Illustration 1.

Pass the Journal entries for the following transactions of Gurman Traders:
2025 `
May 1 Paid cash to Maira against dues 9,750
Received cash discount 250
May 3 Sold goods to Hemant of List Price ` 20,000 less 10% Trade Discount
May 7 Sold goods in cash 2,500
May 10 Goods returned by Hemant of List Price ` 2,000
May 20 Received cash from Hemant in settlement of his account 15,700
May 20 Bought goods from Nihar of List Price ` 30,000 less 15% Trade Discount
May 22 Goods returned to Nihar of List Price ` 5,000, not being as per specifications
May 25 Paid to Nihar on account 9,800
Received cash discount 200
May 30 Paid salary to Jiten 14,000
Solution: JOURNAL OF GURMAN TRADERS
Date Particulars L.F. Dr. (`) Cr. (`)
2025
May 1 Maira ...Dr. 10,000
To Cash A/c 9,750
To Discount Received A/c 250
(Amount paid to Maira, availed Cash Discount)
May 3 Hemant ...Dr. 18,000
To Sales A/c 18,000
(Goods sold on credit allowing 10% Trade Discount)
May 7 Cash A/c ...Dr. 2,500
To Sales A/c 2,500
(Goods sold against cash)
May 10 Sales Return A/c ...Dr. 1,800
To Hemant 1,800
(Goods returned by Hemant of ` 1,800 (i.e., ` 2,000 – ` 200))
May 20 Cash A/c ...Dr. 15,700
Discount Allowed A/c ...Dr. 500
To Hemant 16,200
(Cash received from Hemant in Settlement)
May 20 Purchases A/c ...Dr. 25,500
To Nihar 25,500
(Goods purchased from Nihar of List Price ` 30,000 less 15% Trade Discount)
May 22 Nihar ...Dr. 4,250
To Purchases Return A/c 4,250
(Goods returned, being not as specified)
May 25 Nihar ...Dr. 10,000
To Cash A/c 9,800
To Discount Received A/c 200
(Part payment made, Cash Discount received)
May 30 Salaries A/c ...Dr. 14,000
To Cash A/c 14,000
(Salary paid to Jiten)

1
Illustration 2.
Journalise the following transactions:
(i) ` 5,000 due from Ramesh are irrecoverable.
(ii) Sohan is declared insolvent. Received from his Official Receiver 60 paise in a
rupee on a debt of ` 10,000.
(iii) Received cash for a bad debt written off last year ` 700.
Solution: JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
(i) Bad Debts A/c ...Dr. 5,000
To Ramesh 5,000
(Bad debts written off)
(ii) Cash A/c ...Dr. 6,000
Bad Debts A/c ...Dr. 4,000
To Sohan 10,000
(Cash dividend of 60 paise in a rupee out of his debt of
` 10,000 received from Sohan on his insolvency)
(iii) Cash A/c ...Dr. 700
To Bad Debts Recovered A/c* 700
(Cash received on account of recovery of a bad debt
which was previously written off)
* Recovery of bad debts written off last year is a gain, therefore, it is credited to the Bad Debts
Recovered Account.

2
1. Analyse the following transactions, state the nature of accounts and state which account
will be debited and which account will be credited:
S. No. Particulars `

(i) Lal started business with cash 3,00,000

(ii) Purchased furniture for cash from Shanti Furniture House 75,000
(iii) Purchased goods for cash 55,000
(iv) Sold goods for cash to Pal 35,000
(v) Sold goods to Om on credit 60,000
(vi) Deposited cash in bank for opening an account 70,000
(vii) Received a cheque from Om 20,000
(viii) Deposited Om’s cheque the next day
(ix) Borrowed from Sohan 1,00,000
(x) Purchased furniture from Haryana Safe 50,000
(xi) Paid interest on loan 10,000
(xii) Paid rent by cheque 4,000
(xiii) Paid salary to staff 14,000
(xiv) Withdrew cash for personal use 5,000

1
 1. Show the Accounting Equation on the basis of the following transactions and present a
Balance Sheet on the last new equation balance: `
(i) Raj commenced business with Cash 70,000
(ii) Purchased goods on credit 14,000
(iii) Withdrew for private use 1,700
(iv) Goods purchased for cash 10,000
(v) Paid wages 300
(vi) Paid to creditors 10,000
(vii) Sold goods on credit for 15,000
(viii) Sold goods for cash (cost price was ` 3,000) 4,000
(ix) Purchased furniture for 500
[Assets: Cash ` 51,500 + Stock ` 9,000 + Furniture ` 500 + Debtors ` 15,000
= Liabilities: ` 4,000 + Capital: ` 72,000.]

2. Draw an Accounting Equation from the following transactions:

(i) Commenced business with cash ` 50,000, cheque ` 1,00,000, goods ` 30,000 and furniture
` 20,000.
(ii) Car, personal asset of the proprietor, was sold for ` 1,00,000 against cheque which he
deposited in his Savings Account.
(iii) An amount of ` 50,000 was transferred from his Savings Account to the firm’s
Bank Account.
(iv) A new car was purchased for ` 6,00,000 for office use. It was paid by taking loan from
Bank of ` 5,00,000 and balance by issue of cheque from firm’s Bank Account.
(v) Sold goods to Ajay on credit costing ` 4,000 for ` 5,000.
(vi) Sold goods for cash costing ` 12,000 for ` 16,000.
(vii) Purchased goods for cash ` 40,000.
(viii) Purchased goods on credit for ` 20,000.
(ix) Paid rent ` 3,000 including ` 2,000 in advance.
(x) Paid salaries ` 2,000.
(xi) Sold goods costing ` 8,000 for ` 10,000.
(xii) Salaries outstanding ` 1,000.
(xiii) Charge depreciation on furniture ` 500.
[Assets: ` 7,73,500 = Liabilities: ` 5,21,000 + Capital: ` 2,52,500.]
[Hint: In transaction (xiii), furniture will be reduced by ` 500 and capital will also be

reduced by ` 500 because of loss due to depreciation.]
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 3. Prove that the Accounting Equation is satisfied in all the following transactions of
Sameer Goel:
(i) Started business with cash ` 10,000.
(ii) Paid rent in advance ` 300.
(iii) Purchased goods for cash ` 5,000 and credit ` 2,000.
(iv) Sold goods for cash ` 8,000 costing ` 4,000.
(v) Paid salary ` 450 and salary outstanding being ` 100.
(vi) Bought motorcycle for personal use ` 3,000. (KVS)
[Assets: Cash ` 9,250 + Prepaid Rent ` 300 + Stock ` 3,000 =
Liabilities: Salary Outstanding ` 100 + Creditor ` 2,000 + Capital: ` 10,450.]
4. Complete the following Accounting Equation by filling the missing amounts:

