Short Answer Questions

1. Define Journal

The book wherein the transactions are recorded in a chronological order of dates
after determining the debit account and credit account of transactions with explanation is called
journal.

2. What is Journalizing?

The process of recording transactions in the journal is known as journalizing

3. What is journal Entry?

The record of each transaction in a journal is known as journal entry. Every transaction has two
aspects. One is debit entry and the other is credit entry.

4. What is narration?

A brief explanation of a transaction given in brackets below the journal entry is the particulars
column is called narration

5. What is simple journal entry?

If a journal entry contains only one debit and one credit, it is known as journal entry

6. What is compound journal entry?

When two or more transactions of similar nature occurring on the same day are recorded by
means of a combined entry, it is known as compound entry. Thus compound journal entry is a
combination of two or more simple journal entries.

7. What is trade discount?

The seller may allow a reduction in the selling price as as incentive for bulk purchase. This
reduction is known as trade discount.

8. What is purchase return?

Sometimes the goods bought on credit are damaged or substandard or unsuitable. Such goods are
returned to suppliers. This is called purchase return or return outwards

9. What is a sale returned?

The goods sold on credit may be returned by the buyer to the seller if they are damaged or
substandard or unsuitable. This is called sales return or return inward.

10. What is opening entry?

 A firm closes its books of account at the end of each year and starts a new set of books in the
beginning of each year. The first entry in the journal at the beginning of the New Year is to
record previous year’s closing balances. This entry is known as Opening entry. Thus opening
entry is the journal entry passed through the journal to open the new books of account for a new
year.

11. What is ledger?

A ledger is a book containing accounts in which the classified and summarized information from
the journals is posted as debits and credits. It is also called the second book of entry.

12. What is posting?

Posting refers to the process of recording the transaction from journal to ledger. It is the process
of transferring the debit and credit items from the journal to the respective accounts in the ledger.

13. What do you mean by balancing of an account?

Balancing of an account is to total both debit and credit sides of an account and putting the
difference on that side which is shorter.

14. What do you mean by subsidiary books?

The subdivision of journal for recording transactions of similar nature is known as subsidiary
books. These books are books of original entry.

15. What is cash book?

In every business concern generally there is large number of cash transactions. For the purpose
of recording all such transactions a separate book is maintained. This is called cash book.

16. What is single column cash book?

It has only one column for amount on cash side. On the debit side all receipts are recorded. On
the credit side all payments are recorded.

17. What is two column cash book?

Two column cash book has two columns one each side- cash column and discount column. In
the additional column added on the debit side discount allowed is recorded. In the extra column
added on the credit side, discount received is recorded.

18. What is three column cash book?

Three column cash book contains three columns on both sides. These three columns are cash, bank
and discount. Thus the cash book which contains bank column in addition to cash and discount
column is called three column cash book.
19. What is petty cash book?

Petty cash book is a subsidiary book maintained for recording minor expenses to be paid in cash.
It is maintained by a petty cashier. He is given a certain amount of money by the chief cashier.
The petty cashier makes small or pretty payments out of this money.

20. What is journal proper?

Journal proper is a journal kept for recording those transactions which cannot be recorded in other
subsidiary books.

21. What is trial balance?

When all entries in the journal have been posted into the ledger, it is necessary to test whether the
accounting work is done accurately and correctly. For this purpose a statement is prepared by
taking all balances (debit and credit) from ledger accounts. This statement is known as Trial
Balance. Thus trial balance is a statement of debit and credit balances extracted from all accounts
in the ledger for testing the arithmetical accuracy.

22. What is final account?

The accounts which are prepared at the final stage of the accounting cycle to know the profit or
loss and financial position of a business concern are called Final Accounts.

Trading & Profit and Loss Account and Balance Sheet are collectively known as final accounts.
Final accounts are also known as financial statement.

23. What is trading account?

Trading means buying and selling of goods. Trading account is prepared to show the result of
trading during an accounting period. The result of trading may be gross profit or loss. If the sales
exceed the cost of goods sold the difference is gross profit. On the other hand, if the cost of the
goods sold exceeds sale the difference is gross loss. Trading account is an account which shows
gross profit or loss.

