TUTOR MARKED ASSIGNMENT

ASSIGNMENT CODE BCOC-131/TMA/2024-25

Section-A
1. Explain the objectives of Accounting and briefly describe the qualitative
characteristics of accounting information.

Accounting is a process of identifying the events of financial nature, recording

them in the journal, classifying in their respective accounts and summarising them in
profit and loss account and balance sheet and communicating results to users of such
information, viz. owner, government, creditor, investors, etc.

According to American Institute of Certified Accountants, 1941, “Accounting

is the art of recording, classifying and summarising in a significant manner and in
terms of money, transactions and events that are, in part at least, of financial character
and interpreting the results thereof.”

Objectives of Accounting:

 Recording business transactions systematically

It is necessary to maintain systematic records of every business transaction, as it is
beyond human capacities to remember such large number of transactions. Skipping
the record of any one of the transactions may lead to erroneous and faulty results.

 Determining profit earned or loss incurred

In order to determine the net result at the end of an accounting period, we need to
calculate profit or loss. For this purpose trading and profit and loss account are
prepared. It gives information regarding how much of goods have been purchased and
sold, expenses incurred and amount earned during a year.

 Ascertaining financial position of the firm

Ascertaining profit earned or loss incurred is not enough; proprietor also interested in
knowing the financial position of his/her firm, i.e. the value of the assets, amount of
liabilities owed, net increase or decrease in his/her capital. This purpose is served by
preparing the balance sheet that facilitates in ascertaining the true financial position of
the business.

Accounting Information is essential to understand the financial position of any

business. It must possess specific characteristics so that the management of a firm can
use this information to make critical strategic decisions and formulate plans for the
future. Companies must aim to imbibe these qualitative characteristics of accounting
information while presenting the financial reports to the stakeholders of an
organisation. These characteristics help the stakeholders to get a better understanding
of the company’s financial position and make informed decisions about their activities
related to the business.
Qualitative Characteristics of Accounting Information
Accounting information should possess certain qualitative characteristics to be useful
and reliable for decision-making. These characteristics are as follows:
Relevance: Accounting information should be relevant to the needs of users and have
the ability to influence their decisions. It should be timely, capable of making a
difference in decision-making, and have predictive or confirmatory value.
Reliability: Accounting information should be reliable, meaning it should be free from
bias and faithfully represent the economic events it purports to represent. It should be
verifiable, meaning that different knowledgeable individuals would reach a consensus
on its accuracy.
Comparability: Accounting information should be comparable over time and across
different entities. This allows users to identify similarities and differences between
different periods or companies, aiding in decision-making and trend analysis.
Consistency: Accounting information should be presented consistently over time.
Consistency ensures that users can compare financial statements from different
periods without confusion or distortion.
Understandability: Accounting information should be presented in a clear and concise
manner, making it easily understandable to users who have a reasonable knowledge of
business and economic activities.
Materiality: Accounting information should be material, meaning it is significant
enough to influence the decisions of users. Materiality is determined by the nature and
amount of the item or event.
These qualitative characteristics help ensure that accounting information is
relevant, reliable, comparable, consistent, understandable, and material. By possessing
these characteristics, accounting information becomes more useful for decision-
making purposes.

2. What do you mean by principle of double entry? Give the rules of debit and
credit with suitable examples.

Double entry is a bookkeeping and accounting method, which states that every
financial transaction has equal and opposite effects in at least two different accounts.
It is used to satisfy the accounting equation:

Assets=Liabilities+EquityAssets=Liabilities+Equity

Debit and Credit in Accounting

Debit and Credit are the two accounting tools. Business transactions are to be
recorded and hence, two accounts, which are debit and credit, get facilitated.
The business transaction is separated into accounts while doing the bookkeeping. The
commonly affected accounts are-
 Assets  Liabilities
 Expenses  Equity
 Revenue
Different Effects of Debit and Credit are as Follows

Types of Accounts Debit Credit

Assets Increase Decrease
Liabilities and Capital Decrease Increase
Revenues Decrease Increase
Expenses Increase Decrease

3. What is meant by convergence to IFRS? Explain and distinguish between Indian

AS and International AS.

