1. Define Journal
The book wherein the transactions are recorded in a
chronological order of dates after determining the debit
account and credit account of transactions with
explanation is called journal.
2. What is Journalizing?
The process of recording transactions in the journal is
known as journalizing
3. What is journal Entry?
The record of each transaction in a journal is known as
journal entry. Every transaction has two aspects. One is
debit entry and the other is credit entry.
4. What is narration?
A brief explanation of a transaction given in brackets
below the journal entry is the particulars column is
called narration
5. What is simple journal entry?
If a journal entry contains only one debit and one
credit, it is known as journal entry
6. What is compound journal entry?
When two or more transactions of similar nature
occurring on the same day are recorded by means of a
combined entry, it is known as compound entry. Thus,
compound journal entry is a combination of two or
more simple journal entries.
7. What is trade discount?
The seller may allow a reduction in the selling price as
as incentive for bulk purchase. This reduction is known
as trade discount.
8. What is purchase return?
Sometimes the goods bought on credit are damaged or
substandard or unsuitable. Such goods are returned to
suppliers. This is called purchase return or return
outwards
9. What is a sale returned?
The goods sold on credit may be returned by the buyer
to the seller if they are damaged or substandard or
unsuitable. This is called sales return or return inward.
10. What is opening entry?
A firm closes its books of account at the end of each
year and starts a new set of books in the beginning of
each year. The first entry in the journal at the beginning
of the New Year is to
record previous year’s closing balances. This entry is
known as Opening entry. Thus opening entry is the
journal entry passed through the journal to open the
new books of account for a new year.
11. What is ledger?
A ledger is a book containing accounts in which the
classified and summarized information from the
journals is posted as debits and credits. It is also called
the second book of entry.
12. What is posting?
Posting refers to the process of recording the
transaction from journal to ledger. It is the process of
transferring the debit and credit items from the journal
to the respective accounts in the ledger.
13. What do you mean by balancing of an account?
Balancing of an account is to total both debit and credit
sides of an account and putting the difference on that
side which is shorter.
14. What do you mean by subsidiary books?
The subdivision of journal for recording transactions of
similar nature is known as subsidiary books. These
books are books of original entry.
15. What is cash book?
In every business concern generally there is large
number of cash transactions. For the purpose of
recording all such transactions a separate book is
maintained. This is called cash book.
16. What is single column cash book?
It has only one column for amount on cash side. On the
debit side all receipts are recorded. On the credit side
all payments are recorded.
17. What is two column cash book?
Two column cash book has two columns one each side-
cash column and discount column. In the additional
column added on the debit side discount allowed is
recorded. In the extra column added on the credit side,
discount received is recorded.
What is three column cash book?
Three column cash book contains three columns on
both sides. These three columns are cash, bank and
discount. Thus, the cash book which contains bank
column in addition to cash and discount column is
called three column cash books.
18. What is petty cash book?
Petty cash book is a subsidiary book maintained for
recording minor expenses to be paid in cash. It is
maintained by a petty cashier. He is given a certain
amount of money by the chief cashier. The petty cashier
makes small or pretty payments out of this money.
19. What is journal proper?
Journal proper is a journal kept for recording those
transactions which cannot be recorded in other
subsidiary books.
20. What is trial balance?
When all entries in the journal have been posted into
the ledger, it is necessary to test whether the
accounting work is done accurately and correctly. For
this purpose, a statement is prepared by taking all
balances (debit and credit) from ledger accounts. This
statement is known as Trial Balance. Thus, trial balance
is a statement of debit and credit balances extracted
from all accounts in the ledger for testing the
arithmetical accuracy.
21. What is final account?
The accounts which are prepared at the final stage of
the accounting cycle to know the profit or loss and
financial position of a business concern are called Final
Accounts.
Trading & Profit and Loss Account and Balance Sheet
are collectively known as final accounts. Final accounts
are also known as financial statement.
