NCERT Solutions for Class 11 Accountancy Financial ...

NCERT Solutions for Class 11 Accountancy

Financial Accounting Part-1 Chapter 1 Short answers

Q1 :

Define accounting.

Answer :

Accounting is a process of identifying the events of financial nature, recording them in Journal, classifying in their respective ledgers,

summarising them in Profit and Loss Account and Balance Sheet and communicating the results to the users of such

information, viz. owner/s, government, creditors, investors etc.

According to the American Institute of Certified Accountants, 1941, "Accounting is an art of recording, classifying and summarising

in a significant manner and in terms of money transactions and events that are, in part at least, of a financial character and

interpreting the results thereof."

Q2 :

State what is end product of financial accounting?

Answer :

1. Income statements (Trading and/or Profit and Loss Account)- An income statement that includes Trading and Profit and Loss Account,

ascertains the financial results of a business in terms of gross (or net) profit or loss.

2. Balance Sheet- It depicts the true financial positions of a business that provides required information like assets and liabilities of a business

firm, to the users of accounting information like owners, creditors, investors, government, etc.

Q3 :

Enumerate main objectives of accounting.

Answer :

The main objectives of accounting are given below.

1. To keep a systematic record of all business transactions

2. To determine the profit earned or loss incurred during an accounting period by preparing profit and loss account

3. To ascertain the financial position of the business at the end of each accounting period by preparing balance sheet

4. To assist management for decision making, effective control, forecasting, etc.

5. To assess the progress and growth of business from year to year

6. To detect and prevent frauds and errors

7. To communicate information to various users

Q4 :

List any five users who have indirect interest in accounting.

Answer :

The five users who have indirect interest in accounting are given below.

1. Trade associations

2. Labour unions

3. Customers

4. Stock exchanges

5. Tax authorities

Q5 :

State the nature of accounting information required by long-term lenders.

Answer :

Accounting information required by the long term lenders are repaying capacity of the business, profitability, liquidity, operational

efficiency, potential growth of business, etc.

Q6 :

Who are the external users of information?

Answer :

External users of information are the individual or the organisations that have direct or indirect interest in the business firm; however,

are not a part of management. They do not have direct access to the internal data of the firm and uses published data or reports

like profit and loss accounts, balance sheets, annual reports, press releases, etc. Some examples of external users are government,

tax authorities, labour unions, etc.

Q7 :

Enumerate informational needs of management.

Answer :

The informational needs of management are concerned with the activities given below.

1. Assists in decision making and business planning

2. Preparing reports related to funds, costs and profits to ascertain the soundness of the business

3. Comparing current financial statements with its own historical financial statements and of other similar firms to assess the operational

efficiency of the business.

Q8 :

Give any three examples of revenues.

Answer :

Three examples of revenue are given below.

1. Sales revenue

2. Interest received

3. Dividends

Q9 :

Distinguish between debtors and creditors.

Answer :

Basis of

difference Debtors Creditors

Meaning Persons or

organisations that are

liable to pay money to

a firm are called

debtors.

Persons or organisations

to whom the firm is

liable to pay money are

called creditors.

Nature They have debit

balance to the firm.

They have credit

balance to the firm.

Payment Payments are received

from them.

Payments are made to

them.

Shown They are shown as

assets in the Balance

sheet under Current

Assets.

They are shown as

liabilities in the Balance

Sheet under Current

Liabilities.

Q10 :

'Accounting information should be comparable'. Do you agree with this statement? Give two reasons.

Answer :

Accounting information should be comparable because of the following reasons.

1. Comparable accounting information helps in inter-firm comparisons. This helps in assessing viability and advantages of various policies

adopted by different firms.

2. It also helps in intra-firm comparisons that help in determining the changes and also to ascertain the results of various policies and plans

adopted in different time periods. This also helps to figure out the errors, ascertain growth and assist in management planning.

Q11 :

If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information

is violated?

Answer :

If the accounting information is not clearly presented, then the qualitative characteristics like, comparability, reliability and

understandability, are violated. This is because if the accounting information is not clearly presented, then meaningful comparison

may not be possible, as the data is not trustworthy, which may lead to faulty conclusions.

Q12 :

The role of accounting has changed over the period of time"- Do you agree?

Explain.

Answer :

The role of accounting is ever changing. While in earlier times, accounting was merely concerned with recording the financial

events, i.e. record-keeping activity; however, now-a-days, accounting is done with the rationale of not only maintaining records, but

also providing an information system that provides important and relevant information to various accounting users. The need of this

change is brought over due to the ever-changing and dynamic business environment, which is more competitive in nature now than

it was in earlier times. Further, there are various relevant activities like decision making, forecasting, comparison, and evaluation

that make these changes in the role of accounting, inevitable.

Q13 :

Giving examples, explain each of the following accounting terms:

Fixed assets

Gain

Profit

Revenue

Expenses

Short-term liability

Capital

Answer :

Fixed assets- These are held for long term and increase the profit earning capacity of the business, over various accounting periods.

These assets are not meant for sale; for example, land, building, machinery, etc.

Revenue- It refers to the amount received from day to day activities of business, viz. amount received from sales of goods and services to

customers; rent received, commission received, dividend, royalty, interest received, etc. are items of revenue that are added to the capital.

Capital- It refers to the amount invested by the owner of a firm. It may be in form of cash or asset. It is an obligation of the business

towards the owner of the firm, since business is treated separate or distinct from the owner.

Capital = Assets - Liabilities.

Gains- Gains are incidental to the business. They arise from irregular activities or non-recurring transactions; for example, profit on sale of

fixed assets, appreciation in value of asset, profit on sale of investment, etc.

Expenses- Expenses are those costs that are incurred to maintain the profitability of business, likerent, wages, depreciation, interest,

salaries, etc. These help in the production, business operations and generating revenues.

Profit- This refers to the excess of revenue over the expense. It is normally categorised into gross profit or net profit. Net profit is added to

the capital of the owner, which increases the owner's capital. For example, goods sold above its cost

Short term liabilities- Those liabilities that are incurred with an intention to be paid or are payable within a year; for example, bank

overdraft creditors, bills payable, outstanding wages, short-term loans, etc.

Q14 :

How will you define revenues and expenses?

Answer :

Revenues- Revenues refer to the amount received from day to day activities of the business, likesale proceeds of goods and

rendering services to the customers. Rent received, commission received, royalties and interest received are considered as

revenue, as they are regular in nature and concerned with day to day activities. It is shown in the credit side of the profit and loss

account or trading account.

Expenses- Expenses refer to those costs that are incurred to earn revenue for the business. It is incurred for maintaining

profitability of the business. It indicates the amount spent to meet short-term needs of the business. It is shown in the debit side of

the profit and loss account or trading account. For example, wages, rent paid, salaries paid, outstanding wages, etc.

Q15 :

What is the primary reason for the business students and others to familiarise themselves with the accounting discipline?

Answer :

Every monetary transaction must be recorded in such a manner that various accounting users must understand and interpret these

results in the same manner without any ambiguity. The reasons for why business students and others should familiarise themselves

with the accounting discipline are given below.

1. It helps in learning the various aspects of accounting.

2. It helps in learning how to maintain books of accounts.

3. It helps in learning how to summarise accounting information.

4. It helps in learning how to interpret the accounting information with relative accuracy.

Next Chapter 2 : Theory Base of Accounting >> Long answers : Solutions of Questions on Page Number : 20

Q1 :

Explain the factors, which necessitated systematic accounting.

Answer :

The factors that necessitated systematic accounting are given below.

1. Only financial transactions are recorded- Those events that are financial in nature are only recorded in the books of accounts. For

example, salary of an employee is recorded in the books but his/her educational qualification is notrecorded.

2. Transactions are recorded in monetary terms- Only those transactions which can be expressed in monetary terms are recorded in the

books. For example, if a business has two buildings and four machines, then their monetary values is recorded in the books, i.e. two

buildings costing Rs 2,00,000, four machines costing Rs 8,00,000. Thus the total value of assets is Rs 10,00,000.

3. Art of recording- Transactions are recorded in the order of their occurrence.

4. Classification of transaction- Business transactions of similar nature are classified and posted under their respective accounts. For

example, all the transactions relating to machinery will be posted in the Machinery Account.

5. Summarising of data- All business transactions are summarised in the form of Trial Balance, Trading Account, Profit and Loss Account

and Balance Sheet that provides necessary information to various users.

6. Analysing and interpreting data- Systematic accounting records enable users to analyse and interpret the accounting data in a proper

and appropriate manner. These accounting data and information are presented in form of graphs, statements, charts that leads to easy

communication and understandability by various users. Moreover, these facilitates in decision making and future predictions.

Q2 :

Describe the brief history of accounting.

Answer :

The history of accounting can be traced long back in civilisation. Around 4000 B.C., in Babylonia and Egypt, payment of wages and

taxes were recorded on clay tablets. As history claims that Egyptians kept the record of gold and valuables deposits and withdrawal

from the treasuries. These records were reported on daily basis by the incharge of treasuries to the wazir, who used to forward the

monthly reports to the king. Babylonia and Egypt used this method to rectify and remove errors, frauds and inefficiency from the

records. Around 2000 B.C., China used sophisticated form of accounting. In Greece, accounting was used to maintain total receipts

and total payments and to balance government accounts. In Rome, around 700 B.C., receipts and payments were recorded in

daybook and were posted in the ledger at the end of the month. In India, around twenty three centuries ago, Kautilya wrote the

book Arthshastra, which describes how accounting records have to be maintained. In 1494, Luca Pacioli wrote the book Summa de

Arithmetica Geometria Proportioni et Proportionalita. In this, he explained the term debit and credit, which are used in accounting till

date.

Q3 :

Explain the development of and role of accounting.

Answer :

Development of accounting

In ancient times, around 4000 B.C., accounting was used for recording wages and salaries, deposits and withdrawals of valuable

goods (such as gold and silver) from the treasures of the king. Afterwards, it was used to record the receipts and payments and

balancing of government financial transactions. During 1500 A.D., accounting was used by business firms for recording transactions

related to business. In 1800 A.D., accounting was used to record transactions and also to provide information to various users of

financial data.

Role of accounting- While in the earlier times accounting was merely concerned with recording the financial events (i.e. record-

keeping activity); however, now-a-days, accounting is done with the rationale of not only maintaining records, but also providing an

information system that provides important and relevant information to various accounting users.

1. Substitute of memory- As, it is beyond human capabilities to remember each and every business transaction, so accounting plays an

important role in recording these transactions in the book of accounts.

2. Assistance to management- Management uses accounting information for short term and long term planning of business activities and to

control various costs and budgets.

3. Comparative study- In order to ascertain the performance of the business, accounting enables comparison of current year's profit with that

of previous years (intra-firm comparison)and also with other firms in the same business (inter-firm comparison).

4. Evidence in court- It acts as evidence that can be used or presented in the court, if any discrepancy arises in the future.

Q4 :

Define accounting and state its objectives.

Answer :

Accounting is a process of identifying the events of financial nature, recording them in the journal, classifying in their respective

accounts and summarising them in profit and loss account and balance sheet and communicating results to users of such

information, viz. owner, government, creditor, investors, etc.

According to American Institute of Certified Accountants, 1941, "Accounting is the art of recording, classifying and summarising in a

significant manner and in terms of money, transactions and events that are, in part at least, of financial character and interpreting

the results thereof."

In 1970, American Institute of Certified Public Accountants changed the definition and stated, "The function of accounting is to

provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making

economic decisions."

Objectives of Accounting:

1. Recording business transactions systematically- It is necessary to maintain systematic records of every business transaction, as it is

beyond human capacities to remember such large number of transactions. Skipping the record of any one of the transactions may lead to

erroneous and faulty results.

2. Determining profit earned or loss incurred- In order to determine the net result at the end of an accounting period, we need to calculate

profit or loss. For this purpose trading and profit and loss account are prepared. It gives information regarding how much of goods have

been purchased and sold, expenses incurred and amount earned during a year.

3. Ascertaining financial position of the firm- Ascertaining profit earned or loss incurred is not enough; proprietor also interested in

knowing the financial position of his/her firm, i.e. the value of the assets, amount of liabilities owed, net increase or decrease in his/her

capital. This purpose is served by preparing the balance sheet that facilitates in ascertaining the true financial position of the business.

4. Assisting management- Systematic accounting helps the management in effective decision making, efficient control on cash management

policies, preparing budget and forecasting, etc.

5. Assessing the progress of the business- Accounting helps in assessing the progress of business from year to year, as accounting

facilitates the comparison both inter-firm as well as intra-firm.

6. Detecting and preventing frauds and errors- It is necessary to detect and prevent fraud and errors, mismanagement and wastage of the

finance. Systematic recording helps in the easy detection and rectification of frauds, errors and inefficiencies, if any.

7. Communicating accounting information to various users- The important step in the accounting process is to communicate financial

and accounting information to various users including both internal and external users like owners, management, government, labour, tax

authorities, etc. This assists the users to understand and interpret the accounting data in a meaningful and appropriate manner without any

ambiguity.

Q5 :

Describe the informational needs of external users.

Answer :

There are various external users of accounting who need accounting information for decision making, investment planning and to

assess the financial position of the business. The various external users are given below.

1. Banks and other financial institutions- Banks provide finance in form of loans and advances to various businesses. Thus, they need

information regarding liquidity, creditworthiness, solvency and profitability to advance loans.

2. Creditors- These are those individuals and organisations to whom a business owes money on account of credit purchases of goods and

receiving services; hence, the creditors require information about credit worthiness of the business.

3. Investors and potential investors- They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of

their investment, creditors need information about profitability and solvency of the business.

4. Tax authorities- They need information about sales, revenues, profit and taxable income in order to determine the levy various types of tax

on the business.

5. Government- It needs information to determine national income, GDP, industrial growth, etc. The accounting information assist the

government in the formulation of various policies measures and to address various economic problems like employment, poverty etc.

6. Researcher- Various research institutes like NGOs and other independent research institutions like CRISIL, stock exchanges, etc.

undertake various research projects and the accounting information facilitates their research work.

7. Consumer- Every business tries to build up reputation in the eyes of consumers, which can be created by the supply of better quality

products and post-sale services at reasonable and affordable prices. Business that has transparent financial records, assists the customers

to know the correct cost of production and accordingly assess the degree of reasonability of the price charged by the business for its

products and thus helps in repo building of the business.

8. Public- Public is keenly interested to know the proportion of the profit that the business spends on various public welfare schemes; for

example, charitable hospitals, funding schools, etc. This information is also revealed by the profit and loss account and balance sheet of the

business.

Q6 :

What do you mean by an asset and what are different types of assets?

Answer :

Any valuable thing that has monetary value, which is owned by a business, is its asset. In other words, assets are the monetary

values of the properties or the legal rights that are owned by the business organisations.

Fixed Assets- These are those assets that are hold for the long term and increase the profit earning capacity and productive

capacity of the business. These assets are not meant for sale, for example, land, building machinery, etc.

Current Assets- Assets that can be easily converted into cash or cash equivalents are termed as current assets. These are

required to run day to day business activities; for example, cash, debtors, stock, etc.

Tangible Assets- Assets that have physical existence, i.e., which can be seen and touched, are tangible assets; for example, car,

furniture, building, etc.

Intangible Assets- Assets that cannot be seen or touched, i.e. those assets that do not have physical existence, are intangible

assets; for example, goodwill, patents, trade mark, etc.

Liquid Assets- Assets that are kept either in cash or cash equivalents are regarded as liquid assets. These can be converted into

cash in a very short period of time; for example, cash, bank, bills receivable, etc.

Fictitious Assets- These are the heavy revenue expenditures, the benefit of whose can be derived in more than one year. They

represent loss or expense that are written off over a period of time, for example, if advertisement expenditure is Rs 1,00,000 for 5

years, then each year Rs 2,00,000 will be written off.

Q7 :

Explain the meaning of gain and profit. Distinguish between these two terms.

Answer :

Profit- Excess of revenue over expense is known as profit. It is normally categorised into gross profit or net profit. It increases the

owner's capital as it is added to the capital at the end of each accounting period. For example, goods costing Rs 1, 00,000 is sold at

Rs 1,20,000, then the sale proceeds of Rs 1,20,000 is the revenue and 1,00,000 is the expense to generate this revenue. Hence,

accounting profit of Rs 20,000 (i.e. Rs 1,20,000 - Rs 1,00,000) is the difference between the revenue and expense that is earned by

the business.

Gain- It arises from irregular activities or non-recurring transactions. In other words, a gain is a result of transactions that are

incidental to the business, other than operating transactions. For example, an old machinery of book value Rs 20,000 is sold at Rs

25,000. Hence, the gain is Rs 5,000 (i.e. Rs 25,000 - Rs 20,000). Here, the sale of the old machinery is an irregular activity; so, the

difference is termed as gain

Thus, in other words the only difference between profit and gain is that profit is the excess of revenue over expense and gain arises

from other than operating transactions.

Q8 :

Explain the qualitative characteristics of accounting information.

Answer :

The following are the qualitative characteristics of accounting information:

1. Reliability- It means that the user can rely on the accounting information. All accounting information is verifiable and can be verified from

the source document (voucher), viz. cash memos, bills, etc. Hence, the available information should be free from any errors and unbiased.

2. Relevance- It means that essential and appropriate information should be easily and timely available and any irrelevant information should

be avoided. The users of accounting information need relevant information for decision making, planning and predicting the future

conditions.

3. Understandability- Accounting information should be presented in such a way that every user is able to interpret the information without

any difficulty in a meaningful and appropriate manner.

4. Comparability- It is the most important quality of accounting information. Comparability means accounting information of a current year

can be comparable with that of the previous years. Comparability enables intra-firm and inter-firm comparison. This assists in assessing the

outcomes of various policies and programmes adopted in different time horizons by the same or different businesses. Further, it helps to

ascertain the growth and progress of the business over time and in comparison to other businesses.

Q9 :

Describe the role of accounting in the modern world.

Answer :

The role of accounting has been changing over the period of time. In the modern world, the role of accounting is not only limited to

record financial transactions but also to provide a basic framework for various decision making, providing relevant information to

various users and assists in both short run and long run planning. The role of accounting in the modern world are given below.

1. Assisting management- Management uses accounting information for short term and long term planning of business activities, to predict

the future conditions, prepare budgets and various control measures.

2. Comparative study- In the modern world, accounting information helps us to know the performance of the business by comparing current

year's profit with that of the previous years and also with other firms in the same industry.

3. Substitute of memory- In the modern world, every business incurs large number of transactions and it is beyond human capability to

memorise each and every transaction. Hence, it is very necessary to record transactions in the books of accounts.

4. Information to end user- Accounting plays an important role in recording, summarising and providing relevant and reliable information to

its users, in form of financial data that helps in decision making.


Financial Accounting Part-1 Chapter 2

Theory Base of Accounting

Short answers : Solutions of Questions on Page Number : 37

Q1 :

Why is it necessary for accountants to assume that business entity will remain a going concern?

Answer :

Going Concern Concept assumes that the business entity will continue its operation for an indefinite period of time. It is necessary to

assume so, as it helps to bifurcate revenue expenditure (i.e. expenditure related to current year), and capital expenditure (i.e.

expenditure whose benefits accrue over a period of time). For example, a machinery that costs Rs 1,00,000, having an expected life

of 10 years, will be treated as a capital expenditure, as its benefit can be availed for more than one year; whereas, the per year

depreciation of the machinery, say Rs 10,000, will be regarded as a revenue expenditure.

Q2 :

When should revenue be recognised? Are there exceptions to the general rule?

Answer :

Revenue should be recognised when sales take place either in cash or credit and/or right to receive income from any source is

established. Revenue is not recognised, in case, if the income or payment is received in advance or the payment is actually

received from the debtors. In a nutshell, revenue will be recognised when the right to receive income is established. For example,

Mr. A sold goods in January and received payment in February; then revenue is considered to be recognised in the month of

January and not in February. However, if Mr A received cash in advance, i.e. in December and goods are sold in January, then the

revenue is recognised in January and not in December.

The exceptions to this rule are given below.

1) Hire purchase- When goods are sold on hire-purchase system , the amount received in instalments is treated as revenue.

2) Long term construction contract- The long term projects like construction of dams, highways, etc. have long gestation period.

Income is recognised on proportionate basis of work certified and not on the completion of contract.

Q3 :

What is the basic accounting equation?

Answer :

The basic accounting equation is,

Assets = Liabilities + Capital

It means that all the monetary value of all assets of a firm are equal to the total claims, viz. owners and outsiders.

Q4 :

The realisation concept determines when goods sent on credit to customers are to be included in the sales figure for the

purpose of computing the profit or loss for the accounting period. Which of the following tends to be used in practice to

determine when to include a transaction in the sales figure for the period. When the goods have been:

a. dispatched b. invoiced

c. delivered d. paid for

Give reasons for your answer.

Answer :

According to the realisation concept, revenue is recognised when an obligation to receive the amount arises. When the goods are

invoiced, it is treated as the transfer of ownership of goods from the seller to the buyer and hence the revenue is recognised.

Q5 :

Complete the following work sheet:

(i) If a firm believes that some of its debtors may ”²default”², it should act on this by

making sure that all possible losses are recorded in the books. This is an example of

the ___________ concept.

(ii) The fact that a business is separate and distinguishable from its owner is best

exemplified by the ___________ concept.

(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is

explained by the ___________ concept.

(iv) The ___________ concept states that if straight line method of depreciation is used

in one year, then it should also be used in the next year.

(v) A firm may hold stock which is heavily in demand. Consequently, the market value

of this stock may be increased. Normal accounting procedure is to ignore this

because of the ___________.

(vi) If a firm receives an order for goods, it would not be included in the sales figure

owing to the ___________.

(vii) The management of a firm is remarkably incompetent, but the firms accountants can

not take this into account while preparing book of accounts because of ________

concept.

Answer :

(i) If a firm believes that some of its debtors may ”²default”², it should act on this by

making sure that all possible losses are recorded in the books. This is an example of

the conservatism concept.

(ii) The fact that a business is separate and distinguishable from its owner is best

exemplified by the business entity concept.

(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is

explained by the dual aspect concept.

(iv) The consistency concept states that if straight line method of depreciation is used in

one year, then it should also be used in the next year.

(v) A firm may hold stock which is heavily in demand. Consequently, the market value

of this stock may be increased. Normal accounting procedure is to ignore this

because of the conservatism.

(vi) If a firm receives an order for goods, it would not be included in the sales figure

owing to the revenue recognition.

(vii) The management of a firm is remarkably incompetent, but the firm's accountants

cannot take this into account while preparing book of accounts because of money

measurement concept.

<< Previous Chapter 1 : Introduction to AccountingNext Chapter 3 : Recording of Transactions - I >> Long answers : Solutions of Questions on Page Number : 38

Q1 :

'The accounting concepts and accounting standards are generally referred to as the essence of financial accounting'.

Comment.

Answer :

Financial accounting is concerned with the preparation of the financial statements and provides financial information to various

accounting users. It is performed according to the basic accounting concepts like Business Entity, Money Measurement,

Consistency, Conservatism, etc. These concepts allow various alternatives to treat the same transaction. For example, there are a

number of methods available for calculating stock and depreciation, which can be followed by various firms. This leads to wrong

interpretation of financial results by external users due to the problem of inconsistency and incomparability of financial results

among different business entities. In order to mitigate inconsistency and incomparability and to bring uniformity in preparation of the

financial statements, accounting standards are being issued in India by the Institute of Chartered Accountant of India. Accounting

standards help in removing ambiguities and inconsistencies. Hence, accounting standards and accounting concepts are referred as

the essence of financial accounting.

Q2 :

Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.

Answer :

Financial statements are drawn to provide information about growth or decline of business activities over a period of time or

comparison of the results, i.e. intra-firm (comparison within the same organisation) or inter-firm comparisons (comparison between

different firms). Comparisons can be performed only when the accounting policies are uniform and consistent.

According to the Consistency Principle, accounting practices once selected should be continued over a period of time (i.e. years

after years) and should not be changed very frequently. These help in a better understanding of the financial statements and thus

make comparisons easy. For example, if a firm is following FIFO method for recording stock, and switches over to the weighted

average method, then the results of this year cannot be compared to that of the previous years. Although consistency

does not prevent change in the accounting policies, but if change in the policies is essential for better presentation and better

understanding of the financial results, then the firm must undertake change in its accounting policies and must fully disclose all the

relevant information, reasons and effects of those changes in the financial statements.

Q3 :

Discuss the concept-based on the premise 'do not anticipate profits but provide for all losses'.

Answer :

According to the Conservatism Principle, profits should not be anticipated; however, all losses should be accounted (irrespective

whether they occurred or not). It states that profits should not be recorded until they get recognised; however, all possible losses

even though they may happen rarely, should be provided. For example, stock is valued at cost or market price, whichever is lower. If

the market price is lower than the cost price, loss should be accounted; whereas, if the former is more than the latter, then this profit

should not be recorded until unless the stock is sold. There are numerous provisions that are maintained based on the

conservatism principle like, provision for discount to debtors, provision for doubtful bad debts, etc. This principle is based on the

common sense and depicts pessimism. This also helps the business to deal uncertainty and unforeseen conditions.

Q4 :

What is matching concept? Why should a business concern follow this concept? Discuss?

Answer :

Matching Concept states that all expenses incurred during the year, whether paid or not, and all revenues earned during the year,

whether received or not, should be taken into account while determining the profit of that year. In other words, expenses incurred in

a period should be set off against its revenues earned in the same accounting period for ascertaining profit or loss. For example,

insurance premium paid for a year is Rs1200 on July 01 and if accounts are closed on March 31, every year, then the insurance

premium of the current year will be ascertained for nine months (i.e. from July to March) and will be calculated as,

Rs 1200 - Rs 900 = Rs 300

Thus, according to the matching concept, the expense of Rs 900 will be taken into account and not Rs 1200 for determining profit,

as the benefit of only Rs 900 is availed in the current accounting period.

The business entities follow this concept mainly to ascertain the true profit or loss during an accounting period. It is possible that in

the same accounting period, the business may either pay or receive payments that may or may not belong to the same accounting

period. This leads to either overcasting or undercasting of the profit or loss, which may not reveal the true efficiency of the business

and its activities in the concerned accounting period. Similarly, there may be various expenditures like, purchase of machinery,

buildings, etc. These expenditures are capital in nature and their benefits can be availed over a period of time. In such cases, only

the depreciation of such assets is treated as an expense and should be taken into account for calculating profit or loss of the

concerned year. Thus, it is very necessary for any business entity to follow the matching concept.

Q5 :

What is the money measurement concept? Which one factor can make it difficult to compare the monetary values of one

year with the monetary values of another year?

Answer :

Money Measurement Concept states that only those events that can be expressed in monetary terms are recorded in the books of

accounts. For example, 12 television sets of Rs10,000 each are purchased and this event is recorded in the books with a total

amount of Rs 1,20,000. Money acts a common denomination for all the transactions and helps in expressing different measurement

units into a common unit, for example rupees. Thus, money measurement concept enables consistency in maintaining accounting

records. But on the other hand, the adherence to the money measurement concept makes it difficult to compare the monetary

values of one period with that of another. It is because of the fact that the money measurement concept ignores the changes in the

purchasing power of the money, i.e. only the nominal value of money is concerned with and not the real value. What Rs 1 could buy

10 years back cannot buy today; hence, the nominal value of money makes comparison difficult. In fact, the real value of money

would be a more appropriate measure as it considers the price level (inflation), which depicts the changes in profits, expenses,

incomes, assets and liabilities of the business.



Recording of Transactions


Q1 :

State the three fundamental steps in the accounting process.

Answer :

The fundamental steps in the accounting process are diagrammatically presented

below.

Q2 :

Why is the evidence provided by source documents important to accounting?

Answer :

The evidence provided by the source document is important in the following manners:

1. It provides evidence that a transaction has actually occurred.

2. It provides important and relevant information about date, amount, parties involved and other

details of a particular transaction.

3. It acts as a proof in the court of law.

4. It helps in verifying transactions during the auditing process.

Q3 :

Should a transaction be first recorded in a journal or ledger? Why?

Answer :

A transaction should be recorded first in a journal because journal provides complete

details of a transaction in one entry. Further, a journal forms the basis for posting the

transactions into their respective accounts into ledger. Transactions are recorded in

journal in chronological order, i.e. in the order of occurrence with the help of source

documents. Journal is also known as 'book of original entry', because with the help of

source document, transactions are originally recorded in books. The process of

recording the transactions in journal and then in ledger is presented in the below given

flow chart.

Q4 :

Are debits or credits listed first in journal entries? Are debits or credits indented?

Answer :

As per the rule of double entry system, there are two columns of 'Amount' in the journal

format namely 'Debit Amount' and 'Credit Amount'. The way of recording in a journal is

quite different from normal recording. Journal entry is recorded in journal format in

which the 'Debit Amount' column is listed before the 'Credit Amount' column.

Credits are indented. Indentation is leaving a space before writing any word. Journal

entry has its own jargon. While journalising, in the 'Particulars' column of journal format,

debited account is written first and credited account is in the next line leaving some

space, which is indentation.

Q5 :

Why are some accounting systems called double accounting systems?

Answer :

Some accounting systems are called double accounting systems because under this

system there are two aspects of every transaction, i.e., every transaction has dual

effect. Every transaction affects two accounts simultaneously, that is represented by

debiting one account and crediting the other account. It is based on the fact that if there

is receiver, there should be a giver.

Q6 :

Give a specimen of an account.

Answer :

_________Account

Dr.

Cr.

Date Particulars J.F.

Amount

Rs Date Particulars J.F.

Amount

Rs

Q7 :

Why are the rules of debit and credit same for both liability and capital?

Answer :

Every business acquires funds from internal as well as from external sources. According

to the business entity concept, the amount borrowed from the external sources together

with the internal sources like, capital invested by the proprietor, is termed as liability to

the business. Business entity concept treats business and business owner separately.

Capital of the owner is treated as liability to the business because the business has to

repay the amount of capital to the owner, in case of closure of the business. As liability

incurred is credited, in the same way, fresh capital introduced and net profit increases

the owner's capital, and so, capital is credited. On the other hand, if liability is paid, it

reduces liability, and so, it is debited. Similarly, drawings from capital and net loss

reduce the capital, and so, capital is debited. Thus the rules of debit and credit are

same for both liability and capital.

Q8 :

What is the purpose of posting J.F numbers that are entered in the journal at the

time entries are posted to the accounts?

Answer :

J.F. number is the number that is entered in the ledger at the time of posting entries into

their respective accounts. It helps in determining whether all transactions are properly

posted in their accounts. It is recorded at the time of posting and notat the time of

recording the transactions.

The purpose of entering J.F. number in the ledger is because of the below given

benefits.

1. J.F. number helps in locating the entries of accounts in the journal book. In other words, J.F

number helps to locate the position of the related journal entry and subsidiary book in the

journal book.

2. J.F. number in accounts ensures that recording in the books of original entry has been

posted or not.

Q9 :

What entry (debit or credit) would you make to: (a) increase revenue (b) decrease

in expense, (c) record drawings (d) record the fresh capital introduced by the

owner.

Answer :

1. Increase in revenue

Increase in revenue is credited as it increases the capital. Capital has credit balance

and if capital increases, then it is credited.

2. Decrease in expense

Decrease in expense is credited as all expenses have debit balance. If expense

decreases, then it is credited.

3. Record drawings

Capital has credit balance; if the capital increases, then it is credited. If capital

decreases, then it is debited. Drawings are debited as they decrease the capital.

4. Record of fresh capital introduced by the owner- credit

Capital has credit balance, if capital increases, then it is credited. The introduction of

fresh capital increases the balance of capital, and so, it is credited.

Q10 :

If a transaction has the effect of decreasing an asset, is the decrease recorded as

a debit or as a credit? If the transaction has the effect of decreasing a liability, is

the decrease recorded as a debit or as a credit?

Answer :

If a transaction has a decreasing effect on an asset, then this decrease is recorded as

credit. This is because, as all assets have debit balance and if assets decrease, then it

is credited. For example, sale of furniture results in decrease in furniture (asset); so, the

sale of furniture will be credited.

If a transaction has a decreasing effect on a liability, then this decrease is recorded as

debit. This is because all liabilities have credit balance. If the liability increases, then it is

credited and if the liability decreases, then it is debited. For example, payment to the

creditors results in a decrease in the creditors (liability); so, the creditors account will be

debited.

<< Previous Chapter 2 : Theory Base of AccountingNext Chapter 4 : Recording of Transactions - II >> Numerical questions : Solutions of Questions on Page Number : 80

Q1 :

Prepare accounting equation on the basis of the following:

(a) Harsha started business with cash Rs 2,00,000

(b) Purchased goods from Naman for cash Rs 40,000

(c) Sold goods to Bhanu costing Rs 10,000/- Rs 12,000

(d) Bought furniture on credit Rs 7,000

Answer :

S.No. Explanation Assets

= Liabilities + Capital

Cash + Stock + Debtors + Furniture Creditors

(a) Increase in cash 2,00,000

=

Increase in capital 2,00,000

2,00,000

= NIL + 2,00,000

(b) Increase in stock

40,000

Decrease in cash (40,000)

1,60,000 + 40,000

= NIL + 2,00,000

(c) Increase in debtors

12,000

Decrease in stock

(10,000)

Profit

2,000

1,60,000 + 30,000 + 12,000

= NIL

2,02,000

(d) Increase in furniture

7,000

Increase in creditors 7,000

1,60,000 + 30,000 + 12,000 + 7,000 = 7,000 + 2,02,000

Q2 :

Prepare accounting equation from the following:

Rs

(a) Kunal started business with cash 2,50,000

(b) He purchased furniture for cash 35,000

(c) He paid commission 2,000

(d) He purchases goods on credit 40,000

(e) He sold goods (costing Rs 20,000) for cash 26,000

Answer :

S.No. Explanation Assets Liabilities + Capital

Cash + Furniture + Stock = Creditors



2,50,000

= NIL + 2,50,000

(b) Increase in furniture

35,000


2,15,000 + 35,000

= NIL + 2,50,000

(c) Decrease in capital (Expense)

(2,000)


2,13,000 + 35,000

= NIL + 2,48,000

(d) Increase in stock

40,000

Increase in creditors 40,000

2,13,000 + 35,000 + 40,000

= 40,000 + 2,48,000

(e) Increase in cash 26,000

Q3 :

Mohit has the following transactions, prepare accounting equation:

Rs

(a) Business started with cash 1,75,000

(b) Purchased goods from Rohit 50,000

(c) Sales goods on credit to Manish (Costing Rs 17,500) 20,000

(d) Purchased furniture for office use 10,000

(e) Cash paid to Rohit in full settlement 48,500

(f) Cash received from Manish 20,000

(g) Rent paid 1,000

(h) Cash withdrew for personal use 3,000

Answer :


Cash + Stock + Debtors Furniture = Creditors



1,75,000

= NIL + 1,75,000


50,000

Increase in creditors (Rohit) = 50,000 + 1,75,000

1,75,000 + 50,000

= 50,000 + 1,75,000

(c) Increase in debtors (Manish)

20,000

Decrease in stock

(17,500)

Increase in capital (Profit)

2,500

1,75,000 + 32,500 + 20,000

= 50,000 + 1,77,500

(d) Increase in furniture

10,000


Q4 :

Rohit has the following transactions:

Rs

(a) Commenced business with cash 1,50,000

(b) Purchased machinery on credit 40,000

(c) Purchased goods for cash 20,000

(d) Purchased car for personal use 80,000

(e) Paid to creditors in full settlement 38,000

(f) Sold goods for cash costing Rs 5,000 4,500

(g) Paid rent 1,000

(h) Commission received in advance 2,000

Prepare the Accounting Equation to show the effect of the above transactions on the assets,

liabilities and capital.

