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Wednesday, January 15, 2014

IGNOU SOLVED ASSIGNMENT: ECO - 02 (2012 - 2013)


Answer of Q.N.1(a).
Accounting
Accounting is the analysis and interpretation of book-keeping records. It includes not only maintains of accounting records but also the preparation of financial and economic information. Which involves the measurement of transaction and other events pertaining to a business. “Accounting system is a measure of collecting summarizing, analyzing and reporting in monetary terms the information of the business”
According to the American institute of certified public accounts,”It is The arts of recordings, classifying and summarizing in a significant manner and in terms of money transaction and events which in parts, at least of a financial charter and interpreting the result thereof”.
From the above discussion it is clear that accounting is an of analysis and interpretation of financial records
Accounting concepts which are followed at the time of recording transaction:
The basis aims of book-keeping and accountancy are to record the business transactions and events in a summarised form. Transactions are recorded in chronological order in proper books of accounts book-keeping. Accountancy is a science based on fundamental truth and rules or conducts or procedures which are universally accepted. These rules of conducts to record business transactions are called accounting concepts and conventions.
The term ‘concept’ is used to denote accounting postulates, i.e., basic assumptions or conditions upon the edifice of which the accounting super-structure is based. The following are the common accounting concepts adopted by many business concerns.
i)        Business Entity Concept
ii)       Money Measurement Concept
iii)     Going Concern Concept
iv)     Dual Aspect Concept
v)      Periodicity Concept
vi)     Historical Cost Concept
vii)   Matching Concept
viii)  Realisation Concept
ix)     Accrual Concept

i) Business Entity Concept: Business entity concept implies that the business unit is separate and distinct from the persons who provide the required capital to it. This concept can be expressed through an accounting equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself owns the assets and in turn owes to various claimants.
ii) Money Measurement Concept: According to this concept, only those events and transactions are recorded in accounts which can be expressed in terms of money. Facts, events and transactions which cannot be expressed in monetary terms are not recorded in accounting. Hence, the accounting does not give a complete picture of all the transactions of a business unit.
iii) Going Concern Concept: Under this concept, the transactions are recorded assuming that the business will exist for a longer period of time. Keeping this in view, the suppliers and other companies enter into business transactions with the business unit. This assumption supports the concept of valuing the assets at historical cost or replacement cost.
iv) Dual Aspect Concept: According to this basic concept of accounting, every transaction has a two-fold aspect, Viz., 1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry system is that every debit has a corresponding and equal amount of credit. This is the underlying assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or Capital = Assets – Liabilities, will further clarify this concept, i.e., at any point of time the total assets of the business unit are equal to its total liabilities.
V) Periodicity Concept: Under this concept, the life of the business is segmented into different periods and accordingly the result of each period is ascertained. Though the business is assumed to be continuing in future, the measurement of income and studying the financial position of the business for a shorter and definite period will help in taking corrective steps at the appropriate time. Each segmented period is called “accounting period” and the same is normally a year.
vi) Historical Cost Concept: According to this concept, the transactions are recorded in the books of account with the respective amounts involved. For example, if an asset is purchases, it is entered in the accounting record at the price paid to acquire the same and that cost is considered to be the base for all future accounting.
vii) Matching Concept: The essence of the matching concept lies in the view that all costs which are associated to a particular period should be compared with the revenues associated to the same period to obtain the net income of the business.
viii) Realisation Concept: This concept assumes or recognizes revenue when a sale is made. Sale is considered to be complete when the ownership and property are transferred from the seller to the buyer and the consideration is paid in full.
ix) Accrual Concept: According to this concept the revenue is recognized on its realization and not on its actual receipt. Similarly the costs are recognized when they are incurred and not when payment is made. This assumption makes it necessary to give certain adjustments in the preparation of income statement regarding revenues and costs.

