Financial Accounting

2 marks
1. What are factors affecting the amount of depreciation?
i) Original cost of the asset (ii) Estimated scrap or residual value (iii) Estimated life
ii)
2. What is depreciation?
The reduction in value of fixed assets is called depreciation. The gradual and permanent decrease
.
3. Define depreciation.
According to Carter defines depreciation as, “the gradual and permanent decrease in the value of an asset from
any cause”

4. Explain Amortization?
This refers to loss in the value of intangible assets such as goodwill, patents and preliminary expenses.

5. Explain Depletion?
Decrease in the value of mineral wealth such as coal, oil, iron ore etc., is termed as depletion.

6. Explain Obsolescence?
When an asset becomes useless due to new inventions, improved techniques and technological advances it is
termed as obsolescence. An asset becomes out of date due to improved methods or models.

7. What is Residual value?

The value expected to be realized on its sale on the expiry of its useful life. This is otherwise known as scrap
value or turn-in value.

8. What is meant by single entry system?

Single entry system is an incomplete, inaccurate, unscientific and unsystematic system of book keeping. It
maintains only personal and cash accounts.

9. Define single entry system.

According to Kohler defines single entry system as, “A system of book keeping in which as rule only records
of cash and personal accounts are maintained. It is always incomplete double entry, varying with the
circumstances”

10. How the profit of a business is ascertained under net worth method?
Statement of profit or loss for the year….
Rs
Closing capital xxxxx
Add: Drawings xxxx
xxxx
Less: Additional capital xxxx
Adjusted closing capital xxxx
Less: Opening capital xxxx
Net profit or Net loss for the year xxxx

11. Explain useful life of a machine?

Useful life is the time during which the asset is helpful in the normal business activities of a firm. It can be less
than the total life time of the asset.

12. What is a Depreciable asset?

The assets whose lifetime can be estimated and useful during two or more accounting periods in production or
service activities of an organization can be called depreciable assets.

13. What is depreciable amount? It is the cost of acquisition and installation of an asset after reducing any realizable value at
the end of useful life.

14. What is fixed asset?

All assets whose benefit is derived by a businessman for a long period of time, more than one year period is
called fixed assets. For example Machinery, Furniture, Buildings etc.

15. What is net worth method?

Net worth is ascertained with the help of statement of affairs. Net worth is the owner’s share of the assets after
providing for outside liabilities. This is also called “statement of affairs method”
 16. What is journal proper?
Journal proper is used for making the original record of such transactions for which no special journal has
been kept in the business. a) opening entries b) closing entries c)adjusting entries d)transfer entries e)rectifying entries f)
miscellaneous entries

17. What is Bank Reconciliation Statement?

The causes of difference between the ‘Bank Balance as per Cash book’ and ‘Balance as per Pass book’ at a
particular date, it is necessary to prepare a statement which is called Bank Reconciliation Statement (BRS).

18. What is trading account?

Trading means buying and selling. The trading account shows the result of buying and selling of goods
.
19. What is cash book?
A cash book is a special journal which is used to record all cash receipts and cash payments.

20. What is profit and loss account?

Profit and loss account is prepared in order to calculate the net profit or net loss of the business.

21. What is pass book? Bank pass book a copy of the customer’s account in the books of a bank.
Format
Dr. Cr. Balance Initials
Date Particulars Withdrawals Rs Deposits Dr/Cr
Rs Rs
22. What are subsidiary books?
Maintaining a single journal book in which journal entries are written for each transaction and posting them to ledger is
called subsidiary books. i)Purchases book (record credit purchases) ii)Sales book (record credit sales)
iii) Purchase return book (iv)Sales return book (v)Cash book (vi)Bills receivable book (vii) Bills payable book
(viii)Journal Proper or General Journal

23.What are liabilities?

Debts repayable to outsiders by the business are called liabilities. For eg.,creditors, bills payable, capital, loans

24. What are assets?

Anything of value owned by a business. For eg.,machinery, furniture, goodwill, investments, debtors etc.,

25. What is capital?

It represents owners funds invested in business. It may be the original amount invested in business. It is also known as
owner’s equity or net worth.

26. What is Drawings?

The proprietor may withdraw certain amounts from the business to meet personal expenses or goods for personal use are
called drawings.
Drawings from business
Cash Cheque Goods

27. What are direct expenses?

Expenses which are incurred from the stage of purchase to the stage of making the goods in saleable condition are termed
as direct expenses. For e.g. Wages, carriage inwards, power, coal etc.,

28. Who are proprietor? A person who owns a business is called proprietor.

29. Who are debtors?

A person who receives a benefit without giving money immediately, but liable to pay in future is a debtor. It is an assets
side of balance sheet.

