Answer of Q.N.1.
Accounting Equation:
The
accounting equation is the fundamental equation upon which all double entry
accounting is based. Whatever business possesses in the form of assets is
financed by proprietor or by outsiders. This equation expresses the equality of
assets on one side and the claims of outsiders (liabilities) and owners or
proprietors on the other side. Accounting equation signifies that the assets of
a business are always equal to the total of liabilities and capital. This
relationship is expressed as under:
Assets =
Liabilities + Capital
“Accounting
Equation remains intact under all circumstances”. This statement can be proved
through following examples.
He started business with cash Rs.
5, 00,000 have been introduced by Mr. X in terms of cash, which is the capital
for the business concern. Hence on one hand, the asset (cash) has been created
to the extent of Rs. 5, 00,000.
Assets
|
= Capital
|
+ Liabilities
|
Cash = 500000
|
500000
|
Nil
|
Example.2.He purchased furniture
for cash worth Rs. 50,000.
This transaction has its effect
only on the assets, as one asset has been purchased against the other. In this
transaction, furniture is purchased against cash given. Furniture and cash both
are assets. Hence furniture is introduced by Rs. 50,000.
Assets
|
= Capital
|
+ Liabilities
|
Cash= 500000-50000=450000
Furniture = 50000
|
500000
|
Nil
|
Example.3. He purchased goods for
cash Rs. 10,000
This transaction has its effect
only on the assets, as one asset has been purchased against the other. In this
transaction, goods are purchased against cash given. Goods (Stock) and cash
both are assets. Hence Stock is introduced by Rs. 10,000.
Assets
|
= Capital
|
+ Liabilities
|
Cash= 450000 – 10000= 440000
Furniture = 50000
Stock = 10000
|
500000
|
Nil
|
Example.4. Rent paid Rs. 10,000
This transaction has its effect
on cash and capital since rent is expenses and all the expenses directly
affects capital.
Assets
|
= Capital
|
+ Liabilities
|
Cash= 440000 – 10000= 430000
Furniture = 50000
Stock = 10000
|
500000 – 10000 = 490000
|
Nil
|
Example.5. Goods purchased on
credit Rs. 10000.
This transaction has its effect
on stock and creditors. Goods purchased are assets and since cash is not paid,
the amount of goods purchased is shown as liability.
Assets
|
= Capital
|
+ Liabilities
|
Cash= 440000 – 10000= 430000
Furniture = 50000
Stock = 10000 + 10000= 20000
|
500000 – 10000 = 490000
|
10000
|
From the above
examples, it is clear that Accounting Equation is true under all circumstances.
Q.N.2. Write short notes on the
following
(b)Principle of
Materiality
The role of this convention
cannot be over-emphasised in as much as accounting will be unnecessarily
overburdened with more details in case an accountant is not able to make an objective
distinction between material and immaterial matters. American Accounting Association
(AAA) defines the term materiality as under : “An item should be regarded as
material if there is reason to believe that knowledge of its would influence
the decision of informed investor”.
Kohler has defined materiality as
under : “The characteristic attaching to a statement, fact, or item whereby its
disclosure or the method of giving it expression would be likely to influence
the judgement of a reasonable person”.
Some of the examples of material
financial information to be disclosed are likely fall in the value of stocks,
loss of markets due to competition or Government regulation, increase in wage bill
under recently concluded agreement, etc. It is now agreed that information
known after the date of balance sheet must also be disclosed.
Another example of materiality is
the question of allocation of costs. An item of small value may last for three
years and technically its cost must be allocated to every one of the three
years. Since its value is small, it can be treated as the expense in the year
of purchase. Such a decision is in accordance with the principle of
materiality. Likewise, unimportant items can be either left out or merged with
other items. Sometimes items are shown as footnotes or in parentheses according
to their relative importance.
It should be noted that an item
material for one concern may be immaterial for another. And similarly, an item
material in one year may not be material in the next year. As per A.S. – 1,
materiality should govern the selection and application of accounting policies.
According to the consideration of materiality financial statement should
disclose all items which are material enough to affect evaluations or
decisions.
Answer of Q.N.3.