Answer :


Cash + Machinery + Stock = Creditors + Unaccrued Income



1,50,000

= NIL + 1,50,000

(b) Increase in machinery

40,000

Increase in creditors = 40,000

1,50,000 + 40,000

= 40,000 + 1,50,000

(c) Increase in stock

20,000


1,30,000 + 40,000 + 20,000 = 40,000 + 1,50,000

(d) Decrease in cash (80,000)

Decrease in capital (Drawings) (80,000)

50,000 + 40,000 + 20,000 = 40,000 + 70,000

(e) Decrease in creditors (40,000)


Increase in capital

(Discount received)

Q5 :

Use accounting equation to show the effect of the following transactions of M/s Royal

Traders:

Rs

(a) Started business with cash 1,20,000

(b) Purchased goods for cash 10,000

(c) Rent received 5,000

(d) Salary outstanding 2,000

(e) Prepaid Insurance 1,000

(f) Received interest 700

(g) Sold goods for cash (costing Rs 5,000) 7,000

(h) Goods destroyed by fire 500

Answer :

S.No. Explanation Assets = Liabilities + Capital

Cash + Stock + Prepaid Expenses Outstanding Expenses



1,20,000

= NIL + 1,20,000


10,000

Increase in cash (10,000) =

1,10,000 + 10,000

= NIL + 1,20,000

(c) Increase in cash 5,000


5,000

1,15,000 + 10,000

= NIL + 1,25,000

(d) Increase in outstanding expenses

= 2,000

Decrease in capital (Expense) (2,000)

1,15,000 + 10,000

= 2,000 + 1,23,000

(e) Increase in prepaid expenses

1,000


1,14,000 + 10,000 + 1,000 = 2,000 + 1,23,000

(f) Increase in cash 700


700

1,14,700 + 10,000 + 1,000 = 2,000 + 1,23,700

(g) Increase in cash 7,000

Decrease in stock

(5,000)


2,000

1,21,700 + 5,000 + 1,000 = 2,000 + 1,25,700

(h) Decrease in stock

(500)

Q6 :

Show the accounting equation on the basis of the following transaction:

(a) Udit started business with: Rs

(i) Cash 5,00,000

(ii) Goods 1,00,000

(b) Purchased building for cash 2,00,000

(c) Purchased goods from Himani 50,000

(d) Sold goods to Ashu (Cost Rs 25,000) 36,000

(e) Paid insurance premium 3,000

(f) Rent outstanding 5,000

(g) Depreciation on building 8,000

(h) Cash withdrawn for personal use 20,000

(i) Rent received in advance 5,000

(j) Cash paid to Himani on account 20,000

(k) Cash received from Ashu 30,000

Answer :

S.No. Explanation


Cash + Stock + Building + Debtors Creditors + Outstanding

Expenses

+ UnaccruedIncome


Increase in stock

1,00,000


5,00,000 + 1,00,000

= NIL

+ 6,00,000

(b) Increase in building

2,00,000

Decrease in cash (2,00,000)

=

3,00,000 + 1,00,000 + 2,00,000

= NIL

+ 6,00,000

(c) Increase in stock

50,000

Increase in creditors

= 50,000

3,00,000 + 1,50,000 + 2,00,000 = 50,000

Q7 :

Show the effect of the following transactions on Assets, Liabilities and Capital through

accounting equation:

Rs

(a) Started business with cash 1,20,000

(b) Rent received 10,000

(c) Invested in shares 50,000

(d) Received dividend 5,000

(e) Purchase goods on credit from Ragani 35,000

(f) Paid cash for house hold Expenses 7,000

(g) Sold goods for cash (costing Rs 10,000) 14,000

(h)

(i)

Cash paid to Ragani

Deposited into bank

35,000

20,000

Answer :


Cash + Stock + Investment + Bank Creditors



1,20,000 +

= NIL + 1,20,000

(b) Increase in cash 10,000

Increase in capital (Income) = 10,000

1,30,000

= NIL + 1,30,000

(c) Decrease in investment

50,000


=

80,000 + 50,000 = NIL + 1,30,000

(d) Increase in cash 5,000

Increase in capital (Income)

5,000

85,000 + 50,000 = NIL + 1,35,000

(e) Increase in stock

35,000

Increase in creditor (Ragani)

35,000

85,000 + 35,000 + 50,000 = 35,000 + 1,35,000

(f) Decrease in capital

(7,000)


78,000 + 35,000 + 50,000 = 35,000 + 1,28,000

(g) Increase in cash

Q8 :

Show the effect of following transaction on the accounting equation:

Rs

(a) Manoj started business with

(i) Cash 2,30,000

(ii) Goods 1,00,000

(iii) Building 2,00,000

(b) He purchased goods for cash 50,000

(c) He sold goods(costing Rs 20,000) 35,000

(d) He purchased goods from Rahul 55,000

(e) He sold goods to Varun (Costing Rs 52,000) 60,000

(f) He paid cash to Rahul in full settlement 53,000

(g) Salary paid by him 20,000

(h) Received cash from Varun in full settlement 59,000

(i) Rent outstanding 3,000

(j) Prepaid Insurance 2,000

(k) Commission received by him 13,000

(l) Amount withdrawn by him for personal use 20,000

(m) Depreciation charge on building 10,000

(n) Fresh capital invested 50,000

(o) Purchased goods from Rakhi 6,000

Answer :

S.No. Explanation

Assets

= Liabilities + Capital

Cash + Stock + Building + Debtors +

Prepaid

Expenses Creditors +

Outstanding

Expenses

(a) Increase in cash,

stock and building

2,30,000 + 1,00,000 + 2,00,000

Increase in capital

5,30,000

2,30,000 + 1,00,000 + 2,00,000

=

+ 5,30,000


50,000


1,80,000 + 1,50,000 + 2,00,000

=

+ 5,30,000

(c) Increase in cash 35,000

Decrease in stock

(20,000)

increase in capital

(Profit)

15,000

2,15,000 + 1,30,000 + 2,00,000

Q9 :

Transactions of M/s. Vipin Traders are given below.

Show the effects on Assets, Liabilities and Capital with the help of accounting Equation.

Rs

(a) Business started with cash 1,25,000

(b) Purchased goods for cash 50,000

(c) Purchase furniture from R.K. Furniture 10,000

(d) Sold goods to Parul Traders (costing Rs 7,000 vide bill no. 5674) 9,000

(e) Paid cartage 100

(f) Cash Paid to R.K. furniture in full settlement 9,700

(g) Cash sales (costing Rs 10,000) 12,000

(h) Rent received 4,000

(i) Cash withdrew for personal use 3,000

Answer :


Cash + Stock + Furniture + Debtors Creditors



1,25,000 +

= NIL + 1,25,000


50,000

Decrease in cash (50,000) =

75,000 + 50,000

= NIL + 1,25,000

(c) Increase in furniture

10,000

=

Increase in creditors

= 10,000

75,000 + 50,000 + 10,000 = 10,000 + 1,25,000

(d) Increase in debtors

9,000

Decrease in stock

(7,000

)


2,000

75,000 + 43,000 + 10,000 + 9,000 = 10,000 + 1,27,000

(e) Decrease in capital (Cartage

Expenses)

(100)

Decrease in cash (100)

74,900 + 43,000 + 10,000 + 9,000 = 10,000 + 1,26,900

(f) Decrease in creditors

= (10,000)


Increase in capital (Discount-

received)

300

Q10 :

Bobby opened a consulting firm and completed these transactions during November, 2005:

(a) Invested Rs 4,00,000 cash and office equipment with Rs 1,50,000 in a business called Bobbie Consulting.

(b) Purchased land and a small office building. The land was worth Rs 1,50,000 and the building worth Rs 3,50,000. The

purchase price was paid with Rs 2,00,000 cash and a long term note payable for Rs 8,00,000.

(c) Purchased office supplies on credit for Rs 12,000.

(d) Bobbie transferred title of motor car to the business. The motor car was worth Rs 90,000.

(e) Purchased for Rs 30,000 additional office equipment on credit.

(f) Paid Rs 75,00 salary to the office manager.

(g) Provided services to a client and collected Rs 30,000

(h) Paid Rs 4,000 for the month's utilities.

(i) Paid supplier created in transaction (c).

(j) Purchase new office equipment by paying Rs 93,000 cash and trading in old equipment with a recorded cost of Rs 7,000.

(k) Completed services of a client for Rs 26,000. This amount is to be paid within 30 days.

(l) Received Rs 19,000 payment from the client created in transaction (k).

(m) Bobby withdrew Rs 20,000 from the business.

Analyse the above stated transactions and open the following T-accounts:

Cash, client, office supplies, motor car, building, land, long term payables, capital,

withdrawals, salary, expense and utilities expense.

Answer :

a)

The transaction (a) increases assets by Rs 5,50,000 (cash Rs 4,00,000 and office equipment Rs

1,5,000) it will be debited and on the other hand it will increase the capital by Rs 5,50,000, so it

will be credited in capital account.

Cash Account

Office Equipment Account

Capital Account

Dr. Cr.

Dr. Cr . Dr. Cr.

(a) Rs 4,00,000

(a) Rs 1,50,000

(a) Rs 4,00,000

(a) Rs 1,50,000

b)

Purchase of land and small office building are assets. On one hand, the purchase of these items

will increase their individual accounts and this will increase the total amount of the assets in the

business; so, both the accounts will be debited. On the other hand, payment in cash on the

purchase of these assets will decrease the cash balance, so cash account will be credited to the

extent of amount paid. After payment for building in cash, the balance of building account will

be transferred to creditors for building account. This will increase the amount of the creditors,

which in turn will increase the total liabilities of the business. Long term payables are regarded

as loan to the business that will increase both cash balance (due to intake of loan) as well as

liabilities of the business.

Land Account

Building Account

Dr. Cr.

Dr. Cr.

(b) Rs 1,50,000

(b) Rs 3,50,000

Cash Account

Long Term Payable Account

Dr. Cr.

Dr. Cr.

(a) Rs 4,00,000 (b) Rs 1,50,000

(b) Rs 8,00,000

(b) Rs 8,00,000 (b) Rs 50,000

Q11 :

Journalise the following transactions in the books of Himanshu:

2005 Rs

Dec.01 Business started with cash 75,000

Dec.07 Purchased goods for cash 10,000

Dec.09 Sold goods to Swati 5,000

Dec.12 Purchased furniture 3,000

Dec.18 Cash received from Swati in full settlement 4,000

Dec.25 Paid rent 1,000

Dec.30 Paid salary 1,500

Answer :

Books of Himanshu

Journal

Date Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2005

Dec.01 Cash A/c Dr. 75,000

To Capital A/c

75,000

(Started business with cash)

Dec.07 Purchases A/c Dr. 10,000

To Cash A/c

10,000

(Goods purchased for cash)

Dec.09 Swati Dr. 5,000

To Sales A/c

5,000

(Goods sold on credit)

Dec.12 Furniture A/c Dr. 3,000

To Cash A/c

3,000

(Furniture purchased for cash)


Discount Allowed A/c Dr. 1,000

To Swati

5,000

(Cash received from Swati and discount allowed)

Dec.25 Rent A/c Dr. 1,000

To Cash A/c

1,000

(Rent paid in cash)

Q12 :

Enter the following Transactions in the Journal of Mudit :

2006 Rs

Jan.01 Commenced business with cash 1,75,000

Jan.01 Building 1,00,000

Jan.02 Goods purchased for cash 75,000

Jan.03 Sold goods to Ramesh 30,000

Jan.04 Paid wages 500

Jan.06 Sold goods for cash 10,000

Jan.10 Paid for trade expenses 700

Jan.12 Cash received from Ramesh 29,500

Discount allowed 500

Jan.14 Goods purchased for Sudhir 27,000

Jan.18 Cartage paid 1,000

Jan.20 Drew cash for personal use 5,000

Jan.22 Goods use for house hold 2,000

Jan.25 Cash paid to Sudhir 26,700


Answer :

Books of Mudit

Journal

Date Particulars

L.F.

Debit

Amount

Rs

Credit

Amount Rs

2006

Jan.0

1 Building A/c

Dr. 1,00,000

Cash A/c Dr. 1,75,000

To Capital A/c

2,75,000

(Commenced business with cash and building)

Jan.0

2 Purchases A/c Dr. 75,000

To Cash A/c

75,000


Jan.0

3 Ramesh Dr. 30,000

To Sales A/c

30,000

(Goods sold to Ramesh)

Jan.0

4 Wages A/c Dr. 500

To Cash A/c

500

(Wages paid in cash)

Jan.0

6 Cash A/c Dr. 10,000

To Sales A/c

10,000

(Goods sold for cash)

Q13 :

Journalise the following transactions:

2005 Rs

Dec. 01 Hema started business with cash 1,00,000

Dec. 02 Open a bank account with SBI 30,000

Dec. 04 Purchased goods from Ashu 20,000

Dec.06 Sold goods to Rahul for cash 15,000

Dec.10 Bought goods from Tara for cash 40,000

Dec.13 Sold goods to Suman 20,000

Dec.16 Received cheque from Suman 19,500


Dec.20 Cheque given to Ashu on account 10,000

Dec.22 Rent paid by cheque 2,000

Dec.23 Deposited into bank 16,000

Dec.25 Machine purchased from Parigya 10,000

Dec.26 Trade expenses 2,000

Dec.28 Cheque issued to Parigya 10,000

Dec.29 Paid telephone expenses by cheque 1,200

Dec.31 Paid salary 4,500

Answer :

Books of Hema

Journal

Date Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2005

Dec.01 Cash A/c Dr. 1,00,000

To Capital A/c

1,00,000


Dec.02 Bank A/c Dr. 30,000

To Cash A/c

30,000

(Bank account opened with SBI)


To Ashu

20,000

(Goods purchased from Ashu)


To Sales A/c

15,000



To Cash A/c

40,000


Dec.13 Suman Dr. 20,000

To Sales A/c

Q14 :

Jouranlise the following transactions in the books of Harpreet Bros.:

(a) Rs 1,000 due from Rohit are now bad debts.

(b) Goods worth Rs 2,000 were used by the proprietor.

(c) Charge depreciation @ 10% p.a for two month on machine costing Rs 30,000.

(d) Provide interest on capital of Rs 1,50,000 at 6% p.a. for 9 months.

(e) Rahul become insolvent, who owed is Rs 2,000 a final dividend of 60 paise in a rupee is received from his estate.

Answer :

Books of Harpreet Bros.

Journal

S. No.

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

(a) Bad Debt A/c Dr. 1,000

To Rohit (Debtors)

1,000

(Due from Rohit became bad debt)

(b) Drawings A/c Dr. 2,000

To Purchases A/c

2,000

(Goods withdrawn by proprietor for personal

use)

(c) Depreciation A/c Dr. 500

To Machinery A/c

500

(Depreciation charged on machinery for two

months)

(d) Interest on Capital A/c Dr. 6,750

To Capital A/c

6,750

(Interest on capital at 6% due for 9 months)

(e) Bad Debt A/c Dr. 800

Cash A/c Dr. 1,200

To Rahul (Debtor)

2,000

(Received from Rahul 60 paise in a rupee and

rest amount considered as bad debt)

Q15 :

Prepare Journal from the transactions given below :

Rs

(a) Cash paid for installation of machine 500

(b) Goods given as charity 2,000

(c) Interest charge on capital @ 7% p.a. when total capital were 70,000

(d) Received Rs 1,200 of a bad debts written-off last year.

(e) Goods destroyed by fire 2,000

(f) Rent outstanding 1,000

(g) Interest on drawings 900

(h) Sudhir Kumar who owed me Rs 3,000 has failed to pay the amount. He pays me a compensation of 45 paise

in a rupee.

(i) Commission received in advance 7,000

Answer :

Journal

S. No.

Particulars L.F.

Debit

Amount

Rs

Credit

Amount

Rs

(a) Machinery A/c Dr. 500

To Cash A/c

500

(Cash paid for installation of machinery)

(b) Charity A/c Dr. 2,000

To Purchases A/c

2,000

(Goods given as charity)

(c) Interest on Capital A/c Dr. 4,900

To Capital A/c

4,900

(Interest on capital charged @ 7% p.a.)

(d) Cash A/c Dr. 1,200

To Bad Debt Recovered A/c

1,200

(Cash received on from debtors which was

previously written off as bad)

(e) Goods Destroyed by Fire A/c Dr. 2,000

To Purchases A/c

2,000

(Goods destroyed by fire)

Q16 :

Journalise the following transactions, post to the ledger:

2005 Rs

Nov. 01 Business started with (i) Cash 1,50,000

(ii) Goods 50,000

Nov. 03 Purchased goods from Harish 30,000

Nov. 05 Sold goods for cash 12,000

Nov. 08 Purchase furniture for cash 5,000

Nov. 10 Cash paid to Harish on account 15,000

Nov. 13 Paid sundry expenses 200

Nov. 15 Cash sales 15,000

Nov. 18 Deposited into bank 5,000

Nov. 20 Drew cash for personal use 1,000

Nov. 22 Cash paid to Harish in full settlement of account 14,700

Nov. 25 Good sold to Nitesh 7,000

Nov. 26 Cartage paid 200

Nov. 27 Rent paid 1,500

Nov. 29 Received cash from Nitesh 6,800


Nov. 30 Salary paid 3,000

Answer :

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2005

Nov.01 Cash A/c Dr. 1,50,000

Stock A/c Dr. 50,000

To Capital A/c

2,00,000

(Started business with cash and goods)

Nov.03 Purchases A/c Dr. 30,000

To Harish

30,000

(Goods purchased from Harish)

Nov.05 Cash A/c Dr. 12,000

To Sales A/c

12,000

Q17 :

Journalise the following transactions is the journal of M/s. Goel Brothers and post them to

the ledger.

2006 Rs

Jan. 01 Started business with cash 1,65,000

Jan. 02 Opened bank account in PNB 80,000

Jan. 04 Goods purchased from Tara 22,000

Jan.05 Goods purchased for cash 30,000

Jan.08 Goods sold to Naman 12,000

Jan.10 Cash paid to Tara 22,000

Jan.15 Cash received from Naman 11,700


Jan. 16 Paid wages 200

Jan. 18 Furniture purchased for office use 5,000

Jan. 20 Withdrawn from bank for personal use 4,000

Jan. 22 Issued cheque for rent 3,000

Jan. 23 Goods issued for house hold purpose 2,000

Jan. 24 Drawn cash from bank for office use 6,000

Jan. 26 Commission received 1,000

Jan. 27 Bank charges 200

Jan. 28 Cheque given for insurance premium 3,000

Jan. 29 Paid salary 7,000

Jan. 30 Cash sales 10,000

Answer :

Books of M/s Goel Brothers

Journal

Date Particulars L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.01 Cash A/c Dr. 1,65,000

To Capital A/c

1,65,000


Jan.02 Bank A/c

Dr. 80,000

To Cash A/c

80,000

(Bank account opened with PNB)

Jan.04 Purchases A/c

Dr. 22,000

To Tara

22,000

(Goods purchased from Tara)

Jan.05 Purchases A/c

Dr. 30,000

To Cash A/c

30,000


Jan.08 Naman

Dr. 12,000

To Sales A/c

12,000

(Sale of goods to Naman)

Q18 :

Give journal entries of M/s. Mohit traders; post them to the Ledger from the following

transactions:

August,

2005

Rs

1 Commenced business with cash 1,10,000

2 Opened bank account with H.D.F.C. 50,000

3 Purchased furniture 20,000

7 Bought goods for cash from M/s. Rupa Traders 30,000

8 Purchased good from M/s. Hema Traders 42,000

10 Sold goods for cash 30,000

14 Sold goods on credit to M/s. Gupta Traders 12,000

16 Rent paid 4,000

18 Paid trade expenses 1,000

20 Received cash from Gupta Traders 12,000

22 Goods return to Hema Traders 2,000

23 Cash paid to Hema Traders 40,000

Jan.10 Tara

Dr. 22,000

To Cash A/c

22,000

(Cash paid to Tara)

Jan.15 Cash A/c

Dr. 11,700

Discount Allowed A/c Dr. 300

To Naman

12,000

(Cash received from Naman and discount

allowed)

25 Bought postage stamps 100

30 Paid salary to Rishabh 4,000

Answer :

Books of M/s. Mohit Traders

Journal


Debit

Amount

Rs

Credit

Amount

Rs

2005

Aug.01 Cash A/c Dr. 1,10,000

To Capital A/c

1,10,000

(Commenced business with cash)

Aug.02 Bank A/c Dr. 50,000

To Cash A/c

50,000

(Bank account opened with H.D.F.C)

Aug.03 Furniture A/c Dr. 20,000

To Cash A/c

20,000

(Furniture purchased)

Aug.07 Purchases A/c Dr. 30,000

To Cash A/c

30,000


Aug.08 Purchases A/c Dr. 42,000

To M/s. Hema Traders

42,000

(Goods purchased from M/s. Hema Traders)

Aug.10 Cash A/c Dr. 30,000

To Sales A/c

30,000


Aug.14 M/s. Gupta Traders Dr. 12,000

To Sales A/c

12,000

(Goods sold to M/s. Gupta traders)

Q19 :

Journalise the following transaction in the Books of the M/s. Bhanu Traders and Post them

into the Ledger.

December, 2005 Rs

1 Started business with cash 92,000

2 Deposited into bank 60,000

4 Bought goods on credit from Himani 40,000

6 Purchased goods from cash 20,000

8 Returned goods to Himani 4,000


14 Cheque given to Himani 36,000

17 Goods sold to M/s. Goyal TradeRs 3,50,000

19 Drew cash from bank for personal use 2,000

21 Goyal traders returned goods 3,500

22 Cash deposited into bank 20,000

26 Cheque received from Goyal Traders 31,500

28 Goods given as charity 2,000

29 Rent paid 3,000

30 Salary paid 7,000

31 Office machine purchased for cash 3,000

Answer :

Books of M/s. Bhanu Traders

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2005


To Capital A/c

92,000


Dec.02 Bank A/c Dr. 60,000

To Cash A/c

60,000

(Cash deposited into bank)


To Himani

40,000

(Goods purchased from Himani)

Q20 :

Journalise the following transaction in the Book of M/s. Beauti tradeRs Also post them in

the ledger.

Dec.

2005

Rs

1 Started business with cash 2,00,000

2 Bought office furniture 30,000

3 Paid into bank to open an current account 1,00,000

5 Purchased a computer and paid by cheque 2,50,000

6 Bought goods on credit from Ritika 60,000

8 Cash sales 30,000

9 Sold goods to Karishna on credit 25,000

12 Cash paid to Mansi on account 30,000

14 Goods returned to Ritika 2,000

15 Stationery purchased for cash 3,000

16 Paid wages 1,000

18 Goods returned by Karishna 2,000

20 Cheque given to Ritika 28,000

22 Cash received from Karishna on account 15,000

24 Insurance premium paid by cheque 4,000

26 Cheque received from Karishna 8,000

28 Rent paid by cheque 3,000

29 Purchased goods on credit from Meena Traders 20,000

30 Cash sales 14,000

Answer :

Books of Beauti Traders

Journal


Debit

Amount

Rs

Credit

Amount

Rs

2005

Dec.01 Cash A/c Dr. 2,00,000

To Capital A/c

2,00,000


Dec.02 Office Furniture A/c Dr. 30,000

To Cash A/c

30,000

(Office furniture purchased)

Dec.03 Bank A/c Dr. 1,00,000

To Cash A/c

1,00,000

(Opened a current account)

Dec.05 Computer A/c Dr.

2,50,000

Q21 :

Journalise the following transaction in the books of Sanjana and post them into the ledger:

January, 2006 Rs

1 Cash in hand 6,000

Cash at bank 55,000

Stock of goods 40,000

Due to Rohan 6,000

Due from Tarun 10,000

3 Sold goods to Karuna 15,000

4 Cash sales 10,000

6 Goods sold to Heena 5,000

8 Purchased goods from Rupali 30,000

10 Goods returned from Karuna 2,000

14 Cash received from Karuna 13,000

15 Cheque given to Rohan 6,000

16 Cash received from Heena 3,000

20 Cheque received from Tarun 10,000

22 Cheque received from to Heena 2,000

25 Cash given to Rupali 18,000

26 Paid cartage 1,000

27 Paid salary 8,000

28 Cash sale 7,000

29 Cheque given to Rupali 12,000

30 Sanjana took goods for Personal use 4,000

31 Paid General expense 500

Answer :

Books of Sanjana

Journal Entries

S.No.

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.01 Cash A/c Dr. 6,000

Bank A/c Dr. 55,000

Stock A/c Dr. 40,000

Tarun Dr. 10,000

To Rohan

6,000

To Capital A/c

1,05,000

(Balance brought from the last month)

Jan.03 Karuna Dr. 15,000

To Sales A/c

15,000

(Goods sold to Karuna)

<< Previous Chapter 2 : Theory Base of AccountingNext Chapter 4 : Recording of Transactions - II >> Long answers : Solutions of Questions on Page Number : 80

Q1 :

Describe the events recorded in accounting systems and the importance of

source documents in those systems?

Answer :

It is beyond human capabilities to memorise each financial transaction and that is why,

source documents have their own importance in accounting system. They are

considered as an evidence of transactions and can be presented in the court of law.

Transactions supported by evidence can be verified. Source documents also ensure

that transactions recorded in the books are free from personal biases.

A few events that are supported by source document are given below.

1. Sale of goods worth Rs 200 on credit, supported by sales invoice/bill

2. Purchase of goods worth Rs 500 on credit, supported by purchase invoice/bill

3. Cash sales worth Rs 1,000, supported by cash memo

4. Cash purchase of goods worth Rs 400, supported by cash memo

5. Goods worth Rs 100 returned by customer, supported by credit note

6. Return of goods purchased on credit worth Rs 200, supported by debit note

7. Payment worth Rs 1,200 through bank, supported by cheques

8. Deposits into bank worth Rs 500, supported by pay-in slips.

Out of the above events, only those events that can be expressed in monetary terms,

are recorded in the books of accounts. However, the non-monetary events

are not recorded in accounts; for example, promotion of manger cannot be recorded

but increment in salary can be recorded at the time when salary is paid or due.

Source document in accounting is important because of the below given reasons.

1. It provides evidence that transaction has actually occurred.

2. It provides information about the date, amount and parties involved and other details of a

particular transactions.

3. It acts as an evidence in the count of law.

4. It helps in verifying the transaction during the auditing process.

Q2 :

Describe how debits and credits are used to analyse transactions.

Answer :

Debit originated from the Italian word debito, which in turn is derived from the Latin

word debeo, which means 'owed to proprietor' and credit comes from the Italian

word credito, which is derived from the Latin word credo, which means belief, i.e., 'owed

by proprietor'.

According to the dual aspect concept, all the business transactions that are recorded in

the books of accounts, have two aspects- debit and credit. The dual aspect can be

better understood by the help of an example; bought goods worth Rs 500 on cash. This

transaction affects two accounts with the same amount simultaneously. As goods are

brought in exchange of cash, so the cash balances in the business reduce by Rs 500,

i.e. why the cash account is credited. Simultaneously, the amount of goods increases by

Rs 500, so purchases account will be debited. Debit and credit depend on the nature of

accounts involved; such as assets, expenses, income, liabilities and capital. There are

five types of Accounts.

1. Assets- These include all properties or legal rights owned by a firm for its operations, such

as cash in hand, plant and machinery, bank, land, building, etc. All assets have debit

balance. If assets increase, they are debited and if assets decrease, they are credited.

For example, furniture purchased and payment made by cheque. The journal entry is:

Furniture A/c Dr.

To Bank A/c

Here, furniture and bank balance, both are assets to the firm. As furniture is purchased,

so furniture account will increase, and will be debited. On the other hand, payment of

furniture is being made by cheque that reduces the bank balance of the business, so

bank account will be credited.

2. Expense- It is made to run business smoothly and to carry day to day business activites.

All expenses have debit balance. If an expense is incurred, it must be debited.

For example, rent paid. The journal entry is:

Rent A/c Dr.

To Cash A/c

Here, rent is an expense. All expenses have debit balance. Hence, rent is debited. On

the other hand, as rent is paid in cash that reduces the cash balances, so cash account

is credited.

3. Liability- Liability is an obligation of business. Increase in liability is credited and decrease in

liability is debited.

For example, loan taken from bank. The journal entry is:

Bank A/c Dr.

To Bank Loan A/c

Here, loan from bank is a liability to the firm. As all liabilities have credit balance, so loan

from bank has been credited because it increases the liabilities.

4. Income- Income means profit earned during an accounting period from any source. Income

also means excess of revenue over its cost during an accounting period. Income has credit

balance because it increases the balance of capital.

For example, rent received from tenant. The journal entry is:

Cash A/c Dr.

To Rent A/c

Here, rent is an income; hence, rent account has been credited and cash has been

debited, as rent received increases the cash balances.

5. Capital- Capital is the amount invested by the proprietor in the business. Capital has credit

balance. Increase in capital is credited and decrease in capital is debited

For example, additional capital introduced by owner. The journal entry is:

Cash A/c Dr.

To Capital A/c

As additional capital is introduced, so the amount of capital will increase, i.e. why,

capital account is credited. On the other hand, as capital is introduced in form of cash,

so the cash balances decrease, i.e. why, cash account is debited.

Q3 :

Describe how accounts are used to record information about the effects of

transactions?

Answer :

Every transaction is recorded in the original book of entry (journal) in order of their

occurrence; however, if we want to know that how much we receive from our debtors or

how much to pay to the creditors, it is not possible to determine at a single movement.

Hence, we prepare accounts to know the position of business activities in the meantime.

There are some steps to record transactions in accounts; it can be easily understood

with the help of an example.

Sold goods to Mr A worth Rs 50,000 on 12th April and received payment Rs 40,000 on

25th April. The following journal entries will be recorded:

Particulars L.F.

Debit

Amount

Rs

Credit

Amount

Rs

Apr.12 A's A/c Dr. 22 50,000

To Sales 18 50,000

(Goods sold on credit to Mr. A)

Apr.25 Cash A/c Dr. 13 40,000

To A's A/c 22 40,000

(Cash received from Mr. A)

Step 1- Locate the account in ledger, i.e., Mr A's Account.

Step 2- Enter the date of transaction in the date column of the debit side of Mr A's

Account.

Step 3- In the 'Particulars' column of the debit side of Mr A's Account, the name of

corresponding account is to be written, i.e., 'Sales'.

Step 4- Enter the page number of the ledger in the Journal Folio (J.F.) column of Mr A's

Account.

Step 5- Enter the amount in the 'Amount' column.

Step 6- Same steps are to be followed to post entries in the credit side of Mr A's

Account.

Step 7- After entering all the transactions for a particular period, balance the account by

totalling both sides and write the difference in shorter side, as 'Balance c/d'.

Step 8- Total of account is to be written on either sides.

Q4 :

What is a journal? Give a specimen of journal showing at least five entries.

Answer :

Journal is derived from the French word Jour, means daily records. In this book,

transactions are recorded in order of their occurrence, i.e., in chronological order from

the source document. It is also termed as the book of original entry and each

transaction is termed as journal entry.

Performa of Journal

In the books of.....


Debit

Amount

Rs

Credit

Amount

Rs

Date- Date of transaction is recorded in the order of their occurrence.

Particulars- Details of business transactions like, name of the parties involved and the

name of related accounts, are recorded.

L.F.- Page number of ledger account when entry is posted.

Debit Amount- Amount of debit account is written.

Credit Amount- Amount of credit account is written.

Recording of a Journal Entry

Date

1) Started business with cash Rs 1,00,000 April 01

2) Open a bank account Rs 20,000 April 03

3) Purchase goods for cash Rs 25,000 April 04

4) Goods sold for cash Rs 30,000 April 05

5) Goods sold to Mr. X Rs 2,000 April 06

Books of Mr A

Journal


Debit

Amount

Rs

Credit

Amount

Rs

April1 Cash A/c Dr. 1,00,000

To Capital A/c 1,00,000


April 3 Bank A/c Dr. 20,000

To Cash A/c 20,000

(Bank account opened with cash)

April 4 Purchase A/c Dr. 25,000

To Cash 25,000


April 5 Cash A/c Dr. 30,000

To Sales A/c 30,000


April 6 Mr. X's A/c Dr. 2,000

Q5 :

Differentiate between source documents and vouchers.

Answer :

Basis of Difference Source Documents Vouchers

Meaning It refers to the documents in writing, containing the

details of events or transactions.

When source document is considered as evidence

of an event or transaction, then it is called

voucher.

Purpose It is used for preparing accounting vouchers. It is used for analysing the transactions.

Recording It acts as a basis for preparing accounting voucher that

helps in recording.

It acts as a basis for recording transactions.

Preparation It is prepared at the time when an event or a

transaction occurs.

It can be prepared either when an event or a

transaction occurs, or later on.

Legality/Validity It can be used as evidence in the court of law. It can be used for assessing the authentication of

transactions.

Prepared By It is prepared by the persons who are directly involved

in the transactions, or who are authorised to prepare or

approve these documents.

It is prepared by the authorised persons or by the

accountants.

Examples Cash memo, invoice, and pay-in-slip, etc. Cash memo, invoice, pay-in-slip (if used as

evidence), debit note, credit note, cash vouchers,

transfer vouchers, etc.

Q6 :

Accounting equation remains intact under all circumstances. Justify the

statement with the help of an example.

Answer :

According to the dual-aspect concept, every transaction simultaneously, has two effects

of equal amount, i.e. debit and credit. However, in any case, the equality of total assets

with the total claims of business (sum of capital and liabilities) is not disturbed. This

equality is algebraically represented as:

Or

or, Liabilities = Asset - Capital

or, Capital = Assets - Liabilities

In any circumstance the above equation cannot be changed. For example,

1. Business started with cash Rs 1,00,000

Cash A/c Dr.

