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IGNOU FREE SOLVED ASSIGNMENT: ECO - 02 ACCOUNTANCY I (2019 - 2020)

Bachelor’s Degree Programme (BDP)
ASSIGNMENT (2019-20)
Elective Course in Commerce
ECO – 02: Accountancy-I
For July 2019 and January 2020 admission cycle

Dear Students,

As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course.

Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.

This assignment is valid for two admission cycles (July 2019 and January 2020). The validity is given below:

1)      Those who are enrolled in July 2019, it is valid up to June 2020.

2)      Those who are enrolled in January 2020, it is valid up to December 2020.

You have to submit the assignment of all the courses to The Coordinator of your Study Centre.

For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September. 

TUTOR MARKED ASSIGNMENT
Course Code: ECO-02
Course Title: Accountancy – 1
Assignment Code: ECO-02TMA/2019-20
Coverage: All Blocks
Maximum Marks: 100

Attempt all the questions

1. Define Accounting. What are its objectives? Briefly explain the accounting concepts which guide the accountant at the recording stage.                                               (3+5+12)

Ans: Accounting is the analysis and interpretation of book-keeping records. It includes not only maintains of accounting records but also the preparation of financial and economic information which involves the measurement of transaction and other events pertaining to a business.

According to the American institute of certified public accounts” The arts of recordings, classifying and summarizing in a significant manner and in terms of money transaction and events which in parts, at least of a financial charter and interpreting the result there of”.

Again in 1966, AICPA defines Accounting as “The process of identifying, measuring and communicating economic information to permit; informed judgement and decisions by the uses of accounts”.

Thus accounting may be defined as the process of recording, classifying, summarizing, analysing and interpreting the financial transactions and communicating the results. Thereof to the persons interested in such information.

Objectives of Accounting

The main objective of Accounting is to provide financial information to stakeholders. This financial information is normally given via financial statements, which are prepared on the basis of Generally Accepted Accounting Principles (GAAP). There are various accounting standards developed by professional accounting bodies all over the world. In India, these are governed by The Institute of Chartered Accountants of India, (ICAI). In the US, the American Institute of Certified Public Accountants (AICPA) is responsible to lay down the standards. The Financial Accounting Standards Board (FASB) is the body that sets up the International Accounting Standards.

These standards basically deal with accounting treatment of business transactions and disclosing the same in financial statements. In short the basic objectives of accounting are stated below:

(a) To ascertain the amount of profit or loss made by the business i.e. to compare the income earned versus the expenses incurred and the net result thereof.

(b) To know the financial position of the business i.e. to assess what the business owns and what it owes.

(c) To provide a record for compliance with statutes and laws applicable.

(d) To enable the readers to assess progress made by the business over a period of time.

(e) To disclose information needed by different stakeholders.

Accounting concepts:

The term ‘concept’ is used to denote accounting postulates, i.e., basic assumptions or conditions upon which the accounting structure is based. The following are the common accounting concepts adopted by many business concerns:

i) Business Entity Concept: Business entity concept implies that the business unit is separate and distinct from the persons who provide the required capital to it. This concept can be expressed through an accounting equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself owns the assets and in turn owes to various claimants.

ii) Money Measurement Concept: According to this concept, only those events and transactions are recorded in accounts which can be expressed in terms of money. Facts, events and transactions which cannot be expressed in monetary terms are not recorded in accounting. Hence, the accounting does not give a complete picture of all the transactions of a business unit. 2006

iii) Going Concern Concept: Under this concept, the transactions are recorded assuming that the business will exist for a longer period of time. Keeping this in view, the suppliers and other companies enter into business transactions with the business unit. This assumption supports the concept of valuing the assets at historical cost or replacement cost.      

iv) Dual Aspect Concept: According to this basic concept of accounting, every transaction has a two-fold aspect, Viz., 1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry system is that every debit has a corresponding and equal amount of credit. This is the underlying assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or Capital = Assets – Liabilities, will further clarify this concept, i.e., at any point of time the total assets of the business unit are equal to its total liabilities.

