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B.Com First Semester [General, Comp App & Honours]

Financial Accounting I - Theory Notes
Index
Sl. No. Topic Pg. No.
1 Syllabus 1
2 Theory Notes 2

Syllabus
Paper : (BC 104) : FINANCIAL ACCOUNTING - I
UNIT-I: ACCOUNTING PROCESS:

Financial Accounting: Introduction – Definition – Evolution – Functions-Advantages and Limitations –

Users of Accounting Information- Branches of Accounting – Accounting Principles: Concepts and
Conventions- Accounting Standards– Meaning – Importance – List of Accounting Standards issued by
ASB -– Accounting System- Types of Accounts – Accounting Cycle- Journal- Ledger and Trial Balance.
(Including problems)

UNIT-II: SUBSIDIARY BOOKS:

Meaning –Types - Purchases Book - Purchases Returns Book - Sales Book - - Sales Returns Book - Bills
Receivable Book - Bills Payable Book – Cash Book - Single Column, Two Column, Three Column and
Petty Cash Book - Journal Proper.(Including problems)

UNIT-III: BANK RECONCILIATION STATEMENT:

Meaning – Need - Reasons for differences between cash book and pass book balances – Favourable and
over draft balances – Ascertainment of correct cash book balance (Amended Cash Book) - Preparation of
Bank Reconciliation Statement. (Including problems)

UNIT-IV: RECTIFICATION OF ERRORS AND DEPRECIATION:

Capital and Revenue Expenditure – Capital and Revenue Receipts: Meaning and Differences - Differed
Revenue Expenditure. Errors and their Rectification: Types of Errors - Suspense Account – Effect of
Errors on Profit. (Including problems)
Depreciation (AS-6): Meaning – Causes – Difference between Depreciation, Amortization and Depletion -
Objectives of providing for depreciation – Factors affecting depreciation – Accounting Treatment –
Methods of depreciation: Straight Line Method - Diminishing Balance Method (Including problems)

UNIT-V: FINAL ACCOUNTS:

Final Accounts of Sole Trader: Meaning -Uses -Preparation of Manufacturing, Trading and Profit & Loss
Account and Balance Sheet – Adjustments – Closing Entries.(Including problems)

B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 1
 Theory Notes
[Q1] Distinction between Book Keeping and Accounting. [May 2017]
[Answer]
The differences between bookkeeping and accounting arise due to the following reasons:
No. Points of difference Bookkeeping Accounting
1 Area of work Bookkeeping involves the Accounting in addition to
recording of businessrecording of business
transactions in a prescribed transactions, also includes
manner. other matter such as making
adjustments, preparation of
income statement, balance
sheet and interpreting results
thereof.
2 Scope Bookkeeping is an initial stage The scope of accounting is
of accounting therefore, the wider.
scope of bookkeeping is
limited. It provides the
primary information about
the business.
3 Nature of job Much of the work of a The work of accountant is
bookkeeper is clerical in technical in nature. Modern
nature and the job is mainly accounting serves as eyes and
preliminary. ears to the management. It has
become the foundation on
which the whole structure of
commerce rests and without
which no business can be run
at all.
4 Information It provides the primary It provides information about
information to the business. the final results of the business.
5 Financial decisions Financial statements are not Financial statements are
prepared from bookkeeping prepared from accounting
records. records.
6 Business conditions It does not give the complete It gives the complete picture of
picture of the financial financial condition of the
condition of the business unit. business unit.
7 Managerial decisions It does not provide any It provides information for
information for taking taking managerial decisions.
managerial decisions.
8 Branches It has no branches. It has several branches, e.g.,
financial accounting,
managerial accounting, cost
accounting etc.
9 Knowledge and skill No professional knowledge Professional knowledge and
and skill is required for a skill is prerequisite for an
bookkeeper. accountant.

