UNIT - I

SECTION – A

1) Define Financial Accounting.

The American Institute of Certified Public Accountants (AICPA) had defined accounting as the
“art of recording, classifying, and summarising in a significant manner and in terms of money,
transactions and events which are, in part at least, of financial character, and interpreting the
results thereof”.

2) What is Personal Account?

A personal account is a type of account that relates to individuals, entities, or groups, such as
customers, suppliers, or owners. It involves the record-keeping of transactions with people or
organizations.

3) What is Journal Entry?

A journal entry is the recording of a financial transaction in the accounting system. It includes
details such as the accounts affected, the amounts, and a brief description of the transaction.

4) Write shot note on Real Account.

A real account in accounting is an account that represents tangible assets like property,
equipment, or inventory. Real accounts are permanent and are not closed at the end of an
accounting period.

5) State the golden rules of accounts

Golden Rules of Accounts:

For Personal Accounts: Debit the receiver, credit the giver.
For Real Accounts: Debit what comes in, credit what goes out.
For Nominal Accounts: Debit all expenses and losses, credit all incomes and gains.

6) What is Ledger?
A ledger is a book or electronic record that contains individual accounts in which transactions
are recorded. It is a collection of all accounts maintained by a company.

7) What do you mean by Double entry system?

The double-entry system is a method of bookkeeping in which every transaction affects at least
two accounts. There is a debit entry and a corresponding credit entry, ensuring that the
accounting equation (assets = liabilities + equity) is always in balance.

8) What are Subsidiary books?

Subsidiary books are specialized journals used to record specific types of transactions, such as
sales, purchases, and cash transactions, before they are posted to the general ledger.

9) Write short note on Petty cash book.

A petty cash book is a ledger used to record small and miscellaneous expenses that are paid in
cash. It helps in tracking and controlling small expenditures without the need for frequent
entries in the main cash book.
 10) What is Nominal Account?
A nominal account is an account that relates to revenue, expenses, gains, and losses. These
accounts are temporary and are closed at the end of the accounting period.
11) Define cash book.
A cash book is a subsidiary book that records cash transactions, including both receipts and
payments. It serves as a ledger for cash and bank accounts.

12) What is Trial Balance?

A trial balance is a statement that lists the balances of all accounts in the general ledger to
ensure that the debits equal the credits, confirming the accuracy of the recorded transactions.

13) What do you understand by Rectification of Errors?

Rectification of errors refers to the process of correcting mistakes made in the accounting
records. It ensures that financial statements accurately represent the financial position of a
business.

14) What is Common Errors?

Common errors in accounting include mistakes in arithmetic, posting to the wrong account,
omitting entries, and errors of principle. These errors can impact the accuracy of financial
statements.

15) What do you mean by three column Cash book?

A three-column cash book is a special cash book that has three columns on each side: one for cash,
one for bank, and one for discounts. It is used to record cash and bank transactions along with
discounts.
SECTION – B
16) What are the functions of Financial Accounting?
Functions of accounting
Accounting serves several important functions within an organization or entity. These functions
are crucial for managing financial information, making informed decisions, and ensuring
transparency. Here are the key functions of accounting:
1. Recording Financial Transactions: The primary function of accounting is to
systematically record all financial transactions, such as sales, purchases, expenses, investments,
and borrowings. This process captures the details of each transaction in a structured manner,
creating a reliable record of the entity's financial activities.
2. Classifying and Categorizing Transactions: Accounting involves categorizing and
classifying transactions into relevant accounts based on their nature. This helps organize financial
information and ensures that data is properly grouped for analysis and reporting.
3. Summarizing and Aggregating: Periodically, accounting compiles and summarizes the
recorded transactions into financial statements. These statements, including the balance sheet,
income statement, and cash flow statement, provide a comprehensive overview of the entity's
financial position, performance, and cash flows.
4. Providing Financial Information: One of the key functions of accounting is to generate
timely and accurate financial information that assists stakeholders in making informed decisions.
Internal users, such as management and employees, use this information for planning, budgeting,
and performance evaluation. External users, like investors, creditors, and regulators, rely on
financial information to assess the entity's financial health and stability.
5. Assessing Financial Performance: Accounting enables the analysis and interpretation of
financial data to evaluate an entity's financial performance. Financial ratios, trend analysis, and
other techniques help assess aspects such as profitability, liquidity, solvency, and efficiency.
6. Supporting Decision-Making: Accounting information plays a vital role in decision-
making processes. Managers use financial data to make strategic and operational decisions,
allocate resources, and set goals. Investment decisions by potential investors and borrowing
decisions by creditors are also influenced by the financial information provided through
accounting.
7. Monitoring and Control: Accounting helps establish internal controls and monitoring
mechanisms to prevent errors, fraud, and misuse of resources. Regular financial reporting and
audits ensure that financial transactions are accurate, complete, and in compliance with
regulations.
8. Facilitating Financial Planning: Accounting data supports the creation of budgets,
forecasts, and financial plans. These tools help organizations set goals, allocate resources, and
track progress toward achieving their objectives.
9. Evaluating Tax Liabilities: Accurate accounting records are essential for calculating and
reporting taxes owed to government authorities. Tax compliance and reporting are based on the
financial information maintained through accounting processes.
10. Facilitating Communication: Accounting serves as a means of communication between
an organization and its stakeholders. Financial statements and reports provide a clear and
standardized format for conveying financial information to investors, creditors, regulators, and the
general public.
11. Enabling Performance Evaluation: Accounting data allows for the measurement and
assessment of individual departments, projects, or business segments. This enables organizations
to identify areas of strength and weakness and make necessary improvements.
In summary, the functions of accounting encompass a wide range of activities aimed at accurately
recording, summarizing, analyzing, and communicating financial information to support decision-
making, planning, control, and accountability within an organization.

