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Tuesday, May 23, 2017

IGNOU Solved Question Papers - ECO 02 (June' 2014)

Term-End Examination June, 2014
ECO-2 ACCOUNTANCY-I
Note: Attempt any four questions, including question no. 1 which is compulsory.
1. Attempt any two questions from the following: 7+7
(a) What are the advantages of accounting?
Ans: 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.
The main advantages of accounting are mentioned below:
  1. Accounting information is used by the management in taking various menageries at decision.
  2. It shows the operating efficiency i.e. net profit of business for a particular year.
  3. It shows the financial position of business on a particular data.
  4. Accounting data are accepted by the tax authorities as authentic and reliable. Hence they can be used as the basis for discharging tax liabilities.
  5. Accounting supplies financial data which are accepted by the insurance company as reliable figure for settlement of insurance claim.
  6. It is also helpful for financial institution who lends money to the business.
  7. It is also useful for owners of the business. It shows whether their investment is fruitful or not.
(b) Distinguish between Capital Expenditure and Revenue Expenditure with examples.
Ans: The main points of distinction between capital expenditure and revenue expenditure are follows.
  1. Purpose: Capital expenditure is incurred for acquisition or erection of fixed assets to used in the business. On the other hand, revenue expenditure is incurred for the day-to conduct of business.
  2. Earning Capacity: Capital expenditure increases the earning capacity of the business whereas revenue expenditure does not increase the earning capacity as it is incurred maintaining the existing earning capacity.
  3. Period of Benefit: The benefit of capital expenditure extends to more than one year, the benefit of revenue expenditure extends only to the current year.
  4. Accounting Treatment: Capital expenditure is shown in the Balance Sheet as an asset, the other hand, revenue expenditure is shown as an expense in the Trading Account or Pro and Loss Account.
  5. Nature: Capital expenditure is of a non-recurring nature because such expenditure is incurred every day. On the contrary, revenue expenditure is recurring in nature as it is incurred on day to day operations.
Examples of Capital Expenditure
  1. Purchase of furniture, office building etc.
  2. Purchase of additional furniture or machinery
  3. Purchase of patent right, copy rights etc.
Examples of Revenue Expenditure
  1. Payment of salaries
  2. Payment of rent, rates and taxes
  3. Purchases of goods
(c) Make a clear distinction between 'Sale' and 'Goods Sent on Consignment'.
Ans: Difference between Goods sent on Consignment and Sale:
Basis of Difference
Goods sent on Consignment
Sale
Ownership
In a consignment, the ownership remains which the principal.
The ownership passes to the buyer.
Relationship
The relationship between consignor and consignee is principal and the agent and continue till terminated.
The relations between buyer and seller terminated as soon as the goods are delivered and payment is made.
Return
In a consignment, goods may be returned at any time.
In a sale, the buyer cannot return the goods unless otherwise agreed.
Payment
In case of consignment payment is due as and when goods are sold, otherwise no payment is due.
In case of sale, payment is due immediately on sale or as agreed.
Account Sale
Account sale is prepared.
No need to prepare account sale


(d) What is Single Entry System of Book-keeping? How has Double Entry System removed its limitations?
Ans: Single entry system: It is defined as the method of accounting which does not follow the principle of double entry system .Under this method only one account is given debit or credit for each transaction. Under this method, only personal accounts are maintained and impersonal account may not be maintained in the books.
Double entry system removed the limitations of single entry in the following way
Merits of Double Entry System
Demerits of Single Entry System
Under this system, both aspect of each transaction are record.
Under this system, both aspect of each transaction are not recorded.
In this system, Personal, Real and Nominal accounts are kept fully.
In this system, only Personal Accounts are kept and Real and Nominal Accounts are ignored.
In this system, Cash book, General ledger, Debtors’ Ledger and Creditors’ Ledger are maintained.
In this system, only Debtors’ Ledger and creditors’ Ledger are kept. Cash book is also kept but personal transaction gets mixed up with business transaction.
Under this system, arithmetical accuracy can be checked by preparing Trial Balance at any moment of time.
Under this system, arithmetical accuracy cannot be checked because to Trial Balance can be prepared.
In this system, Trading, Profit and Loss Accounts and balance sheet can be prepared.
In this system, Trading, Profit And Loss Accounts and Balance sheet cannot be prepared.
For interpretation of financial statement, we can compute different ratios, if the accounts are maintained under this system.
Vital ratios cannot be computed, if the accounts are maintained under this system.
This system is scientific and follows certain rules.
This system is unscientific and does not follow any concrete rules.