International Financial Reporting Standards (IFRS) are a set of accounting standards

developed by the International Accounting Standards Board (IASB) to provide a
globally uniform framework for financial reporting. The concept of convergence to
IFRS refers to the process by which countries and organizations align their local
accounting standards with IFRS to promote consistency, comparability, and
transparency in financial reporting across the world. Convergence helps facilitate
cross-border investments and ensures that financial statements prepared by companies
from different countries are understandable and comparable globally.

In many countries, including India, convergence has been a significant step toward
modernizing their accounting frameworks to match global standards. While
convergence aims to align local standards with IFRS, it may also allow some country-
specific modifications to address local economic conditions and regulatory
requirements.

Understanding IFRS and its Importance

IFRS provides a comprehensive framework for companies to prepare financial

statements that reflect their economic reality. It encompasses various standards,
including how to recognize revenue, account for assets and liabilities, disclose
financial risks, and report on business performance. The core aim of IFRS is to
standardize accounting practices globally so that investors, regulators, and
stakeholders can compare financial information across different companies and
countries with ease.

The importance of IFRS lies in its ability to bring consistency, transparency, and
reliability to financial reporting. It helps multinational corporations by reducing the
complexities that arise from having to comply with multiple local accounting
standards. Additionally, it supports better decision-making by investors who are
looking to assess investment opportunities across different markets.

Convergence to IFRS

Convergence to IFRS refers to the alignment of a country’s local accounting standards

with IFRS. Instead of fully adopting IFRS in their original form, some countries
choose to converge their local standards with IFRS while retaining certain unique
requirements to accommodate local laws, taxation systems, or economic conditions.
The main objective of convergence is to harmonize the local accounting framework
with the global standards, making financial statements more comparable and
understandable to users worldwide.

In practical terms, convergence does not mean a complete replacement of local

standards with IFRS. Instead, it implies significant alignment with IFRS principles
while allowing for some deviations or additional disclosures specific to a country.
This approach allows companies to gradually transition to a more global reporting
framework while addressing local business and regulatory needs.

Importance of Convergence to IFRS

Convergence to IFRS is crucial for multiple reasons, including improving

transparency, ensuring consistency, and attracting global investment. Some of the key
benefits of convergence include:

 Global Comparability:
One of the primary reasons for convergence is to enhance the comparability of
financial statements across different countries. Investors, analysts, and other
stakeholders can assess the financial performance of companies on a common
basis, regardless of their geographic location. This promotes greater confidence in
financial reports and supports cross-border investment decisions.

 Reduced Complexity for Multinational Companies:

Multinational companies operating in different countries often face the challenge
of complying with multiple accounting standards. Convergence with IFRS
simplifies this process, reducing the complexity of preparing financial statements
in various jurisdictions. It also reduces the cost of financial reporting and
compliance.

 Enhanced Credibility and Transparency:

IFRS is recognized as a high-quality and transparent accounting framework.
Converging local standards with IFRS improves the credibility and reliability of
financial reports. This, in turn, helps attract foreign investments, as global
investors prefer financial statements prepared under recognized international
standards.

 Facilitation of Economic Growth:

By promoting global comparability and transparency in financial reporting, IFRS
convergence can stimulate foreign direct investment (FDI) and economic growth.
It opens up more opportunities for businesses to access capital in global markets
and expands their investor base.

Indian Accounting Standards (Indian AS)

In India, the process of convergence with IFRS led to the development of Indian
Accounting Standards (Indian AS or Ind AS). Indian AS is largely based on IFRS but
incorporates certain modifications to address local legal, regulatory, and economic
conditions. The convergence process in India began in the mid-2000s and was aimed
at bringing the Indian financial reporting framework in line with global standards
while considering the specific needs of the Indian business environment.
Indian AS applies to large companies, listed entities, and certain financial institutions
in India. The standards help ensure that financial reports prepared by Indian
companies are comparable with those prepared by companies in other IFRS-compliant
jurisdictions.

Key Features of Indian AS

Indian AS shares many similarities with IFRS, but it also includes several key features
that are specific to the Indian regulatory environment. Some of these features are:

 Alignment with IFRS:

Indian AS is largely aligned with IFRS in terms of recognition, measurement, and
disclosure of financial items. For instance, both Indian AS and IFRS require
companies to prepare financial statements based on the accrual principle and to
apply fair value accounting where applicable.

 Regulatory Modifications:
Certain modifications have been made in Indian AS to comply with Indian laws,
taxation policies, and business practices. For example, Indian AS includes
specific provisions for accounting for government grants, employee benefits, and
legal obligations, which are customized to the Indian regulatory landscape.

