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Chapter 13 Computerised Accounting System NCERT SOLUTION CLASS 11TH ACCOUNTS | EDUGROWN NOTES

Short Answer Type question:

Q.1 State the four basic requirements of a Database Applications.

ANSWER:The following are the four basic requirements of a Database Application.

Front-end Interface- It acts as an interactive connecting link between the user and the database oriented software through which the user communicates or interacts to the back-end database.
Back-end Database- It is the data storage system that is hidden from the users. It responds to the requirement of the users to the extent the user is authorised to access.
Data Processing- It is a sequence of actions that are taken to transform the input data into useful information for taking various decisions.
Reporting System- It is an integrated set of objects that includes all the relevant information that constitutes a report.

Q.2 Name the various categories of Accounting Package.

ANSWER:The following are the four basic requirements of a Database Application. The Accounting Packages are classified into the following categories.

Ready-to-use or Readymade Software.
Customised Software
Tailored or Tailor-made Software.

Q.3 Give examples of two types of Operating Systems.

ANSWER:The following are the four basic requirements of a Database Application. The following are the two types of Operating System along with their examples.

Single-User Operating System for example, DOS, Windows 95/97
Multi-User Operating System for example, UNIX, LINUX

Q.4 List the various advantages of Computerised Accounting Systems.

ANSWER:The following are the four basic requirements of a Database Application. The mentioned below are the various advantages of Computerised Accounting Systems.

Speed
Accuracy
Reliability
Up-to-Date Information
Real Time User Interface
Automated Document Production
Scalability
Legibility

Q.5 Give two examples each of the organisations where ‘ready-to-use’, ‘customised’, and ‘tailored’ accounting packages respectively suitable to perform the accounting activity.

ANSWER: Ready-to-use’ accounting packages are basically used by the small-sized enterprises. For example, grocery stores, medical stores, etc.

On the other hand, ‘Customised’ accounting packages are basically used by the medium and large business. For example, shopping malls, hospitals, etc.

Whereas, ‘Tailored’ accounting packages are basically used by the geographically scattered businesses. For example, MNC’s, Communication Industries, etc.:

Q.6 Distinguish between ‘ready-to-use’ and ‘tailored’ accounting software.

ANSWER:

Basis of Difference	Ready-to-Use Accounting Software	Tailored Accounting Software
(i) Nature of Business	This software is used in small and conventional businesses.	This software is used in large and typical businesses.
(ii) Adaptability	Its adaptability is very high.	Its adaptability is very specific and cannot be used by every business houses.
(iii) Linkage to other Information System	Its interface with the other information system is limited.	Its interface with the other information system is unlimited.
(iv) Number of Users	It has limited users.	It has huge number of users.
(v) Installation and Maintenance Costs	The installation and maintenance cost is low.	The installation and maintenance cost is comparatively higher.

Long Answer Type Question:

Q.1 Define a Computerised Accounting System. Distinguish between a Manual and Computerised Accounting Systems.
ANSWER: Computerised Accounting Systems is based on the concept of database. It is an accounting information system that processes the
financial transactions and events in accordance to the Generally Accepted Accounting Principles (GAAP) to produce reports as per
the requirements of the users.
The computerised accounting is one of the database oriented application, where in the transactions data is stored in a wellorganised database. The accounting systems are of two types namely Manual and Computerised Accounting Systems.
The following are some point of differences between Manual and Computerised Accounting Systems.
Basis of
Difference
Manual Accounting
Systems
Computerised Accounting
Systems
(i) Identifying The identification of
transactions is based on
the application of the
accounting principles.
The identification of
transactions in
computerised accounting is
also based on the
application of accounting
principles
(ii) Recording In Manual Accounting
Systems, the recording
of financial transactions
is done through books of
original entries, i.e.
Journal.
In Computerised
Accounting Systems, the
data of such transactions is
stored in a well designed
database.
(iii)
Summarising
By ascertaining the
balance of various
accounts, transactions
are summarised to
produce Trial Balance in
the Manual Accounting
Systems. Consequently,
the generation of ledger
In Computerised
Accounting Systems, the
originally stored
transactions data are
processed to give out the
list of balances of various
accounts to be finally
shown in the Trial Balance
accounts becomes a
necessary condition.
report. Thus, the generation
of ledger accounts is not a
necessary condition.
(iv)
Classification
In Manual Accounting
Systems, transactions
recorded in the books of
original entry are further
classified by posting into
ledger accounts. Thus,
the data can be
duplicated.
In order to produce ledger
accounts in Computerised
Accounting Systems, the
stored data is processed to
appear as classified, such
that no data is duplicated.
(v) Adjusting
Entries
Adjusting entries are
recorded to match the
expenses and revenues
generated of the
accounting period. So,
under Manual
Accounting System,
these entries are made to
stick to the principles of
cost matching revenue.
In Computerised
Accounting Systems, no
such adjusting entries for
errors and rectification are
made. Thus, Journal and
vouchers are prepared and
stored to follow the
principles of cost matching
revenue.
(vi) Financial
Statements
The preparation of
financial statements
hypotheses the
availability of Trial
Balance under the
Manual System of
Accounting.
However, in Computerised
Accounting System, journal
vouchers are prepared and
stored to follow the
principles of cost matching
revenue, but there is
nothing like passing
adjusting entries for error
and rectification.
(vii) Closing the
books
After preparing financial
reports, the accountants
prepare books for the
following accounting
period, which is done by
posting of closing and
reversing the closing
Journal entries.
In the Computerised
Accounting Systems, to
create and store the opening
account balances in the
database, year-end process
is used.

Q.2 Discuss the advantages of Computerised Accounting Systems over the Manual Accounting Systems.
Answer : The following are the various advantages of the Computerised Accounting Systems over the Manual Accounting Systems

Speed- The speed of a computer is very high and takes very less time in performing various difficult operations. The accounting
data is processed comparatively faster through the Computerised Accounting Systems than it can be done through the manual
efforts.
Accuracy- In Computerised Accounting Systems, the possibility of errors is minimised or reduced as the primary accounting data
is entered only once for preparing various accounting reports and for subsequent usage and processes.
On the other hand, in Manual Accounting Systems, posting of same data is required a numerous times to prepare different types of
accounting reports. This increases the possibility of accounting errors.
Reliability- As the Computerised Accounting Systems is well-equipped in performing repetitive operations, so it is comparatively
more reliable to perform the operations than the manual system. Also, the Computerised Accounting Systems overcome the
limitation of Manual Accounting Systems such as tiredness, boredom or fatigue, etc., thereby enhances the degree of reliability.
Up-to-Date Information- In the Computerised Accounting Systems, whenever the new accounting data is entered and stored,
the existing accounting records automatically gets updated. For example, when a transaction related to purchase of machinery is
entered in the Computerised Accounting Systems, then automatically the cash balance and machinery balance on the Assets side
of the Balance Sheet gets updated immediately. This ensures that latest information is reflected in the accounting reports at any
particular period of time.
On the other hand, the accounting records maintained under the Manual Accounting Systems fail to reflect the latest status. This is
because it depends on the human mental capability and patience to update the records each time a transaction happens.
Real-Time User Interface- Most of the automated accounting systems are inter-linked through a network of computers. The
availability of information to various users at the same time on the real-time basis is facilitated under computerised system of
accounting. This is very difficult to avail such facility under manual system as this call for availability of multiple copies of the
accounting records that can be accessed by many users at the same time.
Automated Document Production- Under Computerised Accounting Systems, the accounting reports such as, Cash Book, Trial
balance, Statement of Accounts, etc. are very easy to obtain. This is because most of the computerised systems have standardised
and user-defined format of accounting reports that are generated automatically. On the other hand, such an ease cannot be enjoyed
under manual system. This is because the accounts books are prepared by different employees, thereby subjected to vary from
person to person.
Scalability- The computerised systems of accounting are highly scalable as the requirement of additional manpower is mainly
confined to data entry for recording and storing the additional vouchers in the computers. Thus, the additional cost of processing
additional transactions is meagre as compared to the cost associated with hiring new accountants to handle additional transactions.
Legibility- In Computerised Accounting Systems, the accounting records are typed and presented in standard fonts. The various
characters especially numbers, alphabets, graphics, etc. are more clear and can be read without any difficulty and ambiguity. But, in
the manual system, the writing of different personnel varies; consequently, reading and interpreting the written materials involve
errors due to misinterpretation

Q.3 Describe the various types of accounting software along with their advantages and limitations.
Answer :

Ready-to-use
Customised
Tailored
Ready-to-use Software- This type of software is readily available in the market with prescribed and standard features. This
accounting software is basically used by the small-size business enterprises, where the number of transactions is not so large. The
cost of its installation and maintenance is also low. It has limited number of users. Its adaptability is very high as it is relatively easier
to learn and operate. It does not have a wide scope to link it with other information systems.
Customised Software- Customised software is the software that has standardised features to meet the special requirements of the
users. It provides the scope of changing the features of accounting software. The functions of this software can be programmed as
per the needs and requirements of the users. This type of software best suits the needs of medium and large businesses. Its cost of
installation and maintenance is comparatively higher. It can be easily linked to the other information systems.
Tailored Software- Tailored or Tailor-made accounting software is the software that is developed as per the specifications and
requirements of the users. This accounting software is generally used in the large business organisations with multi-users and
geographically scattered locations. It is designed to meet the specific needs of the users and form an integral part of the
organisational MIS. It has infinite number of users.
Advantages of Ready-made Accounting Software
The advantages of Ready-made Accounting Software are enlisted below.
This software is easily available in the market.
It is less expensive, as it comes with basic and standard features.
It involves a lesser need for training.
It is less sophisticated.
Its adaptability is very high as it is relatively easier to learn and operate.
It is suitable for small-size business enterprises.
Disadvantages of Ready-made Accounting Software
The disadvantages of Ready-made Accounting Software are enlisted below.
It has limited number of users.
It is not suitable for medium and large business organisation, where the number of transactions is very large.
It fails to cater the specific needs of the users.
It suffers from the low level of data secrecy.
It does not have a wide scope to link it with other information systems.
Advantages of Customised and Tailor-made Accounting Software
The following are the advantages of Customised and Tailor-made AccountingSoftware.
This software is suitable for medium and large business organisation.
It caters the specific requirements and needs of the users.
It can be modified as per the needs of the organisation.
It has high level of security and minimises the loss and unauthorised access of data.
It cannot be easily imitated or duplicated in the market due to difference in the needs and requirements of different users.
It does not involve high cost of training as the training can be imparted within the organisation by the experienced personnel.
It can be easily linked to the other information systems.
It forms an integral part of the organisational MIS.
Disadvantages of Customised and Tailor-made Accounting Software
The following are the disadvantages of Customised and Tailor-made Accounting Software.
It involves high cost of installation and maintenance.
Developing customised software is a time-consuming process and involves high cost of development.
Maintenance of this software is difficult as there exists limited availability of knowledge to the developers.
It lacks standard training module.

Q.4 Accounting software is an integral part of the Computerised Accounting Systems’ Explain. Briefly list the generic
considerations before sourcing accounting software.
Answer : The accounting software does form an integral part of the Computerised Accounting Systems. The accounting software should be
selected after considering the level of skill and proficiency of the accounting professionals. This is one of the important aspects that
should be taken care of before introducing Computerised Accounting Systems, as the accounting professionals are responsible for
accounting and the not computers.
The following are some of the important points that should be taken into consideration before introducing accounting software in an
organisation.

