2/12.

MARKS QUESTIONS
BOOK KEEPING
BASIC OF ACCOUNTS
Question1.What is the meaning of commerce?
Answer: All the activities of buying and selling of goods for the sake of earn
profit is known as commerce.

Question2. What is the meaning of accounting?

Answer ACCONTING IS-
(a) an art…..
(b)of recording,classifying and summarizing……
(c)in term of money…..
(d)transaction and events of financial nature and
(e)interpreting the result thereof.

Question3.What is the meaning of book keeping? Explain its importance?

Answer Book-keeping is that branch of knowledge which tells us how
to keep a record of business transactions. It is often routine and
clerical in nature. It is important to note that only those transactions
related to business which can be expressed in terms of money are
recorded. The activities of book-keeping include recording in the
journal, posting to the ledger and balancing of accounts.Importance
of book keeping is:
i. Permanent and Reliable Record: Book-keeping provides
permanent record for all business transactions, replacing the memory
which fails to remember everything.
ii. Arithmetical Accuracy of the Accounts:With the help of
book keeping trial balance can be easily prepared. This is used to
check the arithmetical accuracy of accounts.
iii. Net Result of Business Operations: The result (Profit or
Loss) of business can be correctly calculated.
iv. Ascertainment of Financial Position: It is not enough to
know the profit or loss; the proprietor should have a full picture of
his financial position in business. Once the full picture (say for a year)
is known, this helps him to plan for the next year’s business.
v. Ascertainment of the Progress of Business: When a
proprietor prepares financial statements evey year, he will be in a
position to compare the statements. This will enable him to ascertain
the growth of his business. Thus book keeping enables a long range
planning of business activities besides satisfying the short term objective
of calculation of annual profits or losses.
vi. Calculation of Dues : For certain transactions payments
may be made later. Therefore, the businessman has to know how
much he has to pay others.
vii. Control over Assets: In the course of business, the
proprietor acquires various assets like building, machines, furnitures,
etc. He has to keep a check over them and find out their values year
after year.
viii. Control over Borrowings: Many businessmen borrow
from banks and other sources. These loans are repayable. Just as
he must have a control over assets, he should have control over
liabilities.
ix. Identifying Do’s and Don’ts : Book keeping enables the
proprietor to make an intelligent and periodic analysis of various
aspects of the business such as purchases, sales, expenditures and
incomes. From such analysis, it will be possible to focus his attention
on what should be done and what should not be done to enhance his
profit earning capacity.
x. Fixing the Selling Price : In fixing the selling price, the
businessmen have to consider many aspects of accounting information
such as cost of production, cost of purchases and other expenses.
Accounting information is essential in determining selling prices.
xi. Taxation: Businessmen pay sales tax, income tax, etc. The
tax authorities require them to submit their accounts. For this purpose,
they have to maintain a record of all their business transactions.
xii. Management Decision-making: Planning, reviewing,
revising, controlling and decision-making functions of the management
are well aided by book-keeping records and reports.
xiii. Legal Requirements: Claims against and for the firm in
relation to outsiders can be confirmed and established by producing
the records as evidence in the court.

BASIC TERMONOLOGY:
Capital: It is the amount invested by the proprietor/s in the
business. This amount is increased by the amount of profits earned
and the amount of additional capital introduced. It is decreased by the
amount of losses incurred and the amounts withdrawn. For example,
if Mr.Vijender starts business with Rs.5,00,000, his capital would be
Rs.5,00,000.

Financial Transaction: Transactions are those activities of a

business, which involve transfer of money or goods or services
between two persons or two accounts. For example, purchase of
goods, sale of goods, borrowing from bank, lending of money,
salaries paid, rent paid, commission received and dividend received.
Transactions are of two types, namely, cash and credit transactions.
Cash Transaction is one where cash receipt or payment is involved
in the transaction. For example, When Raman buys goods from priya
paying the price of goods by cash immediately, it is a cash
transaction.
Credit Transaction is one where cash is not involved immediately
but will be paid or received later. In the above example, if Raman,
does not pay cash immediately but promises to pay later, it is credit
transaction.

Purchases: Purchases refers to the amount of goods bought by a

business for resale or for use in the production. Goods purchased for
cash are called cash purchases. If it is purchased on credit, it is
called as credit purchases. Total purchases include both cash and
credit purchases.

Sales: Sales refers to the amount of goods sold that are already
bought or manufactured by the business. When goods are sold for
cash, they are cash sales but if goods are sold and payment is not
received at the time of sale, it is credit sales. Total sales includes
both cash and credit sales.

ASSETS:Assets represents those goods which is purchase by

business not for sale purpose or for production on it, but for the office
use or for use in factory in production process in known as assets.
Some examples of assets are:- Furniture, building,are for office use
and machinery, tools are for factory use.

Liability: Liability represents the total responsibility of

business toward outsider.In other words Liabilities refer to the
financial obligations of a business. These denote the amounts which
a business owes to others, e.g., loans from banks or other persons,
creditors for goods supplied, bills payable, outstanding expenses,
bank overdraft etc.

Debtors: Debtor represents those person who are liable to pay

business in any future date.In other words we can say that a
person (individual or firm) who receives a benefit without
giving money or money’s worth immediately, but liable to pay in
future or in due course of time is a debtor. The debtors are shown
as an asset in the balance sheet. For example, Kajal bought
goods on credit from Rashmi for Rs.10,000. Now Kajal is a debtor
to Rashmi till he pays the value of the goods.

Creditors:Creditor represents those persons to whom

business are liable to pay in any future date.In other words we
can say that a person who gives a benefit without receiving money
or money’s worth immediately but to claim in future, is a creditor. The
creditors are shown as a liability in the balance sheet. For example
Naval purchase goods from Harsha on credit, in this case harsha is
creditor for naval.
Drawings: It is the amount of cash or value of goods withdrawn from
the business by the proprietor for his personal use. It is deducted
from the capital. For example Arvind is a properitor, if he withdrew
Cash from the business for its house use/personal use, then it is
called as Arvind’s drawing.