24. Explain the equation relating to Gross profit

Gross Profit (Gross Loss) =Net Sales –Cost of Goods Sold

Cost of goods sold =Opening Stock + Net Purchase + Direct expenses – Closing Stock
Net Sales = Gross Sales- Sales Return
Net Purchase = Gross purchases – Purchase Return

25. What you mean by closing entries

At the end of the every accounting period, all revenue items (expenses and income) are closed by
transferring them to Trading and Profit and Loss Account. Such entries are known as closing
 entries. Thus closing entries are those entries passed at the end of the accounting year to close the
accounts relating to income, expenses, gain and loss.

26. What is profit and loss account?

Profit and loss account is prepared to ascertain the net profit or net loss of the business for an
accounting period. Profit & Loss account is prepared after the preparation of trading account, with
the help of trial balance. The balance of trading account is transferred to this account, after which
all expenses and losses are debited, and all incomes and gains are credited to this account.

When the debit side of the account exceeds the credit side, it is a net loss, and when the credit side
is more than the debit one, the result is net profit. The balance (net profit or net loss) is transferred
to the capital account, on the balance sheet.

27. What is balance sheet?

A Balance sheet is a statement showing the asset, liabilities and capital of a business on a particular
date. It is prepared to know the financial position. Hence it is known as Position Statement. A
balance sheet is not an account. It is a statement. It has two sides. The assets are shown on the right
hand side and Liabilities and Capital are shown on the left-hand side. The Two sides must always
tally.

Short Essay Questions

28. What are the advantages/ uses/ important of Journal?
➢ Journal records all business transactions in one place on the time and date basis.
➢ All transactions which are recorded are supported with a receipt or bill, so we can check
the authenticity of each journal entries with their bills.
➢ Accountant writes each journal entry’s narration below that journal entry, so another
auditor can know what the reason of that journal entry is.
➢ Without making of the journal, an accountant cannot make ledger accounts.
➢ If there is a mistake in ledger accounts, we can easily rectify it with the help of journal
29. What are the different steps to be followed in journalizing transactions?
➢ First read the transaction carefully and find out the two accounts involved in the
transaction.
➢ Find out which category these accounts belong, i.e. real or personal, or nominal.
➢ Apply the rules of debit and credit and find out which account is to be debited and which
are to be credited.
➢ Enter the transaction in the date column
➢ In the particulars column write the debit entry and in the next line write the credit entry.
➢ Give narration below the journal entry in the particular column
➢ Enter the amount in the Debit and Credit column.
➢ After every journal entry a thin line should be drawn in particulars column, so that each
entry is separated.
30. Discuss the Significance and explanation of columns in the Journal
 Specimen form of Journal

Date Particulars L.F Debit Amount Credit Amount

Name of the account to be
debited
Name of the account to be
credited
(Narration)
Date: In the first column, date of the transaction is recorded. The year is recorded at the top. Below
it month and day are recorded.

Particulars: In the particulars column, a summary of the accounts involved in a specific

transaction is mentioned. Here, the starting line states the account/accounts to be debited, and the
next line signifies the account/accounts to be credited. The last line is the brief description of the
transaction to give a clear picture is called Narration.

Ledger Folio Number (L.F.): The page number on which a particular journal entry appears in a
ledger is noted down in the column of ledger folio number, in front of that specific journal entry.

Debit: The amount of the account debited in the particulars column is written in the debit section
Credit: Similarly, the amount of the account which has been credited in the particulars column is
recorded in the credit section.

31. What are the important of Ledger?

➢ It provides a permanent record of all the transactions.
➢ It gives complete information of all accounts in one book
➢ It helps to know the final balance or position of each account on any date
➢ It helps to prepare trial balance
➢ It helps to prepare final accounts
32. Differentiate between Journal and ledger

Journal Ledger
1. Book of first or prime entry 1. Book of final or secondary entry
2. Chronological record 2. Analytical record
3. The process of recording is known as 3. The process of recording is known as
journalizing posting
4. It is a subsidiary book 4. It is a principal or main book
5. Final accounts cannot be prepared 5. Final accounts can be prepared
6. Narration is written after every entry 6. No narration is given
33. Explain the format of ledger account
Ledger account is basically divided into two parts. Left side is known as ‘debit side’ and right
side is known as ‘credit side’. On the left side, all debits are recorded and on the right, all credits
are recorded.
 The following information shall be contained in the various columns on both sides of the ledger:
Date: In this column, the date of a transaction is recorded.
Particulars: In this column, the details of the transaction are recorded. On the debit side, the
word ‘To’ and on the credit side, the word ‘By’ are prefixed.
Journal Folio (J.F.): In this column, the page number of the book of original entry (i.e., journal
or any subsidiary book) from which this account has been taken is to be written.
Amount: in the ‘Amount’ column, the amount in terms of money shall be recorded.

