PCO - 01: PREPARATORY COURSE IN COMMERCE | IGNOU SOLVED ASSIGNMENT 2020 - 21 | B.COM | FREE SOLVED ASSIGNMENT

IGNOU FREE SOLVED ASSIGNMENTS (2020-21)
Elective Course in Commerce
PCO – 01: PREPARATORY COURSE IN COMMERCE
ASSIGNMENT- 2020-21

TUTOR MARKED ASSIGNMENT
Course Code: PCO-01
Course Title: PREPARATORY COURSE IN COMMERCE
Assignment Code: PCO-01/TMA/2020-21
Coverage: ALL BLOCKS
Maximum Marks: 100

Attempt all the questions:

Q.1 What do you mean by business? Explain the various types of business activities. Name various parties who assist in the flow of goods from Producer to the Consumers. (2, 5, 3)

Ans: Business is an economic activity, which is related with continuous and regular production and distribution of goods and services for satisfying human wants.

Lewis Henry defines business as, "Human activity directed towards producing or acquiring wealth through buying and selling of goods."

Thus, the term business means continuous production and distribution of goods and services with the aim of earning profits under uncertain market conditions.

Classification of Business Activities: Business Activities are classified into two broad categories:

a)      Industry

b)      Commerce. Commerce is further divided into Trade and aids to trade

a) Industry: It includes production or processing of goods and services. It is concerned with changing the form of the products. It gives form utility to the products.

Types of industry:

1. Primary Industry: Extraction and production of natural resources and reproduction and development of living organisms, plants etc.

2. Secondary Industry: Processing the materials got in the primary industries

3. Tertiary Industry: Support services to primary and secondary industries. It includes auxiliaries to trade.

Types of Primary industry:

Primary Industry is further divided into two parts:

a. Extractive Industry: E.g. Mining, lumbering, hunting and fishing operations

b. Genetic Industry: E.g. Breeding plants and animals, Poultry farming and fish hatchery

Types of Secondary Industry      

Secondary industry is further divided into two parts:

a. Manufacturing Industry: Production and processing of goods creating form utilities.

b. Construction Industry: Construction of Buildings, dams, bridges, etc.

b) Commerce: It includes all those activities which are concerned with removing all the hindrances in the movement of goods from the manufacturer to the consumers. It includes trade and auxiliaries to trade. Commerce includes the following activities:

a)      Trade

b)      Auxiliaries or aids to trade

a)      Trade: Trade means exchange of goods and services between sellers and buyers with profit motive. Trade may internal trade and external trade. Internal trade includes wholesale trade and retail trade and external trade includes import, export and entrepot trade.

b)      Auxiliaries to Trade: Auxiliaries of trade refer to the integration of all the agency services, which facilitate the distribution of goods and services.

Auxiliaries to Trade: Auxiliaries of trade refer to the integration of all the agency services, which facilitate the distribution of goods and services from producers to consumers. It includes:

1.       Transport and communication:  Physical movement of goods from the place where there is no demand to the place where there is demand.  Creates place utility to the product.

2.       Banking and Finance: Helps in removing financial hindrances.  Facilitates production, buying and selling by providing funds by way of loans.

3.       Insurance: It facilitates business by ensuring compensation for various types of risks.

4.       Warehousing: It keeps the goods in tact till they are in demand.  It creates time utility to the product.

5.       Advertising: It provides information about availability of goods and services.  It induces the consumers to buy the product.

Q.2 What do you understand by the Principle of Double Entry? Give the rules of Debit and Credit with suitable examples. Discuss various stages involved in Accounting Process. (2, 4, 4)

Ans: Principle of Double Entry: Double Entry is an accounting system that records the effects of transactions and other events in at least two accounts with equal debits and credits. Under this system all accounts i.e., Personal, real and nominal accounts are maintained. It is a complete system of recording business transactions. The true profit and true financial position of any business organisation can be ascertained with the help of double entry system of accounting.

Rules of Debit and Credit

A. Traditional Approach: Under this approach, Accounts are classified in to three namely real accounts, personal accounts and nominal accounts. There are separate rules for each type of accounts they are as follows

1. Real accounts: An account relating to an asset or property is called real account. Cash, furniture, plant and machinery etc are examples of real accounts the debit, credit rule applicable to real account is:

Debit what comes in

Credit what goes out

For example: If furniture is purchase for cash, then furniture comes in within the organisation so it is debited and cash goes out from the organisation so it is credited.

