FinancialandManagementAccounting

Unit3

Unit3
Structure

DoubleEntryAccounting

3.1Introduction Objectives 3.2 Meaningofdoubleentryaccounting SelfAssessmentQuestions1 3.3 Cashandmercantilesystemofdoubleentrysystem SelfAssessmentQuestions2 3.4 Accountingtrail SelfAssessmentQuestions3 3.5 Transactionsandevents SelfAssessmentQuestions4 3.6 Preparationofvouchers SelfAssessmentQuestions5 3.7 Financialstatementsandtheirnature SelfAssessmentQuestions6 3.8 Accountingequation SelfAssessmentQuestions7 3.9 Effectoftransactionsonaccountingequation SelfAssessmentQuestions8 3.10 MeaningandrulesofdebitandcreditShortAnswerQuestions SelfAssessmentQuestions9 TerminalQuestions AnswertoSAQsandTQs

3.1Introduction:
Thedualaspectconceptofaccountingisafullproofsystemofrecording,havingtheadvantage of internal checking. The very fact that every transaction is recorded of its debit and credit aspectsindicatesthatthefinalaccountsofanorganizationtakesintoconsiderationeverysmallor big transactionand theimpactis every accountisabsorbedin thepreparation offinalfinancial statements. Double entry book keeping is definitely an improvement and more systematically

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designedthansingleentrysystem,whereonlyafewpersonalandrealaccountsareconsidered. In this unit, the process of accounting recording, journalizing, posting, ledger balancing, preparationoftrialbalance,preparationoffinalstatementsofaccountsisdescribedalongwith theeffectofeverytransactiononaccountingequation.Therulesofdebitandcreditasapplicable tovarioustypesofaccountsarealsodiscussed.

LearningObjectives: Afterstudyingthisunit,youshouldbeabletounderstandthefollowing 1. Toknowwhatdoubleentrybookkeepingmeans. 2. Tounderstandtheprocessofaccounting,knownasaccountingtrail. 3. Toknowthenatureoffinancialstatements. 4. ToformulateanAccountingequationbasingondebitsandcredits. 5. ToknowpracticallytheimpactofeachtransactionontheAccountingEquation. 6. Tosummarizetherulesofdebitandcreditasapplicabletodifferenttypesofaccounts. The students should be able to appreciate the double entry system and know the accounting process.

3.2MeaningofDoubleEntryAccounting
We have learnt that the dual aspect recording is the most important accounting concept. Accordingtotheconcept,everybusinesstransactioninvolvesreceivingaspectandgivingaspect. Ifcapitalisbroughtinbytheownerofthebusinessunit,theowneristhegiverofthebenefitand thebusinessunitisthereceiverofthebenefit.Itisaliabilitytothebusinessunitanditisequally balancedbyanassetinthebusinessunit,intheformofcashreceivedtowardscapital.Therefore everyliabilityisrepresentedbyanasset.Thisisalsoexpressedaseverydebithasanequivalent credit. Thelogicadoptedindoubleentryaccountingcanwellbeunderstoodbyanillustration.Weshall considerfivetransactionsandshowhowtheyareaccountedforinthebooksofthebusiness. a. Mr.AbhibringsRs.100000cashascapitalintohisbusiness. b. HepurchasesfurnituretohisshopRs.10000 c. HebuysgoodsforcashRs.50000 d. HesellsgoodsworthRs.30000forRs.40000oncredittoArjun e. HepayswagestoservantsRs.1000

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In the first transaction, the business receives capital in cash and so capital account and cash accountareaffected.Capitalisaliabilityandcashisanassettothebusiness. CapitalRs.100000(Liability)=CashRs.100000(Asset) In the second transaction, Furniture is purchased for cash and so furniture account and cash accountareaffected.Thistransactioncanbereflectedasunder Capital Rs.100000 CashRs.(10000010000) Furniture 90000 10000

