UNIT – I
What is accounting? (Or) Give the meaning of
accounting (or) why accounting is called as “the Language of Business”?
Accounting
is a means of communicating the results of business operations to various
parties interested in or connected with the business (Viz., the owners,
Creditors, Investors, Government, Financial Institutions, Bankers etc,). Arnold
Define
Financial Accounting?
Definition 1: According to the American Institute of Certified Public Accountants
(AICPA) “Accounting is the art of
recording, classifying and summarizing in a significant manner and in terms of
money transactions and events which are of a financial character and
interpreting the results there of”.
Definition 2: According to American Principles Board “Accounting is a service
activity. Its function is to provide quantitative information primarily
financial in nature, about economic activities that is intended to be useful in
making economic decisions in making rational choices among alternative courses
of action”.
What are the objectives of
accounting? (Or) State the objectives of accounting? (Or) What are the advantages of accounting?
Objectives or Advantages of accounting may
differ from business to business depending upon their specific requirements.
However following are the general objectives or advantages;
·
Record maintenance: Accounting record serves as a basis for
accounting work. So the records have to be maintained systematically by
following the Generally Accepted Accounting Principles (GAAP).
·
Ascertainment of profit or loss: Accounting
is expected to ascertain and record the net results of business. Various
interested parties like owners, management, investors, etc., should be supplied
with such results as per their specific requirements.
·
Depiction of Financial position: A true
and fair view of financial position should be presented. The properties and
assets of business should be shown at appropriate values at prevailing
practices.
·
Providing communication: The Accounting
should provide information for making decisions in crucial areas, controlling
of organization’s human and material resources and facilitate social functions
and control.
·
Aid to Decision – making: Management of
a firm requires innumerable routine and policy decisions while discharging its
functions. Accounting provides information for making appropriate and effective
decisions.
·
Statutory requirements: Various legal
requirements like maintenance of Provident fund of employees, Employees State
Insurance contribution (ESI), etc., are properly fulfilled with the help of
accounting.
·
Taxation purposes: Accounting records
are the basic source for computation and settlement of Sales tax, Income tax
and other local taxes.
What
are the Attributes and steps of accounting? (Or) Explain the process or
functions of Accounting.
Attributes and steps (Process or functions) of accounting
An analysis of above definition will bring out
the following functions of accounting;
1)
Recording: Systematic recording of
business transactions is the first step in accounting process. Each and every
business transactions are recorded in chronological order with reliable
documentary evidence. Recording of business transactions are usually done in
‘Journal’ or in ‘Subsidiary Books’ which are ‘Books of Original entry’.
2)
Classification: The classification takes
form of ‘accounts’ in a separate book known as ‘Ledger’. Separate accounts are
opened for each expense, income, property, liability, and persons with whom the
business has dealings. Classification facilitates segregation of numerous
business transactions into separate identifiable groups.
3)
Summarizing: The transactions recorded
in the ledger will be summarized and balance in each account will be
ascertained and list of such balances is called ‘Trial Balance’. The Trial
Balance ensures the arithmetical accuracy of the recording and classification
process. Moreover Trial balance serves as a basis for the preparation of Final
accounts (i.e. Trading, Profit & loss a/c and Balance sheet).
4)
Interpreting: It refers to deriving
conclusions from accounting records i.e. to find out the real position of the
concern to which accounting relates. Interpretation is needed for various
purposes like;
I.
Future planning of operations.
II.
Designing credit policies.
III.
Analyze the growth of profit.
IV.
Liquidity and stability of
business.
Explain
the ‘Accounting Equation’? (Or) Explain the components of ‘Accounting
Equation’?
Accounting Equation is a formula which indicates the ‘equivalence’ of
assets and capital and liabilities. Recording of business transactions is based
on accounting equation. Balance sheet is the end result of accounting process
and conforms to accounting equation.
Equation:
Assets = Equities
(Or)
Assets = Liabilities
+ Capital
(Or)
Capital = Assets
– Liabilities
The total of properties owned by a business is equal to the ‘total
of Rights of properties’. The properties owned by a business are called as
assets and rights to properties are called as ‘Equities’.
Equities are called as Internal Equity (Or) capital which represents
the owner’s interest in assets and External equities (Or) liabilities which
represents the outsider’s interest in assets.
