IGNOU Solved Question Papers - ECO 02 (June' 2013)

Term-End Examination June, 2013
Note: Attempt any four questions, including question no. 1 which is compulsory.
1. Answer any two of the following: 7+7
(a) What is consistency concept? Explain its accounting implications with examples.
(b) Explain the objectives of accounting.
Ans: Objective of Accounting: Objective of accounting may differ from business to business depending upon their specific requirements. However, the following are the general objectives of accounting:
  1. To keeping systematic record: It is very difficult to remember all the business transactions that take place. Accounting serves this purpose of record keeping by promptly recording all the business transactions in the books of account.
  2. To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit earned or loss suffered in business during a particular period. For this purpose, a business entity prepares either a Trading and Profit and Loss account or an Income and Expenditure account which shows the profit or loss of the business by matching the items of revenue and expenditure of the some period.
  3. To ascertain the financial position of the business: In addition to profit, a businessman must know his financial position i.e., availability of cash, position of assets and liabilities etc.
  4. To portray the liquidity position: Financial reporting should provide information about how an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its capital transactions, cash dividends and other distributions of resources by the enterprise to owners and about other factors that may affect an enterprise’s liquidity and solvency.
  5. To protect business properties: Accounting provides upto date information about the various assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a payment which is not due to him.
  6. To facilitate rational decision – making: Accounting records and financial statements provide financial information which help the business in making rational decisions about the steps to be taken in respect of various aspects of business.
  7. To satisfy the requirements of law: Entities such as companies, societies, public trusts are compulsorily required to maintain accounts as per the law governing their operations such as the Companies Act, Societies Act, and Public Trust Act etc.
(c) What do you mean by depreciation? Discuss the factors affecting the amount of depreciation.

(d) Make a distinction between Provisions and Reserves.
Ans: Provisions: The term ‘provision’ means an amount, which is written off, or retained, by way of providing for depreciation, renewals, diminution in the value of assets; or retained by way of providing for any unknown future liability of which the amount cannot be determined with reasonable accuracy.
Reserves: A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion or to meet future contingencies such as workmen compensation are called reserves.
Difference between reserves and provisions:
  1. Provision is made to meet known liability the  amount of which cannot be ascertained with substantial  accuracy. Whereas Reserve is created to meet unexpected losses and  contingencies likely to arise in future.
  2. Provision can be used only for meeting the specific  purpose for which it has been made. Whereas Reserve can be used for any purpose unless it is created for a specific purpose.
  3. Provision is a charge on profits and reduces the amount of net profits. Whereas, Reserves is an appropriation of profits and reflects undistributed profits.
  4. Provision is to be made even if there are no profits. Whereas Reserve is created only when there are profits.
  5. Provision creation is compulsory. Whereas Reserves creation is at the discretion of management with the exception of debenture redemption reserve for which the Companies Act has made a provision in certain cases.
  6. Provision is meant for meeting expected losses and cannot be used for dividend distribution. Whereas Reserves is a part of owner’s funds and can be used for distribution of dividends.

2. (a) The Literary Society of Mumbai had received Rs. 60,000 in 2010 towards subscription. Further information is: Subscription for 2009 unpaid on 1.1.2010 was Rs. 4000, Rs. 3800 of which were received in 2010. Subscriptions paid in advance on 31.12.2009 were Rs. 1600 and the same on 31.12.2010 were Rs. 2100. Subscriptions for 2010 unpaid on 31.12.2010 were Rs. 5,100. What amount of subscription will be credited to Income and Expenditures account of the year 2010. 6+6
Subscription A/c
To Balance b/d
(outstanding at the beginning)
To Income and Expenditure
To Balance c/d

By Balance b/d
By Receipt and Payment A/c
By Balance c/d



(b) What is meant by Receipts and Payments Account? In what respect does it differ from Income and Expenditure A/C.
Ans: Receipts and Payments Account: A Receipts and Payments Account is a summary of bank and cash transaction. Receipts are shown on the left hand side while payments are shown on the right hand side. It starts with opening cash and bank balances and ends with their closing balances. All receipts and payments are recorded in this account whether these are of revenue nature or capital nature.
Income and Expenditure Account: Income and Expenditure Account is a Nominal Account which is prepared at the end of the accounting period by a Not-For-Profit Organisation to ascertain the surplus, i.e., excess of income over expenditure, or the deficit, i.e.  Excess of expenditure over income.
Difference between Receipts and Payments Account and Income and Expenditure Account
Receipt and Payment Account
Income and Expenditure Account
1. Nature
It is a Real Account
It is nominal Account.
2. Recording
It records receipt and payments of both capital and revenue nature.
It records incomes and expense of revenue nature only.
3. Period of items
It records the items received or paid during the current year, whether relating to past, present or future periods.
It includes expenses or incomes relating to current year only.
4. Non cash items
It ignores non-cash items like depreciation, credit purchase, credit sales etc.
It records non-cash items also.
5. Balance of account
It usually shows a debit balance.
It may show a debit or a credit balance.

