ECO - 02: ACCOUNTANCY - 1 | IGNOU SOLVED ASSIGNMENT 2020 - 21 | B.COM | FREE SOLVED ASSIGNMENT

Bachelor’s Degree Programme (BDP)
ASSIGNMENT (2020-21)
Elective Course in Commerce
ECO – 02: Accountancy-I
For July 2020 and January 2021 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 2020 and January 2021). The validity is given below:

1)      Those who are enrolled in July 2020, it is valid up to June 2021.

2)      Those who are enrolled in January 2021, it is valid up to December 2021.

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/2020-21
Coverage: All Blocks
Maximum Marks: 100

Attempt all the questions:

1. What is meant by Bank Reconciliation Statement? What are the main causes of differences between the cash balance shown by Cash Book and Pass Book? Explain the steps involved in preparation of a Bank Reconciliation Statement. (20)

Ans: Bank Reconciliation Statement

Business concern maintains the cash book for recording cash and bank transactions. The Cash book serves the purpose of both the cash account and the bank account. It shows the balance of both at the end of a period. Bank also maintains an account for each customer in its book. All deposits by the customer are recorded on the credit side of his account and all withdrawals are recorded on the debit side of his account. A copy of this account is regularly sent to the customer by the bank. This is called ‘Pass Book’ or Bank statement. It is usual to tally the firm’s bank transactions as recorded by the bank with the cash book. But sometimes the bank balances as shown by the cash book and that shown by the pass book/bank statement do not match. If the balance shown by the pass book is different from the balance shown by bank column of cash book, the business firm will identify the causes for such difference. It becomes necessary to reconcile them. To reconcile the balances of Cash Book and Pass Book a statement is prepared. This statement is called the ‘Bank Reconciliation Statement.

Causes of difference between balance as par cash book and pass book

a)      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.

b)      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.

c)       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.

d)      Interest and bank charges debited by bank: - The bank debits the customer’s 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 customer’s account, but there entries are not made in cash book till date of preparation of B.R.S

e)      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 customer’s account. If these items are not recorded in the cash book till the date of preparation of the reconciliation statement the balance will differ.

f)       Direct Payment by bankers on behalf of customer: Sometimes banks pay expenses of their customer say mobile bill, insurance premium etc. from their account as per their standing instruction. If these items are not recorded in the cash book till the date of preparation of the reconciliation statement the balance will differ.

How to Prepare Bank Reconciliation Statement: 

To reconcile the bank balance as shown in the pass book with the balance shown by the cash book, Bank Reconciliation Statement is prepared. After identifying the reasons of difference, the Bank Reconciliation statement is prepared without making change in the cash book balance. We may have the following different situations with regard to balances while preparing the Bank Reconciliation statement. These are:

1. Favourable balances

(a) Debit balance as per cash book is given and the balance as per pass book is to be ascertained.

(b) Credit balance as per pass book is given and the balance as per cash book is to be ascertained.

2. Unfavourable balance/overdraft balance

(a) Credit balance as per cash book (i.e. overdraft) is given and the balance as per pass book is to be ascertained.

(b) Debit balance as per pass book (i.e. overdraft) is given and the balance as per cash book is to be ascertained.

The following steps are taken to prepare the bank reconciliation statement:

(i) Favourable balances: When debit balance as per cash book or credit balance as per pass book is given:

(a) Take balance as a starting point say Balance as per Cash Book.

(b) Add all transactions that have resulted in increasing the balance of the pass book.

(c) Deduct all transactions that have resulted in decreasing the balance of pass book.

(d) Extract the net balance shown by the statement which should be the same as shown in the pass book.

In case balance as per pass book is taken as starting point all transactions that have resulted in increasing the balance of the Cash book will be added and all transactions that have resulted in decreasing the balance of Cash book will be deducted. Now extract the net balance shown by the statement which should be the same as per the Cash book.

(ii) Unfavourable Balance/Overdraft: Sometimes a businessman withdraws excess amount from the bank account and the closing bank balance of a month is a debit balance. This balance amount is called ‘overdraft balance’ as per Pass Book. This is shown in the cash book as a credit balance.  Overdraft balance is to be shown in the minus column of statement as the starting point. The other steps shall remain the same as mentioned above. The following illustration helps to understand dealing with the unfavourable balance as per cash book and pass book.