Accounting Equation
S. No. Transactions Assets (`) = Liabilities (`) + Capital (`)

(i) B Invested ` 50,000 in cash 50,000 = ...(1)... + ...(2)...

(ii) Purchased securities for ` 7,500 in cash ...(3)... = 0 + ...(4)...
New Equation ...(5)... = 0 + ...(6)...
(iii) Purchased a shop for ` 15,000 giving ` 5,000
in cash and the balance through a loan ...(7)... = ...(8)... + 0
New Equation ...(9)... = ...(10)... + 50,000
(iv) Sold securities costing ` 1,000 for ` 1,500 ...(11)... = 0 + ...(12)...
New Equation ...(13)... = 10,000 + ...(14)...
(v) Purchased an old car for ` 2,800 in cash ...(15)... = 0 + ...(16)...
New Equation 60,500 = ...(17)... + ...(18)...
(vi) Received cash as Commission ` 3,600 ...(19)... = 0 + ...(20)...
New Equation ...(21)... = 10,000 + ...(22)...
(vii) Paid loan’s instalment ` 800 including ` 300 for interest ...(23)... = ...(24)... + ...(25)...
New Equation 63,300 = ...(26)... + ...(27)...

[1: 0; 2: ` 50,000; 3: 0; 4: 0; 5: ` 50,000; 6: ` 50,000; 7: ` 10,000; 8: ` 10,000; 9: ` 60,000;

10: ` 10,000; 11: ` 500; 12: ` 500; 13: ` 60,500; 14: ` 50,500; 15: 0; 16: 0; 17: ` 10,000;
18: ` 50,500; 19: ` 3,600; 20: ` 3,600; 21: ` 64,100; 22: ` 54,100; 23: (` 800); 24: (` 500);
25: (` 300); 26: ` 9,500; 27: ` 53,800.]

5. Prepare an Accounting Equation from the following:

(i) Started business with cash ` 1,00,000.
(ii) Purchased goods for cash ` 20,000 and on credit ` 30,000.
(iii) Sold goods for cash costing ` 10,000 and on credit costing ` 15,000 both at a profit
of 20%. (Delhi)
[Assets: Cash ` 92,000 + Stock ` 25,000 + Debtors ` 18,000 =
Liabilities: Creditors ` 30,000 + Capital: ` 1,05,000.]
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6. Show the accounting equation on the basis of following transactions:
(a) Ram started business with ` 25,000.
(b) Purchased goods from Shyam ` 10,000.
(c) Sold goods to Sohan costing ` 1,500 for ` 1,800. (MSE Chandigarh)
[Capital: ` 25,300 + Liabilities: Creditors ` 10,000 = Assets: Cash ` 25,000
+ Debtors ` 1,800 + Stock ` 8,500.]

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 1. Following transactions of Ramesh, Delhi for April, 2023 are given below. Journalise them:
2023 `
April 1 Ramesh started business with cash........................................................................................................................... 30,000
April 2 Opened a current account with Bank by depositing cheque from Savings Account.............................. 70,000
April 3 Bought goods for cash.................................................................................................................................................... 5,000
April 13 Sold goods to Krishna on credit.................................................................................................................................. 1,500
April 20 Bought goods from Atul on credit............................................................................................................................. 2,250
April 24 Received from Krishna.................................................................................................................................................... 1,450
Allowed him discount..................................................................................................................................................... 50
April 28 Paid cash to Shyam.......................................................................................................................................................... 2,150
Discount allowed by him............................................................................................................................................... 100
April 30 Cash sales for the month................................................................................................................................................ 8,000
April 30 Paid rent............................................................................................................................................................................... 500
April 30 Paid salary............................................................................................................................................................................ 10,000

2. Journalise the following transactions of Ram, Delhi:

2023 `
Jan. 1 Ram commenced business with cash....................................................................................................................... 30,000
Jan. 2 Opened a bank account with Union Bank by cheque from savings account............................................. 21,000
Jan. 3 Purchased goods from Rahul in cash........................................................................................................................ 10,000
Jan. 7 Withdrew cash from bank for office use................................................................................................................... 3,000
Jan. 10 Sold goods to Hari............................................................................................................................................................ 5,000
Jan. 15 Purchased goods from Shyam..................................................................................................................................... 15,000
Jan. 20 Cash sales............................................................................................................................................................................. 3,000
Jan. 25 Paid to Shyam.................................................................................................................................................................... 14,750
Discount Received............................................................................................................................................................ 250