Flexibility- This is the most important factor that should be considered before sourcing accounting software. The accounting software
should be flexible in terms of data entry, retrieval of data and generating design of reports. The software should be able to run on different
computers having different operating systems and having different configurations. It should provide some flexibility among its users. It
should also provide easy switch over between users, operating system and hardware.
Cost of Installation and Maintenance- The selection of accounting software largely depends upon its cost to the organisation. The cost of
accounting software includes cost of installing the related components and hardware, maintenance and alteration costs, cost of training the
staff and cost involved in recovering data in case of data failure. An organisation needs to evaluate the benefits of the software against its
costs. Based on its evaluation, an organisation will introduce the software if the benefits are more than the cost and if it is in the affordable
range of the organisation.
Size of Organisation- The size of an organisation also determines the selection of accounting software. The small-sized organisations,
where the volume of business transactions is not so large, usually opt for simple and single user oriented software. On the other hand,
large scale organisations, where the volume of business transactions is very large choose the latest and sophisticated software for meeting
the multi-user requirements.
Training Needs- Another factor that affects the choice of software is the training needs. There are some accounting software that requires
comparatively lesser training and are more user-friendly. While, there are some other complicated software that requires continuous and
thorough training.
Level of Secrecy- The level of expected security is one of the important factors that an organisation bears in mind before sourcing
accounting software. Software should be able to prevent the unauthorised access and manipulation of data. It should have in-built features
of security. For example, in tailored software the user rights may be restricted according to their work or responsibility criteria.
Exchanging Data Facility- The capability of accounting software to transfer data is another important factor to be considered for its
selection. The accounting software should be able to provide an easy and safe transfer of data from one system to another system and
during migration of database.
Utilities/MIS Reports- Another factor which helps in determining the software selection is the MIS reports and the extent to which they are
used in the organisation.
Vendor Reputation and Capability- The selection of software is also affected by the capability and competence of the vendor. It depends
upon the reputation of the vendor in the market, the user-reviews of the similar software, the extent of post sales support services from the
vendors, etc.

Q.5 Computerised Accounting Systems are best form of accounting system’. Do you agree? Comment.

Answer : Yes, we agree with this statement that ‘Computerised Accounting Systems are best form of accounting system’. It becomes very
easier to work with Computerised Accounting Systems leading to reduction in the accounting errors. Moreover, the computerised
accounting reports are highly reliable, thereby enhances the overall efficiency.
Due to the following positive aspects, the Computerised Accounting Systems certainly enjoy an edge over the Manual Accounting
Systems.

Speed- The speed of a computer is very high and takes very less time in performing various difficult operations. The accounting
data is processed comparatively faster through the Computerised Accounting Systems than it can be done through the manual
efforts.
Accuracy- In Computerised Accounting Systems, the possibility of errors is minimised or reduced as the primary accounting data
is entered only once for preparing various accounting reports and for subsequent usage and processes.
On the other hand, in Manual Accounting Systems, posting of same data is required a numerous times to prepare different types of
accounting reports. This increases the possibility of accounting errors.
Reliability- As the Computerised Accounting Systems is well-equipped in performing repetitive operations, so it is comparatively
more reliable to perform the operations than the manual system. Also, the Computerised Accounting Systems overcome the
limitation of Manual Accounting Systems such as tiredness, boredom or fatigue, etc., thereby enhances the degree of reliability.
Up-to-Date Information- In the Computerised Accounting Systems, whenever the new accounting data is entered and stored,
the existing accounting records automatically gets updated. For example, when a transaction related to purchase of machinery is
entered in the Computerised Accounting Systems, then automatically the cash balance and machinery balance on the Assets side
of the Balance Sheet gets updated immediately. This ensures that latest information is reflected in the accounting reports at any
particular period of time.
On the other hand, the accounting records maintained under the Manual Accounting Systems fail to reflect the latest status. This is
because it depends on the human mental capability and patience to update the records each time a transaction happens.
Real-Time User Interface- Most of the automated accounting systems are inter-linked through a network of computers. The
availability of information to various users at the same time on the real-time basis is facilitated under computerised system of
accounting. This is very difficult to avail such facility under manual system as this call for availability of multiple copies of the
accounting records that can be accessed by many users at the same time.
Automated Document Production- Under Computerised Accounting Systems, the accounting reports such as, Cash Book, Trial
balance, Statement of Accounts, etc. are very easy to obtain. This is because most of the computerised systems have standardised
and user-defined format of accounting reports that are generated automatically. On the other hand, such an ease cannot be enjoyed
under manual system. This is because the accounts books are prepared by different employees, thereby subjected to vary from
person to person.
Scalability- The computerised systems of accounting are highly scalable as the requirement of additional manpower is mainly
confined to data entry for recording and storing the additional vouchers in the computers. Thus, the additional cost of processing
additional transactions is meagre as compared to the cost associated with hiring new accountants to handle additional transactions.
Legibility- In Computerised Accounting Systems, the accounting records are typed and presented in standard fonts. The various
characters especially numbers, alphabets, graphics, etc. are more clear and can be read without any difficulty and ambiguity. But, in
the manual system, the writing of different personnel varies; consequently, reading and interpreting the written materials involve
errors due to misinterpretation.

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Chapter 12 Applications of Computers in Accounting NCERT SOLUTION CLASS 11TH ACCOUNTS | EDUGROWN NOTES

Short Answer Type Question:

Q.1 State the different elements of a computer system.

ANSWER: A computer system is mainly composed of the following six elements.

1. Hardware- It includes all the physical components of a computer such as, keyboard, mouse, monitor, processor, etc. These can be touched and a user inputs commands through them.

2. Software- It is referred to a set of the programs that enables a computer to perform its tasks or commands given by the user. There are following six types of software.

Operating System
Utility Programs
Application Software
Language Processors
System Software
Connectivity Software

3. People- It constitutes the most important part of a computer system. It basically refers to the individuals or the users who interact with the computer through the use of hardware and software. The following are the people who are involved in a computer system.

System Analysts
Operators
Programmers

4. Procedures- A series of operations that are executed in a certain manner in order to achieve a desired set of results is known as ‘Procedures’. There are mainly following three types of procedures.

Hardware-oriented Procedures
Software-oriented Procedures
Internal Procedures

5. Data- The facts that are gathered and entered into a computer system is known as ‘Data’. It may comprise of numbers, text, graphics, etc.

6. Connectivity- This refers to the manner, in which a computer system is connected to the other electronic devices through telephone lines, microwave transmission, satellite link, etc., is known as ‘Connectivity’.

Q.2 List the distinctive advantages of a computer system over a manual system.

ANSWER: The following are some of the distinctive advantages of a computer system over a manual system.

High speed
Accuracy
Reliability
Versatility
Storage

Q.3 Draw block diagram showing the main components of a computer.

ANSWER:

Q.4 Give three examples of a Transaction Processing System.

ANSWER: Transaction Processing System (TPS) refers to a computerised system that records, processes, validates and stores routine transactions that occur in various functional areas of a business on daily basis. Some of the examples of Transaction Processing System are enlisted as:

1. Automatic Teller Machine (ATMs)- These are those machines that handle the bank transactions through the use of specialised computer programs.

2. Payroll Applications- These are the applications that help to execute payroll programs using terminal and online processing. These are commonly used for preparing payroll or salary of the employees.

3. Order Processing- With the help of TPS applications, orders are collected from clients either manually or through mails and telephonic calls. Thereafter, these orders are processed to initiate invoicing, account receivables and inventory control processing. These are now-a-days widely used in almost every spheres of business, such as online purchasing of tickets, online booking, etc.

Q.5 State the relationship between Information and Decision.

ANSWER: An organisation consists of various interdependent decision making units at every level of management and department. All these separate departments take decisions for their respective fields to achieve the desired common organisational objectives. The organisation as a whole needs to set its targets, draft plans and formulate various policies. These activities are based on the information (in form of data) regarding the past experiences and expected future conditions. It is on the basis of this information that an organisation allocates its resources and attempts to accomplish its determined targets. Thus, it can be said that on one hand, information facilitates the decision making process while on the other hand, decisions took in the past acts as a pool of information in the future.

Q.6 What is Accounting Information System?

ANSWER: An Accounting Information System (AIS) is a system that identifies, collects, processes, summarises, generates and presents information about a business organisation to a wide variety of users. It provides relevant information by processing voluminous accounting data, which is beyond the human capabilities. It provides a glimpse of various organisational activities and maintains a detailed financial record. It acts as a common pool of information from which different departments such as, production department, sales and marketing department, HR department, etc. can fetch useful and relevant information. The information thus provided, helps the users to take their decisions rationally and accordingly formulate their plans and policies. Thus, it can be said that an efficient AIS enhances the effectiveness and efficacy of an organisation as a whole.

The below mentioned points highlight the important characteristics of AIS.

1. It helps in handling the huge volume of accounting and financial transactions of an organisation.

2. It helps in drafting future plans and accordingly setting the future objectives.

3. It acts as a common pool for providing information to different departments besides accounts and finance departments.

4. It helps in maintaining the accounting information as per the guidelines laid down by the Law.

5. It helps in meeting the informational needs by generating reports for both external accounting users (investors, creditors, etc.) as well as for the internal accounting users (management, shareholders, etc.).

Q.7 State the various essential features of an accounting report.

ANSWER: The following are the various features of an accounting report.

a. Relevance

b. Accuracy

c. Timeliness

d. Conciseness

e. Completeness

Q.8 Name three components of a Transaction Processing System.

ANSWER: The following are three main components of a Transaction Processing System (TPS).

1. Input- A computerised accounting system accepts the complete transaction data as input through the process of data collection, data editing, data validation and data manipulation.

2. Storage- The system stores the inputted data in computer storage media such as hard disk.

3. Output- The stored data, through the process of report generation and query support can be retrieved and processed as and when required for generating an accounting report as output.

Q.9 Give example of the relationship between a Human Resource Information System and MIS.

ANSWER: Management Information System (MIS) is a planned system of collecting, processing, storing and disseminating the data in the form of information to perform the task of decision making and management of an organisation.

Human Resource Information System (HRIS) maintains the records of the employees and prepares salaries and wages payable to them.

Relationship between MIS and HRIS

HRIS provides MIS with the information such as, the qualifications, skills, experiences and past performances of an individual employee. The MIS in turn uses this information to take appropriate decisions. This helps in placing the right person with right qualities at right job positions. This also helps in making decisions regarding promotions and increments of the employees.

Long Answer Type Question:

‘Q.1 An organisation is a collection of interdependent decision-making units that exists to pursue organisational objectives. In the light of this statement, explain the relationship between information and decisions. Also explain the role of Transaction Processing System in facilitating the decision-making process in business organisations.
ANSWER: In organisation consists of various interdependent decision making units at every level of management and department. All these
separate departments take decisions for their respective fields to achieve the desired common organisational objectives. The
organisation as a whole needs to set its targets, draft plans and formulate various policies. These activities are based on the
information (in form of data) regarding the past experiences and expected future conditions. It is on the basis of this information that
an organisation allocates its resources and attempts to accomplish its determined targets. Thus, it can be said that on one hand,
information facilitates the decision making process while on the other hand, decisions took in the past acts as a pool of information
in the future
In this aspect, information forms the most crucial part of today’s business environment. In this context, Transaction Processing
System (TPS) has emerged as crucial component of the business operations. Transaction Processing System (TPS) refers to a
computerised system that records, processes, validates and stores routine transactions that occur in various functional areas of a
business on daily basis. This system facilitates the decision making in a business organisation through the following processes.

Data Collection- The TPS collects all the required data to complete one or more transactions. The data can be collected either
manually or through other devices such as scanners and point of sale equipments.
Data Editing- The system checks the data for its accuracy, correctness and completeness.
Data Validation- It refers to a process, where TPS verifies the data for its correctness and rectifies the errors, if detected.
Data Manipulation- TPS performs the process of calculation, then processes and analyses the inputted data on a pre-set design.
Data Storage- It places or stores the data in one or more database.
Output Generation- TPS helps in creating and generating reports and also presents the reports generated in a pre-designed
format either as hardcopy or softcopy.
Query Support- TPS provides a mechanism enabling its users to raise a query upon the stored data and extract the required
information in required format as and when the need arises.

