Short Answer Type Questions
Q1. State the three fundamental steps in the accounting process.
Answer : The fundamental steps in the accounting process are diagrammatically presented below.
Q3. Should a transaction be first recorded in a journal or ledger? Why?
Answer : A transaction should be recorded first in a journal because journal provides complete details of a transaction in one entry. Further, a journal forms the basis for posting the transactions into their respective accounts into ledger. Transactions are recorded in journal in chronological order, i.e. in the order of occurrence with the help of source documents. Journal is also known as ‘book of original entry’, because with the help of source document, transactions are originally recorded in books. The process of recording the transactions in journal and then in ledger is presented in the below given flow chart.
Q4. Are debits or credits listed first in journal entries? Are debits or credits indented?
Answer : As per the rule of double entry system, there are two columns of ‘Amount’ in the journal format namely ‘Debit Amount’ and ‘Credit Amount’. The way of recording in a journal is quite different from normal recording. Journal entry is recorded in journal format in which the ‘Debit Amount’ column is listed before the ‘Credit Amount’ column.
Credits are indented. Indentation is leaving a space before writing any word. Journal entry has its own jargon. While journalising, in the ‘Particulars’ column of journal format, debited account is written first and credited account is in the next line leaving some space, which is indentation.
Q5. Why are some accounting systems called double accounting systems?
Answer : Some accounting systems are called double accounting systems because under this system there are two aspects of every transaction, i.e., every transaction has dual effect. Every transaction affects two accounts simultaneously, that is represented by debiting one account and crediting the other account. It is based on the fact that if there is receiver, there should be a giver.
Q6. Give a specimen of an account.
Q7. Why are the rules of debit and credit same for both liability and capital?
Answer :
Every business acquires funds from internal as well as from external sources. According to the business entity concept, the amount borrowed from the external sources together with the internal sources like, capital invested by the proprietor, is termed as liability to the business. Business entity concept treats business and business owner separately. Capital of the owner is treated as liability to the business because the business has to repay the amount of capital to the owner, in case of closure of the business. As liability incurred is credited, in the same way, fresh capital introduced and net profit increases the owner’s capital, and so, capital is credited. On the other hand, if liability is paid, it reduces liability, and so, it is debited. Similarly, drawings from capital and net loss reduce the capital, and so, capital is debited. Thus the rules of debit and credit are same for both liability and capital.
Q8. What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts?
Answer : J.F. number is the number that is entered in the ledger at the time of posting entries into their respective accounts. It helps in determining whether all transactions are properly posted in their accounts. It is recorded at the time of posting and not at the time of recording the transactions.
The purpose of entering J.F. number in the ledger is because of the below given benefits.
1. J.F. number helps in locating the entries of accounts in the journal book. In other words, J.F number helps to locate the position of the related journal entry and subsidiary book in the journal book.
2. J.F. number in accounts ensures that recording in the books of original entry has been posted or not.
Q9. What entry (debit or credit) would you make to: (a) increase revenue (b) decrease in expense, (c) record drawings (d) record the fresh capital introduced by the owner.
Answer :
1. Increase in revenue
Increase in revenue is credited as it increases the capital. Capital has credit balance and if capital increases, then it is credited.
2. Decrease in expense
Decrease in expense is credited as all expenses have debit balance. If expense decreases, then it is credited.
3. Record drawings
Capital has credit balance; if the capital increases, then it is credited. If capital decreases, then it is debited. Drawings are debited as they decrease the capital.
4. Record of fresh capital introduced by the owner- credit
Capital has credit balance, if capital increases, then it is credited. The introduction of fresh capital increases the balance of capital, and so, it is credited.
Q10. If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as a debit or as a credit?
Answer :If a transaction has a decreasing effect on an asset, then this decrease is recorded as credit. This is because, as all assets have debit balance and if assets decrease, then it is credited. For example, sale of furniture results in decrease in furniture (asset); so, the sale of furniture will be credited.
If a transaction has a decreasing effect on a liability, then this decrease is recorded as debit. This is because all liabilities have credit balance. If the liability increases, then it is credited and if the liability decreases, then it is debited. For example, payment to the creditors results in a decrease in the creditors (liability); so, the creditors account will be debited.
Numerical Questions
Q1. Prepare accounting equation on the basis of the following:
(a) Harsha started business with cash Rs 2,00,000
(b) Purchased goods from Naman for cash Rs 40,000
(c) Sold goods to Bhanu costing Rs 10,000/- Rs 12,000
(d) Bought furniture on credit Rs 7,000
Q2. Prepare accounting equation from the following:
Answer:
Q3. Mohit has the following transactions, prepare accounting equation:
Answer:
Q4. Rohit has the following transactions:
Prepare the Accounting Equation to show the effect of the above transactions on the assets, liabilities and capital.
