CORPORATE ACCOUNTING (60 MARKS)

CHAPTER 1: INTRODUCTION TO FINANCIAL ACCOUNTING

NEED OF ACCOUNTING:

Business is an economic activity undertaken with the motive of earning profits

and maximizing of the wealth for owners. No business can run in isolation.
Largely, the business activity is carried out by people coming together with a
purpose to serve a common cause. This team is often referred to as an
organization, which could be in different form such as sole proprietorship,
partnership, corporate body, etc.

The rules of any business are based on general principles of trade, social values,
and statutory framework encompassing national or international boundaries.
While these variables could be different for different businesses, different
countries etc., the basic purpose is to add value to a product or service to satisfy
customer’s demand.

The business activities require resources (which are limited and have multiple
uses) primarily in terms of material, labour, machineries, factories and other
services. The success of a business depends on how efficiently and effectively
these resources are managed. Therefore, there is a need to ensure that the
businessman tracks the use of these resources. The resources are not free, and
thus one must be careful to keep an eye on the cost of acquiring them as well.

As the basic purpose of business is to make profit, one must keep an ongoing
track of the activities undertaken in course of business. Two basic questions
would have to be answered:
(a) What is the result of any business operations? This will be answered by
finding out whether it has made profit or loss?
(b) What is the position of the resources acquired and used for business
purposes? How are these resources financed? Where do the funds come from?

The answers to these questions are to be found continuously, and the best way
to find them is to record all the business activities. Recording of business
activities has to be done in a scientific manner so that they reveal the correct
outcome. The science of book-keeping and accounting provides an effective
solution. It is a branch of social sciences. This study material aims at giving a
platform to the students to understand basic principles and concepts, which
can be applied to accurately measure the performance of a business.

OBJECTIVES OF BOOK KEEPING:

1. Systematic recording of Transactions – Basic objective of accounting is to
systematically record the financial aspects of business transactions i.e. book-
keeping. These recorded transactions are later on classified and summarized
logically for the preparation of financial statements and for their analysis and
interpretation.
2. Ascertainment of results of above recorded Transactions– Accountant
prepares profit and loss account to know the results of business operations
for a particular period of time. If revenues exceed expenses then it is said
that business is running profitably but if expenses exceed revenue then it
can be said that business is running under loss. The profit and loss account
helps the management and different stakeholders in taking rational
decisions. For example, if business is not proved to be remunerative or
profitable, the cause of such a state of affair can be investigated by the
management for taking remedial steps.

3. Ascertainment of the financial position of the business – Businessman is not

only interested in knowing the results of the business in terms of profits or
loss for a particular period but is also anxious to know that what he owes
(liability) to the outsiders and what he owns (assets) on a certain date. To
know this, accountant prepares a financial position statement popularly
known as Balance Sheet. The balance sheet is a statement of assets and
liabilities of the business at a particular point of time and helps in
ascertaining the financial health of the business.

4. Providing information to the users for rational Decision-Making– Accounting

as a ‘language of business’ communicates the financial results of an
enterprise to various stakeholders by means of financial statements.
Accounting aims to meet the information needs of the decision-makers and
helps them in rational decision-making.

5. To know the Solvency position: By preparing the balance sheet, management

not only reveals what is owned and owed by the enterprise, but also it gives
the information regarding concern’s ability to meet its liabilities in the short
run (liquidity position) and also in the long run as and when they fall due.
MEANING & SCOPE OF ACCOUNTING:
The committee on terminology set up by the American Institute of Certified
Public Accountants formulated the following definition of accounting in 1961:
“Accounting is the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at
least, of a financial character, and interpreting the results thereof.”

RECORDING All business transactions are evidenced by some

documents like sale bill, purchase bill, voucher, salary
slips, etc. and are recorded in the books of accounts from
such documentary evidences generated in normal course
of business. Recording is done in Journal which is
further divided in subsidiary books according to nature
and size of the business. The process of recording
transactions and events in Journal is known as
Journalizing.
 CLASSIFYING This stage deals with classification of similar
transactions or entries under one group or account so as
to put information in compact and usable form.

SUMMARISING This process leads to the preparation of following

financial statements:
a) Trial Balance
b) Profit and Loss A/c
c) Balance Sheet
d) Cash Flow statement.

ANALYSING It means methodical classification of the data given in the

financial statements and it forms the basis for
interpretation. It is the establishment of relationship
between the items of the Profit & Loss A/c and Balance
sheet. The technique of Ratio Analysis is often used for
this purpose.

INTERPRETATION It is concerned with explaining the meaning and

significance of the relationships as established by the
analysis of the accounting data. This financial data is
interpreted in a manner that enables various end users
to understand the financial condition and profitability
of the business concern. The interpretation helps various
stakeholders to take their respective decision rationally.

COMMUNICATING It is concerned with the transmission of summarized,

analysed and interpreted information to the end-users to
enable them to make rational decisions. This is done
through preparation and distribution of accounting
reports, which include besides the usual profit and loss
account and the balance sheet, additional information in
the form of accounting ratios, graphs, diagrams, fund
flow statements etc.

ACCOUNTING CYCLE

Input Identification of
Transaction

Economic
Events Accounting Cycle Output
measurable in
financial
aspect
 Communicating
Recording in Posting to Preparation Preparation of information to
original Ledger of Trial Final users
books of Balance Accounts
accounts

Internal Users: External Users:

Board of directors Investors
Partners Lenders
Managers Suppliers
Officers Govt Agencies
Employees Customers
SYSTEMS OF ACCOUNTING:
ACCRUAL The method of recording transaction by which revenues,
BASIS OF cost, assets and liabilities are reflected in the accounts in
ACCOUNTING: the period in which they accrue. This basis is also referred
to as “Mercantile basis of accounting”.
(BASIS OF
ACCOUNTING The following are essential features of accrual system:
BENEFITS  Revenue is recognised as it is earned irrespective of
RECEVIED OR whether cash is received or not;
GIVEN)  Cost are matched against revenue on the basis of
relevant time period to determine periodic income and
 Costs which are not charged to income are carried
forward and are kept under continuous review. Any
cost that appears to have lost its utility or its power to
generate future revenue is written off as a loss.

CASH BASIS The method of recording transaction by which revenues,

OF costs and Assets and liabilities are reflected in the
ACCOUNTING accounts in the period in which actual receipts or actual
payments are made.
(BASIS OF
ACCOUNTING Cash system is suitable in the following situations:
IS CASH  Where the organization is very small;
RECEIVED OR  Where credit transactions are almost negligible and
PAID) collections are uncertain e.g. accounting in case of
professionals like doctors, lawyers, CAs, CSs. But
while recording expenses they take into account the
outstanding expenses also. In such a case, the
financial statement prepared by them for
determination of their income is termed as Receipt and
expenditure account.

ELEMENTS OF FINANCIAL STATEMENTS:

ASSETS An Asset is a resource controlled by the entity as a result of
past events and from which future economic benefits are
expected to flow to the entity.

LIABILITY A liability is a present obligation of the entity arising from past

events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic
benefits.

EQUITY Equity is the residual interest in the assets of the entity after
deducting all its liabilities.
INCOME Income is increases in economic benefits during the
accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increase in
equity, other than those relating to contributions from equity
participants.
EXPENSES Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletion of assets
or incurrences of liabilities that result in decrease in equity,
other than those relating to distribution to equity participants.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS:

Certain fundamental accounting assumptions underlie the preparation and
presentation of financial statements. They are usually not specifically stated
because their acceptance and use are assumed. Disclosure is necessary if they
are not followed.
1. GOING CONCERN: The enterprise is normally viewed as a going concern, i.e.
as continuing in operation for the foreseeable future. It is assumed that the
enterprise has neither the intention nor the necessity of liquidation or of
curtailing materially the scale of operations.

