ECO-02 : ACCOUNTANCY – I , June -2022, Question & Answer

 1. From the following transactions, make accounting equation and prepare the Balance Sheet : 

(i) Mukesh started business with cash 80,000

 (ii) Purchased goods for cash 28,000 

(iii) Purchased goods on credit 20,000 

(iv) Purchased furniture for cash 6,000

 (v) Paid rent 2,000

 (vi) Received commission 500 

(vii) Withdrew cash for personal use 3,000

 (viii) Sold goods on credit (Cost Price Rs 30,000 ) Sold Rs. 40,000

 (ix) Paid to creditors 15,000

How is Bank Reconciliation Statement prepared from the adjusted balance of Cash Book ? Discuss with example.

 A Bank Reconciliation Statement (BRS) is prepared to reconcile the balance shown in the bank statement with the adjusted balance in the cash book. Here's a short explanation with an example:

1. **Start with the adjusted balance in the cash book**: This is the balance after considering all the transactions recorded in the cash book, including deposits, withdrawals, and any bank charges or interest.

2. **List the items that cause differences**: Identify the reasons why the bank statement balance might differ from the cash book balance. Common reasons include outstanding checks, deposits in transit, bank charges, and interest earned.

3. **Adjust the cash book balance for these items**: Add or subtract the amounts of outstanding checks, deposits in transit, bank charges, and interest earned to the cash book balance. This will result in an adjusted cash book balance.

4. **Compare the adjusted cash book balance with the bank statement balance**: After making adjustments, compare the adjusted cash book balance with the balance shown on the bank statement.

5. **Prepare the Bank Reconciliation Statement**: List down the adjusted cash book balance and the bank statement balance. Then, identify and explain any differences between the two balances. This will typically involve listing outstanding checks, deposits in transit, bank charges, and interest earned.

**Example**:

Let's say the adjusted balance in the cash book is $10,000.

Upon comparing it with the bank statement, you find the following differences:

- Outstanding checks totaling $2,000.

- Deposits in transit totaling $1,500.

- Bank service charges of $50.

Adjusted cash book balance: $10,000

Adjustments:

- Add outstanding checks: -$2,000

- Add deposits in transit: +$1,500

- Subtract bank service charges: -$50

Adjusted cash book balance after adjustments: $9,450

Bank statement balance: $9,800

Now, prepare the Bank Reconciliation Statement:

Adjusted Cash Book Balance: $9,450

Bank Statement Balance: $9,800

Difference:

Bank Statement Balance - Adjusted Cash Book Balance

$9,800 - $9,450 = $350 (This is likely due to items not yet recorded in the cash book or recorded incorrectly)

In summary, the Bank Reconciliation Statement helps ensure that the cash book and bank statement balances match after accounting for any discrepancies, providing a clear overview of the financial position of the business.

3. Explain both the methods of determining profit under Single Entry System of Accounting. 

In the Single Entry System of Accounting, which is simpler than the Double Entry System, there are two primary methods used to determine profit: the Statement of Affairs Method and the Conversion Method.

1. **Statement of Affairs Method**:

•     This method involves preparing two statements: one at the beginning of the accounting period (opening statement) and another at the end of the accounting period (closing statement).
•    The opening statement is known as the Statement of Affairs, which lists all the assets and liabilities of the business at the start of the accounting period.
•    The closing statement is prepared similarly, listing all the assets and liabilities at the end of the accounting period.
•     To determine the profit or loss, the difference between the total assets and total liabilities in the opening statement is compared to the difference in the closing statement. If the total assets have increased more than the total liabilities, it indicates a profit. Conversely, if the total liabilities have increased more than the total assets, it suggests a loss.

2. **Conversion Method**:

•     In this method, the Single Entry records are converted into a Double Entry format to ascertain profit or loss.
•     The process involves creating a Trial Balance by identifying all the assets and liabilities from the Single Entry records and then reconstructing the accounts in a Double Entry format.
•     Once the Trial Balance is prepared, the profit or loss is determined by comparing the total credits and total debits. If the total credits exceed the total debits, it indicates a profit, and if the total debits exceed the total credits, it suggests a loss.

Both methods have their own advantages and limitations. The Statement of Affairs Method is simpler and more suitable for small businesses with uncomplicated financial transactions, while the Conversion Method provides a more accurate representation of profit or loss but requires more effort and expertise to implement.