FINANCIAL ACCOUNTING – I (BCA –II YEAR)

Unit-I
INTRODUCTION TO ACCOUNTING
Meaning- Definition- Functions- Objectives- Users of Accounting
Information- Accounting Concepts and Conventions – Advantages and Limitations
of Accounting.

Unit-II
DOUBLE ENTRY SYSTEM OF ACCOUNTING
Meaning and concepts - Golden Accounting Rules- Journal Entries- Ledger-
Trail Balance – Rectification of Errors (Simple Problems).

Unit-III
FINAL ACCOUNTS
Preparation of Trading Account, Profit and Loss Account and Balance
Sheet- Adjustment Entries (Simple Problems).

Unit-IV
SINGLE ENTRY SYSTEM
Meaning - Features - Advantages - Limitations - Methods- Net Worth
Method – Conversion Method (Simple Problems).

Unit-V
AVERAGE DUE DATE AND BANK RECONCILIATION STATEMENT
Average Due Date - Meaning -Uses – Problems - Bank Reconciliation
Statement- Meaning- Reasons for Preparation- Procedures and Preparation of Bank
Reconciliation statement (Simple Problems).

IMPORTANT TWO MARKS AND FIVE MARKS

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1. What do you mean by Accounting?
Accounting is the process of reporting, recording, interpreting and summarising
economic data. The introduction of accounting helps the decision-makers of a company
to make effective choices, by providing information on the financial status of the
business.

2. Define Accounting.
The American Institute of Certified Public Accountants (AICPA) defines
accountancy as “the art of recording, classifying, and summarizing, in a significant
manner and in terms of money, transactions and events which are, in part at least, of
financial character, and interpreting the results thereof”

3. Write any two Objective of Accounting.

To maintain a systematic record of business transactions

Accounting is used to maintain a systematic record of all the financial transactions in a

book of accounts.

To ascertain profit and loss

Every businessman is keen to know the net results of business operations periodically. To
check whether the business has earned profits or incurred losses, we prepare a “Profit &
Loss Account”.

4. What are the Different Branches of Accounting?

(a) Financial accounting (b) Cost accounting (c) Management accounting

5. What is Financial Accounting?

Financial Accounting is that branch of accounting which involves identifying,
measuring, recording, classifying, summarising the business transactions, i.e. it involves
the steps from Identifying, Recording of transactions to Summarisation, and
communicating the financial data.

6. What is Accounting concept?

Bookkeeping or accounting concepts are the establishments to place an
interrelated bookkeeping structure in an organisation. Accounting ideas or concepts are
exceptionally essential for each organisation, as this helps with staying in check with
synchronisation and harmony with the businesses, concerning utilising a homogenous
accounting concept.

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7. What is Accounting Conventions?
Accounting conventions show the fundamental rules that are utilised, to assist the
organisations with deciding how to record the transactions that happen within the
business, which are not completely tended to by the bookkeeping principles. These
methodology and standards are however not lawfully restricting, yet these are for the
most part acknowledged by the bookkeeping bodies. Essentially, these are intended to
promote an organisation’s consistency, and assist the bookkeepers with conquering the
pragmatic issues which can emerge while setting up the budget summaries.

8. What is Business Entity Concept?

The concept of business entity says that a business is a separate entity from its
owners. Therefore, for the objective of accounting, the firm and its owners are considered
as 2 distinct persons. Hence, when an owner brings in capital into the firm, it is
considered as a liability of the business.

9. What is Money Measurement Concept?

The concept of money measurement associates to such transactions of a business,
which can be recorded in terms of money in the books of accounts. The records are to be
kept in monetary units alone and not in physical. All the assets are consequently shown in
monetary terms for accounting purposes.

10. What is Going Concern Concept?

Going concern concept says that a firm will take on its business for an unlimited
period of time and would not be converted into cash at any pre-decided timeframe.

11. What is Accounting Period Concept?

Accounting period is the timeframe at the end of which, the financial statements of a
business are prepared, to evaluate its profits and losses, and to learn the status of its assets
and liabilities. This is required for the smooth availability of data to the users of the
accounting information in a convenient manner.

