ECO 02 Solved Assignment 2022 – 23 (IGNOU)[Free]

ECO 02 Solved Assignment 2022 – 23

IGNOU B.Com Free Solved Assignment 2022 – 23

ACCOUNTANCY – 1 ECO 02 SOLVED ASSIGNMENT  2022 – 23

COURSE CODE AND TITLE: ECO – 02 ACCOUNTANCY-I

ASSIGNMENT CODE: ECO-02/TMA/2022-23

COVERAGE: ALL BLOCKS

Attempt all the questions.

Maximum Marks: 100

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1. (a) “Ledger is said to be the principal book of entry and the transactions can even be directly entered into the ledger account.” Elaborate on the statement and explain why Journal is necessary. 10

Ans: A Ledger account may be defined as a summary statement of all the transactions relating to a person, asset, expense or income, which have taken place during a given period of time and show their net effect. So every entry recorded in the journal must be posted into the Ledger.

 A ledger account is a statement shaped liked an English alphabet ‘T’ that systematically contains all financial transactions relating to either a particular person or thing for a certain period of time. It is the principal book of accounts. All the transactions can be posted directly into the ledger account and preparation of journal can be avoided. But journal offers many advantages by the reason of which it is necessary to prepared journals.

Journal is known as a book of original/prime record. Maintaining journal gives the following advantages to the entity concerned:

(1) Transactions recorded date-wise with explanation: All business monetary transactions are entered in journal in chronological order i.e., order of occurrence. Thus, chances of omitting a transaction are reduced. Moreover, each entry carries brief explanation known as narration which makes understanding of the real meaning of the transaction at a future date easier.

(2) Process of classification at convenience: Since transaction are recorded in journal as and when these take place, it ensures that nothing shall be omitted which should be recorded. Process of posting into ledger can be scheduled at the convenience of the entity.

(3) Ensures that double entry rules have been followed: Each transaction, before it is recorded in journal, is analysed for the aspects involved; accounts to be debited and credited and also the debit and credit amount. Totaling of amount columns on each page ensures that the basic rule of ‘debit having equal and corresponding credit’ has been followed.

(4) Reliable evidence: As the transactions taking place and recording are at the same time, therefore, chances of cooking or manipulating the facts are minimized. Thought out alterations or insertions are not possible. Therefore, courts regard the evidential quality of journal much better as compared to secondary records, say, and ledger.

(5) Sub-division enables division of labour: Now a day, most of the entities follow what is known as “Practical system of book-keeping”. Under this system, more than one journal are maintained (system shall be discussed in a subsequent chapter) to record one type of transactions in a separate journal, say, separate journals to record purchases, sales, etc., In such a case, different sub-journals can be handled by different persons, thus, each person acquires the expertise, and total efficiency increases.

(6) Detection of arithmetical errors: In case, the total of amount columns on the debit and credit do not tally, it is a sure and quick indication that some error has been committed. The same can be examined at the earliest.

(7) Provides primary source-data: Journal is directly written on the basis of vouchers. So, the information contained in the journal is a primary source of financial statistics of the business.

(8) Forwarding of balances: The closing balances of last year, related to assets and liabilities can be brought forward to the next year by passing opening journal entry.

(9) Transfer in accounts: Transfer of amount from one account to another account is made through journal.

(b) What is the purpose of noting on the bill? Is it necessary in case of a promissory note?         10

Ans: When a bill is dishonoured, it is necessary that the fact of dishonour and the causes of dishonour should be established. When the drawer approaches the court for legal action, the drawee can prove that the bill was not properly presented for payment and may escape legal action.

Therefore, if there is a dishonour the holder of the bill should get the fact of dishonour noted to a Notary Public (a person appointed by the court). The Notary presents the bill himself to the drawee for payment and if the money is received, it is given to the holder of the bill.

But if it is refused by the drawee, the Notary will note the fact of dishonour, the date of dishonour and the reasons of dishonour and return the bill back to the holder.

Thus, noting of a bill is considered as a legally acceptable evidence of dishonour. The Notary Public charges small amount for his services which is called Noting Charges.

The nothing charges are first paid by the holder of the bill who may be either drawer, endorsee or banker and are ultimately recoverable from the drawee provided there is no agreement to the contrary.

According to the Negotiable Instruments Act, 1881 noting of dishonour a promissory note is also necessary.