2. CONSISTENCY: It is assumed that accounting policies are consistent from

one period to another.

3. ACCRUAL: Revenue and cost are accrued that is recognised as they are
earned or incurred (and not as money is received or paid) and recorded in
the financial statement of the period to which they relate.
BOOK KEEPING:
As defined by Carter, “Book-Keeping is a science as well as art of correctly
recording in books of accounts all those business transactions that result in
transfer of money or money‘s worth”.

Book-keeping is an activity concerned with recording and classifying financial

data related to business operation in order of its occurrence.

Book-keeping is a mechanical task which involves:

 Collection of basic financial information
 Identification of events and transactions with financial character, i.e.,
economic transactions
 Measurement of economic transactions in terms of money
 Recording of financial effects of economic transactions in order of its
occurrence
 Classifying effects of economic transactions
 Preparing organized statement known as Trial Balance
BOOK KEEPING VS ACCOUNTING:

Book Keeping Accounting

It is a process concerned with the
It is a process concerned with
summarizing of the recorded
the recording of transactions.
transactions.
It constitutes the base of It is considered as the language of the
accounting business.
Financial statements are prepared in
Financial statements do not form
this process on the basis of the book
part of this process
keeping records.
Managerial decisions cannot be
Management takes decisions on the
taken on the basis of these
basis of these records.
records.
It has several sub fields of accounting
There is no sub field of book like cost accounting, financial
keeping accounting, management accounting,
etc.
Financial position of the Financial position of the business is
business cannot be ascertained ascertained on the basis of accounting
through book keeping records. reports.

SUB FIELDS OF ACCOUNTING:

FINANCIAL  It covers the preparation and interpretation of financial
ACCOUNTING statements and communication to the users of accounts.
 It is historical in nature as it records transactions which
had already been occurred.
 The final step of financial accounting is the preparation
of Profit and Loss Account and the Balance Sheet.
 It primarily helps in determination of the net result for an
accounting period and the financial position as on a given
date.

MANAGEMENT  It is concerned with internal reporting to the managers

ACCOUNTING of a business unit.
 To discharge the functions of stewardship, planning,
control and decision-making, the management needs
variety of information.
 The different ways of grouping information and preparing
reports as desired by managers for discharging their
functions are referred to as management accounting.

COST  The terminology of Cost Accounting published by the

ACCOUNTING Institute of Cost and Management Accountants of
 England defines cost accounting as: “the process of
accounting for cost which begins with the recording of
income and expenditure or the bases on which they are
calculated and ends with the preparation of periodical
statements and reports for ascertaining and controlling
costs.”

USERS OF ACCOUNTING INFORMATION:

INVESTORS They provide risk capital to the business. They need
information to assess whether to buy, hold or sell their
investment. Also they are interested to know the ability of
the business to survive, prosper and to pay dividend. In non-
corporate sector, where ownership and management are not
essentially separated, the owners still need information
about performance of the business and its financial position
to decide whether to continue or shut down.

EMPLOYEES Growth of the employees is directly related to the growth of

the organization and therefore, they are interested to know
the stability, continuity and growth of the enterprise and its
ability to provide remuneration, retirement and other
benefits and to enhance employment opportunities.

LENDERS They are interested to know whether their loan-principal and

interest will be paid when due.

SUPPLIERS They are also interested to know the ability of the enterprise
AND to pay their dues that helps them to decide the credit policy
CREDITORS for the relevant concern, rates to be charged and so on.
Sometimes, they also become interested in long-term
continuation of the enterprise if their existence becomes
dependent on the survival of that business. Suppose, small
ancillary units supply their products to a big enterprise, if
the big enterprise collapses, the fate of the small units also
becomes sealed.

CUSTOMERS Customers are also concerned with the stability and

profitability of the enterprise because their functioning is
more or less dependent in a vertical chain, suppose, a
company produces some chemicals used by pharmaceutical
companies. It supplies chemicals on three month’s credit. If
all of a sudden it faces some trouble and is unable to supply
the chemical, the customers will also be in trouble.
GOVERNMENT They regulate the functioning of business enterprises for
AND THEIR public good, allocate scarce resources among competing
AGENCIES enterprises, control prices, charge excise duties and taxes,
and so they have continued interest in the business
enterprise.

PUBLIC The public at large is interested in the functioning of the

enterprise because it may make a substantial contribution
to the local economy in many ways including the number of
people employed and their patronage to local suppliers.

DOUBLE ENTRY SYSTEM

Double entry system of book-keeping has emerged in the process of evolution
of various accounting techniques. It is the only scientific system of accounting.
According to it, every transaction has two-fold aspects–debit and credit and
both the aspects are to be recorded in the books of accounts. For example, if a
business acquires something then either it must have been given by someone
or it must have been acquired by giving up something. On purchase of furniture
either the cash balance will be reduced or a liability to the supplier will arise.
This has been made clear already; the Double Entry System is so named since
it records both the aspects. We may define the Double Entry System as the
system which recognizes and records both the aspects of transactions. This
system has proved to be systematic and has been found of great use for
recording the financial affairs for all institutions requiring use of money.
It was in 1494 that Luca Pacioli, the Italian mathematician, first published his
comprehensive treatise on the principles of Double Entry System.
ADVANTAGES OF DOUBLE ENTRY SYSTEM
(a) Since personal and impersonal accounts are maintained under the double
entry system, both the effects of the transactions are recorded.

(b) It ensures arithmetical accuracy of the books of accounts, for every debit,
there is a corresponding and equal credit. This is ascertained by preparing a
trial balance periodically, or at the end of the financial year.

(c) It prevents and minimizes frauds. Moreover frauds can be detected early.

(d) Errors can be checked and rectified easily.

(e) The balances of receivables and payables are determined easily, since the
personal accounts are maintained.

(f) The businessman can compare the financial position of the current year with
that of the past years.
(g) The businessman can justify the standing of his business in comparison
with the previous year purchase, sales, and stocks, incomes and expenses with
that of the current year figures.

(h) Helps in decision-making.

(i) The net operating results can be calculated by preparing the Trading and
Profit and Loss A/c for the year ended and the financial position can be
ascertained by the preparation of the Balance Sheet.

(j) It becomes easy for the Government to calculate the tax.

(k) It helps the Government to decide sickness of business units and extend
help accordingly.

(l) The other stakeholders, like suppliers and banks take a proper decision
regarding grant of credit or loans.

LIMITATIONS OF DOUBLE ENTRY SYSTEM

(a) The system does not disclose all the errors committed in the books
accounts.
(b) The Trial Balance prepared under this system does not disclose certain
types of errors.
(c) It is costly as it involves maintenance of numbers of books of accounts

TRANSACTIONS
In the system of book-keeping, students can notice that transactions are
recorded in the books of accounts. A transaction is a type of event, which is
generally external in nature and can be determined in terms of money. In an
accounting period, every business has huge number of transactions which are
analysed in financial terms and then recorded individually, followed by
classification and summarization process, to know their impact on the financial
statements.

A transaction is a two way process in which value is transferred from one party
to another. In it either a party receives a value in terms of goods etc. and passes
the value in terms of money or vice versa. Therefore, one can easily make out
that in a transaction, a party receives as well as passes the value to other party.
For recording transaction it is very important that they are supported by a
substantial document like purchasing invoices, bills, pay-slips, cash-memos,
passbook etc.

