IGNOU B.

COM ECO-02 Solved Assignments 2010

Course Code : ECO-02
Course Title : Accountancy-1
Assignment Code : ECO-02/TMA/2010 -11
Maximum Marks : 100

Attempt all the questions.

1. (a) What do you understand by classification of accounts? Explain the different types of
accounts. (b) Explain the reasons on account of which the balance shown by the Pass
Book does not agree with the balance shown by the bank column of the Cash Book. (10+10)

Solution: According to Modern approach Accounts are classified into five groups:

1 Asset
2. Expense
3. Revenue
4. Liability
5. Capital

According to Traditional approach Accounts are classified into three groups:

1. Personal Accounts: Accounts recording transactions relating to individuals or firms or company

are known as personal accounts. Personal accounts may further be classified as :

(1) Natural person's personal accounts: The accounts recording transactions relating to individual human
beings e.g., Anand's A/c, Remesh's A/c, Pankaj's A/c are classified as natural person's personal accounts.

(2) Artificial person's personal account: The accounts recording transactions relating to limited
companies. bank, firm, institution, club. etc. e.g. Delhi Cloth Mill; Hans Raj College; Gymkhana Club are
classified as artificial persons' personal accounts.

(3) Representative personal accounts: The accounts recording transactions relating to the expenses and
incomes are classified as nominal accounts. But in certain cases due to the matching concept of
accounting the amount, on a particular date, is payable to the individuals or recoverable from individuals.

Such amount (a) relates to the particular head of expenditure or income and (b) represents persons to
whom itis payable or from whom it is recoverable. Such accounts are classified as representative personal
accounts e.g. "Wages Outstanding Account", Pre-paid Insurance Account. etc.

2. Real Accounts The accounts recording transactions relating to tangible things (which can be
touched, purchased and sold) such as goods, cash, building. machinery etc., are classified as
tangible real accounts.

Whereas the accounts recording transactions relating to. intangible things (which do not have physical
shape) such as goodwill, patents and copy rights. trade marks etc., are classified as intangible real
accounts.
 3. Nominal Accounts: The accounts recording transactions relating to the losses, gains. expenses
and incomes e.g., Rent, salaries, wages, commission, interest, bad debts etc. are classified as
nominal accounts. As already discussed, wherever a nominal account represents the amount
payable to or receivable from certain persons it is known as representative personal account.

Rules of Debit and Credit (classification based)

1. Personal Accounts: Debit the receiver, Credit the giver (supplier)

2. Real Accounts: Debit what comes in, Credit what goes out

3. Nominal Accounts: Debit expenses and losses, Credit incomes and gains.,

The reasons on account of which the balance shown by the Pass

Book does not agree with the balance shown by the bank column of the Cash Book.

1. Cheques issued but not yet presented for payment Entry is made Balance =Decreased No entry is made
till the cheques are presented for payment. Balance= Same as before

2. Cheques paid into the bank but not yet cleared. Entry is made Balance = Increased No entry is made till
the cheques are cleared Balance = same.

3. Interest allowed by the Bank No entry is made till the Pass Book is checked Balance = Same Entry is
made Balance = Increased

4. Interest and Expenses Charged by the Bank No entry is made till the Pass Book is checked Balance =
Same Entry is made Balance = Decreased

5. Interest and dividends collected by Bank No entry is made till the Pass Book is checked Balance =
Same Entry is made Balance = Increased

6. Direct payments by the bank No entry is made till the Pass Book is checked Balance = Same Entry is
made Balance = decreased

7. Direct payments into the bank by a customer No entry is made till the Pass Book is checked Balance =
Same Entry is made Balance = Increased

8. Dishonor of a bill discounted with the bank No entry is made till the pass Book is checked
Balance = Same Entry is made Balance = decreased

9. Bills collected by the bank on behalf of the customer No entry is made till the Pass Book is checked
Balance = Same Entry is made Balance = Increased

10 Errors committed either in Cash Back or Pass Book

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2. (a) What is Suspense Account? Why is it opened and how is it closed? (b) What are the objectives
of preparing a Balance Sheet? Distinguish between a Balance Sheet and a Trial Balance. (10+10)
Solution: A "suspense" account is a separate category of account code opened to record expenditure
and/or income which, for the time being at least, cannot be properly allocated to a specific budget related
expenditure or income account code. By definition, entries in suspense accounts are transitional and there
is a presumption that there is no adequate authority for any items remaining in suspense over a period of
time. For this reason, individual entries in suspense accounts must be capable of identification and
balances in suspense must be reviewed regularly to confirm that their retention in suspense is justified.

Why is it opened and how is it closed

All items added to the suspense account are found on report- Daily Suspense Update Report. The 'Daily
Suspense Update Report' gives the details of each transaction such as debit/credit account, transaction
code, date posted, description and reason why the transaction put in suspense. The most common
circumstances for transactions to be posted to the suspense account include the use of an invalid six-digit
account number, four-digit subcode or an account previously frozen.

