Ch5 Exercise Solution

Suggested Solutions to Exercise in Financial Accounting for Management by Ramachandran & Kakani
Authored by Ram Kumar Kakani, Copyright with Tata McGraw Hill Education Private Limited, 2011

1

CHAPTER 5

Accounting Records
SELF ASSESMENT QUESTIONS

1. Typically, all the transactions that occur are written as and when they occurred as per the
documents, vouchers, or papers relating to them. These documents/vouchers are then filed
properly in the order of their occurrence. On the basis of these records, the accounts are
maintained by way of the journal.
The primary record for a transaction is the journal. A journal is a chronological record of all
transactions, showing the debit and credit of the accounts as affected by the transactions. The
journal also contains a narrative description of the transaction, so as to explain the same.

The ledger is a book of final entry in which a record of the debits and credits to the various
accounts are kept. Usually, a ledger is a group of accounts. The ledger will contain at least as
many separate accounts as there are items on the balance sheet and income statement. The
number of accounts is governed by the managements need for information statutory
requirements, if any, and the cost (of course, in relation to the benefits to be derived from it) of
keeping it. For practical convenience, the ledger is also usually classified into groups of
accounts. (See Section 5.7 to 5.9 for details)

2. All nominal accounts relating to expenses and gains or incomes must be closed at the end of the
year. In order to close them, they are transferred either to trading account or profit and loss
account. J ournal entry required for transferring them to trading account or profit and loss
account is called a closing entry. (See pages 285-286 for details)
3. No, an organisation can not prepare its financial statements without preparing a worksheet.
In a business organisation with a large number of transactions at the end of an accounting
period, the balances of both debit and credit accounts of all the ledger accounts are first
transferred to a worksheet, which is called, the original trial balance or unadjusted trial
balance. Adjustments are then worked out, giving rise to an Adjusted trial balance. Finally,
based on the type of the account, the balances of the individual accounts are then taken to either
of the two final financial statements that is the balance sheet or the profit & loss account. (See
section 5.12 for details)

4. An account that is kept within a subsidiary ledger, which in turn summarizes into the general
ledger are called subsidiary accounts. (Refer Section 5.8 for details)

5. Three columnar cash book with cash, bank and discount columns.

6. When transactions appear on both the sides in both cash and bank columns at the same time,
they are called Contra entries. For Example, when a firm receives a cheque from a party, it is
generally deposited in the bank on the same day.
Sometimes, this cheque is not deposited in the bank on the same day. Rather, it is deposited in
the bank afterwards. When it is deposited in the bank after this date, a contra entry is made
first on the credit side in the cash column and then again on the debit side in the bank column.

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7. In almost all businesses, it is found necessary to keep small sums of ready money with the
cashier or petty cashier for the purpose of meeting small expenses such as postage, telegrams,
stationary and office sundries etc. The sum of money so kept in hand generally termed as petty
cash and book in which the petty cash expenditures are recorded is termed as petty cash book.

8. Special Purpose Subsidiary books are kept in those business firms which have large number of
transactions of different types. Separate books are kept for recording separate type of
transactions. Cash transactions receipts and/or payments are recorded in cash book or journals
only. Similarly, credit purchases of goods are recorded in purchases journal. Returns of goods
to suppliers or creditors on account of defect in goods, etc. are recorded in separate journal
known as purchases return journal. (Refer Section 5.8 for details)

9. Cash discount may be defined as an allowance made by the person who receives cash to the
payer for prompt payment. Cash discount is always allowed or received when payment is made.

Trade discount, on the other hand, is an allowance made by the wholesale dealers to retailers
off the catalogue or invoice price. This allowance is made between purchasers and sellers
engaged in the same class of trade.

Cash Discount Trade Discount
1. It is recorded in account books. 1. It is not shown separately.
2. It is generally allowed by retailers to
customers.
2. It is granted by one trader to another
trader.
3. The purpose of providing cash
discount is prompt payment by the
debtor to the creditor.
3. The purpose of allowing trade discount
is to enable the retailers to sell the
goods at list price.

10. Trial balance can be defined as a list of all balances standing on the ledger accounts of a firm at
any given time.
The following are the important objects or purposes of preparing a trial balance:
I. If the two sides of the trial balance are equal, it is proved that the books are at least
arithmetically correct.
II. Error in casting the books of subsidiary records is immediately known.
III. Error in posting from the books of subsidiary records to ledger is found out.
IV. Error in balancing the ledger accounts is found out.
V. Schedules of debtors and creditors are verified to be correct.