Transactions analysed in terms of money and supported by proper documents

are recorded in the books of accounts under double entry system. To analyse
the dual aspect of each transaction two approaches can be followed:
(1) American Approach.
(2) Traditional Approach.
AMERICAN APPROACH OR MODERN APPRAOCH:
According to this approached the rules of debit and credit transactions are
divided into the following five categories:
(a) Transactions relating to owner, e.g., Capital – these are personal accounts.
(b) Transactions relating to other liabilities, e.g., suppliers of goods – these are
mostly personal accounts.
(c) Transactions relating to assets, e.g., land, building, cash, bank, stock-in-
trade, and bills receivable – these are basically real accounts.
(d) Transactions relating to expenses, e.g., rent, salary, commission, wages, and
cartage – These are nominal accounts.
(e) Transactions relating to revenues, e.g., interest received, dividend received,
sale of goods – these are nominal accounts.

TRADITIONAL APPROACH OR BRITISH APPROACH:

Under traditional approach of recording transactions one should first
understand the term debit and credit and their rules.
Transactions in the journal are recorded on the basis of the rules of debit and
credit only. For the purpose of recording, these transactions are classified in
three groups:
(i) Personal transactions.
(ii) Transactions related to assets and properties.
(iii) Transactions related to expenses, losses, income and gains.

ACCOUNTING EQUATION:
The whole Financial Accounting depends on Accounting Equation which is
also known as Balance Sheet Equation. The basic Accounting Equation is:
Assets = Liabilities + Owner’s equity

While trying to do this correlation, please note that income or gains will
increase owner‘s equity and expenses or losses will reduce it.

CLASSIFICATION OF ACCOUNTS
(i)Personal Accounts: Personal accounts relate to persons, debtors or creditors.
Example would be; the account of Ram & Co., a credit customer or the account
of Jhaveri & Co., a supplier of goods. The capital account is the account of the
proprietor and, therefore, it is also personal but adjustment on account of
profits and losses are made in it. This account is further classified into three
categories:
(a) Natural personal accounts: It relates to transactions of human beings like
Ram, Rita, etc.
(b) Artificial (legal) personal account: For business purpose, business entities
are treated to have separate entity. They are recognised as persons in the eye
of law for dealing with other persons. For example: Government, Companies
(private or limited), Clubs, Co-operative societies etc.
(c) Representative personal accounts: These are not in the name of any person
or organization but are represented as personal accounts. For example:
outstanding liability account or prepaid account, capital account, drawings
account.
(ii)Impersonal Accounts: Accounts which are not personal such as machinery
account, cash account, rent account etc. These can be further sub-divided as
follows:
(a) Real Accounts: Accounts which relate to assets of the firm but not debt. For
example, accounts regarding land, building, investment, fixed deposits etc., are
real accounts. Cash in hand and Cash at the bank accounts are also real.
(b) Nominal Accounts: Accounts which relate to expenses, losses, gains,
revenue, etc. like salary account, interest paid account, and commission
received account. The net result of all the nominal accounts is reflected as profit
or loss which is transferred to the capital account. Nominal accounts are,
therefore, temporary.

Classify the below mentioned accounts:

PROFIT & LOSS ACCOUNT
Particular Type Particulars Type
Opening Stock Real Sales Nominal
Purchases Nominal Closing Stock Real
Direct Expenses Nominal
Gross Profit
Salary Nominal Gross Profit
Rent Nominal Discount Received Nominal
Legal Fees Nominal Interest Received Nominal
Travelling Nominal Commission Received Nominal
Printing & Stationery Nominal Rent Received Nominal
Electricity Expense Nominal Dividend Received Nominal
Telephone Expense Nominal
Office Expense Nominal
Interest Paid Nominal
Repairs & Nominal
Maintenance
Insurance Expense Nominal
Advertisement Nominal
Expense
Discount Allowed Nominal
Accounting Charges Nominal
Bad Debts Nominal
Depreciation Nominal
Net Profit

BALANCE SHEET
Liabilities Type Assets Type
Non-Current Non-Current Assets
Liabilities
Share Capital Personal Goodwill & Patent Real
Reserves & Surplus Personal Plant and Machinery Real
Bank Loan Personal Land and Building Real
Debentures Personal Furniture and Fixtures Real
Public Deposits Personal Vehicles Real
Unsecured Loans Personal Long term investments Real
Current Liabilities Current Assets
Sundry Creditors Personal Sundry Debtors Personal
Dividend Payable Personal Loans and Advances Personal
Bill Payable Personal Cash and Bank balance Real
Bank Overdraft Personal Bill Receivable Real
Outstanding Personal Stock Real
Expenses
Prepaid Expenses Personal

1. Nominal Account: Debit Balance: Debit Side of Trading & P & L Account
Credit Balance: Credit Side of Trading & P & L Account

2. Real Account: Asset Side of Balance Sheet

3. Personal Account: Debit Balance: Asset Side of Balance Sheet

Credit Balance: Liability Side of Balance Sheet

GOLDEN RULES OF ACCOUNTING

All the above classified accounts have two rules each, one related to Debit and
one related to Credit for recording the transactions which are termed as golden
rules of accounting, as transactions are recorded on the basis of double entry
system.
1. Personal account is governed by the following two rules:
Debit the receiver; Credit the giver

2. Real account is governed by the following two rules:

Debit what comes in; Credit what goes out

3. Nominal account is governed by the following two rules:

Debit all expenses and losses; Credit all incomes and gains.

JOURNAL / BOOK OF PRIME ENTRY

Transactions are first entered in this book to show which accounts should be
debited and which credited. Journal is also called subsidiary book. Recording
of transactions in journal is termed as journalizing the entries.
A journal contains the following columns:
i. Date: The date on which the transaction took place.
 ii. Particulars: The two aspects (debit and credit) are recorded here.
iii.Ledger Folio (LF): it records the page number in the ledger in which the
accounts are given entry are posted.
iv. Amount (Debit): debit amount is recorded in the Dr. Column
v. Amount (Credit): Credit amount is recorded in Cr. Column
FORMAT OF JOURNAL
Date Particulars L/f Dr. Amount Cr.
Amount

Process of Journalizing:
1. Ascertain what accounts are affected in the transaction
2. Ascertain the nature of the account (i.e. Real, Personal & Nominal)
3. Apply the rules of debit and credit to each type of account.
4. Pass the entry.
Points to be taken into consideration while recording a transaction in the
Journal:
1. Journal entries can be Simple Entry (i.e. one debit and one credit) or
Compound Journal entry (i.e. one debit and two or more credits or two or
more debits and one credit or two or more debits and credits). In such cases,
it is important to check that the total of both debits and credits are equal.

2. If journal entries are recorded in several pages then both the amount column
of each page should be totalled and the balance should be written at the end
of that page and also that the same total should be carried forward at the
beginning of the next page. However, this total is only for checking arithmetical
accuracy & does not serve any other purpose.

3. When journal entries for two or more transactions are combined, it is called
Composite journal entry.
ADVANTAGES OF JOURNAL
In journal, transactions recorded on the basis of double entry system, fetch
following advantages:
1. As transactions are recorded on chronological order, one can get complete
information about the business transactions on time basis.
2. Entries recorded in the journal are supported by a note termed as narration,
which is a precise explanation of the transaction for the proper understanding
of the entry. One can know the correctness of the entry through these
narrations.
3. Journal forms the basis for posting the entries in the ledger. This eases the
accountant in their work and reduces the chances of error.
SUBSIDIARY BOOKS:
In a Business most of the transactions generally relate to receipts and payments
of cash, sale of goods and their purchase. It is convenient to keep a separate
register for each such class of transactions one for receipts and payments of
cash, one for purchase of goods and one for sale of goods. A register of this type
is called a book of original entry or of prime entry. For transactions recorded in
such books there will be no journal entry. The system by which transactions of
a class are first recorded in the book, specially meant for it and on the basis of
which ledger accounts are then prepared is known as the Practical System of
Book keeping or even the English System. It should be noted that in this
system, there is no departure from the rules of the double entry system.

