Govt.
Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
Chapter # 1
Accounts from Incomplete Records
What is single entry system?
Single entry system is a system in which there are no two aspects of each and every transaction. Under
this system some transactions are not completely recorded while in others only one side of the
transaction is recorded. In this system only personal aspects of transactions are recorded but real and
nominal aspects are ignored.
What is double entry system?
A system in which two aspects of every transaction (one is debit and second in credit) are recorded is
known as double entry system.
Under single entry system what kinds of book-keeping records are kept?
Under single entry systems following book-keeping records are kept
• A day book or general journal
• A cash book
• Ledger accounts for individual customers and creditors.
What do you understand by increased-net worth method of single entry
system?
The method in which adjusted capital at the end and capital in the beginning and compared to ascertain
the profit or loss under single entry system.
What is statement of affairs?
Statement of affairs is a sort of balance sheet having assets on left side and liabilities and capital on the
right side under single entry system.
Write the equations to calculate the value of adjusted capital (at the end)
and profit or loss under single entry system?
Adjusted Capital At The End = Capital At The End + Drawings & Interest On Drawings – Fresh Capital Introduced
How the capital at the start can be calculated in net worth method of single
entry system?
It can be calculated by preparing the statement of affairs at the start of year.
How the cash in hand and cash at bank at the end of year can be calculated?
Cash in hand can be calculated with the help of cash account and cash at bank by preparing bank account.
How the opening balance of debtors, closing balance of debtors, cash
received from debtors, credit sales can be calculated?
Opening balance of debtors, closing balance of debtors, cash received from debtors and credit sales can be
calculated by preparing total debtors account.
How the opening balance of creditors, closing balance of creditors, credit
purchases and cash paid to creditors can be calculated?
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 1
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
Opening balance of creditors, closing balance of creditors, cash paid to creditors and credit purchases can be
calculated by preparing total creditors account.
What are the disadvantages or defects of single entry system?
Defects of single entry system
• As two aspects of each and every transaction are not recorded, so accounts remain incomplete.
• As two aspects of each and every transaction are not recorded, so trial balance cannot be drawn.
• As nominal accounts are not maintained, so profit and loss account cannot be prepared.
What are the methods to determine the profit under single entry system?
Under single entry system, profit can be ascertained by:
• Increased net worth method
• Conversion method
Distinguish between statement of affairs and balance sheet.
• Statement of affairs is prepared under single entry system.
• Balance sheet is prepared under double entry system.
• Data and information for preparing statement of affairs is obtained partly from trader’s
books and partly from others sources.
• Data and information for preparing balance sheet is obtained from books of accounts
only.
If capital at the beginning is Rs. 5000 and capital at the end of year is Rs.
6000, find profit or loss?
Capital at the end of year 6000
Less capital at the beginning 5000
Profit earned during the year 1000
How profit or loss is determined under “increased net worth method” of
single entry system?
Under this method profit or loss is ascertained in following way:
• Prepare two statement of affairs one at the commencement of year and the other at the end of
year. The excess of assets over liabilities as shown by this statement will represent the capital.
• Then apply following formula to ascertain profit or loss:
Capital (Ending) --------------
Add Drawings --------------
Less Further capital --------------
Less Interest on capital --------------
Less Opening capital --------------
Net Profit / Loss --------------
When is conversion method adopted under single entry system?
When single entry system, subsidiary books like purchases books, sales books etc. are also maintained
then it becomes possible to prepare trading and profit and loss account as in usual double entry system.
Define fresh Capital.
The additional amount which is invested by the owner in the business during the year is called as fresh
capital. It is also known as additional capital.
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 2
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
Define opening statement of affairs?
Opening statement of affairs is having opening assets on left side and opening liabilities on the right
side, and it is prepared to find out the opening capital under single entry system.
Define closing statement of affairs?
Closing statement of affairs is having closing assets on left side and closing liabilities on the right side,
and it is prepared to find out the closing capital under single entry system.
Define statement of profit & loss?
This statement is prepared to find out the profit or loss of the business under single entry system.
Chapter # 2
The Accounts of Non-Profit Making Organizations
What do you mean by non-profit making organizations?
All institutions which do not manufacture or sell anything and whose object is to good to society instead
of making profit, are called non-profit making organizations.
Give examples of non-profit making organizations.