22. What is trading account?
Trading means buying and selling of goods. Trading
account is prepared to show the result of trading during
an accounting period. The result of trading may be
gross profit or loss. If the sales exceed the cost of goods
sold the difference is gross profit. On the other hand, if
the cost of the goods sold exceeds sale the difference is
gross loss. Trading account is an account which shows
gross profit or loss.
23. Explain the equation relating to Gross profit
Gross Profit (Gross Loss) =Net Sales –Cost of Goods Sold
Cost of goods sold =Opening Stock + Net Purchase +
Direct expenses – Closing Stock
Net Sales = Gross Sales- Sales Return
Net Purchase = Gross purchases – Purchase Return
24. What you mean by closing entries
At the end of every accounting period, all revenue
items (expenses and income) are closed by transferring
them to Trading and Profit and Loss Account. Such
entries are known as closing entries. Thus, closing
entries are those entries passed at the end of the
accounting year to close the accounts relating to
income, expenses, gain and loss.
25. What is profit and loss account?
Profit and loss account is prepared to ascertain the net
profit or net loss of the business for an accounting
period. Profit & Loss account is prepared after the
preparation of trading account, with the help of trial
balance. The balance of trading account is transferred
to this account, after which all expenses and losses are
debited, and all incomes and gains are credited to this
account.
When the debit side of the account exceeds the credit
side, it is a net loss, and when the credit side is more
than the debit one, the result is net profit. The balance
(net profit or net loss) is transferred to the capital
account, on the balance sheet.
26. What is balance sheet?
A Balance sheet is a statement showing the asset,
liabilities and capital of a business on a particular date.
It is prepared to know the financial position. Hence it is
known as Position Statement. A balance sheet is not an
account. It is a statement. It has two sides. The assets
are shown on the right-hand side and Liabilities and
Capital are shown on the left-hand side. The Two sides
must always tally.
Short Essay Questions
27. What are the advantages/ uses/ important of
Journal?
Journal records all business transactions in one place
on the time and date basis.
All transactions which are recorded are supported with
a receipt or bill, so we can check the authenticity of
each journal entries with their bills.
Accountant writes each journal entry’s narration below
that journal entry, so another auditor can know what
the reason of that journal entry is.
Without making of the journal, an accountant cannot
make ledger accounts.
If there is a mistake in ledger accounts, we can easily
rectify it with the help of journal
28. What are the different steps to be followed in
journalizing transactions?
First read the transaction carefully and find out the two
accounts involved in the transaction.
Find out which category these accounts belong, i.e.
real or personal, or nominal.
Apply the rules of debit and credit and find out which
account is to be debited and which are to be credited.
Enter the transaction in the date column
In the particular’s column write the debit entry and in
the next line write the credit entry.
Give narration below the journal entry in the particular
column
Enter the amount in the Debit and Credit column.
After every journal entry a thin line should be drawn in
particulars column, so that each entry is separated.
1. Define marginal cost
The Marginal Cost refers to the change in the total cost
as a result of the production of one more
unit of the product. In other words, the marginal cost is
the increase or decrease in the total cost
due to the production of one additional unit of the
product.
2. Define Marginal Costing
Marginal Costing is the ascertainment, by differentiating
between fixed costs and variable costs,
of marginal cost and of the effect of profit of changes in
the volume or type of output.
Particulars: In the particular’s column, a summary of
the accounts involved in a specific transaction is
mentioned. Here, the starting line states the
account/accounts to be debited, and the next line
signifies the account/accounts to be credited. The last
line is the brief description of the transaction to give a
clear picture is called Narration. Ledger Folio Number
(L.F.): The page number on which a particular journal
entry appears in a ledger is noted down in the column
of ledger folio number, in front of that specific journal
entry. Debit: The amount of the account debited in the
particular’s column is written in the debit section
Credit: Similarly, the amount of the account which has
been credited in the particular’s column is recorded in
the credit section.
