BCOC-131 Solved Assignment

Question 1: What are the main purposes of accounting, and what makes accounting information “good quality”?

A. Objectives of accounting

Accounting is meant to support decision-making by recording business transactions and turning them into useful summaries. In practical terms, the main objectives are:

• Systematic record-keeping: Maintain a complete and orderly record of transactions so that the business can track what happened, when, and for how much.
• Finding business results (profit or loss): Measure the outcome of operations for a period by matching incomes with the related costs and expenses.
• Knowing the financial position: Show what the business owns and owes (assets and liabilities) and the owner’s interest at a point in time.
• Providing information for decisions and control: Help owners/managers, lenders, and other users evaluate performance, plan actions, and keep control over resources (for example, monitoring cash, debts, and expenses).

Practical illustration : If a student runs a small online resale page, accounting helps answer: “Did I actually earn a profit this month?”, “How much cash is available to buy more stock?”, and “How much do customers still owe me?”

B. Qualitative characteristics of accounting information

Accounting information is valuable only when it has certain qualities that make it reliable and useful for users. Key qualitative characteristics include:

• Understandability: Information should be presented in a form that users can follow (clear headings, proper classification, and simple disclosure).
• Relevance: It should help users make decisions by having predictive value (helps in planning) and/or confirmatory value (helps evaluate past decisions).
• Reliability (faithful representation): Figures should be based on valid evidence and should represent what they claim to represent (free from major bias and significant error).
• Comparability: Users should be able to compare performance across years and across businesses, which needs consistent methods and adequate disclosure.
• Consistency: Similar transactions should be treated in the same way from period to period, unless a justified change is clearly explained.

Practical note: If two years of accounts use different depreciation methods without explanation, comparisons become misleading. Consistency and disclosure prevent that confusion.

Question 2: Explain the double entry principle and the rules of debit and credit, with examples

A. Principle of double entry system

The double entry system is based on the idea that every transaction has two aspects. If something comes into the business, something else goes out (or an obligation arises). Therefore, each transaction affects at least two accounts, and the total debits must equal the total credits.

Why it matters: Because both aspects are recorded, the system produces more complete records and supports arithmetical checking through a trial balance.

B. Rules of debit and credit

In practice, debit and credit rules are applied based on the type of account:

• Personal accounts: Debit the receiver, credit the giver.
• Real accounts (assets): Debit what comes in, credit what goes out.
• Nominal accounts (income/expense): Debit expenses and losses, credit incomes and gains.

C. Examples (showing both aspects)

• Example 1: Bought furniture for cash
  Furniture (asset) increases → Debit Furniture A/c
  Cash (asset) decreases → Credit Cash A/c
• Example 2: Sold goods on credit to a customer
  Customer becomes debtor (personal account) → Debit Customer A/c
  Sales (income) increases → Credit Sales A/c
• Example 3: Paid rent by bank
  Rent (expense) → Debit Rent A/c
  Bank (asset) decreases → Credit Bank A/c

Question 3: What does “convergence to IFRS” mean, and how do Indian standards differ from international standards?

A. Meaning of convergence to IFRS

Convergence to IFRS means aligning a country’s accounting standards with International Financial Reporting Standards so that financial statements become more comparable internationally. Instead of copying IFRS word-for-word in every case, convergence generally means adopting IFRS principles while allowing limited changes to suit local legal and economic conditions.

Why convergence is discussed:

• It improves comparability of financial statements across countries.
• It supports investors and lenders who want consistent reporting.
• It encourages transparent reporting through globally accepted practices.

B. Distinction between Indian accounting standards and international standards

A clear way to understand the difference is to compare the “traditional” Indian standards with the IFRS-aligned approach used internationally:

• Basis and orientation: International standards are designed mainly for global comparability, while Indian standards historically developed with strong linkage to local regulatory and reporting needs.
• IFRS linkage: International standards (IFRS) are the global reference; Indian standards under convergence move closer to IFRS while still reflecting local requirements where necessary.
• Disclosure and presentation approach: IFRS-style reporting typically emphasizes wider disclosures and internationally consistent presentation to support cross-border users.
• Scope of application: International standards are used across many countries; Indian standards apply within India and may include India-specific guidance consistent with national law and practice.

