Accounting Process

Question 1.
Double Entry System.
Answer:
Double Entry System:

This system was invented by an Italian merchant named Fra Luco Pacioli in 1494 A.D.

According to this system, every transaction has got a two-fold aspect (dual aspect), i.e. one party giving the benefit and the other receiving the benefit and it has effect of opposite nature on two financial items.

• • Information of one financial nature at one place is known as an account which is divided into two sides, debit and credit.
  • In short, one account is to be debited and another account is to be credited for every transaction in order to have a complete record of the same.
  • Therefore, every transaction affects two accounts in opposite direction.
  • For example, if goods are sold to Mr. A on credit, the same will affect goods /sales account and A’s account and entries will be made in opposite direction in these two accounts.
  • This system is called Double Entry System since it keeps records for every transaction in two accounts.
  • Therefore, the basic principle, under this system, is that for every debit there must be a corresponding credit or vice versa.
  • Before going to discuss the double entry principle it becomes necessary to explain certain terms which are frequently used in accounting. They are discussed in later questions.

Question 2
Petty Cash Book.

Answer:
Petty Cash Book:

• This is to be prepared to record the petty (small) expenses, which are incurred frequently.
• On the payment side the amount is classified into various columns depending upon the account to which it has to be debited.
• The columns can be for conveyance expenses, postage, repairs & maintenance, printing & stationery, salary, wages and so on.
• It is also known as analytical cash book.
• In petty cash book receipt will be from main cash book.

Posting:

• The total of this column is debited to respective expense accounts in the ledger after a specific period may be monthly, weekly etc.
• The Balance of petty cash book (i.e. receipts (-) payments) shows the balance of cash in hand which will be shown in Trial balance.

Question 3.
Imprest System.
Answer:
Imprest System:

• An amount is fixed which is given to petty cashier who meets expenses out of it & periodically or when the amount is spent, he takes reimbursement from main Cashier exactly equal to amount spent hence his cash balance again becomes equal to fixed imprest amount.
• This is the upper limit of cash which petty cashier can have.
• It is a version of Petty cash book only.
• Example – Imprest amount is fixed at ₹ 1,000. Petty cashier has spent ₹ 785 in that period, thus he has balance of ₹ 215. Now he will get reimbursement from main cashier ₹ 785, thus his balance will again become ₹ 1000.

Question 4.
Sales Book.
Answer:
Sales Book:

• • The Sales Day-Book is a register specially kept to record credit sales of goods dealt in by the firm.
  • Cash sales are entered in the Cash Book and not in the Sales Day Book.
  • Credit sales of things other than the goods dealt in by the firm are not entered in the Sales Day Book, they are journalised.
  • For accounting, Goods means only those items in which the particulars concern is doing business i.e. purchasing & selling it.
  • It is a subsidiary book/subsidiary journal & posting is made from it to the sales account and accounts of the customers.

Posting:

• The total of sales register is credited to sales a/c periodically say monthly.
• And individual amounts are debited to respective parties (debtors) a/c.

Sales Account is a final record and postings are made to it from Cash Book (cash sales) and Sales Day Book (credit sales). Sales Account is maintained in the ledger in the manner, the other accounts are maintained. Sales Account is a nominal account and its balance is used for ascertaining gross profit or gross loss.

Question 5.
Purchase Book.
Answer:
Purchase Book:

• • All credit purchases of goods are recorded in Purchase Book.
  • Cash purchases are entered in the Cash Book and not in the Purchases . Day Book.
  • Credit purchases of things other than the goods dealt in by the firm are not entered in the Purchases Day Book; they are journalised.
  • It is a subsidiary book/subsidiary journal & posting is made from it to the purchases account and accounts of the suppliers.

Posting:

• The total of purchase register is debited to purchase a/c periodically say monthly &
• Individual amounts are credited to respective parties (suppliers) a/c.

Cash Sales & Cash Purchases will be recorded in Cash Book and credit sales & credit purchase of Assets will be recorded in Journal. Comments for sales account made above equally apply to purchase account.