34. Discuss the classification or subdivision of ledger

Debtors Ledger: It contains personal accounts of customers or debtors to whom goods are sold
on credit
Creditors Ledger: This ledger contains the personal account of those who have supplied goods
to the business on credit. It is therefore a ledger for keeping personal accounts of creditors.
General ledger: It contains all accounts other than debtors and creditors.
Private Ledger: The capital account and drawings account of the proprietor may be separately
maintained in another ledger called private ledger
35. Explain the advantages of subsidiary books
The following are the advantages of subsidiary book:-
➢ It enables the division of work among accounting personnel by assigning
with separate books and it increases efficiency of personnel as they perform
same activities daily.
➢ It helps to save time and labor by recording similar type of transactions in a separate
book.
➢ It becomes easy to access the detailed information relating to a particular transaction as
the transactions relating to one head are recorded in a separate book.
➢ It helps to install internal check system as the subsidiary book maintained by a clerk is
automatically checked by another clerk.
➢ The existence of separate books help in the detection of errors quickly in case of
disagreement of trial balance..
36. Explain different subsidiary books and their purpose
 Purchases Day Book – for recording credit purchase of goods only. Cash purchase or assets
purchased on credit are not entered in this book.
Sales Day Book – for recording credit sales of goods only. Assets sold or cash sales are not
recorded in this book.
Purchases Returns Book – for recording the goods returned to the suppliers when purchased on
credit.
Sales Returns Books – for recording goods returned by the customers when sold on credit.
Bills Receivable Book – for recording the bills received [Bills Receivables] from customers for
credit sales.
Bills Payables Book – for recording the acceptances [Bills Payables] given to the suppliers for
credit purchases.
Cash Book – for all receipts and payments of cash.
Journal Proper – for recording any transaction which could not be recorded in the above-
mentioned subsidiary books. For example, assets purchased or sold on credit
37. What is cash book? Explain different types of cash books

In every business concern generally there is large number of cash transactions. For the purpose
of recording all such transactions a separate book is maintained. This is called cash book.

There are four types of cash book. They are:

✓ Simple or single column cash book

It has only one column for amount on cash side. On the debit side all receipts are recorded. On
the credit side all payments are recorded.

Format of Simple cash book

Date Particulars J.F Amount Date Particulars J.F Amount

The pages of the cash book are vertically divided into two equal parts. The left hand side is for
recording receipts and the right hand side is for recording payments.

•
Record the transactions in order of date.
•
If any amount of cash is received on an account, the name of that account is entered in
the particulars column by the word "To" on the left hand side of the cash book.
• If any amount is paid on account, the name of the account is written in the particulars
column by the word "By" on the right hand side of the cash book.
• It should be balanced at the end of a given period.
✓ Double column cash book

A double column cash book or two column cash book is one which consists of two separate
columns on the debit side as well as credit side for recording cash and discount. The discount
column on the debit side of the cash book will record discounts allowed and that on the credit side
discounts received.
 Format of Double column cash book

Date Particulars J.F Discount Cash Date Particulars J.F Discount Cash
allowed Received

✓ Three column cash book

Three column cash book contains three columns on both sides. These three columns are cash, bank
and discount. Thus the cash book which contains bank column in addition to cash and discount
column is called three column cash book.

Date Particulars J.F Discount Cash Bank Date Particulars J.F Discount Cash Bank
allowed Received

Date: The date column is used to enter the transaction date.

Particulars: The particulars column is used to write the name of the account to be debited or
credited in the ledger as a result of cash or bank transaction.
Discount: The amount of discount allowed is recorded on debit side and the amount of
discount received is recorded on credit side in discount column.
Cash: The amount of cash received (net of any discount allowed) is entered on the debit side
and the amount of cash paid (net of any discount received) is entered on the credit side in cash
column.
Bank: The amount of all receipts and payments made by the bank account are entered in
bank column of the cash book.
✓ Petty cash Book

There are two types of petty cash book they are:

• Simple petty cash book
Under this type of petty cash book, only one amount column is given for all types of petty
payments.
Simple petty cash book
Date Receipts Voucher Amount Date Payments Voucher Amount
No. No.