To Capital A/c


Cash 1,00,000

(1,00,000)

Assets decrease, as cash is invested into the business and capital increases. Thus the

equality between LHS and RHS remains intact.

2. Goods purchased on credit Rs 20, 000


Cash Stock Creditors

1,00,000 20,000 = 20,000 + 100,000

Assets increase as well as liability increases, without disturbing the equality.

3. Goods purchased with cash 25000


Cash Stock =

1,00,000 20,000 20,000 + 1,00,000

(25,000) 25,000

As goods are purchased for cash, so cash balance reduces by Rs 25,000, but on the

other hand, stock balance increases by Rs 25,000. Thus the total balance of LHS

remains equal to the total claims.

Q7 :

Explain the double entry mechanism with an illustrative example.

Answer :

Double entry system is based on the dual aspect concept. It means every transaction

has two-sided effects, i.e., every debit has its credit.

This system is explained by Luca Pacioli in his book Summade Arithmetica

Geometria Proportioni et Proportionalita, 1494. He said if one is receiver, then the

other should be the giver.

In double entry system, accounts are classified as shown below.

1. Personal Accounts: It includes individual persons, firms, companies, and other institutions,

such as Mr. A, M/s ABC & Co. etc.

Rule of double entry system for personal accounts:

Debit the receiver.

Credit the giver.

For example:

i. Cash paid to Mr. A.

A's A/c Dr.

To Cash

ii. Cash received from Mr. X

Cash A/c Dr.

To Mr. X

2. Impersonal Accounts: It relates to non living things. Impersonal accounts are further

classified as real accounts and nominal accounts.

1. Real Account- It includes all types of assets.

i. Tangible assets that can be seen and touched; for example, machinery, building, etc.

ii. Intangible assets that cannot be seen and touched; for example, goodwill, patent, etc.

Rule of double entry system for real accounts:

Debit what comes in.

Credit what goes out.

For example:

Furniture purchased for cash

Furniture A/c Dr.

To Cash A/c

2. Nominal Account: It includes all expenses, losses, incomes and gains.

Rule of double entry system for nominal accounts:

Debit all losses and expenses.

Credit all gains and incomes.

For example:

i. Rent paid

Rent A/c Dr.

To Cash A/c

ii. Commission received.

Cash A/c Dr.

To Commission A/c

NCERT Solutions for Class 11 Accountancy Financial

Accounting Part-1 Chapter 4

Recording of Transactions – II


Q1 :

Briefly state how the cash book is both journal and a ledger?

Answer :

Transactions are recorded directly from source documents in the Cash Book, so there is no need to record transactions in the

Journal book. Further, on the basis of the cash transactions recorded in the Cash Book, cash and bank balances can be

determined, and so there is no need to prepare cash account (which is a part of ledger) separately. Thus, the Cash Book serves the

purpose of both Journal as well as ledger.

Q2 :

What is the purpose of contra entry?

Answer :

Contra entry represents deposits or withdrawals of cash from bank or vice versa. The purpose of contra entry is to indicate the

transactions that effect both cash and bank balances. This entry does not affect the financial positions of a business. A contra entry

is recorded in both sides of a two column Cash Book and is denoted by 'C' in the ledger folio column.

Q3 :

What are special purpose books?

Answer :

Business transactions are large in number and difficult to record; so, journal is sub-divided for quick, efficient and accurate recording

of the business transactions. Special purpose books like, sales book and purchases book are maintained for those transactions that

are routine and repetitive in nature. Recording through these books is economical and enables division of work among accountants.

Q4 :

What is petty cash book? How it is prepared?

Answer :

Petty Cash Book is used for recording payment of petty expenses, which are of smaller denominations like postage, stationery,

conveyance, refreshment, etc. Person who maintains petty cash book is known as petty cashier and these small expenses are

termed as petty expenses.

It is prepared by two methods:

1. Ordinary system: In this case, a fixed sum of money is paid to petty cashier for the payment of petty expenses and after spending the

whole amount, the account is submitted by the petty cashier to the main cashier.

2. Imprest system: In this case, a fixed sum of the money is given to the petty cashier in the beginning of a period and at the end of the

period the amount spent by him is reimbursed, so that he has a fixed amount in the beginning of every new period.

Q5 :

Explain the meaning of posting of journal entries?

Answer :

Posting is the process of transferring the business transactions from Journal to ledgers.

Every transaction is first recorded in the Journal and subsequently transferred to their respective accounts.

Q6 :

Define the purpose of maintaining subsidiary journal.

Answer :

The process of accounting starts from identification of financial and non-financial events. Financial events are first recorded in a

Journal. A small business has lesser number of transactions and thereby it may be possible to record these transactions through

Journal entry. However, on the contrary, as the business grows, there will be voluminous number of transactions and the firm may

experience difficulty, thereby it becomes tedious to record through Journal entry. Thus, in order to save time and effort, it is

recommended to sub-divide Journal. Sub-division of Journal provides scope for division of work. This leads to the improvement of

efficiency and effectiveness and infuses higher degree of accountability to the accountants for the specific subsidiary Journal

assigned to them. The purposes of maintaining subsidiary Journal are given below.

1. It saves time and efforts in recording.

2. It enables division of work, leading to an enhancement of efficiency and effectiveness, as particular accountant takes care of particular

books.

3. It also makes each accountant more responsible and accountable for the books assigned to them.

4. It records routine and repetitive transactions at one place, which leads to easy accessibility of information and hassle-free communication.

Q7 :

Write the difference between return inwards and return outwards.

Answer :

Basis of Difference Return Inwards Return Outwards

Meaning Goods sold to the customers,

are returned by them.

Goods purchased are returned

to the suppliers.

Balance It has debit balance. It has credit balance.

Treatment It is deducted from Sales in the

Trading Account.

It is deducted from Purchases

in the Trading Account.

Issued Credit note is prepared by the

seller.

Debit note is prepared by the

buyer.

Reduction It reduces the payment from

the Debtors.

It reduces the payment made to

the Creditors.

Term It is also termed as Sales

Returns.

It is also termed as Purchases

Returns.

Q8 :

What do you understand by ledger folio?

Answer :

Ledger folio is a page number of an account in ledger that is written in the L.F. column of a journal format. In journal entry, ledger

folio number is written corresponding to the name of the account in the L.F. column. It helps in easy locating of the account in the

ledger book. It reduces the time in recording and rechecking.

Q9 :

What is difference between trade discount and cash discount?

Answer :

Basis of Difference Trade Discount Cash Discount

Meaning It is allowed when goods are

purchase or sold.

It is allowed at the time of payment.

Recording in books It is recorded in invoice/bill

but not in the books.

It is recorded in the discount column

of the Cash Book's debit side, if

allowed, and credit side, if received.

Purpose It is allowed to increase sale. It is allowed for earlier payment.

Deduction It is deducted from the price-list

of the goods.

It is not deducted from the price-list of

the goods.

Q10 :

Write the process of preparing ledger from a journal.

Answer :

The process of preparing ledger from Journal can be explained with the help of an example. Let us suppose that machinery is

purchased from Mr. X, so, the journal entry will be:

Machinery A/c Dr.

To Mr. X Account

In this example, Machinery Account is debited and Mr. X Account is credited. Let us understand the process of preparing ledger

from the journal entry.

Account which is debited in the entry:

Step 1: Indentify the account in ledger that is debited, i.e., 'Machinery Account'.

Step 2: Enter date in the debit side of the 'Machinery Account' in the 'Date' column.

Step 3: Enter the name of the account as 'Mr. X Account' (which is credited in the entry) in the 'Particulars' column in the debit side

of the Machinery Account.

Step 4: Enter the page number of the journal, where the entry is recorded in the 'J.F.' (journal folio) column.

Step 5: Post the corresponding amount in the 'Amount' column, which is recorded against 'Machinery Account' in the journal entry.

Account which is credited in entry:

Step 1: Indentify the account in ledger that is credited, i.e., 'Mr. X Account'.

Step 2: Enter date in the credit side of 'Mr. X Account' in the 'Date' column.

Step 3: Enter the name of the account as 'Machinery Account' (which is debited in the entry) in the 'Particulars' column in the credit

side of the 'Machinery Account'.

Step 4: Enter the page number of the journal where the entry is recorded in the 'J.F.' (journal folio) column.

Step 5: Post the corresponding amount in the 'Amount' column, which is recorded against 'Mr. X Account' in the journal entry.

Q11 :

What do you understand by Imprest amount in petty cash book?

Answer :

Imprest amount is an amount of money given by the main cashier to the petty cashier in the beginning of a period. At the end of the

period, the amount spent by the petty cashier gets reimbursed in such a manner, that he has the same amount of cash in hand in

the beginning of next period. For example, if the main cashier gives an imprest amount of Rs 1,000 to the petty cashier on April 01,

2011 and at the end of the month the petty expenses amount to be Rs 850, which is spent by the petty cashier during the month. In

this case, Rs 850 will be reimbursed, so, that on May 01, 2011, the petty cashier will have Rs 1,000 at his disposable to meet petty

expenses for the next month.

<< Previous Chapter 3 : Recording of Transactions - INext Chapter 5 : Bank Reconciliation Statement >> Long answers : Solutions of Questions on Page Number : 142

Q1 :

Explain the need for drawing up the special purpose books.

Answer :

The needs for drawing up the special purpose book are given below.

1. Quick and efficient recording: It is a time consuming process to record all the transactions in a journal. If there are separate books, then

recording of transactions can be done more efficiently and timely. So, the need of special purpose book arises.

2. Repetitive nature: In every business, some transactions are similar and repetitive in nature. It will be more convenient to record all similar

transactions at one place. For example, all credit sales transactions are recorded in the Sales Book.

3. Economical: It is more economical as recording through the special purpose books saves time and also enhances the efficiency of

accountants and clerks.

4. Easy posting: If similar transactions are recorded at one place, posting becomes easier.

5. Complete information at one place: All information related to purchases, sales, cash receipts, payments, etc. are easily and hassle-free

available.

Q2 :

What is cash book? Explain the types of cash book.

Answer :

Cash Book is a book of original entry. It records all transactions related to receipts and payments of cash and deposits in and

withdrawals from a bank in a chronological order. In the debit side of the cash book, the cash receipts are recorded in the cash

column while all deposits into bank account are recorded in the bank column. On the contrary, in the credit side of the cash book, all

cash payments are recorded in the cash column, while all payments through cheques are recorded in the bank column. Usually, it is

prepared on monthly basis. Cash book also serves the purpose of principle book (i.e. cash account and bank account).

1. Single Column Cash Book: A single column Cash Book contains one column of amount on both sides, i.e., one in the debit side and other

in the credit side. In the single column Cash Book, only cash transactions are recorded. In the debit side of the Cash Book, all cash receipts

are recorded, while in the credit side all cash payments are recorded.

2. Double Column Cash Book: A double column Cash Book contains two columns of amount, namely cash column and bank column on

both sides. In the cash column of Cash Book, all cash receipts and payments are recorded, according to the rule of Real Accounts. All

deposits either in cash or through cheques into the bank account of the business are debited in the bank column and all withdrawals of

cash and payments through cheques are credited in the bank column.

Cash Book

Dr. Cr.

Date Particulars L.F. Cash

Rs

Bank

Rs Date Particulars L.F.

Cash

Rs

Bank

Rs

Cash (C) - Bank (C) -

3.

3. Triple Ccolumn Cash Book: In a triple column Cash Book, there are three columns of amount namely, cash, bank and discount. Discount

allowed and discount received are recorded in the discount column. While in the debit side, discount allowed is recorded along with the

receipts, either in cash or through cheque; whereas, in the credit side, discount received is recorded, along with the payments made either

in cash or by issuing cheques.

4. Petty Cash Book: This book is used for recording payment of petty expenses, which are of smaller denominations like, postage,

stationery, conveyance, refreshment, etc. is known as Petty Cash Book.

Q3 :

What is contra entry? How can you deal this entry while preparing double column cash book?

Answer :

The transaction that is entered in either sides of the double column or three column cash book, affecting both cash and the bank

balances concomitantly is called contra entry. These entries result in increase in cash balances and decrease in bank balances or

vice versa. In other words, a debit of bank account leads to a credit of cash account and a credit of bank account leads to a debit of

cash account. For example, Rs 200 cash deposited into bank. This transaction increases the bank amount on one hand; whereas,

on the other hand reduces the cash balance. In this entry, in the debit side of the cash book, 'Cash' will be recorded with a balance

of Rs 200 in the bank column and in the credit side of the cash book, 'Bank' will be recorded with a balance of Rs 200 in the cash

column. This entry is a contra entry as it affects both cash and bank balance together. The contra entries are denoted by 'C'.

Some transactions that lead to contra entry are given below.

1. Opening a bank account

2. Depositing cash into bank

3. Withdrawal from bank

These transactions are recorded in a double column Cash Book as done below.

Cash Book

Dr.

Cr.

Date Particulars L.F. Cash

Rs

Bank


Cash

Rs

Bank

Rs

Cash (C)

-

Bank (C) -

Q4 :

What is petty cash book? Write the advantages of petty cash book?

Answer :

Petty Cash Book is used for recording payments of small expenses, which are of smaller denominations such as postage,

stationery, conveyance, refreshment, etc. Person who maintains Petty Cash Book is known as petty cashier and these small

expenses are termed as petty expenses.

It is prepared by the below given two methods.

1. Ordinary system: Under this system, a certain sum of money is given to the petty cashier for the payment of petty expenses. After

spending the whole amount, the accounts are submitted by the petty cashier to the main cashier.

2. Imprest system: Under this system, a fixed sum of money is given to the petty cashier in the beginning of a period to meet the petty

expenses to be incurred in that period. At the end of the period, the amount spent by the petty cashier is reimbursed. So, the petty cashier

has the same fixed amount of money in the beginning of the next period.

The Performa of Petty Cash Book is given below.

Petty Cash Book

Dr. Cr.

Amount

Received Date Particulars

Voucher

No.

Amount

Paid

Rs

Analysis of Payments

Postage Stationery Conveyance

Telephone

and

Telegram

Miscellaneous Remarks

Advantages of Petty Cash Book:

Simple method: Recording of transactions in a petty cash book is easy. In an analytical Petty Cash Book, there exists separate

heads for different petty expenses, which makes recording much easier. Recording in a Petty Cash Book doesnot require formal

knowledge of accounting principles and techniques.

Time saving: Recording in Petty Cash Book saves time and efforts of the chief cashier.

Efficient control: At the end of a period,Petty Cash Book is audited by the main cashier, so frauds and errors are less probable.

Convenient handling: Recording in Petty Cash Book is convenient, as entries are to be recorded under separate heads, which

makes posting easier and quicker.

Q5 :

Describe the advantages of sub-dividing the Journal.

Answer :

The advantages of sub division of Journal are given below.

1. Division of work: The lack of sub-division of Journal may lead to chaos and confusions, if large numbers of transactions are to be

recorded through Journal entry by more than one accountant. There will be more inflexibility and lack of accountability among the

accountants. Sub-division of Journal into Subsidiary Books facilitates division of work. Sub-division enables different accountants to work

on different books. This will not only avoid confusions but also enhance the sense of accountability among the accountants.

2. Time saving: The art of recording through subsidiary book is time efficient and more effective as compared to recording through Journal

entries.

3. Prompt information: The transactions of similar nature are recorded in a particular Subsidiary Book. This acts as a ready source to access

information quicker than through Journal entry.

4. Creates Accountability: Sub-division of Journal entrusts accountants with higher degree of responsibility and accountability for

maintaining subsidiary book that are assigned to them.

5. Easy checking: In case discrepancies or errors arise, they can be easily located and rectified, as lesser number of transactions is recorded

in a Subsidiary Book than in a Journal.

6. Specialisation: The accountability, responsibility and division of work together enhance the specialisation of each accountant. This is

because, routine and repetitive tasks are performed by each accountant.

Q6 :

What do you understand by balancing of account?

Answer :

Accounts are prepared on weekly, fortnightly, monthly, quarterly or on daily basis. At the end of each period they are balanced. The

balancing of the accounts is done in the manner given below.

1. The totals of the debit and credit of an account is calculated, to ascertain which one of them is higher.

2. The higher figure among debit and credit side is written in the grand total cell on both sides of the account, i.e., in debit and in credit side.

3. The next step is to ascertain the difference between the debit total and the credit total. This difference is called 'Closing Balance' or

'Balance carried down', and is denoted by 'Balance c/d'.

4. The 'Balance c/d' will be shown either in the debit or credit side, whichever totals up into lower amount.

5. If 'Balance c/d' is written in the debit side, then the balance is called 'Credit balance'. On the other hand, if 'Balance c/d' is written in the

credit side, then the balance is called 'Debit Balance'.

6. On closing the account, 'Balance c/d' is brought forward to the subsequent period, and it is written as 'Balance b/d'.

Usually, the closing balances of real and personal accounts are forwarded to the next period by this manner. For nominal accounts,

Steps 1 to 3 remain same and they are closed by transferring the closing balances either to Trading Account or to Profit and Loss

Account.

<< Previous Chapter 3 : Recording of Transactions - INext Chapter 5 : Bank Reconciliation Statement >> Numerical questions : Solutions of Questions on Page Number : 143

Q1 :

Enter the following transactions in a simple cash book for December 2005:

Rs


05 Cash received from Bhanu 4,000

07 Rent Paid 2,000

10 Purchased goods Murari for cash 6,000


18 Purchase stationery 300

22 Cash paid to Rahul on account 2,000


30 Paid rent 500

Answer :

Cash Book

Dr.

Cr.


Amount


Amount

Rs

2005

2005

Dec.01 Balance b/d 12,000 Dec.07 Rent

2,000

Dec.05 Bhanu 4,000 Dec.10 Purchases

6,000

Dec.15 Sales 9,000 Dec.18 Stationery

300

Dec.22 Rahul

2,000

Dec.28 Salaries

1,000

Dec.30 Rent

500

Dec.31 Balance c/d

13,200

25,000

25,000

Q2 :

Record the following transaction in simple cash book for November 2005:

Rs


04 Cash paid to Hari 600

07 Purchased goods 800

12 Cash received from Amit 1,960

16 Sold goods for cash 800

20 Paid to Manish 590

25 Paid cartage 100


Answer :

Cash Book

Dr. Cr.


Amount


Amount

Rs

2005 2005

Nov.01 Balance b/d 12,500 Nov.04 Hari 600

Nov.12 Amit 1,960 Nov.07 Purchases 800

Nov.16 Sales 800 Nov.20 Manish 590

Nov.25 Cartage 100

Nov.30* Salaries 1,000

Nov.30* Balance c/d 12,170

15,260 15,260

* Note: There is a misprint in the question as there is a transaction on November 31, which

is not possible as there are only 30 days in the month of November.

Q3 :

Enter the following transaction in Simple cash book for December 2005:

Rs


06 Paid to Sonu 45

08 Purchased goods 600

15 Received cash from Parkash 960

20 Cash sales 500

25 Paid to S. Kumar 1,200

30 Paid rent 600

Answer :

Cash Book

Dr.

Cr.


Amount


Amount

Rs

2005

2005

Dec.01 Balance b/d 7,750 Dec.06 Sonu

45

Dec.15 Prakash 960 Dec.08 Purchases

600

Dec.20 Sales 500 Dec.25 S. Kumar

1,200

Dec.30 Rent

600

Dec.31 Balance c/d

6,765

9,210

9,210

Q4 :

Record the following transactions in a bank column cash book for December 2005:

Rs

01 Started business with cash 80,000

04 Deposited in bank 50,000

10 Received cash from Rahul 1,000

15 Bought goods for cash 8,000

22 Bought goods by cheque 10,000

25 Paid to Shyam by cash 20,000

30 Drew from Bank for office use 2,000


Answer :

Cash Book

Dr.

Cr.


Cash

Rs

Bank


Cash

Rs

Bank

Rs

2005

2005

Dec.01 Capital 80,000 Dec.04 Bank C 50,000

Dec.04 Cash C

50,000 Dec.15 Purchases

8,000

Dec.10 Rahul 1,000 Dec.22 Purchases

10,000

Dec.30 Bank C 2,000 Dec.25 Shyam

20,000

Dec.30 Cash C 2,000

Dec.31 Rent

1,000

Dec.31 Balance c/d

5,000 37,000

83,000 50,000

83,000 50,000

Q5 :

Prepare a double column cash book with the help of following information for December

2005 :

Rs

01 Started business with cash 1,20,000

03 Cash paid into bank 50,000

05 Purchased goods from Sushmita 20,000

06 Sold goods to Dinker and received a cheque 20,000

10 Paid to Sushmita cash 20,000

14 Cheque received on December 06, 2005 deposited into bank

18 Sold goods to Rani 12,000

20 Cartage paid in cash 500

22 Received cash from Rani 12,000

27 Commission received 5,000

30 Drew cash for personal use 2,000

Answer :

Cash Book

Dr.

Cr.


Cash

Rs

Bank


Cash

Rs

Bank

Rs

2005

2005

Dec.01 Capital 1,20,000 Dec.03 Bank C 50,000

Dec.03 Cash C

50,000 Dec.10 Sushmita

20,000

Dec.06 Dinker 20,000

Dec.14 Bank C 20,000

Dec.14 Cash C

20,000 Dec.20 Cartage

500

Dec.22 Rani 12,000

Dec.30 Drawings C 2,000

Dec.27 Commission 5,000

Dec.31 Balance c/d

64,500 70,000

1,57,000 70,000

1,57,000 70,000

Q6 :

Enter the following transactions in double column cash book of M/s Ambica Traders for

November 2005:

Rs

01 Commenced business with cash 50,000

03 Opened bank account with ICICI 30,000

05 Purchased goods for cash 10,000

10 Purchased office machine for cash 5,000

15 Sales goods on credit from Rohan and received cheque 7,000

18 Cash sales 8,000

20 Rohan's cheque deposited into bank

22 Paid cartage by cheque 500

25 Cash withdrawn for personal use 2,000

30 Paid rent by cheque 1,000

Answer :

Books of M/s. Ambika Traders

Cash Book

Dr.

Cr.


Cash

Rs

Bank


Cash

Rs

Bank

Rs

2005

2005

Nov.01 Capital 50,000 Nov.03 Bank C 30,000

Nov.03 Cash C

30,000 Nov.05 Purchases

10,000

Nov.15 Rohan 7,000 Nov.10 Office Machine

5,000

Nov.18 Sales 8,000 Nov.20 Bank C 7,000

Nov.20 Cash C

7,000 Nov.22 Cartage

500

Nov.25 Drawings

2,000

Nov.30 Rent

1,000

Nov.30 Balance c/d

11,000 35,500

65,000 37,000

65,000 37,000

Q7 :

Prepare double column cash book from the following information for September 2005:

Rs


Bank overdraft 3,500

03 Paid wages 200

05 Cash sales 7,000

10 Cash deposited into bank 4,000

15 Goods purchased and paid by cheque 2,000

20 Paid rent 500

25 Drew from bank for personal use 400


Answer :

Cash Book

Dr.

Cr.


Cash

Rs

Bank


Cash

Rs

Bank

Rs

2005

2005.

Sep.01 Balance b/d 7,500 Sep.01 Balance b/d (Overdraft)

3,500

Sep.05 Sales 7,000 Sep.03 Wages

200

Sep.10 Cash C

4,000 Sep.10 Bank C 4,000

Sep.15 Purchases

2,000

Sep.20 Rent

500

Sep.25 Drawings

400

Sep.30 Salaries

1,000

Sep.30 Balance c/d (Over draft)

1,900 Sep.30 Balance c/d

8,800

14,500 5,900

14,500 5,900

Q8 :

Enter the following transaction in a double column cash book of M/s Mohit Traders for

January 2005:

Rs


Bank overdraft 2,300

03 Goods purchased for cash 1,200

05 Paid wages 200

10 Cash sales 8,000


22 Sold goods for cheque which was deposited into bank same day 2,000

25 Paid rent by cheque 1,200

28 Drew from bank for personal use 1,000

31 Bought goods by cheque 1,000

Answer :

Books of M/s. Mohit Traders

Cash Book

Dr.

Cr.


Cash

Rs

Bank


Cash

Rs

Bank

Rs

2005

2005

Jan.01 Balance b/d 3,500 Jan.01 Balance b/d (overdraft)

2,300

Jan.10 Sales 8,000 Jan.03 Purchases

1,200

Jan.15 Cash C

6,000 Jan.05 Wages

200

Jan.22 Sales

2,000 Jan.15 Bank C 6,000

Jan.25 Rent

1,200

Jan.28 Drawings

1,000

Jan.31 Purchases

1,000

Jan.31 Balance c/d

4,100 2,500

11,500 8,000

11,500 8,000

Q9 :

Prepare double column cash book from the following transactions for the year December

2005:

Rs


Cash at bank 5,000

03 Purchased goods for cash 3,000

05 Received cheque from Jasmeet 10,000


10 Jasmeet's cheque deposited into bank

12 Purchased goods and paid by cheque 20,000

15 Paid establishment expenses through bank 1,000

18 Cash sales 7,000


24 Paid trade expenses 500

27 Received commission by cheque 6,000

29 Paid Rent 2,000

30 Withdrew cash for personal use 1,200


Answer :

[[S]]

Cash Book

Dr.

Cr.


Cash

Rs

Bank


Cash

Rs

Bank

Rs

2005

2005

Dec.01 Balance b/d 17,500 5,000 Dec.03 Purchases

3,000

Dec.05 Jasmeet 10,000 Dec.10 Bank C 10,000

Dec.08 Sales 7,000 Dec.12 Purchases

20,000

Dec. 10 Cash C

10,000 Dec.15 Establishment

Expenses

1,000

Dec.18 Sales 7,000 Dec.20 Bank C 10,000

Dec.20 Cash C

10,000 Dec.24 Trade Expenses

500

Dec.27 Commission

6,000 Dec.29 Rent

2,000

Dec.30 Drawings

1,200

Dec.31 Salaries

6,000

Dec.31 Balance c/d

8,800 10,000

41,500 31,000

41,500 31,000

Q10 :

M/s Ruchi trader started their cash book with the following balances on Dec. 01 2005 : cash

in hand Rs 1,354 and balance in bank current account Rs 7,560. He had the following

transaction in the month of December, 2005:

Rs

03 Cash sales 2,300

05 Purchased goods, paid by cheque 6,000

08 Cash sales 10,000


15 Sales goods, received cheque (deposited same day) 20,000

18 Purchased motor car paid by cheque 15,000

20 Cheque received from Manisha (deposited same day) 10,000

22 Cash Sales 7,000

25 Manisha's cheque returned dishonoured

28 Paid Rent 2,000

29 Paid telephone expenses by cheque 500

31 Cash withdrawn for personal use 2,000

Prepare bank column cash book

Answer :

Books of M/s. Ruchi Trader

Cash Book

Dr.

Cr.


Cash

Rs

Bank


Cash

Rs

Bank

Rs

2005

2005

Dec.01 Balance b/d 1,354 7,560 Dec.05 Purchases

6,000

Dec.03 Sales 2,300 Dec.12 Trade Expenses

700

Dec.08 Sales 10,000 Dec.18 Motor Car

15,000

Dec.15 Sales

20,000 Dec.25 Manisha (Dishonour)

10,000

Dec.20 Manisha

10,000 Dec.28 Rent

2,000

Dec.22 Sales 7,000 Dec.29 Telephone Expenses

500

Dec.31 Drawings

2,000

Dec.31 Balance c/d

15,954 6,060

20,654 37,560

20,654 37,560

Q11 :

Prepare petty cash book from the following transactions. The imprest amount is Rs 2,000.

January Rs

01 Paid cartage 50

02 STD charges 40

02 Bus fare 20

03 Postage 30

04 Refreshment for employees 80

06 Courier charges 30

08 Refreshment of customer 50

10 Cartage 35

15 Taxi fare to manager 70

18 Stationery 65

20 Bus fare 10

22 Fax charges 30

25 Telegrams charges 35

27 Postage stamps 200

29 Repair on furniture 105

30 Laundry expenses 115

31 Miscellaneous expenses 100

Answer :

Petty Cash Book

Amount

Received

Rs

Date Particulars Voucher

No.

Amount

Paid

Rs


Telephone

Telegram Postage Conveyance Refreshment Cartage Miscellaneous

2,000 Jan.01 Cash

Jan.01 Cartage 50 50

Jan.02 STD charges 40 40

Jan.02 Bus Fare 20 20

Jan.03 Postage 30 30

Jan.04 Refreshment for Employees 80 80

Jan.06 Courier charges 30 30

Jan.08 Refreshment of customer 50 50

Jan.10 Cartage 35 35

Jan.15 Taxi Fare to Manager 70 70

Jan.18 Stationery 65 65

Jan.20 Bus Fare 10 10

Q12 :

Record the following transactions during the week ending Dec. 30, 2005 with a weekly imprest Rs 500

Rs

24 Stationery 100

25 Bus fare 12

25 Cartage 40

26 Taxi fare 80

27 Wages to casual labour 90

29 Postage 80

Answer :

Petty Cash Book

Amount

Received

Rs

Date Particulars Voucher

No.

Amount

Paid

Rs


Stationery Conveyance Cartage Postage Miscellaneous

2005

500 Dec.24 Cash

Dec.24 Stationery 100 100

Dec.25 Bus Fare 12 12

Dec.25 Cartage 40 40

Dec.26 Taxi Fare 80 80

Dec.27

Wages to

Casual labour 90 90

Dec.29 Postage 80 80

402 100 92 40 80 90

Dec.30 Balance c/d 98

2005 500

98 Dec.31 Balance b/d

402 Dec.31 Cash

Q13 :

Enter the following transactions in the Purchase Journal (Book) of M/s Gupta Traders of

July 2005:

01 Bought from Rahul Traders as per invoice no. 20041

40 Registers @ Rs 60 each

80 Gel Pens @ Rs 15 each

50 note books @ Rs 20 each

Trade discount 10%.

15 Bought from Global Stationers as per invoice no. 1132

40 Ink Pads @ Rs 8 each

50 Files @ Rs 10 each

20 Color Books @ Rs 20 each

Trade Discount 5%

23 Purchased from Lamba Furniture as per invoice no. 3201

2 Chairs @ 600 per chair

1 Table @ 1,000 per table

25 Bought from Mumbai Traders as per invoice no. 1111

10 Paper Rim @ Rs 100 per rim

400 drawing Sheets @ Rs 3 each

20 Packet water colour @ Rs 40 per packet

Answer :

Books of M/s. Gupta Traders

Purchases Book

Date

Invoice

No.

Name of Supplier

(Accounts to be credited) L.F.

Details

Rs

Amount

Rs

2005

July 01 20041 Rahul Traders

40 Registers @ Rs 60 each 2,400

80 Gel Pens @ Rs 15 each 1,200

50 Note Books @ Rs 20 each 1,000

4,600

Less: Trade Discount 10% (460) 4,140

July 15 1132 Global Stationeries

40 Ink Pads @ Rs 8 each 320

50 Files @ Rs 10 each 500

20 Colour Books @ Rs 20 each 400

1,220

Less: Trade discount 5% (61) 1,159

July 25 1111 Mumbai Traders

10 Paper Rim @ Rs 100 each 1,000

400 Drawing Sheet @ Rs 3 each 1,200

20 Packet Water Colour @ Rs 40 per pack 800 3,000

Purchases Account 8299

Note: Furniture purchased from Lamba Traders will not be recorded in the Purchases

Book as furniture is not to be considered as goods for the M/s Gupta Trader. This is

because as per the transactions M/s. Gupta traders deals in stationery and not in furniture.

Note: Slight change in the Performa of subsidiary book is done. Here 'Details' column has

been added in Purchase Book.

Q14 :

Enter the following transactions in sales (journal) book of M/s. Bansal electronics:

September

01 Sold to Amit Traders as per bill no.4321

20 Pocket Radio @ 70 per Radio

2, T.V. set, B&W.(6.) @ 800 Per T.V.

10. Sold to Arun Electronics as per bill no.4351

5 T.V. sets (20.) B&W @ Rs 3,000 per T.V.

2 T.V. sets (21.) Colour @ Rs 4,800 per T.V.

22 Sold to Handa Electronics as per bill no.4,399

10 Tape recorders @ Rs 600 each

5 Walkman @ Rs 300 each

28 Sold to Harish Trader as per bill no.4430

10 Mixer Juicer Grinder @ Rs 800 each.

Answer :

Books of M/s. Bansal Electronics

Sales Book

Date Bill No.

Name of the Customer

(Accounts to be debited) L.F.

Details

Rs

Amount

Rs

Sept.01 4321 Amit Traders

20 Pocket Radio @ Rs 70 Per Radio 1,400

2 T.V. Set, B&W (6") @ Rs 800 per T.V. 1,600 3,000

Sept.10 4351 Arun Electronics

5 T.V. sets (20") B&W @ Rs 3,000 per T.V. 15,000

2 T.V. sets (21") Colour @ Rs 4,800 per T.V. 9,600 24,600

Sept.22 4399 Handa Electronics

10 Tape Recorders @ Rs 600 each 6,000

5 Walkman @ Rs 300 each 1,500 7,500

Sept.28 4430 Harish Traders

10 Mixer Juicer Grinder @ Rs 800 each 8,000 8,000

Sales Account 43,100

Q15 :

Prepare a purchases return (journal) book from the following transactions for January

2006.

Rs

05 Returned goods to M/s Kartik Traders 1,200

10 Goods returned to Sahil Pvt. Ltd. 2,500

17 Goods returned to M/s Kohinoor Traders for list price Rs 2,000 less 10%

trade discount.

28 Return outwards to M/s Handa Traders 550

Answer :

Purchases Return Book

Date

Debit Note

No.

Name of Supplier

(Account to be debited) L.F.

Amount

Rs

2006

Jan. 05 M/s Kartik Traders 1,200

Jan. 10 Sahil Pvt. Ltd. 2,500

Jan. 17 M/s Kohinoor Trader

List Price 2,000

Less: 10% Trade discount (200) 1,800

Jan. 28 M/s Handa Traders 550

Purchases Return Account 6,050

Q16 :

Prepare Return Inward Journal (Book) from the following transactions of M/s Bansal

Electronics for November 2005:

Rs

04 M/s Gupta Traders returned the goods 1,500

10 Goods returned from M/s Harish Traders 800

18 M/s Rahul Traders returned the goods not as per specifications 1,200

28 Goods returned from Sushil Traders 1,000

Answer :

Sales Return Book

Date

Credit Note

No.

Name of Customer

(Account to be credited) L.F.