2. Why is distinction between capital and revenue important? Give examples to show, how wrong classification can affect the ascertainment of profit.          (20)

Ans: The concepts of capital and revenue are of paramount importance in accounting. The true performance of a business enterprise can be measured by matching the business incomes with business expenses of the same period.

The distinction between the capital and revenue items is necessary to determine the accounting profit for a particular period and to recognize the business assets and liabilities at the end of that period. Economists also use the term ‘revenue’ for sale proceeds of goods and services or earnings from interest, dividend, rent etc., but the accountants do not use the term revenue strictly in the same sense. Accountants use the term revenue for the items of recurring nature the benefit of which expires within an accounting period.

The total expenses or receipts of a business may be of capital or revenue nature. The capital items are non-recurring in nature and are recorded in the Balance Sheet, while the revenue items are recurring in nature and are recorded in the income statement. However, a distinction between capital and revenue items is a difficult task. The dividing line between the two is very thin in many cases.

The need to distinguish between capital and revenue items arises:

(1) To determine the true results in terms of profit or loss of the business enterprise in an accounting period;

(2) To ascertain the true financial position of the business enterprise at the end of an accounting period;

(3) To determine the tax liability as per taxation laws;

(4) To allocate the depreciation on the fixed assets to the Profit & Loss A/c on the basis of its useful life.

In order to achieve the above mentioned objectives, the capital and revenue items are classified in the following categories:

1. Capital and Revenue Expenditure.

2. Capital and Revenue Payments.

3. Capital and Revenue Receipts.

4. Capital and Revenue Profits.

5. Capital and Revenue Losses.

Impact of wrong classification on financial statements

Treating capital expenditures as revenue expenditure or vice-versa have a significant impact on financial statements.

Capital Expenditure: The transactions of capital expenditure give benefits for more than one accounting period, such as acquisition and improvement of assets, acquisition of special rights, increasing of earning capacity, restoration of operating efficiency.

Some examples of capital expenditure: (i) Purchase of land, building, machinery or furniture; (ii) Cost of leasehold land and building; (iii) Cost of purchased goodwill; (iv) Preliminary expenditures; (v) Cost of additions or extensions to existing assets; (vi) Cost of overhauling second-hand machines; (vii) Expenditure on putting an asset into working condition; and (viii) Cost incurred for increasing the earning capacity of a business.

It is non-recurring in nature. Therefore, they are shown on the assets side of the Balance Sheet. If capital expenditure is treated as revenue expenditure, then profit of the company will be understated. Also balance sheet will not disclose true position of the firm.

For example; Microtek Developers paid wages on construction of building is Rs. 1,00,000. But it is wrongly debited in trading account. This should have been shown as asset in balance sheet. The impact of this error of principles is that profit of Microtek developers will be understated by Rs. 1,00,000 and also assets will be understated by Rs. 1,00,000. Due to this error, income statement will not disclose true profit and balance sheet will not show true financial position.

Revenue Expenditure: It is incurred for generating revenue in the current accounting period and its benefit expires with such period. It helps to maintain the normal working condition of a business.

Some examples of Revenue Expenditure: (i) Salaries and wages paid to the employees; (ii) Rent and rates for the factory or office premises; (iii) Depreciation on plant and machinery; (iv) Consumable stores; (v) Inventory of raw materials, work-in-progress and finished goods; (vi) Insurance premium; (vii) Taxes and legal expenses; and (viii) Miscellaneous expenses.

 It is charged as expenses in Trading / Profit & Loss Account on debit side.If revenue expenditure is treated as capital expenditure, then profit of the company will be overstated. Also balance sheet will not disclose true position of the firm.

For example; Microtek Developers paid repairing expenses on building Rs. 1,00,000 but it is added with building in balance sheet. This should have been debited to profit and loss account. The impact of this error of principles is that profit of Microtek developers will be overstated by Rs. 1,00,000 and also assets will be overstated by Rs. 1,00,000. Due to this error, income statement will not disclose true profit and balance sheet will not show true financial position.

3. X of Bangalore consigned 100 bags of cement for sale to his agent Y. Cost price of each bag is Rs. 120. ‘X’ immediately drew a 4 months’ bill for Rs. 5,090 on the latter and discounted it with bank at 6% per annum. ‘X’ paid Rs. 800 on packing and Rs. 250 for carriage. ‘Y’ spent Rs. 300 as selling expenses.

