Assignment Code: ECO-02/Assignment/2022-23

Course Code: ECO-02

Assignment Name: Accountancy-1

Year: 2022-2023

Verification Status: Verified by Professor

There are six questions in this assignment which carried 100 marks. Answer all the questions. Please go through the guidelines regarding assignments given in the Program Guide for the format of presentation.

Attempt all the questions: (20x5)

Q1)

(a) “Ledger is said to be the principal book of entry and the transactions can even be directly entered into the ledger account.” Elaborate on the statement and explain why Journal is necessary.

Ans) Ledger is a book where all accounts and journal entries are kept. Ledger is the main book of entries that records all transactions, assets, revenues, and costs. Some have recommended recording all transactions in ledger and eliminating Journal. We won't have a date-wise record of the transactions and their data. Future reference requires this record.

Posting into Ledger

Journal entries are used to record transactions in ledger accounts, which is called posting. When posting a diary entry, follow these steps.

1. Every journal entry must be posted to all debited/credited accounts.

2. The debit side of a journal-debited account and the credit side of a journal-credited account will be posted.

3. Whether posting on the debit or credit side, the transaction date is typed first. Ledger date recording is the same as journal.

4. When posting on the debit side of an account, we write the name of the account credited in the journal and add 'To' before the name. When posting on the credit side of an account, we write the name of the account debited in the journal and add 'By' before the name.

5. Journal entries have 'narration' In ledger accounts, it's optional.

6. In the folio column, we list the journal entry's page number.

7. The journal entry amount goes in both accounts' amount columns.

Balancing Ledger Accounts

1. To know the net effect of multiple transactions in an account, we must calculate its balance. Balance is the difference between debit and credit. Balancing means finding balance. Balance by:

2. Total the accounts on both sides.

3. Calculate the difference between the two sides' sums.

4. Put the discrepancy in the side with the lower total's amount column.

5. if a debit entry is made for the difference. if the discrepancy is recorded on the credit side.

6. Each sides' totals will be equal if you add up both of them.

7. The closing balance becomes the next period's opening balance. Next month's statement shows the initial balance. A debit balance is when the debit side total is larger than the credit side total.

8. Sometimes debit and credit account totals are equal. Infers a zero balance. In this case, the account has no closing or opening balances.

(b) What is the purpose of noting on the bill? Is it necessary in case of a promissory note?

Ans) Selling goods on credit has become a very common phenomenon in business. The producer takes raw material on credit and supplies the finished goods to the wholesalers on credit. The wholesalers in dm provide the credit facilities to the retailers. The retailers also sell on credit to some of the ultimate consumers. Credit may also be granted by a moneylender, a bank, or a financial institution.

Bill of Exchange

When a seller extends credit to a customer, he prefers to have a written guarantee that the purchaser will pay the agreed-upon amount by the deadline; otherwise, the payment may not be completed as agreed. Typically, such a written commitment will be presented as a bill of exchange or a promissory note. A bill of exchange is drawn by the seller on the buyer requesting that he pay the given sum to him, or his order, or to a person designated in the bill after a specified amount of time. A bill of exchange is a written document with an unconditional order, signed by the maker, commanding someone to pay a specific amount of money solely to, or at the direction of, a specific person, or to the bearer of the document, in accordance with the Negotiable Instruments Act 1881.

Three parties are involved in a bill of exchange, as is made evident as follows:

1. Drawer: a person who draws the bill

2. Drawee: a person who accepts the bill

3. Payee: a person who is to receive the payment.

Promissory Note

To make payment on a specified data can take the form of a bill of exchange or as promissory note. A bill of exchange is drawn by the seller and accepted by the buyer. A promissory note, on the other hand, is written by the buyer promising the seller to pay a specified amount after a specified period to him, or his order. It can be defined as an instrument in writing containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of a certain person, or to the bearer of the instrument. In case of a promissory note there are only two parties. They are:

1. Maker: A person who makes the note and promises to pay the amount.

2. Payee: A person who is to receive the amount.

Q2) Why is distinction between capital and revenue important? Give examples to show, how wrong classification can affect the ascertainment of profit.

