
received
• Income received in advance/ unearned income
• Depreciation
Ans:
Outstanding expense/Expenses Accrued
Outstanding expenses are those expenses which have been incurred
during the current accounting year but have not been paid till the end of
the year. They are also called 'expenses accrued'. The common
examples of such expenses are the salaries, wages and rent for the last
month of the accounting year paid in the first month of the next year. Since
they remained unpaid as at the end of accounting year, no entry might
have been passed in the books of account. So, they must be taken into
account while preparing the Trading and Profit and Loss Account
otherwise it will not reveal the correct amount of profit or loss.
Prepaid Expenses/Unexpired Expenses

Sometimes, the benefit of some expenses will be available not only in the
current accounting year but also during the next year. That portion of
expense the benefit of which is yet to.be received is called 'prepaid
expense'. It is also called 'unexpired expense'. Examples of such
expenses are unexpired insurance, interest paid in advance, etc. In such

situations it is necessary to find out the unexpired portion and adjust it in
the concerned expense.
Accrued Income /outstanding incomes/ incomes earned but not yet

received
Accrued Incomes are those incomes which have been earned during the
current accounting year but have not been received till the end of the year.
They are also called 'outstanding incomes' or 'incomes earned but not
yet received'. Examples of such incomes are commission receivable,
income on investments due but not yet received, etc
Income received in advance/ unearned income

Any income which belongs to the next accounting year but has been
received during the current accounting year is called 'income received in
advance' or 'unearned income'. It is the income in respect of which the
service is yet to be provided. Examples of such incomes arc rent received
in advance, interest received in advance, etc. In such a situation, the
unearned portion of the income will have to be adjusted
while preparing the final accounts.
Depreciation
Depreciation means decrease in the value of fixed assets due to their
usage and the passage of time. You know the fixed assets are used for
the purpose of earning revenue. Therefore, the fall in their value should
be considered as an expense or loss incurred in realising such revenue
and should be charged to the Profit and Loss Account, Depreciation is not
recognized on day-to-day basis it is brought into the books only at the end
of the accounting period
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BLOCK - 2 (UNIT 4)
Q. Types of Errors in accounting?

Ans: The errors may occur while recording transactions in the subsidiary
books, or while posting them into the ledger or at the time of closing or
balancing various accounts, or while preparing the Trial Balance itself.
Whatever the stage at which the error is committed, it may be either an
error of principle or an-error of clerical nature. All errors can therefore be.
broadly divided into (a) the errors of principle, and (b) the clerical erors.
The clerical errors can be further divided into (i) errors of omission,
(ii) errors of commission, and (iii) compensating errors
1. Errors of principle: When a transaction has not been recorded as per

the rules of debit and credit, or it violates some other principle, the errors
so arising are called 'errors of principle'. Example of such error are:
i) A credit purchase of fixed assets recorded in the Purchases Journal

instead of the Journal Proper. This results in debiting the Purchases
Account instead of the concerned fixed asset account. This is an error of
principle because it amounts to treating an expenditure of capital nature
as a revenue expenditure.
The errors of principle do not affect the Trial Balance because they simple
amount to debiting or crediting wrong accounts, the debit-credit
correspondence is not upset.
2. Errors of Omission: When a transaction is completely or partially

omitted to be recorded in books of account, it is called an 'error of
omission’. If the transaction is not recorded in the subsidiary books or its
posting is completely omitted, it is called an 'error of complete omission'.
If, however, the posting is done in one account but omitted from the other,
it is called an 'error of partial omission’, For example, if a
credit purchase of goods from Shyam is not recorded in the Purchases
Journal or a credit purchase of furniture from Ram is recorded in the
Journal Proper but no posting is done in any of the two accounts involved,
then these will be termed as errors of complete omission. If the purchase
of goods from Shyam is recorded in the Purchases Journal but is not
posted in Shyam's Account, it will be called an error of partial omission.
Other examples of partial omission are: Omission in carrying
forward the total from one page to the other, omission to balance an
account, and on.
The errors of complete omission do not affect the Trial Balance. But the
errors of partial omission would certainly cause disagreement of the Trial
Balance because they would lead to either short debit or short credit.
3. Error of Commission: When an error is committed in recording a