Q.2 Explain, using examples, the relationship between the organisational MIS and the other functional information system in
ANSWER: an organisation. Describe how AIS receives and provides information to other functional MIS.
Answer :
MIS is a planned system of collecting, processing, storing and disseminating the data in the form of information to perform the task
of decision making and management of an organisation. An organisation basically operates in an environment, which is surrounded
by its suppliers and customers. The informational needs of the organisation emerge from the business processes stratified into its
various functional areas. Thus, in this sense, MIS has functional relationship with other functional management information system
namely Manufacturing Information System, Human Resource Information System, Accounting Information System and Marketing
Information System. MIS receives information from these other functional information systems and uses the received information to
take appropriate decisions.
An Accounting Information System (AIS) is a system that identifies, collects, processes, summarises, generates and presents
information about a business organisation to a wide variety of users. It is an important component of MIS. It receives and provides
information to the various sub-systems of the MIS.
Relationship between AIS, Manufacturing Information System and Human Resource Information System
The Human Resource Department sends a list of workers to the Manufacturing Department. The Manufacturing Department on the
basis of this information prepares a report on the performance of each worker and deductions to be made from the wages, if any.
Thereafter, this report is send to both Accounts Department as well as to Human Resource Department. After this, the Human
Resource Department sends report to the Accounts Department to pay the wages. The Accounts Department with the help of these
reports calculates the amount payable and statutory dues and subsequently, makes the final payments to the workers. The report of
the final payments is send to the HR Department and the Manufacturing Department by the Accounts Department.
Relationship between AIS and Manufacturing Information System- Business processes in the Manufacturing Department
include the following activities.
a) Preparation of Plans and Schedules
b) Issue of Material Requisition Form and Job Cards
c) Issue of Stock and Inventory
d) Issue of Raw Material Procurement Orders
e) Handling Supplier Invoices
f) Payments to Suppliers
The AIS would accordingly include the process of
a) Purchasing Orders
b) Payments to Suppliers
c) Preparing Inventory Status Reports
d) Preparing Reports of Accounts Payable
Relationship between AIS and Marketing Information System- Business processes in the Marketing and Sales Department
involve the following activities.
a) Inquiry Process
b) Creation of Contacts
c) Entry of Orders
d) Dispatching Goods
e) Generation of Bills to Customers
The AIS would accordingly include the following activities.
a) Processing of Sales Orders
b) Authorisation of Credit
c) Keeping Custody of the Goods
d) Inventory Status
e) Shipping Details

Q.3 An accounting report is essential report which must be able to fulfil certain basic criteria’. Explain? List the various types of accounting reports.
ANSWER: When the collected data is processed and manipulated in a useful sense that can be understood by the users without any ambiguity,
then it becomes information. When this relevant information is further summarised to meet a particular aim, it is called a report. The
content and the design of the report depend upon the level of management to which it is to be submitted. The various decisions are
to be made on the basis of this report. Irrespective of the content and design, every accounting report must fulfill the following
criteria.
1) Relevance
2) Timeliness
3) Accuracy
4) Completeness
5) Summarisation
The various types of reports used in MIS can be broadly categorised as follows.

Summary Reports- These are the reports that summarise all the activities of an organisation. Example, Profit and Loss Account.
Demand Reports- These are the reports that are prepared on the request and need of the management.
Example, Bad-Debts report.
Customer/Supplier Reports- These are the reports that are prepared as per the specifications of the management showing
various aspects of the suppliers/customers.
Example, Report of Top 10 customers.
Exception Reports- These are the reports that are prepared in accordance with some specific conditions or exceptions.
Example, Inventory Status Report.
Responsibility Reports- These reports are prepared by the managers who are responsible for their respective departments.
Example, Purchase Manager submits a report regarding different aspects of purchase.

Q.4 Describe the various elements of a computer system and explain the distinctive features of a computer system and manual system.
ANSWER: A computer system is ideally composed of the following six elements.

Hardware- It includes all the physical components of a computer such as, keyboard, mouse, monitor, processor, etc. These can
be touched and a user inputs commands through them.
Software- It is referred to a set of the programs that enables a computer to perform its tasks or commands given by the user.
There are following six types of software.
a. Operating System- It is an integrated set of specialised programs that are meant to manage and control the resources of a
computer. They make the computer user-interactive, i.e. user-friendly. It means that operating system forms an interactive link
between the user and the computer hardware.
b. Utility Programs- Utility Programs refer to the set of pre-written computer programs that are designed to perform certain
supporting operations. Most of the utility software are highly specialised and are specially designed to perform a single task or a
small range of tasks.
c. Application Software- These are user-oriented programs that are designed and developed for performing certain specified
tasks.
d. Language Processors- These are the software that interpret or translate a program language into a machine language.
e. System Software- These are the software that controls the internal functions of the system such as reading data from the input
devices.
f. Connectivity Software- These are the software that creates and controls the connection between a computer and a server with
the purpose of sharing the data.
People- It constitutes the most important part of a computer system. It basically refers to the individuals or the users who interact
with the computer through the use of hardware and software. The following are the people who are involved in a computer system.
a. System Analyst- They are the people who design the data processing system.
b. Operators- They are the people who write programs to implement the data processing system.
c. Programmers- They are the people who participate in operating the computers.
Procedures- A series of operations that are executed in a certain manner in order to achieve a desired set of results is known as
‘Procedures’. There are mainly following three types of procedures.
a. Hardware Oriented Procedures- Hardware Oriented Procedures provide details about various components of a computer and
their uses.
b. Software Oriented Procedures – Software Oriented Procedures provide detailed set of instructions required for using the
software of a computer system.
c. Internal Procedures- These procedures help in sequencing the operation or working of each sub-set of overall computer system.
Data- It refers to the facts that are gathered and entered into a computer system. It may comprise of numbers, text, graphics, etc.
Connectivity- This refers to the manner, in which a computer system is connected to the other electronic devices through
telephone lines, microwave transmission, satellite link, etc., is known as ‘Connectivity’.
The mentioned below are some distinctive features of a computer system and a manual system.
Accuracy- The computations and operations performed by a computer are highly accurate and correct. If any error is detected it
may be due to input of the wrong data or wrong command by the user.
As against this, in manual system the results generated or produced by the human beings are not very accurate due to
carelessness, boredom and fatigue.
Speed- Computer systems require far less time than the manual systems in performing a task. Modern computers can perform
100 million calculations per second.
Reliability- It may be beyond the human capabilities to work continuously for long hours. Often people get tired, lack
concentration and may feel mental stress while working out huge volume of data that involves tedious calculations. Computer
systems overcome these limitations very easily. A computer can easily perform variety of tasks with great precision and accuracy,
thereby making the results highly reliable.
As against this, the reliability of the manual system is little doubtful in case of voluminous data.
Versatility- Computers are designed to perform a variety of task and has wide application in various areas such as, business,
industry, etc. As against this, in manual systems human beings can perform only a few specialised tasks and thus are lesser
versatile.
Storage- Computers have a huge storage capacity and can store huge volume of data in a very small physical space. For
example a typical main frame computer can store bullions of characters and thousands of graphic images. As against this, the
capabilities of manual system are no where close to this.

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Chapter 11 Accounts from Incomplete Records NCERT SOLUTION CLASS 11TH ACCOUNTS | EDUGROWN NOTES

Short Answer type Question:

Q.1 State the meaning of incomplete records?
Answer : Accounts that are not recorded as per the double entry system are known as incomplete records. According to Kohler (Dictionary
for Accountants), single entry system is defined as, ” A system of book-keeping in which as a rule, only records of cash and of
personal accounts are maintained; it is always incomplete double entry, varying with circumstances.”
Many small-sized business firms maintain incomplete records of their business transactions. They do not maintain proper books of
accounts and mainly prepare books like, Cash Book, personal accounts (of debtors and creditors) and Balance Sheet at the end of
the year. They maintain books as per their needs. This system is also known as defective double entry system. The preparation of
financial statements is neither as easier nor as effective, as it is under double entry system. Consequently, accurate profit or loss
is not possible to ascertain.

Q.2 What are the possible reasons for keeping incomplete records?
Answer : The possible reasons for keeping incomplete records are:

Simple method: Proprietors, who do not have the proper knowledge of accounting principles, find it much convenient and easier
to maintain their business records under this system.
Less time consuming: Maintaining books according to the single entry system is less time consuming, as only few books are to
be maintained. Further, the books are not as comprehensive as they are under double entry system.
Less expensive: It is an economical mode of maintaining records, as there is no need to appoint specialised accountant.
Flexible: Owner may record transactions as per his/her own needs. It can be easily adjusted or changed whenever needed.

Q.3 Distinguish between statement of affairs and balance sheet.

Answer : Difference between Statement of Affairs and Balance Sheet
Basis of Difference Statement of Affairs Balance Sheet
Objective It is prepared to determine the
amount of capital at a particular
date.
It is prepared to ascertain the true
financial position.
Reliability It is based on estimates; hence, it It is based on sophisticated and well
is less reliable. developed principles; hence, it is
more reliable.
Accounting Method It is prepared from incomplete
records of business transactions
under single entry system.
It is prepared when accounts are
maintained under double entry
system.
Omission Omission of assets and
liabilities cannot be easily
identified.
Omission of assets and liabilities can
be easily identified, as omission will
lead to mismatch of either sides of
the balance sheet

Q.4 What practical difficulties are encountered by a trader due to incompleteness of accounting records?
Answer : The following are the difficulties that are encountered by a trader due to incompleteness of accounting records.

Accuracy of accounts: Arithmetical accuracy of accounts can not be ascertained, since proper records of accounts
are not maintained. Consequently, Trial Balance cannot be prepared.
Encourages fraud: As the arithmetical accuracy cannot be determined; so, this encourages fraud and provides sufficient scope
for bluffing and carelessness.
Difficult to ascertain correct profit or loss: Since all expenses and income are not recorded, true profit or losscannot be
correctly ascertained.
Difficult to analyse the true financial position: As profit or loss cannot be ascertained easily, so the Balance Sheet cannot be
easily prepared. Hence, the absence of Balance Sheet will not reflect the true financial position of the business.
Difficulty in comparison: Due to the incomplete records and non-availability of previous years’ data, comparison
isnot possible. By the same token, comparisons with other firms are also not possible.
Unacceptable to tax authorities: It does not reflect the true and acceptable presentation of expenses and revenues. Hence,
these are not acceptable by the tax authorities.
Raising funds: Since analysis of solvency, profitability and liquidity of business cannot be done, it is difficult to raise fund from outside.

Long Answer Type Question:

Q.1 What is meant by a ‘statement of affairs’? How can the profit or loss of a trader be ascertained with the help of a statement of affairs?

Answer :A Statement of Affairs resembles Balance Sheet; however, it is not called a Balance Sheet. The statement of affairs is a Statement of Assets and Liabilities. The main difference between a Statement of Affairs and a Balance Sheet is that while the former is prepared on the basis of physical counts and improper source documents, the latter is prepared purely on the basis of ledger accounts. Thus, the authentication and relevance of the latter is guaranteed. The excess of assets over liabilities (i.e., balancing figure) is denoted as the capital of the firm. The performa of the statement of affairs is presented below.

Statement of Affairs as on…
Liabilities	AmountRs	Assets	AmountRs
Bills Payable	–	Land and Building	–
Creditors	–	Plant and Machinery	–
Outstanding Expense		Furniture
Capital (Balancing Figure)^@		Stock	–
		Debtors	–
		Cash and Bank	–
		Prepaid Expenses	–
		Capital-Deficiency (Balancing Figure, if any)*

* When liabilities are more than assets, then the balancing figure is denoted by Capital-Deficiency in the assets side of the statement of affairs.

^@ When the assets’ balance exceeds liabilities’ balance, the balancing figure is denoted by Capital in the liabilities side of the statement of affairs.

For ascertaining profit or loss, if capital in the beginning is not given, then opening statement of affairs is prepared in order to calculate the capital in the beginning. Once the opening capital and closing capital is calculated, a Statement of Profit or Loss is prepared to determine the amount of profit earned or loss incurred during the accounting period.

Statement of Profit or Loss for the year ended………
Particulars	AmountRs
Closing capital at the end of the year	–
	Add: Drawings made during the year	–
	Less: Additional capital introduced during the year	–
Adjusted capital at the end of the year	–
	Less: Capital in the beginning of the year	–
	Profit (Loss) for the year	–
	(Balancing figure)

Q.2 Is it possible to prepare the profit and loss account and the balance sheet from the incomplete book of accounts kept by a trader’? Do you agree? Explain.

ANSWER: The Profit and Loss Account and the Balance Sheet can be prepared from the incomplete book of accounts through Conversion Method. According to this method, incomplete records are converted into double entry records. In case of incomplete records, details of some transactions are easily available like cash sales, cash purchases, creditors, debtors; however, there are number of transactions, the details of which may not be available directly. Yet, these details can be found out indirectly or logically. Some of the important items that are vital for preparing Balance Sheet are given below.

1. Opening Capital

2. Closing Capital

3. Credit Purchases

4. Cash Purchases

5. Credit Sales

6. Cash Sales

7. Payment from Debtors

8. Payment to Creditors

9. Opening Stock

10. Closing Stock

Below given are the steps included in the conversion method in a chronological order.

1. If opening capital is not given, then the first step is to prepare opening Statement of Affairs that gives the Opening Capital.

2. The second step is to prepare Cash Book that gives the opening or the closing cash and bank balance.

3. The next step is to prepare Total Debtors Account. It is prepared in order to find out one of the missing figures, such ascredit sales, opening debtors, closing debtors and cash received from debtors.

