BASIC ACCOUNTANCY

JAIIB DECEMBER 2002 EXAMINATION

SECTION I
Q1. Define any five of the following terms:
a. Lease Accountancy b. Accounting Standards
c. Computerised Accounting d. Cash basis of accounting
e. Cash Credit f. No-Banking assets
g. Inter-Bank Adjustments h. Returns Inwards Journal

Answer to Q 1.
a. Lease Accounting: Accounting procedure followed and separate set of books
maintained to record transactions relating to lease is known as Lease Accounting.

b. Accounting Standards: A recognized accounting body of a country issues certain

policy documents relating to various accounting transactions and procedures which are
known as accounting standards

c. Computerised Accounting: Using computer accounting software package for

recording, classifying summarizing and interpreting various accounting transactions is
known as computerized accounting

d. Cash basis of accounting: All accounting entries are recorded only when cash is
received or paid. Non-cash transactions are not recorded in accounting books.

e. Cash credit: Cash credit is an arrangement with a bank to get a loan up to a limit
against pledge or hypothecation of some securities

f. Non-banking assets: Assets in possession of bank, which are acquired for non-
payment of loan dues from the loanee are known as non-banking assets.

g. Inter-bank adjustments: Various adjustment transactions, which take place between

the Head Office and various branches of the bank are known as Inter-bank adjustments

h. Returns inward journal: A subsidiary journal or daybook where transactions relating

to sales returns are recorded

SECTION II

Q2. The accounting books of a Commercial Bank show some of the following accounting
heads. At the end of an accounting period they are either recorded in the Profit and Loss
Account or Balance Sheet. You are required to identify where they are recorded and give
reason for your answer. (Any five)
a. Demand deposits b. Discount on bills
c. Stationery d. Doubtful debts
e. Interest on term deposits f. Loans to co-operative Banks
g. Interest on RBI borrowings h. Payment to and provisions for employees
 Answer to Q2.
Sr. No. Items
a Demand deposits
b Discount on bills
c Stationery
d Doubtful debts
e Interest on term deposits
f Loans to co-operative banks
g Interest on RBI borrowings
Entry Reason
Liabilities Deposits received from other banks and
public which are returnable on demand.
Earned discount on bills is an income
Income side P&L a/c Amount paid for purchase of stationery
Expenditure Only a note to the effect is given in the
Not shown in P&L a/c or Profit & Loss a/c. Amount is not specified
balance sheet Amount paid by the bank as interest on
deposits collected by them
Expenditure side of P&L a/c Amount receivable from cooperative banks
is recorded as asset
Asset Amount of interest expanded on
borrowings taken from RBI
Expenditure side of P&L a/c Operating expenses of the bank

h Payments to and provisions for Expenditure side of P&L a/c

employees

Q3. Date: July 2002 Rs.

1 Received from chief cashier 500
3 Bought ink 10
5 Paid for telegrams 50
8 Printing charges paid 60
10 Purchase of tube light 90
12 Paid for cartage 20
15 Refreshment expenses paid for guest 50
18 Purchased a pencil box and two note books 80
20 Paid for office expenses 40
25 Paid conveyance to Ramu 24
30 Purchased post cards 10

Answer to Q 3.
Columnar Petty Cash Book
Amt Date Transaction Total Printing Postage Conveyance Office L Ledger
Rs. payment & Expenses F a/c
stationery
500.00 2002
July 1 Received from chief
cashier
3 Bought ink 10.00 10.00
5 Paid for telegram 50.00 50.00
8 Printing charges paid 60.00 60.00
10 Purchase of tube light 90.00 90.00
12 Paid for cartage 20.00 20.00
15 Refreshment expense 50.00 50.00
18 Purchase of pencil 80.00 80.00
box and two note
books
20 Paid for office 40.00 40.00
expense
25 Paid for conveyance 24.00 24.00
30 Purchased post cards 10.00 10.00

Total Expenses 434.00 150.00 60.00 44.00 180.00

Balance c/d 66.00
500.00 500.00
66.00 Aug 1 Balance b/d
434.00 Received from chief
cashier
 SECTION III
Q4.
First option:
Name the accounts involved in the following transactions and state what type of account
it is and also state with reasons, which account is debited and which account is credited
a. Ram purchased goods worth Rs. 40,000/- from Sam on credit
b. Ram withdrew Rs. 2,500 for personal use
c. Paid salaries Rs. 5,400 in cash
d. Ram pays cash Rs. 12,000 to Tom
e. Purchased furniture worth Rs. 5,000 and the amount was paid by cheque

Answer to First option:

