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.
Example.1.
Suppose Mr. X starts his business and the following transactions take place:
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
a) Principle of Consistency: The convention of consistency refers to the
state of accounting rules, concepts, principles, practices and conventions
being observed and applied constantly, i.e., from one year to another there
should not be any change. If consistency is there, the results and performance
of one period can he compared easily and meaningfully with the other. It also
prevents personal bias as the persons involved have to follow the consistent
rules, principles, concepts and conventions. This convention, however, does not
completely ignore changes. It admits changes wherever indispensable and adds to
the improved and modern techniques of accounting.
b) Disclosure: The convention of disclosure stresses the
importance of providing accurate, full and reliable information and data in the
financial statements which is of material interest to the users and readers of
such statements. This convention is given due legal emphasis by the Companies
Act, 1956 by prescribing formats for the preparation of financial statements.
However, the term disclosure does not mean all information that one desire to
get should be included in accounting statements. It is enough if sufficient
information, which is of material interest to the users, is included.
Answer of Q.N.3.
Single column Cash Book
Date
|
Receipts
|
Amount
|
Date
|
Payments
|
Amount
|
Mar. 1
Mar. 5
Mar. 15
Mar. 26
|
To Capital A/c
To Sales A/c
To Sales A/c
To Commission A/c
|
20,000
4,000
8,000
600
|
Mar. 2
Mar. 13
Mar. 18
Mar. 20
Mar. 24
Mar. 28
Mar. 31
Mar. 31
|
By Purchases A/c
By Ravi’s
By Furniture A/c
By Wages A/c
By Rent A/c
By Drawings A/c
By Salary A/c
By Balance C/d
|
5,000
7,000
6,000
380
400
1,000
900
11,920
|
32,600
|
32,600
|
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
How to Prepare Bank Reconciliation Statement: The following steps
are taken to prepare the bank reconciliation statement:
(i) Favourable
balances: When debit balance as per cash book is given:
(a)
Take balance as a starting point say Balance as per Cash Book.
(b)
Add all transactions that have resulted in increasing the balance of the pass
book.
(c)
Deduct all transactions that have resulted in decreasing the balance of pass
book.
(d)
Extract the net balance shown by the statement which should be the same as
shown in the pass book.
In
case balance as per pass book is taken as starting point all transactions that
have resulted in increasing the balance of the Cash book will be added and all
transactions that have resulted in decreasing the balance of Cash book will be
deducted. Now extract the net balance shown by the statement which should be
the same as per the Cash book.
(ii) Unfavorable
Balances: When Credit balance as per cash book is given:
(a)
Take overdraft as a starting point say Overdraft as per Cash Book.
(b)
Add all transactions that have resulted in decreasing the balance of the pass
book.
(c)
Deduct all transactions that have resulted in increasing the balance of pass
book.
(d)
Extract the net overdraft shown by the statement which should be the same as
shown in the pass book.
In
case overdraft as per pass book is taken as starting point, all transactions
that have resulted in decreasing the balance of the Cash book will be added and
all transactions that have resulted in increasing the balance of Cash book will
be deducted. Now extract the net overdraft shown by the statement which should
be the same as per the Cash book.
Example of Bank Reconciliation
Statement
Prepare Bank Reconciliation
Statement from the detail given below:
i) Overdraft shown as per
passbook on Dec.31.2005 Rs.20, 000.
ii) Bank chargers for the above
period also debited in the pass book Rs.200
iii) Cheque issued but not encashed
prior to Dec.31.2005 amounted Rs.4, 000.
iv) Interest on investment
collected by bank and credited in pass book Rs.700.
v) Cheque paid into bank was not
cleared before Dec.31.2005 were Rs.2, 200.
Bank Reconciliation statement as
on Dec.31, 2005
Particulars
|
Amount
|
Overdraft as per Pass Book
Add: (i) Cheque issued but not enchased
prior to Dec.31.2005
ii) Interest on investment collected by bank
and credited in pass book but not entered in cash book
Less: (i) Bank chargers for the
above period also debited in the pass book
(ii)Cheque paid into bank was
not cleared before Dec.31.2005
Overdraft as per Cash Book
|
20000
4000
700
200
2200
22300
|
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 Ajay’s Account
(Being the goods purchased from
ajay wrongly entered in sales book, now rectified)
|
2,600
2,600
|
5,200
|
|
2.
|
Surendra’s Account Dr.
To Purchases A/c
To Sales A/c
(Being the goods sold to
surendra wrongly entered in purchases book, now rectified)
|
8,800
|
4,400
4,400
|
|
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)
|
1,000
1,000
|
2,000
|
|
4.
|
Sales A/c Dr.
To Rajesh’s Account
(Being the sales to rajesh of
Rs. 126 wrongly entered as Rs. 162, now rectified)
|
36
|
36
|
|
5.
|
Sales A/c
Dr.
To Chairs and Table Account
(Being the sale of chairs and
tables wrongly treated as sales, now rectified)
|
700
|
700
|
|
6.
|
Drawings A/c Dr.
To Rent A/c
(Being the rent of proprietor’s
home wrongly debited in rent account, now rectified)
|
800
|
800
|
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 80,000
Less: Purchase Return 4,000
To Wages 42,000
Add: Wages Outstanding 3,000
To carriage Inward
To Gross Profit
|
20,000
76,000
45,000
3,600
1,43,400
|
By Sales 2,70,000
Less: Sales Return 6,000
By Closing Stock
(Cost or market price whichever
is lower)
|
2,64,000
24,000
|
288000
|
288000
|
||
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
3,700
1,400
7,200
10,500
1,200
4,500
1,600
87,700
|
By Gross Profit
By Discount
|
1,43,400
5,200
|
1,48,600
|
1,48,600
|
Balance Sheet as on 31st December, 2010
Liabilities
|
Amount
|
Assets
|
Amount
|
Capital 75,000
Add: Net Profit 87,700
Less: Drawings 18,000
Sundry Creditors
Bills Payable
Wages Outstanding
Salaries Outstanding
|
1,44,700
25,000
1,800
3,000
2,500
|
Plant and Machinery 90,000
Less: Depreciation @5% 4,500
Furniture 8,000
Less: Depreciation @20% 1,600
Sundry Debtors
Bills Receivable
Cash in hand
Closing Stock
Prepaid Insurance
|
85,500
6400
52,000
2,500
6,300
24,000
300
|
1,93,200
|
1,93,200
|
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