State
some basic accounting terms
They are
a.
Capital: it represents owner’s funds invested in a business. Capital
represents owner’s claim against the assets of a business.
b.
Liability: Liabilities are debts, they are amounts owed to creditors i.e. debts
repayable to outsiders by business are called liabilities.
c.
Assets: It is ‘anything of value owned by business’ i.e. future economic
benefits, rights owned or controlled by an organization or individual.
d.
Revenue: It includes all incomes like Sales, receipts, interest, commission,
etc.; However receipts of capital nature like additional capital, sale of
assets etc., are not part of revenue.
e.
Expenses: It is any amount spent in order to produce and sell the goods and
services, which brings in revenue. It is divided in to
i.
Capital expenditure: It includes acquisition of long-term assets like Machinery, which
generates revenue for several accounting years.
ii.
Revenue expenditure: It includes current expenses like rent, salary, etc., which
benefits current accounting year
f.
Debtors: A person who receives a benefit without giving money or money’s
worth. Debtor can be trade debtor if he buys goods on credit.
g. Creditors: A person who gives benefit
without receiving money or money’s worth. Creditor can be trade creditor if he
sells goods on credit.
h. Tangible assets: Assets
which have physical existence e.g. Buildings, Machinery.
i.
Intangible assets: Assets, which has no physical existence e.g., Goodwill, Patents.
j.
Fictitious assets: They represent unadjusted losses. e.g. Preliminary expenses
k.
Fixed assets: Assets meant for income generation and not for resale but benefits
accrue for a longer period. e.g. Machinery
l.
Current or Floating assets: Assets, which are converted into cash within one year or in normal
course of business. E.g. Stock, Debtors.
m.
Purchases: Goods bought which are meant for resale are called purchases. It
may be on cash or credit basis.
n.
Sales: Selling of goods in normal course of business. It may be on cash or
credit basis.
o.
Stock: The stock of goods, which remain unsold at the end of accounting
period, is called ‘Closing stock’ and stock at the beginning is called ‘Opening
stock’.
p.
Losses: Loss indicates money given up without any return e.g. Loss due to
fire, theft, etc.,
q.
Drawings: Any amount money or money’s worth withdrawn by owners of business
for personal use is called ‘Drawings’.
r.
Invoice: It is a statement prepared by a seller of goods showing details of
quantity; price etc., to be sent to buyer.
s.
Voucher: Documentary evidence of any transaction is called a ‘Voucher.
t.
Goods: Commodities bought for resale are treated as goods. For a furniture
dealer, furniture is a good, but for other firms furniture is an asset.
u.
Current liability: Those liabilities which are repayable within e year e.g. Creditors,
Bills payable.
v.
Long-term liabilities: Liabilities repayable beyond a period of one year are treated as
long-term liabilities e.g. Mortgage loans.
w.
Solvent: A person who has assets with realizable value, which exceeds his
liabilities, is solvent.
x.
Insolvent: A person whose liabilities are more than the realizable value of
his assets is called an Insolvent.
y.
Transaction: A transaction is an
exchange in which each participant receives or sacrifices value e.g. sale of
goods.
Briefly explain the basic accounting concepts and
conventions?
Accountants all
over the world have developed certain rules, procedures and conventions, which
represent a consensus view by the profession of good accounting practices and
procedures and are generally referred to a “Generally Accepted Accounting
Principles”. (GAAP) Accounting
Statements are prepared in conformity with these principles in order to place
more reliance on them. Accounting is based on certain uniform and
scientifically laid down principles. Following these principles will ensure
uniformity, clarity and understanding in recording transactions. It is
classified as
I.
Accounting concepts:
They are
the assumptions or ideas which are essential to the practice of accounting and
preparation of financial statements. They are;
1. Accounting period concept:
The life time of a business is considered as long
as indefinite. But it is essential to study the result of business at appropriate
intervals for taking corrective action as and when necessary. Therefore in
accounting the life time of business is divided into number of accounting years
to know its profitability and financial position.
2. Accrual concept: This concept is based not only on cash transactions but also on
credit transactions ensuring that the Profit & loss a/c shown is on the
basis of full facts relating to all expenses and incomes without regard to the
date of receipt or payment.
