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## Friday, January 17, 2014

### IGNOU SOLVED ASSIGNMENT: PCO - 01 (2012 - 2013)

Accounting Equation:
The accounting equation is the fundamental equation upon which all double entry accounting is based. Whatever business possesses in the form of assets is financed by proprietor or by outsiders. This equation expresses the equality of assets on one side and the claims of outsiders (liabilities) and owners or proprietors on the other side. Accounting equation signifies that the assets of a business are always equal to the total of liabilities and capital. This relationship is expressed as under:
Assets = Liabilities + Capital
“Accounting Equation remains intact under all circumstances”. This statement can be proved through following examples.

Example.1. Suppose Mr. X starts his business and the following transactions take place:
He started business with cash Rs. 5, 00,000 have been introduced by Mr. X in terms of cash, which is the capital for the business concern. Hence on one hand, the asset (cash) has been created to the extent of Rs. 5, 00,000.
 Assets = Capital + Liabilities Cash = 500000 500000 Nil

Example.2.He purchased furniture for cash worth Rs. 50,000.
This transaction has its effect only on the assets, as one asset has been purchased against the other. In this transaction, furniture is purchased against cash given. Furniture and cash both are assets. Hence furniture is introduced by Rs. 50,000.
 Assets = Capital + Liabilities Cash= 500000-50000=450000 Furniture = 50000 500000 Nil

Example.3. He purchased goods for cash Rs. 10,000
This transaction has its effect only on the assets, as one asset has been purchased against the other. In this transaction, goods are purchased against cash given. Goods (Stock) and cash both are assets. Hence Stock is introduced by Rs. 10,000.
 Assets = Capital + Liabilities Cash= 450000 – 10000= 440000 Furniture = 50000    Stock = 10000 500000 Nil

Example.4. Rent paid Rs. 10,000
This transaction has its effect on cash and capital since rent is expenses and all the expenses directly affects capital.
 Assets = Capital + Liabilities Cash= 440000 – 10000= 430000 Furniture = 50000    Stock = 10000 500000 – 10000 = 490000 Nil

Example.5. Goods purchased on credit Rs. 10000.
This transaction has its effect on stock and creditors. Goods purchased are assets and since cash is not paid, the amount of goods purchased is shown as liability.
 Assets = Capital + Liabilities Cash= 440000 – 10000= 430000 Furniture = 50000    Stock = 10000 + 10000= 20000 500000 – 10000 = 490000 10000

From the above examples, it is clear that Accounting Equation is true under all circumstances.

Q.N.2. Write short notes on the following
a)  Principle of Consistency: The convention of consistency refers to the state of accounting rules, concepts, principles, practices and conventions being observed and applied constantly, i.e., from one year to another there should not be any change. If consistency is there, the results and performance of one period can he compared easily and meaningfully with the other. It also prevents personal bias as the persons involved have to follow the consistent rules, principles, concepts and conventions. This convention, however, does not completely ignore changes. It admits changes wherever indispensable and adds to the improved and modern techniques of accounting.
b) Disclosure: The convention of disclosure stresses the importance of providing accurate, full and reliable information and data in the financial statements which is of material interest to the users and readers of such statements. This convention is given due legal emphasis by the Companies Act, 1956 by prescribing formats for the preparation of financial statements. However, the term disclosure does not mean all information that one desire to get should be included in accounting statements. It is enough if sufficient information, which is of material interest to the users, is included.

Single column Cash Book
 Date Receipts Amount Date Payments Amount Mar. 1 Mar. 5 Mar. 15 Mar. 26 To Capital A/c To Sales A/c To Sales A/c To Commission A/c 20,000 4,000 8,000 600 Mar. 2 Mar. 13 Mar. 18 Mar. 20 Mar. 24 Mar. 28 Mar. 31 Mar. 31 By Purchases A/c By Ravi’s By Furniture A/c By Wages A/c By Rent A/c By Drawings A/c By Salary A/c By Balance C/d 5,000 7,000 6,000 380 400 1,000 900 11,920 32,600 32,600