4. The subsequent step is to prepare Total Creditors Account to ascertain one of the missing figures, such as credit sales, opening creditors, closing creditors and cash paid to the creditors.

5. The last step is to prepare final accounts. On the basis of the missing figures ascertained in each of the above steps, along with other mentioned information, Trading and Profit and Loss Account and Balance Sheet can be prepared.

Q.3 Explain how the following may be ascertained from incomplete records:

(a) Opening capital and closing capital

(b) Credit sales and credit purchases

(d) Closing balance of cash.

ANSWER:

1. Opening capital and closing capital: Opening capital can be ascertained by preparing opening statement of affairs at the beginning of the accounting period and closing capital can be ascertained by preparing closing Statement of Affairs at the end of the accounting period.

Statement of Affairs as on….
Liabilities	AmountRs	Assets	AmountRs
Bills Payable	–	Land and Building	–
Creditors	–	Machinery	–
Outstanding Expense	–	Furniture	–
Capital (Balancing Figure)^@	–	Stock	–
		Debtors	–
		Cash and Bank	–
		Prepaid Expenses	–
		Capital-Deficiency (Balancing Figure)*	–

* When liabilities are more than assets, capital appears in assets side, as it is balancing figure.

^@ When the assets’ balance exceeds liabilities’ balance, the balancing figure is denoted by capital in the Liabilities side of the Statement of Affairs.

2. Credit Sales and Credit Purchases: Credit sales are ascertained as the balancing figure of the Total Debtors Account and Credit Purchases are ascertained as the balancing figure of the Total Creditors Account.

Total Debtors Account
Dr.					Cr.
Particulars	J.F.	AmountRs	Particulars	J.F.	AmountRs
Balance b/d		–	Cash		–
Bills Receivable		–	Bank		–
(Bill Dishonoured)			Discount Allowed		–
Bank (Cheque Dishonoured)		–	Bad Debts		–
Credit Sales (Balancing Figure)		–	Sales Returns		–
			Bills Receivable(Bill Drawn)		–
			Balance c/d		–

Total Creditors Account
Dr.					Cr.
Particulars	J.F.	Amount Rs	Particulars	J.F.	AmountRs
Cash		–	Balance b/d		–
Bank		–	Bank(Cheque Dishonoured)		–
Bills Payable		–	Bills Payable (Bills Dishonoured)		–
Discount Received		–	Credit Purchases		–
Purchases Returns		–	(Balancing Figure )		–
Balance c/d		–

3. Payment to creditors and collection from debtors: Payment to the creditors are ascertained from the Total Creditors Account as a balancing figure and collection from debtors are ascertained from the Total Debtors Account as a balancing figure.

4. Closing balance of cash: Closing balance of cash is ascertained from the Cash Book, which shows all receipts in the debit side and all payments in the credit side during an accounting year and the balancing figure of the cash book is the closing balance of cash.

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Chapter 10 Financial Statements – I NCERT SOLUTION CLASS 11TH ACCOUNTS | EDUGROWN NOTES

Short Answer Type Question:

Q.1Why is it necessary to record the adjusting entries in the preparation of final accounts?

ANSWER: It is extremely important to record the adjusting entries in the preparation of final accounts.

1. This is done in order to assess the true net profit or net loss of the business organisation.

2. It helps us record those adjustments which were left or omitted and were not recorded in the accounts.

3. It assists us to separate all the financial transactions into a year-wise category. The financial statements include only those entries which belong to the current year. It rules out the previous and forthcoming years’ entries which are the basis for accrual basis of accounting.

4. Further, it provides us the room for making various provisions which are made at the end of the year, after assessing the entire year’s performance.

Q.2 What is meant by closing stock? Show its treatment in final accounts.

ANSWER: Closing stock implies the value of unsold goods at the end of an accounting period. The valuation of closing stock is done on the basis of its cost price or the realisable value, whichever of the two is lesser.

Example: If a good with the cost price of Rs 20,000 is purchased at the end of an accounting period and its realisable value is Rs 30,000, then the closing stock will be valued at Rs 20,000 not at Rs 30,000.

Treatment of closing stock

If closing stock is given in the adjustment, then there will be two postings.

Trading Account

Balance Sheet

Dr.

Cr.

Particulars

Amount

Particulars

Amount

Liabilities

Amount

Assets

Amount

Closing Stock

If closing stock is given in the trial balance, then it needs to be shown only in the assets side of the Balance Sheet.

Q.3 State the meaning of:

(a) Outstanding expenses

(b) Prepaid expenses

(d) Accrued income

ANSWER: (a) Outstanding Expenses: These refer to those expenses which belong to and are incurred in the current accounting period but are left unpaid. In other words, we can say that the services in exchange of these payments have been realised but the payments are not made. For example, if Rs 1000 wages are outstanding, then this means that labour worth Rs 1,000 has been used but has not been paid for till the end of the year.

(b) Prepaid Expenses: These refer to those expenses for which the benefits have not been realised but the payments have already been made in advance. These are basically the advance payments for the next year, which are made in the current accounting period.

Example: Prepaid insurance premium of Rs 1,000 means that the payment of Rs 1,000 is made in advance for the next accounting period.

(c) Income Received in Advance: This refers to the income received whose actual realisation of benefits will occur in the next accounting period. These are also called unearned incomes.

Example: Commission of Rs 1,200 for the year 2011-12 is received in 2010-11. This commission does not belong to the current year as it is related with the work to be done in the next accounting year i.e., 2011-12.

(d) Accrued Income: This refers to those incomes which have been earned during an accounting period but have not been actually realised in the current period. These are also called earned incomes.

Q.4 Why is it necessary to create a provision for doubtful-debts at the time of preparation of final accounts?

ANSWER: The provision for doubtful-debts is created with the motive of minimising the effect of actual loss caused by the bad-debts. The actual figure of the current year’s bad-debts will be known in the next year with the realisation of debtors. At that point of time, it will be known as to how many of the debtors have become bad. Thus, instead of waiting for the realisation of debtors, we create a provision for doubtful-debts in order to cover the expected future loss associated with the debtors becoming bad.

Q.5 What is meant by provision for discount on debtors?

ANSWER: The discount is allowed to those debtors who are ready to pay a huge amount in one shot. It is given in order to encourage them to repay the debt. The provision for discount on debtors is created on good debtors. The amount of good debtors is calculated by deducting the amount of Bad Debts, further Bad Debts and new provision for Doubtful Debts. The required percentage of the good debtors is calculated and the provision for discount on debtors is deducted from the Debtors’ amount in the Assets side of a Balance Sheet. As it is a loss for the business, it is shown in the Debit side of the Profit and Loss Account.

Long Answer type Question:

Q.1 What are adjusting entries? Why are they necessary for preparing the final accounts?
ANSWER: Adjusting entries are the entries of those adjustments which are given outside the trial balance and which help us reflect the true
financial position i.e., profit or loss of an organisation. According to the double-entry system, all the adjustments given outside the
Trial Balance are posted at two places. The adjusting entries are necessary they enable us to post and take into account those
items which are omitted or entered with the wrong amount and/or recorded under wrong heads.
The treatment of adjusting entries is necessary.
(i) It helps us assess the true financial position of an organisation based on accrual basis of accounting.
(ii) It helps us know the actual figure of profit or loss.
(iii) It records the omitted entries and rectifies the errors made.
(iv) It helps in providing depreciation and making different provisions, such as Bad Debts and depreciation.

Q.2 What is meant by provision for doubtful-debts? How are the relevant accounts prepared and what journal entries are
recorded in the final accounts? How is the amount for provision for doubtful-debts calculated?
ANSWER: The provision for doubtful-debts is provided after deducting the amount of bad-debts from the
debtors. The provision for doubtful-debts is provided because of the rationale that the actual
amount of bad-debts will only be known in the next year, when the amount of debtors will get
realised. Thus, it will only then be known as to how many of the debtors have become bad. Thus,
in order to bridge-up the expected future loss, we create a provision for doubtful-debts.
For the provision for doubtful-debts, we prepare debtors account and provision for doubtfuldebts account. For recording bad-debts, the following journal entry is passed.
Profit and Loss A/c Dr.
To Provision for Bad and Doubtful Debts A/c
Example: An extract from a Trial Balance as on December 31, 2010.
Debtors 10,500
Provision for Doubtful Debts as on January 01, 2010 1,000
Bad Debts Account 1,500
Adjustment:
(i) Further bad-debts amount to Rs 500.
(ii) Create a provision for doubtful-debts at 5% on debtors.
Explanation
The provision for Doubtful Debt as on January 01, 2010 was Rs 1,000 and the Bad Debts during
the year were Rs 1,500. In addition to this, there was a further Bad Debt of Rs 500 which was
known at the end of the year i.e., December 31, 2010. Now we need to create a provision for
Doubtful Debts at 5% on debtors.
Profit and Loss A/c
Dr. Cr.
Particulars AmountParticularsAmount
Bad Debts 1,500
Add: Further Bad Debts 500
Add: New Provision for Doubtful Debts 500
Less: Old Provision (given in Trial Balance) 1,000 1,500
Balance Sheet
Liabilities Amount Assets Amount
Debtors 10,500
Less: Further Bad Debts 500
10,000
Less: New Provision for Doubtful Debts 500 9,500

The amount of provision for Doubtful Debts is calculated by debiting the amount of further Bad
Debts from debtors and calculating the given percentage of provision on remaining debtors. This
provision is added to the Bad Debts amount in the profit and loss account and deducted from
debtors in the assets side of a Balance Sheet.
Q.3 Show the treatment of prepaid expenses, depreciation and closing stock at the time of preparation of final accounts when
they are given
(a) inside the Trial Balance
(b) outside the Trial Balance
ANSWER: (i) Prepaid expenses
(a) When given inside the Trial Balance: It will be posted only in the Assets side of the Balance Sheet.
Balance Sheet
Assets Amount
Prepaid Expenses
(b) When given outside the Trial Balance:
Dr. Cr.
Particulars Amoun
t
Particular
s
Amoun
t
Liabilitie
s
Amoun
t
Assets Amoun
t
Concerned
Expenses
Prepaid
Expenses
Less: Prepaid
Expenses

(ii) Depreciation
(a) If depreciation is given inside the Trial Balance, then it can be shown in the Debit side of the Profit and Loss A/c. It means that
this depreciation amount has already been deducted from the concerned assets in the Balance Sheet.
Profit and Loss Account
Dr. Cr.
Particulars Amount Particulars Amount
Depreciation

(b) If depreciation is given outside the Trial Balance, i.e. in the adjustments, then it is shown in the debit side of the Profit and Loss
Account and deducted from the concerned assets in the Assets side of Balance Sheet

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Chapter 9 Financial Statements – I NCERT SOLUTION CLASS 11TH ACCOUNTS | EDUGROWN NOTES

Short Answer Type Question:

Q.1 What are the objectives of preparing financial statements?

ANSWER: The following are the objectives of preparing financial statements.

1. To ascertain profit earned or loss incurred by a business during an accounting period. This is estimated by preparing Trading and Profit and Loss Account.

2. To ascertain the true financial position of a business. This is reflected by the Balance Sheet.

3. To enable comparison of current year’s performance with that of the previous year’s, i.e., intra-firm comparisons. Also, to compare own performance with that of the other firms in the same industry, i.e., inter-firm comparisons.

4. To assess the solvency and credit worthiness of the business

5. To provide various provisions and reserves to meet unforeseen future conditions and to toughen the financial position of the business

6. To provide vital information to facilitate various users of accounting information in decision making process.

Q.2 What is the purpose of preparing trading and profit and loss account?

ANSWER: The purposes of preparing Trading Account are:

1. To calculate gross profit earned or gross loss incurred during an accounting period

2. To estimate the cost of goods sold

3. To record direct expenses (i.e., expenses incurred on the purchases and manufacturing of goods)

4. To measure the adequacy and reasonability of direct expenses incurred by comparing purchases with direct expenses incurred

5. To compare the realised efficiency and performance with the desired or proposed targets

The purposes of preparing Profit and Loss Account are:

1. To calculate net profit or net loss

2. To ascertain net profit ratio and to compare this year’s net profit ratio with that of the desired and proposed target in order to assess the efficiency and effectiveness

3. To measure the adequacy and reasonability of indirect expenses incurred by ascertaining ratio between indirect expenses and net profit

4. To compare current year’s actual performance with desired and planned performance

5. To provide various provisions and reserves to meet unforeseen future conditions and to toughen the financial position of the business

Q.3 Explain the concept of cost of goods sold?