• Trade unions
• Sports club
• Consumer society
• Libraries
• Hospitals
What is meant by receipt & payment account?
A receipt and payment account is a summary of cash book. All actual cash receipts are recorded on debit
side and all cash payments are recorded on credit side in receipt and payment account.
What is meant by income & expenditure account?
The account through which surplus or deficit of non-profit making organization is ascertained with the
use of expenses and incomes of the current year, is called income and expenditure account.
What are the characteristics of income and expenditure account?
• It is a profit and loss account of non-trading concerns.
• All revenue income and expenses of current year are recorded in it.
• It is prepared on the last day of accounting year.
• Its main object is to ascertain the surplus or deficit
What is meant by legacy received by non-profit making organizations?
Legacy is the property received by non-trading concern as per will of the person after his death. It is
treated as capital receipt and should appear on liability side of balance sheet.
How “receipts and payments” account is prepared?
Receipts and payments account is prepared with all the cash receipts and cash payments of the whole
year. The net result of cash receipts and cash payments of a fixed period of time is determined through
this account.
How “income and expenditure” account is prepared?
• Surplus or deficit of a fixed period of time is ascertained through this account. So it’s
heading will be:
• Income and expenditure account for the year ended 31.12.2006.
• It is a nominal account, so only revenue items will find place in it.
• All items of revenue income and expenditure relating to the current year will appear in it.
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 3
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
What is special subscription?
The additional subscription collected from members over and above the regular subscription for some
special purpose such as construction of club’s own building, charities to poor, awarding of prizes etc., is
known as special subscription.
What is the admission fee or entrance fee?
The amount which is paid by a new member at the time of admission in addition to subscription is called
admission fee and entrance fee.
What is capital fund?
Excess of total assets over total external liabilities of non-profit seeking organization is called capital
fund. It is also known as general fund, accumulated fund or surplus fund.
Briefly explain the term subscription in non-trading concern.
It is monthly or annually contribution by members to non-trading concern to enable it to perform its
functions.
What is meant by donation received by non-trading concern?
It is the amount received by way of gift. It appears on receipt side of receipts and payments account. If
donation is received for special purpose or if amount is large, it is treated as liability otherwise income.
What is meant by life membership fee received by non-trading concern?
This is the amount paid by a person in a lump sum to become a member for whole of the life. Life
members are not required to pay the annual membership fees.
Define Surplus.
When the incomes of non-profit making organizations exceed over expenses, is known as surplus.
What is Honorarium?
Amount given by non-profit making organizations to those persons who are invited in the organizations
for lectures or performance, is called honorarium.
Define Deficit.
When the expenses of non-profit making organizations exceed over incomes, is known as deficit.
Define Subscription.
The specific amount which is received from the member of non-profit making organizations on monthly
or yearly basis is called subscription.
Chapter # 3
Consignment Accounts
What is consignment?
When goods are delivered by its owner to his agent for selling purpose on commission basis, it is called
consignment.
How many parties are involved?
There are two main parties are involved in consignment
Which are:
• Consignor
• Consignee
How many classifications of consignment are?
There are two classifications of consignment.
• Consignment outward.
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 4
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
• Consignment inward.
Define consignment outward.
When the goods are sent to consignee by consignor it will be treated as consignment outward from the
consignor’s viewpoint.
Define consignment inward.
When the goods are received from consignor to consignee it will be treated as consignment inward from
the consignee’s viewpoint.
What is the relationship between consignor and consignee?
The relationship between consignor and consignee is that of principal and agent.
Define commission?
In connection with the consignment, the remuneration of the consignee for selling the goods of the
consignor is called commission.
Define overriding commission?
It is normally granted by consignor when he desires his agent to work hard to push a new line of product
in the market.
What do you understand by proforma invoice?
Proforma invoice is a forwarding letter sent by consignor to consignee along with the goods containing
particulars as to the name of the items; number (quantity or weight or measurement) and the price.
What is abnormal loss of stock?
Any loss which occurs due to fire, accident, theft, negligence etc., is known as abnormal loss of stock.
Due to this loss consignment profit is not reduced.
What is normal loss of stock?
A loss which occurs due to natural causes e.g., normal leakage, loss in weight due to nature of goods etc.
is treated as normal loss. Such loss inflates the value of closing stock.
What is the accounting treatment for abnormal loss and normal loss of
stock?