100000

100000

Thethirdtransactionisbuyinggoodsforcash,whichmeansthatstockofgoodsarereceivedand cashbalanceisreducedandthiscanbereflectedinthestatementasunder. Capital Rs.100000 CashRs(9000050000) Furniture Stockofgoods 100000 40000 10000 50000 100000

Thefourth transactionisa credit transactionof sellinggoodsforRs40000, the cost of whichis only Rs. 30000 to Arjun.So the accountsaffected are goodsaccount, Arjun account and profit account.Sincetheprofitbelongstotheowneranditisfairtoaddittotheownerscapital.The effectofthistransactioncanappearonthestatementasshownbelow:

Capital Profit

Rs.100000 10000

Cash Furniture Stockofgoods(5000030000) Arjun(Debtor)

40000 10000 20000 40000 110000

110000

Thefifthtransactionispaymentofwages,whichmeansthatcashaccountisaffectedandprofitis reduced as a result of the expenditure(wages account). This changes the statement as shown below:

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Capital Profit(100001000)

Rs.100000

Cash(400001000) Furniture

39000 10000 20000 40000 109000

9000

Stockofgoods Arjun

109000

Fromtheaboveillustration,itisclearthateverytransactionhasdualeffectandrecordingthese twoaspectswhichareknownasdebitandcreditaspectsisthefundamentalideabehinddouble entrysystemofbookkeeping.Sothemeaningofdoubleentrysystemisthateverytransactionis recordedbyidentifyingthetwoormoreaccountsaffectedthereinandsuitablyreflecttheminthe financialstatements.Thisisasystemwhereinternalcrosscheckingisensured. SelfAssessmentQuestions1:

1. Thesystemofrecordingtransactionsbasedondualaspectconceptiscalled
i) Doubleaccountsystem ii) Doubleentrysystem iii) Singleentrysystem

2. Show the dual aspect effect of the following transactions on the assets and liabilities of business. a. PurchasedgoodsforcashRs.80000 b. PurchaseddeliveryvanoncreditforRs.400000 c. PaidRs.5000toasupplierofgoodsoncredit d. The proprietor withdrew Rs.20000 from the bank account of business for Personal expenses.

3.3Cashandmercantilesystemofdoubleentrysystem
Therearetwosystemsofdoubleentrybookkeepingnamelycashsystemandmercantilesystem. Incaseofcashsystem,transactionsarerecordedonlyifcashisreceivedorpaid.Government accountingis done basing on this system. On the other hand, mercantile systemis one where bothcashandcredittransactionsarerecorded.Besides,outstandingexpensesorincomesalso findplaceinthemercantilesystem.Itisfairenoughtoadoptmercantilesystembecausewhenan eventtakesplace,itgetsrecordedirrespectiveofitsimmediateimpactonthecashposition.In caseofcredittransactions,cashdoesnotflowimmediatelybutittakesplaceatafuturepointof

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time. Transactions like sales or purchases on credit, salary payable, rent receivable, interest accrued but not received, depreciation provided etc., influence on the financial position of the business unit and therefore they should be recorded. Mercantile system facilitates this. Hence doubleentryrecognizesthefactthateverytransaction,whethercashorcredit,influencesatleast twoaccountsonerepresentingdebitaspectandanothercreditaspect. SelfAssessmentQuestions2: 1. Thetwosystemsofdoubleentrybookkeepingare________and__________. 2. Governmentaccountingisbasedonmercantilesystem.Trueorfalse? 3. Allcredittransactionscomeundermercantilesystem.TrueorFalse? 4. Interestreceivable,rentreceivable,dividendreceivablearerecordedincashsystemofbook keeping.TrueorFalse? 5. Profitaspercashsystemandmercantilesystemofdoubleentryshowdifferentfigures.True orFalse

