February 19, 2024

ECO-02 - June-2020 QUESTION AND ANSWER

(a) Explain the limitations of Accounting.

Limitations of Accounting

Subjectivity: Accounting involves judgment calls and estimations, leading to potential biases.
Historical focus: It primarily deals with past transactions and may not reflect current economic realities accurately.
Lack of non-financial information: It often overlooks qualitative aspects like employee satisfaction or brand value.
Complexity: Accounting rules can be intricate and difficult to interpret, leading to inconsistencies.
Inability to predict future performance: While it provides insights into past performance, it doesn't guarantee future outcomes.

(b) What are the different concepts of accounting? Explain the 'Dual Concept' of Accounting.

1 Business Entity Concept
2 Money Measurement Concept
3 Objective Evidence Concept
4 Historical Record Concept
5 Cost Concept
6 Dual Aspect Concept

Dual Aspect Concept: This is a basic concept of accounting. According to this concept, every business transaction has a two-fold effect. In a commercial context, it is a famous dictum that "every receiver is also a giver and every giver is also a receiver". For example, if you purchase a machine for Rs. 8,000, you receive the machine on the one hand and give Rs. 8,000 on the other. Thus, this transaction has a two-fold effect i.e., (i) an increase in one asset and (ii) a decrease in another asset.

(c) How are one-sided errors rectified? Explain with the help of a suitable example.

Identification: Identify the error through a thorough examination of the accounts.
Analysis: Determine the nature and impact of the error on the financial statements.
Rectification Entry: Create a correcting entry to fix the mistake.
Journal Entry: Record the entry in the appropriate journal with the necessary debits and credits.
Posting: Post the rectification entry to the ledger accounts to reflect the correct balances.
Example: If a payment of $500 for rent was recorded as a debit to Rent Expense but not credited to Cash, the error can be rectified by debiting Rent Expense and crediting Cash with $500 to correct the mistake.

(d) Differentiate between 'Sale' and 'Consignment'.

Sale:

Involves transferring ownership of goods or property from the seller to the buyer in exchange for payment.
The seller receives immediate payment for the goods.
The buyer assumes full responsibility and risk for the goods upon purchase.

Consignment:

Involves temporarily placing goods with a third party (consignee) for sale on behalf of the owner (consignor).
Ownership of the goods remains with the consignor until they are sold.
The consignee receives a commission or fee upon the sale of the goods, while any unsold items may be returned to the consignor.

2. Megha Ltd. consigned 5000 kg. of Vanaspati Ghee to Ashoka Dealers, Chandigarh @ Rs. 8 per kg. Megha Ltd. paid Rs. 50 for carriage, Rs. 250 for packing and Rs. 200 for insurance. After 3 months from the date of consignment of goods Ashoka dealers reported that 3500 kg of ghee was sold @ Rs. 9.5 per kg and expenses were Rs. 500 on godown rent and Rs. 750 on salesman salary. Ashoka dealers are entitled to a commission of 5% on sales. 500 kg ghee was destroyed in the godown. Insurance claim of Rs. 3500 was admitted. Prepare necessary ledger accounts in the books of Megha Ltd.

Sure, here are the ledger accounts for Megha Ltd.:

3. What is Bank Reconciliation Statement? Discuss the causes of disagreement between the balances shown by Cash Book and Pass Book.

Ans :

Bank Reconciliation Statement:

A bank reconciliation statement is a document prepared by a company that shows its recorded bank account balance matches the balance the bank lists. This statement includes all transactions, such as deposits and withdrawals, from a given timeframe

Causes of disagreement:

Timing differences: Transactions recorded in one book may not have been updated in the other book due to timing discrepancies.
Errors in recording: Mistakes in recording transactions in either the Cash Book or Pass Book can lead to discrepancies.
Bank charges and interest: Bank charges and interest earned or charged may not be reflected accurately in both books.
Unpresented cheques: Cheques issued but not yet presented for payment may cause imbalances.
Uncredited cheques: Cheques received but not yet credited by the bank can result in differences between the two balances.
Direct deposits and withdrawals: Transactions directly processed by the bank may not be immediately reflected in both books.

4. Distinguish between : 4+4+4
(a) Outstanding expenses and unexpired expenses
(b) Normal loss and Abnormal loss
(c) Provision for discount on debtors and provision for discount on creditors.