transaction with wrong amount, or posting it to a wrong account or the
wrong side of an account, it is called an 'error of commission'. For
example, a credit sale of Rs. 720 is recorded in the Sales Journal as Rs.
270, or it is posted to the debit of C's Account instead of B's Amount or it
is posted on the credit side of B's Account. Errors like double posting,
wrong totalling, wrong carry forward, wrong balancing etc. are also
regarded as errors of commission. Such errors usually cause
disagreement in the Trial Balance. But the errors committed while
recording the transaction in subsidiary books or posting it to a wrong
amount (but with correct mount and on the correct side) do not affect the
Trial Balance.
4. Compensating Errors: Those errors which nullify the effect of each

other are called 'compensating errors'. In other words, compensating
errors refer to such a group of errors wherein the effect of one error is
compensated by the effect of other error or errors. For example, while
posting an entry of Rs. 200 to the debit of Ram's Account we wrongly
wrote Rs. 400. Then, while posting an entry of Rs. 500 to the debit of some
other account we wrote Rs. 300. The first error led to a higher debit of Rs.
200 whereas the second error resulted in a lower debit of Rs. 200. Thus,
the effect of the first error is nullified by the effect of the second error. Take
another example. The Purchases Journal is overcast in excess by Rs.
1,000 which means the Purchases Account will be debited in excess by
Rs. 1,000. The Sales Journal also, by
mistake, is overcast by Rs. 1,000 which means the Sales Account will be
credited in excess by Rs. 1,000. These two mistakes, together, result in
an excess debit of Rs. 1,000 as well & an excess credit of Rs. 1,000. Thus,
they cancel out of the effect of each other. Such errors do not affect the
Trial Balance.
_________________________________________________________
BLOCK - 3 (UNIT 1)
Q. What is Consignment? What are parties to consignment?

Ans: When goods are sent by a manufacturer or a trader to an agent to
be sold by him on commission basis and at the risk and account of the
former, they are said to be sent on consignment. In other words, a
producer/trader forwards his products to his selling agents, appointed at
different places, to sell them on his behalf for an agreed commission. The
process of sending goods on this basis by one firm to another for sale is
known as 'Consignment' and this transaction is called a 'Consignment
Transaction'. The consignment is 'Outward Consignment' for the person
who sends the goods and an 'Inward Consignment' for the person who
receives the goods for sale.
There are two parties involved: (1) the person who sends the goods and,
(ii) the person to whom the goods are sent. The person who sends the
goods to the agent is called the consignor and the person to whom the
goods are sent for sale is called the consignee. If 'X' sends goods to 'Y'
for sale, 'X' is known as consignor and 'Y' consignee. The
Consignor is the 'principal' and the consignee is the 'agent'.
Q. Difference between Sale & Consignment?

Ans:
Q. What is proforma invoice and account sales in consignment?

Ans: Proforma Invoice: Since the goods sent on consignment cannot
be treated as sales, the consignor does not prepare proper invoice. He
simply prepares a Proforma Invoice and sends it to the consignee, along
with the goods despatched. This is prepared with a view to inform the
consignee about price of goods, expenses incurred, mode of
transportation and the minimum sale price at which the goods are to be
sold. A specimen of proforma invoice is given in below figure:
Account Sales: As the consignee is an agent and is selling the goods on

behalf of the consignor, he has to furnish the details of sale proceeds,
expenses, commission, etc. to the consignor. He furnishes all these
details by means of a statement called 'Account Sales'. This shows the
quantity and description of goods sold, sale proceeds realised, the
expenses incurred by the consignee, commission due to him, and the
balance amount payable by him to the consignor. While preparing an
Account Sales the consignee will deduct all expenses incurred by him in
relation to the consignment and the commission due to him. The
remittances made in advance, if any, are also to be deducted from the
balance so obtained. The consignee will send a bank draft or his
acceptance for the balance due to the consignor.
Q. Types of commission in Consignment?

Ans: Commission: It is the remuneration paid to the consignee by the
consignor in consideration of the services rendered by the former in selling
the goods consigned. This commission can be divided into two types (a)
Ordinary Commission, and (b) Special Commission.
a) Ordinary Commission: It is a commission usually paid as a fixed

percentage on gross sale proceeds. The terms commission normally
denotes ordinary commission, unless specified otherwise. The consignee

is not responsible for any bad debts and he does not
guarantee the payment from all those who buy on credit so long as he is
getting ordinary commission only.
b) Special Commission: This is the commission which the consignee

gets over and above the ordinary commission. It can be sub-divided into
two categories viz., (i) Over-riding Commission and (ii) Del Credre
Commission.
i)Over-riding Commission: This is an extra commission allowed over