ANSWER: Cost of goods sold (COGS) is the cost of merchandise that is sold to the customers. It includes cost of raw materials purchased, direct expenses incurred, value of opening stock, i.e., the value of the last year’s unsold stock and excludes closing stock if any, i.e., the value of current year’s unsold stock. The formula to calculate COGS is:

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses − Closing Stock

Q.4 What is a balance sheet? What are its characteristics

ANSWER: Balance Sheet is a statement prepared to ascertain values of assets and liabilities of a business on a particular date. It is called Balance Sheet as it contain balances of real and personal accounts, which are not closed on a particular date.

Characteristics of Balance Sheet

1. It is a statement of assets and liabilities.

2. The total of Assets side must be equal to Liabilities sides.

3. It is prepared at a particular date.

4. It helps in ascertaining the financial position of the business.

Q.5 Distinguish between capital and revenue expenditure and state whether the following statements are items of capital or revenue expenditure

(a) Expenditure incurred on repairs and whitewashing at the time of purchase of an old building in order to make it usable.

(b) Expenditure incurred to provide one more exit in a cinema hall in compliance with a government order.

(d) Expenditure incurred in the maintenance of a tea garden which will produce tea after four years.

(e) Depreciation charged on a plant.

(f) The expenditure incurred in erecting a platform on which a machine will be fixed.

(g) Advertising expenditure, the benefits of which will last for four years.

ANSWER:

Basis of Difference	Capital Expenditure	Revenue Expenditure
Meaning	It is incurred to increase the earning capacity of a business.	It is incurred to maintain the earning capacity of a business.
Purpose	It is incurred to acquire fixed assets to carry out operations.	It is incurred to conduct day to day activities.
Benefits	The benefits of such expenditures can be availed for more than one year.	The benefits of such expenditures can only be availed for one year.
Nature	It is non-recurring by nature.	It is generally recurring in nature.
Shown	Capital expenditure is shown in the assets side of the Balance Sheet.	Revenue expenditure is shown in the debit side of the trading and Profit and Loss Account.

(a) Capital expenditure

(b) Revenue expenditure

(d) Capital expenditure

(e) Revenue expenditure

(f) Capital expenditure

(g) Deferred revenue expenditure

Q.6 What is an operating profit?

ANSWER: Operating profit is a profit earned though normal activities of a business. It is the excess of gross profit over operating expenses. In other words, it is the excess of operating revenue over operating cost. It is also termed as earning before interest and tax (EBTI). It does not include incomes and expenses that are not related to main course of the business.

It is calculated by following formulae:

Operating Profit = Gross Profit − Operating Expenses

Or,

Operating Profit = Sales − Operating Cost

Operating Profit = Sales − COGS − Operating Expenses

Operating expenses include office and administrative expenses, selling and distribution expenses, discount, bad debts, etc.

Long Answer Type Question:

Q.1What are financial statements? What information do they provide?

Answer: Every business firm wants to know its financial position at the end of an accounting period. In order to assess its financial position,
profit earned or loss incurred during an accounting period, the book value of its assets and liabilities is to be ascertained. In order to
serve this purpose, financial statements are prepared. Financial statements are the statements showing profitability and financial
position of a business at the end of the year. It includes:

Income statements, viz., Trading and Profit and Loss Account, which represents direct and indirect expenses incurred to
generate revenues. On one hand, trading account discloses either gross profit or gross loss, on the other hand, profit and loss
account discloses either net profit or net loss.
Statement of financial position, viz., Balance Sheet, which enlists the book value of all the assets and liabilities of the firm.
Balance Sheet discloses the true financial position, solvency and credit worthiness of the business.
The information provided by the financial statements is in the form of gross profit or gross loss, net profit or net loss and book value
of the assets and their liabilities. The value and relevance of the information provided by the financial statements varies from one
user of accounting information to another. Various users of accounting information can be explained graphically as below.
Internal: Internal users are those persons who are directly related to the business. For example, owners, management,
employees, workers, etc.
a. Owners: The information required by owners about profit earned or loss incurred during an accounting period. This information is
provided by the financial statements in form of gross (net) profit or gross (net) loss.
b. Management: Financial statements provide vital information to the management for decision making, designing policies and
future plans. There are various parameters such as ratio of direct (indirect) expenses to gross (net) profit, by the help of which
management can check the adequacy, control and relevance of various expenses incurred and plans and policies implemented.
c. Employees and workers: They expect bonus at the year end, which is directly related to the profit of that particular period. The
net profit as disclosed by the profit and loss account forms the basis of this expectation.
External: External users are those persons and institutions that are indirectly related to the business. For example, government,
tax authorities, investors, etc.
a. Government: Government needs information in order to ascertain various macroeconomic variables, such as national income,
GDP, employment opportunities generated, etc.
b. Tax authorities: Tax department is interested in knowing the actual sales, production, turnovers and exports and imports by the
business. Tax department levies various taxes, such as income tax, VAT, excise tax, etc. The information disclosed by the financial
statements form the basis of estimation of the tax dues of the business.
c. Investors: Financial statements help to know about the earning capacity, scope and potential to grow and to assess financial
position of the business. It also helps in knowing various investments made by the business and also investments made by the
organisations and individuals in the business. This information helps the investors to assess and determine whether investments by
them will be fruitful or not.
d. Bank and other financial institutions: Financial statements provide information to banks and other financial institutions, such
as LIC, GIC, etc., about the credit worthiness, solvency and repaying capacity of the business.
e. Creditors: Financial statements provide information to the creditors about the goodwill of the business and its credit worthiness
and repaying capacity.

Q.2 What are closing entries? Give four examples of closing entries.
Answer :The balances of all nominal accounts are transferred to the Trading and Profit and Loss Account. The entries required for such
transfers are termed as closing entries.
The examples of closing entries are given below.

Closing entries to transfer the following items to the debit side of trading account from Trial Balance:
Trading A/c Dr.
To Opening Stock A/c
To Purchase A/c
To Wages A/c
To Carriage A/c
To All Other Direct Expenses A/c
(Transferred debit balances to Trading Aaccount)
Closing entries to transfer the following items to the credit side of trading account from Trial Balance:
Sales A/c Dr.
Closing Stock A/c Dr.
To Trading A/c
(Transferred credit balances to Trading Account)
Closing entries to transfer the following items to the debit side of Profit and Loss Account from Trial Balance:
Profit and Loss A/c Dr.
To Salaries
To Rent
To Bad Debts
To All in Direct Expenses
(Transferred debit balances to Profit and Loss Account)
Closing entries to transfer the following items to the credit side of Profit and Loss Account from Trial Balance:
Commission Received A/c Dr.
Interest Received A/c Dr.
All Other Indirect Income A/c Dr.
To Profit and Loss A/c
(Transferred credit balances
to Profit and Loss Account)

Q.3 Discuss the need of preparing a balance sheet.

Answer :The needs to prepare a Balance Sheet are given below.

It helps in determining the nature and book value of various assets, such as fixed assets, investments, current assets, etc. at the
end of an accounting period.
It helps in ascertaining the nature and amount of various liabilities like long term liabilities, current liabilities, provisions, etc., which
a business owes.
It discloses important information about capital invested in a business. The additional capital invested during the accounting
period, drawings of the owners and profit (or loss) added to (or deducted from) the capital of the business.
It helps in assessing the solvency of a business.
It discloses the true financial position of a business at a particular point of time.
It lays down the basis for maintaining new books for next accounting period.

Q.4 What is meant by Grouping and Marshalling of assets and liabilities? Explain the ways in which a balance sheet may be
Answer : The rationale behind preparing financial statements is to present a summarised version of all
financial activities in such a manner that all users can interpret and understand the information
easily, appropriately and also take decisions accordingly.
Grouping of assets and liabilities: Grouping means showing similar assets and liabilities under
a single head. For example, all assets that can be used for more than a year are clubbed together
under the heading ‘fixed assets’, for example, building, furniture, machinery, etc.
Marshalling of asset and liabilities: When assets and liabilities are shown in a particular order
of liquidity or permanence, they are said to be marshalled.

In order of liquidity: Liquidity means convertibility into cash. Assets that can be converted
into cash in least possible time, i.e., more liquid assets are recorded first, followed by the lesser
liquid assets. In a balance sheet, cash in hand is recorded at first and goodwill at last. In the same
way, liabilities that are to be paid first, i.e., high priority liabilities are recorded first, followed by
the lower priority ones. In a balance sheet, current liabilities are recorded first and then the long
term liabilities and capital at the last.
Balance Sheet of………………, as on…………….
Liabilities Amount
Rs Assets Amount
Rs
Current Liabilities: Current Assets:
Bills Payable – Cash in Hand –
Sunday Creditors – Cash at Bank –
Bank Overdraft – Bills Receivable –
Long Term Loans – Debtors –
Capital: Closing Stock –
Opening balance – Long Term Investments
Add: Net Profit – Fixed Assets:
Less: Drawings – – Furniture –
Plant and Machinery –
Land and Building –
Goodwill –

In order of permanence: It is just the reverse of the above method. In this, assets and
liabilities are arranged in their reducing level of permanence. The assets with higher degree of
permanence are recorded first, followed by the assets with lower degree of permanence. For
example, goodwill, land and building have the highest degree of permanence and hence are
recorded at the top, whereas, cash at bank and cash in hand are recorded at the bottom. In the
same way, liabilities are shown according to their life in the business. Liabilities with higher
level of permanence like, capital is recorded at the top and other liabilities with lower
permanence are recorded at the bottom.
Balance Sheet of………………, as on…………….
Liabilities
Amount
Rs Assets
Amount
Rs
Capital: Fixed assets:
Opening Balance – Goodwill –
Add: Net profit – Land and Building –
Less: Drawings

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Chapter 8 Bills of Exchange NCERT SOLUTION CLASS 11TH ACCOUNTS | EDUGROWN NOTES

Short Answer type question:

Q.1 Write two points of distinction between bills of exchange and promissory note.
Solution:

ncert-solutions-class-11-financial-accounting-bills-exchange 1

Q2. State any four essential features of bill of exchange.
ANSWER:
Essential features of bills of exchange are as follows:

A bill of exchange is a written order to make payment.
It is an unconditional order to make payment by a person i.e. drawee.
The amount of bill of exchange and the date of payment are certain.
It is signed by the drawer of the bill.
It is accepted by the drawee by signing on it.
The amount specified in the bill of exchange is payable either on demand or on the expiry of a fixed period.
The amount specified in the bill is payable either to a certain person or to his order or to the bearer of the bill.
It is stamped as per legal requirements.

Q3. State the three parties involved in a bill of exchange.
ANSWER:
There are three parties in a bill of exchange:

Drawer is the person who makes the bill of exchange. She/he is a person who has granted credit to the person on whom the bill of exchange is drawn. The drawer is entitled to receive money from the drawee (acceptor).
Drawee is the person on whom the bill of exchange is drawn for acceptance and to whom credit has been granted by the drawer. He/she is liable to pay money to the creditor/drawer.
Payee is the person who receives the payment from the drawee. Usually the drawer and the payee are the same person.

Q4. What is meant by maturity of a bill of exchange?
ANSWER:
The date calculated after adding 3 days of grace to the due date of a bill is called the date of maturity of a bill. It is to be noted that when a bill is to be payable on demand/at sight, then days of grace is not applicable. When the period of a bill is mentioned in days, the maturity of bill is calculated in days. Similarly, when the period of a bill is mentioned in months, the maturity of bill is calculated in months. In certain cases, when the maturity date of any bill falls on a public holiday, then the maturity date of the bill will be the previous business day.

Q5. What is meant by dishonour of a bill of exchange?
ANSWER:
When the drawee of the bill fails to make the payment on the maturity date of the bill, then the bill is said to have been dishonoured. Hence, liability of the acceptor is restored. Entries made for recording dishonour of the bill of exchange are as follows:
In the books of drawer
ncert-solutions-class-11-financial-accounting-bills-exchange-sa6

Q6. Name the parties to a promissory note
ANSWER:
There are two parties to a promissory note:

Maker- The person who makes the note and undertakes to pay the amount.
Payee- The person who receives the payment.