Answer:
Q5. Use accounting equation to show the effect of the following transactions of M/s Royal Traders:
Answer:
Q6. Show the accounting equation on the basis of the following transaction:
Answer:
Q7. Show the effect of the following transactions on Assets, Liabilities and Capital through accounting equation:
Answer :
Q8. Show the effect of the following transaction on the accounting equation:
Answer :
Q9. Transactions of M/s. Vipin Traders are given below.
Show the effects on Assets, Liabilities and Capital with the help of accounting Equation.
Answer:
Q10. Bobby opened a consulting firm and completed these transactions during November, 2005:
(a) Invested Rs 4,00,000 cash and office equipment with Rs 1,50,000 in a business called Bobbie Consulting.
(b) Purchased land and a small office building. The land was worth Rs 1,50,000 and the building worth Rs 3,50,000. The purchase price was paid with Rs 2,00,000 cash and a long term note payable for Rs 8,00,000.
(c) Purchased office supplies on credit for Rs 12,000.
(d) Bobbie transferred title of motor car to the business. The motor car was worth Rs 90,000.
(e) Purchased for Rs 30,000 additional office equipment on credit.
(f) Paid Rs 75,00 salary to the office manager.
(g) Provided services to a client and collected Rs 30,000
(h) Paid Rs 4,000 for the month’s utilities.
(i) Paid supplier created in transaction (c).
(j) Purchase new office equipment by paying Rs 93,000 cash and trading in old equipment with a recorded cost of Rs 7,000.
(k) Completed services of a client for Rs 26,000. This amount is to be paid within 30 days.
(l) Received Rs 19,000 payment from the client created in transaction (k).
(m) Bobby withdrew Rs 20,000 from the business.
Analyse the above stated transactions and open the following T-accounts:
Cash, client, office supplies, motor car, building, land, long term payables, capital, withdrawals, salary, expense and utilities expense.
Answer :
(a) The transaction (a) increases assets by Rs 5,50,000 (cash Rs 4,00,000 and office equipment Rs 1,5,000) it will be debited and on the other hand it will increase the capital by Rs 5,50,000, so it will be credited in capital account.
(b)
Purchase of land and small office building are assets. On one hand, the purchase of these items will increase their individual accounts and this will increase the total amount of the assets in the business; so, both the accounts will be debited. On the other hand, payment in cash on the purchase of these assets will decrease the cash balance, so cash account will be credited to the extent of amount paid. After payment for building in cash, the balance of building account will be transferred to creditors for building account. This will increase the amount of the creditors, which in turn will increase the total liabilities of the business. Long term payables are regarded as loan to the business that will increase both cash balance (due to intake of loan) as well as liabilities of the business.
Q11. Journalise the following transactions in the books of Himanshu:
Answer:
Q12. Enter the following Transactions in the Journal of Mudit :
Answer :
Q13. Journalise the following transactions:
Answer :
Q14. Jouranlise the following transactions in the books of Harpreet Bros.:
(a) Rs 1,000 due from Rohit are now bad debts.
(b) Goods worth Rs 2,000 were used by the proprietor.
(c) Charge depreciation @ 10% p.a for two month on machine costing Rs 30,000.
(d) Provide interest on capital of Rs 1,50,000 at 6% p.a. for 9 months.
(e) Rahul become insolvent, who owed is Rs 2,000 a final dividend of 60 paise in a rupee is received from his estate.
Answer :
Q15. Prepare Journal from the transactions given below :
Answer :
Q16. Journalise the following transactions, post to the ledger:
Answer :
Q17. Journalise the following transactions is the journal of M/s. Goel Brothers and post them to the ledger.
Answer :
Q18. Give journal entries of M/s. Mohit traders; post them to the Ledger from the following transactions:
Answer :
Q19. Journalise the following transaction in the Books of the M/s. Bhanu Traders and Post them into the Ledger.
Answer :
Q20. Journalise the following transaction in the Book of M/s. Beauti tradeRs Also post them in the ledger.
Answer:
Q21. Journalise the following transaction in the books of Sanjana and post them into the ledger:
Answer :
Long Answer type Question:
Q.1Describe the events recorded in accounting systems and the importance of source documents in those systems.
Irrespective whether a business is small or big, there would be n-amount of financial transactions which would take place. A human mind cannot grasp this much amount of information. So in such instances, the source documents come in handy. A source document always enables verifiability and acts as evidence in court. They ensure that transactions recorded in the books are free from personal biases.
Source document in accounting is important because of the below given reasons.