2. Personal accounts: It includes the account of person with whom the business deals. These accounts are classified in to three categories

a) Natural personal accounts: The term natural persons mean persons who are creation of god. For e.g.;-Raja’s accounts, Gupta’s accounts etc.

b) Artificial personal accounts: These accounts includes accounts of corporate bodies or institutions

c) Representative personal account-these are accounts which represents certain person or group of persons. For example salary due, rent outstanding etc. The rule of personal account is

Debit the receiver

Credit the giver

For example, goods purchased from Mr. A on credit. Mr. A in this case is giver so he is credited and purchases account is debited.

Again, a goods sold to Mr. B. Mr. B in this case is receiver of goods, so Mr. B is debited and sales is credited.

3) Nominal accounts: Accounts relating to expenses and losses and incomes and gains are called nominal accounts. Salary accounts, commission account etc are examples. The rule of nominal account is

Debit all expenses and losses

Credit all incomes and gains

For example, Rent paid in cash. Rent paid is an expense so it is debited and cash is credited.

Again, Salaries received in cash. Salary received is an income so it is credited and cash is debited.

Modern approach: Under this approach accounts are classified into five categories namely Assets, Liabilities, Capital, Incomes & Gains and Expenses & Losses. There are separate rules for each particular which are as follows:

Asset A/c	:	Increase Dr.	:	Decrease Cr.
Liability A/c	:	Increase Cr.	:	Decrease Dr.
Capital A/c	:	Increase Cr.	:	Decrease Dr.
Revenue A/c	:	Increase Cr.	:	Decrease Dr.
Expenses A/c	:	Increase Dr.	:	Decrease Cr.

 

Q.3 Journalize the following transactions, post them into Ledger and prepare a Trial Balance.  (4, 4, 2)

a) Business started with a capital of Rs 4, 00,000

b) Furniture purchased from Rai & Sons on credit Rs. 1, 00,000

c) Payment made to Shaliny & Brothers Rs. 12,000

d) Commission Received from Rajasthan Handlooms Rs. 6,000

e) Goods purchased from Raghuveer & Sons Rs. 5, 00,000

f) Interest paid to Dayal & Sons Rs. 7,000

Ans:

Journal Entries

In the Books of _____________

Date	Particulars	L.F.	Amount (Dr.)	Amount (Cr.)
a)	Cash Account                                     Dr To Capital Account (For business started with cash)		4,00,000	4,00,000
b)	Furniture Account                            Dr To Rai and Sons (For Furniture purchased from Rai and Sons)		1,00,000	1,00,000
c)	Shaliny & Brothers                     Dr To Cash Account (For payment made to Shaliny & brothers)		12,000	12,000
d)	Cash Account                          Dr To Commission Account (For commission received from Rajasthan Handlooms)		6,000	6,000
e)	Purchases Account                Dr To Raghuveer & Sons (For goods purchased from Raghuveer & Sons)		5,00,000	5,00,000
f)	Interest Account                      Dr To Cash Account (For interest paid to Dayal & Sons)		7,000	7,000

Cash Account

Date	Particulars	L.F.	Amount	Date	Particulars	L.F.	Amount
	To Capital A/c To Commission A/c		4,00,000 6,000		By Shaliny & Brothers A/c By Interest A/c By Balance C/d		12,000   7,000 3,87,000
			4,06,000				4,06,000
	To Balance b/d		3,87,000

Capital Account

	By Balance C/d		4,00,000		By Cash A/c		4,00,000
			4,00,00				4,00,000
					By Balance b/d		4,00,000

Furniture Account

	To Rai & Sons		1,00,000		By Balance C/d		1,00,000
			1,00,000				1,00,000
	To Balance b/d		1,00,000

Rai & Sons

	To balance C/d		100,000		By Furniture A/c		1,00,000
			1,00,000				1,00,000
					By Balance b/d		1,00,000

Shaliny & Brothers

	To Cash A/c		12,000		By Balance c/d		12,000
			12,000				12,000
	To Balance b/d		12,000

Commission Account

	To Balance c/d		6,000		By Cash A/c		6,000
			6,000				6,000
					By Balance b/d		6,000

Purchases Account

	To Raghuveer & Sons		5,00,000	July 31	By Balance c/d		5,00,000
			5,00,000				5,00,000
	To Balance b/d		5,00,000

Raghuveer & Sons

	To balance C/d		5,00,000		By Purchases A/c		5,00,000
			5,00,000				5,00,000
					By Balance b/d		5,00,000

Interest Accounts

	To Cash Account		7,000	July 31	By Balance C/d		7,000
			7,000				7,000
	To Balance b/d		7,000