B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 2
[Q2] What is Journal? What are the basic rules of passing Journal Entries? [Dec 2016]
[Answer]
Journal is a primary book in which business transactions are recorded in the order in which they
occur in a systematic manner. A journal is called a book of ‘original entry’ or ‘prime entry’ because
all the business transactions are entered first in this book. The process of recording a transaction in
journal is called ‘journalizing’. The entry made in the journal is called journal entry.
The following are the basic rules of passing journal entries:
(i) Ascertain the accounts involved in the transaction.
(ii) Ascertain the nature of account involved i.e., real account, or personal account or nominal
account.
(iii) Ascertain which rule of debit and credit is applicable for each of the account involved.
(iv) Ascertain which account is to be debited and which account is to be credited.
(v) Record the date of transaction in the date column.
(vi) Write the name of the account to be debited very close to left hand side with the abbreviation
‘Dr’ on the same line in the extreme right hand side of particulars column.
(vii) Write the name of the account to be credited in the next line. It should be preceded by the word
‘To’ at a few spaces towards right in the particulars column and the amount to be credited in
the credit amount column against the name of the account.
(viii) Write the ‘Narration’ (brief explanation of the transaction) within the brackets in the next line
in the particulars column.
(ix) Draw a line across the entire ‘particular column’ to separate one entry from the other. The line
should be drawn only in the particulars column.
(x) The word a/c should be suffixed to both debit and credit aspects of journal entry.
For Example:
01-02-2014 -> Purchased furniture for Rs. 1000/-
Date Particulars LF Debit (Rs) Credit (Rs)
01-02-2014 Furniture A/c Dr 1000
To Cash A/c 1000
(Being furniture purchased with Cash)

[Q3] Explain the various accounting concepts and conventions.

[Answer]
I. The following are the various Accounting Concepts:
(i) Business Entity Concept: This concept implies that business unit is having a separate legal
entity distinct from its proprietors. The proprietors or members are not liable for the acts of
the company. This concept applies to all forms of business to determine the scope of what is to
be recorded or what is to be excluded from the business books.
For example, if the proprietor of the business invests Rs. 50,000 in his business, it is deemed
that the proprietor has given that much amount to the business as loan which will be shown as
a liability for the business. On withdrawal of any amount it will be debited in cash account and
credited in proprietor's capital account.
(ii) Dual Aspect Concept: According to this concept, every business transaction involves two
aspects, receiving of benefit and a corresponding giving of benefit. The dual aspect concept is
the basis of the double entry book keeping. Accordingly for every debit there is an equal and
corresponding credit. The accounting equation of the dual aspect concept is:
Capital + Liabilities = Assets

