TUTOR MARKED ASSIGNMENT

Course Code : ECO - 02

Course Title : Accountancy I
Assignment Code : ECO 02/TMA/2014-15
Coverage : All Blocks
Maximum Marks: 100

Q.N-01 How a Bank Reconciliation Statement is prepared? Give a proforma example

of the same, with figures starting with overdraft as per Pass Book.
(20)
Answer of Q.N.1.
Bank Reconciliation Statement
Business concern maintains the cash book for recording cash and bank transactions. The
Cash book serves the purpose of both the cash account and the bank account. It shows the
balance of both at the end of a period. Bank also maintains an account for each customer in
its book. All deposits by the customer are recorded on the credit side of his account and all
withdrawals are recorded on the debit side of his account. A copy of this account is regularly
sent to the customer by the bank. This is called Pass Book or Bank statement. It is usual to
tally the firms bank transactions as recorded by the bank with the cash book. But sometimes
the bank balances as shown by the cash book and that shown by the pass book/bank
statement do not match. If the balance shown by the pass book is different from the balance
shown by bank column of cash book, the business firm will identify the causes for such
difference. It becomes necessary to reconcile them. To reconcile the balances of Cash Book
and Pass Book a statement is prepared. This statement is called the Bank Reconciliation
Statement
How to Prepare Bank Reconciliation Statement:
To reconcile the bank balance as shown in the pass book with the balance shown by the cash
book, Bank Reconciliation Statement is prepared. After identifying the reasons of difference,
the Bank Reconciliation statement is prepared without making change in the cash book
balance. We may have the following different situations with regard to balances while
preparing the Bank Reconciliation statement. These are:
1. Favourable balances
(a) Debit balance as per cash book is given and the balance as per pass book is to be
ascertained.
(b) Credit balance as per pass book is given and the balance as per cash book is to be
ascertained.

2. Unfavourable balance/overdraft balance

(a) Credit balance as per cash book (i.e. overdraft) is given and the balance as per pass book
is to be ascertained.
(b) Debit balance as per pass book (i.e. overdraft) is given and the balance as per cash book
is to be ascertained.
The following steps are taken to prepare the bank reconciliation statement:
(i) Favourable balances: When debit balance as per cash book or credit balance as per pass
book is given:
(a) Take balance as a starting point say Balance as per Cash Book.
(b) Add all transactions that have resulted in increasing the balance of the pass book.
(c) Deduct all transactions that have resulted in decreasing the balance of pass book.
(d) Extract the net balance shown by the statement which should be the same as shown in the
pass book.
In case balance as per pass book is taken as starting point all transactions that have resulted
in increasing the balance of the Cash book will be added and all transactions that have
resulted in decreasing the balance of Cash book will be deducted. Now extract the net
balance shown by the statement which should be the same as per the Cash book.
(ii) Unfavourable Balance/Overdraft: Sometimes a businessman withdraws excess amount
from the bank account and the closing bank balance of a month is a debit balance. This
balance amount is called overdraft balance as per Pass Book. This is shown in the cash
book as a credit balance. Overdraft balance is to be shown in the minus column of statement
as the starting point. The other steps shall remain the same as mentioned above. The
following illustration helps to understand dealing with the unfavourable balance as per cash
book and pass book.
Illustration.1. On December 31, 2013, the cash book of the M/s. X shows the credit balance
Rs.6, 500. Cheques amounting to Rs.3, 500 deposited into bank but were not collected by the
bank. Firm issued cheques of Rs. 1,000 which were not presented for payment. There was a
debit in the pass book of Rs.200 for interest and Rs.400 for bank charges. Prepare Bank
Reconciliation Statement.
Solution: Bank Reconciliation of M/s. X as on 31st Dec, 2013
Particulars
Overdraft as per cash book
1. Cheque issued but not presented for payment
2. Cheque deposited but not credited by bank
3. Bank charges and Interest charged
Overdraft as per pass book

Plus
(Amount)

Minus
(Amount)
6,500

1,000
3,500
600
9,600
10,600

Illustration.2. Prepare Bank Reconciliation Statement of M/s. X on 31st Dec, 2013, from
the following information:
Overdraft as per pass book 16,500,