and above the normal commission and is generally offered when the
agent is required to put in hard work either in introducing a new product in
the market or where he is entrusted with the work of supervising the
performance of other agents in a particular area. This commission is also
given for sales at prices higher than the price fixed by the consignor.
ii) Del Credre Commission: Usually, all the losses are borne by the
consignor. Sometimes the consignor expects that the consignee should
also be responsible for recovering the debts and bear the loss on account
of bad debts, if any. In order to compensate him for this responsibility he
is given some extra commission called 'Del Credre Commission'. Such
commission is calculated on the total sales unless
there is a special agreement to the effect that it is to be paid only on the
amount of credit sales. Payment of this commission imposes extra liability
on the consignee and induces him to deal in a prudent and cautious
manner.
Q. Expenses in Consignment?
Ans: Expenses: Expenses relating to consignment of goods are divided
into two categories viz., (i) Non-recurring Expenses. and (ii) Recurring
Expenses.
i) Non-recurring Expenses: All the expenses which are incurred for

bringing goods to the godown of the consignee are non-recurring in
nature. Such expenses are generally incurred on the consignment as a
whole, the non-recurring expenses will be incurred partly by the consignor
and partly by the consignee. The consignor usually incurs expenses on
sending the goods to the consignee such as packing, cartage, loading
charges, insurance, freight, etc.
The consignee usually incurs expenses on receiving the goods from
the consignor such as dock dues, customs duty, clearing charges, octroi,
etc.
II) Recurring Expenses: These expenses are incurred after the goods
have reached the consignee's place or godown. They are recurring in
nature because they may be incurred repeatedly by the consignor and the
consignee. The examples of recurring expenses incurred, by the
consignor are: advertising, discount on bills, commission on collection of
cheques, travelling expenses of salesmen, bad debts etc. The examples
of recurring expenses incurred by the consignee are godown rent, godown
insurance, sales promotion, etc.
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BLOCK - 3 (UNIT 2)
Q. Explain Loss of Goods in Consignment?

Ans: There are two types of loss in consignment:
a) Normal Loss and

b) Abnormal Loss
Normal Loss: It is a loss which is due to the inherent nature of the goods
consigned. It may arise in the process of loading and unloading of goods,
breaking of bulk pieces into smaller ones, weighing or due to evaporation,
processing, etc. For example, while loading or unloading or weighing coal,
some part is bound to fall down in powdered form. Similarly, the petroleum
products are bound to loose weight due to evaporation or leakage. This
type of loss is unavoidable. It can be reduced to some extent but cannot
be eliminated altogether. Since this loss occurs in the ordinary course of
business and is on account of inner characteristics of the goods, it is called
a normal loss.
Abnormal Loss: The loss which occurs due to negligence, inefficiency or

some accident is treated as abnormal loss. For example, loss of goods
due to fire, floods, earth quakes, riots. war, theft etc. Such a loss does not
occur on account of inherent nature of the product but on account of the
operation of certain external forces.
_________________________________________________________
_________________________________________________________
BLOCK - 3 (UNIT 3)
Q. What is Loading?
Ans: You know that the invoice price is obtained by adding a certain
amount of profit to the cost price. The amount of profit which is added to
the cost in order to arrive at the invoice price is called loading. In other
words, loading is the difference between the invoice price and the cost
price
Loading = IP – CP
For example, if the invoice price is Rs. 10,000 and the cost price is Rs.
7,500, the amount of loading will be
Loading = IP - CP or Number of units x (IP per unit - CP per unit)

= 10,000 - 7,500
= Rs. 2,500.
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BLOCK - 3 (UNIT 4)
Q. What is Joint Venture?

Ans: When two or more persons join together to carry out a specific
business venture and share the profits on an agreed basis it is called a
'joint venture'. Each one of them who join as a party to the joint venture
is called 'Co-venturer'. No Firm name is normally used for the joint
venture business because its duration is limited to a short period. During
this period, the co-venturers are free to carry on their own business as
usual unless agreed otherwise.
The business relationship amongst the co-venturer comes to an end as

soon as the venture is completed. Thus, a joint venture is sone kind of
a temporary partnership between two or more persons who have
agreed to jointly carry out a specific venture.
The joint ventures are quite common in construction business,

consignment, sale and purchase of property, underwriting of shares and
debentures, etc. For example, A and B agreed to construct a college
building for which they pooled their resources and skill. A provided Rs. 6
lakhs and B Rs. 4 lakhs as capital. They completed the building and
shared the profits in the ratio of their contributions to capital. In this
example, joining hands by A and B to construct a building is a joint

venture. A and B are co-venturers. They will share the profits in the ratio
of 6 and 4 (same as the ratio of their capitals).
Q. what are essential features of a joint venture?
Ans:
1. It is formed by two or more persons.
2. The purpose is to execute a particular venture or project.
3. No specific firm name is used for the joint venture business.
4. It is of a temporary nature. Hence, the agreement regarding the venture
automatically, stands terminated as soon as the venture is completed.
5. The co-venturers share profit and loss in the agreed ratio. However, in
the absence of any other agreement between the co-venturers, the profits
and losses are to be shared equally.
6. During the tenure of joint venture, the co-venturers are free to continue
with their own business unless agreed otherwise.
Q. Difference between Joint venture and Consignment?