After posting the accounts in the Ledger, a statement is prepared to show separately the debit and credit balances and to check the arithmetic accuracy of the accounts of a certain periods such a statement is known as the Trial Balance.
The agreement of a trail balance ensures arithmetical accuracy only.  A concern can prepare trail balance at any time, but its preparation as on the closing date of an accounting year is compulsory.
According to M.S. Gosav “Trail balance is a statement containing the balances of all ledger accounts, as at any given date, arranged in the form of debit and credit columns placed side by side and prepared with the object of checking the arithmetical accuracy of ledger postings”.
Trial Balance is not a complete proof of arithmetical accuracy of account. A Trial Balance in which the credit and debit accounts match does not prove that, all transactions have been recorded in the proper accounts. For example, the wages paid for the installation of machinery had been erroneously recorded by debiting the wages account in the place of machinery account, the Trial Balance would still agree.
Similarly, an agreed Trial Balance does not prove that all transactions have been recorded in the books of original entry. For example, a credit sale invoice were to be completely omitted from being recorded in the sales day book, the error would not be disclosed in the Trial Balance.
To conclude, we can say that a trial balance should not be recorded as a conclusive proof of the correctness of the books of account.

Errors which are not disclosed by a Trial Balance/Limitations of a Trial Balance
Errors of Commission: These are the errors which are committed due to the wrong posting of wrong transaction, wrong totaling or balancing of the accounts, wrong casting of the subsidiary books. Such errors are called Errors of Commission.
Errors of Omission: The errors of omission may be committed at the time of recording the transaction in the books of original entry or while posting to the ledger. These can be of two types:
i) Errors of complete omission
ii) Errors of partial commission
When a transaction is completely omitted from recording in the books of original record, it is an error of complete omission. When a transaction is partially omitted from posting in ledger, it is an error of partial omission.
Error of principle: Accounting entries are recorded as per the generally accepted accounting principles. If any of these principles are violated or ignored, errors resulting from such violation are known as errors of principle. An error of principle may occur due to incorrect classification of expenditure or receipt between capital and revenue.
Compensating errors: When two or more errors are committed in such a way that the effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors. Such errors do not affect the tally of the trial balance.

Bank Reconciliation Statement

The statement which is prepared for verifying and reconciling the bank balances, shown by the cash book and pass book on a certain date and incorporates the reasons of disagreement between them is called a bank reconciliation statement.

Utility of B.R.S

a)      It gives an authentic proof of the accuracy of the cash and pass book balances.

b)      Entries in both the book are automatically checked.

c)       The cash book may be made up- to-date by recording some hitherto unknown entries.

d)      It helps to detect any mistake in the cash book and pass book

How to Prepare Bank Reconciliation Statement: The following steps are taken to prepare the bank reconciliation statement:

(i) Favourable balances: When debit balance as per cash book is given:

(a) Take balance as a starting point say Balance as per Cash Book.

(b) Add all transactions that have resulted in increasing the balance of the pass book.

(c) Deduct all transactions that have resulted in decreasing the balance of pass book.

(d) Extract the net balance shown by the statement which should be the same as shown in the pass book.

In case balance as per pass book is taken as starting point all transactions that have resulted in increasing the balance of the Cash book will be added and all transactions that have resulted in decreasing the balance of Cash book will be deducted. Now extract the net balance shown by the statement which should be the same as per the Cash book.

(ii) Unfavorable Balances: When Credit balance as per cash book is given:
(a) Take overdraft as a starting point say Overdraft as per Cash Book.

(b) Add all transactions that have resulted in decreasing the balance of the pass book.

(c) Deduct all transactions that have resulted in increasing the balance of pass book.

(d) Extract the net overdraft shown by the statement which should be the same as shown in the pass book.

In case overdraft as per pass book is taken as starting point, all transactions that have resulted in decreasing the balance of the Cash book will be added and all transactions that have resulted in increasing the balance of Cash book will be deducted. Now extract the net overdraft shown by the statement which should be the same as per the Cash book.

Example of Bank Reconciliation Statement
Prepare Bank Reconciliation Statement from the detail given below:
i) Overdraft shown as per passbook on Dec.31.2005   Rs.20, 000.
ii) Bank chargers for the above period also debited in the pass book Rs.200
iii) Cheque issued but not encashed prior to Dec.31.2005 amounted Rs.4, 000.
iv) Interest on investment collected by bank and credited in pass book Rs.700.
v) Cheque paid into bank was not cleared before Dec.31.2005 were Rs.2, 200.

Bank Reconciliation statement as on Dec.31, 2005
 Particulars Amount Overdraft as per Pass Book Add: (i) Cheque issued but not enchased prior to Dec.31.2005  ii) Interest on investment collected by bank and credited in pass book but not entered in cash book Less: (i) Bank chargers for the above period also debited in the pass book (ii)Cheque paid into bank was not cleared before Dec.31.2005 Overdraft as per Cash Book 20000 4000 700 200 2200 22300