Amount

Rs

2005

Nov.04

M/s Gupta Traders 1,500

Nov.10

M/s Harish Traders 800

Nov.18

M/s Rahul Traders 1,200

Nov.28

Sushil Traders 1,000

Sales Return Account 4,500

Q17 :

Prepare proper subsidiary books and post them to the ledger from the following

transactions for the month of February 2006:

Rs

01 Goods sold to Sachin 5,000

04 Purchase from Kushal Traders 2,480

06 Sold goods to Manish Traders 2,100

07 Sachin returned goods 600

08 Returns to Kushal Traders 280

10 Sold to Mukesh 3,300

14 Purchased from Kunal Traders 5,200

15 Furniture purchased from Tarun 3,200

17 Bought of Naresh 4,060

20 Return to Kunal Traders 200

22 Return inwards from Mukesh 250

24 Purchased goods from Kirit & Co. for list price of 5,700

less 10% trade discount

25 Sold to Shri Chand goods 6,600


26 Sold to Ramesh Brothers 4,000

28 Return outwards to Kirit and Co. 1,000


28 Ramesh Brothers returned goods Rs 500.

Answer :

Journal

Purchases Book

Date

Invoice

No.

Name of Supplier

(Accounts to be credited) L.F.

Amount

Rs

2006

Feb.04

Kushal Traders

2,480

Feb.14

Kunal Traders

5,200

Feb.17

Naresh

4,060

Feb.24

Kirit and Co. 5,700

Less: Trade Discount 10% (570) 5,130

Purchases Account 16,870

Sales Book

Date

Invoice

No.

Name of Customer

(Accounts to be debited) L.F.

Amount

Rs

2006

Feb. 01

Sachin

5,000

Feb.06

Manish Traders

2,100

Feb.10

Mukesh

Q18 :

The following balances of ledger of M/s Marble Traders on April 01, 2006

Rs

Cash in hand 6,000

Cash at bank 12,000

Bills receivable 7,000

Ramesh (Cr.) 3,000

Stock (Goods) 5,400

Bills payable 2,000

Rahul (Dr.) 9,700

Himanshu (Dr.) 10,000

Transactions during the month were:

April Rs

01 Goods sold to Manish 3,000

02 Purchased goods from Ramesh 8,000

03 Received cash from Rahul in full settlement 9,200

05 Cash received from Himanshu on account 4,000

06 paid to Remesh by cheque 6,000


10 Cash received from manish 3,000

12 Cash sales 6,000

14 Goods returned to Ramesh 1,000

15 Cash paid to Ramesh in full settlement 3,700

16 Discount received 300

18 Goods sold to Kushal 10,000


21 Drew for personal use 1,000

22 Goods return from Kushal 1,200

24 Cash received from Kushal 6,000

26 Paid for stationery 100

27 Postage charges 60

28 Salary Paid 2,500

29 Goods purchased from Sheetal Traders 7,000

30 Sold goods to Kirit 6,000

Goods purchased from Handa Traders 5,000

Journalise the above transactions and post them to the ledger.

Answer :

Books of M/s. Marble Traders

Journal


Debit

Amount

Rs

Credit

Amount

Rs

2006 Cash A/c Dr. 6,000

Apr.01 Bank A/c Dr. 12,000

Bills Receivable A/c Dr. 7,000

Stock A/c Dr. 5,400

Rahul's A/c Dr. 9,700

Himanshu A/c Dr. 10,000

To Ramesh's A/c

3,000

To Bills Payable A/c

2,000

To Capital A/c (Balancing figure )

45,100

(Balance brought from last year)

Apr.01 Manish Dr. 3,000

To Sales A/c

3,000

(Goods sold to Manish)



Bank Reconciliation Statement


Q1 :

State the need for the preparation of bank reconciliation statement?

Answer :

The need to prepare Bank Reconciliation Statement are given below.

1. It helps in finding out the errors and omissions committed in the Cash Book and the Pass Book.

2. It shows uncleared cheques, which have already been debited in the Cash Book but have not been yet recorded in the Pass Book.

3. It helps in checking embezzlement of money from the bank account.

4. It helps in measuring the accuracy of the transactions recorded in the Cash Book.

5. It facilitates in preparing revised Cash Book that reflects true bank balance.

Q2 :

What is a bank overdraft?

Answer :

Bank overdraft is a liability to an account holder. When the account holder withdraws excess amount over his/her available bank

balance, he/she runs a negative bank balance. The negative bank balance is an obligation to the account holder and is called bank

overdraft. In other words, bank overdraft is the excess of withdrawal over deposits.

Q3 :

Briefly explain the statement 'wrongly debited by the bank' with the help of an example.

Answer :

Amount wrongly debited by the bank implies a situation when the bank wrongly debits a Pass Book. The following are the common

mistakes that occur in the Pass Book when bank wrongly debits the Pass Book.

1. Mistake occurs when any two account holders' names are identical. For example, a cheque of Rs 2,000 issued by Mr. Prem Singh was

wrongly paid through Mr. Prem Kumar's account.

2. Mistake occurs in case a person has more than one account in a bank. For example, a cheque of Rs 1,000 issued from his Current Account

was wrongly paid through his Savings Account.

3. Sometimes amounts of cheques are wrongly recorded. For example, payment of Rs 2,000 through cheque was wrongly debited in the Pass

Book as Rs 20,000.

Q4 :

State the causes of difference occurred due to time lag.

Answer :

The causes of difference that occur due to time lag are given below.

1. When issued cheques are not presented for payment in the period for which Bank Reconciliation Statement is being

prepared, i.e., date of issue and the date of presenting the cheques are not same.

Cheques are credited in the Cash Book on the date that is mentioned on it, while in the Pass Book, cheques are debited when they

are presented for the payment. Sometimes, the holder of a cheque does not present the cheque for payment on date ehich is

mentioned on Cheque. The time gap between the date of issue and the date of presenting cheque for payment in the bank may lead

to difference between the Cash Book and the Pass Book balances.

2. When deposited cheques are not cleared in the period for which the Bank Reconciliation Statement is being prepared.

Usually, date of deposit of cheque and date of clearance are not same as the clearance of cheque takes time. The difference

between the Cash Book and the Pass Book balances arise when a cheque is deposited at the end of a period for which the Bank

Reconciliation Statement is prepared and the cheque gets clearance in the subsequent period.

Q5 :

Briefly explain the term favourable balance as per cash book

Answer :

Favourable balance (Debit Balance), as per the Cash Book, is an asset to an account holder. It is also known as debit balance as

per the Cash Book. Favourable balance is the excess of total of debit side over total of credit side of a bank column of a Cash Book.

In other words, favourable balance means excess of deposits over withdrawals.

Q6 :

Enumerate the steps to ascertain the correct cash book balance.

Answer :

Generally, differences between the Cash Book and the Pass Book arise due to the reason that items have not been recorded in the

Cash Book. In order to ascertain the correct Cash Book balance, we need to prepare Corrected (Adjusted) Cash Book. The below

given steps are involved in the preparation of Corrected (Adjusted) Cash Book.

Step 1: Note down the bank balance as per the Cash Book.

Step 2: Rectify all the errors committed in the Cash Book.

Step 3: Enter those transactions in the debit of the Cash Book, which are only in the credit of the Pass Book.

Step 4: Enter those transactions in the credit of the Cash Book that are only in the debit of the Pass Book.

Step 5: The Cash Book is totalled and balancing figure is calculated. This balancing figure is use for preparing BRS.

<< Previous Chapter 4 : Recording of Transactions - IINext Chapter 6 : Trial Balance and Rectification of Errors >> Long answers : Solutions of Questions on Page Number : 171

Q1 :

What is a bank reconciliation statement? Why is it prepared?

Answer :

Bank Reconciliation Statement is a statement prepared for determining causes of differences and reconciling bank balance (as per

the Cash Book) with the balance as per the Pass Book or vice versa.

In day to day affairs, an individual or organisation makes numerous transactions through bank. Along with the copy of bank

statement (i.e., the Pass Book), an individual or organisation needs to maintain a separate book (Cash Book) for recording the

banking transactions. When large number of transactions is made through bank, the balance of the Cash Book may differ from the

balance of the Pass Book.

There can be many reasons of differences between the Cash Book and the Pass Book, such as below given ones.

1. Deposit of cheque was recorded in the Cash Book at the time of deposit; however, was collected later or notcollected by the bank.

2. Cheque issued was recorded in the Cash Book; however, was not recorded in the Pass Book in the month of issue. It was entered in the

Pass Book in the next month when it was presented for payment in the bank.

3. Interest allowed by the bank is added in the pass book but not in the Cash Book.

Bank Reconciliation Statement (BRS) is prepared when the bank balance of the Cash Book is not equal to the balance shown by

the Pass Book on the same date (when BRS is being prepared). In order to match the two respective balances, errors and

omissions are to be located and rectified, which is the main rationale behind preparing the Bank Reconciliation Statement.

Specimen of Bank Reconciliation Statement

Particulars

Amount

Rs

(Add)

Amount

Rs

(Less)

Balance as per the Cash

Book -

Cheque issued

but not presented -

Cheque deposited

but not collected -

Balance as per the Pass

Book

The need for preparation of Bank Reconciliation Statement is explained below.

1. It helps in finding out the errors and omissions committed in the Cash Book and in the Pass Book.

2. It shows uncleared cheques that have already been debited in the Cash Book but have not yet been recorded in the Pass Book.

3. It helps in checking embezzlement of money from the bank account.

4. It helps in measuring the accuracy of transactions recorded in the Cash Book.

5. It facilitates in preparing revised cash book that reflects a true bank balance.

Q2 :

Explain the reasons where the balance shown by the bank passbook does not agree with the balance as shown by the

bank column of the cash book.

Answer :

Below given are the reasons on account of which the balance shown by the bank Pass Book does not agree with the balance

shown by the bank column of the Cash Book.

1. Differences due to time lag: In the following situations, differences may arise, if the date of recording transactions in the bank column of

the Cash Book is not same to that of in the Pass Book.

2. Cheques issued by the firm but presented after the date that is mentioned on the cheque or still not presented in the

bank: Usually, issue of a cheque is recorded in the bank column of the Cash Book on the date that is mentioned (mentioned date) on the

cheque. Sometimes, the holder of the cheque does not present the cheque on the date which is mentioned on it. This may lead to

differences in the balance between the Pass Book and the bank balance of the Cash Book.

3. Deposit of cheque recorded in the Cash Book at the time of deposit but collected later or not collected by the bank:Deposit of a

cheque is recorded in the bank column of the Cash Book on the date when it is deposited in the bank for payment but bank records it in the

Pass Book on the date of clearance. Usually, date of deposit and date of clearance are not the same. This difference in the two respective

dates leads to a mismatch between the Pass Book and the bank balance of the Cash Book.

4. Transactions recorded only in the Pass Book: Transactions, like interest allowed by bank on the deposits, bank charges, etc., are

recorded first in the Pass Book. After getting intimation from the bank, these are recorded in the bank column of the Cash Book. However,

sometimes, due to delay in intimation of these transactions to the customers, the Cash Book remains notupdated, which leads to the

difference between the Pass Book and the bank balance of the Cash Book.

Below given are the examples that lead to such differences.

1. The transactions that reduce balance of the Pass Book and are recorded only in the Pass Book and not in the Cash Book are

given below.

i. Bank charges, charged by the bank but not recorded in the Cash Book

ii. Dishonour of a bill discounted by the bank

iii. Interest charged by the bank on overdraft

iv. Direct payment made by the bank as per the instructions of the accountholder

2. The transactions that increase the balance of the Pass Book and are recorded only in the Pass Book and not in the Cash

Book are given below.

i. When intimation regarding interests and dividend collected by the bank is not given to the accountholder

ii. Amount deposited by any customer directly into the bank

iii. Interest credited (allowed) by the bank

3. Errors and omissions

Any error or omission committed in the Pass Book, such as double recording of a deposited cheque, wrong posting of amounts, current

account cheque wrongly paid through saving account, etc., result in the difference of the balance between the Pass Book and the bank

balance of the Cash Book.

Q3 :

Explain the process of preparing bank reconciliation statement with amended cash balance.

Answer :

Bank Reconciliation Statement can be prepared with the adjusted/amended bank column of the Cash Book by the below given

steps.

Step 1: Note down the bank balance as per the Cash Book.

Step 2: Rectify all the errors committed in the Cash Book.

Step 3: Enter those transactions in the debit column of the Cash Book that are only in the credit column of the Pass Book.

Step 4: Enter those transactions in the credit column of the Cash Book that are only in the debit column of the Pass Book.

Step 5: After completing the above steps, the balance or the overdraft, as per amended Cash Book, arrives, with which Bank

Reconciliation Statement can be prepared.

The performa of Bank Reconciliation Statement through amended balance is given below.

Bank Reconciliation Statement, as on ______

Particulars

Amount

Rs

(Add)

Amount

Rs

(Less)

Adjusted balance as per the amended the Cash Book -

Add: Cheque issued but not presented. -

Less: Cheque deposited but not credit - -

Balance as per the Pass Book

<< Previous Chapter 4 : Recording of Transactions - IINext Chapter 6 : Trial Balance and Rectification of Errors >> Numerical questions : Solutions of Questions on Page Number : 171

Q1 :

From the following particulars, prepare a, bank reconciliation statement as at March 31,

2005.

(i) Balance as per cash book Rs 3,200

(ii) Cheque issued but not presented for payment Rs 1,800

(iii) Cheque deposited but not collected upto March 31, 2005 Rs 2,000

(iv) Bank charges debited by bank Rs 150

Answer :

Bank Reconciliation Statement, as on March 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs

Balance as per the Cash Book 3,200

(i) Cheque issued but not presented for payment 1,800

(ii) Cheque deposited but not cleared 2,000

(iii) Bank charges 150

Balance as per the Pass Book 2,850

5,000 5,000

Note: As per the solution, the Balance as per Pass Book is Rs 2,850. However, the answer

given in the NCERT book is Rs 2,800.

Q2 :

On March 31 2005 the cash book showed a balance of Rs 3,700 as cash at bank, but the

bank passbook made up to same date showed that cheques for Rs 700, Rs 300 and Rs 180

respectively had not presented for payment, Also, cheque amounting to Rs 1,200 deposited

into the account had not been credited. Prepare a bank reconciliation statement.

Answer :

Bank Reconciliation Statement, as on March 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(i) Three cheques issued but not presented for payment 1,180

(ii) Cheque deposited but not cleared 1,200


4,880 4,880

Q3 :

The cash book shows a bank balance of Rs 7,800. On comparing the cash book with

passbook the following discrepancies were noted:

(a) Cheque deposited in bank but not credited Rs 3,000

(b) Cheque issued but not yet present for payment Rs 1,500

(c) Insurance premium paid by the bank Rs 2,000

(d) Bank interest credit by the bank Rs 400

(e) Bank charges Rs 100

(d) Directly deposited by a customer Rs 4,000

Answer :

Bank Reconciliation Statement

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(a) Cheque deposited but not credited in the Pass Book 3,000

(b) Cheque issued but not yet presented for payment 1,500

(c) Insurance premium paid by bank 2,000

(d) Bank allowed interest 400

(e) Bank debited charges 100

(f) Amount directly deposited by customer 4,000


13,700 13,700

Q4 :

Bank balance of Rs 40,000 showed by the cash book of Atul on December 31, 2005. It was

found that three cheques of Rs 2,000, Rs 5,000 and Rs 8,000 deposited during the month of

December were not credited in the passbook till January 02, 2005. Two cheques of Rs 7,000

and Rs 8,000 issued on December 28, were not presented for payment till January 03, 2005.

In addition to it bank had credited Atul for Rs 325 as interest and had debited him with Rs

50 as bank charges for which there were no corresponding entries in the cash book.

Prepare a bank reconciliation statement as on December 31, 2004.

Answer :

Bank Reconciliation Statement of Atul as on December 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(i) Cheques deposited but not cleared in December 15,000

(ii) Cheque issued but presented for payment for payment 15,000

(iii) Bank allowed interest 325

(iv) Bank debited charges 50


55,325 55,325

Note: The answer given in the NCERT book is Rs 40,245, which should be Rs 40,275.

Q5 :

On comparing the cash book with passbook of Naman it is found that on March 31, 2005,

bank balance of Rs 40,960 showed by the cash book differs from the bank balance with

regard to the following:

(a) Bank charges Rs 100 on March 31, 2005, are not entered in the cash book.

(b) On March 21, 2005, a debtor paid Rs 2,000 into the company's bank in

settlement of his account, but no entry was made in the cash book of the

company in respect of this.

(c) Cheques totaling Rs 12,980 were issued by the company and duly recorded in

the cash book before March 31, 2005, but had not been presented at the bank for

payment until after that date.

(d) A bill for Rs 6,900 discounted with the bank is entered in the cash book with

recording the discount charge of Rs 800.

(e) Rs 3,520 is entered in the cash book as paid into bank on March 31st, 2005, but

not credited by the bank until the following day.

(f) No entry has been made in the cash book to record the dishon or on March 15,

2005 of a cheque for Rs 650 received from Bhanu.

Prepare a reconciliation statement as on March 31, 2005.

Answer :

Bank Reconciliation Statement of Naman as on March 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(a) Bank debited charges 100

(b) Amount directly paid by debtor into bank account 2,000

(c) Cheques issued but not presented for payment 12,980

(d) Discount charges of bill was omitted to be recorded in the Cash Book 800

(e) Amount debited in bank column of the Cash Book but not deposited in bank 3,520

(f) Cheque dishonoured not recorded in the Cash Book 650


55,940 55,940

Q6 :

Prepare bank reconciliation statement as on December 31, 2004. On this day the passbook

of Mr. Himanshu showed a balance of Rs 7,000.

(a) Cheques of Rs 1,000 directly deposited by a customer.

(b) The bank has credited Mr. Himanshu for Rs 700 as interest.

(c) Cheques for Rs 3,000 were issued during the month of December but of these

cheques for Rs 1,000 were not presented during the month of December.

Answer :

Bank Reconciliation Statement of Mr. Himanshu as on December 31, 2004

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(a) Cheques directly deposited by a customer 1,000

(b) Bank allowed interest 700

(c) Cheques issued but not presented for payment in December 1,000


7,000 7,000

Note: As per the NCERT book the answer is Rs 3,300. However, the correct answer is Rs

4,300.

Q7 :

From the following particulars prepare a bank reconciliation statement showing the

balance as per cash book on December 31, 2005.

(a) Two cheques of Rs 2,000 and Rs 5,000 were paid into bank in October, 2005 but

were not credited by the bank in the month of December.

(b) A cheque of Rs 800 which was received from a customer was entered in the bank

column of the cash book in December 2004 but was omitted to be banked in

December, 2004.

(c) Cheques for Rs 10,000 were issued into bank in January 2005 but not credited by

the bank on December 31, 2005.

(d) Interest on investment Rs 1,000 collected by bank appeared in the passbook.

Balance as per Passbook was Rs 50,000

Answer :

Bank Reconciliation Statement as on December 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(a) Cheques deposited but not cleared till 31 December 7,000

(b) Cheque debited in the Cash Book but not deposited in the bank 800

(c) Cheque issued but not presented (not debited in the Pass Book)

10,000

(d) Interest on investment collected by bank

1,000

Balance as per the Cash Book

46,800

57,800 57,800

Note:

(1) In question No. 7 there is a mistake in statement (c). In place of 'credited' it should be

'debited'.

(2) The answer given in NCERT Book is Rs 47,800 whereas it should be Rs 46,800.

Q8 :

Balance as per passbook of Mr. Kumar is 3,000.

(a) Cheque paid into bank but not yet cleared

Ram Kumar Rs 1,000

Kishore Kumar Rs 500

(b) Bank Charges Rs 300

(c) Cheque issued but not presented

Hameed Rs 2,000

Kapoor Rs 500

(d) Interest entered in the passbook but not entered in the cash book Rs 100

Prepare a bank reconciliation statement.

Answer :

Bank Reconciliation Statement of Mr. Kumar

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(a) Cheques deposited but not yet cleared. 1,500

(b) Bank debited charges 300

(c) Cheques issued but not presented for payment 2,500

(d) Bank allowed interest but not entered in the Cash Book 100


4,800 4,800

Q9 :

The passbook of Mr. Mohit current account showed a credit Balance of Rs 20,000 on dated

December 31, 2005. Prepare a Bank Reconciliation Statement with the following

information.

(i) A cheque of Rs 400 drawn on his saving account has been shown on current

account.

(ii) He issued two cheques of Rs 300 and Rs 500 on of December 25, but only the

Ist cheque was presented for payment.

(iii) One cheque issued by Mr. Mohit of Rs 500 on December 25, but it was not

presented for payment whereas it was recorded twice in the cash book.

Answer :

Bank Reconciliation Statement of Mr. Mohit's Current Account, as on December 31, 2005

S.

No. Particulars

(+)

Amount

Rs

(-)

Amoun

t

Rs

Balance as per pass book 20,000

(i) Cheque issued from saving account wrongly debited in the current

account of the pass book 400

(ii) Cheque issued but not presented for payment 500

(iii) Cheque issued but not presented for payment and twice credited in

cash book

1,000

Balance as per cash book 18,900

20,400 20,400

Note: In the question item (i), it is not given whether it is the current account of Pass Book

or the current account of Cash Book. In the solution, we have assumed that it is the current

account of the Pass Book.

Q10 :

On Ist January 2005, Rakesh had an overdraft of Rs 8,000 as showed by his cash book.

Cheques amounting to Rs 2,000 had been paid in by him but were not collected by the bank

by January 01, 2005. He issued cheques of Rs 800 which were not presented to the bank for

payment up to that day. There was a debit in his passbook of Rs 60 for interest and Rs 100

for bank charges. Prepare bank reconciliation statement for comparing both the balance.

Answer :

Bank Reconciliation Statement of Rakesh as on January 01, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs

Overdraft as per the Cash Book 8,000

(i) Cheques deposited but not yet cleared 2,000

(ii) Cheques issued but not presented for payment 800

(iii) Interest on overdraft debited by bank 60


Overdraft as per the Pass Book 9,360

10,160 10,160

Q11 :

Prepare bank reconciliation statement.

(i) Overdraft shown as per cash book on December 31, 2005 Rs 10,000.

(ii) Bank charges for the above period also debited in the passbook Rs 100.

(iii) Interest on overdraft for six months ending December 31, 2005 Rs 380 debited

in the passbook.

(iv) Cheques issued but not incashed prior to December 31, 2005 amounted to Rs

2,150.

(v) Interest on Investment collected by the bank and credited in the passbook Rs

600.

(vi) Cheques paid into bank but not cleared before December, 31 2005 were Rs

1,100.

Answer :


S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(i) Bank debited charges 100

(ii) Interest charged by bank on overdraft 380

(iii) Cheques issued but not presented for payment 2,150

(iv) Interest on investment credited in the Pass Book but not

entered in the Cash Book 600

(v) Cheques deposited but cleared 1,100


11,580 11,580

Q12 :

Kumar find that the bank balance shown by his cash book on December 31, 2005 is Rs

90,600 (Credit) but the passbook shows a difference due to the following reason:

A cheque (post dated) for Rs 1,000 has been debited in the bank column of the cash book

but not presented for payment. Also, a cheque for Rs 8,000 drawn in favour of Manohar

has not yet been presented for payment. Cheques totaling Rs 1,500 deposited in the bank

have not yet been collected and cheque for Rs 5,000 has been dishonoured.

Answer :

Bank Reconciliation Statement of Kumar as on December 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(i) Cheque debited in the Cash Book but not deposited in the bank 1,000

(ii) Cheque issued but not presented for payment 8,000

(iii) Cheque deposited but not yet cleared 1,500

(iv) Cheque dishonoured 5,000


98,100 98,100

Note: As per NCERT, the answer is Rs 103,600. However, it should be Rs 90,100.

Q13 :

On December 31, 2005, the cash book of Mittal Bros. Showed an overdraft of Rs 6,920.

From the following particulars prepare a Bank Reconciliation Statement and ascertain the

balance as per passbook.

(1) Debited by bank for Rs 200 on account of Interest on overdraft and Rs 50 on

account of charges for collecting bills.

(2) Cheques drawn but not encashed before December, 31 2005 for Rs 4,000.

(3) The bank has collected interest and has credited Rs 600 in passbook.

(4) A bill receivable for Rs 700 previously discounted with the bank had been

dishonoured and debited in the passbook.

(5) Cheques paid into bank but not collected and credited before December 31, 2005

amounted Rs 6,000.

Answer :

Bank Reconciliation Statement of Mittal Bros. as on December 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


1 Bank debited interest on overdraft 200

Bank debited charges for collecting bills 50

2 Cheque issued but not presented for payment 4,000

3 Bank collected interest 600

4 Bill Receivable dishonoured 700

5 Cheque deposited but not cleared in December 6,000


13,870 13,870

Q14 :

Prepare bank reconciliation statement of Shri Bhandari as on December

31, 2005

(i) The Payment of a cheque for Rs 550 was recorded twice in the passbook.

(ii) Withdrawal column of the passbook under cast by Rs 200

(iii) Cheque of Rs 200 has been debited in the bank column of the Cash Book but it

was not sent to bank at all.

(iv) A Cheque of Rs 300 debited to Bank column of the passbook was not sent to the

bank.

(v) Rs 500 in respect of dishonoured cheque were entered in the passbook but not in

the cash book. Overdraft as per passbook is Rs 20,000.

Answer :

Bank Reconciliation Statement of Shri Bhandari as on December 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(i) Payment of cheque twice debited in the Pass Book 550

(ii) Withdrawal column of the Pass Book undercast 200

(iii) Cheque debited in the Cash Book but not deposited in the bank 200

(iv) Cheque added in the Cash Book but not deposited in the bank 300

(v) Cheque dishonoured 500


20,200 20,200

Note:

(1) In item (iv) of the question, 'A cheque of Rs 300 debited to bank column of the Pass

Book was not sent to the bank' should be, 'A cheque of Rs 300 debited to Bank column

of the Cash Book was not sent to the bank'.

(2) The answer given in the book is Rs 20,350; however, it should be Rs 18,650.

Q15 :

Overdraft shown by the passbook of Mr. Murli is Rs 20,000. Prepare bank reconciliation

statement on dated December 31, 2005.

(i) Bank charges debited as per passbook Rs 500.

(ii) Cheques recorded in the cash book but not sent to the bank for collection Rs

2,500.

(iii) Received a payment directly from customer Rs 4,600.

(iv) Cheque issued but not presented for payment Rs 6,980.

(v) Interest credited by the bank Rs 100.

(vi) LIC paid by bank Rs 2,500.

(vii) Cheques deposited with the bank but not collected Rs 3,500.

Answer :

Bank Reconciliation Statement of Mr. Murli as on December 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(i) Bank charges debited in the Pass Book 500

(ii) Cheque recorded in the Cash Book but not banked 2,500

(iii) Amount directly paid by customer in the bank 4,600

(iv) Cheque issued but not presented for payment 6,980

(v) Interest allowed by bank 100

(vi) LIC (insurance premium) paid by bank 2,500

(vii) Cheques deposited but not cleared 3,500


31,680 31,680

Q16 :

Raghav & Co. have two bank accounts. Account No. I and Account No. II. From the

following particulars relating to Account No. I, find out the balance on that account of

December 31, 2005 according to the cash book of the firm.

(i) Cheques paid into bank prior to December 31, 2005, but not credited for Rs

10,000.

(ii) Transfer of funds from account No. II to account no. I recorded by the bank on

December 31, 2005 but entered in the cash book after that date for Rs 8,000.

(iii) Cheques issued prior to December 31, 2005 but not presented until after that

date for Rs 7,429.

(iv) Bank charges debited by bank not entered in the cash book for Rs 200.

(v) Interest Debited by the bank not entered in the cash book Rs 580.

(vi) Overdraft as per Passbook Rs 18,990.

Answer :

Bank Reconciliation Statement of Mr. Raghav and Co. Account No. I as on December 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(i) Cheque deposited but not cleared prior to 31 Dec. 2005 10,000

(ii) Amount transferred Account II to Account I recorded in the Pass Book

but not entered in the Cash Book

8,000

(iii) Cheque issued but not presented for payment 7,429


(v) Interest on overdraft not credited in the Cash Book 580


34,419 34,419

Q17 :

Prepare a bank reconciliation statement from the following particulars and show the

balance as per cash book.

(i) Balance as per passbook on December 31, 2005 overdrawn Rs 20,000.

(ii) Interest on bank overdraft not entered in the cash book Rs 2,000.

(iii) Rs 200 insurance premium paid by bank has not been entered in the cash book.

(iv) Cheques drawn in the last week of December, 2005, but not cleared till date for

Rs 3,000 and Rs 3,500.

(v) Cheques deposited into bank on November, 2005, but yet to be credited on

dated December 31, 2005 Rs 6,000.

(vii) Wrongly debited by bank Rs 500.

Answer :


S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(i) Interest on overdraft not credited in the Cash Book 2,000

(ii) Insurance premium paid by bank not entered in the Cash Book 200

(iii) Cheques issued but not presented for payment 6,500

(iv) Cheques deposited but not cleared 6,000

(v) Amount wrongly debited by bank 500


26,500 26,500

Q18 :

The passbook of Mr. Randhir showed an overdraft of Rs 40,950 on March 31, 2005.

Prepare bank reconciliation statement on March 31, 2005.

(i) Out of cheques amounting to Rs 8,000 drawn by Mr. Randhir on March 27, a

cheque for Rs 3,000 was encashed on April 03.

(ii) Credited by bank with Rs 3,800 for interest collected by them, but the amount is

not entered in the cash book.

(iii) Rs 10,900 paid in by Mr. Randhir in cash and by cheques on March, 31 cheques

amounting to Rs 3,800 were collected on April, 07.

(iv) A Cheque of Rs 780 credited in the passbook on March 28 being dishonoured is

debited again in the passbook on April 01, 2005. There was no entry in the cash

book about the dishonour of the cheque until April 15

Answer :

Bank Reconciliation Statement of Mr Randhir as on March 31, 2005

S. No. Particulars

(+)

Amount

Rs

(-)

Amount

Rs


(i) Cheque issued but not presented for payment in March 3,000

(ii) Interest collected by bank not entered in the Cash Book 3,800

(iii) Cheque deposited but not yet cleared in March 3,800

(iv) Cheque dishonoured in April 780


47,750 47,750

Note: The answer given in NCERT is Rs 36,350, which should be Rs 43,170.



Trial Balance and Rectification of Errors


Q1 :

State the meaning of a Trial Balance?

Answer :

Trial Balance is a statement prepared with debit and credit balances of all accounts in ledger, to verify the arithmetical accuracy of

the accounts. It is prepared after balancing all the accounts of ledger. There are two columns in a Trial Balance: debit and credit.

While debit side includes all the debit balances, credit side includes all the credit balances of the accounts. It also helps in preparing

financial statements, as it is a summarise version of the ledger. It is generally prepared on monthly or yearly basis.

Q2 :

Give two examples of errors of principle?

Answer :

'Errors of principle' refer to those errors that are committed when recording of transactions is done against the accounting principle.

Below given are the examples of error of principle

1. Wages paid for construction of building debited to Wages Account

In this transaction, wages paid for the construction of building is a capital expenditure and accordingly building account should have

been debited. However, in this case, it is treated as revenue expenditure and is debited to Wages Account. This error violates the

accounting principle.

2. Amount spent on repair of machinery debited to Machinery Account

In this transaction, amount of repair is a revenue expenditure and not a capital expenditure. It should have been debited as

'Repairs', but was wrongly debited to the Machinery Account.

Q3 :

Give two examples of errors of commission?

Answer :

Errors of Commission refer to those errors that are committed when transactions are recorded with wrong amounts; wrong

balancing or wrong posting and/or wrong carrying forwarding is done. Below given are the examples of error of commission.

1. Goods purchased worth Rs 20,000 on credit are recorded in the Purchases Book as Rs 10,000.

This transaction should have been recorded in the Purchases Book with an amount of Rs 20,000; however, it was recorded as Rs

10,000. This is an error due to wrong recording of amount.

2. Total of Sales Book is carried forward as Rs 5,000 instead of Rs 500.

In this case, wrong amount is carried forwarded from one accounting period to another or from an end of one page to the beginning

of another page. This is referred to as an error of carrying forward.

Q4 :

What are the methods of preparing trial balance?

Answer :

Below are diagrammatically explained methods to prepare Trial Balance.

Let us understand these methods of preparing Trial Balance with the help of an abstract account of Mr. A.

Mr. A's Account

Dr. Cr.

2011 2011

Apr.1 Balance b/d 50,000 Apr.7 Cash 30,000

Apr.3 Sales 20,000 Apr.8 Sales Return 20,000

Apr.10 Sales 40,000 Apr.16 Bank 50,000

Apr.30 Balance c/d 10,000

1,10,000 1,10,000

1. Totals method: According to the Totals method, the total of debit and credit sides of an account is shown in the debit and credit columns of

the Trial Balance. If the total of the debit column and the total of credit column of Trial Balance are equal, then the Trial Balance is said to

agree, otherwise not.

For example, in the above example, the total of the debit side of Mr. A Account, i.e., Rs 1,10,000 is shown in the debit column of the Trial

Balance and the total of the credit side of Mr. A Account, i.e., Rs 1,10,000 is shown in the credit column of the Trial Balance. The total of

debit column and the total of the credit column of the Trial Balance are equal to each other.

Trial Balance as on April 30, 2011

Accounts L.F.

Debit Total

Rs

Credit Total

Rs

Mr. A's Account 1,10,000 1,00,000

3. Balance method: According to the Balance method, the balance of ledger accounts is shown in the debit and credit column of the Trial

Balance. The balance of ledger may be either debit balance or credit balance. In the former case, the debit side of an account exceeds its

credit side; whereas, in the latter case the credit side exceeds the debit side of the account. The sum total of the balances in the debit

column of the Trial Balance must be equal to the sum total of the balances in the credit columns of the Trial Balance. It is a commonly used

method.

4. For example, Mr A's account shows a debit balance of Rs 10,000, as the total of the debit side (Rs 1,10,000) exceeds the total of the credit

side (Rs 1,00,000). The debit balance of Rs 10,000 will be shown in the debit column of the Trial Balance.


Accounts L.F.

Debit

Balance

Rs

Credit

Balance

Rs

Mr. A's Account 10,000

5. Total cum balance method: It is a combination of both of the above methods, i.e., Totals method and Balance method.


Accounts L.F.

Debit

Total Rs

Credit

Total

Rs

Debit

Balance

Rs

Credit

Balance

Rs

Mr. A's Account 1,10,000 1,00,000 10,000

Q5 :

What are the steps taken by an accountant to locate the errors in the trial balance?

Answer :

The following are various steps that an accountant takes to locate the errors in the Trial Balance.