Depreciation: Any decrease in the value of business

asset, due to passage of time,or due to change in
technology,is known as depreciation . For example,
business purchase a machinery for use in production
process on 1 jan 2010, for rs1lakh, latter on 31
dec2010 , its value goes down to rs30000, These
decrease of rs70000 is known as depreciation.

Goodwill: Goodwill refers to the reputation of any firm/ business in

market which help him to earn extra profit on sale.It is the good
name of firm/business, which establish after giving long period
service to consumer. Example:-

Revenue: Revenue means the amount receivable or realised from sale of

goods and earnings from interest, dividend, commission, etc.

Expenses :-It is the amount spent in order to produce and sell the
goods and services. For example, purchase of raw materials,
payment of salaries, wages, etc.

INCOME:- Income is the difference between revenue and expense.

INCOME = REVENUE- EXPENCES

Sales Return or Returns Inward :When goods are returned from the
customers due to defective quality or not as per the terms of sale, it is
called sales return or returns inward. To find out net sales, sales
return is deducted from total sales.

Purchases Return or Returns Outward: When goods are returned

to the suppliers due to defective quality or not as per the terms of
purchase, it is called as purchases return. To find net purchases,
purchases return is deducted from the total purchases.

Stock: Stock includes goods unsold on a particular date. Stock may

be opening and closing stock. The term opening stock means goods
unsold in the beginning of the accounting period. Whereas the term
closing stock includes goods unsold at the end of the accounting
perid. For example, if 4,000 units purchased @ Rs. 20 per unit
remain unsold, the closing stock is Rs.80,000. This will be opening
stock of the subsequent year.

Bad Debts :When the goods are sold to a customer on credit and if
the amount becomes irrecoverable due to his insolvency or for some
other reason, the amount not recovered is called bad debts. For
recording it, thebad debts account is debited because the unrealised
amount is a loss to the business and the customer’s account is
credited.

Opening Entry :Opening Entry is an entry which is passed in the

beginning of each current year to record the closing balance of assets and
liabilities of the previous year. In this entry asset accounts are debited and
liabilities and capital account are credited. If capital is not given in the
question, it will be found out by deducting total of liabilities from total of
assets.

ACCOUNTING CONCEPT AND CONVENTION

Question:-Explain accounting concepts and convention?

Answer: Basic accounting concepts are referred to as the
fundamental ideas or basic assumptions underlying the theory and
practice of accounting and are broad working rules for all accounting
activities. Accounting is the language of business and to make this
language convey the same meaning to all people, as far as
practicable, and to make it meaningful, accountants have agreed on a
number of concepts which are followed in the preparations of
financial statements. These concepts are discussed below:-

(i) Separate Entity Concept :According to this

assumption/concept, business is treated as a unit or entity apart from its
owners, creditors and others. In other words, the proprietor of a business
concern is always considered to be separate and distinct from the business
which he controls. All the business transactions are recorded in the books of
accounts from the view point of the business. Even the proprietor is treated
as a creditor to the extent of his capital.

(ii) Going Concern Concept: As per this assumption/concept,

the business will exist for a long period and transactions are recorded from
this point of view. There is neither the intention nor the necessity to wind up
the business in the foreseeable future.Business is only wind up in the case of
insolvenency of business. According to this concept business is ren for
unlimited period.
 BUSINESSMAN/ BUSINESSMAN’S
SO ON….
INVESTER SON

(iii)Money Measurement Concept: This concept states

that only those transactions which can be expressed in money terms
are recorded in accounting though their quantitative records may also
be kept. Thus means that all business transactions are expressed
only in money. Thus, transactions which cannot be expressed in
money will not be recorded in accounting books however important
they may be for the business. For example, labour-management
relations, sales policies, labour unrest, effectiveness of competition
etc, which are of vital importance to the business enterprise, do not
find any place in
accounting. Since money is the only practical unit of measurement
that can be employed to achieve homogeneity of financial data,
money measurement concept helps in making the accounting records
clear, simple, comparable and understandable.

(iv) Accounting Period Concept: The users of financial

statements need periodical reports to know the operational result and
the financial position of the business concern. Hence it becomes
necessary to close the accounts at regular intervals. Usually a period
of 365 days or 52 weeks or 1 year is considered as the accounting
period. Accounting period concept is mandatory because without
accounting period business is unable to know about the financial
position of business.

(v) Accrual Concept : The essence of accrual concept is that

revenue is recognised when it is occurred or realised i.e. when sale is
complete or services are given and it is immaterial whether cash is
received or not. Similarly, according to this concept, expenses are
recognised in the accounting period in which they help in earning the
revenues whether cash is paid or not. Thus, to ascertain correct profit
or loss for an accounting period we must take into account all
expenses and incomes relating to the accounting period whether
actual cash has been paid or received or not. It is because of this
concept that outstanding expenses and accrued incomes are taken
into account.

(vi) Matching Concept : Matching the revenues earned during

an accounting period with the cost associated with the period to
ascertain the result of the business concern is called the matching
concept. It is the basis for finding accurate profit for a period which
can be safely distributed to the owners.

IMP. (vii) Dual Aspect Concept: Dual aspect principle is the

basis for Double Entry System of book-keeping. All business
transactions recorded in accounts have two aspects - receiving
benefit and giving benefit. For example, when a business acquires an
asset (receiving of benefit) it must pay cash (giving of benefit).

(viii) Cost Concept: Under this concept, assets are recorded at the
price paid to acquire them and this cost is the basis for all subsequent
accounting for the asset. For example, if a piece of land is purchased
for Rs.5,00,000 and its market value is Rs.8,00,000 at the time of
preparing final accounts the land value is recorded only for
Rs.5,00,000. Thus, the balance sheet does not indicate the price at
which the asset could be sold for.