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 The term Capital refers to funds provide by the proprietor of the business concern. The term
liability denotes the funds provided by the creditors and debenture holders against the assets of
the business. The term assets represent the resources owned by the business.
(iii) Accounting Period Concept: According to this concept, profit or loss of a business can be
analyzed and determined on the basis of suitable accounting period instead of wait for a long
period, until it is liquidated. Being a business is in continuous affairs for an indefinite period
of time, the proprietors, the shareholders and outsiders want to know the financial position of
the concern, periodically. Thus, the accounting period is normally adopted for one year. At
the end of the each accounting period ‘Profit &Loss Account’ and Balance sheet are
prepared.
(iv) Going Concern Concept: This concept assumes that business concern will continue for a long
period and it is not likely to be liquidated in the near future. This assumption implies that
assets of business are valued not on the basis of their realizable value or the present market
value, but at cost less depreciation till date for the purpose of balance sheet.
(v) Cost Concept: Cost Concept implies that assets acquired are recorded in the accounting
books at the cost or price paid to acquire it. This cost is the basis for subsequent accounting
for the asset. For accounting purpose the market value of assets are not taken into account
either for valuation or charging depreciation of such assets.
(vi) Money Measurement Concept: According to this concept, accounting transactions are
measured, expressed and recorded in terms of money. This concept excludes those
transactions or events which cannot be expressed in terms of money. For example, factors
such as the skill of the supervisor, product policies, planning, and employer-employee
relationship cannot be recorded in accounts in spite of their importance to the business.
(vii) Matching Concept: To measure the profit for a particular period it is essential to match
accurately the costs associated with the revenue. Thus, matching of costs and revenues
related to a particular period is called as Matching Concept.
(viii) Realization Concept: Realization Concept is otherwise known as Revenue Recognition
Concept. According to this concept, revenue is the gross inflow of cash, receivables or other
considerations arising in the course of an enterprise from the sale of goods or rendering of
services from the holding of assets. If no sale takes place, no revenue is considered. However,
there are certain exceptions to this concept. Examples: Hire Purchase / Sale, Contract
Accounts etc.
(ix) Accrual Concept: Accrual Concept is closely related to Matching Concept. According to this
concept, revenue recognition depends on its realization and not accrual receipt. Likewise cost
is recognized when they are incurred and not when paid. The accrual concept ensures that
the profit or loss shown is on the basis of full fact relating to all expenses and incomes.
(x) Rupee Value Concept: This concept assumes that the value of rupee is constant. In fact, due
to inflationary pressures, the value of rupee will be declining. Under these situations financial
statements are prepared on the basis of historical costs not considering the declining value of
rupee. Similarly depreciation is also charged on the basis of cost price. Thus, this concept
results in underestimation of depreciation and overestimation of assets in the balance sheet
and hence will not reflect the true position of the business.
II. Accounting Conventions
(i) Convention of Disclosure: The disclosure of all material information is one of the important
accounting conventions. According to these conventions all accounting statements should be
honestly prepared and all facts and figures must be disclosed therein. The disclosure of financial
information is required for different parties who are interested in the welfare of that enterprise.
The Companies Act lays down the forms of Profit and Loss Account and Balance Sheet. Thus
convention of disclosure is required to be kept as per the requirement of the Companies Act and
Income Tax Act.
B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 4
 (ii) Convention of Conservatism: This convention is closely related to the policy of playing safe. This
principle is" often described as "anticipate no profit, and provide for all possible losses." Thus,
this convention emphasizes that uncertainties and risks inherent in business transactions should
be given proper consideration. For example, under this convention inventory is valued at cost
price or market price whichever is lower. Similarly, bad and doubtful debts are made in the
books before ascertaining the profit.
(iii) Convention of Consistency: The Convention of Consistency implies that accounting policies,
procedures and methods should remain unchanged for preparation of financial statements
from one period to another. Under this convention alternative improved accounting policies
are also equally acceptable. In order to measure the operational efficiency of a concern, this
convention allows a meaningful comparison in the performance of different period.
(iv) Convention of Materiality: According to Kohler's Dictionary of Accountants Materiality may
be defined as "the characteristic attaching to a statement fact, or item whereby its disclosure or
method of giving it expression would be likely to influence the judgment of a reasonable
person." According to this convention consideration is given to all material events, insignificant
details are ignored while preparing the profit and loss account and balance sheet. The
evaluation and decision of material or immaterial depends upon the circumstances and lies at
the discretion of the Accountant.

[Q4] Define Accounting. What are its Limitations?

[Answer]
Definition of Accounting: The American Institute of Certified Public Accountants defined accounting
as “the art of recording, classifying and summarising in a significant manner in terms of money
transactions and events which in part, at least of financial character and interpreting the results
thereof.”
The following are the limitations of accounting:
(i) No detail information about cost: Financial Accounting provides information as a whole in terms
of income, expenses, assets and liabilities. It does not provide detail of cost involved by
departments, processes, products, services or other unit of activity within the organisation.
(ii) No cost control method: It does not have proper mechanism to control expenditure on various
elements of cost, viz, material and labour. As a result, misappropriation, wastage and losses of
materials are left unchecked. Proper utilization of labour becomes impossible and suitability of
different labour incentive plans goes without evaluation.
(iii) No information on efficiency: It does not have a system to judge the efficiency in the use of
material, labour and overhead costs of the organisation in comparison to the standard fixed for
their use.
(iv) No classification of expenses: It does not classify expenses as direct and indirect or fixed and
variable. Besides, these are also not allocated to different stages of production or departments
or processes to show the controllable and uncontrollable items on overhead cost.
(v) Historical in nature: It is prepared at the end of the accounting period. It fails to provide day-to-
day information to pre-determine cost.
(vi) Not helpful in price fixation: It does not provide adequate cost information to fix up the price of
products manufactured and service rendered by the organisation.
(vii) No analysis of losses: It does not provide detail information about the reasons of losses. It also
does not help to determine the variations in the cost between different working times, idle time
and seasonal conditions of the industry.
(viii) No technique to evaluate alternative methods: In planning expansions contraction of plants,
equipments, products and processes it is not poses to calculate and compare the profitability of
alternatives with the help Financial Accounting.