1. Re-totalling of the debit and the credit columns of the Trial Balance to locate the difference in the total of both the columns.

2. Checking whether any account is omitted to be recorded with the exact difference amount.

3. Half the difference, then check whether any amount is posted in the wrong column of the Trial Balance.

4. Divide the difference by 9, if it is completely divisible, it is an error of transposition of figure, i.e. 546 is written as 645.

5. If there exist differences especially of Rs 1, Rs 10, Rs 100, Rs 1000, etc., it suggests that the casting of Subsidiary Books should be

checked once again.

6. If difference still exists and it is not possible to detect the reason for the difference, then for the time being, the difference is transferred in

the suspense account in order to proceed further. Otherwise, a complete checking is suggested.

Q6 :

What is a suspense account? Is it necessary that suspense account will balance off after rectification of the errors

detected by the accountant? If not, then what happens to the balance still remaining in suspense account?

Answer :

When Trial Balance does not agree, i.e., when the total of the debit column does not match that of the credit column, then the

difference of the Trial Balance is transferred to a temporary account in order to avoid delay in preparation of the financial

statements. This temporary account is termed as Suspense Account. If the debit column falls short of the credit column, then the

Suspense Account is debited and if the credit column falls short of the debit column then the Suspense Account is credited.

If all the errors are detected and rectified, then the Suspense Account automatically gets closed (i.e. becomes zero). However, if still

there exists any difference, then it should be transferred to the Balance Sheet. If the Suspense Account shows a debit balance, then

it is shown in the Assets side and if the Suspense Account shows a credit balance, then it is shown in the Liabilities side of the

Balance Sheet.

Q7 :

What kinds of errors would cause difference in the trial balance? Also list examples that would not be revealed by a trial

balance?

Answer :

The errors that lead to the differences in the Trial Balance are termed as one-sided errors. These are those errors that affect only

one account. Below are given the errors that cause differences in the Trial Balance.

1. Wrong casting of any account, this is termed as the error of casting.

2. Wrong carrying forward of the balances from previous year's books or from one end of page to another. These types of errors are termed

as the errors in carrying forward.

3. If entries are posted in the wrong side of accounts.

4. Posting of a wrong amount in account, this is termed as the error of posting.

5. If entries are recorded partially, i.e., the entries are not recorded completely, then due to the error of partial omission, Trial Balance

does not agree.

Here are a few examples that would not be revealed in a Trial Balance:

1. Sales to Mr. X, omitted to be recorded in the Sales Day Book

2. Purchases made from Mukesh, recorded in Mahesh's Account, who is an other creditor

3. Wages paid for construction of building, recorded in the Wages Account

Q8 :

State the limitations of trial balance?

Answer :

If the Trial Balance agrees, then it should not be taken for granted, that there is absolutely no errors. In fact, there do exist some

errors that are not revealed by a Trial Balance. Such ineffectiveness of the Trial Balance is termed as the limitations of Trial

Balance. The various limitations of the Trial Balance are given below.

1. It does not assist to detect errors that arise if an entry is not recorded in the Journal. Such errors are termed as the Errors of Complete

Omission.

2. If the effect of one error is cancelled by the effect of another error, then it cannot be ascertained by the Trial Balance. Such types of errors

are termed as Compensatory Errors, which are rare to find.

3. If correct amount is posted in the correct side; however, in the wrong account and if wrong amount is posted in the wrong side, but in the

correct account, then the Trial Balance fails to reflect these errors.

4. If there arises any error of principle, like capital expenditure mistakenly regarded as revenue expenditure or vice-versa, then such errors

may not be revealed in form of mismatch between the two columns of the Trial Balance.

5. If any transaction is recorded wrongly in the books of original entry, then such mistakes lead to the errors of recording which

are not revealed by Trial Balance.

<< Previous Chapter 5 : Bank Reconciliation StatementNext Chapter 7 : Depreciation, Provisions and Reserves >> Long answers : Solutions of Questions on Page Number : 218

Q1 :

Describe the purpose for the preparation of trial balance.

Answer :

The important purposes for the preparation of Trial Balance are explained with the help of the following points.

1. Ascertaining the arithmetical accuracy- When the total of all debit balance accounts are equal to all credit balance accounts, it is

assumed that at least posting from journal to the respective accounts is arithmetically correct.

2. Summarising the ledger accounts- Trial Balance acts as a consolidated statement, providing a comprehensive list of all the accounts.

Thus, a Trial Balance provides a summarised version of each account.

3. Preparing final accounts- As the Trial Balance provides a summarised version of each account, so different accounts can be directly

transferred to Trading, Profit and Loss Account, and Balance Sheet without referring to different ledgers.

4. Locating and rectifying errors- If the Trial Balance does not agree, it indicates the occurrence of arithmetical error, which can be easily

located. However, Trial Balance only helps in locate and rectify arithmetical error and not other types of errors.

Q2 :

Explain errors of principle and give two examples with measures to rectify them.

Answer :

Errors of Principle refer to those errors that are committed when recording of transactions in the original book of entry is done

against the accounting principle. These errors are not reflected in the Trial Balance. These errors are committed when proper

distinction is not made between capital expenditure and revenue expenditure, or vice versa or between capital income and revenue

income or vice versa.

The following examples will illustrate the process of understanding and rectification of such errors.

Let us consider first example. Wages paid for construction of building are debited to Wages Account.

Wrong entry made is:

Wages A/c Dr.

To Cash A/c

( Wages paid in cash)

In this case, Wages paid for the construction of building should be treated as a capital expenditure and accordingly should be

debited to the building account. However, the Wages Account is wrongly debited. Thus,

the correct entry that should have been made is:

Building A/c Dr.

To Cash A/c

(Wages paid for construction

of building)

In order to rectify this error, the rectifying entry should be:

Building A/c Dr.

To Wages A/c

(Wages paid for construction

of building was debited to Wages Account, now rectified)

The second example of errors of principle is the sale of old machinery recorded as sales.

Wrong entry made:

Cash A/c Dr.

To Sales A/c

(Sales of old machinery, recorded as sales)

In this case, the sale of old machinery should not be recorded as sales; in fact the Machinery Account should be credited. Thus, the

correct entry that should have been made is:

Cash A/c Dr.

To Machinery A/c

(Old machinery sold for cash)

In order to rectify this error, Sales Account will be debited, as it is wrongly credited and machinery will be credited, as it willnot be

recorded in the books. Thus, the rectifying entry will be:

Sales A/c Dr.

To Machinery A/c

(Sale of old machinery recorded as sales, now rectified)

Q3 :

Explain the errors of commission and give two examples with measures to rectify them.

Answer :

Errors of commission refer to those errors that are committed when transactions are recorded with wrong amounts, wrong balancing

is done, wrong posting and/or wrong carrying forwarded is done. The following examples will illustrate the process of understanding

and rectification of such errors.

1. Let us consider the first example. Sales made to Mr. X of Rs10,000 recorded as 1,000 from invoice.

In this case, Mr. X's account has been debited with Rs 1,000 instead of Rs 10,000; hence, the error of commission is committed.

This requires a further debit of Rs 9,000, in order to rectify this error of commission. This will be rectified by passing the following

entry:

Mr X's A/c Dr. 9,000

To Sales A/c 9,000

(Goods sold to Mr X of Rs 10,000 was wrongly posted as Rs 1,000,now

rectified)

2. Purchase book was undercast by Rs 10,000.

This error can be rectified in any of the following two stages:

a. If an error is located before preparing trial balance, then Rs 10,000 should be recorded in the debit side of Purchases Account.

b. If an error is located after preparing Trial Balance, then the following entry need to be recorded.

Purchase A/c Dr. 10,000

To Suspense A/c 10,000

Q4 :

What are the different types of errors that are usually committed in recording business transaction?

Answer :

1. Errors of omission- When an entry gets omitted during recording in the book of original entry or during posting the transaction, then error

of omission is committed. There are two types of errors of omission, viz.:

1. Partial omission- When a transaction is correctly recorded in one side of account but is not recorded in the other side of the account. For

example, goods sold to Mahesh recorded in sales but omitted to be recorded in Mahesh's account. It affects the trial balance.

2. Complete omission- When a transaction gets completely omitted to be recorded in the books, then it is the case of complete omission .

For example, transaction related to purchase of goods from Rakesh is not recorded in the purchases book. Such omissions does not affect

the trial balance.

2. Errors of principle- These refer to those errors that are committed when recording of transactions in the book of the original entry is done

against the accounting principle. These errors affect the trial balance.

3. These errors are committed when proper distinction is not made between revenue income or expenditure and capital income or

expenditure. These are of two types:

When revenue transactions are treated as capital transactionsWhen capital transactions are treated as revenue transactions.For

example, repairs made to machinery, recorded in machinery account.

4. Errors of commission- These refer to those errors that are committed when transactions are recorded with wrong amounts, wrong

balancing, wrong posting and/or wrong carrying forwarded is done.

5. These are of two types:

1. Trial balance does not agree

When trial balance does not agree, then there exist one-sided errors that affect only one account and thereby are easily detectable.

These one-sided errors exist due to the following reasons:

i. Wrong casting of subsidiary bookPosting wrong amount in ledgerPosting on the wrong side of accountWrong balancing of account

2. Trial balance agrees

i. When the trial balance agrees, then it should not be taken for granted that there are no errors, as the tallied trial balance just ensures the

absence of arithmetical errors.These errors are not easily detectable; as these do notaffect the trial balance. These errors arise due

to:Recording wrong amount in the original book

ii. Posting amount in the wrong account but in the correct side

6. Compensating errors- When effects of one error are cancelled by the effects of another error of an equal amount, then compensating

errors are committed. For example, Mr. A's account was credited by Rs 2,000 instead of 200 and Mr. B's account was credited by Rs 200

instead of 2,000. In this case, the error in Mr. A's account will be compensated by the error in Mr. B's account.

Q5 :

As an accountant of a company, you are disappointed to learn that the totals in your new trial balance are not equal. After

going through a careful analysis, you have discovered only one error. Specifically, the balance of the Office Equipment

account has a debit balance of Rs. 15,600 on the trial balance. However, you have figured out that a correctly recorded

credit purchase of pen-drive for Rs 3,500 was posted from the journal to the ledger with a Rs. 3,500 debit to Office

Equipment and another Rs. 3,500 debit to creditors accounts. Answer each of the following questions and present the

amount of any misstatement :

(a) Is the balance of the office equipment account overstated, understated, or correctly stated in the trial balance?

(b) Is the balance of the creditors account overstated, understated, or correctly stated in the trial balance?

(c) Is the debit column total of the trial balance overstated, understated, or correctly stated?

(d) Is the credit column total of the trial balance overstated, understated, or correctly stated?

(e) If the debit column total of the trial balance is Rs. 2,40,000 before correcting the error, what is the total of credit column.

Answer :

According to the given information, trial balance does not agree. Pen-drive is wrongly debited to office equipment account, instead

of stationery account and supplier account is debited instead of crediting. Due to these mistakes, the following errors are committed:

1. The balance of office equipment is overstated by Rs 3,500.

2. The balance of creditors account is understated by Rs 7,000.

3. The total of the debit column of the trial balance is correctly stated.

4. The total of the credit column of the trial balance is understated by Rs 7,000.

5. If the total of the debit column of the trial balance is Rs 2,40,000 before rectifying error, the total of the credit column of the trial balance is

Rs 2,33,000 (i.e., Rs 2,40,000 - Rs 7,000).

<< Previous Chapter 5 : Bank Reconciliation StatementNext Chapter 7 : Depreciation, Provisions and Reserves >> Numerical questions : Solutions of Questions on Page Number : 218

Q1 :

Rectify the following errors:

(i) Credit sales to Mohan Rs 7,000 were not recorded.

(ii) Credit purchases from Rohan Rs 9,000 were not recorded.

(iii) Goods returned to Rakesh Rs 4,000 were not recorded.

(iv) Goods returned from Mahesh Rs 1,000 were not recorded.

Answer :

Journal

S.No. Particulars L.F.

Debit

Amount

Rs

Credit

Amount

Rs

(i) Mohan Dr. 7,000

To Sales A/c

7,000

(Goods sold to Mohan were not recorded, now recorded)

(ii) Purchases A/c Dr. 9,000

To Rohan

9,000

(Goods purchased to Rohan were not recorded, now recorded)

(iii) Rakesh Dr. 4,000

To Purchases Return A/c

4,000

(Goods returned to Rakesh were not recorded, now recorded)

(iv) Sales Return A/c Dr. 1,000

To Mahesh

1,000

(Goods returned from Mahesh were not recorded, now recorded)

Q2 :


(i) Credit sales to Mohan Rs 7,000 were recorded as Rs 700.

(ii) Credit purchases from Rohan Rs 9,000 were recorded. as Rs 900.

(iii) Goods returned to Rakesh Rs 4,000 were recorded as Rs 400.

(iv) Goods returned from Mahesh Rs 1,000 were recorded as Rs 100.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(i) Mohan Dr. 6,300

To Sales A/c

6,300

(Goods sold to Mohan Rs 7,000 were recorded as Rs 700,

now rectified)

(ii) Purchases A/c Dr. 8,100

To Rohan

8,100

(Goods purchased from Rohan Rs 9,000 were recorded as

Rs 900, now rectified)

(iii) Rakesh Dr. 3,600


3,600

(Goods returned to Rakesh Rs 4,000 were recorded as


(iv) Sales Return A/c Dr. 900

To Mahesh

900

(Goods returned from Mahesh Rs 1,000 were not

recorded as Rs 100, now rectified)

Q3 :


(i) Credit sales to Mohan Rs 7,000 were recorded as Rs 7,200.

(ii) Credit purchases from Rohan Rs 9,000 were recorded as Rs 9,900.

(iii) Goods returned to Rakesh Rs 4,000 were recorded as Rs 4,040.

(iv) Goods returned from Mahesh Rs 1,000 were recorded as Rs 1,600.

Answer :

Journal

S. No. Particulars L.F.

Debit

Amount

Rs

Credit

Amount

Rs

(i) Sales A/c Dr. 200

To Mohan

200

(Goods sold to Mohan Rs 7,000 were recorded as Rs 7,200,

now rectified)

(ii) Rohan Dr. 900

To Purchases A/c

900

(Goods purchased from Rohan Rs 9,000 were recorded as Rs 9,900,

now rectified)

(iii) Purchases Return A/c Dr. 40

To Rakesh

40

(Goods returned to Rakesh Rs 4,000 were recorded as Rs 4,040

now rectified)

(iv) Mahesh Dr. 600

To Sales Return A/c

600

(Goods returned from Mahesh Rs 1,000 were recorded as

Rs 1,600, now rectified)

Q4 :


(a) Salary paid Rs 5,000 was debited to employee's personal account.

(b) Rent Paid Rs 4,000 was posted to landlord's personal account.

(c) Goods withdrawn by proprietor for personal use Rs 1,000 were debited to sundry

expenses account.

(d) Cash received from Kohli Rs 2,000 was posted to Kapur's account.

(e) Cash paid to Babu Rs 1,500 was posted to Sabu's account.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Salaries A/c Dr. 5,000

To Employee

5,000

(Salary paid Rs 5,000 were wrongly debited to Employee's

personal Account, now rectified)

(b) Rent A/c Dr. 4,000

To Land Lord A/c

4,000

(Rent paid Rs 4,000 was posted to Landlord's Account,

now rectified)

(c) Drawings A/c Dr. 1,000

To Sundry Expenses A/c

1,000

(Goods drawn by proprietor were wrongly debited to Sundry

Expenses Account, now rectified)

(d) Kapur Dr. 2,000

To Kohli

2,000

(Cash received from Kohli was posted to Kapur's Account,

now rectified)

(e) Babu Dr. 1,500

To Sabu

1,500

(Cash paid to Babu was posted wrongly to Sabu's Account,

now rectified)

Q5 :


(a) Credit Sales to Mohan Rs 7,000 were recorded in purchases book.

(b) Credit Purchases from Rohan Rs 900 were recorded in sales book.

(c) Goods returned to Rakesh Rs 4,000 were recorded in the sales return book.

(d) Goods returned from Mahesh Rs 1,000 were recorded in purchases return book.

(e) Goods returned from Nahesh Rs 2,000 were recorded in purchases book.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Mohan Dr. 14,000

To Sales A/c

7,000

To Purchases A/c

7,000

(Goods sold on credit to Mohan were recorded in Purchases Book,

now rectified)

(b) Sales A/c Dr. 900

Purchases A/c Dr. 900

To Rohan

1,800

(Goods purchased from Rohan were recorded in Sales Book,

now rectified)

(c) Rakesh Dr. 8,000


4,000

To Sales Return A/c

4,000

(Goods returned to Rakesh were recorded in Sales Return Book,

now rectified)

(d) Sales Return A/c Dr. 1,000

Purchases Return A/c Dr. 1,000

To Mahesh

2,000

(Goods returned from Mahesh were recorded in Purchases

Return Book, now rectified)

(e) Sales Return A/c Dr. 2,000

To Purchases A/c

2,000

(Goods returned from Mahesh were recorded in Purchases

Book, now rectified)

Q6 :


(a) Sales book overcast by Rs 700.

(b) Purchases book overcast by Rs 500.

(c) Sales return book overcast by Rs 300.

(d) Purchase return book overcast by Rs 200.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Sales A/c Dr. 700

To Suspense A/c

700

(Sales Book overcast by Rs 700, now rectified)

(b) Suspense A/c Dr. 500

To Purchases A/c

500

(Purchases Book overcast by Rs 500, now rectified)

(c) Suspense A/c Dr. 300

To Sales Return A/c

300

(Sales Return Book overcast by Rs 300, now rectified)

(d) Purchases Return A/c Dr. 200

To Suspense A/c

200

(Purchases Return Book overcast by Rs 200, now rectified)

Q7 :

Rectify the following errors :

(a) Sales book undercast by Rs 300.

(b) Purchases book undercast by Rs 400.

(c) Return Inwards book undercast by Rs 200.

(d) Return outwards book undercast by Rs 100.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Suspense A/c Dr. 300

To Sales A/c

300

(Sales Book undercast by Rs 300, now rectified)

(b) Purchases A/c Dr. 400

To Suspense A/c

400

(Purchases Book undercast by Rs 400, now rectified)

(c) Return Inwards A/c Dr. 200

To Suspense A/c

200

(Return Inwards Book undercast by Rs 200, now rectified)

(d) Suspense A/c Dr. 100

To Return Outwards A/c

100

(Return Outwards Book undercast by Rs 100, now rectified)

Q8 :

Rectify the following errors and ascertain the amount of difference in trial balance by

preparing suspense account:

(a) Credit sales to Mohan Rs 7,000 were not posted.

(b) Credit purchases from Rohan Rs 9,000 were not posted.

(c) Goods returned to Rakesh Rs 4,000 were not posted.

(d) Goods returned from Mahesh Rs 1,000 were not posted.

(e) Cash paid to Ganesh Rs 3,000 was not posted.

(f) Cash sales Rs 2,000 were not posted.

Answer :


Debit

Amount

Rs

Credit

Amount

Rs

(a) Mohan Dr. 7,000

To Suspense A/c

7,000

(Goods sold on credit to Mohan were not posted in

Mohan's Account, now rectified)

(b) Suspense A/c Dr. 9,000

To Rohan

9,000

(Goods purchased from Rohan were not posted in

Rohan's Account, now rectified)


To Suspense A/c

4,000

(Goods returned to Rakesh were not posted in

Rakesh's Account, now rectified)

(d) Suspense A/c Dr. 1,000

To Mahesh

1,000

(Goods return from Mahesh were not omitted to be

recorded in Mahesh's Account, now rectified)

(e) Ganesh Dr. 3,000

To Suspense A/c

3,000

(Cash paid to Ganesh was not posted to Ganesh's

Account , now recorded)

(f) Suspense A/c Dr. 2,000

To Sales A/c

2,000

(Cash receipts from sale, was not posted to Sales

Account, now rectified)

Q9 :

Rectify the following errors and ascertain the amount of difference in trial balance by

preparing suspense account:

(a) Credit sales to Mohan Rs 7,000 were posted as Rs 9,000.

(b) Credit purchases from Rohan Rs 9,000 were posted as Rs 6,000.

(c) Goods returned to Rakesh Rs 4,000 were posted as Rs 5,000.

(d) Goods returned from Mahesh Rs 1,000 were posted as Rs 3,000.

(e) Cash sales Rs 2,000 were posted as Rs 200.

Answer :


Debit

Amount

Rs

Credit

Amount

Rs

(a) Suspense A/c Dr. 2,000

To Mohan

2,000

(Sold goods to Mohan Rs 7,000 wrongly posted as Rs 9,000,

now rectified)


To Rohan

3,000

(Purchased goods from Rohan Rs 9,000 wrongly posted

as Rs 6,000, now rectified)

(c) Suspense A/c Dr. 1,000

To Rakesh

1,000

(Goods returened to Rakesh Rs 4,000 wrongly posted as


(d) Mahesh Dr. 2,000

To Suspense A/c

2,000

(Goods returned from Mahesh Rs 1,000 wrongly posted as 3,000,

now rectified)

(e) Suspense A/c Dr. 1,800

To Sales A/c

1,800

(Goods sold for cash Rs 2,000 wrongly posted as Rs 200,

now rectified)

Suspense Account

Dr.

Cr.

S. No. Particulars J.F.

Amount

Rs S. No. Particulars J.F.

Amount

Rs

(a) Mohan

2,000 (d) Mahesh

2,000

Q10 :


(a) Credit sales to Mohan Rs 7,000 were posted to Karan.

(b) Credit purchases from Rohan Rs 9,000 were posted to Gobind.

(c) Goods returned to Rakesh Rs 4,000 were posted to Naresh.

(d) Goods returned from Mahesh Rs 1,000 were posted to Manish.

(e) Cash sales Rs 2,000 were posted to commission account.

Answer :


Debit

Amount

Rs

Credit

Amount

Rs

(a) Mohan Dr. 7,000

To Karan

7,000

(Goods sold to Mohan wrongly posted to Karan's


(b) Gobind Dr. 9,000

To Rohan

9,000

(Goods purchased to Gobind wrongly posted to Rohan's



To Naresh

4,000

(Goods returned to Rakesh wrongly posted in Naresh's


(d) Manish Dr. 1,000

To Mahesh

1,000

(Goods returned from Mahesh wrongly

posted in Manish's Account, now rectified)

(e) Commission A/c Dr. 2,000

To Sales A/c

2,000

(Goods sold for cash wrongly posted to Commission Account, now

rectified)

Q11 :

Rectify the following errors assuming that a suspense account was opened.

Ascertain the difference in trial balance.

(a) Credit sales to Mohan Rs 7,000 were posted to the credit of his account.

(b) Credit purchases from Rohan Rs 9,000 were posted to the debit of his account as

Rs 6,000.

(c) Goods returned to Rakesh Rs 4,000 were posted to the credit of his account.

(d) Goods returned from Mahesh Rs 1,000 were posted to the debit of his account as

Rs 2,000.

(e) Cash sales Rs 2,000 were posted to the debit of sales account as Rs 5,000.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Mohan Dr. 14,000

To Suspense A/c

14,000

(Goods sold to Mohan wrongly credited to his account,

now rectified)


To Rohan

15,000

(Goods purchased from Rohan, Rs 9,000 wrongly

debited to Rohan's Account as Rs 6,000, now rectified)


To Suspense A/c

8,000

(Goods returened to Rakesh wrongly credited to his

account, now rectified)


To Mahesh

3,000

(Goods returned from Mahesh Rs 1,000 wrongly debited to

his account as Rs 2,000, now rectified)


To Sales A/c

7,000

(Goods sold for cash for Rs 2,000 wrongly debited to Sales

Account as Rs 5,000, now rectified)

Suspense Account

Dr.

Cr.


Amount


Amount

Rs

(b) Rohan

15,000 (a) Mohan

14,000

(d) Mahesh

3,000 (c)

Q12 :

Rectify the following errors assuming that a suspense account was opened.


(a) Credit sales to Mohan Rs 7,000 were posted to Karan as Rs 5,000.

(b) Credit purchases from Rohan Rs 9,000 were posted to the debit of Gobind as Rs

10,000.

(c) Goods returned to Rakesh Rs 4,000 were posted to the credit of Naresh as Rs

3,000.

(d) Goods returned from Mahesh Rs 1,000 were posted to the debit of Manish as Rs

2,000.

(e) Cash sales Rs 2,000 were posted to commission account as Rs 200.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Mohan Dr. 7,000

To Karan

5,000

To Suspense A/c

2,000

(Goods sold to Mohan Rs 7,000 posted wrongly to

Karan's Account as Rs 5,000, now rectified)


To Rohan

9,000

To Gobind

10,000

(Goods returned from Rohan Rs 9,000 posted wrongly

to Gobind's Account as Rs 10,000, now rectified)


Naresh Dr. 3,000

To Suspense A/c

7,000

(Goods returned to Rakesh Rs 4,000 posted wrongly to

Naresh's Account Rs 3,000, now rectified)


To Mahesh 1,000

To Manish

2,000

(Goods returned from Mahesh Rs 1,000 posted wrongly to

Manish's Account as Rs 2,000, now rectified)

(e) Commission A/c Dr. 200

Suspense A/c Dr. 1,800

To Sales A/c

2,000

(Cash sales Rs 2,000 posted wrongly to the Commission Account

as Rs 200, now rectified)

Q13 :

Rectify the following errors assuming that suspense account was opened.


(a) Credit sales to Mohan Rs 7,000 were recorded in Purchase Book. However,

Mohan's account was correctly debited.

(b) Credit purchases from Rohan Rs 9,000 were recorded in sales book. However,

Rohan's account was correctly credited.

(c) Goods returned to Rakesh Rs 4,000 were recorded in sales return book. However,

Rakesh's account was correctly debited.

(d) Goods returned from Mahesh Rs 1,000 were recorded through purchases return

book. However, Mahesh's account was correctly credited.

(e) Goods returned to Naresh Rs 2,000 were recorded through purchases book.

However, Naresh's account was correctly debited.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs


To Sales A/c

7,000

To Purchases A/c

7,000

(Goods sold to Mohan wrongly recorded in Purchases Book;

however, Mohan's Account was correctly debited, now rectified)

(b) Purchases A/c Dr. 9,000

Sales A/c Dr. 9,000

To Suspense A/c

18,000

(Purchased goods from Rohan wrongly recorded in Sales Book.

However, Rohan's Account was correctly credited, now rectified)



4,000

To Sales Return A/c

4,000

(Goods returned to Rakesh Rs 4,000 wrongly entered in

Sales Return Book; however, Rakesh's Account was correctly

debited, now rectified)

(d) Sales Return A/c Dr. 1,000

Purchases Return A/c Dr. 1,000

To Suspense A/c

2,000

(Goods Returned from Mahesh wrongly entered in

Purchases Return Book; however, Mahesh's Account was

correctly credited, now rectified)



2,000

To Purchases A/c

2,000

(Goods returned to Naresh wrongly entered in Purchases

Book; however, correctly debited to Naresh's Account,

now rectified)

Q14 :


(a) Furniture purchased for Rs 10,000 wrongly debited to purchases account.

(b) Machinery purchased on credit from Raman for Rs 20,000 was recorded through

purchases book.

(c) Repairs on machinery Rs 1,400 debited to machinery account.

(d) Repairs on overhauling of secondhand machinery purchased Rs 2,000 was debited

to Repairs account.

(e) Sale of old machinery at book value of Rs 3,000 was credited to sales account.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Furniture A/c Dr. 10,000

To Purchases A/c

10,000

(Furniture purchased wrongly debited to Purchases Account,

now rectified)

(b) Machinery A/c Dr. 20,000

To Purchases A/c

20,000

(Machinery purchased from Raman wrongly entered in the

Purchases Book, now rectified)

(c) Repairs A/c Dr. 1,400

To Machinery A/c

1,400

(Repair of machinery wrongly debited to Machinery Account,

now rectified)

(d) Machinery A/c Dr. 2,000

To Repairs A/c

2,000

(Overhauling of second hand machine wrongly

debited in Repairs Account, now rectified)

(e) Sales A/c Dr. 3,000

To Machinery A/c

3,000

(Machinery sold wrongly credited to Sales


Q15 :

Rectify the following errors assuming that suspension account was opened.


(a) Furniture purchased for Rs 10,000 wrongly debited to purchase account as Rs

4,000.

(b) Machinery purchased on credit from Raman for Rs 20,000 recorded through

Purchases Book as Rs 6,000.

(c) Repairs on machinery Rs 1,400 debited to Machinery account as Rs 2,400.

(d) Repairs on overhauling of second hand machinery purchased Rs 2,000 was

debited to Repairs account as Rs 200.

(e) Sale of old machinery at book value Rs 3,000 was credited to sales account as Rs

5,000.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Furniture A/c Dr. 10,000

To Purchases A/c

4,000

To Suspense A/c

6,000

(Furniture purchased Rs 10,000 wrongly entered in

Purchases Account as Rs 4,000, now rectified)

(b) Machinery A/c Dr. 20,000

To Purchases A/c

6,000

To Raman

14,000

(Machinery purchased Rs 20,000 from Raman wrongly

entered in Purchases Book as Rs 6,000, now rectified)

(c) Repairs A/c Dr. 1,400


To Machinery A/c

2,400

(Repair of machinery Rs 1,400 wrongly debited to

Machinery Account as Rs 2,400)

(d) Machinery A/c Dr. 2,000

To Repairs A/c

200

To Suspense A/c

1,800

(Overhauling of second hand machine Rs 2,000 wrongly

debited to Repairs Account as Rs 200, now rectified)


To Machinery A/c

3,000

To Suspense A/c

2,000

(Old machinery sold for Rs 3,000 wrongly credited to Sales


Q16 :


(a) Depreciation provided on machinery Rs 4,000 was not posted.

(b) Bad debts written off Rs 5,000 were not posted.

(c) Discount allowed to a debtor Rs 100 on receiving cash from him was not posted.

(d) Discount allowed to a debtor Rs 100 on receiving cash from him was not posted

to discount account.

(e) Bill receivable for Rs 2,000 received from a debtor was not posted.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Depreciation A/c Dr. 4,000

To Machinery A/c

4,000

(Depreciation on machinery was not posted, now rectified)

(b) Bad debts A/c Dr. 5,000

To Debtors A/c

5,000

(Bad debts written off were not posted, now

rectified)

(c) Discount Allowed A/c Dr. 100

To Debtors A/c

100

(Discount allowed to debtors was not posted, now rectified)

(d) Discount Allowed A/c Dr. 100

To Suspense A/c

100

(Discount allowed to debtors was not posted in Discount


(e) Bills Receivable A/c Dr. 2,000

To Debtors A/c

2,000

(Bill receivable received from debtor was not posted,

now rectified)

Q17 :


(a) Depreciation provided on machinery Rs 4,000 was posted as Rs 400.

(b) Bad debts written off Rs 5,000 were posted as Rs 6,000.

(c) Discount allowed to a debtor Rs 100 on receiving cash from him was posted as Rs

60.

(d) Goods withdrawn by proprietor for personal use Rs 800 were posted as Rs 300.

(e) Bill receivable for Rs 2,000 received from a debtor was posted as Rs 3,000.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs


To Machinery A/c

3,600

(Depreciation provided on machinery Rs 4,000 wrongly posted

as Rs 400, now rectified)

(b) Debtors A/c Dr. 1,000

To Bad debt A/c

1,000

(Bad debt written off Rs 5,000 wrongly posted as Rs 6,000,

now rectified)


To Debtors A/c

40

(Discount allowed to debtors Rs 100 wrongly posted as Rs 60,

now rectified)

(d) Drawings A/c Dr. 500

To Purchases A/c

500

(Drawings of goods Rs 800 wrongly posted as Rs 300,

now rectified)

(e) Debtors A/c Dr. 1,000

To Bills Receivable A/c

1,000

(Bills receivable for 2,000 received from debtors wrongly posted as

Rs 3,000)

Q18 :

Rectify the following errors assuming that suspense account was opened.


(a) Depreciation provided on machinery Rs 4,000 was not posted to Depreciation

account.

(b) Bad debts written-off Rs 5,000 were not posted to Debtors account.

(c) Discount allowed to a debtor Rs 100 on receiving cash from him was not posted

to discount allowed account.

(d) Goods withdrawn by proprietor for personal use Rs 800 were not posted to

Drawings account.

(e) Bill receivable for Rs 2,000 received from a debtor was not posted to Bills

receivable account.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs


To Suspense A/c

4,000

(Depreciation on machinery was not posted to

Depreciation Account, now rectified)


To Debtors A/c

5,000

(Bad debts written off were not posted to Debtors Account,

now rectified)


To Suspense A/c

100

(Discount allowed to customers was not posted to

Discount Allowed Account, now rectified)

(d) Drawings A/c Dr. 800

To Suspense A/c

800

(Goods withdrawn by proprietors were not posted to Drawings


(e) Bills Receivable A/c Dr. 2,000

To Suspense A/c

2,000

(Bill Receivable received from debtors were not posted to

Bills Receivable Account, now rectified)

Suspense Account

Dr.

Cr.


Amount


Amount

Rs

(b) Debtors

5,000 (a) Depreciation

4,000

Q19 :

Trial balance of Anuj did not agree. It showed an excess credit of Rs 6,000.

He put the difference to suspense account. He discovered the following erro Rs

(a) Cash received from Ravish Rs 8,000 posted to his account as Rs 6,000.

(b) Returns inwards book overcast by Rs 1,000.

(c) Total of sales book Rs 10,000 was not posted to Sales account.

(d) Credit purchases from Nanak Rs 7,000 were recorded in sales Book. However,

Nanak's account was correctly credited.

(e) Machinery purchased for Rs 10,000 was posted to purchases account as Rs 5,000.

Rectify the errors and prepare suspense account.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs


To Ravish

2,000

(Cash received from Ravish Rs 8,000 wrongly posted to

his account as Rs 6,000, now rectified)


To Return Inwards A/c

1,000

(Return Inwards Book overcast by Rs 1,000, now rectified)


To Sales A/c

10,000

(Total of Sales Book was not posted to Sales Account,

now rectified)

(d) Purchases A/c Dr. 7,000

Sales A/c

7,000

To Suspense A/c

14,000

(Goods purchased from Nanak wrongly posted to Sales Book;

however, Nanak's Account was correctly credited, now rectified)

(e) Machinery A/c Dr. 10,000

To Purchases A/c

5,000

To Suspense A/c

5,000

(Machinery purchased Rs 10,000 wrongly posted to

Purchases Account Rs 5,000, now rectified)

Suspense Account

Dr.

Cr.


Amount

Rs S. No. Particulars J.F. Amount

Q20 :

Trial balance of Raju showed an excess debit of Rs 10,000. He put the difference to

suspense account and discovered the following errors:

(a) Depreciation written-off the furniture Rs 6,000 was not posted to Furniture

account.