12. What is Book-keeping?

Book-keeping is the recording of financial transactions, and is part of the process
of accounting in business and other organizations. The person in an organisation who is
employed to perform bookkeeping functions is usually called the bookkeeper (or book-
keeper).

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13. What is Journal?
 Journal entries are how you record financial transactions.
 To make a journal entry, you enter details of a transaction into your company’s
books.
 In the second step of the accounting cycle, your journal entries get put into the
general ledger.
14. What is Ledger?
 Ledger is the third stage of accounting process.
 A ledger is a book or collection of accounts in which account transactions are
recorded.
 Each account has an opening or carry-forward balance and would in the trial
balance.
15. What is Trial Balance?
 A trial balance is a bookkeeping worksheet in which the balance of all ledgers is
compiled into debit and credit account column totals that are equal.
 A company prepares a trial balance periodically, usually at the end of every
reporting period.
 The general purpose of producing a trial balance is to ensure the entries in a
company's bookkeeping system are mathematically correct.
16. What is Error of Principle?
 Error of principle is said to occur when the accountant records a transaction that
does not comply with the rules of accounting.
 As per accounting rules, for every debit, there should be a corresponding credit.
 When a transaction violates this rule, an error results from it and such an error is
known as the error of principle.
 Recording of such a transaction does not have an impact on the trial balance, it
simply means transactions are recorded but in incorrect accounts.
17. What is Clerical error?
Clerical Errors: Clerical errors are those errors that are generated from the
improper recording of transactions. Clerical errors are further of three types and
are discussed below
Errors of Omission, Errors of Commission, Compensating Errors
18. What is Errors of Omission?
 Errors of omission are those types of errors that are generated when the
accountant forgets to record an entry.
 There can be two variations of such errors one is the complete omission of
transaction in which the transaction is not recorded in books of accounts.

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  The second type of error is the partial omission, in which the accountant
records the transaction in either the debit or credit side and forgets to record the
transaction on the opposite side.
19. What is Errors of Commission?
 These types of error result from the negligence of the person who is in charge
of recording the transactions.
 These types of errors have an impact on the trial balance and the examples of
such errors can be the recording of incorrect amounts and incorrect totalling in
the ledger or subsidiary books or posting at the wrong side of ledger accounts.
20. What is compensating errors?
 Compensating errors occur when one wrong entry neutralises the impact of
another incorrect entry.
 These entries cancel the other error that is recorded.
21. Give Accounting golden Rules.
Golden Rules of Real Account Personal Account Nominal Account
Accounting
Debit What comes in The receiver All expenses and losses
Credit What goes out The giver All incomes and gains
22. What is Real Account?
A real account is a general ledger account that reflects all the transactions relating
to assets and liabilities. It comprises tangible and intangible assets. Tangible assets such
as furniture, land, building, machinery, etc. On the other hand, intangible assets such as
goodwill, copyright, patents, etc.

23. What is Personal Account?

A personal account is a general ledger account relating to persons. It can be
natural persons like individuals or artificial persons like companies, firms, associations,
etc. When company A receives money or credit from another business or individual,
company A becomes the receiver. And, the other business or individual who gives it
becomes the giver, in the case of a personal account. A creditor account is a type of
personal account.

24. What is Nominal Account?

A nominal account is a general ledger account relating to all business income,
expenses, profit and losses. It accounts for all transactions pertaining to one fiscal year.
As a result, the balances are reset to zero and can start afresh. An interest account is a
type of nominal account.

