Course
Code: PCO- 01
Assignment
Code: PCO-01/TMA/2017
1.
What do you mean by business? Explain
various parties who assist in the flow of goods from producer to consumers.
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
The manufacturer produces goods for the consumer.
Sometimes there may not be anybody between the two, but often the manufacturer
may take the help of middlemen like the wholesalers and retailers to distribute
the goods to the consumers.
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Manufacturer
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Manufacturer
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Retail Trader
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Retail Trader
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Wholesale trader
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Consumer
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Consumer
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Consumer
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Manufacturer
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Fig. Flow of Goods
There exist other parties or things without which
goods cannot be transferred to consumer, such as;
Warehousing:
Storage is indispensable in
these days of mass production. The goods should be stored carefully from the
time these are produced till the time they are sold.
Insurance:
The goods may be destroyed while
in production process or in transit due to accidents, or in due to fire or
theft etc. Insurance companies may cover these losses. The undertake to compensate the loss suffered
due to such risks.
Advertising:
Advertising is an effective aid
in selling the goods. The producer through advertisement communicates all
information about his goods, to the prospective consumers and creates in them a
strong desire to buy the product.
Banking:
Now-a-days we cannot think of business without
banks. To start the business or to run it smoothly we require money. Banks
supply money. Banks also provide many services required for the business.
So, in conclusion we can say that this things act as
a medium in the flow of goods.
Q2.
What do you understand by ‘Double Entry System’? How is it different from
‘Single Entry System’? Discuss.
Answer:
The Double entry system of accounting or
book keeping means that every business transaction will involve two accounts (or
more). For example, when a company
borrows money from its bank, the company’s Cash account will increase and its
liability account Loans payable will increase.
It
is the fundamental concept underlying present day book keeping and accounting.
Double entry account is based on the fact that every financial transaction has
equal and opposite effects in at least two different accounts. It is used to
satisfy the equation Assets= Liabilities + Equity, in which each entry is
recorded to maintain the relationship.
In
double entry system, transactions are recorded in terms of debits and credits.
The
main difference between single entry and double entry system of accounting are:
1.
Under
single entry system, only one balance sheet is prepared which contains assets
and liabilities. But, under Double entry system, the balance sheet is split up
into two parts.
2.
Under
single entry system, the purpose of preparing accounts is to show the financial
position of a firm at a particular date, whereas, under double entry system,
the purpose is to show the amount of capital received and the application of
the same in fixed assets.
3.
In
case of single entry system only one aspect of transaction is recorded, whereas
in case of double entry system both the aspect of the transactions is recorded.
4.
In
case single entry, errors are hard to identify.
But in case
of double entry system of accounting errors are easy to locate.
5.
Single
entry system of accounting known as incomplete type of recording, whereas
double entry known as complete type of recording.
6.
Under
single entry, only personal and cash account are considered. But in case of
double entry Personal, Real and Nominal all are considered.
7.
Single
entry is preferable for small enterprises, where double entry accounting is
preferable for big enterprises.
8.
In
case of single entry, financial position cannot be ascertained. Whereas, under
double entry system it can be ascertained easily.
Q.3
Solution:
|
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Accounts
Affected
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Classification
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Debit/Credit
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a
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Typewriter A/c
Cash A/c
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Real A/c
Real A/c
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Debit
Credit
|
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b
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Furniture A/c
R& Co. A/c
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Real A/c
Personal A/c
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Debit
Credit
|
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c
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Cash A/c
Interest A/c
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Real A/c
Nominal A/c
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Debit
Credit
|
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d
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Wages A/c
Cash A/c
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Nominal A/c
Real A/c
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Debit
Credit
|
|
e
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Cash A/c
A A/c
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Real A/c
Personal A/c
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Debit
Credit
|
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f
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Cash A/c
Capital A/c
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Real A/c
Personal A/c
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Debit
Credit
|
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G
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B A/c
Cash A/c
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Personal A/c
Real A/c
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Debit
Credit
|
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h
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Carriage A/c
Cash A/c
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Nominal A/c
Real A/c
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Debit
Credit
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I
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Purchase A/c
F& Co. A/c
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Nominal A/c
Personal A/c
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Debit
Credit
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j
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Cash A/c
Sales A/c
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Real A/c
Nominal A/c
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Debit
Credit
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|
|
|
|
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Q4.