Ans:
Q. Difference between Joint Venture and Partnership?

Ans:
BLOCK - 4 (UNIT 1)
Q. What is Self-Balancing system?
Ans: All business transactions are recorded first in journal or its sub-
division and then posted into the concerned accounts in the ledger. A
statement called Trial Balance is also prepared at the end of the
accounting period primarily to check the arithmetical accuracy of the
entries in the ledger, Normally the firms maintain one ledger for all the
accounts involved. So long as the volume of transactions is small and the
number of accounts is limited, this works fairly well. But as the business
expands and the number of accounts increases, especially those of the
debtors and creditors, maintaining all accounts in a single ledger becomes
impractical. The ledger becomes too bulky and location of errors involves
more time. Hence many firms decide to introduce multiple ledger system
whereby separate ledgers are kept for debtors and creditors and the
entries are recorded in each ledger in such a way that a separate Trial
Balance can be prepared for each ledger. This is called 'Self-balancing
System'.
Q. Advantages of Self Balancing System.

Ans: The main advantages of self-balancing system are as follows:
1. It is easy to locate the errors because we prepare separate Trial

Balance for each ledger. If the Trial Balance of a particular ledger
agrees, it implies that there are no errors in that. ledger. The detection
work is confined only to the accounts in a ledger whose Trial Balance
does not agree. For-instance, if an error is committed in the personal
account of a customer neither the General Ledger nor the Creditors
Ledger is affected. It is only the Debtors Ledger which is affected and its
Trial Balance will not agree. Hence you will look for the errors in Debtors
Ledger only. Similarly, if the Trial Balance of General Ledger does not
agree you will check entries in the nominal and real accounts only. This
narrows down the area of detection work and the errors can be quickly
detected.
2. The maintenance of ledgers can be divided amongst many persons.
This helps in quick posting and fixation of responsibility in case of errors
and frauds.
3. The main ledger becomes less bulky because the personal accounts
of customers and suppliers are excluded. The system is very useful
when the number of customers and suppliers is large.
4. It is easy to check the accuracy of each ledger independently with the
help of Adjustment Accounts.
5. It facilitates the preparation of interim accounts whenever required by
including the figure of total debtors and total creditors. There is no need
to go through the Debtors and Creditors Ledgers.
Q. What is Sectional Balancing System?

Ans: The sectional balancing refers to a system under which only a
section of the group of ledgers is self-balanced. If a firm which uses three
ledgers viz., Debtors Ledger, Creditors Ledger and General Ledger,
makes only one ledger self-balancing (normally the General Ledger) it will
be called 'Sectional Balancing System'. Under this system only two
Adjustment Accounts viz., Debtors Ledger Adjustment Account and
Creditors Ledger Adjustment Account are prepared. They are termed as
Total Debtors Account and Total Creditors Account respectively. They are
also known as control accounts.
BLOCK - 4 (UNIT 2)
Q. What is Single Entry System?

Ans: Small traders, petty shopkeepers and persons in the profession
cannot afford to employ qualified persons, for the accounting work. Such
persons usually keep the accounting records themselves which are often
incomplete. Some of them keep only personal accounts of customers and
suppliers, some keep only a Cash Book while others may keep personal
accounts of customers and suppliers as well as the Cash book. Thus, they
maintain partial and incomplete records without fully following the
principles of Double Entry System of Book Keeping. Such partial and
incomplete recording of transactions is known as 'Single Entry System'.
The term Single Entry System is quite misleading. It gives an

impression that under this system only one aspect of a transaction is
recorded in books. This is not true. Single Entry System actually refers to
incomplete records or the defective Double Entry System. Under this
system, for certain transactions both the aspects are recorded while for
others only one aspect is recorded. Some transactions may simply be
ignored, they are not recorded at all.
Q. What is Net Worth method in Incomplete Records?