3.4AccountingTrail
Accountingtrailistheprocessofidentifyingthetransactionsorevents,preparationofvouchers, recordingthemasjournalentries,preparationofledgeraccounts,balancingtheledgeraccounts, incorporating all adjustments, preparation of a trail balance and finally preparing the financial statementsandbalancesheet.Itisasequentialorderinwhichtheaccountingprocessflows.All transactions are recorded first in a book called journal. The transactions are posted to the respectiveaccounts,maintainedinaseparatebookcalledledger.Later,alladjustmentssuchas openingentries,closingentries,adjustingentriesaremadeinabookcalledjournalproperand there from, the ledger balances are summarized to form a trial balance. From trial balance, tradingaccount,profitandlossaccountandbalancesheetareprepared. The identification of the accounts affected in the transactions is a major task. There are three typesofaccounts,namelypersonalaccounts,realaccountsandnominalaccounts.Anaccountis asummaryoftransactionspertainingtoaparticularhead. Personalaccountsincludeaccountsofnaturalpersons,suchasAbhiaccount,Mohansaccount, Sonali account etc artificial personal accounts such as Syndicate Bank account, X Co. Ltd account, a club account etc representative personal account like outstanding rent account, salariespayableaccountetc. Real accounts are those which may be tangible real accounts and intangible real accounts. Tangiblerealaccountsrelatetothingsthatcanbetouched,felt,physicallymeasurable.Building

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account,furnitureaccount,stockaccount,cashaccountetcaretangiblerealaccounts.Intangible realaccountsaresuchthattheycannotbeseenortouched.Theycanbemeasuredintermsof moneysuchasgoodwill,patentrightsetc. Nominalaccountsarealsoknownasimpersonalaccounts.Theyareintheformofexpensesor losses, incomes or gains. They do not really exist in physical form, but behind every nominal accountcashisinvolved.Forexample,salaryaccountisanominalaccountand whensalaryis paid,therealityisthecashgoesoutandthereisnothingsalaryinphysicalform.Thereforesalary accountisregardedasnominalaccount.Similarlyallexpensesandlossesandallincomesand gainsaccountsareregardedasnominalaccounts. SelfAssessmentQuestions3: 1. Accountingtrialisaprocessstartingfromidentifyingthetransactionsoreventstopreparation offinalstatementofaccounts.TrueorFalse 2. Therearethreetypesofaccountsnamely____________and________________. 3. Atrialbalanceisthesummarizedformofledgerbalances.TrueorFalse 4. Classifythefollowingaccountsintopersonal,realandnominal i)BankofBarodaAccountii)PrintingandstationeryexpensesMachineryOutstandingsalary iii) Copy Rights iv) Sock of goods v) Loan given to Krishna vi) Loan from Bank vii)Dividendreceivedviii)DiscountAccount

3.5 TransactionsandEvents
Atransactionisabusinessactivityinvolvingtransferofmoneyormoneysworth.Itmaybecash transactionor credit transaction. In cashtransaction cash flows immediately where as in credit transactioncashwillbepaidorreceivedatfuturedate.Assetsacquiredorsold,liabilitiesincurred or paid, expenses paid or payable, incomes received or receivable are all business transactions. But there are events which are neither cash nor credit transactions butit has an impactonthefinancialpositionofabusiness.Theseeventsmayincludeprovisionforbaddebts, provisionforrepairs,depreciation,taxation,transferofprofittowardsreservefundorsinkingfund or investment fluctuation fund, etc., Events happen as a result of internal policies or external needs.Inaccounting,transactionsandeventshaveequalrelevanceandtheymustberecorded toarriveatthefinancialresultsofthebusinessconcern. SelfAssessmentQuestions4: 1. A transaction is a business activity where there is transfer of money or moneys worth. TrueorFalse 2. Aneventhappensasaresultofinternalpolicyofanorganization.TrueorFalse
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3. Businesstransactionsandeventshaveequalimportanceinfindingthefinancialresultsofthe businessconcern.TrueorFalse? 4. Identifythefollowingastransactionsoreventsasthecasemaybe. i)Depreciationofassetsii)Taxratesiii)Acquisitionofassetsiv)Sellinganassetv)Transfer ofprofitstoReserveFund