V) Periodicity Concept: Under this concept, the life of the business is segmented into different periods and accordingly the result of each period is ascertained. Though the business is assumed to be continuing in future, the measurement of income and studying the financial position of the business for a shorter and definite period will help in taking corrective steps at the appropriate time. Each segmented period is called “accounting period” and the same is normally a year.

vi) Historical Cost Concept: According to this concept, the transactions are recorded in the books of account with the respective amounts involved. For example, if an asset is purchases, it is entered in the accounting record at the price paid to acquire the same and that cost is considered to be the base for all future accounting.

vii) Matching Concept: The essence of the matching concept lies in the view that all costs which are associated to a particular period should be compared with the revenues associated to the same period to obtain the net income of the business.

viii) Realisation Concept: This concept assumes or recognizes revenue when a sale is made. Sale is considered to be complete when the ownership and property are transferred from the seller to the buyer and the consideration is paid in full.

ix) Accrual Concept: According to this concept the revenue is recognized on its realization and not on its actual receipt. Similarly the costs are recognized when they are incurred and not when payment is made. This assumption makes it necessary to give certain adjustments in the preparation of income statement regarding revenues and costs.

2. What are the various types of errors that are usually committed in the process of accounting? Explain with the help of examples.                                           (20)

Ans: Errors: In accounting, an error may be defined as a ‘mistake’. Generally, errors arise out of innocence or carelessness or lack of accounting knowledge on the part of the person who is responsible for maintaining the accounts. Errors may occur at the time of journalizing, posting, balancing or preparation of trial balance.

Types of Error: All errors of accounting procedure can be classified into two main categories:

1. Errors of Principles

2. Clerical Errors

Clerical Errors are further classified as:

a) Errors of omission

b) Errors of commission

c) Compensating errors

d) Trial Balance Errors

(1) Errors of Principle: Errors of principle generally arise due to disregard of the fundamental principles of accountancy. Such errors are sometimes committed intentionally to falsify and manipulate accounts with an objective of showing more or less profits than their actual figure. In other words, when the basic rules of debit and credit are violated either out of lack of knowledge or intentionally, such errors are called ‘Errors of Principles’. These errors do not affect the agreement of trial balance.

Examples:

a)      Wrong allocation of revenue and capital expenditure. When a revenue expenditure is treated as capital expenditure or vice versa, the profits will be effected and Balance Sheet will also not show correct position e.g., repair Rs. 500 paid for machinery is wrongly debited to Machinery Account instead of Repair Account. Repair is a revenue item and machinery is a capital item. It is an error of principle, because revenue item is wrongly treated as capital item.

b)      Revenue item is charged to personal account. When a revenue item is wrongly debited to personal account, it is a case of error of principle. This will not affect the agreement of trial balance e.g., rent paid Rs. 200 to landlord was posted to the debit of landlord’s personal account instead of rent account.

c)       Income is treated as liability. When an income is treated as liability, it will not affect the trial balance e.g., commission Rs. 600 received from Jaideep was credited to Jaideep’s personal account instead of commission account.

d)      A liability is treated as income. Suppose, a loan of Rs. 5,000 is taken from Punjab Finance Corporation. It was wrongly credited to commission account instead of loan account. This error will not affect the two sides of trial balance.

Other Examples of errors of principle are:

1)         Error in valuation of stock.

2)         Error in identifying sales and purchases.

3)         Error in computing depreciation.

4)         Error in providing outstanding expenses and accrued incomes.

5)         Error in adjustment of prepaid expenses.

It is important to note that the errors of principle are not clerical errors. These errors occur because of wrong choice and wrong application of accounting policies.

(2) Clerical Errors: The errors which arise due to omissions or commission of recording, posting or totaling are called clerical errors. These errors can again be sub-divided as follows:

a)      Errors of Omission: When a transaction is either wholly or partially not recorded in the books, it is an error of omission. It may be with regard to omission to enter a transaction in the books of original entry or with regard to omission to post a transaction from the books of original entry to the concerned account in the ledger.

