Question Paper

Accounting (3702): January 2004

Section A
Answer any two from the four questions given below: 2 × 20 = 40
1. Following transactions took place in the business of a trader for the month of January 2003.
Jan. 1. Cash in hand Rs.500.
2. Overdraft with bank Rs.4,000.
3. Introduced cash Rs.10,000 as further capital of which Rs.5,000 is deposited into
bank.
5. Sold goods for cash Rs.4,000.
7. Purchased goods for cash Rs.4,500 of which Rs.2,500 was paid by cheques.
10. Paid Rs.2,750 by cheques to B and discount received Rs.100.
11. Received Rs.3,000 from P in full settlement of Rs.3,250.
12. Paid commission in cash Rs.200.
15. Drew cheques for personal use Rs.1,000.
16. Cash deposited into bank Rs.5,000.
18. Rent paid by cheque Rs.1,000.
20. Cash withdrawn Rs.1,000 and paid for stationery.
25. Collected from A deposited into bank Rs.2,000
26. Dividends received by cheque Rs.500.
a. Prepare three column cash book and find out the balance as on January 31, 2003.
b. Write a note on Imprest System of cash book.
c. Distinguish accounting and book keeping.
(10 + 5 + 5 = 20 marks) <Answer>
2. P draws a bill on Q for 3 months for Rs.10,000 which Q accepts on January 01, 2003. P
endorses the bill in favour of R. Before maturity Q approaches P with a request that the bill be
renewed for a further period of 3 months at 18%interest per annum. P pays the sum to R on the
due date. And agrees to the proposal of Q. The second bill is duly met on the due date.
a. Pass journal entries in the books of P.
b. Distinguish between the Bills of Exchange & Promissory Note.
c. Explain the types of accommodation bills.
(10 + 5 + 5 = 20 marks) <Answer>
3. The plant and machinery account of a company had a debit balance of Rs.2,18,700 on 1st
Jan.,2003. The company was incorporated in 2000 and has been following the practice of
charging full year’s depreciation every year on diminishing balance system @ 10%. In 2003 it
was however, decided to change the method from Reducing Balance to Straight-line method.
With retrospective effect from 2000 and to give effect of the change while preparing final
accounts. For the year ended December 31, 2003 the rate of depreciation remains the same as
before. In 2003, a new machine were purchased at a cost of Rs.60,000. All other machines were
 acquired in 2000.
a. Prepare Plant account from 2000 – 2003.
b. Explain the term Depreciation and why it is needed?
c. Write a note on account sales.
(10 + 5 + 5 = 20 marks) <Answer>
4. P, Q and R are partners sharing profits and losses in the ratio of 2:2:1. The balance sheet on December 31, 2002 is
as follows:
Liabilities Rs. Assets Rs.
Creditors 3,000 Cash 3,000
P 7,500 Sundry Debtors 1,950
Q 3,000 Less: Provision 450 1,500
R 1,500 Stock 3,000
Furniture 7,500
15,000 15,000
They decided to dissolve the business and assets realized as follows:
Furniture Rs.6,750
Stock Rs.3,390
Debtors Rs.1,350
Creditors Rs.2,850
Expenses on realization Rs. 90
a. Show the necessary ledger accounts on dissolution of firm.
b. Explain the rule in Garner vs. Murray’s case.
c. State the legal provisions for the settlement of accounts on dissolution of firm as per
section 48 of the Partnership Act, 1932.
(10 + 5 + 5 = 20 marks) <Answer>
Section B
Answer any two from the three questions given below: 2 × 10 = 20
5. a. Rectify following errors and prepare the Suspense account.
1. A purchase of Rs.500 from A has been entered in sales book. However A’s account
has been correctly credited.
2. An old furniture sold for Rs.840 has been entered in the sales account as Rs.480.
3. A cheque of Rs.3,456 received from A after allowing him a discount of Rs.19 was
endorsed to B in full settlement of Rs.3,475. The cheque was finally dishonoured but
no entries were passed in the books.
