Theory Notes

Chapter’s
1th & 10th

Q.1. What is book keeping?

Ans Book-keeping is a process of detailed recording of all the financial transactions of a
business.

Q.2. What is accounting?

Ans Accounting uses the book-keeping record to prepare financial statements at regular
intervals.

Q.3. What is the statement of financial position?

Ans This shows what the business owns and what is owing to it, its assets; and what the
business owes, its liabilities.

Q.4. Define;
a. Capital: is the total resources provided by the owner and represents what the
business owes the owner.
b. Assets: represent anything owed by or owing to the business.
c. Liabilities: represent anything owed by the business.
d. Inventory: is the goods a business has available for resale.
e. Trade payables: represent the amount the business owes to the business owes to the
credit suppliers of goods (the trade creditors).
f. Trade receivables: represent the amount owed to the business by its credit
customers (the trade debtors).

Q.5. What is double entry book-keeping?

Ans Double entry book-keeping is the process of making a debit entry and a credit entry
for each transaction.

Q.6. Carriage inwards- carriage inwards is the cost of bringing the goods to the business.

Q.7. Carriage outwards- carriage outwards is the cost of delivering the goods to the
customer.

Q.8. What is trail balance?

Ans A trial balance is a list of balances on the ledger as a certain date.

Q.9. Important Note- While preparing trail balance.

1
Ans The opening inventory is included in a trail balance. The closing inventory does not
appear on the books when a trail balance is prepared so cannot be included in a trail
balance.

Q.10. Different types of errors, which are not revealed by trail balance.
An

Name of error Description of error Example

A. Error of This occurs when a transaction Cash received from
commission is entered using the correct Malini
amount and on the correct side, Credited to mallika’s
but in the wrong account of the account.
same sides.

B. Error of This occurs when the correct Cash drawings debited

complete account is entered in the correct to the cash account and
reversal accounts, but the entry has been credited to the drawings
made on the wrong side of each account.
accounts.
C. Error of This occurs when a transaction Payment of wages not
omission has been completely omitted entered in the books.
from the accounting records.
Neither a debit entry nor a credit
entry has been made.

D. Error of This occurs when an incorrect Goods $100, bought on

original figure is used when a credit but recorded as $
original transaction is first entered in the 1000.
accounting records. The double
entry will therefore use the
incorrect figure.
E. Error of This occurs when a transaction Motor expenses debited
principle is entered using the correct to the motor vehicles
amount and on the correct side, account.
but in the wrong class of
account.
F. Compensating These occur when two or more Purchases account
errors errors cancel each other out. under-added by $100
and sales returns account
over-added by $100.

2
Q.11. Division of ledger

Sales ledger purchase ledger Nominal ledger /

general ledger
All personal accounts All personal accounts A part from cash
of credit customers / of credit suppliers are accounts, bank accounts
trade receivable are kept kept in purchase ledger. Trade receivable acc-
in sales ledger. ounts, trade payable
accounts. All others
accounts are kept here.

Q.12. Explain contra entries in cash book.

Ans A contra entry is one which appears on both sides of the cash book.
There are two situations in which contra entries are passed.
1) Cash deposited into bank
2) Cash withdrawn from bank for office use.

Q.13. What is bank overdraft?

Ans A bank overdraft occurs when more has been paid out of the bank than was put into
the bank account.

Q.14. Dishonoured cheque.

Ans A dishonoured cheque is a cheque received which the debtor’s bank refuses to pay.
This may occur because the debtor does not have enough money is his / her bank
account, or it may be because of an error on the cheque, e.g. no signature, no date,
the amount in words and the amount in figures do not agree.

Q.15. Meaning of petty cash book?

Ans A petty cash book is used to record low-value cash payments.

Q.16. What do we mean by imprest system?

Ans The imprest system of petty cash is where the amount spent each period is restored
so that the petty cashier starts each period with the same amount.

Q.17. Define:
a. Invoice: An invoice is a document issued by the supplier of goods on credit
showing details, quantities and prices of goods supplied.

3
 b. Debit note: A debit note is a document issued by a purchaser of goods on credit to
request a reduction in the invoice received.
c. Credit note: A credit note is a document issued by a seller of goods on credit to
notify of a reduction in an invoice previously issued.
d. Statement of accounts: A statement of accounts I a document issued by the seller of
goods on credit to summarise the transactions for the month.
e. Cheque: a cheque is a written order to a bank to pay s stated sum of money to the
person or business named on the order.
f. Receipt: A receipt is a written acknowledgment of money received and acts as
proof of payment.

Q.18. What is book of prime entry?