Accounting conventions
Accounting conventions have been evolved and developed to bring
about uniformity in the maintenance of accounts. Convention denotes
customs or traditions or usage which are in use since long. To be
more precise accounting conventions are nothing but unwritten laws.
The accountants have to adopt usage or customs which are used as
a guide in the preparation of accounting reports and statements.
Following are the important conventions.

(i) Revenue Recognition Convention : This convention helps in

ascertaining the amount and time of recognising revenues from
business activities. Revenue is said to have been earned in the
period in which sales have taken place or services have been
rendered to the satisfaction of the customers and the revenue has
been received or has become receivable. However, there are some
exceptions to this rule. For example, in case of contracts of
construction works which take a long time ‘say 2-5 years’ to be
completed, proportionate amount of revenue based on the part of
contract completed by the end of the accounting period is considered
as realised. Similarly, when goods are sold on hire purchase basis,
the amount collected in installments is considered as revenue
realised.

(ii) Full Disclosure Convention: According to this convention, all

accounting statements should be honestly prepared and to that end
full disclosure of all significant information should be made. All
information which is of material interest to proprietors, creditors and
investors should be disclosed in accounting statements. An obligation
is placed on the accounting profession to see that the books of
accounts prepared on behalf of others are as reliable and informative
as circumstances permit.
For example SEBI regulations require disclosures to be made by
companies to potray true and fair view of business operations to
ensure the discharge of accountability by those who prepare the
various financial statements. Accountability is said to have been
discharged when complete information is delivered with due diligence
so that the economic interests of the users of the accounting
information are not adversely affected.

(iii) Conservatism Convention or Prudence: “Anticipate no profit and

provide for all possible losses” is the essence of this convention.
Future is uncertain and uncertainties are not uncommon for a
business enterprise also. Conservatism refers to the policy of
choosing the procedure that leads to understatement of resources
and income. The consequences of an error of understatement are
likely to be less serious than that of an error of overstatement. For
example, closing stock is valued at cost or market price whichever is
less. This convention of caution of playing safe is adhered to while
preparing financial statements. Showing a position better than what it
is not permitted. Moreover, it is not proper to show a position
substantially worse than what it is.
• The value of an asset should not be overestimated.
• The value of a liability should not be underestimated.
• Profit should not be overestimated.
• Loss should not be underestimated.
Convention of conservation is generally applied to present a true and
fair value of the business in the financial statement.

Question: Explain which system is used in accounting? Or

Explain double entry system?
Answer: According to J.R.Batliboi “Every business transaction has a
two-fold effect and that it affects two accounts in opposite directions
and if a complete record were to be made of each such transaction, it
would be necessary to debit one account and credit another account. It
is this recording of the two fold effect of every transaction that has
given rise to the term Double Entry System”.
Features
i. Every business transaction affects two accounts.
ii. Each transaction has two aspects, i.e., debit and credit.
iii. It is based upon accounting assumptions concepts and
principles.
iv. Helps in preparing trial balance which is a test of arithmetical
accuracy in accounting.
v. Preparation of final accounts with the help of trial balance.

Question : Explain various types of accounts?

Classification of Accounts
Transactions can be divided into three categories.
i. Transactions relating to individuals and firms
ii. Transactions relating to properties, goods or cash
iii. Transactions relating to expenses or losses and incomes or
gains. Therefore, accounts can also be classified into Personal, Real
and Nominal. The classification may be illustrated as follows
I. Personal Accounts : The accounts which relate to persons.
Personal accounts include the following.

i. Natural Persons : Accounts which relate to individuals. For

example, Mohan’s A/c, Shyam’s A/c etc.

ii. Artificial persons : Accounts which relate to a group of

persons or firms or institutions. For example, HMT Ltd., Indian
Overseas Bank, Life Insurance Corporation of India,
Cosmopolitan club etc.

iii. Representative Persons: Accounts which represent a

particular person or group of persons. For example,
outstanding salary account, prepaid insurance account, etc.
The business concern may keep business relations with all the
above personal accounts, because of buying goods from them or selling
goods to them or borrowing from them or lending to them. Thus they
become either Debtors or Creditors.

i. Real Accounts: Accounts relating to properties and assets

which are owned by the business concern. Real accounts
include tangible and intangible accounts. For example, Land,
Building, Goodwill, Purchases, etc.
ii. Nominal Accounts: These accounts do not have any
existence, form or shape. They relate to incomes and expenses
and gains and losses of a business concern. For example,
Salary Account, Dividend Account, etc.

Golden Rules of Accounting :All the business transactions are recorded

on the basis of the following rules.

Question: Explain the importance of accounting?

Answer:Importance of Accounting:-
Accounting is important as it provides information to interested users,
helping them to make business decisions. The information contained
in Income Statements and Position Statements is the outcome of
accounting and is of great importance for external users. Besides
this, accounting serves the internal users by providing additional
information for business records. Thus accounting is necessary for

1.Maintenance of business records: Human memory is not

adequately programmed to remember business operations. Business
executives need not strain their memory if proper and complete
businessrecords are kept. Proper records facilitate the process of
decision-making.

2.Assistance in planning and decision-making: Accounting assists the

management in planning business activities for future and taking
decisions like whether certain goods should be purchased from the
open market and which goods should be manufactured. It also helps
in controlling the business activities according to the time schedule
and production targets.

3.Assessment of business results: The main purpose of business is

to earn profits. Accounting gives information about the profit and loss
made by the business at the end of a year. The same is calculated
by deducting expenses from associated revenues. Profit is crucial to
the business information for the owner, managers and others.