17) Difference between single entry and double entry system.

Single Entry System:
1. Recording Method:
 Incomplete Record: Single entry system is an incomplete form of record-keeping where
only one aspect of a transaction is recorded. Usually, it records only cash and bank
transactions.
2. Accounts Maintained:
 Limited Accounts: In single entry, only personal accounts and cash book are maintained.
There is no systematic recording of all transactions affecting different accounts.
3. Accuracy:
 Less Accurate: It is generally considered less accurate than the double entry system
because it doesn't provide a complete picture of the financial transactions.
4. Financial Position:
 Limited Information: The financial position of a business is difficult to ascertain
accurately because it lacks a systematic approach to recording all transactions.
5. Profit Determination:
 Profit Calculation: Profit is determined by comparing opening and closing capital, and it
may not reflect the true financial performance due to missing information.
6. Complexity:
 Simple: It is simpler and requires less effort than the double entry system, making it
suitable for small businesses.
Double Entry System:
1. Recording Method:
 Complete Record: Double entry system records both aspects of a transaction – the debit
and the credit. Every transaction has an equal and opposite entry.
2. Accounts Maintained:
 Complete Accounts: In double entry, a comprehensive set of accounts is maintained,
including assets, liabilities, revenues, and expenses. It provides a holistic view of the
financial transactions.
3. Accuracy:
 Highly Accurate: It is considered highly accurate as every transaction is recorded twice,
providing a built-in system of checks and balances.
4. Financial Position:
 Clear Picture: The financial position of a business is accurately reflected through the
complete and systematic recording of all transactions.
5. Profit Determination:
 Accurate Profit Calculation: Profit is calculated through the preparation of the income
statement, providing a more accurate representation of the financial performance.
6. Complexity:
 Complex: The double entry system is more complex compared to single entry due to its
comprehensive nature. It requires a good understanding of accounting principles.
In summary, while the single entry system is simpler and may be suitable for small businesses, the
double entry system provides a more accurate and comprehensive view of a company's financial
position and performance. The double entry system is widely used and accepted in modern
accounting due to its ability to provide a complete and systematic record of financial
transactions.

18) List out the objectives of Accounting

1. To Keep a Systematic Record of All Business Transactions
Accounting is used to maintain a systematic record of all the financial transactions in the
books of accounts of an entity and that is one of the main accounting objectives. For this
purpose, all transactions have recorded the books of accounts in chronological order in
Journal and then posted to different ledger accounts.

2. To Ascertain Profit and Loss & Ascertainment of Results

Every business starts with the motive to earn profits. We can say that profits are the backbone
of any business. Also, the users of financial statements are very keen to know the net
results of business operations periodically. To check whether the business is earning
profits or making losses, we prepare a statement or account called “Profit and Loss
Account or Statement of Profits & Losses”.

3. To Determine the Financial Position of an Entity

 By accounting for each and every asset owned by an entity and liabilities incurred by the
entity, we can get to know the exact financial position of our business at a particular date.
In this regard, we prepare a “Balance Sheet” to check the value of assets and liabilities.

4. To Provide Information to Various Users of Financial Statement

Users of financial statements play a major role in the company. The financial statements of
an entity can affect the decision-making process of the user of the financial statement.
They also participate in future business growth. Providing information to the various
interested parties or stakeholders is one of the most important objectives of accounting,
it helps them in making good financial decisions.