Ans: Many small business firms simply maintain the personal accounts of
Debtors and Creditors or only the Cash Book. In such a situation it is not
possible to prepare the Trading and Profit and Loss Account. Hence, we
have to use the net worth method for finding out the profit or loss at the
end of an accounting period. This method is also known as 'Net Assets
Method' or 'Statement of Affairs Method'.
The net worth method is based on a simple fact that any increase or
decrease in the net worth (capital) of a business takes place as a result of
the profit earned or the loss incurred during the year. For example, a
person started his business with a capital of Rs. 20,000 on January 1,
1987. On December 31, 1987 when he analyses his assets and liabilities,
he finds that his capital had increased to Rs. 28,000. This would mean
that he earned a profit of Rs. 8,000 (Rs. 28,000 - Rs. 20,000) during 1987.
If, however, his capital on December 31. 1987 worked out as Rs. 16,000
it would mean he incurred a loss of Rs. 4,000 (Rs. 20,000 - Rs. 16,000).
Thus, under net worth method the profit can be ascertained by comparing
the net worth (or capital) of the business as at the beginning of the
accounting period (opening capital) with the net worth (or capital) as at the
end of the period (closing capital). If, the net worth at the end is more as
compared to the net worth at the beginning, the difference is treated as
the profit earned during the period. If, on the other hand, the net worth at
the end is less than the net worth at the beginning, it means the firm has
incurred loss during the period.
BLOCK - 4 (UNIT 3)
Q. What is Abridged Conversion and Full Conversion method in

Incomplete Records?
Ans: Conversion Method involves preparation of proper Profit and
Loss Account and the Balance Sheet. There are two ways of doing it:
(1) preparation of final accounts after converting the single-entry records

into complete double entry records including the preparation of Trial
Balance,
(2) preparation of final accounts simply by Incomplete Records
ascertaining certain missing figures.
The first method is known as 'Full Conversion Method' and the second
an 'Abridged Conversion Method'.
Full Conversion Method: full conversion method involves conversion of

records maintained on single entry system into complete double entry
records. You know most of the firms which keep records on single entry
system usually maintain a Cash Book along with the personal accounts of
the customers and suppliers. So, in order to convert them into double
entry records, you must also open all the concerned real and nominal
accounts in the ledger and make proper postings therein. This involves a
series of steps as follows:
1. Prepare the Statement of Affairs at the beginning and open all those
real and personal accounts which do not appear in the ledger maintained
under single entry system. This may involve the opening of all real
accounts (other than cash and bank) and the personal accounts such as
Capital, Drawings, Loan, Outstanding Expenses, Outstanding Incomes,
Prepaid Expenses, etc. It can be done by passing an opening journal

entry.
2. From the Cash Book, complete postings into all real and personal
accounts opened above.
3. Go through the debit side of the Cash Book and open all the incomes'
accounts in the ledger and make postings therein.
4. Go through the credit side of the Cash Bank and open all expenses'
accounts in the ledger and make postings therein.
5. Make complete analysis of the customers accounts and complete

double entry in accounts like Sales, Sales Returns, Bad Debts, Bills
Receivable, etc.
6. Similarly, make a complete analysis of suppliers accounts and complete

double entry in accounts like Purchases, Purchases Returns, Bills
Payable, etc.
7. Go through all vouchers and documents and note whether certain other
items require entry in books. For example, a piece of old furniture might
have been sold which may involve some profit or loss, the same will have
to be brought into books.
8. Prepare a Trial Balance and ensure that double entry is complete in

every respect.
You can now prepare the Trading and Profit & Loss Account and the
Balance Sheet.
Abridged Conversion method: Abridged Conversion Method helps us

to prepare the Trading and Profit & Loss Account and the Balance Sheet
without the opening of any additional accounts in the ledger. Under this
method we simply prepare a summary of all Cash transactions for the
entire accounting period. This is known as 'Receipt and Payments
Account'. In this account we show the opening cash and bank balances
and enter all receipts during the year under different heads of accounts
on its debit side. All Payments during the year under various head of
accounts and the closing balances of cash and bank are shown on its
credit side. This enables us to work out the amounts of various incomes
earned and the expenses incurred during the year. Not only that, a
number of other items such as cash purchases, cash sales, cash received
from debtors, cash paid to creditors, and purchase or sale of fixed assets
can also be worked out from the Receipt and Payments Account.
Similarly, we prepare a Total Debtors Account and Total Creditors
Account to find out the accounts of credit sales and credit purchases
respectively. This enables us to work out most of the figures required for
preparing the final accounts at the end of the accounting period.
BLOCK - 4 (UNIT 4)
Q. What is Memorandum Trading Account?