4. Goods of the value Rs.450 returned by A were entered in the purchase book and
passed there from to B as Rs.540.
5. Rs.11,690 paid for repairs of buildings was debited to building account as Rs.11,960.
b. What do you mean by Consignment and distinguish it from sales.
(5 + 5 = 10 marks) <Answer>
6. a. A firm maintains a provision for bad debts at 5% and a provision for discount at 2% on
 total debtors. From the following particulars write up the provision and reserve
account.
Balance on April 01,2000
Provision for bad debts Rs.4,500
Provision for discount on debtors Rs.4,000
Total debtors were
On March 31, 2001- Rs.1,00,000 after writing off bad debts of Rs.2,500 and allowing
Discount of Rs.3,000
On March 31, 2002-Rs.60,000 after writing off bad debts of Rs.1,500 and discount of
Rs1,750.
b. State the legal provisions regarding the utilization of “Securities Premium”.
(5 + 5 = 10 marks) <Answer>
7. a. What are the limitations of Financial Statement Analysis?
b. A company forfeited 250 shares of Rs.10 each issued at a premium of 10% for the non-
payment of first call of Rs.2 and final call of Rs.3. Out of these, the company reissued 100
shares at a discount of 10 percent.
(5 + 5 = 10 marks) <Answer>
Section C
Answer any two from the four questions given below: 2 × 20 = 40
8. The following is the trial balance of A as on December 31, 2002.
Particulars Dr. Rs. Cr. Rs.
Purchases 15,000 -
Debtors 20,000 -
Interest earned - 400
Salaries 3,000 -
Sales - 32,100
Purchase returns - 500
Wages 2,000 -
Rent 1,500 -
Sales returns 1,000 -
Bad debts written off 700 -
Capital - 12,000
Creditors - 10,000
Drawings 2,400 -
Provision for bad debts - 600
Printing and stationery 800 -
Insurance 1,200 -
 Opening stock 5,000 -
Office expenses 1,200 -
Furniture and Fittings 2,000 -
Accumulated depreciation - 200
55,800 55,800
Prepare a Trading, Profit and Loss account for the year ended December 31, 2002 and also the
balance sheet as on that date after making the following adjustments.
a. a.Depreciate furniture and fittings by 10% on original cost.
b. b. Make a provision for doubtful debts at equal to 5% of debtors.
c. c.Salaries for the month of December amounting to Rs.300 was unpaid which must be
provided for. The balance in the account includes Rs.200 paid in advance.
d. d. Insurance prepaid to the extent of Rs.200.
e. e.Provide Rs.800 for office expenses.
f. f. Stock valued at Rs.600 was put by A to his personal use.
g. g. Closing stock was valued at Rs.6,000.
(20 marks) <Answer>
9. On March 31, 2003 the cash book of Thin Ltd. Showed a credit balance of Rs.14,370 at bank.
The following further information is available:
a. a. Cheques worth Rs.58,000 were deposited in the bank before march 27, 2003but it
appears from the bank passbook that cheques worth Rs.49,000 only had been credited
before March 31, 2003.
b. b. A cheque of Rs.2,000 debited by the bank on March 02, 2003, was not issued by the
firm.
c. c. Cheques for Rs.42,000 were issued during the month of March, out of which two
cheques for Rs.7,650 were presented on April 03, 2003 the remaining having been paid in
March itself.
d. d. The cashier of the firm misappropriated a sum of Rs.3,500 by passing a fictitious
entry as cash deposited in bank on March 02, 2003.
e. e. The passbook showed that the bank had collected Rs.650 as an interest on
Government securities.
f. f. The bank had charged interest Rs.170 and bank charges of Rs.50. there was no entry
in the cash book for the charges, interest etc.
g. g. It was found that the total of the credit side of the bank column in the cashbook on
March 24, 2003 was Rs.360 short.
h. h. An amount of Rs.2,500 was debited by bank for payment of premium as per standing
instructions.
i. i. A bill for Rs.1,500 was retired by SBI under a rebate of Rs.75 but full amount of the
bill was credited in bank column of the cashbook.