Q 7. What is meant by acceptance of a bill of exchange?
ANSWER:
A bill of exchange is a written instrument which contains an unconditional order directing a person to pay a certain amount on an agreed date. In other words, it is drawn by the creditor on her/his debtors to make a payment of a certain amount on the mentioned date. Such a bill comes into existence after the consent of both the parties. A bill cannot come into existence without the acceptance of a debtor. Hence, the debtor of the bill has to accept the terms of the bill, sign the same and make it a legal document.

Q8. What is noting of a bill of exchange?
ANSWER:
When the drawee of the bill fails to make the payment on the maturity date of the bill, then the bill is said to have been dishonoured. To have a legal proof of the dishonour, the bill gets noted by the notary public who is approved by the central/state government. The notary public charges fees called the noting charges for noting and protesting the bill of exchange of its dishonour

Q9. What is meant by renewal of a bill of exchange?
ANSWER:
When the drawee does not have enough funds to make the payment, he may approach the drawer and ask for an extension of time for the payment. If the drawer agrees, then a new bill is drawn which is known as renewal of bill. The new bill may include interest for the extended period.

Q10. Give the performa of a Bills Receivable Book.
ANSWER:

ncert-solutions-class-11-financial-accounting-bills-exchange 2

Q11. Give the performa of a Bills Payable Book.
ANSWER:

ncert-solutions-class-11-financial-accounting-bills-exchange 3

Q12. What is retirement of a bill of exchange?
ANSWER:
When the drawee of the bill pays off the amount of the bill before the maturity of the bill it is called retirement of the bill. Holder of the bill may give discount for such earlier payment which is called as ‘rebate’.
Entry in the books of the holder of the bill
ncert-solutions-class-11-financial-accounting-bills-exchange-sa13

Q13. Give the meaning of rebate.
ANSWER:
If the drawee wishes to pay the bill before the due date of the bill to the holder and the holder accepts such request, then due to the early payment, the holder may give some discount to the drawee. Such a discount is termed as rebate.

Q10. What is meant by renewal of a bill of exchange?
Solution:
When the drawee does not have enough funds to make the payment, he may approach the drawer and ask for an extension of time for the payment. If the drawer agrees, then a new bill is drawn which is known as renewal of bill. The new bill may include interest for the extended period.

Long Answer Type Question:

Q.1A 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.”

Q.2A 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.

ANSWER: 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.

Q.3Briefly 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.
	To Bills Receivable A/c
(Bill dishonoured)

Entry in the books of drawee:

Bills Payable A/c	Dr.
	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 Bills Receivable A/c
	To Cash A/c (Noting charges)
(Bill dishonoured and Noting charges paid)

In the books of drawee:

Bills Payable A/c	Dr.
Noting charges A/c	Dr.
	To Drawer
(Bill dishonoured and Noting charges due)

Q.4 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 1^st July and due date is 1^st September. Then add 3 days of grace and payment will be made on 4^th 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,

If a bill is drawn on 12^th July and its due date is 12^th August, then after adding 3 days of grace the maturity day is 15^th August. However, as 15^th August is a national holiday; so, 14^th August becomes the payment day.
If a bill is drawn on 1^st May and the maturity period is of one month, then the due date is 1^st June. After adding 3 days of grace, the payment date becomes 4^th June. However, if 4^th June happens to be a Sunday, then the payment will be made on 3^rd 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 1^st May and is payable after 15 days, then, after adding 3 days of grace period, the due date becomes 18^th May. However, if a national strike is declared on 18^th May, then 19^th May becomes the due date of the bill.

Q.5 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.

Q.6 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.
	To Bills Receivable A/c
(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.

Bills Payable A/c	Dr.
	To Cash A/c
	To Rebate A/c
(Bill paid before the due date and rebate received for early payment)

Q.6Explain 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.

Q.7 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.

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Chapter 7 Depreciation, Provisions and Reserves NCERT SOLUTION CLASS 11TH ACCOUNTS | EDUGROWN NOTES

Short Answer Type Questions

Q1. What is ‘Depreciation’?

ANSWER: Depreciation means fall in book value of depreciable fixed asset because o

wear and tear of the asset
passage/efflux of time
obsolescence
accident

A machinery costing ₹ 1,00,000 and its useful life is 10 years; so, depreciation is calculated as:
Annual Depreciation per annum
= Cost of Asset-Estimated Scrap Value/Expected or Estimated life of Asset
= 100000/10 = ₹ 10,000

Q2. State briefly the need for providing depreciation.

ANSWER: The needs for providing depreciation are given below.

To ascertain the correct profit or 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.
To show true and fair view of financial statements: If depreciation is not charged, assets will be shown at higher value than their actual value in the balance sheet. Consequently, the balance sheet will not reflect true and fair view of financial statements.
For ascertaining the accurate cost of production: Depreciation on the assets, which are engaged in production, is included in the cost of production. If depreciation is not charged, the cost of production is underestimated, which will lead to low selling price and thus leads to low profit.
To provide funds for replacement of assets: Unlike other expenses, depreciation is non cash expense. So, the amount of depreciation debited to the profit and loss account will be retained in the business. These funds will be available for replacement of fixed assets when its useful life ends.
To meet the legal requirement: To comply with the provisions of the Companies Act and Income Tax Act, it is necessary to charge depreciation.

Q3. What are the causes of depreciation?
ANSWER:
ncert-solutions-class-11-financial-accounting-depreciation-provisions-reserves-sa3

Use of asset: Because of constant use of the fixed assets there exists a normal wear and tear which leads to fall in the value of the assets.
Passage of time: Whether assets are used or not, with the passage of time, its effective life will decrease.
Obsolescence: Because of new technologies, innovations and inventions, assets purchased currently may become outdated later which leads to the obsolescence of fixed assets.
Accident: An asset may lose its value due to mishaps such as a fire accident, theft or by natural calamities and they are permanent in nature.

Q4. Explain basic factors affecting the amount of depreciation.
ANSWER:

Original cost of asset: The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The total cost of an asset include all expenses incurred up to the point the asset is ready for use like freight expenses and installation charges.
Total Cost= Purchase Price+ Freight Expenses+ Installation Charges.
Estimated useful life: Every asset has its useful life other than its physical life in terms of number of years and units used by a business. The asset may exist physically but may not be able to produce the goods at a reasonable cost. For example, an asset is likely to lose its useful value within 15years, its useful life, i.e., life for purpose of accounting should be considered as only 15 years
Estimated scrap value: It is estimated as the net realisable value of an asset at the end of its useful life. It is deducted from the total cost of an asset and the difference is written off over the useful life of the asset. For example, Furniture acquired at ₹ 1,30,000, its useful life is estimated to be 10 years and it is estimated scrap value ₹ 10,000.
Depreciation per annum= 1,30,000-10,000/10 years= 12,000

Q5. Distinguish between straight line method and written down value method of calculating depreciation.
ANSWER:

Straight Line Method	Written Down Value Method
Depreciation is calculated on the original cost of an asset.	Depreciation is calculated on the reducing balance, i.e., the book value of an asset.
Equal amount of depreciation is charged each year over the useful life of the asset.	Diminishing amount of depreciation is charged each year over the useful life of the asset.
Book value of the asset becomes zero at the end of its effective life.	Book value of the asset can never be zero.
It is suitable for the assets such as patents, copyright, land and buildings which have lesser possibility of obsolescence and lesser repair charges.	It is suitable for assets which needs more repair in the later years such as plant and machinery and car.
As depreciation remains same over the years but repair cost increases in the later years, there will be unequal 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, there will be equal effect over the life of the asset.
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:
The written down value method is most appropriate to overcome the burden of the profit and loss account because of high depreciation and repair costs over the years of the asset. The cost of depreciation reduces and the repair and maintenance expenses increase over the yea₹ However, the entire burden will not get ease to the management.

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 as follows:

An increase in depreciation will be debited in the profit and loss account which reduces net profit.
Hence total expenses increase which leads to an excess of debit over credit balance.

The effects of depreciation on Balance Sheet are as follows:

The original cost or book value of the concerned asset gets reduced.
The overall balance of asset’s column in the balance sheet gets reduced.

Q8. Distinguish between ‘provision’ and ‘reserve’.
ANSWER:

Provision	Reserve
It is charge against profit.	It is an appropriation of profit.
It is created to meet a specific liability or contingencies.	It is made for strengthening the financial position of the business. Some reserves are also mandatory under law.
It is recorded on the debit side of profit and loss account.	It is recorded on the credit side of the profit and loss appropriation account.
It can be shown either (i) by way of deduction from the item on the assets side for which it is created, or (ii) in the liabilities side along with the current liabilities.	It is shown on the liabilities side after capital.
It cannot be utilized for dividend distribution.	It can be utilized for dividend distribution.
It is never invested outside the business.	It can be invested outside the business.
It reduces net profits.	It reduces only divisible profit.

Q9. Give four examples each of ‘provision’ and ‘reserves’.
ANSWER:
Four examples of provision are given below.

Provision for bad and doubtful debts
Provision for discount on debtors
Provision for depreciation
Provision for tax

Four examples of reserve are given below.

General reserve
Capital redemption reserve
Dividend equalisation reserve
Debenture redemption reserve

Q10. Distinguish between ‘revenue reserve’ and ‘capital reserve’.
ANSWER:

Revenue Reserve	Capital Reserve
It is formed out of revenue profit which is earned from normal activities of business operations.	It is formed out of capital profit which is a gain from other than normal activities of business operations, such as sale of fixed assets.
It can be used for distribution of dividend.	It cannot be used for distribution of dividend.
It is created for increasing the financial position of the business.	It is created for the purpose of the Companies Act.

Q11. Give four examples each of ‘revenue reserve’ and ‘capital reserve’.
ANSWER:
Examples of revenue reserve are as follows:

General reserve
Investment equalisation reserve
Dividend equalisation reserve
Debenture reserve

Examples of capital reserve are as follows:

Issues of shares at premium
Profit on forfeiture of shares
Profit on sale of fixed assets
Profit on redemption of debentures

Q12. Distinguish between ‘general reserve’ and ‘specific reserve’.
ANSWER:

Specific Reserve	General Reserve
It is created for specific purpose.	It is not created for specific purpose.
It is not available for any future contingencies or expansion of business. It is utilised only for that purpose for which it is created.	It is available for any future contingencies or expansion of business. It strengthens the financial position.
Dividend equalisation reserve, debenture redemption reserve, development rebate reserves.	Contingency reserve and general reserve

Q13. Explain the concept of ‘secret reserve’.
ANSWER:
Secret reserves are created by overstating liabilities or understating assets which are not shown in the balance sheet. This will reduce tax liabilities, because 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 material facts and accounting policies while preparing final statements.

Long Answer Type Questions

Q1. Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?
Solution:
Depreciation means fall in book value of depreciable fixed asset because of

wear and tear of the asset,
passage/efflux of time,
obsolescence, or
accident.

The need for providing depreciation is:

To ascertain the correct profit: 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.
To show true and fair view of the financial position: If depreciation is not charged, assets will be shown at higher value than their actual value in the balance sheet. Consequently, the balance sheet will not reflect true and fair view of financial statements.
To retain, out of profit, funds for replacement: Unlike other expenses, depreciation is non cash expense. So, the amount of depreciation debited to the profit and loss account will be retained in the business. These funds will be available for replacement of fixed assets when its useful life ends.
To ascertain correct cost of production: Depreciation on the assets, which are engaged in production, is included in the cost of production. If depreciation is not charged, the cost of production is underestimated, which will lead to low selling price and thus leads to low profit.
To meet the legal requirement: To comply with the provisions of the Companies Act and Income Tax Act, it is necessary to charge depreciation.

The causes of depreciation are as stated below:

Use of Asset i.e., wear and tear: Due to constant use of the fixed assets there exist a normal wear and tear that leads to fall in the value of the assets.
Passage/Efflux of Time: Whether assets are used or not, with the passage of time, its effective life will decrease.
Obsolescence: Due to new technologies, innovations and inventions, assets purchased today may become outdated by tomorrow which leads to the obsolescence of fixed assets.
Accidents: An asset may lose its value due to mishaps such as a fire accident, theft or by natural calamities and they are permanent in nature.

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.
Solution:
The two methods of depreciation are

Fixed percentage on original cost or straight line method
Fixed percentage on diminishing balance or written down value method

Straight Line Method
According to this method, a fixed and equal amount is charged as depreciation for every accounting period during the life time of an asset. This method is based on the assumption of equal usage of time over asset’s entire useful life. Hence, the amount of depreciation is same from period to period over the life of the asset.

