PRINCIPLES OF ACCOUNTING (438)
Q. 1 Define Cash Book and also explain the features of Cash Book. (20)
Cash
Book is a financial record that tracks all cash transactions made by a business
entity. It serves as a subsidiary book within the accounting system and is
maintained alongside other books such as the general ledger and subsidiary
ledgers. The primary purpose of the Cash Book is to provide a detailed and
chronological account of all cash inflows and outflows.
Features of Cash Book:
1.Classification of Cash Transactions: The
Cash Book categorizes cash transactions into different types for better
organization and analysis. These classifications may include cash receipts,
cash payments, cash sales, cash purchases, and any other relevant categories based
on the nature of the business.
2. Double-Entry System: Cash
Book follows the principles of double-entry accounting, which means that every
transaction recorded in the Cash Book has an equal and opposite entry. This
ensures that the accounting equation (Assets = Liabilities + Equity) remains
balanced.
3. Chronological Order: The
Cash Book maintains a systematic and chronological record of cash transactions,
enabling easy reference and retrieval of information. Each entry is recorded in
the order it occurs, typically with a date, description, and amount.
4. Cash Receipts: This
section of the Cash Book records all cash inflows received by the business. It
includes sources such as cash sales, loans received, capital injections, and
any other cash receipts. The entries include details of the source, date, and
amount received.
5. Cash Payments: The
Cash Payments section records all cash outflows made by the business. It
includes payments for various expenses such as salaries, rent, utilities,
inventory purchases, loan repayments, and any other cash disbursements. The
entries include details of the recipient, date, and amount paid.
6.
Bank and Cash Columns: The Cash Book typically has separate columns for
recording cash transactions and bank transactions. This allows for the
differentiation between cash transactions that directly involve physical
currency and those that occur through bank accounts. The use of separate
columns facilitates accurate reconciliation of cash and bank balances.
7. Contra Entries: Contra
entries are transactions that involve both cash and bank accounts
simultaneously. These entries occur when cash is deposited or withdrawn from
the bank. The Cash Book records these transactions in both the cash and bank
columns to maintain accuracy and reconcile the balances.
8. Cash Balance: The
Cash Book provides an up-to-date record of the cash balance available with the
business at any given time. By subtracting the total cash payments from the
total cash receipts and adding it to the previous balance, the current cash
balance can be determined.
9. Source of Verification: The
Cash Book serves as a reliable source of verification for cash transactions. It
provides a comprehensive record that can be cross-checked against other
financial documents such as receipts, vouchers, bank statements, and supporting
documents.
10. Internal Control: The
Cash Book plays a crucial role in internal control measures within an
organization. By maintaining an accurate and detailed record of cash
transactions, it helps prevent fraud, theft, and other irregularities. Regular
reconciliation of cash balances with actual physical cash and bank statements
ensures transparency and accountability.
In
conclusion, the Cash Book is an essential accounting tool that helps businesses
maintain a systematic record of their cash transactions. Its features, such as
classification, double-entry system, chronological order, separate cash and
bank columns, contra entries, and verification, make it a reliable and
effective instrument for managing cash inflows and outflows. By providing an
accurate reflection of the cash position, the Cash Book aids in financial
decision-making, internal control, and financial reporting.
Q. 2 The
following shows the position of the Lahore library as 1st January 2019. (20)
|
Rs. |
Assets |
Rs. |
|
|
Capital Fund Outstanding Liabilities for expenses |
3,00,000 10,000 |
Building Furniture Library Books Investments Outstanding Subscription Cash in Hand |
100,000 10,000 50,000 100,000 40,000 10,000 |
|
Total |
3,10,000 |
Total |
3,10,000 |
An
analysis of cash book during the year gives the following particulars:
|
Receipts |
Rs. |
Payment |
Rs. |
|
Subscription Donation Interest
on investment Sales
of old furniture Proceeds
of lecture |
1,50,000 100,000 1,200 1,000 16,000 |
Salaries Purchase
of Books Rent
& Rates Outstanding
Liabilities Insurance
and Premium Printing
and stationery Purchase
of Furniture Investment Sundry
expenses Balance |
7,200 80,000 7,200 10,000 3,000 900 15,000 1,50,000 900 4,000 6,000 |
|
|
2,68,200 |
|
2,68,200 |
The
following adjustments are required: -
i.
Outstanding
subscription Rs. 30,000.
ii.
Outstanding
liabilities for Expenses Rs. 15,000.
iii.
Insurance
& premium Rs. 600 was paid in advance.
iv.
Depreciation
Building @ 5%, Library Books @ 10% and Investment @5%.
Required: From the above information, prepare the
income & expenditure account for the year ended 31st December
2019 and Balance Sheet as that date.
To
prepare the income and expenditure account and balance sheet for the Lahore
library for the year ended 31st December 2019, we need to consider the given
information and make the necessary adjustments. Let's calculate the values step
by step.
Income
and Expenditure Account for the year ended 31st December 2019:
Particulars Amount
(Rs.)
Receipts:
Subscription 1,50,000
Donation 1,00,000
Interest
on investment 1,200
Sales
of old furniture 1,000
Proceeds
of lecture 16,000
Total
Receipts 2,68,200
Less:
Expenses:
Salaries 7,200
Purchase
of Books 80,000
Rent
& Rates 7,200
Outstanding
Liabilities (Expenses) 10,000
Insurance
and Premium (Adjustment) 2,400
(3,000 - 600)
Printing
and stationery 900
Purchase
of Furniture 15,000
Investment
(Adjustment) 1,42,500 (1,50,000 -
7,500)
Sundry
expenses 4,000
Depreciation:
Building
@ 5% 2,500
(50,000 * 5%)
Library
Books @ 10% 5,000
(50,000 * 10%)
Investment
@ 5% 7,125
(1,42,500 * 5%)
Total
Expenses 2,82,425
Net
Surplus/(Deficit) (Receipts - Expenses) -14,225
Balance
Sheet as of 31st December 2019:
Liabilities Amount
(Rs.) Assets Amount (Rs.)
Capital
Fund 3,00,000 Building 50,000
Outstanding
Liabilities (Expenses) 25,000 Furniture 10,000
Outstanding
Subscription 30,000 Library
Books 45,000 (50,000 - 5,000)
Insurance and
Premium (Prepaid) 600
Cash
in Hand 10,000
Total
Liabilities 3,55,000 Investments 1,35,375 (1,42,500 - 7,125)
Total 3,55,000
Note:
The adjustments made are as follows:
i.
Outstanding subscription of Rs. 30,000 is added to the liabilities.
ii.
Outstanding liabilities for expenses of Rs. 15,000 is added to the liabilities.
iii.
Insurance and premium of Rs. 600 paid in advance is deducted from expenses and
shown as a prepaid expense.
iv.
Depreciation is calculated on Building @ 5% (Rs. 2,500), Library Books @ 10%
(Rs. 5,000), and Investment @ 5% (Rs. 7,125) and deducted from the respective
assets.
The
income and expenditure account shows a deficit of Rs. 14,225, indicating that
expenses exceeded the receipts for the year. The balance sheet provides a
snapshot of the financial position of the Lahore library as of 31st December
2019, with the assets totaling Rs. 3,55,000 and the liabilities matching the
same amount.
Q. 3 Naeem & Co. keeps his books by single entry system. He gives
you the financial information from which you are required toa certain his
profit or loss on Dec.31, 2023. (20)
|
|
Jan.
1, 2023 |
Dec.
31, 2023 |
|
Cash
in hand |
100,000 |
80,000 |
|
Sundry
Debtor |
157,500 |
200,000 |
|
Furniture |
100,000 |
100,000 |
|
Building |
200,000 |
196,000 |
|
Plant
& machinery |
75,000 |
72,500 |
|
Overdraft
in Bank |
80,000 |
65,200 |
|
Sundry
Creditor |
130,600 |
140,500 |
During
the year Naeem & Co. had withdraw Rs. 30,000. He brought the money Rs.
25,000 into business on 107-2023.
Ascertain
the profit or loss made by him after considering the following adjustment.
1.
Depreciation
on Furniture @ 10% p.a.
2.
Charge
Interest ion capital @5% p.a.
3.
Write
off Rs. 500 from Sundry Debtors.
To ascertain the profit or loss
made by Naeem & Co. on December 31, 2023, we need to consider the given
financial information and the adjustments provided. Let's calculate the values
step by step.
1.
Calculate the Opening Capital:
Opening Capital = Cash
in hand (Jan. 1, 2023) - Withdrawals + Additional Capital
Opening Capital =
100,000 - 30,000 + 25,000
Opening Capital =
95,000
2.
Calculate the Closing Capital:
Closing Capital =
Opening Capital + Profit - Loss - Drawings
Since we don't have the
profit or loss yet, we will calculate it later.
3.
Calculate the Depreciation on Furniture:
Depreciation on
Furniture = Furniture (Jan. 1, 2023) * Depreciation Rate
Depreciation on
Furniture = 100,000 * 10% = 10,000
4.
Calculate the Interest on Capital:
Interest on Capital =
Opening Capital * Interest Rate
Interest on Capital =
95,000 * 5% = 4,750
5.
Write off the Bad Debt from Sundry Debtors:
Sundry Debtors (Dec.
31, 2023) = Sundry Debtors (Dec. 31, 2023) - Bad Debt
Sundry Debtors (Dec.
31, 2023) = 200,000 - 500 = 199,500
6.