10,600

Interest on overdraft 1,600,

Insurance premium paid by the bank 800
800,
Cheques deposited but not yet credited 5,500
5,500,
Cheques issued but not present for payment 6,000
6,000,
Wrongly credit to firm account by the bank 1,000
Solution: Bank Reconciliation of M/s. X as on 31st Dec, 2013
Particulars
Overdraft as per pass book
1. Interest on overdraft
2. Insurance Premium paid by bank
3. Cheque deposited but not credited by bank
4. Cheque issued but not presented for payment
5. Wrongly credited by bank
Overdraft as per cash book

Plus
(Amount)

Minus
(Amount)
16,500

1,600
800
5,500
6,000
1,000
15,600
23,500

23,500

Q.N-02 From the following Trial Balance of Gupta Furniture House, prepare Trading and Profit &
Loss Account and a Balance Sheet as on 3
31st December, 2013.

Adjustments:
1.Write off Rs. 1,500 as Bad-Debts
Debts and create a provision for doubtful debts

@ 5% on Debtors.
2.Provide 2% for discount on Debtors.
3.Depreciate building by 5% and machinery by 10%.
4.Rent is payable at the rate of Rs. 400 per month.
5.One third of the commission received is in respect of work to be done next year.
6.Rs. 1,100 is to be provided as interest on Drawings.
7.Closing Stock was valued at Rs. 56,700.

Answer of Q.N.2.
Trading and Profit and Loss Account of Gupta Furniture House
For the year ended on 31st March, 2013
Particulars
Amount
Particulars
To Opening Stock
32,200 By Sales
: 3,54,000
To Purchase : 1,80,000
Less: Return :
4,500
1,73,800 By Closing Stock
Less: Return : 6,200
To Carriage on Purchase
2,600
To Fuel and Power
8,500
21,000
To Wages and Salaries
To Gross Profit C/d
1,68,100
4,06,200
To Carriage on Sales
1,500 By Gross Profit B/d
To Rent
: 4,000
By Interest On Investment
Add: Outstanding
800
4,800 By Commission Received: 7,500
To General Expenses
: 15,000
Less: Advance
2,500
Less: Prepaid Insurance
1,000
14,000 By Interest on Drawings
To Sales Tax Paid
4,400
To Bad Debt
: 1,500
Add: Provision for B/D : 4,000
(New)
5,500
Less: Provision for B/D : 2,900
2,600
(Old)
To Depreciation on Building
7,500
To Depreciation on Machinery
7,200
To Provision for Discount on Debtors
1,520
To Net Profit (Transferred to Capital 1,34,280
Account)
1,77,800
Balance Sheet of Gupta Furniture House
As on 31st December, 2013
Liabilities
Amount
Assets
Capital
: 2,10,000
Prepaid Insurance
Less: Drawings
: 22,000
Cash
Less: Interest on Drawings
1,100
Building (At Cost)
1,86,900
Machinery (At Cost)
Add: Net Profit
1,34,280
3,21,180 Debtors

Amount
3,49,500
56,700

4,06,200
1,68,100
3,600
5,000
1,100

1,77,800

Amount
1,000
3,000
1,50,000
72,000
:81,500

Sundry Creditors
Accumulated Depreciation
(20,000+7,500+7,200)
Sales Tax Collected
Rent Outstanding
Commission received in Advance

Less: Bad Debts

: 1,500
80,000
28,000
34,700 Less: Provision for B/d @5% 4,000
76,000
6,000 Less: Provision for discount 1,520
800 On Debtors @2%
2,500 Investments
Closing Stock
3,93,180

74,480
36,000
56,700
3,93,180

Q.N-03How would a not-for-profit organisation deal with the following items?

(a) Outstanding subscription
(b) Donations
(c) Legacy
(d) Tournament fund
(54)
Answer of Q.N.3.
(a) Outstanding Subscription
Subscription is received by the non-trading organisations from its members regularly each
year. It is a recurring receipt of revenue nature and hence treated as a main source of income.
This is shown to the debit side of Receipts and Payments Account and to the credit side of the
Income and Expenditure Account. It is shown on cash basis in the Receipts and Payments
Account and on accrual basis in the Income and Expenditure Account i.e., outstanding
subscription and advance subscription is to be adjusted.

