Course Code: PCO- 01
Assignment Code: PCO-01/TMA/2016
1. What do you mean by business? Explain various types
of business activities. (10)
Answer:
The term ‘Business’ can be defined as production of goods and services that are
involved in flow of goods from the point of consumption or final use with a
view to earn profit.
So
we can say that any activity carried with profit motive is business.
The various types of
business activities are as follows:
1) Sole proprietorship
2) Partnership
3) Company
These are explained in
brief as follows:-
SOLE PROPRIETORSHIP:
The sole proprietorship
is a form of business that is owned, managed and controlled by an individual.
He has to arrange capital for the business and he alone is responsible for its
management. He is therefore, entitled to the profits and has to bear the loss
of business. This type of business organization is also called single ownership
or single proprietorship. If the business primarily consists of trade, the
organization is a sole trading organization. Small factories and shops are
often found to be sole proprietorship organizations.
Features of Sole
Proprietorship:
The important features
of a sole-proprietary organization include the following:
(I) Individual Initiative: One person is the owner in sole proprietary forms of
organization.
(ii) Risk Bearing: The proprietor is the sole beneficiary of profits in
this form organization. If there is a loss he alone has to bear it. Thus the
risks of business are borne by the proprietor himself.
(iii) Management and control: Management and control of this type of organization
is the responsibility of the sole proprietor. He may, however, employ a manager
or other people for the purpose.
PARTNERSHIP
Partnership is an
association of persons who agree to combine their financial resources and
managerial abilities to run a business and share profits in an agreed ratio.
Since the resources of a sole proprietor to finance, and his capacity to manage
a growing business are limited, he feels the need for a partnership firm.
Partnership business, therefore, usually grows out of the need for expansion of
business with more capital, better supervision and control, division of work
and spreading of risks.
Features of Partnership:
The features of
partnership are as follows:
(i) Existence of an agreement: Partnership is formed on the basis of an agreement
between two or more persons to carry on business. The terms and conditions of
partnership are laid down in a document known as Partnership Deed.
(ii) Engagement in business: A partnership can be formed only on the basis of a
business activity. Its business may include any trade, industry or profession.
Thus, a partnership can engage in any occupation – production and/or
distribution of goods and services with a view to earning profits.
(iii) Sharing of profits and losses: In a partnership firm, partners
are entitled to share in the profits and are also to bear the losses, if any.
COMPANY
A company is defined as
a voluntary association of persons having separate legal existence, perpetual
succession and a common seal. As per the definition, there must be a group of
persons who voluntarily agree to form a company. Once formed the company
becomes a separate legal entity with a distinct name of its own. Its existence
is not affected by change of members. It must have a seal to be imprinted on documents
whenever required. The capital of a company consists of transferable shares,
and members have limited liability.
Features of a Company:
The following are the
chief characteristics of the company form of organization:
(i) Registered body: A company comes into existence only after its
registration. For that purpose, necessary legal formalities have to be
completed as prescribed under the
Companies Act.
(ii) Distinct legal entity: A company is regarded as a legal entity separate
from its members. Thus a company can carry on business in its own name, enter
into contracts, sue, and be sued.
(iii) Artificial person: A company is the creation of law and has a distinct
entity. It is therefore, regarded as an artificial person. The business is run
in the name of the company. But because it is an artificial person, its
functions are performed by the elected representatives of members, known as
directors.
2. Define Accounting. Explain its scope.(10)
Answer:
Accounting
means the systematic recording, reporting, and analysis of financial
transactions of a business. The person in charge of accounting is known as an accountant, and this
individual is typically required to follow a set of rules and regulations, such
as the Generally Accepted Accounting Principles.
The Committee on Terminology set up by
the American Institute of Certified Public Accountants formulated the following
definition of accounting in 1961:
“Accounting is the art of recording,
classifying, and summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least, of a financial character,
and interpreting the result thereof.
Scope of Accounting:
Accounting has got a very wide scope and area
of application. Its use is not confined to the business world alone, but spread
over in all the spheres of the society and in all professions. Now-a-days, in
any social institution or professional activity, whether that is profit earning
or not, financial transactions must take place. So there arises the need for
recording and summarizing these transactions when they occur and the necessity
of finding out the net result of the same after the expiry of a certain fixed
period. Besides, this is also the need for interpretation and communication of that
information to the appropriate persons. Only accounting use can help overcome
these problems.
1. Business
Accounting
is widely applicable in the business sector. Today, in the modern world, most
of the people are engaged in business sector and all businessmen follow
Generally Accepted Accounting Principle (GAAP) to find out profit, loss and
financial position of business firm.
2. Government organizations
Though,
Government organizations do not follow Generally Accepted Accounting Principle
(GAAP), its keep systematic records of all transactions in order to find the
position of public fund.