 Separate Requirements for Small and Medium-Sized Enterprises (SMEs):

While large companies and listed entities in India are required to comply with
Indian AS, SMEs are allowed to follow simplified accounting standards known as
the Accounting Standards (AS), which are less stringent than Indian AS. This
ensures that smaller businesses are not overburdened by complex financial
reporting requirements.

 Use of Functional Currency:

Indian AS allows for the use of the functional currency (the primary currency in
which a company operates) in preparing financial statements, aligning with IFRS
requirements. This ensures that companies with global operations can report
financial results that reflect their economic reality.

International Accounting Standards (IFRS)

IFRS is used by more than 140 countries globally, including major economies such as
the European Union, Australia, and Canada. The IASB develops and maintains IFRS
with the aim of creating a common financial language that enhances transparency and
consistency in financial reporting. Some of the key principles of IFRS include:

 Fair Value Measurement:

IFRS places significant emphasis on fair value measurement, particularly for
financial instruments, assets, and liabilities. This approach ensures that financial
statements reflect the current market value of items rather than historical costs.

 Principle-Based Approach:
Unlike some local accounting standards that rely on strict rules, IFRS adopts a
principle-based approach. This allows companies more flexibility in applying
accounting standards, as long as they adhere to the overarching principles of
transparency, relevance, and faithful representation.
 Comprehensive Disclosure Requirements:
IFRS emphasizes the need for comprehensive and detailed disclosures in
financial statements. This ensures that users of the financial statements have
access to all relevant information to make informed decisions about the
company’s financial health and performance.

 Global Recognition:
IFRS is recognized and accepted in the global marketplace, making it the
preferred standard for multinational corporations. By adopting IFRS, companies
can access global capital markets, enhance their credibility with international
investors, and increase the comparability of their financial statements.

Differences Between Indian AS and IFRS

Although Indian AS and IFRS are largely aligned, there are several important
differences between the two standards. These differences arise due to India’s unique
regulatory, legal, and business environment, as well as the need to accommodate local
laws and practices. Some key distinctions include:

 Legal and Regulatory Adjustments:

Indian AS incorporates several modifications to comply with local laws and
regulations, particularly in areas such as employee benefits, taxes, and
government grants. For example, Indian AS provides specific guidance on
accounting for gratuity and provident funds, which are unique to the Indian labor
system.

 Carve-Outs in Indian AS:

Indian AS includes carve-outs (deviations) from certain IFRS standards to suit
local requirements. One notable example is the treatment of financial instruments
under Indian AS 109, which differs slightly from IFRS 9 due to the inclusion of
additional transitional provisions for Indian companies.

 Presentation of Financial Statements:

While IFRS provides broad guidelines for the presentation of financial statements,
Indian AS includes more prescriptive requirements. For example, Indian AS
mandates specific formats for balance sheets and profit and loss statements,
which align with Indian legal requirements.

 Consolidation of Financial Statements:

Under Indian AS, the criteria for determining whether an entity is required to
consolidate its financial statements may differ slightly from IFRS. Indian AS
allows for exemptions in certain situations, such as government-owned entities,
that are not present in IFRS.

 Currency Translation:
While both Indian AS and IFRS allow for financial statements to be presented in
the functional currency, Indian AS includes specific guidelines for translating
foreign currency transactions that reflect the Indian market’s unique
characteristics.
4. What is a trial Balance? Explain the causes for disagreement of a Trial Balance?

Trial Balance
A trial balance is a list of all the general ledger accounts contained in the accounting
records of a business, along with their respective debit or credit balances. It is used to
ensure that the total debits equal the total credits, which is a fundamental principle of
double-entry bookkeeping.
Causes for Disagreement of a Trial Balance
Errors of Omission: When a transaction is completely omitted from the accounting
records, it can cause a disagreement in the trial balance.
Errors of Commission: Mistakes made when recording transactions, such as entering
an incorrect amount or posting to the wrong account, can lead to a trial balance
discrepancy.
Errors of Principle: These occur when a transaction is recorded using an incorrect
accounting principle, such as capitalizing an expense instead of expensing it.
Reversal of Entries: Accidentally reversing the debit and credit entries for a
transaction can cause the trial balance to disagree.
Compensating Errors: If two or more errors cancel each other out, the trial balance
may still balance even though there are mistakes in the accounts.
Duplicate Entries: Recording the same transaction twice can lead to an imbalance in
the trial balance.
Incorrect Balances: If the ending balances of individual accounts are incorrect, it can
cause the trial balance to disagree.
Fraudulent Activities: Deliberate manipulation of accounts or transactions can also
lead to discrepancies in the trial balance.