30. Who are creditors?

A person who gives a benefit without receiving money immediately, but to claim in future is a creditor. It is a liability
side of balance sheet.
31. Define accounting?
According to AICPA defines as “Accounting is the art of recording, classifying and summarizing in a significant manner
and in terms of money transactions and events which are of a financial character and interpreting the results thereof”.
32. What are the objectives of accounting?
i) Maintenance of accounting records
ii) Ascertainment of profit or loss
iii) Depiction of financial position
 iv) Providing information
33. What are the branches of accounting?
a) Financial accounting (b) Cost accounting (c) Management accounting
34. What are the methods of accounting?
a)Double entry system (b)Single entry system
35. What is meaning of debit? The benefit receiving aspect is known as debit. It denotes ‘Dr’ .
36. What is meaning of credit? The benefit giving aspect is known as credit. It denotes ‘Cr’ .
37. What is accounting equation? Assets = Capital +Liabilities (or) Capital= Assets- Liabilities
38. What are the types of accounts?
Types of accounts
Personal account Impersonal account
a)Natural Real account Nominal account
b)Artificial a)Tangible
c)Representative b)Intangible
39. State the rules of accounts or golden rules of accounts?
Personal accounts Real accounts Nominal accounts
Debit the receiver Debit what comes in Debit all expenses and losses
Credit the giver Credit what goes out Credit all incomes and gains
40. What is personal account? Give example.
The accounts which relate to persons. For example Mohan a/c, Capital a/c, LIC, IOB, prepaid insurance,etc.,
41. What is real a/c? Give example.
Real account include tangible and intangible accounts. For example, land, building, goodwill, purchases etc.
42. What is nominal accounts? Give example.
These accounts do not have any existence form and shape. They relate to incomes and expenses and gains and losses of a
business. For eg. Salary account, dividend account, commission a/c etc.
43. What is narration?

A brief explanation of the transaction together with necessary details is given in the particulars column with in brackets
called narration. The word ‘Being’ used before starting.
44. What is bad debts? Debts which cannot be recovered are called bad debts. It is a loss for the business.
45. What is posting?
The process of transferring the entries recorded in the journal or subsidiary books to the respective accounts opened in the
ledger is called posting.
46. What are the kinds of subsidiary books?
i)Purchases book (record credit purchases) ii)Sales book ( record credit sales )
iii) Purchase return book( iv)Sales return book (v)Cash book
vi)Bills receivable book (vii) Bills payable book (viii)Journal Proper or General Journal
47. What is voucher? A voucher is a written document in support of a business transaction.
48. What is journal?
Journal is a book of primary entry or original entry. All transactions are initially recorded in the journal. A daily record of
the business transactions is called journal.
Specimen of journal entry
Date Particulars L.F Debit Credit
Rs Rs
1999 March 1 Cash A/c Dr 50,000
To Sales A/c 50,000
(Being cash sales)
49. What is ledger?
Ledger is the second important stage in the accounting cycle. Classification or grouping the form of accounts in a
separate book known as ‘Ledger’. Ledger is the main books of accounts in a business. It is also called book of final entry.
Journal entry
Date Particulars L.F Debit Credit
Rs Rs
1999 March 1 Cash A/c Dr 50,000
To Sales A/c 50,000
(Being cash sales)
Ledger
Cash A/c
Date Particulars J.F Rs Date Particulars J.F Rs
1999 March 1 To sales a/c 50,000
Sales A/c
Date Particulars J.F Rs Date Particulars J.F Rs
1999 By Cash a/c 50,000
March 1
50. What is trial balance?
 Trial balance is a statement which shows debit balances and credit balances of all accounts in the ledger. Such statement
is known as “Trail balance”.
Trial Balance as on…….
S.No Name of Account L.F Debit Balance Credit Balance
Rs. Rs
51. What are methods of preparing trial balance?
i) Total method ii) Balance method
52. Write a short on suspense account?
When it is difficult to locate the mistakes before preparing the final accounts, the difference in the trial balance is
transferred to newly opened imaginary and temporary account called suspense account. Suspense account is prepared to
avoid the delay in the preparation of final accounts. When the errors affecting the trail balance are located and rectified,
the suspense account automatically gets closed.
53. What is gross profit?
Gross profit or gross loss is the difference between actual sale proceeds and the cost of goods sold.
54. What is net profit?
To earn net profit a trader has to incur many expenses apart from those purchases and manufacturing of goods. Such
expenses are less than gross profit; the result will be net profit.
55. What are the need for BRS?
i)It provides a check on the accuracy of entries in both books.
ii)It helps to rectify any error committed in both books
56. Who prepare BRS? A bank reconciliation statement is prepared by the customers.
57. What is balance sheet?
A statement which sets out the assets and liabilities of a business firm and which serves to ascertain the financial position
of the same on any particular date is called balance sheet.
58. What is trade discount? Trade discount is an allowance or concession granted by the seller to the buyer.
59. What is cash discount? When goods are sold on credit the customers enjoy a facility of making payment a deduction is
offered is called cash discount.