2. (a) What are the Rules for recording business transactions in Journal? 6+6
(b) Pass the Journal Entries for the following:
(i) Credit sales to Sahil, 15,000.
(ii) Cash received from Sahil in full settlement of his account, Rs. 14,750.
(iii) Office rent due 5,000; paid only Rs. 3,000.
(iv) Loss of stock by fire, Rs. 8,500.
Journal Entries
Date
Particulars
L/F
Amount
Amount
(i)
Sahil’s A/c                                            Dr.
   To Sales A/c
(for credit Sales to Sahil’s)

1,50,000

1,50,000
(ii)
Cash A/c                                               Dr.
Discount allowed A/c                            Dr.
   To Sahil’s A/c
(for Cash received from Sahil in full settlement of his account)

14,750
250


15,000
(iii)
Rent A/c                                               Dr.
   To Cash A/c
   To Outstanding Rent A/c
(for office rent and due)

5,000

3,000
2,000
(iv)
Loss by fire A/c                                     Dr.
   To purchases A/c
(for loss of Stock by fire)

8,500

8,500


3. (a) What are the differences between 'Receipts and Payments Account' and 'Income and Expenditure Account'? 6+6
Ans: Receipts and Payments Account: A Receipts and Payments Account is a summary of bank and cash transaction. Receipts are shown on the left hand side while payments are shown on the right hand side. It starts with opening cash and bank balances and ends with their closing balances. All receipts and payments are recorded in this account whether these are of revenue nature or capital nature.
Income and Expenditure 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.
Difference between Receipts and Payments Account and Income and Expenditure Account
Basis
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. 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.
4. Non cash items
It ignores non-cash items like depreciation, credit purchase, credit sales etc.
It records non-cash items also.
5. Balance of account
It usually shows a debit balance.
It may show a debit or a credit balance.


(b) Make a distinction between Provisions and Reserves.
Ans: Provisions: The term ‘provision’ means an amount, which is written off, or retained, by way of providing for depreciation, renewals, diminution in the value of assets; or retained by way of providing for any unknown future liability of which the amount cannot be determined with reasonable accuracy.
Reserves: A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion or to meet future contingencies such as workmen compensation are called reserves.
Difference between reserves and provisions:
  1. Provision is made to meet known liability the  amount of which cannot be ascertained with substantial  accuracy. Whereas Reserve is created to meet unexpected losses and  contingencies likely to arise in future.
  2. Provision can be used only for meeting the specific  purpose for which it has been made. Whereas Reserve can be used for any purpose unless it is created for a specific purpose.
  3. Provision is a charge on profits and reduces the amount of net profits. Whereas, Reserves is an appropriation of profits and reflects undistributed profits.
  4. Provision is to be made even if there are no profits. Whereas Reserve is created only when there are profits.
  5. Provision creation is compulsory. Whereas Reserves creation is at the discretion of management with the exception of debenture redemption reserve for which the Companies Act has made a provision in certain cases.
  6. Provision is meant for meeting expected losses and cannot be used for dividend distribution. Whereas Reserves is a part of owner’s funds and can be used for distribution of dividends.
4. From the following Ledger balances and adjoining information, you are required to prepare a Trading and Profit and Loss Account for the year ended on 31st March 2012 and the Balance Sheet as on that date. 12
Particulars
Dr.
Cr.
Opening Stock
Purchases
Sales
Purchases Returns
Sales Returns
Carriage Inward
Carriage outward
Bank Overdraft
Cash
Capital
Sundry Creditors
Loans
Investments
Accrued Incomes
Machinery
Drawings
Wages
Salaries
Outstanding Expenses
Prepaid Expenses
Postage
Discount Received
Discount Allowed
Bad debts
Debtors
Interest Paid
Interest Received
Provision for Bad debts
Furniture and Fixtures
40,000
4,10,000


2,500
1,500
2,500

4,000



10,000
600
47,500
10,000
11,000
7,300

750
900

1,000
750
1,00,000
3,500


7500


4,29,000
1,250



21,000

1,27,750
37,500
41,375






1,000


375




300
1,750


6,61,300
6,61,300
Other Information:
(a) Unsold Stock 1, 10,000
(b) Depreciate Machinery by 10%
(c) Tax Payable 7,500
(d) Accrued Interest on Investment 1,200
Trading and Profits & Loss A/c
For the year ended as on 31st March, 2012
Particulars
Amount
Particulars
Amount
To Opening Stock
To Purchases                4,10,000
Less : Returns                    1,250
To carriage Inward
To Wages
To Gross Profit c/d
40,000

4,08,750
1,500
11,000
75,250
By Sales                   4,29,000
Less : Return                 2,500
By Closing Stock

4,26,500
1,10,000

5,36,500

5,36,500
To Carriage Outward
To Depreciation Machinery
To Salaries
To Postage
To Discount allowed
To Bad debts
To Interest paid
To Tax Payable
To Net Profit
2,500
4,750
7,300
900
1,000
750
3,500
7,500
50,675
By Gross Profit b/d
By Discount received
By Provision for bad debts
By interest received              300
Add : Accrued Interest       1,200
75,250
375
1,750