Examples:

1. Purchases goods worth Rs. 10,000 from B but omitted to be recorded.

2. Sold goods to Mr. C worth Rs. 15,000 but omitted to be posted in Mr. C’s account

b)      Errors of Commission: These errors arise at the time of recording transactions in the journal, ledger and / or subsidiary books. Agreement of trial balance may or may not be affected by these errors. Some of the errors of commission affect the two sides of trial balance, while others do not affect. Few examples are given below when the trial balance does not agree due to errors of commission:

Examples:

a)         Wrong totaling of subsidiary books. Generally, subsidiary books are periodically totaled and their totals are posed to the relevant ledger account. If there is any mistake in totaling the subsidiary book, the trial balance will not agree e.g., Purchase book was totaled Rs. 8,050 instead of actual total of Rs. 8,500. It means purchase book is under cast by Rs. 450. Since posting to purchase account is made from the purchase book, it means purchase account will be given debit with Rs. 8,050 instead of Rs. 8,500. This error will not allow the trial balance to tally, because debit side of trial balance will be short by Rs. 450.

b)         Posting the same amount on wrong side. This type of error affects the agreement of trial balance with double amount e.g., Goods of Rs. 1,500 purchased from Baljit was correctly recorded in purchase book; however, Baljit was given debit instead of credit. This will increase the debit of trial balance with Rs. 3,000 (i.e., Rs. 1,500 for the unwanted debit and Rs. 1,500 for the credit missing in Baljit’s Account).

c)          Errors in balancing. There may be errors committed at the time of balancing the ledger accounts. Balance in accounts is ascertained by deducting the sum of lower side from the sum of higher side. While extracting the difference in the two sides, there may be errors. Such errors affect the agreement of trial balance.

d)         Posting the wrong amount. If a wrong amount is posted in the ledger account, the two sides of trial balance will not reconcile e.g., cash Rs. 130 paid to Sunil was written correctly in the credit side of cash book. It was to be posted to the debit of Sunil with Rs. 130; however Rs. 310 were debited to Sunil by mistake. It means Sunil was debited in excess by Rs. 180 (310 – 130). The debit side of trial balance will be higher with Rs. 180 as compared to credit side.

e)         Errors in carrying forward of total. Errors may be committed while carrying forward the total of one page to another page. This affects the agreement of trial balance. For example, total of Machinery Account Rs. 7,500 is carried forward to next page as Rs. 5,700. This mistake will reduce the Machinery Account (debit) balance with Rs. 1,800.

f)          Errors of duplication. Such errors arise when a transaction is recorded twice in the original books and posted twice in ledger accounts. These errors do not affect the agreement of trial balance.

(3) Compensating Errors: There are a group of errors. The total effect of these errors is neutralized and is not reflected in the trial balance. Error in one account is compensated with error in another account. These errors occur by change only.

Example:

2019

April 1.

April 2.

 

Goods of Rs. 15,180 purchased from Priyanka.

Goods of Rs. 3,300 purchased from Vipasha.

But purchase from Priyanka is entered as Rs. 15,000 and purchase from Vipasha is entered as Rs. 3,380. These two errors will neutralized the trial balance because the errors are occurred in same book.

(4) Trial Balance Errors: So far, we have discussed those errors which occur in journal, ledger and subsidiary books. There may be errors which occur during the course of preparing trial balance.  These may be:

a)      Omission of recording ledger balance in trial balance.

b)      A debit balance is written in the credit column of trial balance or vice-versa.

c)       The amount of a ledger balance is wrongly written in trial balance e.g., salaries account Rs. 625 is written in trial balance as Rs. 652.

d)      Wrong totaling of two columns of trial balance.