What is Trial Balance? How is it prepared? Explain.
Answer:
Trial Balance is a statement, prepared
with the debit and credit balances of ledger accounts to test the arithmetical accuracy
of the books. It may also
be prepared with debit and credit totals of ledger accounts and also with the
balances and totals of ledger accounts. Books of accounts are maintained
according to the Double entry system.
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 trial 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
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Serial no
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Heads of
account
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L/F
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Debit balance
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Credit balance
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1
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Land and
building
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6,00,000
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|
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2
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Plant and
machinery
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6,00,000
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3
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Furniture and
fixtures
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50,000
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4
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Purchase
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2,00,000
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5
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Sales
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8,00,000
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6
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Cash in hand
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50,000
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7
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Creditors
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600,000
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8
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Loan from bank
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5,00,000
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9
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Capital
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12,10,000
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10
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wages
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10,000
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|
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Total
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23,10,000
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23,10,000
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There are three methods of preparing trial balance. The
total of debit and credit columns of the trial balance must be equal in all he
methods. The following methods can be used for preparing trial balance:
a. Balance
Method: Trial balance, as its
name itself points out is prepared with the balance of ledger accounts. Every
ledger account has got the debit and credit side. At the end of certain period,
ledger accounts are balanced. The total of both the debit and credit side must
be equal.
b.
Total Method:
According to this
method, the total of the debit and credit side of every account is separately
written in the debit and credit column of the trial balance. The total of both
the debit and credit must be equal.
c.
Total and Balance Method: This method
presents both the balance and total method in the same trial balance. The
amount column is divided between total and balance methods. There will be
different totals according to the different methods but the total of debit and
credit of each method will be equal.
Q5.
What are the advantages of maintaining a Petty Cash Book? Explain.
Answer: Advantages of maintaining Petty Cash Book:
1.
Petty
cash book maintains records of all petty payments systematically.
2. Petty cash book supplies information
regarding petty payments made on different heads more easily and quickly.
3. Petty cash book makes possible for making
comparison of the petty expenses between two periods and helps in controlling
such petty expenses more effectively.
4. Petty cash reduces the burden of head
cashier as he is not required to handle petty transactions. Hence, the head
cashier will have enough time to manage and control major cash transactions
more effectively.
5. Petty cash book helps in making the main
cash book more informative, clean and clear by including only major
transactions.
6. Petty cash book helps in making the records
of cash transactions up-to-date because of division of labor in recording cash
transactions.
7. Petty cash book saves time
because each payment under particular head is not posted into the ledger
separately. The posting is made with the periodical
total at a time.
Q6. Explain
the procedure of preparing a Bank Reconciliation Statement. State various
reasons of disagreement between the balances shown by the Cash Book and the
Pass Book.
Answer:
Bank
reconciliation statement is a statement which contains a complete and
satisfactory explanation of the differences in balances as per the cash book
and bank statement. The preparation of bank reconciliation statement is not a
part of the double entry book keeping 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.
While preparing
bank reconciliation statement, the following steps should be adopted:
Step_1: Identification of the balance with which
bank reconciliation statement has to be prepared.
Step_2: Identification of the plus and minus
balance.
Step_3: Determining the effect of the
transaction.
Step_4: Considering the date of preparing the
statement.
Step_5: Balancing the statement.
Reasons
for disagreement between the balances shown
by the Cash Book and the Pass Book:
Reasons for Differences between Cash Book and Pass
Book. The differences are basically of two types: (A) Items appear in Cash Book
but not appearing in Pass Book and
(B)
Items appear in Pass Book but not appearing in the Cash Book.
Let us
understand these reasons:
(A) Items
not appearing in Bank Pass Book
(1) Cheques issued by business entity not debited by
the Bank – This may be because they might not have been Banked by the payee or
it may still be under clearance. The entry in Cash Book will be made
immediately when the cheque is issued thereby reducing the Bank balance in the
books of entity’s books of A/cs. Here, Bank balance as per Cash Book will be
less, but as per Bank Pass Book it will be more. This is also termed as
unpresented cheques.