29. What are the important of Ledger?
It provides a permanent record of all the transactions.
It gives complete information of all accounts in one
book
It helps to know the final balance or position of each
account on any date
It helps to prepare trial balance
It helps to prepare final accounts
31. Explain the format of ledger account
Ledger account is basically divided into two parts. Left
side is known as ‘debit side’ and right side is known as
‘credit side’. On the left side, all debits are recorded and
on the right, all credits are recorded.
The following information shall be contained in the
various columns on both sides of the ledger: Date: In
this column, the date of a transaction is recorded.
Particulars: In this column, the details of the transaction
are recorded. On the debit side, the word ‘To’ and on
the credit side, the word ‘By’ are prefixed.
Journal Folio (J.F.): In this column, the page number of
the book of original entry (i.e., journal or any subsidiary
book) from which this account has been taken is to be
written. Amount: in the ‘Amount’ column, the amount
in terms of money shall be recorded.
32. Discuss the classification or subdivision of ledger
Debtors Ledger: It contains personal accounts of
customers or debtors to whom goods are sold on credit
Creditors Ledger: This ledger contains the personal
account of those who have supplied goods to the
business on credit. It is therefore a ledger for keeping
personal accounts of creditors.
General ledger: It contains all accounts other than
debtors and creditors.
Private Ledger: The capital account and drawings
account of the proprietor may be separately maintained
in another ledger called private ledger
33. Explain the advantages of subsidiary books
The following are the advantages of subsidiary book: -
It enables the division of work among accounting
personnel by assigning with separate books and it
increases efficiency of personnel as they perform same
activities daily.
It helps to save time and labor by recording similar
type of transactions in a separate book.
It becomes easy to access the detailed information
relating to a particular transaction as the transactions
relating to one head are recorded in a separate book.
It helps to install internal check system as the
subsidiary book maintained by a clerk is automatically
checked by another clerk.
The existence of separate books helps in the detection
of errors quickly in case of disagreement of trial
balance.
34. Explain different subsidiary books and their
purpose
Purchases Day Book – for recording credit purchase of
goods only. Cash purchase or assets purchased on
credit are not entered in this book.
Sales Day Book – for recording credit sales of goods
only. Assets sold or cash sales are not recorded in this
book.
Purchases Returns Book – for recording the goods
returned to the suppliers when purchased on credit.
Sales Returns Books – for recording goods returned by
the customers when sold on credit.
Bills Receivable Book – for recording the bills received
[Bills Receivables] from customers for credit sales.
Bills Payables Book – for recording the acceptances
[Bills Payables] given to the suppliers for credit
purchases.
Cash Book – for all receipts and payments of cash.
Journal Proper – for recording any transaction which
could not be recorded in the above-mentioned
subsidiary books. For example, assets purchased or sold
on credit
35. What is cash book? Explain different types of cash
books
In every business concern generally, there is large
number of cash transactions. For the purpose of
recording all such transactions a separate book is
maintained. This is called cash book.
There are four types of cash book. They are:
Simple or single column cash book
It has only one column for amount on cash side. On the
debit side all receipts are recorded. On the credit side
all payments are recorded.
Record the transactions in order of date.
If any amount of cash is received on an account, the
name of that account is entered in the particular’s
column by the word "To" on the left-hand side of the
cash book.
If any amount is paid on account, the name of the
account is written in the particular’s column by the
word "By" on the right hand side of the cash book.
It should be balanced at the end of a given period.
Double column cash book
A double column cash book or two column cash book is
one which consists of two separate columns on the
debit side as well as credit side for recording cash and
discount. The discount column on the debit side of the
cash book will record discounts allowed and that on the
credit side discounts received.