3. Ram Das of Hyderabad consigned goods costing Rs. 72,000 to Prakash of Cochin at a pro-forma invoice price which is cost plus a profit of 1/6th on invoice price. The consignor paid Rs. 1,800 as insurance and other charges. Prakash received the goods and paid Rs. 3,000 for freight and other charges. He was allowed 3% commission on gross sales. 3/4th of the goods were sold at 33.33% profit on cost, half of which were credit sales. Half of the balance was stolen, but the stock being insured, a claim was lodged for Rs. 8,000 and was settled for Rs. 7,000. Balance of stock was valued at proforma invoice price. Write up the Consignment and the Abnormal Loss Accounts.                        (20)

Ans:

In the Books of Ram Das

Consignment to Cochin Account

Particulars

Amount

Particulars

Amount

To Goods sent on Consignment a/c

(IP – 1/6 profit on IP or 20% on cost)

To Bank (Insurance and other charges)

To Prakash

- Expenses                   3,000 

- Commission              2,160

To Abnormal Loss a/c (Loading removed)

To Stock reserve a/c

(Loading on closing stock)

To Profit and loss account

86,400

 

1,800

 

 

5,160

1,800

1,800

 

12,240

By Prakash

By Abnormal Loss a/c (w.n.1)

By Consignment stock a/c (w.n.2)

By Goods sent to consignment a/c

(loading on goods sent)

 

72,000

11,400

11,400

14,400

 

1,09,200

 

1,09,200

Abnormal Loss account

Particulars

Amount

Particulars

Amount

To Consignment to Cochin a/c

11,400

By Consignment to cochin a/c

(Loading on abnormal loss)

By Insurance company a/c

By Profit & Loss a/c

1,800

 

7,000

2,600

 

11,400

 

11,400

Calculation of value of abnormal loss: W.N.1

Invoice price of goods lost due to theft (50% of ¼ of goods)

Add: Proportionate expenses of consignor (1,800*10,800/86,400)

Add: Proportionate non-recurring expenses of Consignee (3,000*10,800/86,400)

10,800

225

375

Value of abnormal loss

Loading included in the value of abnormal loss (10,800*16.67%

11,400

1,800

Calculation of value of closing stock: W.N.2

Invoice price of unsold stock (50% of ¼ of goods)

Add: Proportionate expenses of consignor (1,800*10,800/86,400)

Add: Proportionate non-recurring expenses of Consignee (3,000*10,800/86,400)

10,800

225

375

Value of abnormal loss

Loading included in the value of abnormal loss (10,800*16.67%

11,400

1,800

 

4. (a) Under what circumstances would you prepare Bills Receivable Account and Bills Payable Account while preparing final accounts from incomplete records? Explain.            10

Ans: Preparation of Bills Receivable and Bills Payable Account:

Sometimes the question may not give the opening or closing balances of Bills Receivable and Bills Payable. Bills receivable is shown as an asset and bills payable is a liability. Without this amount balance sheet cannot be prepared. Again it is possible that opening and closing balance of bills receivable and bills payable are given but bills receivable received during the year and bills payable accepted during the year are not given. Bills receivable received during the year is transferred to total debtors account to find credit sales and bills payable is transferred to total creditors account to find credit purchases during the year. In these situations it becomes essential to prepare bills receivable and bills payable account. Proforma of Bills Receivable Accounts and Bills Payable Account as shown below:

BILLS RECEIVABLE ACCOUNT

Dr.

Rs.

Cr.

Rs.

To Balance b/d (Opening Balance)

To Sundry Debtors

(B/R received during the year)

 

By Cash

(Bills receivable honoured during the year)

By Total Debtors (B/R dishonoured)

By Balance c/d (Closing Balance)

 

 

BILLS PAYABLE ACCOUNT

Dr.

Rs.

Cr.

Rs.

To Sundry Creditors (B/P dishonoured)

To Cash

To Balance c/d (Closing Balance)

 

By Balance b/d (Opening Balance)

By Sundry Creditors

(Acceptances given during the year)

 

 

(b) “Credit Sales can be ascertained either by preparing the total Debtors Account or with the help of Memorandum Trading Account.” Discuss.                          10

Ans: Calculation of Credit Sales by Preparing total debtors account and Memorandum Trading Account

While preparing final accounts where single entry system is followed, credit sales cannot be given in the question. In order to find credit sales, we can either prepare total debtors account or memorandum trading account to find credit sales.