3. Business entity concept: Business is treated as a separate entity from the proprietor and
the persons associated with it. Transactions are recorded from view point of
accounting entity and not from point of view of owners.
For
e.g.: If A starts business in the name
“A & Co” then accounts is prepared for “A & Co” and not for A.
4. Cost concept: This concept is based on the owing concern concept. It states that
assets acquired are shown in books at cost. The market value is immaterial for
accounting purpose. This concept has the advantage of bringing objectivity in
the preparation and presentation of financial statements.
5. Dual aspect concept: Every business transactions have two aspects – receiving of benefit
and giving of benefit. Both the aspects of a transaction are recorded in the
books of accounts which is the basis for double – entry system of book –
keeping. The basic rule is that ‘for every debit there must be a corresponding
credit’ clearly indicates the concept.
a.
: Accounting is based on the assumption
that the accounting unit is to continue in operation or continue to exist for
unlimited period unless of course dissolved or terminated for some reasons.
6. Money measurement concept: This concept requires that those transactions alone which are
capable of being measured in terms of money are to be recorded in books. Other
than money transactions fall beyond the scope of accounting.
7. Matching concept: Matching of revenues with cost of a period is necessary to ascertain
the profits earned during that period. This matching of periodical cost with
revenue is known as matching concept.
8. Realization or Revenue
recognition concept: According to this concept
revenue is considered as earned on the date when it is realized. The revenue
should be realized only when it is legally due and realizable.
For
e.g.: When goods are sold, the date of
placing the order and date of receipt of cash are irrelevant and only date of
passing title to goods is relevant to income recognition.
II. Accounting conventions:
While
preparing the accounting statements certain customs and traditions are followed
which are called as accounting conventions. They are as follows;
1.Consistency: The accounting practice
followed in a business should not be changed from one year to another. These
practices should be adopted continuously to make financial statements more
reliable.
2.Disclosure: In accounting statements,
all information which is essential to the people who are interested in business
like owners, creditors, etc., should be disclosed to make the statement more
informative.
3.Conservatism: It means the policy of
playing safe. No anticipated profit should be recorded and at the same time all
possible losses should be provided for
4.Materiality: Whether something should be disclosed or not depend on whether it
is material or immaterial and the amount involved in those transactions.
What are the Basic
accounting rules?
The rules for making Double entry system can be summarized as
follows:
a. Personal accounts
Debit the ‘Receiver’
Credit
the ‘Giver’.
b.
Real accounts:
Debit ‘What comes in’.
Credit ‘What goes out’.
c.
Nominal accounts:
Debit
all Expenses and Losses.
Credit
all Incomes and Gains.
Mention the classification of accounts? (Or)
Explain the types of Accounts?
The
object of Double entry system of Book – keeping is to keep a record of all the
transactions that take place in a business.
An
account is a statement in the ledger which records the transactions relevant to
the person, asset, expense, or profit named in the heading. Accounts can be
divided in to
a.
Personal accounts
b.
Impersonal accounts.
a. Personal accounts
Accounts
of persons with whom the business has dealings are known as personal accounts.
It takes following forms;
1. Natural persons: Name of an individual, customers or suppliers (e.g.) Krishna ’s account, N’s account.
2. Artificial persons or
legal bodies: Firm’s account, limited companies,
bank account etc., are known as artificial person’s account.
3. Representative personal
accounts: All accounts representing outstanding
expenses, Prepaid expenses, Accrued incomes etc.,
b. Impersonal accounts
It is divided in to
1.
Real accounts: Accounts in which the
business records the real things owned by it i.e. assets of business, tangible
and intangible real accounts. It includes Building, cash furniture, trademark,
good will etc.,
2.
Nominal accounts: It relates to items
which exist in name only. Expenses, incomes etc., Accounts which record
expenses, losses, incomes and gains of business. E.g. rent a/c, salaries a/c,
interest received a/c.
What
are the limitations of Accounting?
In spite of its indispensable position in modern business,
accounting has its own limitations. They are;
·
Accounting ignores
transactions, which cannot be expressed in terms of money (non-monetary
nature).
·
It relies on Estimates and
forecasts in several important matters like life of machinery, Market value of
investments, etc.,
·
Estimates and subjective
influence of accountants affects the accuracy and reliability of accounting
results.