Single column Cash Book
Date
|
Receipts
|
Amount
|
Discount
|
Date
|
Payments
|
Amount
|
Discount
|
Mar. 1
Mar. 5
Mar. 10
Mar. 15
Mar. 24
Mar. 26
|
To Capital A/c
To Sales A/c
To Naresh and Co. A/c
To Sales A/c
To Rent A/c
To Interest A/c
|
50,000
20,000
9,800
10,000
600
500
|
200
|
Mar. 2
Mar. 13
Mar. 18
Mar. 20
Mar. 28
Mar. 31
Mar. 31
|
By Purchases A/c
By Sunil’s
By Furniture A/c
By Wages A/c
By Drawings A/c
By Shyam and Co. A/c
By Balance C/d
|
6,000
5,000
12,000
500
1,500
13,750
52,150
|
250
|
90,900
|
200
|
90,900
|
250
|
Answer of Q.N.4.
After
posting the accounts in the Ledger, a statement is prepared to show separately
the debit and credit balances and to check the arithmetic accuracy of the
accounts of a certain periods such a statement is known as the Trial Balance.
The
agreement of a trail balance ensures arithmetical accuracy only. A concern can prepare trail balance at any
time, but its preparation as on the closing date of an accounting year is
compulsory.
According to
M.S. Gosav “Trail balance is a statement containing the balances of all ledger
accounts, as at any given date, arranged in the form of debit and credit
columns placed side by side and prepared with the object of checking the
arithmetical accuracy of ledger postings”.
Trial
Balance is not a complete proof of arithmetical accuracy of account. A Trial
Balance in which the credit and debit accounts match does not prove that, all
transactions have been recorded in the proper accounts. For example, the wages
paid for the installation of machinery had been erroneously recorded by
debiting the wages account in the place of machinery account, the Trial Balance
would still agree.
Similarly,
an agreed Trial Balance does not prove that all transactions have been recorded
in the books of original entry. For example, a credit sale invoice were to be
completely omitted from being recorded in the sales day book, the error would
not be disclosed in the Trial Balance.
To conclude,
we can say that a trial balance should not be recorded as a conclusive proof of
the correctness of the books of account.
Errors which are not
disclosed by a Trial Balance/Limitations of a Trial Balance
Errors of Commission: These are the errors which are committed due to the wrong posting
of wrong transaction, wrong totaling or balancing of the accounts, wrong
casting of the subsidiary books. Such errors are called Errors of Commission.
Errors of Omission: The errors of omission may be committed at the time of recording
the transaction in the books of original entry or while posting to the ledger.
These can be of two types:
i) Errors of
complete omission
ii) Errors of
partial commission
When a
transaction is completely omitted from recording in the books of original
record, it is an error of complete omission. When a transaction is partially
omitted from posting in ledger, it is an error of partial omission.
Error of
principle: Accounting
entries are recorded as per the generally accepted accounting principles. If
any of these principles are violated or ignored, errors resulting from such
violation are known as errors of principle. An error of principle may occur due
to incorrect classification of expenditure or receipt between capital and
revenue.
Compensating errors: When two or more errors are committed in such a way that the
effect of these errors on the debits and credits of accounts is nil, such
errors are called compensating errors. Such errors do not affect the tally of
the trial balance.
Answer of Q.N.5.
Bank
Reconciliation Statement
The statement which
is prepared for verifying and reconciling the bank balances, shown by the cash
book and pass book on a certain date and incorporates the reasons of
disagreement between them is called a bank reconciliation statement.
Utility of B.R.S
a) It gives an authentic proof of the accuracy of the
cash and pass book balances.
b) Entries in both the book are automatically checked.
c) The cash book may be made up- to-date by recording
some hitherto unknown entries.
d) It helps to detect any mistake in the cash book and
pass book
REASONS FOR DISAGREEMENT BETWEEN THE BALANCES OF
CASH BOOK AND PASS BOOK:
Ø Cheques deposited but not collected before the date
of reconciliation:
Cash book show a higher balance than the pass book balance.
Ø Cheques issued but not presented for payment before
the date of reconciliation: the balance of the cash book is lower
than the balance shown in the pass book.