3.6 PreparationofVouchers
Avoucherisadocumentinsupportofabusinesstransaction.Itmaybeareceipt,acounterfoilof a receipt, an invoice or even correspondence with the concerned parties. Usually in large organizations, voucher system is adopted to record payments. Some organizations will have printed voucher book and each voucher contains the number of voucher, date, the name of payee to whom the payment is made, the amount, the purpose for which payment is made, signature of the person authorized to pay and the person who receives the payment. For instance,RamhassuppliedtousgoodsworthRs5000,forwhichhehasgivenaninvoice.This invoiceitselfcanberegardedasvoucher,againstwhichthepaymentismade.Ifcarriagecharges ofRs100arepaid,weprepareavoucherandtakethe signatureofthepersonwhoreceivesit. When wepaycash,thereceiverwillgiveusareceipt,that itselfbecomesavoucher.Vouchers are often prepared basing on the invoices received or goods received returns. The actual payment may be made partially or completely and it may be made in course of time. In such cases, they are entered in Voucher register. The payment of a voucher is recorded in cheque register.Thesystemhasthefollowingadvantages: 1. Itsafeguardsallcashdisbursements 2. Totalamountpayabletocreditorscanbefoundoutwiththehelpofunpaid 3. vouchers. 4. Internalcheckisensured 5. Informationaboutfuturecashrequirementscanbefoundout. However,thesystemisnotsuitableforsmallorganizationsbecauseitinvolvespersonnelandthe costofmaintenance. SelfAssessmentQuestions5: 1. Vouchersystemisadoptedtorecordpayments.TrueorFalse? 2. Vouchersystemissuitableforsmallorganizations.TrueorFalse? 3. Voucherisadocumentshowingthe__________forwhichpaymentismade. 4. Vouchersystemensuresinternalcheck.TrueorFalse?
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3.7 Financialstatementsandtheirnature
Financialstatementsarepreparedtofindouttheprofitorlossattheendofanaccountingperiod. Inatradingconcern,tradingaccountandprofitandlossaccountareprepared.Thepurposeof preparingtradingaccountistofindoutthegrossprofit/loss.Similarly,profitandlossaccountis preparedtofindoutnetprofit/loss.Boththeseaccountsarerevenueaccounts.Inotherwords, allrevenuereceiptsandrevenuepaymentsareconsidered.Revenueexpensesarethosewhich areincurredindaytodaybusinessactivities.Examplesmayincludewages,carriageexpenses, insurancepremiumpaidonstocks,salaries,printing,stationary,administrativeexpenses,selling expenses and so on. Revenue receipts are called incomes and the examples include rent received, sales made, interest received, dividend received, discount received, royalty received, compensation receivedetc. More details about tradingandprofit and lossaccountaregivenin Unit7. After preparing final accounts, a balance sheet is prepared containing capital and liabilities on onesideandassetsontheothersideofastatement.Balancesheetisastatementofaffairsand not an account. Liabilities of a business include trade creditors, bills payable, bank over draft, loanspayable, outstanding expenses, prereceivedincomes etc. Capital ofthe owner, which is calledequity,isaddedwithliabilitiesontheleftsideofthebalancesheet.Assetsof abusiness include fixed assets like buildings, plant, machinery, furniture etc current assets like sundry debtors,billsreceivable,closingstockofmaterials,outstandingincomes,prepaidexpenses,cash in hand, cash at bank etc., Trading account or profit and loss account and balance sheet are prepared at the end of a particular accounting period, say one year. In Unit 7, details about balancesheetpreparationaregiven. SelfAssessmentQuestions6: 1. TradingaccountandProfitandlossaccountarerevenueaccounts.TrueorFalse? 2. WhatisthepurposeofpreparingTradingAccount? 3. Whatistheendresultofpreparingprofitandlossaccount? 4. Isbalancesheetanaccount?Whatisitotherwise? 5. Whatitemsareshownonthelefthandsideofbalancesheet? 6. Assetsareshownonwhichsideofbalancesheet? 7. Whatisthepurposeofpreparingabalancesheet?