Question 4: Explain how depreciation is recorded, and show how “provision for depreciation” appears in the Balance Sheet

A. Methods of recording depreciation in books

• Method 1: Maintain a Provision for Depreciation (Accumulated Depreciation) Account
  The asset continues to appear in the ledger at original cost, while depreciation for each year accumulates in a separate provision account.
• Method 2: Do not maintain a Provision account (credit the asset directly)
  Depreciation is credited straight to the asset account each year, so the asset shows written down value in the ledger.

Key journal entries (generic form)

When provision account is maintained:

Depreciation A/c Dr.
To Provision for Depreciation A/c

Profit and Loss A/c Dr.
To Depreciation A/c

When provision account is not maintained (asset reduced directly):

Depreciation A/c Dr.
To Asset A/c

Profit and Loss A/c Dr.
To Depreciation A/c

B. How provision for depreciation is shown in the Balance Sheet

When a provision is maintained, the Balance Sheet normally shows the asset at cost and then deducts accumulated provision to arrive at book value (written down value).

format:

Asset (at cost) …………..
Less: Provision for Depreciation …………..
Net Book Value …………..

$$ \text{Net book value} = \text{Cost of asset} – \text{Accumulated depreciation} $$

Question 5: What is a trial balance, and why might it fail to agree?

A. Meaning of trial balance

A trial balance is a statement prepared on a particular date that lists the debit and credit balances of ledger accounts in separate columns. It is mainly used to check arithmetical accuracy of postings under the double entry system and acts as a base for preparing final accounts.

B. Causes for disagreement of a trial balance

A trial balance may not tally when errors affect only one side (debit or credit) or affect values unequally. Common causes include:

• Posting omitted in one account: One side posted, the other side missed.
• Double posting in one account: An entry posted twice on the same side of an account.
• Posting on the wrong side: Debit posted as credit (or vice versa) in an account.
• Wrong amount posted: Correct side but incorrect figure posted.
• Wrong totalling of a subsidiary book: Overcasting/undercasting affects the ledger posting.
• Total of a subsidiary book not posted: For example, sales journal total not transferred to Sales A/c.
• Wrong balancing/totalling of a ledger account: Errors in carry forwards or balance computation.
• Omission of an account balance from the trial balance: An account is left out entirely.
• Balance placed in the wrong column of the trial balance: A debit balance shown on the credit side (or vice versa).

Question 6: Explain the closing entries related to Trading Account and Profit and Loss Account

Meaning of closing entries

Closing entries are journal entries passed at the end of the accounting period to transfer balances of nominal accounts (expenses, losses, incomes, gains) to Trading Account or Profit and Loss Account so that these accounts are closed for the period.

A. Closing entries for Trading Account (to find gross profit or gross loss)

1) Transfer items that normally have debit balances (opening stock, purchases, direct expenses, etc.) to Trading Account:

Trading A/c Dr.
To Opening Stock A/c
To Purchases A/c
To Returns Inwards / Sales Returns A/c (as applicable)
To Direct Expenses A/c (each direct expense credited separately)

2) Transfer items that normally have credit balances (sales, purchase returns, closing stock) to Trading Account:

Sales A/c Dr.
Purchases Returns A/c Dr.
Closing Stock A/c Dr.
To Trading A/c

3) Transfer gross profit (or gross loss) from Trading Account to Profit and Loss Account:

Trading A/c Dr.
To Profit and Loss A/c (Gross Profit)

If there is gross loss, the entry is reversed.

B. Closing entries for Profit and Loss Account (to find net profit or net loss)

1) Transfer indirect expenses/losses to Profit and Loss Account:

Profit and Loss A/c Dr.
To Indirect Expenses A/c (credited individually)
To Indirect Losses A/c (credited individually)

2) Transfer indirect incomes/gains to Profit and Loss Account:

Indirect Incomes/Gains A/c Dr. (debited individually)
To Profit and Loss A/c

3) Transfer net profit (or net loss) to capital:

Profit and Loss A/c Dr.
To Capital A/c (Net Profit)

If net loss arises, the entry is reversed.