·
Accountants rely on historical
cost for recording fixed assets, which do not reflect current financial
position.
·
It also ignores price level
changes, which influences the value of assets and liabilities.
·
Inflation, which is a universal
phenomenon, makes the profit ascertained and financial position shown by
accounting unrealistic and unreliable.
Write a note on ‘Journal’.
Journal’ is a book of Primary entry or
original entry. All transactions are initially recorded in Journal. The ruling
of Journal is such that any business transactions can be analyzed under the
heads of debit and credit.
Specimen or Format Journal in the
books of…
|
Date
|
|
Particulars
|
L.F
|
Debit (Rs.)
|
(p)
|
Credit (Rs.)
|
(p)
|
Transactions
are recorded in chronological order. Particulars represent the account to be
debited and credited. L.F. represents Ledger folio and the amount column
represents respective amounts mentioned in the entry. Every entry is
accompanied by a narration explaining details of transaction.
E.g. Transaction: Jan 1, 2004 Cash sales of Rs. 5000
Journal in the books of…
|
Date
|
|
Particulars
|
L.F
|
Debit (Rs.)
|
(p)
|
Credit (Rs.)
|
(p)
|
|
2004 Jan
|
1
|
Cash a/c
Dr
To Sales a/c
[Being cash sales made]
|
|
5000
|
-
|
5000
|
-
|
What is a ledger?
A ledger account may be described
as “A summary statement of all the transactions relating to a person, asset,
expense or income which have taken place during a given period of time and
shows their net effect”. All recorded business transactions are grouped on a
predetermined basis and this grouping of accounts in a separate book known as
‘Ledger’.
Specimen or Format Ledger in the
books of…
Dr Cr
|
Date
|
|
Particulars
|
J.F
|
Amount
(Rs.)
|
Date
|
|
Particulars
|
J.F
|
Amount
(Rs.)
|
E.g. Transaction: Jan 1,
2004 Cash sales of Rs. 5000
Ledger in the books of…
Dr Cash
a/c Cr
|
Date
|
|
Particulars
|
J.F
|
Amount
(Rs.)
|
Date
|
|
Particulars
|
J.F
|
Amount
(Rs.)
|
|
2004
Jan
|
1
|
To
Sales a/c
|
|
5000
|
|
|
|
|
|
Dr Sales
a/c Cr
|
Date
|
|
Particulars
|
J.F
|
Amount
(Rs.)
|
Date
|
|
Particulars
|
J.F
|
Amount
(Rs.)
|
|
|
|
|
|
|
2004
Jan
|
1
|
By
cash a/c
|
|
5000
|
Write about Subsidiary books. (Or) State some reasons for
maintaining Subsidiary books.
In
bigger businesses, transactions are so numerous so it may be necessary to group
similar transactions even at journal stage in the shape of ‘Special Journals’
to minimize and facilitate ledger work. Thus Subsidiary books were developed.
It
comprises of:
1.
Purchases book to record credit
purchases of goods.
2.
Sales book to record credit
sale of goods.
3.
Purchase returns book to record
return to suppliers.
4.
Sale
5.
Cash book to record all cash
receipts and payments.
6.
Bills receivable book to record
bills received.
7.
Bills payable book to record
bills accepted.
8.
Journal proper to record any
transactions, which cannot be entered in above, specified books.
Reasons:
1.
This system reduces overall
work compared to a single Journal.
2.
Work on subsidiary books can be
carried out by many accountants.
3.
Increased accuracy because of
specialized work and monthly-summarized postings.
4.
Communicates better
information, which is not possible in journal system.
What is trial balance?
State its Objectives.
M.S. Gosav (The
substance of Accountancy) “Trial balance is a statement containing balances of
all ledger accounts, as at any given date, arranged in the form of debit and
credit columns placed side by side with the object of checking the arithmetic
accuracy of ledger postings”.
Objectives:
1.
To establish arithmetic
accuracy of books to check whether accounting processes have been carried out
without errors.
2.
To prepare financial statements
based on trial balance
3.
To serve as a summary of what
is contained in a ledger.
4.
To derive important conclusions
by comparing yearly balances.
5.
To have a test of accounts
before preparing final accounts.