ADVANTAGES OF SUBSIDIARY BOOKS

The use of subsidiary books affords the under mentioned advantages:
(i) Division of work: Since in the place of one journal there will be so many
subsidiary books, the accounting work may be divided amongst a number
of clerks.

(ii) Specialization and efficiency: When the same work is allotted to a

particular person over a period of time, he acquires full knowledge of it
and becomes efficient in handling it. Thus the accounting work will be
done efficiently.

(iii) Saving of the time: Various accounting processes can be undertaken

simultaneously because of the use of a number of books. This will lead to
the work being completed quickly.

(iv) Availability of information: Since a separate register or book is kept for each
class of transactions, the information relating to each transaction will be
available at one place.

(v) Facility in checking: When the trial balance does not agree, the location of
the error or errors is facilitated by the existence of separate books. Even
the commission of errors and frauds will be checked by the use of various
subsidiary books.
TYPES OF SUBSIDIARY BOOKS:
PURCHASE It records the credit purchase of goods traded in. Example: sta
BOOK purchased stationery in credit from Ram.

It follows that any cash purchase or purchase of things other tha

recorded in the purchase day book.

Periodically, the totals of purchase day book are posted to purchase

ledger.

Specimen of Purchase Day Book

Date Name of Invoice LF Amount Remarks
Supplier Reference

SALES DAY It records the credit sale of goods dealt in (traded in). Example: Fu
BOOK sold furniture on credit.

Sale of other things, even on credit, will not be entered in the sales
is entered in Journal Proper. If goods are sold for cash, it is enter
book.

Total of sales day book is periodically posted to the sales account in

Specimen of Sales Day Book

Date Particulars Invoice LF Amount Remarks
Reference

PURCHASE It records the goods or material returned to the suppliers that have b
RETURN on credit. When goods are returned to supplier a debit note is
BOOK indicating that his account has been debited with the amount me
(RETURN debit note.
OUTWARD)
Return Outward Day Book
Date Particulars Debit LF Details Totals Remark
Note

SALES It records the goods or material returned by the purchaser that ha

RETURN credit. When goods are returned by a customer a credit note i
BOOK mentioning that his account has been credited with the value of goo
(RETURN Return Inward Day Book
INWARD) Date Particulars Credit LF Details Totals Remark
Note

BILLS It records the bills of exchange or promissory note received by a bus

RECEIVABLE
BOOK Bill Receivable Day Book
No. Date From Name of Name Name of Date Due LF `
of Whom Receiver of Acceptor of Date
Bills Drawer Bill

BILLS It records the acceptances given to the creditor in the form of bills
PAYABLE notes.
BOOK
Bill Payable Day Book
No. Date To Name Name Name Date Term Due `
of Whom Drawer of of of date
Bills Given Payee Payable Bill

CASH BOOK It is used to record all cash transactions of the business.

Example: Sale of goods in cash, Sale of Fixed Assets in cash, Purch
cash, Purchase of Fixed Asset in cash, Payment of Expenses, Receipt
Payment to creditors, etc.

JOURNAL All entries which cannot be recorded in the above subsidiary books a
PROPER this book. Format of Journal Proper is exactly same as the Journal.
(BALANCING
JOURNAL) Example: opening entries, Closing entries, rectification entries,
Credit purchase of Fixed Assets, Credit Sale of Fixed Assets, etc.

JOURNAL PROPER:
OPENING When books are started for the New Year, the opening
ENTRIES balance of assets and liabilities are journalized.

CLOSING At the end of the year the profit and loss account has to
ENTRIES be prepared. For this purpose, the nominal accounts are
transferred to this account. This is done through journal
entries called closing entries.
RECTIFICATION If an error has been committed, it is rectified through a
ENTRIES journal entry.

TRANSFER If some amount is to be transferred from one account to

ENTRIES another, the transfer will be made through a journal
entry.

ADJUSTING At the end of the year the amount of expenses or income

ENTRIES may have to be adjusted for amounts received in advance
or for amounts not yet settled in cash. Such an
adjustment is also made through journal entries. Usually,
the entries pertain to the following:
(a) Outstanding expenses, i.e., expenses incurred but not
yet paid;

(b) Prepared expenses, i.e., expenses paid in advance for

some period in the future;

(c) Interest on capital, i.e., the interest which the

proprietor thinks proper to allow on his investment; and

(d) Depreciation, i.e., fall in the value of the assets used

on account of wear and tear. For all these, journal entries
are necessary.

ENTRIES ON If someone who accepted a promissory note (or bill) and is

DISHONOUR OF not able to pay in on the due date, a journal entry will be
BILLS necessary to record the non-payment or dishonour.
MISCELLANEOUS The following entries will also require journalizing:
ENTRIES (a) Credit purchase of things other than goods dealt in or
materials required for production of goods e.g. credit
purchase of furniture or machinery will be journalized.

(b) An allowance to be given to the customers or a charge

to be made to them after the issue of the invoice.

(c) Receipt of promissory notes or issue to them if separate

bill books have not been maintained.

(d) On an amount becoming irrecoverable, say, because,

of the customer becoming insolvent.

(e) Effects of accidents such as loss of property by fire.

(f) Transfer of net profit to capital account.

CASH BOOK:
CASH BOOK - A Subsidiary Book as well as Principal Book
Cash transactions are straightaway recorded in the Cash Book and on the basis
of such a record, ledger accounts are prepared. Therefore, the Cash Book is a
subsidiary book. But the Cash Book itself serves as the cash account and the
bank account; the balances are entered in the trial balance directly. The Cash
Book, therefore, is part of the ledger also. Hence, it has also to be treated as the
principal book. The Cash Book is thus both a subsidiary book and a principal
book.
KINDS OF CASH BOOK:

Cash Book

Single Column Two Column Three Column Petty Cash Book

Record cash To record Cash, To record Receipts

Record Cash
transactions along bank and Discount and payment of
Transaction
with discount Transactions petty cash

The main Cash Book may be of the three types:

(i) Simple Cash Book;
(ii) Two-column Cash Book;
(iii) Three-column Cash Book.

In addition to the main Cash Book, firms also generally maintain a petty cash
book but that is purely a subsidiary book.

SIMPLE CASH BOOK:

Date Particulars J/f Amount Date Particulars J/f Amount

Such a cash book appears like an ordinary account, with one amount column
on each side. The left-hand side records receipts of cash and the right hand
side the payments. Balancing of the Cash Book: The cash book is balanced like
other accounts. The receipts column is always bigger than payments column.
The difference is written on the credit side as 'By balance c/d'. The totals are
then entered in the two columns opposite one another and then on the debit
side the balance is written as "To Balance b/d", to show cash balance in hand
in the beginning of next period.

DOUBLE COLUMN CASH BOOK

Dat Particular J/ Cas Bank/Dis Dat Particular J/ Cas Bank/Dis
e s f h c e s f h c

If along with columns for amounts to record cash receipts and cash payments
another column is added on each side to record the cash discount allowed or
the discount received, or a column on the debit side showing bank receipts and
another column on the credit side showing payments through bank. It is a
double column cash book.

Cash discount is an allowance which often accompanies cash payments. For

example, if a customer owes ` 500 but is promised that 2% will be deducted if
payment is made within a certain period, the customer can clear his account
by paying promptly ` 490. Cash received will be ` 490 and ` 10 will be the
discount for the firm receiving the payment discount is a loss; for the person
making the payment it is a gain. Since cash discount is allowed only if cash is
paid, it is convenient to add a column for discount allowed on the receipt side
of the cashbook and a column for discount received on the payment side of the
cash book.

In the cash column on the debit side, actual cash received is entered; the
amount of the discount allowed, if any, to the customer concerned is entered in
the discount column. Similarly, actual cash paid is entered in the cash column
on the payments side and discount received in the discount column. Also the
bank column on the debit side records all receipts through bank and the same
column on the credit side shows payment through bank.