Question 7: Explain the accounting treatment of (a) income received in advance and (b) provision for discount on debtors

A. Income received in advance (unearned income)

Meaning: It is income received during the current period that actually relates to the next accounting period because the service is still to be provided.

Adjusting entry:

Concerned Income A/c Dr.
To Income Received in Advance A/c

Final accounts treatment:

• Profit and Loss Account: Deduct the unearned portion from the concerned income.
• Balance Sheet: Show “Income Received in Advance” under current liabilities.

B. Provision for discount on debtors

Meaning: A business may allow cash discount to debtors in the next year if they pay promptly. For debtors outstanding at year-end, the expected discount is anticipated and provided for.

Important calculation point: When both provision for bad debts and provision for discount are needed, the provision for bad debts is computed first, and then discount provision is calculated on debtors after that reduction.

Adjusting entry:

Profit and Loss A/c Dr.
To Provision for Discount on Debtors A/c

Final accounts treatment:

• Profit and Loss Account: Show provision for discount on debtors as an expense/charge.
• Balance Sheet: Deduct it from Sundry Debtors (after other relevant deductions).

Question 8: Steps to calculate interest when total cash price and instalments are given (rate of interest not given)

Situation: Total cash price, down payment, and instalment amounts are known, but the interest rate is not given. The interest element must still be split instalment-wise.

Step-by-step procedure

1. Find total hire purchase price: Add down payment and all instalments.
2. Compute total interest: Subtract total cash price from total hire purchase price.

$$ \text{Total interest} = \text{Hire purchase price} – \text{Cash price} $$

3. Work out outstanding hire purchase amount at the start of each instalment period: Start with total hire purchase price minus down payment, then reduce by instalments as they fall due.
4. Form the ratio of outstanding amounts: If instalments are equal, the ratio becomes simple (for 3 equal instalments it is 3:2:1; for 4 equal instalments it is 4:3:2:1).
5. Apportion total interest using the ratio: Distribute total interest across instalments according to the outstanding-balance ratio to get interest included in each instalment.

tip: Think of interest as highest in the first instalment because the outstanding principal is highest at the start, and it reduces as the balance reduces.

Question 9: Journal entries to open accounts under the Stock and Debtors System for hire purchase business

Idea of the system: Under this method, control accounts are used to track hire purchase stock, debtors, goods sold, and repossessions. A Hire Purchase Adjustment Account is used to work out overall profit or loss on hire purchase operations.

Journal entries (generic forms)

1) For goods sold on hire purchase (at hire purchase price)

Hire Purchase Stock A/c Dr.
To Goods Sold on Hire Purchase A/c

2) For total instalments becoming due during the year

Hire Purchase Debtors A/c Dr.
To Hire Purchase Stock A/c

3) For cash received from hire purchase debtors

Cash/Bank A/c Dr.
To Hire Purchase Debtors A/c

4) For goods repossessed (instalments unpaid)

Goods Repossessed A/c Dr.
To Hire Purchase Stock A/c

5) For loading (profit element) on goods sold on hire purchase

Goods Sold on Hire Purchase A/c Dr.
To Hire Purchase Adjustment A/c

6) For loading included in opening hire purchase stock

Stock Reserve A/c Dr.
To Hire Purchase Adjustment A/c

7) For loading included in closing hire purchase stock

Hire Purchase Adjustment A/c Dr.
To Stock Reserve A/c

8) For loss on goods repossessed (as applicable)

Hire Purchase Adjustment A/c Dr.
To Goods Repossessed A/c

9) For hire purchase business expenses

Hire Purchase Adjustment A/c Dr.
To Expenses A/c

10) For transfer of profit on hire purchase business

Profit and Loss A/c Dr.
To Hire Purchase Adjustment A/c

If there is a loss, the entry is reversed.

11) For closing Goods Sold on Hire Purchase Account

Goods Sold on Hire Purchase A/c Dr.
To Trading (Stock at Shop) A/c

Question 10: Systems for maintaining accounts of a dependent branch and how branch profit/loss is found

Dependent branch (context): A dependent branch does not maintain a complete set of books. Most accounting work is done by the head office, and the branch typically maintains limited records such as sales, stock details, and (where relevant) debtors.