3. Record the following tansactions in the Journal of Ashoka Furniture Traders:

2023    `
Jan. 1 Started business with cash............................................................................................................................................ 50,000
Jan. 2 Deposited into bank from his Savings Account.................................................................................................... 3,50,000
Jan. 10 Purchased machinery of ` 1,00,000. An old machine (personal) valued at ` 15,000 was given in
exchange and balance was paid by cheque.
Jan. 15 Paid installation charges for machinery................................................................................................................... 2,000
Jan. 20 Purchased timber from Singh & Co. of the list price of ` 20,000. He allowed 10% Trade Discount.
Jan. 25 Timber used for furnishing the office ..................................................................................................................... 5,000
Jan. 31 Sold furniture to Rakesh of the list price of ` 10,000 and allowed him 10% Trade Discount.
Jan. 31 Old furniture valued at ` 500 was taken from Rakesh in exchange.
Feb. 10 Sent cheque to Singh & Co. in full settlement........................................................................................................ 17,000
Feb. 15 Received from Rakesh in full and final settlement............................................................................................... 8,000
Feb. 20 Paid wages.......................................................................................................................................................................... 15,000
Feb. 25 Issued a cheque in favour of the landlord for rent of February....................................................................... 5,000

1
 Higher Order Thinking Skills (HOTS) Questions
Q. 1. Appointment of Chief Financial Officer is not recorded in the books of account. Why?
Ans. It is not recorded because it cannot be measured in money terms.
Q. 2. Book Keeping is not a part of accounting. Is the statement correct?
Ans. No. Book Keeping is a part of accounting. Two processes of accounting, i.e., collecting
and recording of financial transactions and events are the processes of Book Keeping.
Q. 3. Is the basic objective of Book Keeping to maintain systematic records or to ascertain
net results of operations of financial transactions? (MSE Chandigarh)
Ans. Yes, the basic objective of Book Keeping is to maintain systematic records of financial
transactions.
Q. 4. Recording the transactions and events correctly and preparing financial statements
are the only objectives of accounting. Is it correct?
Ans. No. Besides recording them correctly and preparing financial statements, accounting
has the objectives of facilitating management control and communicating financial
information to the users.
Q. 5. M/s Shiva Bros. has disclosed interest rates on different borrowings. Does this
information qualify the characteristic of “relevance”? What is your opinion?
Ans. The information qualifies the characteristic of ‘relevance’ as the user is in a position
to determine whether the cost of funds is economical or it needs to be improved.
Q. 6. Which type of accounting information shows profit earned or loss incurred?
Ans. Profit & Loss Account (in case of firms) and Statement of Profit & Loss (in case of
Companies) shows profit earned or loss incurred during the accounting period.

Very Short Answer Type Questions

Q. 1. Give the meaning of ‘Accounting’. (Delhi)
Ans. Accounting is a process of identifying financial transactions, measuring them in
money terms, recording them in primary books, classifying, summarising, analysing,
interpreting them and communicating the results to the users.
Q. 2. List any two functions of Accounting.
Ans. Two functions of accounting are:
(i) Identifying financial transactions; and (ii) Recording them in the books of account.
Q. 3. Name the branch of commerce, which keeps a record of monetary transactions in a
set of books. (MSE Chandigarh)
Ans. Book Keeping.
Q. 4. Define Book Keeping.
Ans. Book Keeping is an art of recording in the books of account the monetary aspect of
commercial and financial transactions.
Q. 5. What is the function of Book Keeping?
Ans. The function of Book Keeping is to identify financial transactions and events, measuring
them in money terms, recording them in the books of account and classifying the
recorded transactions.

1
Q. 6. Name any two objectives of Accounting. (KVS)

Ans. The two objectives of Accounting are:

(i) Ascertaining profit or loss; and (ii) Ascertaining financial position.
Q. 7. What are the advantages of Accounting? (Any Two)
Ans. Two advantages of Accounting are:
(i) Financial performance and position is known; and
(ii) Assist management in making business plans, take decisions and exercise control.
Q. 8. What are the limitations of Accounting? (Any Two) (Delhi, KVS)

Ans. The limitations of Accounting are:

(i) Non-financial information are not recorded; and
(ii) It ignores price level changes.
Q. 9. Name any one external user of Accounting information. (Delhi)

Ans. Creditors.
Q. 10. Name the external user of accounting information from whom the firm purchases
goods on credit. (KVS)

Ans. Supplier of goods.

Q. 11. Is the basic objective of Book Keeping to maintain systematic records or to ascertain
net results of operations of financial transactions? (MSE Chandigarh)

Ans. The basic objective of Book Keeping is to maintain systematic records of financial
transactions.
Q. 12. Name the external users directly concerned with accounting information.
(MSE Chandigarh)

Ans. (i) Creditors,

(ii) Bankers or Financial Institutions.

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 Higher Order Thinking Skills (HOTS) Questions
Q. 1. Rahul, the proprietor of M/s. R.K. & Co. purchased an air-conditioner and installed it
at his residence. The payment was made by issuing a cheque from the account of
M/s. R.K. & Co. The Accountant debited the Drawings Account with the amount whereas
Rahul is of the view that it should be debited to the Fixed Assets. In your view, who is
correct and why?
Ans. The Accountant is correct because according to the Business Entity Concept business is
separate and distinct from the owners. Since, the air-conditioner has been installed at
the residence of the proprietor, i.e., for his personal use, it is drawings by the owner.
Q. 2. Which accounting principle requires that personal expenses of proprietor or partners
should be debited to Drawings Account?
Ans. Accounting Entity or Business Entity Principle.
Q. 3. Production at a factory had to stop for a week due to a labour strike. The owner
estimated the loss of production and the likely loss of profit arising out of the
situation. He directed the accountant to record the loss in the books of account. Is
the owner correct in recording the likely loss? Give reasons.
Ans. No, the owner is not correct because transactions and events are recorded in the
books of account if they can be measured in money terms and on the basis of
evidences. In the present case, evidence to the effect of loss or profit does not exist
on the basis of which the owner can measure the loss in money terms.
Q. 4. Under which accounting principle, quality of manpower is not recorded in the books
of account?
Ans. Money Measurement Principle.
Q. 5. The assets of Gurman Sugar Co. were acquired by the Government on 1st April,
2000 and the company received a compensation of ` 10 crores. The company did not
have any other business as on the date of acquisition and has also not ventured
into any other business after acquisition of assets. The company placed the amount
so received in a fixed deposit with a bank, which is lying deposited with the bank
as on date also. It has also filed a case in the Court seeking higher compensation.
Is the company a going concern?
Ans. The company is not a going concern because it has not commenced any business post
acquisition. The company is only seeking higher compensation and not quashing of
the acquisition order of the Government. It has invested the compensation received
in the fixed deposit which remains deposited as on date also. Thus, the company
does not have intentions to conduct the business.
Q. 6. Which concept (principle) assumes that a business enterprise will not be liquidated
in the near future? (Delhi)
Ans. Going Concern Concept.
Q. 7. Which accounting principle requires that life of a business be broken into smaller
parts?
Ans. Accounting Period Principle.