B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 5
(ix) No cause and effect analysis: As financial account fails to provide o and profit information
product-wise, the causes of profit or loss cannot effectively determined and analysed.
(x) No data for comparison: It does not provide data to facilitate compare of costs of operation of the
firm with other firms in the industry.

[Q5] What are the objectives of Accounting?

[Answer] The following are the objectives of Accounting:
(i) To keep a permanent, accurate and complete record of business transactions.
(ii) To maintain records of incomes, expenses and losses in such a way that the net profit or loss
for any specified period may be ascertained.
(iii) To keep records of assets and liabilities in such a way that the financial position of the
business at any point can be easily ascertained.
(iv) To enable the businessman to review and revise his policies in the light of past experience,
brought to light by analyzing and interpreting records and reports.
(v) To provide information for legal and tax purposes.

[Q6] What is double entry system? Give any five advantages of double entry system.
[Answer]
 The double entry system was invented by a trader called “Luca Pacioli” of Italy. He wrote
about this system in his book called “De Computiset Scripturis in the year 1734.
 According to him, every transaction takes place between two persons or two firms.
 When a transaction takes place one person receives the benefit and the other person gives the
benefit. These two benefits are inseparable.
 In accountancy receiving the benefit is referred as debit aspect and giving the benefit is
referred as credit aspect.
 Thus, the procedure of recording both the receiving and giving aspects related to business
transactions is called as “Double Entry System”.
 For Example:
A firm purchases Machine for Rs. 80000. The firms receive Machine hence, Machine is Debit
and the firm is giving cash hence, cash is Credit.
Advantages of Double Entry System:
(i) It records all transactions of the business.
(ii) It gives correct and accurate information.
(iii) It helps to check the arithmetical accuracy by preparing trail balance.
(iv) It helps in ascertainment of profit of loss of the business transaction.
(v) It helps in ascertainment of financial position of the business concern.
(vi) It provides accounting information readily.
(vii) It helps in preventing frauds and errors as the recording of the transactions are based
on vouchers.
[Q7] What are the rules of Debit and Credit relating to Double Entry System? Or Types of Accounts.
[Answer]
For every transaction there are two aspects. One is called Debit and the other is called Credit. The
debit and credit aspects of a transaction are to be identified based on the principles of double entry
system of accounting.
Debit refers to entering an amount on the left side of an account and Credit means to enter an amount
on the right side of an account. The abbreviated form of “Dr” Stands for Debit and “Cr” Stands for

B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 6
Credit. Rules of debit and credit is based on dual aspect concept i.e. every transaction has Debit effect
and an equivalent credit effect.
Before deciding which account is to be debited or credited, it is necessary to decide the nature of
accounts which are influenced by the business transactions.
The rules of Debit and Credit are given below:
(i) Personal Accounts: (Natural persons and artificial persons)
Rule: Debit the receiver
Credit the giver
According to the above principle, the benefit receiver’s account is to be debited and the
benefit giver’s account is to be credited.
For Example: Goods purchased from Ramesh on credit for Rs. 2000
The two accounts involved in this transaction are goods purchased A/c and Ramesh A/c. So,
Ramesh is the Giver of the goods. Hence, Ramesh Account is credited (i.e. credit the giver
rule applies) goods purchased are expenditure, so nominal account, hence is to be debited.

(ii) Real Accounts: (Assets)

Rule: Debit what comes in.
Credit what goes out.
According to real accounts principle, when an asset is received by the business, the asset
account is to be debited, when any asset goes out of the business, the asset account is to be
credited.
For Example: Purchased office furniture for Rs. 10000.
In this transaction office furniture (asset-Real A/c) is coming in and cash (asset – Real A/c)
is going out. Hence, office furniture account is to be debited and cash account is to be
credited.
(iii)Nominal Accounts: (Expenses, Losses, Incomes, Gains)
Rule: Debit all expenses and losses.
Credit all incomes and gains.
According to normal account principle, expenses and losses are to be debited and all
incomes and gains of the business are to be credited.
For Example: Salaries paid Rs. 5000
In this transaction salaries (expenditure – nominal A/c) is an item of expenditure and cash
(real A/c) is going out.

[Q8] Explain Debit Note and Credit Note.