(b) Credit sales to Rupam Rs 10,000 were recorded as Rs 7,000.

(c) Purchases book undercast by Rs 2,000.

(d) Cash sales to Rana Rs 5,000 were not posted.

(e) Old Machinery sold for Rs 7,000 was credited to sales account.

(f) Discount received Rs 800 from Kanan on playing cash to him was not posted.

Rectify the errors and prepare suspense account.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs


To Furniture A/c

6,000

(Depreciation on furniture was not posted to

Furniture Account, now rectified)

(b) Rupam Dr. 3,000

To Sales A/c

3,000

(Goods sold to Rupam Rs 10,000 wrongly recorded as


(c) Purchases A/c Dr. 2,000

To Suspense A/c

2,000

(Purchases Book undercast by Rs 2,000, now rectified)

(d) Cash A/c Dr. 5,000

To Sales A/c

5,000

(Goods sold for cash to Rana were not posted, now rectified)


To Machinery A/c

7,000

(Sale of old machinery wrongly recorded in Sales Account,

now rectified)

(f) Kanan Dr. 800

To Discount Received A/c

800

(Discount received from Kanan was not posted,

now rectified)

Q21 :

Trial balance of Madan did not agree and he put the difference to suspense account. He

discovered the following errors:

(a) Sales return book overcast by Rs 800.

(b) Purchases return to Sahu Rs 2,000 were not posted.

(c) Goods purchased on credit from Narula Rs 4,000 though taken into stock, but no

entry was passed in the books.

(d) Installation charges on new machinery purchased Rs 500 were debited to sundry

expenses account as Rs 50.

(e) Rent paid for residential accommodation of madam (the proprietor) Rs 1,400 was

debited to Rent account as Rs 1,000.

Rectify the errors and prepare suspense account to ascertain the difference in trial balance.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Suspense A/c Dr. 800

To Sales Return A/c

800

(Sales Return Book overcast by Rs 800, now rectified)

(b) Sahu Dr. 2,000


2,000

(Goods returned to Sahu, were not posted, now rectified)

(c) Purchases A/c Dr. 4,000

To Narula

4,000

(Goods purchased from Narula were not posted, now rectified)

(d) Machinery A/c Dr. 500

To Sundry Expense A/c

50

To Suspense A/c

450

(Installation charges on machinery Rs 500 wrongly debited to

Sundry Expenses Account as Rs 50, now rectified)

(e) Drawings A/c Dr. 1,400

To Rent A/c

1,000

To Suspense A/c

400

(Rent paid for residential accommodation of proprietor as

1,400, was posted to Rent Account as Rs 1,000, now rectified)

Suspense Account

Dr.

Cr.


Amount


Amount

Rs

(a) Sales Return

Q22 :

Trial balance of Kohli did not agree and showed an excess debit of Rs 16,300. He put the

difference to a suspense account and discovered the following errors:

(a) Cash received from Rajat Rs 5,000 was posted to the debit of Kamal as Rs 6,000.

(b) Salaries paid to an employee Rs 2,000 were debited to his personal account as Rs

1,200.

(c) Goods withdrawn by proprietor for personal use Rs 1,000 were credited to sales

account as Rs 1,600.

(d) Depreciation provided on machinery Rs 3,000 was posted to Machinery account

as Rs 300.

(e) Sale of old car for Rs 10,000 was credited to sales account as Rs 6,000. Rectify

the errors and prepare suspense account.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs


To Rajat

5,000

To Kamal

6,000

(Cash received from Rajat Rs 5,000 wrongly posted

in the debit of Rajat's Account as Rs 6,000, now rectified)

(b) Salaries A/c Dr. 2,000

To Employee

1,200

To Suspense A/c

800

(Salaries paid to employee wrongly posted to

Employee's Account as Rs 1,200, now rectified)

(c) Sales A/c Dr. 1,600

To Suspense A/c

600

To Purchases A/c

1,000

(Goods drawn by proprietor for personal use Rs 1,000

wrongly credited to Sales Account as Rs 1,600, now rectified)


To Machinery A/c

2,700

(Depreciation on machinery Rs 3,000 wrongly credited

to Machinery Account as Rs 300, now rectified)



To Car A/c

10,000

(Sale of old car for Rs 10,000 wrongly posted to Sales Account

as Rs 6,000, now rectified)

Q23 :

Give journal entries to rectify the following errors assuming that suspense account had

been opened.

(a) Goods distributed as free sample Rs 5,000 were not recorded in the books.

(b) Goods withdrawn for personal use by the proprietor Rs 2,000 were not recorded in

the books.

(c) Bill receivable received from a debtor Rs 6,000 was not posted to his account.

(d) Total of Returns inwards book Rs 1,200 was posted to Returns outwards account.

(e) Discount allowed to Reema Rs 700 on receiving cash from her was recorded in

the books as Rs 70.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs

(a) Advertisement A/c Dr. 5,000

To Purchases A/c

5,000

(Goods distributed as free sample Rs 5,000 were not recorded,

now rectified)

(b) Drawings A/c Dr. 2,000

To Purchases A/c

2,000

(Goods withdrawn by proprietor for personal use were

not recorded, now rectified)


To Debtors A/c

6,000

(B/R received from debtors was not posted to his account,

now rectified)

(d) Return Inward A/c Dr. 1,200

Return Outward A/c Dr. 1,200

To Suspense A/c

2,400

(Total Return Inwards Book Rs 1,200 wrongly posted to Returns

Outwards Account, now rectified)

(e) Discount Allowed A/c Dr. 630

To Reema Dr. 630

(Discount allowed to Reema Rs 700 wrongly recorded as


Suspense Account

Dr.

Cr.


Amount


Amount

Rs

Q24 :

Trial balance of Khatau did not agree. He put the difference to suspense account and

discovered the following errors:

(a) Credit sales to Manas Rs 16,000 were recorded in the purchases book as Rs

10,000 and posted to the debit of Manas as Rs 1,000.

(b) Furniture purchased from Noor Rs 6,000 was recorded through purchases book

as Rs 5,000 and posted to the debit of Noor Rs 2,000.

(c) Goods returned to Rai Rs 3,000 recorded through the Sales book as Rs 1,000.

(d) Old machinery sold for Rs 2,000 to Maneesh recorded through sales book as Rs

1,800 and posted to the credit of Manish as Rs 1,200.

(e) Total of Returns inwards book Rs 2,800 posted to Purchase account.

Rectify the above errors and prepare suspense account to ascertain the difference in trial

balance.

Answer :

Journal


Debit

Amount

Rs

Credit

Amount

Rs


Manas Dr. 15,000

To Purchases A/c

10,000

To Sales A/c

16,000

(Goods sold to Manas Rs 16,000 wrongly recorded in Purchases

Book as Rs 10,000 and debited to Manas's Account as Rs 1,000,

now rectified)

(b) Furniture A/c Dr. 6,000


To Noor

8,000

To Purchases A/c

5,000

(Furniture purchased Rs 6,000 from Noor wrongly recorded in

Purchases Book as Rs 5,000 and debited to Noor's Account as


(c) Sales A/c Dr. 1,000

Rai A/c Dr. 2,000

To Return Outwards A/c

3,000

(Goods returned to Rai Rs 3,000 wrongly recorded in the

Sales Book as Rs 1,000, now rectified)

(d) Manish A/c Dr. 1,200

Sales A/c Dr. 1,800

Maneesh A/c Dr. 2,000

To Machinery A/c

2,000

To Suspense A/c

3,000

(Old machinery sold to Maneesh Rs 2,000 wrongly recorded in

the Sales Book as Rs 1,200 and wrongly credited to Manish's


Q25 :

Trial balance of John did not agree. He put the difference to suspense account and

discovered the following errors :

(a) In the sales book for the month of January total of page 2 was carried forward to

page 3 as Rs 1,000 instead of Rs 1,200 and total of page 6 was carried forward to

page 7 as Rs 5,600 instead of Rs 5,000.

(b) Wages paid for installation of machinery Rs 500 was posted to wages account as

Rs 50.

(c) Machinery purchased from R & Co. for Rs 10,000 on credit was entered in

Purchase Book as Rs 6,000 and posted there from to R & Co. as Rs 1,000.

(d) Credit sales to Mohan Rs 5,000 were recorded in Purchases Book.

(e) Goods returned to Ram Rs 1,000 were recorded in Sales Book.

(f) Credit purchases from S & Co. for Rs 6,000 were recorded in sales book.

However, S & Co. was correctly credited.

(g) Credit purchases from M & Co. Rs 6,000 were recorded in Sales Book as Rs

2,000 and posted there from to the credit of M & Co. as Rs 1,000.

(h) Credit sales to Raman Rs 4,000 posted to the credit of Raghvan as Rs 1,000.

(i) Bill receivable for Rs 1,600 from Noor was dishonoured and posted to debit of

Allowances account.

(j) Cash paid to Mani Rs 5,000 against our acceptance was debited to Manu.

(k) Old furniture sold for Rs 3,000 was posted to Sales account as Rs 1,000.

(l) Depreciation provided on furniture Rs 800 was not posted.

(m) Material Rs 10,000 and wages Rs 3,000 were used for construction of building.

No adjustment was made in the books.

Rectify the errors and prepare suspense to ascertain the difference in trial balance.

Answer :

S. No.

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

(a) Sales A/c Dr. 400

To Suspense A/c

400

(Net balance of Sales Book overcasted by Rs 400,

now rectified)

(b) Machinery A/c Dr. 500

To Wages A/c

50

To Suspense A/c

450

(Wages paid for installation of machinery wrongly posted as

Rs 50 to Wages Account, now rectified)

(c) Machinery A/c Dr. 10,000


To Purchases A/c

6,000

To R & Co. A/c

9,000

(Purchased machinery from R & Co. Rs 10,000 wrongly posted

to Purchases Book as Rs 6,000 and posted to R & Co.

Account Rs 1,000, now rectified)

(d) Mohan Dr. 10,000

To Sales A/c

5,000

To Purchases A/c

5,000

(Goods sold to Mohan Rs 5,000 wrongly recorded in the

Purchases Book, now rectified)



1,000

(Goods returned to Ram wrongly recorded in the Sales Book,

now rectified)

(f) Pu



Depreciation, Provisions and Reserves


Q1 :

What is Depreciation?

Answer :

Every business acquires fixed assets for its use in the business over a period of time. As the benefits of these assets can be availed

over a long period of time, thus, due to their regular use, there occurs continuous wear and tear and consequently fall in their value.

This fall in the value of fixed assets, due to their regular use or expiry of time is termed as depreciation.

A machinery costing Rs 1,00,000 and its useful life is 10 years; so, depreciation is calculated as:

Q2 :

State briefly the need for providing depreciation.

Answer :

The needs for providing depreciation are given below.

1. To ascertain true net profit or net loss- Correct profit or loss can be ascertained when all the expenses and losses incurred for earning

revenues are charged to Profit and Loss Account. Assets are used for earning revenues and its cost is charged in form of depreciation from

Profit and Loss Account.

2. To show true and fair view of financial statements- If depreciation is not charged, assets are shown at higher value than their actual

value in the Balance Sheet; consequently, the Balance Sheet does not reflect true and fair view of financial statements.

3. For ascertaining the accurate cost of production- Depreciation on plant and machinery and other assets, which are engaged in

production, is included in the cost of production. If depreciation is not included, cost of production is underestimated, which will lead to low

sale price and thus leads to low profit.

4. Distribution of dividend out of profit- If depreciation is not charged, which leads to overestimating of profit and consequently more profit

is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business.

5. To provide funds for replacement of assets- Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation

charged will be retained in the business and will be used for replacement of fixed assets after its useful life.

6. Consideration of tax- If depreciation is charged, then Profit and Loss Account will disclose lesser profit as to when the depreciation

is not charged. This depicts reduced profit and thus the business will be liable for lesser tax amount.

Q3 :

What are the causes of depreciation?

Answer :

1. Constant use - Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.

2. Expiry of time - With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather,

etc. lead to deterioration of the fixed assets.

3. Obsolescence - Due to the fast technological innovations and inventions today's assets may be outdated by tomorrow's sophisticated

assets. This leads to the obsolescence of fixed assets.

4. Expiry of legal rights - If an asset is acquired for a specific period of time, then, whether the asset is put to use ornot, its value becomes

zero at the end of its useful life. For example, if a land is acquired for Rs 1,00,000 for 25 years on lease, then each year its value

depreciates by of its gross value. At the end of the 25th year, the value of the lease will be zero.

5. Accident - An asset may lose its value and damage may happen to it due to mishaps such as a fire accident, theft or a natural calamity.

The loss due to accident is permanent in nature.

6. Permanent fall in value - Generally, we do not record fluctuations in the market price of the fixed assets in the books. However, if the fall

in market price is permanent, it is accounted, which leads to a fall in the value of fixed assets in the books.

Q4 :

Explain basic factors affecting the amount of depreciation.

Answer :

1. Total cost of asset - The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses

incurred in acquiring, installing and constructing asset and bringing the asset to its usable condition are included in the total cost of asset.

2. Estimated useful life - Every asset has its useful life other than its physical life (in terms of number of years, units, etc.), used by a

business. The useful life of an asset is considered to estimate the effective life of a fixed asset. For example, land has indefinite life;

however, if business acquiress a piece of land on lease for 25 years, then the useful life of the piece of land is considered to be 25 years.

3. Estimated scrap value - It is estimated as the net realisable value or sale value of an asset at the end of its effective life. It is deducted

from the total cost of an asset. For example, furniture is acquired at Rs 50,000 and its effective life is 10 years.

After 10 years, the furniture will be sold at Rs 10,000. So, depreciation is charged as:

Q5 :

Distinguish between straight line method and written down value method of calculating depreciation.

Answer :

Basis of Difference Straight Line Method Written Down Value Method

Basis for

calculation

Depreciation is calculated on

the original cost of an asset.


the reducing balance, i.e., the

book value of an asset.

Amount of

depreciation

Equal amount is charged each

year over the effective life of

the asset.

Diminishing amount of

depreciation (on the written

down value of asset) is charged

each year over the effective life

of the asset.

Book value of asset Book value of the asset

becomes zero at the end of its

effective life.

Book value of the asset can

never be zero.

Suitability It is suitable for the assets like

patents, copyright, land and

buildings, etc., which have

lesser possibility of

obsolescence and lesser repair

charges.

It is suitable for assets that

needs more repair in the later

years like, plant and

machinery, car, etc.

Effect of

depreciation and

repair on profit and

loss account

Unequal effect over the life of

the asset, as depreciation

remains same over the years

but repair cost increases in the

later years.

Equal effect over the life of the

asset, as depreciation cost is

high and repairs are less in the

initial years but in the latter

years the repair costs increase

and depreciation cost

decreases.

Recognition under

Income Tax Act

It is not recognised under the

income tax act.

It is recognised under the

income tax act.

Q6 :

In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year.

Which method is suitable for charging depreciation if the management does not want to increase burden on profits and

loss account on account of depreciation and repair.

Answer :

If the management does not want to exert undue burden on the profits due to high depreciation and repair costs in the latter years

of the assets, then 'written down method' should be a preferred method to provide depreciation. This is because the cost of

depreciation reduces; whereas, repair and maintenance expenses increase in the latter years. However, on the whole, it

does not exert increasing burden on profits.

Q7 :

What are the effects of depreciation on profit and loss account and balance sheet?

Answer :

The effects of depreciation on Profit and Loss Account are given below.

1. Depreciation increases the debit side of profit and loss account and hence reduces net profit.

2. Depreciation increases the total expenses, leading to an excess of debit over credit balance.

The effects of depreciation on Balance Sheet are given below.

1. It reduces the original cost or book value of the concerned asset.

2. It reduces the overall balance of asset's column in the balance sheet.

Q8 :

Distinguish between provision and reserve.

Answer :

Basis of Difference Provision Reserve

Meaning It is created to meet the known

liability.

It is created to meet unknown

liability.

Nature Provision is charged against

profit.

Reserve is appropriation of the

profit.

Purpose It is created for a specific

liability.

It is created for strengthening

the financial position.

Mode of creation It is created by debiting the profit

and loss account.

It is created by debiting the

profit and loss appropriation

account.

Use for payment of

dividend

It cannot be used for payment of

dividends.

It can be used for payment of

dividends.

Creation Creation of provision is

compulsory. It is created even if

there is no profit.

Creation of reserve depends on

the discretion of the

management. It is created only

when there is profit.

Q9 :

Give four examples each of provision and reserves.

Answer :

Four examples of provision are given below.

1. Provision for bad and doubtful debts

2. Provision for discount on debtors

3. Provision for depreciation

4. Provision for taxation

Four examples of reserve are given below.

1. General reserve

2. Capital reserve

3. Dividend equalisation reserve

4. Debenture redemption reserve

Q10 :

Distinguish between revenue reserve and capital reserve.

Answer :

Basis of Difference Revenue Reserve Capital Reserve

Source It is created out of revenue

profit, i.e., revenue earned

from normal activities of

business operations.

It is created out of capital

profit, i.e., gain from other than

normal activities of business

operations, such as sale of

fixed assets, etc.

Dividend It can be used for dividend. It cannot be used for dividend.

Purpose It is created for strengthening

the financial position of the

business.

It is created for the purpose

laid down in the Companies

Act.

Q11 :

Give four examples each of revenue reserve and capital reserves.

Answer :

1. Four examples of revenue reserve are given below.

1. General Reserve

2. Retained Earnings

3. Dividend Equalisation Reserve

4. Debenture Redemption Reserve

2. Four examples of capital reserve are given below.

1. Issues of shares at premium

2. Profit or issue of shares

3. Sale of fixed assets

4. Profit on redemption of debentures

Q12 :

Distinguish between general reserve and specific reserve.

Answer :

Basis of

Difference General Reserve Specific Reserve

Meaning When the reserve is created

without any specified purpose,

the reserve is called general

reserve.

When reserve is created for

some specific purpose, the

reserve is called specific

reserve.

Usage It can be used for any purpose. It cannot be used for any

purpose other than the specified

purpose for which it is created.

Examples Retained earnings, reserve

funds, etc.

Debenture redemption reserve,

dividend equalisation reserve,

etc.

Q13 :

Explain the concept of secret reserve.

Answer :

Reserves that are created by overstating liabilities or understating assets are known as secret reserves. They are notshown in the

balance sheet. These reduce tax liabilities, as the liabilities are overstated. It is created by management to avoid competition by

reducing profit. Creation of secret reserve is not allowed by Companies Act, 1956 that requires full disclosure of all material facts

and accounting policies while preparing final statements.

<< Previous Chapter 6 : Trial Balance and Rectification of ErrorsNext Chapter 8 : Bills of Exchange >> Long answers : Solutions of Questions on Page Number : 273

Q1 :

Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?

Answer :

Every business acquires fixed assets for its use in the business over a period of time. As the benefits of these assets can be availed

over a long period of time (due to their regular use), there exists continuous wear and tear and consequently fall in their value. This

fall in the value of fixed assets (due to regular use or expiry of time) is termed as depreciation.

A machinery that costs Rs 1,00,000 and its useful life of 10 years, its depreciation will be calculated as:

1. To ascertain true net profit or net loss - Correct profit or loss can be ascertained when all the expenses and losses incurred for earning

revenues are charged to profit and loss account. Assets are used for earning revenues and its cost is charged in form of depreciation from

profit and loss account.

2. To show true and fair view of financial statements - If depreciation is not charged, assets are shown at higher value than their actual

value in the balance sheet; consequently, the balance sheet does not reflect true and fair view of financial statements.

3. For ascertaining the accurate cost of production - Depreciation on plant and machinery and other assets, which are engaged in

production, is included in the cost of production. If depreciation is not included, cost of production is underestimated, which will lead to low

sale price and thus leads to low profit.

4. Distribution of dividend out of profit - If depreciation is not charged, which leads to overestimating of profit and consequently more profit

is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business.

5. To provide funds for replacement of assets - Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation

charged will be retained in the business and will be used for replacement of fixed assets after its useful life.

6. Consideration of tax - If depreciation is charged, then profit and loss account will disclose lesser profit as to when the depreciation

is not charged. This depicts reduced profit and thus the business will be liable for lesser tax amount.

Below are given the causes for depreciation.

1. Constant use - Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.

2. Expiry of time - With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather,

etc. lead to deterioration of the fixed assets.

3. Obsolescence - Due to the fast technological innovations and inventions today's assets may be outdated by tomorrow's sophisticated

assets. This leads to the obsolescence of fixed assets.

4. Expiry of legal rights - If an asset is acquired for a specific period of time, then, whether the asset is put to use ornot, its value becomes

zero at the end of its useful life. For example, if a land is acquired for Rs 1,00,000 for 25 years on lease, then each year its value

depreciates by of its gross value. At the end of the 25th year, the value of the lease will be zero.

5. Accident - An asset may lose its value and damage may happen to it due to mishaps such as a fire accident, theft or a natural calamity.

The loss due to accident is permanent in nature.

6. Permanent fall in value - Generally, we do not record fluctuations in the market price of the fixed assets in the books. However, if the fall

in market price is permanent, it is accounted, which leads to a fall in the value of fixed assets in the books.

Q2 :

Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and

also give situations where they are useful.

Answer :

Straight Line method

It is a simple method of charging depreciation. Under this method, depreciation is charged on the original cost of an asset, at a fixed

rate of percentage. In this method, amount of depreciation remains same from year to year and asset's value becomes zero at the

end of its useful life.

Amount of depreciation is calculated as under:

Advantages of Straight Line Method

1. It is simple to calculate.

2. Asset can be completely written off, i.e., asset can be depreciated until the net scrap value is zero.

3. Same amount of depreciation is charged every year. Therefore, it helps in easy comparison of Profit and Loss Account for different years.

4. It is used for assets that have low repairs and maintenance expenses and are continuously used over a period of time.

Limitations of Straight Line Method

1. Burden of deprecation is more on profit and loss account in the later years, when repair and maintenance costs increase, as asset

becomes older.

2. Value of asset becomes zero in the books even if asset is still in usable condition in business.

Uses of Straight Line Method

1. This method is useful where repairs and maintenance expenses on asset are low.

2. It is also useful when an asset is continuously used from one year to another.

3. It is useful when the value of assets, such as patent, copyright, goodwill, etc., becomes zero

Written Down Value Method

This method is applicable where depreciation is charged on the diminishing balance, i.e., book value of the asset. In this method,

asset's value goes on diminishing year after year and the amount of depreciation declines.

Rate of depreciation is calculated as follows:

Where,

R represents rate of depreciation

n represents expected useful life of the asset

s represents the scrap value

c represents the cost of the asset

Advantages of Written Down Value Method

1. It is based on the logical assumption that asset is used more in the earlier years, so more cost is charged in form of depreciation.

2. It is suitable for the assets where repairs are more in the later years, as depreciation is lesser and on a whole the combined burden of

depreciation and repairs exerts equal pressure on the net profit over years.

3. This method is accepted by the income tax authorities.

4. As more depreciation is charged in the earlier years, so the loss due to obsolescence of the asset is reduced.

Limitations of Written Down Value Method

1. It is difficult to calculate and is a time consuming process.

2. The value of an asset cannot be zero, thus the asset cannot be completely written off.

3. There arises shortage of funds for replacement of new asset. This happens due to the fact that the amount of depreciation is retained and

used in the business. Consequently, at the end of the useful life of an old asset, business finds it difficult to arrange funds for its

replacement.

Uses of Written Down Value Method

1. It is useful when assets have long life.

2. It is useful for those assets that require more repair and maintenance costs in the later years.

3. It provides easy calculation to provide depreciation of additional asset purchased during a year.

Difference between Straight Line Method and Written Down Value Method

Basis of Difference Straight Line Method Written Down Method

Basis for

calculation


the original cost of an asset.


the reducing balance, i.e., the

book value of an asset.

Amount of Equal amount is charged each Diminishing amount of

depreciation year over the effective life of

the asset.

depreciation (on the written

down value of asset) is charged

each year over the effective life

of the asset.

Book value of asset Book value of the asset

becomes zero at the end of its

effective life.

Book value of the asset can

never be zero.

Suitability It is suitable for the assets like,

patents, copyrights, land and

buildings, etc., which have

lesser possibility of

obsolescence and lesser repair

charges.

It is suitable for assets that

needs more repairs and

maintenance costs in the later

years like, plant and

machinery, car, etc.

Effect of

depreciation and

repair on profit and

loss account

Unequal effect over the life of

the asset, as depreciation

remains same over the years

but repair cost increases in the

later years.

Equal effect over the life of the

asset, as depreciation is high

and repairs are less in the

initial years but in the latter

years the repair cost increases

and depreciation cost

decreases.

Recognition under

Income Tax Act

It is not recognised under the

Income Tax Act.

It is recognised under the

Income Tax Act.

Q3 :

Describe in detail two methods of recording depreciation. Also give the necessary journal entries.

Answer :

The two methods of recording depreciation are diagrammatically presented below.

1. Charging depreciation to Asset Account- Under this method, depreciation is directly credited to the asset account and no separate

account is prepared for provision of depreciation. Under this method, the original cost of an asset and the total amount of

depreciation cannot be determined from the Balance Sheet, as the Asset Account appears at its written down value.

Journal entries for depreciation are given below.

When depreciation is charged to Assets Account

Depreciation A/c Dr.

To Assets A/c

(Depreciation charged to Assets Account)

Closing of Depreciation Account

Profit and Loss A/c Dr.

To Depreciation A/c

(Depreciation transferred to Profit and Loss Account)

2. Creating Provision for Depreciation Account- Under this method, depreciation is not credited to the Assets Account; in fact, it is credited

to the provision for Depreciation Account. At the year end, asset is shown at the original cost in the Balance Sheet and total depreciation up

to the date of Balance Sheet is shown as Provision for Depreciation Account.

Journal entries for depreciation are:

Charging Depreciation

1.

1.

Depreciation A/c Dr.

To Provision for Depreciation A/c

(Depreciation charged)

Closing of Depreciation Account


To Depreciation A/c

(Depreciation account is transferred to Profit and Loss Account)

When the asset is sold, the accumulated depreciation on that asset is credited to the Asset Account by passing the following Journal

entry:

Provision for Depreciation A/c Dr.

To Asset A/c

(Accumulated depreciation transferred to Assets Account)

Q4 :

Explain determinants of the amount of depreciation.

Answer :

1. Total cost of asset - The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses

incurred in acquiring, installing and constructing of assets and bringing the assets to their usable condition are included in the total cost of

asset.

2. Estimated useful life - Every asset having it's useful life other than it's physical life, in terms of number of years, units, etc. are considered

to estimate the effective life of a fixed asset. For example, land has indefinite life; however, if business acquires a piece of land on lease for

25 years, it's useful life is considered to be 25 years.

3. Estimated scrap value - It is estimated as the net realisable value or sale value of an asset at the end of it's effective life. It is deducted

from the total cost of an asset. For example, furniture is acquired at Rs 50,000 with it's effective life of 10 years.

After 10 years, furniture will be sold at Rs 10,000. So, depreciation is charged as:

Q5 :

Name and explain different types of reserves in details.

Answer :

Reserves- Reserves are created for strengthening the financial positions and future growth. It is created out of profit earned by

business.

The broad classification of reserve is diagrammatically presented below.

1. Revenue Reserve- It is created out of revenue profit, i.e., revenue earned from normal activities of the business. It can be used for either

general purpose or specific purpose. It is of two types:

a. General Reserve- When the reserve is created without any specified purpose, then the reserve is called general reserve. It is a

free reserve and so can be used for any purpose. It can also be used for future growth and expansion. For example, reserve funds,

retained earnings, contingencies reserves, etc.

b. Specific Reserve- When reserve is created for some specific purpose, then the reserve is called specific reserve.

Examples of specific reserve are given below.

i. Debenture Redemption Reserve

ii. Investment Fluctuation Reserve

iii. Dividend Equalisation Reserve

iv. Workmen Compensation Fund

2. Capital Reserve- It is created out of capital profit, i.e., gain from other than normal activities of business operations, such as sale of fixed

asset, etc. It is created to meet the capital loss. It cannot be distributed as dividend. The example of capital reserves are given below.

i. Premium on issue of shares

ii. Premium on issue of debentures

iii. Profit on redemption of debentures

iv. Profit on sale of fixed assets

v. Profit on reissue of forfeited shares

vi. Profit prior to incorporation

3. Secret Reserves- Reserves that are created by overstating liabilities or understating assets are known as secret reserves. They

are not shown in the Balance Sheet. These reduce tax liabilities, as the liabilities are overstated. It is created by management to avoid

competition by reducing profit. Creation of secret reserve is not allowed by Companies Act, 1956, which requires full disclosure of all

materials facts and accounting policies, while preparing final statements.

Q6 :

What are provisions? How are they created? Give accounting treatment in case of provision for doubtful Debts.

Answer :

Provisions are the amount that is created against profit to meet the known liability; however, the amount of liability is uncertain. It is

created for specific liability. Creation of provision is compulsory even if, there is no profit. The underlying principle behind creation of

provision is conservatism, viz., to prepare for future loss. The main rationale for making provisions is to provide cushion to the future

business performance against the uncertain and unforeseen losses that may arise from the past transactions. A few examples of

provisions are given below.

1. Provision for bad and doubtful debts

2. Provision for depreciation

3. Provision for taxation

4. Provision for discount on debtors

Provisions are made by debiting the Profit and Loss Account on estimate basis. The provisions are created on the basis of past

experiences. Every year, a business may experience common losses, such as depreciation of fixed assets, taxation, etc., which are

although known; however, their exact amount of future period is unknown. Thus, business creates provision of certain percentage

every year, which is truly based on the intuitions and past experiences. These unascertained liabilities in form of provisions are kept

aside, which help future business activities, undisturbed from the future losses.

Accounting treatment for provision for doubtful debts is:


To Provision for Doubtful Debts

(Provision for doubtful debt made)

<< Previous Chapter 6 : Trial Balance and Rectification of ErrorsNext Chapter 8 : Bills of Exchange >> Numerical questions : Solutions of Questions on Page Number : 273

Q1 :

On April 01, 2000, Bajrang Marbles purchased a Machine for Rs 2,80,000 and spent Rs

10,000 on its carriage and Rs 10,000 on its installation. It is estimated that its working life is

10 years and after 10 years its scrap value will be Rs 20,000.

(a) Prepare Machine account and Depreciation account for the first four years by

providing depreciation on straight line method. Accounts are closed on March

31st every year.

(b) Prepare Machine account, Depreciation account and Provision for depreciation

account (or accumulated depreciation account) for the first four years by

providing depreciation using straight line method accounts are closed on March

31 every year.

Answer :

Books of Bajrang Marbles

(a)

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2000 2001

Apr.01 Bank 3,00,000 Mar.31 Depreciation 28,000

Balance c/d 2,72,000

3,00,000 3,00,000

2001 2002

Apr.01 Balance b/d 2,72,000 Mar.31 Depreciation 28,000

Mar.31 Balance c/d 2,44,000

2,72,000 2,72,000

2002 2003



2,44,000

Q2 :

On July 01, 2000, Ashok Ltd. Purchased a Machine for Rs 1,08,000 and spent Rs 12,000 on

its installation. At the time of purchase it was estimated that the effective commercial life of

the machine will be 12 years and after 12 years its salvage value will be Rs 12,000.

Prepare machine account and depreciation Account in the books of Ashok Ltd. For first

three years, if depreciation is written off according to straight line method. The account are

closed on December 31st, every year.

Answer :

Books of Ashok Ltd.

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2000 2000

Jul.01 Bank 1,20,000 Dec.31 Depreciation 4,500

Dec.31 Balance c/d 1,15,500

1,20,000 1,20,000

2001 2001

Jan.01 Balance b/d 1,15,500 Dec.31 Depreciation 9,000


1,15,000 1,15,500

2002 2002

Jan.01 Balance b/d 1,06,500 Dec.31 Depreciation 9,000

Dec.31 Balance c/d 97,500

1,06,500 1,06,500

2003

Q3 :

Reliance Ltd. Purchased a second hand machine for Rs 56,000 on October 01, 2001 and

spent Rs 28,000 on its overhaul and installation before putting it to operation. It is expected

that the machine can be sold for Rs 6,000 at the end of its useful life of 15 years. Moreover

an estimated cost of Rs 1,000 is expected to be incurred to recover the salvage value of Rs

6,000. Prepare machine account and Provision for depreciation account for the first three

years charging depreciation by fixed instalment Method. Accounts are closed on December

31, every year.

Answer :

Books of Reliance Ltd.

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2001 2001

Oct.01 Bank 84,000


84,000 84,000

2002 2002

Jan.01 Balance b/d 84,000


84,000 84,000

2003 2003

Jan.01 Balance b/d 84,000


84,000 84,000

Q4 :

Berlia Ltd. Purchased a second hand machine for Rs 56,000 on July 01, 2001 and spent Rs

24,000 on its repair and installation and Rs 5,000 for its carriage. On September 01, 2002, it

purchased another machine for Rs 2,50,000 and spent Rs 10,000 on its installation.

(a) Depreciation is provided on machinery @10% p.a on original cost method annually on

December 31. Prepare machinery account and depreciation account from the year 2001 to

2004.

(b) Prepare machinery account and depreciation account from the year 2001 to 2004, if

depreciation is provided on machinery @10% p.a. on written down value method annually

on December 31.

Answer :

Books of Berlia Ltd.

(a)

Machinery Account (Original Cost Method)

Dr. Cr.


Amount


Amount

Rs

2001 2001

Jul.01 Bank (i) 85,000 Dec.31 Depreciation 4,250

(5,600 + 24,000 +

5,000) Dec.31 Balance c/d 80,750

85,000 85,000

2002 2002

Jan.01 Balance b/d (i) 80,750 Dec.31 Depreciation

Sep.01 Bank (ii) 2,60,000

(i) 8,500, (ii)

8,667 17,167

(2,50,000 +

10,000) Dec.31 Balance c/d 3,23,583

(i) 72,250, (ii)

2,51,333

3,40,750 3,40,750

2003 2003

Jan.01 Balance b/d 3,23,583

Q5 :

Ganga Ltd. purchased a machinery on January 01, 2001 for Rs 5,50,000 and spent Rs

50,000 on its installation. On September 01, 2001 it purchased another machine for Rs

3,70,000. On May 01, 2002 it purchased another machine for Rs 8,40,000 (including

installation expenses).

Depreciation was provided on machinery @10% p.a. on original cost method annually on

December 31. Prepare:

(a) Machinery account and depreciation account for the years 2001, 2002, 2003 and 2004.

(b) If depreciation is accumulated in provision for Depreciation account then prepare

machine account and provision for depreciation account for the years 2001, 2002, 2003 and

2004.

