CHAPTER-2

RULES OF ACCOUNTING AND THE JOURNAL

Important question and answers

Q1. Write a short note on rules of  debit and credit?

Ans- Rules of debit and credit are of three types:

1. Personal account:- Personal account are related person. personal account are futher classified into three types:

• Natural account:- ram and shyam,etc
• Artifical Personal Account:- Name of the company like XYZ LTD., Kapoor and sons,etc
• Representative personal account:- It is an account like Capital, Drawing, Debtors, Creditors, etc.

                                                     "Debit the receiver,

                                                       Credit the giver".

2. Real Account:- Real account are the accounts like building,machinery, furniture, cash, goodwill, live stock, etc.

                                            "Debit What comes in,

                                              Credit What goes out".

3. Nominal Accounts:- It is related to all expenses and income. Example Rent, interest, commission, wages, insurance, depreciation, etc.

                                              "Debit all expenses and losses,

                                                Credit all income and gains."

Q2. Difference between the Trade Discount and Cash Discount?

Ans-  Trade discount are differ from cash discount:--

Q3. What are journal? Why is the journal called a book of original entry?

Ans- A journal is a book of original entry in which transactions are recorded in the order in which they occur i.e., in chronological order.

A journal is called a book of original entry because all transactions are entered first in this book.

Q4. What is Compound Journal Entry and Opening Entry? 

Ans- Compound Journal Entry:- Two or more transactions relating to one particular account take place on the same date. In such cases, instead of passing separate entries for all such transactions, only one entry is passed. Such entry is called Compound Journal Entry.

Opening Entry:- Opening entry is a compound entry which carries forward all the balances of assets and liabilities of previous year to current year.

Q5. Journalise the following transactions:-

March

2012

       1 Started business with cash Rs 50,000.

       2 Purchased machinery for cash Rs 20,000. Paid installment charges on machinery Rs 2000.

      5 Purchased goods from X of the list price of Rs 25,000, Trade Discount 20% and Cash Discount           5%. Payment was made in cash. 

     10 Sold goods to Y costing Rs 10,000 at 30% profit on costless 10% trade discount.

     15 Paid Rent Rs 1,000.

     20 Goods stolen from business Rs 2,000.

    22 Gave as charity: cash Rs 100 and Goods Rs 200.

    31 Purchased a typewriter for business Rs 5,000.

Ans- 

Q6. Goods of the list price of Rs 80,000 are sold by Mr. Mahesh to Mr. Jagmohan. Trade Discount is 9% and Cash Discount is 5%, 60% payment is made in cash. Give Journal Entries in the books of Mr. Mahesh and Mr. Jagmohan.

Ans- 

Q7. Journalise the following:-

1. Purchased goods for Rs 25,000 for cash and paid Rs 200 for carriage on these goods.
2. Purchased goods for Rs 40.000 on credit from sudhir and paid Rs 500 for carriage on these goods.
3. Received an order of goods for Rs 50,000 from gopal.
4. Purchased machinery for Rs 20,000 and spent Rs 500 on its carriage and Rs 300 on its installation.
5. Purchased goods from Anil for Rs 15,000.
6. Sold 1/3rd of the above goods at a profit of 20%.
7. Gopal's order was executed and cartage Rs 2000 was paid in this connection.
8. Goods costing Rs 12,000 sold to Mr. X, issued invoice at 25% above costless 10% trade discount.
9. Provide 20% depreciation furniture costing Rs 10,000.

Ans- 

chapter 1

Accounting theory and philosophy

Important questions and answers

Q1. What is accounting concept? Explain the six accounting concepts?

Ans- Accounting concept provide a foundation for accounting process. No enterprise can prepare its financial statement without considering these basic concept. These guide how trancation should be recorded and reported.

Six accounting concepts are:

1. Business Entity Concept:-  As per this concept, the business is considered to have a separate identity apart from its owner. Only the business transaction are recorded in the books of accounts. As per this concept the business is liable to pay to the owner the capital brought by him.

2. Going concern concept:-  Accounting standard or statement are prepared on the basis that the business will continue its activities in the near future. it is also assumed that business has idefinitely long life
3. Full Disclosure principle:- The convention of disclosure means that the information of material nature must be fully or properly disclosed in the financial statement.
4. Matching Concept:- As per this concept, the revenue of an accounting period such expenses are deducted which are incurred to earn that income. This helps to determine the correct profit or loss of that period.
5. Principle of Conservatism:- This implies that the accountant should not anticipate income but provide for all possible losses. This puts a guard against all possible losses.
6. Consistency Concept:- In order to compare the financial statement of different years it is necessary to maintain consistency in the accounting policies followed by the business.
Q2. What is GAAP?
Ans- GAAP(General Accepted Accounting Principles) are basic or fundamental proposition accepted by the accountant based on which transaction are recorded in the books of account and financial statements are prepared. GAAP refers to the common set of accepted accounting principles, standards and procedure that company and their accounting must follow when they compile their financial statement.
Q3. Difference between Book Keeping and Accounting.
Ans- Book-Keeping differ from Accounting in the following respect:-

