BBA - II SEMESTER

BBA203 & FINANCIAL ACCOUNTING

Q1. Explain the objectives for accounting. Write about the limitations
of accounting. (Objectives for accounting, Limitations of Accounting)
Answer:
Objectives for accounting
The main objectives of accounting include:

Systematic recording of all business events or transactions and subsequent

posting to ledger, to finally prepare financial statements - profit and loss
account and balance sheet.

Reporting the results to management, shareholders, creditors, bankers,

investors, stock brokers, stock exchanges, employees, government etc.

Satisfying the statutory requirements, especially Registrar of Companies

(ROC), Securities Exchange Board of India (SEBI), tax authorities (sales tax,
excise, customs and income tax) and government in order to protect the
interest of general public.

Protecting the properties of business by recording them on the date of

acquisition and showing their accounts in the balance sheet.

Planning, controlling and decision making functions become easy where books
of accounts are maintained properly. This helps in internal control by holding
concerned persons responsible for any errors, lapses or under performance.

Accounting is a tool for effective planning. Current years financial

performance becomes the basis for future predictions and estimations. Since it
is a tool for planning, it also acts as a tool for controlling. Preparation of
budgets, cost analysis, tax planning, auditing are some of the functions of
accounting.

Limitations of Accounting
Accounting suffers from various limitations. They are as follows:
1) Accounting information is expressed in terms of money: Non-monetary
events or transactions are completely omitted.
2) Fixed assets are recorded in the accounting records at the original cost:
Actual amount spent on the assets like building, machinery, plus all incidental
charges is recorded. In this way the effect of rise in prices is not taken into
consideration. As a result the Balance Sheet does not represent the true financial
position of the business.
3) Accounting information is sometimes based on estimates:
Estimates are often inaccurate. For example, it is not possible to predict the
actual life of an asset for the purpose of depreciation.

4) Accounting information cannot be used as the only test of managerial

performance on the basis of mere profits : Profit for a period of one year can
readily be manipulated by omitting certain expenses such as advertisement,
research and development, depreciation etc. i.e. window dressing is possible.
5) Accounting information is not neutral or unbiased: Accountants ascertain
income as excess of revenue over expenses. But they consider selected revenue
and expenses for calculating profit of the concern. They also do not include cost
of items such as water, noise or air pollution i.e. social cost, they may use
different methods of valuation of stock or depreciations.

Q2. What is Petty Cash Book? Solve the below given problem.
On 1st Jan 2009, Ramanathan opened a Bank Account by depositing
Rs. 6,000/- in cash. All remittances are to be paid into bank on the
same day on which they are received and all payments are made by
cheques. Enter the following transactions in three columnar cash
book.
Jan 2 Goods sold to Mohan for cash Rs.250
Jan 5 Settled Haris account of Rs.200 at a discount of 5%
Jan 7 Received from Shyam a cheque for Rs.725. Discount allowed
Rs.25.
Jan 10 Purchased a calculator for Rs.200.Spent Rs.50 on the cover.
Jan 12 Shyams cheque was returned dishonoured.
Jan 15 Received a money order for Rs. 25 from Hari.
Jan 20 Shyam settled his account by means of a cheque for Rs.755,
Rs.5 being for interest charged
Jan 27- Purchased machinery from Rajiv for Rs.5000 and paid him by
means of a bank draft purchased from bank for Rs.5005.
(Meaning of petty cash, solving the problem)
Answer:
Meaning of petty cash
The amount which the main cashier gives to the petty cashier to meet the petty or
small cash expenses for a given period is known as imprest cash book. The petty
cash book contains columns for each class of expenditure. Petty cash book is an
additional cashbook, which is used for recording petty payments, such as postage
and telegrams, printing and stationery cartage and carriage, advertisement,
travelling expenses, sundry expenses etc.
Solution of the problem
THREE COLUMN CASH BOOK
Dat Particula L.
Cas Ban Dat Particul L. Di Cas Ban
e
rs
F Dis h
k
e
ars
F s h k
To Capital
Jan1 a/c

600
0

Jan By
1
a/c

bank
c

600
0

Jan
1
To cash
2

600
0
2

To Sales

To Cash

To Shyam

15

To Hari

15

To Cash

250

25

190

725 10

By
calculator
a/c

50

12

By
Shyam

15

By bank

To Shyam

750 27

20

To interest

627 775
25 5
5

By
Machiner
y
By Draft
commissi
on

31

10

200

25

By Hari

250

250 10

20

To
Feb Balance
1
b/d

By
calculator
a/c

25
c

By bank

By
balance
c/d

25
c

725
25

5000
5

1585
627
35 5 7755

158
5

Q3. What are Errors in Accounting? Explain the classifications of

Errors. Write any two examples of one sided errors. (Errors in
accounting, Classification of errors, Examples of one sided errors)
Answer:
Errors in accounting
In the process of recording a large number of transactions in the books of accounts,
errors are likely to creep in.

Error may arise either while recording the transactions in the books of original
entry or while writing up the ledger accounts or while preparing the trial

balance.