Ans) You spend money each day on a variety of things. You purchase goods like food, office supplies, cosmetics, kitchenware, furnishings, etc. They come in both consumable and durable varieties. Spending money on consumables like stationery, cosmetics, etc. yields benefits quickly. The same is valid for business. Both normal expenses, such as stationery, and fixed assets, such as machinery, buildings, furniture, etc., whose benefits are spread out over a number of years, are incurred in business. The first kind of expenses is known as revenue expenses in accounting, and the second is known as capital expenses. Let's examine the precise makeup of capital and revenue expenses immediately.

Capital Expenditure

A cost is deemed a capital expenditure if the benefit is not used up in the year it is incurred but is instead spread out over a number of years. The following expenses are typically considered capital outlays.

Any investment that results in the purchase of fixed assets including real estate, buildings, machinery, office equipment, copyright, and more. You should be aware that such capital expenditures comprise both the fixed asset's purchase price and any related acquisition-related costs. As a result, capital expenditures also include brokerage fees or commissions paid in connection with the purchase of an asset, freight and cartage paid for the transportation of machinery, installation costs, and legal fees and registration fees paid in connection with the purchase of land and buildings.

Any investment made in a fixed asset that increases its size, significantly lengthens its life, or boosts its ability to generate income. Increased manufacturing capacity, lower production costs, or higher firm sales can all be used to improve the revenue-earning capability. As a result, the cost of adding on to structures and the amount spent renovating outdated equipment are also considered capital expenditures. If you purchase used equipment and spend a significant amount of money repairing it, that expense should also be considered capital expenditure. Similar to this, spending on structural alterations or additions to existing fixed assets that boost their ability to generate income is also counted as capital expenditure.

Expenditure made in the early years to develop mines and plantation land until they are ready for use.

The price of conducting studies that ultimately lead to the purchase of a patent. The cost of unsuccessful trials should not be considered a capital expense. It is handled as a future expense that will be written off in two to three years.

Legal fees associated with filing or defending lawsuits to defend property rights, fixed assets, etc.

Revenue Expenditure

An expense is considered a revenue expenditure if the benefit is not likely to be realised for at least a year. Therefore, all costs incurred in the normal course of business are considered revenue expenditures. Examples of such costs include:

1. Expenses related to running the firm on a daily basis, such as rent, utilities, mail, office supplies, insurance, and so forth.

2. The cost of purchasing merchandise for resale or raw resources for production.

3. Expenditures made to maintain fixed assets, such as building and equipment repairs and replacements.

4. Decreasing the value of fixed assets this is often referred to as a loss of revenue.

5. Interest on loans taken out to operate the business you should be aware that any loan interest paid in the beginning, before to the start of production, is not considered a revenue expense. It is considered a capital expense.

6. Legal fees incurred in the normal course of business, such as those incurred when collecting debt from customers or defending against a lawsuit for damages, etc.

Q3) X of Bangalore consigned 100 bags of cement for sale to his agent Y. Cost price of each bag is Rs. 120. 'X' immediately drew a 4 months bill for Rs. 5,090 on the latter and discounted it with bank at 6% per annum. 'X' paid Rs. 800 on packing and Rs, 250 for carriage. 'Y' spent Rs. 300 as selling expenses. The consignee returned 5 bags. He realised 20 bags at Rs. 130 per bag and 50 bags on credit at Rs. 140 per bag and took the balance in his own stock at Rs. 135 per bag.

Consignee is entitled to get commission of 3% and 2% del credere commission on credit sales. 'Y' recovered all money from debtors except Rs. 500. Prepare the necessary ledger accounts in the books of both parties.

Ans)

Q4) What is Sectional Balancing? How does it differ from Self-balancing? Give proforma of a Total Debtors Account.