5. Describe the methods of recording depreciation in the books of account. How is

the balance of the provisions for depreciation account shown in the Balance
Sheet?

Depreciation is a key concept in accounting that refers to the systematic allocation of

the cost of a tangible fixed asset over its useful life. It represents the wear and tear,
obsolescence, or decline in the value of an asset due to usage and time. Depreciation
helps businesses account for the gradual loss in value of assets such as machinery,
buildings, and equipment, ensuring that the asset’s cost is allocated fairly across the
periods that benefit from its use. The objective is to match the cost of the asset with
the revenue it generates over time, ensuring accurate profit calculation.

Depreciation is recorded as an expense in the income statement and affects both the
balance sheet and the company’s financial performance. Various methods of
depreciation exist, each suitable for different types of assets and business needs.

Importance of Depreciation in Accounting

Depreciation serves several important functions in accounting. First, it ensures that

the income statement reflects the expense associated with using assets, thereby
providing a more accurate representation of a company’s financial performance.
Second, it helps maintain the accuracy of the balance sheet by reducing the book
value of assets over time, reflecting their decreasing worth. Third, depreciation is
important for tax purposes, as companies are allowed to deduct depreciation expenses
from their taxable income, thus reducing the overall tax burden.

Depreciation also aids in the replacement planning of assets. By systematically

accounting for the decline in value, companies can plan for future investments and
replacements of depreciating assets.

Methods of Recording Depreciation

There are several methods to calculate and record depreciation in the books of
accounts. The method chosen depends on the nature of the asset, the expected usage
pattern, and the company’s financial strategy. The most commonly used methods are:

Straight-Line Method (SLM):

The straight-line method is the simplest and most widely used depreciation method.
Under this approach, the cost of the asset is spread evenly over its useful life. This
means that an equal amount of depreciation is charged to the income statement each
year.

Formula:
Depreciation Expense = (Cost of Asset – Residual Value) / Useful Life
Diminishing Balance Method (DBM):
The diminishing balance method (also known as the reducing balance method)
calculates depreciation as a fixed percentage of the asset’s book value at the
beginning of each period. This method results in higher depreciation expenses in the
early years of the asset’s life and lower expenses as the asset ages.

Units of Production Method (UOP):

The units of production method ties depreciation directly to the usage or output of the
asset. Depreciation is calculated based on the actual usage of the asset rather than the
passage of time, making it ideal for machinery, equipment, or vehicles whose wear
and tear depend on how much they are used.

Sum of the Years’ Digits Method (SYD):

The sum of the years’ digits method is an accelerated depreciation method that results
in higher depreciation expenses in the earlier years of an asset’s life and lower
expenses in later years. It is based on a fraction that represents the remaining life of
the asset.

Provision for Depreciation Account

A provision for depreciation account is a contra-asset account used to accumulate

depreciation over time. Instead of directly reducing the asset’s value on the balance
sheet, depreciation is recorded in this separate account. Each year, the depreciation
expense is credited to the provision for depreciation account, and the asset remains on
the books at its original cost. This approach provides clarity by keeping the original
cost of the asset intact while showing the accumulated depreciation separately.
How the Balance of the Provision for Depreciation Account is Shown in the
Balance Sheet

In the balance sheet, the balance of the provision for depreciation account is shown as
a deduction from the gross value of the fixed asset. This provides a clear
representation of the asset’s net book value, which is the value of the asset after
accounting for depreciation. The presentation of the provision for depreciation on the
balance sheet ensures that users of the financial statements can see both the historical
cost of the asset and how much of its value has been depreciated over time.

