CPT Section A - Fundamentals of Accountancy Chapter 2 Unit 1

FCA SK Chhabra

Capital

Means the amount which the owners has invested in the firm or can claim from the firm.

For the firm, it is liability towards the owner because the owner is treated to be separate from the business.

It is also know as Owners Equity and net worth.

Liabilities Liabilities mean the amount which the firm owes to outsiders, that is

excepting the proprietors

OR

Long term Liabilities

These are those liabilities which are payable after a long

term, (generally more than one year).

For example long term loans,

debentures, etc.

Current Liabilities

These are those liabilities which are

payable in near future (Generally within one

year).

For example creditors, bank overdraft, bills

payable, short term loans, etc.

Assets Assets are things of value owned by the business. Anything which will enable the firm to get cash or a benefit in future, is

an asset. For example stock of goods, cash, furniture, machines, building, etc.

Debtors Person who owes money to the firm generally on account of credit sale

of goods is called a debtors. He is called a debtor because he owes the amount to the firm

Fixed Assets

Are those assets which are purchased for the

purpose of operating the business to earn revenue

and not for resale

Examples land, building, machinery, furniture, motor car

etc.

Current Assets

Are those assets of the business which are kept

for short term for converting into cash or

for resale.

Example Unsold goods, debtors, bills

receivables, bank balance, etc..

Stock

The term stock includes goods lying unsold on a particular date.

Stock is valued on the basis of cost or net realisable value whichever is less

Receivables The term receivables is used for the amount that is

receivable by the business from others

Creditors A person from whom goods are purchased on credit. For

example, Mohan is creditor of the firm when goods are purchased on credit from him.

Payables The term payable is used for the amount payable by the firm

to the outsiders

Losses

Loss means something against which the firm receives no benefit.

It may be noted that expenses lead to revenue but losses do not, such as theft, bad debt etc

Proprietor

The person who makes the investment and bears all the risks connected with the business is called the proprietor

Drawings

It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use

Revenue

Means amount receivable by the business from sale of goods, services, interest received, rent received, miscellaneous receipts etc due to business

Expenses

An expense is the amount spent in order to produce and sell the goods and services which produce the revenue. It is the cost of the use of things of services for the purpose of generating revenue Examples are payments of salaries, wages, rent, etc.

Income

It is the difference between revenue and expense For example, goods costing Rs. 15,000 are sold for Rs. 21,000, the cost of goods sold, i.e., Rs. 15,000 is expense, the sale of goods, i.e., Rs. 21,000 is revenue and the difference, i.e., Rs. 6,000 is income.

Gain It is a term used to describe profit of an irregular nature, e.g., capital gains.

Purchases

The term purchases is used only for the purchase of goods. Goods are those things which are purchased for resale or for producing the finished products which also are meant to be sold. Goods purchased for cash are called cash purchases but if goods are purchased on credit, it is referred to as credit purchases.

Sales

The term sale refers to the amount for which the goods are sold or services are rendered/given.

The sales may be for cash or on credit.

Gross Profit

Gross profit is the difference between sales revenue or the proceeds of goods sold and/or services rendered over its direct cost

Net Profit

Net Profit is the profit made after allowing for all expenses. In case, expenses are more than the revenue, it is Net Loss

Cost of Goods Sold

Cost of goods sold is the direct costs of the goods or services sold

Cash Memo

Is prepared by seller when the goods are sold against cash It has details with respect to description of goods sold, quantity,

rate of each item and the total amount received, date etc

Invoice/ Bill

Is prepared by the seller when the goods are sold on credit. It is has details with respect to the name of the party to whom

goods are sold, the description of the goods sold

Pay in slip

Pay in slip is a form available from a bank for depositing money in a bank account. It has a counterfoil which is returned to the depositor with signature of cashier, as receipt

Voucher

Is a document evidence of some business transaction. Such evidence are source documents, i.e., Cash Memo, Invoice or Bill, Receipt, Pay in Slip, etc

Tangible assets Are those assets which

can be seen and felt like buildings, machinery, stock, cash, furniture, etc

Intangible assets Are those assets which

cannot be seen or felt, like the goodwill of a firm or the know how which it possesses

