Program

: BBA

Semester

:2

Subject Code

: BB0003 / BBA203

Subject Name

: Financial Accounting

1. Journalize the following transactions in the books of Balu.

2004

Rs.

Jan. 1 Commenced business

Jan. 2 Goods

purchased

25,000
for

cash

15,000
Jan 3

Paid

freight

500
Jan. 7 Goods sold to Raj Kumar on credit

5,000

Jan. 8 Paid for stationery

2,000

Jan.10 Paid for Rent

1,000

Jan.13 Cash

received

from

Mohan

Das

15,400
Allowed

him

discount

600
Jan.15 Paid Premium

4,000

Jan.20 Paid to postage

1,000

Jan.25 Paid for salaries

500

Jan.30 Commission received

Date

Particulars

1,000

L.F.

Dr
Cr
Amount Amount
(Rs.)
(Rs.)

2004 Cash A/c

Jan.1 To Capital A/c
(Being Business
with cash
of Rs.25, 000)

Dr.

25,000
25,000

commenced

Jan.2 Purchases A/c

To Cash A/c
(Being the amount of
purchases)

Dr.

15,000
15,000

cash
500

Jan.3

Freight A/c ...

Dr.

To Cash A/c
(Being the payment for
freight)
Jan.7 Raj Kumars A/c
Dr.

500

5,000

5,000

To Sales A/c
(Being sale of goods on credit
to Mr.
Raj Kumar)
Jan.8 Stationery A/c ..

Dr.

2,000
2,000

To Cash A/c
(Being the payment
stationery)

of

Jan.1
0
Rent A/c.

Dr.
1,000

1,000

To Cash A/c
(Being the amount of rent
paid)
Jan.1
3
Cash A/c

Dr.
15,400

Discount A/c
To Mohan Dass
A/c
(Being cash received
Mohan Das)

Dr.
600
from

Jan.1
5
Premium A/c .
To Cash A/c
(Being the
premium)

payment

Jan.2 Postage A/c

16,00
0

Dr.

4,000
4,000

for
Dr.

1,000

0
To Cash A/c
(Being the payment
postage)
Jan.2 Salaries
5
.

1,000

for
500

A/c

Dr.
500

To Cash A/c
(Being the payment
salaries)

for

Jan.3
0
Cash A/c
Dr.
To
Commission
A/c
(Being
the
receipt
of
commission)
Total

1,000
1,000

71,000

71,00
0

2. Accountancy refers to a systematic knowledge of accounting.

It explains why to do and how to do of various aspects of
accounting. Explain the objectives of accounting and explain
the categories of users.
Explanation of accounting objectives:The basic objective of accounting is to provide full, accurate
and meaningful financial information about the financial
activities of a business to all those who have a right and a need
to have such information.
The main objectives of accounting include:
a. Systematic recording of all business events or transactions
and subsequent posting to ledger, to finally prepare
financial statements - profit and loss account and balance
sheet.
b. Reporting the results to management, shareholders,
creditors, bankers, investors, stock brokers, stock
exchanges, employees, government etc.
c. Satisfying the statutory requirements, especially Registrar of
Companies (ROC), Securities Exchange Board of India
(SEBI), tax authorities (sales tax, excise, customs and
income tax) and government in order to protect the interest
of general public.
d. Protecting the properties of business by recording them on
the date of acquisition and showing their accounts in the
balance sheet.
e. Planning, controlling and decision making functions become