1
Q. 8. Gurpreet purchased 1,000 sq. yards land to build a factory and paid ` 15 lakh
towards its cost including registration charges. At the end of the financial year,
the value of the land came down to ` 13 lakh. Gurpreet recorded the land at ` 13
lakh and booked a loss of ` 2 lakh. Is he correct in treating the fall in value as a
loss?
Ans. No, Gurpreet is not correct because he has purchased a fixed asset by paying ` 15
lakh. The Cost Concept of Accounting holds that an asset should be recorded in
the books at the price paid.
Q. 9. Under which accounting concept asset is recorded at cost, even if the market price
is more or less?
Ans. Cost Concept.
Q. 10. If one aspect of a transaction is not recorded, which accounting concept is not
followed?
Ans. Dual Aspect Concept.
Q. 11. Under which concept if advance is received against sale of goods, the advance
received is recorded as ‘Advance Against Sale’ and not Sales?
Ans. Revenue Recognition Concept.
Q. 12. An enterprise prepares its accounts under the accrual basis. Salaries amounting to
` 10,000 for the month of March, 2024 were not paid. The owner did not want to
account it in the books of account on the ground that the amount was not paid.
The enterprise closes its books of account on 31st March every year. Is he correct?
Ans. No, the owner is not correct because under the Accrual Concept, expense should
be accounted at the time when it is incurred and not when it is paid. Salaries
for March 2024 have become due on 31st March, 2024 and therefore, should be
accounted in the books of account for the year ended 31st March, 2024.
Q. 13. Rent for the month of March, 2024 is not paid. Under which accounting concept
it should be recorded as expense for the year ended 31st March, 2024?
Ans. Accrual Concept.
Q. 14. Why the entire life of business is divided into intervals? (KVS)
Ans. To ascertain the amount of profit earned or loss suffered by the business at regular
intervals, i.e., during the accounting period.
Q. 15. ‘Capital is a liability for the business.’ Explain this statement with the principle
applied.
(MSE Chandigarh)
Ans. According to Accounting Entity or Business Entity Principle capital is a liability
for the business. This principle requires that for accounting purpose, a distinction
should be made between business affairs and personal affairs and in the accounting
books of the business only business transactions be recorded. The amount invested
by the owner is recorded in his Capital Account and the amount withdrawn by the
owner from the business for his personal use is recorded in Drawings Account. The
amount in the credit of the Capital Account is a liability of the business towards
the owner.

2
Q. 16. ‘Closing Stock is valued at lower of cost or market price.’ Which concept of Accounting
is applied here? (Delhi)
Ans. Prudence Concept.
Q. 17. A company lost vital machinery in an accident on 2nd March, 2024 which will have
adverse impact on its production capacity. As a result, it is likely to loose business to its
competitors. The company has not disclosed this fact in its annual report for the year ended
31st March, 2024. Do you think it is complying with the Convention of Full Disclosure?
Ans. No, the company is not complying with the Convention of Full Disclosure as loss of
vital machinery has adverse impact on the business and thus, on its profitability.
It being material information should have been disclosed.
Q. 18. Under which principle, resignation by a Marketing Manager is not recorded in the
books of account? (MSE Chandigarh)
Ans. Money Measurement Principle.
Q. 19. An investment company has been valuing its inventory of land at lower of market
price or cost. It now wants to value its inventory at the current market price which
is higher than the cost. Which accounting concept will be violated?
Ans. Prudence Concept.
Q. 20. An investment company has securities as current assets having market value
substantially lower than the cost price. The company continues to show them at
cost. Do you think the Concept of Prudence is being followed?
Ans. No, the company is not following the Concept of Prudence. It should bring down the
value of current assets to its market value because the financial statements will
otherwise show a better picture than what it actually is.

Very Short Answer Type Questions

Q. 1. What do you understand by Accounting Concepts?
Ans. Accounting concepts are the basic assumptions or fundamental propositions within
which accounting function is carried out.
Q. 2. Explain Dual Aspect Concept. (Delhi, MSE Chandigarh, KVS)
Ans. Every transaction has two aspects a debit and a credit of equal amount. It means for every
debit there is a credit of equal amount in one or more accounts and vice versa. According
to Dual Aspect Concept, both the aspects are recorded in the books of account.
Q. 3. Explain Business Entity Concept.
Ans. According to the Business Entity Concept, proprietor of the business is a separate and
distinct entity from business. The transactions are recorded in the books of account
from the point of view of business, not from the point of view of the proprietor.
Q. 4. Explain Going Concern Concept. (KVS, Delhi)
Ans. According to the Going Concern Concept, it is assumed that the business will continue
for a foreseeable future and there is no intention to close or scale down the operations
significantly.