5. To Assist the Management

By analyzing the financial data of an entity and providing interpretations in the form of
reports, accounting can also assist management in handling the daily business operations
in an effective manner.

19) Prepare journal entries from the following transactions

1. Commenced business with capital 1,00,000
2. Bought goods for cash 60,000
3. Sold goods for cash 50,000
4. Received commission cash 6,000
5. Paid salary cash 8,000
6. Deposit to bank cash – 25,000
7. Paid Advertisement expenses – 2,000
8. Withdrew from bank for personal use – 40,000.
Solution:
Journal Entries
Date Particulars L.F Debit Credit
Rs. Rs.
1 Cash a/c Dr 1,00,000
To capital a/c 1,00,000
(Being capital invested)
2 Purchase a/c Dr 60,000
To cash a/c 60,000
(Being cash purchase)
3 Cash a/c Dr 50,000
To sales a/c 50,000
(Being cash sales)
4 Cash a/c Dr 6,000
To commission received a/c 6,000
(Being commission received)
5 Salary a/c Dr 8,000
To cash a/c 8,000
 (Being salary paid)
6 Bank a/c Dr 25,000
To cash a/c 25,000
(Being Cash deposit in bank)
7 Advertising A/c Dr 2,000
To Cash A/C 2,000
(Being advertising expenses paid)
8 Drawings A/c Dr 40,000
To Bank A/c 40,000
(Being cash withdrawn for personal use)

20) Prepare Sales book from the following transactions

Sold goods to Ram on credit
60 shirts @ RS. 8 each
40 T. Shirt @ RS. 10 each
Sold old furniture RS. 50,000
Sold 100 shirts to Jagan @ RS. 8 per shirt
Sold 20 shirts to Senthil @ RS. 9
Sold 200 shirts @ RS. 8 each

SALES BOOK

Date Name of the customer Outward invoice No. LF Amount Amount

Ram
(60 shirts @ RS. 8 each) 480
(40 T. Shirt @ RS. 10 each) 400
880

Jagan (100 shirts @ Rs. 8) 800

Selvam
(20 shirts @ Rs. 9) 180
(200 shirts @ Rs. 8) 1,600 1,780
Total 3,460

21) Prepare purchase Returns book

June 6th 2000 – Returned goods to Ramesh Rs. 1000
June 8th 2000 - Returned goods to sureshRs. 900
June 15th 2000 Returned goods to kumarRs. 1,500
Prepare the sales returns books from the following transactions.
Jan. 10th 2000 – Akash returned goods worth Rs. 700
Jan 15th 2000 – Janaki returned goods worth Rs. 1,500
Jan 20th 2000 – Hari returned goods worth Rs. 2,000
Solution
PURCHASE RETURN BOOK
Date Name of the supplierDebit note no LF Amount Amount
 6/6/2020 Ramesh 1,000
8/6/2020 Suresh 900
15/6/2020 Kumar 1,500
Total 3,400

SALES RETURN BOOK

Date Name of the customer Credit LF Amount Amount
note no
10/1/2020 Akash 700
15/1/2020 Janaki 1,500
20/1/2020 Hari 2,000
Total 4,200

22) The following Trial Balance has been prepare wrongly you are asked to prepare the Trial
Balance correctly.
NAME OF THE ACCOUNT DEBIT CREDIT
Cash in hand 2,000
Purchase returns 4,000
Wages 8,000
Establishment expenses 12,000
Sales returns 8,000
Capital 22,000
Carriage outwards 2,000
Discount received 1,200
Commission earned 800
Machinery 20,000
Stock 10,000
Debtors 8,000
Creditors 12,000
Sales 44,000
Purchase 28,000
Bank over draft 14,000
Manufacturing expenses 14,000
Loan from Akash 14,000
Carriage inwards 1,000
Interest on investment 1,000
Solution :

NAME OF THE ACCOUNT DEBIT CREDIT

Cash in hand 2,000
Purchase returns 4,000
Wages 8,000
Establishment expenses 12,000
Sales returns 8,000
Capital 22,000
Carriage outwards 2,000
Discount received 1,200
 Commission earned 800
Machinery 20,000
Stock 10,000
Debtors 8,000
Creditors 12,000
Sales 44,000
Purchase 28,000
Bank over draft 14,000
Manufacturing expenses 14,000
Loan from Akash 14000
Carriage inwards 1,000
Interest on investment 1,000
TOTAL 1,13,000 1,13,000

23) Prepare Simple cash book from the following transaction of Mr. Kannan

S.NO PARTICULARS AMOUNT

Jay-1 Kannan started business with cash 16,000
2 He bought goods for cash 10,000
4 Sold goods for cash 200
5 Received cash from suresh 720
10 Paid into bank 6,000
12 Paid cash to raj 430
15 Sold goods for cash 3,000
17 Paid for stationary 30
19 Paid for office furniture 370
20 Paid for Ram 1360
24 Paid for advertisement 180
26 Purchased postage stamps 16
29 Paid rent 200
31 Paid electricity charges 30
Solution:
IN THE SINGLE COLUMN CASH BOOK OF MR.KANNAN

Date Receipts Rs Date Payments Rs.