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25. What is Final Accounts?
 The most important function of an accounting system is to provide information
about the profitability of the business.
 A sole trader furnishes a Trading and Profit and loss Account which depicts the
result of the business transactions of the sole trader. Along with the Trading
and Profit and Loss Account he also prepares a Balance Sheet which shows the
financial position of the business.
26. What is Trading Account?
 It is an account which is prepared by a merchandising concern which purchases
goods and sells the same during a particular period.
 The purpose of it to find out the gross profit or gross loss which is an important
indicator of business efficiency
27. What is Balance Sheet?
 Business needs some resources which have longer life (say more than a
year).Such resources are, therefore, not related to any particular accounting
period, but are to be used over the useful life thereof.
 The resources do not come free. One requires finance to acquire them. This
funding is provided by owners through their investment, bank & other through
loans, suppliers by way of credit terms.
 The Balance Sheet shows the list of resources and the funding of the resources
i.e. assets and liabilities (towards owners and outsiders). It is also referred as
sources of funds
28. What is closing stock?
 Closing Stock is an amount of unsold stock lying in your business on a given
date. In simple words, it’s the inventory which is still in your business
waiting to be sold for a given period.
 The closing stock can be in various forms such as raw materials, in-process
goods (WIP) or finished goods.
29. What is Adjustment entry?
 An adjusting journal entry is an entry in a company's general ledger that
occurs at the end of an accounting period to record any unrecognized income
or expenses for the period.
 Adjusting journal entries can also refer to financial reporting that corrects a
mistake made previously in the accounting period.
30. What is a Bad debt?
 Bad debt is an expense that a business incurs once the repayment of credit
previously extended to a customer is estimated to be uncollectible and is thus
recorded as a charge off.

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  Bad debt is a contingency that must be accounted for by all businesses that
extend credit to customers, as there is always a risk that payment won't be
collected.
31. What is Adjustment of Outstanding Expenses?
Expenses incurred but not paid yet are called outstanding expenses. In order to
avoid overstating profits adjustments in final accounts are recorded. Examples:
Outstanding Rent, Salary, Wages, Interest, etc.
32. What is Prepaid Expenses or Unexpired Expenses?
 Prepaid expenses are expenses that are paid in advance for a benefit that is
not received yet.
 In order to avoid understating profits, it is crucial to record them towards
the end of an accounting year.
Examples: Prepaid rent, prepaid interest, prepaid insurance, etc.
33. What is Provision for Discount on Debtors?
 A cash discount is provided to debtors as an encouragement for early
payments.
 In some cases the payment may be received in the next accounting year this
means that as per the accrual concept of accounting such discounts should
be treated as an expense in the current year.
 When such a provision is created it is called a provision for discount on
debtors.
34. What is the Journal entry of Depreciation?
Depreciation A/C Debit

To Provision for Depreciation A/C Credit

35. What is a Single Entry System?

 A single entry system records each accounting transaction with a single
entry to the accounting records, rather than the more common double entry
system.
 The single entry system is centered on the results of a business that are
reported in the income statement.
 The core information tracked in a single entry system is cash
disbursements and cash receipts. Asset and liability records are usually not
tracked in a single entry system; these items must be tracked separately.

36. What is Net worth Method?

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  To know the capital at the beginning of the year or at the last date of the
preceding accounting year, first step is to prepare the statement of affairs at
the beginning of the year.
 One statement of affairs should be prepared on the last date of accounting year
to ascertain.
 Drawing should be added to the amount of capital as ascertained at the end of
the year and the capital introduced if, any, during the year will be subtracted.
 Capital introduced if, any, during the year will be subtracted.
37. What is Conversion Method?
Statement of affairs should prepare on the date on which the change need
to be made. After the proper checking and verification of such balances from
available records, all the balances like cash balance, bank balance, assets,
liabilities, debtors, and creditors should appear in the statement of affairs.
38. What is the meaning of incomplete records?
 The biggest problem with single entry bookkeeping system is that of
incomplete records.
 Single entry system records only transactions that the firm is undertaking
with external parties.
 There are numerous transactions within the firm that are of vital
importance and need a place in the financial statements. However, the
single entry system ignores these needs and gives incomplete information
to the management.

39. Write formula for statement of affairs method.

40. Write Meaning of Debtors accounts.

A debtor is an individual or organisation that owes the money. In case the debt is in
the form of a loan from a financial institution, the debtor is referred to as a creditor, and
the debtor is referred to as an issuer in the form of securities, like bonds. Legally, anyone

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 who files a voluntary petition for bankruptcy declaration is often called a debtor. Failure
to pay a debt is no crime. With the exception of such bankruptcy cases, debtors may
priorities their debt repayments as they wish.