easy where books of accounts are maintained properly. This

helps in internal control by holding concerned persons
responsible for any errors, lapses or under performance.
f. Accounting is a tool for effective planning. Current years
financial performance becomes the basis for future
predictions and estimations. Since it is a tool for planning,
it also acts as a tool for controlling. Preparation of budgets,
cost analysis, tax planning, auditing are some of the
functions of accounting.
Various users of Accounting InformationDifferent categories of users need different kinds of information
for making decisions. These users can be divided into:
1. Internal Users
2. External Users.
1. Internal Users:
These are the persons who manage the business, i.e.
management at the top, middle, and lower levels. Their
requirements of information are different because they
make different types of decisions. The top level is more
concerned with planning, the middle level is concerned
equally with planning and control and the lower level is
concerned more with controlling operations. Information is
supplied on different aspects, e.g. cash resources, sales
estimates, results of operations, financial position, etc.
2. External Users:
All persons other than internal users come in the group of
external users. External users can be divided into two
groups:
a. Those having direct interest
b. Those having indirect interest in a business organization.
The main sources of information for external users are annual
reports of business organizations. They not only state the
financial position and performance but also give the auditors
report, directors report and other information. Investors and
creditors are the external users having direct interest. Tax
authorities, regulatory agencies, customers, labour unions,
trade associations, stock exchanges, investors, etc., are
indirectly interested in the companys financial strength, its
ability to meet short-term and long-term obligations, its future
earning power, etc., for making various decisions. Investors
who are providers of risk capital would be interested to know
the financial health of the firm, Lenders would be interested to
know whether the firm will be able to service the loan, Security
analyst, rating agencies and other information specialists would
be interested in assessing the prospective returns of the firm.
Managers need financial information for planning and
controlling operations, employees and Trade Unions would like
to know general operations, stability and profitability of the
firm, customers are interested to know the source of future

purchase, after sale services and finally Government and

regulatory authorities are responsible to regulate business
activities and to collect tax.
3. What do you understand by good will? Explain the
accounting treatment of goodwill at the time of admission. Give
journal entry for the below problem:
T and S are partners in a firm sharing profit in the ratio 5:3.
They admitted G as a new partner for 1/4th share in the profit.
G brings Rs.45,000 for her share of goodwill and Rs.1,20,000
for capital. They have withdrawn the goodwill from the firm.
Make journal entries in the books of the firm after the
admission of G. The new profit sharing ratio will be 2:1:1.
Goodwill-Meaning & Formula
Goodwill generally means the reputation of the firm. When a
business is doing its operations over a number of years, it may
develop a good name and reputation among the customers or
society. In accounting parlance, it can be called as Goodwill.
The goodwill of a firm may earn extra profit for the business
over a normal profit, which can be called as Super Normal
Profit. Thus, goodwill can be calculated as .
Goodwill = Super Normal Profit Normal
Profit.
Accounting Treatment of Goodwill at the time of
AdmissionThere are different situations relating to the treatment of
goodwill at the time of admission of a new partner. These are
discussed as under:
A. When the amount of goodwill is paid privately by the new
partner.
B. When the new partner brings his/her share of goodwill in
cash.
C. When the new partner does not bring his/her share of
goodwill in cash.
A. The amount of goodwill is paid privately by the new
partner
If the amount of goodwill is paid by the new partner to the
existing partner privately, no journal entries are made in the
books of the firm.
B. The new partner brings his share of goodwill in cash
and the amount of goodwill is retained in the Business:
When, the new partner brings his/her share of goodwill in cash.
The amount brought in by the new partner is transferred to the
existing partner in the sacrificing ratio. If there is any goodwill
account in the balance sheet of existing partner, it will be
written off immediately in existing ratio among the partners.

C. When a new partner does not bring his/her share of

goodwill in cash:
When the goodwill of the firm is calculated and the new partner
is not able to bring his/her share of goodwill in cash, goodwill
will be adjusted through new partners capital accounts. In this
case new partners capital account is debited for his share of
goodwill and the existing partners capital accounts are credited
in their sacrificing ratio.
Journal entry in the books of T,S and G
Existing Ratio: T- 5/8 and S 3/8
New Ratio: T- 2/4, S- 1/4 and G 1/4
Sacrificing Ratio = T- 5/8-2/4 = 1/8; S 3/8 = 1/8
Sacrificing Ratio = 1:1
Books of T, S and G
Bank A/c Dr.
To Goodwill A/c
To Gs Capital A/c

1,65,000
45,000
1,20,000

(Cash brought by G for her share of goodwill and capital)

Goodwill A/c Dr.
To Ts Capital A/c
To Ss Capital A/c

45,000
30,000
15,000

(Goodwill transferred to existing partners capital account in

their profit sharing ratio)
Ts Capital A/c Dr.
Ss Capital A/c Dr.
To Bank A/c

27,500
27,500
45,000

(Amount of Goodwill is withdrawn by them in the sacrificing

ratio)
_____________________________________________________
4. Differentiate between trade discount and cash discount.
Enter the following transactions in Sadhanas simple cash book.
2010 April 1st April Balance of cash in hand Rs.1500
8th April Purchased goods for cash from X for Rs.320
15th April Sold goods for Rs. 480 to Y for cash
20th April Received commission Rs.65
22nd April Paid Commission Rs.55
28th April Paid to Reena on account Rs.715
30th April Paid salary to the office clerk Rs.100 and office rent
Rs.60
Trade discount

Cash discount

1) It is reduction granted by a

1) It is the reduction granted by

supplier from the list price of

a supplier from the invoice

goods or services bought

price in consideration of

other than for prompt

immediate payment or

payment.

within a specified period

2) It is allowed to promote the

2) It is allowed to encourage

sales

prompt payment

3) A separate trade discount

3) Since it is not shown in the

account is not opened in the

invoice, a separate cash

ledger because it is shown

discount account is opened

by the way of deduction in

in the ledger

the invoice itself.

4) It may vary with the period

4) It may vary with the quantity

within which the payment is

purchased.

Date

Particulars

2007
Apr 1

To balance b/d

15

To sales

20

To commission

made.

LF

Amoun
t DateParticulars

LF Amount

Apr 8By purchases

1,500
480
65

By
22 commission

715

30By salaries

100

By
30 c/d
Total

May 1

To balance bld

2045

55

28By shantaram

30By office rent

30

320

balance

Total

795

5. Final Accounts are prepared at the end of accounting year

with various adjustments. Explain the features and objectives
of final accounts.
Explanation of objectives of final accounts
A financial statement should reflect true and fair view of the
business affairs of the organization. As these statements are
used by various constituents of the society / regulators, they

60
795
2045

need to reflect true view of the financial position of the

organization.
Financial statements are required for measuring the
performance of the business which is indicated by gross profit
or gross loss. Financial statements facilitate the comparison of
trading results of the current year with those of the previous
year. International Accounting Standards Committee (IASC)
stated that the objective of financial statements is to provide
information about the enterprise that is useful to a wide range
of users in making economic decisions.
Various stakeholders would like to assess the financial
performance of the enterprise, its ability to generate future
cash flows. It is almost impossible to make sound decision on
above matter if one has no access to the financial statements.
Financial statements act as a summary of all transactions,
which have been taking place in business. The financial
statements comprise of the income statement account, the
balance sheet and the cash flow statement.
To be of great value to all stakeholders financial information
should assist the users of accounts in assessing the financial
performance of an enterprise, its financial position and also its
cash flow position.
Features of Final Accounts:Qualitative characteristics of financial statements include:
Relevance
Understandability
Reliability
Comparability
True and Fair View/Fair Presentation
The main characteristics are:1. Relevant financial information: This simply means the
information is able to directly influence the decision making
process of the user. To be relevant, financial information should
contain the past as well as present records and be able to
provide a yardstick for the future. Relevance is also measured
in relation to materiality. If an item or event is material, it is
probably relevant to the user of financial statements. In other
words, an item is material if the user would have done
something differently if he or she had not known about the
item.
In assessing materiality of financial information it should not
only be based on the financial value but also depends on the
nature of the transaction. There are other items in financial
statements which require strict accuracy as may have a large
influence on the operations of the enterprise or may lead to

misconception by users of financial information. Example

includes the directors remuneration, because the directors act
as agents of the shareholders and any slight under statement
in their remuneration may attract an outcry from the
shareholders.
2. Understandability: In addition to relevance, the users of
financial statements will be able to make informed and better
decision if they can be able to interpret the contents of financial
statements. Understandability is about communicating an
intended meaning. This depends on both the accountant and
the decision maker. Accountants should produce financial
information and present it in a form, which can be easily
understood and interpreted by their intended users. Example,
information which is produced for the loan application at the
bank need to elaborate more on the financial
position of the enterprise which information for the Malawi
revenue authority need to emphasize on profitability.
3. Reliable information: According to IASCs Conceptual
framework, to be reliable, information must be neutral, that is
free from bias. Financial statements are not neutral, if by the
selection or presentation of information, they influence the
making of a decision or judgment in order to achieve a predetermined result or income.
In order to be relied upon, the financial information requires
the following attributes: Faithful presentation of information.
Neutrality.
Substance over form i.e. accounting should be based on
financial reality and not merely on legal form.
Prudence.
Completeness.
4. Comparability: Another important character of accounting
information is comparability. Financial statements of the
organization must be capable of being linked with other nonfinancial information within the enterprise. User should also be
able to compare financial statements of an enterprise through
time in order to assess the trend in performance and financial
position.
In assessing the compatibility of financial information, the
enterprise must also disclose on the accounting policies they
have been adopting over the years. If possible the entity should
apply accounting policies consistently to ensure meaningful
comparison of the results over time. The financial information
should be presented together with the corresponding
information of the preceding periods for easy comparison.
5. True and Fair View/Fair Presentation: It must exhibit