1,500

78,875

78,875
Balance Sheet
Liabilities
Amount
Assets
Amount
Capital                        1,27,750
Less : Drawings             10,000
                                   1,17,750
Add : Net Profit              50,675
Bank Overdraft
Sundry Creditors
Loans
Outstanding Expenses
Tax Payable



1,68,425
21,000
37,500
41,375
1,000
7,500
Cash
Investments
Accrued Incomes
Machinery                      47,500
Less: Depreciation
@ 10%                            4,750
Prepaid Expenses
Debtors
Furniture & Fixtures
Closing Stock
Accrued Interest Investments
4,000
10,000
600


42,750
750
1,00,000
7,500
1,10,000
1,200

2,75,800

2,76,800


5. Pass the necessary Journal entries for the rectification of following accounting errors: 12
(a) Purchase of LCD Projector debited to Purchase Account Rs. 50,000.
(b) Credit Sales of 720 recorded in Sales Journal as Rs. 270.
(c) Credit Sales of 1,500 rupees to Sameer was omitted from being recorded in books.
(d) Sameer had paid Rs. 1,000 but it was credited to Rahim's account.
(e) Discount Allowed column of Cash Book was overcast by Rs. 75.
(f) Sales Book was under cast by Rs. 550.
Date
Particulars
L/F
Amount
Amount
(a)
LCD Projector A/c                                Dr.
   To Purchases A/c
(for purchases of LCD Projector wrongly debited to Purchases Account, now rectified)

50,000

50,000
(b)
Debtors A/c                                         Dr.
   To Sales A/c
(for credit sales of Rs. 720 recorded in Sales Journal as Rs. 270, now rectified)

450

450
(c)
Sameer’s A/c                                      Dr.
   To Sales A/c
(for Sales to Sameer omitted to be  in books, now recorded)

1,500

1,500
(d)
Rahim’s A/c                                         Dr.
   To Sameer’s A/c
(for Cash received from Sameer’s wrongly credited to Rahim’s A/c now rectified)

1,000

1,000
(e)
Suspense A/c                                       Dr.
   To Discount allowed A/c
(for Discount allowed overcast by 75, now rectified)

75

75
(f)
Suspense A/c                                       Dr.
   To Sales A/c
(for sales book undercast by Rs. 550, now rectified)

550

550


6. Prepare Machinery Account for the years 2007 to 2011. 12
On 30th June 2007, a business man purchased machinery for Rs. 10,000 and spent on its installation Rs. 1000. It charged depreciation @ 10% annually according to Fixed Instalment method of charging depreciation. On 30-6-2009, he added another machinery costing Rs. 8,000. On 30-6-2011, the machinery purchased on 30-6-2007 was sold for Rs. 5,000.
Machinery A/c
Date
Particulars
Amount
Date
Particulars
Amount
30-6-07
To Bank A/c
To Bank (expenses)
10,000
1,000
31-12-07

31-12-07
By Depreciation A/c
(11,000 x 10% x 6/12
By Balance c/d
550

10,450


11,000


11,000
1-1-08
To Balance b/d
10,450
31-12-08

31-12-08
By Depreciation A/c
(11,000 x 10%)
By Balance c/d
1,100

9,350


10,450


10,450
1-1-09
30-6-09
To Balance b/d
To Bank A/c
9,350
31-12-09


31-12-09
By Depreciation A/c
1st = (11,000 x 10%)
2nd = (8,000 x 10% x 6/12)
By Balance c/d

1,100
400
15,850


17,350


17,350
1-1-10
To Balance b/d
15,850
31-12-10

31-12-10
By Depreciation A/c
(19,000 x 10%)
BY Balance c/d
1,900

13,950


15,850


15,850
1-1-11
To Balance b/d
13,950
30-06-11



31-12-11

31-12-11
By Bank A/c
By Profit & Loss A/c
By Depreciation A/c
(11,000 x 10% x 6/12)
By Depreciation A/c
(8,000 x 10%)
By Balance c/d
5,000
1,600
550

800

6,000


13,950


13,950


Calculating Loss on Machinery Sold:
Cost of Purchases (30-6-07)
Less : Depreciation @ 10% (31-12-07)
= 11,000
= 550
Book Value as on (1-1-08)
Less : Depreciation @ 10% (31-12-08)
= 10,450
= 1,100
Book Value as on (1-1-09)
Less : Depreciation @ 10% (31-12-09)
= 9,350
=1,100
Book Value as on (1-1-10)
Less : Depreciation @ 10% (31-12-10)
= 8,250
= 1,100
Book Value as on (1-1-11)
Less : Depreciation @ 10% (330-6-11)
= 7,150
= 550
Book Value as on )30-6-11)
Less : Sale of Plant
= 6,600
= 5,000
Loss on Sale of Plant
1,600