IGNOU ASSIGNMENT REFERENCE MATERIAL (2017-18) P.C.O.-01 PREPARATORY COURSE IN COMMERCE
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IGNOU ASSIGNMENT REFERENCE MATERIAL (2017-18) P.C.O.-01 PREPARATORY COURSE IN COMMERCE
Q1. What are the various forms of business organization? Explain.
Ans. The required capital, takes the responsibility of arranging other resources, puts them into action, and coordinates and controls the activities to earn the desired profits for e.g. : a small grocery shop is owned and run by a single individual who performs all these activities. But, in big businesses, it may not be possible for a single person to perform all these activities. So in such cases two or more persons join hands to finance and manage the business properly and share its profit as per their agreement. Thus, business organisations may be owned and managed by a single individual or group of individuals who may form a partnership firm or a joint stock company. Such arrangement of ownership and management is termed as a form of business organisation. A business organisation usually takes the following forms in India:
Sole Proprietorship: Rohan has a grocery shop in the local market. He buys goods from the wholesale market and sells it to the customers as per their requirement. By doing so he earns some profit. He had started his business two years ago by investing Rs. one lakh, which he had borrowed from his friend. Today, he is running his business successfully, earning a good profit, and has been able to pay back the borrowed money. He has also employed two persons to help him in the shop.
Q2. What do you understand by principle of double entry? Give the rules of debit and credit with suitable examples.
Ans. Every transaction affects two accounts and according to Double Entry system entries will be made in both of them on the debit side (left hand side) in one account and on the credit side (right hand side) in the other. Hence, for every debit there must be a corresponding credit for an equal amount and vice versa. This is known as the ‘Principle of Double Entry, and all business transactions are recorded in books of account according to this principle.
Rules of debit and credit
Every transaction affects two accounts and this effect will have to be entered in both of them, on the debit side in one account and on the credit side in the other account. It is, therefore, necessary to find out which of the two accounts is to be debited and which is to be credited. For this purpose, one has to first identify the class to which these two accounts belong i.e., personal, real or nominal; and then certain rules known as rules of debit and credit are applied. These rules are as follows:
- For personal accounts: the account of the person receiving the benefit (receiver) of the transaction (from the business) is debited and the account of the person giving the benefit (giver) of the transaction (to the business) is credited.
|May 1||Purchase A/c Dr..
To cash A/c
(Being cash purchase)
|May 2||Purchase A/c Dr..
To Ram Lal A/c
(Being goods purchased from Ram Lal on credit)
|May 5||Mahesh’s A/c Dr..
To sales A/c
(Being goods sold to Mahesh )
|May 8||Jayant’s A/c Dr..
To cash sales A/c
(Being cash sales to jayant)
|May 9||Ram Lal A/c Dr..
To Return Outwards A/c
(Being goods returned to Ram Lal)
Q4. Write short notes on any two of the following:
(a) Going Concern Concept
Ans. Normally, the business is started with the intention of continuing it indefinitely or at least for the foreseeable future. The investors lend money and the creditors supply goods and services with the expectation that the enterprise would continue for long.
(b) Full Disclosure Concept
Ans. The financial statements are the basic means of communication of financial information to all interested parties. These statements are the only source for assessing the performance of the enterprise for investors, lenders, suppliers.
(c) Consistency Concept
Ans. The principle of consistency means ‘conformity from period to period with unchanging policies and procedures’. It means that accounting method adopted should not be changed from year to year.
Q5. Explain how Bank Reconciliation Statement is Prepared with an adjusted balance of cash book?