Abnormal loss is credited to the consignment account. In case of normal loss, the total cost of goods sent
is charged to the units remaining (Total Units – Loss Units). Value of stock is inflated to cover the
normal loss or normal loss is absorbed by the remaining units.
Who is consignor?
Consignor is the owner of goods who supplies them to consignee for selling purpose. He is also known
as Principal.
Who is consignee?
Consignee is a person to whom goods are delivered by consignor for selling purpose. He is also known
as an agent.
What is performa invoice?
Performa invoice is a statement or letter which contains particulars as name of items, quantity, quality
and price. This forwarding letter is sent by the consignor along with the goods to be consignee.
What is “account sales”?
An “Account Sale” is a statement prepared and sent by the consignee to the consignor containing the
information about goods sold, price realized, consignee expenses and consignee commission.
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 5
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
What is del-credere commission?
Del-credere commission is an extra commission allowed to the consignee guaranteeing the realization of
debts in full. When this commission is paid to the consignee then loss on account of bad debts is borne
by him.
Describe how the consignment account is maintained in the books of
consignor?
When consignor sends goods to consignee, he does not record them as sales and cannot take up any
profit until goods have been actually sold by the consignee. He maintains a separate subsidiary register
(journal) to keep the full record of goods consigned. This special register is known as “consignment
outward book or journal”.
Define direct expenses of consignment.
The expenses paid by consignor or consignee before the goods reached to warehouse of the consignee, is
called direct expenses of consignment.
Define indirect expenses of consignment.
The expenses paid by consignor or consignee after the goods reached to warehouse of the consignee, is
called direct expenses of consignment.
What is consignment account?
Consignment account is a particular trading and profit and loss account. This account is prepared to
ascertain the profit or loss on consignment.
Chapter # 4
Accounts of Joint Stock Companies
Define Joint Stock Company?
Company is an artificial person created by law having separate legal entity with a perpetual succession
and common seal.
Define Share capital?
The sum of the par value of the shares of the company, is called Share Capital.
Define authorized capital?
Authorized capital means maximum capital with which a company is registered. Company cannot issue
shares in excess of authorized limit. It is also called registered capital.
Define issued capital?
It is a part of authorized capital which is offered to general public for subscription.
Define subscribed capital?
It is a part of issued capital for which applications are received from public by company.
Define called-up capital?
A company may require payment of shares either in installments on in lump sum. So amount of shares
demanded by company is known as called-up capital.
Define paid-up capital?
It is that part of subscribed capital which is actually received by the company.
Under which ordinance a company is formed?
Joint Stock Company is formed under companies’ ordinance 1984.
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 6
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
What is meant by Article of association?
Article of Association is a document which contains rules and regulations for internal affairs of company.
What is meant by Memorandum of association?
Memorandum of Association is a document which contains powers, scope and limits of a company.
What is meant by prospectus?
Prospectus is a document through which companies invite public to purchase the shares.
What is meant by issue of shares at discount?
When a share is issued for an amount less than its face value, it is called issue of shares at discount.
What is meant by issue of shares at premium?
When a share is issued for an amount more than its face value, it is called issue of shares at premium.
What is meant by issue of shares at par?
When a share is issued for an amount equal to its face value, it is called issue of shares at par.
What is meant by debentures?
Debenture is a document issued by the company as an evidence of its debts.
What is the purpose of issue of debenture?
Debentures are issued by a company to borrow money for long period from general public.
Define par value of a share?
Value assigned to the shares by the company is called par value of the share.
Define a share?
The total amount of capital of the company is divided into smaller units. Each unit is called a share.
Define association not for profit?
It enjoys all the privileges of a limited company without using the word limited or private limited. It is
mainly formed for the promotion of commerce, art, religion, charity, etc.
Define the following:
a) Directors b) Promoters c) Underwriters d) Shareholder
Directors: the shareholders elect the directors in the annual general meeting and entrust the
management of the company to them.
Promoters: promoters are the persons who take necessary steps for the formation of the company.
Underwriters: underwriters are the persons who give the guarantee for the sale of share of the
company on commission basis.
Shareholders: shareholders are the owner of the company.
What do you understand by the under subscription and over subscription
in case of a joint stock company?
Under subscription: in under subscription applications received less than the shares offered to
general public.
Over subscription: in over subscription applications received more than the shares offered to
general public.
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 7
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
Define underwriting commission.