Prepare a Bank Reconciliation Statement as on March 31, 2003.
(20 marks) <Answer>
10. Prepare Balance sheet from the following details as on March 31, 2003.
Fixed Assets Rs.5,00,000 ; Working capital Rs.3,00,000 ; Current ratio is 2:1 ; Gross profit
ratio is 25%, Debtors velocity 1.5 months ; Creditors velocity 2 months ; Fixed assets to
turnover ratio 4:1 ; Stock velocity ratio 2 months ; Net profit ratio is 5% ; Capital gearing ratio
is 1:1 ; and Reserves to profits is 2/3.
(20 marks) <Answer>
11. A of Agra consigned goods to C of Chennai for sale at invoice price or over. Goods costing
Rs.30,000 were consigned to C which were invoiced at cost plus 25% profit C was entitled to a
commission of 3% on invoice price and 20% of any surplus price realized.
A paid Rs.1,875 for freight and Rs.625 for insurance. C has paid Rs.1,000 as landing charges
and Rs.2,500 for selling and godown expenses on receiving the consignment. He send an
account sales showing that 4/5 of the consignment was sold at Rs.37,500. C sent a bank draft
for the amount due from him.
Show the necessary ledger accounts in the books of A with working notes.
(20 marks) <Answer>
END OF QUESTION PAPER
 Suggested Answers
Accounting (3702): January 2004
Section A
1. Three-column cash Book
Dt Particulars l. Dis. Bank Cash Dt. Particulars l.f Dis. Bank cash
03 f. All 03 Rec.

Jan To balance b/d Jan

1 To capital 500 1 By balance b/d 4000
3 To cash 10000 3 By bank c 5000
3 To sales C 5000 7 By purchases 2500 2000
5 To P’s a/c 4000 10 By B’s a/c 100 2750
11 To cash 250 3000 12 By commission 200
16 To bank 5000 15 By drawings 1000
20 To A’s a/c C 1000 16 By bank c 5000
25 To cash 2000 18 By rent 1000
25 To dividends C 2000 20 By cash c 1000
25 20 By stationery 1000
500 25 By bank c 2000
31 By balance c/d 250 5300
250 12500 20500 100 12500 20500

b. Petty Cash Book

The Petty Cash Book is nothing but a separate Cash Book, which records small payments on accounts
of expenses like carriage, cartage, postage, refreshment to customers etc. If all these small transactions are
recorded in the Cash Book, it will consume a lot of time and will be inconvenient for the posting clerk. Therefore,
petty cashier is appointed by the business to make payment of all such petty expenses in the Petty Cash Book.
The Petty Cashier works under the supervision of the Chief Cashier. The Petty Cash Book is usually maintained
on the basis of Imprest system. In this system, the Chief Cashier advances a fixed amount to the Petty Cashier at
the beginning of the period to meet petty cash expenses. He submits his accounts at the end of the period and the
Chief Cashier after examining his accounts gives him a fresh advance equivalent to the amount spent by him
during the period. The amount so advanced to him is termed as “Imprest”.
The amounts received by the petty cashier from the main cashier are entered on the debit side
of Petty Cash Book and payments on the credit side of the Petty Cash Book. Every small
payment is entered twice on the credit side; one in the total payments column and second in
one of the analytical amount columns. The periodic total of each column is posted to the
expenses accounts concerned, while the total payments column serves to find out the balance
of cash with the petty cashier. The Petty Cash Book contains a number of analytical columns
for grouping the various expenses under a few classifications, which facilitates the subsequent
posting into general ledger.
c. Welsch and Anthony have distinguished between book-keeping and accountancy as follows”
some people confuse book-keeper with an accountant and bookkeeping with accounting. In
effect they confuse one of the minor parts with the whole of accounting. It tantamount to
comparing the simple administration of first aid with the complex practice of medicine by the
physician. Book-keeping is the routine and clericals side of accounting and requires only
minimal knowledge of the accounting model. A book-keeper records the repetitive and the
uncomplicated transactions in most businesses and may maintain the simple records of very
 small business. In contrast , the accountant is professional, competent in the design of
information design of information systems, analysis of complex economic events,
interpretative and analytical processes, reporting, financial advising, and management
consulting’.