41. What is Bank Reconciliation Statement?

Bank Reconciliation Statement is a record book of the transactions of a bank
account. This statement helps the account holders to check and keep track of their funds
and update the transaction record that they have made. Bank Reconciliation statement is
also known as bank passbook. The balance mentioned in the bank passbook of the
statement must tally with the balance mentioned in the cash book. In the statement, all the
deposit will be shown in the credit column and withdrawals will be shown in the debit
column. However, if the withdrawal exceeds deposit it will show a debit balance
(overdraft).
42. What is Average Due Date?
To simplify the calculation of interest involved in such transactions, we use the concept of
the average due date. In this concept, a person pays all his dues on a particular date, in a manner
so that neither the debtor nor the creditor suffers loss or gain by way of interest. This date is the
Average due date (ADD).

43. What is the Maturity of a Bill?

The maturity of a bill or a transaction refers to the date on which the bill of exchange is due to
be paid. For calculating this, an additional 3 days are added as a grace period.

44. What is the Due Date?

Due date is a date on which transactions such as loan installments, sales, purchases, bills, etc.
fall due for the settlement.

45. How is the Due Date Calculated?

1. The due date is calculated by adding the bill/credit period on the relevant date + 3 grace
days if it is applicable.
2. The relevant dates of bills of exchange can be the date of the bill or the date of
acceptance according to the terms of the bill. In other cases, it can be the date of the
transaction.
3. The due date of a bill of exchange is calculated for finding the date on which the payment
of the transaction or the bill is due.
4. To calculate the due date of the bill of exchange, the steps given below are followed:
5. The first step is identifying the start date or the base date, which refers to the date
wherein the bill of exchange was drawn.

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 6. Then the number of days or months is added after which the bill is due for the
payment .And lastly, an additional period of 3 days is added as the grace period.

46. What is Maturity Date?

1. The maturity date is the point in time when a fixed income instrument's principal must be
returned to an investor.
2. The maturity date is also the date by which a borrower must repay an instalment loan in
full.The maturity date is used to categorize bonds into three major categories: short-term
(1-3 years), medium-term (10 or more years), and long-term (30 year Treasury bonds).
3. Once the maturity date is reached, the interest payments to investors end since the loan
arrangement is no longer in effect.

47. Give Formula for find Average Due Date.

Average Due Date = Base Date ± Total of the Products /Total of the Amount

FIVE MARKS QUESTIONS

1. What are the Objectives of Accounting?

To maintain a systematic record of business transactions

 Accounting is used to maintain a systematic record of all the financial transactions in a

book of accounts.
 For this, all the transactions are recorded in chronological order in Journal and then
posted to principle book i.e. Ledger.
To ascertain profit and loss

 Every businessman is keen to know the net results of business operations periodically.
 To check whether the business has earned profits or incurred losses, we prepare a “Profit
& Loss Account”.
To determine the financial position

 Another important objective is to determine the financial position of the business to

check the value of assets and liabilities.
 For this purpose, we prepare a “Balance Sheet”.
To provide information to various users

 Providing information to the various interested parties or stakeholders is one of the most
important objectives of accounting.
 It helps them in making good financial decisions.

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 To assist the management

 By analysing financial data and providing interpretations in the form of reports,

accounting assists management in handling business operations effectively.

2. Explain the Characteristics of Accounting.

(1) Identifying financial transactions and events

 Accounting records only those transactions and events which are of financial nature.
 So, first of all, such transactions and events are identified.
(2) Measuring the transactions

 Accounting measures the transactions and events in terms of money which are considered
as a common unit.
(3) Recording of transactions

 Accounting involves recording the financial transactions inappropriate book of accounts

such as Journal or Subsidiary Books.
(4) Classifying the transactions

 Transactions recorded in the books of original entry – Journal or Subsidiary books are
classified and grouped according to nature and posted in separate accounts known as
‘Ledger Accounts’.
(5) Summarising the transactions

 It involves presenting the classified data in a manner and in the form of statements, which
are understandable by the users.
 It includes Trial balance, Trading Account, Profit and Loss Account and Balance Sheet.
(6) Analysing and interpreting financial data

 Results of the business are analyzed and interpreted so that users of financial statements
can make a meaningful and sound judgment.
(7) Communicating the financial data or reports to the users

 Communicating the financial data to the users on time is the final step of Accounting so
that they can make appropriate decisions.