Main systems used by head office for dependent branches

1) Debtors System

• How it is maintained: Head office prepares a single Branch Account for the branch (often suitable for smaller branches).
• How profit/loss is ascertained: The balancing figure of the Branch Account represents profit (credit balance) or loss (debit balance).
• Practical feel: Works well when control needs are moderate and the branch activity is not complex.

2) Final Accounts System

• How it is maintained: Head office prepares Branch Trading Account and Branch Profit and Loss Account to measure branch performance more formally, plus a Branch Account to show net assets/amount due to or due from branch.
• How profit/loss is ascertained: Branch profit comes from branch Trading and P&L results, not merely as a balancing figure.
• Practical feel: Useful when the branch is bigger and management wants clearer operating results.

3) Stock and Debtors System

• How it is maintained: Control accounts are used (Branch Stock, Branch Debtors, Goods Sent to Branch, Branch Adjustment, etc.) for tight internal control.
• How profit/loss is ascertained: Profit is determined through the Branch Adjustment Account (after considering loading, shortages, and relevant expenses).
• Practical feel: Best when strong stock control is needed and goods may be invoiced at a price above cost.

Question 11: Methods of recording joint venture transactions without keeping a separate set of books

When co-venturers do not open a separate set of books for the venture, the venture is recorded in the personal books of the co-venturers using one of these methods:

1) Recording in the books of one co-venturer

• How it works: One co-venturer is responsible for recording all venture transactions.
• Accounts typically prepared: A Joint Venture Account to find profit/loss and personal accounts of other co-venturers to determine amounts due to/from them.
• Profit sharing: After profit/loss is found, each co-venturer’s share is transferred to their personal account (or to Profit and Loss for the recording co-venturer’s own share, as applicable).

2) Recording in the books of all co-venturers

• How it works: Each co-venturer records all joint venture transactions in his own books (including transactions done by the other venturer) so that each can independently compute venture profit.
• Outcome: Each co-venturer can work out profit/loss and settle with the other co-venturer(s).
• When used: Suitable when both parties want complete visibility in their own records.

3) Memorandum Joint Venture Account method

• How it works: Each co-venturer records only those transactions that directly involve him (for example, expenses he paid or goods he supplied).
• How profit is determined: Since no single set of books contains all venture transactions, a Memorandum Joint Venture Account is prepared to combine all items and compute total profit/loss, which is then shared.
• When used: Useful when co-venturers are handling different parts of the venture and do not want to record every transaction of the other party in their own books.

Question 12: Short notes on (a) ledger creation and (b) creating invoices (in Tally)

A. Ledger creation

A ledger in Tally is an account head used to record transactions (for example, Capital, Building, Purchases, Sales, Debtors, Creditors). Ledger creation means setting up these accounts under correct groups so that entries post properly in reports.

Common steps (single ledger creation):

• Go to Gateway of Tally → Accounts Info → Ledgers.
• Choose Create (single ledger).
• Enter Name of ledger (example: Capital, Building, Furniture).
• Select the correct Under (Group) such as Capital Account, Fixed Assets, Sundry Debtors, Sundry Creditors, etc.
• Enter opening balance (if applicable) and accept/save.

Multiple ledger creation (faster for similar ledgers): Use multiple ledger creation to create several ledgers under the same group quickly (for example, multiple fixed asset ledgers).

B. Creating invoices (Sales invoice/voucher)

In Tally, invoices are commonly created through sales or purchase vouchers (in invoice or voucher mode). A sales invoice records goods sold on cash or credit and automatically updates customer balances and inventory (when inventory is enabled).

Typical steps for a sales invoice/voucher:

• Ensure Sales ledger is created under Sales group and inventory values are enabled where required.
• Go to Gateway of Tally → Accounting Vouchers.
• Press F8 for Sales.
• Select the customer ledger (for credit sale, under Sundry Debtors) and set reference details as needed.
• Select Sales ledger and enter item details through inventory allocation (stock item, godown/location, quantity, rate).
• Add narration if needed, then accept/save to generate the invoice entry.