Transaction Account Name Type of A/C Dr. Cr. With reasons

A Purchase a/c Nominal Debit – Debit all expenses
Sam a/c Personal Credit – Credit the giver
B Drawings a/c Personal Debit- Debit the receiver
Cash a/c Real Credit – Credit what goes out
C Salaries a/c Nominal Debit- Debit expenses
Cash a/c Real Credit – credit what goes out
D Tom a/c Personal Debit – debit the receiver
Cash a/c Real Credit – credit what goes out
E Furniture a/c Real Debit – debit what comes in
Bank a/c Personal Credit – credit the giver

Second option:

a. What is the function of a ‘Suspense Account’? How is the ‘Suspense Account’ finally
squared of?

b. How do you rectify the following errors assuming that:

i. they were detected before preparation of Trial Balance
ii. they were detected after preparation of Trial Balance but before preparing
Final Accounts, the difference was taken to suspense account
iii. they were detected after preparing final accounts

1. Purchase of Rs. 630 from Raju and Co. was passed through Sales Day Book as Rs. 360

2. Purchase of stationery worth Rs. 100 remained unposted from the Cash Book

3. Rs. 5,000 paid for purchase of office furniture charged to office expenses account

Answer to second option:

a. The function of a suspense account is to carry the difference arising in tallying a Trial
Balance till the errors in accounting are located and rectified using suspense account.
Further a suspense account balance squared off when all the errors affecting the Trial
Balance are located and rectification entries are posted to the suspense account
 b.
Transaction Before TB Before final a/c After final a/c
1 Purchases a/c dr. 630 Purchases a/c dr. 630 P & L a/c dr. 990
Sales a/c dr. 360 Sales a/c dr. 360 Raju & Co cr. 990
Raju & Co. cr 990 Raju & Co. cr. 990

2 Stationery a/c dr. 100 Stationery a/c dr. 100 No entry

Suspense a/c cr. 100
3 Office furniture a/c dr. 5000 Office furniture a/c dr. 5000 Office furniture a/c dr. 5000
Office expenses a/c cr. 5000 Office expenses a/c cr. 5000 Profit & Loss a/c cr. 5000

Q5.
First option:
a. Distinguish between Capital Reserve and Revenue Reserve with suitable examples
b. The provision for bad and doubtful debts at the beginning of the year was Rs. 8,500
and bad debts during the year amounted to Rs. 5,500. Provision on bad and doubtful
debts to be created @ 5% on sundry debtors. The sundry debtors at the close of the year
were Rs. 1,55,500. Draw various accounts to show the entries. Show how it will appear in
the Balance Sheet.

Answer to first option:

a. Capital Reserve is reserves created out of capital profits and they cannot be used for
distribution as profits and they cannot be used for distribution as dividend. Example:
Share premium, Capital redemption Reserve.
Whereas:
A revenue reserve is a reserve created out of revenue profits or normal profits earned by
the business through its transactions. Example general reserve, dividend equalization
reserve and this reserve can be used for declaration of reserve or for capitalization

b.
Bad debts a/c
To debtors 5500 By PBD 5500

Provision for Bad debts a/c

To bad debts 5500 By balance b/d 8500
To balance c/d 7500 By P&L a/c 4500

Debtors a/c
To balance b/d 155500 By bad debts 5500
By balance c/d 150000

Second option:
What is accounting? Briefly explain various branches of accounting. Who are the
different parties interested in accounting information and why?

Answer to second option:

An art of systematically recording, classifying summarizing and interpreting financial

transactions is known as accounting.
Various branches of accounting are:
a. Financial Accounting: Financial accounting deals with various financial transactions
of business. It is prepared for everyone who is concerned about the business.

b. Management Accounting: Accounting procedures followed for managerial

information, reports, interpretation, cash flow, fund flow, ratios etc. It is used only by
Managers in their decision making process

c. Cost accounting: Accounting process used for a cost unit or department or an

operation

d. Taxation accounting : Accounts prepared according to the Tax laws.

Different parties interested in accounting information are:

1. Shareholders or owners: They are interested in knowing the probability of the
business and the assets and liabilities of business to be calculated in their capital
wealth.
2. Management: They are interested in all information relating to business to frame
future policies and strategies.
3. Potential investors: They are interested in knowing the past and current
performances of the firm so that they can conclude about their investment in the
firm.
4. Creditors: They are always interested in the accounting information on day to
day activities of the business and its constant progress.
5. Employees: They are interested in the good running of the business, its
probability and prosperity.
6. Government: Government keeps a watch in its business to collect tax, to know
the fulfillment of social obligations of the business, etc.
7. Researchers: They acquire the information to do academic research work.