- Systematic track of records
- Detect and prevent frauds and errors
- Alternative memory box
- Verifying the transaction during the auditing process
- Evidence in the count of law
Scenarios which are supported by source document are
- Return of goods purchased on credit worth Rs. 500, supported by debit note
- Deposits into bank worth Rs. 1000, supported by pay-in slips
- Purchase of goods worth Rs. 1000 on credit, supported by purchase invoice/bill
- Cash sales worth Rs. 2,000, supported by cash memo
The books of accounts only record events expressed in monetary terms and not the non-monetary events. For example, promotion of an employee is not recorded in the book but the salary increment is recorded at the time when salary is paid or due. Question LA 2
Describe how debits and credits are used to analyse transactions.Solution LA 2
An accounting system is of two types, single entry accounting system and double entry accounting system. Majority of the business use the double entry accounting system as it consists of dual aspect. Double entry system is a complete system of recording transaction in the books of accounts. Each transaction reveals two aspects, receiving aspect or incoming aspect or expenses/loss aspect known as debit aspect and giving aspect or outgoing aspect or income/gain aspect known as credit aspect. The dual aspect can be better understood by the help of an example; bought goods worth Rs.1000 on cash. This transaction affects two accounts with the same amount simultaneously. As goods are brought in exchange of cash, the cash balances in the business reduce by Rs.1000 i.e. the cash account is credited. Simultaneously, the amount of goods increases by Rs.1000, so purchase account will be debited.
Debit and credit depend on the nature of accounts involved; such as assets, expenses, income, liabilities and capital. There are five types of accounts.
- Assets– This increases the profit earning capacity of the business over a long-term across various accounting periods. Examples of fixed assets are furniture, machinery, land, plant and buildings.For example, machinery purchased and payment is made by cheque. The journal entry isMachinery A/c Dr.To Bank A/c Here, machinery and bank balance, both are assets to the firm. As machinery is purchased, so machinery account will increase, and will be debited. On the other hand, payment of machinery is being made by cheque that reduces the bank balance of the business, so bank account will be credited.
- Expense– It is the costs incurred to maintain the profitability of business in the process of earning profits. This help in the generating revenues, business operations and production such as rent, wages, depreciation, interest, salaries. They are measured by the services rendered or the cost of assets during an accounting period. For example, rent paid. The journal entry is:Rent A/c Dr.To Cash A/cHere, rent is an expense. All expenses have debit balance. Hence, rent is debited. On the other hand, as rent is paid in cash that reduces the cash balances, so cash account is credited.
- Liability– Liabilities refer to the financial obligations or debt which a business owes to others such as loans from banks, other persons or creditors for goods supplied. Long term liabilities are loans which are payable after a period of 1 year. Short term liabilities are obligations which are payable within a period of time.The journal entry is:Bank A/c Dr.To Bank Loan A/cHere, loan from bank is a liability to the firm. As all liabilities have credit balance, so loan from bank has been credited because it increases the liabilities.
- Income- It refers to the amount received from selling the products or providing services to customers, royalty and commission received; they are added to the capital.
For example, rent received from tenant. The journal entry is:Cash A/c Dr.To Rent A/cHere, rent is an income; hence, rent account has been credited and cash has been debited, as rent received increases the cash balances. - Capital- It refers to the amount invested in form of cash or asset by the owner in a firm’s business or organisation of his choice. It is a claim on the assets of the business and also it will be an obligation of the business towards the owner of the firm. On the balance sheet, the capital is shown on the liabilities side.For example, additional capital introduced by owner. The journal entry is:Cash A/c Dr.To Capital A/cThe amount of capital increases i.e. credited when additional capital is introduced. On the other hand, the cash account is debited when the cash balances decrease i.e. capital introduced in form of cash.
Q.2 Describe how accounts are used to record information about the effects of transactions.
In a business, recording each and every transaction is of utmost importance. Not doing so, can notably affect the financial status of the business.
A transaction is first recorded in the journal, the book of original entry. However, if the further details on expense, revenue, equity, liability or increase or decrease in assets are needed, an account is brought in use. A detailed record of the information relating to a financial transaction can be termed as an account. It helps in determining the financial position of the business.
There are some steps to record transactions in accounts; it can be easily understood with the help of an example.
Sold goods to Mr. X worth Rs. 40,000 on 12th April and received payment Rs. 40,000 on 25th April. The following journal entries will be recorded:
| Date | Particulars | L.F | Debit Rs. | Credit Rs. |
| Apr. 12 Apr 25. | X’ A/c Dr To Sales(Goods sold on credit to Mr. X) Cash A/c Dr To X’s A/c(Cash received from Mr. X) | 2218 1322 | 40,000 40,000 | 40,000 40,000 |
Step 1– Locate the account in ledger, i.e. Mr. X’s Account.