Book-keeping is the science of recording in books of accounts all those business transactions
that result in transfer of money or money’s worth. Book-keeping is recording of the financial
transactions of a business in a systematic manner so that information can be obtained any
time .On the other hand Accounting is concerned with the design of the system of records, the
preparation of reports based on the accounting records, it also involves interpretation of the
data and communicating the results to the person who are interested in information. The work
of an accountant involves directing and reviewing the work of the book-keepers, therefore the
accountants must possess higher knowledge as compared to the book-keepers
< TOP >
2. a. Journal Entries in the books of P.
Date Particulars Lf Dr.Rs Cr.Rs
1/1/03 Bills receivable a/c……………….Dr 10,000
To Q’s a/c 10,000
[Being bill accepted by Q]
,, R’s a/c……………………………Dr 10,000
To Bills receivable a/c 10,000
[Being bill endorsed to his creditor R]
4/4/03 Q’s a/c…………………………..Dr 10,000
To R’s a/c 10,000
[Being endorsed bill cancelled]
R’s a/c………………………….Dr 10,000
,, To Bank a/c 10,000
[Being amount paid to R]
Bills receivable a/c…………….Dr 10,450
,, To Q’s a/c 10,000
To Interest a/c 450
[Being new bill accepted by Q in lieu of
cancellation of bill together with 18%
7/7/03 interest] 10,450
Bank a/c……………………….Dr 10,450.
To Bills Receivable a/c
[Being the new bill met on the due date]
b. Difference between Bills of exchange and Promissory Note:
Bills of Exchange Promissory Note
It is drawn by the seller. It is drawn by the purchaser
 It is an order to make payment It is a promise to make payment
It involves three parties , the It involves two parties , namely, the promiser
drawer , the acceptor and the (or maker) and promise ( or payee)
payee
To be effective, it must be It does not need acceptance
accepted
Drawer and payee can be the same Maker and payee cannot be the same person
person
Acceptor is required to make Drawer or maker is required to make payment
payment on due date . In case of on due date.
default, drawer is liable to pay the
amount to payee.
c. Accommodation Bills may be of three types;
(i) When only the drawer is only accommodated through the bill:
For Example; Mr. Samuel needed some funds. He approached to Mr. Kumar to accept his
bill of Rs. 30,000 on 1-2-2002. Mr. Kumar accommodated Mr. Samuel and accepted the
bill payable after three
months on 2-2-2002. Mr. Samuel got the bill discounted @ 11% p.a. Thus he got Rs.
29,195, as bank charged discount Rs.805. On the due date 2-5-2002 Mr. Samuel paid
Rs.30,000 to Mr. Kumar. Mr. Kumar paid the money to bank in settlement of the bill.
(ii) When both the parties (the drawer and the drawee) are accommodated through a single
bill:
For Example; Bimal and Ashok were in need of funds of Rs.10,000 each. Bimal drew a
bill on Ashok on 1.2.2002.payable after three months for Rs.21,365 which Ashok
accepted. Bimal got the bill discounted on 1.2.2002 @ 14% p.a. The bank charged
discount Rs.1,365 and Bimal got net amount of Rs.20,000 and Bimal paid Rs.10,000 to
Ashok.They have to bear the discount equally. On the due date Bimal paid Ashok
Rs.10,000 plus Rs. 682 i.e., Rs.10,682. Ashok met the bill.
(iii) When both the parties are accommodated through a single book.
Manoj and Saroj were in need of funds. Manoj needs Rs. 20,000 and Saroj Rs. 25,000.