4.Depiction of financial positions: The position statement or balance

sheet gives the financial position of the business by listing assets
(possessed resources) and matching them with liabilities (claims)
and capital (owner’s equity). It evaluates the strengths and
weaknesses of the business and its financial position in general. It
also helps at the time of sale of assets in the realisation of reasonable
prices.

5.Prevention of misuse of business properties: Accounting provides

protection to business properties from unjustified and unwarranted
use. It also supplies up-to-date information of funds, payables, cash
and bank balances etc. and helps the proprietors or managers in
assuring that the funds of business are not unnecessarily kept idle or
underutilised.

6.Realisation of debt: Accounting proves useful in realising debt from

other persons. The businessman can produce his accounting books
in a court of law as a proof of debt.

7. Assistance in payment of taxes: These days many types of taxes

like income tax, sales tax, excise duty etc. are imposed upon
business. Properly maintained accounts are important for accurate
computation of taxes and their payment without any difficulty.

8. Proof in court of law: When business accounts are kept according

to the principles of accounting, they can be presented in a court of
law for giving necessary documentary evidence at the time of
disputes with suppliers, fellow businessmen, taxation authorities etc.

Question: Difference between book keeping and accountancy?

Answer: The main difference between book keeping and accountancy
are:-
QUESTION:EXPLAIN THE USER OF ACCOUNTING
INFORMATION?
ANSWER: The basic objective of accounting is to provide information
which is useful for persons and groups inside and outside the organisation.

I. Internal users: Internal users are those individuals or groups who are
within the organisation like owners, management, employees
and trade unions.

II. External users: External users are those individuals or

groups who are outside the organisation like creditors, investors,
banks and other lending institutions, present and potential investors,
Government, tax authorities, regulatory agencies and researchers.
The users and their need for information are as follows:
 JOURNAL AND LEDGER
Question: Explain the meaning of Journal?
Answer: Journal: Journal is the basic book of original entry.
Transactions in the journal are recorded in chronological order, i.e.,
the transaction which happened first followed by the next transaction
and so on. The journal provides a date-wise record of all the
transactions with details of the amounts debited and credited and the
amount of each transaction. The format of the journal is given below:

Steps in Journalising
The process of analysing the business transactions under the
heads of debit and credit and recording them in the Journal is called
Journalising. An entry made in the journal is called a ‘Journal Entry’.
Step 1 à Determine the two accounts which are involved in the
transaction.
Step 2 à Classify the above two accounts under Personal, Real or
Nominal.
Step 3 à Find out the rules of debit and credit for the above two
accounts.
Step 4 à Identify which account is to be debited and which account
is to be credited.
Step 5 à Record the date of transaction in the date column. The
year and month is written once, till they change. The
sequence of the dates and months should be strictly
maintained.
Step 6 à Enter the name of the account to be debited in the
particulars column very close to the left hand side of the
particulars column followed by the abbreviation Dr. in the
same line. Against this, the amount to be debited is written
in the debit amount column in the same line.
Step 7 à Write the name of the account to be credited in the second
line starts with the word ‘To’ a few space away from the
margin in the particulars column. Against this, the amount
to be credited is written in the credit amount column in the
same line.
Step 8 à Write the narration within brackets in the next line in the
particulars column.
Step 9 à Draw a line across the entire particulars column to seperate
one journal entry from the other.

QUESTION: Explain cash discoumt and trade diacount?

ANSWER: Trade Discount
Trade discount is an allowance or concession granted by the
seller to the buyer, if the customer purchases goods above a certain
quantity or above a certain amount. The amount of the purchase
made, is always arrived at after deducting the trade discount, ie., only
the net amount is considered. For example, if the list price (price
prescribed by the manufacturers or wholesalers) of a commodity is
Rs.100, and trade discount granted by manufacturer to the wholesaler
is 20% then cost price of the commodity to the wholesaler is Rs.80.
Trade discount is not recorded in the books. They are used for
determining the net price.
Cash Discount
Sale of goods on credit is a common phenomenon in any business.
When goods are sold on credit the customers enjoy a facility of
making payment on some date in the future. In order to encourage
them to make the payment before the expiry of the credit period
a deduction is offered. The deduction so made is known as
cash discount. For example, If Ram purchases goods worth Rs.5,000
on 30 days credit then, as per the terms of contract, he is authorised
to make payment 30 days after the date of purchase. If he is offered
a cash discount of 2% on payment within 10 days and if he does so,
he is entitled to deduct Rs.100 from the invoice price and pay
Rs.4,900. In this case Rs.100 is cash discount. But if he does not
choose to make payment within 10 days then he will not get any cash
discount. In this case he will pay Rs.5,000 after 30 days.
Distinction between cash discount and trade discount
Trade discount differs from cash discount in the following respects.

Question:Explain basis of accounting?

Answer: Basis of Accounting
From the point of view the timing of recognition of revenue and costs,
there can be two broad approaches to accounting. These are:

(i) Cash basis; and

(ii) Accrual basis.
Under the cash basis, entries in the book of accounts are made
when cash is received or paid and not when the receipt or payment
becomes due. Let us say, for example, if office rent for the month of
December 2005, is paid in January 2006, it would be recorded in the
book of account only in January 2006. Similarly sale of goods on
credit in the month of January 2006 would not be recorded in January
but say in April, when the payment for the same is received. Thus this
system is incompatible with the matching principle, which states that
the revenue of a period is matched with the cost of the same period.
Though simple, this method is inappropriate for most organisations as
profit is calculated as a difference between the receipts and
disbursement of money for the given period rather than on happening
of the transactions.
Under the accrual basis, however, revenues and costs are
recognised in the period in which they occur rather when they are
paid. A distinction is made between the receipt of cash and the right
to receive cash and payment of cash and legal obligation to pay cash.
Thus, under this system, the monitory effect of a transaction is taken
into account in the period in which they are earned rather than in the
period in which cash is actually received or paid by the enterprise.
This is a more appropriate basis for the calculation of profits as
expenses are matched against revenue earned in relation thereto.

