CPT Section A - Fundamentals of Accountancy Chapter 2

Unit 1
FCA SK Chhabra

Means the amount which the owners has invested in the firm or can
claim from the firm.

Capital

Liabilities

For the firm, it is liability towards the owner because the owner is
treated to be separate from the business.
It is also know as Owners Equity and net worth.

Liabilities mean the amount which the firm owes to outsiders, that is
excepting the proprietors

OR

Long term
Liabilities

Current
Liabilities

These are those

liabilities which are
payable after a long
term, (generally more
than one year).

These are those

liabilities which are
payable in near future
(Generally within one
year).

For example long

term loans,
debentures, etc.

For example
creditors, bank
overdraft, bills
payable, short term
loans, etc.

Assets are things of value owned by the business.

Assets

Debtors

Anything which will enable the firm to get cash or a benefit in future, is
an asset.
For example stock of goods, cash, furniture, machines, building, etc.

Person who owes money to the firm generally on account of credit sale
of goods is called a debtors. He is called a debtor because he owes the
amount to the firm

Fixed
Assets

Current
Assets

Are those assets which

are purchased for the
purpose of operating the
business to earn revenue
and not for resale

Are those assets of the

business which are kept
for short term for
converting into cash or
for resale.

Examples land,
building, machinery,
furniture, motor car
etc.

Example Unsold
goods, debtors, bills
receivables, bank
balance, etc..

Stock

Receivables

The term stock includes goods lying unsold on a particular

date.
Stock is valued on the basis of cost or net realisable value
whichever is less

The term receivables is used for the amount that is

receivable by the business from others

 A person from whom goods are purchased on credit. For

example, Mohan is creditor of the firm when goods are
Creditors
purchased on credit from him.

Payables

The term payable is used for the amount payable by the firm
to the outsiders
Loss means something against which the firm receives no

benefit.

Losses

It may be noted that expenses lead to revenue but losses do

not, such as theft, bad debt etc

The person who makes the investment and bears all the
risks connected with the business is called the
Proprietor
proprietor

Drawings

Revenue

It is the amount of money or the value of goods which

the proprietor takes for his domestic or personal use

Means amount receivable by the business from sale of

goods, services, interest received, rent received,
miscellaneous receipts etc due to business

Expenses

An expense is the amount spent in order to produce and sell the

goods and services which produce the revenue. It is the cost of
the use of things of services for the purpose of generating
revenue
Examples are payments of salaries, wages, rent, etc.

It is the difference between revenue and expense

Income

For example, goods costing Rs. 15,000 are sold for Rs. 21,000,
the cost of goods sold, i.e., Rs. 15,000 is expense, the sale of
goods, i.e., Rs. 21,000 is revenue and the difference, i.e., Rs.
6,000 is income.

Gain

It is a term used to describe profit of an irregular nature, e.g.,

capital gains.

The term purchases is used only for the purchase of goods. Goods
are those things which are purchased for resale or for producing
the finished products which also are meant to be sold.

Purchases

Goods purchased for cash are called cash purchases but if goods
are purchased on credit, it is referred to as credit purchases.

Sales

The term sale refers to the amount for which the goods
are sold or services are rendered/given.
The sales may be for cash or on credit.

Gross profit is the difference between sales revenue or the

proceeds of goods sold and/or services rendered over its
Gross Profit
direct cost

Net Profit

Net Profit is the profit made after allowing for all expenses.
In case, expenses are more than the revenue, it is Net Loss

Cost of
Goods
Sold

Cost of goods sold is the direct costs of the goods or services sold

Is prepared by seller when the goods are sold against cash

Cash
Memo

It has details with respect to description of goods sold, quantity,

rate of each item and the total amount received, date etc

Is prepared by the seller when the goods are sold on credit.

Invoice/
Bill

It is has details with respect to the name of the party to whom

goods are sold, the description of the goods sold

Pay in slip

Voucher

Pay in slip is a form available from a bank for depositing

money in a bank account. It has a counterfoil which is
returned to the depositor with signature of cashier, as
receipt

Is a document evidence of some business transaction. Such

evidence are source documents, i.e., Cash Memo, Invoice or
Bill, Receipt, Pay in Slip, etc

Tangible assets

Intangible assets

Are those assets which

can be seen and felt
like buildings,
machinery, stock, cash,
furniture, etc

Are those assets which

cannot be seen or felt,
like the goodwill of a
firm or the know how
which it possesses

Modern
Approach

Traditional
Approach

Assets/Expenses

Debit for
Increase

Credit for
Decrease

Liabilities/Revenue/Capital

Debit for
Decrease

Credit for
Increase

Under Traditional Approach accounts can be classified under

Personal Accounts
These accounts relate to persons like debtors or creditors. Example Ram and
Co. a credit supplier of goods

Real Accounts
These accounts relate to assets of the firm and include both tangible and
intangible assets like Land, Buildings, cash, patents, copyrights etc

Nominal Accounts
These accounts relate to income, expense, gains and losses Example Interest
paid account, commission received account etc

Personal
accounts

Debit the receiver

Real
accounts

Debit what comes in

Nominal
accounts

Debit all expenses and losses

Credit the giver

Credit what goes out

Credit all incomes and gains

Natural

Transactions of human beings like Ram,

Shyam etc

Artificial (Legal)

Business entities are treated as separate

entities. They are recognised as persons in
the eyes of law. For example Companies
(private or public), government

Representatives

For example outstanding liability or

prepaid account, income received in
advance etc

Started or commenced business with Rs. 20,000

Cash A/c

Dr

To Capital A/c

20,000
20,000.