Here’s how it appears on the balance sheet:

 Fixed Assets:
 Machinery (at cost) ₹100,000
 Less: Provision for Depreciation ₹40,000
 Net Book Value: ₹60,000
Adjusting for Depreciation and Disposal of Assets

When an asset is fully depreciated or disposed of, adjustments are made to both the
asset account and the provision for depreciation account. If an asset is sold or
discarded, its cost and the accumulated depreciation are removed from the balance
sheet. For instance, if an asset costing ₹100,000 has been depreciated by ₹80,000 and
is sold for ₹30,000, the accounting entries would be:

 Debit: Provision for Depreciation ₹80,000

 Debit: Cash/Bank ₹30,000
 Credit: Asset Account ₹100,000
 Credit: Gain on Sale of Asset ₹10,000
This adjustment removes the asset and accumulated depreciation from the books,
ensuring that the financial records remain accurate.
 Section-B

6. Give closing entries for Trading and Profit and Loss account.

Closing entries are accounting entries made at the end of an accounting period to
transfer balances from temporary accounts to permanent accounts, ultimately
preparing the books for the next accounting cycle. Temporary accounts include
revenue, expenses, and dividends accounts, while permanent accounts include assets,
liabilities, and equity accounts.

1. Closing Entries for Trading Account:

The Trading Account reflects the gross profit or loss of a business. To close the
trading account at the end of the accounting period, the following steps are followed:

 Transfer all direct expenses (e.g., purchases, wages, freight) and direct
incomes (e.g., sales) to the Trading Account.
 If there is a gross profit, it is transferred to the Profit and Loss Account. The
journal entry is:
 Debit: Trading Account
 Credit: Profit and Loss Account
If there is a gross loss, it is also transferred to the Profit and Loss Account, but the
entry is reversed:
 Debit: Profit and Loss Account
 Credit: Trading Account
2. Closing Entries for Profit and Loss Account:
The Profit and Loss Account records all indirect expenses and incomes to determine
the net profit or loss.

 Transfer indirect expenses (e.g., rent, salaries, depreciation) and indirect

incomes (e.g., interest received, discounts) to the Profit and Loss Account.
 If there is a net profit, it is transferred to the Capital Account or Retained
Earnings (in case of a company). The journal entry is:
 Debit: Profit and Loss Account
 Credit: Capital Account/Retained Earnings
 If there is a net loss, it is also transferred to the Capital Account or Retained
Earnings, but the entry is reversed:
 Debit: Capital Account/Retained Earnings
 Credit: Profit and Loss Account
These closing entries reset the balances of revenue and expense accounts to zero,
ensuring that each new accounting period begins with no carry-forward balances from
the previous period.

7. Provide the accounting treatment of adjustments in the final accounts for the
following:
a) Income received in advance
b) Provision for discount on debtors

When preparing final accounts, adjustments are necessary to ensure that the financial
statements reflect the true financial position of the business. The following are the
accounting treatments for two common adjustments: income received in
advance and provision for discount on debtors.

a) Income Received in Advance (Unearned Income)

Income received in advance refers to money that has been received by the business for
goods or services that are yet to be provided. This is considered a liability since the
business owes goods or services in the future.
Accounting Treatment:

Adjustment in the Income Statement:

The income received in advance should not be treated as revenue for the current
accounting period. Hence, the portion of the income that relates to future periods is
deducted from the total income in the income statement.

 Debit: Income (e.g., Rent, Interest, Fees, etc.)

 Credit: Income Received in Advance (Liability)

Adjustment in the Balance Sheet:

The unearned portion is shown as a liability under "Current Liabilities" in the balance
sheet.

Example: If a business receives ₹10,000 as rent for the next year, the journal
entry would be:
 Debit: Rent Income ₹10,000
 Credit: Income Received in Advance (Liability) ₹10,000
b) Provision for Discount on Debtors
Provision for discount on debtors is an estimate of the discount that a business expects
to allow its debtors (customers) in the future when they make early payments. It
reduces the potential collectible amount from debtors.

Accounting Treatment:

Adjustment in the Income Statement:

The provision for discount on debtors is recorded as an expense in the Profit and Loss
Account.

 Debit: Discount Allowed (Expense)

 Credit: Provision for Discount on Debtors (Liability)

Adjustment in the Balance Sheet:

The provision for discount on debtors is deducted from the debtors’ balance
under "Current Assets" on the balance sheet, thereby showing the net realizable
value of debtors.

Example: If the total debtors amount to ₹50,000 and a provision for discount of
5% is made, the journal entry would be:
 Debit: Discount Allowed ₹2,500
 Credit: Provision for Discount on Debtors ₹2,500
Thus, these adjustments ensure that the financial statements accurately reflect the
financial obligations and potential expenses related to these items.
8. Explain the steps involved in order to calculate the interest when total cash price
of instalments are given.