The consignee returned 5 bags. He realised 20 bags at Rs. 130 per bag and 50 bags on credit at Rs. 140 per bag and took the balance in his own stock at Rs. 135 per bag. Consignee is entitled to get commission of 3% and 2% del Credere commission on credit sales. ‘Y’ recovered all money from debtors except Rs. 500. Prepare the necessary ledger accounts in the books of both parties.       (20)

Ans:

In the Books of X

Consignment Account

Particulars	Amount	Particulars	Amount
To Goods Sent on Consignment (100 Bags @ Rs. 120 each) To Cash (Expenses) – Packing: 800 – Carriage: 250 To Y (Expenses) – Selling Expenses To Y (Commission) – Total 5% on 12,975	12,000 1,050 300 648.75	By Y’s Account (Sales Consideration) (20*130+50*140+135*25) By Good Sent on Consignment (Return of 5 bags) By Profit & loss Account (Loss on consignment)	12,975 652.50 371.25
	13,998.75		13,998.75

Y’s Account
Particulars	Amount	Particulars	Amount
To Consignment A/c	12,975	By Bills Receivable A/c By Consignment A/c (Expenses) By Consignment to Jaipur A/c (Comm.) By Balance c/d	5,090 300 648.75 6,936.25
	12,975		12,975

In the Books of Y X’s Account
Particulars	Amount	Particulars	Amount
To Bills Payable Account To Bank Account To Commission Account To Balance c/d	5,090 300 648.75 6,936.25	By Cash Account By Debtors Account By Purchase Account	2,600 7,000 3,375
	12,975		12,975

Calculation of Return:

Goods sent on Consignment = 100*120 = 12,000

Add: Expenses of consignee =                        1,050

Cost of total 100 bags  = 13,050

Cost per bag = 13,050/100 = 130.50

Cost of 5 bags = 130.50*5 = 652.50

4. What is Sectional Balancing? How does it differ from Self-balancing? Give proforma of a Total Debtors Account.         (20)

Ans: In the big business houses, the numbers of business transactions are in a large number. So it is very difficult to keep all accounts in a single ledger. The size of ledger may be increased and it may be very difficult to keep them safe. Due to large number of accounts in a single ledger, it will also be difficult to find out mistakes.

To solve the above mention problems, business houses may maintain multiple-ledgers. For this purpose, main ledger may be divided in to three ledgers. In the first ledger all Debtors Accounts are opened, in second ledger all Creditors Accounts are to be opened and in third ledger, that is rest of the part of main ledger or say General ledger, all other accounts are to be opened in this general ledger.

The division of ledger helps us to keep ledger properly. Further, if the number of Debtors and Creditors are in large number, we can make the sub division of Debtors ledger and Creditors ledger. For example, Debtors ledger no. one for debtor’s name starting from A to M and ledger no. second may be for Debtors for N to Z. Same can be done for Creditors ledger also. In addition to this the private accounts of the businessman may be kept in a separate private ledger which has no concern with business.

Due to the division of main ledger, only one part(Debtor/Creditor) will be recorded in the Debtors and Creditors ledgers and second part (i.e. credit sales/purchase, cash received or paid, Discount allowed/ received bad debt etc.) will be recorded in General Ledger. Because no ledger has both the parts of a transactions, so Trial Balance cannot be prepared. To prepared Trail Balance, we are to open Total Debtors Account and Total Creditors Account in the General Ledger by total of Debtors and Creditors amount by monthly or quarterly or half yearly or yearly basis.

Now balancing of all the accounts are available in the General Ledger and so now we can prepare the Trail Balance. This system is called Sectional Balancing System, in which only in General Ledger (a section of ledger) we do double entry.

Difference between Self-Balancing and Sectional-Balancing:

Both self balancing ledgers and sectional balancing ledgers serve the same purpose. Under both the system control accounts have to be prepared. However, there are certain points of distinction between the two systems which can be described as follows:

Self Balancing Ledger	Sectional Ledger
Control accounts are prepared in all the ledgers. In the general ledger, debtors ledger adjustment account and creditors ledger adjustment account are prepared.	Control accounts are prepared in general ledger only. The name of these control accounts are total debtors accounts and total creditors account. Personal ledgers namely debtor’s ledger and creditors ledger have no control account.
A trial balance can independently be prepared from each one of the ledgers.	A trial balance can be prepared only from the general ledger.
All the ledgers form part of double entry system.	Double entry system is completed in the general ledger only. Debtors ledger and creditors ledger serve only as memorandum books of account.
It is suitable when transactions are not too many.	It is suitable where transactions are too many.