3. Non-Government
organizations
Non-government
and service organizations such as NGOS, INGOs, Red Cross Society, SOS etc which
plays a vital role in the development of nation also uses accounting. The
accounting system used in these organizations is called fund accounting.
4. Individuals
Individuals
also perform economic activities to earn their livelihood. They also perform
some form of accounting to draw financial information for making personal
economic decision.
3. Solution: In the
Books of Sita Ram
Journal Entries Dr. Cr.
|
Date
|
Particulars
|
L/F
|
Amount(Rs.)
|
Amount(Rs.)
|
|
April-1
April-3
April-7
April-9
April-11
April-17
April-20
April-24
|
Cash A/c Dr.
To Capital A/c
(Being business
started with cash Rs. 5,00,000)
Purchase
A/c Dr.
To Cash
A/c
(Being goods
purchased for cash Rs. 2,00,000)
Cash A/c
Dr.
To Sales A/c
(Being goods
sold for cash Rs. 1,00,000)
Machinery A/c
Dr.
To
Anil A/c
(Being
machinery bought from Anil on credit)
Cash A/c
Dr.
To
Rent A/c
(Being rent
paid for Rs. 5,000)
Cash A/c
Dr.
To
Commission A/c
( Being
commission received for Rs. 2,000)
Ram A/c
Dr.
To
Cash A/c
( Being cash
paid to Ram )
Cash A/c
Dr.
To
Mahesh A/c
( Being cash
received from Mahesh for Rs. 10,000)
|
|
5,00,000
2,00,000
1,00,000
60,000
5,000
2,000
11,000
10,000
|
5,00,000
2,00,000
1,00,000
60,000
5,000
2,000
11,000
10,000
|
4.
What is imprest
system of Petty Cash Book? Explain its advantages.
Answer:
Petty means small, in big business
firms, all payments are made by cheques and all receipts are banked. There are
numerous small payments on account of expenses like stationery, cartage, coolie
hire, refreshments to guests etc. which cannot be paid through cheques.
Moreover, the main cashier will be
over-burdened if he makes these small as well as frequent payments. To avoid
this inconvenience, such items of expenditure of frequent occurrence are
removed to a separate book, known as Petty Cash Book, which is maintained by a
Petty Cashier. Petty Cashier is a person, who maintains the Petty Cash Book.
Petty cash book is maintained in a columnar form.
In this book, separate columns are
provided for usual head of expenditure. A Petty Cashier makes a detailed
analysis of petty payments and records under suitable heads, i.e., column.
Petty cash book is similar to cash book.
The amounts received by Petty Cashier
from the main Cashier are debited in petty cash book and all petty payments are
credited. Periodic total of each column is posted to respective nominal account
in the ledger.
The book may be considered as the book
of original entry or memorandum book. If treated as a part of double entry,
then no separate Petty Cash Account is needed. When the Petty Cashier needs
further cash, he makes up the petty cash book and presents it to the Chief
Cashier, who verifies the accounts and gives further amount.
Imprest System of Petty Cash Book:
Under this system, a round sum of
money estimated as necessary for the possible needs of the business to meet
petty expenses for the week or fortnight is handed over to the Petty Cashier.
At the end of the fixed period or earlier, when petty cashier needs further
cash, he submits the petty cash book, along with vouchers.
The Chief Cashier examines the cash
book with the vouchers. Then, Chief Cashier gives money/cheque for the exact
amount, which he actually spent during the period. Thus, he starts for the next
period with the same sum as held previously. That is, the Petty Cashier will
have again the fixed sum in the beginning of the next period.
This system is known as Imprest System
of Petty Cash Book. For instance, a business estimates that a sum of Rs 500 is
required to meet small expenses in the business for one week. This amount is
given to the Petty Cashier. At the week end or earlier, the Petty Cashier spent
Rs 480 and needs more cash.
Therefore, Petty Cashier completes the
records and hands over the petty cash book along with vouchers to Chief
Cashier, who examines the entries. Then, the Chief Cashier gives a cheque for
an exact amount he spent i.e., Rs 480. This sum i.e., Rs 480 plus the unspent
balance i.e., Rs 20 would restore him the original sum with which he has
started in the beginning of the last period i.e., Rs 500.
Advantages of
Imprest System of Petty Cash Book:
1. It relieves the cash book and the
Chief Cashier of the burden of recording tiny and frequent payments.
2. Commission of fraud is reduced as
the Chief Cashier verifies petty cash book along-with vouchers and the Petty
Cashier is more responsible.
3. This method is very scientific and
labour saving. The total expenditure under each column can easily be
ascertained and only the periodical totals of each column need be posted to the
ledger.
5.
What is meant by
Bank reconciliation Statement? Explain the purposes of preparing this system.
