Describe how accounts are used to record information about the effects of transactions?
Every transaction is recorded in the original book of entry (journal) in order of their occurrence; however, if we want to know that how much we receive from our debtors or how much to pay to the creditors, it is not possible to determine at a single movement. Hence, we prepare accounts to know the position of business activities in the meantime.
There are some steps to record transactions in accounts; it can be easily understood with the help of an example.
Sold goods to Mr A worth Rs 50,000 on 12th April and received payment Rs 40,000 on 25th April. The following journal entries will be recorded:
Step 1− Locate the account in ledger, i.e., Mr A’s Account.
Step 2− Enter the date of transaction in the date column of the debit side of Mr A’s Account.
Step 3− In the ‘Particulars’ column of the debit side of Mr A’s Account, the name of corresponding account is to be written, i.e., ‘Sales’.
Step 4− Enter the page number of the ledger in the Journal Folio (J.F.) column of Mr A’s Account.
Step 5− Enter the amount in the ‘Amount’ column.
Step 6− Same steps are to be followed to post entries in the credit side of Mr A’s Account.
Step 7− After entering all the transactions for a particular period, balance the account by totalling both sides and write the difference in shorter side, as ‘Balance c/d’.
Step 8− Total of account is to be written on either sides.
Mr. Sunrise started a business for buying and selling of stationery with ₹ 5,00,000 as an initial investment. Of which he paid ₹ 1,00,000 for furniture, ₹ 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid ₹ 5,000 as their salaries. Out of the stationery bought he sold some stationery for ₹ 1,50,000 for cash and some other stationery for ₹ 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery items of ₹ 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost ₹ 30,000 worth of stationery. A part of the machinery, which cost ₹ 40,000, was sold for ₹ 45,000.
From the above, answer the following :
1. What is the amount of capital with which Mr. Sunrise started business?
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine if the following are assets, liabilities, revenues, expenses or none of the these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner.
Differentiate between source documents and vouchers.
Define accounting and state its objectives.
What is a journal? Give a specimen of journal showing at least five entries.
Complete the following sentences with appropriate words:
(a) Information in financial reports is based on .....................
(b) Internal users are the ..................... of the business entity.
(c) A ..................... would most likely use an entities financial report to determine whether or not the business entity is eligible for a loan.
(d) The Internet has assisted in decreasing the ..................... in issuing financial reports to users.
(e) ..................... users are groups outside the business entity, who uses the information to make decisions about the business entity.
(f) Information is said to be relevent if it is ......................
(g) The process of accounting starts with ............ and ends with ............
(h) Accounting measures the business transactions in terms of ............ units.
(i) Identified and measured economic events should be recording in ............ order.
Complete the following work sheet:
(i) If a firm believes that some of its debtors may ′default′, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the ___________ concept.
(ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the ___________ concept.
(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the ___________ concept.
(iv) The ___________ concept states that if straight line method of depreciation is used in one year, then it should also be used in the next year.
(v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be increased. Normal accounting procedure is to ignore this because of the ___________.
(vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the ___________.
(vii) The management of a firm is remarkably incompetent, but the firms accountants can not take this into account while preparing book of accounts because of ________ concept.
Enumerate informational needs of management.
What is the basic accounting equation?
Should a transaction be first recorded in a journal or ledger? Why?
What is Noting of a bill of exchange.
Give four examples each of ‘revenue reserve’ and ‘capital reserves’.
Deepti wants to buy a building for her business today. Which of the following is the relevant data for his decision?
a. Similar business acquired the required building in 2000 for ₹ 10,00,000
b. Building cost details of 2003
c. Building cost details of 1998
d. Similar building cost in August, 2005 ₹ 25,00,000
Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?
Unfavourable bank balance means:
(a) Credit balance in passbook (b) Credit balance in cash book
(c) Debit balance in cash book (d) None of these
What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts?
Show the effect through Journal entries:
Credit sales to Mohan 10,000 were posted to his account as 12,000
This is an error of ..................................
The wrong effect has been:
The correct effect should have been:
The rectification entry will be.
Distinguish between ‘general reserve’ and ‘specific reserve’.