Balancing: It should be noted that the discount columns are not balanced.
They are merely totalled. The total of the discount column on the receipts side
shows total discount allowed to customers and is debited to the Discount
Account. The total of the column on the payments side shows total discount
received and is credited to the Discount Account. The Cash columns are
balanced, as already shown. The bank columns are also balanced and the
balancing figure is called bank balance. Thus a double column cash book
should have two columns on each side comprising of either cash and discount
transaction or cash and bank transactions.

THREE COLUMN CASH BOOK

Dat Particular J/ Cas Ban Dis Dat Particular J/ Cas Ban Dis
e s f h k c e s f h k c
A firm normally keeps the bulk of its funds at a bank; money can be deposited
and withdrawn at will if it is current account. Probably payments into and out
of the bank are more numerous than strict cash transactions. There is only a
little difference between cash in hand and money at bank. Therefore, it is very
convenient if, on each side in the cash book, another column is added to record
cash deposited at bank (on the receipt side of the cash book) and payments out
of the bank (on the payment side of the cash book).

For writing up the three column cash book the under mentioned points should
be noted:

While commencing a new business, the amount is written in the cash column
if cash is introduced and in the bank column if it is directly put into the bank
with the description" To Capital Account". If a new cash book is being started
for an existing business, the opening balances are written as: "To Balance b/d".

The advantages of such type of Cash Book are that -

(a) The Cash Account and the Bank Account are prepared simultaneously;
therefore the double entry is completed in the Cash Book itself. Thus the contra
entries can be easily cross-checked in Cash column in one side and the Bank
column in the other side of the Cash Book. Also the chances of error are
reduced.

Distinction Trade Discount Cash Discount

Meaning It is a reduction granted by A reduction granted by a
a supplier from the list supplier from the invoice price
price (MRP) of goods or in consideration of immediate
services on business payment or payment within a
considerations (such as stipulated period of time.
quantity bought, etc.) other
than for prompt payment.

Purpose It is allowed to promote the It is allowed to encourage the

sale or as a trade practice. prompt payment.

Time when It is allowed on purchase of It is allowed on immediate

allowed goods payment or payment within
specified period.
Disclosure It is shown by way of It is not shown in the invoice.
in the deduction in the invoice
invoice itself.

Ledger Trade discount account is Cash discount account is

Account not opened in the ledger opened in the ledger
Variation It may vary with the It may vary with the period
quantity purchased within which the payment is
made.

PETTY CASH BOOK

In a business house a number of small payments, such as for telegrams, taxi
fare, cartage, etc., have to be made. If all these payments are recorded in the
cash book, it will become unnecessarily heavy. Also, the main cashier will be
overburdened with work. Therefore, it is usual for firms to appoint a person as
'Petty Cashier' and to entrust the task of making small payments say below `
25, to him. Of course he will be reimbursed for the payments made. Later, on
an analysis, the respective account may be debited.

IMPREST SYSTEM OF PETTY CASH

It is convenient to entrust a definite sum of money to the petty cashier in the
beginning of a period and to reimburse him for payments made at the end of
the period. Thus, he will have again the fixed amount in the beginning of the
new period. Such a system is known as the Imprest system of petty cash.

The system is very useful especially if an analytical Petty Cash Book is used.
The book has one column to record receipt of cash (which is only from the main
cashier) and other columns to record payments of various types. The total of
the various columns show why payments have been made and then the relevant
accounts can be debited.

(i) The amount fixed for petty cash should be sufficient for the likely small
payments for a relatively short period, say for a week or a fortnight.

(ii) The reimbursement should be made only when petty cashier prepares a
statement showing total payments supported by vouchers, i.e., documentary
evidence and should be limited to the amount of actual disbursements.

(iii) The vouchers should be filed in order.

(iv) No payment should be made without proper authorization. Also, payments

above a certain specified limit should be made only by the main cashier

(v) The petty cashier should not be allowed to receive any cash except for
reimbursement.
In the petty cash book the extreme left-hand column records receipts of cash.
The money column towards the right hand shows total payments for various
purposes; a column is usually provided for sundries to record infrequent
payments. The sundries column is analysed. At the end of the week or the
fortnight the petty cash book is balanced. The method of balancing is the same
as for the simple cash book.

ADVANTAGES OF THE PETTY CASH BOOK

There are mainly three advantages:
(i) Saving of time of the chief cashier;
(ii) Saving in labour in writing up the cash book and posting into the ledger;
and
(iii) Control over small payments.

LEDGER ACCOUNTING:

INTRODUCTION:
After recording the transactions in the journal, recorded entries are classified
and grouped into by preparation of accounts and the book, which contains all
set of accounts (viz. personal, real and nominal accounts), is known as Ledger.
It is known as principal books of account in which account-wise balance of each
account is determined.

SPECIMEN OF LEDGER ACCOUNTS

A ledger account has two sides-debit (left part of the account) and credit (right
part of the account). Each of the debit and credit side has four columns. (i) Date
(ii) Particulars (iii) Journal folio i.e. page from where the entries are taken for
posting and (iv) Amount.

Date Particulars J/f Amount Date Particulars J/f Amount

POSTING:
The process of transferring the debit and credit items from journal to classified
accounts in the ledger is known as posting.

RULES REGARDING POSTING OF ENTRIES IN THE LEDGER

1. Separate account is opened in ledger book for each account and entries from
ledger posted to respective account accordingly.
2. It is a practice to use words 'To' and 'By' while posting transactions in the
ledger. The word 'To' is used in the particular column with the accounts
written on the debit side while 'By' is used with the accounts written in the
particular column of the credit side. These 'To' and 'by' do not have any
meanings but are used to represent the account debited and credited.
3. The concerned account debited in the journal should also be debited in the
ledger but reference should be of the respective credit account.
BALANCING AN ACCOUNT
At the end of the each month or year or any particular day it may be necessary
to ascertain the balance in an account. This is not a too difficult thing to do;
suppose a person has bought goods worth ` 1,000 and has paid only ` 850; he
owes ` 150 and that is balance in his account. To ascertain the balance in any
account, what is done is to total the sides and ascertain the difference; the
difference is the balance.

If the credit side is bigger than the debit side, it is a credit balance. In the other
case it is a debit balance. The credit balance is written on the debit side as, "To
Balance c/d"; c/d means "carried down". By doing this, two sides will be equal.
The totals are written on the two sides opposite one another. Then the credit
balance is written on the credit side as "By balance b/d (i.e., brought
down)".This is the opening balance for the new period.

The debit balance similarly is written on the credit side as "By Balance c/d",
the totals then are written on the two sides as shown above as then the debit
balance written on the debit side as, "To Balance b/d", as the opening balance
of the new period.

It should be noted that nominal accounts are not balanced; the balance in the
end are transferred to the profit and loss account. Only personal and real
accounts ultimately show balances.

SUB-DIVISION OF LEDGER:
Practically, the Ledger may be divided into two groups -
(a) Personal Ledger:
 Debtor’s Ledger
 Creditor’s Ledger

(b) Impersonal Ledger

 Cash Book
 General Ledger
o Nominal Ledger
o Private Ledger

Personal Ledger: The ledger where the details of all transactions about persons
who are related to the accounting unit are recorded is called Personal Ledger.

Impersonal Ledger: The ledger where details of all transactions about assets,
income & expenses, etc., are recorded is called Impersonal Ledger.

Again, Personal Ledger may be divided into two groups:

Viz. (a) Debtors‘ Ledger, and (b) Creditors‘ Ledger.
I) Debtors’ Ledger: The ledger where the details of transactions about the
persons to whom goods are sold, cash is received, etc., are recorded is called
Debtors‘ Ledger.