2. Give journal entries for the following adjustments and also explain the accounting treatment of these adjustments while preparing the Final Accounts of an Enterprise?     (20)

i.         Interest received in advance Rs. 600

ii.       Interest on drawings Rs. 1200

iii.      Provision for discount on creditors Rs. 400

iv.     Loss of goods by theft Rs. 9,000

v.       Drawings of goods by the proprietor Rs. 800

Solution:

Journal Entries

In the books of ______________________

Date

Particulars

L.F.

Amount (Dr)

Amount (Cr)

i.

Interest Account                           Dr.

To Interest Received in Advance Account

(For interest received in advance adjusted with interest)

Treatment in Final accounts:

a) In profit and loss account, interest received in advance is deducted with interest on credit side.

b) In Balance sheet, it is shown as liability.

 

600

 

600

ii.

Capital Account                           Dr.

To Interest on Drawings Account

(For interest on drawings provided)

Treatment in final accounts:

a) In profit and loss account, interest on drawings is credited.

b) In balance sheet, it is deducted with capital.

 

1,200

 

1,200

iii.

Provision for discount on creditors Account     Dr.

To Profit and loss Account

(For provision for discount on creditors transferred to profit and loss account)

Treatment in final accounts:

a) Since provision for discount on creditors is a loss. Therefore, it is credited to profit and loss account.

b) In balance sheet, it is deducted with sundry creditors on liability side.

 

 

 

iv.

Loss by fire Account                        Dr.

To Purchases Account

(For loss of goods by fire)

Treatment in final accounts:

a) Total Loss of goods by fire is deducted with purchase while preparing trading account.

b) If goods are insured, then net loss by fire after deducting insurance claim is debited to profit and loss account and insurance claim to the extent realised or realisable is shown as an asset in balance sheet.

c) If goods are uninsured, then net loss by fire is debited to profit and loss account but nothing is shown in balance sheet.

 

9,000

 

9,000

v.

Drawings Account                          Dr

To Purchases Account

(For drawings of goods by proprietor for personal use)

Treatment in final accounts:

a) Drawings of goods for personal use are deducted with purchase while preparing trading account.

b) In balance sheet, it is deducted with capital.

 

800

 

800

 3. a) What procedure is followed for valuation of closing stock when normal and abnormal losses occur simultaneously. Explain with suitable examples.               10

Ans: Valuation of Unsold Stock

Usually, at the time of closing of the books some of the goods remain unsold. For correct accounting it is necessary that such unsold stock should be valued properly. The general principal of valuing stock on the basis of cost of market price, whichever is lower applies in this cost also. However, the meaning of cost should be properly considered. If the expected selling price of stock on hand is lower than the cost the value put on the stock should be net expected selling price only, i.e. expected selling price less delivery expenses, etc.

In addition to the purchase price, those expenses which are necessary to put the goods in their present place and condition must also be taken into account. Usually all expenses till the goods are placed in the consignee’s Godown are treated as part of cost. Instances of such expenses are freight, insurance in transit, customs duty, Octroi duty, Cartage, etc to the godown of the consignee.

Expenses incurred after the goods reach the consignee’s godown, such as rent and insurance for the godown, interest, etc, do not add to the value of goods. Such expenses, therefore, are not considered while valuing stock.

In addition to the above, all the normal and abnormal loss of goods is also taken into consideration at the time of valuation of closing stock.

Normal loss: Losses which are arises due to nature of goods and which cannot be avoided is called normal loss. Such loss would be spread over the entire consignment while valuing stock. The total cost of material and expenses incurred should be dividend the net quantity (Total quantity – normal loss) to ascertain the cost per unit. While calculating value of closing stock, normal loss is to be adjusted with cost of unsold stock by increasing cost per unit.

Suppose 1,000 kg of apples are consigned to a wholesaler, the cost being Rs.3/- per kg, plus Rs.400/- of freight. It is concluded that a loss of 15% is unavoidable. The cost per kg will be Rs.3400/850 or Rs.4/-. If the stock is 100 kgs, its value will be Rs.400/-

Abnormal loss: Losses which are accidental in nature or which can be avoided are called abnormal loss. Value of abnormal loss must be deducted from total cost to find out actual and comparative profit. Abnormal loss can be occurred during transit or after the goods received by the consignee. The cost of abnormal loss is to be deducted while calculating the amount of stock.