3. What are the Advantages of Accounting?

1. Provide information about financial performance

 Accounting provides factual information about financial performance during a given

period of time

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  Like, profit earned or loss incurred over a period and financial position at a particular
point of time.
2. Provide assistance to management

 Accounting helps management in business planning, decision making and in exercising

control.
 For this, it provides financial information in the form of reports.
3. Facilitates comparative study

 By keeping systematic records and preparation of reports at regular intervals, accounting

helps in making a comparison.
4. Helps in settlement of tax liability

 Systematic accounting records help in settlement of various tax liabilities. Such as –

Income Tax, GST, etc.
5. Helpful in raising loan

 Banks and Financial Institutions grant a loan to the firm on the basis of appraisal of the
financial statement of the firm.
6. Helpful in decision making

 Accounting provides useful information to the management for taking decisions.

4. What Are the Limitations of Accounting?

 Accounting is not precise: Accounting is not completely free from personal bias or
judgment.
 Accounting is done on historic values of assets: Accounting records assets at their
historical cost less depreciation. It does not reflect their current market value.
 Ignore the effect of price level changes: Accounting statements are prepared at
historical cost. So changes in the value of money are ignored.
 Ignore the qualitative information: Accounting records only monetary transactions. It
ignores the qualitative aspects.
 Affected by window dressing: Window dressing means manipulation in accounting to
present a more favourable position of the business than the actual position.

5. Explain the Users of Accounting Information.

(A) Internal Users

 Owners: Owners contribute capital in the business and thus they are exposed to
maximum risk. So, they are always interested in the safety of their capital.

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  Management: Accounting information is used by management for taking various
decisions.
 Employees: Employees are interested in the financial statements to assess the ability of
the business to pay higher wages and bonuses.
(B) External Users

 Banks and financial institutions: Banks and Financial Institutions provide loans to
business. So, they are interested in financial information to ensure the safety and recovery
of the loan.
 Investors: Investors are interested to know the earning capacity of business and safety of
the investment.
 Creditors: Creditors provide the goods on credit. So they need accounting information to
ascertain the financial soundness of the firm.
 Government: The government needs accounting information to assess the tax liability of
the business entity.
 Researchers: Researchers use accounting information in their research work.
 Consumers: They require accounting information for establishing good accounting
control, which will reduce the cost of production.

6. Explain Accounting Concept.

Business Entity Concept:

The concept of business entity says that a business is a separate entity from its
owners. Therefore, for the objective of accounting, the firm and its owners are considered
as 2 distinct persons. Hence, when an owner brings in capital into the firm, it is
considered as a liability of the business.

Money Measurement Concept:

The concept of money measurement associates to such transactions of a business,

which can be recorded in terms of money in the books of accounts. The records are to be
kept in monetary units alone and not in physical. All the assets are consequently shown in
monetary terms for accounting purposes.

Going Concern Concept:

Going concern concept says that a firm will take on its business for an unlimited
period of time and would not be converted into cash at any pre-decided timeframe.

Accounting Period Concept:

Accounting period is the timeframe at the end of which, the financial

statements of a business are prepared, to evaluate its profits and losses, and to learn the

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 status of its assets and liabilities. This is required for the smooth availability of data to the
users of the accounting information in a convenient manner.

Cost Concept:

Cost concept requires that all the assets must be recorded in the books of accounts
at the price at which they were bought, which involves the cost incurred for
transportation, installation and acquisition. The cost concept is traditional in nature as a
particular amount concerning the asset is paid on the date of purchase and does not
change year after year.

7. What is the Difference Between Bookkeeping and Accounting?

Book-keeping Accounting

Bookkeeping involves identifying, In addition to bookkeeping, Accounting also

measuring, recording & classifying includes summarizing, interpreting and
financial transactions in the ledger communicating the financial data to the users
accounts. of financial statements.

The main aim is to maintain systematic
records of financial transactions.
It is a primary stage of accounting
This job is in routine and repetitive in
nature.
Bookkeeping does not require special
skills. It is performed by Junior Staff.
The main aim is to ascertain the profitability
and financial position of the business.
It is a second stage and begins where book-
keeping ends.
This job is analytical in nature.
It requires specialized skill to analyze, so it is
performed by senior staff.

8. What are the Objectives of Final accounts?

The final account is legally required for the entities.