Ans. Business concern maintains the cash book for recording cash and bank transactions. The Cash book serves the purpose of both the cash account and the bank account. It shows the balance of both at the end of a period. Bank also maintains an account for each customer in its book. All deposits by the customer are recorded on the credit side of his/her account and all withdrawals are recorded on the debit side of his/her account. A copy of this account is regularly sent to the customer by the bank. This is called ‘Pass Book’ or Bank statement. It is usual to tally the firm’s bank transactions as recorded by the bank with the cash book. But sometimes the bank balances as shown by the cash book and that shown by the pass book/bank statement do not match. If the balance shown by the pass book is different from the balance shown by bank column of cash book, the business firm will identify the causes for such difference. It becomes necessary to reconcile them. To reconcile the balances of Cash Book and Pass Book a statement is prepared. This statement is called the ‘Bank Reconciliation Statement.
Q6. If the Trial Balance does not tally, it means there are some errors in books of accounts. Explain the procedure of locating these errors.
Ans. The tallying of the two totals (debit balances and credit balances) of the trial balance ensures only arithmetic accuracy but not accounting accuracy. If however, the two totals do not tally, it implies that some errors have been committed while recording the transactions in the books of accounts. The following are the various kinds of errors.
Kinds of Errors: Keeping in view the nature of errors, all the errors committed in the accounting process can be classified into two. (i) Errors of Principle and (ii) Clerical Errors
- Errors of Principle: Transactions are recorded as per generally accepted accounting principles. If any of these principles is violated or ignored, errors resulting from such violation are known as errors of principle.
- Clerical Errors: These errors arise because of mistakes committed in the ordinary course of accounting work. These can be further classified into three types as follows:
(a) Errors of Omission: This error arises when a transaction is completely or partially omitted to be recorded in the books of accounts. Errors of omission may be classified as below:
(b) Errors of Commission: This error arises due to wrong recording, wrong posting, wrong casting, wrong balancing, wrong carrying forward etc. Errors of commission may be classified as follows:
(a) Capital Receipt and revenue Receipt
Ans. Capital Receipt: Capital receipt is one which is invested in the business for a long period. It includes long term loans obtained from others and any amount realised on sale of fixed assets.
Revenue Receipt: Revenue receipt is the receipt of income which is earned during the normal course of business. It is recurring in nature.
(b) Capital Profit and revenue profit
Ans. Capital profits: Capital profit is the profit which arises not from the normal course of the business.
Revenue profits: Revenue profit is the profit which arises from the normal course of the business.
Q8. What is meant by closing Stock? How is it valued and shown in the final accounts? Explain.
Ans. Closing Stock is the stock of goods remaining unsold at the end of the accounting year. Ordinarily this does not appear in the Trial Balance. Hence, this needs to be incorporated in financial statements. This appears on the credit side of the Trading Account as well as Assets side of the Balance Sheet. The adjustment entry will be: Closing Stock A/c Dr To Trading A/c (Closing stock transferred to trading A/c).
Q9. What do you mean by one sided errors? How are these errors rectified? Explain with suitable examples.
Ans. Certain errors affect only one side of an account, either the debit side or the credit side. Such errors are called ‘one-sided errors’.
Rectification of one sided errors
(i) if the accounts affected are of revenue nature If one account involved is of revenue nature, the account affected will be the suspense a/c and the profit and loss adjustment a/c.
(ii) if the account involved in the error is of a non revenue nature, the affected accounts will be the suspense a/c and the non revenue a/c involved in the error.
Q10. From the following Trial Balance of Sh. Raghu Ram, Prepare Trading, Profit & Loss Account for the year ended 31st December, 2017 and Balance Sheet as on that date:
- Stock at the end Rs. 50,000
- Depreciate Fixed Assets by 8%
- Commission earned but not received amounts to Rs. 600
- Rent received in advance Rs. 1,000
- Allow 7% interest on Capital and charge Rs. 900 as interest on Drawings.
|To Opening stock
To Purchase 3,75,000
Less Purchase Return 10,000
Gross loss b/d
|By Sales 4,20,000
Less Sales return 15,000
Commission Received 13,000
Commission earned 600
Add: Interest on capital 17,500
Less: Net loss 29,400
Less: Drawing 15,000
Less: Interest on Drawing 900
|Fixed Assets 2,00,000
Less: Depreciate 16,000
Cash at Bank
Cash in Hand