Calculation of Unsold Stock when there is normal and abnormal loss of stock

Cost of unsold stock (after adjusting normal loss and deducting loading)

Add: Proportionate expenses of consignor  (all expenses/net goods sent on consignment*unsold stock)

xxxxxxxxx

xxxxxxxxx

 

Less:  Cost of abnormal loss in transit

xxxxxxxxx

------------

 

Add: Proportionate expenses of consignee (all expenses incurred by consignee till the goods reach his premises*unsold stock/goods received by him)

xxxxxxxxx

 

Value of Closing Stock

XXXXXXXX

The journal entry for unsold stock is:

Stock on Consignment A/c……Dr

To Consignment Account

For Example: 1000 kgs Goods worth Rs. 1, 00,000 are consigned by X to Y. Y pays freights of Rs. 3000 and insurance of Rs. 1000. Y paid octroi of Rs. 250 and unloading charges of Rs. 750. He also paid establishment charge of Rs. 2500 per month. There was a normal loss of 10% and loss due to accident is 1/10 of goods received by consignee. One fourth of the goods sent were in stock. What’s the value of closing stock?

Calculation of value of closing stock

Cost of goods consigned (cost per kg = 1,00,000/900 = 111.111)

Add: Expenses of consignor (3000+1000)

Add: Direct Expenses of consignee (250+750)

1,00,000

4000

1,000

 

Less: Value of abnormal Loss (1,05,000*90)/900

1,05,000

10,500

Total cost of goods consigned

Value of 1/4th stock

94,500

23,625

b) Explain various methods of recording the joint venture transactions without maintaining separate set of books. 10

Ans: Joint venture account is either maintained separately or no separate sent of books are maintained. If no separate set of books of accounts are maintained, then accounting for joint venture can be done in the following way:

1. When each co-venturer keeps records of all transactions: Under this method, the following accounts are prepared by each co-venturer: Joint venture account and co-venturer’s account.

When venturers maintain full records of joint venture, the following journal entries are necessary:

Date

Particulars

L.F.

Amt (Dr)

Amt (Cr)

 

For supply of goods to venture out of business stock

Joint Venture Account            Dr.

To Purchases Account

 

 

 

 

For meeting expenses or purchase of ventures

Joint Venture Account               Dr

To Bank/Creditors Account

 

 

 

 

When co-venturer supplies goods and incurs expenses for venture

Joint Venture Account           Dr

To Co-venturer Account

 

 

 

 

For Venture Sale

Bank/Debtors Account               Dr

To Joint Venture Account

 

 

 

 

For Venture sale made by the co-venturer

Co-venturer Account                  Dr

To Joint Venture Account

 

 

 

 

For bill of exchange drawn on co-venturer

Bills receivable Account                 Dr

To Co-venturer Account

 

 

 

 

For discounting of bills of exchange

Bank Account                 Dr

Joint Venture Account Dr

To Bill Receivable Account

 

 

 

 

For accepting the bill of exchange drawn by co-venturer

Co-venturer Account           Dr

To Bills payable Account

 

 

 

 

For bills of exchange discounted by co-venturer

Joint venture Account            Dr

To Co-venturer Account

 

 

 

 

For Venture Profit

Joint Venture Account                Dr

To Profit and Loss Account

To Co-venturer Account

 

 

 

 

For venture loss

Profit and loss Account                 Dr

Co-venturer Account                     Dr

To Joint Venture Account

 

 

 

 

For settlement of claims – When payment is due to co-venturer

Co-venturer Account               Dr

To Bank Account

 

 

 

 

For settlement of claims – When payment is due from co-venturer

Bank Account                  Dr

To Co-venturer Account

 

 

 

2. When each co-venturer keeps records of their own transactions only: Sometimes the venturer find it wasteful to keep full record of venture transactions; rather it is considered convenient to keep record of own transaction only. For this purpose, it is necessary to open joint venture with co-venturer account. All expenses incurred are debited to this account and profit earned is credited to this account. The following journal entries are passed in this method:

Date

Particulars

L.F.

Amt (Dr)

Amt (Cr)

 

For supply of goods to venture out of business stock

Joint Venture with X Account            Dr.

To Purchases Account

 

 

 

 

For meeting expenses

Joint Venture with X Account               Dr

To Bank Account

 

 

 

 

For Venture Sale

Bank Account               Dr

To Joint Venture with X Account

 

 

 

 

For venture profit

Joint Venture with X Account     Dr

To Profit and Loss Account

 

 

 

 

For venture loss

Profit and loss Account                 Dr

To Joint Venture with X Account

 

 

 

 

For settlement of claims – When payment is due to co-venturer

Joint Venture with X Account               Dr

To Bank Account

 

 

 

 

For settlement of claims – When payment is due from co-venturer

Bank Account                  Dr

To Joint Venture with X Account

 

 

 