Ø Cheques /cash directly deposited in the bank by the
customers: the
balance of the cash book is lower than the balance shown in the pass book.
Ø Payments directly made by the bank on behalf of the
business: the
pass book shows a lower balance than the cash book
Ø Dividends or interest collected or credited by the
bank: The pass
book will show a higher balance than the cash book.
Ø Interest on overdraft, commission, bank charges
etc., debited by the bank in the pass book: the pass book shows a lower balance than
the cash book
Ø Cheques received and entered in the cash book but
forgotten to sent to bank: the pass book shows a lower balance than
the cash book
Ø Cheques sent to collection but dishonored: the pass
book shows a lower balance than the cash book.
Ø Mistakes in cash book: Undercast, overcast, wrong
balancing and carryforwarding.
Ø Mistakes in pass book: Undercast, overcast, wrong
balancing and carryforwarding.
Answer of Q.N.6.
Journal Entries
Date
|
Particulars
|
L.F.
|
Amount (Dr.)
|
Amount (Cr.)
|
1.
|
Purchases A/c Dr.
Sales A/c
Dr.
To Ram’s
Account
(Being the goods purchased from
Ram wrongly entered in sales book, now rectified)
|
3,000
3,000
|
6,000
|
|
2.
|
Anil’s Account Dr.
To Purchases A/c
To Sales A/c
(Being the goods sold to Anil
wrongly entered in purchases book, now rectified)
|
8,000
|
4,000
4,000
|
|
3.
|
Sales Return A/c Dr.
Purchases Return A/c Dr.
To Customer’s Account
(Being the goods return by
customer wrongly entered in purchase return book, now rectified)
|
1,500
1,500
|
3,000
|
|
4.
|
Sales A/c
Dr.
To Mohan’s Account
(Being the sales to Mohan of
Rs. 126 wrongly entered as Rs. 162, now rectified)
|
36
|
36
|
|
5.
|
Sales A/c
Dr.
To Table Account
(Being the sale of old tables
wrongly treated as sales, now rectified)
|
650
|
650
|
|
6.
|
Drawings A/c Dr.
To Rent A/c
(Being the rent of proprietor’s
home wrongly debited in rent account, now rectified)
|
1,000
|
1,000
|
Answer of Q.N.7.
Trading and
Profit & Loss Account of Sh. Rama Nand Sagar
For the year
ended 31st December, 2010
Particulars
|
Amount (Dr.)
|
Particulars
|
Amount (Cr.)
|
To Opening Stock
To Purchases 90,000
Less: Purchase Return 5,000
To Wages 32,000
Add: Wages Outstanding 3,000
To carriage Inward
To Gross Profit
|
21,000
85,000
35,000
3,600
1,64,400
|
By Sales 2,90,000
Less: Sales Return 5,000
By Closing Stock
(Cost or market price whichever
is lower)
|
2,85,000
24,000
|
3,09,000
|
3,09,000
|
||
To Carriage Outward
To Salaries
27,500
Add: Outstanding 2,500
To Travelling Expenses
To Lighting
To Rent and Taxes
To General Expenses
To Insurance 1,500
Less: Prepaid 300
To Depreciation on P/M
To Depreciation on Furniture
To Net Profit
|
800
30,000
3,500
1,600
7,000
10,700
1,200
4,250
2,600
1,07,950
|
By Gross Profit
By Discount
|
1,64,400
5,200
|
1,69,600
|
1,69,600
|
Balance Sheet as on 31st December, 2010
Liabilities
|
Amount
|
Assets
|
Amount
|
Capital
55,000
Add: Net Profit 1,07,950
Less: Drawings 18,000
Sundry Creditors
Bills Payable
Wages Outstanding
Salaries Outstanding
|
1,44,950
24,000
1,800
3,000
2,500
|
Plant and Machinery 85,000
Less: Depreciation @5% 4,250
Furniture 13,000
Less: Depreciation @20% 2,600
Sundry Debtors
Bills Receivable
Cash in hand
Closing Stock
Prepaid Insurance
|
80,750
10,400
52,000
2,600
6,200
24,000
300
|
1,76,250
|
1,76,250
|