3
 Q. 5. Explain Revenue Recognition Concept. (Delhi)
Ans. According to the Revenue Recognition Concept, revenue is considered to have been
realised when a transaction has been entered into and the obligation to receive
the amount has been established.
Q. 6. Explain Verifiable Objective Concept.
Ans. According to the Verifiable Objective Concept, accounting should be free from personal
bias. Measurements that are based on verifiable evidences are regarded as objective.
Q. 7. Explain Historical Cost Concept. (Delhi)
Ans. According to the Historical Cost Concept assets are recorded in the books of account
at the prices paid to acquire them and it is the basis for all subsequent accounting of
the assets.
Q. 8. Explain Accounting Period Concept. (Delhi, MSE Chandigarh)
Ans. According to the Accounting Period Concept, life of the business is broken into smaller
periods (one year) so that its performance is measured at regular intervals.
Q. 9. Explain Consistency Convention. (Delhi, KVS)
Ans. According to the Consistency Convention, accounting practices once selected and
adopted should be applied consistently year after year.
Q. 10. Explain Money Measurement Concept. (Delhi, KVS)
Ans. According to the Money Measurement Concept, transactions and events that can be
measured in terms of money are recorded in the books of account.
Q. 11. Explain Accrual Concept. (Delhi, KVS)
Ans. According to the Accrual Concept, a transaction is recorded in the books of account
at the time when it is entered into and not when the settlement takes place. For
example, sales made on credit will be recorded in the books of account on the date
of sales, not when the amount is received.
Q. 12. Explain Principle of Matching Revenue with Cost. (Delhi)
Ans. According to the Matching Concept, cost incurred to earn revenue should be recognised
as expense in the period when revenue is recognised as earned.
Q. 13. Why is it necessary for accountants to assume that a business entity will remain a
going concern?
Ans. Going Concern Concept is a fundamental accounting concept. It is because of this
concept, distinction is made between capital and revenue expenditures and thus
assets and liabilities are recognised.
Q. 14. How does the Matching Principle apply to depreciation? (MSE Chandigarh)
Ans. According to the Matching Principle, the expenses for an accounting period are
matched against related revenues for the determination of profit. On account of this
principle, the purchase price of the fixed asset is not taken but only depreciation
on fixed asset related to the accounting period is taken.

4
Q. 15. Why should a business follow the Consistency Principle? (MSE Chandigarh)

Ans. Comparability is a qualitative characteristic of a financial statement, i.e., the financial

performance of a year may be compared with that of another year. It is possible
only when accounting practices are consistently followed.

Q. 16. Explain any three of the following accounting conventions:

(i) Full Disclosure, (MSE Chandigarh)

(ii) Consistency, (KVS)

(iii) Materiality, and

(iv) Conservatism. (Delhi, KVS)

Ans. (i) According to the Convention of Full Disclosure, all significant information relating to
the economic affairs of the entity should be reported in the financial statements
in an understandable manner.
(ii) According to the Convention of Consistency, accounting practices once selected
and adopted should be consistently applied year after year.
(iii) According to the Convention of Materiality, a transaction should be reported in
the financial statements on the basis of its materiality. An item is material
if it can influence the decision of the user.
(iv) According to the Convention of Conservatism, anticipated losses should be accounted
while anticipated incomes should not be accounted.

Q. 17. Give the meaning of ‘Full Disclosure Principle’ of Accounting. (Delhi)

Ans. According to the Convention of Full Disclosure, all significant information relating
to the economic affairs of the entity should be reported in the financial statements
in an understandable manner.

Q. 18. Explain Accounting Standards briefly. (Delhi)

Ans. Accounting Standards are a set of guidelines, i.e., Generally Accepted Accounting
Principles, issued by the accounting body of the country, i.e., The Institute of
Chartered Accountants of India, that are followed for preparation and presentation
of financial statements. The objective of setting Accounting Standards is to bring
uniformity in accounting practices and to ensure transparency, consistency and
comparability.

Q. 19. What is the main objective of setting accounting standards? (Delhi)

Or
What is meant by Accounting Standards? Explain one objective of Accounting
Standards. (KVS)

Ans. Accounting Standards are the guidelines for the preparation and presentation of
Financial Statements. The objective of setting Accounting Standards is to bring
uniformity in accounting practices and to ensure transparency, consistency and
comparability.

5
Q. 20. Briefly explain your understanding of Ind-AS.
Ans. Ind-AS are the accounting standards issued by the Ministry of Corporate Affairs,
Government of India, and notified under the Companies Act, 2013 prescribed to be
used by the enterprises to prepare financial statements. They are principle based
accounting standards in comparison to rule based Accounting Standards. Ind-AS
also incorporate the concept of fair valuation.

Q. 21. Which financial statements are prepared under Ind-AS?

Ans. Financial Statements prepared under Ind-AS include:
(i) Statement of Financial Position;
(ii) Statement of Comprehensive Income;
(iii) Statement of Changes in Equity;
(iv) Statement of Cash Flow; and
(v) Notes and Significant Accounting Policies.

Q. 22. Briefly explain the elements of Statement of Comprehensive Income.

Ans. A Statement of Comprehensive Income comprises of two statements, i.e., Income
Statement and a Statement of Comprehensive Income are prepared. The Statement
of Comprehensive Income reconciles the income or loss as per Income Statement
with total comprehensive income. The elements or contents of the statement are:
(i) Revenue: It increases the economic benefit during the accounting period because
of business operations and/or increase in the value of assets or decrease in
liabilities. As a result of it, value of shareholders’ equity increases.
(ii) Expense: It is a decrease in economic benefits in the form of outflows during
the accounting period because of business operations and/or decrease in the
value of assets or increase in liabilities. As a result of it, value of shareholders’
equity decreases.

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 Higher Order Thinking Skills (HOTS) Questions
Q. 1. Dr. Arvind Kishore, a homeopath doctor in practice has been advised by his Accountant
to maintain his accounts on Accrual Basis instead of the presently followed Cash
Basis of Accounting. Do you agree with the advice of the Accountant? Give reasons.
Ans. No, I do not agree. Cash Basis of Accounting is more appropriate for Dr. Arvind
Kishore because a medical practitioner receives his fee immediately after giving
consultancy.
Q. 2. M/s Kalra Bros., a dealer in computer hardware, has received an order for 10 computers
along with an advance of ` 50,000. The firm maintains its accounts on Accrual
Basis of Accounting. Should the amount received, i.e., ` 50,000 be credited to the
Sales Account or to the Advance Received Account? Give reasons for your answer.
Ans. It should be credited to the Advance Received Account and later transferred to the
account of purchaser on affecting sale.