Question: What is the meaning of ledger?

Answer: The ledger is the principal book of accounting system. It
contains different accounts where transactions relating to that
account are recorded. A ledger is the collection of all the accounts,
debited or credited, in the journal proper and various special
journal .A ledger may be in the form of bound register, or cards, or
separate sheets may be maintained in a loose leaf binder. In the
ledger, each account is opened preferably on separate page or card.
A ledger is called the principal book of accounts because it helps in
achieving the objectives of accounting by providing the following
types of information.
• The total sales to an individual customer
• The total purchases from an individual supplier
• How much amount is to be paid to others?
• How much amount is to be received from others?
• What is the position of different assets of the business?
• What is the amount of profit earned of loss suffered during a
particular period?
Following is the format of a ledger account.
DR. CR.
DATE PARTICULAR J.F AMT DATE PARTICULAR J.F AMT
TO NAME OF CR BY NAME OF
A/C DR. A/C

Question: Difference between journal and ledger?

Answer: The Journal and the Ledger are the most important books of
the double entry mechanism of accounting and are indispensable for
an accounting system. Following points of comparison are worth
noting:
 CASK BOOK AND OTHER SUBSIDIARY BOOKS

Question: Explain cash book?

Answer: A cash book is a special journal which is used to record all cash
receipts and cash payments. The cash book is a book of original entry
or prime entry since transactions are recorded for the first time from the
source documents. The cash book is a ledger in the sense that it is
designed in the form of a cash account and records cash receipts on the
debit side and cash payments on the credit side. Thus, the cash book
is both a journal and a ledger. Cash Book will always show debit
balance, as cash payments can never exceed cash available. In short,
cash book is a special journal which is used for recording all cash receipts
and cash payments.

7.2 Advantages
1. Saves time and labour: When cash transactions are recorded
in the journal a lot of time and labour will be involved. To avoid
this all cash transactions are straight away recorded in the cash
book which is in the form of a ledger.
2. To know cash and bank balance: It helps the proprietor to
know the cash and bank balance at any point of time.
3. Mistakes and frauds can be prevented: Regular balancing
of cash book reveals the balance of cash in hand. In case the
cash book is maintained by business concern, it can avoid frauds.
Discrepancies if any, can be identified and rectified.
4. Effective cash management: Cash book provides all
information regarding total receipts and payments of the business
concern at a particular period. So that, effective policy of cash
management can be formulated.
7.3 Kinds of Cash Book
The various kinds of cash book from the point of view of uses
may be as follow:
Single Column Cash Book
Single column cash book (simple cash book) has one amount
column in each side. All cash receipts are recorded on the debit side
and all cash payments on the credit side. In fact, this book is nothing
but a Cash Account. Hence, there is no need to open cash account in
the ledger. The format of a single column cash book is given below.
Format

Double Column Cash Book

The most common double column cash books are
i. Cash book with discount and cash columns
ii. Cash book with cash and bank columns.
i. Cash Book with discount and cash columns
On either side of the single column cash book, another column is
added to record discount allowed and discount received. The format
is given below.

ii. Cash Book with Cash and Bank Columns

When bank transactions are more in number, it is advisable to
open a cash book by providing a separate column on either side of the
cash book to record the bank transactions therein.
In such case, it is not necessary to open a separate Bank
Account in the Ledger because the two columns in the cash book serve the
purpose of Cash Account and Bank Account respectively. It is a
combination of Cash Account and Bank Account.

Triple Column Cash Book

Large business concerns receive and make payments in cash and
by cheques. Where cash discount is a regular feature, a Triple Column
Cash Book is more advantageous. This cash book has three amount
columns (cash, bank and discount) on each side. All cash receipts,
deposits into bank and discount allowed are recorded on debit side
and all cash payments, withdrawals from bank and discount received
are recorded on credit side.
Petty Cash Book
A business, irrespective of its size, has to make a large number of
small payments like bus fare, cartage, collieage, postage, stationery,
taxi charges etc. These payments are generally repetitive in nature. If
all these payments are recorded in the Cash Book, it will become
very bulky. Usually, these payments are made by a person other than
the main cashier called the Petty Cashier. The Petty Cashier is given
a certain sum of money and then all small payments, say below Rs
100, are made by him. He records all such payments in a separate
and special cash book called Petty Cash Book. Petty Cashier
produces all the vouchers concerning the payments made by him
before the main cashier. The main cashier checks these vouchers
and hands over the necessary cash equal to the payments made by
the petty cashier to him.
The system which is adopted for recording the
petty cash transactions by the petty cashier in the petty cash book is
called the imprest system. Under this system, in the beginning, a
fixed sum of money is given to the petty cashier who makes
payments out of it. This amount is called imprest money.
Question: Explain in short:-
(i)Purchaseday book/purchase journal
(ii)Sales day book/ sales journal
(iii)Purchase return book
(iv)Sales return book
Answer Purchases Book
Purchases book also known as Bought Day Book is used to
record all credit purchases of goods which are meant for resale in the
business. Cash purchases of goods, cash and credit purchases of
assets are not entered in this book.

Format

Sales Book
The sales book is used to record all credit sales of goods dealt
with by the trader in his business. Cash sales, cash and credit sales
of assets are not entered in this book. The entries in the sales
book are on the basis of the invoices issued to the customers with
the net amount of sale. The format of sales book is shown below:-
Purchases Return Book:-
Sometimes goods purchased are returned to the suppliers. This may
be done because the goods are not of the required quality, or as per
the specifications of the sample sent by the supplier, or are defective
etc. The return of such goods to the suppliers is recorded in the
purchases returns book. When the goods are returned, a debit note is
prepared in which the details of the goods returned are mentioned.
The debit note is sent to the supplier. On the basis of the information
given in the debit note the supplier makes necessary entries in his
books. The format of the purchases returns journal is similar to the
purchases book as given below.