1 Jan To capital a/c 16000 2 By purchases 10000
4 To sales 200 10 By bank 6000
5 To suresh 720 12 By raj 430
15 To sales 3000 17 By stationery 30
19 By office furniture 370
20 By ram 1360
24 By advertisement 180
26 By postage stamps 16
29 By rent 200
31 By electricity 30
 31 By balance c/d 1304
19,920 19,920
1 Feb To balance c/d 1304

24) Prepare petty cash book on the Imprest system from the following data:
Received for petty cash Rs. 300
Paid bus fare Rs. 15
Paid cartage Rs. 8
Postage and stamps Rs.15
Wages Rs. 18
Stationary Rs.12
Auto fare Rs. 6
Repairs Rs. 45
Bus fare Rs. 12
Postage and telegram Rs.33
Taxi fare Rs.9
Cartage Rs. 15
Refreshment Rs. 15
 25) Prepare Two Column Cash Book from November 2000
S.NO PARTICULARS AMOUNT
1 Cash in hand 390
5 Sold goods for cash 6,420
6 Credit purchase from varun 4,350
10 Received from mohan 4,240
Discount allowed to him 40
14 Paid for electricity charges 250
16 Bought stationary 336
19 Drew from bank for office use 2,800
24 Paid for varunRs. 4,300 in full settlement
29 Received cash from velavan 770
Discount allowed to him 30
30 Paid salaries 2,000
 SECTION – C
1) Explain the Accounting concepts.
Accounting concepts and conventions

Accounting concepts and conventions are fundamental principles and guidelines that provide a
framework for how financial information is recorded, presented, and interpreted in accounting.
These concepts and conventions ensure consistency, reliability, and comparability of financial
statements across different entities and over time. Here are some important accounting concepts
and conventions:

Accounting information is meant for users, and it can be utilised to compare financial statements
and decision-making. Given this essential requirement, accounting concepts and accounting
conventions are established.

Accounting concepts

Accounting concepts are the basic assumptions on which accounting operates. These are the
following accounting concepts as discussed below:

1. The business entity concept: According to this, the business and owner are separate entities.
Business transactions are recorded in the books of accounts from the company’s point of view,
and not the owner’s. The owners are considered separate from their business’s point of view and
are regarded as creditors to the extent of their capital.
2. The money measurement concept: According to this, transactions and events are measured in
monetary terms in the books of accounts of the enterprise.
3. The going concern concept: Under this concept, it is assumed that the business will continue for
an indefinite period, and there is no intention to close the business or cut down its operations
significantly.
4. The accounting period concept: According to the accounting period concept, the life of an
enterprise can be broken into smaller periods, usually termed accounting periods, so that its
performance is measured at regular intervals.
5. The cost concept: According to this concept, an asset is recorded in the books of account at the
price paid to acquire it, and the cost is the basis for all following accounting of the asset.
6. The dual concept: According to the dual aspect concept, every business transaction entered into
by the organisation has two aspects, a debit and an equal creditor amount. For every debit, there
will be an equal amount of credit.
7. The revenue recognition concept: According to this concept, revenue is determined to have been
realised when a transaction has been written in the books and the obligation to receive the amount
has been ascertained.
8. The matching concept: Here, it is ascertained that every cost incurred to earn the revenue should
be recognised as an expense in the accounting period when revenue is earned. In a given
accounting period, expenses are matched with the revenue earned.
9. The accrual concept: A transaction is said to be accrued if a transaction is recorded at the time
when it takes place and not at the time when the settlement takes place.
10. The verifiable objective concept: The verifiable objective concept states that accounting should
be free from personal bias.

2) Explain the different types of cash book.

A cash book is defined as a subsidiary accounting book that records only cash transactions. There
are thousands of cash transactions that take place in an organization in a given accounting year
and it is an extremely tedious and meticulous job to journalize them. The main function of a Cash
book is to record the cash transactions which are used as a ledger and a journal to find out about
the activities in a firm. The cash receipts are recorded on the debit side while all the cash payments
are entered on the credit side.