Modern Approach Traditional

Approach

Assets/Expenses

Debit for

Increase

Credit for

Decrease

Liabilities/Revenue/Capital

Debit for

Decrease

Credit for

Increase

Under Traditional Approach accounts can be classified under

Personal Accounts These accounts relate to persons like debtors or creditors. Example Ram and

Co. a credit supplier of goods

Real Accounts These accounts relate to assets of the firm and include both tangible and

intangible assets like Land, Buildings, cash, patents, copyrights etc

Nominal Accounts These accounts relate to income, expense, gains and losses Example Interest

paid account, commission received account etc

Debit the receiver Credit the giver

Personal accounts

Debit what comes in Credit what goes out

Real accounts

Debit all expenses and losses Credit all incomes and gains

Nominal accounts

Transactions of human beings like Ram, Shyam etc Natural

Business entities are treated as separate entities. They are recognised as persons in the eyes of law. For example Companies (private or public), government

Artificial (Legal)

For example outstanding liability or prepaid account, income received in advance etc

Representatives

Started or commenced business with Rs. 20,000

Cash A/c Dr 20,000

To Capital A/c 20,000.

Goods purchased for Rs. 9,000 Or Cash purchases Rs. 9,000

Purchases A/c Dr 9,000

To Cash A/c 9,000

Goods purchases from Mohan Rs. 18,000 Or Goods purchases from Mohan on credit Rs. 18,000

Goods returned to Mohan Or Mohan admitted our claim for Rs. 100

Purchases A/c Dr 18,000 To Mohan A/c 18,000

Mohan A/c Dr. 100 To Purchases Return A/c 100

Cash sales for 7000. Or Goods sold to Mohan for cash

Cash A/c Dr 7,000 To Sales A/c 7,000

Goods sold to Mohan for 4000 or Goods sold to Mohan on credit

Goods of Rs 100 returned by Mohan

Mohan A/c Dr 4,000 To Sales A/c 4,000

Sales Return A/c Dr 100 To Mohan A/c 100

Furniture purchased for Rs 12000

One Furniture sold for Rs 2000

Salaries paid Rs 1200

Furniture A/c Dr 12,000 To Cash A/c 12,000

Cash A/c Dr 2000 To Furniture A/c 2000

Salaries A/c Dr 1200 To Cash 1200

Rent Received Rs 200

Amount Received from Mohan Rs 900 Discount allowed to him Rs 100

Cash A/c Dr 200 To Rent A/c 200

Cash A/c Dr 900 Discount allowed A/c Dr 100 To Mohan 1000

Amount paid to Shyam Rs 900 Discount allowed by him Rs 100

Depreciation on Machinery Rs 100

Interest on capital Rs 150

Shyam A/c Dr 1000 To Cash A/c 900 To Discount Received A/c 100

Depreciation A/c Dr 100 To Machinery 100

Interest on Capital A/c Dr 150 To Capital A/c 150

Outstanding Salaries Rs 1000

Prepaid Insurance Rs 100

Amount withdrawn for personal use Rs 150

Salaries A/c Dr 1000 To Outstanding Salaries A/c 1000

Prepaid Insurance A/c Dr 100 To Insurance A/c 100

Drawings A/c Dr 150 To Cash A/c 150

Goods withdrawn for personal use Rs 100

Goods given for charity Rs 200

A become insolvent. First and final composition of 40 paise in a rupee is received out of a loan of Rs. 2,000

Drawings A/c Dr 1000 To Purchases A/c 1000

Charity A/c Dr 200 To Purchases A/c 200

Cash A/c Dr 800 Bad debts A/c Dr 1200 To As A/c 2000

Amount previously written off as Bad debt Rs 100 now recovered

Loss of goods by theft Rs 200

Advance received from Mohan for supply of an order Rs 800

Cash A/c Dr 100 To Bad debts recovered A/c 100

Loss by theft A/c Dr 200 To Purchases A/c 200

Cash A/c Dr 800 To Advance from Mohan A/c 800

Paid Income Tax amounting to Rs. 20,000 through cheque

Drawings A/c Dr 20000 To Bank A/c 20000

Relevant for CPT Exam

1. The rent paid to landlord is credited to

(a) Landlords account. (b) Rent account. (c) Cash account. (d) None of the above.