(2) Errors –
The Bank may by mistake miss out entering the debit or credit which results in
the difference.
(3) Standing Instructions – The entity may give
standing instruction to the Bank for certain regular payments like loan
repayment installment, transfer of funds etc. This may get entered in the Cash
Book immediately, but Pass Book entry may be delayed.
(B)
Items not appearing in the Cash Book
(1) Bank
interest, Bank charges etc. – The Bank will charge interest on overdraft or
also charges for services, issue of demand draft, pay orders etc. Here, being
the source of transaction, the Bank will record in the Pass Book immediately
and send the debit advice slips to the business entity. The entry in the Cash
Book may be delayed. Similarly the Bank could credit interest on fixed
deposits, which may get entered in business books at a later date.
(2) Direct
deposits in Bank account – Sometimes customers or others may directly deposit
an amount in the Bank for goods or services rendered. The Bank will enter it
immediately, but entry in Cash Book will appear later.
(3) Bills for collection – The Business Entity may
send bills of exchange for collection. The Bank will collect the payment and
credit the same in the passbook. The entry in Cash Book will be made only after
receipt of information from the Bank.
Q7.
How would you determine whether a particular expenditure is capital or revenue?
Give five examples of each.
Answer: Rules
for Determining Capital Expenditure:
Expenditure
can be recognized as capital if it is incurred for the following purposes:
An expenditure incurred for the purpose of acquiring
long term assets (useful life is at least more than one accounting period) for
use in business to earn profits and not meant for resale, will be treated as a
capital expenditure. For example, if a second hand motor car dealer buys a
piece of furniture with a view to use it in business; it will be a capital
expenditure. But if he buys second hand motor cars, for re-sale, then it will
be revenue expenditure because he deals in second hand motor cars. When expenditure
is incurred to improve the present condition of a machine or putting an old
asset into working condition, it is recognized as a capital expenditure. The
expenditure is capitalized and added to the cost of the asset.
Likewise, any
expenditure incurred to put an asset into working condition is also a capital
expenditure Similarly, if a building is purchased for ` 1,00,000 and ` 5,000 is
spent on registration and stamp duty, the capital expenditure on the building
stands at ` 1,05,000. If expenditure is incurred, to increase earning capacity
of a business will be considered as of capital nature. For example, expenditure
incurred for shifting ‘the ‘factory for easy supply of raw materials. Here, the
cost of such shifting will be a capital expenditure
Preliminary expenses incurred before the
commencement of business is considered capital expenditure. For example, legal
charges paid for drafting the memorandum and articles of association of a company
or brokerage paid to brokers, or commission paid to underwriters for raising
capital. Thus, one useful way of recognizing expenditure as capital is to see
that the business will own something which qualifies as an asset at the end of
the accounting period. Some examples of capital expenditure: (i) Purchase of
land, building, machinery or furniture; (ii) Cost of leasehold land and
building; (iii) Cost of purchased goodwill; (iv) Preliminary expenditures; (v)
Cost of additions or extensions to existing assets;
Rules
for Determining Revenue Expenditure:
Any expenditure which cannot be recognized as
capital expenditure can be termed as revenue expenditure. Revenue expenditure
temporarily influences only the profit earning capacity of the business.
Expenditure is recognized as revenue when it is
incurred for the following purposes:
Expenditure for day-to-day conduct of the business,
the benefits of which last less than one year. Examples are wages of workmen,
interest on borrowed capital, rent, selling expenses, and so on. Expenditure on
consumable items, on goods and services for resale either in their original or
improved form. Examples are purchases of raw materials, office stationery, and
the like. At the end of the year, there may be some revenue items (stock,
stationery, etc.) still in hand. These are generally passed over to the next
year though they were acquired in the previous year. Expenditures incurred for
maintaining fixed assets in working order. For example, repairs, renewals and
depreciation.
Some examples of revenue expenditure (i) Salaries
and wages paid to the employees; (ii) Rent and rates for the factory or office
premises; (iii) Depreciation on plant
and machinery; (iv) Consumable stores; (v) Inventory of raw materials, work-in-progress
and finished goods;
Q8. Differentiate between
the following:
(a)
Gross
Profit and Net Profit
(b)
Answer:
|
Gross
Profit
|
Net
Profit
|
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1. Gross profit is the income of the company left
after pan off direct expenses.