 The financial accounting and preparation Financial statements are obligatory

for the entities as well as getting those accounts audited.
 These accounts are prepared for presenting and providing the financial
performance and status of the entity to the stakeholders, users, investors,
promoters, etc.
 The presentation of comparable figures of the current period from the
previous period increases the utility of the statements of accounts.

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  It presents the accurate & fair view of the organization’s financial
performance by providing accurate & full information regarding the business
with proper notes and disclosures of the real facts.
 They are prepared for the calculation of Gross profit & net profit earned by
the organization for the relevant period by presenting the Statement of Profit
& Loss.
 The Balance sheet is prepared for providing the correct financial position of
the company as on the date.
 These accounts use the bifurcation of direct expense to obtain the gross profit
& loss and bifurcation in indirect expenses
 Indirect expenses are the general costs incurred for running business
operations and management in any enterprise.
 In simple terms, when you want to buy grocery from a supermarket, the
transportation cost to get you to the supermarket and back is the indirect
expenses.
 To ascertain the Net profit & loss for the organization.
 These accounts through the Balance sheet bifurcate the assets & liabilities as
per the holding & usage periods of the same.

9. What is an Adjustment Entry? How to adjust in the final accounts?

Adjustment entries are the journal entries that convert an entity's

accounting record in an accrual basis of accounting. In accrual basis of
accounting, we recognize incomes when we earn them and not when we receive
the cash. Similarly, we recognize the expenses when we incur them and not when
we actually pay them.

 It all starts mainly with the accrual concept of accounting, which says that all
income earned during an accounting period should be recorded whether or not
it has been received or not.
 Similarly, all expenses incurred during the period should be accounted for
regardless of the actual payment. This is the primary reason for adjustments in
final accounts.

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Why are adjustments important in final accounts?

 If such adjustments in preparation of financial statements are missed then the

numbers shown by the business in their final accounts will not be accurate and
true.
 Journal entries are posted to reflect any necessary adjusting entries.

List of Adjustments in Final Accounts

1. Closing Stock
2. Outstanding Expenses
3. Prepaid or Unexpired Expenses
4. Accrued or Outstanding Income
5. Income Received In Advance or Unearned Income
6. Depreciation
7. Bad Debts
8. Provision for Doubtful Debts
9. Provision for Discount on Debtors & Creditors
10. Interest on Drawings
11. Interest on Capital
12. Interest on Loan
13. Drawing for Personal Use
14. Abnormal or Accidental Losses
Treatment of Closing Stock Adjustment in Financial Statements
Trading Account: Show on the credit side
Profit & Loss Account: No effect
Balance Sheet: Show on the assets side (usually under the head current
assets
Treatment of Outstanding Expenses Adjustment in Financial Statements
Trading Account: Show on the debit side (add to respective direct
expense)
Profit & Loss Account: Show the debit side (add to respective indirect
expense)
Balance Sheet: Show on the liability side (usually under the head current
liabilities)

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Treatment of Prepaid Expenses Adjustment in Financial Statements
Trading Account: Show on the debit side (subtract from the respective
direct expense)
Profit & Loss Account: Show the debit side (subtract from the respective
indirect expense)
Balance Sheet: Show on the assets side (usually under the head current
assets)
Treatment of Accrued Income Adjustment in Financial Statements
Trading Account: No effect
Profit & Loss Account: Show on the credit side (Add to respective income)
Balance Sheet: Show on the assets side (usually under the head current assets)
Treatment of Income Received in advance Adjustment in Financial Statements
Trading Account: No effect
Profit & Loss Account: Show on the credit side (Subtract from the
respective income)
Balance Sheet: Show on the liability side (usually under the head current
liabilities)
Treatment of Depreciation in Financial Statements (No Provision)
Trading Account: No effect
Profit & Loss Account: Show on the debit side (calculate as per % & method
given)
Balance Sheet: Show on the asset side (subtract depreciation from the fixed
assets
Treatment of Bad Debts in Financial Statements
Situation 1 – When bad debts are given inside the trial balance – No
Adjustment, only show in P&L
Situation 2 – When bad debts are given outside the trial balance as an
adjustment – They are called further bad debts and adjustments in final
accounts are posted.
Trading Account: No effect
Profit & Loss Account: Show on the debit side (add to bad debts already
written off)
Balance Sheet: Show on the asset side (subtract from sundry debtors
Treatment of Provision for Doubtful Debts in Financial Statements
Trading Account: No effect
Profit & Loss Account: Show on the debit side (calculate as % on Debtors)
Balance Sheet: Show on the asset side (subtract from sundry debtors)
Note: Provisions do not reduce the amount due from debtors.

