Term-End Examination June, 2014
ECO-2 ACCOUNTANCY-I
Note: Attempt any four questions, including question no. 1 which is compulsory.
1. Attempt any two questions from the following: 7+7
(a) What are the advantages of accounting?
Ans: Accounting: 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.
The main advantages of accounting are mentioned below:
- Accounting information is used by the management in taking various menageries at decision.
- It shows the operating efficiency i.e. net profit of business for a particular year.
- It shows the financial position of business on a particular data.
- Accounting data are accepted by the tax authorities as authentic and reliable. Hence they can be used as the basis for discharging tax liabilities.
- Accounting supplies financial data which are accepted by the insurance company as reliable figure for settlement of insurance claim.
- It is also helpful for financial institution who lends money to the business.
(b) Distinguish between Capital Expenditure and Revenue Expenditure with examples.
Ans: The main points of distinction between capital expenditure and revenue expenditure are follows.
- Purpose: Capital expenditure is incurred for acquisition or erection of fixed assets to used in the business. On the other hand, revenue expenditure is incurred for the day-to conduct of business.
- Earning Capacity: Capital expenditure increases the earning capacity of the business whereas revenue expenditure does not increase the earning capacity as it is incurred maintaining the existing earning capacity.
- Period of Benefit: The benefit of capital expenditure extends to more than one year, the benefit of revenue expenditure extends only to the current year.
- Accounting Treatment: Capital expenditure is shown in the Balance Sheet as an asset, the other hand, revenue expenditure is shown as an expense in the Trading Account or Pro and Loss Account.
- Nature: Capital expenditure is of a non-recurring nature because such expenditure is incurred every day. On the contrary, revenue expenditure is recurring in nature as it is incurred on day to day operations.
Examples of Capital Expenditure
- Purchase of furniture, office building etc.
- Purchase of additional furniture or machinery
- Purchase of patent right, copy rights etc.
Examples of Revenue Expenditure
- Payment of salaries
- Payment of rent, rates and taxes
- Purchases of goods
(c) Make a clear distinction between 'Sale' and 'Goods Sent on Consignment'.
Ans: Difference between Goods sent on Consignment and Sale:
Basis of Difference | Goods sent on Consignment | Sale |
Ownership | In a consignment, the ownership remains which the principal. | The ownership passes to the buyer. |
Relationship | The relationship between consignor and consignee is principal and the agent and continue till terminated. | The relations between buyer and seller terminated as soon as the goods are delivered and payment is made. |
Return | In a consignment, goods may be returned at any time. | In a sale, the buyer cannot return the goods unless otherwise agreed. |
Payment | In case of consignment payment is due as and when goods are sold, otherwise no payment is due. | In case of sale, payment is due immediately on sale or as agreed. |
Account Sale | Account sale is prepared. | No need to prepare account sale |
(d) What is Single Entry System of Book-keeping? How has Double Entry System removed its limitations?
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.
Double entry system removed the limitations of single entry in the following way
Merits of Double Entry System | Demerits of 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. |
2. (a) What are the Rules for recording business transactions in Journal? 6+6
(b) Pass the Journal Entries for the following:
(i) Credit sales to Sahil, 15,000.
(ii) Cash received from Sahil in full settlement of his account, Rs. 14,750.
(iii) Office rent due 5,000; paid only Rs. 3,000.
(iv) Loss of stock by fire, Rs. 8,500.
Journal Entries
Date | Particulars | L/F | Amount | Amount |
(i) | Sahil’s A/c Dr. To Sales A/c (for credit Sales to Sahil’s) | 1,50,000 | 1,50,000 | |
(ii) | Cash A/c Dr. Discount allowed A/c Dr. To Sahil’s A/c (for Cash received from Sahil in full settlement of his account) | 14,750 250 | 15,000 | |
(iii) | Rent A/c Dr. To Cash A/c To Outstanding Rent A/c (for office rent and due) | 5,000 | 3,000 2,000 | |
(iv) | Loss by fire A/c Dr. To purchases A/c (for loss of Stock by fire) | 8,500 | 8,500 |
3. (a) What are the differences between 'Receipts and Payments Account' and 'Income and Expenditure Account'? 6+6
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
Basis | 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. |
(b) 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:
- 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.
- 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.
- Provision is a charge on profits and reduces the amount of net profits. Whereas, Reserves is an appropriation of profits and reflects undistributed profits.
- Provision is to be made even if there are no profits. Whereas Reserve is created only when there are profits.
- 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.
- 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.