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3.8Accountingequation
Thepreparationofbalancesheetisthefinalstepinaccountingprocess.Theaccountingequation indicatesthatthesourcesoffundsshouldbeequaltousesoffunds.Inotherwords,proprietors equityandliabilitiestooutsidersshouldbeequaltoassets. SourcesofFunds=Applicationoffunds OR Ownersequity=Asset Ownersequity+outsideliabilities L+P =Assets OR OR

=A,whereLisliabilities,PisproprietorequityandA

meansassets.Fromthisequation,thefollowingexpressionscanbeobtained L=AP P=AL ALP=Zero SelfAssessmentQuestions7: 1. LiabilitiesplusEquityisequalto____________________________. 2. Assetsminusliabilitiestooutsidersisequalto__________________. 3. IfassetsareRs.5lakhs,liabilitiesareRs.3lakhs,findoutequity. 4. If Owners equity is Rs3lakhs, Outsiderliabilities are Rs.2lakhs, Owners share ofprofitis Rs.1lakhs,findoutthetotalvalueofassets. 5. Everytransactioninfluences balance sheetand it is shown by accountingequation True or False?

3.9 EffectofTransactionsonAccountingEquation
As said earlier, every transaction has its effect on the balance sheet equation. This has been amplyillustratedwhilediscussingthemeaningofdoubleentry.Thedualaspectofatransaction is reflected on the balance sheet, ultimately making liabilities side equal to asset side of a balancesheet.Thefollowingarethepossiblesetsoftransactionsthatcanchangethevaluesof assetsandliabilitiesbutthechangesareequalonbothsidesofbalancesheet. 1. Increaseinoneassetwithadecreaseinanotherasset.Forexample,goodsarepurchased for cash. It affects cash balance to come down and stock balance increases and both of themareassets. 2. An increase in one asset with an equal amount of increase in liability. For example, a buildingispurchasedforbusinessforRs500000byraisingaloanfrombank.Hereanasset iscreatedandaloanisalsoraisedandthebalancesheettallies.

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3. An increase in asset with an equivalent rise in the proprietors equity.When an additional capitalisobtainedincash,Cashaccountontheassetsideincreasesandcapitalaccounton theliabilitiessidealsoincreaseswiththesameamount. 4. An increase in a liability causing an equal amount of decrease in another liability. Ex: A banks overdraft is paid out of debenture amount collected. Here debenture liability increaseswithanequalamountofdecreaseinbanksoverdraft. 5. Increaseinaliability,followedbydecreaseinproprietorsequity.Ifdebenturesareissuedfor thepurposeofpayingredeemablepreferenceshares,theownersequitygetsreducedand anadditionalliabilityofdebenturesisaddedup. 6. Decreaseinanassetandequivalentdecreaseinaliability.Forinstance,billspayableare paidoutbycheque.Thebankbalancewhichisanassetisdecreasedandcorrespondingly theliabilityofbillspayableisalsodecreased. 7. Decreaseinanassetandcorrespondingdecreaseinownersequity.Ifcapitalispaidoutfor anyreason,cashtothatextentisdecreasedontheassetsideandthecapitalisreducedto thatextentontheliabilitiesside. SelfAssessmentQuestions8: 1. The principle of accounting equation is that the total of assets should be equal to total of liabilitiesside.TrueorFalse. 2. Showhowtheaccountingequationisaffectedinthefollowingtransactions a. LalstartedbusinesswithRs20000cash b. HepurchasedgoodsoncreditRs.80000 c. HesoldgoodscostingRs.25000forRs.30000oncash. d. HepurchasedfurnitureforcashRs14000 e. HesoldgoodstoHaricostingRs500forRs.800 f. HereceiveddividendonsecuritiesRs.2000