UNDERSTANDING
OF FINANCIAL STATEMENTS
Manufacturing Account:
Those
concerns, which convert the raw materials into finished goods, are required to
find out the cost of goods manufactured besides gross and net profit and these
are manufacturing cum trading concerns.
In order to have full information about the cost of goods manufactured,
these concerns firstly prepare manufacturing Account and then prepare Trading
and Profit and Loss Account.
Objectives:
The main object of Manufacturing Account is
to show:
- Cost of Finished Goods Produced
- Constituent items thereof such as cost of materials consumed, productive wages, direct and indirect expenses.
Trading and Profit & Loss Account:
Trading Account:
This Account is prepared to know the
trading results of the business i.e. how much gross profit the business has
earned from buying and selling during a particular period. The difference between the sales and cost of
goods sold is gross profit.
For the purpose of calculating cost of goods
sold, we take into consideration opening stock, purchases, and direct expenses
on purchasing or manufacturing the goods and closing stock. The balance of this account represents gross
profit or loss and is transferred to the profit and loss account.
Profit and Loss Account:
This
account is prepared to calculate the net profit of the business. There are certain items of incomes and
expenses of the business, which must be taken into consideration for calculating
net profit of the business. These are of
indirect nature i.e. concerning the whole business and relating to various
activities, which are done by the business for the purpose of making the goods
available to the consumers.
Indirect
expenses may be selling and distribution expenses, management expenses,
financial expenses, extraordinary losses and expenses to maintain the assets
into working order. This account is
prepared from nominal accounts and its balance is transferred to capital
account as the whole profit or loss will be that of owner and it will increase
or decrease his capital.
Balance Sheet:
A
Balance Sheet is a statement prepared with a view to measure the financial
position of a business on a certain fixed date.
The financial position of a concern is indicated by its assets on a
given date and its liabilities on that date.
Excess of assets over liabilities represent the capital and is
indicative of the financial soundness
of a company.
A
Balance Sheet is also described as a “statement Showing the Sources and
application of capital”. It is a
statement and not an account and prepared from real and personal accounts. The left hand side of the balance sheet may
be viewed as a description of the sources from which the business has obtained
the capital with which it currently operates and the right hand side as a
description of the form in which that capital is invested on a specified date.
Objectives:
A
properly drawn up balance sheet gives information relating to
A)
The nature and value of Asset,
B)
The nature and extent of Liabilities,
C)
Whether the firm is solvent,
D)
Whether the firm is overtrading.
If
assets exceeds the liabilities, the firm is solvent i.e., able to pay its debts
in full.
FORMAT OF FINAL ACCOUNTS
Trading
& profit & loss a/c for the year ended…
|
Particulars
|
Rs.
|
Particulars
|
Rs.
|
|
To opening stock
To
purchases
xx
Less:
purchases returns (or) returns xx outwards
To Manufacturing a/c (cost of finished
goods)
To
wages & Salaries
To Octroi duty, Dock charges
To fuel &power, coal, gas, coke
To factory rent & rates
To freight inwards(on purchases)
To carriage inwards
To consumable stores
To gross profit t/fred to p&l a/c(credit)
|
xxxx
|
By sales
xx
Less:
sales returns/ return outwards xx
By closing stock
By abnormal loss of stock
By gross loss t/fred to p&l a/c (debit)
|
xxxx
|
|
|
xxxx
|
|
xxxx
|
|
To gross loss b/d
To salaries & wages
To rent rates taxes
To printing & stationery
To repairs & maintenance
To audit fees
To discount allowed
To carriage outward
To travelling expenses
To advertising
To bad debts xx
Add: new provision on debtors xx
Less: old provision (provision
For bad
debts) xx
To charity
To interest on loan & capital
To loss on sale of fixed assets
To loss on sale of investment
To loss by fire (not covered by insurance)
To commission paid
To net profit (added with capital in B/S)
|
xxxx
|
By gross profit b/d
By discount recd
By interest recd
By dividend recd
By rent recd
By commission recd
By profit on sale of fixed assets
By profit on sale of investments
By apprentice premium
By interest on drawings
By miscellaneous income
By net loss (deducted from capital a/c in
B/S)
|
|
|
|
xxxx
|
|
Xxxx
|
Balance sheet of ……as on
……
|
Liabilities
|
Rs.