Answer:
Bank reconciliation statement is a statement which contains a complete and satisfactory
explanation of the differences n balances as per the cash book and bank
statement.
The preparation of bank reconciliation
statement is not a part of the double entry bookkeeping system. It is just a
procedure to prove the cash book balance.
It should be noted that:
1. A bank reconciliation statement is to be
prepared whenever a bank statement is received.
2.It is prepared on a stated day.
Bank
reconciliation is a usual and valued practice of almost all business concerns.
It is an important mechanism of internal control of cash inflow and outflow.
Both of them must be tall as per cash book wt the bank statement. This brings
into focus errors and irregularities, if any. Because of the fear of detection,
people in charge of maintaining and record the cash have to be careful.
Purpose for bank reconciliation
statement;
1.
It reflects the actual bank balance position.
2.
It helps to detect any mistake in the cash
book and n the pass book.
3.
It prevents frauds n record the banking transaction.
4.
To explains a delay in the collection of
cheques.
5.
It identifies valid transactions recorded b
one part but not b the other.
6. What are the rectifying entries? How are
two sided and one sided errors rectified? Explain with examples.
Answer: When an error is committed in
the books of accounts, the same should be corrected to show true numbers in
financial statements. If the error is immediately identified, it may be fixed
by striking out the wrong entry and replacing it with a correct one. However,
if the error is identified at a later stage, the correction should be made by
passing a suitable journal entry; such entries used to fix an accounting error
are called rectification entries.
And the correction of accounting
errors in a systematic manner is called the rectification of errors. In other
words, the process of systematically correcting the accounting errors is known
as rectification of errors. The presence of accounting errors affects accuracy
of the profit and loss and the financial position of the business shown by the
final accounts; therefore, no error should be left uncorrected.
For purposes of rectification the
errors are divided into two categories i.e. one-sided errors and two-sided
errors.
One-sided
errors: Certain errors affect only one side of
an account either the debit side or credit side. Such errors are called ‘one –
sided errors’. Examples of one-sided errors are:
i) Rs. 100 received from Deshmukh was
posted to his account as Rs.10. It means Deshmukh’s Account has been credited
with Rs. 10 instead of Rs. 100 and there is no mistake in the cash book. Thus,
this error has affected only one side of an account.
ii) The Purchase book is overcast by
Rs. 1000. This will affect his debit side of Purchase Account where the total
of the purchase book is posted, and no other account is affected.
Two-sided
errors:
Certain
errors may affect two or more accounts. Such errors are called ‘two-sided
errors.’ Examples of two-sided errors are:
i) A credit sale of Rs. 1080 to Anand
was wrongly recorded in the sales book for Rs. 1800. This error will affect two
accounts i.e. Anand’s Account and Sales Account.
ii) A sale of Rs. 500 made to Kamal
has been posted on the debit side of Kishore’s Account. This error will affect
two accounts namely Kamal’s Account and Kishore’s Account.
Rectification
of one-sided errors:
Generally errors are corrected by
passing suitable journal entries. We know passing a journal entry means
debiting one account and crediting another. But in the case of one-sided errors
only one account is involved. So it cannot be corrected by passing journal
entry. It is rectified by noting the correction on the appropriate side. Take
the first example of one-sided error. Deshmukh’s account was credited short by
Rs. 90. This will be corrected by an additional entry for Rs. 90 on the credit
side of his account as follows:
Deshmukh’s Account
Dr. Cr.
|
|
|
By difference in amount received from him posted on
|
90
|
And in the second example of one-sided
errors, the Purchase Account is debited in excess by Rs. 1,000. This will be
corrected by crediting the Purchase Account with Rs. 1000 as follows:
Purchase Account
Dr. Cr.
|
|
|
By over casting of purchase book for the month of…
|
1000
|
Rectification
of two-sided errors:
Two-sided errors are mostly rectified
by journal entries. It is because such errors affect two or more accounts and
in most of the cases the debit and credit are equally affected. Take the case
first example of two-sided errors given earlier. A credit sale of Rs.1080 to
Anand was wrongly recorded in the sales book as Rs. 1800. The two accounts
affected are: i) Anand’s Account which shows an excess debit of Rs. 720, and
ii) Sales account which stands credited in excess of by Rs.720. To rectify this
error we must credit Anand’s account with Rs. 720 and debit the sales Account
with Rs. 720. So a journal entry can be passed as follows:
Rs. Rs.
Sale Account Dr. 720
To anand 720
( Being sales of Rs. 1080 to Anand
wrongly
recorded in the Sales book as Rs. 1800
now rectified)
Take the second example of two-sided
errors given earlier. A sale of Rs. 500 made to Kamal was posted to the debit
side of Kishore’s Account. The two accounts
affected are: i) Kamal’s Account which has been wrongly debited with
Rs.500. To rectify this error we have to debit Kamal’s Account with Rs. 500 and
credit Kishore’s Account with Rs. 500. So, journal entry for the rectification
of this error will be as follows:
Rs. Rs.