60. What are the kinds of cash book?

i) Single column cash book
ii) Double column cash book
a) with discount and cash column
b) with cash and bank column
iii) Triple column cash book
iii) Petty cash book
61. What is petty cash book?
Petty means “small”. Petty cash book is a book where small payments like carriage, cartage, postage, printing etc., are
recorded by the petty cashier.
62. What is imprest system?
Imprest means “money advanced on loan”. This system is reimbursing the amount spent by the petty cashier at fixed
period is known as imprest system.
63. What is overdraft or bank overdraft?
Overdraft is an amount over and above the actual balance kept in the bank account is called overdraft. This facility
available only to the current account holders.
64. What are the objectives of trial balance?
i) To check the arithmetical accuracy of the ledger accounts
ii) To locate the errors
iii) To facilitate the preparation of final accounts
65. What are the kinds of errors?
I) Errors of principle II) Clerical errors a) Errors of Omission i)Partial Omission ii)Complete Omission
b) Errors of Commission i)Error of Recording ii) Error of Posting
iii) Error of Casting iv) Error of Carrying forward
c) Compensating Errors
66. How will you compute depreciation on Depletion or output method?
Depreciation rate= Cost of the asset/ Total mineral to be extracted
Depreciation = Annual output x Depreciation rate
67. What are the principle used in rectification of errors?
Neutralisation and Restoration
68. When do you prepare manufacturing account?
Converting raw material into finished goods and then sell the finished goods, are required to prepare manufacturing
account
69. What is profit and loss account?
Profit and loss account means all expenses and incomes.
70. What is meant by financial statement?
Financial statement is final result of accounting work done during the accounting period. Financial statements include
Trading, Profit and Loss account and Balance Sheet.
 71. What are outstanding expenses?
Expenses which have been incurred but not yet paid during the accounting period.
72. What are prepaid expenses?
Expenses which have been paid in advance are called prepaid expenses or unexpired expenses.
73. What is meant by closing stock?
The unsold goods in stock at the end of the accounting period is called as closing stock. This is valued cost or market
price whichever is less.
Closing Stock A/c Dr xxxx
To Trading A/c xxxx
74. What is a miscellaneous expenses? Give examples.
A business firm spends money for various types of expenses. In is types of expenses which are repeatedly incurred. There
are so many expenses for which expenses miscellaneous expenses. For example, very small amount of donations or
charities, membership fees for local organizations etc
75. What do you mean by cheque dishonour?
When the cheque is returned by the banker for anyone or more reasons by the banker it is known as dishonor cheque or
bounced cheque or returned cheque.
76. What are reasons for the cheque dishonoured or returned?
a) Insufficient funds ii) Stale cheque c) post dated cheque d) multidated cheque
77. State the procedure for balancing ledger account
The act of finding the balance in a ledger account is called ledger balancing.
78. State the sailent features of accounting
a) Absence of Uniformity b) Records Maintained c) Mixing of transactions d) Suitability e) Dependence on original
vouchers f) Finalisation of accounts
79. Mention advantages of preparing trading account
1. trading account shows the relationship between gross profit and sales that helps to measure profitability position.
2. trading account shows the ratio between cost of goods sold and gross profit .

3. trading account gives the information about efficiency of trading activities.

80. State any two defects of single entry system
i) Insufficient records ii) absence of trial balance iii) lack of statistical data iv)planning and decision making are
different v)difficulty in ascertaining profit
81. What is contra entry? When an entry affect both cash and bank accounts it is called contra entry. In contra entries both
the debit and credit aspects of a transaction are recorded in the cash book itself.
i) Cash paid into bank
Bank A/c Dr xxx
To Cash A/c xxx
( Being cash paid into bank)
82. What are the types of fundamental concepts?
1. Business Entity concept 2.Money measurement concept
83. What are the types of non- fundamental concepts
1. Going concern concept 2. Dual aspect concept 3. Accounting period concept 4.Cost concept
5. Revenue Recognition or Realization concept 6. Matching concept 7. Accrual concept
8. Objective evidence concept
84. What is conversion method? The process of collecting , computing and recording missing information along with the
available data in the incomplete books of a business is called conversion method.
5 Marks and 10 Marks
1. Difference between Straight Line Method and WDV method?
S.No Basis Straight Line Method WDV method
1 Change in amount of The same amount of depreciation is The amount of depreciation decreasing every
depreciation charged every year. year.
2 Balance in asset The balance in the asset account will be The balance in the asset account will not be
account reduced Zero. reduced Zero.
3 Recognition Income tax authorities do not recognize Income tax authorities recognize this method.
this method.
4 Profit Profits under this method are more. Profits are less.
5 Overall charges Overall charges changed this method. Overall charges almost uniform.
6 Calculation This method is very simple and easy to Calculation of depreciation is slightly
calculate. complicated

2. What are the difference between Trial balance and Balance Sheet?
S.No Basis Trial Balance Balance Sheet
1. Objective To know the arithmetical accuracy of the To know the true and fair financial position of
accounting. a business.
2. Format The columns are debit and credit balances. The two sides are assets and liabilities.
3. Content It is a summary of all the ledger balances. It is the closing balances of personal and real
accounts.
 4. Stage It is the middle stage in the preparation of It is the last stage in the preparation of
accounts. accounts.
5. Period It can be prepared end of the month, quarterly or It is generally prepared at the end of the
half yearly etc., accounting period.
6. Preparation It is prepared before the final accounts. It is prepared after the trading, profit and loss
account.
7. Stock It shows opening stock only. It shows closing stock only.
8. Order Balances are not shown in order. Balances are shown in order.
9. Evidence It cannot be produced as a evidence. It can be produced as a evidence.
10. Compulsion Preparation of trial balance is not compulsory. Preparation of balance sheet is must.