Types of Cash Books

The cash books can be classified primarily into four different types that are:
1. Simple Cash Books -
These are also known as Single Column Cash Books. They are used to record the cash transactions
and the cash receipts (cash that comes in) are entered on the left side while the cash payments are
recorded on the right side. As all cash transactions are recorded in one book, there is no need for a
cash ledger account.
2. Two Column Cash Books -
In a two-column cash book, there is an additional column provided for recording the specific
discount entries which allow the discount transactions to be recorded in the same cash book along
with the cash transactions. This cash book is usually maintained by organizations where it is a
general practice to give or receive discounts.
3. Three Column Cash Books -
As the name suggests, three-column cash books have three columns; one for cash, one for the
discount, and the additional bank columns. For most of the organizations that are now dealing with
banking instruments like cheques or bills of exchange along with cash, a bank column in the cash
book makes simplified accounting entries.
4. Petty Cash Book -
In each firm, the cash transactions take place in all the departments. These cash transactions are
recorded in one of the three cash books but sometimes there are some cash transactions that are
for very small amounts. Several of these transactions take place in a single day and are called petty
cash transactions. Examples of such transactions are expenses for stationery, postage, food, etc.

3) Journalise the following transactions, post them in the ledger and balance the
accounts on 31st Jan 1999. Rs.
Jan. 1 Lakshmi started business with a Capital of 50,000
 2 She purchased goods from Mala on credit 10,000
5 She paid cash to Mala 5,000
7 She sold goods to Shanthi 10,000
10 She received cash from Shanthi 8,000
15 She further purchased goods from Mala 12,000
20 She paid cash to Mala 4,000
25 She further sold goods to Shanthi 13,000
30 She recevied cash from Shanthi 3,000

Solution :
Journal entries in the books on 31.01.1999
Date Particulars Debit Credit
1 Cash a/c Dr 50,000
To capital A/c 50,000
(being started business with cash)
2 Purchase a/c Dr 10,000
To Mala a/c 10,000
(Being purchased goods from mala)
5 Mala a/c Dr 10,000
To cash a/c 5,000
To Discount Received 5,000
(Being cash paid to mala)
7 Shanthi a/c Dr 10,000
To sales a/c 10,000
(Being sold goods to shanthi)
10 Cash a/c Dr 8000
Discount Allowed A/c Dr 2000
To shanthi A/c 10,000
(Being cash received from shanthi)
CHECK YOUR NOTEBOOK FOR LEDGER ACCOUNTS

4) From the following balances extracted from the ledger. You are required to prepare
Trial Balance.
Opening stock 10,600
Wages 2,200
Carriage 200
commission (Dr) 300
Purchase 12,000
Return inwards 440
Trade expenses 580
Rent 200
Plant 2,600
Repairs to plant 460
cash in hand 200
cash at bank 1000
Debtors 3000
Income Tax 500
Drawings 700
Return outwards 150
 Sales 25,200
Discount received 400
Capital 7000
Creditors 830
Loan(cr) 1,400

Solution :

Particulars Dr. Cr.

Opening stock 10,600
Wages 2,200
Carriage 200
Commission (Dr) 300
Purchase 12,000
Return inwards 440
Trade expenses 580
Rent 200
Plant 2,600
Repairs to plant 460
Cash in hand 200
Cash at bank 1000
Debtors 3000
Income Tax 500
Drawings 700
Return outwards 150
Sales 25,200
Discount received 400
Capital 7000
Creditors 830
Loan (cr.) 1,400
34,980 34,980

5) Prepare a three Column Cash Book from the following2000,

Mar 1 Rs.

Cash in hand 90,000

Cash at bank 75,000
3 Cash sales deposited in Bank 3,000
4 Amount deposited by a customer directly in Bank 4,500
5 Sold goods to Rakesh on credit 9,000
 6 Deposited Cash for opening a fixed deposit account 15,000
7 Received a cheque from Jagan for 1,500
Discount allowed 100
The cheque was sent to Bank for collection
9 Paid to Vivek by cheque 4,500
12 Goods returned by Rakesh 1,500
13 Interest allowed by Bank 3,000
14 Cheque received from Jagan is dishonoured.
Bank charges Rs. 10 for dishonour of the cheque.
15 A bill receivable for Rs. 15,000 discounted in Bank at 10%.
17 Received a cheque from Rakesh for Rs.7.000 in full
and final settlement
19 Withdrew from Bank for paying Medical Expenses
of the owner of 3,000
20 Rakesh's cheque deposited in bank
22 Purchased building and payment made by cheque 1,00,000
24 Bad debts recovered 1,000
31 An insolvent debtor pays 40% of Rs.5,000 due from him.
Solution: