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ACCOUNTANCY CLASS XI

CHAPTER-1 INTRODUCTION OF ACCOUNTING Q.1. Define Accounting.

Ans. Accounting is the process of collecting, recording, classifying,summarising and

communicating financial information to the users.

Q.2. Define Book keeping.

Ans. Book keeping is a part of accounting. The process of recording financial transaction in a

systematic manner and classifying them into ledgers is termed as Book keeping. Book keeping thus

involves:

(i) Identify financial transactions and events,

(ii) Measuring them in terms of money,

(iii) Recording the identified financial transactions and events in the books of accounts, and

(iv) Classifying, i.e., posting them into ledger accounts.

Q.3. Meaning of Accountancy.

Ans. Accountancy is a systematic knowledge of accounting, i.e., it educates how to maintain the

books of accounts.

Q.4. What is meant by Income statement ?

Ans. Income statement refers to Trading, and Profit and Loss Account (statement of profit and loss,

in case of companies). It shows the profit earned or loss incurred by the enterprise during the

accounting year.

Q.5. What is meant by Position statement ?

Ans. Position statement refers to balance sheet which shows the financial position of the enterprise

on a particular date.

Q.6. Define Accounting Information.

Ans. Accounting Information is used for forecasting, comparing and evaluating the earning capacity

and financial position of the business.

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Q.7. What is meant by Double Entry System of Accounting ?

Ans. Double Entry System of Accounting means a system of accounting whereby both, debit and

credit, aspects of a transaction are recorded.

Q.8. What is Single Entry Sysytem of Accounting ?

Ans. Single Entry System of Accounting is a system under which both aspects of the transactions are

not recorded in all the cases. In some cases both aspects are recorded, while in others either one

aspect is recorded or a transaction is not recorded at all. This, is also known as Incomplete Double

Entry System.

Q.9. Define Accounting and main characteristics of it.

Ans. Accounting is an art of recording, classifying and summarizing in terms of money transactions

and events of a financial nature and interpreting the results thereof. In other words, it is the process

of collecting, recording, summarising and communicating financial information.

Characteristics of (Attributes) an Accounting are as follows.

1. Identification of Financial Transactions and Events : Accounting records only those transactions

and events which are of financial nature as they bring change in the resources of a firm.

2. Measuring the Identified Transactions : Accounting measures the transactions and events in

terms of a common measurement unit, i.e., the currency of the country.

3. Recording : Accounting is an art of recording business transaction in the books of accounts.

Recording is the process of recording business transactions of financial character in the book of

original entry, i.e., Journal.

4. Classifying : Accounting is an art of classifying business transactions. Classification is the process

of collecting similar transactions at one place by opening accounts in the Ledger Book.

5. Summarising : Accounting is an art of summarising financial transactions. This involves presenting

the classified data in a manner which is understandable and useful to internal as well as external

users of accounting statements.

6. Analysis and Interpretation : Financial data is analysed and interpreted so that the users of

financial data can make a meaningful judgement of the financial performance (profit) and financial

position of the business.





7. Communicating : Finally, accounting function involves communicating the financial data, i.e., financial

statements to its users.

Q.10. Is Accounting a Science or an Art. Explain ?

Ans. Accounting is an Art as well as a Science. Art is the technique which helps us to achieve our desired

objectives. Accounting is an art of recording, classifying and summarising financial transactions. It helps

us in knowing the profitabilityand financial position of the business.

Any organised knowledge based on certain basic principles is a ‘science’. Accounting is also a science as

it is an organized knowledge based on certain basic principles.

Q.11. What are the steps of Accounting Process ?

Ans. The steps of accounting process are as follows:

(i) Financial transactions

(ii) Recording

(iii) Classifying

(iv) Summarising

(v) Analysis and Interpreting and

(vi) Communicating

Q.12. Define Financial Accounting.

Ans. Financial accounting is that branch of accounting which records financial transactions and events,

summarises and interprets them and communicates the results to the users.

Q.13. Define Cost Accounting.

Ans. The limitation of Financial Accounting in respect of information relating to the cost of products or

services led to the development of a specialized branch, i.e., Cost Accounting.

Q.14. Define Management Accounting.

Ans. Management Accounting is the most recently developed branch of accounting. It is concerned with

generating accounting information relating to funds, costs, profits, etc., as it enables the management in

decision-making. We may say that Management Accounting addresses the needs of a single user group,

i.e., the management.

Q.15. Define the terms ‘Book Keeping, Accounting’ and ‘Accountancy’.





Ans. The terms ‘Book keeping’ and ‘Accounting’ are often considered as same. But it is not so. The two

terms are distinct from each other. Accounting is a wider concept and includes Book Keeping.

Q.16. What is the meaning of Book Keeping ?

Ans. Book keeping is a part of accounting being a process of recording of financial transactions and

events in the books of accounts. Thus, Book keeping involves:

1. Identifying financial transactions and events,

2. Measuring them in terms of money,

3. Recording the identified financial transactions and events in the books of accounts,and

4. Classifying recorded transaction and events, i.e., position them into Ledger accounts.

Q.17. Distinguish between Book Keeping and Accounting.

Ans.

Basis Book Keeping Accounting

1. Scope Book Keeping is concerned with indentifying Accounting is concerned with

financial transaction; measuring them in money summarising the recorded

terms; recording them in the books of accounts transactions, interpreting them and

and classifying them. Communicating the results

2. Stage It is primary stage. It is the basis for accounting. It is a secondary stage. It begins

where Book Keeping ends.

3. Objective The objective of book keeping is to maintain The objective of accounting is to

Systematic records of financial transactions. Ascertain net results of operations

Financial position and to

Communicate information to the

Interested parties.

4. Nature of Job This job is routine in nature. This job is analytical and dynamic in

nature.





5. Performance junior staff performs this function. Senior staff performs this function.

6. Special skills Book Keeping is mechanical in nature Accounting requires special skills and

and, thus, does not require special skills. ability to analyse and interpret.

Q. 18. Define Accountancy.

Ans. Accountancy is a systematic knowledge of accounting. It explains how to deal with various aspects

of accounting. It educates us how to maintain the books of accounts and how to summarise the

accounting information and communicate it to the users. In other words of Kohler, accountancy refers

to the entire body of the theory and practice of accounting.

Q.19.What are the Main Objectives and functions of accounting ?

Ans. The main objectives of accounting are:-

1. Record of Financial Transactions and Events: The objective of accountancy is to record financial

transactions and events of the organisation in the books of accounts following the principles of

accounting in a systematic manner.

2. Determine Profit or Loss: Another objective of accounting is to determine the financial

performance, i.e., profit earned or loss incurred, for the accounting period.

3. Determine Financial Position : Another objective of accounting is to determine financial

position. It is known from the Balance Sheet. Financial position of the business is as relevant for

the users of financial statements as is the Income Statement.

4. Assisting the management : Another objective of accounting is to assist the management by

providing financial information to it. The management often requires financial information for

decision-making, exercising control, budgeting and forecasting.

5. Communicating Accounting Information to users : Another objective of accounting is to provide

accounting information to users who analyse them as per their individual requirements.

6. Protecting Business Assets : Another objective of accounting is to have records of assets owned

by the business. Accounting maintains record of assets owned by the business which enables

the management to protect them and exercise control.

The main functions of accounting are:-

1. Maintaining Systematic Accounting Records. The primary function of accounting is to maintain

systematic accounting records of financial transactions and events.

2. Preparation of Financial Statements. Financial statements means final accounts prepared at the

end of the accounting period. It includes Income Statement and (Profit and Loss Account or

Statement of Profit and Loss, in the case of companies) and position statement (Balance Sheet).





3. Meeting Legal Requirements. Accounting records are accepted as evidence by the court of law

if they are maintained systematically following the accounting principles and concepts.

4. Communicating the Financial Data. It is yet another function of accounting to communicate the

financial data to the users.

5. Assistance to Management. Management often requires information beyond the information

conveyed by the financial data.

Q.20. State the advantages of accounting.

Ans. Advantages of accounting are:-

1. Financial Information about business : Financial performances during the accounting period,

i.e., profit or loss and also the financial position at the end of the accounting period is known

through accounting.

2. Assistance to Management : The management makes business plans, takes decisions and

exercises control over the affairs on the basis of accounting information.

3. Replaces Memory : A systematic and timely recording of transactions obviates the necessity to

remember transactions. The accounting record provides the necessary information.

4. Facilities Comparative Study : A systematic record enables a businessman to compare one

year’s results with those of other years and locate significant factors leading to change, if any.

5. Facilities Settlement of Tax Liabilities : A systematic accounting record immensely helps in

settlement of income tax, sales tax, VAT and exercise duty liabilities, since it is a good evidence

of the correctness of transactions.

6. Facilities Loans : Loan is granted by the banks and financial institutions on the basis of growth

potential which is supported by the performance. Accounting makes available the information

with respect to performance.

7. Evidence in Court : Systematic record of transactions is often accepted by the courts as good

evidence.

8. Facilities sale of business : If someone desires to sell his business, the accounts maintained by

him enable the ascertainment of the proper purchase price.

9. Helps in Decision-Making : Accounting helps in taking a large number of decisions like the

amount to be withdrawn by proprietor, the price at which goods should be sold, etc.