[Answer]
Debit Note: At the time of returning the goods, the net amount is calculated and a Note or Letter is
prepared by the purchaser. This note is known as “Debit note”. The purpose of this Note is to inform
the supplier about the Debit given to his account: on receiving this Debit Note, the supplier can
understand that his account has been debited.
Credit Note: When the goods are returned by the customers, a credit note is prepared and send to the
seller. The credit note informs that seller account is credited with the amount of the goods returned.

[Q9]What is a Contra Entry? How it is different from other Entries?

[Answer]
In dual entry accounting system, a Contra Entry is an entry which is recorded to reverse or offset an
entry on the other side of an account. If a debit entry is recorded in an account, contra entry will be
recorded on the credit side and vice-versa.
Debit and credit aspects of a single transaction are entered in the same account, but in different
columns. Each entry in this case is viewed as a contra entry of the other. Remember the word contra
as “Against” or “Opposite”. For Contra Entries Letter ‘C’ is written in L.F. Column on each side of
the Account.
B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 7
 Contra Entries are recorded in the following cases:
(i) When cash is deposited into Bank.
(ii) When cash is withdrawn from Bank for office use.
(iii) When an account is opened with Bank.
(iv) When the cheque received on one day and deposited on another day.
On the other hand if a single transaction is recorded once either in the debit side or in the credit side
of an account, it is a non Contra Entry.
For Example:
(i) Goods Purchased for Cash
(ii) Salaries Paid
(iii) Purchase of Furniture from Godrej
(iv) Cash Paid to Mahendra

[Q10] What are subsidiary books? Describe various subsidiary books.

[Answer]
Definition: Subsidiary book may be defined as a book of prime entry in which transactions of a
particular category are recorded. In other words, in order to save time and energy, the transactions
which are of similar character are recorded in separate books; these are called subsidiary books or
subdivision of journal. A number of subsidiary books are opened to record all business transactions.
In practical system of book-keeping, subsidiary books are:
(i) Purchase book: All credit purchase of goods is written in this book. Cash purchase of goods and
credit purchase of assets are not recorded in this book. Various types of goods and properties are
purchased in business out of them, to keep the record of product or goods which are purchased on
credit for resale purpose; a book is maintained known as Purchase Book. It is prepared based on
inward invoice.
While posting such transactions from purchase book to ledger accounts, we need to prepare
creditors account and purchase account. Total amount of purchase will be debited and individual
account of creditors will be credited. Specimen of it is as follows:-
Purchase Book of … … … …
Date Particular Invoice No. L.F. No. Detail Amount Rs. Amount Rs.

(ii) Sales Book: Goods are sold in cash and on credit. Sale of goods in cash is recorded in cash book
but goods which are sold on credit which was purchased for resale purpose is recorded in a book
called Sales Book. Cash sale of goods and credit sale of assets are not recorded in this book.
Other names of Sales Book are Sales Day Book, Sales Journal, Sold book, Outward Invoice Book
etc. This book is maintained based upon the outward invoice. Date of sale, invoice number, name
of purchaser, and amount of invoice are recorded in this book.
While posting into ledger from this book, individual account of debtors will be debited with
their amount of sales and sales account will be credited with total amount of sales. Specimen of it
is given below.
Sales Book of……………….
Date Particulars Invoice No. L.F. No. Detail Amount Amount

(iii) Purchase Return Book: Transactions which are related to return are recorded in this book.
Sometimes, goods purchased are returned to the supplier for various reasons like low quality,
high price, defective and damaged goods etc. For every return, a debit note is prepared and sent
B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 8
 to supplier for making necessary entries in his book. The source document for recording entries
in purchase return book is debit note. It contains the name of party and reasons of returning
goods. This book is also known as Return Outward Book.
While posting it in ledger account, name of creditors will be debited and purchase return account
will be credited. Specimen of it is as follows:
Purchase Return Book……………………
Date Particulars Debit Note No. L.F. No. Detail Amount Rs. Amount

(iv) Sales Return Book: This book is used to record sales returns from customers of the goods sold to
them on credit for various reasons like being defective, damaged, low quality, change in terms
and condition of trade & payments etc. On the receipt of goods from customers, a credit note is
prepared. Credit note contains details regarding the name of the customers and details of goods
received back. The main document for recording sales return in sales return book is credit note.
This book is also known as Return Inward Book.
Sales Return Book………….
Date Particulars Credit Note No. L.F. No. Detail Amount Amount