(a) Outstanding expenses and unexpired expenses are both types of expenses recorded in financial accounting, but they represent different stages of payment and consumption:
Outstanding Expenses:

These are expenses that have been incurred but not yet paid for by the company.
They are recorded as liabilities on the balance sheet because the company owes money for them.
Examples include unpaid salaries, rent, utilities, or taxes.
They represent expenses that have already been consumed or utilized by the company but not yet settled in terms of payment.

Unexpired Expenses:
These are expenses that have been paid for in advance but have not yet been consumed or utilized by the company.
They are recorded as assets on the balance sheet because the company has prepaid for them and will benefit from them in the future.
Examples include prepaid insurance, prepaid rent, or prepaid subscriptions.
They represent expenses that will be utilized or consumed by the company in future periods.
In short, outstanding expenses are incurred but not yet paid for, while unexpired expenses are paid for in advance but not yet utilized.

Normal loss
Normal loss is defined as a type of loss that takes place in certain situations due to the nature of used processes and raw materials.
Normal loss takes place due to factors such as market conditions, competitors in the market, turnover of employees, etc.

Abnormal Loss
Abnormal loss is defined as a type of loss that takes place due to some mischief or unexpected condition.
Abnormal loss can occur due to various events such as carelessness, mishandling, lack of knowledge, unplanned work, accidents, etc.

C.Ans:

- **Provision for Discount on Debtors**:

It's an allowance made by a company to account for potential discounts given to customers for early payment of invoices.
Represents a reduction in accounts receivable to reflect the expected amount of discounts that customers might claim.
Appears on the asset side of the balance sheet as a contra account to accounts receivable.
Affects net income positively when discounts are not claimed, as the provision is reversed.

- **Provision for Discount on Creditors**:
It's an allowance made by a company to account for potential discounts received from suppliers for early payment of invoices.
Represents a reduction in accounts payable to reflect the expected amount of discounts that the company might claim.
Appears on the liability side of the balance sheet as a contra account to accounts payable.
Affects net income positively when discounts are claimed, as the provision reduces expenses.

https://youtu.be/K5g_2YhKuR4?si=p9cXRijk3id42WVY

5. What is Sectional Balancing? How does it differ from self-balancing?

Give proforma of a Total Debtor Account. 3+3+6

Answer youtube

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Sectional balancing is a technique of accounting in which a complete section of a group of multiple ledgers is balanced. There is one main ledger, and two other ledgers in the balancing system. So, when the accountant balances only one of the three ledgers, it is known as "sectional balancing"

Self-Balancing :

(i) Control accounts are prepared in all the ledgers. In the general ledger, the debtor’s ledger adjustment account and the creditor’s ledger adjustment account are prepared.

(ii) A trial balance can independently be prepared from each one of the ledgers.

(iii) All the ledgers form part of a double-entry system.

Sectional :

(i) Control accounts are prepared in the general ledger only. The names of these control accounts are total debtors accounts and total creditors accounts. Personal ledgers namely debtors ledger and creditors ledger have no control account.

(ii) A trial balance can be prepared only from the general ledger.

(iii) Double entry system is completed in the general ledger only. The debtor’s ledger and creditor’s ledger serve only as memorandum books of account.

6. Sharat & Sons purchased a car for Rs. 1,00,000 on 1st January, 2014. The car was depreciated at 10% under written down value method. On 1st January, 2017, they wanted to change the method of depreciation from W.D.V. method to straight line method without changing the rate. Show the asset amount from 2014

Sure, here's the calculation of the asset amount from 2014 onwards using the written down value (W.D.V.) method:

2014:

Asset Value: Rs. 1,00,000
Depreciation (10%): Rs. 10,000
Asset Value at the end of 2014: Rs. 90,000

2015:

Asset Value at the beginning of 2015: Rs. 90,000
Depreciation (10%): Rs. 9,000
Asset Value at the end of 2015: Rs. 81,000

2016:

Asset Value at the beginning of 2016: Rs. 81,000
Depreciation (10%): Rs. 8,100
Asset Value at the end of 2016: Rs. 72,900
Now, transitioning to straight-line method from 2017:

2017:
Asset Value at the beginning of 2017 (W.D.V. method): Rs. 72,900
Depreciation for 2017 (10%): Rs. 7,290 (since the rate remains the same)
Total Depreciation (till 2017): Rs. 26,100 (10,000 + 9,000 + 8,100)
Remaining Book Value: Rs. 72,900 - Rs. 26,100 = Rs. 46,800 (this is the value to be depreciated over remaining years using straight-line method)

From 2017 onwards, the depreciation will be calculated using straight-line method on the remaining book value of Rs. 46,800.