Q.21. What are the Limitations of Accounting ?

Ans. Limitations of Accounting are :-

1. Accounting is not Fully Exact : Although most of the transactions are recorded on the basis of

evidence such as sale or purchase or receipt of cash, yet some estimates are also made for





ascertaining profit or loss. Examples of these are providing depreciation on the basis of

estimated useful life of an asset, possible bad debts etc.

2. Accounting does not Indicate the Realisable Value : The Balance sheet does not show the

amount of cash which the firms may realize by the sale of all the assets.

3. Accounting Ignores the Qualitative Elements : Since accounting is confined to monetary

matters only, qualitative elements like quality of staff, industrial relations and public relations

are ignored.

4. Accounting Ignores the Effect of Price Level Changes : Accounting statements are prepared at

historical cost. Money as a measurement unit, changes in value. It does not remain stable.

5. Accounting may Lead to Window Dressing : The term window dressing means manipulation of

accounts so as to conceal vital facts and present the financial statements in such a way as to

show better position than what it actually is. In this situation, income statement (i.e., Profit and

Loss Account ) fails to provide a true and fair view of the result of operations and the balance

sheet fails to provide a true and fair view of the financial position of the enterprise.

Q.22. What is Accounting Information and its types ?

Ans. “Accounting is a service activity. Its function is to provide qualitative information, primarily financial

in nature, about economic entities that is intended to be useful in making economic decisions”.

Types of Accounting Information

Accounting information refers to the financial statements generated through the process of book

keeping, use of which helps the users to arrive decisions. The information made available by these

statements can be categorized into the following :

1. Information Relating to Profit or surplus;

2. Information Relation to Financial Position; and

3. Information about Cash Flow.

Let us now discuss these in detail.

1. Information Relating to Profit or Surplus : The Income Statement makes available the

accounting information about the profit earned and loss incurred as a result of business

operations or otherwise during an accounting period.

2. Information Relating to Financial Position : The Position Statement, i.e., the Balance Sheet

makes available the information about the financial position of the entity

3. Information about Cash Flow : Cash Flow Statement is a statement that shows flow, both inflow

and outflow, of cash during a specific period. It is of immense use as many decisions such as





payment of liabilities, payment of dividend and expansion of business, etc., are based on

availability of cash.

Q.23. Explain the users of Accounting Information.

Ans. Users of Accounting Information may be categorized into Internal Users and External Users.

Internal Users

(i) Owners: Owners contribute capital in the business and thus are exposed to maximum risk.

(ii) Management: The management makes extensive use of accounting information to arrive at

informed decisions such as determination of selling price, cost controls and reduction, etc.

(iii) Employees and Workers: Employees and workers are entitled to bonus at the year-end,

which is linked to the profit earned by an enterprise.

External Users

(i) Banks and Financial Institutions: Banks and financial institutions are an essential part of any

business as they provide loans to businesses.

(ii) Investors and Potential Investors: Investment involves risk and also the investors do not

have direct control over the business affairs.

(iii) Creditors: Creditors are those parties who supply goods or services on credit. It is a common

business practice that a large number of supplier remain invested in credit sales.

(iv) Government and its Authorities : The government makes use of financial statements to

compile national income accounts and other information.

(v) Researchers: Researches use accounting information in their research work.

(vi) Consumer: Consumers require accounting information for estabilishing good accounting

control so that cost of production may be reduced with the resultant reduction in the prices

of products they buy.

(vii) Public: They want to see the business running since it makes substantial contribution to the

economy in many ways, e.g., employment of people, patronage to supplier etc.

Q.24. Explain the Qualitative Characteristics Of Accounting Information.

Ans. Qualitative characteristics are attributes that makes the accounting information useful to users.

The qualitative characteristics are:

1. Reliability: Accounting information must be reliable. Reliability of information means it is

verifiable, free from material error and bias.





2. Relevance: Accounting information must be televant to the user. Information is relevant if it

meets the needs of the users in decision-making.

3. Understandability: Understandability means that the information provided through the

financial statements must be presented in a manner that the users are able to unde rstand it.

4. Comparability: Comparability means that the users should be able to compare the accounting

information of an enterprise of the period either with that of other periods, known as intra-firm

comparison or with the accounting information of other enterprises, known as inter-firm

comparison.

Q.25. Write the main features and advantages of Double Entry System.

Ans. The main features of Double Entry System are:-

1. It maintains a complete record of each transaction.

2. It recognise two-fold aspect of every transaction, viz., the aspect of receiving (value in) and the

aspect of giving (value out).

3. In this system, one aspect is debited and the other aspect is creadited following the rules of

debit and credit.

4. Since one aspect of a transaction is debited and the other is credited, the total of all debits is

always equal to all credits. It helps in estabilishing arithmetical accuracy by preparing the Trial

Balance.

Advantages of the Double Entry System are:-

(i) Scientific System: Double Entry System is a scientific system of recording business

transactiona as compared as compared to other systems of Book Keeping. It helps attain the

objectives of accounting.

(ii) Complete Record of Transaction: Under the system, both sides of a transaction are

recorded. It is a complete record as it results in showing correct income or loss, assets and

liabilities.

(iii) A check on the Accuracy of Accounts: By the use of this system, accuracy of the accounting

work can be established Profit and Loss Account.

(iv) Determining Profit or Loss : Profit earned or loss incurred during a period can be

determined by preparing Profit and Loss Account.

(v) Knowledge of Financial Position : Financial position of the firm or the institution can be

ascertained at the end of each period by preparing the Balance Sheet.

(vi) Full details for Purposes of Control: The system permits accounts to be maintained in as

much detail as necessary and, therefore, provides significant information for purposes of

control, etc.





(vii) Comparative Study is Possible: Results of one year may be compared with those of previous

years and reasons for the change may be ascertained.

(viii) Helps Management in Decision-making: Management may be able to obtain good

information for its work, especially in making decisions.

(ix) Frauds and Misappropriations: Frauds and misappropriations are minimised since complete

information about all assets and liabilities is available.

Q.26. Define Single Entry System.

Ans. Single entry system of recording transactions in the books of accounts may be defined as an

incomplete Double Entry System. In this system, all transactions are not recorded on double entry

basis. The single entry system is also known as Accounts from Incomplete Records.





ACCOUNTANCY CLASS XI CHAPTER-2 BASIC ACCOUNTING TERMS

Q.1. Define Business Transaction and write the characteristics of it.

Ans. The term ‘Business Transaction’ means a financial transaction or event entered into between

two parties and recorded in the books of accounts.

Characteristics of a Business Transaction

1. It is concerned with money or money’s worth of goods or services.

2. It arises out of the transfer of exchange of goods or services.

3. It brings about a change in the financial position (assets and liabilities).

4. It has an effect on the accounting equation.

5. It has dual aspects or sides- ‘ receiving’ (Debit) and ‘giving’ (Credit) of the benefit.

Q.2. What is account ?

Ans. Account is a summarised record of transactions relating to a particular head at one place. It

records not only the amount of transactions but also their effect and direction.

Q.3. Define capital ?

Ans. Capital is the amount invested by the proprietor or partner in the business.

Caputal = Assets - Liabilities

Q.4. What is Drawings ?

Ans. It is the amount withdrawn or goods taken by the proprietor for his personal use. Goods so

taken by the proprietor are valued at purchase cost. Drawings reduce the investment (or capital) of

the owners.

Q.5. What is Liability ?

Ans. Liability means amount owed (payable) by the business. Liability towards the owners

(proprietor) of the business is termed as internal liability. On the other hand, liability towards the

outsiders, i.e., other than the owners ( proprietor) is termed as external liability .

There are two types of liability:-





(i) Non-current Liability: Non-current Liability is that liability which is payable after a period of

more than a year. Examples of Non-Current Liability are long-term loans, debentures, etc.

(ii) Current Liability: Current Liability is that liability which is payable within a year. Examples of

Current Liability are creditors, bills payable, short-term loans, etc.

Q.6. Define asset.

Ans. Asset is property or legal rights owned by a business to which money value can be attached.

Assets can be classified in to (i) Non-current Assets, and (ii) Current Assets:

(i) Non- current Assets: Non- current Assets are those assets which are held by a business from

a long-term point of view. They are not held with a purpose to resell but are held either as

investment or to facilitate business operations.

(a) Tangible Assets: Tangible Assets are those assets which have physical existence, i.e., they can be

seen and touched. Examples of Tangible Assets are land, building, machinery, computer, goods

etc.

(b) Intangible Assets: Intangible Assets are those assets which do not have physical existence, i.e.,

they can not be seen and touched. Examples of Inangible Assets are land, building, machinery,

computer etc.

(ii) Current Assets : Current Assets are those assets which are held by the business with the

purpose of converting them into cash within a short period, i.e., one year. For example,

goods are purchased with a purpose to resell and earn profit, debtors exist to convert them

into cash, i.e., receive the amount from them, bills receivable exist again for receiving cash

against it, etc.

(iii) Fictitious Assets : Fictitious Assets are those assets which are neither tangible assets nor

intangible assets. They are losses written off not in the year in which they are incurred but in

more than one accounting period.

Q.7. What is receipts ?

Ans. Receipts is the amount received or receivable for selling assets, goods or services.

Receipts are categorised into:-

Revenue Receipts: It is the amount received or receivable in the normal course of business. For

example, amount received or receivable against sale of goods or rendering of services.





Capital Receipts: It is the amount received or receivable against transactions which are not revenue

in nature. For example, amount received or receivable for sale of machinery, building, furniture,

loan etc.

Q.8. What is expenditure ?

Ans. Expenditure is the amount spent or liability incurred for acquiring assets, goods or services.

Expenditure may be categorised into:

(i) Capital Expenditure : It is an expenditure incurred to acquire assets or improving the

existing assets which will increase the earning capacity of the business, i.e., will give benefit

to the business in more than one accounting year.

(ii) Revenue expenditure : Revenue expenditure is the expenditure incurred, the benefit of

which is consumed or exhausted within the accounting period. It has direct relationship with

revenue or with the accounting period, e.g., cost of goods sold, salaries , rent, electricity

expenses, etc.

(iii) Deffered Revenue Expenditure : Deferred Revenue Expenditure is revenue expenditure in

nature but is written off (charged) in more than one accounting period. For example, large

advertising expenditure that will give benefit for more than one accouting period is a

Deferred Revenue Expenditure.

Q.9. What is Expense ?

Ans. Expense is the cost incurred for generating revenue. It is the value which has expired during the

accounting period. It may be

(i) Cash payment such as salaries, wages, rent, etc (depreciation).

(ii) An amount written off out of a current assets (say bad debts).

(iii) Decline in the value of assets (say investment)

(iv) Cost of good sold.

An expense is charged (debited) to Profit and Loss Account.

Prepaid Expenses: It is an expense that has been paid in advance and the benefit of which will be

available in the following year or years.

Outstanding Expenses : It is an expense that has been incurred but has not been paid.

Q.10. What is Income or Profit ?





Ans. Income is the profit earned during a period. In other words, the difference between revenue

and expenses is termed as Income.

Income = Revenue – expenses

Income is also known as Profit

Q.11. Define Gross Profit/ Net Profit.

Ans. Profit is normally categorized into gross profit and net profit.

Gross Profit : Gross Profit is the difference between revenue from sales and/ or services rendered

over its direct cost.

Net Profit : Net profit is the profit earned after allowing for all expenses. In case expenses are more

than the revenue, it is Net Loss.

Q.12. What is gain ?

Ans. Gain is a profit of irregular or non-recurrent nature. It is a profit that arises from transactions

which are incidental to business such as profit on sale of fixed asset or investments.

Q.13. What is loss ?

Ans. Loss is excess of expenses of a period over its related revenues which may arise from normal

business activities. It decreases the owner’s equity.

Q.14. Define the term Purchases.

Ans. The term ‘Purchases’ is associated with or used for purchases of goods. Goods are articles

purchased for resale or for producing the finished products which are also to be sold.

Q.15. Define purchases return.

Ans. Goods purchased may be returned to the seller for any reason, say, they are not as per the

specifications or are defective. Goods returned are known as Purchases Return or Return Outward.

Q.16. Define the term sales.

Ans. The term ‘Sales’ is associated with or used for sale of goods that are dealt with by the firm. The

term ‘sales’ includes both cash and credit sales. When goods are sold for cash, they are termed as

Cash Sales and when sold on credit, they are termed as Credit Sales.





Q.17. Define sales return.

Ans. Goods sold when returned by the purchaser are termed as Sales Return or Returns Inward.

Q.18. Define stock(Inventory).

Ans. Stock is tangible asset held by an enterprise for the purpose of sale in the ordinary course of

business or for the purpose of using it in the production of goods meant for sale. Stock may be: (i)

Opening Stock or (ii) Closing Stock.

(i) Opening Stock is the stock-in-hand in the beginning of the accounting year. In other words,

it is stock-in-hand at the end of the previous accounting year.

(ii) Closing Stock is the stock-in-hand at the end of the accounting year.

Stock may be of the following kinds:

(i) Stock of Goods: Stock of goods in the case of a trading concern comprises stock of goods

remaining unsold. In the case of manufacturing concern, it comprises processed goods

manufactured for the purpose of sale. It is valued at cost or net realisable value, whicheve r

is lower.

(ii) Stock of Raw Material: It comprises the stock of raw material used for manufacturing of

goods lying unused. For example, stock of cloth to be used for stitching shirts.

(iii) Work- in- Progress : It is a stock that is in the process of being finished, i.e., they are partly

finished goods. It is valued at an aggregate of cost of raw material used, cost of labour,

other production cost, i.e., power, fuel, etc.

Q.19. What is Trade Receivables ?

Ans. It is the amount receivable for sale of goods or services rendered in the ordinary course of

business. Trade Receivables is a sum total of debtors and bills receivable.

Q.20. Define Debtor.

Ans. Debtor is a person who owes amount to the enterprise against credit sales of goods or services. For

examples, when goods are sold to a person on credit that person is called a Debtor because he owes the

amount to the enterprise. The amount due is known as debt.

Q.21. Define trade receivables.

Ans. Trade receivables is the amount receivable against goods sold and services rendered in the

ordinary course of business.





Q.22. Define Creditor.

Ans. Creditor is a person to whom an enterprise owes amount against credit purchases of goods or

services taken. For example, Mohan is a creditor of a firm when goods are purchase d from him on

credit.

Q.23. What is meant by Bills Payable ?

Ans. Bills Payable means a Bill of Exchange accepted, the amount of which will be payable on the

specified date. It is included in Trade Payables because Bill Payable replaces a creditor.

Q.24. Define Goods.

Ans. Goods are the physical items of trade. It is a term that applies to all the items making up the sales

or purchases of a business.

Q.25. Define Cost.

Ans. It is the amount of expenditure incurred on or attributable to a specified article, product or activity.

Q.26. Define Voucher.

Ans. Voucher is an evidence of a business transaction. Explain of voucher are Cash Memo, Invoice or Bill,

Receipt, Debit/Credit Notes, etc.

Q.27. Define Discount.

Ans. When customers are allowed a reduction in the prices of goods by the business, it is known as a

Discount.

Q.28. What is meant by Books of Accounts ?

Ans. Books of Accounts means Journal and Ledger in which transactions are recorded.

Q.29. Define Entry.

Ans. A transaction and event when recorded in the books of accounts is known as an Entry.

Q.30. Define Debit.

Ans. An account has two parts, i.e., debit and credit. The left side is the debit side while the right side is

the credit side. If an account is to be debited, then the entry is posted to the debit side of the account.

Q.31. Define Credit.





Ans. Credit is the right side of an account. If an account is to be credited, then the entry is posted to the

credit side of the account.

Q.32. Define Depreciation.

Ans. Depreciation is a fall in the value of an asset because of usage or with afflux of time or

obsolescence or accident. It is an allocation of cost of fixed asset in each accounting year during its

expected useful life.

Q.33. Define Cost of Goods Sold.

Ans. Cost of Goods Sold is the direct costs of the goods or services sold.

Q.34. Define Bad Debts.

Ans. Bad Debts is the amount owed to the business that is written off because it has become

irrecoverable. It is a loss for the business and is, thus, debited to Profit and Loss Account .

Q.35. What is Insolvent ?

Ans. Insolvent is a person or enterprise which is not in a position to pay its debts.

Q.36. What is Solvent ?

Ans. Solvent is a person or enterprise which is in a position to pay its debts.

Q.37. Define Book Value.

Ans. This is the amount at which an item appears in the books of accounts or financial statements.

Q.38. What is Balance Sheet.

Ans. It is a statement of the financial position of an individual or enterprise at a given date, which

exhibits its assets, liabilities, capital, reserves and other account balances at their respective book

values.

Q.39. Define Entity.

Ans. An Entity means an economic unit which performs economic activities (e.g., Reliance Industries,

Bajaj Auto, Maruti, TISCO).





ACCOUNTANCY CLASS XI CHAPTER-3 THEORY BASE OF ACCOUNTING:

ACCOUNTING STANDARDS AND INTERNATIONAL FINANCIAL REPORTING

STANDARDS (IFRS)

Q.1. What is the meaning and nature of Accounting Principles ?

Ans. “Principles of Accounting are the general law or rule adopted or proposed as a guide to action , a

settled ground or basis of conduct or practice.”

Accounting Principles are the rules of action or conduct adopted by accountants universally while

recording accounting transactions. They are the norms or rules which are followed in giving accounting

treatment to various items of assets, liabilities, expenses, income, etc. These principles are classified into

two categories:

1. Accounting Concepts;

2. Accounting conventions.

1. Accounting Concepts: Accounting Concepts are the basic assumptions or fundamental

propositions within which accounting operates.

2. Accounting conventions: Accounting Conventions are the outcome of accounting practices or

principles being followed by the enterprises over a period of time.

FEATURES OF ACCOUNTING PRINCIPLES

1. Accounting Principles are Man-Made: Accounting Principles are man-made and, therefore, they

do not stand the scrutiny like the principles of natural science.

2. Accounting Principles are Flexible: Accounting Principles are not rigid but flexible. Whenever a

situation arises that requires solution, accountants arrive at a reasoned and reasonable decision

which gradually becomes the accepted Accounting Principles.

3. Accounting Principles are Generally Accepted: Accounting Principles are the bases and

guidelines for accounting and are generally accepted. The general acceptance of an Accounting

Principle usually depends on how it meets three criteria: relevance, objectivity and feasibility.

(i) Relevance: Accounting Principles are relevant if they result in information that is useful

to the users of accounting information.





(ii) Objective: Accounting Principles are objective if they are not influenced by the personal

bias of the persons preparing the accounting information.

(iii) Feasible: Accounting Principles are feasible if they can be applied without undue

complexity and cost.

Q.2. What is the Necessity of Accounting Principles and Fundamental Accounting Assumptions

?

Ans. Accounting information is better understood if it is prepared following the set of

Accounting Principles uniformly. It means the same Accounting Principles are followed by all

entities in preparing their final accounts.

The fundamental accouting assumptions are:-

1. Going Concern Assumption: According to this assumption, it is assumed that business shall

continue for a foreseeable period and there is no intension to close the business or scale

down its operations significantly.

2. Consistency Assumption: According to the Consistency Assumption, accounting practices

one selected and adopted, should be applied consistently year after year.

3. Accrual Assumption: According to the Accrual Assumption, a transaction is recorded in the

books of accounts at the time when it is entered into and not when the settlement takes

place.

Q.3. What are the Principles of Accounting ?

Ans. Accounting Principles are:-

1. Accounting Entity or Business Entity Principle : According to the Business Entity principle,

business is considered to be separate and distinct from its owners. Business Transactions,

therefore, are recorded in the books of accounts from the business point of view and not

from that of the owners.

2. Money Measurements Principle : According to the Money Measurement Principle,

transactions and events that can be measured in money terms are recorded in the books of

accounts of the enterprise.

3. Accounting Period Principle : According to the Accounting Period Principle, the life of an

enterprise is broken into smaller periods so that its performance is measured at regular

intervals.

4. Full Disclosure Principle : According to the Principle of Full Disclosure, “there should be

complete and understandable reporting on the financial statements of all significant

information relating to the economic affairs of the entity.”





5. Materiality Principle: The Materiality Principle refers to the relative importance of an item

or an event. According to the American Accounting Association, “an item should be

regarded as material if there is a reason to believe that knowledge of it would influence the

decision of an informed investor.”

6. Prudence or Conservation Principle : The Prudence Principle is many a time described using

the phrase “Do not anticipate a profit, but provide for all possible losses.”

7. Cost Concept or Historical Cost Principle : According to the Cost Concept, an asset is

recorded in the books of accounts at the price paid to acquire it and the cost is the basis for

all subsequent accounting of the asset.

8. Matching Concept or Matching Principle : This concept is based on the accounting period

concept. An important objective of business is to determine profit periodically.

9. Dual Aspect or Duality Principle : According to the Dual Aspect Concept, every transaction

entered into by an enterprise has two aspects, a debit and a credit of equal amount.

Owner’s equity or capital + Claims of outsider = Assets

Or

Assets = Owner’s equity + Claims of outsiders

10. Revenue Recognition Concept : According to the Revenue Recognition Concept, revenue is

considered to have been realised when a transaction has been entered into and the

obligation to receive the amount has been established.

11. Verifiable Objective Concept : The Verifiable Objective Concept holds that accounting

should be free personal bias.

Q.4. What is the meaning and nature of Accounting Standards ?

Ans. The Accounting Standards are set of guidelines, i.e., Generally Accepted Accounting

Principles, issued by the accounting body of the country such as The Institute of Chartered

Accountants of India, that are followed for preparation and presentation of Financial

Statements.

NATURE OF ACCOUNTING STANDARDS

Following points highlight the nature of Accounting Standards :

1. Accounting Standards are guidelines providing the framework so that credible Financial

Statements can be produced.

2. The objective of setting Accountancy Standards is to bring uniformity in accounting practices

and to ensure transparency, consistency and comparability.

3. Accounting Standards are prepared keeping in view the business environment and laws of

the country.





4. Accounting Standards are mandatory in nature.

5. Accounting Standards have also been made flexible in the sense that where alternative

accounting principles are acceptable, an enterprise is free to adopt any of the practices with

a suitable disclosure.

Q.5. What is the concpt of Accounting Standards and its objectives ?

Ans. Accounting Standards prescribe the accounting rules and procedures for recognition,

measurement, treatment, presentation and discloser of accounting transactions in financial

statements.

OBJECTIVES OF ACCOUNTING STANDARDS

Objectives of Accounting Standards are:

1. Minimise the diverse accounting policies and practices with the aim to eliminate them to

the extent possible.

2. Promote better understanding of financial statements.

3. Understand singnificant Accounting Policies adopted and applied.

4. Facilitating meaningful comparison of financial statements of two or more entities.

5. Enhancing reliability of financial statements.

Q.6. What is International Financing Reporting Standards (IFRS) ?

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

by IASB, which came into existence in the year 2001.

IASB adopted existing International Accounting Standards (IAS) and SIC as their standards. Out

of 41 IAS, 12 IAS stand withdrawn and in effect 29 IAS are still applicable.

IFRS comliant financial statements are:

1. Statement of Financial Position,

2. Comprehensive Income Statement,

3. Statement of Changes in Equity,

4. Statement of Cash Flow, and

5. Notes and Summary of Accounting Policies.

Q.7. What are the objectives of IASB ?

Ans. The objectives of IASB are:-





1. To develop, in the public interest, a single set of high-quality, understandable, and

enforceable global accounting standards that require high-quality, transparent, and

comparable information in financial statements and other financial reporting to help

participants in the various capital markets of the world and other users of the information to

make economic decisions;

2. To promote the use and rigorous application of those standards; and

3. In fulfilling the objectives associated with (1) and (2), to take account of, as appropriate, the

special needs of small and medium-sized entities and emerging economies; and

4. To bring about convergence of national accounting standards and International Financial

Reporting Standards to high-quality solutions.

Q.8. What is the difference between IFRS and Indian Accounting Standards ?

Ans. The principal difference between the two is that while IFRS are based on principle and fair

value, Indian Accounting Standards are based on rules and historical value.

India decided to coverage Indian Accounting Standards with IFRS and has issued converged

International Accounting Standards titled ‘Ind-AS’.

Q.9. What are the Assumptions in IFRS ?

Ans. The underlying assumption in IFRS are:

1. Accrual Assumption : The transactions are recorded in the books of accounts on accrual

basis, i.e., as and when they occur and not when the settlement of transactions takes place.

2. Going Concern Assumption : It is assumed that the life of the business is infinite, i.e., the

entity will continue its operations for an indefinite period.

3. Measuring Unit Assumption : Measuring unit for valuation of capital is the current

purchasing power. It means assets should be reflected at current, i.e., fair value.

4. Constant Purchasing Power Assumption : Constant purchasing power means value of

capital be adjusted to inflation in the economy at the end of the financial year.

Q.10. What are IFRS Based Financial Statements ?

Ans. The financial statements produced under IFRS are:

1. Statements of Financial Position : The elements or contents of the statement are:

(i) Asset : Assets are the resources controlled by the enterprise as a result of past events

and operations from which the future economic benefits shall flow to the enterprise.





(ii) Liability : Liabilities are the obligations of the enterprise from the past events and

operations, which shall result in outflow of resources, i.e., assets.

(iii) Equity : Equity is the residual interest in the assets of the enterprise after deducting

liabilities. It is the real value of shareholders’ equity.

2. Statement of Comprehensive Income : A statement of comprehensive Income includes two

separate statements, i.e. Income Statement and a Statement of Comprehensive Income are

prepared. The elements or contents of the statement are:

(i) Revenue : It increases the economic benefit during the accounting period as a result of

business operations or increase in value of assets or decrease in liabilities. It results in

increase in the value of shareholder’s equity.

(ii) Expenses : It is a decrease in economic benefits in the form of outflows during the

accounting period as a result of business operations or decrease in val ue of assets or

increase in liabilities. It results in decrease in the value of shareholders’ equity.

3. Statement of Changes in Equity.

4. Statement of Cash Flow.

5. Notes and Significant Accounting Policies.

Measurement of elements of IFRS Based Financial Statements

1. Historical Cost : Assets are recorded at the amount of cash or cash equivalents paid or the fair

value of the consideration paid to acquire them at the time of their acquisition. Liabilities are

recorded at the amount of proceeds received in exchange for the obligation.

2. Current Cost : Assets are carried in the Balance Sheet at the amount of cash or cash equivalents

that would have to be paid if the same or an equivalent asset has been acquired currently.

Liabilities are carried at undiscounted value that would be require to settle the obligation.

3. Realisable (Settlement) Value: Assets are carried at the amount of cash or cash equivalents that

could be realised by selling the asset in an orderly disposal.

Q.11. What are the difference between IFRS and Indian GAAP or Accounting Standards ?

Ans. The principal differences between IFRS and GAAP or Accounting Standards are as follows:

IFRS are Principle based while Indian GAAP or Accounting Standards are Rule based. Unlike Indian

Accounting Standards, IFRS do not prescribe any form for preparing the financial statements. For

example, under the Indian laws, Balance Sheet is prepared according to Schedule VI of the

companies Act, 1956 or in the form as near thereto.





IFRS are based on Fair Value Concept while Indian GAAP or Accounting Standards are based on

Historical Cost Concept. Unlike Indian GAAP or Accounting Standards, IFRS require that the assets

and liabilities of the company should be shown at the fair value as at the date of the Balance Shee t.

However, besides the above two principal differences there are differences in a number of areas

and are hereunder:

Revenue Recognition

Inventory Valuation in Service Sector

Accounting for Taxes on Income

Useful Life of Intangible Assets

Current and Non-current Classification

Prior Period Items

Extraordinary Items

Regrouping/Reclassification

Impact on Fixed Assets





ACCOUNTANCY CLASS XI CHAPTER-4 BASES OF ACCOUNTING

Q.1. What is Cash Basis of Accounting ?

Ans. It is a system of accounting according to which transactions are recorded in the books of accounts

when cash is received or paid.

Q.2. What is Accrual Basis of Accounting ?

Ans. It is a system of accounting according to which transactions are recorded in the books of accounts

when transaction is entered into irrespective of cash having been received or not.

Q.3. What are Outstanding Expenses ?

Ans. They are those expenses which have been incurred during the accounting period but have not yet

been paid during the year. In the Balance Sheet, they are shown as liability.

Q.4. What are prepaid expenses ?

Ans. They are those expenses which have been paid in advance. In the Balance Sheet, they are shown as

an asset.

Q.5. What is Accrued Income ?

Ans. It is an income which has been earned during the accounting period but has not yet become due

for payment and, therefore, has not been received. In the Balance Sheet, it is shown as an asset.

Q.6. What is Income Received in Advance ?

Ans. It is an income which has been received before it has been earned, i.e., goods have been sold or

services have been rendered. In the Balance Sheet, it is shown as a liability.

Q.7. What are the Advantages and Disadvantages of Cash Basis of Accounting ?

Ans. Advantages : Advantages of Cash Basis of Accounting are:

(i) It is a simple basis of accounting as adjustments for outstanding expenses, prepaid

expenses, accrued income and income received in advance is not made.

(ii) This approach is more objective as very few estimates and judgements are required.





(iii) This basis of accounting is suitable for those enterprises where most of the transactions are

on cash basis.

Disadvantages : Disadvantages of Cash Basis of Accounting are :

(i) It does not give a true and fair view of the profit or loss and the financial position of an

enterprise because it ignores outstanding and prepaid expenses and accrued income and

income received in advance.

(ii) It does not follow the matching principle of accounting.

(iii) This system does not distinguish between capital and revenue items and, as a result, there is

no consistency in the profits of the two years.

Q.8. What is Accrual Basis of Accounting ?

Ans. Accrual Basis of Accounting: Under Accrual Basis of Accounting, unlike under Cash Basis of

Accounting, income is recorded as income when it is earned or accrued. For example, credit sale is

recognised as sale irrespective of the fact whether amount has been recived or not. Similarly, if an

expense has been incurred but payment has not been made, it will be recorded as an expense.

Q.9. What are the advantages and disadvantages of Accrual Basis of Income ?

Ans. Advantages : The advantages of Accrual Basis of Accounting are :

(i) It is more scientific compared to Cash Basis of Accounting and hence is preferred by

accountants.

(ii) This basis of accounting shows a complete picture of financial transactions of the business

as it takes into account the effect of all transactions relating to a period as well as

adjustments like outstanding expenses, prepaid expenses, accrued income and income

received in advance.

(iii) This basis discloses correct profit or loss for a particular period and also exhibits true

financial position of the business on a particular day.

(iv) It reflects true profit or loss during the accounting period and, therefore, has wide

acceptability. This system is followed by most of the industrial and commercial firms.

Disadvantages : The disadvantages of Accrual Basis of Accounting are:

(i) This system is not as simple as Cash Basis of Accounting.

(ii) The accounting process is too elaborate.

(iii) A quick appraisal of the profit/loss is not possible because many adjustments are required to

ascertain the true financial position of the business.





Q.10. What are the difference between Accrual Basis of Accounting and Cash Basis of Accounting ?

Ans. Difference between Accrual Basis of Accounting and Cash Basis of Accounting are:

Basis Accrual Basis of Accounting Cash Basis of Accounting

Recorded of Transactions Both cash and credit transactions Cash transactions are recorded.

are recorded.

Prepaid/Outstanding Prepaid and outstanding expenses are Prepaid and outstanding accounted in the Profit and Loss account. Expenses are not adjusted. Expenses Accrued income and income received Similarly, accrued income and Accrued Income/Income in advance are also accounted and income received in advance

Received in Advance shown in the Balance Sheet. are not adjusted.

Profit or Loss Correct profit or loss is ascertained Correct profit or loss is not because it records both cash and credit ascertained because it records

transactions. Only cash transactions

Technical Knowledge The Accrual Basis of Accounting requires It does not require much of technical knowledge as many adjustments technical knowledge as is like prepaid, outstanding, capital and required for Accrual Basis

revenue are required to be made. Of Accounting.

Legal Position Accrual Basis of Accounting is recognised Cash Basis of Accounting is not By the Companies Act, 1956. recognised by the Companies

Act, 1956.

Acceptability Accrual Basis of Accounting is more acceptable Cash Basis of Accounting is not in business as it reveals correct income and acceptable in business as it expenses besides assets and liabilities. does not reveal the required

information.

Reliability Accrual Basis of Accounting is more reliable Cash Basis of Accounting is As it records both cash and credit transactions less reliable as it records only and, thus reveals correct profit or loss besides cash transactions and as a assets and liabilities. result does not reveal correct profit or loss and also

assets and liabilities.

Suitability Accrual Basis of Accounting is suitable for Cash Basis of Accounting is business as it requires information that suitable for Not-for-Profit is complex. It can be made available by Organisations and Accrual Basis of Accounting. Professionals such as Chartered accountants, Lawyers,etc., since they require comparatively less

information.





ACCOUNTANCY CLASS XI CHAPTER-5 ACCOUNTING EQUATION

Q.1. Do you think that a transaction can break the Accounting Equation ?

Ans. No, a transaction can change the Accounting Equation but cannot break it.

Q.2. Goods costing ₹ 10,000 have been sold for cash at 25% profit. How will you show the transaction

in the Accounting Equation ?

Ans. Increase cash by ₹ 12,500; Decrease stock by ₹ 10,000; and Increase capital by ₹ 2,500.

Q.3. The capital of a business is ₹ 2,00,000 and outside liabilities are ₹ 1,50,000. Calculate the total

assets of the business.

Ans. ₹ 3,50,000 (Capital + Outside Liabilities = Assets).

Q.4. If total assets of a business are ₹ 1,30,000 and capital is ₹ 80,000, calculate the outside liabilities.

Ans. ₹ 50,000 (Liabilities = Total Assets – Capital).

Q.5. If total assets of the business are ₹ 4,50,000 and outside liabilities are ₹ 2,00,000, calculate

owner’s equity.

Ans. Assets = Owner’s Equity + Liabilities

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

Owner’s Equity = ₹ 2,50,000.

Q.6. Briefly explain the Accounting Equation.

Ans. The accounting equation is a mathematical equation which shows that the assets and liabilities of a

firm are equal, i.e., Assets = Liabilities + Capital. It is based on Dual Aspect Concept of Accounting.

Q.7. What is owner’s equity ?

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

Q.8. Give an example of decrease in an asset and decrease in a liability.

Ans. Cash paid to a creditor.

Q.9. Give an example of a transaction where an asset will increase and also the liability.

Ans. Goods purchased on credit.

Q.10. Give an example of a transaction where an asset and owner’s capital will increase.





Ans. Capital introduced by the proprietor.

Q.11. Give an example of a transaction due to which owner’s capital and an asset will decrease.

Ans. Goods taken by the proprietor for personal use.

Q.12. Which transaction decreases one asset and increase another asset ?

Ans. Amount received from a debtor.

Q.13. Give an example of a transaction which increases one liability and decreases another.

Ans. Acceptance of Bill Payable.

Q.14. Give an example of a transaction which has effect on two items on the assets side.

Ans. Sales of goods on credit.

Q.15. Indicate how Accounting Equation is affected if machinery is purchased for cash ?

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

Q.16. Indicate how Accounting Equation is affected if cash is received against services rendered ?

Ans. Cash increases and so does the capital.

Q.17. Indicate how Accounting Equation is affected if payment is made to a creditor ?

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





ACCOUNTANCY CLASS XI CHAPTER-6 ACCOUNTING PROCEDURES-RULES

OF DEBIT AND CREDIT Q.1. Define Account.

Ans. Account is a summarised record of transactions at one place relating to a particular head. It records

not only the amount of transactions but also their effect and direction.

Q.2. What is the meaning and rules of Debit and Credit ?

Ans. Debit and Credit are two opposing terms. In simple words, debit refers to the left side of an

account and credit refers to the right side of an account. In the abbreviated form Dr. stands for debit

and Cr. Stands for credit.

Rules of Debit and Credit

Under Double Entry System of book keeping each transaction has two aspects. One aspects is debit

aspect, i.e., receiving or incoming aspect. Another aspect is credit aspect, i.e., giving or outgoing aspect.

Debit and credit aspects of a transaction form the basis of Double Entry System.

Assets = Liabilities + Capital

Or

Assets – Liabilities = Capital

Q.3. Classify the ways of Accounts.

Ans. Accounts can be classify in two ways:

1. Traditional Classification

2. Modern Classification

1. Traditional Classification of accounts

Accounts are classified into two groups

(i) Personal Accounts

(ii) Impersonal Accounts





Personal Accounts : Accounts which relate to persons, i.e., individual, firms, companies, debtors or

creditors etc., are Personal Accounts. Examples of Personal Accounts are the account of Ram & Co., a

credit customer, or the account of Jhaveri & Co., a supplier of goods.

Personal Accounts can be classified into three categories:

(i) Natural Personal Accounts : The term ‘Natural Persons’ means persons who are creations of

God. For example, Ram’s Account, Asha’s Account, etc.

(ii) Artificial Personal Accounts : These accounts include accounts of corporate bodies or

institutions which are recognised as persons in business dealings. For example, the account

of a limited company, the account of a club or a cooperative society, etc.

(iii) Representive Personal Accounts : These are accounts which represent a certain person or a

group of persons. For example, if rent is due to the landlord. The Outstanding Rent Account

represents the amount of rent payable to the landlord.

Rules of Debit and Credit – Debit the receiver, Credit the giver.

2. Impersonal Accounts : Accounts which are not personal such as Machinery Account, Cash

Account, Rent Account, etc., are termed as ‘Impersonal Accounts’. These can be further sub -

divided into two accounts:

(i) Real Accounts : Real Accounts are the accounts which are relate to tangible or

intangible assets of the firm (excluding debtors). For example Goodwill, Machinery,

Patents and Trademark.

Rules of Debit and Credit – Debit what comes in, Credit what goes out.

(ii) Nominal (Revenue or Expenses) Accounts : Accounts which relate to expenses, losses,

gains, revenue, etc., are termed as Nominal Accounts. These are salary Account,

Purchases Account, Interest Paid Account, Sales Account and Commission Received

Account.

Rules of Debit and Credit – Debit all expenses and losses, Credit all incomes and gains.

Modern Classification of Accounts





The accounts are classified according to what is called Modern Classification of

Accounts.

1. Assets Accounts : These accounts are accounts of assets and properties such as land

and building, plant and machinery, furniture, patents, inventory, etc.

2. Liabilities Accounts : These accounts are that of lenders, creditors for goods,

outstanding for expenses, etc.

3. Capital Accounts : They refer to the accounts of the proprietor/partners who

invested in the business, e.g., capital account of owner, capital accounts of partners,

drawings account, current accounts of partners.

4. Revenue Accounts : These are accounts of incomes and gains. Examples are: sales,

discount received, interest received, bad debts recovered, etc.

5. Expenses Accounts : These are accounts which show the amount spent or even lost

in carrying on business operations. Examples are: purchases, wages paid,

depreciation, rent, discount allowed etc.

Q.4. Define Balancing an account.

Ans. A balance of an account is the difference between the total of its debit and credit sides. If the total

of debit side is more than the total of credit side, the account is said to have a debit balance. It has a

credit balance when total of credit side is more than the total of debit side.

Q.5. What are the significance of Debit and Credit balance in accounts ?

Ans. Singnificance of Debit and Credit balance in accounts are as follows :

1. Credit balance in the Capital Account means amount due to the owner of the business. In other

words, the amount invested in the business by the owner.

2. Credit balance in Bank Account, Suppliers Account, etc., means amount payable by the business,

i.e., liability of the business.





3. Debit balance in Cash Account, Bank Account, Debtors Account, means Cash in Hand, Cash at

Bank, and amount receivable against sale respectively.

4. Credit balance in Discount Received Account, Interest Received Account, etc., means income

earned by the business.

5. Debit balance in Discount Allowed Account, Salary, Rent, Interest Paid Account, etc., means

expenses.

So, we can briefly say that:

(a) A debit balance is either an asset (cash, bank, etc.) or an expenses (salary,rent,etc.); and

(b) A credit balance shows the income earned or liability or the amount invested by the

proprietor.

Very Short Answer Type Questions

Q.1. What is an Account ?

Ans. An account is a summarised record of transactions at one place relating to a particular

head.

Q.2. When is a Capital Account debited ?

Ans. Capital Account is debited when the proprietor makes a drawings with the amount of loss.

Q.3. When is a Capital Account is credited ?

Ans. Capital Account is credited when the proprietor introduces further capital with the amount

of profit.

Q.4. What is an Asset Account ?

Ans. Asset Account is the account which relates to tangible or intangible asset.

Q.5. What is the rule for an Asset Account ?





Ans. Rule for an asset account is ‘Increases in assets are debits and decreases credit’.

Q.6. What is a Liability Account ?

Ans. Liability Account is an account which shows the amounts payable by the enterprise.

Q.7. What is the rule for Liability Account ?

Ans. Rule for Liability Account is ‘Increases are credits and decreases are debits.’

Q.8. What are the two sides of an Account called ?

Ans. The two sides of an account are Debit and Credit.

Q.9. What is the objective of preparing an Account ?

Ans. The objectives of preparing an account is to summarise all transactions relating to a

particular head in one account. Balance of all the accounts leads to preparation of Trial Balance.

Q.10. What is the rule for Expenses Account ?

Ans. The rule for Expenses Account is ‘Increase in expenses are debits and decreases are

credits’.

Q.11. What is the rule for Revenue or Income Account ?

Ans. The rule for Revenue or Income Account is ‘Increases in revenue or income is credit and

decreases are debits’.

Q.12. Give two examples of Liability Account.

Ans. Two examples of Liability Account are:





(i) Capital Account and (ii) Creditor’s Account.

Q.13. Give two examples of Asset Account.

Ans. Two examples of Asset Account are:

(i) Land Account and (ii) Computer’s Account.

Q.14. Give two examples of Expense Account.

Ans. (i) Salary Account and (ii) Commission Account.

Q.15. What does a debit in an Asset Accoount signify ?

Ans. A debit in an Asset Account means further assets purchased by the firm.

Q.16. What does a credit in an Asset Account signify ?

Ans. A credit is an Asset Account means the assets sold or discarded by the firm.

Q.17. What does a debit in an Expense Account signify ?

Ans. A debit in an Expense Account means the amount of expense incurred by the firm under

that head of account.

Q.18. What does a credit in an Income Account signify ?

Ans. A credit in an Income Account means the amount of income earned by the firm under that

head of account.

Q.19. What does a credit balance in a Capital Account signify ?





Ans. A credit balance in a Capital Account signifies the amount invested by the proprietor as on

date.

Q.20. What is signified by a debit cash balance ?

Ans. A debit cash balance signifies Cash in Hand.

Q.21. What is signified by a debit bank balance ?

Ans. A debit bank balance signifies balance lying deposited in the bank.

Q.22. What is signified by a credit bank balance ?

Ans. A credit bank balance signifies amount payable to the bank by the firm.





ACCOUNTANCY CLASS XI CHAPTER-7 ORIGIN OF TRANSACTIONS-

SOURCE DOCUMENTS AND PREPARATION OF VOUCHERS

Q.1. What is Source Documents ?

Ans. “A Source Document is a written document containing details of the transaction”.

Q.2. Define Cash Memo.

Ans. Cash Memo is prepared by the seller when goods are sold against cash.

Q.3. What is Invoice or Bill ?

Ans. An Invoice or Bill is prepared by the seller when the goods are sold on credit.

Q.4. Define Receipt.

Ans. When cash or cheque is received from a customer, a receipt for the amount received is issued.

Q.5. What is Pay-in-Slip ?

Ans. It is a source document used for depositing cash or cheques into bank. A Pay-in-Slip is a form

available from a bank.

Q.6. Define Cheque.

Ans. A Cheque is a document in writing, drawn upon the bank with which the account is held and is

payable on demand.

Q.7. What is Debit Note ?

Ans. A Debit Note is made out evidencing that a debit has been made to the account of the party named

in the debit note.

Q.8. What is Credit Note ?

Ans. A Credit Note is made out evidencing that credit has been granted to a debtor. For example, if a

customer returns goods previously invoiced, or the customer is allowed further discount, a credit not is

issued.





Q.9.Explain is the meaning of Voucher.

Ans. A Voucher is a document evidencing a business transaction. It flows from the above definition that

when a transaction is entered into, an evidence to that effect is also established. Such evidences are

Source Documents. Example of Source Documents are Cash Memo, Invoice or Bill, Receipt, Pay -in-Slip,

Cheque and Debit and Credit Notes, etc.

Q.10. What are the Types of Vouchers ?

Ans. Vouchers may be categorised into:

1. Source Vouchers or Source Documents or Supporting Vouchers and

2. Accounting Vouchers.

1. Source Vouchers or Source Documents or Supporting Vouchers: Source Vouchers or Source

Documents or Supporting Vouchers are documents which come into existence when a

transaction is entered into. Examples of this are issue of cash memo on cash sales, issue of

credit memo (Invoice) on credit sales, issue of rent teceipt of rent and so on.

Features of Source Voucher:

(i) It is a written document.

(ii) It contains complete details of the transaction.

(iii) It is a proof of a transaction having taken place.

(iv) It is generally for a business transaction.

(v) It is singned by the maker.

2. Accounting Vouchers: An Accountant has with him source or supporting vouchers for cash

payments, cash receipts, invoices for credit purchases and sales.

Features of Accounting Voucher:

(i) It is a written document.

(ii) It is prepared on the basis of evidence of the transaction.

(iii) It is an analysis of a transaction.

(iv) It is prepared and signed usually by an Accountant and countersigned by the authorized

signatory.

(v) In the case of cash/bank voucher, it is a receipt.





Types of Accounting Vouchers : Accounting Vouchers are of two types, i.e.,

1. Cash Vouchers; and

2. Non-Cash Vouchers or Transfer Vouchers.

Let us discuss them in detail.

1. Cash Vouchers: Cash Voucher refers to the voucher prepared at the time of

receipt or payment of cash and includes receipt and payment through cheques.

Cash Vouchers can be of two types namely (i) Credit Voucher and (ii) Debit

Voucher.

(i) Credit Voucher : Credit Vouchers are prepared when cash is received. Cash

may be received against (a) sales of goods, (b) sale of fixed assets, (c) sale of

investments, (d) receipts from debtors and (e) withdrawal from bank, etc.

(ii) Debit Voucher : Debit Vouchers are prepared when payment is made.

Payment, may be made against (a) expenses, (b) purchases of goods, (c)

purchase of fixed assets, (d) payment to creditors, (e) deposits into bank, (f)

drawings, etc.

2. Non-Cash Vouchers or Transfer Vouchers: Non-Cash Vouchers refer to vouchers

prepared for transactions not involving cash. Examples of these are Invoice or

Bills, Debit and Credit Notes, etc. Non-Cash Vouchers are prepared for the

transactions of credit sales, credit purchases, goods returned (both inwards and

outwards), rectifying the mistakes etc.

Very Short Answer Type Questions

Q.1. Name any two source documents.

Ans. Two source documents are:

(i) Cash Memo; are (ii) Invoice.

Q.2. Is ‘Cash Memo’ a source document or an Accounting Voucher ?

Ans. Cash Memo is a source document prepared by the seller of goods for cash.





Q.3. What is an Invoice ?

Ans. Invoice is a source document prepared by the seller of goods on credi t.

Q.4. What do you mean by Voucher ?

Ans. The documents prepared for the purpose of recording business transactions in the books of

accounts are known as Vouchers.

Q.5. How an Accounting Voucher is Prepared ?

Ans. Accounting Voucher is prepared on the basis of source voucher after analyzing and determining

accounts to be debited and credited.

Q.6. Briefly explain Cash Voucher.

Ans. Cash Voucher is prepared at the time of receipt or payment of cash or cheque.

Q.7. Briefly explain Credit Voucher.

Ans. Credit Voucher is prepared when cash is received.

Q.8. What is a Pay-in-Slip ?

Ans. Pay-in-Slip is a source document for having deposits made in the bank.

Q.9. Define a Cheque.

Ans. Cheque is a written document drawn upon a specific banker and payable on demand.

Q.10. What is a debit note ?

Ans. Debit Note is a document evidencing that the account of the named person is debited for the

reason stated therein.

Q.11. What is a Credit Note ?

Ans. Credit Note is a document evidencing that the credit has been granted to the named person for the

reason stated therein.

Q.12. What is a Compound Voucher ?

Ans. Voucher which records a transaction that entails multiple debits/credits and one credit/ debit is

called Compound Voucher. It may be debit voucher or credit voucher.





ACCOUNTANCY CLASS XI CHAPTER-8 JOURNAL AND LEDGER

Q.1. What is journal ?

Ans. It is the primary book of accounts in which transactions are first recorded in a chronological order.

Q.2. What is Simple Journal ?

Ans. All business transactions can be recorded in a simple journal.

Q.3. What is Special Journal ?

Ans. Alternatively an enterprise may use separate journals to record particular type of transactions,

e.g., credit purchases may be recorded in purchases journal; credit sales, may be recorded in sales

journal purchases return may be recorded in purchases return journal and so on. These journal are

called Special Journals.

Q.4. What are the Charactersitics of a journal ?

Ans. The characteristics of a journal are :-

1. A Journal contains day-to-day transactions in a choronological order.

2. It is a book of original entry in which transactions are written before they are posted in the

ledger.

3. It records both the debit and credit aspects of a transaction by using the double entry system of

book keeping.

4. A Journal is a record which shows complete details of a transaction in one entry.

5. Journalising means recording a transaction in the journal and the form in which it is recorded is

known as Journal Entry.

Q.5. What are the forms of Journal ?

Ans. The forms of journal are:

1. Date : In this column the transaction date is written.





2. Particulars : In this column to aspects of transactions are recorded i.e., the name of the two

accounts affected by the transaction. The name of the account to be debited is followed by the

word ‘Dr.’ written close of the left hand margin line while the name of the account to be credit

proceed by the word ‘To’ is written in the next line, a little to the right. Narration, i.e., a brief

description of the transaction is also written.

3. Ledger Folio : In this column, the number of the ldger page is written to which the amount is

posted in the Ledger.

4. Debit Amount : In this column the amount debited is written.

5. Credit Amount : In this column, the amount credited is written.

Q.6. What are steps of Journalising ?

Ans. Steps involved in Journalising are:

1. Ascertain the accounts that are affected by the transaction.

2. Ascertain the nature of the account affected.

3. Ascertain the account to be debited and credited by applying the rules of debit and credi t.

4. Ascertain the amount by which the accounts are to be debited and credited.

5. Write the date and month of the transaction in the ‘Date’ column and the year at the top.

6. Write in the ‘Particulars’ column name of the account to be debited. Along with the name of the

account , abbreviation ‘Dr.’ is written in the same line against the name of the account. Write

the amount to be debited in the ‘Debit Amount’ column.

7. Write in the ‘Particulars’ column name of the account to be credited. Name of the account to be

credited is written in the next line proceeded by the word ‘To’. The word ‘To’ is written towards

the right after leaving a few spaces. Write the amount to be credited in the ‘Credited Amount’

column.

8. Write brief description of the transaction starting from the next line in the ‘Particulars’ colum.

This brief description of the transaction is called narration.

9. Draw a line across the ‘Particulars’ column to separate one Journal entry from the other.

Q.7. What is totaling and carry forward ?





Ans. The number of transactions in a business are large and requires a number of pages of a journal.

Amount of the debit and credit columns on each page are totaled and carried forward to the next

page.

Q.8. What is Book of Original Entry ?

Ans. It is the book in which a transaction is first recorded, i.e., Journal Book.

Q.9. Define Principal Book.

Ans. It is the book which has record of the transactions in a summarised manner, i.e., Ledger.

Q.10. Define Bad Debts.

Ans. It is the amount which is not recoverable and hence written off.

Q.11. What is Bad Debts recovered ?

Ans. It is the amount which was earlier written off as bad debt and is later recovered, in full or in

part.

Q.12. Define Discount.

Ans. There are two types of discounts.

Trade Discount

Cash Discount

(i) Trade Discount : It is a discount allowed to the purchaser of goods when goods are

purchased in large quantity.

(ii) Cash Discount : It is a discount allowed on receipt of amount promptly, i.e., Before the due

date.

Q.13. What is Simple Journal Entry ?

Ans. It is a journal entry in which one account is debited and other account is credited.

Q.14. What is Compound Journal Entry ?

Ans. It is a journal entry in which one or more accounts are debited and or credit.

Q.15. Define Opening Entry.

Ans. It is the first entry passed in the journal book in corporting the close balance of previous year.

Q.16. Define Ledger Account.





Ans. It is a book containing ledger account.

Q.17. What is Balancing of Accounts ?

Ans. It means totalling the two sides of the accounts and determining the difference. Difference

between the totals of two sides is written in the side with shorter total.

Q.18. Define Trial Balance.

Ans. It is a statement in which the balance is in the accounts are written. The total of amount in the

two columns should be same and is a proof of arithmetical accuracy transactions recorded in the

books of accounts.

Q.19. What is Journalising ?

Ans. Journalising is a process of recording a transaction in a Journal.

Q.20. Name the category of accounts that are balanced.

Ans. Real and Personal Accounts are balanced.

Q.21. Name the category of account that is not balanced.

Ans. Nominal Accounts are not balanced. They are totalled and transferred to Profit and Loss

Account at the end of the accounting year.





ACCOUNTANCY CLASS XI CHAPTER-9 SPECIAL PURPOSE BOOKS I-CASH

BOOK

Q.1. What is Special Purpose Books or Subsidiary Books ?

Ans. The sub-division for the Journal into various books recording transactions of similar nature are

called subsidiary books.

Q.2. Define Cash Book.

Ans. Cash Book is a Special Purpose Subsidiary Book or Journal in which cash receipts and cash

payments are recorded.

Q.3. What are the Kinds of Cash Book ?

Ans. The kinds of cash book are:

(i) Simple Cash Book : It is a cash book in which only cash transactions are recorded. It has only

one column on each side of the cash book.

(ii) Double-column or Two-column Cash Book : It is a cash book which has two columns on

each side of the cash book to record cash receipts and payments besides cash discount

allowed and received.

(iii) Triple-column or three-column Cash Book : It is a cash book which has three columns on

each side of the cash book. One column to record cash transactions, one column to record

bank transactions and one column to record cash discount allowed and received.

(iv) Pretty Cash Book : It is a cash book in which payment of small amount is recorded.

Q.4. What is Imprest System of Petty Cash ?

Ans. It is a system whereby an estimate of expenditure is made and the estimated amount is given

to the Petty Cashier. Thereafter he submits the statement of expenses at the end of the designated

period. Which is reimbursed to him to make the petty cash equal to the original petty cash amount.

Q.5. Define Cash Discount.





Ans. Cash discount is the amount of discount received or allowed on cash payments and cash

receipts. Discount received is an income for the business while discount allowed is an expense.

Q.6. What is Cheques in Hand ?

Ans. It means cheques that have been received but have not been deposited into bank.

Q.7. What is contra Entry ?

Ans. It means a transaction involving both cash and bank. Such transactions though recorded in the

cash book are not posted into the ledger. In the folio for ledger letter ‘C’ is written to indicate that it

is a contra entry.

Q.8. What are the Advantages of Subsidiary Books ?

Ans. The Advantages of subsidiary books are :

1. Division of Work : Since in the place of one Journal, subsidiary books are also maintained,

accounting work can be divided among a number of persons.

2. Specialisation and Efficiency : When the same work is handled by a particular person for a

considerable time, he acquires expertise in it and becomes efficient in handling it. Thus,

accounting is done more efficiently.

3. Saving of Time : Various accounting processes can be undertaken simultaneously because of the

use of number of book. Thus, it leads to saving of time.

4. Availability of Information : Since a separate book is maintained for each class of transactions,

information relating to each class is available at one place.

5. Facility in Checking : In case, the Trial Balance does not agree, locating the error or errors is

facilitated by the existence of separate books. Since the number of transactions is less in each

subsidiary book as compared to only one Journal, it is easy to locate the errors.

6. Responsibility : Division of work results in assigning a particular job to a particular person. If an

error is committed in recording, responsibili ty can be easily fixed.

Q.9. What are the features of Cash Book ?

Ans. The features of Cash Book are :

1. Only cash transactions are recorded in the Cash Book.





2. Cash and Cheque receipts are recorded on the debit side while cash and cheque payment are

recorded on the credit side.

3. It records only one aspect of the transaction, i.e., cash.

4. Cash and bank transactions are recorded in the Cash Book in a chronological order, i.e., in order

they take place.

5. It performs the function of both Journal and the Ledger at the same time.

Q.10. Define Bank Overdraft.

Ans. Bank overdraft is the drawings out of a Bank Account of more than what has been deposited in

it.

Q.11. Name two types of Petty Cash Book.

Ans. Simple Petty Cash Book and Analytical Petty Cash Book.

Q.12. What do you understand by Analytical Petty Cash Book ?

Ans. Analytical Petty Cash Book has two sides, left side is used to record the receipts of cash and the

right side is used for recording the payments. The payments side has columns for recording each

type of expense.

Q.13. State any one advantage of maintaining the Petty Cash Book.

Ans. It saves the time of Chief Cashier.

Q.14. What are the Advantages of Petty Cash Book ?

Ans. The advantages of maintaining a Petty Cash Book are:

(i) Time Saving : Saves the Chief Cashier’s time.

(ii) Labour Saving : Saving of labour in writing up the Cash Book and posting into the Ledger.

(iii) Control : It provides control over small payments.

(iv) Convenience in Preparing Ledger Accounts : The total are only takento post them into

Ledger. No unnecessary details are to be given. Hence, it is convenient to post these directly

into the Ledger.





ACCOUNTANCY CLASS XI CHAPTER-10 SPECIAL PURPOSE BOOKS II –

OTHER BOOKS Q.1. What is a Purchases Book ?

Ans. It is subsidiary book in which goods purchased on credit are recorded.

Q.2. What is a Purchases Return Book ?

Ans. It is a subsidiary book in which outward, i.e., returns of goods purchased is recorded.

Q.3. Define a Sales Book ?

Ans. It is a subsidiary book in which goods sold on credit are recorded.

Q.4. What is Sales Return Book ?

Ans. It is a subsidiary book in which goods returned by the customer are recorded.

Q.5. Define Journal Proper.

Ans. It is a book in which transactions that are not recorded in other five book, are recorded.

Q.6. Define Debit Note.

Ans. It is the document prepared to debit the account of the person. For example, purchaser of goods

prepares a Debit Note when goods are returned to the seller.

Q.7. Define Credit Note.

Ans. It is the document prepared to credit the account of the person. For example, purchaser of goods

prepares a Debit Note when goods are returned to the seller.

Q.8. What is Trade Discount ?

Ans. Trade Discount is the discount allowed by the seller on goods sold. It is recorded in the Purchases

Book and Sales Book. But, in the ledger, purchases and sales are accounted at net amount.

Q.9. What are the features of Purchases Book ?

Ans. The features of Purchases Book are :





1. Credit purchases of goods traded in or material used for production are recorded in the

Purchases Book. Credit purchases of goods or materials not dealt in, such as office furniture or

computers for office use are not recorded in the Purchases Book. They are journalised.

2. Cash purchases are not recorded in the Purchases Book since they are recorded in the Cash

Book.

3. The entries in the Purchases Book are made on the basis of invoices received from the suppliers

with the net amount after Trade Discount.

Q.10. What is an opening entry ?

Ans. Opening entry is the entry made in the beginning of a financial year to open the books by

debiting assets and crediting liabilities and capital, appearing in the Balance Sheet of the previous

year.

Q.11. Give two examples of entries which appear in a ‘Journal Proper’.

Ans. Credit purchase of plant and machinery, Credit sales of fixed assets.

Q.12. For what purposes is a Journal Proper used ?

Ans. Journal Proper is a residuary book which is used for recording those transactions which are not

recorded in any of the other books of original entry.

Q.13. What is Closings Entries ?

Ans. Closing entries are passed at the end of the year to close the accounts relating to expenses and

revenues by transferring them to the Trading Accounts and Profit and Loss Account.

Q.14.What is meant by Rectification Entries ?

Ans. Entries to rectify the errors in the books of original entries or of a Ledger are recorded in the

Journal Proper.

Q.15. Define Transfer Entries.

Ans. If an amount is to be transferred from one account to another, such a transfer is also made

through a Journal entry only.

Q.16. What is Transfer Entries ?

Ans. If an amount is to be transferred from one account to another, such a transfer is also made

through a Journal entry only.





Q.17. What are Adjusting Entries ?

Ans. At the end of the year, the amount of expenses or incomes may have to be adjusted for

amounts paid or received in advance or for amounts not yet settled in cash. Such an adjustment is

also made through Journal entries only. Usually the adjustment entries may pertain to the following:

(a) Outstanding expenses, i.e., expenses incurred but not yet paid.

(b) Prepaid expenses, i.e., expenses already paid in advance for some period in the future.

(c) Income received in advance.

(d) Accrued Income, i.e., income earned but not received.

(e) Interest on capital, i.e., the interest which the proprietor thinks proper to allow on his

investment.

(f) Depreciation, i.e., fall in the value of the assets used on account of wear and tear over a period.

Q.18. What do you mean by Entries for Dishonour of Bills ?

Ans. If someone who accepted a Bill of Exchange or issued a Promissory Note, is not able to pay it on

its due date , a Journal entry is necessary to record the non-payment or dishonour.

Q.19. Write the following Miscellaneous Entries.

Ans. The following Miscellaneous Entries are:

(a) Credit purchase of goods other than goods dealt in or materials required for production of

goods, e.g., credit purchase of furniture or machinery will be journalising.

(b) Discount Allowed and Discount Received.

(c) An allowance to be given to customers or a charge to be made to them after the issue of the

invoice.

(d) On an amount becoming irrecoverable, say, because of the customer becoming insolvent.

(e) Effects of accidents such as loss of property by fire.

Q.20. Distinction between Special Journal and General Journal.

Ans.





Basis Special Journal (Subsidiary Books) General Journal (Journal Proper)

Nature of transactions recorded

It records transaction of similar nature, e.g., Purchases Book records only credit purchases.

It does not record transaction of a similar nature.

Format It is in the form of a statement. It is in the form of a Journal.

Need A business unit may not have a Special Journal.

A business unit must have a Journal Proper.

Posting Each transaction is not recorded in the ledger separately.

Each transaction is recorded in the ledger separately.

Rectification A mistake in the Journal Proper is not rectified by a Special Journal.

A mistake in Special Journal is rectified by the Journal Proper.

Q.21. What is Central Sales Tax ?

Ans. Central Sales Tax is charged on inter-state sales from the customers on the net sale value, i.e., sale

value less Trade Discount.

Q.22. What is Value Added Tax (VAT) ?

Ans. VAT is the tax charged on local (within the state) sales. The VAT paid on purchases is set-off against

VAT collected on sales and balance in the VAT Collected Account is deposited in the Government

Account.

Q.23. What are Freight and Packing Charges ?

Ans. Freight and Packing Charges are charged from the customer along with the cost of goods sold in the

sale invoice itself.

Q.24. Distinction between Sales Book and Sales Account.

Ans.

Basis Sales Book Sales Account

Part It is a part of a Journal Book. It is apart of a ledger.

Format Like a Ledger Account, it does not have debit

and credit columns.

It has debit and credit columns.

Contents Only credit sales of goods are recorded. Credit as well as cash sales of goods are recorded.

Amount Total amount of Sales Book is posted to the Sales Account periodically.

Balance in the account is transferred to the Trading Account.