3.10 Meaningandrulesofdebitandcredit
Debitand credit are thetwo wordsbasicfor accounting. Debit represents receivingaspect and credit represents giving aspect. However the meaning of debit and credit depends upon the classification of accounts. An account, as we have understood is a summary of transactions pertainingtoaparticularhead.Theaccountmaybepersonal,realandnominal.Beforegrasping therulesofdebitandcreditasapplicabletovariousclassesofaccounts,itisnecessarytoknow howanaccountappearsinthebooksofaccounts.AnaccountisrecordedinaTform,theleft
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sideindicatingthedebitoftheaccountandtherightsiderepresentingthecreditoftheaccount. On theleft sideofan account thecolumns are date, particulars,ledgerfolioand amountand similarlyontherightside(creditside),thecolumnsaredate,particulars,ledgerfolioandamount. Thefollowingillustrationmaybeobserved: CASHACCOUNT
DebitSide DateparticularsLedgerAmount Folio(Rs) 2005 Jan.1ToBalancebroughtdown20000 Jan15ToJoseph3510900 Jan28ToSales18 108900 2005 Jan05Bysalaries10900 Jan25ByFurniture1236000 Jan30Bypurchases1958800 Jan31ByRent2987500 Bybalancec/d56600 139800 Feb1Tobalanceb/d 56600 139800 CreditSide DateParticularsLedgerAmount Folio(Rs)

Observefromtheaboveformofanaccountthefollowing: 1. Thebalancebroughtdownistheclosingbalanceofthelastmonth,December,2004 2. TheamountreceivedfromJosephisRs.10900andhisaccountispreparedintheinthepage number 35 of the ledger. Similarly from sales and its account is found in the ledger folio (page)18. 3. The credit side contains payment of cash towards salary, furniture, purchase ofgoods and rentrespectivelyondifferentdates. 4. The balance carrieddown is the closingbalance on thelast day of January, 2005 anditis broughtdownasopeningbalanceonFeb,1 5. Onthedebitside,ToandcreditsideByaretheprefixusedforeveryentryasamatterof convention. Thereisastandardformofdrawingaledgeraccount.Itissimilartothatofapassbookissuedby abank.Theaboveillustrationisshowninthestandardform.

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CASHACCOUNT Date 2005 Jan1 Jan5 Jan15 Jan25 Jan28 Jan30 Jan31 Openingbalanceb/d Salaries Joseph Furniture Sales Purchases Rent 35 123 18 19 298 108900 58800 7500 10900 6000 Particulars Post.Ref. LF Debit Rs 20000 10900 Credit Rs Balance Rs 20000 9100 20000 14000 122900 64100 56600

Therulesofdebitandcreditfordifferentclassesofaccountsarethefollowing 1. Inrespectofpersonalaccounts 2. Inrespectofrealaccounts 3. Inrespectofnominalaccounts : : : Debitthereceiverandcreditthegiver Debitwhatcomesinandcreditwhatgoesout Debitallexpensesandlossesandcreditallincomes andgains. Thefollowingstepsshouldberememberedtoapplydebitandcreditprinciples a) Identifytheaccountsaffectedinatransactionfrombusinesspointofview b) Ifapersonalaccountisinvolved,findwhetherthepersonisreceiverorgiverofbenefit c) Iftherealaccountisaffected,findwhetheritiscominginorgoingout d) Iftheaccountisnominalaccount,findoutifitisexpenditureorincomeorlossorgain. e) Applythesuitableprincipletodebitorcredittherespectiveaffectedaccount. Illustration: Showwhataccountsareaffectedinthefollowingtransactions. Alsoshowtheaccountingequationforthetransactions 1. Madancommencedbusinesswithcash 2. Purchasedgoodsoncredit 3. Withdrewforprivateuse 4. Goodspurchasedforcash 5. Paidwages 6. Paidtocreditors 7. Soldgoodsoncredit(costpriceRs18000) 8. Soldgoodsforcash(CostpriceRs.3000) 9. Purchasedfurnitureforcash
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10. Receivedfromdebtors Solution: Transaction No 01

11000

Accounts affected in the Accounttobedebitedandaccounttobe booksofthebusiness credited Capital account and cash Cash account being real accountis debited account andCapitalaccountbeingpersonalaccount iscredited Goods account and creditors Goodsaccountbeingrealaccountisdebited account and creditors account being personal accountiscredited