the true and fair view of the financial position of the

organization.

6 Prepare Trading, Profit and Loss Account and Balance Sheet

from the following particulars as at 31st March 2012.
Trial Balance
Particulars

Dr. (Rs)

Cr. (Rs)

Capital / Drawings

1,400

10,000

Cash in hand

1,500

Bank overdraft @ 5%

2,000

Purchase and Sales

12,000

15,000

Returns

1,000

2,000

Establishments charges

2,500

Taxes and Insurance

500

Provision for Doubtful Debts

1,000

Bad Debts

500

Sundry Debtors and Creditors

5,000

1,850

Commission

500

Investments

4,000

Stock on 1 April 2010

3,000

Furniture

600

Bills Receivable & Bills payable

3,000

2,500

Collected Sales Tax

150

Total 35,000

Further, you are required to take into consideration the

following information:
a) Salary Rs.100 and taxes Rs.400 are outstanding but
insurance Rs.50 prepaid

35,000

b) Commission amounting to Rs.100 has been received in

advance for work to be done next year.
c) Interest accrued on investments Rs.210
d) Provision for doubtful Debts is to be maintained at
20%
e) Depreciation on furniture is to be charged at 10% p.a.
f) Stock on 31st March 2012 was valued at Rs.4,500
g) A fire occurred on 25th March 2012 in the godown and
stock of the value of Rs.1,000 was destroyed. It was
fully insured and the insurance company admitted the
claim in full.

Trading and Profit and loss Account for the period ended 31 st
March
2012
Dr.
Cr
.
Particulars

Rs

To Opening Stock
To Purchase

3,000
12,000

Less: Purchases
Returns

Particulars

Rs

By Sales

15,000

Less:Sales
Returns

1,000

By Closing
Stock
2,000 10,000 By Abnormal
Loss of Stock

To Gross Profit
c/d

4,500
1,000

6,500
19,500

To Establishment 2,500
charges paid
Add: Sales
outstanding

100

To Taxes and
insurance

500

2,600

900
50

To Interest on
bank
overdraft

850
100

Bad Debts

500

Add: Closing
Provision for
Doubtful Debts

1,000

19,500
By Gross Profit
b/d

Add: Outstanding 400

taxes

Less: Prepaid

14,000

6,500

By Commission 500
Less: Unearned100
Comm.

400

By Interest
accrued on
investment

210

By Claims form
insurance Co.

1,000

1,500
Less: Opening
provision

1,000 500

To Depreciation
for
furniture

60

To Abnormal Loss
of
Stock

1,000

To Net Profit
transferred to
Capital
A/c

3,000

Tota
l

8,110

8,110

Balance Sheet as at 31st March

2012
Particulars

Rs

Particulars

Rs

Bills Payable

2,500

Cash in Hand

1,500

Sundry Creditors

1,850

Bills Receivable

3,000

Sales Tax

150

Insurance Co.

1,000

Outstanding
expenses:
Salaries

100

Taxes

400

Unearned
commission
Bank overdraft

2,000

Add: Interest on
Bank

100

Investment

4,000

Add : Accrued
interest

210

4,210

500

Prepaid
Insurance

50

100

Closing Stock

4500

Sundry Debtors 5,000

2,100

Less: Provision 1,000 4,000

overdraft
Capital :

Furniture

600

Opening Balance 10,000

Less:
Depreciation

60

Add: Net Profit

540

3,000
13,000

Less:Drawings
Tota
l

1,400 11,600
18,80
0

18,800

___________________________________________________________