Answer :

(a)

Books of Ganga Ltd.

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2001 2001

Jan.01 Bank (i) 6,00,000 Dec.31

Depreciation

(i) 60,000 (ii)

12,333 72,333

(5,50,000 +

50,000) Dec.31 Balance c/d

Sep.01 Bank (ii) 3,70,000 (i) 5,40,000, (ii)

3,57,667 8,97,667

9,70,000 9,70,000

2002 2002

Jan.01 Balance b/d Dec.31 Depreciation

(i) 5,40,000,

(ii) 3,57,667 8,97,667 (i) 60,000, (ii)

37,000,

May.01 Bank (iii) 8,40,000 (iii) 56,000 1,53,000

Dec.31 Balance c/d

(i) 4,80,000 (ii)

3,20,667,

(iii) 7,84,000 15,84,667

17,37,667 17,37,667

Q6 :

Azad Ltd. purchased furniture on October 01, 2002 for Rs 4,50,000. On March 01, 2003 it

purchased another furniture for Rs 3,00,000. On July 01, 2004 it sold off the first furniture

purchased in 2002 for Rs 2,25,000. Depreciation is provided at 15% p.a. on written down

value method each year. Accounts are closed each year on March 31. Prepare furniture

account, and accumulated depreciation account for the years ended on March 31, 2003,

March 31, 2004 and March 31,2005. Also give the above two accounts if furniture disposal

account is opened.

Answer :

Books of Azad Ltd.

Furniture Account

Dr. Cr.


Amount


Amount

Rs

2002 2003

Oct.01 Bank (i) 4,50,000

2003 Mar.31 Balance c/d 7,50,000

Mar.01 Bank (ii) 3,00,000

7,50,000 7,50,000

2003 2004

Apr.01 Balance b/d

(i) 4,50,000, (ii)

3,00,000 7,50,000 Mar.31 Balance c/d 7,50,000

7,50,000 7,50,000

2004 2004

Apr.01 Balance b/d 7,50,000 July 01

Furniture

Disposal 4,50,000

(i) 4,50,000, (ii)

3,50,000 2005


Q7 :

M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2001 for Rs 1,00,000. On

July 01, 2002 another machine costing Rs 2,50,000 was purchased . The machine purchased

on April 01, 2001 was sold for Rs 25,000 on October 01, 2005. The company charges

depreciation @15% p.a. on straight line method. Prepare machinery account and

machinery disposal account for the year ended March 31, 2006.

Answer :

Books of M/s. Lokesh Fabrics

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2001 2002

Apr.01 Bank (i) 1,00,000 Mar.31 Depreciation 15,000

Mar.31 Balance c/d 85,000

1,00,000 1,00,000

2002 2003

Apr.01 Balance b/d 85,000 Mar.31 Depreciation

July.01 Bank (ii) 2,50,000

(i) 15,000 +

28,125 43,125

Mar.31 Balance c/d

(i) 70,000, (ii)

2,21,875 2,91,875

3,35,000 3,35,000

2003 2004

Apr.01 Balance b/d Mar.31 Depreciation

(i) 70,000, (ii)

2,21,875 2,91,875

Q8 :

The following balances appear in the books of Crystal Ltd, on Jan 01, 2005

Rs

Machinery account on 15,00,000

Provision for depreciation account 5,50,000

On April 01, 2005 a machinery which was purchased on January 01, 2002 for Rs 2,00,000

was sold for Rs 75,000. A new machine was purchased on July 01, 2005 for Rs 6,00,000.

Depreciation is provided on machinery at 20% p.a. on Straight line method and books are

closed on December 31 every year. Prepare the machinery account and provision for

depreciation account for the year ending December 31, 2005.

Answer :

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2005 2005

Jan.01 Balance b/d 15,00,000 Apr.01

Machinery

Disposal 2,00,000

(13,00,000 +

2,00,000)

Jul.01 Bank 6,00,000 Dec.31 Balance c/d 19,00,000

21,00,000 21,00,000

Provision for Depreciation Account

Dr. Cr.


Amount


Amount

Rs

2005 2005

Apr.01

Machinery

Disposal 1,30,000 Jan.01 Balance b/d 5,50,000

Apr.01 Balance c/d 7,50,000 Apr.01 Depreciation 10,000

Dec.31 Depreciation

(i) 2,60,000, (ii)

60,000 3,20,000

8,80,000 8,80,000

Working Note:

Machine Sold on July 01, 2005

(i) Years Opening Balance Depreciation Closing

Balance

2002 2,00,000 - 40,000 = 1,60,000

2003 1,60,000 - 40,000 = 1,20,000

2004 1,20,000 - 40,000 = 80,000

2005 80,000 - 10,000 = 70,000

Accumulated

Depreciation

= 1,30,000

Value on April 01,

2005

=

Q9 :

M/s. Excel Computers has a debit balance of Rs 50,000 (original cost Rs 1,20,000) in

computers account on April 01, 2000. On July 01, 2000 it purchased another computer

costing Rs 2,50,000. One more computer was purchased on January 01, 2001 for Rs 30,000.

On April 01, 2004 the computer which has purchased on July 01, 2000 became obsolete and

was sold for Rs 20,000. A new version of the IBM computer was purchased on August 01,

2004 for Rs 80,000. Show Computers account in the books of Excel Computers for the

years ended on March 31, 2001, 2002, 2003, 2004 and 2005. The computer is depreciated

@10 p.a. on straight line method basis.

Answer :

Books of M/s Excel Computers

Computer Account

Dr. Cr.


Amount


Amount

Rs

2000 2001

Apr.01 Balance b/d (i) 50,000 Mar.31 Depreciation

Jul.01 Bank (ii) 2,50,000

(i) 12,000, (ii)

18,750,

2001 (iii) 750 31,500

Jan.01 Bank (iii) 30,000 Mar.31 Balance c/d

(i) 38,000, (ii)

2,31,250,

(iii) 29,250 2,98,500

3,30,000 3,30,000

2001 2002

Apr.01 Balance b/d Mar.31 Depreciation

(i) 38,000, (ii)

2,31,250,

(i) 12,000 (ii)

25,000,

(iii) 29,250 2,98,500 (iii) 3,000 40,000

Mar.31 Balance c/d

(i) 26,000 (ii)

2,06,250,

Q10 :

Carriage Transport Company purchased 5 trucks at the cost of Rs 2,00,000 each on April

01, 2001. The company writes off depreciation @ 20% p.a. on original cost and closes its

books on December 31, every year. On October 01, 2003, one of the trucks is involved in an

accident and is completely destroyed. Insurance company has agreed to pay Rs 70,000 in

full settlement of the claim. On the same date the company purchased a second hand truck

for Rs 1,00,000 and spent Rs 20,000 on its overhauling. Prepare truck account and

provision for depreciation account for the three years ended on December 31, 2003. Also

give truck account if truck disposal account is prepared.

Answer :

Books of Carriage Transport Company

Truck Account

Dr. Cr.


Amount


Amount

Rs

2001 2001

Apr.01 Bank 10,00,000 Dec.31 Balance c/d 10,00,000

10,00,000 10,00,000

2002 2002

Jan.01 Balance b/d 10,00,000 Dec.31 Balance c/d 10,00,000

10,00,000 10,00,000

2003 2003

Jan.01 Balance b/d 10,00,000 Oct.01 Truck Disposal 2,00,000

Oct.01 Bank 1,20,000 Dec.31 Balance c/d 9,20,000

11,20,000 11,20,000

Provision for Depreciation Account

Dr. Cr.


Amount


Amount

Rs

Q11 :

Saraswati Ltd. purchased a machinery costing Rs 10,00,000 on January 01, 2001. A new

machinery was purchased on 01 May, 2002 for Rs 15,00,000 and another on July 01, 2004

for Rs 12,00,000. A part of the machinery which originally cost Rs 2,00,000 in 2001 was

sold for Rs 75,000 on October 31, 2004. Show the machinery account, provision for

depreciation account and machinery disposal account from 2001 to 2005 if depreciation is

provided at 10% p.a. on original cost and account are closed on December 31, every year.

Answer :

Books of Saraswati Ltd.

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2001 2001

Jan.01 Bank (i) 10,00,000

(8,00,000 +

2,00,000) Dec.31 Balance c/d 10,00,000

10,00,000 10,00,000

2002 2002


May.01 Bank (ii) 15,00,000

25,00,000 25,00,000

2003 2003


25,00,000 25,00,000

2004 2004

Jan.01 Balance b/d 25,00,000 Oct.31

Machinery

Disposal 2,00,000

Jul.01 Bank (ii) 12,00,000 Dec.31 Balance c/d

(i) 8,00,000 (ii)

15,00,000

Q12 :

On July 01, 2001 Ashwani purchased a machine for Rs 2,00,000 on credit. Installation

expenses Rs 25,000 are paid by cheque. The estimated life is 5 years and its scrap value

after 5 years will be Rs 20,000. Depreciation is to be charged on straight line basis. Show

the journal entry for the year 2001 and prepare necessary ledger accounts for first three

years.

Answer :

Books of Ashwani

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2001

Jul.01 Machinery A/c Dr. 2,25,000

To Creditors for Machinery A/c 2,00,000

To Bank A/c 25,000

(Machinery bought on credit and Rs 25,000 paid

for installation through cheque)

2001

Dec.31 Depreciation A/c Dr. 20,500

To Machinery A/c 20,500

(Depreciation charged on Machinery)

2001

Dec.31 Profit and Loss A/c Dr. 20,500

To Depreciation A/c 20,500

(Depreciation transferred to Profit and Loss

Account)

2002

Dec.31 Depreciation A/c Dr. 41,000

To Machinery A/c 41,000

(Depreciation charged on Machinery)

Q13 :

On October 01, 2000, a Truck was purchased for Rs 8,00,000 by Laxmi Transport Ltd.

Depreciation was provided at 15% p.a. on the diminishing balance basis on this truck. On

December 31, 2003 this Truck was sold for Rs 5,00,000. Accounts are closed on 31st March

every year. Prepare a Truck Account for the four years

Answer :

Books of Laxmi Transport Ltd.

Truck Account

Dr. Cr.


Amount


Amount

Rs

2000 2001

Oct.01 Bank 8,00,000 Mar.31 Depreciation 60,000


8,00,000 8,00,000

2001 2002

Apr.01 Balance b/d 7,40,000 Mar.31 Depreciation 1,11,000


7,40,000 7,40,000

2002 2003



6,29,000 6,29,000

2003

Q14 :

Kapil Ltd. purchased a machinery on July 01, 2001 for Rs 3,50,000. It purchased two

additional machines, on April 01, 2002 costing Rs 1,50,000 and on October 01, 2002 costing

Rs 1,00,000. Depreciation is provided @10% p.a. on straight line basis. On January 01,

2003, first machinery become useless due to technical changes. This machinery was sold for

Rs 1,00,000, prepare machinery account for 4 years on the basis of calendar year.

Answer :

Books of Kapil Ltd.

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2001 2001

Jul.01 Bank (i) 3,50,000 Dec.31

Depreciation (6

months) 17,500


3,50,000 3,50,000

2002 2002

Jan.01 Balance c/d 3,32,500 Dec.31 Depreciation

Apr.01 Bank (ii) 1,50,000

(i) 35,000 (ii)

11,250 (9 months),

Oct.01 Bank (iii) 1,00,000

(iii) 2,500 (3

months) 48,750

Dec.31 Balance c/d

(i) 2,97,500, (ii)

1,38,750,

(iii) 97,500 5,33,750

5,82,500 5,82,500

2003

Q15 :

On January 01, 2001, Satkar Transport Ltd, purchased 3 buses for Rs 10,00,000 each. On

July 01, 2003, one bus was involved in an accident and was completely destroyed and Rs

7,00,000 were received from the Insurance Company in full settlement. Depreciation is

writen off @15% p.a. on diminishing balance method. Prepare bus account from 2001 to

2004. Books are closed on December 31 every year.

Answer :

Books of Satkar Transport Ltd.

Bus Account

Dr. Cr.


Amount


Amount

Rs

2001 2001

Jan.01 Bank 30,00,000 Dec.31 Depreciation 4,50,000


30,00,000 30,00,000

2002 2002

Jan.01 Balance b/d 25,50,000 Dec.31 Depreciation 3,82,500


25,50,000 25,50,000

2003 2003

Jan.01 Balance b/d 21,67,500 July.01

Depreciation (6

months) 54,187

July.01

Profit and Loss

(Profit) 31,687 July.01

Insurance Co.

(Insurance claim) 7,00,000

Dec.31 Depreciation 2,16,750

Q16 :

On October 01, 2001 Juneja Transport Company purchased 2 Trucks for Rs 10,00,000

each. On July 01, 2003, One Truck was involved in an accident and was completely

destroyed and Rs 6,00,000 were received from the insurance company in full settlement. On

December 31, 2003 another truck was involved in an accident and destroyed partially,

which was not insured. It was sold off for Rs 1,50,000. On January 31, 2004 company

purchased a fresh truck for Rs 12,00,000. Depreciation is to be provided at 10% p.a. on the

written down value every year. The books are closed every year on March 31. Give the

truck account from 2001 to 2004.

Answer :

Books of Juneja Transport Company

Truck Account

Dr. Cr.


Amount


Amount

Rs

2001 2002

Oct.01 Bank 20,00,000 Mar.31 Depreciation 1,00,000


20,00,000 20,00,000

2002 2003

Apr.01 Balance b/d 19,00,000 Mar.31 Depreciation 1,90,000


19,00,000 19,00,000

2003 2003

Apr.01 Balance b/d 17,10,000 Jul.01

Depreciation (3

Month on one

Truck) 21,375

Jul.01

Bank (Insurance

Claim) 6,00,000

2004 Jul.01

Profit and Loss

(loss) 2,33,625

Jan.31 Bank 12,00,000

Q17 :

A Noida based Construction Company owns 5 cranes and the value of this asset in its books

on April 01, 2001 is Rs 40,00,000. On October 01, 2001 it sold one of its cranes whose value

was Rs 5,00,000 on April 01, 2001 at a 10% profit. On the same day it purchased 2 cranes

for Rs 4,50,000 each. Prepare cranes account. It closes the books on December 31 and

provides for depreciation on 10% written down value.

Answer :

Cranes Account

Dr. Cr.


Amount


Amount

Rs

2001 2004

Apr.01

Machinery

(35,00,000

+

5,00,000) 40,00,000 Oct.01 Depreciation 25,000

Oct.01

Profit and

Loss

(Profit) 47,500 Oct.01 Bank 5,22,500

Oct.01 Bank 9,00,000 Dec.31 Depreciation

35,00,000

x

10 x

9 =

2,62,500

100 12

9,00,000

x

10 x

6 =

22,500

2,85,000 100 12

Dec.31 Balance c/d

32,37,500 + 8,77,500 41,15,000

49,47,500 49,47,500

Q18 :

Shri Krishan Manufacturing Company purchased 10 machines for Rs 75,000 each on July

01, 2000. On October 01, 2002, one of the machines got destroyed by fire and an insurance

claim of Rs 45,000 was admitted by the company. On the same date another machine is

purchased by the company for Rs 1,25,000.

The company writes off 15% p.a. depreciation on written down value basis. The company

maintains the calendar year as its financial year. Prepare the machinery account from 2000

to 2003.

Answer :

Books of Shri Krishna Manufacturing Company

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2000 2000

Jul.01 Bank 7,50,000 Dec.31 Depreciation 56,250


7,50,000 7,50,000

2001 2001

Jan.01 Balance b/d 6,93,750 Dec.31 Depreciation 1,04,063


6,93,750 6,93,750

2002 2002


Depreciation (9

months 6,634

for one machine)

Oct.01 Bank 1,25,000 Oct.01 Insurance Co.

Q19 :

On January 01, 2000, a Limited Company purchased machinery for Rs 20,00,000.

Depreciation is provided @15% p.a. on diminishing balance method. On March 01, 2002,

one fourth of machinery was damaged by fire and Rs 40,000 were received from the

insurance company in full settlement. On September 01, 2002 another machinery was

purchased by the company for Rs 15,00,000.

Write up the machinery account from 2002 to 2003. Books are closed on December 31,

every year.

Answer :

Machinery Account

Dr. Cr.


Amount


Amount

Rs

2002 2002

Jan.01

Balance b/d (i)

(10,83,750 +

3,61,250) 14,45,000

Mar.01 Depreciation (1/4

Machine

for 2 Months) 9,031

Sep.01 Bank (ii) 15,00,000 Mar.01 Bank 40,000

Mar.01 Profit and Loss 3,12,219

Dec.31 Depreciation (i)

(i) 1,62,563

(3/4th of machine),

(ii) 75,000 2,37,563

Dec.31 Balance c/d

(i) 9,21,187, (ii)

14,25,000 23,46,187

29,45,000 29,45,000

2003 2003

Jan.01 Balance b/d Dec.31 Depreciation

(i) 9,21,187,

(ii) 14,25,000 23,46,187 Dec.31

(i) 1,38,177, (ii)

2,13,750 3,51,927

Q20 :

A Plant was purchased on 1st July, 2000 at a cost of Rs 3,00,000 and Rs 50,000 were spent

on its installation. The depreciation is written off at 15% p.a. on the straight line method.

The plant was sold for Rs 1,50,000 on October 01, 2002 and on the same date a new Plant

was installed at the cost of Rs 4,00,000 including purchasing value. The accounts are closed

on December 31 every year.

Show the machinery account and provision for depreciation account for 3 years

Answer :

Plant Account

Dr. Cr.


Amount


Amount

Rs

2000 2000

July.01 Bank 3,50,000 Dec.31 Balance c/d 3,50,000

3,50,000 3,50,000

2001 2001

Jan.01 Balance b/d 3,50,000


3,50,000 3,50,000

2002 2002


Provision for

Depreciation 1,18,125

Oct.01 Bank 4,00,000 Oct.01 Bank 1,50,000

Oct.01 Profit and Loss 81,875


7,50,000 7,50,000

Q21 :

An extract of Trial balance from the books of Tahiliani and Sons Enterprises on December

31 2005 is given below:

Name of the Account

Debit Amount

Rs

Credit

Amount

Rs

Sundry debtors 50,000

Bad debts 6,000

Provision for doubtful debts 4,000

Additional Information:

Bad Debts proved bad; however, not recorded amounted to Rs 2,000.

Provision is to be maintained at 8% of debtors

Give necessary accounting entries for writing off the bad debts and creating the provision

for doubtful debts account. Also, show the necessary accounts.

Answer :

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

Bad Debt A/c Dr. 2,000

To Debtors A/c 2,000

(Further bad debt charged from Debtors

Account)

Provision for Doubtful Debt A/c Dr. 8,000

To Bad Debt A/c 8,000

(Amount of bad debt transferred to

Provision for Doubtful Debt Account)

Profit and Loss A/c Dr. 7,840

To Provision for Doubtful Debt A/c 7,840

(Amount of Provision for Doubtful Debt

transferred

to Profit and Loss Account)

Bad Debt Account

Dr. Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount

Rs Rs

2005 2005

Dec.31 Balance b/d 6,000 Dec.31

Provision for

Doubtful

Dec.31 Debtors 2,000 Debt 8,000

8,000 8,000

Q22 :

The following information is extracted from the Trial Balance of M/s Nisha Traders on 31

December 2005.

Sundry Debtors 80,500

Bad Debts 1,000

Provision for Bad Debts 5,000

Additional Information

Bad Debts Rs 500

Provision is to be maintained at 2% of Debtors

Prepare bad debts account, Provision for bad debts account and profit and loss account.

Answer :

Bad Debt Account

Dr. Cr.


Amount


Amount

Rs

2005 2005

Dec.31 Balance b/d 1,000 Dec.31

Provision for Bad

Debts 1,500

Dec.31 Debtors 500

1,500 1,500

Provision for Bad debt Account

Dr. Cr.


Amount


Amount

Rs

2005 2005

Dec.31 Bad Debt 1,500 Dec.31 Balance b/d 5,000

Dec.31 Profit and Loss 1,900


5,000 5,000

Profit and Loss Account

Dr. Cr.


Amount




Bills of Exchange


Q1 :

Name any two types of commonly used negotiable instruments.

Answer :

The two types of commonly used negotiable instruments are:

1. Cheques

2. Bills of exchange

Q2 :

Write two points of distinction between bills of exchange and promissory note.

Answer :

Basis of

Difference Bills of Exchange Promissory Note

Drawer It is drawn by a creditor. It is drawn by a debtor.

Parties There are three parties

involved, namely drawer,

drawee and payee.

There are two parties involved,

namely maker and payee.

Q3 :

State any four essential features of bill of exchange.

Answer :

The four essential features of bills of exchange are:

1. It must be a written document.

2. It is an unconditional order to pay by the drawer to the drawee.

3. The maker of bill must sign it, without which it will not be a legal proof.

4. The amount to be paid along with its expiry date must be specifically mentioned (both in figures and words) in a bill of exchange.

Q4 :

State the three parties involved in a bill of exchange.

Answer :

The following three parties are involved in a bill of exchange.

1. Drawer who makes the bill

2. Drawee who accepts the bill

3. Payee who receives the payment

Q5 :

What is meant by maturity of a bill of exchange?

Answer :

Maturity of a bill means a date on which the bill is due for payment. Maturity date of the bill differs on the basis of the terms and

conditions of the bill. There are three types of bill, viz. after date bill, after sight bill and at sight bill.

1. After date bill: In case of after date bill, the payment of the bill is made on the maturity date of the bill. The maturity date of the

bill is ascertained by adding three days of grace period with the specified period of the bill (which starts from the date of drawing).

For example, if a bill is drawn on 1st March, 2011 and payable after one month; its maturity date is 4th April. If the maturity date

happens to be a gazetted holiday, then the bill is due for payment one day before. However, if the maturity date happens to be a

casual holiday, then the bill is due for payment after one day.

2. After sight bill: In case of after sight bill, the payment of the bill is made on the maturity date of the bill. The maturity date of the

bill is ascertained by adding three days of grace period with the specified period of the bill (which starts from the date of

acceptance by the drawee). For example, if a one month bill is drawn on 1st March, 2011 and is accepted by the drawee on

5th March, 2011; its maturity date is 8th April. In this case, the date of the bill starts from 5th March and notfrom 1st March. If the

maturity date happens to be a gazetted holiday, then the bill is payable one day before. However, if the maturity date happens to be

a casual holiday, then the bill is payable after one day.

3. At sight bill: In case of at sight bill, the due date of the bill is considered as and when the bill is presented for payment by the

holder of the bill. In this case, there is no grace period. The bill becomes due whenever it is presented for payment.

Q6 :

What is meant by dishonour of a bill of exchange?

Answer :

Dishonour of a bill happens when the acceptor of the bill fails to make the payment on the date of maturity of the bill. Hence, liability

of the acceptor is restored. Entries made for recording dishonour of the bill of exchange are reverse of the entries of recording

drawing of the bill.

In the books of drawer

Acceptor A/c Dr.


(Bill dishonoured)

In the books of acceptor/drawee

Bills Payable A/c Dr.

To Drawer A/c

(Bill dishonoured)

Q7 :

Name the parties to a promissory note

Answer :

The parties to a promissory note are given below.

1. Promissor, who makes the note and undertakes to pay the amount of promissory note.

2. Payee, who receives the payment.

Q8 :

What is meant by acceptance of a bill of exchange?

Answer :

A bill is drawn in favour of a person from whom the amount is due. In other words, a bill of exchange is drawn by the creditors on

his/her debtors to make payment of specific amount, on a mentioned date. Generally, a bill is drawn by a seller to a purchaser.

Purchaser accepts the bill for the amount due on account of the credit sales. The bill may be accepted for the amount due other

than credit purchases, such as commission payable, salary outstanding, etc. A bill cannot come into existence without the

acceptance of a debtor.

Q9 :

What is Noting of a bill of exchange.

Answer :

When a bill is presented for payment and acceptor fails to make payment, the bill gets dishonoured. In order to keep a legal proof of

dishonour, the bill gets noted by the Notary public (which is approved by the government). In exchange of the Notary service, Notary

public charges fees, known as Noting charges. Notary public notes the following facts:

1. Date and amount of the bill

2. Reasons for dishonour

3. Amount of Noting charges

Q10 :

What is meant by renewal of a bill of exchange?

Answer :

When an acceptor of a bill does not have sufficient fund to meet the obligations of the bill on time, he/she requests the drawer for

extension (of time) for payment. If the drawer agrees, then a new bill is drawn which is known as renewal of bill. Generally, a bill is

renewed on the condition that the drawee has to pay interest for the extended period.

Q11 :

Give the performa of a Bills Receivable Book.

Answer :

Serial

Number

of Bill

Date Recei

ved

Dat

e of

Bill

Receiv

ed

From

Whom

Draw

er

Accept

or

Wher

e

payab

le

Ter

m

Du

e

dat

e

Ledg

er

Folio

Amou

nt

Cas

h

Boo

k

Foli

o

Remar

ks

Q12 :

Give the performa of a Bills Payable Book.

Answer :

Serial

Number o

f Bill

Dat

e of

Bill

Given

To

Who

m

Drawe

r

Paye

e

Payabl

e

Where

Ter

m of

Bill

Due

Dat

e

Ledge

r Folio

Amoun

t Paid

Dat

e

Cas

h

Boo

k

Foli

o

Remark

s

Q13 :

What is retirement of a bill of exchange?

Answer :

When a holder receives the amount of a bill before the maturity date on the request of the acceptor, then it is called retirement of the

bill of exchange. Holder of the bill may give discount for such earlier payment. This discount is termed as 'rebate'.

Entry in the books of the holder of the bill

Cash A/c Dr.

Rebate A/c Dr.


(Bill amount received before maturity and rebate allowed)

Entry in the books of the acceptor (drawee) of the bill


To Cash A/c

To Rebate A/c

(Bill paid and received rebate for early payment)

Q14 :

Give the meaning of rebate.

Answer :

If the drawee expresses his/her wish to pay the bill before the due date to the holder, and if the holder accepts his/her request, then

on account of the early payment, the holder may give some discount. This discount is termed as rebate. In other words, rebate is a

discount given by the holder to the drawee (or acceptor) for his/her request of early payment of the bill before the due date. It is an

expense for the drawer and hence, is debited to the drawer's books. On the other hand, as it is a gain for the acceptor of bill, so it is

credited in the drawee's books.

Entry in the books of drawer of the bill:

Cash A/c Dr.

Rebate A/c Dr.


(Bill honoured before maturity)

Entry in the books of drawee of the bill:


To Cash A/c

To Rebate A/c

(Bill paid and rebate received)

Q15 :

Give the performa of a Bill of Exchange.

Answer :

Performa of a Bill of exchange is given below.

Mr. X (The Drawer)

Rs 25,000

New Delhi

May 01, 2011

Two months after date pay to me or my order, the sum of rupees twenty five thousand

only, for value received

Accepted

(Signed)

To

Mr. Z (The Drawee)

May 01, 2011

Tilak Nagar,

New Delhi 110018

(Signed)

Mr. X

Janak Puri, New Delhi

110032

<< Previous Chapter 7 : Depreciation, Provisions and ReservesNext Chapter 1 : Financial Statements - I >> Long answers : Solutions of Questions on Page Number : 322

Q1 :

A bill of exchange must contain an unconditional promise to pay. Do you agree with a statement?

Answer :

According to Negotiable Instrument Act, 1981, "A bill of exchange is defined as an instrument in writing, containing an unconditional

order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or

to the bearer of the instrument."

A bill of exchange contains an unconditional promise to pay a certain sum of money on an agreed date to the drawer or the bearer

by the drawee of the bill.

An unconditional order to pay: It is one of the important characteristic of a negotiable instrument. Unconditional order

implies no condition should be attached by the acceptor regarding the payment. The conditions like, payment of bill (only in case of

profit on sales), payment of bill (only if the prices of goods increase), etc. should not be attached with the bill. Moreover, the

language of the bill should not be ambiguous.

Q2 :

Briefly explain the effects of dishonour and noting of a bill of exchange.

Answer :

When a bill is presented for payment and the acceptor fails to make the payment, the bill gets dishonoured. In this situation, liability

of the acceptor is restored.

Entry in the books of drawer (if Noting charges are not paid):

Drawee Dr.


(Bill dishonoured)

Entry in the books of drawee:


To Drawer

(Bill dishonoured)

Noting charges are charged by the notary public for keeping a proof that the bill is dishonoured. The noting charges are paid by the

holder of the bill but actually due on the drawee or the acceptor of the bill..

Notary public notes the below given facts.

1. Date and amount of bill

2. Reasons for dishonour

3. Amount of noting charges

Effect of Noting charges in the books of holder of bill (if Noting charges are paid):

Drawee Dr.


To Cash A/c (Noting charges)

(Bill dishonoured and Noting charges paid)

In the books of drawee:


Noting charges A/c Dr.

To Drawer

(Bill dishonoured and Noting charges due)

Q3 :

Explain briefly the procedure of calculating the date of maturity of a bill of exchange? Give example.

Answer :

The procedure to calculate the date of maturity of a bill of exchange is given below.

1. Ascertain the date on which the bill will be honoured.

2. Add three days of grace to the above date.

For example, a bill with maturity period of one month is drawn on 1st July and due date is 1st September. Then add 3 days of grace

and payment will be made on 4th September.

Days of grace depend on the following situations:

1. Declared holidays: If the payment day happens to be a national holiday or Sunday, then the preceding day becomes the

payment day.

For example,

1. If a bill is drawn on 12th July and its due date is 12th August, then after adding 3 days of grace the maturity day is 15th August. However, as

15th August is a national holiday; so, 14th August becomes the payment day.

2. If a bill is drawn on 1st May and the maturity period is of one month, then the due date is 1st June. After adding 3 days of grace, the payment

date becomes 4th June. However, if 4th June happens to be a Sunday, then the payment will be made on 3rd June.

2. Undeclared holidays: If the payment day happens to be an emergency holiday, then the succeeding day becomes the payment

day. For example, if a bill is drawn on 1st May and is payable after 15 days, then, after adding 3 days of grace period, the due date

becomes 18th May. However, if a national strike is declared on 18th May, then 19th May becomes the due date of the bill.

Q4 :

Distinguish between bill of exchange and promissory note.

Answer :

Basis of

Difference Bills of Exchange Promissory Note

Order or promise It is an order to pay. It is a promise to pay.

Parties There are three parties

involved, drawer, acceptor and

payee.

There are two parties involved,

maker and payee.

Drawer It is drawn by the creditor. It is drawn by the debtors.

Acceptance It needs acceptance by the

drawee.

As it is prepared by promissor, so

no acceptance is required.

Payee Drawer and payee may be the

same.

Promissor cannot be the payee.

Noting In case of dishonour of the

bill, the bill may get noted.

Noting is not necessary.

Liability Drawer is not primarily liable. Promissor is the primarily liable.

Q5 :

Briefly explain the purpose and benefits of retiring a bill of exchange to the debtor and the creditor.

Answer :

When a holder receives the amount of a bill before the maturity date on request of the acceptor, it is called retirement of the bill of

exchange. Holder of the bill may give discount for such earlier payment. This discount is termed as 'rebate'.

Rebate is given by the holder to the acceptor of the bill on account of payment before the due date. Rebate is a loss for the holder of

the bill; so, it is debited in the books of the holder when payment is received.

Cash A/c Dr.

Rebate A/c Dr.


(Payment received and rebate allowed for early payment)

Acceptor of the bill gets rebate for the payment made before the due date. The rebate is a gain for the drawee; so, it is credited in

the books of the drawee.


To Cash A/c

To Rebate A/c

(Bill paid before the due date and rebate received for early payment)

Q6 :

Explain briefly the purpose and advantages of maintaining of a Bills Receivable Book.

Answer :

Bills Receivable Book is a special purpose book that is maintained to keep records of bills received from the debtors. It contains

details such as acceptor's name, date of bill, due date, amount, etc. for future references. It is totalled periodically and its balance is

transferred to the debit side of the bills receivable account.

Benefits of Maintaining the Bill Receivable Book

1. Availability of information: All the information related to the bills receivable, such as amount, due date, etc., are recorded at one

place and hence are easily accessible.

2. Possibility of fraud: Since all the bills are recorded at one place, possibility of fraud is minimised.

3. Responsibility: The person who maintains the bills receivable book will also be responsible for any errors or omissions.

Therefore, higher degree of accountability and responsibility exists. Also, if any error is detected, then it can be fixed quickly.

4. Time efficient: Recording of bills receivable through the bills receivable book takes lesser time than that of journal entry.

Therefore, it saves time of the accountant in recording numerous transactions of repetitive and routine nature.

Q7 :

Briefly explain the benefits of maintaining a Bills Payable Book and state how is its posting is done in the ledger?

Answer :

A Bills Payable Book is a special purpose book, maintained to keep records of acceptance of bills, given to the creditors. It contains

details of the amount, date of bill, due date, to whom acceptance is given, etc., for future references. It is totalled periodically and its

balance is transferred to the credit side of the bills payable account.

Benefits of Maintaining Bills Payable Book

1. Availability of information: All the information related to the bills payable are recorded at one place, such as the amount, due

date, etc.

2. Possibility of fraud: Since all the bills are recorded at one place, possibility of fraud is minimised.

3. Responsibility: All the transactions are recorded by the same person. Therefore, errors can be easily detected and rectified. This

leads to a higher degree of responsibility and accountability of the accountant.

<< Previous Chapter 7 : Depreciation, Provisions and ReservesNext Chapter 1 : Financial Statements - I >> Numerical questions : Solutions of Questions on Page Number : 323

Q1 :

On Jan 01, 2006 Rao sold goods Rs 10,000 to Reddy. Half of the payment was made

immediately and for the remaining half Rao drew a bill of exchange upon Reddy payable

after 30 days. Reddy accepted the bill and returned it to Rao. On the due date Rao

presented the bill to Reddy and received the payment Journalise the above transactions in

the books Rao and prepare of Rao's account in the books of Reddy.

Answer :

Books of Rao

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.01 Reddy Dr.

10,000

To Sales A/c

10,000

(Goods sold to Reddy)

Jan.01 Cash A/c Dr.

5,000

To Reddy

5,000

(Cash received from Reddy)

Jan.01 Bills Receivable A/c Dr.

5,000

To Reddy

5,000

(Bill received for 30 days accepted by Reddy)

Feb.03 Cash A/c Dr.

5,000


5,000

(Reddy's acceptance met on due date)

Books of Reddy

Rao's Account

Dr.