Depreciation amount can be calculated by using the following formula:

If the asset has a residual value at the end of its useful life, the amount to be written of every year is as follows:
Depreciation = Cost of asset – Estimated net residual value / No. of years of expected life
If the annual depreciation amount is given then we can calculate the rate of depreciation as follows:
Rate of depreciation = Annual depreciation amount / Cost of asset * 100

Advantages of Straight Line Method

Simple to calculate the depreciation amount
Assets can be depreciated up to the estimated scrap value
Easy to understand the amount of depreciation
Every year, the same amount of depreciation is debited to profit and loss account, and hence the effect on profit and loss account will remain the same.

Disadvantages of Straight Line Method

Interest on capital invested in assets is not provided in this method.
Over the years, the work efficiency of assets decreases and repair expenses increases. Therefore, there is burden on the profit and loss account.
Book value of the assets becomes zero but still the assets are used in the business.

Written Down Value Method
In this method depreciation is charged on the book value of the asset and the amount of depreciation reduces year after year. It implies that a fixed rate on the written down value of the asset is charged as depreciation every year over the expected useful life of the asset. The rate of depreciation is applicable to the book value but not to the cost of asset.

Rate of depreciation can be ascertained on the basis of cost, scrap value and useful life of the asset as follows:
ncert-solutions-class-11-financial-accounting-depreciation-provisions-reserves-la2
Where, R is the rate of depreciation in percent, n is the useful life of the asset; S is the scrap value at the end of useful life and C is the cost of the asset.

Advantages of Written Down Value Method

The profit and loss account of depreciation and repair expenses has same weightage throughout the useful life of asset because depreciation decreases with an increase in repair expenses.
Since the benefits from asset keep on decreasing, the cost of asset is allocated rationally.
This method is most favorable for those assets which require increased repairs and maintenance expenses over the years.
This method is widely accepted under the Income Tax Act.

Disadvantages of Written Down Value Method

The value of assets can never be zero even though it is discarded.
In this method, it is difficult to calculate depreciation.
There is no provision of interest on capital invested in use of assets.

Difference between Straight Line and Written Down Value Method

Straight Line Method	Written Down Value Method
Depreciation is calculated on the original cost of fixed asset	Depreciation is calculated on the book value (i.e. original cost less depreciation) of fixed asset
Amount of depreciation remains constant for all years	Amount of depreciation keeps on decreasing year after year
At the end of the useful life of an asset, the balance in the asset account will reduce to zero	At the end of the useful life of an asset, the balance in the asset account will not reduce to zero
It is not accepted by Income Tax Law	It is accepted by Income Tax Law
It is suitable for assets which get completely depreciated on the account of expiry of its useful life	It is suitable for assets which require more and more repairs in the later stage of its useful life
Rate of depreciation is easy to calculate	Rate of depreciation is difficult to calculate

Q3. Describe in detail two methods of recording depreciation. Also give the necessary journal entries.
Solution:
The two methods of recording depreciation are as follows:
1. When Depreciation is Charged or Credited to the Assets Account
In this method, depreciation is deducted from the asset value and charged (debited) to profit and loss account. Hence the asset value is reduced by the amount of depreciation.
ncert-solutions-class-11-financial-accounting-depreciation-provisions-reserves-la3-i
In the Balance sheet, asset appears at its written down value which is cost less depreciation charged till date. In this method, the original cost of an asset and the total amount of depreciation which has been charged cannot ascertain from this balance sheet.
2. When Depreciation is Credited to Provision for Depreciation Account
In this method, depreciation is credited to the provision for depreciation account or accumulated depreciation account every year. Depreciation is accumulated in a separate account instead of adjusting into the asset account at the end of each accounting period. In the balance sheet, the asset will continue to appear at the original cost every year. Thus, the balance sheet shows the original cost of the asset and the total amount of depreciation charged on asset.
ncert-solutions-class-11-financial-accounting-depreciation-provisions-reserves-la3-ii

Q4. Explain determinants of the amount of depreciation.
Solution:

Historical (Original) Cost of the Asset: The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The total cost of an asset include all expenses incurred up to the point the asset is ready for use like freight expenses and installation charges.
Total Cost =Purchase Price+ Freight Expenses+ Installation Charges.
Estimated Net Residual Value: It is estimated as the net realisable value of an asset at the end of its useful life. It is deducted from the total cost of an asset and the difference is written off over the useful life of the asset. For example, Furniture acquired at Rs.1,30,000, its useful life is estimated to be 10 years and it is estimated scrap value Rs.10,000.
Depreciation p.a.= 1,30,000-10,000/10 Years = Rs.12,000
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 asset may exist physically but may not be able to produce the goods at a reasonable cost. For example, an asset is likely to lose its useful value within 15 years, its useful life, i.e., life for purpose of accounting should be considered as only 15 years.

Q5. Name and explain different types of reserves in details.
Solution:
Types of Reserves:

Revenue Reserve: It is an amount set aside out of revenue profits for distribution of dividends. For example, general reserve, investment fluctuation fund, capital reserve and workmen compensation fund. It is not a charge against profit but it is appropriation of profit shown in the profit and loss account. It is beneficial for the smooth function of the business. The retention of profit in the form of reserves reduces the amount of profit to distribute among the business owners. This is further classified in to general reserve and specific reserve.
1. General reserve means a reserve which is not maintained for specific purpose. It helps to strengthen the financial status of the business. It is also known as free reserve and contingency reserve.
2. Specific reserve means a reserve which is maintained for specific purpose. For example, dividend equalisation reserve is created to maintain dividend rate. This reserve amount is utilised to maintain the rate dividend in the year of low profit. Likewise, the workmen compensation fund is maintained to provide claims of the workers, investment fluctuation fund is used at times of decline in the value of investment and debenture redemption reserve is used to provide funds for redemption of debentures.
Capital Reserve: It is an amount set aside out of capital profits which is not available for distribution as dividend among the shareholders. It is used for writing capital losses/issue of bonus share in a company. Examples of capital reserves are
- Profit prior to incorporation
- Premium on issue of shares or debentures
- Profit on redemption of debenture
- Profit on forfeiture of share
- Profit on sale of fixed assets
- Capital redemption reserve
- Profit on revaluation of fixed assets and liabilities

Q6. What are ‘provisions’? How are they created? Give accounting treatment in case of provision for doubtful Debts.
Solution:
Provision is an amount which is set aside by charging it to profit for the purpose of providing for any known liability or uncertain loss or expense. The amount of which cannot be determined with certainty is also referred to as provision. Few examples are provision for depreciation, provision for doubtful debts and provision for discount on bad debtors.
The main objective of provision is to account all expenses and losses. Through the creation of provision account, the amount of liability, losses and expenses are estimated and accounted for the accounting period. Therefore, the true profit and loss is ascertained, liabilities and assets are presented with correct values.
Importance of Provision:

To meet anticipated losses and liabilities: Provision is created to meet the anticipated losses and liabilities such as provision for doubtful debts, provision for discount on debtors and provision for taxation.
To meet known losses and liabilities: Provision is created to meet known losses and liabilities such as provision for repairs and renewals.
To present correct financial statements: To present a true and fair view of profit and financial statement, the business must maintain provision for known liabilities and losses.

Therefore, provision is necessarily to be created to ascertain the current income or profit. Also, it is considered as a charge against revenue or profits.
Accounting Treatment
Provision is a charge against the profit which is debited in the profit and loss account. In the balance sheet, the amount of provision may be shown on the asset side by deducting from the relevant asset or on the liability side along with the current liabilities.

Treatment on asset side- Provision for doubtful debts is deducted from the amount of sundry debtors and the provision for depreciation is deducted from the relevant asset.
Treatment on liability side- Provision for repairs and charges are shown along with the current liabilities.

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Chapter 6 Trial Balance and Rectification of Errors NCERT SOLUTION CLASS 11TH ACCOUNTS | EDUGROWN NOTES

Short Answer Type Questions

Q1. State the meaning of a Trial Balance.
Solution: Trial balance is a statement prepared to check the arithmetical accuracy of transactions recorded in the journal, posted into the ledger and balanced in the ledger accounts. The balance of ledger accounts shows the difference between the total of the debit items and credit items in an account. Personal, real and nominal accounts are considered for preparing the trial balance. Generally, it is prepared at the end of an accounting year. However, it may be prepared at the end of any chosen period, which may be monthly, quarterly, half yearly or annually depending upon when it is required. It helps in the preparation of the financial statements.

Q2. Give two examples of errors of principle?
Solution: Generally accepted accounting principles are to be followed to record the accounting entries. When accounting entries are recorded in contravention of accounting principles, it is known as an error of principle.

Wages paid for installation of new machinery debited to wages account:
Wages paid for installation of new machinery is a capital expenditure and accordingly machinery account should have been debited. But, here it is treated as revenue expenditure and is debited to wages account. Thus, it violates the accounting principle.
Amount spent on repair of building debited to machinery account: Expense on repair is revenue expenditure and not a capital expenditure. The amount should have been debited to repairs account and to the machinery account which is a capital account. Thus, it violates the accounting principle.

Q3. Give two examples of errors of commission?
Solution: Errors of commission are committed because of wrong recording, wrong posting, wrong balancing and wrong casting of subsidiary books. Such errors affect the accuracy of the trial balance.

Cash received from a creditor worth Rs.5,000 is recorded in the cash book as Rs.500.
The transaction is recorded in the cashbook as Rs.500 instead of Rs.5,000. This is an error because of the wrong recording of amount in the cash book.
Amount received from Arun Rs.2,000, is wrongly posted in Tarun’s account.
In this transaction, Tarun’s A/c is credited instead of Arun’s A/c. This is referred to as an error of wrong posting of transactions.

Q4. What are the methods of preparing trial balance?
Solution: A trial balance can be prepared in the following three ways :

Totals Method: In this method, the total of the debit and the credit side of the ledger is determined and presented separately in the trial balance. The total of both the sides should match as the accounts are based on double entry system.
Balances Method: In this method, the balances of all ledger accounts are presented in their respective debit and credit columns of the trial balance. The total of both the sides should match as the accounts are based on double entry system and this method of preparing a trial balance is widely used because it helps in the preparation of financial statements.
Totals-cum-balances Method: This method is a blend of the totals and balances method. This method has four columns. The first two columns are to write the totals of the debits and credits of the various accounts and the other two columns are to write the debit or the credit balances of these accounts. This method is time consuming, and hence are not used widely.

Q5. What are the steps taken by an accountant to locate the errors in the trial balance?
Solution: Steps to identify the errors:

Recast the totals of the debit and credit columns of the trial balance.
Compare each account head and its amount appearing in the trial balance with that of the ledger to detect any difference in amount or omission of any account.
Compare the trial balance of the current year with that of the previous year to check the additions or deletions to any accounts and to verify if there is any unexplained difference in amounts.
Re-check the correctness of balances of individual accounts in their respective ledgers.
Re-check the accuracy of the postings in individual accounts from the transactions entered in the books of original entry.
If the difference between the debit and credit columns is of `1, `10, `100 or `1000, the casting of the subsidiary books should be re-checked.
If the difference between the debit and credit columns is divisible by 2, then there is a possibility that an amount equal to half the difference may have been posted to the wrong side of another ledger account.
The above point may also indicate a complete omission of a posting.
If the difference is divisible by 9, the mistake could be because of transposition of figures.
Still, if it is not possible to locate the errors, the difference in the trial balance for that moment is transferred to the suspense account. All the one-sided errors detected are rectified through this account.

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?
Solution:
In certain cases, when the debit column and the credit column of a trial balance do not agree, then the difference of the trial balance is transferred to a temporary account which is called a suspense account. This account is created to avoid any delay in creation of the financial statements. 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.

When all the errors are detected and rectified, then the suspense account automatically gets balanced. However, when errors still exist and are not rectified, the suspense account will not balance off and the balance amount of the suspense account will have to be transferred to the balance sheet. The debit balance of the suspense account is shown on the assets side and the credit balance is shown on 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?
Solution:
One-sided errors are the errors which when committed affect the agreement of the trial balance. These errors affect only one account and any one side i.e. debit or the credit side of the account. Errors of partial omission, recording transactions with wrong amount, casting, posting of incorrect amount are examples of one-sided errors.
Two-sided errors do not affect the agreement of the trial balance. Here, are a few examples which would not be revealed in a trial balance:

Purchases from Mr. Shah, completely omitted to be recorded in the purchase book.
Purchases made from Vijesh, recorded in Ritesh’s account who is another creditor.
Stationary purchased for office use recorded in the purchase book.