Errors in the books of accounts arise either due to the negligence or

carelessness of the book-keepers in recording the transactions in the books of
accounts.

Errors in accounting mean unintentional mistakes committed by the bookkeepers in the books of accounts.

Classification of errors
1. Errors of Omission: The error of omission is one where a transaction has not
been recorded in the books of account either wholly or partially. When the
transaction has been completely omitted in the books of accounts, it is an error of
complete omission.
For example, if a credit purchase of goods is omitted to be entered in the
purchase book, it is an error of complete omission. Such an error will not affect
the trial balance and the omission will not even be apparent. But sometimes it is
apparent from the balance of an account that an entry has been omitted e.g., the
rent account may show that the rent for the 12th month has not been paid. This
type of error can be detected by careful observation.
Partial Omission: If one of the items or aspects of a transaction recorded in a
subsidiary book is omitted to be posted from the subsidiary book to a ledger
account, the error is an error of partial omission. For e.g. if salaries paid to clerks
recorded in the cash book is omitted to be posted to salaries account in the
ledger, the error is an error of partial omission.
2. Errors of Commission: Error of commission refers to errors resulting from
something, which ought not to be done. In other words, when a transaction has
been recorded but has been wrongly entered in the books of original entry or
posted in the ledger, error of commission is said to have been made.
For example a purchase invoice for Rs. 1,320 was entered in the purchase book
as Rs. 1,230. Such an error may be intentional or unintentional. This type of error
usually occurs in the process of totalling, postings, carries forward and balancing
of subsidiary books.
3. Errors of Principle: If a transaction is recorded in the books of account against
the fundamental principle of double entry book keeping the error is known as
error of principle. Such errors arise when the entries are not recorded according
to the fundamental principles of accountancy.
For example, wrong allocation of expenditure between capital and revenue,
ignoring the outstanding assets and liabilities, valuation of assets against the
principles of book-keeping.
4. Compensating Errors or off-setting Errors: A compensating error or offsetting error is one which is counter balanced by any other error or errors.
For example, if As account was to be debited for Rs. 100 but was debited for Rs.
10 while Bs account which was to be debited for Rs. 10 was debited for Rs. 100.

Thus, both the accounts have been debited for a total sum of Rs. 110 which
amount ought to have been debited.
5. Errors of Duplication: Such errors arise when an entry in a book of original
entry has been made twice and has also been posted twice.
Examples of one-sided errors
The following are the examples of one-sided errors:
1. Omission to post an item from a subsidiary book to a ledger account.
For e.g. :
o Omission to post a credit sale to the customers account from the sales
book;
o Omission to post a credit purchase to the suppliers account from the
purchases book;
o Omission to post the salaries paid to the salaries account from the cash
book.

Q4. From the following Trial Balance, prepare trading and profit and
loss account for the year ended 31st Dec 2009 and balance sheet on
that date.

Adjustments:
a) Provide for wages Rs.5000/b) Write off 5 % depreciation on freehold premises and 10 % on office
furniture
c) Insurance to the extent of Rs.200/- relates to 1993
d) Stock on 31-12-2009 is Rs.52000/e) Charge interest on capital 5 % and on drawings Rs. 300/f) Further bad debts are Rs.1000/g) Provide for doubtful debts @ 5 % on sundry debtors
h) Make provision for discount on debtors and reserve for discount
on creditors @ 2 %

(Preparation of trading account, Preparation of P/L a/c, B/S)

Answer:
Preparation of trading account
Trading Account for the year ending 31st Dec 2009
Amoun
Particulars
t
Amount Particulars Amount Amount
To opening stock
To purchases

46000

By sales

208950

150200

Less: returns 550

208400

Less: returns

600

By
closing
stock

52000

To wages

25000

149600

Add: o/s
5000
To gross profit trsf
to
profit & loss a/c
Total

30000
34800
260400

Total

260400

Preparation of P/L a/c, B/S

Profit and Loss Account for the year ending 31st Dec 2009
Particulars
To
expenses

trade

To printing,
stationery
&advertising.

To professional
fee
To salaries

Amou
nt

Amou Particula
nt
rs

Amou
nt

Amou
nt

840

By gross
profit

34800

1640

By
commissio
n

3300

280

By interest
200
received

14000

Add:
Accrued

200

400

To rent, rate &

insurance

Less: Prepaid

4000

By
discount

200

By interest
on
drawing

3800

1930
To Depreciation
on building

300

580

305

To Depreciation
on furniture
To Interest
capital

By
Reserve
for
Discount
on
creditors

4600

on

5700

To Bad debts
1000

Add: new RBD

1750

2750

Less: old RBD

670

To Reserve
Discount

for

2080
665

On
debtors(RDD)