02

03

Personaldrawingsaccountand Drawingsaccountbeingpersonalaccountis cashaccount debitedandcashaccountbeingrealaccount iscredited

04

Goods account account

and

cash Goodsaccountbeingrealaccountisdebited and cash account being real account is credited

05

Wages account and cash Wages account being nominal account is account debitedandcashaccountbeingrealaccount iscredited

06

Cash account and creditors Creditors account being personal account account is debited and cash account being real accountiscredited Goods account, Debtors Debtorsaccountbeingpersonalaccountis accountandprofitaccount debited, profit transferred to capital account being personal account is credited and goods account being real account is also credited

07

09

Furniture account and Cash Furniture account being real account is account debitedandcashaccountbeingrealaccount iscredited

10

Cash account and debtors Cash account being real accountis debited account and debtors account being personal accountiscredited.

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Accountingequationsforthetransactions Transaction Cash+ 01 02 03 04 05 06 07 08 09 10 Endequation +6000 5000 +11000 52000+ 5000+ 11000 11000+ 5000+ 4000+ 73000 69000 3000 12000 5000 10000 18000 3000 5000 22000 10000 +4000 +3000 +12000 5000 70000 14000 14000 3000 Assets= Goods+ Liabilities + Owners Equity Debtors+ Furniture+ Creditors = + Madans capital 70000

73000

SelfAssessmentQuestions9: 1. Rulesofdebitandcreditaredifferentfordifferenttypesofaccounts.TrueorFalse? 2. Debitthereceiverand_______________thegiver. 3. Debitallassetsandcreditall________________. 4. Debit_____________________andcreditwhatgoesout. 5. Allexpensesare___________________typeofaccounts. 6. Incomes and gains are always _________ as per principle of debit and credit for nominal accounts. 7. Capitalis____________________whenitiswithdrawn. 8. Whencashisreceivedfromdebtors,debtorsaccountis______.

TerminalQuestions 1. TheaccountingequationisAssets=_______________+_______________. 2. Statethemeaningofdoubleentrybookkeeping.

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3. Statetheremarkabledifferencebetweencashsystemandmercantilesystemofdouble entry. 4. Statetheimportantaccountingtrail. 5. Classifythefollowingaccountsaspersonal,realandnominal a.Landaccount b.outstandingexpensesaccount e.Discountreceivedaccount c.capitalaccount f.salaries account

d.ABCcoLtd.,account

6. Avoucherisadocumentwhich_______________cashdisbursement. 7. Whatisatradingaccount? 8. Theresultofatradingaccountis____________or_______________. 9. Netprofitornetlossistheresultof____________________account. 10. Givealistofanyfouritemsofassets. 11. Nameanyfouritemsthatappearontheliabilitiessideofbalancesheet. 12. Balancesheetisa________________________ofaffairsofabusiness. 13. Findthevalueofthefollowing: a. If thetotalassets are Rs87000 and theliabilities are Rs47000,find outtheamountof capital. b. IfthecapitalofproprietorisRs400000andthetotalassetsareRs600000,whatisthe amountofliabilitiestooutsiders? c. If creditors are Rs56000, bank overdraft is Rs100000 and outstanding expenses are Rs.8000,whatisthetotalamountofassets? d. FixedassetsareRs.70000andcurrentassetsareRs.100000andthecreditorsare Rs.30000.Whatiscapital? 14. Showtheeffectofthefollowingtransactionsonassets,liabilitiesandowners Equityofthebusiness: i.GaneshstartedbusinesswithacapitalofRs.40000 9. HepurchasedstockofgoodsRs.30000 10. SoldgoodsoncashRs.40000,costofwhichisRs25000 11. BoughtgoodsoncreditRs.10000 12. SoldgoodsoncreditforRs18000,thecostofwhichbeingRs10000 13. PaidSalescommissionRs.5000 14. ReceivedcashdiscountRs3000 15. PurchasedfurnitureRs.10000.