Answer of Q.N.1(b).
Journal
The word ‘Journal’ has been derived from the French word ‘JOUR’ means daily records. Journal is a book of original entry in which transactions are recorded as and when they occur in chronological order (in order of date) from source documents. Recording in journal is made showing the accounts to be debited and credited in a systematic manner.
In the words of E. L. Kolher, “A Journal is a chronological record of accounting transactions showing the names of the accounts that are to be debited or credited, the amounts of debits and credit, and any useful supplementary information about the transactions. It is analogous to a diary.”
Thus, the journal provides a date-wise record of all the transactions with details of the accounts and amounts debited and credited for each transaction with a short explanation, which is known as narration.
Ledger
Journal records all business transactions separately and date-wise. The transactions relating to a particular person, asset, expense or income are recorded at different places in the journal as they occur on different dates. Hence, it fails to bring the similar transactions together at one place. Thus, to have a consolidated view of the similar transactions different accounts are prepared in the Ledger.
A Ledger account may be defined as a summary statement of all the transactions relating to a person, asset, expense or income, which have taken place during a given period of time and show their net effect. So every entry recorded in the journal must be posted into the Ledger.  A ledger account is a statement shaped liked an English alphabet 'T' that systematically contains all financial transactions relating to either a particular person or thing for a certain period of time. It is the principal book of accounts.

Necessity or Utility of Journal
1. Direct recording of transactions in the ledger may result in committing errors and omissions and it would be difficult to correct them later on. Hence, Journal is necessary.
2. A complete record (i.e. Debit and credit aspects of each transaction) is available at one place.
3. As the transactions are recorded date wise, it facilitates quick and easy reference to any transaction, whenever necessary.
4. Narration to Journal entry explains the purpose of the entry and helps in understanding the transaction recorded.
5. Entries in the ledger can be made at leisure by the clerk concerned according to his convenience.
6. Cross checking between Journal and Ledger is facilitated to check the accuracy.
7. As the entries in the Journal are made from basic documents like invoices. Vouchers, receipts etc. The court considers the entries in the Journal as proof of transactions.


Answer of Q.N.2.
Joural Entries
In the books of Deven Verma
Date
Particulars

Amount
Amount
a.  
Purchases A/c
Sales A/c
To Suspense A/c
(For Goods purchased wrongly entered in sales book, now rectified)
Dr.
Dr.
400
400



800
b. 
Ramdas’s A/c
To Suspense A/c
(For Ramdas account wrongly credited by Rs. 340 instead of being debited by Rs. 430)
Dr.

770


770

c.  
Sales A/c
Suspense A/c
To Furniture A/c
(For the sale of furniture for Rs. 540 credited to sales book as Rs. 450)
Dr.
Dr.
450
90




540

d. 
Drawings A/c
To Purchases A/c
(for goods Taken by proprietor not entered in the books, now rectified)
Dr.

100

100
e. 
Krishan’s A/c
To Sales A/c
(For less amount of sales recorded in the sales book)
Dr.

27

27
f.   
Sales Return A/c
To Suspense A/c
(For the balance of sales return book not recorded in accounts)
Dr.

210


210

Suspense Account
Particulars
Amount
Particulars
Amount
To Difference in Trial Balance
To Furniture
To Balance C/d
1270
90
420
By Purchases
By Sales
By Ramdas’s
By Sales Return
400
400
770
210

1780

1780


Answer of Q.N.4.
Total Debtors account
Particulars
Amount
Particulars
Amount
To Balance B/d
To Credit Sales
5300
4700
By Cash (received from debtors)
By Balance C/d
4000
6000

10000

10000

Total Creditors account
Particulars
Amount
Particulars
Amount
To Cash (Paid to creditors)
To Balance C/d
2700
1900
By Balance B/d
By Credit purchase
1500
3100

4600

4600

Statement of Affairs (Opening)
Liabilities
Amount
Assets
Amount
Creditors
Overdraft
Opening Capital (Balancing Figure)
1500
600
7500
Building
Debtors
Stock
2500
5300
1800

9600

9600

Trading account and Profit & loss account
For the year ended on 31 – 12 - 2010
Particulars
Amount
Particulars
Amount
To Opening stock
To Purchase
To Gross Profit
1800
3100
2400
By Sales
By Closing Stock
4700
2600


7300

7300
To Salaries
To General Expenses
To Depreciation
To Interest on Loan
To Net Profit
300
900
125
45
1030
By Gross Profit
2400

2400

2400

Balance Sheet
As on 31 – 12 - 2010
Liabilities
Amount
Assets
Amount
Capital                                                     7500           
Add: Net profit                                      1030
Add: Additional Capital                         300
Less: Drawings                                        400
Creditors
Loan From C                                          1500
Add: Interest on Loan                              45