3. What are the difference between discount allowed and discount received?
S.No Discount Allowed Discount Received
1. When the seller grants a payment discount to a buyer. When a customer is granted a discount by the supplier.
2. It is granted by the supplier to the customer. It is obtained by the customer from the supplier.
3. It helps to maintain and strengthen relationships with All customers do not receive discounts but timely settlement
customers. and healthy business relationships.
4. Explain the salient features or characteristics of single entry system
a) Absence of uniformity
It is a not specific system governed by definite rules of operation.
a) Records Maintained: personal accounts and cash book only maintained
b) Mixing of transactions: personal transactions are mixed while writing the cash book
c) Suitability: Sole trader , partnership firms professionals are follow this method.
d) Dependence on original vouchers: no entries are made for a large number of transactions.
e) Finalisation of accounts: Regular final accounts cannot be prepared. Profit or loss can be ascertained, which is not reliable.

5. What are the difference between Journal and Ledger?

S.No Basis Journal Ledger
1. Primacy It is the original entry. It is dependent on journal.
2. Recording It is recording is chronological order. It is recording analytical.
3. Focus It is focus on transaction. Both debit and It is focus on account.
credit.
4. Book It is the book of prime entry. It is the main book of account.
5. Stage Recording of entries in the journal is the first Recording of entries in the ledger is the second
stage. stage.
6. Process The process of recording in journal is called The process of recording ledger is called
‘Journalizing’. ‘Posting’.
7. Transactions Transactions relating to a person or property Transactions relating to a particular account are
or expense etc., found together on particular page.
8. Net effect The final position of a particular account The final position of a particular account can be
cannot be found. ascertained.
9. Next stage Entries are transferred to the ledger. From the ledger, first prepared trial balance and
finally prepared final accounts.
10. Tax authorities Do not rely upon these books Rely on the ledger for assessment purpose.
11. Timing Journalizing is the continuous process. Ledger can be prepared any time.

6. What are the difference between Balance Sheet and Statement of Affairs?

S.No Basis Balance Sheet Statement of Affairs

1. Preparation Balance sheet is prepared based on It is prepared from balances, some ledger accounts and
ledger balances. estimates.
2. Accounting When accounts are maintained under When accounts are maintained under single entry
method double entry system. system.
3. Trial balance Trial balance prepared before the balance Trial balance not prepared.
sheet.
4. Omission of Omissions of any assets or liabilities are It cannot reveal any omissions and commissions in
assets and automatically found in balance sheet assets and liabilities.
liabilities because it will not tally.
5. Objective It reveals financial position of a business It is shows only estimated financial position. It is also
accurately. useful in ascertain profit or loss of the business.
 6. Reliability It is regarded as a reliable statement. It is not regarded as a reliable statement.
7. Missing of No chance for missing of facts. Always a possibility missing of facts , because
facts accounts are incomplete.

7. What are the difference between Double Entry System and Single Entry System?
S.No Basis Double Entry System Single Entry System
1. Recording of Debit and credit aspects of all transactions Debit and credit aspects of all transactions
transactions are recorded. are not recorded.
2. Nature of accounts Maintains complete record of personal, An incomplete record. Only personal and
maintained real and nominal accounts. cash accounts are maintained.
3. Principle For every debit there is a corresponding Debit and credit do not agree.
credit.
4. Preparation of trial Trial balance can be prepared. Trial balance cannot be prepared.
balance
5. Ascertaining profit or Accurate profit or loss can be found. Profit or loss cannot be found normally.
loss
6. Suitability It is suitable for all type of traders. It is suitable for only small traders.
7. Acceptability Acceptable for income tax and other Not acceptable.
purposes.
8. Dependability It is the only scientific system of keeping It is unscientific system.
books of accounts.
9. Internal check Internal check is possible. Internal check is not possible.
10. Acceptable evidence In case of disputes, accounting records be The accounting records are not acceptable as
produced in courts of law. evidence.