Ans) A mechanism known as "sectional balancing" allows only a portion of the set of ledgers to be self-balanced. It is referred to as a "Sectional Balancing System" if a company that employs three ledgers the Debtors Ledger, Creditors Ledger, and General Ledger makes only one ledger self-balancing. Only two adjustment accounts the debtor ledger adjustment account, and the creditor ledger adjustment account are created using this technique. They are known respectively as the Total Debtors Account and the Total Creditors Account. Control accounts are another name for them.

The majority of businesses do not adhere to the self-balancing scheme. To check the accuracy of the Debtors and Creditors Ledgers, they only prepare the Total Debtors and Total Creditors Account. In reality, no ledger contains these two accounts. No journal entries are therefore passed to open the accounts. In order to prepare them, pertinent "figures" from numerous ancillary volumes are taken. The Total Debtors Account, like the Debtors Ledger Adjustment Account, includes the sum of all the items that have been either credited or debited to the personal accounts of the Wade debtors.

Self-Balancing

The debit and credit portions of some transactions will not display in the same ledger if separate ledgers are kept for trade debtors and trade creditors. For instance, in a credit sale, the credit portion will show up in the general ledger while the debit portion will show up in the debtor ledger. Consider an additional instance when a creditor permitted a monetary discount. While the debit part will show up in Creditors Edger, the credit aspect will be noted in General Ledger.

No ledger balances itself, and there is no way to create a distinct Trial Balance for every ledger. Therefore, each ledger must fully disclose the corresponding debit and credit features in order for it to be self-balancing. This is accomplished by creating a few more accounts in each ledger referred to as Adjustment Accounts. Each ledger's double entry is completed by the adjustment account, resulting in self-balancing books.

Proforma of a Total Debtors Account

Q5) Differentiate between the following:

(a) Trading Account and Manufacturing Account

Ans)

Trading Account

The Trading Account is prepared for ascertaining the gross profit or gross loss. The gross profit is defined as the excess of sales revenue over cost of goods sold.

This can be presented in the form of an equation as follows:

Gross Profit=Net Sales - Cost of Goods sold

Where

1. Net Sales=Total sales - Sales Returns

2. Cost of Goods Sold = Opening stock + Net Purchases - Direct Expenses - Closing stock

The initial stock is added to the net purchases and subtracted from the closing stock to arrive at the cost of goods sold. Direct expenses are the costs incurred on purchases of commodities up until they are delivered to the place of business for sale. Freight, insurance, import duties, dock fees, clearing fees, octroi duties, carriage, cartage, and other costs are included in this category. Administrative costs, selling and distribution costs, interest payments, and other expenses are categorised as indirect costs and are therefore not included in the cost of goods sold.

Manufacturing Account

By creating a Trading Account, you may cap and out the cost of items and the profit in cases of trading. A manufacturing company, however, must first set up a different account, the Manufacturing Account, in order to calculate the cost of products created. The cost of goods produced is then transferred to the Trading Account in order to calculate the cost of goods sold and the gross profit.

An enterprise engaged in manufacturing obtains raw materials from the market and transforms them into completed products for sale. Thus, the price of producing items includes two significant expenses: (i) the price of the raw materials used, and (ii) the price of conversion.

Cost of Raw Materials Consumed: This indicates the cost of raw materials utilised during production, which may be calculated by modifying opening and closing raw material stock levels during raw material acquisitions.

For example, a firm purchased raw materials worth Rs. 6,50,000 during 1967, and its stock of raw materials on January 1, 1987 (opening stock) was Rs. 70,000 and on December 31, 1987 (closing stock) Rs, 90,000.

The cost of raw materials consumed during 1987 will be worked out as follows:

The cost of raw materials utilised may also include direct costs related to the procurement of raw materials, such as freight, import duties, dock fees, cartage, etc. However, it is customary to display them individually on the Manufacturing Account's debit assistance.

Cost of Conversion: Included in this are all costs incurred in the factory, such as wages paid to employees, salaries of management, factory rent and rates, motive power, repairs to equipment, depreciation on equipment, etc. These costs are all charged against the Manufacturing Account.

(b) Non-Recurring and Recurring Expenses

Ans)