IGNOU Solved Question Papers - ECO 02 (June' 2012)

Term-End Examination: June, 2012
Note: Attempt any four questions, including question no.1 which is compulsory.
1. Answer any two of the following:  7+7
(a) What is Business Entity Concept? Explain its accounting implications with examples.
(b) Define 'Accounting'. Explain any three functions 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.
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”.
Functions of Accounting
i) Record Keeping Function: The primary function of accounting relates to recording, classification and summary of financial transactions-journalisation, posting, and preparation of final statements. These facilitate to know operating results and financial positions. The purpose of this function is to report regularly to the interested parties by means of financial statements.

ii) Managerial Function:Decision making programme is greatly assisted by accounting. The managerial function and decision making programmes, without accounting, may mislead. The day-to-day operations are compared with some predetermined standard. The variations of actual operations with pre-determined standards and their analysis is possible only with the help of accounting.
iii) Legal Requirement function: Auditing is compulsory in case of registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements. Accounting is a base and with its help various returns, documents, statements etc., are prepared.
(c) What is Bank Reconciliation Statement? State any five causes that lead to disagreement in the balances of cash book and pass book.
Ans: Bank Reconciliation Statement: The statement which is prepared for verifying and reconciling the bank balances, shown by the cash book and pass book on a certain date and incorporates the reasons of disagreement between them is called a bank reconciliation statement.
Causes of difference between balance as par cash book and pass book
  1. Cheques issued but not presented for payment: - when cheques are issued, the entry in the cash book is made immediately. But if the cheques issued are not presented to bank for payment till the date of preparing reconciliation statement, it will be a causes of disagreement between AB and CB balances.
  2. Cheques paid into the bank but not yet cleared: - As soon as the cheques are deposited in to the bank, the entry is passed on the debit side of the bank column in the cash book. But cheques deposited may not be collected and credited by bank till date.
  3. Interest allowed by the bank: - Bank might have credited the account of the customer with the interest and have made entry in the pass book. But such entry may not be recorded in the cash book.
  4. Interest and bank charges debited by bank: - The bank debits the customers account with the interest due on bank overdraft. It also debits the account of the customers for the incidental and collection charges. The bank debits the customers account, but there entries are not made in cash book till date of preparation of B.R.S
  5. Interest, dividend etc collected by bank: - Sometime interest on government securities or dividend on share is collected by the bank and is credited to the customers account. If these items are not recorded in the cash book till the date of preparation of the reconciliation statement the balance will differ.
(d) Define depreciation. Explain the objectives of providing depreciation.
Ans: Depreciation:-Depreciation may be defined as permanent decrease in the value of assets due to Use and /or the lapse of the time. According to Carter, “Depreciation may be defined as the permanent and gradual decrease in the Value of an assets from any cause.’’
Objectives for providing depreciation
  1. For the replacement of assets: The fund equal to the amount of the depreciation is created which will remain in the firm. After the expiry of the life of asset, the same fund can be utilized to replace the new asset.
  2. For the determination of true profit or loss: Depreciation is also an expense like repair and maintenance which must be included in profit and loss account to ascertain the correct profit or loss of a business for the year.
  3. For the presentation of assets in the balance sheet at their proper value: Depreciation must be charged to each fixed asset for the true and fair presentation of assets in the balance sheet. The depreciation is deducted from the cost or book value of assets each year.
  4. For the determination of correct cost of production: Correct cost of production can not be ascertained if the depreciation is not charged to the fixed assets. Thus, it is necessary to include amount of depreciation in the calculation of cost of each product.
2. (a) Distinguish between Sales and Consignment. 6+6
Ans: Difference between Consignment and Sale:
Basis of Difference
In a consignment, the ownership remains which the principal.
The ownership passes to the buyer.
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.
In a consignment, goods may be returned at any time.
In a sale, the buyer cannot return the goods unless otherwise agreed.
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

(b) What is a Joint Venture? Explain the essentials features of a joint venture.
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.
Since the business is to be terminated after completion of the venture, a firm name is not generally used. Thus the joint venture is like a temporary partnership without a firm name. it can also be said a particular partnership or partnership for a particular object.
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.