8. What are the difference between cash discount and trade discount?
S.No Basis Trade Credit Cash Credit
1. Source It is given during sale or purchase of It is given during the time of payment.
goods.
2. Foundation It is directly proportional to the It is inversely proportional to the amount of the
magnitude of the sales or purchases. time taken before making a payment.
3. Parties Manufacturer or Supplier Wholesaler(creditor) and Buyer(debtor)
4. Record in books of It is not recorded in cash book. It is recorded in the cash book.
accounts
5. Deductions The deduction of this discount invoice The deduction is not invoice value of goods
value of the goods purchased. purchased.
6. Presentation Can be found in the purchases book or Can be found on the debit side of the cash book
the sales book. as discount allowed.
7. Profit and Loss A/c Does not appear profit and loss a/c. It is appear profit and loss a/c.
8. Discount Policy Trade discount is offered as a short term. Cash discount allowed in cash when payments
are made.
9. What are the difference between Book keeping and Accounting?
S.No Basis Book Keeping Accounting
1. Scope Recording and maintenance of books of It is not only recording and maintenance of
accounts. books of accounts but also includes analysis,
interpreting and communicating information.
2. Stage Primary stage. Secondary stage.
3. Objective To maintain systematic records of business To ascertain the net result of the business
transactions. operations.
4. Nature Routine and clerical nature. Analytical and executive in nature.
5. Responsibility A book keeper is responsible for recording An accountant is also responsible for the work
business transactions. of book keeper.
6. Supervision The book keeper does not supervise. An accountant supervise and checks the work.
7. Staff involved Work is done by the junior staff Senior staff performs the accounting work.
8. Types Two types of book keeping single entry It is prepared companies budget and plans.
and double entry.
9 Decision making Management cannot take a decision. The management can take business decision.
10. Skills required Book keeping does not require any special Accounting requires special skills.
skills.
11. Analysis Does not require any analysis. To analysis and interpret the data
 12. Preparation of Financial statements are not prepared. Financial statement are prepared.
financial statements
10. Explain the types of cash book.
Cash book is used for recording only cash transactions i.e receipts and payments of cash.
i) Single column cash book
ii) Double column cash book a) with discount and cash columns b) with cash and bank columns
iii) Triple column cash book
iv) Petty cash book
i) Single column cash book or Simple cash book:
Single column cash book has one amount column in each side. All cash receipts are recorded on the debit side and all cash
payments on the credit side. This book is nothing but a cash account. There is no need to open cash account in the ledger.
Format:
Dr Single Column Cash Book of ……… Cr
Date Particulars R.N L.F Amount Date Particulars V.N L. Amount
Rs. F Rs.
ii) Double column cash book:
a) Cash book with discount and cash columns
On either side of cash column another column is discount allowed and discount received.
Format:
Dr Double Column Cash Book ( cash book with discount column and cash column) Cr
Date Particulars R.N L.F Discount Amount Date Particulars V.N L.F Discount Amount
Allowed Rs. Received Rs.
Rs Rs
b) Cash book with cash and bank columns
When the transactions are more in number, it is advisable to open a cash book by providing a separate column on either
side of the cash book to record the bank transactions.
Format:
Dr Double Column Cash Book ( cash book with cash column and bank column) Cr
Date Particulars R.N L.F Cash Bank Date Particulars V.N L.F Cash Bank
Rs Rs. Rs Rs.

iii)Triple column cash book:

Large business concerns receive and make payments in cash and cheques. This cash book is three amount column on each
side. All cash receipts ,deposits into bank and discount allowed are recorded debit side and all cash payments and
withdrawals from bank and discount received are recorded on credit side
Format:
Dr Triple Column Cash Book ( cash book with discount,cash column and bank column) Cr
Dat Particula R. L. Discount Cash Bank Date Particulars V. L. Discount Cash Bank
e rs N F Allowed Rs Rs. N F Received Rs Rs.
Rs Rs.
iv)Petty cash book:
Small and recurring expenses are recorded in a separate cash book called “ Petty cash book”. The person who maintains the petty
cash is called the “ Petty Cashier”. Petty means small. Small recurring payments like carriage, printing and stationery, postage and
stamps etc.
Format: Analytical Petty Cash Book of……
Dr. Cr. Analysis of payments
Receipt C. Date Particulars V Total Postage Printing Carriage Travelling Office Sundri L Personal
B. . Payments and and Expenses expenses es . accounts
F. N Stamps Stationery & F
N Repairs

Rs. P Rs.P Rs.P Rs.P Rs.P Rs.P Rs.P Rs. P Rs. P

11.Explain the classified of errors?

Errors or mistakes may be committed in different stages of the accounting process. There are three ways the errors can be
classified.
I) On the basis of nature
1)Errors of principle
2)Clerical errors
a)Errors of Omission i)Partial Omission ii) Complete Omission
b)Errors of Commission i)Error of Recording ii) Error of Posting iii) ) Error of Casting iv) Error of Carrying forward
c)Compensating Errors
1. Errors of principle:
Transactions are recorded as per accepted principles. If any of these principles is violated or ignored, such error are known as
errors of principle. For example, purchase of assets recorded in the purchases book. Trial balance will not disclose errors of
principle.
2.Clerical errors:
 These errors arise because of mistakes committed in the ordinary course of accounting work. These error can be further
classified three types.
a) Errors of Omission:
This error arises when transaction is completely or partially omitted to be recorded in the books of accounts.
i)Partial omission:
This error arises when only one aspect of the transaction either debit or credit. This error affects the trial balance. For example,
a credit sale of goods to Siva recorded in sales book but omitted to be posted in Siva’s account.
ii) Complete omission:
This error arises when transaction is totally omitted to be recorded in the books of accounts. This error does not affect the
trial balance. For example, Goods purchased from Ram completely omitted.
b) Errors of commission:
Commission means doing something which should not have been done. These mistakes done through due to lack of
concentration and carelessness.
i)Error of Recording:
This error arises when a transaction is wrongly recorded in the books of original entry. This error does not affect the trial
balance. For example, Goods purchased of Rs.5, 000. was recorded in the book for Rs.5, 500.
ii) Error of Posting:
This error arises when information recorded in the books of original entry are wrongly entered in the ledger. This error
may or may not affect trial balance.
For example, right amount to wrong side and wrong amount to right side.
iii) Error of Casting (Totaling):
This error arises when a mistake is committed while totaling the subsidiary book. For example, Rs. 12,000 it may
be wrongly totaled as Rs. 13,000. This is called overcastting. If it is wrongly totaled as Rs. 11,000 it is called under
casting.
iv) Error of Carrying forward:
This error arises when a mistake is committed in carrying forward a total of one page to the next page. For example, total
of purchases book in one page Rs. 10,686, while carrying forward the balance to the next page is Rs.10,866.
c) Compensating Errors:
The errors arising from excess debits or under debits of accounts being neutralised error is called
compensating errors. This error does not affect the trial balance. For example, if the purchases book and sales book are both
excess totaling by Rs.10,000, the errors compensate each other.