Manoj drew a bill for three months bill of Rs. 20,780 on Saroj on 1.2.2002. On the next
date he got the bill discounted @16%p.a.Thus he got Rs.20,000. Similarly Saroj drew a
three months bill of Rs. 26,950 on Manoj on 1.2.2002. On the next date he also got the bill
discounted @ 16% p.a. Thus he got Rs. 25,000.
On the due date 2.5.2002 the parties had to settle their dues. Manoj had to pay Rs. 20,780 to Saroj
and saroj had to pay Rs. 26,950 to Manoj. In other words, saroj could pay Rs. 6,170 to Manoj.
Thereafter, Saroj paid Rs.20,780 and Manoj paid Rs. 26,950 to bank to settle the liabilities for bill
on the due date
< TOP >
3.
a.
Plant and Machinery Account
 Date Particulars Lf Rs Date Particulars Lf Rs
2000 2000
1/1 To bank 300000 31/12 By depreciation 30,000
,, By balance c/d 2,70,000
3,00,000 3,00,000
2001 2001
1/1 To balance b/d 2,70,000 31/12 By depreciation 27,000
,, By balance c/d 2,43,000
2002 2,70,000 2,70,000
1/1 To balance b/d 2002
2,43,000
31/12 By depreciation
24,300
,, By balance c/d
2,43,000 2,18,700
2003 2,43,000
1/1 To balance b/d 2003
2,18,700 36,000
To bank 31/12 By depreciation
60,000 8,700
,, By profit & loss
2,34,000
By balance c/d
2,78,700 2,78,700
2004
2,34,000
1/1 To balance b/d
Working Notes:
Cost of Plant & Machinery on 1st January 2000
Rs.2,18,700 x 100 /90 x 100 /90 = Rs.3,00,000
Amount transferred to Profit & loss account on depreciation charged:
Straight line method for 3 years Rs.90,000
Less: Depreciation under WDV for 3 years 81,300
(30,000 + 27,000 + 24,300) --------
Depreciation to be charged 8,700.
b. Acquisition of fixed asset for the purpose of producing goods and services is in the nature of
Capital Expenditure. These fixed assets are used for many years in the business, as the result
of this, its value decreases with the passage of time. The value of fixed assets used for the
purpose of generating incomes must be recovered in an accounting year to find out the real
profit made by the concern. The portion of cost of fixed asset allocated in one accounting year
is called depreciation In Simple term, Depreciation may be defined as reduction in the value
of assets due to wear and tear. Or it is permanent, gradual and continuing decrease in the book
value of the asset.
According to IASC “depreciation is the allocation of the depreciable amount of an asset over
its estimated useful life. Depreciation for the accounting period is charged to income either
directly or indirectly”.
According to Spicer and Pegler , depreciation may be defined as, “ The measure of
 exhaustion of the effective life of an asset from any cause during a given period.”
According to Pickles, “Depreciation is the per meant and continuing diminution in the
quality , quantity or value of an asset.”
From the above definitions, it can be concluded that depreciation is a gradual decrease in the
value of an asset from any cause and does not involve payment of money to any third party, it
is nevertheless an accounting entry in the books. Depreciation is the acquisition cost of an
asset (less the expected salvage value ) spread over the economic life of that asset. The
purpose of charging depreciation over the economic life of the asset is to match the cost of the
asset over the period for which revenue is earned by using the asset. Being an expenditure it is
charged to Profit and loss account
Need for providing depreciation.:
Every business enterprise needs a suitable depreciation policy to depreciate its fixed asset.
Basic objective of providing depreciation is to ascertain the profit or loss correctly, to have a
true and fair view of Balance sheet, but the most important is to provide the necessary amount
for replacing the asset at the end of its useful life. The charging of depreciation is important
because of following reasons;
1. To allocate the depreciable cost of the asset over its estimated useful life.
2. To ascertain the correct profit or loss of the concern for the period.
3. To reveal or present a true and fair financial position in the Balance Sheet.
4. To provide fund for replacement of asset
5. To compute tax liability as depreciation is a chargeable expense of the profit and loss a/c
and thereby save the tax payable on profits.