Question 6.
Principal Book (Ledger).
Answer:
Principal Book (Ledger):

• • All accounts are opened in a separate register known as a ledger
  • Only exception is cash & Bank a/c which are not prepared in ledger because cash & Bank book itself is Cash & Bank account also (when Cash-cum-Bank Book is prepared).
  • All other books are only books of entry they are not ledger accounts.
  • Hence when we enter a transaction in a book of entry, we decide/write which account should be debited & which account should be credited.
  • But actual debit & credit gets completed only when we write the amount from this book to respective accounts in ledger on debit or credit side as the case may be.
  • This process of writing the amount from books of entry to ledger account is known as ‘posting’.

Posting:

• Each account will have two sides, left hand side is known as debit side & right hand side as credit side.
• If the amount is written on debit side that means that account is debited
• If written on credit side means that account is credited.
• All these accounts are then totalled & balanced.
• All the accounts which are having balances either debit or credit are listed on a statement known as Trial Balance.
• With the help of this Trial Balance, Final accounts namely Trading & P&L A/c and Balance Sheet is prepared.

Instead of one ledger, concern can maintain multiple ledgers like Debtors ledger, Creditors ledger, General ledger etc.

Ledger Account

Question 7.
Mercantile System of Accounting and Cash System of Accounting
Answer:
Mercantile System of Accounting (Accrual basis of accounting) and Cash System of Accounting:

• A transaction is recognized when either a liability is created (i.e. when goods/services/benefits or properties are received) and/or an asset is created (i.e. when goods/services/benefits or properties are given).
• Whether payment is made or received is immaterial in accrual basis accounting.
• Accrual basis of accounting is also known as mercantile basis of accounting.
• On the other hand, cash basis of accounting is system of accounting by which a transaction is recognized only if cash is received or paid, no entry is being made when a payment or receipt is merely due.
• Accrual basis accounting is the only generally accepted accounting method for business entities which are supposed to operate for long period.
• Cash basis accounting is suitable for short duration ventures.
• All the chapters which you will study are on accrual basis only exception may be joint venture.

Question 8.
Journal proper.
Answer:
Journal proper:
If there is no special book meant to record a transaction, it is recorded in the Journal (proper).
(i) Opening entries: When books are started for the new year, the opening balance of assets and liabilities are journalised.

(ii) Closing entries: At the end of the year nominal accounts are transferred to the profit and loss account. This is done through journal entries called closing entries.

(iii) Rectification entries: If an error has been committed, it is rectified . through a journal entry.

(iv) Transfer entries: If some amount is to be transferred from one account to another, the transfer will be made through a journal entry.

(v) Adjusting entries: At the end of the year the amount of expenses or income may have to be adjusted for amounts received in advance or for amounts not yet settled in cash. Such an adjustment is also made through journal entries. Usually, the entries relating to Outstanding expenses, Prepaid expenses, Interest on Capital and Depreciation are necessary.

(vi) Entries on dishonour of Bills: If someone who accepted a promissory note (or bill) is not able to pay it on the due date, a journal entry will be necessary to record the non-payment or dishonour.

(vii) Miscellaneous entries: The following entries will also be shown in Journal proper:

• Credit purchase of things other than goods dealt in or materials required for production of goods e.g. credit purchase of asset will be journalised.
• An allowance to be given to the customers.
• Receipt of promissory notes or issue to them if separate bill books have not been maintained.
• On an amount becoming irrecoverable, because of the customer becoming insolvent.
• Effects of accidents such as loss of property by fire etc.

Question 9.
Trade discount and Cash discount.
Answer:
Trade discount and Cash discount:

• Trade discount is a discount on the selling price for bulk purchase or for purchasing above a minimum quantity or is offered generally to regular customers.
• It is also called quantity discount.
• This is a technique of sales promotion.
• It is generally determined at the stage of sale itself & is deducted from the sale/purchase value & hence doesn’t appear separately in the Books of accounts & Final a/cs.
• Cash discount is the discount offered by the supplier in consideration of early or timely payment.
• It may vary with the period of payment.
• It is accounted as a separate item & appears in the Profit & loss a/c.
• Cash discount is usually given at the time of payment/receipt as against trade discount is given at the stage of sale/purchase.

Question 10.
Debit Note and Credit Note.
Answer:
Debit Note and Credit Note:
Debit Note:

• • A debit note is a statement sent by one party to the other stating/informing him that his account has been debited with a specified amount and the reason for debit.
  • A debit note is sent to the supplier when the goods purchased from him are returned (purchase return) or for discount to be received from him or for any expenses incurred for him.