Ans A book of prime entry is one in which transactions are recorded before being entered
in the ledger.

Q.19. Explain sales journal.

Ans The sales journal shows a list of the names of businesses to which credit sales have
been made, the value of the goods sold and the date on which the sales were made.

Q.20. Explain sales returns journal.

Ans The sales returns journal shows a list of the names of businesses which have returned
goods previously sold on credit, the value of the goods returned and the date on
which the returns were made.

Q.21. Explain purchase journal.

Ans The purchase journal shows a list of the names of businesses from which credit
purchases have been made, the value of the goods purchased and the date on which
the purchases were made.

Q.22. Explain purchase returns journal.

Ans The purchases returns journal shows a list of the names of businesses to which
goods, previously purchased on credit have been returned, the value of the goods
returned and the date on which the returns were made.

Q.23. Accrual principle.

Ans The matching principle is also referred to as the accruals principle. The revenue of
the accounting period is matched against the costs of the same period.

Q.24. Business entity.

Ans The business entity principle is also known as the accounting entity principle. This
means that the business is treated as being completely separate from the owner of the
4
 business. The personal assets of the owner, the personal spending of the owner, etc.
do not appear in the accounting records of the business.

Q.25. Consistency.
Ans There are some areas of accounting where a choice of method is available. For
example, there are several different ways to calculate the depreciation of a non-
current asset. Where a choice of method is available, the one with the most realistic
outcome should be selected. Once a method has been selected. The method must be
used consistently from one accounting period to the next. This known as the
consistency principle.

Q.26. Duality.
Ans The principle of duality is also referred to as the dual aspect principle. Every
transaction has two aspects-a giving and a receiving.

Q.27. Materiality.
Ans The materiality principle means that individual items which will not significantly
affect either the profit or the assets of a business do not need to be recorded
separately.

Q.28. Money measurement.

Ans The money measurement principle means that only information which can be
expressed in terms of money can be recorded in the accounting records. Money is a
recognised unit of measure and is a traditional way of valuing transactions.

Q.29. Historic cost.

Ans The historic cost principle requires that all assets and expenses are initially recorded
in the ledger accounts at their actual cost.

Q.30. Going concern.

Ans The going concern principle means that the accounting records are maintained on the
basis that the business will continue to operate for an indefinite period of time.

Q.31. Realisation.
Ans The realisation principle emphasises the importance of not recording a profit until it
has actually been earned. This means that revenue is only regarded as being earned
when the legal title to goods or services passes from the seller to the buyer, who has
then an obligation (liability) to pay for those goods.

Q.32. Prudence.
Ans The prudence principle means that profits and assets should not be overstated and
losses and liabilities should not be understated.

Q.33. International Accounting.

5
Ans International accounting standards ensure that financial statements are prepared using
the same rules and guidelines internationally. The objectives of the standards are to
ensure that users of financial statements are protected are not misled.

Q.34. The Quality of information in financial statement can be measures in terms of 4

factors.
a. Comparability -
The information contained in financial statement can be useful if it can be
compared with similar information about the same business for another
accounting period or at another point in time. It is also useful to be able to
compare the information with similar information about
other business.

b. Relevance -
Financial statement provide information about a business’s financial
performance and position. These can be used as the basis for financial
decisions. It is important that the information is provided in time for these
decisions to be made: information not available when required is of little use.

c. Reliability -
The information provided in financial statements can be reliable if it is:
 Capable of being depended upon by users as being a true representation of
the underlying transactions and events which it is representing.
 Capable of being independently verified.
 Free from bias.
 Free from significant errors.
 Prepared with suitable caution being applied to any judgements and
estimates which and necessary.

d. Understandability –
It is important that financial statements can be understood by the users of those
statements. This depends partly on the clarity of the information provided.

Q.35. What is capital expenditure?

Ans capital expenditure is money spent on purchasing, improving or extending non-
current assets.

Q.36. What is Revenue expenditure?

Ans Revenue expenditure is money spent on running business on a day to day basis.

Q.37. What is capital Receipt?

Ans A capital receipt is money received by a business from a source other than the
normal trading activities.

6
Q.38. What is Revenue Receipt?
Ans A revenue receipt is money received by a business from normal trading activities.

Q.39. How is inventory values?

Ans Inventory is always valued at the lower of cost or net realisable value.

Q.40. What do mean by “cost”?

Ans The cost of the inventory is the actual purchase price plus any additional costs (such
as carriage inwards) incurred in bringing the inventory to its present position and
condition.

Q.41. What is Net Realisable value?

Ans Net realisable value is the estimated receipts from the sales of the inventory, less any
costs of completing the goods or casts of selling the goods.