Q4. Write a short note on 
       (a) Internal user of accounting information.
       (b) External user of accounting information.
Ans- Internal user of accounting information:
Internal user are the primary user of accounting. Following are the 3 types of internal user and their information needs:

• OWNER:- Owner is the main user of accounting. Owner need to assess how well their organisation or business is performing.He uses accounting information to know amounts due to others and due from others. 
• MANAGER:- Manager need accounting information to plan, control, and execute. Manager need to allocate the capital, human and financial resources towards need of the business through the budgeting process.
• EMPLOYEE:- employee using accounting information for various purposes. Many employees review accounting information in the annual report just to get a better understanding of the business.

External user of accounting information:

External user are the secondary user of accounting. following are the types of external user:

• INVESTORS:- Person who are interested to make  investment in some company, may study annual report. Investor use accounting information to determine whether an investment is a good fit for their portfolio.
• SUPPLIERS:- Person who supply  goods and services to business on credit are interested to watch liquidity position  of the business. Suppliers use accounting information to ensure repayment capacity of the business.
• CUSTOMERS:- Customer who place order and are dependent on specific business organisation for their supplies have to ensure the capability of the firm to execute the order.
• GOVERNMENT:- Government uses accounting information for levying various taxes like sales tax, export duty, etc.
• PUBLIC:- they also interested in accounting information of a company. These could include joirnalists, academics, acticists and individuals with an interest in economic developments.
• RESEARCHER:- Research scholar who have undertaken research on any aspects of business activity, may use accounting information for the purpose of analysis.

Q5. What are the advantages, function and limitations of accounting?

Ans- Advantages of accounting:

• It helps in management of business.
• Helpful in decision making.
• Helpful in raising loan.
• Helpful in prevention and detection of error and fraud.
• Proviide complete and systematic record.
• Information regrading profit and loss and financial position.
• Facilitates sale of business.

Functions of accounting:-

• Maintain complete and systematic records of business transaction, post them to ledger and to prepare the financial statement i.e., statement of profit and loss and the balance sheet.
• It maintain proper records of various assets such as cash in hand, bank balance, inventory, debtors etc.
• Accounting perform this function by supplying the information to the government agencies.
• Accounting provide assestance to management in the task of  planning, controlling, and decision making.
• Accounting is to communicate the information regarding net profit(or loss), assets, liabilities etc. to the interest parties.

Limitation of accounting:-

• Recording only monetary itens.
• Transaction are recorded on the basis of evidence such as sale or purchase or reciept of cash.
• Allocation process is an important problem in accounting system. The value of fixed assets is exhausted charging depreciation for allocated period.

Q6. What are the needs of accounting? And also explain evolution of accounting?

Ans- Need of Accounting:
Accounting helps you track who owes you what, what you owe to who, manage payroll records, track loan and interest repayments, sets you up with the financial data you need when it comes time to file and pay your company's taxes. The goal of mangerial accounting is to help company manager and supervisor make financial decisions, whereas the goal of accounting is to provide finacial information about your company to those outsider of the business.
Evolution of accounting:
In the earliest ages man's commercial activities were based upon direct barter and, therefore, the keeping of records was not a neccessary part of business, but as soon as the principle of transaction upon credit term beecame a part of commercial practice, records became a necessary  that might  know what amounts were owing to him by his customers and what was owing by him to his creditors.
As soon as, men commenced to keep book-keeping recoeds the need for accuracy became apparent. With the end in view and in order that the recorder  might be complete, the double entry system of book keeping was evolved.

Q7. Give two example of transactions which are not recorded in accounting.

Ans- Business events that are not recorded in the financial books, Example are hiringof employees, death of the owner, entering into a contract etc.

Q8. What is accounting process?

Ans- 

Q9. What are Accounting terminology?
Ans- Accounting terminologies are :-

• Trade debtors
• Trade creditors
• Assets- tangible assets, intangible assets, current assets, ficticious assets.
• Liabilities
• Capital
• Drawings
• Baddebts
• Goods/raw material
• Inventory/ stock
• Revenue/Income
• Expenditure
• Profit/ Loss
• Reserves and Provisions
• Contingent Liabilities
• Depreciation/ Appreciation

Q10. What are the main characteristics of accounting?
Ans-  The main characteristics of accounting are:-

1. Recording of financial transactions only.
2. Recording in terms of money.
3. Classifying.
4. Summarising.
5. Interpretation of the results.
6. Communication.