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount

Rs Rs

Jan.01 Cash 5,000 2006

Jan.01 Bills Receivable 5,000 Jan.01 Purchases 10,000

10,000

Q2 :

On Jan 01,2006, Shankar purchased goods from Parvati for Rs 8,000 and immediately

drew a promissory note in favour of Parvati payable after 3 months. On the date of

maturity of the promissory note, the Government of India declared holiday under the

Negotiable Instrument Act 1881. Since, Parvati was unaware about the provision of the law

regarding the date of maturity of the bill, she handed over the bill to her lawyer, who duly

presented the bill and received the payment. The amount of the bill was handed over by the

lawyer to Parvati immediately. Record the necessary Journal entries in the books of

Parvati and Shankar.

Answer :

Books of Parvati

Journal

Date

Particulars L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.01 Shankar Dr.

8,000

To Sales A/c

8,000

(Goods sold to Shankar)


8,000

To Shankar

8,000

(Promissory Note received from Shankar for

three months)

Apr.05 Cash A/c Dr.

8,000


8,000

(Cash received for Promissory Note one day after the

maturity date on account of holiday declared by Govt.)

Books of Shankar

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.01 Purchases A/c Dr.

8,000

To Parvati

8,000

(Goods purchased from Parvati)

Jan.01 Parvati Dr.

8,000


8,000

(Promissory note for three months sent

to Parvati)

Apr.5 Bills Payable A/c Dr.

Q3 :

Vishal sold goods for Rs 7,000 to Manju on Jan 05, 2006 and drew upon her a bill of

exchange payable after 2 months. Manju accepted Vishal's draft and handed over the same

to Vishal after acceptance. Vishal immediately discounted the bill with his bank@12% p.a.

On the due date Manju met her acceptance. Journalise the above transactions in the books

of Vishal and Manju.

Answer :

Books of Vishal

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.05 Manju Dr.

7,000

To Sales A/c

7,000

(Goods sold to Manju)


7,000

To Manju

7,000

(Manju's acceptance received for two months)

Jan.05 Bank A/c Dr.

6,860

Discount A/c Dr.

140 7,000


(Bill Receivable discounted with the bank @

12 % p.a. for two months)

Books of Manju

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006


7,000

To Vishal

7,000

(Goods purchased from Vishal)

Jan.05 Vishal Dr.

7,000


7,000

(Bill drawn by Vishal accepted)

Q4 :

On Feb 01, 2006, John purchased goods for Rs 15,000 from Jimmy. He immediately made a

payment of Rs 5,000 by cheque and for the balance accepted the bill of exchange drawn

upon him by Jimmy. The bill of exchange was payable after 40 days. Five days before the

maturity of the bill, Jimmy sent the same to his bank for collection. The bank duly

presented the bill to John on the due date who met the bill. The bank informed the same to

Jimmy. Prepare John's account in the books of Jimmy and Jimmy account in the books of

John.

Answer :

Books of Jimmi

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Feb.01 John Dr.

15,000

To Sales A/c

15,000

(Goods sold to John)

Feb.01 Bank A/c Dr.

5,000

To John

5,000

(Cheque received for Rs 5,000 from John)

Feb.01 Bills Receivable A/c Dr.

10,000

To John

10,000

(Bill received from John for 40 days)

Mar.10 Bill Sent for Collection A/c Dr.

10,000


10,000

(John's acceptance sent to bank for collection)

Mar.15 Bank A/c Dr.

10,000

To Bill Sent for Collection A/c

10,000

(John's acceptance met on due date and bank

received the payment)

Ledger

John's Account

Dr.

Cr.


Amount


Amount

Rs

2006

2006

Feb.01 Sales

Q5 :

On Jan 15, 2006, Kartar Sold goods for Rs 30,000 to Bhagwan and drew upon him three

bills of exchanges of Rs 10,000 each payable after one month, two month, and three months

respectively. The first bill was retained by Kartar till its maturity. The second bill was

endorsed by him in favour of his creditor Ratna and the third bill was discounted by him

immediately @ 6% p.a. All the bills were met by Bhagwan. Journalise the above

transactions in the books of Kartar and Bhagwan. Also prepare ledger accounts in books of

Kartar and Bhagwan.

Answer :

Books of Kartar

Journal


Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.15 Bhagwan Dr. 30,000

To Sales A/c 30,000

(Goods sold to Bhagwan)

Jan.15 Bills Receivable A/c Dr. 30,000

To Bhagwan 30,000

(Three bills of Rs 10,000 each, received from Bhagwan â€“

the first bill for one month, second bill for two months and

third bill for three months)

Jan.15 Ratna Dr. 10,000

To Bills Receivable A/c 10,000

(The second bill endorsed to Ratna)

Jan.15 Bank A/c Dr. 9,850

Discount A/c Dr. 150


(Bill discounted at 6% p.a.)

Feb.18 Cash A/c Dr. 10,000


(The first bill met by Bhagwan, on due date)

Books of Bhagwan

Journal


Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.15 Purchases A/c Dr. 30,000

To Kartar 30,000

(Good purchased from Kartar on credit)

Jan.15 Kartar Dr. 30,000

To Bills Payable A/c 30,000

(Three bill Rs 10,000 each drawn by Kartar â€“ the first bill for

one month, the second bill for two months and the third bill for

three months, accepted and returned them to Kartar)

Q6 :

On Jan. 01, 2006 Arun sold goods for Rs 30,000 to Sunil. 50% of the payment was made

immediately by Sunil on which Arun allowed a cash discount of 2%. For the balance Sunil

drew a promissory note in favour of Arun payable after 20 days. Since, the date of maturity

of bill was a public holiday, Arun presented the bill on a day, as per the provisions of

Negotiable Instrument Act which was met by Sunil. State the date on which the bill was

presented by Arun for payment and Jounalise the above transactions in the books of Arun

and Sunil.

Answer :

Books of Arun

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.01 Sunil Dr.

30,000

To Sales A/c

30,000

(Goods sold to Sunil)

Jan.01 Cash A/c Dr.

14,700

Discount Allowed A/c Dr.

300

To Sunil

15,000

(Half of the amount due from Sunil was received and

allowed him 2% Cash Discount)


15,000

To Sunil

15,000

(Promissory note received for balance amount which due

from Sunil)

Jan.23 Cash A/c Dr.

15,000


15,000

(Cash received from Sunil one day before the maturity date,

as per negotiable instrument act, if the date of maturity is public

holiday, negotiable instrument will be met one day before maturity)

Date of maturity of the promissory note is Jan. 24, 2006, on account of public holiday; it

will be presented one day earlier that is on Jan. 23, 2006.

Book of Sunil

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006


30,000

To Arun

30,000

(Goods purchased from Arun)

Q7 :

Darshan sold goods for Rs 40,000 to Varun on 8.1.2006 and drew upon him a bill of

exchange payable after two months. Varun accepted the bill and returned the same to

Darshan. On the due date the bill was met by Varun. Record the necessary Journal entries

in the books of Darshan and Varun in the following circumstances.

When the bill was retained by Darshan till the date of its maturity.

When Darshan immediately discounted the bill @ 6% p.a. with his bank.

When the bill was endorsed immediately by Darshan in favour of his creditor Suresh.

When three days before its maturity, the bill was sent by Darshan to his bank for collection.

Answer :

Case (i): When the bill was retained by Darshan till the date of its maturity

Books of Darshan

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.08 Varun Dr.

40,000

To Sales A/c

40,000

(Goods sold to Varun)


40,000

To Varun

40,000

(Varun's acceptance received)

Mar.11 Cash A/c Dr.

40,000


40,000

(Bill met on due date)

Books of Varun

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006


40,000

To Darshan

40,000

(Goods bought from Darshan)

Jan.08 Darshan Dr.

40,000


40,000

(Bill of two months accepted for Darshan)

Mar.11 Bills Payable A/c Dr.

Q8 :

Bansal Traders allow a trade discount of 10% on the list price of the goods purchased from

them. Mohan traders, who runs a retail shop made the following purchases from Bansal

Traders

Date Amount

Rs

Dec.21, 2005 1,000

Dec.26, 2005 1,200

Dec.18, 2005 2,000

Dec.31, 2005 5,000

For all the purchases Mohan Traders drew promissory note in favour of Bansal Traders

payable after 30 days. The promissory note for the sale of Dec. 21, 2005 was retained by

Bansal Traders with them till the date of its maturity. The promissory note drawn on

26.12.2005 was discounted by Bansal Traders from their bank at 12% p.a. The promissory

note drawn on Dec. 28, 2005 was endorsed by Bansal Traders in favour of their creditor

Dream Soaps in full settlement of a purchase amounting to Rs 1,900. On 25.1.2006 Bansal

Traders sent the promissory note drawn on Dec. 31, 2005 to their bank for collection. All

the promissory notes were met by Mohan Trade Rs Record the necessary journal entries

for the above transactions in the books of Bansal Traders and Mohan Traders and prepare

Mohan Traders account in the books of Bansal Traders and Bansal Traders account in the

books of Mohan Trade Rs

Answer :

Books of Bansal Traders

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2005

Dec.21 Mohan Traders Dr.

900

To Sales A/c

900

(Goods sold to Mohan Traders list price Rs 1,000 at

10% trade discount)

Dec.21 Bills Receivable A/c Dr.

900

To Mohan Traders

900

(Promissory Note received from Mohan Traders

payable after 30 days)

Dec.26 Mohan Traders Dr.

1,080

To Sales A/c

1,080

(Goods sold to Mohan Traders list price Rs 1,200 at

10% trade discount)


1,080

To Mohan Traders

Q9 :

Narayanan purchased goods for Rs 25,000 from Ravinderan on Feb. 01, 2006. Ravinderan

drew upon Narayanan a bill of exchange for the same amount payable after 30 days. On

the due date Narayanan dishonoured his acceptance. Pass the necessary journal entries in

the books of Ravinderan and Narayanan in following cases:

When the bill was retained by Ravinderan with him till the date of its maturity.

When the bill was discounted by Ravinderan immediately with his bank @ 6% p.a.

When the bill was endorsed to his creditor Ganeshan.

When the bill was sent by Ravinderan to his bank for collection a few days before it maturity.

Answer :

Case (i) : When the bill was retained by Ravinderan with him till the date of its maturity

Books of Ravinderan

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Feb.01 Narayanan Dr.

25,000

To Sales A/c

25,000

(Goods sold to Narayanan)


25,000

To Narayanan

25,000

(Narayanan's acceptance received for 30

days)

Mar.05 Narayanan Dr.

25,000


25,000

(Narayanan failed to meet his

acceptance and bill dishonoured)

Books of Narayanan

Journal

Date

Q10 :

Ravi sold goods for Rs 40,000 to Sudershan on Feb 13, 2006. He drew four bills of exchange

upon Sudershan. The first bill was for Rs 5,000 payable after one month. The second bill

was for Rs 10,000 payable after 40 days; the third bill was for Rs 12,000 payable after three

months and fourth bill was for the balance amount payable after 19 days. Sudershan

accepted all the bills and returned the same to Ravi. Ravi discounted the first bill with his

bank at 6% p.a. He endorsed the second bill to his creditor Mustaq for the full settlement

of a debt of Rs 10,200. The third bill was kept by Ravi with him till the date of maturity.

Five days before the maturity of the fourth bill, Ravi sent the bill to his bank for collection.

All the four bills were dishounoured by Sudarshan on maturity. Sudershan settled

Ravi's claim in cash three days after the dishonour of each bill along with interest @ 12%

p.a. for the terms of the bills. You are requested to record the necessary journal entries in

the books to Ravi, Sudershan, Mustaq and bank for the above transaction. Also prepare

Sudershan's account and Mustaq's account in the books of Ravi.

Answer :

Books of Ravi

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Feb.13 Sudershan Dr.

40,000

To Sales A/c

40,000

(Goods sold to Sudershan)


40,000

To Sudershan

40,000

(Four bills from Sudershan received: the first for Rs

5,000, the second bill for Rs 10,000, the third bill for

Rs 12,000 and the fourth bill for Rs 13)

Feb.13 Bank A/c Dr.

4,975

Discount A/c Dr.

25


5,000

(The first bill discounted with bank at 6% p.a.)

Q11 :

On Jan 01, 2006 Neha sold goods for Rs 20,000 to Muskan and drew upon her a bill of

exchange payable after two months. One month before the maturity of the bill Muskan

approached Neha to accept the payment against the bill at a rebate @ 12% p.a. Neha

agreed to the request of Muskan and Muskan retired the bill under the agreed rate of

rebate. Journalise the above transaction in the books of Neha and Muskan.

Answer :

Books of Neha

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.01 Muskan Dr.

20,000

To Sales A/c

20,000

(Goods sold to Muskan)


20,000

To Muskan

20,000

(Muskan's acceptance received)

Feb.04 Cash A/c Dr.

19,800

Rebate on bill A/c Dr.

200


20,000

(Muskan's acceptance retired one month before

maturity and allowed rebate at 12% p.a.)

Books of Muskan

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006


20,000

To Neha

20,000

(Goods bought from Neha)

Jan.01 Neha Dr.

20,000


20,000

(Bill drawn by Neha payable after 2 months

accepted)

Feb.04 Bills Payable A/c Dr.

20,000

Q12 :

On Jan 15, 2006 Raghu sold goods worth Rs 35,000 to Devendra and drew up to the latter

three bills of exchanges. The first bill was for Rs 5,000 payable after one month, the second

bill was for Rs 20,000 payable after three months and third bill for balance amount for 4

months. Raghu endorsed the first bill in favour of his creditor Dewan in full settlement of a

debt of Rs 5,200. The second bill was discounted by Raghu @ 6 % p.a. and the third bill

was retained by Raghu till the date of maturity. Devendra dishonoured the bill on maturity

and the bank paid Rs 30 as noting charges. Four days before the maturity of the third bill

Raghu, sent the same for collection to his bank. The third bill was also dishonoured by

Devendra and the bank paid Rs 200 as noting charges. Five days after the dishonour of the

bill Devendra paid the entire amount due to Raghu along with interest Rs 1,000 for this

purpose Devendra obtained a short term loan from his bank. You are requested to record

the necessary journal entries in the books of Raghu Devendra and Dewan and also prepare

Devendra's account in Raghu's books and Raghu's account in Devendra's account.

Answer :

Books of Raghu

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.15 Devendra Dr.

35,000

To Sales A/c

35,000

(Goods sold to Devendra)


35,000

To Devendra

35,000

(Three bills received from Devendra-the first bill Rs 5,000,

the second bill Rs 20,000, the third bill Rs 10,000)

Jan.15 Dewan Dr.

5,200


5,000


200

(The first bill endorsed to Dewan in full settlement

of amount due to him)

Jan.15 Bank A/c Dr.

19,700

Discount A/c Dr.

300


20,000

(The second bill discounted with bank at 6% p.a.)

Apr.18 Devendra Dr.

20,030

To Bank A/c

20,030

(The second bill dishonoured and bank paid

Rs 30 for noting charges)

May14 Bill Sent for Collection A/c Dr.

10,000

Q13 :

Vimal purchased goods Rs 25,000 from Kamal on Jan 15, 2006 and accepted a bill of

exchange drawn upon him by Kamal payable after two months. On the date of the

maturity the bill was duly presented for payment. Vimal dishonoured the bill. record the

necessary journal entries in the books of Kamal and Vimal when.

”¢ The bill was retained by Kamal till the date of its maturity.

”¢ The bill was immediately discounted by Kamal with his bank @ 6% p.a.

”¢ The bill was endorsed by Kamal in favour of his creditor Sharad.

”¢ Five days before its maturity the bill was sent by Kamal to his bank for collection.

Answer :

Case (i) : The bill was retained by Kamal till the date of its maturity

Books of Kamal

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.15 Vimal Dr.

25,000

To Sales A/c

25,000

(Goods sold to Vimal)


25,000

To Vimal

25,000

(Vimal's acceptance reccived)

Mar.18 Vimal Dr.

25,000


25,000

(Vimal acceptance dishonoured)

Books of Vimal

Journal


Debit

Amount

Rs

Credit

Amount

Rs

2006

Q14 :

Abdula sold goods to Tahir on Jan 17, 2006 for Rs 18,000. He drew a bill of exchange for

the same amount on Tahir for 45 days. On the same date Tahir accepted the bill and

returned it to Abdulla. On the due date Abdulla presented the bill to Tahir which was

dishonoured. Abdulla paid Rs 40 as noting charges. Five days after the dishonour of his

acceptance Tahir settled his debt by making a payment of Rs 18,700 including interest and

noting charges. Record the necessary journal entries in the books of Abdulla and Tahir.

Also prepare Tahir.s account in the books of Abdulla and Abdulla.s account in the books of

Tahir.

Answer :

Books of Abdula

Journal


Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.17 Tahir Dr. 18,000

To Sales A/c 18,000

(Goods sold to Tahir)

Jan.17 Bills Receivable A/c Dr. 18,000

To Tahir 18,000

(Tahir's acceptance received)

Mar.06 Tahir Dr. 18,040


To Cash 40

(Tahir's acceptance dishonoured and Rs 40 paid as

noting charges)

Mar.06 Tahir Dr. 660

To Interest A/c 660

(Interest charged from Tahir on account of bill

dishonoured)

Mar.12 Cash A/c Dr. 18,700

To Tahir 18,700

(Tahir cleared his account by paying cash)

Ledger

Tahir's Account

Dr. Cr.

Date Particulars J.F. Amount


Amount

Rs

2006 2006

Jan.17 Sales 18,000 Jan.17 Bills Receivable 18,000

Mar.06 Bills Receivable 18,000 Mar.11 Cash 18,700

Mar.06 Cash 40

Mar.06 Interest 660

36,700 36,700

Books of Tahir

Journal


Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.17 Purchases A/c Dr. 18,000

To Abdula 18,000

(Goods bought from Abdula)

Q15 :

Asha sold goods worth Rs 19,000 to Nisha on March 02, 2006. Rs 4,000 were paid by Nisha

immediately and for the balance she accepted a bill of exchange drawn upon her by Asha

payable after three months. Asha discounted the bill immediately with her bank. On the

due date Nisha dishonoured the bill and the bank paid Rs 30 as noting charges.

Record the necessary journal entries in the books of Asha and Nisha.

Answer :

Books of Asha

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Mar.02 Nisha Dr.

19,000

To Sales A/c

19,000

(Goods sold to Nisha)

Mar.02 Cash A/c Dr.

4,000

Bills Receivable A/c Dr.

15,000

To Nisha

19,000

(Cash and Nisha's acceptance received)

Mar.02 Bank A/c Dr.

14,635

Discount A/c Dr.

375


15,000

(Nisha's aceptance discounted with

bank at 10% p.a.)

Note: In this question rate of discount is not

given, the rate of discount (10% p.a.) has been

assumed).

June.05 Nisha Dr.

15,030

To Bank A/c

15,030

(Nisha's acceptance dishonoured and bank

paid Rs 30 as noting charges)

Books of Nisha

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Mar.02 Purchases A/c Dr.

19,000

To Asha

19,000

(Goods bought from Asha)

Q16 :

On Feb. 02, 2006, Verma purchased from Sharma goods for Rs 17,500. Verma paid Rs

2,500 immediately and for the balance gave a promissory note to Sharma payable after 60

days. Sharma immediately endorsed the promissory note in favour of his creditor.

Gupta for the full settlement of a debt of Rs 15,400. On the due date of the bill Gupta

presented the bill to Verma which the latter dishonoured and Gupta paid Rs 5,000 noting

charges. On the same date Gupta informed Sharma about the dishonour of the bill.

Sharma settled his debt to Gupta by cheque for Rs 15,500 which includes noting charges

and interest. Verma settled Sharma.s claim by cheque for the same amount.

Record the necessary journal entries is the books of Sharma, Gupta and Verma for the

above transaction and prepare Verma.s and Gupta.s accounts in the books of Sharma.

Sharma.s account in the books of Verma. And also Sharma.s account in the books of

Gupta.

Answer :

Books of Sharma

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Feb.02 Verma Dr.

17,500

To Sales A/c

17,500

(Goods sold to Verma)

Feb.02 Cash A/c Dr.

2,500


15,000

To Verma

17,500

(Cash Rs 2,500 and Promissory Note Rs 15,000 received

from Verma for 60 days)

Feb.02 Gupta A/c Dr.

15,400


15,000


400

(Promissory Note endorsed to Gupta in full settlement

of amount due to him)

Apr.05 Discount Received A/c Dr.

400

Verma Dr.

15,050

To Gupta

15,450

(Promissory Note issued by Verma dishonoured

and Gupta paid Rs 50 as noting charges)

Note: In this question Rs 5,000 is given as noting charges,

there is mistake. Here Rs 50 has been taken as noting

charges instead of Rs 5,000).

Apr.06 Interest A/c Dr.

50

To Gupta

50

(Interest of Rs 50 debited to Gupta, on account of

dishonour of Promissory Note)

Apr.06 Gupta

Q17 :

Lilly sold goods to Mathew on 1.3.2006 for Rs 12,000 and drew upon Mathew a bill of

exchange for the same amount payable after two months. Lilly immediately discounted the

bill with her bank at 9% p.a. The maturity date of the bill was a non business day

(holiday), therefore, Lilly had to present the bill as per the provisions of the Indian

Instruments Act.1881. The bill was dishonoured by Mathew and Lilly paid Rs 45 as noting

charges. Mathew settled the claim of Lilly five days after the dishonour of the bill by a

cheque, which includes interest @ 12% for the term of the bill. Journalise the above

transactions in the books of Lilly and Mathew and prepare Mathew's account in the books

of Lilly and Lilly's account in the books of Mathew.

Answer :

Books of Lilly

Journal


Debit

Amount

Rs

Credit

Amount

Rs

2006

Mar.01 Mathew Dr. 12,000

To Sales A/c 12,000

(Goods sold to Mathew)

Mar.01 Bills Receivable A/c Dr. 12,000

To Mathew 12,000

(Mathew's acceptance payable after two months received)

Mar.01 Bank A/c Dr. 11,820

Discount A/c Dr. 180


(Mathew's bill discounted at 9% p.a.)

May03 Mathew A/c Dr. 12,045

To Bank A/c 12,045

(Mathew's acceptance dishonoured bank paid Rs 45 as

noting charges)

Note: In this question, May 04 has been considered as

Holiday, so the date of maturity will be May 03, 2006 in

place of May 04, 2006.

May08 Mathew Dr. 241

To Interest A/c 241

(Interest @ 12% credited to Mathew on account of bill

dishonoured)

May08 Bank A/c Dr. 12,286

To Mathew 12,286

(Cheque received from Mathew for the amount due from him)

Ledger

Mathew's Account

Dr. Cr.


Amount


Amount

Rs

2006 2006

Mar.01 Sales 12,000 Mar.01 Bills Receivable 12,000

May03 Bank 12,045 May08 Bank 12,286

May08 Interest 241

24,286 24,286

Books of Mathew

Journal


Debit

Amount

Rs

Q18 :

Kapil purchased goods for Rs 21,000 from Gaurav on 1.2.2006 and accepted a bill of

exchange drawn by Gaurav for the same amount. The bill was payable after one month.

On 25.2.2002 Gaurav sent the bill to his bank for collection. The bill was duly presented by

the bank. Kapil dishonoured the bill and the bank paid Rs 100 as noting charges. Record

the necessary journal entries for the above transactions in the books of Kapil and Gourav.

Answer :

Books of Gaurav

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Feb.01 Kapil Dr.

21,000

To Sales A/c

21,000

(Goods sold to Kapil)


21,000

To Kapil

21,000

(Kapil's acceptance received)

Feb.25 Bills Sent for Collection A/c Dr.

21,000


21,000

(Bill Receivable sent to bank for collection)

Mar.04 Kapil Dr.

21,100

To Bill Sent for Collection A/c

21,000

To Bank A/c

100

(Kapil's acceptance dishonoured)

Books of Kapil

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Feb.01 Purchases A/c Dr.

21,000

To Gaurav

21,000

(Goods bought from Gaurav)

Feb.01 Gaurav Dr.

21,000

Q19 :

On Feb. 14, 2006 Rashmi sold good Rs 7,500 to Alka. Alka paid Rs 500 in cash and for the

bank balance accepted a bill of exchange drawn upon her by Rashmi payable after two

months. On Apr.10, 2006 Alka approached Rashmi to cancel the bill since she was short of

funds. She further requested Rashmi to accept Rs 2,000 in cash and draw a new bill for the

balance including interest Rs 500. Rashmi accepted Alka's request and drew a new bill for

the amount due payable after 2 months. The bill was accepted by Alka. The new bill was

duly met by Alka on maturity.

Record the necessary journal entries in the books of Rashmi and Alka and prepared

Alka's account in the books of Rashmi's and Rashmi's account in the books of Alka's.

Answer :

Books of Rashmi

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Feb.14 Alka Dr.

7,500

To Sales A/c

7,500

(Goods sold to Alka)

Feb.14 Cash A/c Dr.

500


7,000

To Alka

7,500

(Cash received Rs 500 and the bill accepted by Alka)

Apr.10 Alka Dr.

7,000


7,000

(Alka got the bill cancelled)

Apr.10 Cash A/c Dr.

2,000

To Alka

2,000

(Received cash from Alka)

Apr.10 Alka Dr.

500

To Interest A/c

500

(Interest charged on the amount due from Alka)

Apr.10 Bills Receivable A/c Dr.

5,500

To Alka

5,500

(Alka's acceptance payable of two months received)

Q20 :

Nikhil sold goods for Rs 23,000 to Akhil on Dec. 01, 2005. He drew upon Akhil a bill of

exchange for the same amount payable after 2 months. Akhil accepted the bill and sent it

back to Nikhil. Nikhil discounted the bill immediately with his bank @12 p.a. On the due

date Akhil dishonoured the bill of exchange and the bank paid Rs 100 as noting charges.

Akhil requested Nikhil to draw a new bill upon him with interest @10% p.a. which he

agreed. The new bill was payable after two months. A week before the maturity of the

second bill Akhil requested Nikhil to cancel the second bill. He further requested to accept

Rs 10,000 in cash immediately and drew a third bill upon him including interest of Rs 500.

Nikhil agreed to Akhil's request. The third bill was payable after one month. Akhil met the

third bill on its maturity. Record the necessary journal entries in the books of Nikhil and

Akhil and also prepare Akhil's account in the books of Nikhil and Nikhil's account in the

books of Akhil.

Answer :

Books of Nikhil

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2005

Dec.01 Akhil Dr.

23,000

To Sales A/c

23,000

(Goods sold to Akhil)


23,000

To Akhil

23,000

(Akhil's acceptance received)

Dec.01 Bank A/c Dr.

22,540

Discount A/c Dr.

460


23,000

(Akhil's acceptance discounted at 12% p.a with

bank)

2006

Feb.04 Akhil Dr.

23,100

To Bank A/c

23,100

(Akhil's acceptance dishonoured, bank paid

Rs 100 as noting charges)

Feb.04 Akhil Dr.

385

To Interest A/c

385

(Interest credited on account of bill dishonoured

at 10% p.a. for two months)


23,485

To Akhil

23,485

Q21 :

On Jan 01, 2006 Vibha sold goods worth Rs 18,000 to Sudha and drew upon the latter a bill

of exchange for the same amount payable after two months. Sudha accepted Vibha's draft

and returned the same to Vibha after acceptance. Vibha endorsed the bill immediately in

favour of her creditor Geeta. Five days before the maturity of the bill Sudha requested

Vibha to cancel the bill since she was short of funds. She further requested to draw a new

bill upon her including interest of Rs 200. Vibha accepted Sudha's request. Vibha took the

bill from Geeta by making the payment to her in cash and cancelled the same. Then she

drew a new bill upon Sudha as agreed. The new bill was payable after one month. The new

bill was duly met by Sudha on maturity. Record the necessary journal entries in the books

of Vibha.

Answer :

Books of Vibha

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.01 Sudha Dr.

18,000

To Sales A/c

18,000

(Goods sold to Sudha)


18,000

To Sudha

18,000

(Sudha's acceptance received)

Jan.01 Geeta Dr.

18,000


18,000

(Sudha's acceptance endorsed in favour of Geeta)

Feb.27 Sudha Dr.

18,000

To Geeta

18,000

(Sudha cancelled the bill five days before the maturity)

Feb.27 Geeta Dr.

18,000

To Cash A/c

18,000

(Cash paid to Geeta)

Feb.27 Sudha

200

To Interest A/c

200

(Interest credited to Sudha on account of

cancelling the bill )


18,200

Q22 :

Following was the position of debtor and creditor of Gautam as on 1.1.2006.

Debtors Creditors

Rs Rs

Babu 5,000 -

Chanderkala 8,000 -

Kiran 13,500 -

Anita 14,000 -

Anju - 5,000

Sheiba - 12,000

Manju - 6,000

The following transactions took place in the month of Jan 2006:

Jan.

02

Drew on Babu at two months after date at full settlement for Rs

4,800. Babu accepted the bill and returned it on 5.1.2006.

Jan.

04

Babu's bill discounted for Rs 4,750.

Jan.

08

Chanderkala sent a promissory note for Rs 8,000 payable three months after

date.

Jan.

10

Promissory note received from Chanderkala discounted for Rs 7,900

Jan.

12

Accepted Sheiba draft for the amount due payable two months after date.

Jan.

22

Anita sent his promissory note payable after two months.

Jan.

23

Anita's promissory note endorsed in favour of Manju.

Jan.

25

Accepted Anju's draft payable after three months.

Jan.

29

Kiran sent Rs 2,000 in cash and a promissory note for the balance payable

after three months. Record the above transactions in the proper subsidiary

books.

Answer :

Bills Receivable Book

No. Date of Bill

2006

Date Received

2006

From whom

of Bill

Drawer

whom

received

Acceptor Where Term

Payable

Due date

2006 L.F.

Amount

Rs

Cash

Book

Folio

Remarks

01 Jan.02 Jan.05 Babu Self Babu

2 months Mar.05

4,800

Total

4,800

Bills Payable Book

No. Date of Bill

2006

To Whom

Given Drawer Payee

Where

payable Term

Due date

2006 Ledger

Amount

Rs

Date

paid

Cash

Book

Folio

Remarks

01 Jan.12 Sheiba Sheiba -

2 months Mar.15

12,000

02 Jan.25 Anju Anju -

2 months Apr.28

5,000

Q23 :

On Jan. 01, 2006 Harsh accepted a month bill for Rs 10,000 drawn on him by tanu for

latter's benefit. Tanu discounted the bill on same day @ 8% p.a. On the due date tanu sent

a cheque to Harsh for honour the bill. Harsh duly honoured his acceptance. Record the

journal entries in the Books of Tanu and Harsh.

Answer :

Books of Tanu

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006


10,000

To Harsh

10,000

(Harsh's acceptance received)

Jan.01 Bank A/c Dr.

9,933

Discount A/c

67


10,000

(Harsh's acceptance discounted at 8% p.a.

for one month)

Feb.04 Harsha Dr.

10,000

To Bank A/c

10,000

(Harsh's account settled by paying amount

due to Harsh through cheque)

Books of Harsh

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006

Jan.01 Tanu Dr.

10,000


10,000

(Bill drawn by Tanu accepted)

Feb.04 Bank A/c Dr.

10,000

To Tanu

10,000

(Cheque received from Tanu)

Feb.04 Bills Payable A/c

Q24 :

Ritesh and Naina were in need of funds temporarily. On August 01 2005 Ritesh drew upon

Naina a bill for Rs 12,000 for 4 months. Naina accepted the bill and returned to Ritesh.

Ritesh discounted the Bill @ 8% p.a. Half amount of the discounted bill remitted to Naina.

On due date, Ritesh sent the required sum to Naina, who met the bill. Journalise the

transaction in the books of both the parties.

Answer :

Books of Ritesh

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2005

Aug.01 Bills Receivable A/c Dr.

12,000

To Naina

12,000

(Naina's acceptance received)

Aug.01 Bank A/c Dr.

11,680

Discount A/c Dr.

320


12,000

(Naina's acceptance discounted at 8% p.a.

with bank)

Aug.01 Naina Dr.

6,000

To Cash A/c

5,840

To Discount A/c

160

(Bill discounted with bank for four months at 8%

p.a.)

Dec.04 Naina Dr.

6,000

To Cash A/c

6,000

(Balance amount paid to Naina, in order

to met the bill)

Books of Naina

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2005

Aug.01 Ritesh Dr.

12,000


12,000

(Bill payable after four months accepted by Harish)

Q25 :

On Jan. 01, 2006, Bhanu and Naman drew on each other a bill for Rs 8,000 payable 3

months after the due date for their Mutual benefit. On January 02 they discounted with

their bank each other's bill at 5% p.a. on the due date each met his own acceptance. Give

journal entry in the books of Bhanu and Naman.

Answer :

Books of Bhanu

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006


8,000

To Naman

8,000

(Received Naman's acceptance for mutual help)

Jan.01 Naman Dr.

8,000


8,000

(Naman's acceptance accepted, payable

after 3 months for mutual help)

Jan.01 Bank A/c Dr.

7,900

Discount A/c Dr.

100


8,000

(Naman's acceptance discounted at 5% p.a.

with bank for three months)

Apr.04 Bills Payable A/c Dr.

8,000

To Bank A/c

8,000

(Naman's acceptance cleared)

Books of Naman

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2006


8,000

To Bhanu

8,000

(Bhanu's acceptance received for mutual help)

Jan.01 Bhanu Dr.

8,000


Q26 :

On Nov. 01, 2005 Sonia drawn a bill on sunny for Rs 15,000 for 3 months for mutual

accommodation. Sunny accepts the bill and return it to sonia. Sonia discounted the same

with his bankers @ 6% p.a. The proceeds are shared between sonia and sunny in

proportion of 2/3rd, 1/3rd respectively. On the due date sonia remits his proportion to

sunny who fails to met the bill and as a result sonia has to meet it. Sunny Give a fresh

acceptance for the amount due to sonia plus interest of Rs 100 sunny meet his second

acceptance on due date. Record the necessary journal entries in the books of sonia and

sunny.

Answer :

Books of Sonia

Journal

Date

Particulars

L.F.

Debit

Amount

Rs

Credit

Amount

Rs

2005

Nov.01 Bills Receivable A/c Dr.

15,000

To Sunny

15,000

(Sunny's acceptance received)

Nov.01 Bank A/c Dr.

14,775

Discount A/c Dr.

225


15,000

(Bill discounted with banker at 6% p.a. for 3

months)

Nov.01 Sunny Dr.

5,000

To Cash A/c

4,925

To Discount A/c

75

(1/3rd amount of discounted bill remitted to Sunny)

2006

Feb.04 Sunny Dr.

10,000

To Cash A/c

10,000

(Balance amount bill remitted to Sunny)

Feb.04 Sunny Dr.

15,000

To Bank A/c

15,000

(Bill discounted with bank dishonoured)

Feb.04 Bank A/c Dr.

15,000

To Cash A/c

NCERT Solutions for Class 11 Accountancy Financial ...

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