Ans: Sometimes you will find that the opening and closing stock are not
given. The opening stock can be worked out by preparing the opening
Statement of Affairs, provided all other figures including opening capital is
given. But, if the opening capital is also not given then the opening stock
will have to be worked out by preparing a Memorandum Trading
Account, which is just like the normal Trading Account. You know the
Trading Account is prepared for ascertaining the gross profit. It is debited
with opening stock, purchases, and direct expenses and credited with
sales and closing stock. The gross profit is equal to the excess of the credit
side total over the debit side total and is shown on the debit side of the
Trading Account. The gross profit can also be worked out if the gross
amount of sales is known and the rate of gross profit is given. Now if all
figures other than the opening stock are available and the gross profit has
been worked out with the help of goss profit rate. You can prepare a
Memorandum Trading Account and find out the amount of opening stock
on the basis of balancing figure.
BLOCK - 5 (UNIT 1)
Q. Receipts and Payments Account.
Ans: It gives full information about all receipts and payments under
different heads and is prepared with the help of the Cash Book. The Cash
Book contains a record of all receipts and payments in a chronological
order but the Receipts & Payments Account will simply show the total
amount received or paid under each head. For example, a club receives
subscriptions from its members on different dates in a year. These are
recorded in the Cash Book separately on those dates. But in Receipts &
Payments Account, the total amount of subscriptions received during the
year will appear as one item on its debit side. Similarly, salaries paid to
the staff will appear in Cash Book every month whereas the Receipts &
Payments Account will simply show the total amount for salaries paid
during the year on its credit side. You will recall that the opening balance
in Receipts and Payments Account represents the cash and bank
balances at the beginning of the year whereas the difference between the
totals of the two sides reflects the closing cash and bank balances.
Q. What is Income & Expenditure Account?

Ans: The Income & Expenditure Account serves the same purpose for a
non-trading concern as the Profit & Loss Account for a trading concern. It
is also prepared exactly in the same manner as the Profit & Loss Account
i.e., all incomes are shown on the credit side and all expenses and losses
on the debit side. However, in case of non-trading concerns the excess of
income over expenses and losses is not termed as profit. It is called
'Excess of Income over Expenditure' or 'Surplus'. Similarly, the excess of
expenses and losses over income is termed as 'Excess of Expenditure
over Income' or 'Deficiency'.
As stated earlier, the Income & Expenditure Account is prepared with the
help of Receipts & Payments Account and the additional information
available. You know the Income & Expenditure Account will show incomes
and expenses only for the period to which it relates and that too on accrual
basis.
BLOCK - 5 (UNIT 2)
This Unit involves practical questions. Refer book for more.
BLOCK - 5 (UNIT 3)
Q. What is Depreciation?
Ans: You are already familiar with the distinction between revenue
expenditure and capital expenditure. You are aware that when the benefit
of an expenditure is available beyond the accounting year (for one or more
years) such an expenditure is treated as capital expenditure and it often
results in acquisition of an asset. Since many accounting years are likely
to receive benefits on account of the use-of such an asset, the cost of
investment must necessarily be allocated over the period of its useful life
and charged to the Profit and Loss Account. Allocation of the appropriate
amount to each period is called Depreciation which represents the

expired portion of the cost of an asset.
BLOCK - 5 (UNIT 4)
This Unit involves practical questions. Refer book for more.
BLOCK - 5 (UNIT 5)
Q. What is a Provision?
Ans: It is a generally accepted accounting principle that while measuring
income for an accounting year, all possible losses and expenses must be
taken into account. Hence, we usually provide for depreciation on fixed
assets and their repairs, renewal etc. Similarly, there may be certain
liabilities/losses the amounts of which cannot be ascertained with
substantial accuracy such as dispute claims for damages, bad debts, and
so on. We must charge their estimated amounts to Profit and Loss
Account before working out the net profit. Such charge to the Profit and
Loss Account is called 'Provision'.
Thus, provisions are the amounts set aside out of profits and other
surpluses to provide for
(i) depreciation, renewals, or diminution in the value of assets, and
(ii) any known liability of which the amount cannot be determined with
substantial accuracy.
The provisions are usually created by debiting the Profit and Loss Account
and are either shown on the liabilities side of the Balance Sheet or
deducted from the concerned asset.
Q. Provision for Repair and Renewal.