Calculate the Closing Capital:
Closing Capital =
Opening Capital + Profit - Loss - Drawings
Since we don't have the
profit or loss yet, we can't calculate the closing capital.
To ascertain the profit
or loss, we need the closing capital. However, the given information does not
provide the profit or loss for the year. Without the profit or loss figure, we
cannot determine the closing capital or ascertain the profit or loss made by
Naeem & Co. on December 31, 2023.
Q.
4 Define
term of account and describe the Qura’anic Concept of two side of an Account. (20)
Term of Account:
In
accounting, the term "account" refers to a systematic record that
tracks the financial transactions and balances of a specific asset, liability, equity,
revenue, or expense. It is a fundamental concept in double-entry bookkeeping,
which is widely used in financial accounting. An account provides a detailed
and organized summary of the monetary activities related to a particular
element of the business.
An
account consists of three essential elements: a title, a debit (left) side, and
a credit (right) side. The title of the account describes the nature of the
financial element being recorded, such as "Cash," "Accounts
Payable," "Sales Revenue," or "Rent Expense." The
debit and credit sides represent the two aspects of each transaction that
affect the account.
Qura’anic Concept of Two Sides of an
Account:
The
Qura’anic concept of two sides of an account refers to the idea that every
action or deed performed by an individual will be accounted for in the
afterlife. It is rooted in the Islamic belief in the Day of Judgment, where
individuals will be held accountable for their actions and will face either
rewards or punishments based on their deeds.
In the
Islamic faith, the concept of accountability is deeply ingrained, and the
Qur'an emphasizes the importance of leading a righteous and just life. The
concept of two sides of an account is derived from verses in the Qur'an that
highlight the meticulous recording and evaluation of human actions by God.
The
Qur'an states that every person has two angels assigned to them, one on their
right shoulder recording their good deeds and one on their left shoulder
recording their bad deeds. This metaphorical representation signifies that each
action performed by an individual has a consequence and will be accounted for
in the Hereafter.
The
concept of two sides of an account serves as a reminder for Muslims to be
mindful of their actions and to strive towards righteousness and moral
integrity. It encourages believers to lead a balanced life, seeking to perform
good deeds and avoid sinful behavior. The Qur'an emphasizes the significance of
accountability, stating that on the Day of Judgment, individuals will be presented
with their book of deeds, which will contain a complete record of their
actions.
Overall,
the Qura’anic concept of two sides of an account underscores the belief that
individuals are responsible for their actions in this life, and they will ultimately
face the consequences in the afterlife. It serves as a moral and ethical guide,
encouraging individuals to strive for virtuous conduct and to be mindful of the
choices they make.
Q. 5 On 1st July 2016 Mr.
Aslam purchased a second- hand machine foe Rs. 18,000 and spent Rs. 2,000 on
its repairs and distillation. On 30th June 2019 the machinery was disposed off
for a sum of Rs. 13,600. Assuming the books are closed on 31st December each
year and taking the rate of deprecation @ 10% p.a on diminishing balance, Show
thew machinery Account. (20)
Required: Prepare machinery
Accounts from 2016 to 2019. Accounts rae closed on 31st December
every year.
To
prepare the Machinery Account from 2016 to 2019, we need to calculate the
depreciation for each year based on the given rate of 10% p.a. on the
diminishing balance method. Let's calculate the values step by step:
Machinery Account:
Year Particulars Cost (Rs.) Depreciation
(Rs.) Accumulated
Depreciation (Rs.) Balance (Rs.)
2016 To
Cash 18,000 - - 18,000
To Repairs and Distillation 2,000 - - 2,000
To Balance b/d - - - 20,000
2017 By
Depreciation - 2,000
2,000 18,000
To Balance b/d
- - 2,000
18,000
2018 By
Depreciation - 1,800
3,800 16,200
To Balance b/d
-
- 3,800 16,200
2019 By
Depreciation - 1,620
5,420 14,580
By Sale of Machinery - - 13,600 600
To Balance c/d
- - 5,420 600
Note: In each year,
depreciation is calculated based on the diminishing balance method, which means
that the depreciation is calculated on the remaining balance after deducting
the accumulated depreciation.
The
Machinery Account shows the cost of the machinery initially, the repairs and
distillation expenses, the annual depreciation, the accumulated depreciation,
and the balance remaining in the account.
By the
end of 2016, the cost of the machinery and repairs amounted to Rs. 20,000. In
subsequent years, depreciation is calculated on the diminishing balance,
resulting in a reduction of the machinery's value. By the end of 2019, the
accumulated depreciation reaches Rs. 5,420, and the machinery is disposed of for
Rs. 13,600. The balance in the Machinery Account is Rs. 600.
Please
note that the Machinery Account does not reflect any other transactions or
financial events apart from the initial purchase, repairs, depreciation, and
disposal.