II) Creditors’ Ledger: The ledger where the details of transactions about the
persons from whom use purchased goods on credit, pay to them, etc., are
recorded, is called Creditors‘ Ledger.

Impersonal Ledger may, again be divided into two group, viz, (a) Cash Book;
and (b) General Ledger.
I) Cash Book: The book wherein all cash & bank transactions are recorded is
called Cash Book.

II) General Ledger: The ledger where all transactions relating to real accounts,
nominal accounts, details of Debtors‘ Ledger and Creditors‘ Ledger are recorded
is called General Ledger.
General Ledger may again be divided into two groups, viz, Nominal Ledger &
Private Ledger.

I) Nominal Ledger: The ledger where all transactions relating to income and
expenses are recorded is called Nominal Ledger.

II) Private Ledger: The Ledger where all transactions relating to assets and
liabilities are recorded is called Private Ledger.

Unit 3: TRIAL BALANCE:

INTRODUCTION:
Preparation of trial balance is the third phase in the accounting process. After
posting the accounts in the ledger, a statement is prepared to show separately
the debit and credit balances. Such a statement is known as the trial balance.
It may also be prepared by listing each and every account and entering in
separate columns the totals of the debit and credit sides. Whichever way it is
prepared, the totals of the two columns should agree. An agreement indicates
reasonable accuracy of the accounting work; if the two sides do not agree, then
there is simply an arithmetic error(s).

This follows from the fact that under the Double Entry System, the amount
written on the debit sides of various accounts is always equal to the amounts
entered on the credit sides of other accounts and vice versa. Hence the totals of
the debit sides must be equal to the totals of the credit sides. Also total of the
debit balances will be equal to the total of the credit balances. Once this
agreement is established, there is reasonable confidence that the accounting
work is free from clerical errors, though is not proof of cent per cent accuracy,
because some errors of principle and compensating errors may still remain.
Generally, to check the arithmetic accuracy of accounts, trial balance is
prepared at monthly intervals. But because double entry system is followed,
one can prepare a trial balance any time. Though a trial balance can be
prepared any time but it is preferable to prepare it at the end of the accounting
year to ensure the arithmetic accuracy of all the accounts before the
preparation of the financial statements. It may be noted that trial balance is a
statement and not an account.

If Trial Balance does not tally, then it is artificially tallied by opening Suspense
Account. Later on, errors are rectified and Suspense Accounts get closed
automatically.

FEATURES OF TRIAL BALANCE:

(I) It is a list of debit and credit balances which are extracted from various ledger
accounts.
(II) It is a statement of debit and credit balances.
(III) The purpose is to establish arithmetical accuracy of the transactions
recorded in the Books of Accounts.
(IV) It does not prove arithmetical accuracy which can be determined by audit.
(V) It is not an account. It is only a statement of account.
(VI) It is not a part of the final statements.
(VII) It is usually prepared at the end of the accounting year but it can also be
prepared anytime as and when
required like weekly, monthly, quarterly or half-yearly.
(VIII)It is a link between the Books of Accounts, Profit and Loss Account and
Balance sheet

PREPARATION OF TRIAL BALANCE

(I) It may be prepared on a loose sheet of paper.
(II) The ledger accounts are balanced at first. They will have either “debit-
balance” or “credit balance” or “nil-balance”.
(III) The accounts containing debit-balance are written on the debit column, and
those with credit-balance are written on the credit column.
The sum total of both the balances must be equal for “Every debit has its
corresponding and equal credit”

LIMITATIONS OF TRIAL BALANCE

One should note that the agreement of Trial Balance is not a conclusive proof
of accuracy. In other words, in spite of the agreement of the trial balance some
errors may remain.

These maybe of the following types:

(i) Transaction has not been entered at all in the journal.
(ii) A wrong amount has been written in both columns of the journal.
(iii) A wrong account has been mentioned in the journal.
(iv) An entry has not at all been posted in the ledger.
(v) Entry is posted twice in the ledger.
Still, the preparation of the trial balance is very useful; without it, the
preparation of financial statement, the profit and loss account and the balance
sheet, would be difficult.
FORMS OF A TRIAL BALANCE

1) JOURNAL FORM: This form of a trial balance will have a format of Journal
Folio. It will have columns for serial number, name of the account, ledger
folio, debit amount and credit amount in the journal form. The ledger folio
will show the page number on which such account appears in the ledger.

Specimen of journal form of trial balance

Trial balance of _____________
As on _______________
Sr. Name of Account L/F Debit Credit
No Amount Amount

2) LEDGER FORM: This form of a trial balance has two sides, i.e., debit side and
credit side. In fact, the ledger form of a trial balance is prepared in the form
of an account. Each side of the trial balance will have particular like name of
the account column, folio column and amount column.

Specimen of journal form of trial balance

Trial balance of _____________
As on _______________
Date Name of LF Amount Date Name of LF Amount
Account Account

METHODS OF PREPARATION OF TRIAL BALANCE

1. TOTAL METHOD
Under this method, every ledger account is totalled and that total amount (both
of debit side and credit side) is transferred to trial balance. In this method, trial
balance can be prepared as soon as ledger account is totalled. Time taken to
balance the ledger accounts is saved under this method as balance can be
found out in the trial balance itself. The difference of totals of each ledger
account is the balance of that particular account. This method is not
commonly used as it cannot help in the preparation of the financial
statements.

2. BALANCE METHOD
Under this method, every ledger account is balanced and those balances only
are carried forward to the trial balance. This method is used commonly by the
accountants and helps in the preparation of the financial statements. Financial
statements are prepared on the basis of the balances of the ledger accounts.
3. COMPOUND METHOD:
Under this method, totals of both the sides of the accounts are written in the
separate columns. Along with this, the balances are also written in the separate
columns. Debit balances are written in the debit column and credit balances
are written in the credit column of the trial balance. This method also is not
commonly used.
 MULTIPLE CHOICE QUESTIONS
1) Which of the following is not a function of accounting:
(a) Keeping systematic record
(b) Protecting properties of business
(c) Maximizing the results
(d) Meeting legal requirements

2) The system of recording transactions based on dual concept is called:

(a) Double account system
(b) Single entry system
(c) Double entry system
(d) Cash system

3) A person who owes money to the business is a ______________.

(a) Debtor
(b) Creditor
(c) Investor
(d) Promoter

4) Assets are held in the business for the purpose of:

(a) Resale
(b) Conversion into Cash
(c) Earning Revenue
(d) None

5) Which of the following is not dependent on accounting?

(a) Management Accounting
(b) Cost Accounting
(c) Financial Accounting
(d) Book keeping

6) If nothing is written in the financial statements about the three fundamental

assumptions, then it could be presumed that:
(a) They have not been followed
(b) They have been followed
(c) They have been followed to some extent.
(d) None

7) Which of the following is not a subfield of accounting?

(a) Management accounting
(b) Cost accounting
(c) Book keeping
(d) Financial accounting

8) Users of accounting information includes:

(a) Creditors
(b) Customers
 (c) Lenders
(d) All of the above

9) Accounting cycle starts with _____ends with________.

(a) Recording of transactions, preparation of final accounts
(b) Recording of transactions, posting them in ledgers
(c) Recording and posting of transactions, preparation of final accounts
(d) None of the above

10) Purchase of Machinery for cash:

(a) Decreases total Assets
(b) Increases total Assets
(c) Retains total assets unchanged
(d) Decreases total liabilities

11) Which method of accounting is commonly adopted by business concerns:

(a) Cash Method of Accounting
(b) Mercantile Method of Accounting
(c) Special Method of Accounting
(d) Systematic Method of Accounting

12) Capital brought in by the proprietor is an example of:

(a) Increase in Asset and increase in liability
(b) Increase in Liability and decrease in asset
(c) Increase in asset and decrease in liability
(d) Increase in one asset and decrease in another asset

13) Net profit or loss will be derived at _____Stage of Accounting.