Ans: Provision for Repairs and Renewals: Certain assets used for
business purposes need repairs and renewals which may not be
significant in initial years when any asset is purchased, but it may increase
with its constant use and passage of time. To equalise the charge on Profit
and Loss Account over the year in respect of repairs and renewals, we
make a provision for repairs and renewals by debiting the Profit and loss
Account and crediting the Provision for Repairs and Renewals Account.
The actual expenditure incurred on repairs and renewals is charged to the

Provision for Repairs and Renewals Account every year.
Q. What is Reserve?
Ans: Any amount set aside out of profits to meet unexpected future losses
and liabilities is called reserve. Not only that if any amount retained by
way of providing for any known liability in excess of the amount actually
needed for the purpose, shall also be treated as reserve and not a
provision.
The basic purpose of creating a reserve is to provide for unexpected

losses in future and also retain profits within business (not distribute
them to the owners or shareholders) to provide funds for expansion
of the business. Most well managed companies make it a point not to
distribute the whole of their profits to the shareholders. They retain good
portion of their profit in the form of general reserve (also called
contingency reserve). This also enables them to pay dividend even during
the year when the profits are low or there are losses.
Q. Difference between Provision and Reserve.

Ans:
Q. Types of Reserves.
Ans:
Open Reserves: There are two ways of creating reserves:
(1) by debiting the amount to Profit and Loss Account and clearly showing
it in the Balance Sheet in one form or the other, and
(2) by undervaluation of assets or overproviding for losses.
The first category of reserves can be easily identified from the financial
statements and are termed as open reserves. The second category of
reserves cannot be identified by the reader of financial statements. They
are known only to the management. Such reserves are called 'secret
reserves'.
Open reserves are further classified as capital reserves and revenue

reserves depending on the nature of profit out of which they are created.
Capital Reserve: A reserve created out of capital profits is called 'Capital

Reserve'. Capital profits may arise on account of revaluation or sale of
fixed assets. In case of companies the following items are also regarded
as capital profits.
i) credit balance left in Forfeited Shares Account after the re-issue of such
shares,
ii) premium received on issue of shares on debentures,
iii) profit realised on the purchase of company's own debentures from the
market
iv) profits made prior to incorporation.
you should note that reserve capital is not the same thing as capital
reserve. The reserve capital refers to the uncalled amount of share capital
which can be called only in the event of liquidation of the company
Revenue Reserve: Any reserve other than capital reserve can be called
a revenue reserve. Revenue reserves are usually created out of business
profits which are available for distribution of dividends. They are meant for
specific purposes or general purposes and are accordingly known as

specific reserves or a 'general reserve'. The specific purposes for which
they are usually created are dividend equalisation (known as dividend
equalization reserve), redemption of debenture (Known as debenture
redemption fund), workmen's compensation (known as workman's
compensation fund); etc. A general reserve, on the other hand, is meant
for meeting the unforeseen contingencies and to strengthen the financial
position of the business. All these reserves are debited to the Profit and
Loss Appropriation Account and shown on the liabilities side under the
head 'Reserves and Surplus'. As a matter of fact, they reflect the
undistributed profits of the business.
Q. Difference between Capital Reserve and Revenue Reserve?

Ans:
Q. What is Sinking Fund?

Ans: Sinking Fund: A sinking fund is a specific reserve created with the
object of providing funds for the redemption of long-term liabilities like
redeemable debenture. It is created by setting aside a fixed sum out of
profits every year for a definite period. Such a sum is invested at a
compound interest so that at the end of the period, the annual amounts
with accumulated interest will be sufficient to discharge the liability. If, for
example, a company has to redeem debentures worth Rs, 1,00,000 at the
end of ten years, it may set aside certain amount of profits every year and
invest it in some securities carrying certain rate of interest. The interest
earned every year is also re-invested. At the end of ten years, the total
amount of investment (including interest) will be equal to the amount
needed for redemption i.e., Rs. 1,00,000). The securities are then sold
and the amount so realized is used for the redemption of the debenture.
Q. Write short notes on Dividend Equalization Fund, Investment Fund and

Workman’s Compensation Fund?
Ans: Dividend Equalization Fund: This fund is created by setting aside

a portion of distributable profits during prosperous years as a provision for
lean period so that company is able to declare usual dividend even if
sufficient profits are not there. The amount representing this fund need
not be invested in outside securities. Even if there is no specific dividend
equalization fund, a company can always use its reserves, if any, for the
purpose of equalising dividends.
Investment Fluctuation Fund: This is a reserve created to provide for

the loss by way of fluctuation in the values of investments made by the
company in outside securities. This is generally provided by banks and
insurance companies who invest huge funds in government securities.
Workman's Compensation Fund: Under Workmen Compensation Act,

the workers are entitled to certain amount of compensation in case of
accidents in the factory. When an accident takes place, the amount of
compensation involved may be heavy. Hence, in order to avoid such loss
being charged to the Profit and Loss Account of the year in which it occurs,
the companies set aside a portion of profits every year and create
&special fund for this purpose. It is called, 'Workmen's Compensation
Fund'. As and when some compensation is paid, the same can be debited
to this fund.
Q. What are Secret Funds?