(v) Cash Book: A separate book is maintained by the firm to keep the record of cash receipts and
cash payments which is known as Cash Book. Whenever cash transactions take place they are
recorded in cash book. It is helpful to see the position of cash of a firm. A cash book also
removes a condition of making cash account. All the cash receipts are recorded in debit side
and cash payment in credit side. The following are the different types of cash book.
(a) Simple cash book or single column cash Book: - It is a book which is maintained to keep
the record of cash receipt and payment having single column in both the sides for
recording amount is known as simple or single column cash book. Left hand side or
debit side is used to keep the record of cash received and right side or credit side is used
to keep the record of cash payments. Specimen of it is as follows: -

Dr Single Column Cash Book Cr

Date Particulars LF Amount Date Particulars LF Amount

(b) Double Column Cash Book: - A Cash Book having provision of recording transactions
related to cash & discount is known as double column cash book. Cash receipts &
discount allowed are recorded in debit side and cash payment & discount received are
recorded in credit side. Specimen of double column is as follows:

Dr Double Column Cash Book Cr

Date Particulars LF Discount Cash Date Particulars LF Discount Cash

(c) Triple Column Cash Book: - A cash book having three columns in both the sides to keep
the record of amount of discount, cash and bank is known as Triple Column Cash Book.
In large business houses where discount is offered and received, payment and receipt is

B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 9
 made in cash and through bank, this type of book is used. Specimen of triple column is
as follows:
Dr Triple Column Cash Book Cr
Date Particulars LF Discount Cash Bank Date Particulars LF Discount Cash Bank

(vi) Bills Receivable Book: When credit sales of goods are made the purchaser gives his guarantee
to make payment in future in the form of bill. When the seller receives such bill, it is Bill
Receivable for him as he will receive payment in future against such bill. In case a business
house receives a number of bills, a Bills Receivable Book is maintained to record all such bills.
(vii) Bills Payable Book: When credit purchases are made by a firm it gives a guarantee to the seller
to make payment in future in the form of a bill. This bill is said to be Bills Payable for the firm
as he will pay for the bill in future. A Bills Payable Book is opened to record all such bills.

(viii) Journal Proper: It is a subsidiary book maintained to record the transaction which cannot be
recorded in the above subsidiary books. Usually the transactions of infrequent character are
recorded in the journal proper. The entries like adjustment entries, opening entries, closing
entries, transfer entries, purchase and sale of assets on credit, interest on capital, interest on
drawing, depreciation of assets, rectification of errors etc. are recorded in journal proper.

[Q11] What is Bank Reconciliation Statement? [Mar 2011]

[Answer]
A Bank Reconciliation Statement is that explains the difference between the bank balance shown in an
organization’s bank statement, as supplied by the bank, and the corresponding amount shown in the
organization's own accounting records at a particular point in time.
Such differences may occur, for example, because a cheque or a list of cheques issued by the
organization has not been presented to the bank, a banking transaction, such as a credit received, or a
charge made by the bank, has not yet been recorded in the organization’s books, or either the bank or
the organization itself has made an error.
It may be easy to reconcile the difference by looking at very recent transactions in either the bank
statement or the organization’s cash book. It is necessary to go through and match every single
transaction in both sets of records since the last reconciliation, and see what transactions remain
unmatched. The necessary adjustments should then be made in the cash book, or any timing
differences recorded to assist with future reconciliations.
[Q12] Explain need of Bank Reconciliation Statement. [Dec 2016]
[Answer]
(i) To determine the correct position of trader’s bank balance.
(ii) To identify the mistakes which are being recorded in both cash book and pass book?
(iii) To avoid frauds in documenting the bank transactions in the Cash book.
(iv) To find the reasons for the delay in collecting the cheques that are sent for collection.
(v) To identify the misuse of cash.
(vi) To get an idea over the number of cheques issued but not presented for payment.
(vii) To know the correctness of the entries made in cash book.