11. The main reasons for disagreement of a trial balance may be enumerated as under:
1) Balance of personal accounts placed on wrong sides in trial balance.
2) Bank overdraft being put on wrong side.
3) Cash balance or bank balance may be omitted to be recorded in trial balance.
4) Error in bringing forward proper or correct balances from the previous years books.
5) Errors in additions of items in accounts and carry forwards of total to next page.
6) Omission of any balance from the nominal accounts, e.g. salary, rent etc. in the trial
balance.
7) Omission of any balance in the schedule or list of sundry debtors and creditors.

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8) Omission of any monthly totals of the Purchases Book, Sales Book, Returns Book, Bills
Book to be posted in the ledger.
9) Posting of entries to wrong sides of accounts.
10) Wrong posting of the totals of discount columns from the cash book to the trial
balance. (See Section 5.14 & 5.15 for details)

12. When all the accounts of a concern are balanced off they are put in a list, debit balances on one
side and credit balances on the other side. The list so prepared is called trial balance. The total
of the debit side of trial balance must be equal to that of its credit side. This is based on the
principle that in double entry system, for every debit there must be a corresponding credit.
The preparation of a trial balance is an essential part of the process because if totals of both
the sides are the same then it is generally proved that books are at least arithmetically correct.
It must be remembered that equalizing the two sides of a trial balance is not the sole and
conclusive proof of the complete correctness of books.

13. This is an account that is maintained till the trial balance is not matched. A suspense account is
opened and the amounts relating to all the errors that affect the trial balance, are transferred to this
account. As and when the errors are located, a corrective entry is passed in the respective account,
with a corresponding entry to the suspense account. A suspense account is not required for the errors
that do not affect the trial balance, because the errors in such cases occur in two accounts. When all
the errors are located and rectified, the balance in the suspense account becomes nil.
If there are no errors in the books, the suspense account would simply vanish or balance out to give a
zero balance in the end. However, if errors go undetected, the suspense account appears in the
balance sheet either on the asset side (for debit balance) or on the liabilities side (for credit balance).
(See Section 5.17 for details)

MULTIPLE CHOICE QUESTIONS

1. (c) and (f)
2. (b)
3. (b)
4. (b)
5. (b)
6. (c)
7. (a), (b) & (c)
8. (d)
9. (b)
10. (b)
11. (a)
12. (d)
13. (a) & (b)
14. (b)
15. (c)
16. (d)
17. (a)

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18. (c)
19. (a)

EXERCISE

1. Trial Balance Exercise

Accounts Debits (in Rs.) Credits (in Rs.)
Cash 7,500
Salaries Payable 900
Taxes Payable 3,000
Accounts Receivable 16,500
Inventory 21,000
Capital Stock 60,000
Long-term Debt 34,000
Land 6,000
Buildings (net) 60,000
Other Assets 2,000
Accounts Payable 7,000
Dividends Payable 2,500
Retained Earnings -17,400
Totals 84,500 84,500

2. Match The Following

Column A Column B
Acquire assets by incurring debt Debit Asset and Credit Liability
Distributions to Owners Debit Owner(s) Equity and Credit Asset
Investments by Owners Debit Asset and Credit Owner(s) Equity
Use assets to acquire other assets Debit Asset and Credit Asset
Use assets to extinguish debts Debit Liability and Credit Asset

3. Mark True (T) or False (F)
1. T
2. T
3. T
4. F
5. F
6. T
7. F
8. T
9. T
10. T

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11. T
12. T
13. T
14. T

4. Uday Consultancy Limited (UCL)

Uday Consultancy Limited (UCL)
Income Statement for the period ending March 31 (all figures in $)
Software Sales 200,000
Expenses
Salary Expenses 40,000
Social Welfare Expenses (including Donations) 200
Courier Expenses 450
Telephone Expenses 500
Employee Welfare Expenses 80,000
Sales and Marketing Expenses 4,600
Rent Expenses 11,200
Repairs and Maintenance Expenses 820
Travel Expenses 37,000
Net Income 25,230
Less: Withdrawal 13,500
Profit transferred to Balance Sheet (i.e., Retained Earnings) 11,730