Ans: The term 'Secret Reserve' is applied to reserve, the existence of
which does not appear on the face of the Balance Sheet. When secret
reserves exist, the financial position of the business is better than what
may appear on the face of the balance sheet.
The main purpose of creating secret reserve is to reduce the disclosed

profit so that during bad period this hidden profit, or a portion of it, may be
merged into the earnings and thus help in equalising the dividends.
Methods of creating Secret Reserves: Secret Reserves may be created

in one of the following ways:
i) Writing off excessible depreciation

i) Undervaluation of closing stock'
iii) Charging capital expenditure to Profit and Loss Account
iv) Making excessive provision for bad and doubtful debts
v) Showing contingent liabilities as actual liabilities
vi) Retaining appreciating assets at cost price
In all the above cases the value of the assets are reduced without
disclosing the fact in the financial statements, As such they become
'secret' and are known only to the management.
_________________________________________________________
_________________________________________________________

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ECO-002[Accountancy] Notes from SUMAYA ACADEMY

Q. Name the parties interested in accounting information?

Internal users: Owners, Management and Employees.

Q. What are the limitations of accounting?

2. The data is historical in nature. The accountants adopt historical cost

3. Facts recorded in financial statements are greatly influenced by

Business Entity Concept: From the accounting point of view every

Money Measurement Concept: Usually, business deals in a variety of

Dual Aspect Concept: This is a basic concept of accounting. According

Q. What is single entry system?

Q. What is double entry system?

Ans: Journal is a daily record of business transactions, It is also called a

Q. What is Ledger. Draw its format.

Proforma of Ledger Book is given below:

Q. What is Trial Balance? Draw its format.

Proforma of Trial Balance:

Q. What is opening entry?

Ans: When an accounting year begins. the previous year's balances in

Q. What are subsidiary books or special journals? Explain their

journals called Subsidiary Books. Each book is used for recording

2. Purchases Journal: It is used for recording all credit purchases of

3. Sales Journal: It is used for recording all credit sale of goods.

4. Purchases Returns Journal: It is used for recording the returns of

5. Sales Returns Journal: It is used for recording the returns of goods by

6. Bills Receivable Journal: This book is meant for recording

7. Bills Payable Journal: This book is meant for recording bills of

8. Journal Proper: In this book only, such transactions are recorded

The advantages of having a number of subsidiary books as listed above

i) Classification of transactions becomes automatic: As there is a separate

ii) Reference becomes easy: If any reference is required, it can be traced

iii) Facilitate division of work: Sub-division of journal into various

V) Responsibility can be fixed: The work of maintaining a particular book

Q. What is Bank Reconciliation Statement?

When a cheque is issued to a creditor by the firm, it is immediately

4. Interest allowed by the bank

5. Interest and dividend collected by the bank

If the bank collects dividend on shares, interest on investments, etc on

6. Direct payment through bank

7. Direct payment into the bank by a customer

There may be errors in the account maintained by the customer or bank.

9. Bank charges and commission charged by the bank

Bank provides several services to its customers. It collects their outstation

10. Interest on bank overdraft charged by the bank

Generally, the bank allows the overdraft facility to traders on current

Q. What is Bank Overdraft?

Q. What is Purchases Journal? Draw it’s proforma.

Q. What is Sales Journal? Draw it’s proforma.

Proforma of Sales Journal is:

Q. What is Purchases Returns Journal? Draw it’s proforma.

Ans: In any business, sometimes goods purchased may have to be

also called 'Returns Outwards Journal' or 'Purchases Returns Book'.

Q. What is Sales Returns Journal? Draw it’s proforma.

Q. What is Debit Note?

Q. What is Credit Note?

Ans: When a customer returns goods to the business, a statement called

let us now briefly discuss them one by one.

1. Opening Entry: An opening entry is passed in the journal for opening

incorporate the balances of various assets and liabilities brought forward

2. Closing Entries: At the end of each accounting year, when final

3 Transfer Entries: When an amount is to be transferred from one

4. Adjustment Entries: At the time of preparing the final accounts, it

5. Rectification Entries: You may commit errors while recording

6. Miscellaneous Entries: If, in addition to the entries mentioned above,