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16. ReceivedcashfromdebtorsRs.15000 17. PaidcashtocreditorsRs.6000.

AnswerforSelfAssessmentQuestions SelfAssessmentQuestions1:

1. Doubleentrysystem
2. a. Stockofgoodsincreasesandcashbalanceisreduced b. Delivery Van is anasset and thesupplier of the delivery van becomes acreditor and it appearsasliability c. Creditors balance is reduced on liabilities side and cash paid brings down the cash balanceontheassetside d. The bank balance comes down on asset side and capital account is reduced by the amountofdrawingsontheliabilitiesside. SelfAssessmentQuestions2: 1. Cashsystem,Mercantilesystem 2. False 3. True 4. False 5. True. SelfAssessmentQuestions3: 1. True 2. Personal,realandnominal 3. True

i. Personal ii. Nominal iii. Real iv. Personal v. Real vi. Real vii. Personal viii. Personal ix. Nominal x. Nominal
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SelfAssessmentQuestions4: 1. True 2. True 3. True 4. i)Eventii)Eventiii)Transactioniv)Transactionv)Event SelfAssessmentQuestions5:

1. True 2. False 3. Purpose 4. True

SelfAssessmentQuestions6: 1. True 2. Tofindoutgrossprofitorgrossloss 3. Tofindoutnetprofitorloss 4. No.Itisastatementofassetsandliabilities 5. Capital,liabilitiesareshownonthelefthandsideofBalanceSheet 6. Onrighthandside 7. Toknowthefinancialpositionofthebusiness. SelfAssessmentQuestions7: 1. Assets 2. Equity 3. Rs.2lakh 4. AssetsareRs.6lakh 5. True SelfAssessmentQuestions8: a) True b) i. LalscapitalincreasesonliabilitiessideandCashbalanceincreasesontheassetsideby Rs.20000 ii. CreditorsonliabilitiessideandstockofgoodsontheassetsideincreasebyRs.80000 iii. ProfitofRs.5000isaddedtocapitalontheliabilitiesside,stockofgoodsisreducedby Rs.25000andCashbalanceincreasesbyRs.30000

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iv. Furniture value increases by Rs.14000 on the asset side, Cash balance is reduced by Rs.14,000,thusmakingnoeffectonliabilitiesside. v. Hari appears as debtor onthe asset side for Rs.800, Stock of goods gets reduced by Rs.500ontheassetsidebutonliabilitysidetheprofitofRs.300isaddedtocapital. vi. CashbalanceonassetsideincreasesbyRs2000,dividendbeingincomeresultsinprofit ofRs.2000andsoaddedtocapitalonliabilityside. SelfAssessmentQuestions9: 1. True 2. Credit 3. Liabilities 4. Whatcomesin 5. Nominal 6. Credited 7. Debited 8. Credited. AnswersforTerminalQuestions: 1. Liabilities+Ownerscapital 2. Everytransactionhastwoaspects,debitand creditandforeverydebit,thereisequivalent credit. 3. 3.Allcashtransactionsarerecordedincashsystem,whilebothcashandcredittransactions arerecordedinmercantilesystem 4. Identificationof accounts affected in transactions, recording them in Journal, post them to ledger,balancetheledgeraccounts,preparetrialbalance,finallypreparefinalaccounts. 5. a)Realb)Personalc)personald)Personale)Nominalf)Nominal 6. Records 7. Accountshowingtheresultoftradingactivities(Purchaseandsaleofgoods) 8. Grossprofitorgrossloss 9. ProfitandLossAccount 10. Land and Buildings, Plant and Machinery, Furniture and Fixtures, Debtors, Cashin hand, andBank,Closingstocketc. 11. BillsPayable,creditors,Bankoverdraft,Capitaletc., 12. Statement
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13. a)Rs.40000b)Rs.200000c)Rs.164000d)Rs.140000 14. RefertoIllustrationundersubhead9.

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