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Q.1 Define Accounting. Why is Accounting Necessary? Difference between
Accounting and Book-Keeping
Definition of Accounting
Accounting is the process of systematically recording, classifying, summarizing,
and interpreting financial transactions of a business in monetary terms to provide
useful information for decision-making.
Why Accounting is Necessary?
1. Systematic Record – keeps all transactions in order.
2. Determination of Profit/Loss – by preparing Profit & Loss A/c.
3. Financial Position – shows assets and liabilities in Balance Sheet.
4. Decision-Making Tool – helps management to control costs and increase
profit.
5. Legal Requirement – required for tax and audit purposes.
Difference between Accounting and Book-Keeping
Book-keeping is limited to recording transactions only.
Accounting includes book-keeping plus analysis, interpretation, reporting, and
decision-making.
Example
Book-keeping: Recording "Cash received Rs. 5,000".
Accounting: Preparing final accounts to see profit/loss from all such records.
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Q.2 Use of Accounting Information in Decision-Making
Decision
Definition
Accounting information means the data and reports prepared from accounting
records that are used by different parties (owners, managers, investors,
creditors, government) for decision-making.
decision
Explanation
1. For Owners – to know profit earned.
2. For Management – to plan expenses and future growth.
3. For Investors – to check business
bus performance before investing.
4. For Creditors – to know repayment ability.
5. For Government – for tax calculation and compliance.
Example
If accounting records show:
Sales = Rs. 500,000
Expenses = Rs. 450,000
Profit = Rs. 50,000
Management may decide to expand sales operations because the business
is profitable.
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Q.3 Double Entry System: Personal, Real & Nominal Accounts
Definition
The double-entry system is a system of accounting where every transaction
affects two accounts: one account is debited and the other is credited.
Explanation of Types of Accounts
1. Personal Account Rule – Debit the receiver, Credit the giver.
2. Real Account Rule – Debit what comes in, Credit what goes out.
3. Nominal Account Rule – Debit expenses/losses, Credit incomes/gains.
Examples
Personal: Paid Ali Rs. 1,000 → Debit Ali A/c, Credit Cash A/c.
Real: Bought furniture Rs. 5,000 → Debit Furniture A/c, Credit Cash A/c.
Nominal: Paid rent Rs. 2,000 → Debit Rent A/c, Credit Cash A/c.
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Q.4 Distinguish Between
(i) Journal and Ledger
Definition of Journal
The Journal is the book of original entry in which all business transactions are first recorded in
chronological (date-wise) order using the double-entry system.
Definition of Ledger
The Ledger is the book of final entry where transactions from the Journal are classified and
posted under respective heads (accounts).
Explanation
Journal records the transactions as they occur.
Ledger groups all entries of similar nature into their respective accounts (e.g., Cash A/c, Sales
A/c).
Example
Journal entry:
Jan 1: Cash A/c Dr. 50,000
To Capital A/c 50,000
Ledger:
In Cash A/c, Rs. 50,000 will be recorded on debit side.
In Capital A/c, Rs. 50,000 will be recorded on credit side.
(ii) Journalising and Posting
Definition of Journalising
Journalising means the process of recording business transactions in the Journal in the form of
journal entries.
Definition of Posting
Posting means transferring entries from the Journal to the Ledger under their respective accounts.
Explanation
Journalising is the first stage of recording.
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Posting is the second stage, where entries are classified account-wise.
account
Example
Journalising:
Purchases A/c Dr. 10,000
To Cash A/c 10,000
Posting:
In Purchases A/c (Ledger), Rs. 10,000 on Debit side.
In Cash A/c (Ledger), Rs. 10,000 on Credit side.
(iii) Periodic Balance Ledger and Running Balance Ledger
Definition of Periodic Balance Ledger
In this type of ledger, the balance of each account is calculated periodically (weekly, monthly, or
yearly) after totaling the debit and credit sides.
Definition of Running Balance Ledger
In this ledger, the balance is shown after every transaction. It continuously show
shows the updated
balance after each entry.