To Discount

6300

To net profit c/fd

6440

Total

4398
0

Total

4398
0

Liabilities

Balance Sheet as on 31st Dec 2009

Amou Amoun
Amou Amoun
nt
t
Particulars nt
t

Capital

114000

Freehold
premises

Add: interest
on
capital
5700

38600

Less:
depreciation 1930

36670

119700
Less:Drawing
s10000

Office
furniture

Income
tax1600

Less:
depreciation 305

3050
2745

Less: interest
on
drawings
300
11900
107800
Add:
Net
Profit b/fd
6440
Sundry
creditors

29000

Less: RDC

580

Investments 4000

114240

28420

Add:
Accrued
interest

200

Sundry
debtors

36000

Less:
debts

4200

bad
1000
35000

B/P

10000

Less:
RBD

new
1750
33250

O/S wages

5000

Less:
RDD

new
665

32585

B/R

3200

Prepaid
insurance

200

Closing
stock

52000

Total

157660

Cash
hand

in

Cash
bank

at

Total

3400
22660
157660

Q5. Give the meaning and importance of bank reconciliation

statements. From the following particulars of Neha and Co. prepare
Bank Reconciliation Statement on March 31, 2008.
Overdraft as per pass book Rs. 16,500
Interest on overdraft Rs. 1,600
Insurance premium paid by the bank Rs. 800
Cheques deposited but not yet credited Rs. 5,500
Cheques issued but not present for payment Rs. 6,000
Wrong credit to firm account by the bank Rs. 1,000
(Meaning of Bank Reconciliation Statement, Importance of bank
reconciliation
statement,
Calculation
of
bank
reconciliation
statement)
Answer:
Bank Reconciliation Statement
A reconciliation statement has to be prepared to identify the reasons for nonagreeing of the balances and reasons for that. Such kind of statement is called as
Bank Reconciliation statement. A bank reconciliation statement is a statement
prepared to explain the reasons for the disagreement between the bank balance as
shown by the cash book and the bank balance as shown by the pass book as on a
particular date
Importance of bank reconciliation statement
The importance of the bank reconciliation statement may be given as follows:
1. It helps in identifying the difference and the reason for difference.
It helps to identify the errors committed either in cash book or pass book.
3. It also shows the undue delay in the clearance of cheques
4. It helps in locating the various entries entered by bank with regard to bank
interest, bank charges, etc...
Calculation of bank reconciliation statement
Bank Reconciliation Statement as on 31st March, 2008
Particulars

Amoun
t Rs.

Bank overdraft as per Pass

Book

Amoun
t Rs.
16,500

Add:
Cheques issued but not
presented for payment

6,000

Wrong credit to firm

account by Bank

1,000
7,000
23,500

1,600
Less :
800
Interest on Overdraft
5,500

-7,900

Insurance Premium paid by

Bank
Cheques deposited but not
credited
Overdraft Balance
per Cash Book

as

15,600

Q6 Explain on endorsement of a bill. Solve the given problem. Black

sells goods worth Rs. 2,000 to Brown on 1st October, 2004 and draws
a bill on him for the amount for 2 months. On the same day, the bill
is endorsed by him to his creditor, White. The bill is duly paid on
maturity. Pass journal entries in the books of all the parties. (Drawer,
endorsee, acceptor)
(Explanation of endorsement of a bill, Journal entries in the books of
Black, Journal entries in the books of White, Journal entries in the
books of Brown)
Answer:
Endorsement of a bill
Endorsement of a bill means signing on the reverse (back) of the bill with the object
of transferring the property (i.e., the value) of the bill to another person. The person
who endorses the bill is called Endorser, and the person to whom the bill is
endorsed is called the Endorsee.

Journal entries in the books of Black

Date
2004
Oct.

Journal Entries in the Books of Black (Drawer)

Particulars
LF Dr.
Cr.

Browns Account
Dr.
To Sales Account
(Being the goods sold to Brown on
credit)

2,000

Bills Receivable Account

Dr.
To Browns Account
(Being the bill received from
Brown)

2,000

2,000

2,000

Whites Account
Dr.
To
Bills
Receivable
Account
(Being the bill endorsed over to
White)

2,000
2,000

Journal entries in the books of White

Journal Entries in the Books of White

(Endorsee)
Date

Particulars

2004
Oct.

Bills Receivable

LF

Dr.

Dr.

2,000

To Blacks Account
(Being the bill received from
Black)
Dec.

Cash Account
Dr.
To
Bills
Receivable
Account
(Being the cash received for the
bill on
the due date)

2,000

Cr.

2,00
0

2,00
0

Journal entries in the books of Brown

Journal Entries in the Books of Brown
(Acceptor)
Date

Particulars

2004
Oct.

Purchases Account
To Blacks Account
(Being the goods bought
Black on
credit)

Blacks Account
To Bills Payable Account
(Being the acceptance given
to Black)

LF Dr.

Dr.

Cr.

2,000
2,00
0

from

Dr.

2,000
2,00
0

Dec.

Bills Payable Account

To Cash Account

Dr.

2,000
2,00
0

(Being the cash paid for the bill on the due date)
Note: No entry should be passed in the books of Brown, the acceptor, for the
endorsement of the bill by Black to White because he is not at all concerned with
the endorsement of the bill.