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Treatment of Provision for Discount on Debtors in Financial Statements
Trading Account: No effect
Profit & Loss Account: Show on the debit side (calculate on good debtors i.e.
after adjusting bad debts & provision for doubtful debts)
Balance Sheet: Show on the asset side (subtract from sundry debtors)
Treatment of Provision for Discount on Creditor in Financial Statements
Trading Account: No effect
Profit & Loss Account: Show on the credit side (calculate on good creditors)
Balance Sheet: Show on the liabilities side (subtract from sundry creditors)
Treatment of Interest on Capital Adjustment in Financial Statements
Trading Account: No effect
Profit & Loss Account: Show the debit side
Balance Sheet: Show on the liability side (Add to owner’s capital)
Note: If interest on capital is given in the trial balance then it will be shown
only in the Profit and Loss account as the credit entry has already been
passed.
Treatment of Interest on Drawing Financial Statements
Trading Account: No effect
Profit & Loss Account: credit side
Balance Sheet: Show on the liability side (Subtract from owner’s capital)
Treatment of Abnormal or Accidental Loss in Financial Statements
(Goods Not Insured)
Trading Account: Show on the credit side (with the cost of goods destroyed)
Profit & Loss Account: Show on the debit side (with the cost of goods
destroyed)
Balance Sheet: No effect

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10. Draw the Proforma of P&L A/C

11. Write the proforma of Balance sheet.

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 Liabilities Amount Assets Amount

Capital a/c: Tangible fixed assets:

Balance xxxx Land and building Xxxx

Add: net profit/less net Plant and machinery Xxxx

loss xxxx

Less: drawings xxxx xxxx Vehicle Xxxx

Long term loans: Furniture and fixtures Xxxx

Term loans Xxxx Intangible assets:

Other loans Xxxx Goodwill Xxxx

Short term loans: Patents Xxxx

Cash credit Xxxx Investments:

Overdraft Xxxx Long term investment Xxxx

Other loans Xxxx Current assets:

Current liabilities: Cash in hand Xxxx

Trade payables Xxxx Cash at bank Xxxx

Outstanding expenses Xxxx Inventory xxxx

Advance taken Xxxx Trade receivables Xxxx

Provision: Prepaid expenses Xxxx

Provision for bad and xxxx Short term investment Xxxx

doubtful debts

Provision for taxation xxxx Advance Xxxx

Xxxx Xxxx

12. What are the major differences between single entry system and double entry system?

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 Single entry system Double entry system

 Tells about cash, debtors and creditors cash  Tells about every business financial entity.
balances only.

 Records transactions related to business

 Records all effects of transactions.
only.

 Incomplete system of recording the

transactions.  Complete system of recording the
transactions.
 Can easily record fraud transactions.
 Difficult to record fraud transactions.
 Hard to find errors.
 Easy to identify errors.
 Persons accounts and cash accounts are
included.  All accounts are considered.

 Not accepted by taxation department.  Accepted by taxation department.

 Takes lot of time in calculation profit/loss.  Easy to calculate profit/loss.

 Suitable for small business.  Suitable to all types of business.

 Cost of implementation is not required.  Cost of implementation is required.

 Reconciliation of accounts is not possible.  Reconciliation of accounts is possible.

 Special knowledge is not required in  Special knowledge is required in

maintaining books. maintaining books.

 Trail balance can’t be prepared.  Trail balance can be prepared.

 Not suitable for tax purpose  Suitable for tax purpose.

 Difficult to prepare financial statement  Easy to prepare financial statements.

 Difficult to tell about financial position  Can easily tell about financial position.