Explanation
Periodic Balance Ledger: Suitable for manual systems, balances are known only after
preparation of trial balance.
Running Balance Ledger: Suitable for computerized systems, balances are available instantly.
Summary:
Journal vs Ledger → Journal is first entry book; Ledger is final classification book.
Journalising vs Posting → Journalising = recording, Posting = transferring.
Periodic vs Running Ledger → Periodic = balance at intervals, Running
Running = balance after every
transaction
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Q.5 Difference between Depreciation and Depletion
Definition of Depreciation
Depreciation is the gradual reduction in the value of a tangible fixed asset (such as
machinery, furniture, building, vehicles) due to wear and tear, usage, passage of time,
or obsolescence.
Definition of Depletion
Depletion is the reduction in the value of natural resources (such as coal mines, oil
wells, forests, gas reserves) due to continuous extraction or usage.
Key Differences
1. Nature of Asset
Depreciation applies to tangible fixed assets.
Depletion applies to natural resources.
2. Cause of Reduction
Depreciation occurs due to wear & tear, passage of time, or obsolescence.
Depletion occurs due to extraction or consumption of natural resources.
3. Calculation Method
Depreciation is calculated using methods like Straight Line Method (SLM) or Written
Down Value (WDV).
Depletion is calculated using units-of-production method (based on quantity extracted).
4. Accounting Treatment
Depreciation is shown as an expense in Profit & Loss Account and deducted from the
asset’s value in the Balance Sheet.
Depletion is also charged as an expense, reducing the carrying value of the natural
resource asset.
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Examples
Depreciation Example
A machine worth Rs. 100,000 has a useful life of 10 years.
Annual depreciation (Straight Line Method) = Rs. 100,000 ÷ 10 = Rs. 10,000.
Each year, Rs. 10,000 is charged as depreciation expense.
Depletion Example
A coal mine costs Rs. 500,000 and is expected to yield 100,000 tons of coal.
Depletion per ton = Rs. 500,000 ÷ 100,000 = Rs. 5 per ton.
If 20,000 tons are extracted in a year → Depletion = 20,000 × 5 = Rs. 100,000
Q.6 Bank Reconciliation Statement (BRS)
Definition
A Bank Reconciliation Statement is a statement prepared to reconcile the
difference between the balance shown in the Cash Book of the business and the
Pass Book of the bank.
Explanation
Disagreements arise due to timing differences or errors such as:
1. Cheques issued but not presented.
2. Cheques deposited but not cleared.
3. Bank charges not recorded.
4. Direct deposits by customers not recorded.
Prepared monthly or periodically to ensure accuracy.
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Example
Cash Book shows Rs. 10,000.
Bank charges Rs. 200.
Cheque of Rs. 2,000 issued not yet presented.
Bank Balance = Rs. 10,000 – 200 + 2,000 = Rs. 11,800.
Q.7 Partnership Agreement – Essential Elements and Ratios
Definition
A partnership agreement is a written contract between partners that defines the
terms, conditions, rights, and duties of each partner in a business.
Essential Elements
1. Name and nature of business.
2. Capital contribution of each partner.
3. Profit and loss sharing ratio.
4. Interest on capital, drawings, and loans.
5. Salary/commission of partners.
6. Rules for admission, retirement, death.
7. Settlement at dissolution.
Profit & Loss Ratios
1. Equal Ratio – if not mentioned in agreement.
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2. Fixed Ratio – decided beforehand.
3. Capital Ratio – according to capital invested.
Examples
Profit Rs. 100,000 shared equally → A gets Rs. 50,000, B gets Rs. 50,000.
Profit Rs. 100,000 in ratio 3:2 → A gets Rs. 60,000, B gets Rs. 40,000.
Q.8 Difference between Realization Account and Revaluation Account
1. Realization Account
A Realization Account is prepared at the time of dissolution of a partnership firm.
It is used to record the sale of assets, payment of liabilities, and the realization of
profit or loss arising at the time of closing the firm.