4. What are the salient features of Single Entry System? Discuss the drawbacks of Single Entry System of Accounting. Briefly explain the two methods of ascertaining profit when accounting records are incomplete. (20)

Ans: Single Entry System: It is difficult to define single entry system because, in fact, there exists no system like single entry system. Broadly speaking, it is a defective double entry system. Any system that falls short of complete double entry method is called single entry system. Under this method, sometimes both the aspects of transactions are recorded, sometimes only one aspect is recorded or sometime no aspects of transactions is recorded in the books. As a general rule under the single entry practice only the personal aspects of the transactions are recorded and the nominal and real aspects are omitted altogether. As the name implies, the single entry system does not take into account the double affect of every transaction. The ledger contains only the personal accounts of debtors and creditors, all impersonal accounts such as purchases, sales, wages, carriage, rent etc., are not recorded. Thus the system does not consider the two fold aspect of every transaction. In short single entry system may be called a mix of double entry, single entry and no entry.

Single entry system may be defined as a system which does not strictly conform to the double entry system of bookkeeping. Under this system what is found in practice is an intermixture of single entry, double entry and no entry.

According to Arthur Field house, "single entry is faulty, incomplete, inaccurate, unscientific and unsystematic style of account keeping". For this reason many persons call the single entry system as accounting from incomplete records.

In simple words, 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.  From the above explanation, we get the following characteristics of single entry system:

Characteristics of Single Entry System:-

a)      This system is a mixture of (i) double entry (ii) Single entry and (iii) no entry.

b)      This system is suitable for small business.

c)       In this system, generally personal Account are kept but real and Normal Account are ignored.

d)      In the absence of record of the two-fold aspect of every transaction, it is not possible to prepare a trial balance and check the arithmetical accuracy of the books of account.

e)      Under this system the profit or loss can be found out but its composition will not be available.

The following are the notable disadvantages of single entry system:

1. Unscientific and Unsystematic: The single entry system is unsystematic and unscientific system of recording financial transactions. It does not have any set of fixed rules and principles for recording and reporting the financial transactions.

2. Incomplete System: Single entry system is incomplete system because it does not record the two aspects or accounts of all the financial transactions of the business. It does not maintain any record of the transactions relating to the nominal account and real account except cash account.

3. Lack of Arithmetical Accuracy: Single entry system is not based on the principles of debit and credit. It fails to provide the arithmetical accuracy of the books of accounts. Trial balance cannot be prepared under this system to check the arithmetical accuracy of books of accounts.

4. Does Not Reflect True Profit Or Loss: Under single entry system, the true amount of profit or loss cannot be ascertained because it does not maintain the nominal accounts.

5. Does Not Reflect True Financial Position: The single entry system does not maintain real accounts except cash book. Therefore, it cannot reveal the true financial position of the business.

6. Frauds and Errors: The single entry system of book-keeping is incomplete, inaccurate and unscientific. It does not help to check the arithmetical accuracy of the books of accounts. Therefore, there is always a possibility of committing frauds and errors in the books of accounts.

7. Unacceptable for Tax Purpose: The single entry of book keeping has incomplete records of the financial transactions of the business. Hence, the tax office cannot accept the account maintained under this system for the purpose of assessment of tax.

In case of accounting from incomplete records, the following two methods are used to determine profit for the year:

1.       Statement of Affairs Method or Net Worth Method

2.       Conversion Method              

1. Statement of Affairs or Net Worth Method: When books of accounts are maintained under single entry system, it is not possible to prepare trading and profit and loss account because no record is maintained for nominal accounts. However in order to determine profit or loss, Statement of affairs method based on fundamental balance sheet equation is followed. Under this method, two balance sheets (Statement of affairs) are prepared. One at the beginning of the period for finding out the opening capital and the other at the end of the period for finding out the closing capital. But necessary adjustments is required to be made for Drawings made by the proprietor, additional capital introduced during the year, interest on drawings and on capital for ascertaining the true operating profit.

Steps for ascertaining Profit under Statement of affairs Method:    

a) A Statement of Affairs at the beginning of the year is prepared to determine the amount of capital of the proprietor at the beginning of the year.

b) Similarly, A Statement of Affairs at the end of the year is prepared to determine the amount of capital at the end of the year.

c) Drawings made by the proprietor during the year should be added to the amount of Capital at the end of the year for the reason that the capital at the end would have been more if there is no such withdrawal by the proprietor.