13. What is the difference between Balance Sheet and Statement of Affairs?

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  Balance sheet is prepared based on double entry system. Statement of affairs is a single
and incomplete entry.
 Balance sheet is prepared to present financial position of a business entity at a given date.
Statement of affairs is prepared to find out the amount of capital either opening or
closing.
 Balance sheet shows assets at book value. Statement of affairs shows assets at both book
value and market value.
 Balance sheet is usually prepared at the end of the financial year. Statement of affairs is
prepared for the date when the order is given against the debtor.
 A balance sheet has to obey accounting practices, standards, concepts and policies. A
statement of affairs has to be prepared according to the insolvency act.
 Balance sheet adheres to going concern concept believing that these assets and liabilities
will remain with the organization for a period. Statement of affairs considers realizable
and payable values of the assets and liabilities to the present date, which is against to the
going concern concept.
 Balance sheet is prepared as the final financial statement of the general manual
accounting procedure. Statement of affairs is prepared before the preparation of profit
and loss statement
o Statement of Affairs vs Balance Sheet Summary
 Balance sheet and statement of affairs are two statements prepared to assess the financial
position of a particular business entity.
 Balance sheet is a mandatory requirement under accounting procedures, which is
prepared by aggregating balances of all the ledger accounts.
 In contrast, statement of affairs presents the insolvency level of a business entity,
emphasizing the net realizable and payable values of assets and liabilities.
 Both of these statements help decision makers to make financial and investment decisions
in a substantial manner.

14. Explain Ascertainment of Profit under Single Entry System.

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 The Profit/ Loss in case of Single Entry System can be ascertained by the
following two methods, Statement of Affairs Method (or Net Worth Method): A
Statement of Affairs is a statement of assets and liabilities. It is similar to (though not the
same) as a Balance Sheet. Under this system profit is ascertained by comparing the
capitals at the beginning and capital at the end of the accounting period and necessary
adjustments are made for drawings, fresh introduction of capital, withdrawal of capital
and interest on capital.

Steps for ascertain profit and loss

Step 1: Prepare the statement of affairs at the beginning (if not given) of the accounting period to
ascertain the opening capital. According to accounting equation, we know that :Capital = Assets
— Liabilities

Step 2: Ascertain drawings and capital introduced during the year.

Step 3: Prepare a statement of Affairs at the end of the accounting period to ascertain the closing
capital (Capital at the end)

Step 4: Prepare a statement of Profit as follow Conversion Method or Final Account Method:

 Accounts maintained under single entry system are not sufficient for preparing trial
balance at the end of the accounting period.
 As a results, final accounts (financial statements) cannot be prepared from
incomplete records, unless steps are taken for their completion.

Under conversion method, cash account, debtors account, creditors account etc. maintained
under single entry system are analysed and an attempt is made to complete double entry. by
making necessary posting into unposted ledger accounts. If a particular account is not already
maintained, a new account is opened and necessary posting is done.

Practical steps involved in the preparation of Final Accounts from incomplete records :

Step 1: Prepare Cash Book (if not available in proper form with both sides tallied) to ascertain
the missing information (such as opening and closing balance, cash sales/cash purchases,
drawings).

Step 2: Prepare Total Debtors Account to ascertain the missing information such as
opening/closing balance, credit sales, collection, B/R drawn).

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Step 3: Prepare Bills Payable Account to ascertain the missing information (such as
opening/closing balance, B/P accepted, B/P discharged).

Step 4: Prepare Stock Account for ascertaining missing information (such as opening
stock/closing stock, total purchases, and cost of goods sold shortage).

Step 5: Prepare Revenue Expense Account for ascertaining missing information (such as
opening/closing balance of outstanding/ prepaid expenses, expenses paid and current year’s
expense).

Step 6: Prepare Revenue Income Account to for ascertaining missing information (such as
opening/closing balance of accrued/ un accrued income, income received, current year’s
income).

Step 7; Prepare Fixed Asset Account for ascertaining missing information (such as
opening/closing balance, purchases/sale, depreciation provided, profit-loss on sale).

Step 8: Find-out Opening Capital by preparing Statement of Affairs at the beginning of the
accounting period.

Step 9: Prepare Trial Balance to check the arithmetical accuracy.

Step 10: Prepare Trading and Profit and Loss Account and the Balance Sheet

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