6. To have an approximately .idea for selling the used asset in the second-hand market.
7. It is useful for determining the product cost for managerial decisions.
c. An account sales is a statement prepared and sent by the consignee giving the details of quality
and quantity of goods sold by him, the gross proceed realized and the balance of amount that is
due to the consignor after deducting the expenses incurred by the consignee on consignment of
goods, commission (ordinary + del-credere) payable to the consignee and the advance if any
paid by the consignee from the gross sale proceeds. This is send to the consignor to enable him
to record the consignee’s expenses; consignee’s commission and the total sales proceed of
goods consigned. The account sales is prepared in the following way
Account sales of 100 cases sold by Sanjay of Surat for the account and at the risk of Ahmed of
Aurangabad.
Particulars Rs
Gross proceed of sales
Less: consignee’s Expenses
Consignee’s Commission
Less: Advance if any
Balance of amount sent by draft/ bill/ cash

E.& O.E Sanjay of Surat

Consignee
 < TOP >
4. a. Realisation Account
Particulars Rs Particulars Rs
To sundry assets: By creditors 3,000
Sundry debtors 1,950 By provision for bad 450
Stock 3,000 debts
Furniture 7,500 By cash: 1,350
To cash: Sundry debtors 3,390
Creditors 2,850 Stock 6,750
Realization expenses 90 Furniture
By loss transferred to 180
capital a/cs: P 180
Q 90
15,390 R
15,390
Partner’s Capital Account.
P Q R P Q R
To realization 180 180 90 By balance 7,500 3,000 1,500
To cash 7320 2820 1410 b/d
7500 3,000 1500 7,500 3,000 1,500
Cash Account
Rs Rs
To balance b/d 3,000 By realization 2,940
To realization a/ 11,490 By P’s account 7,320
By Q’s account 2,820
By R’s account 1,410
14,490 14,490
b. Garner Vs Murray’s case.
On the dissolution of the firm, if any of the partner’s capital account is showing a debit
balance, it means that he has to pay that amount to the firm.. But if a partner is adjudicated as
insolvent and owes some money to firm, then the firm can recover such amount from the
private estate of such a partner. The term Insolvent refers to a person who is unable to pay his
debts to the firm. This unpaid amount is loss or deficiency to the firm. The loss arising on
account of insolvency of a partner is a capital loss for the firm and should be borne by the
solvent partner’s in proportion to their capital. Before Garner Vs Murray’s case decision, such
deficiency was considered as ordinary loss, which was shared by the partner’s in their profit
sharing ratio. But the Garner Vs Murray’s case gave the following rules:
The solvent partners has to bring their share of realization loss in cash,
In the absence of any agreement to the contrary, the deficiency of insolvent partner should be
borne by the solvent partners in proportion to their capital as appearing in the balance sheet
before dissolution of firm or the capital amount before debiting the realization loss. While
determining the capital ratios of the partners, a distinction has to be made whether the capitals
of the partners are fixed or fluctuating.
(a) If the capital accounts of the partners are fixed, then deficiency of insolvent partner is to
be borne by the solvent partners in fixed capital ratio before making the adjustments for
accumulated profits or losses, reserves, interest on capital and drawings. All these adjustments
are made in the current account of the partner. For ascertaining the deficiency of the insolvent
partner, the balance of insolvent partner’s current account is transferred to his capital account.