The daily balance of the suspense account is monitored through the file, Daily Suspense Balance (by
month).xls. This file is kept to monitor and investigate any unusual balances in the suspense account over
a given time. Any relevant information regarding the balances is kept in the notes section of the file.

Once the correct account information has been received by the Administrator, a batch is created in order
to correct the transaction in (remove from the suspense account and post to the correct account). A batch
ID is assigned by the Office of Finance for the used to enter all of correcting transactions. No corrections
are made by the originator of the transactions. The procedures described above are also performed during
month-end closing and year-end closing processes. These procedures are integrated in the month-end
closing and year-end closing checklists to ensure the suspense account is monitored and cleared on a
timely fashion throughout the accounting cycle closing process.

The main objectives of preparing a Balance Sheet is to ascertain the financial position of the business
on a particular date. While ascertaining the financial position, we also obtain the following additional
information:

* Nature and Value of the assets: A balance sheet contains various assets in classified, from with their
respective values and as such it gives a clear picture about the nature and the value of different assets
Comprising fixed assets, current assets etc.
* Nature and extent of liabilities and actual capital: Like assets, a balance sheet also contains different
liabilities in a classified form and shows the amount of liabilities the business owes to different types of
creditors. It also shows the actual capital of the business at the end of trading period, representing the
excess of assets over liabilities.
* Solvency of the business: If the assets exceed the liabilities the business is considered as solvent.
Greater is the difference, stronger is the financial position. On the other hand, if liabilities exceed the
assets, the business is considered as insolvent.
* Over-trading and under-trading: If the total creditors exceed assets - Cash, Bank, Investments, Debtors
etc., the position of the business is financially unsound, indicating over-trading. For sound financial
position, a business must have sufficient working capital. On the other hand, under-trading indicates
excess liquid assets over current liabilities, showing idleness of the funds

Distinguish between a Balance Sheet and a Trial Balance.

A balance sheet is one of the main financial statements and is also known as the statement of financial
position. The balance sheet is referred to as an external report because it is used outside of the company
by investors, lenders, and others. The balance sheet reports on the organization’s assets, liabilities, and
stockholders’ or owner’s equity as of a point in time—for example, as of midnight of April 30, 2009. The
balance sheet also shows that the total of the asset amounts is equal to the total of the amounts of
liabilities and stockholders’ equity.

A trial balance is an internal document used only within the accounting department. Its purpose is to show
that the amounts of debits and credits within the accounting system are equal. The trial balance consists of
three columns: the first column lists every account title having an account balance, the second column is
for account balance if it is a debit balance, and the third column is for the account balance if it is a credit
balance. The amounts in the debit column are summed and the amounts in the credit column are summed.
The total amount of each column should be the same..

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3. A of Ahmedabad consigned goods to B of Mumbai for sale at performa invoice price or over. B is
entitled to have commission on sale at 5% on performa invoice price and 25%
of any surplus realized. Goods consigned by A to B during the year 2008, costs A
Rs. 20, 900 and invoiced at Rs. 28, 400. A paid Rs. 1,045 as freight and received
Rs. 15, 000 as advanced from B. 80% of the goods were sold by B for Rs. 26, 000.
B remitted the balance of proceeds after deducting the commission. Prepare necessary
ledger accounts in the books of A. (20)

Solution: Coming soon …

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4. (a) What is meant by incomplete records? What are their limitations?

(b) What do you understand by self-balancing system? How are ledgers made
self-balancing under it? State the advantages of this system. (10+10)

Solution: Incomplete records is the term used for any system of bookkeeping which does not use full
double entry. There may be many reasons why a firm has incomplete records, but whatever the reason,
accounts must be prepared using a number of techniques. Once you have mastered these techniques, you
should find incomplete records problems more straightforward. It should be said that the techniques
needed to complete examination problems are also used in practice when a client’s records are
incomplete.

There are two major disadvantages to such incomplete (non-double entry basis) accounting records:
(1) a great deal of useful information may be lost. It is possible to prepare financial accounting statements
from the available information, but this may be more difficult than when complete records are available.
Certain transactions may not be accounted for and there is also no continuity in the recording of financial
and other useful information. (2) The advantages of the controls inherent in a double entry accounting
system are lost.

A discussion of the treatment of incomplete records is useful for various reasons. First, it emphasises the
advantage of a comprehensive double accounting system. Further, it is practical because accountants
often have to prepare financial statements from such incomplete records, chiefly for income tax purposes.
In practice, therefore, the conversion of single entry accounting information to a double entry basis is an
analytical exercise. It may also happen that the double entry accounting records of an enterprise are lost
(e.g. as a result of damage by fire) and the accountant must reconstruct them from incomplete records.
Consequently, attention is given to certain aspects and practical procedures that arise as a result of
keeping incomplete accounting records.