3. Raghav Radio & Co., Mumbai sent on consignments to chaddha & Co. Calcutta 100 radio sets, invoiced at Rs. 1,000 each on January 6 2011. Raghav Radio & Co. Paid Rs. 4,000 on the same day for dispatching goods to the consignee. Consignee remitted Rs. 50,000 as an advance by bank draft on 14th January. The consignee is entitled to a commission of 10% on the sale proceeds. On receipts of goods the consignee paid Rs. 2000 for freight and Rs. 4,500 for godown charges. On January 28, Chaddha & Co. sent an Account sales showing that the radio sets have realized Rs. 1,500/ each. He remits the amount due to Raghav Radio & Co. Pass journal entries in the books of consignor. 12
4. (a) What is self - Balancing system? State its advantages. 6+6
Ans: Meaning of Self Balancing: When a large number of debtors and creditors are there in a business, it is advantageous to maintain a separate sales ledger and bought ledger for smooth handling of the record-keeping & function as well as to facilitate division of work. Generally, three self- balancing ledgers are maintained in a large business, namely
1. Bought ledger
2. Sales ledger and
3. General ledger
In the bought ledger, a general ledger adjustment account is maintained to make it self-balancing. In the sales ledger also, a general ledger adjustment account is maintained to make it self-balancing. Lastly, in the general ledger, a bought ledger adjustment account and a sales ledger adjustment account are maintained which give summary of the bought ledger and sales ledger respect and make the general ledger self-balancing. In the bought ledger, individual creditors’ account are maintained. In the sales ledger, individual debtors’ accounts are maintained and in the general ledger, all other accounts including summary of the sales ledger and bought ledger are maintained.
Following are the advantages of self-balancing ledgers
1. It is easy to locate mistake if ledgers are kept on self-balancing system.
2. A complete trial balance can be compiled before the individual personal ledger balances are abstracted.
3. It is possible to ascertain the accuracy of posting of each ledger independently. 4. Where it is not desired to reveal the content of the private ledger to the clerical staff the balances on this ledger can be incorporated in total in the trial balance.
5. It is instrumental in strengthening the internal check.
6. The system is specially useful under the following two circumstances:
7. When there is a large number of customers and suppliers, who can be classified on some basis regional basis or alphabetical basis, etc.
8. When it is desired to prepare final statement of accounts periodically.
(b) Discuss the draw backs of single entry system of accounting.
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.
Drawbacks of Single Entry System:-
  1. It is not a scientific method of accounting because it does not record the two-fold aspect of each transaction.
  2. No trial balance can be prepared under Single Entry System.
  3. The arithmetical accuracy of the books cannot be checked in the absence of trial balance.
  4. In the absence of various checks, Fraud is more easily committed and it is very difficult to detect.
  5. In the absence of Real and nominal accounts the true financial position of the business cannot be ascertained.

5. Pass journal entries to rectify the following errors. 12
(a) Goods Rs. 4,000 sold on credit to B, no entry was made in books.
(b) No entry was made for purchases returns of Rs. 3,000.
(c) No entry was made for sales returns of Rs. 5,000.
(d) Goods purchased on credit from S Rs. 5,000, was recorded in purchase book as Rs. 500
(e) Sales of Rs. 6,000 to D were recorded as Rs. 600 in sales Book.
(f) Rs. 1,000 Received from Ram has been credited to Shyam's account.
Q. 5 Journal Entries
B’s A/c Dr.
   To Sales A/c
(for goods sold to be not recorded, now rectified)


Creditors A/c Dr.
   To Purchases return A/c
(for goods return to creditors not recorded, now rectified)


Sales Return A/c Dr.
   To Debtors A/c
(for goods returned by debtors not recorded, now rectified)


Purchases A/c Dr.
   To S’s A/c
(for goods purchased from S, recorded as Rs. 500 instead of Rs. 5,000, now rectified)


D’s A/c Dr.
   To Sales A/c
(for sale of goods to D recorded as Rs. 600 instead of Rs. 6,000 now rectified)


Shyam’s A/c Dr.
   To Ram’s A/c
(for Cash received from Ram, wrongly credited to Shyam A/c, now rectified)



6. Write short notes on any two of the following: 6+6
(a) Provision for doubtful debts
(b) Capital expenditure
(c) Deferred Revenue Expenditure

(d) Cost - concept of Accounting.