Entry:

Credit Note:

• A Credit note is a statement/letter sent by one party to the other stating/informing him that his account has been credited with a specified amount and the reason for credit.
• A credit note is sent to the customer when we receive good returned by them or for discount to be allowed to him or for any expenses incurred for us by him.

Entry:

Question 11
Classify the following accounts into Personal, Real and Nominal.
a. Cash Account
b. Wages Account
c. Building Account
d. Calcutta Tramway Co. Account
e. East Bengal Club Account
f. Rent Account
g. Capital Account
h. Drawings Account
i. Interest Account
j. Trade Mark Account
k. Dividend Account
l. Land Account
m. Goodwill Account
n. Patent Account
o. Bad Debts Account
p. Bank Account
q. Discount Allowed Account
r. Interest Received Account
s. Discount Received Account
t. Salary Payable
u. Bills Receivable
Solution:
Personal Accounts – d, e, g, h, p, t, u
Real Accounts – a, c, j, l, m, n
Nominal Accounts – b, f, i, k, o, q, r, s

TRUE AND FALSE

Question 1.
Wages paid for erection of machinery is debited to Profit and Loss Account.
Answer:
False: Wages paid for erection is a capital expenditure, so it should be debited to the machinery account.

Question 2.
The balance in the cash book shows net income.
Answer:
False: The balance in the cash book shows cash in hand at the end of the period.

Question 3.
The debts written off as bad, if recovered subsequently are credited to Debtors Account.
Answer:
False: The debts written off as bad, if recovered subsequently, shall be credited to Bad Debts Recovered Account.

Question 4.
The sales day book is a part of the ledger.
Answer:
False: The sales day book is a book of prime entry and so it is part of journal.

Question 5.
Patent right is in the nature of nominal account.
Answer:
False: Patent right is an intangible asset, so it is a real account.

Question 6.
Goods costing ₹ 600 taken by the proprietor for personal use should be credited to Sales Account.
Answer:
False: Goods taken by the proprietor for personal use should be credited to Purchase Account at a cost price of ₹ 600.

Question 7.
If a cheque received is further endorsed, it must be entered on both sides of the cash book.
Answer:
True: The cash book is debited in cash column when the cheque is received and it is credited when it is endorsed.

Question 8.
Rent paid account is Nominal Account whereas, rent received account is a Real Account.
Answer:
False: Rent paid and rent received-both are nominal accounts because they are expenses and incomes of the business.

Question 9.
A tallied Trial balance is a conclusive proof of accuracy of books of account.
Answer:
False: Agreement of trial balance is not a conclusive proof of the accuracy, because there may be some errors like errors of principle, compensating errors etc. which do not affect the total of trial balance.

Question 10.
Opening, Closing, Rectifying and Adjusting entries are recorded in journal proper.
Answer:
True: All the Opening, Closing, Rectifying and Adjusting entries are recorded in journal proper because these are not recorded in any other subsidiary book.

Question 11.
Sale of office furniture should be credited to Sales Account.
Answer:
False: Sale of office furniture is a capital receipt, so it should be credited to Furniture Account.

Question 12.
The balance in the Petty Cash Book represents expenses.
Answer:
False: The balance in the Petty Cash Book represents petty cash balance lying with the Petty cashier. It is treated as an asset of the business.

Question 13.
The purchase day book is a part of the ledger.
Answer:
False: Purchase day book is a book of original entry and so it is a part of journal.

Question 14.
In a Cash Book, Discount Columns may show either debit balance or credit balance.
Answer:
False: Discount Columns of a Cash Book are totalled but never balanced. These are totalled and transferred to Discount Allowed and Discount Received Account respectively.

Question 15.
Purchase book records all purchases of goods.
Answer:
False: Purchase book records only credit purchases of goods.

Question 16.
The Sales book is kept to record all sales.
Answer:
False: The Sales book is kept to record only the credit sales of goods.

Question 17.
The debit notes issued are used to prepare sales return book.
Answer:
False: The credit notes are used to prepare sales return book.

Question 18.
Bank column of the cash book will show only a debit balance.
Answer:
False: Bank column of the cash book may show debit or credit balance.