Answer: (c)

2. In case of a debt becoming bad, the amount should be credited to

(a) Debtors account (b) Bad debts account (c) Cash account (d) Sales account

Answer: (a)

3. Sunset Tours has a 3,500 account receivable from Mohan. On January 20, the Rotary makes a partial payment of 2100 on behalf of mohan to Sunset Tours The journal entry made on January 20 by Sunset Tours includes

(a) A credit to the cash received account of 2,100 (b) A credit to the Mohan account of 2,100. (c) A debit to the cash account of 1,400 (d) A debit to the Accounts receivable account of 1,400

Answer: (b)

4. Which account is the odd one out?

(a) Office furniture & Equipment. (b) Freehold land and Buildings. (c) Stock of materials. (d) Plant and Machinery

Answer: (c)

5. Which financial statement represents the accounting equation - Assets = Liabilities + Owners equity

(a) Income Statement (b) Statement of Cash flows (c) Balance Sheet (d) None of the above

Answer: (c)

6. The debts written off as bad, if recovered subsequently are (a) Credited to Bad Debts Recovered Account (b) Credited to Debtors Account (c) Debited to Profit and Loss Account (d) None of the above

Answer: (a)

Prepaid salary Account

Personal Account

Bill payable Account

Personal Account

Rent Account

Nominal Account

Proprietors Account

Personal Account

Patents Account

Real Account

Salaries

Expense

Equipment.

Asset

Accounts Payable.

Liability

Membership Fees Earned.

Revenue

Accounts Receivable

Asset

Building

Asset

Stock

Asset

In Double Entry System of Book-keeping every business transaction affects:

Two accounts. Two sides of the same account The same account on two different dates

Answer: Two Accounts

A sale of goods to Ram for cash should be debited to

Ram Cash Sales

Answer: Cash

A withdrawal of cash from business by the proprietor should be credited to:

Drawing Account Capital Account Cash Account

Answer: Cash Account

Relevant from Exam perspective

1. Employees had taken stock worth Rs10,000 (Cost price 7,500) on the eve of Diwali and the same was deducted from their salaries Salaries A/c Dr. 7,500 To Purchase A/c 7,500

2. Wages paid for erection of Machinery Rs 8,000

Machinery A/c Dr 8,000 To cash A/c 8,000

3. Income tax liability of proprietor Rs 1,700 was paid out of petty cash

Drawings A/c Dr. 1,700 To Petty Cash A/c 1,700

4. Purchase of goods from Naveen of the list price of Rs 2,000. He allowed 10% trade discount, Rs 50 cash discount was also allowed for quick payment. Purchase A/c Dr. 1,800 To Cash A/c 1,750 To Discount Received A/c 50

BASIC ACCOUNTING PROCEDURES - JORNAL ENTRIESBasic Accounting TermsRelation between Capital and LiabilitiesClassification of LiabilitiesBasic Accounting TermsClassification of AssetsBasic Accounting TermsBasic Accounting TermsBasic Accounting TermsBasic Accounting TermsBasic Accounting TermsBasic Accounting TermsBasic Accounting TermsBasic Accounting TermsTangible VS Intangible AssetsBasic Journal entriesApproaches to Journal EntriesModern ApproachModern ApproachTraditional ApproachGolden Rules to Traditional ApproachClassification of Personal AccountsTraditional Approach- In briefImportant Journal EntriesTransaction 1 Transaction 2Transaction 3Transaction 4Transaction 5Transaction 6Transaction 7Transaction 8Transaction 9Transaction 10Transaction 11Transaction 12Multiple Choice QuestionsChoose the Correct AnswerChoose the Correct AnswerChoose the Correct AnswerClassify under Real, Nominal and Personal A/cClassify under Revenue, Asset, Expense and LiabilityClassify under Revenue, Asset, Expense and LiabilityChoose the Correct OptionChoose the Correct OptionIllustration Pass the journal entriesPass the journal entries