Kamal Account Dr. 720
To Kishore Account 720
(Being rectification of wrong debit to
Kishore
for sale made to Kamal)
7. What is Trial Balance? Prepare a Trial balance with imaginary figures.
Answer: Before using the account
balances to prepare final accounts, an attempt is made to prove the total of
accounts with debt balances is in fact equal to the total of accounts with credit
balances. This proof of the equality of debt and credit balances is called a trail
balance.
A trail balance is a five column
schedule listing the names and balances of all the accounts in the ledger and
cash book, listed in the order in which they appear in the ledger. Last two
columns are used for listing the balances of different accounts. The debt
balances are listed in the left-hand column and the credit balances in the right-hand
column. The total of two columns should agree. The different columns of the trial
balance are; i) serial number, ii)heads of account iii)ledger folio iv)debt
balance v)credit balance.
Trial balance with imaginary figures;
Trial
balance of………………..as at 31st March,2015
|
Serial no
|
Heads of account
|
L/F
|
Debit balance
|
Credit balance
|
|
1
|
Land and building
|
|
6,00,000
|
|
|
2
|
Plant and machinery
|
|
6,00,000
|
|
|
3
|
Furniture and fixtures
|
|
50,000
|
|
|
4
|
Purchase
|
|
2,00,000
|
|
|
5
|
Sales
|
|
8,00,000
|
|
|
6
|
Cash in hand
|
|
50,000
|
|
|
7
|
Creditors
|
|
|
600,000
|
|
8
|
Loan from bank
|
|
|
5,00,000
|
|
9
|
Capital
|
|
|
12,10,000
|
|
10
|
wages
|
|
10,000
|
|
|
|
Total
|
|
23,10,000
|
23,10,000
|
8. Distinguish between Capital Expenditure and Revenue Expenditure.
Answer:
|
Basis of Comparison
|
Capital Expenditure
|
Revenue Expenditure
|
|
Meaning
|
The expenditure
incurred in acquiring a capital asset or improving the capacity of an
existing one, resulting in the extension in its life years.
|
Expenses
incurred in regulating day to day activities of the business.
|
|
Term
|
Capital Expenditure is a long term expenditure.
|
Revenue Expenditure is a short term expenditure
|
|
Capitalization
|
Capital Expenditure is capitalized
|
Revenue Expenditure which is not capitalized.
|
|
Shown in
|
Capital expenditure is shown in the Balance Sheet, in asset
side, and in the Income Statement (depreciation),
|
Revenue Expenditure is shown only in the Income Statement.
|
|
Nature
|
The Capital expenditure is a onetime investment of money.
|
Revenue expenditure occurs frequently.
|
|
Benefit
|
More than one
year
|
Only in current
accounting year
|
9. Solution: In the books of Shri Rai Bahadur
Trading and Profit & Loss A/c
Dr.
For the year ended 31st December, 2014 Cr.
|
Particulars
|
Amount(Rs.)
|
Amount(Rs.)
|
Particulars
|
Amount(Rs.)
|
Amount(Rs.)
|
|
|
To, Opening
stock
“ Purchases
Less: Return
“ Freight and carriage
“ Wages
“ Gross Profit
c/d
To, Salaries
“ Repairs
“ Trade
Expenses
“ Rent and Taxes
“ Net Profit
----Transferred
|
75,000
3,000
|
20,000
72,000
7,500
36,500
1,31,000
|
By, Sales
Less: Return
“ Closing Stock
By Gross Profit
b/d
“ Commission
“ Interest on
bank deposits
|
2,50,000
8,000
|
2,42,000
25,000
|
|
|
|
||||||
|
|
||||||
|
|
2,67,000
|
|
2,67,000
|
|||
|
|
12,000
1,200
4,000
24,000
95,100
|
|
1,31,000
3,300
2,000
|
|||
|
|
1,36,300
|
|
1,36,300
|
|||
|
|
||||||
Balance Sheet as at 31st
December, 2014
|
Liabilities
|
Amount(Rs.)
|
Amount(Rs.)
|
Assests
|
Amount(Rs.)
|
Amount(Rs.)
|
|
Capital
Add: Net Profit
Less: Drawings
Sundry
Creditors
B/P
|
1,70,000
95,100
|
2,48,500
15,000
6,200
|
Plant and
Machinery
Debtors
Bank Deposit
B/R
Cash in Hand
Closing Stock
|
|
1,60,000
55,000
20,000
4,000
5,700
25,000
|
|
2,65,100
16,600
|
|||||
|
|
|||||
|
|
2,69,700
|
|
2,69,700
|
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