Trial Balance

AS on ___________

Particulars	Amount	Particulars	Amount
Cash Furniture Purchases Interest Shaliny & Brothers	3,87,000 1,00,000 5,00,000 7,000 12,000	Capital Raghuveer & Sons Commission Rai & sons	4,00,000 5,00,000 6,000 1,00,000
	10,06,000		10,06,000

Q.4 Why is journal sub-divided? Name the special journals and state the types of transactions entered in each of them. (3, 7)

Ans: SUB-DIVISION OF JOURNAL: When innumerable number of transactions takes place, the journal, as the sole book of the original entry becomes inadequate. In order to overcome this problem, the journal is sub-divided into many subsidiary books which are called special journals. The journal in which transaction of a similar nature is recorded is known as special journal or subsidiary book.

The special journals are ruled differently on the basis of the nature of transactions to be recorded. Transactions that cannot be recorded in any of the special journals are recorded in a journal called journal proper or miscellaneous journal.

Sub-division of Journal is done due to the following reasons:

a) Economy in labour: If the transaction are recorded in the book of accounts directly if will be consume less time than if transaction are recorded in the journal then posted to the ledger

b) More accuracy: There will be more accuracy in the book of accounts as entries are made in total only.

c) Statistical record: Additional information is collected while maintaining a subsidiary book as a book of original entry.

Various types of subsidiary books: There are three types of journals which are listed below:

1. Cash Book: Cash Book is a sub-division of Journal recording transactions pertaining to cash receipts and payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted subsequently to the respective ledger accounts. Cash book is further divided into:

a) Simple or Single Column Cash Book

b) Two Column Cash Book or Cash Book with cash and discount columns

c) Three Columnar Cash Book or Cash Book with cash, bank and discount columns.

d) Petty Cash Book.

2. Day book: These books are prepared to record credit transactions. Day book are of various types which are:

a)      Sales Day Book- to record all credit sales.

b)      Purchases Day Book- to record all credit purchases.

c)       Sales Returns Day Book- to record the return of goods sold to customers on credit.

d)      Purchases Returns Day Book- to record the return of goods purchased from suppliers on credit.

e)      Bills Receivable Book- to record the details of all the bills received.

f)       Bills Payable Book- to record the details of all the bills accepted.

3. Journal proper is book of original entry (simple journal) in which miscellaneous credit transactions which do not fit in any other books is recorded. It is also called miscellaneous journal. This book is used to record all the residual transactions which cannot find place in any of the subsidiary books. While recording, the entries are made in the journal covering both the aspects of the transaction. The form and procedure for maintaining this journal is the same that of simple journal. The following are some of the examples of transactions which are entered in this book:

a)      Opening entries.

b)      Closing entries.

c)       Adjusting entries.

d)      Transfer entries from one account to another account.

e)      Rectification entries.

f)       Entries for rare transactions.

g)      Entries for which there is no special journal.

Q.5 State various causes of disagreement between the balances shown by the Cash Book and Pass Book. Explain the procedure of preparing a Bank Reconciliation Statement. (5, 5)

Ans: 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.

Q.6 Distinguish between Cash Basis and Accrual Basis of Accounting with examples. Briefly explain the accounting concepts to be observed at the time of preparing Final Accounts. (5, 10)

Ans: Accounting on ‘Cash basis’: Under cash basis of accounting, entries are recorded only when cash is received or paid. No entry is passed when a payment or receipt becomes due. Government system of accounting is mostly on cash basis. For example: If goods are sold for cash, it is recorded in books of account but if goods are sold on credit, than no entry is passed.

Accrual Basis of Accounting or Mercantile System: Under accrual basis of accounting, accounting entries are made on the basis of amounts having become due for payment or receipt. Incomes are credited to the period in which they are earned whether cash is received or not. Similarly, expenses and losses are detailed to the period in which, they are incurred, whether cash is paid or not. The profit or loss of any accounting period is the difference between incomes earned and expenses incurred, irrespective of cash payment or receipt. For example, while preparing final accounts, all expenses outstanding at the end is added with expenses paid for the year and all advance payment is deducted with expenses.

Accounting concepts to be observed at the time of preparing final accounts:

The term ‘concept’ is used to denote accounting postulates, i.e., basic assumptions or conditions upon which the accounting structure is based. The following are the common accounting concepts adopted by many business concerns.