When purchasing an asset on an installment basis, it’s important to differentiate

between the cash price of the asset and the total amount payable through installments.
The total cash price represents the price if the purchase was made in a single payment,
while the installment plan typically includes an additional interest charge. To
calculate the interest portion in such a scenario, the following steps are involved:

1. Identify the Total Amount Payable through Installments:

This is the total of all the installments that will be paid over the period of the
agreement. It includes both the principal (cash price) and the interest component.

2. Determine the Cash Price of the Asset:

The cash price is the amount that would be paid if the asset was purchased outright,
without any installment or credit terms. This information is usually provided in the
purchase agreement or invoice.

3. Calculate the Difference Between Total Installment Price and Cash Price:
The difference between the total amount payable through installments and the cash
price represents the total interest charged over the installment period.

 Formula:
Total Interest = Total Installment Price – Cash Price
4. Allocate the Interest over the Installment Period:
Once the total interest is known, it can be spread over the period of the installments.
Depending on the terms of the agreement, the interest might be distributed equally
over the number of installments, or it might decrease over time (as in the case of
reducing balance method).

5. Determine the Interest Rate (Optional):

If required, the effective interest rate can be calculated using the following formula:

 Formula:
Interest Rate = (Total Interest / Cash Price) × 100
For example, if the total installment amount is ₹120,000, and the cash price is
₹100,000, the total interest is ₹20,000. This ₹20,000 can be allocated over the
installment period to calculate the interest on each payment.

This approach ensures that both the principal and interest components are accounted
for when calculating installment payments.

9. State the journal entries to be passed in order to open various accounts under
Stock and Debtor system applicable in case of hire purchase business.

The Stock and Debtor system is used by hire-purchase businesses to keep track of
goods sold on hire purchase and outstanding balances from debtors. Under this system,
separate accounts are maintained for goods sold on hire purchase, hire purchase
debtors, and other related items. The following journal entries are required to open
various accounts in a hire purchase business under the Stock and Debtor system:

1. When Goods are Sent on Hire Purchase:

This entry records the goods being sent to the customer on a hire-purchase basis. The
goods are not immediately considered as sales; instead, they are treated as stock until
the customer completes all installment payments.

Journal Entry:
 Debit: Hire Purchase Stock Account
 Credit: Goods on Hire Purchase Account (at cost)
2. Recording Installments Due:
When an installment becomes due, the portion of the outstanding balance is moved
from the hire purchase stock account to the hire purchase debtors account. This entry
reflects the shift of responsibility from goods (stock) to the customer (debtor).

Journal Entry:
 Debit: Hire Purchase Debtors Account
 Credit: Hire Purchase Stock Account (for installment amount due)
3. Recording Cash Received from Debtors:
When a customer makes an installment payment, this reduces the outstanding balance
in the hire purchase debtor’s account and increases the business’s cash or bank
balance.

Journal Entry:
 Debit: Cash/Bank Account
 Credit: Hire Purchase Debtors Account (for cash received)
4. Interest Earned on Hire Purchase:
Hire purchase agreements typically include an interest component. When recording
interest, the following entry is made:

Journal Entry:
 Debit: Hire Purchase Debtors Account (for interest portion)
 Credit: Interest Income Account (to record interest earned)
5. Recording Goods Repossessed:
In the event of repossession due to non-payment, the goods are returned to stock. The
entry is as follows:

Journal Entry:
 Debit: Goods Repossessed Account
 Credit: Hire Purchase Debtors Account
These journal entries help in accurately tracking sales, outstanding balances, and
interest in a hire purchase business under the Stock and Debtor system.

The Stock and Debtor system is used by hire-purchase businesses to keep track of
goods sold on hire purchase and outstanding balances from debtors. Under this system,
separate accounts are maintained for goods sold on hire purchase, hire purchase
debtors, and other related items. The following journal entries are required to open
various accounts in a hire purchase business under the Stock and Debtor system:
1. When Goods are Sent on Hire Purchase:
This entry records the goods being sent to the customer on a hire-purchase basis. The
goods are not immediately considered as sales; instead, they are treated as stock until
the customer completes all installment payments.

Journal Entry:
 Debit: Hire Purchase Stock Account
 Credit: Goods on Hire Purchase Account (at cost)
2. Recording Installments Due:
When an installment becomes due, the portion of the outstanding balance is moved
from the hire purchase stock account to the hire purchase debtors account. This entry
reflects the shift of responsibility from goods (stock) to the customer (debtor).