SECTION IV
Q6.
First option:
Given below is the trial balance of Mr. Mohan as on 31st March 2002. You are required to
prepare Trading and Profit & Loss Account for the year ended 31st March 2002 and
Balance Sheet as on that date.
TRIAL BALANCE

Particulars Debit Credit

Purchases and Sales 1,18,000 1,54,500
Debtors and Creditors 42,000 30,000
Returns 2,000 1,000
Furniture 25,000
Building 60,000
Cash in hand 1,250
Cash at bank 6,750
Salaries 14,000
Discount 500 250
Printing and Stationary 2,000
Stock as on 01.04.2001 12,500
 Postage and telegram 750
Advertisement 4,500
Carriage inward 1,500
Carriage outward 1,250
Drawings and Capital 4,000 1,58,750
Rent received 1,500
Machinery 50,000
3,46,000 3,46,000
Adjustments:
1. Closing stock was valued at Rs. 28,500
2. Outstanding salaries Rs. 2000
3. Depreciate machinery by 5% and furniture by 10%

Answer to first option:

Mr. Mohan
Trading and Profit & Loss a/c for the year ended 31st March 2002
Particulars Amount Particulars Amount
To opening stock 12,500 By sales 1,54,000
To purchases 118000 Less returns 2,000 1,52,500
Less: Returns 1,000 1,17,000 By closing stock 28,500
To carriage inward 1,500
To gross profit 50,000
----------- -----------
1,81,000 1,81,000

To salaries 14,000 By gross profit 50,000

Add: outstanding 2,000 16,000 By discount 250
To discount 500 By rent received 1,500
To printing & stationery 2,000
To postage & telegram 750
To advertisement 4,500
To carriage outward 1,250
To depreciation on machinery 2,500
To depreciation on furniture 2,500
To net profit 21,750
--------- ----------
51,750 51,750

Balance sheet as on 31st March 2002

Liabilities Amount Assets Amount
Capital 1,58,750 Building 60,000
Less drawings 4,000 Machinery 50,000
1,54,000 1,76,500 Less Depreciation 2,500 47,5000
Add Net Profit 21,750 Furniture 25,000
Creditors 30,000 Less Depreciation 2,500 22,500
Outstanding salaries 2,000 Debtors 42,000
Cash in hand 1,250
Cash at bank 6,750
Closing stock 28,500
----------- -----------
2,08,500 2,08,500
Second option:
A firm takes a policy of its 3 partners P,Q and R for Rs. 1,00,000 on January 2, 1999 by
paying a premium of Rs. 12,000. Its surrender value on 31st December 1999, 2000 and
2001 was NIL. Rs. 6,000 and Rs. 14,000 respectively. Q dies on 1st January 2002. Make
necessary Accounts.
a. Under method A (Premium treated as expenses)
b. Under method B (Premium treated as asset)
c. Under method C (Opening Joint policy reserve a/c)

Answer to second option:

a. Under method A (Premium treated as expenses)
Insurance Premium Account
Dr Rs. Rs. Cr.
Jan. 2, 1999 To bank 12,000 Dec. 31, 1999 By P & L a/c 12,000
Jan. 2, 2000 To bank 12,000 Dec. 31, 2000 By P & L a/c 12,000
Jan. 2, 2001 To bank 12,000 Dec. 31, 2001 By P & L a/c 12,000

Profit & Loss Account (Abstract only)

Dr. Rs. Cr.
Dec. 31, 1999 To Ins. Premium 12,000
Dec. 31, 2000 To Ins. Premium 12,000
Dec. 31, 2001 To Ins. Premium 12,000

Joint Life Insurance Policy A/c

Dr. Rs. Rs. Cr.
Jan. 1, 2002 To capital A 33,333 Jan. 1, 2003 By bank a/c 1,00,000
B 33,333
C 33,333
----------- -------------
1,00,000 1,00,000

b. Under method B: Treating Premium as asset)

Joint Life Insurance Policy Account
Dr. Rs. Rs. Cr.
Jan. 2, 1999 To bank a/c 12,000 Dec.31, 1999 By P& L a/c 12,000
Jan. 2, 2000 To bank a/c 12,000 Dec. 31, 2000 By P& L a/c 6000
Dec. 31, 2000 By balance c/f 6000
24,000 24,000

Jan. 2, 2001 To balance b/d 6,000 Dec. 31, 2001 By P & L a/c 4,000
To bank 12,000 By bal c/f 14,000
18,000 18,000

Jan. 2, 2002 To balance b/f 14,000 Jan. 1. 2002 By bank a/c 1,00,000
To partners
Capital a/c’s
A 28,668
B 28,668
C 28,664

1,00,00 1,00,000
 0
Abstract of Profit and Loss A/c
Dr. Rs. Cr.
Dec. 31, 1999 To Jt. Life Ins. Policy a\c 12,000
Dec. 31, 2000 To Jt. Life Ins. Policy a\c 6,000
Dec. 31, 2001 To Jt. Life Ins. Policy a\c 4,000

c. Under method C (Opening Joint Policy Reserve Account

Joint Life Policy Account
Dr. Rs. Rs. Cr.
Jan. 2, 1999 To bank a/c 12,000 Dec.31, 1999 By Jt. Policy Res a/c 12,000
Jan. 2, 2000 To bank a/c 12,000 Dec. 31, 2000 By Jt. Policy Res a/c 6000
Dec. 31, 2000 By balance c/f 6000
24,000 24,000