                           i.      Business Entity Concept

                         ii.      Money Measurement Concept

                        iii.      Going Concern Concept

                       iv.      Dual Aspect Concept

                         v.      Periodicity Concept

                       vi.      Historical Cost Concept

                      vii.      Matching Concept

                    viii.      Realisation Concept

                       ix.      Accrual Concept

i) Business Entity Concept: Business entity concept implies that the business unit is separate and distinct from the persons who provide the required capital to it. This concept can be expressed through an accounting equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself owns the assets and in turn owes to various claimants.

ii) Money Measurement Concept: According to this concept, only those events and transactions are recorded in accounts which can be expressed in terms of money. Facts, events and transactions which cannot be expressed in monetary terms are not recorded in accounting. Hence, the accounting does not give a complete picture of all the transactions of a business unit. 2006

iii) Going Concern Concept: Under this concept, the transactions are recorded assuming that the business will exist for a longer period of time. Keeping this in view, the suppliers and other companies enter into business transactions with the business unit. This assumption supports the concept of valuing the assets at historical cost or replacement cost.      

iv) Dual Aspect Concept: According to this basic concept of accounting, every transaction has a two-fold aspect, Viz., 1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry system is that every debit has a corresponding and equal amount of credit. This is the underlying assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or Capital = Assets – Liabilities, will further clarify this concept, i.e., at any point of time the total assets of the business unit are equal to its total liabilities.

V) Periodicity Concept: Under this concept, the life of the business is segmented into different periods and accordingly the result of each period is ascertained. Though the business is assumed to be continuing in future, the measurement of income and studying the financial position of the business for a shorter and definite period will help in taking corrective steps at the appropriate time. Each segmented period is called “accounting period” and the same is normally a year.

vi) Historical Cost Concept: According to this concept, the transactions are recorded in the books of account with the respective amounts involved. For example, if an asset is purchases, it is entered in the accounting record at the price paid to acquire the same and that cost is considered to be the base for all future accounting.

vii) Matching Concept: The essence of the matching concept lies in the view that all costs which are associated to a particular period should be compared with the revenues associated to the same period to obtain the net income of the business.

viii) Realisation Concept: This concept assumes or recognizes revenue when a sale is made. Sale is considered to be complete when the ownership and property are transferred from the seller to the buyer and the consideration is paid in full.

ix) Accrual Concept: According to this concept the revenue is recognized on its realization and not on its actual receipt. Similarly the costs are recognized when they are incurred and not when payment is made. This assumption makes it necessary to give certain adjustments in the preparation of income statement regarding revenues and costs.

Accounting Conventions: Accounting conventions are common practices, which are followed in recording and presenting accounting information of a business. They are followed like customs in a society. The following conventions are to be followed to have a clear and meaningful information and data in accounting:

i) Consistency: The convention of consistency implies that the same accounting procedures should be used for similar items over periods. It is essential for clear and correct understanding and interpretation of the financial statements. It is also important for inter-period comparison.                               

ii) Full Disclosure: According to this principle, all accounting statements should be honestly prepared and all information of material interest to proprietors, creditors, investors, etc. should be disclosed in the accounting statements. Moreover, books of accounts should be prepared in such a way that they become reliable, informative and transparent.

iii) Conservatism or Prudence: This convention follows the policy of caution or playing safe. It takes into account” all possible losses but not the possible profits or gains”. The implication of this principle is to give a pessimistic view of the financial position of the business.             2006, 2010

iv) Materiality: Materiality deals with the relative importance of accounting information. In order to make financial statements more meaningful and to economize costs, accountants should incorporate in the financial statements only that information which is material and useful to users. They should ignore insignificant details.

Q.7 How would you determine whether a particular expenditure is Capital or Revenue? Give five examples of each. Explain the concept of Deferred Revenue Expenditure with suitable example. (10, 5)

Ans: Capital Expenditure: The transactions of capital expenditure give benefits for more than one accounting period, such as acquisition and improvement of assets, acquisition of special rights, increasing of earning capacity, and restoration of operating efficiency. It is non-recurring in nature. Therefore, they are shown on the assets side of the Balance Sheet.

Rules for Determining Capital Expenditure

Ø  An expenditure incurred to acquire long term assets (at least more than one accounting period).

Ø  Such Long term assets must be uses in business to earn profits and not meant for resale.

Ø  Expenditure incurred to keep the assets in working condition.

Ø  Expenditure is incurred to increase earning capacity of a business.

Ø  Preliminary expenses incurred before the commencement of business is considered capital expenditure.

Some examples of capital expenditure: (i) Purchase of land, building, machinery or furniture; (ii) Cost of leasehold land and building; (iii) Cost of purchased goodwill; (iv) Preliminary expenditures; (v) Cost of additions or extensions to existing assets; (vi) Cost of overhauling second-hand machines; (vii) Expenditure on putting an asset into working condition; and (viii) Cost incurred for increasing the earning capacity of a business.