Journal Entry:
 Debit: Hire Purchase Debtors Account
 Credit: Hire Purchase Stock Account (for installment amount due)
3. Recording Cash Received from Debtors:
When a customer makes an installment payment, this reduces the outstanding balance
in the hire purchase debtor’s account and increases the business’s cash or bank
balance.

Journal Entry:
 Debit: Cash/Bank Account
 Credit: Hire Purchase Debtors Account (for cash received)
4. Interest Earned on Hire Purchase:
Hire purchase agreements typically include an interest component. When recording
interest, the following entry is made:

Journal Entry:
 Debit: Hire Purchase Debtors Account (for interest portion)
 Credit: Interest Income Account (to record interest earned)
5. Recording Goods Repossessed:
In the event of repossession due to non-payment, the goods are returned to stock. The
entry is as follows:

Journal Entry:
 Debit: Goods Repossessed Account
 Credit: Hire Purchase Debtors Account
These journal entries help in accurately tracking sales, outstanding balances, and
interest in a hire purchase business under the Stock and Debtor system.

10. Name the systems of maintaining the accounts of a dependent branch and describe
how profit is ascertained under each system.

A dependent branch is one that does not maintain a complete set of accounting
records and relies on the head office for major financial decisions and support. To
maintain the accounts of a dependent branch, two primary systems are used: Debtors
System and Stock and Debtors System. Each system has its method of accounting and
profit ascertainment.
1. Debtors System:

Under the Debtors System, only essential records are maintained at the branch, such
as accounts for branch debtors, cash transactions, and a stock register. The head office
handles the primary accounting.

Maintaining Accounts:
The branch sends periodic reports to the head office regarding sales, collections, and
expenses. The head office records these entries in the branch account.

Profit Ascertainment:
Profit or loss is ascertained by preparing a Branch Account at the head office. The
balance of the Branch Account represents the branch’s profit or loss, calculated as
follows:

Formula:
Branch Profit/Loss = (Opening Branch Assets + Goods Sent to Branch + Expenses
Paid) – (Branch Revenue + Closing Branch Assets)
2. Stock and Debtors System:

The Stock and Debtors System is more detailed and involves maintaining additional
records like the Stock Account, Debtors Account, and Branch Adjustment Account.
This system is suitable for branches that handle significant stock and credit sales.

Maintaining Accounts:
The branch keeps detailed records of stock received, stock sold, and debtors. The head
office maintains separate accounts for stock, branch debtors, and branch expenses.

Profit Ascertainment:
Profit is calculated by comparing the opening stock and goods sent to the branch with
sales and closing stock. The head office prepares a Branch Trading and Profit & Loss
Account to determine the profit:
Formula:
Branch Profit = (Sales + Closing Stock) – (Opening Stock + Goods Sent + Expenses)
 Section-C

11. Briefly explain various methods of recording the joint venture transactions
without maintaining separate set of books.

A joint venture (JV) is a business arrangement in which two or more parties agree to
pool their resources for a specific project or business activity. In a joint venture, the
partners share profits, losses, and control of the business, but they remain independent
entities. Unlike a partnership, a joint venture is typically formed for a particular
purpose and has a limited duration.

When it comes to accounting for joint ventures, the parties involved have the option
to maintain a separate set of books for the joint venture, or they can opt to record the
transactions in their own books of accounts without creating separate financial
statements for the joint venture. This article discusses the various methods of
recording joint venture transactions without maintaining a separate set of books.

Methods of Recording Joint Venture Transactions

There are several methods available to account for joint venture transactions without
maintaining a separate set of books. These methods allow the participants in a joint
venture to record their respective shares of transactions, profits, and losses directly in
their own accounting records. The main methods used are:

Method 1: Recording Joint Venture Transactions in One Venturer’s Books

In this method, one of the venturers takes responsibility for recording all the
transactions related to the joint venture in their own books. The other venturer(s) do
not maintain any records of the joint venture transactions. Instead, they are provided
with periodic reports by the venturer who maintains the accounts.

Journal Entry for Sharing Profit/Loss:

Debit: Joint Venture Account (for total profit)
Credit: Venturer’s Capital/Current Account (for their respective share of profit)
In case of a loss, the entries would be reversed.