DATE DEBIT NOTE NAME OF SUPPLIER L.F DETAIL AMT

Sales Return (Journal) Book:-

This journal is used to record return of goods by customers to them
on credit. On receipt of goods from the customer, a credit note is
prepared, like the debit note referred to earlier. The difference
between the credit not and the debit note is that the former is
prepared by the seller and the latter is prepared by the buyer. Like
the debit note, the credit note is also prepared in duplicate and
contains detail relating to the name of the customer, details of the
merchandise received back and the amount. Each credit note is
serially numbered and dated. The source document for recording
entries in the sales return book is generally the credit note. The
format of the sales return book is shown in figure:

DATE CREDIT NAME OF CUSTOMER L.F DETAIL AMT

NOTE

Journal Proper:-
A book maintained to record transactions, which do not find place in
special journals, is known as Journal Proper or Journal Residual.
Following transactions are recorded in this journal:
1. Opening Entry
2. Adjustment Entries
3. Rectification entries
4. Transfer entries
5. Other entries.

Question: Explain debit note and credit note?

Answer: Debit Notes:
A Debit note is a document evidencing a debit to be raised against a
party for reasons other than sale on credit. On finding that goods
supplied are not as per the terms of the order placed, the defective
goods are returned to the supplier of the goods and a note is
prepared to debit the supplier; or when an additional sum is
recoverable from a customer such a note is prepared to debit the
customer with the additional dues. In these two situations the note is
called a debit note.
 Name of the Firm Issuing the Note

Address of the Firm

No.
Date of Issue.........
DEBIT NOTE
Against: Supplier’s Name
Goods returned as per delivery
Amount (Rs)
Challan No.
(Details of goods returned)
(Rupees ...........only)

Signature of the Manager with date

CREDIT NOTE:
A Credit note is prepared, when a party is to be given a credit for
reasons other than credit purchase. It is a common practice to make
it in red ink. When goods are received back from a customer, a credit
note should be sent to him. The suggested
proforma of credit note is shown below:

Name of the Firm Issuing the Note

Address of the Firm No.

Date of Issue .........
CREDIT NOTE
Against : Customer’s Name
Goods returned by the customer
Amount (Rs)
Challan No.
(Details of goods returned)
(Rupees ...........only)
Si
gnature of the Manager with date
 BANK RECONCILATION STAEMENT
Question: Define bank reconciliation statement? Explain the reason
behind the difference arise in cash book and pass book?
Answer: All bank transaction are recorded by trader in bank coloumn
of his cash book for which corresponding entries are recorded by
bank in the pass book. So at a particular date the balances at bank
as shown by cash book should tally with the pass book balance.but
due to some practical difficulties the balances of both the books do
not tally with each other. In order to know the reasons of
disagreement the trader prepares periodically a statement with the
help of which balances as shown by cash book is reconciled with
pass book balance, taking only those transaction which are either
recorded in cash book but not in pass book or only those transaction
which are either recorded in cash book but not in pass book or vice
versa. This statement is called” BANK RECONCILIATION
STATEMENT”. Following are the important reasons for the non
agreement of the cash book balance with the passbook balance:-

(i) Cheques issued but not yet presented for payment. The entry
in the cash book is made immediately on issue of the cheque but
entry in the passbook will be made by the bank only when the cheque
is presented for payment. There will thus be a gap of some days
between the entry in the cash book and in the passbook.
(ii) Cheques paid into the bank but not yet cleared. As soon as
cheques are sent to the bank, entries are made in the bank column
on the debit side of the cash book. But usually banks credit the
customer’s account only when they have received the payment from
the bank concerned; i.e. when the cheques have been cleared. Again
there will be some gap between the depositing of the cheques and
the credit given by the bank.
(iii) Interest allowed by the bank. If the bank has allowed interest to
the customer, the entry will normally be made in the customers
account and later shown in the passbook. The customer usually
comes to know of the amount of interest by perusing the passbook
and only then he makes the relevant entry in the cash book.

(iv) Interest and expenses charged by the bank. Like (iii) above,
the interest charged by the bank and the amount of the bank charges
are entered in the customers account and later in the passbook. The
customer makes the required entries only after he sees the
passbook.

(v) Interest and dividends collected by the bank. Sometimes

investments are left with the bank in safe custody; the bank itself
sees to it that the interest or the dividend is collected on the due
dates. Etnries are made as indicated in (iv) above.

(vi) Direct payments by the bank. The bank may be given standing
instructions for certain payments such as against insurance premium.
In this case also the customer may come to know of the payment
only on seeing the passbook. The entries in the passbook and in the
cash book may thus be on different dates.
117
(vii) Direct payment into the bank by a customer. If such a
payment is received by the bank, it will be entered in the customers
account and also in the passbook; the account holder may come to
know of the amount only when he sees the passbook.

(viii) Dishonour of a bill discounted with the bank. If the bank is

not able to receive payment on promissory notes discounted by it, it
will debit the customer’s account together with any charges that it
may have incurred. The customer will naturally make the entry only
when he sees the passbook.

(ix) Bills collected by the bank on behalf of the customer : If

goods are sold, the discount may be sent through the bank. If the
bank is able to collect the amount, it will credit the customers
account. The customer may make the entry only on receiving the
passbook.
(x) An error committed by the bank : A bank rarely commits an
error but, if it does, the balance shown in the passbook will naturally
differ from that shown in the cash book.

Need and Importance of Bank Reconciliation Statement

It is essential to prepare a bank reconciliation statement due to the
following reasons.
• A bank reconciliation statement locates the errors or omissions that
may have been committed either on the part of the customer or the
bank. The errors so detected can be rectified accordingly.