The commission which is paid to underwriting for their services regarding sale of sale and taking
the risk relating to sale of share, I called underwriting commission.
Chapter # 5
Depreciation, Provisions & Reserves
Define the term Depreciation.
Gradual decrease in the value of asset due to wear and tear is called depreciation.
Define internal Depreciation.
Depreciation which occures due to inherent (internal) normal cause, is known as internal depreciation
i.e. wear n tear etc.
Define external Depreciation.
Depreciation which occures due to external cause, is known as external depreciation i.e. accident, efflux
of time etc.
List the causes of depreciation.
• Wear and tear
• Obsolescence
• Efflux
• Accident
What is meant by wear and tear?
Wear and tear means decline in the value of asset due to its usage.
What is meant by depletion?
Depletion means decreases in the value of asset in proportion to quantum of production.
What is meant by obsolescence?
If value of old machine falls with the invention of more economical and sophisticated machine. In this
case the manufacturer is required to discard the old machine. Although in good working condition and to
purchase and install one new machine.
What is meant by efflux of time with reference to depreciation?
If value of asset falls due to passage of time even asset is not used. It is called depreciation due to efflux
of time.
Why is depreciation provided on asset?
• To ascertain the true profit loss
• To ascertain the true cost of production
• To ascertain the true value of asset
How to determine the cost of an asset?
The sum of the followings is called cost of an asset:
1. Purchase price of an asset
2. Carriage paid on asset
3. Installation of asset
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Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
What basic factor should be kept in mind while determining depreciation
rate?
• Original cost price of the asset
• Estimated working life of asset
• Estimated scrap value of asset
What is meant by cost price of an asset?
It includes all expenses involved in carrying and installing the asset to the site.
What is market price of an asset?
The price at which an asset can be sold in the market, is called market price of an asset.
What is scrape value of an asset?
The price at which an asset will be sold at the end of its working life. It is also known as residual value,
Salvage Value or break-up value.
Define useful life of an asset.
The period in which asset will be used to earn income in the business, is called useful life of an asset.
Define the term amortization?
The decrease in the value of intangible asset such as patents, copyright, goodwill, etc is known as
amortization.
Define Original Cost Method of providing depreciation.
The method under which depreciation is calculated on the original value of the asset in each year.
List the other name of Original Cost Method.
• Straight line method
• Fixed installment method
• Fixed base method
• Fixed cost method
Where is Original Cost Method of depreciation applied?
This method is applied in case of those assets which have small value and whose life can be easily
estimated e.g. copy rights, license etc.
Define Diminishing Balance method of providing depreciation.
The method under which depreciation is charged on book value of the asset in each year is called
diminishing balance method.
List the other names of Diminishing Balance method.
• Written down value method
• Reducing balance method
• Reducing base method
• Declining balance method
Where is Diminishing Balance method applied?
This method is suitable for those assets where value has not been reduced to zero. This method is most
suitable for plant machinery.
What is Annuity Method of depreciation?
Under this method the cost of asset purchased is considered as asset and interest at fixed rate is
calculated there on. The cost of asset and interest thereon are written down annual by equal installment.
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 9
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
What is the treatment of depreciation in profit and loss account and in
balance sheet?
Depreciation is debited to profit and loss account and deducted from the value of concerned fixed asset
in balance sheet.
What do you mean by the term accumulated depreciation?
The sum of the depreciation expense of the previous years is known as accumulated depreciation.
What is the formula to calculate the annual value of depreciation in fixed
installment method?
Annual value of depreciation = cost price of asset – scrap value
Estimated life of assets
Define fixed assets?
Assets which have long life (more than one year) and which are bought for use in business for long
period of time are called fixed assets e.g., building, machinery, furniture etc.
Define fixed tangible assets?
Assets which have long life and have physical existence and which can be seen, touched or felt are
called tangible fixed assets e.g., building, machinery, furniture etc.
Define fixed intangible assets?
Assets which have long life and have no physical existence and which cannot be seen, touched or felt
are called tangible fixed assets e.g., goodwill, patent right, trade mark, copyright etc.
Define wasting assets?
Those assets whose value gradually reduce on account of use and finally exhausted completely are
called wasting assets e.g. mine, forest etc.
Write the formula to calculate the rate of depreciation under reducing
balance method.
R = 1 – [S/C]1/n
For what assets Annuity Method of depreciation is applied?