Preparation of total debtors accounts: Usually a question on single entry does not give the figures of credit sales. So to find out credit sales a Total Debtors Account is prepared. Total debtors accounts is debited with opening balance of debtors, interest on overdue amount, B/R dishonoured etc. and credited with collection from debtors in the form of cash, bank and B/R, return inwards, discounts allowed and allowances, bad debts and closing balance of debtors. Balancing amount will be credit sales during the year. Proforma of total debtors account is given below:

PROFORMA OF A TOTAL DEBTORS ACCOUNT

Dr.

Rs.

Cr.

Rs.

To Balance b/d (Opening Balance)

To Bills Receivable (Dishonoured)

To Interest on Overdue Accounts

To Transfers

To Cash (Refund for returns)

To Credit Sales (Balancing figure)

 

By Cash/Bank

By Bills Receivable

By Discounts

By Return Inwards

By Allowances

By Transfer

By Bad Debts

By Balance c/d (Closing Balance)

 

 

 

 

 

Memorandum Trading Account: Credit sales can also be ascertained by preparing Memorandum Trading Account provided all other details of trading account are given. Memorandum trading account is debited with opening stock, net purchases, direct expenses and gross profit and credit with closing stock and gross loss if any. Balancing figure of memorandum trading account will be net sales. If cash sales are given then it is to be deducted with net sales to find credit sales otherwise net sales will be considered as credit sales. Proforma of memorandum trading account is given below:

Memorandum Trading Account

Dr.

Rs.

Cr.

Rs.

To Opening Stock

To Net Purchases

To Direct Expenses

To Gross Profit c/d

 

By Net Sales (Balancing figure)

By Closing Stock

By Gross loss c/d

 

 

 

 

 

 5. (a) Describe the methods of recording depreciation in the books of account. How is the balance of the provisions for depreciation account shown in the Balance Sheet?                                         10

Ans: Methods of Charging Depreciation: Straight Line Method and Written Down Value Methods are most widely used. these two methods are explained below:

1. Straight Line Method: Under this method, a fixed proportion of original cost of the asset in written off annually so that, by the time asset is worn out, its value in the books is reduced to zero or residual value. This method is also known as ‘Fixed Installment Method’, or ‘Original Cost Method’. In order to provide depreciation on straight line method, we may be given:

1)         Cost of Asset and rate of depreciation.

2)         Cost of Asset, estimated scrap value and life of asset in years.

Suppose, cost of machinery is Rs. 5, 00,000 and rate of depreciation is 10% p.a. It means Rs. 50,000 depreciation will be charged for full year. However, if the machinery is used for 9 months only, the amount of depreciation will be (5,00,000*9/12*10/100 = 37,500). The rate of depreciation 10% implies that machinery will last for 10 years. In that case, the asset will not have any residual or scrap value. In case, it is estimated that the asset will have a scrap value on the expiry of its useful life, the annual depreciation on the asset is calculated with the help of following symbolic expression: 

This method is called straight line method because if a graph is drawn of the annual depreciation charge under this method, the graph would be a straight line. Out of all the methods, it is the simplest one.

2. Written down Value Method: Under this method, a fixed rate or percentage of depreciation is charged each year on the diminishing value of the asset will the amount is reduced to scrap value. Whereas, the straight line method assumes that the net cost of an asset be allocated to successive periods is uniform amounts, the diminishing balance method assumes that the rate of allocation should be constant throughout time. Under this method, instead of a fixed amount, a fixed rate on the reduced balance of the asset is charged as depreciation every year. Since a constant percentage rate is being applied to the written down value, the amount of depreciation charged every year decreases over the life of the asset. Though the percentage at which depreciation is charged remains fixed, the amount of depreciation goes on decreasing year after year. This is because a constant percentage is applied to a diminishing figure.

This method assumes that an asset should be depreciated more in earlier years of use than in later years because the maximum loss of an asset occurs in the early years of use. This method is also known as ‘Reducing Balance Method’, or ‘Written Value Method’ or ‘Fixed Percentage on Book Value Method’. The fixed percentage rate, to be applied to the allocation of net cost as depreciation, can be obtained by following formula: 

Treatment of Provision for Depreciation in Balance sheet

When it is decided by the enterprise to maintain the fixed asset account at original cost, the asset account is not credited with amount of annual depreciation. Asset account is, thus, carried forward to the subsequent years at original cost (i.e., historical cost). Provision for depreciation account is credited annually with the amount of depreciation and is carried forward to subsequent years with accumulated figure. Provision for depreciation account has a credit balance and it is shown as deducted from original cost of the asset in the balance sheet. When asset is sold or discarded, provision for depreciation is closed by giving a debit.

(b) What is a secret reserve? Enumerate the method employed by a firm to create secret reserves. Critically evaluate the practice from the viewpoint of general investors and shareholders.                       (10+10)

Ans: Meaning of Secret Reserve: Secret Reserve has been defines as “any reserve which is not apparent on the face of the Balance Sheet.” It is called “Hidden Reserve” or “Internal Reserve” or “Inner Reserve”. According to Simon & Karrenbrook, “Secret Reserves are an understatement of assets or an over-statement of liabilities accompanied by a corresponding understatement of capital.” It represents the surplus of assets over liabilities and capital. It is not disclosed although the existence of such a reserve may be inferred from an intelligent perusal of the accounts of the concern even though the amount cannot be ascertained. However, it does appear in the ledger. It is crated usually by Joint-Stock Companies especially the banking, insurance and financial concerns. Its creation may not always be looked upon with suspicion.

Methods of Creation Secret Reserve

1.       Writing down the assets much below their cost or market value, such as investments, stock-in-hand, land and buildings, plant and machinery, etc.

2.       Not writing up the value of an asset, the price of which has permanently gone up.

3.       Providing more reserve than necessary for bad and doubtful debts or discount on sundry debtors.

4.       Providing excessive depreciation on fixed assets.

5.       Writing down the goodwill to a nominal value.

6.       Omitting some of the assets altogether from the balance sheet.

7.       Charging capital expenditure to revenue account and thus showing the value of the asset to be less than its actual value.

8.       Overvaluing the liabilities.

9.       Inclusion of fictitious facilities.

10.   Showing contingent liabilities as real liabilities.

11.   Grouping dissimilar items on the liabilities side of the balance sheet, e.g., reserves, provisions and creditors, under a general heading, as “Sundry Creditors and other Credit Balances.”

Secret reserves have both uses and dangers for investors and shareholders which are stated below:

Need/Importance/Objectives of secret reserves:

1.          To meet extraordinary loss: The reserve may be used in future to meet any extraordinary loss without disclosing this fact to the shareholders or the outsiders.

2.          To withhold information of the progress of the company from trade competitors. If the true earning position of the company is shown, it is possible that more rival companies may come into the field and compete with it, thus bringing down its profits.

3.          To be utilized in a lean year. This is in case where the company has made an abnormal profit in a year and when it is intended that the whole of it should not be distributed.

4.          To utilize profit. The profit which have been utilized for the payment of dividend, remain in the business and increase the working capital and financial stability of the concern.

5.          To equalize the payment of dividends.

Dangers or Objections against Secret Reserve

1.          The balance sheet does not show a true and fair view of the state of affairs of the company as is expected under the Companies Act, if Secret Reserve is created.

2.          The shareholders do not get their due share of the profit. This may not always be correct. The shareholders are entitled to the reserve later on. But if a shareholder ceases to be so by selling his shares, he loses the profit he would gave got, had the Secret Reserve not be created.

3.          Value of the shares goes down in the market. This may not happen if the dividend paid is the same as in the previous year.

4.          Low dividends and supposed bad position of the company may lead the company into crisis. This is so especially in case of banking concern. Secret reserve may not be created when the profits are insufficient. Thus the question of “supposed bad position” will not arise.

5.          Speculation encouraged. By creating Secret Reserve and thus lowering the dividend, the directors may indulge in speculation in the shares of the company.

6.          Loss in reclamation. If the fixed assets are undervalued for the purpose of creating Secret Reserve, and if there is a fire, the company will not be able to claim the full value of the assets because the insurance company will pay according to the book value of the asset destroyed or damaged and hence cause a loss to the company.

7.          Improper use. Secret Reserve may be improperly by the directors to conceal their own weakness.

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