4. From the following Ledger balances and adjoining information, you are required to prepare a Trading and Profit and Loss Account for the year ended on 31st March 2012 and the Balance Sheet as on that date. 12
Particulars | Dr. | Cr. |
Opening Stock Purchases Sales Purchases Returns Sales Returns Carriage Inward Carriage outward Bank Overdraft Cash Capital Sundry Creditors Loans Investments Accrued Incomes Machinery Drawings Wages Salaries Outstanding Expenses Prepaid Expenses Postage Discount Received Discount Allowed Bad debts Debtors Interest Paid Interest Received Provision for Bad debts Furniture and Fixtures | 40,000 4,10,000 2,500 1,500 2,500 4,000 10,000 600 47,500 10,000 11,000 7,300 750 900 1,000 750 1,00,000 3,500 7500 | 4,29,000 1,250 21,000 1,27,750 37,500 41,375 1,000 375 300 1,750 |
6,61,300 | 6,61,300 |
Other Information:
(a) Unsold Stock 1, 10,000
(b) Depreciate Machinery by 10%
(c) Tax Payable 7,500
(d) Accrued Interest on Investment 1,200
Trading and Profits & Loss A/c
For the year ended as on 31st March, 2012
Particulars | Amount | Particulars | Amount |
To Opening Stock To Purchases 4,10,000 Less : Returns 1,250 To carriage Inward To Wages To Gross Profit c/d | 40,000 4,08,750 1,500 11,000 75,250 | By Sales 4,29,000 Less : Return 2,500 By Closing Stock | 4,26,500 1,10,000 |
5,36,500 | 5,36,500 | ||
To Carriage Outward To Depreciation Machinery To Salaries To Postage To Discount allowed To Bad debts To Interest paid To Tax Payable To Net Profit | 2,500 4,750 7,300 900 1,000 750 3,500 7,500 50,675 | By Gross Profit b/d By Discount received By Provision for bad debts By interest received 300 Add : Accrued Interest 1,200 | 75,250 375 1,750 1,500 |
78,875 | 78,875 |
Balance Sheet
Liabilities | Amount | Assets | Amount |
Capital 1,27,750 Less : Drawings 10,000 1,17,750 Add : Net Profit 50,675 Bank Overdraft Sundry Creditors Loans Outstanding Expenses Tax Payable | 1,68,425 21,000 37,500 41,375 1,000 7,500 | Cash Investments Accrued Incomes Machinery 47,500 Less: Depreciation @ 10% 4,750 Prepaid Expenses Debtors Furniture & Fixtures Closing Stock Accrued Interest Investments | 4,000 10,000 600 42,750 750 1,00,000 7,500 1,10,000 1,200 |
2,75,800 | 2,76,800 |
5. Pass the necessary Journal entries for the rectification of following accounting errors: 12
(a) Purchase of LCD Projector debited to Purchase Account Rs. 50,000.
(b) Credit Sales of 720 recorded in Sales Journal as Rs. 270.
(c) Credit Sales of 1,500 rupees to Sameer was omitted from being recorded in books.
(d) Sameer had paid Rs. 1,000 but it was credited to Rahim's account.
(e) Discount Allowed column of Cash Book was overcast by Rs. 75.
(f) Sales Book was under cast by Rs. 550.
Date | Particulars | L/F | Amount | Amount |
(a) | LCD Projector A/c Dr. To Purchases A/c (for purchases of LCD Projector wrongly debited to Purchases Account, now rectified) | 50,000 | 50,000 | |
(b) | Debtors A/c Dr. To Sales A/c (for credit sales of Rs. 720 recorded in Sales Journal as Rs. 270, now rectified) | 450 | 450 | |
(c) | Sameer’s A/c Dr. To Sales A/c (for Sales to Sameer omitted to be in books, now recorded) | 1,500 | 1,500 | |
(d) | Rahim’s A/c Dr. To Sameer’s A/c (for Cash received from Sameer’s wrongly credited to Rahim’s A/c now rectified) | 1,000 | 1,000 | |
(e) | Suspense A/c Dr. To Discount allowed A/c (for Discount allowed overcast by 75, now rectified) | 75 | 75 | |
(f) | Suspense A/c Dr. To Sales A/c (for sales book undercast by Rs. 550, now rectified) | 550 | 550 |
6. Prepare Machinery Account for the years 2007 to 2011. 12
On 30th June 2007, a business man purchased machinery for Rs. 10,000 and spent on its installation Rs. 1000. It charged depreciation @ 10% annually according to Fixed Instalment method of charging depreciation. On 30-6-2009, he added another machinery costing Rs. 8,000. On 30-6-2011, the machinery purchased on 30-6-2007 was sold for Rs. 5,000.
Machinery A/c
Date | Particulars | Amount | Date | Particulars | Amount |
30-6-07 | To Bank A/c To Bank (expenses) | 10,000 1,000 | 31-12-07 31-12-07 | By Depreciation A/c (11,000 x 10% x 6/12 By Balance c/d | 550 10,450 |
11,000 | 11,000 | ||||
1-1-08 | To Balance b/d | 10,450 | 31-12-08 31-12-08 | By Depreciation A/c (11,000 x 10%) By Balance c/d | 1,100 9,350 |
10,450 | 10,450 | ||||
1-1-09 30-6-09 | To Balance b/d To Bank A/c | 9,350 | 31-12-09 31-12-09 | By Depreciation A/c 1st = (11,000 x 10%) 2nd = (8,000 x 10% x 6/12) By Balance c/d | 1,100 400 15,850 |
17,350 | 17,350 | ||||
1-1-10 | To Balance b/d | 15,850 | 31-12-10 31-12-10 | By Depreciation A/c (19,000 x 10%) BY Balance c/d | 1,900 13,950 |
15,850 | 15,850 | ||||
1-1-11 | To Balance b/d | 13,950 | 30-06-11 31-12-11 31-12-11 | By Bank A/c By Profit & Loss A/c By Depreciation A/c (11,000 x 10% x 6/12) By Depreciation A/c (8,000 x 10%) By Balance c/d | 5,000 1,600 550 800 6,000 |
13,950 | 13,950 |
Calculating Loss on Machinery Sold:
Cost of Purchases (30-6-07) Less : Depreciation @ 10% (31-12-07) | = 11,000 = 550 |
Book Value as on (1-1-08) Less : Depreciation @ 10% (31-12-08) | = 10,450 = 1,100 |
Book Value as on (1-1-09) Less : Depreciation @ 10% (31-12-09) | = 9,350 =1,100 |
Book Value as on (1-1-10) Less : Depreciation @ 10% (31-12-10) | = 8,250 = 1,100 |
Book Value as on (1-1-11) Less : Depreciation @ 10% (330-6-11) | = 7,150 = 550 |
Book Value as on )30-6-11) Less : Sale of Plant | = 6,600 = 5,000 |
Loss on Sale of Plant | 1,600 |