Jan. 2, 2001 To balance b/d 6,000 Dec. 31, 2001 By Jt. Policy Res a/c 4,000
To bank 12,000 By bal c/f 14,000
18,000 18,000

Jan. 2, 2002 To balance b/f 14,000 Jan. 1. 2002 By Jt. Policy Res a/c 14,000
To Capital A/c By bank A/c 1,00,000
A 33332
B 33332
C 33336

1,14,000 1,14,000

Joint Policy Reserve Account

Dr. Rs. Rs. Cr.
Dec.31, 1999 To Jt. Life policy a/c 12,000 Dec.31, 1999 By P & L App. A/c 12,000
Dec. 31, 2000 To Jt. Life policy a/c 6,000 Dec. 31, 2000 By P & L App. A/c 12,000
To balance c/f 6,000 Dec. 31, 2000
12,000 12,000

Dec. 31, 2001 To Jt. Life policy a/c 4,000 Dec. 31, 2001 By bal b/f 6,000
To bal c/f 14,000 By P & L App. A/c 12,000
18,000 18,000

Jan. 2, 2002 To Jt. Life policy a/c 14,000 Jan. 1. 2002 By bal b/d 14,000

14,000 14,000

Q7.
First option:
a. State what will you do with the following adjustments while preparing the final
accounts of a Joint Stock Company
i. Share capital includes 500 equity shares of Rs. 10each allotted as bonus shares by Joint
Stock Company
ii. Authorized capital of the company consists of 10,000 equity shares of Rs. 10/- each
and 5,000 6% redeemable preference shares of Rs. 100/- each
iii. Preference shares are redeemable at a premium of 10% in the year 2003
iv. 500 preference shares have been issued to a supplier of a machinery
v. Calls in arrears include Rs. 5,000 due from a director on equity shares
vi. Loan from bank is secured against mortgage of plant and machinery Rs. 2,00,000

b. A Limited closes its books on 31st March every year. The following items appear in its
balance as on 31st March 2002\:
Plant and machinery Rs. 4,20,000
Furniture Rs. 2,40,000
The following further information is available
i. Plant and machinery was purchased at a cost of Rs. 7,00,000. Depreciation is provided
@ 10% per annum on WDV basis.

Answer to first option:

a. Adjustments from i. To v. are only informative adjustments. They are recorded under
the heading “SHARE CAPITAL” in the Balance sheet liabilities side. Adjustment no. vi.
Is also informative to be recorded under the heading “SECURED LOANS” in the
Balance Sheet Liability side. As all the adjustments are informative in nature there is no
debit and credit effect.

b. Balance Sheet of A Ltd. (Relevant entries)

Liability Rs. Asset Rs.
Plant & Machinery
Cost 7,00,000
Less: depreciation 3,22,000
WDV 3,78,000

Furniture
Cost 2,80,000
Less: Depreciation 88,000
WDV 1,92,000

Second option:
a. Give the proper format of profit and loss account of a commercial bank as per the
banking regulations in force.
b. Name the major institutions carrying on banking business in India.
c. State the main functions of a commercial bank.
Answer to Second option:

a. FORM B
Form of Profit and Loss Account
Profit and Loss Account for the year ended ……
Expenditure Rs.
1. Interest paid on deposits borrowings etc
2. Salaries and allowances and (showing
separately salaries and allowances to managing
director, manage, chief executive officer)
Contribution to provident fund
3. Director’s fees and local committee
member’s fees and allowances
4. Rent taxes insurance, lighting etc
5. Law charges
6.Postage, telegram and telephones
7. Auditor’s fees
8. Depreciation of bank’s property
9. Stationery and printing
10. Other expenditures traveling
expenses advertising
11. Loss from sale of or dealing with
non-banking assets
12. Balance of profit -----------
Total Rs.
Income (Less provisions made during the Rs.
year for bad & doubtful debts and other
usual or necessary provisions)
1. Interest and discount
2. Commission, Exchange and
Brokerage
3. Rents
4. Net profit on sale of investments
gold, silver and premises and
other assets
5. Net profit on revaluation
of investments gold, silver
and premises and other assets
6. Income from non-banking
assets and profit from sale of
or dealing with such assets
7. Other receipts
8. Loss (if any)
-----------
Total Rs.

b. Major Institutions carrying on banking business in India

Nationalised banks, SBI and its associates, Foreign banks, Co-operative banks, Rural
banks and Private sector banks.

c. Main functions of Modern Commercial Banks

Accepting deposits, granting loans, dealing in securities, foreign exchange, letters of
credit, transferring money, merchant banking, acting as trustees etc.

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