IGNOU Solved Question Papers - ECO 02 (December' 2011)

Term-End Examination GO December, 2011
Time: 2 hours
Maximum Marks: 50
Note: Attempt any four questions, including question no. 1 which is compulsory.
1. Answer any two questions from the following: 7+7
(a)What is significance of debit and credit balance in different types of accounts? Explain with examples.
(b)What is Trial Balance? State the type of errors that do not affect the trial balance.
Ans: Trial Balance: 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”.
Different types of errors which don’t affect the trial balance agreement

  1. Error of omission: Wherein the full transaction is omitted from the books of accounts. For example sold goods to Mr. Z for Rs.100. We neither entered this transaction in sales account nor have we entered in Mr. Z account
  2. Error of commission: Kind of error where we have entered the correct amounts but in wrong person’s account. For example sales of goods to Mr. A were entered in Mr. B account
  3. Error of principle: This type of error takes place when an item is entered in wrong head or class of accounts. For example purchase of fixed asset is entered in expenses account or sale of fixed asset such as building is entered in sales account
  4. Error of compensation: Errors that cancel the effects of each other. For example we might overstate purchases account by Rs.20 and we can overstate sales account by Rs.20 as well. Since we have added Rs.20 to both debit and credit sides of trial balance, the agreement of trial balance is still intact.
  5. Error of original entry: Entering wrong original figure or amount in accounts. For example, a purchase of Rs.100 was entered as Rs. 200 in the books of accounts.
(c)Why is journal sub-divided? Name the special Journals generally maintained by business and state the type of transactions entered in each of them.
(d)Explain briefly the utility of Debit note and credit note and give the format of any one of these.
Debit Note: It is a simple statement sent by a person to another person showing the amount debited to the account of the latter along with a brief explanation. The debit notes are issued by a trader relating to purchase returns in order to put up his claim for abatement of his dues to the other party.
Credit Note: It is nothing but a statement sent by one person to another person showing the amount credited to the account of the latter along with a brief explanation. The credit notes are used for sales return in order to intimate related abatement.

2. (a) State the transactions recorded in Bill Receivable and Bill payable journals. 6+6
Ans: Transactions recorded in Bills Receivable and Bills Payable Books:
Recoding the transactions in general journal is very convenient, if the transactions are a few. But where numerous bills are drawn and accepted by a business man, than it is advisable for him to record them in special journals (books) known as bills receivable book and bills payable book. The bills drawn and received are recorded in bills receivable books and bills accepted are recorded in bills payable book.
The total of the bills receivable book shows the total amount of the bills drawn and received. This total will be posted to the debit side of bill receivable in ledger. The parties from whom the bills have been received will be credited with the amount shown against their names. In the same way, the total of the bills payable book will be posted to the credit side of bills payable account in ledger. The parties to whom acceptances have been given are debited.
When these two special books are maintained in a business, the general journal is used only for the following bills transactions:
  1. When a bill is endorsed in favor of a creditor.
  2. When a bill receivable and a bill payable are dishonored.
  3. When a bill is renewed.
(b) Distinguish between cash Basis and accrual basis of accounting. Why do you consider accrual basis more rational?
Ans: The major difference between the accrual accounting method and the cash accounting method is the way in which revenue and expenses are recorded in the accounts of the business. This difference is detailed below:
Cash-basis: Using the cash-basis, revenue is only recorded when the cash is actually exchanged i.e. when revenue is received as cash and when expenses are actually paid.
Accrual-basis: By contrast, the accrual-basis records revenue at the moment that a legal obligation is created. Similarly, under the accrual accounting method, expenses are recorded the moment a business becomes legally obliged to pay the bill.
Another key difference between the accrual accounting method and the cash accounting method is that the accrual accounting method properly applies the accounting concept of the 'matching principle' while the cash accounting method does not. 
Accrual basis accounting is more rational than cash accounting since it is able to provide more useful information about the firm's future cash flows. Accrual basis accounting includes estimations. Different from cash basis, accrual accounting requires recognizing revenue when the products are delivered or the services are provided. But Cash basis accounting only recognizes revenues and expenses when cash is actually collected and/or paid out, so accounts receivable would be valued at the cost of goods sold. That is why accrual basis is considered to be more rational
3. (a) State the salient features of Joint venture. Distinguish it from consignment. 6+6
Ans: A joint venture is the combination of two or more persons into a single activity. It is a form of partnership which is limited to a specific venture. It is exactly the same as partnership, with the exception that it is one of a business that is to be terminated.
Features of a Joint Venture:
  1. It is a specific partnership.
  2. It does not entail a continuing partnership since termination is certain.
  3. The business is dissolved after the venture is terminated.
  4. Many accounting concepts are not applicable such as the going concern concept.
  5. Ascertainment of income is relatively simple.
  6. It does not use a firm name generally.
Difference between Consignment and Joint Venture:
Basis of Difference
Joint Venture
There are two parties i.e. the principal and the agent.
The numbers of parties are two or more where all the parties are of equal status i.e., each is principal and agent at the time like partners.
The relationship between consignor and consignee is principal and the agent.
Co-ventures are principal as well as agent.
Term (Period):
Consignment is not confined to any specific term or period.
Joint venture is confined only to a specific venture.
Accounting Methods
Accounts are prepared only by single method.
Accounts are prepared by four methods.
The ownership of consignment is always with consignor and the agent has no right of ownership in the goods.
In case of joint venture, all the co-ventures are the joint owner.
Sharing of Profit or Loss
The profit on the consignment belongs to the principal (Consignor).
The profit or loss is shared equally by all the concerned parties, unless otherwise decided.
Account Sale
Account sale is prepared
No need to prepare account sale

(b) What is a single Entry System? Distinguish it from Double Entry System.
Ans: Single entry system: It is defined as the method of accounting which does not follow the principle of double entry system .Under this method only one account is given debit or credit for each transaction. Under this method, only personal accounts are maintained and impersonal account may not be maintained in the books.
Difference between Double Entry System and Single Entry System
Double Entry System
Single Entry System
Under this system, both aspect of each transaction are record.
Under this system, both aspect of each transaction are not recorded.
In this system, Personal, Real and Nominal accounts are kept fully.
In this system, only Personal Accounts are kept and Real and Nominal Accounts are ignored.
In this system, Cash book, General ledger, Debtors’ Ledger and Creditors’ Ledger are maintained.
In this system, only Debtors’ Ledger and creditors’ Ledger are kept. Cash book is also kept but personal transaction gets mixed up with business transaction.
Under this system, arithmetical accuracy can be checked by preparing Trial Balance at any moment of time.
Under this system, arithmetical accuracy cannot be checked because to Trial Balance can be prepared.
In this system, Trading, Profit and Loss Accounts and balance sheet can be prepared.
In this system, Trading, Profit And Loss Accounts and Balance sheet cannot be prepared.
For interpretation of financial statement, we can compute different ratios, if the accounts are maintained under this system.
Vital ratios cannot be computed, if the accounts are maintained under this system.
This system is scientific and follows certain rules.
This system is unscientific and does not follow any concrete rules.

4. The following information is extracted from the books of businessman. 12
Debtors as on 31.12.09 Rs.25000
Bad debts during 2009 Rs. 1,000
Provision for Bad debts is to be maintained at 5% of debtors. A provision for discount on debtors is also to be made at 2% you are required to calculate the amount to be set aside in respect of provision for bad debts and provision for discount on debtors respectively, and give the journal entries thereof.
5. How would you rectify the following errors in books of K and CO? 12
(a) The sales returns book has been undercast by Rs. 500.
(b)The total of the Bill Receivable Book amounting Rs. 4500 has been posted to the credit of Bill Receivable Account.
(c)While posting purchases book to be ledger the personal Account of Kumar has been credited with Rs. 221 instead of Rs. 212.
(d)Rs. 10,000 paid for the purchases of a T.V. set for the proprietors is debited to General exp. A/c
(e)An amount of Rs. 1000 paid by Pran has been credited to the account of Praneet.
(f)Goods sold to Inder for Rs. 1,200 has been entered in the Purchases Book.
Journal Entries
Suspense A/c                                                  Dr.
To Sales A/c
(for sales book undercast by Rs. 500, now rectified)


Bills Receivable A/c                                        Dr.
To Suspense A/c
(for total of bills receivable wrongly posted to credit of Bills receivable A/c, now rectified)


Kumar’s A/c                                                     Dr.
To Suspense A/c
(for credit of Kumar account with Rs. 221 instead of Rs. 212, now rectified)


Drawings A/c                                                   Dr.
To General Expenses A/c
(for purchases of TV. For personal use wrongly debited to general expenses, now rectified)


Praneet’s A/c                                                   Dr.
To Pran’s A/c
(for cash received from Pran wrongly credited to Praneet Account, now rectified)


Inder’s A/c Dr.
To Sales A/c
To Purchases A/c
(for Sales to Inder wrongly entered in Purchases book, now rectified)



6. On July 1, 2006 a company purchased a plant for Rs. 2, 00,000. Depreciation was provided at 10% per annum on straight line method on December 31, every year. With effect from Jan. 2008, the company decided to change the method of depreciation to diminishing balance method @ 15% per annum. On 1St July 2009, the plant was sold for Rs. 1, 20,000. Prepare Plant Account from 2006 to 2009. 12
Plant A/c
To Bank A/c
By Depreciation A/c
(2,00,000 x 10% x 6/12)
By Balance c/d



To Balance b/d
By Depreciation A/c
(2, 00,000 x 10%)
By Balance c/d



To Balance b/d
By Depreciation A/c
(1, 70,000 x 15%)
By Balance c/d



To Balance b/d
By Depreciation A/c
(1, 44,500 x 15%)
By Balance c/d