[Q13] Explain the various reasons for preparation of Bank Reconciliation Statement. [May 2017]
[Answer]
Reconciliation of the cash book and the bank passbook balances amounts to an explanation of
differences between them. The differences between the cash book and the bank passbook is caused by:
[I] Timing differences on recording of the transactions.
[II] Errors made by the business or by the bank.
B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 10
[I] Timing Differences : When a business compares the balance of its cash book with the balance
shown by the bank passbook, there is often a difference, which is caused by the time gap in
recording the transactions relating either to payments or receipts. The factors affecting time gap
includes :
(a) Cheques issued by the bank but not yet presented for payment : When cheques are issued by
the firm to suppliers or creditors of the firm, these are immediately entered on the credit side of
the cash book. However, the receiving party may not present the cheque to the bank for
payment immediately. The bank will debit the firm’s account only when these cheques are
actually paid by the bank. Hence, there is a time lag between the issue of a cheque and its
presentation to the bank which may cause the difference between the two balances.
(b) Cheques paid into the bank but not yet collected: When firm receives cheques from its
customers (debtors), they are immediately recorded in the debit side of the cash book. This
increases the bank balance as per the cash book. However, the bank credits the customer
account only when the amount of cheques are actually realised. The clearing of cheques
generally takes few days especially in case of outstation cheques or when the cheques are paid-
in at a bank branch other than the one at which the account of the firm is maintained. This
leads to a cause of difference between the bank balance shown by the cash book and the balance
shown by the bank passbook.
(c) Direct debits made by the bank on behalf of the customer: Sometimes, the bank deducts
amount for various services from the account without the firm’s knowledge. The firm comes to
know about it only when the bank statement arrives. Examples of such deductions include:
cheque collection charges, incidental charges, interest on overdraft, unpaid cheques deducted
by the bank – i.e. stopped or bounced, etc. As a result, the balance as per passbook will be less
than the balance as per cash book.
(d) Amounts directly deposited in the bank account: There are instances when debtors (customers)
directly deposits money into firm’s bank account. But, the firm does not receive the intimation
from any source till it receives the bank statement. In this case, the bank records the receipts in
the firm’s account at the bank but the same is not recorded in the firm’s cash book. As a result,
the balance shown in the bank passbook will be more than the balance shown in the firm’s cash
book.
(e) Interest and dividends collected by the bank: When the bank collects interest and dividend on
behalf of the customer, then these are immediately credited to the customers account. But the
firm will know about these transactions and record the same in the cash book only when it
receives a bank statement. Till then the balances as per the cash book and passbook will differ.
(f) Direct payments made by the bank on behalf of the customers: Sometimes the customers give
standing instructions to the bank to make some payment regularly on stated days to the third
parties. For example, telephone bills, insurance premium, rent, taxes, etc. are directly paid by
the bank on behalf of the customer and debited to the account. As a result, the balance as per
the bank passbook would be less than the one shown in the cash book.
(g) Cheques deposited / bills discounted dishonoured: If a cheque deposited by the firm is
dishonoured or a bill of exchange drawn by the business firm is discounted with the bank is
dishonoured on the date of maturity, the same is debited to customer’s account by the bank.
As this information is not available to the firm immediately, there will be no entry in the firm’s
cash book regarding the above items. This will be known to the firm when it receives a
statement from the bank. As a result, the balance as per the passbook would be less than the
cash book balance.
[II] Differences Caused by Errors: Sometimes the difference between the two balances may be
accounted for by an error on the part of the bank or an error in the cash book of the business.
This causes difference between the bank balance shown by the cash book and the balance shown
by the bank statement.

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 (a) Errors committed in recording transaction by the firm: Omission or wrong recording of
transactions relating to cheques issued, cheques deposited and wrong totalling, etc. committed
by the firm while recording entries in the cash book cause difference between cash book and
passbook balance.
(b) Errors committed in recording transactions by the bank: Omission or wrong recording of
transactions relating to cheques deposited and wrong totalling, etc. committed by the bank
while posting entries in the passbook also cause differences between passbook and cash book
balance.
[Q14] What are the causes for Depreciation?
[Answer]
The following are the Causes of Depreciation:
(i) Physical Deterioration:
(a) Wear and Tear: the fixed asset naturally wears out from the use of it, thus the value of
the fixed asset decreases each year.
(b) Rust, rot and decay: The metals of the fixed asset, e.g. motor vehicles will rust away
over the years, thus results in decrease in value.
(ii) Obsolescence (out-of-date): For instance, typewriter is replaced by computer due to advanced
technology. The value of typewriter thus decreases since it is obsolete.
(iii) Inadequacy: This is when an asset is no longer used because of the changes in the size of the
firm. For instance, a mini school-bus is no longer suitable for our school since there are many
students taking the school-bus to school, a large school-bus is therefore replace the mini-bus.
(iv) Depletion: Some assets are of a wasting character, due to the extraction of raw materials from
them, e.g. mines, oils or quarries.