Revenue Expenditure: It is incurred for generating revenue in the current accounting period and its benefit expires with such period. It helps to maintain the normal working condition of a business. It is charged as expenses in Trading / Profit & Loss Account on debit side.

Rules for Determining Revenue Expenditure

Any expenditure which cannot be recognised as capital expenditure can be termed as revenue expenditure. Revenue expenditure temporarily influences only the profit earning capacity of the business. An expenditure is recognised as revenue when it is incurred for the following purposes:

Ø  Expenditure for day-to-day conduct of the business.

Ø  Expenditure for the benefits of less than one year.

Ø  Expenditure on consumable items, on goods and services for resale.

Ø  Expenditures incurred for maintaining fixed assets in working order. For example, repairs, renewals and depreciation.

Some examples of Revenue Expenditure: (i) Salaries and wages paid to the employees; (ii) Rent and rates for the factory or office premises; (iii) Depreciation on plant and machinery; (iv) Consumable stores; (v) Inventory of raw materials, work-in-progress and finished goods; (vi) Insurance premium; (vii) Taxes and legal expenses; and (viii) Miscellaneous expenses. The accounting treatment of capital and revenue expenditure is as under:

Ø  Revenue expenditures – Debited to Profit and Loss Account.

Ø  Capital Expenditures – Shown as assets in the Balance Sheet.

Deferred Revenue Expenditure: Expenditures which are of revenue in nature and incurred during one accounting period but its benefits are expected to be derived over a number of years, such expenditures are called deferred revenue expenditure. Such expenditure is written off to income and expenditure account over the period of benefits realised from such expenditure. Deferred expenditure to the extent not written is shown as an asset in balance sheet.

Features:

a)      These expenditures are not immediately written off in the year of actual expenditure but split over a period of certain years as per the decisions and policies of the management.

b)      These expenditures to the extent not written off are treated as assets and shown at the assets side of balance sheet.

Examples: Advertising suspense, Preliminary expenses, Loss on issue of debentures, Cost of issue of shares and debentures. All these expenditure are paid in one year but their benefits are realised over a period of time.

Q.8 a) What is meant by Provision for Bad Debts and Provision for Discount on Debtors? Explain their treatment in Final Accounts. (5, 5)

Ans: Provision for bad debt: At the end of the year, after writing off the bad debts there may still be some customer balances from whom it is doubtful to collect the entire amount. To show approximately correct value of the sundry debtors in the balance sheet, a provision is created for possible bad debts which are known as provision for bad debts.

Treatment in Final account: Provision for bad debt for current year is added with bad debts in profit and loss account and provision for bad debts of previous year is deduced with bad debts. Again, provision of bad debt of current year is deducted with sundry debtors in balance sheet.

Provision for discount on debtors: It is a normal practice in every business to allow discount to its customer for prompt payment. Sometimes, the goods are sold on credit to customers in one accounting period, whereas the payment of the same is made by them in the next accounting period and discount is to be allowed to them. It is prudent policy to charge this expenditure to the period in which sales have been made, so a provision is created which is known as provision for discount on debtors.

Treatment in final accounts: Treatment in Final account: Provision for discount for current year is added with discount in profit and loss account and provision for discount of previous year is deduced with bad debts. Again, provision of discount of current year is deducted with sundry debtors in balance sheet.

b) What is one- sided errors? Give five examples. Explain the methods of rectifying one- sided errors.

Ans: One sided errors: One-sided errors are those which do not let the trial balance agree as they affect only one side of one account. So, these cannot be corrected with the help of journal entry, if correction is required before the preparation of trial balance. These types of errors are corrected by opening suspense account.

Examples of one sided errors:

1. Sales book under cast by Rs. 500 in the month of January.

2. Discount allowed to A Rs. 50, not posted to discount account.

3. Goods sold to X wrongly debited in sales account.

4. Amount of Rs. 500 paid to Y, not debited to his personal account.

5. Purchases book overcast by Rs. 500.

Rectification of One-sided error: If the trial balance does not tally due to the existence of one sided errors accountant has to carry forward his accounting process prepare financial statements. The accountant tallies his trial balance by putting the difference on the shorter side as “suspense account”. The main use of suspense account is to facilitate the preparation of financial statements. Later on errors affecting the trial balance are located; rectification entries are passed through the suspense account. In case of one sided error, required amount is put on the debit or credit side of the concerned account, as the case may be and respective credit or debit is given to suspense account.