II) On the basis of effect on trial balance:

a) Errors which are disclosed by trial balance
b) Errors which are not disclosed by trial balance
III) On the basis number of accounts affected.
a) Single sided error which affect one account
b) Double sided error which affect two or more accounts.
12. What are the accounting concepts and conventions? Explain.
Accounting concepts are the assumptions or postulates or ideas which are essential to the practice of accounting and
preparation of financial statements.
Basic accounting concepts:
1. Business Entity concept:
A business entity is an organization of persons to accomplish an economic goal. The entity that represents the association
of persons is considered and separate from the owners, managers and employees of the enterprise. The accounting entity
may be the business unit i.e sole trader, partnership firm, company etc. A separate set of books is to be maintained
2. Money measurement concept:
All the business transactions are measured, expressed and recorded in terms of money. Money provides a common
denominator. Managerial planning and control must also take shape in monetary terms. The main objective of a business
unit is to make profits and planning is directed towards this end.
3. Going concern concept:
This concept assumes that a business entity has continuity of life. It will continue for an indefinite period of time. It has
no need or intention to close down. This concept is important for valuation of assets and liabilities. This concept is the
basis for several business transactions.
4. Dual aspect concept:
Dual aspect concept is the basis for double entry system of book-keeping. The governing principle of double entry system
is that ‘for every debit there is an equal and corresponding credit’. Dual aspect concept is also the basis for “accounting
equation”. The equation is
Assets= Liabilities + Capital
or
Capital= Assets - Liabilities
5. Accounting period concept or Periodicity concept:
A business unit may continue for an indefinite period. It is possible to ascertain overall profit or loss of the business. This
concept is the basis for segregation of capital expenditure from revenue expenditure. All expenses whose benefit is
derived within the accounting period are revenue expenses. All incomes pertaining to the accounting period are revenue
incomes. Mercantile system or accrual system of accounting is needed to show all incomes and expenses pertaining to the
accounting period at the time of finalising the accounts.
 6. Cost concept:
According to cost concept, assets are recorded at the price paid to acquire them. This cost is the basis for all subsequent
accounting for the assets. Cost concept provides the reliable objective evidence for recording and depreciating the assets.
7. Revenue Recognition or Realisation concept:
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of an enterprise from the sale
of goods, services and from holding assets. The term ‘realisation’ implies the legal liability to pay by the buyer or user or
customer.
8. Matching concept:
Primary objective of commercial enterprises is profit making. Matching of revenues and costs relevant to a specific period
is called the matching concept. Matching of costs with revenue has to be done in two stages. Direct costs are matched
with sales revenue to ascertain gross profit. Indirect costs are matched with gross profit and other incomes to ascertain net
profit.
9. Accrual concept:
The accrual concept ensures that the profit or loss shown is on the basis of full facts relating to all expenses and incomes.
Any outstanding expenses and prepaid expenses must be recorded. Any accrued incomes, incomes received in advance
must be appropriately recorded.
10. Objective evidence concept:
All accounting entries must be based on objective evidence. Objective refers to verifiability, reliability and absence of
bias. No transaction must be recorded in the books of accounts without verifiable documentary evidence. Objective
evidence concept facilitates auditing of accounts and eliminates unauthorized entries in the books of accounts.
Management decisions based on such accounts are likely to be more successful.