The method is suitable for those assets which require large investment and whose life is long e.g. Land
and building, Leasehold property.
Chapter # 6, 7, 8 & 9
Partnership
Define partnership?
Any lawful business which is carried on by two or more persons for the purpose of earning profit.
What is the maximum number strength of partners in partnership?
In case of banking business it is up to ten and in case of other business it should not exceed twenty.
How a new partner can be entered into partnership?
A new partner can be entered in to partnership with the consent of the old partners.
What is sacrifice ratio?
Sacrifice ratio is calculated on the admission of a new partner in partnership for distribution of goodwill
among the old partner if the goodwill is in cash it is calculated with the help of following equation:
Sacrifice ratio = old share – new share.
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 10
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
How many methods are available for the treatment of goodwill on the
admission of a new partner, if goodwill does not exist in the book of
account?
There are the three methods for the treatment of goodwill, where goodwill does not exist in the books of
account:
• Premium methods
• Revaluation method
• Memorandum revaluation method
Write any three accounting problems on retirement of a partner?
• Calculation of ratios – new profit sharing and gaining.
• Treatment of goodwill.
• Revaluation of assets and liabilities.
What is the formula of gaining ratio or how gaining ratio can be
calculated?
Gaining ratio = New share – Old share.
What is meant by dissolution of firm by agreement?
A firm may be dissolve with the consent of all the partners in accordance with a contract between the
partners. It is known as dissolution by agreement.
What is meant by dissolution by notice of firm at will?
Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all
the other partners of his intention to dissolve the firm.
What is Garner Vs Murray decision?
According to this decision, the deficiency of the insolvent partner’s capital account must be borne by the
other solvent partners in the proportion to their capitals, after each solvent partner has brought in cash
equivalent to his own share of loss on realization.
Define partnership deed?
Partnership deed means a written agreement among partners in which all terms and conditions about to
run the business are mentioned.
Briefly explain any three rules applicable in case of absence of agreement
among partners?
• No partners can receive salary.
• Profit and loss sharing ratio will be equal for each partner.
• No interest is paid to partners on their capitals.
In what case, interest on capital is allowed?
Interest on capital is allowed when partners have un-equal capitals they share profit and loss equally.
In what case, interest on drawing is charged?
Interest on drawing should be charged when drawings of partners are unequal.
In absence of agreement, can any partner receive salary against his
services?
No partner is entitled to any remuneration for his work.
In absence of agreement, how much interest is allowed on loan given by a
partner to partnership firms?
In absence of agreement, interest on partner’s loan is allowed @ 6% p.a
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 11
Govt. Shalimar College Baghbanpura LHR
[Link] II Objective Study Notes
Why do we prepare profit and loss appropriation account in case of
partnership?
Profit and loss appropriation account is prepared to determine the net profit to be shared among all
partners.
Define goodwill?
The value attaching to the reputation of a business is called goodwill.
When is goodwill valued?
Goodwill is valued in the following cases:
• On admission of a new partner
• On retirement of a partner
• On dissolution or sale of business
• When profit sharing ratio amongst partner is changed.
When a new partner pays goodwill to old partners privately, what entry
should be passed?
When a new partner pays goodwill to old partners privately then no entry of goodwill is passed in books
of firm.
What is revaluation account?
When asset are revalued at the time of admission, retirement or death of partner, the revaluation account
is prepared to determine the profit or loss on such revaluation of asset and liabilities.
When do we prepare memorandum revaluation account?
Memorandum revaluation account is prepared only in those cases where partners agree to keep the book
values of assets and liabilities unchanged.
What is meant by retirement of partner?
When a partner withdraws his capital from partnership firm, it is called retirement of partner.
What matters are decided at the retirement of a partner?
Following matters are decided when a partner is retired:
• To calculate new profit sharing ratio
• To determine the value of goodwill
• To ascertain the amount due to the retiring partner
• Revaluation of assets and liabilities
Why new ratio is calculated on the retirement or death of a partner?
New ratio is calculated for the distribution of future income between remaining partners.
Why is goodwill written off on the retirement of a partner?
If remaining partners do not want to show the goodwill in the balance sheet then it is written off.
Define the dissolution of partnership?
Termination of partnership is known as dissolution of partnership.
Prof. Muhammad Alman MS (Finance)*, [Link] & CA Inter 0302-4422224 12