Method 2: Recording Joint Venture Transactions in Each Venturer’s Books

(Own Accounts Method)

Under this method, each venturer records the joint venture transactions related to their
own contribution and share of the income and expenses. There is no centralized set of
accounts for the joint venture, and each party accounts for the transactions separately
in their own books.

Journal Entry for Expenses Incurred by a Venturer:

Debit: Joint Venture Account (for expenses incurred)
Credit: Cash/Bank Account (for payment made)
Journal Entry for Sharing Profit:
Debit: Joint Venture Account (for profit)
Credit: Venturer’s Profit & Loss Account (for their share of profit)
Method 3: Memorandum Joint Venture Method
The Memorandum Joint Venture Method is a simplified approach to recording joint
venture transactions without maintaining separate books. Under this method, each
venturer keeps a record of their own expenses and receipts, but a memorandum joint
venture account is prepared at the end of the accounting period to calculate the total
profit or loss.

Journal Entry for Sharing Profit/Loss:

Once the memorandum account is prepared and the profit or loss is calculated, the
entries are made in the individual venturers’ books.
Debit: Joint Venture Account
Credit: Venturer’s Profit & Loss Account (for share of profit)
In case of a loss, the entries would be reversed.

Profit Sharing and Loss Allocation

Regardless of the method used to record joint venture transactions, the profit or loss
of the joint venture must be calculated and distributed among the venturers based on
their agreed profit-sharing ratio. This is done by calculating the total income earned
by the joint venture and deducting all expenses incurred during the project or business
activity. The net result is the joint venture’s profit or loss.

Sharing Profits:

Journal Entry:
Debit: Joint Venture Account
Credit: Venturers’ Capital/Profit & Loss Accounts (for their respective share of profit)
Sharing Losses:

Journal Entry:
Debit: Venturers’ Capital/Profit & Loss Accounts (for their respective share of loss)
Credit: Joint Venture Account
The profits or losses are then transferred to the venturers’ capital or current accounts,
depending on the agreement.

12. Write short notes on the following:

a) Ledger creation
b) Creating invoices

Ledger Creation
Ledger creation is a fundamental step in the accounting process. A ledger is a book or
database where all the transactions recorded in the journal are posted and categorized
into specific accounts. It serves as the central repository for all financial transactions,
allowing businesses to track their income, expenses, assets, liabilities, and equity over
time. The ledger helps in the preparation of the trial balance, which is used to prepare
financial statements.
Steps in Ledger Creation:

1. Identify Accounts: The first step is to identify the accounts that need to be
maintained, such as Cash, Accounts Receivable, Sales, etc.
2. Classify Accounts: Each account is classified under the appropriate category,
such as assets, liabilities, equity, revenue, or expenses.
3. Assign Account Codes: For ease of reference, account codes may be assigned
to each ledger account. This is useful in computerized accounting systems.
4. Post Journal Entries: The transactions recorded in the journal are posted to the
relevant ledger accounts. Each entry in the ledger includes the date, description,
and amount, showing both debits and credits.
5. Balancing Accounts: At the end of an accounting period, each ledger account
is balanced to prepare for the trial balance.
By keeping accurate ledger accounts, businesses ensure that their financial records are
well-organized and easily accessible for reporting, analysis, and audit purposes.

b) Creating Invoices
Creating invoices is an essential process in managing business transactions,
particularly for companies that provide goods or services on credit. An invoice is a
formal document sent by a seller to a buyer, detailing the products or services
provided, the amount due, and the terms of payment. It acts as a request for payment
and serves as an official record of the transaction for both parties.

Steps in Creating an Invoice:

1. Header Information: Include the seller’s company name, address, contact

details, and logo. Also, provide the invoice number, date of issue, and due date.
2. Buyer Information: List the buyer’s name, address, and contact information to
ensure that the invoice is correctly directed.
3. Description of Goods/Services: Provide a detailed description of the goods or
services provided, including quantities, unit price, and total price for each item.
4. Subtotal and Taxes: Add up the total cost of the goods or services. Include any
applicable taxes (e.g., VAT or sales tax) separately.
5. Total Amount Due: State the total amount that the buyer needs to pay,
including taxes, discounts, or any other charges.
6. Payment Terms: Specify the payment terms, including the due date, accepted
payment methods (bank transfer, credit card, etc.), and any penalties for late
payment.
Creating invoices in a clear and structured manner ensures prompt payments and
helps maintain good financial records.