2. It indicates the profit generated from the core activity
forming part of a business.
3. Helpful n controlling excess costs.
4. A rough estimate about the company’s
profitability.
5. Gross Profit = Net sales – Cost of goods Sold
|
1.
Net profit s the residual income left with the company
after all deductions.
2.
It is calculated by deducting non operating expense from
operating profit and adding non operating income.
3.
Helpful in known the performance of the company n a
financial year.
4.
To know the actual profit made n a particular account ear.
5.
Net Profit = Operating Profit- (Interest + Tax)
|
(b) Direct Expenses and
Indirect Expenses
Answer:
|
Direct
Expenses
|
Indirect
Expenses
|
|
1. Direct expenses are the expenses that a business incurs
that are directly associated with a cost object.
2. Expenses connected with purchases of goods are known as direct expenses.
3. Example of direct expenses is freight, insurance, of goods in transit,
carriage, wages, custom duty, duty etc.
4. Classification direct expenses are; Direct material, direct labour, direct expenses
5. It is used at the time of determination of
gross profit.
|
1.
Indirect expenses are the expenses that a business incurs
that are associated with operation the business as a whole.
2.
All expenses other than direct expenses are assumed as
indirect expenses. Such
expenses have no relationship with purchase of goods.
3.
Examples of indirect expenses include rent of
building, salaries to employees, legal charges, insurance of building,
depreciation, printing charges etc.
4.
Classification direct expenses are; Indirect
material, indirect labour, indirect overheads
5.
It is used at the time of determination of Net
profit.
|
Q9.
What are one sided errors? Give any five examples. Explain the method of
rectifying one-sided errors.
Answer:
For the purpose 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.
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
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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
|
10. Solution: In the books of Shri Ved Vyas
Trading and Profit
& Loss A/c
Dr.
For the year ended 31st December, 2015 Cr.
|
Particulars
|
Amount(Rs.)
|
Amount(Rs.)
|
Particulars
|
Amount(Rs.)
|
Amount(Rs.)
|
|
|
To, Opening stock
“ Purchases
Less: Return
“carriage
“ Wages & Salaries
“ Gross Profit c/d
To, Trade Expenses
“ insurance
“ Audit fees
“Printing and Advt.
“Interest on Loan
“ Deprecation on fixed assets
“ interest on Capital
“ Net Profit
----Transferred
|
2,75,000
9,000
|
36,000
2,66,000
12,400
58,600
1,92,000
|
By, Sales
Less: Return
“ Closing Stock
By Gross Profit b/d
“ Commission
Add: Accrued
“ Interest on drawings
“ Rent
Less: Advance
|
5,20,000
15,000
|
5,05,000
60,000
|
|
|
|
||||||
|
|
||||||
|
|
5,65,000
|
|
5,65,000
|
|||
|
|
2,200
2,000
1,200
5,500
1,500
30,000
20,000
1,43,900
|
1,000
400
13,000
1,000
|
1,92,000
1,400
900
12,000
|
|||
|
|
||||||
|
|
2,06,300
|
|
2,06,300
|
|||
|
|
||||||
Balance Sheet as at 31st December,
2015
|
Liabilities
|
Amount(Rs.)
|
Amount(Rs.)
|
Assets
|
Amount(Rs.)
|
Amount(Rs.)
|
|
|
Capital
Add: Net Profit
Less: Drawings
Less: Interest on drawings
Add: Interest on Capital
Bank Loan
Bills Payable
Sundry Creditors
Advance rent
|
2,50,000
1,43,900
|
3,98,000
20,000
2,200
62,100
1,000
|
Fixed assets
Less: Depreciation @10%
Debtors
Bills Receivable
Cash in Hand
Cash at bank
Accrued Commission
Closing Stock
|
3,00,000
30,000
|
2,70,000
1,10,000
3,300
12,800
26,800
400
60,000
|
|
|
3,93,900
15,000
|
||||||
|
|
||||||
|
3,78,900
900
|
||||||
|
3,78,000
20,000
|
||||||
|
|
||||||
|
4,83,300
|
4,83,300
|
**************************************************************************
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