Fill in the blanks.

1. The actual record keeping phase of accounting is usually called "Bookkeeping".

2. According to the "Realization" concept, revenue is considered as being raised on the
date at which it is realized.
3. Discount account is a "Nominal" account.
Q2. Choose the best answer from the following.
1. Find out the amount of profit made by a concern during the past one year, If its capital increased by
Rs.30,000 and drawings amounted to Rs.20,000. (i) 5,000 (ii) 50,000 (iii) 10,000 (iv) 1000
Ans:- (ii) 50000

2. Which of the following accounts will invariably have a debit balance? *(i) Bank Account-(ii)
Accounts Receivables Account (iii) Loan Account (iv) Accounts Payable Account
Ans:- (ii) Accounts Receivables Account

3. Which of the following accounts have only credit balance? (1) Accounts Payable Account (ii)
Salaries Outstanding Account (iii) Reserve Fund Account (iv) All of these accounts
Ans:- (iv) All of these accounts

Question Answers

• Accounting is the systematic process of recording, summarizing, analyzing, and

reporting Cinancial transactions of a business entity to provide accurate information
about its Cinancial position and performance.

Q1. Is Accounting a science or an art? What are the objectives and limitations
of Accounting?

Is Accounting a Science or an Art?

Accounting is both a science and an art, functioning in a complementary manner. As a science, it follows
systematic principles, standardized rules, and established procedures for recording, classifying, and analyzing
financial transactions. The scientific aspect is evident in its mathematical precision, standardized frameworks like
GAAP or IFRS, and the logical sequence of the accounting cycle.

However, accounting also embodies artistic elements through professional judgment and interpretation.
Accountants must often make informed decisions about complex transactions, valuation methods, and financial
estimates. This artistic aspect comes into play when determining depreciation methods, assessing contingent
liabilities, or making provisions for future expenses.

Objectives of Accounting
1. Recording Financial Information 2. Providing Information to Stakeholders
3. Evidence in Legal Matters 4. Future Planning
5. Decision Making 6. Meeting Legal Requirements

Limitations of Accounting
1. Changing Accounting Policies 2. External Factors Not Considered
 3. Time Lag 4. Cost Involved
5. Complex and Technical

Q What do you mean by Journal? Why is it called the book of original entry ? Give
the rules of Journalizing.

Understanding Journal in Accounting

A journal is fundamentally a chronological record of all business transactions, where each entry is recorded as
it occurs, showing debits and credits with a brief explanation. Think of it as the business's financial diary,
capturing the daily story of financial events. This systematic recording helps maintain accuracy and provides a
clear audit trail of all transactions.

Why It's Called the Book of Original Entry

The journal earns its title "book of original entry" for several compelling reasons. First, it serves as the initial
point of recording any transaction in the accounting system. Before any amount reaches the ledger accounts, it
must first pass through the journal. This chronological recording ensures that no transaction is overlooked or
recorded twice.
The term "original" also emphasizes its role as the primary source document in the accounting process. Like a
historian's primary source, the journal captures transactions in their original form, with all essential details
preserved. This makes it invaluable for tracking the history of transactions and verifying their authenticity.

Rules of Journalizing
1. Basic Debit and Credit Rules
For different types of accounts, the rules are:

• Assets: Increase by debit, decrease by credit

• Liabilities: Increase by credit, decrease by debit
• Capital: Increase by credit, decrease by debit
• Expenses: Increase by debit, decrease by credit
• Revenues: Increase by credit, decrease by debit

2. Recording Process Rules

• Each transaction must have at least one debit and one credit
• The total of debit amounts must equal the total of credit amounts
• Write the date of transaction in the date column
• Debit entries always come before credit entries
• Credit entries are slightly indented

3. Narration Requirements
• Every journal entry must include a clear, concise explanation
• The narration should begin with "Being" or "For"
• Write the narration below the entry and within parentheses
• Provide sufficient detail to understand the transaction's nature

4. Format and Presentation

• Use proper date format consistently
• Write account titles clearly and accurately
• Record amounts in their respective debit and credit columns
• Maintain chronological order strictly
• Use consistent terminology
5. Supporting Documentation
• Each entry should be supported by source documents
• Reference numbers of supporting documents should be noted
• Keep all source documents properly filed and accessible

Q Define a Ledger. Why is it known as the principal book of accounts? Also give its
ruling.

Understanding Ledger in Accounting

A ledger represents the second stage in the accounting cycle, serving as a collection of all accounts used by a
business. It systematically groups similar transactions recorded in journals into specific accounts, making it
easier to track the position of each account. Think of it as a master document that provides a comprehensive
view of all financial activities classified by account type.