The balance (profit/loss) is transferred to the partners’ capital accounts.
Entries Passed in Realization Account:
1. Transfer all assets (except cash, bank, fictitious assets) →
Realization A/c Dr. → To Assets A/c
2. Transfer all liabilities (except partners’ loan, capitals) →
Liabilities A/c Dr. → To Realization A/c
3. When assets are sold →
Cash/Bank A/c Dr. → To Realization A/c
4. When liabilities are paid →
Realization A/c Dr. → To Cash/Bank A/c
5. Profit or loss transferred to partners →
Realization A/c Dr. → To Partners’ Capital A/c (in case of loss)
OR
Partners’ Capital A/c Dr. → To Realization A/c (in case of profit)
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Example:
A firm is dissolved. Assets worth Rs. 100,000 realized Rs. 90,000. Liabilities Rs.
40,000 paid fully. Realization expenses Rs. 2,000.
Loss on realization = (100,000 – 90,000) + 2,000 = Rs. 12,000 → shared by
partners.
2. Revaluation Account
A Revaluation Account is prepared at the time of admission, retirement, or death
of a partner.
Its purpose is to record changes in the value of assets and liabilities and to find
out profit or loss due to revaluation.
This profit/loss is shared by the old partners only, in their old profit-sharing
profit sharing ratio.
Entries Passed in Revaluation Account:
1. Increase in assets →
Assets A/c Dr. → To Revaluation A/c
2. Decrease in assets →
Revaluation A/c Dr. → To Assets A/c
3. Increase in liabilities →
Revaluation A/c Dr. → To Liabilities A/c
4. Decrease in liabilities →
Liabilities A/c Dr. → To Revaluation A/c
5. Profit or Loss on revaluation transferred to old partners’ capitals.
Example:
Building increased from Rs. 50,000 to Rs. 60,000 (gain 10,000). Stock decreased
from Rs. 20,000 to Rs. 18,000 (loss 2,000).
Net gain = 8,000 shared among old partners.
Key Difference:
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Realization A/c → on dissolution, to close the firm.
Revaluation A/c → on admission/retirement/death, to adjust asset & liability
values.
Q.9 Sub-division of Journal (Subsidiary Books)
Introduction
The journal is the book of original entry, but in big firms, it is subdivided into
different books to save time and improve efficiency. These are called subsidiary
books.
Kinds of Subsidiary Books with Specimens
1. Purchases Book
Records credit purchases of goods only.
Specimen:
Date | Name of Supplier | Invoice No. | Amount
2. Sales Book
Records credit sales of goods only.
Specimen:
Date | Name of Customer | Invoice No. | Amount
3. Purchases Returns Book
Records return of goods to suppliers.
Specimen:
Date | Name of Supplier | Debit Note No. | Amount
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4. Sales Returns Book
Records goods returned by customers.
Specimen:
Date | Name of Customer | Credit Note No. | Amount
5. Cash Book
Records all cash and bank transactions.
Types: Single column, double column (cash + bank), triple column (cash + bank
+ discount).
Specimen:
Date | Particulars | Cash (Dr/Cr) | Bank (Dr/Cr) | Discount
6. Bills Receivable Book
Records all bills received by the firm.
7. Bills Payable Book
Records all bills accepted by the firm.
8. Journal Proper
Used for entries which cannot be recorded in other subsidiary books, e.g.
opening entries, closing entries, adjustments, rectification entries.
Example of Journal Proper:
Depreciation charged on furniture Rs. 5,000.
Depreciation A/c Dr. 5,000 → To Furniture A/c 5,000
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Q.10 Types of Errors
Introduction
In accounting, errors occur due to wrong entries, omission, or clerical mistakes.
Errors are broadly classified as:
1. Errors of Omission
When a transaction is completely or partially omitted.
Example: Sale of Rs. 10,000 not recorded.
2. Errors of Commission
Mistakes due to carelessness in posting, carrying forward, or calculation.
Example: Writing Rs. 540 instead of Rs. 450.
3. Errors of Principle
When entries are made violating accounting principles.