[Q 15] What is a Ledger? State its Advantages. [Dec 2016]

[Answer]
A ledger records classified and summarized financial information from journals as debits and credits,
and shows their current balances.
Advantages of a Ledger
(i) Double entry system: It gets completed only in case the journals are posted into different
ledger accounts.
(ii) Maintain classified accounts: The particulars of any classified accounts can get revealed only
after it is recorded in ledger account.
(iii) Presentation of statistical information: The ledger accounts come up with respective balances
and it reflects statistical information which can later be viewed by management while taking
any decision in business.
(iv) Keeping permanent record: Through ledger account it is possible to maintain a permanent
record of financial transaction which occurs in a highly classified manner.
(v) Prepare trial balance: It allows in preparing trial balance so that it becomes possible enough
to check any arithmetical accuracy which can occur due to recording of financial transaction.
(vi) Prepare balance sheet: You can possibly make balance sheet as it is easier to view financial
position of company.

[Q16] What is an Account?

[Answer] An account is a record or statement of financial expenditure and receipts relating to a
particular period or purpose.

B.Com First Semester - Financial Accounting I Theory Notes & Previously Asked Questions Page No. 12
[Q 17] Distinction between Journal and Ledger. [May 2017]
[Answer]
No. Journal Ledger
1. Journal is a primary book wherein all the Ledger is a book where the journalized
business transactions are recorded on a transactions are being classified.
daily basis in a systematic manner.
2. It is a book of primary record. It is a book of final entry.
3. The process of recording transactions in a The process of recording transactions in a
journal is called ‘Journalizing’. ledger is called posting.
4. The organization of the data within journal The organization if the data within ledger is
is known as transaction. known as account.
5. Journal is not balanced except for the cash Every account in the ledger is balanced.
book.
6. It is very difficult to test the accuracy of the The availability of lists of balances ensures
books. easy accuracy testing.
7. Narration is required for each entry. Narration is not required.
8. It maintains the record in sequential It maintains the record in conclusive manner.
manner.
9. It includes the ledger folio. It includes the journal or sub-journal folio.
10. It does not facilitate the preparation of final It serves as a basis for the preparation of
accounts. final accounts.

[Q 18] Explain the stages of accounting.

[Answer]
The following are the various stages or steps in the accounting process / cycle.
(i) Transactions: Financial transactions start the process. Transactions can include the sale or
return of a product, the purchase of supplies for business activities, or any other financial
activity that involves the exchange of the company’s assets, the establishment or payoff of a
debt, or the deposit from or payout of money to the company owners.
(ii) Journal entries: The transaction is listed in the appropriate journal, maintaining the
journal’s chronological order of transactions. The journal is also known as the “book of
original entry” and is the first place a transaction is listed.
(iii) Posting: The transactions are posted to the account that it impacts. These accounts are part
of the General Ledger, where you can find a summary of all the business accounts.
(iv) Trial balance: At the end of the accounting period (which may be a month, quarter, or year
depending on a business’s practices), you calculate a trial balance.
(v) Worksheet: Unfortunately, many times your first calculation of the trial balance shows that
the books aren’t in balance. If that’s the case, you look for errors and make corrections
called adjustments, which are tracked on a worksheet.
Adjustments are also made to account for the depreciation of assets and to adjust for one-
time payments (such as insurance) that should be allocated on a monthly basis to more
accurately match monthly expenses with monthly revenues. After you make and record
adjustments, you take another trial balance to be sure the accounts are in balance.

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(vi) Adjusting journal entries: You post any corrections needed to the affected accounts once
your trial balance shows the accounts will be balanced once the adjustments needed are
made to the accounts. You don’t need to make adjusting entries until the trial balance
process is completed and all needed corrections and adjustments have been identified.
(vii) Financial statements: You prepare the balance sheet and income statement using the
corrected account balances.
(viii) Closing the books: You close the books for the revenue and expense accounts and begin the
entire cycle again with zero balances in those accounts.

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