(a) Classifying
(b) Interpretation
(c) Recording
(d) Summarizing

14) Which of the following provide framework and accounting policies so that
the financial statements of different enterprises become comparable?
(a) Business Standards
(b) Accounting Standards
(c) Central Government Standards
(d) Market Standards

15) Which of these is not available in the financial statements of a company?

(a) Total Sales
(b) Total Profit and Loss
(c) Capital
(d) Production Capacity

16) Selection of inappropriate accounting policy may lead to:

 (a) Understatement of performance
(b) Overstatement of performance
(c) Understatement or overstatement of Performance
(d) None

17) The problems related to price rise are handled under:

(a) Management Accounting
(b) Cost Accounting
(c) Financial Accounting
(d) Inflation Accounting

18) Double Accounting system owes its origin to:

(a) Lucas Pacioli
(b) Adam Smith
(c) Kohler
(d) Karl Marx

19) At the end of the financial year, Mr. X earns a profit of ` 57,000 in his
business. This is:
(a) a transaction
(b) an event
(c) a transaction as well as event
(d) neither a transaction nor an event

20) On January 1, Ram paid rent of ` 10,000. This can be classified as:
(a) An Event
(b) A Transaction
(c) A Transaction as well as an Event
(d) Neither a Transaction nor an Event

21) On March 31, 2007 after sale of goods Worth ` 12,00,000, there is a
closing stock of `25,000. This closing stock is:
(a) An Event
(b) A Transaction
(c) A Transaction as well as an Event
(d) Neither a transaction nor an Event

22) There are ______________generally accepted measurement bases or

valuation principles:
(a) Two
(b) Three
(c) Four
(d) Five

23) On 31st December 2005, Ashok Ltd purchased a machine from Mohan Ltd
for ` 1,75,000. This is:
(a) a transaction
 (b) An event
(c) None of these
(d) Both transaction as well as event

24) The process of recording a transaction in the journal is called:

(a) Posting
(b) Tallying
(c) Journalizing
(d) Casting

25) Journal is a book of:

(a) Original entry
(b) Secondary entry
(c) All cash transactions
(d) All non-cash Transactions

26) Which one of the following is a personal account:

(a) Bills Receivable account
(b) Livestock account
(c) Goodwill account
(d) Outstanding salaries account

27) L.F (i.e. Ledger Folio column ) in the journal is filled at the time of:
(a) Journalizing
(b) Balancing
(c) Posting
(d) Casting

28) Cash book is a:

(a) Subsidiary book
(b) Subsidiary journal and ledger
(c) Ledger account
(d) None of these

29) Cash book does not record:

(a) Credit purchases
(b) Credit sales
(c) Outstanding expense
(d) All of above

30) Closing entries are recording in:

(a) Cash book
(b) Ledger
(c) Journal Proper
(d) Balance sheet

31) The following is entered in journal proper:

 (a) Trade discount allowed
(b) Trade discount received
(c) Cash Discount Allowed
(d) Opening entry

32) The balance in the petty cash book is:

(a) An expense
(b) A profit
(c) An asset
(d) A liability

33) Insurance unexpired account is a:

(a) Real Account
(b) Personal Account
(c) Nominal Account
(d) None of these

34) Bad Debts recovered Account is a:

(a) Real
(b) Personal
(c) Nominal
(d) None

35) Interest Received in Advance Account is a:

(a) Real
(b) Personal
(c) Nominal
(d) None

36) Journal records the transactions of the firm in a:

(a) Analytical Manner
(b) Chronological manner
(c) Periodical Manner
(d) Summarized Manner

37) Proprietor’s Account is _______Account.

(a) Real
(b) Nominal
(c) Personal
(d) None of these

38) Purchase of second hand computer on credit by a cloth merchant will be

recorded in:
(a) Journal Proper
(b) Cash Book
(c) Purchase Book
(d) None of the above
39) Unexpired expense is______ Account.
(a) Real
(b) Personal
(c) Nominal
(d) Representation personal

40) Narration is given along with journal entry:

(a) To signify the impact of entry on profitability
(b) To disclose the profit or loss of the transaction
(c) To give a precise explanation for proper understanding of the entry
(d) To secretly understand the inner meaning of entries

41) Which of the following is not a real account?

(a) Cash
(b) Investment
(c) Outstanding rent
(d) Purchase Account

42) Outstanding salary is a:

(a) Real Account
(b) Personal Account
(c) Representative Personal Account
(d) Nominal Account

43) Goods destroyed by Fire Account is a:

(a) Real
(b) Personal
(c) Nominal
(d) None

44) Bank overdraft Account is a:

(a) Personal
(b) Real
(c) Nominal
(d) Representative personal

45) Which of the following is not an example of nominal account?

(a) Outstanding liability account
(b) Salary account
(c) Interest paid account
(d) Interest received account

46) Value of goods drawn by proprietor should be credited to:

(a) Capital account
(b) Sales account
(c) Drawing account
 (d) Purchase account

47) Ledger records transaction in:

(a) A chronological Order
(b) Analytical Order
(c) Both of the above
(d) None

48) The credit balance of a personal account shows:

(a) Cash in hand
(b) The amount payable
(c) Income
(d) Amount receivable

49) Purchase return account always show a ______Balance

(a) Debit
(b) Credit
(c) Either a or b
(d) None

50) Ledger book is popularly known as:

(a) Secondary books of accounts
(b) Principal Books of accounts
(c) Subsidiary Book of accounts
(d) None

51) Cash account is a:

(a) Personal Account
(b) Real Account
(c) Nominal Account
(d) None of the above

52) Trial balance is prepared on :

(a) End of the year
(b) A particular Date
(c) For the period ending
(d) Both a and b

53) Balances of accounts are transferred to _________.

(a) Trial Balance
(b) Trading account
(c) Profit and Loss Account
(d) Balance Sheet

54) Difference of totals of both debit side and credit side of Trial Balance is
transferred to :
(a) Trading account
 (b) Suspense Account
(c) Difference Account
(d) Miscellaneous Account

55) Trail Balance creates _________accuracy.

(a) Principle
(b) Arithmetical
(c) Clerical
(d) None

56) Which of the following is a method of preparing Trial Balance:

(a) Total Method
(b) Balance Method
(c) Compound Method
(d) All of above

57) Purchase of fixed asset on credit basis is recorded in:

(a) Purchase book
(b) Cash book
(c) Journal proper
(d) Sales Book

58) Small payment are recorded in a book called:

(a) Cash book
(b) Small payments book
(c) Purchase book
(d) Petty cash book

59) If the debit and credit aspects of a transaction are recorded in cash book
it is a:
(a) Contra Entry
(b) Simple Entry
(c) Double Entry
(d) Single Entry

60) Capital receipts are represented in:

(a) Balance sheet
(b) Trading account
(c) Profit and loss account
(d) Manufacturing account

61) Recovery of bad debt is a:

(a) Revenue Receipt
(b) Capital Receipt
(c) Capital expenditure
(d) Revenue expenditure
62) Share premium is a:
(a) Capital receipt
(b) Revenue receipt
(c) Deferred revenue receipt
(d) None of these

63) Contingent liabilities are shown:

(a) As a current liability
(b) As capital fund
(c) As footnotes to balance sheet
(d) As reserves

64) Income tax demand disputed by a company is:

(a) Current liability
(b) Contingent Liability
(c) Long term Liability
(d) None of these

65) A withdrawal of cash from business by the proprietor should be debited

to:
(a) Drawings
(b) Capital
(c) Purchase
(d) Cash

66) Normally, the following accounts are balanced:

(a) Personal and nominal
(b) Real and nominal
(c) Personal and real
(d) All accounts

67) In ledger:
(a) Only personal account are maintained
(b) Only nominal accounts are maintained
(c) Only real and personal accounts are maintained
(d) All personal, real and nominal accounts are maintained

68) Which is entered on the debit side of cash book?