Example: Treating purchase of machinery (capital expenditure) as purchases
(revenue).
4. Compensating Errors
When two or more errors cancel each other.
Example: An overcasting of Rs. 1,000 in purchases cancels an overcasting of
Rs. 1,000 in sales.
5. Errors of Original Entry
Wrong figure entered in the book of original entry.
Example: Purchase of Rs. 2,500 entered as Rs. 2,050.
6. Errors of Duplication
Same entry recorded twice.
Example: Salary paid Rs. 10,000 recorded
re two times.
Conclusion:
Errors can affect the trial balance and final accounts. They are rectified by
passing rectification journal entries.
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Q.11 Short Notes
(i) Profit & Loss Appropriation Account
Meaning
It is a special account prepared by partnership firms after the Profit & Loss Account.
It shows how the net profit is distributed among partners after making appropriations like
interest on capital, salaries, reserves, etc.
Format (Specimen)
Profit & Loss Appropriation Account
Dr. Cr.
------------------------------------------------
----------------------------------------------
Particulars Amount Particulars Amount
------------------------------------------------
Interest on Capital xxx Net Profit b/d xxx
Partners’ Salary xxx Reserve A/c xxx
Reserve Fund xxx Balance c/d xxx
Balance transferred xxx
to Partners’ Capital
------------------------------------------------
Example
Net profit = Rs. 100,000
Partner A salary = Rs. 10,000
Interest on capital = Rs. 5,000
Balance distributed equally.
(ii) Garner Vs Murray Rule
Meaning
This is a legal rule applied at the time of dissolution of a partnership firm when a partner
is insolvent (unable to bring capital).
According to the rule:
The deficiency of the insolvent partner’s capital is borne by the solvent partners in
the ratio of their capital
ital balances, not in profit-sharing
profit ratio.
Example
A, B, C partners. C insolvent. His deficiency Rs. 6,000. A’s capital = 40,000; B’s capital
= 20,000.
Ratio = 40,000 : 20,000 = 2 : 1
A will bear Rs. 4,000; B will bear Rs. 2,000.
(iii) Amalgamation of Firms
Meaning
Amalgamation means two or more firms combine to form a new firm.
The assets and liabilities of old firms are transferred to the new firm.
Purpose
To increase resources, expand business, reduce competition.
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Example
Firm A and Firm B dissolve and form Firm AB Ltd. Their assets & liabilities are taken
over by the new firm.
(iv) Annuity
Meaning
An annuity is a series of equal payments made at equal intervals of time.
It can be yearly, half-yearly,
yearly, quarterly, or monthly.
Types
1. Ordinary Annuity – payment at the end of each period.
2. Annuity Due – payment at the beginning of each period.
Example
If Rs. 10,000 is paid every year for 5 years, it is an annuity.
(v) Joint Life Insurance Policy
Meaning
A life insurance policy taken by all partners
partners jointly to cover the risk of death of a partner.
Premium is paid out of firm’s funds.
On death, insurance money is used to settle the deceased partner’s account.
Methods of Accounting
1. Premium treated as expense – charged to Profit & Loss A/c everyy year.
2. Policy treated as asset – shown at surrender value in Balance Sheet.
Example
Partners A, B, C take joint life policy of Rs. 300,000. A dies → policy money received →
used to pay A’s legal heirs.
Conclusion:
Profit & Loss Appropriation A/c = shows distribution of profits.
Garner vs Murray Rule = insolvency adjustment.
Amalgamation = merging firms.
Annuity = equal periodic payments.
Joint Life Policy = insurance for partners’ protection.