• By preparing a bank reconciliation statement, the customer

becomes sure of the correctness of the bank balance shown by the
cash book. It helps him in making further transactions with the bank.
For example, suppose the cash book shows a bank balance of Rs
20,000, whereas the balance shown by the pass book is Rs. 15,000.
By reconciling the two, it is disclosed that cheques for Rs 5,000 were
deposited into the bank but have not been collected so far (or some
of these have been dishonoured). In such a case, further cheques will
be issued by assuming the bank balance of Rs 15,000 only.
• A reconciliation statement facilitates the preparation of a revised
cash book. For example, the entries relating to bank charges, interest
allowed or charged by the bank, direct payment by the bank on our
behalf etc. will be recorded in the passbook but for which there is no
entry in the cash book. Such entries will now be recorded in the cash
book as well.
• Periodic preparation of this statement reduces the chances of
embezzlement by the staff of the firm or even that of the bank. For
example, if a cashier merely makes an entry in the cash book but
does not deposit the cash and cheques into the bank, it will be
disclosed by preparing a bank reconciliation statement.

• A reconciliation statement helps in revealing the unnecessary delay

in the collection of cheques by the bank.
• It also helps in keeping a track of cheques which have been sent to
the bank for collection.
TRAIL BALANCE AND RECTIFICATION OF ERROR
Question: Explain trial balance? Objectives of preparing trial balance?
Define various method of preparing t.b?
Answer: Trial balance is a statement which shows debit balances and
credit balances of all accounts in the ledger. According to J.R.
Batliboi--“Trial balance is a statement, prepared with the debit and credit
balances of ledger accounts to test the arithmetical accuracy of the
books”
Objectives
The objectives of preparing a trial balance are:
i. To check the arithmetical accuracy of the ledger accounts.
ii. To locate the errors.
iii. To facilitate the preparation of final accounts.
FORMAT OF TRIAL BALANCE:
 Preparation of Trial Balance
A trial balance can be prepared by using any one of the following two
methods.
(i) Totals Method
(ii) Balances Method
The Total Method: According to this method, the total
amount of the debit side of the ledger accounts and the total
amount of the credit side of the ledger accounts are recorded.

The Balance Method: In this method, only the balances

Of an account either debit or credit, as the case may be, are
Recorded against their respective accounts.
QUESTION:Expalin various types of error ?
Answer: Keeping in view the nature of errors, all the errors committed in
the accounting process can be classified into two.
i. Errors of Principle and
ii. Clerical Errors

I. Errors of Principle
Transactions are recorded as per generally accepted accounting
principles. If any of these principles is violated or ignored, errors resulting
from such violation are known as errors of principle. For example,
Purchase of assets recorded in the purchases book. It is an error of
principle, because the purchases book is meant for recording credit
purchases of goods meant for resale and not fixed assets. A trial balance
will not disclose errors of principle.
II. Clerical Errors
These errors arise because of mistakes committed in the ordinary
course of accounting work. These can be further classified into three
types as follows.
a) Errors of Omission
This error arises when a transaction is completely or partially
omitted to be recorded in the books of accounts. Errors of omission
may be classified as below.
i. Error of Complete Omission: This error arises when a
transaction is totally omitted to be recorded in the books of accounts.
For example, Goods purchased from Ram completely omitted to be
recorded. This error does not affect the trial balance.
ii. Error of Partial Omission: This error arises when only one
aspect of the transaction either debit or credit is recorded. For example,
a credit sale of goods to Siva recorded in sales book but omitted to be
posted in Siva’s account. This error affects the trial balance.
b) Errors of Commission
This error arises due to wrong recording, wrong posting, wrong
casting, wrong balancing, wrong carrying forward etc. Errors of
commission may be classified as follows:
i. Error of Recording: This error arises when a transaction is
wrongly recorded in the books of original entry. For example, Goods
of Rs.5,000, purchased on credit from Viji, is recorded in the book for
Rs.5,500. This error does not affect the trial balance.
ii. Error of Posting: This error arises when information recorded
in the books of original entry are wrongly entered in the ledger. Error
of posting may be
i. Right amount in the right side of wrong account.
ii. Right amount in the wrong side of correct account
iii. Wrong amount in the right side of correct account
iv. Wrong amount in the wrong side of correct account
v. Wrong amount in the wrong side of wrong account
vi. Wrong amount in the right side of wrong account, etc.
This error may or may not affect the trial balance.
iii. Error of Casting (Totalling) : This error arises when a
mistake is committed while totalling the subsidiary book. For example,
instead of Rs.12,000 it may be wrongly totalled as Rs.13,000. This is
called overcasting. If it is wrongly totalled as Rs.11,000, it is called
undercasting.
iv. Error of Carrying Forward : This error arises when a
mistake is committed in carrying forward a total of one page to the next
page. For example, Total of purchase book in page 282 of the ledger
Rs.10,686, while carrying forward the balance to the next page it was
recorded as Rs.10,866.
c) Compensating Errors
The errors arising from excess debits or under debits of accounts
being neutralised by the excess credits or under credits to the same
extent of some other account is compensating error. Since the errors in
one direction are compensated by errors in another direction, arithmetical
accuracy of the trial balance is not at all affected inspite of such errors.
For example, If the purchases book and sales book are both overcast
(excess totalling) by Rs.10,000, the errors mutually compensate each
other. This error will not affect the agreement of trial balance.
Effect of Errors on Trial Balance
From the point of view of the effect of errors on trial balance,
accounting errors can be divided into the following two categories.
(i) Errors affecting trial balance.
(ii) Errors not affecting trial balance
Error affecting trial balance: Errors which affect only one side of an
account affect the agreement of the trial balance. Such types of
errors are disclosed by the trial balance. Following are some
examples of such types of errors.
• Wrong casting of a subsidiary book
• Wrong casting of the totals of pages of the subsidiary books
• Wrong carry forward of totals from one page to another page
• Wrong posting of amount from the subsidiary book to the ledger
account
• Wrong balancing of a ledger account
• Omission of posting of a ledger balance to the trial balance
• Wrong posting of a ledger balance in the trial balance
• Posting of a ledger balance in the wrong column of the trial balance
• Wrong totaling of the trial balance
• Errors in preparation of various schedules like debtors schedule and
creditors schedule.