Uday Consultancy Limited (UCL)
Balance Sheet as at March 31 (all figures in $)
Assets Amount Liabilities and Owners Equity Amount
Current Assets Current Liabilities
Cash & Bank Balance 158,130 Accounts Payable 40,000
Accounts Receivable 80,000 Provision for Employee Welfare 60,000
Supplies 60,000 Other Accrued Payables 1,400
Current Assets 298,130 Current Liabilities 101,400
Long Term Assets Long Term Liabilities
Computer and Software 70,000 Loan from Sam 120,000
Long Term Assets 70,000 Long Term Liabilities 120,000
Owner(s) Equity
Share Capital 135,000
Retained Earnings 11,730
Total Shareholder Funds 146,730

Total Assets 368,130 Total Liabilities & Owners Equity 368,130

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Note: We can further improve our presentation by making assumptions (and having adjustment entries) related to
(a) closing stock of supplies
(b) depreciation for computer/software
(c) other accrued items (including revenues)

5. Rachna Manufacturers Limited
(c) Above Rs 40,001

6. Transaction/Event Table:

Transaction / Event CA FA OA CL LTL CC+RR CR Rev. Exp. Div.
Example 1: Ram invests capital in
Ram Software Limited
Dr Cr
Example 2: A customer was
offered a cup of tea
Cr Dr
Q 1: Retirement of an employee
from Pankhuri Textiles Limited
(resulting in complete severance of
ties with the company). Pankhuri
Textiles will record
Cr Dr
Explanation: The provision made for retirement benefits and salaries accrued would be adjusted along
with payment of cash, bank balances, & employee advances
Q2: Convertibility of Rs. 100
Debentures to 1 Equity Shares of
Rs. 10 Par Value
Dr Cr Cr
Explanation: This conveys that a long-term liability is being converted into share capital plus share
premium
Q3: Convertibility of Rs. 100 Par
Value Preference Shares to 50
Equity Shares of Rs 2 par value
each
Dr & Cr
Explanation: One type of share capital is being converted to another type of share capital
Q4: As part of restructuring of a
bankrupt company its par value
of share is reduced from Rs. 10 to
Rs. 1
Cr Dr
Explanation: Losses carried forward (and not adjusted) an asset side item would be adjusted with
the firms capital reduction exercise.
p.s. A famous accounting saying goes losses are of the firm whereas profits are of the shareholders.
Q5: As a reward to shareholders,
Hindustan Unilever Limited issues
bonus debentures to its
shareholders in the ratio of 1:1 i.e.,
Cr Dr

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1 bonus debentures of Rs 100 par
value is issued for every one share
of the company with par value of
Rs 1.
Explanation: Reduction in revenue reserves of HUL. At the same time increases in the firms long-term
liabilities.
Q6: A company follows a % of
sales method for provisioning of
its estimated collection losses. The
company comes to known that a
customer has expired. The said
customer used to always purchase
on a 30-days credit from the
company. The company will
Cr Dr
Explanation: The accounts receivable account of the customer would be written off along with the
provision for bad debts.
Q7: A person goes and cancels his
railway reservation ticket (2841
Coromandal Express from Howrah
to Rajahmundry) of Rs. 500. The
ticket counter fellow punches a
few keys (in the computer) and
pays him Rs. 460. The accounts of
railways will have:
Cr Dr Cr
Explanation: Unearned revenue goes down (a current liability item). Cancellation charges arise as an
income. The money returned is cash going down.
Q8: Railway wagons lying empty
at a customers site results in
demurrage charges. Indian railway
sends a notice to Steel Authority
for delay in returning its empty
wagons.
Dr Cr
Explanation: For railways this leads to income by way of demurrage charges and a simultaneous
increase in accounts receivable. In fact, it is a big source of revenue for Shipping Yards and Indian
Railways
Q9: Disposal of a old fixed asset
by a company at a loss (the
company does not used block
depreciation)
Dr Cr Dr Dr
Explanation: The cash comes in along with adjustments of a loss item (expense), write off of the
fixed asset and the accumulated depreciation related to the item.
Q10: Planned massive capital
repair of a blast furnace
Cr Dr
Explanation: Any repair that increases the life and / or capacity of a fixed asset has to be capitalized as