Similarly, Capital introduced during the year should be deducted from the Capital at the end of the year for the reason that the capital at the end would have been less if there is no such addition by the proprietor.

d) Capital at the beginning of the year should be deducted from the closing capital as adjusted in step (c) and (d) above and the difference will be either a trading profit or loss. If the adjusted capital exceeds the opening capital, the excess will be profit for the year. But if the adjusted capital is less than the capital at the beginning of the year, the difference will be loss for the year.

e) Interest on capital and interest on drawings (if any) are to be adjusted in profit or loss as derived in step (e) to arrive at the net profit or loss for the year.

2. Conversion from Single Entry System to Double Entry System:

The following Steps should be followed if it is desired to change the system of accounting from Single entry to double entry:

a)      A statement of affairs should be prepared at the beginning of the accounting period to determine the opening capital of the business.

b)      The Cash Book should be gone through and entries relating to impersonal accounts should be posted to their respective accounts as impersonal accounts are not maintained under single entry system. This would complete the double entry of the cash book. If no cash account is maintained, pass book should be carefully examined and all cash transactions relating to business to be identified and with the help of it cash book should be prepared.

c)       If a Petty cash book is maintained, the monthly analysis should be posted to the debit of the various accounts for expenses and the total credited to Petty cash account.

d)      Prepare Total Debtors account, Total Creditors account, Bills receivable and Bills payable account, Total Sales and Total Purchases account. This helps in finding out different missing figure relating to these accounts.

e)      Now, the personal accounts and Cash book, which have already been kept under single entry system, should be scrutinized in order to find out the nominal items. Such items should be posted to their respective impersonal accounts so that the two-fold effect of such transactions should be completed.

f)       After completing the double entry of all the transactions, a Trial balance should be prepared to test the arithmetical accuracy of the books.

g)      From the Trial balance, Trading and Profit and Loss account and Balance sheet can be prepared after taking into consideration the necessary adjustments like outstanding expenses and incomes, depreciation, provision for bad debts and discounts etc.

5. Explain the meaning of the following terms and show how will you treat them while preparing the final accounts of a non-trading concern?

i. Legacy

ii. General Donation

iii. Life Membership Fees

iv. Receipts for Tournament Fund

v. Sale of used Sports Materials

Ans: i. Legacy: It is the amount which is received by organisations as per the will of a deceased person. It is treated as a capital receipt and hence debited to receipts and payments account. It is recorded in Receipts and payments account but not considered as income because it is non-recurring in nature. It is added with capital fund. However, legacy of small amount may be considered as income. 

ii. Donation: Donation is the amount received from some person, firm, company or any other body by way of gift. It is also an important item of receipt. It can be of two types:

(a) Specific donation: It is a donation received for a specific purpose. Examples of such donations are: donation for library, donation for building, etc. It is treated as capital receipt. It is debited to receipts and payments account but not shown in income and expenditure account.

(b) General donation: It is a donation which is received not for some specific purpose. It can be of two types:

(i) General donation of big amount: It is treated as capital receipt. It is debited to receipts and payments account but not shown in income and expenditure account.

(ii) General donation of small amount: It is treated as revenue receipt. It is debited to receipts and payments account and shown as income in income and expenditure account.

iii. Life membership fees: Membership, if granted to a person for the whole life, special fee is charged from him/her, this is called life membership fees. It is charged once in the life time of a member. It is a capital receipt for the organisation and hence shown as receipt in receipts and payments account.

Only recurring receipts (revenue receipt) are treated as income but life membership is non-recurring in nature. Therefore, the life membership fees is capitalized and added with capital fund in balance sheet but not shown in income and expenditure account.

iv. Receipts for Tournament Fund: Sports club and association create these types of funds for organising tournament. Any collection from tournament and for tournament fund is added with the respective funds. Income from tournament fund investment is also added with this fund. But, receipts for tournament fund is not shown in income and expenditure account because it is a specific fund and all incomes and expenses relating to any specific fund is adjusted with specific fund.

v. Sale of used sports materials: The proceeds by sale of sports materials are shown in the receipts and payments accounts. Since sale of sports materials is the regular one for any sports club, the sales proceeds is treated as income and shown in the credit side of the income and expenditure account. But for other organisation it is treated as an asset. The amount realized by the sale of used sports materials is shown only in the receipt and payments account of the year in which the assets are sold. But the profit or loss on sale of such assets is shown in the income and expenditure account. If book value of used sport materials sold is more than the sale value, then there is a loss on sale of sports material and such loss is debited to income and expenditure account. Similarly, if book value of old sport materials sold is less than the sale value, then there is a profit on sale of asset and such profit is credited to income and expenditure account.

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