Why It's Called the Principal Book of Accounts

The ledger earns its status as the "principal book of accounts" for several significant reasons:

1. Complete Financial Picture: It presents the complete financial position of each account at any given
time, allowing quick access to vital information about assets, liabilities, revenues, and expenses.
2. Decision-Making Tool: Business owners and managers rely on ledger information to make informed
decisions, as it provides clear insights into the financial health of different aspects of the business.
3. Financial Statement Preparation: The ledger serves as the primary source for preparing financial
statements. Without properly maintained ledger accounts, creating accurate balance sheets and income
statements would be impossible.
4. Trial Balance Foundation: It forms the basis for preparing the trial balance, which tests the arithmetic
accuracy of all recorded transactions.

Ledger Ruling (Format)

Traditional "T" Format:
Account Title Page No.
Dr. Cr.
─────────────────────────────────────────────────────────────────────
Date | Particulars | J.F | Amount || Date | Particulars | J.F | Amount
─────────────────────────────────────────────────────────────────────

Modern Horizontal Format:

Name of Account: _____________ Page No: ___
Dr. Cr.
─────────────────────────────────────────────────────────────────────────────
Date | Particulars | J.F | Amount | Date | Particulars | J.F | Amount |
Balance
─────────────────────────────────────────────────────────────────────────────

Elements of the Ruling:

1. Title Section:
 • Account name at the top
• Page number for reference
• Dr. (debit) and Cr. (credit) sides clearly marked

2. Date Column:

• Records the date of each transaction

• Maintains chronological order

3. Particulars Column:

• Shows the contra account for each entry

• Provides brief description if necessary

4. J.F. (Journal Folio) Column:

• References the journal page number

• Helps in cross-referencing entries

5. Amount Column:

• Records the monetary value of transactions

• Separated into debit and credit sides

6. Balance Column (in modern format):

• Shows running balance after each entry

• Indicates whether balance is debit or credit

This structured format helps in:

• Maintaining clarity and organization

• Easy tracking of transactions
• Quick reference and analysis
• Efficient preparation of financial statements
• Accurate balancing of accounts

Understanding and properly using this ruling is crucial for:

• Accurate record-keeping
• Easy retrieval of information
• Clear audit trails
• Effective financial management
• Compliance with accounting standards

Q Identify the group of people, who would be interested in Accounting information of

an organization and discuss their needs.

Users of Accounting Information

Accounting information serves diverse stakeholders, each with unique information needs and interests in an
organization's financial health. Let's explore these different groups and their specific requirements:

Internal Users
Management
Management teams require detailed accounting information for:
 • Strategic planning and decision-making
• Performance evaluation of different departments
• Budget preparation and control
• Resource allocation decisions
• Cost control and efficiency improvement
• Setting pricing policies
• Investment decisions in new projects

Employees
Workers and their representatives are interested in:

• Company's financial stability for job security

• Profit-sharing calculations
• Wage and salary decisions
• Retirement benefits and pension plans
• Career growth opportunities
• Company's ability to provide bonuses and raises

External Users
Investors and Shareholders
Current and potential investors focus on:

• Return on investment potential

• Company's profitability and growth trends
• Dividend payment capacity
• Share value appreciation
• Overall financial health and stability
• Corporate governance practices

Creditors and Lenders

Banks and other lending institutions need information about:

• Company's ability to repay loans

• Liquidity position
• Asset base and collateral value
• Cash flow patterns
• Working capital management
• Debt-servicing capacity

Suppliers and Trade Creditors

Vendors and suppliers are concerned with:

• Payment capacity for goods and services

• Short-term liquidity
• Working capital management
• Long-term sustainability
• Credit worthiness
• Purchase trends and future business potential

Customers
Customers' interests include:

• Company's ability to continue operations

 • Product pricing justification
• Service quality sustainability
• Warranty fulfillment capacity
• After-sales service capability

Government Agencies
Various government bodies require information for:

• Tax assessment and collection

• Economic planning and statistics
• Regulatory compliance
• Industry analysis
• Employment data
• Foreign exchange management

Competitors
Competitors analyze:

• Market share and performance

• Pricing strategies
• Product line profitability
• Operating efficiency
• Investment patterns
• Growth strategies

Research Analysts and Advisors

Financial analysts need information for:

• Industry analysis and comparisons

• Investment recommendations
• Market trends analysis
• Company valuation
• Performance forecasting

General Public
The public may be interested in:

• Environmental impact assessments

• Corporate social responsibility
• Local economic impact
• Employment opportunities
• Community development contributions