Very Short Answer Type Questions

Q. 1. What are the two bases of accounting? (KVS)
Ans. There are two bases of accounting:
(i) Cash Basis, and (ii) Accrual Basis.
Q. 2. What do you understand by Cash Basis of Accounting?
Ans. Cash Basis of Accounting means that the entry is recorded on receipt or payment of
cash. The system does not distinguish between capital and revenue items. It also
does not recognise prepaid expenses and outstanding expenses.
Q. 3. What do you understand by Accrual Basis of Accounting? (Delhi)
Ans. Accrual Basis of Accounting means the transaction is recorded at the time when it
is entered into and not when the settlement takes place. In other words, under
Accrual Basis of Accounting, accounting entries are recorded when incomes are
earned and expenses are incurred irrespective of cash received or paid.
Q. 4. Distinguish between Cash Basis and Accrual Basis of Accounting. (Two Points)
Ans. (i) Both cash and credit transactions are recorded under the Accrual System of Accounting.
Under the Cash System of Accounting only cash transactions are recorded.
(ii) Capital and revenue items are distinguished under the Accrual System of Accounting.
Under the Cash System of Accounting no such distinction is made.
Q. 5. What are the advantages of Cash Basis of Accounting? (Two Points)
Ans. Advantages of Cash Basis of Accounting are:
(i) It is a simple system as adjustments are not required.
(ii) It is more objective as very few estimates and judgments are made.
Q. 6. What are the disadvantages of Cash Basis of Accounting? (Two Points)
Ans. Disadvantages of Cash Basis of Accounting are:
(i) It does not give a true and fair view of profit or loss and the financial position.
(ii) It does not follow the Matching Principle.

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Q. 7. Does cash basis of accounting violates GAAP? If Yes, how?
Ans. Yes, cash basis of accounting violates GAAP as it does not follow matching principle
and accrual concept.
Q. 8. What are the advantages of Accrual Basis of Accounting? (Two Points)
Ans. Advantages of Accrual Basis of Accounting are:
(i) It gives a true and fair view of profit or loss and the financial position.
(ii) It shows complete picture of financial transactions as it accounts prepaid and
outstanding expenses, earned and unearned incomes, assets and liabilities.
Q. 9. What are the disadvantages of Accrual Basis of Accounting? (Two Points)
Ans. Disadvantages of Accrual Basis of Accounting are:
(i) The accounting process is more elaborate.
(ii) It is more complicated than Cash Basis of Accounting and requires adequate
skills.
Q. 10. Differentiate between Cash Basis of Accounting and Accrual Basis of Accounting
on the basis of recording an income. (KVS)

Ans. Under Cash Basis of Accounting only those incomes are recorded which are received
in cash. However, under Accrual Basis of Accounting, all incomes which relate to the
accounting period are recorded irrespective of the fact whether cash is received or not.

2
 Higher Order Thinking Skills (HOTS) Questions
Q. 1. Do you think that a transaction can break the Accounting Equation?
Ans. No, a transaction can only change the Accounting Equation but cannot break it.

Q. 2. Goods costing ` 10,000 have been sold for cash at 25% profit. How will the transaction
be shown in the Accounting Equation?
Ans. Increase cash by ` 12,500; Decrease stock by ` 10,000; and Increase capital by
` 2,500.

Q. 3. The capital of a business is ` 2,00,000 and outside liabilities are ` 1,50,000. Calculate
the total assets of the business.
Ans. ` 3,50,000 (Capital + Outside Liabilities = Assets).
Q. 4. If total assets of a business are ` 1,30,000 and capital is ` 80,000, calculate the
outside liabilities.
Ans. ` 50,000 (Outside Liabilities = Total Assets – Capital).

Q. 5. If total assets of the business are ` 4,50,000 and outside liabilities are ` 2,00,000,
calculate owner’s equity. (MSE Chandigarh)

Ans. Assets = Owner’s Equity + Liabilities

` 4,50,000 = Owner’s Equity + ` 2,00,000
Owner’s Equity= ` 2,50,000.

Q. 6. Jaspal has purchased a car for ` 5,00,000 which he got financed from a Bank to the
extent of ` 4,00,000. How will it be shown in the accounting equation?
Ans. ` 1,00,000 will be deducted from Asset (Cash/Bank); Asset (Car) will be shown at
` 5,00,000 and Bank Loan (on the Liabilities side) will be shown at ` 4,00,000.

Q. 7. Amit has incurred an expense of ` 5,000 towards repairs. However, the amount is
yet to be paid. How will it be shown in the accounting equation?
Ans. It is an outstanding expense. It will be shown in the accounting equation as deduction
from capital and as an Outstanding Expense on the Liabilities side.

Q. 8. Show the accounting equation if there are no liabilities.

Ans. Assets = Capital.

Very Short Answer Type Questions

Q. 1. Briefly explain the Accounting Equation.
Ans. The accounting equation is a mathematical equation which shows that the assets
and liabilities of a firm are equal, i.e., Assets = Liabilities + Capital. It is based on
Dual Aspect Concept of Accounting.

Q. 2. What is meant by owner’s capital?

Ans. Owner’s capital means balance standing to the credit of Capital Account of the
proprietor.

1
Q. 3. Give an example of decrease in an asset and decrease in a liability.
Ans. Cash paid to a creditor.

Q. 4. Give an example of a transaction where an asset will increase and also the liability.
Ans. Goods purchased on credit.

Q. 5. Give an example of a transaction where an asset and owner’s capital will increase.
Ans. Capital introduced by the proprietor.
Q. 6. Give an example of a transaction due to which owner’s capital and an asset will
decrease.
Ans. Goods taken by the proprietor for personal use.

Q. 7. Which transaction decreases one asset and increases another asset?

Ans. Amount received from a debtor.