Errors not affecting trial balance : There are certain types of

accounting errors which do not affect the agreement of the trial
balance and hence are not disclosed by it. Some examples of such
errors are given below.
• Errors of Complete Omission do not affect the agreement of the trial
balance, for example, not recording the transactions in books of
original entry, omission of posting of the transaction from the
subsidiary books to the ledger etc.
• Posting a correct amount in a wrong account but on the correct
side, for e.g., Rs 1,000 paid to Ram wrongly debited to Shyam’s
account.
• Errors of Principle do not affect the agreement of the trial balance
because such errors do not affect the debit balances and the credit
balances, for example, payment of wages for the manufacture of
furniture is an error of principle but will not affect the trial balance.
• Errors of Compensation naturalise the wrong effect of an already
committed error and hence such errors do not affect the trial balance,
for example, a sale of Rs 4,000 was recorded in the purchases book.
However, the customers account was correctly debited and the sales
account was correctly credited while posting the purchases book. The
second error in this case has cancelled the effect of the first error and
hence will not affect the trial balance.

Question: Explain difference between trial balance and balance

sheet?(vvvv.imp)
Answer:
 OTHERS QUESTION
Question: Explain suspence account?
ANSWER: Suspense Account
When it is difficult to locate the mistakes before preparing the final
accounts, the difference in the trial balance is transferred to newly opened
imaginary and temporary account called ‘Suspense Account’. Suspense
account is prepared to avoid the delay in the preparation of final
accounts. If the total debit balances of the trial balance exceeds the
total credit balances, the difference is transferred to the credit side of
the suspense account. On the other hand, if the total credit balances of
the trial balance exceeds the total debit balances the difference is
transferred to the debit side of the suspense account.

Question: Explain:
1.capital expenditure/receipt
2.revenue expenditure/receipt
3.defeered revenue expenditure
ANSWER: 1. Capital Expenditure
Capital expenditure consist of those expenditures, the benefit of
which is carried over to several accounting periods. In other words the
benefit of which is not consumed within one accounting period. It is
non-recurring in nature.
Characteristics
In other words, it refers to the expenditure, which may be
i. purchase of a fixed asset.
ii. not acquired for sale.
iii. it is non-recurring in nature.
iv. incurred to increase the operational efficiency of the business
concern.
Examples
i. Expenses incurred in the acquisition of Land, Building,
Machinery, Furniture, Car, Goodwill, Copyright, Trade Mark,
Patent Right, etc.
ii. Expenses incurred for increasing the seating accommodation
in a cinema hall.
Capital Receipt
Capital receipt is one which is invested in the business for a long
period. It includes long term loans obtained from others and any amount
realised on sale of fixed assets. It is generally non-recurring in nature.
Characteristics
i. Amount is not received in the normal course of business.
ii. It is non-recurring in nature.
Examples
i. Capital introduced by the owner
ii. Borrowed loans
iii. Sale of fixed asset

2. Revenue Expenditure
Revenue expenditures consist of those expenditures, which are
incurred in the normal course of business. They are incurred in order to
maintain the existing earning capacity of the business. It helps in the
upkeep of fixed assets. Generally it is recurring in nature.
Characteristics
i. It helps in maintaining the earning capacity of the business
concern.
ii. It is recurring in nature.
Examples
i. Cost of goods purchased for resale.
ii. Office and administrative expenses.
iii. Selling and distribution expenses.
iv. Depreciation of fixed assets, interest on borrowings etc.
v. Repairs, renewals, etc.

Revenue Receipt
Revenue receipt is the receipt of income which is earned during
the normal course of business. It is recurring in nature.
Characteristics
i. It is received in the normal course of business.
ii. It is recurring in nature.
Examples
i. Sale of goods or services.
ii. Commission and Discount received.
iii. Dividend and interest received on investments etc.
3. Deferred Revenue Expenditure
A heavy revenue expenditure, the benefit of which may be extended
over a number of years, and not for the current year alone is called
deferred revenue expenditure. For example, a new firm may advertise
very heavily in the beginning to capture a position in the market. The
benefit of this advertisement campaign will last for quite a few years. It
will be better to write off the expenditure in three or four years and not
only in the first year.
Characteristics
i. Benefit is enjoyed for more than one year
ii. It is non-recurring in nature
Examples
i. Expenses incurred on research and development
ii. Abnormal loss arising out of fire or lightning (in case the asset
has not been insured).
iii. Huge amount spent on advertisement.

Revenue expenditure, Capital Expenditure and

Deferred revenue expenditure – Distinction
Question Capital profit/loss or Revenue profit /loss?
ANWER: Capital profit and Revenue profit
In order to find out the correct profit and the true financial position,
there must be a clear distinction between capital profit and revenue
profit.
Capital profits
Capital profit is the profit which arises not from the normal course
of the business. Profit on sale of fixed asset is an example for capital
profit.
Revenue profits
Revenue profit is the profit which arises from the normal course of
the business. i.e, Net Profit – the excess of revenue receipts over
revenue expenditures.
 Capital loss and Revenue loss
In order to ascertain the loss incurred by a firm it is important to
distinguish between capital losses and revenue losses.
Capital Losses
Capital losses are the losses which arise not from the normal course
of business. Loss on sale of fixed asset is an example for capital loss.
Revenue Losses
Revenue losses are the losses that arise from the normal course of
the business. In other words, ‘net loss’ – i.e., excess of revenue
expenditures over revenue receipts.