Importance of Different Information Needs

Understanding these diverse needs is crucial because:

• It helps in designing appropriate reporting formats

• Ensures relevant information disclosure
• Aids in maintaining transparency
• Supports stakeholder relationships
• Facilitates better decision-making
Challenges in Meeting Information Needs
Organizations face several challenges:

• Balancing transparency with confidentiality

• Meeting varying detail requirements
• Ensuring timely information delivery
• Managing cost of information preparation
• Maintaining information accuracy and reliability
• Addressing conflicts between different users' needs

Q2. Journalize the following transactions of M/s Saroj Mart for the month of July, 2023.
01.7.2023 Business started with cash Rs. 1,50,000.
01.7.2023 Goods purchased form Manisha Rs. 36,000
01.7.2023 Stationery purchased for cash Rs: 2,200
02.7.2023 Open a bank account with SBI for Rs. 35,000.
02.7.2023 Goods sold to Priya for Rs. 16,000.
03.7.2028 Received a cheque of Rs. 16,000 from Priya
05.7.2023 Sold goods to Nidhi Rs. 14,000.
08.7.2023 Nidhi pays Rs. 14,000 cash.
10.7.2023 Purchased goods for Rs. 20,000 on credit from Ritu.
14.7.2023 Insurance paid by cheque Rs. 6,000.
18.7.2023 Paid rent Rs. 2,000:
20.7:2023 Goods costing Rs. 1,500 given as charity.
24.7.2023 Purchased office furniture for Rs. 11,200.
29.7.2023 Cash withdrawn for household purposes Rs. 5000.

Date Particulars Dr.(₹) Cr.(₹)

01.7.2023 Cash A/c 1,50,000

To Capital A/c 1,50,000

(Being business started with cash)

01.7.2023 Purchases A/c 36,000

To Manisha A/c 36,000

(Being goods purchased on credit)

01.7.2023 Stationery A/c 2,200

To Cash A/c 2,200

(Being stationery purchased for cash)

02.7.2023 Bank A/c 35,000

To Cash A/c 35,000

(Being bank account opened)

02.7.2023 Priya A/c 16,000

To Sales A/c 16,000

(Being goods sold on credit)

03.7.2023 Bank A/c 16,000

To Priya A/c 16,000

(Being cheque received from debtor)

03.7.2023 Nidhi A/c 14,000

To Sales A/c 14,000

(Being goods sold on credit)

05.7.2023 Cash A/c 14,000

To Nidhi A/c 14,000

(Being cash received from debtor)

08.7.2023 Purchases A/c 20,000

To Ritu A/c 20,000

(Being goods purchased on credit)

10.7.2023 Insurance A/c 6,000

To Bank A/c 6,000

(Being insurance paid by cheque)

14.7.2023 Rent A/c 2,000

To Cash A/c 2,000

(Being rent paid)

18.7.2023 Charity A/c 1,500

To Purchases A/c 1,500

(Being goods given as charity)

 24.7.2023 Furniture A/c 11,200

To Cash A/c 11,200

(Being o\ice furniture purchased)

29.7.2023 Drawings A/c 5,000

To Cash A/c 5,000

(Being cash withdrawn for personal use)

M/s Singhania and Bros. purchased a plant for Rs. 5,00,000 on April 01, 2017, and spent Rs. 50,000 for
its installation. The salvage value of the plant after its useful life of 10 years is estimated to be Rs,
10,000. Prepare Plant Account for first three years. If the depreciation is charged using straight line
method.

Dr. Cr.

─────────────────────────────────────────────────────────────────────────────────────────

Date Particulars Amount(₹) | Date Particulars Amount(₹)

─────────────────────────────────────────────────────────────────────────────────────────

2017-18 |

Apr 1 To Bank A/c 5,00,000 | Mar 31 By Depreciation A/c 54,000

Apr 1 To Bank A/c (Install.) 50,000 | Mar 31 By Balance c/d 4,96,000

───────── | ─────────

Total 5,50,000 | Total 5,50,000

═════════ | ═════════

2018-19 |

Apr 1 To Balance b/d 4,96,000 | Mar 31 By Depreciation A/c 54,000

| Mar 31 By Balance c/d 4,42,000

───────── | ─────────

Total 4,96,000 | Total 4,96,000

═════════ | ═════════

2019-20 |

Apr 1 To Balance b/d 4,42,000 | Mar 31 By Depreciation A/c 54,000

| Mar 31 By Balance c/d 3,88,000

 ───────── | ─────────

Total 4,42,000 | Total 4,42,000

═════════ | ═════════