Assume that a trader has been in business for some time and that he wants to determine his interest in the
undertaking at a specific date. In order to do this he must determine the total interest in the business and
against this, bring into account any external interest. This can be done by, constructing an equity
statement. (Basically, this contains the same information as the balance sheet, but is not prepared from
balances of accounts in a double entry accounting system.)

The equity statement must be prepared by referring to any applicable information available. Keeping in
mind that, undertakings that do not have formal accounting systems will find it necessary to keep records
of certain basic information in order to conduct their business. For example, records of cash received and
paid and amounts owing, both to and by the undertaking, are essential. Cash on hand can be determined
by a cash count, cash in bank from the bank statement and amounts owing to and by the undertaking from
invoices. Stock can be counted physically and the valued. The cost of fixed assets purchased can be
determined from the supporting documentation. Owner's equity will be the difference between the values
allocated to assets and liabilities.

The most practical method of determining net income or loss from incomplete accounting records is to
analyse the change in owner's equity during any specific period. Obviously, owner's equity increases if a
profit is made and when the owner makes additional investments in the undertaking. Conversely, owner's
equity decreases as a result of losses and drawings by the owner

What do you understand by self-balancing system? How are ledgers made

self-balancing under it? State the advantages of this system

In this case the accounting cycle would generate the necessary hits to cash to balance both the expense
and income transactions. Institutions will have the option to have balancing offsets post to the same
account as the original transaction or identify an accounting string where the offset should post. For each
account in the system you can set up an offset accounting string by object code (i.e., cash, accounts
receivable, accounts payable, etc…), then if the scrubber determines a balancing offset is needed it will
create it with the proper accounting string.

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5 (a) Laxmi Limited purchased a machine for Rs. 400000 on 1st July, 2005.
Depreciation is provided @ 10% p.a. on the Diminishing Balance Method.
on 1st October, 2007, one fourth of the machine was found unsuitable and
disposed off for Rs. 60, 000. On the same date a new machine at a cost of
Rs. 1,50, 000 was purchased. Prepare machine account from 2005 to 2008.
The accounts are closed on 31st December each year.
(b) What are the different types of Reserves? Explain. (10+10)

Solution: What are the different types of Reserves

There are two main types of reserves which I am explaining with following way :-

1. Open reserves
Open reserves may be defined all reserves which shows in the balance sheet. Every person or public can
know such reserves of company. Those reserves provide full information to shareholders about which
amount has gone to reserves or why they are not getting all amount of dividend. This type can also divide
in sub parts

a) Capital reserves
Capital reserves are main type of open reserves. It is not created out of profit of company. This reserve is
not used for distributing the dividend to shareholders of company. The main sources of these reserves are
following:-

1. profit earned prior to incorporation

2. Premium on the issue of shares and debentures.
3. Profit on reissue of forfeited shares
4. Profit set aside for the purpose of redemption of preference shares.
5. Profit on sale of undertaking or part of it.
6. Surplus on revaluation of assets and liabilities.

b) Revenue reserves
Revenue reserves are that part of open reserves which are created out of profit of company. It is showed
in profit and loss appropriation account .It can be used for dividend to shareholders. There are following
benefits of revenue reserves:-

1. Extension of business
2. Set off unknown losses of business.
3. Used to create strength in the financial position of business.
4. To make stability in the dividend rate.
These revenue reserves can also divide into two parts.

i) general reserves
ii ) Specific reserves = Specific reserves includes dividend equalization reserve, debenture redemption
reserve , staff reserve. Investment fluctuation reserve, taxation reserve and contingency reserves.

2. Secret Reserves
Secret reserves may be defined as that type of reserves which is not shown in final account of company.
Means it has neither been shown in profit and loss appropriation account nor in balance sheet. These
reserves can easy created by showing less value of assets and more value of liabilities in balance sheet. If
a company has created such secret reserves for the benefits of company, it will be surely strong his
financial position. These secrete reserves can be created by following ways:
* showing heavy depreciation value
* Showing the less value of goodwill and closing stock of business.
* Secrete of sale value of business.
* Showing heavy liabilities which is not of company.
* Showing capital expenses as revenue expenses.
* Grouping of free reserves with creditors.
* Current asset not shown in balance sheet.

But company laws are not in favor because, it increases accounting scams.

3. Other Reserves
i) Foreign currency translation reserve
This reserve is made on the estimation of loss of translating from foreign currency to domestic currency.
When a company is dealing more than one country, at that time this reserve is needed for keeping money
separated for adjustment of currency differences due to difference in the rates applied. It is shown in the
liability side of company.

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