Accounting conventions are established traditions, customs, methods and practices which usually act as guidelines for
preparation and presentation of accounts.
Accounting conventions:
1. Convention of full disclosure:
According to this convention, all accounting statements should be prepared honestly. This should be evident through the
transparency of the statements. The statement should disclose fully all the significant information.
2. Convention of consistency:

The basic aim of the doctrine of consistency is to preserve the comparability and reliability of financial statements.
Consistency can be at three levels vertical, horizontal and dimensional. The convention of consistency makes the financial
statements more reliable and comparable for the needs of the end users.
3. Convention of materiality:
Materiality means ‘relative importance’. All important items and facts should be disclosed in accounting statements. The
test of materiality can be applied to three aspects information, amounts and procedures. The term ‘material’ is subjective
for interpretation of individual accountants.
4. Convention of conservatism:
Conservatism is a policy of caution or playing safe. Conservatism is the defensive accounting mechanism against
‘uncertainty’. Conservatism may result in understatement of assets and income and overstatement of provisions and
liabilities. This may result in secret reserves. Conservatism , within the limits, serves a useful purpose.
13. Explain the disadvantages or limitations or defects of single entry system
1. Insufficient Records: only records personal and cash accounts. All other accounts are left out.
2. Absence of trial balance: trial balance cannot be prepared for any period. Hence arithmetical accuracy of the accounts
cannot be verified.
3. Difficulty in ascertaining profit: absence of record for expenses and incomes
4. Difficulty in ascertaining financial position: absence of real accounts and balance sheet cannot be prepared to assess the
financial position of the business.
5. Lack of statistical data: statistical data cannot be obtained
6. Encouragement to fraud: frauds cannot be detected.
7. Rectification of errors is difficult
8. Value of business cannot be ascertained: difficult to masses the value of goodwill of the business in the absence of records.
9. Planning and decision making are difficult
10. Difficult to get institutional loans: commercial banks do not accept incomplete records.
11. Filing tax returns, preparing claims etc
14. What are the errors which are not disclosed by trial balance?
i) Errors of principle result in equal debit and credit through technically the treatment is wrong. So, trial balance is not
affected.
ii) Errors of complete omission ignore both debit and credit does not affect trial balance.
iii) Errors of duplication occur when the same transaction is recorded twice.
iv) Compensating errors which balance each other etc. also do not affect trial balance.
v) Posting to the correct side of wrong accounts, wrong amounts recorded in subsidiary books etc also do not affect trial
balance.
15. What are the errors which are disclosed by trial balance?
i) all errors of commission are usually disclosed by trial balance because the mistakes affect.
 ii) Errors of posting , casting, balancing, carrying forward etc., affect the trial balance.
iii) Errors of partial omission also affect the trial balance because either debit or credit is partially omitted.
16. Explain objectives of depreciation?
i)Ascertainment of true profits:
Depreciation is an invisible expense. So, it must be charged to the profit and loss account
ii)Presentation of true financial position:
The balance sheet will not disclose a true and fair view of the firms
iii)Replacement:
The amount debited in the profit and loss account is retained in the business. These are available for replacement of the
asset when its life is over.
iv) No distortion of divisible profits:
If depreciation is not charged to profits trading results and divisible profits are distorted
17. Explain the causes of depreciation?
Causes of depreciation
Internal External
i) Wear and tear i) Obsolescence
ii) Disuse ii) Effluxion of time
iii) Maintenance iii) Time factor or Lapse of time
iv) Depletion iv) Accidents
Internal Causes:
The internal causes arise from operation of any cause natural.
i)Wear and tear: Wear and tear is an important cause of depreciation in case of tangible fixed asset. It is due to use of the asset.
ii)Disuse: When a machine is kept continuously idle, it becomes less useful
iii)Maintenance: Lack of proper maintenance
iv)Depletion: An asset may get exhausted through working as in the case of mines, quarries, oil fields and forests etc.,
External causes:
External causes arise from the operation of forces outside the business.
i)Obsolescence:The old asset will become obsolete or useless due to new inventions, improved techniques and
technological advancement.
ii)Effluxion of time: When assets are exposed to forces of nature like weather, wind, rain etc.,

iii)Time factor or Lapse of time:

Lease, copy right, patents are acquired for a fixed period of time. On the expiry of fixed period of time, the assets
cease to exist.
iv)Accidents: An asset may reduce in value because of an accident.
18. What are the difference between Cash Book and Pass Book?
S.No Basis Cash book (bank column) Pass book
1. Maintained by Cashier Banker
2. Deposits of cash Entered on the debit side of the Entered on the credit column of the pass book.
cash book.
3. Withdrawals of cash Entered on the credit side of the Entered on the debit column of the pass book.
cash book
4. Cheques deposited for Entered on the debit side of the Entered in the pass book only on the date of the
collection cash book on the date of realization of the cheque.
depositing the cheques into the
bank.
5. Signature It is not signed by the cashier It is signed by the bank official after each
transaction
6. Balancing It is balanced at the end of a It is balanced after each transaction.
specified period
7. Collection and payments Entered in the cash book after Entered in the pass book first.
seeing the pass book
19. Explain characteristics or importance of depreciation?
i) Depreciation is a reduction in the book value of a fixed asset except land.
ii) The true profits cannot be ascertained without charging depreciation.
iii)It reduces the book value of the asset but not market value.
iv) It is always computed in a systematic and rational manner.
v) It may be physical and functional.
vi)Depreciation can simply estimate. Whatever method of charging depreciation is followed.
vii)Obsolescence due to technological development
viii)It is a change against profit for a particular accounting period
ix)It is a process of allocation of expired cost
x)It is a continuous process. The book value is reduced either with use of the asset.
20. Explain the need for providing depreciation?
i) To ascertain correct profit or loss: Calculate the correct net profit or net loss
Profit and Loss A/c
 To Depreciation:
Furniture xxx
Machinery xxx
ii)To present a true and fair view of the financial position:
Present a true and fair view of the financial position of the business. The value of fixed asset will be shown at a
higher value than its real value in the balance sheet.
Balance Sheet as on…..
Assets
Furniture xxxx
Less: Depreciation xxx xxxx
Machinery xxxx
Less: Depreciation xxx xxxx
iii)To ascertain the real cost of production: For ascertaining the real cost of production
iv)To comply with legal requirements: Depreciation is provided to replace the assets when it becomes useless
21. Discuss methods of providing or calculating depreciation?
1.Straight Line Method or Original Cost Method or Fixed Instalment Method
2. Diminishing Balance Method or Reducing Balance Method or Written Down Value Method (WDV)
3. Annuity method
4. Depreciation fund method or Sinking fund method
5. Insurance policy method
6. Revaluation method
7. Depletion method or output method
8. Machine hour rate method
1. Straight Line Method: Under this method depreciation is charged evenly every year throughout the effective life of an asset. In
India Income tax authorities do not recognize this method.
Amount of depreciation = Cost of fixed asset- Estimated scrap value/ Estimated Life
Rate of depreciation = Amount of depreciation X100
Original cost
Merits: i) This method is very simple and easy to calculate
ii) The value of asset can be reduced to zero
iii) This method is suitable, for those assets whose working life can easily be estimated

iv) It is easy to calculate the amount and rate of depreciation

Demerits: i) As the amount of depreciation remains fixed even during the inflation period
ii) It does not make any provision for the interest
iii)The same amount of depreciation is charged every year irrespective of the use of the asset
2. Diminishing Balance Method:
Under this method depreciation is charged at fixed rate on the reducing balance every year. The balance in the asset account will
not be reduced to zero. Income tax authorities recognize this method.
Merits: i) It is a logical method ii)Income tax authorities recognize this method.iii)Fresh calculation of depreciation is not
necessary.
Demerits: i)The calculation of depreciation is slightly complicated ii)It is difficult to determine the suitable rate of depreciation
iii)The value of asset cannot be brought down to zero
3. Annuity method:
Under this method interest at a fixed rate is calculated on the capital investment involved in the purchase of the asset. The amount
of depreciation is found out from “Annuity Tables”
Merits: i)This method does not ignore interest on capital investments
ii)This is only method which considers interest on capital sunk
iii)It is considered as the most exact and scientific form the point of calculations
iv)In this method most suitable for more capital invested companies
Demerits: i)Interest so calculated is based on an arbitrary rate
ii)It is not suitable for small value
iii)It is most complicated and inconvenient
iv)Depreciation charge remains same but interest goes on diminishing every year
v)Overall impact of depreciation and interest taken is not uniform
4. Depreciation fund method:
Under this method, the amount of depreciation is calculated with reference to sinking fund tables. It is debited to
depreciation account and credited to sinking fund account. At the end of the year the depreciation is charged to profit
and loss account.
Merits: i)Financial position is not adversely affected at the time of replacement
ii)The management will not be tempted to use the depreciation fund
Demerits: i)There is a risk of loss in selling the investment
ii)Profit and loss a/c is burdened heavily by depreciation together with increasing repairs every year
iii)Every year same amount of depreciation is transferred to profit or loss a/c
5. Insurance policy method:
Under this method, a policy is taken for the amount of the policy period. Premium is paid every year and this
premium is equal to the amount of depreciation of each year.
 Merits: i)Drawbacks of depreciation fund method are removed
ii)The risk of reduction in the value of investment
iii)This method is used in case of these assets which are to be replaced at the end of their lives
iv)Better security is provided to the investors
Demerits: i)This method is more expensive
ii)This method is unsuitable
iii)Profit and loss a/c does not show the true position
iv)There is no possibility of making profit
6. Revaluation method:
This method is resorted to in case of assets which call for special consideration such as livestock, loose tools, patents, copy
rights, packages, bottles etc., at the end of the each financial period the assets are revalued.
Merits: i) Very simple to understand and use
ii)Most suitable for certain special types of assets.
Demerits: i)Profit and loss a/c is charged with different sums every year
ii)Revaluation is based on market value iii)Revaluation is to be made by the experts
7. Depletion or output method:
This method is specially suitable for wasting assets like mines, quarries etc from which certain quantity of output can be
obtained.
Depreciation rate= Cost of the asset/ Total mineral to be extracted
Depreciation = Annual output x Depreciation rate
8. Machine Hour rate method:
Under this method, the working life of a machine is estimated in terms of hours
Merits:i) It is very simple once the machine hours are decided
ii)It is more scientific and equal instalments
iii)Most advantages to factories where production is based on machines
Demerits: i) It is very difficult to assess the life of machines quite accurately
ii) It does not equalize the burden on profit and loss of depreciation, repairs and renewals