Q. 8. Give an example of a transaction which has effect on two items on the assets side.
Ans. Sales of goods on credit.

Q. 9. Indicate how Accounting Equation is affected if machinery is purchased for cash?

Ans. It will result in cash being reduced and Machinery Account being increased.

Q. 10. Indicate how Accounting Equation is affected if cash is received against services
rendered?
Ans. Cash increases and so does the capital.

Q. 11. Indicate how Accounting Equation is affected if payment is made to a creditor?

Ans. Cash decreases and so does the liability (creditor).

2
 Higher Order Thinking Skills (HOTS) Questions
Q. 1. To record a purchase of an asset, why Asset Account is debited?
Ans. Purchase of an asset means increase in asset and an increase in asset is debited.
Q. 2. To record an increase in a Liability Account, it must be credited. Why?
Ans. Increase in liability means the firm has received the benefit for which payment is
yet to be made, thus, liability is credited.
Q. 3. When an asset is purchased in cash or an expense is incurred in cash, cash is credited.
Why?
Ans. Cash is an asset. On purchase of an asset against payment in cash, cash has gone
out, i.e., cash has decreased. Thus, Cash Account is credited.
Q. 4. A liability is met by issuing a cheque. Which account will you credit and why?
Ans. Bank Account will be credited because payment has been made by issue of cheque.
As a result, balance in bank is reduced. Bank Account being an asset is credited.
Q. 5. Ajay, a dealer in furniture, received advance against sales of tables and chairs. In
your opinion how should this advance be treated and why?
Ans. The advance received should be treated as a liability because Ajay has not yet made the
sales.
Q. 6. Profit earned by the business means an increase in the proprietor’s capital. Is it
correct?
Ans. Yes, it is correct because the net profit earned by the proprietor’s business is added
to the capital.
Q. 7. A credit balance always signifies a balance in the Liabilities Account. Is it correct?
Ans. No, it is not correct. A credit balance may signify a balance in Liabilities Account or an
income.
Q. 8. Name the side on which increase in Capital Account is recorded. (MSE Chandigarh)
Ans. Credit side.
Q. 9. Why are the rules of debit and credit same for liability and capital? (Delhi)
Ans. Rules of debit and credit for liability and capital are same because of Business Entity
Concept. According to the concept, business is a separate and distinct entity from
its owner.

Very Short Answer Type Questions

Q. 1. What is an Account?
Ans. An account is a summarised record of transactions at one place relating to a particular
head.
Q. 2. What are the two sides of an Account called?
Ans. The two sides of an account are Debit and Credit.
Q. 3. When is Capital Account debited?
Ans. Capital Account is debited when the proprietor makes a drawings or with the amount
of loss.
Q. 4. When is Capital Account credited?
Ans. Capital Account is credited when the proprietor introduces further capital or with
the amount of profit.

1
 Q. 5. What is an Asset Account?
Ans. Asset Account is the account which relates to tangible or intangible asset.
Q. 6. What is the rule for an Asset Account?
Ans. Rule for an Asset Account is ‘Increases in assets are debits and decreases credit’.
Q. 7. What is Liability Account?
Ans. Liability Account is an account which shows the amounts payable by the enterprise.
Q. 8. What is the rule for Liability Account?
Ans. Rule for Liability Account is ‘Increases are credits and decreases are debits’.
Q. 9. What is the objective of preparing an Account?
Ans. The objective of preparing an account is to summarise all transactions relating to a
particular head in one account. Balance of all the accounts leads to preparation of
Trial Balance.
Q. 10. What is the rule for Expenses Account?
Ans. The rule for Expenses Account is ‘Increases in expenses are debited and decreases are
credited’.
Q. 11. What is the rule for Revenue or Income Account?
Ans. The rule for Revenue or Income Account is ‘Increases in revenue or income is credited
and decreases are debited’.
Q. 12. What does debit in an Asset Account signify?
Ans. A debit in an Asset Account means further assets purchased by the firm.
Q. 13. What does credit in an Asset Account signify?
Ans. A credit in an Asset Account means the assets sold or discarded by the firm.
Q. 14. What does debit in an Expense Account signify?
Ans. A debit in an Expense Account means the amount of expense incurred by the firm
under that head of account.
Q. 15. What does credit balance in a Capital Account signify?
Ans. A credit balance in a Capital Account signifies the amount invested by the proprietor
as on date.
Q. 16. What is signified by a debit cash balance?
Ans. A debit cash balance signifies Cash in Hand.
Q. 17. What is signified by a debit bank balance?
Ans. A debit bank balance signifies balance lying deposited in the bank.
Q. 18. What is signified by a credit bank balance?
Ans. A credit bank balance signifies amount payable to the bank by the firm.
Q. 19. Is Capital Account a Personal Account or a Real Account? (MSE Chandigarh)
Ans. Capital Account is a Personal Account because it represents owner of the business.
Q. 20. Mohan treated ‘Accrued Commission’ as a Revenue Account. Is he correct?
Ans. No, Mohan is not correct. Accrued Commission is an Asset Account and not a
Revenue Account. It is so because accrued commission is commission earned but
not received.