Goods purchased for Rs. 9,000 Or

Cash purchases Rs. 9,000

Purchases A/c

To Cash A/c

Dr

9,000
9,000

Goods purchases from Mohan Rs. 18,000 Or

Goods purchases from Mohan on credit Rs. 18,000
Purchases A/c
Dr

To Mohan A/c

18,000

18,000

Goods returned to Mohan Or

Mohan admitted our claim for Rs. 100
Mohan A/c
Dr.
100

To Purchases Return A/c

100

Cash sales for 7000.

Or Goods sold to Mohan for cash
Cash A/c
Dr

To Sales A/c

7,000

7,000

Goods sold to Mohan for 4000 or Goods sold to Mohan on credit

Mohan A/c Dr

To Sales A/c

4,000

4,000

Goods of Rs 100 returned by Mohan

Sales Return A/c Dr

To Mohan A/c

100

100

Furniture purchased for Rs 12000

Furniture A/c
Dr

To Cash A/c

12,000
12,000

One Furniture sold for Rs 2000

Cash A/c
Dr

To Furniture A/c

2000

2000

Salaries paid Rs 1200

Salaries A/c

To Cash

Dr

1200

1200

Rent Received Rs 200

Cash A/c
Dr

To Rent A/c

200

200

Amount Received from Mohan Rs 900

Discount allowed to him Rs 100
Cash A/c
Dr
Discount allowed A/c Dr

To Mohan

900
100

1000

Amount paid to Shyam Rs 900 Discount allowed by him Rs 100

Shyam A/c
Dr
1000

To Cash A/c
900

To Discount Received A/c

100

Depreciation on Machinery Rs 100

Depreciation A/c

To Machinery

Dr

100

100

Interest on capital Rs 150

Interest on Capital A/c Dr

To Capital A/c

150

150

Outstanding Salaries Rs 1000

Salaries A/c
Dr
1000

To Outstanding Salaries A/c

1000

Prepaid Insurance Rs 100

Prepaid Insurance A/c

To Insurance A/c

Dr

100

100

Amount withdrawn for personal use Rs 150

Drawings A/c

To Cash A/c

Dr

150

150

Goods withdrawn for personal use Rs 100

Drawings A/c
Dr

To Purchases A/c

1000

1000

Goods given for charity Rs 200

Charity A/c
Dr

To Purchases A/c

200

200

A become insolvent. First and final composition of 40 paise in a rupee

is received out of a loan of Rs. 2,000
Cash A/c
Bad debts A/c

To As A/c

Dr
Dr

800
1200

2000

Amount previously written off as Bad debt Rs 100 now recovered

Cash A/c
Dr

To Bad debts recovered A/c

100

100

Loss of goods by theft Rs 200

Loss by theft A/c
Dr

To Purchases A/c

200

200

Advance received from Mohan for supply of an order Rs 800

Cash A/c
Dr
800

To Advance from Mohan A/c

800

Paid Income Tax amounting to Rs. 20,000 through cheque

Drawings A/c

To Bank A/c

Dr

20000

20000

Relevant for CPT Exam

1. The rent paid to landlord is credited to

(a) Landlords account.
(b) Rent account.
(c) Cash account.
(d) None of the above.
Answer: (c)
2. In case of a debt becoming bad, the amount should be credited to
(a) Debtors account
(b) Bad debts account
(c) Cash account
(d) Sales account
Answer: (a)

3. Sunset Tours has a 3,500 account receivable from Mohan. On January 20, the
Rotary makes a partial payment of 2100 on behalf of mohan to Sunset Tours
The journal entry made on January 20 by Sunset Tours includes
(a) A credit to the cash received account of 2,100
(b) A credit to the Mohan account of 2,100.
(c) A debit to the cash account of 1,400
(d) A debit to the Accounts receivable account of 1,400
Answer: (b)
4. Which account is the odd one out?
(a) Office furniture & Equipment.
(b) Freehold land and Buildings.
(c) Stock of materials.
(d) Plant and Machinery
Answer: (c)

5. Which financial statement represents the accounting equation - Assets =

Liabilities + Owners equity
(a) Income Statement
(b) Statement of Cash flows
(c) Balance Sheet
(d) None of the above
Answer: (c)
6. The debts written off as bad, if recovered subsequently are
(a) Credited to Bad Debts Recovered Account
(b) Credited to Debtors Account
(c) Debited to Profit and Loss Account
(d) None of the above
Answer: (a)

Prepaid salary Account

Personal Account
Bill payable Account
Personal Account
Rent Account
Nominal Account
Proprietors Account
Personal Account
Patents Account
Real Account

Salaries
Expense
Equipment.
Asset
Accounts Payable.
Liability
Membership Fees Earned.
Revenue

Accounts Receivable
Asset
Building
Asset
Stock
Asset

In Double Entry System of Book-keeping every business transaction affects:

Two accounts.
Two sides of the same account
The same account on two different dates
Answer: Two Accounts

A sale of goods to Ram for cash should be debited to

Ram
Cash
Sales
Answer: Cash

A withdrawal of cash from business by the proprietor should be credited to:

Drawing Account
Capital Account
Cash Account
Answer: Cash Account

Relevant from Exam

perspective

1. Employees had taken stock worth Rs10,000 (Cost price

7,500) on the eve of Diwali and the same was deducted from
their salaries
Salaries A/c

Dr. 7,500

To Purchase A/c 7,500

2. Wages paid for erection of Machinery Rs 8,000

Machinery A/c Dr 8,000

To cash A/c

8,000

3. Income tax liability of proprietor Rs 1,700 was paid out of

petty cash
Drawings A/c Dr. 1,700

To Petty Cash A/c 1,700

4. Purchase of goods from Naveen of the list price of Rs 2,000.

He allowed 10% trade discount, Rs 50 cash discount was also
allowed for quick payment.
Purchase A/c Dr. 1,800

To Cash A/c

1,750

To Discount Received A/c 50