• Analytical Petty Cash Book

In this type of petty cash book all petty expenses are classified into five or six heads. Separate
column are provided on the payment side for each class of petty expenses in addition to a total
column.

Analytical Petty Cash Book

Cash Date Particulars LF Total Postage Stationary Wages Travelling Telegram
Received Payments Expenses

38. Explain the different method of preparing Trial balance

Following are the three methods of preparing trial balance

 1. Total Method: Under this method, debit totals and credit totals of each account are
entered in the trial balance in the debit and credit column respectively. Both the sides of
the trial balance should be equal. If they are not equal, we can understand that there are
certain errors.
2. Balance method: Under this method, trial balance is prepared with the balances
extracted from the ledgers and not total. Debit balances should be entered in debit column
and credit balances shall be taken in credit column.
3. Total and Balance method: In this method trial balances prepared by taking totals as
well as balances from each ledger account.
39. What is trading account? What are objects of preparing Trading Account?

Trading means buying and selling of goods. Trading account is prepared to show the result of
trading during an accounting period. The result of trading may be gross profit or loss. If the sales
exceed the cost of goods sold the difference is gross profit. On the other hand, if the cost of the
goods sold exceeds sale the difference is gross loss. Trading account is an account which shows
gross profit or loss.

Following are the objectives of preparing a Trading account

• To ascertain gross profit or loss

• To provide information about the direct expenses
• To compare closing stock with the stock of previous year
• To provide safety against the possible losses
40. Distinguish between trial balance and Balance Sheet

Trial Balance Balance Sheet

1. It consist of debit and credit side 1. It shows asset and liabilities
2. It is prepared to check the arithmetical accuracy 2. It is prepared to know the financial position
of ledger posting. on a particular date
3. It shows the balance of all ledger accounts 3. It shows the balance of real and personal
4. It is prepared from various ledger accounts account only.
5. It can be prepared at the end of each month 4. It is prepared from Trial balance
6. It is not compulsory to prepare a trial balance 5. It is generally prepared at the end of an
accounting period.
6. It is compulsory to prepare a balance sheet.

41. What do you mean by filial account? Explain each term

After preparation of the trial balance the next step is to prepare final accounts or final statements.
The preparation of final account is the last step in the accounting cycle. The objectives of preparing
final accounting are to determine profit or loss made by business during any accounting period and
to ascertain the financial position on a given date.
 The final accounts consist of Trading and Profit and Loss Account and Balance Sheet. In other
words Trading & Profit and Loss Account and Balance Sheet are collectively known as final
accounts. Final accounts are also known as financial statement.

Trading Account.

Trading means buying and selling of goods. Trading account is prepared to show the result of
trading during an accounting period. The result of trading may be gross profit or loss. If the sales
exceed the cost of goods sold the difference is gross profit. On the other hand, if the cost of the
goods sold exceeds sale the difference is gross loss. Trading account is an account which shows
gross profit or loss.

Profit and loss Account

Profit and loss account is prepared to ascertain the net profit or net loss of the business for an
accounting period. Profit & Loss account is prepared after the preparation of trading account, with
the help of trial balance. The balance of trading account is transferred to this account, after which
all expenses and losses are debited, and all incomes and gains are credited to this account.

When the debit side of the account exceeds the credit side, it is a net loss, and when the credit side
is more than the debit one, the result is net profit. The balance (net profit or net loss) is transferred
to the capital account, on the balance sheet.
Balance Sheet
A Balance sheet is a statement showing the asset, liabilities and capital of a business on a particular
date. It is prepared to know the financial position. Hence it is known as Position Statement. A
balance sheet is not an account. It is a statement. It has two sides. The assets are shown on the right
hand side and Liabilities and Capital are shown on the left-hand side. The Two sides must always
tally.
42. Why is the balance sheet important?
A balance sheet is important because it helps in understanding the performance of a company.
Following are the reasons why the balance sheet is important:

• To understand the financial health of a company.

• Stakeholders can study the balance sheet to understand the liquidity position and business
performance of the company.
• Comparing balance sheets over the years helps in determining the growth of the company.
• A balance sheet is an essential document to obtain a business loan.
• Analyzing the company’s balance sheet helps in understanding the ability of the firm to
undertake expansions projects and unforeseen expenses.
• A Balance sheet helps in identifying the source of company funding, for example, equity
funding or debt funding.