(a) Trade discount allowed
(b) Trade discount received
(c) Cash discount allowed
(d) Cash discount received

69) Salaries due for the month will appear:

(a) On the receipt side of the cash book
(b) On the payment side of the cash book
(c) As a contra entry
 (d) Nowhere in the cash book

70) When a firm maintains a three column cash book, it need not maintain:
(a) Cash account
(b) Bank account
(c) Discount account
(d) Both cash and bank account in the ledger

71) The total of the discount column of the debit side of the cash book is posted
to the:
(a) Credit of the discount allowed account
(b) Debit of the discount received account
(c) Credit of the discount received account
(d) Debit of the discount allowed account

72) Double entry of which of the following transactions is completed in the

cash book itself:
(a) Paid rent by cheque
(b) Withdrew from bank for personal use
(c) A cheque received from a customer is deposited into the bank on the same
day.
(d) Cash deposited into bank

73) Goods taken by proprietor for personal use will be recorded in:
(a) Purchase Book
(b) Sales Book
(c) Cash Book
(d) Journal Proper

74) Salary due for the month of March 2015 will be recorded in:
(a) Sales Book
(b) Cash Book
(c) Purchase Book
(d) Journal Proper

75) Rectifying Entries are passed in:

(a) Cash Book
(b) Ledger
(c) Journal Proper
(d) Balance Sheet

76) Total of journal proper will be debited to:

(a) Cash account
(b) Customer’s account
(c) Supplier’s account
(d) None of above
77) Wages account is an
example of:
(a) Personal account
(b) Real account
(c) Nominal account
(d) None of the above

78) Which of the following would be considered an internal user of the

financial statement?
(a) Shareholder
(b) Creditor
(c) Debtor
(d) Finance Manager

79) Which of the following is not a Subsidiary Book?

(a) Cash Book
(b) Bill Receivable Book
(c) Purchase Return Book
(d) Bank Book

80) Credit Sale of Fixed Asset on Credit will be recorded in which Subsidiary
Book?
(a) Purchase Book
(b) Cash Book
(c) Journal Proper
(d) Any of above

81) Which of the following column of three column cash book is not balanced
but totalled?
(a) Cash
(b) Bank
(c) Discount
(d) All of above

82) Which discount is not recorded in the books?

(a) Trade Discount
(b) Cash Discount
(c) Both of above
(d) None of above

83) Advantages of Petty Cash Book are:

(a) Saving of time of the chief cashier;
(b) Saving in labour in writing up the cash book and posting into the ledger;
(c) Control over small payments.
(d) All of above

84) Advantages of Subsidiary Books are:

 (a) Division of Work
(b) Specialization
(c) Saving of Time
(d) All of above

85) Which of the following is not a method of preparing Trial balance?

(a) Total Method
(b) Balance Method
(c) Carry Forward Method
(d) Compound Method

86) Arrange the following steps of Accounting Cycle in Sequence:

(i) Classifying
(ii) Summarizing
(iii) Recording
(a) (i), (ii), (iii)
(b) (ii), (i), (iii)
(c) (iii), (i), (ii)
(d) (i), (iii), (ii)

87) Assets as mines, quarries, etc., that become exhausted or reduce in value
by their working are called_________________:
(a) Fictitious Assets
(b) Tangible Assets
(c) Wasting Assets
(d) None of above

88) Amount which cannot be recovered from Debtors is called as

_________________:
(a) Good Debts
(b) Doubtful Debts
(c) Bad Debts
(d) None of above

89) Creditors are classified under __________________:

(a) Equity
(b) Long term borrowings
(c) Non-Current Liabilities
(d) Current Liabilities

90) If for a single transaction, only one account is debited and one account is
credited, it is known as _____________________.
(a) Single Entry
(b) Simple Entry
(c) Compound Entry
(d) Combined Entry
91) If the transaction requires more than one account to be debited or more
than one account to be credited, it is known as ___________________:
(a) Double Entry
(b) Simple Entry
(c) Compound Entry
(d) Combined Entry

92) Investments Account is a _____________________:

(a) Nominal Account
(b) Personal Account
(c) Real Account
(d) None of above

93) Which of these is not a function of Financial Accounting?

(a) To provide financial information to the users of financial statements
(b) To portray gloomy picture of the business in order to evade tax liabilities
(c) To keep systematic records of business transactions
(d) To depict a true and fair view of financial position of the business

94) Which of the following is a branch of accounting?

(i) Human Resources Accounting
(ii) Social Responsibility Accounting
(iii) Security Accounting
(a) (i) & (ii)
(b) (ii) & (iii)
(c) (i) & (iii)
(d) All of above

95) The Rule for Nominal Accounts is:

(a) Debit the receiver, Credit the Giver
(b) Debit what Comes in, Credit what goes out
(c) Debit all expenses & losses, Credit All Income & Gains
(d) Any of above

96) The Rule for Real Accounts is:

(a) Debit the receiver, Credit the Giver
(b) Debit what Comes in, Credit what goes out
(c) Debit all expenses & losses, Credit All Income & Gains
(d) Any of above

97) The Rule for Personal Accounts is:

(a) Debit the receiver, Credit the Giver
(b) Debit what Comes in, Credit what goes out
(c) Debit all expenses & losses, Credit All Income & Gains
(d) Any of above

98) The debit balance in Cash account shows:

 (a) Amount receivable
(b) Amount Payable
(c) Cash in Hand
(d) Cash at bank

99) Contra Entry appears in:

(a) Purchase Book
(b) Sales book
(c) Cash Book
(d) Journal Proper

100) Adjustment entries passed at the end of the year are passed in
__________________:
(a) Cash Book
(b) Ledger
(c) Journal Proper
(d) All of above

101) Outstanding Salary of ` 10,000 is to be provided in the accounts will be

recorded in:
(a) Cash Book
(b) Journal Proper
(c) Sales book
(d) Expenses Book

102) Depreciation on Fixed Assets is to be charged at the end of the year will
be recorded in:
(a) Asset book
(b) Expenses Book
(c) Cash Book
(d) Journal Proper

103) Expenses the benefit of which is received in the same year is called as
_________:
(a) Normal Expense
(b) Revenue Expense
(c) Capital Expense
(d) Regular Expense

104) Expenses the benefit of which is received for more than one year is called
as ______:
(a) Normal Expense
(b) Revenue Expense
(c) Capital Expense
(d) Regular Expense

105) Revenue expenses forms part of:

 (a) Profit & Loss
(b) Balance Sheet
(c) Both of above
(d) None of above

106) Capital expenditure forms part of:

(a) Profit & loss
(b) Balance Sheet
(c) Both of above
(d) None of above

107) Under Single Entry System, ________________________accounts are

maintained:
(a) Real, Personal & Nominal
(b) Real & Personal only
(c) Cash & Personal only
(d) Nominal & Real only

108) Purchase of a Fixed Asset is a _______________________:

(a) Regular Expenses
(b) Revenue Expenses
(c) Capital Expense
(d) Loss

109) Debtors can be classified as _________________:

(a) Good Debts
(b) Doubtful Debts
(c) Bad Debts
(d) All of above

110) Capital Assets which has no physical existence is called

as________________:
(a) Fixed Assets
(b) Tangible Assets
(c) Intangible Assets
(d) Wasting Assets

111) _____________________is not recorded in the books of account:

(a) Current Liability
(b) Contingent Liability
(c) Provision
(d) Loss