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part of the value of the fixed asset..
Q11: A company is fully insured
by Life Insurance Corporation
(LIC) of India (as part of its group
insurance scheme for all staff).
After one month there were no
claims made by the company with
LIC. This would result in LIC
having
Dr Cr
Explanation: Unearned revenue would get decreased with a simultaneous recognition of revenue.
Q12. Massive earthquake happens
at a factory (say, Reliance
Refinery). Unfortunately, this
results in complete destruction of
the site. The secured lender will
make the following
Cr Dr
Explanation: Losses / expensing of the firm along due to with write off of the loans & advance given to
Reliance (in the case of a financial institution, this is a current item and hence we would treat it as a
current asset).
Note: CA Current Assets; CC Contributed Capital; CL Current Liabilities & Provisions; CR Capital
Reserves; Div. Dividends; Exp. Expenses; FA Fixed Assets; LTL Long-term Liabilities; OA Other
Assets; RR Revenue Reserves; and Rev. Revenues.


9

REVIEW QUESTIONS

Please refer the Ch5_Exercise_Solution_XL for working and complete solution of these 8 review
questions. The sheets in the excel file have been named as follows:

1. Debjit Rose Trading Company
2. Ram Traders
3. Priyamvada
4. Peddamma
5. Khilona
6. Coconut Business
7. Zareen Technologies
8. Money Lender
9. Bade Miya and Chote Miya

Value of House

250,000,000.00

Funding Bades Share Chotes Share Total
Loan 180,000,000.00 20,000,000.00 200,000,000.00
Personal Saving 25,000,000.00 25,000,000.00 50,000,000.00
205,000,000.00 45,000,000.00 250,000,000.00
Ownership Ratio 0.82 0.18
EMI paid by Bade Miya for the
year
Bades Share Chotes Share
1,968,000.00 432,000.00 2,400,000.00
Interest 1,558,000.00 342,000.00 1,900,000.00
Principal 410,000.00 90,000.00 500,000.00
Rent Received by Chote Miya Bades Share Chotes Share
Rent 984,000.00 216,000.00 1,200,000.00

Based on the above table the net settlement would be:

Bade's A/c
Bade's Share of Rent receivable from Chote 984,000.00
Chote's Share of EMI receivable from Chote 432,000.00
Total Receivable from Chote 1,416,000.00


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In the books of Bade Miya

House A/c 20,50,00,000
To Housing Loan A/c 20,50,00,000

Chote A/c 4,32,000
Housing Loan A/c 4,10,000
Housing Loan Interest A/c 15,58,000
To Bank A/c 24,00,000

Chote A/c 9,84,000
To Rent Income A/c 9,84,000

In the books of Chote Miya

House A/c 4,50,00,000
To Housing Loan A/c 4,50,00,000

Housing Loan A/c 90,000
Housing Loan Interest A/c 3,42,000
To Bade Miya A/c 4,32,000

Bank A/c 12,00,000
To Bade Miya A/c 9,84,000
To Rent Income A/c 2,16,000

10. Kanni Badshah Filters Limited

Dr. Trading Account Cr.
Particulars Amount Particulars Amount
Opening Stock
Wages
Purchases
Gross Profit

50,000
30,000
1,00,000
90,000

2,70,000

Sales
Closing Stock
1,70,000
1,00,000

2,70,000


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Dr.

Profit and Loss Account for the year ending....
Cr.
Particulars Amount Particulars Amount
To Interest
To Bad Debts
To Repairs
To Depreciation
To Rates & Taxes
To Salaries
To Office expenses
To Net Profit
2,000
5,000
3,000
10,000
8,000
20,000
25,000
23,000

96,000

By Gross Profit
By Rent
90,000
6,000

96,000

Dr.
Balance Sheet as on.... Cr.
Liabilities Amount Assets Amount
Capital 2,50,000
Add:Net Profit 23,000

2,73,000
Less: Drawings 20,000

Sundry Creditors
Bills Payable

2,53,000

70,000
40,000

3,63,000

Sundry Debtors
Land & Building
Cash in Hand
Cash at Bank
Bills Receivable
Furniture & Fixture
Plant &Machinery
Closing Stock
15,000
1,00,000
16,000
40,000
20,000
15,000
57,000
1,00,000

3,63,000

1. (c) Above Rs. 80,001
2. (b) Between Rs. 10,001 and Rs. 40,000
3. (b) Between Rs. 1,00,001 and Rs. 2,80,000

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Suggested Solutions to Exercise in Financial Accounting for Management by Ramachandran & Kakani

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