8430
1900

1545
Debtors
Building                                              2500
Less: Depreciation                              125
Stock
Bank Balance
6000

2375
2600
900

11875

11875


Answer of Q.N.5(a)
Income and Expenditure Account
It is the summary of income and expenditure for the accounting year. It is just like a profit and loss account prepared on accrual basis in case of the business organizations. It includes only revenue items and the balance at the end represents surplus or deficit. The Income and Expenditure Account serves the same purpose as the profit and loss account of a business organization does. All the revenue items relating to the current period are shown in this account, the expenses and losses on the expenditure side and incomes and gains on the income side of the account. Income and Expenditure Account is a Nominal Account which is prepared at the end of the accounting period by a Not-For-Profit Organisation to ascertain the surplus, i.e., excess of income over expenditure, or the deficit, i.e.  Excess of expenditure over income. which is transferred to the capital fund shown in the balance sheet.

Features of Income and Expenditure Account.
i)        It is a nominal account which reveals either surplus, i.e., excess of expenditure over income.
ii)       It is prepared for an accounting period based on the accrual concept following the matching principle.
iii)     Only revenue items are considered, while capital items are excluded.
iv)     Both cash and non-cash items, such as depreciation, are recorded.

Difference between Receipts and Payments Account and Income and Expenditure Account
Basic
Receipt and Payment Account
Income and Expenditure Account
1. Nature
It is a Real Account
It is nominal Account.
2. Recording
It records receipt and payments of both capital and revenue nature.
It records incomes and expense of revenue nature only.
3. Opening Balance
Balance at the beginning represents cash and bank balance at the beginning of the year.
There is no balance at beginning.
4. Closing Balance
Balance at the end represents cash and bank balance at the end of the year.
Balance at the end represents either surplus or deficit.
5. Period of items
It records the items received or paid during the current year, whether relating to past, present or future periods.
It includes expenses or incomes relating to current year only.
6. Non cash items
It ignores non-cash items like depreciation, credit purchase, credit sales etc.
It records non-cash items also.
7. Balance of account
It usually shows a debit balance.
It may show a debit or a credit balance.
8. Carrying forward
Closing balance is carried forward to the next period.
Closing balance is added to the capital fund.

Answer of Q.N.5(b).
Depreciation may be defined as permanent decrease in the value of assets due to  Use and /or the lapse of the time. According to Carter,”Depreciation may be defined as the permanent and gradual decrease in the   Value of an assets from any cause.’’

Methods of Depreciation classified under the following groups:-
(1)Uniform charge methods:
(a) Fixed installment method.
(b) Depletion method
(c) Machine hour rate method

(2)Declining charged method:
(a)Diminishing balance method
(b)Sum of years Digit method.
(c)Double Declining method

(3)Others method:
(a)Group Depreciation method
(b)Annuity method
(c)Inventory system of Depreciation
(d)Insurance policy method

Out of the methods mentioned above, most commonly used methods are straight line method and Written down value method which are explained below:

Straight-line Method
Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates the disposal value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portion of original cost in equal increments over that period. The disposal value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero or even negative. Disposal value is also known as scrap value or residual value.

Depreciation under this method is calculated by applying the following formula:
Depreciation = (cost of asset – scrap value)/ life of asset

Reducing Balance Method
Depreciation may be given as a fixed percentage annually and may be applied on cost in the first year, but in subsequent years applied on the reduced balance or net book value of the previous year. This method is called the diminishing balance method.

There are two methods of charging depreciation. Under 1st method fixed assets are shown at book value. In second method a separate account, provision for depreciation, is opened. In this method, Provision for Depreciation Account is opened and depreciation charged in this account instead of Asset Account. 

Following Journal entries are passed at the end of each accounting period:
(i) Depreciation Account                                                               Dr
                                To Provision for Depreciation Account
(for depreciation during the year)
(ii) Profit and Loss Account                                                          Dr
                                To Depreciation Account
(for transferring depreciation to profit and loss account)
In this treatment the balance of Asset Account remains same throughout its useful life. Provision for Depreciation is show liabilities side of Balance Sheet.