This deficiency of the insolvent partner is apportioned to the current accounts of the solvent
partners in fixed capital ratio. The accounting entry for settling the insolvent partner’s
deficiency is :
Solvent Partner’s Current a/c……………….Dr
To Insolvent Partner’s Capital a/c.
b. If the capital accounts of the partners are fluctuating, then the insolvent partners
deficiency will be borne by the solvent partners in the ratio of the balance of capital
accounts after adjusting the balances appearing in the Balance sheet (such as profit & loss
a/c, general reserve, debit balance of profit & loss a/c etc.) but before adjusting the
realization profit or loss. Realisation loss is not considered because of the Garner Vs
Murray’s case rule i.e. the deficiency of the insolvent partner is to be borne by the solvent
partners in their capital ratio as appears before the dissolution of the firm. The accounting
entry for settling the deficiency of the insolvent partner is :
Solvent Partner’s capital a/c………………..Dr
To Insolvent Partner’s capital a/c.
c. SETTLEMENT OF ACCOUNTS ON DISSOLUTION
Section 48 and 55 of the partnership Act deals with modes or rules for the settlement of
accounts on the dissolution of the firm. The section say that “ in settling the accounts of a
firm after dissolution, the following rules shall subject to the agreement be observed”.
(1) (1) As per section 48(a), Losses, including deficiencies, of capital, shall be paid
first out of profits, next out of capital, and lastly, if necessary , by the partners
individually in the proportion in which they are entitled to share profits
(2) (2) As per section 48(b), the assets of the firm, including any sums of money
contributed by the partners to make up deficiencies of capital, shall be applied in the
following order :
(a) (a) in paying the debts of the firm to third parties.
(ii) (ii) in paying to each partner rate ably, what is due to him from
the firm for advances as distinguished from capital
(iii) (iii) in paying to each partner rate ably what is due to him on
account of capital,
(iv) (iv) the residue, if any shall be divided among the partners in the
proportion in which they were entitled to share profits.
(3) (3) As per section 55 the goodwill shall be included in the assets and may be
 sold either separately or along with other property of the firm. A partner may thus
make an agreement with the buyer of the goodwill that he will not carry on any
business similar to that of the firm for a specified period or within specified local
limits. However, such an agreement is valid if the restrictions imposed are reasonable.
In simple words, the amount available from the sale of business asset should be first used for paying
expenses which are incurred for collecting debt and selling the asset, secondly be used for paying
outside liabilities, then partner’s loan if any and lastly the partner’s capital.
Payment of Firm’s Debt and Private Debts.
The assets of the firm are first applied for payment of firm’s debt and surplus, if any, is
paid to the partner’s in proportion to their ratio. In same way, the private property of the
partners is first applied towards the payment of their private debt and surplus, if any, is
handed over to the firm if it needs to pay its debt.
< TOP >
5. a. Rectifying Entries

Date Particulars Lf Dr.Rs Cr.Rs

1. Purchases a/c…………….Dr 500
Sales a/c…………………Dr 500
To Suspense a/c 1,000
[Being rectification of purchases
wrongly entered in sales]
2. Sales a/c…………………..Dr 480
Suspense a/c………………Dr 360
To Old Furniture a/c 840
[Being rectification of sale of furniture
wrongly entered in sales]
3. A’s a/c…………………….Dr 3,475
Discount received a/c…….Dr 19
To B’s a/c 3,475
To Discount allowed a/c 19
[Being rectification of dishonour of
cheque received from A]
Sales return’s a/c…………Dr 450
4. B’s a/c……………………Dr 540
To A’s a/c 450
To Purchases a/c 450
To Suspense a/c 90
[Being A’s sales return entered in
purchased and also to a/c of B]
Repairs a/c…………………Dr 11,690
Suspense a/c……………….Dr
 5 To Buildings a/c 270 11,960
[Being11,690 paid as repairs entered in
building a/c as Rs.11,960]
Suspense Account
Rs Rs
To old furniture 360 By purchases 500
To buildings 270 By sales 500
To balance c/d 460 By B’s a/c 90
1,090 1,090
b. When a shipment of goods sold by a manufacturer or wholesale dealer to an agent to be sold by him on
commission basis, on the risk and account of the manufacturer is known as consignment. The person who sends
the goods to the agent to be sold by him on commission basis is called the consignor. The person to whom the goods
are sent for sale on commission basis is called consignee. When the consignment of goods to the consigner it is
termed as outward consignment and when the consignment is to the consignee it is called inward consignment. When
goods are consigned to the agent or the consignee, it cannot be treated as a sale. They will be treated as sales only
when the consignee sells them.