3. (a) What is meant by 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) What is single entry system? Discuss the drawbacks 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.
4. (a) Give journal entries for any three the following adjustments. 6+6
(i) Outstanding Rent Rs. 4,000.
(ii) Loss of goods by fire Rs. 6,000.
(iii) Proprietor withdrew Rs. 5,000 for personal use.
(iv) Commission received in advance Rs. 10,000.
(v) Provision for discount on debtors Rs. 1,000.
(vi) Interest on capital Rs. 5,000.
Journal Entries
Rent A/c                                             Dr.
To Outstanding Rent A/c
(Being the rent outstanding)


Loss by fire A/c                                   Dr.
To Purchases A/c
(Being the loss of goods by fire)


Drawings A/c                                      Dr.
To Cash A/c
(Being the cash withdrawn for personal use)


Cash A/c                                            Dr.
To Commission received in advance A/c
(Being the  commission received in advance)


Discount A/c                                       Dr.
To Provision for Discount on Debtors A/c
(Being Provision for discount on Debtors transferred to Discount A/c)


Interest on Capital A/c Dr.
To Capital A/c
(Being the interest on capital transferred to Capital A/c)



(b) Distinguish between Capital and Revenue Expenditure with suitable examples.
Ans: Ans: The main points of distinction between capital expenditure and revenue expenditure are follows.
  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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
  1. Purchase of furniture, office building etc.
  2. Purchase of additional furniture or machinery
  3. Purchase of patent right, copy rights etc.
Examples of Revenue Expenditure
  1. Payment of salaries
  2. Payment of rent, rates and taxes
  3. Purchases of goods

5. Rectify the following accounting errors: 12
(a) Machine purchased for Rs. 10,000 has been debited to purchases account.
(b) Rs. 3,000 being the sale proceeds of old furniture has been credited to sales account.
(c) Goods purchased from Sanjay for Rs.4, 000 was recorded in purchase book as Rs. 400.
(d) Rs. 5,000 paid to Anil for salary was debited to his personal account.
(e) Rs. 1,000 paid for cartage for the newly purchased machine has been debited to cartage account.
(f) Rs. 5,000 received from 'Ram' has been credited to 'Shyam' account.
Journal Entries
Machinery A/c                                             Dr.
To Purchases A/c
(for Machinery Purchased wrongly debited to purchases account, now rectified)


Sales A/c                                                       Dr.
To Furniture A/c
(for Furniture sold wrongly credited to Sales Account now rectified)


Purchases A/c                                              Dr.
To Sanjay’s A/c
(for goods Purchased from Sanjay for  Rs. 4,000 wrongly recorded as Rs. 400, now rectified


Salary A/c                                                    Dr.
To Anil's A/c
(for Salary paid to Anil wrongly debited to  his Personal Account now rectified)


Machinery A/c                                            Dr.
To Cartage A/c
(for cartage paid on Purchase of Machinery wrongly debited to Cartage Account, now rectified)


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



6. (a) Explain briefly the various types of reserves with examples. 6+6
Ans: According to the method and object of creation, reserves may be of the following types:
  1. Revenue Reserve
  2. Capital Reserve
Revenue Reserve: Profit earned by a business through its normal activities is determined at the year end through profit and loss account. The portion of such profit which is not paid to the proprietor, but kept apart, is known as revenue reserve.
From the view point of its creation revenue reserve may again be classified into two types:
1. General Reserve: Reserve which is created not for any specific purpose, but for strengthening the financial position of the business is known as general reserve, e.g., reserve fund, contingency fund etc. General reserve is not created for specific purposes. It is usually created for the following purposes:
  1. To strengthen the financial position of the business.
  2. To increase working capital of the business.
  3. To meet future contingencies.
  4. To meet any unknown liability or loss.
2. Specific Reserve: Reserve created for any specific purpose is known as specific reserve. For example, dividend equalization fund, debenture sinking fund etc. This reserve will be utilized for the very purpose for which it has been created. It cannot be used for other purposes. Specific reserve is also known as special reserve.
Capital Reserve: Profit may arise from sources other than normal trading activities. Such profit is known as capital profit. Any reserve created out of such profit is called capital reserve. It is usually not available for payment to shareholders as dividend. Such profit is earned in the following ways:
  1. Sale of fixed asset.
  2. Revaluation of assets and liabilities.
  3. Issue of shares and debentures at a premium.
  4. Profit prior to its incorporation.
  5. Redemption of debenture at a discount.

(b) Receipts and payment Account of a sports  club showed that Rs 50,000 were received by way of subscription for the year ended 31.12.2010. The additional information was as follows:
(i) Subscription outstanding on 31.12.2009 was Rs. 5000.
(ii) Subscription received in advance on 31.12.2009 was Rs. 3000.
(iii) Subscription outstanding on 31.12.2010 was Rs. 10,000.
(iv) Subscription received in advance on 31.12.2010 was Rs. 6,000.
Show how above information would appear in the final accounts for the year ended 31st December 2010 of Sports Club.
Ans: Calculation of Subscription Income to be shown in Income & Expenditure Account:
Subscription received for the year
Add : Subscription outstanding on 31-12-2010

Less : Subscription outstanding on 31-12-2009

Add : Subscription received in advance on 31-12-2009

Less : Subscription received in advance on 31-12-2010
= 50,000
= 10,000
Subscription income for the year
Balance Sheet
As on 31-12-2010
Subscription received in advance as on 31-12-2010
Subscription outstanding
on 31-12-2010