|
Assets
|
Rs.
|
|
Capital xx
Add: net profit xx
Add: Interest on
capital xx
Less: net loss xx
------
Less: drawings xx
Less: interest on
drawings xx
------
Less: income tax
xx
------
Creditors
Loan
Bills payable
Bank over draft
Outstanding
expenses
Advance income
|
xxxx
|
Plant &
machinery (- depn)
Land &
buildings (- depn)
Furniture &
fittings (- depn)
Cash in hand
Cash at bank
Debtors
Less: new provision
Less: discount on debtors
Prepaid expenses
Accrued
(outstanding) income
Bills receivable
Insurance claim
Closing stock
|
|
|
|
xxxx
|
|
xxx
|
Note:
1.
Any adjustments will appear two
times in final a/cs
2.
Any outstanding expenses will
be added with concerned expenses & shown in liability side of the B/S.
3.
Any accrued income will be
added with concerned incomes & shown in assets side of the B/S.
4.
Any prepaid (advance) expenses
will be deducted from concerned expenses & shown in assets side in the B/S.
5.
Any advance income will be
shown in p&l credit and shown in liabilities side in the B/S.
Manufacturing A/c for the year ended….
|
Particulars
|
Rs.
|
Particulars
|
Rs.
|
|
To
Work-in-Progress (Opening)
To Materials
used
Opening Stock xx
Add: Purchases xx
Less: Closing
Stock xx
To Wages
To Factory
Expenses
To Purchase
Expenses
To Import Duty
To Carriage
inward
To Depreciation
on Plant & Machinery
To Repairs to
Machinery
|
xx
xx
|
By sale of Scrap
By
Work-in-Progress (Closing)
By Cost of goods
produced t/fred to Trading a/c
|
Xx
|
|
|
xx
|
|
Xx
|
THE TREATMENT FOR ADJUSTMENTS
|
TYPE OF ADJUSTMENT
|
TREATMENT – TRADING A/C, PROFIT & LOSS A/C
|
BALANCE SHEET
|
|
1. Closing Stock
|
Shown in the Credit Side of the
Trading Account
|
Shown in the Assets Side.
|
|
2. Outstanding Expenses
(Wages, Rent, Salaries)
|
Add the Outstanding to the
Respective Item (It may be Trading
a/c or Profit and Loss a/c)
|
Shown on the Liability Side
(Actual Outstanding Amount)
|
|
3. Prepaid Expenses or
Unexpired Expenses
(Insurance Premium)
|
Deduct it from the Concerned
Account on the Debit Side of the
Trading a/c or Profit & Loss a/c
|
Actual Amount Deducted
should be Shown in the Assets
Side
|
|
4. Accrued Income or
Outstanding Income
(Commission)
|
Add to the Account in the Credit
Side of Profit and Loss Account in
the Respective Item
|
Actual Amount Added should
be Shown in the Asset Side
|
|
5. Income Received in
Advance (Rent)
|
The Amount Received in Advance is
Deducted in the Credit Side of Profit
& Loss Account in the Concerned
Account
|
The Actual Amount Received
should be Shown on the
Liabilities Side
|
|
6. Interest on Capital
|
Shown on the Debit Side of Profit
and Loss Account
|
The Interest should be Added
with Capital on Liabilities Side
|
|
7. Interest on Drawing
|
Shown on the Credit Side of Profit
and Loss Account
|
Added with Drawings and
Deducted from Capital on
Liabilities Side
|
|
8. Interest on Loans
|
Added to the Respective Account in
Profit and Loss Account Debit Side
|
Added to the Loan on the
Liabilities Side
|
|
9. Depreciation (Machinery,
Furniture)
|
The actual Depreciation Amount
Shown on the Debit Side of the
Profit and Loss Account
|
Shown as a Deduction from the
Value of the Respective Asset
in the Assets Side
|
|
10. Bad Debts
|
Should be Shown on the Profit and
Loss Account Debit Side
|
Deducted from Sundry Debtors
on the assets Side
|
|
11. Provision for Bad and
Doubtful Debts
|
a) Shown in the Debit side of Profit
and Loss Account
b) Provision for Bad Debts in the
Trial Balance is Old. Bad Debts
Provision in the Adjustment is New.