The following points distinguishes consignment from sales:
Consignment and Sale:
Consignment Sale
The legal ownership of goods remains with The legal ownership of goods sold is
the consignor till the goods are sold by the transferred to the purchaser of goods.
consignee. The relationship between seller and buyer
The relationship between consignor and is that of a creditor and debtor.
consignee is that of principal and agent. The expenses incurred after sale of goods
The expenses incurred by the consignee in are borne by the purchaser.
connection with the consignment are Return of goods not possible.
usually borne by the consignor. No account sale is required to be submitted
Return of goods is possible if the goods are by the purchaser to the seller.
not sold by the consignee. The seller has nothing to do with the unsold
The consignee is required to submit goods of the buyer.
account sales to the consignor periodically. The risk attached to the goods sold is
The unsold goods with the consignee will transferred to the purchaser of goods.
be treated as stock of the consignor.
The risk attached to the goods consigned
lies with the consignor till the consignee
sells the goods.
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6. a. Provision for Bad Debts Account
Dt Rs Dt Rs
200
 1 To bad debts 2,500 1/4/00 By balance b/d 4,500
31/3 To balance c/d 5,000 31/3/01 By profit & loss 3,000
,, 7,500 7,500

200 To bad debts 1,500 1/4/01 By balance b/d 5,000

2 To profit & loss 500
31/3 To balance c/d 3,000
,, 5,000 5,000
Provision for Discount on Debtors Account
Date Rs Date Particulars Rs
2001
31/3 To discount 3,000 1/4/00 By balance b/d 4000
,, allowed 1,900 31/3/01 By profit & loss 900
To balance c/d 4,900 4,900
2002
31/3 1,750 1/4/01 By balance b/d 1,900
,, To discount 1,140 31/3/02 By profit & loss 990
allowed
2,890 2,890
To balance c/d
b. When the shares are issued at a price, which is above the par value of the share, then it is said to be issued at a
premium. According to Section 78 of Companies Act, the amount of share premium received by a company must
be credited to a separate account called as Share Premium Account. The capital account must show only the
nominal value received on the shares.
Share Premium account can be utilized in the following ways:
1. 1. Unissued shares can be issued as fully paid bonus shares.
2. 2. To write-off preliminary expenses.
3. 3. To write-off commission or discount account.
4. 4. To provide for the premium payable on the redemption of preference shares or
debentures of the company
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7. a. The term Financial Statement includes two statement –
(1) (1) Income Statement,
(2) (2) Position Statement,
The income statement is nothing but Profit and Loss account that is prepared by the concern
at the end of the accounting period to know the profit earned or loss suffered by the concern in
that specified period. Position statement is the Balance Sheet prepared by the concern to know
its financial position on a specified date. The statement of Retained earning is another name
for Profit and Loss Appropriation account which shows the appropriation /utilization of the
profits of the company. A schedule gives full detail of fixed assets, current assets etc.which are
shown in the balance sheet. Other statement includes Funds Flow Statement and Cash Flow
Statement. Funds flow statement shows the source of fund and application of funds along with
the changes in the working capital for a specified period. Cash flow statement is a statement
prepared to show the inflow and outflow of the cash.
Analysis of Financial Statements is a process of analyzing the relationship between the various
components of financial statement in order to have better understanding of performance of
firm. Critical examination of accounting information provided by the financial statement is
known as Analysis.
Limitations of Financial Statement Analysis
1. 1. The financial statements are historical in nature. Such inferences are not helpful in
forecast and planning for the future.
2. 2. Financial statement analysis should not be considered as judgments or conclusion.
3. 3. As the financial statement analysis depends on financial statements, its reliability also
depends on reliability of financial statement.
4. 4. Different user may give different interpretation from the same financial statement.
5. 5. Changes in the price level reduce the validity of the financial statement analysis.
6. 6. It does not facilitate inter-firm comparison.