Format of Double column cash book
Three column cash book
Three column cash book contains three columns on
both sides. These three columns are cash, bank and
discount. Thus, the cash book which contains bank
column in addition to cash and discount column is
called three column cash book
Date: The date column is used to enter the transaction
date. Particulars: The particulars column is used to
write the name of the account to be debited or credited
in the ledger as a result of cash or bank transaction.
Discount: The amount of discount allowed is recorded
on debit side and the amount of discount received is
recorded on credit side in discount column. Cash: The
amount of cash received (net of any discount allowed)
is entered on the debit side and the amount of cash
paid (net of any discount received) is entered on the
credit side in cash column. Bank: The amount of all
receipts and payments made by the bank account are
entered in bank column of the cash book.
. Petty cash Book
There are two types of petty cash book they are:
. Simple petty cash book
Under this type of petty cash book, only one amount
column is given for all types of petty payments.
Analytical Petty Cash Book
In this type of petty cash book all petty expenses are
classified into five or six heads. Separate column are
provided on the payment side for each class of petty
expenses in addition to a total column.
36. Explain the different method of preparing Trial
balance
Following are the three methods of preparing trial
balance
1. Total Method: Under this method, debit totals and
credit totals of each account are entered in the trial
balance in the debit and credit column respectively.
Both the sides of the trial balance should be equal. If
they are not equal, we can understand that there are
certain errors.
2. Balance method: Under this method, trial balance is
prepared with the balances extracted from the ledgers
and not total. Debit balances should be entered in debit
column and credit balances shall be taken in credit
column.
3. Total and Balance method: In this method trial
balances prepared by taking totals as well as balances
from each ledger account.
37. What is trading account? What are objects of
preparing Trading Account?
Trading means buying and selling of goods. Trading
account is prepared to show the result of trading during
an accounting period. The result of trading may be
gross profit or loss. If the sales exceed the cost of goods
sold the difference is gross profit. On the other hand, if
the cost of the goods sold exceeds sale the difference is
gross loss. Trading account is an account which shows
gross profit or loss.
Following are the objectives of preparing a Trading
account
.To ascertain gross profit or loss
.To provide information about the direct expenses
.To compare closing stock with the stock of previous
year
.To provide safety against the possible losses
Comparative Statements
Comparative statements deal with the comparison of
different items of the Profit and Loss Account and
Balance Sheets of two or more periods. Separate
comparative statements are prepared for Profit and
Loss Account as Comparative Income Statement and for
Balance Sheets.
Comparative Income Statement
Three important information are obtained from the
Comparative Income Statement. They are Gross Profit,
Operating Profit and Net Profit. The changes or the
improvement in the profitability of the business
concern is find out over a period of time. If the changes
or improvement is not satisfactory, the management
can find out the reasons for it and some corrective
action can be taken.
Comparative Balance Sheet
The financial condition of the business concern can be
finding out by preparing comparative balance sheet.
The various items of Balance sheet for two different
periods are used. The assets are classified as current
assets and fixed assets for comparison. Likewise, the
liabilities are classified as current liabilities, long term
liabilities and shareholders’ net worth.
Common Size Statements
A vertical presentation of financial information is
followed for preparing common-size statements. The
total assets or total liabilities or a sale is taken as 100
and the balance items are compared to the total assets,
total liabilities or sales in terms of percentage. Thus, a
common size statement shows the relation of each
component to the whole. Separate common size
statement is prepared for profit and loss account as
Common Size Income Statement and for balance sheet
as Common Size Balance Sheet.
Pv ratio
Calculation of break-even point. (Fixed expenses/PV
ratio)
Calculation of profit at a given volume of sales.(profit=
Sales volume x PV ratio)
Calculation of the volume of sales required to earn a
given profit.(Fixed expense +
Profit)/PV Ratio
Calculation of profit when margin of safety is given
Calculation of the volume of sales required to
maintain the present level of profit if
selling price is reduced.
16) What are the Limitations of standard costing?