Preparation of total debtors accounts: Usually a question on single entry does not give the figures of credit sales. So to find out credit sales a Total Debtors Account is prepared. Total debtors accounts is debited with opening balance of debtors, interest on overdue amount, B/R dishonoured etc. and credited with collection from debtors in the form of cash, bank and B/R, return inwards, discounts allowed and allowances, bad debts and closing balance of debtors. Balancing amount will be credit sales during the year. Proforma of total debtors account is given below:

PROFORMA OF A TOTAL DEBTORS ACCOUNT

Dr.	Rs.	Cr.	Rs.
To Balance b/d (Opening Balance) To Bills Receivable (Dishonoured) To Interest on Overdue Accounts To Transfers To Cash (Refund for returns) To Credit Sales (Balancing figure)		By Cash/Bank By Bills Receivable By Discounts By Return Inwards By Allowances By Transfer By Bad Debts By Balance c/d (Closing Balance)

5. Differentiate between the following:             (10+10)

(a) Trading Account and Manufacturing Account.

Ans: Trading account: Trading account is one of the financial statements prepared by the company to show the result of buying and selling of goods and services during an accounting period. Trading account is prepared to ascertain the gross profit or gross loss.

Manufacturing Account: Those concern which convert raw materials into finished goods are required to prepared Manufacturing Account to find cost of production. Manufacturing account is prepared to find cost of production.

Difference between Trading account and Manufacturing Account:

Basis	Trading Account	Manufacturing account
1. Purpose	Trading Account is prepared to calculate gross profit of the business enterprise.	Manufacturing account is prepared to find cost of production.
2. Prepared by	It is prepared by trading businesses.	It is prepared by manufacturing entities.
3. Stock	Opening and closing stock of finished goods are shown in trading account.	Opening and closing Stock of Raw materials and Work-in-progress are shown in manufacturing account.
4. Items	In the Trading Account, items related to direct expenses and direct incomes are recorded.	Manufacturing account includes direct costs such as direct materials, direct labour, and direct expenses.
5. Information	It gives information about the trading activities such as purchase and sales of business entity.	It gives information about cost of goods manufactured and cost of goods sold.
6. Factory Overheads	Trading account does include overhead such as factory overheads.	Manufacturing account include factory overhead.
7. Waste and Scrap	Waste and scrap are not included in trading account.	Waste and scrap are included in manufacturing account.
8. Capital expenditure	Trading account does not include capital expenditure.	Manufacturing account include capital expenditure.

(b) Non-recurring and Recurring Expenses.

Ans: Non-recurring expenses: Non-recurring expenses are those which are not regular in nature. These expenses are also called capital expenditure such as purchase of fixed assets, acquisition of any intangible asset etc.

Recurring expenditure: Recurring expenditure are those which are regular in nature and incurred regularly in day to day operating activities. These expenses are revenue in nature. Example of recurring expenditure are rent paid, salaries paid, electricity bill paid etc.

Difference between non-recurring and recurring expenses

Basis	Non-recurring expenses	Recurring expenses
1. Occurrence	Non-recurring expenses are those which are not regular in nature.	Recurring expenditure are those which are regular in nature and incurred regularly in day to day operating activities.
2. Nature	Non-recurring expenses are capital in nature.	Recurring expenses are revenue in nature.
3. Capital and operating expenditure	Non-recurring expenses are often considered as capital expenditure because it increase life of asset.	Recurring expenses are often considered as revenue expenditure because it is required for day to day operating activities.
4. Cash flow	Normally Huge cash flow incurred in non-recurring expenditure.	Cash flow in Recurring expenses are normally small.
5. Prediction	Prediction of non-recurring expenditure is practically not possible.	Prediction of recurring expenditure is possible because it is regular in nature.
6. Flexibility	It is flexible because it is non-essential and can be delayed.	It is not flexible and cannot be delayed.
7. Depreciation	Depreciation is normally charged on capital expenditure.	No depreciation is charged in revenue expenditure.
8. Balance sheet	On-recurring expenses are normally shown in balance sheet.	Recurring expenses are normally shown in income statement.

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