In that case, Take the Difference of
New Minus Old. The Difference
should be Shown in the Debit Side
of Profit and Loss Account.
|
The New Provisions Alone
Deducted from Sundry Debtors
on Assets Side
|
|
12. Provision for Discount on
Debtors
|
The Ascertained Amount to be
Shown on Debit Side of profit and
Loss Account (After Deducting the
Additional Bad Debts and Provision
for Bad Debts Provision for
Discount on Debtors has to be
Calculated)
|
The Amount of Discount on
Debtors should be Deducted
from the Balance of Debtors
after Deducting the Additional
Bad Debts and Provision for
Bad Debts.
|
|
13. Reserve for Discount on
Creditors
|
The Actual Amount Should be
Shown on credit Side of Profit and
Loss Account
|
The Amount of Reserve
Deducted from Creditors on
the Liabilities Side
|
|
14. Goods Distributed as Free
Sample
|
It is Shown on the Credit Side of the
Trading Account, or Deducted from
the Purchases and is also Shown on
the Debit Side of Profit and Loss
Account as Advertisement
Expenses.
|
NIL
|
|
15. Deferred revenue
Expenditure
|
It is Shown on the Debit Side of
Profit and Loss Account
|
It is Shown on the Assets Side
|
|
16. Reserve fund
|
NIL
|
It i Shown on the Liabilities Side of the Balance Sheet If Reserve
Fund is Already there, It will be Shown by Addition to the Existing Reserve
Fund on the Liabilities Side of the Balance Sheet
|
|
17. Manager’s Commission
|
Such Commission will be Shown on
the Debit Side of the Profit and Loss
Account
|
It is Shown on the Liabilities
Side of the Balance sheet as
Commission Payable.
|
|
18. Loss of Stock By Fire
(Fully Insured)
|
It will be Shown on the Credit Side
of Trading Account in the Name of
Insurance Claim
|
It
is Shown on the Assets Side
of
the Balance Sheet in the
Name of Insurance Claim
|
|
19. Loss of Stock By Fire
(Not Fully Insured)
|
It will be Shown on the Credit Side
of Trading Account with the Value
of Stock in the Name of Insurance
Claim and Profit and Loss a/c and
Shown on the Debit Side of Profit
and Loss Account for that part of
the Stock which is not insured in the
Name of Trading a/c
|
It is Shown on the Assets Side
of the Balance Sheet with the
Amount, Which is to be
Realized from the Insurance
Co. i.e., that part of the Loss
Which is Insured
|
|
20. Loss of Stock By Fire
(Not Insured At All)
|
a) It is Shown on the Credit Side of
the Trading Account in the Name of
Profit & Loss a/c.
b) It is Shown on the Debit Side of
the Profit and Loss account in the
Name of Trading a/c
|
NIL
|
Problems
1.
Pass the journal entries in the books of Sri Balaji
March
1, 2005 Commenced business
cash Rs. 200000
Goods
worth Rs. 400000
Machinery Rs. 1000000
March
3, 2005 Purchased Goods from
Sam &Co Rs. 50000
March
5, 2005 Sold Goods to Ravi
Traders Rs. 100000
March
8, 2005 Current Account opened
in SBI Rs. 100000
March
9, 2005 Goods returned to Sam
& Co Rs.
6000
March
10, 2005 Goods returned to Ravi
Traders Rs. 10000
March
12, 2005 Cheque received from
Ravi Traders
And
deposited into bank
March
13, 2005 Amount paid to Sam
& Co., in full settlement Rs. 43,600
March
15, 2005 Paid Salary Rs. 10000
Wages Rs. 6000
Rent Rs. 2000
March
15, 2005 Interest Received Rs. 2000
2.
Give the journal entries for the following transactions in the book of Thiru.
Ramesh
2001,
July 1 Commenced
business with the capital Rs.
200000
2 Amount
deposited in Bank Rs.
50000
5 Purchased
furniture for cash Rs. 10000
7 Purchased
goods for cash Rs.
16000
8 Purchased
goods from Rahim Ltd for credit Rs. 20000
10 Sold
goods for cash Rs. 50000
12 Sold
goods to Ramu & Co for credit Rs. 30000
14 Amount
paid Rahim Ltd
15 Cheque
received from vignesh Rs.