Step 2– Enter the date of transaction in the date column of the debit side of Mr. X’s Account.
Step 3– In the ‘Particulars’ column of the debit side of Mr. X’s Account, the name of corresponding account is to be written, i.e. ‘Sales’.
Step 4– Enter the page number of the ledger in the Journal Folio (J.F.) column of Mr. X’s Account.
Step 5- Enter the amount in the ‘Amount’ column.
Step 6- Same steps are to be followed to post entries in the credit side of Mr. X’s Account.
Step 7– After entering all the transactions for a particular period, balance the account by totaling both sides and write the difference in shorter side, as ‘Balance c/d’.
Step 8– Total of account is to be written on either sides.Question LA 4
What is a journal? Give a specimen of journal showing at least five entries.Solution LA 4
Journal is known to be the book of original entry. Any financial transaction which takes place is recorded first in a journal so that they can be used for future references. The recording is done as and when a transaction occurs i.e. in a chronological order.
Performa of Journal
In the books of…..
| Date | Particulars | L.F. | DebitRs. | CreditRs. |
Date– Date of the transaction is entered in the first column. This date is entered only once unless and until there is a change in the date of transaction. It should be entered in proper sequence.
Particulars- Details of business transactions like, name of the parties involved and the name of related accounts, are recorded.
L.F. – Page number of ledger account when entry is posted.
Debit Amount– Amount of debit account is written.
Credit Amount- Amount of credit account is written.
Example:
| Date | Transactions by Mr. Ram |
| April 01 | Started business with cash Rs.1,13,000 |
| April 06 | Open a bank account Rs.40,000 |
| April 12 | Purchase goods for cash Rs.5,000 |
| April 19 | Goods sold for cash Rs.4,500 |
| April 25 | Goods sold to Mr. X Rs.3,400 |
Journal in the books of Mr. Ram
| Date | Particulars | L.F. | Dr. (Rs.) | Cr.(Rs.) | |
| 2014 | |||||
| Apr. 01 | Cash A/c | Dr. | 1,13,000 | ||
| To Capital A/c | 1,13,000 | ||||
| (Being business started with cash) | |||||
| Apr.02 | Bank A/c | Dr. | 40,000 | ||
| To Cash A/c | 40,000 | ||||
| (Being bank account opened with cash) | |||||
| Apr.12 | Purchases A/c | Dr. | 5,000 | ||
| To Cash A/c | 5,000 | ||||
| (Being goods purchased for cash) | |||||
| Apr.19 | Cash A/c | Dr. | 4,500 | ||
| To Sales A/c | 4,500 | ||||
| (Being goods sold for cash) | |||||
| Apr.25 | Mr. X’s A/c | Dr. | 3,400 | ||
| To Sales A/c | 3,400 | ||||
| (Being goods sold to Mr. X on credit) | |||||
| Total | 1,62,900 | 1,62,900 |
Q.3Differentiate between source documents and vouchers.Solution
| Basis of Difference | Source Documents | Vouchers |
| Meaning | It refers to the documents in writing, containing the details of events or transactions | When source document is considered as evidence of an event or transaction, then it is called voucher |
| Purpose | It is used for preparing accounting vouchers | It is used for analysing the transactions |
| Recording | It acts as a basis for preparing accounting voucher which helps in recording | It acts as a basis for recording transactions |
| Legality/Validity | It can be used as evidence in the court of law | It can be used for authenticating transactions |
| Prepared By | It is prepared by the those directly involved in the transactions or who are authorised to prepare or approve these documents | It is prepared by the authorised persons or by the accountants |
| Examples | Cash memo, invoice, and pay-in-slip | Cash memo, invoice, pay-in-slip (if used as evidence), debit note, credit note, cash vouchers, transfer vouchers |
Q.4Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.
Majority of the business prefers the double entry accounting system i.e. the dual aspect concept over single entry system as it consists of dual effect i.e. two kinds of amount, debit and credit which affects each transaction. It is based on the fact that if there is receiver, there should be a giver. However, at any point of time, the assets of a business entity will always be equal to the total of its liabilities and capital i.e. total claims.
The equation between the assets and claims can be read as follows:
or Liabilities = Asset – Capital
or Capital = Assets – Liabilities
The equation can also be represented as:
Assets – Liabilities = Capital
Assets – Capital = Liabilities
The above equation cannot be altered. For example,
1. Business started with cash Rs.1,00,000
Cash A/c Dr
To Capital A/c
| Assets | = | Liabilities | + | Capital |
| Cash(1,00,000) | 1,00,000 |
Assets decrease, as cash is invested into the business and capital increases. Thus the equality between LHS and RHS remains intact.