Long Answer Type Questions

Q1. Describe the purpose for the preparation of trial balance.

ANSWER: The important purposes for which the trial balance was prepared are explained with the help of the following points:

Ascertain the arithmetical accuracy of ledger accounts – The trial balance helps to ascertain whether all the debits and credits are properly recorded in the ledger. When the debit and the credit balances are equal, it is said that the posting and the balancing of the accounts is arithmetically correct. However, the tallying of the trial balance cannot be considered as a conclusive proof of accuracy of the books.
Helps in locating errors – When a trial balance does not tally, it helps in detecting or locating the errors. The error may have occurred at any one of the stages of an accounting process; namely,
1. Totaling of the subsidiary books
2. Posting of journal entries in the ledger
3. Calculating account balances
4. Carrying account balances to the trial balance
5. Totaling the trial balance columns
Helps in the preparation of the financial statements – Trial balance is a statement which lists the debit and credit balances of all ledger accounts and helps in the preparation of the financial statements. Hence, it is considered as a connecting link between the accounting records and the preparation of financial statements.

Q2. Explain errors of principle and give two examples with measures to rectify them.

ANSWER: Generally accepted accounting principles are to be followed to record the accounting entries. When accounting entries are recorded violating or ignoring these principles, the error, thus, committed is known as error of principle. These errors do not affect the agreement of the trial balance.

Wages paid for construction of building are debited to wages account.
Wrong entry:

Wages A/c	Dr.
	To Cash A/c
(Being wages paid for construction of building)

Wages paid for the construction of building is to be treated as a capital expenditure and has to be debited to the building account instead of the wages account. Thus, the correct entry is

Building A/c	Dr.
	To Cash A/c
(Being wages paid for construction of building)

Hence, to rectify the error Building A/c needs to be debited and Wages A/c needs to be credited as it was wrongly debited. The rectifying entry is:

Building A/c	Dr.
	To Wages A/c
(Being wages paid for construction of building wrongly debited to wages account, now rectified)

Furniture purchased for Rs.10,000 wrongly debited to purchases account.
Wrong entry made:

Purchase A/c	Dr.
	To Cash A/c
(Being furniture purchased wrongly debited to purchases account)

Furniture is an asset and the purchase of the same should be debited to furniture account instead of purchases account. Thus, the correct entry is:

Furniture A/c	Dr.
	To Cash A/c
(Being old machinery sold for cash)

To rectify this error, Furniture A/c needs to be debited and Purchase A/c needs to be credited as it is wrongly debited. Thus, the rectifying entry is:

Furniture A/c	Dr.
	To Purchase A/c
(Being furniture purchased for wrongly debited to purchases account, now rectified)

Q3. Explain the errors of commission and give two examples with measures to rectify them.
ANSWER: The errors which are committed because of wrong posting of transactions, wrong balancing of accounts, wrong casting of subsidiary books, wrong totaling or wrong recording of amount in the books are all error of commission. These errors affect the agreement of the trial balance.

1. Purchases done from Rohan worth Rs.10,000 recorded as Rs.1,000.
Here, the transaction is recorded for Rs.1,000 instead of Rs.10,000. This is an error of wrong recording of amount. Purchases A/c requires a further debit of Rs.9,000 and Rohan’s A/c requires a further credit of Rs.9,000.The rectifying entry is:

Purchases A/c	Dr.	9,000
	To Rohan’s A/c		9,000
(Being goods purchased from Rohan of Rs.10,000 wrongly recorded as Rs.1,000, now rectified)

2. Sales book totaled as Rs.5,000 instead of Rs.50,000.
Here, the total sales of the book are short by Rs.45,000. This error can be rectified at any of the following two stages:

If the error is located before preparing trial balance, then Rs.45,000 should be recorded in the credit side of Sales Account.
If an error is located after preparing Trial Balance, then assuming that a suspense account is opened the following entry needs to be recorded.

Suspense A/c	Dr.	45,000
	To Sales A/c	45,000
(Being sales book wrongly totaled as Rs.5,000 instead of Rs.50,000)

Q4. What are the different types of errors that are usually committed in recording business transaction?
ANSWER: According to the nature of errors committed, errors are classified into the following four categories:

Errors of Commission: The errors that are committed because of wrong posting of transactions, wrong balancing of accounts, wrong casting of subsidiary books, wrong totaling or wrong recording of amount in the books are all error of commission. These errors affect the agreement of the trial balance.
Errors of Omission: These errors are of two types and are committed when a transactions is partially or completely omitted to be recorded in the books.
1. Error of complete omission – When a transaction is completely omitted to be recorded in the books of accounts or to be posted in the respective ledgers, it is an error of complete omission. Such errors do not affect the agreement of the trial balance.
2. Error of partial omission – When a transaction is partially omitted while recording in the books or amounts or partially omitted from posting in the ledger, it is an error of partial omission. Such errors affect the agreement of the trial balance.
Errors of Principle: Accounting transactions are to be recorded following certain principles. If any of the principle of accounting entries are violated or ignored and the error occurring due to such violation is called error of principle.
Compensating errors: When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors.

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:
Pen-drive is wrongly debited to office equipment account, instead of stationery account and supplier account is debited instead of crediting. Because of these mistakes, the following errors are committed:
a. The balance of office equipment is overstated by Rs.3,500
b. The balance of creditors account is understated by Rs.7,000
c. The total of the debit column of the trial balance is correctly stated.
d. The total of the credit column of the trial balance is understated by Rs.7,000.
e. 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).

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Chapter 5 Bank Reconciliation Statement NCERT SOLUTION CLASS 11 ACCOUNTS/ EDUGROWN NOTES

Short Answer type Question:

Q.1 State the need for the preparation of bank reconciliation statement?

ANSWER: The need to prepare Bank Reconciliation Statement are given below.

It helps in finding out the errors and omissions committed in the Cash Book and the Pass Book.
It shows uncleared cheques, which have already been debited in the Cash Book but have not been yet recorded in the Pass Book.
It helps in checking embezzlement of money from the bank account.
It helps in measuring the accuracy of the transactions recorded in the Cash Book.
It facilitates in preparing revised Cash Book that reflects true bank balance.

Q.2 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.

Q.3 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.

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.
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.
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.

Q.4 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.

Q.5 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.

Q.6 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.

Long Answer Type Questions

Q1. What is a bank reconciliation statement? Why is it prepared?
Solution:
Business organisations maintain the cash book for recording cash and bank transactions. It shows the balance of both the accounts at the end of an accounting period.
Similarly, the bank also maintains an account for each customer in its book. All deposits made by the customer are recorded on the credit side of the account and all withdrawals are recorded on the debit side of the account.
A copy of this is sent to the customer by the bank. This is called pass book or bank statement. This statement is used by the firm to tally its bank transactions as recorded by the bank with the cash book. The balance of the cash book must tally with that of the pass book.
But as both the books are maintained by two different parties, the bank balances as shown by the cash book and that shown by the pass book do not always match. The entries in both the books are, thus, compared and the items because of which the difference has occurred are determined and rectified. Thus, to reconcile the balances of the cash book and the pass book, a statement is prepared. This statement is called the bank reconciliation statement.
Specimen of Bank Reconciliation Statement:
ncert-solutions-for-class-11-financial-accounting-bank-reconciliation-statement-la1

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.
Solution:
The reason for the error in balance between the cash book and pass book can be stated as follows:
Timing difference on recording of the transactions
While comparing the balances of both the accounts, transactions found usually appear only in the cash book or only in the pass book. Such differences are caused by the time gap in recording the transactions in the books relating to either receipts or payments.

Transactions which appear in the cash book but not in the pass book:
1. Cheques issued but not presented for payment at the bank
  The firm/customer issues cheques to its suppliers and creditors, but not all these cheques are presented to the bank. The entry in the cash book is made immediately on issue of the cheque but the bank will not pass an entry until the cheque is presented for payment.
2. Cheques paid or deposited but not collected and credited by the bank
  Entry is passed by the firm in the cash book when it receives cheques from its debtors which increase the balance as per the cash book. But the bank credits the firm’s account only when they receive the payment from the customer’s bank or in other words, once the cheque is collected by the bank.
Transactions which appear in the pass book but not in the cash book:
1. Direct bank charges, commission and interest debited by the bank
  Bank provides us various services for which it levies some charges which is directly debited from the firm’s account. The firm will know of these charges only after she/he verifies the entries with the bank statement.
  Example: Interest on overdraft, unpaid cheques and cheque collection charges
2. Expenses directly paid by the bank on behalf of the customers
  Depending upon the standing instruction of the customer, the bank makes regular payment on behalf of the customer. The bank debits the customer’s account when the payment is made but the firm will pass the entry in his book only after he receives the bank statement. Thus, the balance as per the pass book will be less than the balance in the cash book.
  Example: Insurance premium, telephone bills and rent
3. Amounts directly deposited in the customer’s account
  There are times when the firm’s debtors deposit money or make payments directly into the firm’s bank account. This results in an increase in the balance of the bank account. As no intimation is received by the firm, there will be no record of the same in the cash book.
4. Incomes directly collected by the bank on behalf of customer but not recorded in cash book
  As per the agreement between the customer and the bank, the bank directly accepts payments such as dividends and rents and credits the same into the customer’s account. This increases the balance as per the pass book and causes a decrease in the balance in the pass book.
5. Cheques deposited dishonoured or bills discounted dishonoured
  The bank sometimes allows the facility of discounting the bills of the customers. If such a bill is dishonoured on its date of maturity, the same is debited to customers account. As this information is not available to the firm, there will be no entry in the cash book. Similarly, when a cheque deposited by the firm in the bank is dishonoured, the same is debited to the customer’s account. As a result, there is a difference between the balances of the cash book and the pass book.

Errors in recording transactions by the firm or by the bank
Errors such as wrong recordings relating to cheques deposited/issued, wrong totaling or omission can be committed by the bank or the firm which can cause a difference between the cash book and the pass book balance.
Example: Wrong recording can be passed by the bank because of the similarity in names of its customers or some error caused by the clerk of the bank.

Cheques received by the firm are sent to the bank without passing an entry in the cash book or cheques received from the customers are omitted to be sent to the bank but an entry has been passed in the cash book.

Q3. Explain the process of preparing bank reconciliation statement with amended cash balance.
Solution:
The below given steps are involved in the preparation of adjusted cash book.
Step 1: The bank balance as per the cash book is noted.
Step 2: All the errors committed in the cash book to be recorded are rectified.
Step 3: Transaction present only on the credit side of the pass book needs to be recorded on the debit side of the cash book.
Step 4: Transaction present only on the debit side of the pass book needs to be recorded on the credit side of the cash book.
Step 5: Total the cash book and find the balancing figure. This balancing figure is used for preparing the bank reconciliation statement.
The proforma of the bank reconciliation statement through amended balance is given below:
ncert-solutions-for-class-11-financial-accounting-bank-reconciliation-statement-la3

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Chapter 4 Recording of Transactions – II NCERT SOLUTION CLASS 11 ACCOUNTS/ EDUGROWN NOTES

Short Answer type question:

Q.1Briefly 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.

Q.2 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.

Q.3 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.

Q.4 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:

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.
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

Q.5 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.

Q.6 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.

It saves time and efforts in recording.
It enables division of work, leading to an enhancement of efficiency and effectiveness, as particular accountant takes care of particular books.
It also makes each accountant more responsible and accountable for the books assigned to them.
It records routine and repetitive transactions at one place, which leads to easy accessibility of information and hassle-free communication.

Q.7 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.

Q.8 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.

Q.9 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.

Q.10 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.

Long Answer Type Questions

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).
NCERT Solutions For Class 11 Financial Accounting - Recording of Transactions-II LAQ Q2
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.
NCERT Solutions For Class 11 Financial Accounting - Recording of Transactions-II LAQ Q2.1

3. Triple Column 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.
NCERT Solutions For Class 11 Financial Accounting - Recording of Transactions-II LAQ Q3
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.
NCERT Solutions For Class 11 Financial Accounting - Recording of Transactions-II LAQ Q4

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 does not 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.

Author Archives: Swati

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