2
 Higher Order Thinking Skills (HOTS) Questions
Q. 1. An account is not opened in the name of the proprietor in the books of firm. Why?
Ans. An account is not opened in the name of the proprietor, he is represented by
Capital Account.
Q. 2. Why transactions are first recorded in a Journal?
Ans. Transactions are first recorded in a Journal, it being a Book of Original Entry wherein
both the aspects of the transactions are recorded at one place in a chronological
order.
Q. 3. Debt written off as bad debt, if recovered subsequently, is credited to the Debtors’
Account. Is it correct? Give reasons.
Ans. No. Debt written off as bad debt, if recovered subsequently, is accounted as a gain.
It is credited to the Bad Debts Recovered Account because the due amount was
earlier written off as not recoverable, i.e., was debited as loss.
Q. 4. Exe Co. has purchased 50 computers from HCL and is allowed discount of ` 10,000
for purchase thereof. Is the discount allowed Trade Discount or a Cash Discount?
How will it be recorded in the books of account?
Ans. Discount allowed by HCL is a Trade Discount. It is not recorded separately in the
books of account. Instead purchase is recorded at net value, i.e., Purchase Price
less Trade Discount.
Q. 5. Exe Co. which purchased 50 computers from HCL made payment immediately. As a
result, HCL gave it a discount of ` 10,000. Is the discount received Trade Discount
or Cash Discount? How will it be recorded in the books of account?
Ans. Discount allowed by HCL is a Cash Discount because it is received due to timely
payment. It is recorded in the books of account by crediting it to ‘Discount Received
Account’.
Q. 6. GSC Co. purchased goods from Mohan & Co. for ` 50,000. As per the terms, if GSC Co.
makes full payment to Mohan & Co. within 15 days it will get Cash Discount of 2%.
GSC Co. paid ` 28,000 within the stipulated time. Determine the amount of Cash
Discount that GSC Co. will get.
Ans. GSC Co. will not get Cash Discount because it has not made full payment to Mohan
& Co. within 15 days. Thus, it is not entitled to 2% Cash Discount.
Q. 7. Rahul sold 100 Cricket Bats to V. Sports @ ` 5,000 each less 25% Trade Discount
and 2% Cash Discount if V. Sports pays the amount within 14 days of sale. V. Sports
paid the amount within 14 days. What will be the amount that Rahul will credit
to Sales Account?
Ans. Rahul will credit ` 3,75,000 to Sales Account, i.e., the amount of Gross Sales less
Trade Discount. Cash Discount allowed is an expense, it being allowed for timely
payment and thus, will be debited to Discount Allowed Account.

1
Q. 8. If a partner takes goods for personal use which accounts are debited and credited?
Why?
Ans. Drawings Account is debited because it is not a sale of goods but goods are taken
by the proprietor for personal use.
Purchases Account is credited, it not being a sale. As a result, amount of purchases
is reduced.
Q. 9. If goods are given as charity, which accounts are debited and credited? Why?
Ans. Charity or Donation Account is debited because it is not a sale of goods but given
as charity. Purchases Account is credited, it not being a sale. As a result, amount
of purchases is reduced.
Q. 10. Rajan who trades in electronic goods, gifted a television to his daughter. Will it
be recorded in the books of account? What will be the Journal entry?
Ans. Yes, it will be recorded in the books of account, as drawings by Rajan.
Drawings A/c ...Dr.
To Purchases A/c
(Goods taken by the proprietor for personal use)

Very Short Answer Type Questions

Q. 1. What is a Journal?
Ans. Journal is a primary book of account in which transactions are first recorded in a
chronological order.
Q. 2. What is Journalising?
Ans. Journalising is a process of recording a transaction in a Journal.
Q. 3. What is a Simple Journal Entry?
Ans. Simple Journal Entry means a Journal entry in which only two accounts are affected,
i.e., one account is debited and another account is credited.
Q. 4. What is Compound Journal Entry? Give an example. (Delhi)

Ans. Compound Journal Entry is the entry in which more than one account is debited
or credited. For example, following is a compound entry:
` `
Stationery A/c ...Dr. 2,500
Rent A/c ...Dr. 5,000
Salary A/c ...Dr. 10,000
To Cash A/c 17,500
(Purchase of stationery and payment of rent and salary)
Q. 5. Why is the Journal called a book of original entry?
Ans. Journal is called a book of original entry because all business transactions are
recorded first in this book.

2
 Q. 6. What is meant by Posting?
Ans. Posting means transferring the entries from the Journal to the Ledger Accounts.
Q. 7. What is Trade Discount?
Ans. Trade Discount is the discount allowed when the goods are sold to the purchaser
for resale to the ultimate consumer or when the goods are purchased in large
quantity.
Q. 8. What is Cash Discount?
Ans. Cash Discount is the discount allowed to the debtor for making prompt payment or
for making payment before the due date.
Q. 9. What are the advantages of allowing Trade Discount? (Two points)
Ans. Advantages of Trade Discount are:
(i) It improves sales as purchaser is encouraged to buy large quantity.
(ii) It reduces purchase cost for purchaser and thus, improves profit margin.
Q. 10. What are the advantages of allowing Cash Discount? (Two points)
Ans. Two advantages of Cash Discount are:
(i) Seller gets the due amount within the due date. Thus, his liquidity remains good.
(ii) Purchaser gets Cash Discount thus, it increases the profits.
Q. 11. Distinguish Trade Discount from Cash Discount. (Two points).
Ans. Two points of difference between Trade Discount and Cash Discount are:
(i) Trade Discount is allowed to encourage large purchases whereas Cash Discount is
allowed to encourage prompt payment.
(ii) Trade Discount enables the retailer to sell goods at list price and earn better profit.
Cash Discount will improve the cash flow.
Q. 12. How is Trade Discount recorded in the books of account?
Ans. Trade Discount is recorded in the Purchases Book and Sales Book but is not recorded
in the Ledger Accounts. In the Ledger, only net amount of purchases and sales
are entered.
Q. 13. What is meant by ‘Rebate’?
Ans. Rebate is the discount allowed for reasons other than those for which Trade Discount
and Cash Discount are allowed. Say for poor quality of goods.
Q. 14. What is an Opening Entry?
Ans. Opening Entry is the Journal entry through which the closing balances of the
previous year are brought forward in the current year’s books of account.
Q. 15. Give two advantages of a Journal.
Ans. Two advantages of a Journal are:
(i) It reduces the possibility of error.
(ii) It provides an explanation of the transactions.
Q. 16. Which column in a Journal is not filled at the time of Journalising?
Ans. The column ‘Ledger Folio’ is filled at the time of posting into the ledger and not at
the time of Journalising.