2. Goods purchased on credit Rs.20, 000
| Assets | = | Liabilities | + | Capital | |
| Cash 1,00,000 | Stock 20,000 | = | Creditors 20,000 | + | 1,00,000 |
Assets increase as well as liability increases, without disturbing the equality.
3. Goods purchased with cash Rs.25,000
| Assets | = | Liabilities | + | Capital | |
| Cash1,00,000(25,000) | Stock20,00025,000 | = | 20,000 | + | 1,00,000 |
As goods are purchased for cash, so cash balance reduces by Rs.25,000, but on the other hand, stock balance increases by Rs.25,000. Thus the total balance of LHS remains equal to the total claims. Question LA 7
Explain the double entry mechanism with an illustrative example.Solution LA 7
Majority of the business prefers the double entry accounting system i.e. the dual aspect concept over single entry system as it consists of dual effect i.e. two kinds of amount, debit and credit which affects each transaction. It is based on the fact that if there is receiver, there should be a giver.
If a business firm acquires an asset for cash, it has to give some other asset say cash or the obligation to pay for it in future. Thus, giver necessarily implies a receiver and a receiver necessarily implies a giver.
In double entry system, accounts are classified as shown below:
- Personal Accounts: Accounting transactions relating to persons such as individuals, firms, bank and companies are known as personal accounts, such as Mr. A, M/s ABC and Co. etc.
Rule of double entry system for personal accounts: Debit the receiver and credit the giver.For example: Cash paid to Mr. A.Mr. A’s A/cDr.To Cash A/c (Being cash paid to Mr. A) - Impersonal Accounts: It relates to non living things. Impersonal accounts are further classified as real accounts and nominal accounts.
- Real Account– Accounting transactions relating to tangible assets such as properties, goods and cash and intangible assets such as patents and trademark are known as real accounts.Rule of double entry system for real accounts: Debit what comes in and credit what goes out.For example: Furniture purchased for cash.Furniture A/cDr.To Cash A/c (Being furniture purchased for cash)
- Nominal Account: Accounting transactions relating to incomes and expenses and gains and losses of the firm are known as nominal accounts.Rule of double entry system for nominal accounts:Debit all expenses and losses and credit all incomes and gains.
For example : Rent paidRent A/cDr.To Cash A/c (Being rent paid)
Q.5 What is a journal? Give a specimen of journal showing at least five entries.
Journal is known to be the book of original entry. Any financial transaction which takes place is recorded first in a journal so that they can be used for future references. The recording is done as and when a transaction occurs i.e. in a chronological order.
Performa of Journal
In the books of…..
| Date | Particulars | L.F. | DebitRs. | CreditRs. |
Date– Date of the transaction is entered in the first column. This date is entered only once unless and until there is a change in the date of transaction. It should be entered in proper sequence.
Particulars- Details of business transactions like, name of the parties involved and the name of related accounts, are recorded.
L.F. – Page number of ledger account when entry is posted.
Debit Amount– Amount of debit account is written.
Credit Amount- Amount of credit account is written.
Example:
| Date | Transactions by Mr. Ram |
| April 01 | Started business with cash Rs.1,13,000 |
| April 06 | Open a bank account Rs.40,000 |
| April 12 | Purchase goods for cash Rs.5,000 |
| April 19 | Goods sold for cash Rs.4,500 |
| April 25 | Goods sold to Mr. X Rs.3,400 |
Journal in the books of Mr. Ram
| Date | Particulars | L.F. | Dr. (Rs.) | Cr.(Rs.) | |
| 2014 | |||||
| Apr. 01 | Cash A/c | Dr. | 1,13,000 | ||
| To Capital A/c | 1,13,000 | ||||
| (Being business started with cash) | |||||
| Apr.02 | Bank A/c | Dr. | 40,000 | ||
| To Cash A/c | 40,000 | ||||
| (Being bank account opened with cash) | |||||
| Apr.12 | Purchases A/c | Dr. | 5,000 | ||
| To Cash A/c | 5,000 | ||||
| (Being goods purchased for cash) | |||||
| Apr.19 | Cash A/c | Dr. | 4,500 | ||
| To Sales A/c | 4,500 | ||||
| (Being goods sold for cash) | |||||
| Apr.25 | Mr. X’s A/c | Dr. | 3,400 | ||
| To Sales A/c | 3,400 | ||||
| (Being goods sold to Mr. X on credit) | |||||
| Total | 1,62,900 | 1,62,900 |
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