1000
1.
Prepare Trading account of Mr. A for the year ending 31-12-06.
Rs.
Opening stock 80000
Purchases 860000
Freight inward 52000
Wages 24000
Sales 1440000
Purchases returns 10000
Sales returns 316000
Closing stock 100000
Import duty 30000
2.
Prepare profit & loss a/c of Mr.Raj
Rs.
Gross profit 55000
Carriage on sales 500
Office rent 500
General expenses 900
Discount 360
Interest from bank 200
Travelling expenses 700
Salaries 900
Commission 300
Repairs 500
Telephone expenses 520
Interest (DR) 480
Fire insurance premium 900
Bad debts 2100
Apprentice premium (cr) 1500
Printing & Stationery 2500
Trade expenses 300
3.
Prepare Balance sheet
Dr Cr
Rs. Rs.
Capital 100000
Closing stock 40000
Fixed assets less dep 16000 72000
Sundry debtors 100000
Provision for bad debts 5000
P&L a/c 42000
Sundry creditors 80000
Liabilities for expenses 11000
Drawings 6000
Cash & Bank 20000
238000 238000
4.
Prepare manufacturing & trading a/c
Rs.
Opening stock:
Raw
materials 20000
Work
– in – progress 3000
Finished
goods 10800
Purchase of Raw materials 50000
Sales 240000
Fuel & Coal 1000
Wages 32000
Factory Expenses 40000
Office expenses 30000
Depreciation on Plant & Machinery 3000
Closing stock:
Raw
materials 20000
Work
– in – progress 4000
Finished
goods 8000
5. Prepare
final accounts for the year ended 31-12-1995
Capital 50000 Sales 301000
Bank
OD 8400 Return inwards 5000
Furniture 5200 Discount (Cr.) 800
Business
premises 40000 Taxes & insurance 4000
Creditors 26600 General expenses 8000
Opening
stock 44000 Salaries 18000
Debtors 36000 Commission allowed 4400
Rent
from tenants 2000 Carriage on purchases 3600
Purchases 220000 Provision For Doubtful
Debts 1000
Bad debts written off 1600
Adjustments:
1.
Stock on hand on 31-12-1995 was
estimated as Rs. 40120
2.
Write off Depreciation on
business premises Rs. 600 and furniture Rs. 520
3.
Make a provision of 5% on
debtors for Bad & doubtful debts
4.
Allow interest on capital at 5%
and carry forward Rs. 1400 for unexpired insurance.
6. Prepare final accounts of Mr. kumar for
the year ended 31-12-1994
|
Particulars
|
Debit
(Rs.)
|
Credit
(Rs.)
|
|
Debtors
|
52000
|
|
|
Creditors
|
|
22000
|
|
Cash in hand
|
2392
|
|
|
Furniture
|
3500
|
|
|
Motor car
|
22000
|
|
|
Purchases
|
145000
|
|
|
Sales
|
|
292000
|
|
Sales returns
|
2600
|
|
|
Salaries
|
8420
|
|
|
Opening stock
|
11400
|
|
|
Motor car expenses
|
6108
|
|
|
Rent, rates & taxes
|
3600
|
|
|
Insurance premium paid on 1st
oct 94
|
2400
|
|
|
Cash at bank
|
6200
|
|
|
Machinery
|
24000
|
|
|
Wages
|
23600
|
|
|
General expenses
|
2680
|
|
|
Carriage inward
|
2040
|
|
|
Carriage outward
|
1630
|
|
|
Fuel & Power
|
6430
|
|
|
Capital
|
20000
|
|
|
Drawings
|
8000
|
|
Adjustments:
1. Closing stock Rs. 35000
2. Goods worth Rs.2000 were distributed as free samples
3. Rs. 1000 paid for installation of machinery was debited to wages
4. Write off further bad debts Rs. 2000 & make a provision for
doubtful debts @ 5% on debtors
5. Depreciate furniture & machinery by 10% & motor car by 20%
6. Commission of Rs. 3600 has been earned but not received till end of
accounting year
7. Rs. 2000 is to be transferred to Reserve fund out of profit.