38. What do you mean by filial account? Explain each 1. Difficult Process in Setting of Standard: The process
term of setting up standards is a difficult task as it requires
After preparation of the trial balance the next step is to technical skill.
prepare final accounts or final statements. The 2. Frequent Revision of Standard: the fixing of standard
preparation of final account is the last step in the requires the revision at frequent intervals. If not so,
accounting cycle. The objectives of preparing final there is no meaning of fixing standard.
accounting are to determine profit or loss made by 3. Unsuitable for Non-Standardized Products: The
business during any accounting period and to ascertain standards cannot be fixed for all the products. It means
the financial position on a given date. that there may be some products which cannot be fixed
The final accounts consist of Trading and Profit and Loss as standard products.
Account and Balance Sheet. In other words Trading & 4. Labour Problems: The incorrect standards may lead
Profit and Loss Account and Balance Sheet are to constant labour problems.
collectively known as final accounts. Final accounts are 5. No Freedom at Work: Whenever the standard costing
also known as financial statement. system is in operation, the employees cannot work at
Trading Account. their wishes.
Trading means buying and selling of goods. Trading 6. Fast Changing Technology: The industries liable for
account is prepared to show the result of trading during frequent technological changes will not be suitable for
an accounting period. The result of trading may be standard costing system.
gross profit or loss. If the sales exceed the cost of goods . What are the uses of Contribution margin?
sold the difference is gross profit. On the other hand, if It helps in fixing selling price
the cost of the goods sold exceeds sale the difference is It enables to determine breakeven point
gross loss. Trading account is an account which shows It helps to find out the profitability of various
gross profit or loss. products
Profit and loss Account It guides the management is selecting the profitable
Profit and loss account is prepared to ascertain the net product mix or method of production.
profit or net loss of the business for an accounting It helps the management in taking make or buys
period. Profit & Loss account is prepared after the decision
preparation of trading account, with the help of trial It enables, the management decide whether to
balance. The balance of trading account is transferred introduce a new product in the market
to this account, after which all expenses and losses are It indicates the profit potential of a business
debited, and all incomes and gains are credited to this enterprise.
account. It highlight the relationship among cost, sales and
When the debit side of the account exceeds the credit profit
side, it is a net loss, and when the credit side is more
than the debit one, the result is net profit. The balance
(net profit or net loss) is transferred to the capital
account, on the balance sheet.
Balance Sheet
A Balance sheet is a statement showing the asset,
liabilities and capital of a business on a particular date.
It is prepared to know the financial position. Hence it is
known as Position Statement. A balance sheet is not an
account. It is a statement. It has two sides. The assets
are shown on the right-hand side and Liabilities and
Capital are shown on the left-hand side. The Two sides
must always tally.
39. Why is the balance sheet important?
A balance sheet is important because it helps in
understanding the performance of a company.
Following are the reasons why the balance sheet is
important:
• To understand the financial health of a company.
• Stakeholders can study the balance sheet to
understand the liquidity position and business
performance of the company.
• Comparing balance sheets over the years helps in
determining the growth of the company.
• A balance sheet is an essential document to obtain a
business loan.
• Analyzing the company’s balance sheet helps in
understanding the ability of the firm to undertake
expansions projects and unforeseen expenses.
• A Balance sheet helps in identifying the source of
company funding, for example, equity funding or debt
funding.
1.Define accounting?
Accounting may be defined as the process of
recording, classifying, summarizing and interpreting
the financial transactions and communicating the
results there of to the persons interested in such
information.
2. What is accountancy?
Accountancy is the practice of recording, classifying,
and reporting on business transactions for a business. It
provides feedback to management regarding the
financial results and status of an organization.
3. What is financial Accounting?
Financial accounting is the process of preparing
financial statements that companies’ use to show their
financial performance and position to people
outside the company, Including investors, creditors,
suppliers, and customers
4. Define accounting principles
Accounting principles may be defined as those rules
and procedure which are adopted by the accountants
universally in recording the accounting transaction.