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CHAP NO 1: TRADING PROFIT AND LOSS ACCOUNT AND B. SHEET 20
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SOLBED GUESS PAPERPRINCIPLES OF ACCOUNTING FOR
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CHAPTER 2: CASH BOOK AND BANK RE CONCILIATIONSTATEMENT 20+20
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CHAP NO. 3: DEPRECIATION 20
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CHAPTER NO. 4. RECTIFICATION OF ERRORS: 20
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CHAPTER NO. 5: RECEIPT AND PAYMENT ACCOUNT 20
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CHAPTER NO. 6: SINGLE ENTRY SYSTEM 20
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CHAPTER NO. 7: CAPITAL AND REVENUE EXPENDITURES
1. State with the reasons whether the following are capital or revenue.
(i) Wages paid on the purchase of goods
Classification: Revenue
Reason: Normal cost of buying goods for resale.
(ii) Carriage paid on goods purchased
Classification: Revenue
Reason: Cost of bringing goods for sale.
(iii) Transportation paid on machinery purchased
Classification: Capital
Reason: Necessary to make machinery ready for use.
(iv) Octroi duty paid on machinery
Classification: Capital
Reason: Tax paid to acquire machinery, added to cost.
(v) Octroi duty paid on goods
Classification: Revenue
Reason: Tax on goods purchased for resale.
(vi) Second-hand car purchased for Rs. 7,000 and Rs. 5,000 spent on repairs and
overhauling
Classification: Capital
Reason: Repairs were required to make the car usable, so included in cost.
(vii) Office building whitewashed at a cost of Rs. 3,000
Classification: Revenue
Reason: Regular maintenance of building.
(viii) New machinery purchased for Rs. 80,000 and Rs. 1,000 spent on installation
Classification: Capital
Reason: Installation cost is part of machinery’s cost.
(ix) Books purchased for Rs. 50,000 and Rs. 1,000 spent on carriage
Classification: Capital
Reason: Carriage added to cost of books (fixed asset).
(x) Land purchased for Rs. 1,00,000 and Rs. 5,000 paid for legal expenses
Classification: Capital
Reason: Legal cost is part of land’s acquisition.
(xi) Rs. 50,000 paid for customs duty and freight on machinery from Japan
Classification: Capital
Reason: Direct cost of acquiring the machinery.
(xii) Old furniture repaired at a cost of Rs. 500
Classification: Revenue
Reason: Normal repair, not improvement.
(xiii) An additional room constructed at a cost of Rs. 15,000
Classification: Capital
Reason: Increases value and capacity of building.
(xiv) Damages paid for breach of contract
Classification: Revenue
Reason: Business loss during operations.
(xv) Replacement of an old worn out part of machinery
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Classification: Revenue
Reason: Routine replacement to maintain use.
(xvi) Repairs to a motor car after an accident
Classification: Revenue
Reason: Restores car to original condition.
(xvii) Rs. 10,000 spent on improving a machinery
Classification: Capital
Reason: Improves efficiency or capacity of machinery.
(xviii) Cost of removing plant and machinery to a new site
Classification: Capital
Reason: Related to relocation and reinstallation of asset.
(xix) Cost of acquiring goodwill of an old firm
Classification: Capital
Reason: Intangible asset giving long-term benefit.
(xx) Cost of redecorating a cinema hall
Classification: Revenue
Reason: Regular upkeep and decoration.
(xxi) Cost of putting up a gallery in a cinema hall
Classification: Capital
Reason: Permanent addition that increases income.
(xxii) Compensation paid to a director for loss of office
Classification: Revenue
Reason: Expense related to management.
(xxiii) Premium paid on redemption of debentures
Classification: Capital
Reason: Cost of repaying long-term capital.
(xxiv) Costs of attending a mortgage
Classification: Capital
Reason: Legal cost of raising long-term loan.
(xxv) Commission paid on issue of debentures
Classification: Capital
Reason: Cost of raising long-term capital.
(xxvi) Cost of air-conditioning director’s office
Classification: Capital
Reason: Permanent improvement in office.
(xxvii) Repairs and renewal of machinery
Classification: Revenue
Reason: Regular maintenance to keep asset working.
(xxviii) Cost of acquiring patent rights and trademarks
Classification: Capital
Reason: Intangible assets giving long-term benefits.
(xxix) Compensation paid to workers for termination of services
Classification: Revenue
Reason: Expense of staff settlement, not asset acquisition.
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