Subscription can be outstanding both in the beginning and at the end of the accounting year.
Outstanding subscription at the beginning is that amount of subscription which due in previous
year and not received in previous year. Therefore, it is deducted while ascertaining
subscription income during the current year and on the other hand, it is shown on the assets
side of opening balance sheet. Again, Subscription outstanding at the end is that sum which is
due in current year and yet not received. It is related to current year, therefore it is added
while ascertaining subscription income during the current year and on the other hand, and it is
shown on the assets side of closing balance sheet.
(b) Donation:
In Income and Expenditure Account: It is the amount received from some person, firm,
company or any other body by sway of a gift. It is shown in receipts and payments accounts of
the year. If a donation is received for a specific purpose (donation for building, donation for
conducting specific events sports, annual day celebration etc.) It is in the nature of a capital
receipt credited to a separate Fund account and shown in the balance sheet. The non trading
concern has to fulfill the purpose for which the donation is received. If the donation is not for a

specific purpose, it is known as a general donation. General donation of a big amount is

capitalized and not shown as income as it is non-recurring in nature. Donations of a small
amount may be expected every year. So this may be considered as income during the year.
In Receipts and Payments Account: Donation is shown in the receipts side of Receipts and
Payments Account whether it is of general purpose or specific purpose.
(c) Legacy:
In Income and Expenditure Account: It is the amount received by the nonprofit
organizations as per the will of a deceased person. It is a capital receipt and is shown on the
liability side of the balance sheet, but if the amount is small it may be treated as income and
may be shown on the credit side income and expenditure account In the absence of any
specific information legacy must be preferably be capitalized and added with capital fund.
In Receipts and Payments Account: It is the amount which is received by organisations as
per the will of a deceased person. It is treated as a capital receipt and shown on the receipts
side of Receipts and Payments Account.
(d) Tournament Fund:
In non trading concerns, Tournament funds are created for conducting tournaments. It a
specific fund and invested in specific securities by non-trading organisations. The income
derived from the investment is added to that fund and is not treated as income. Incomes are
normally added with the fund. Again, expenditure incurred on conducting tournament is
deducted with tournament fund and is not shown as expense. For example:
Tournament Fund - 20,000;
Tournament fund investment - 15,000;
Interest on Tournament Fund Investment for the year - 2,000;
Expenditure on Tournament - 8,000.
Now the total Tournament fund is Rs. 22,000 (20,000 + 2,000) the interest of Rs. 2000 is
added with the Prize fund. The expenses incurred out of fund are deducted from the fund
itself. In the previous example the accumulated Prize fund is Rs. 22,000. The Prize given for
of Rs. 8,000 is deducted from the Prize fund and the balance fund of Rs. 14,000 will be shown
in the Balance sheet.

Q.N-04 (a) Explain the procedure of calculating profit by statement of affairs method in
case of incomplete records.
(b) What are the different types of Reserves? Explain. Differentiate between Provisions
And Reserves.
(10+10)

Answer of Q.N.4.
(a) Statement of Affairs or Net Worth Method
When books of accounts are maintained under single entry system, it is not possible to
prepare trading and profit and loss account because no record is maintained for nominal

accounts. However in order to determine profit or loss, Statement of affairs method based on
fundamental balance sheet equation is followed. Under this method, two balance sheets
(Statement of affairs) are prepared. One at the beginning of the period for finding out the
opening capital and the other at the end of the period for finding out the closing capital. But
necessary adjustments is required to be made for Drawings made by the proprietor, additional
capital introduced during the year, interest on drawings and on capital for ascertaining the true
operating profit in a statement which is called Statement of Profit or Loss.
Steps for ascertaining Profit under Statement of affairs Method:
a) A Statement of Affairs at the beginning of the year is prepared with the opening assets
and liabilities to determine the amount of capital of the proprietor at the beginning of the year.
b) Similarly, A Statement of Affairs at the end of the year is prepared to determine the
amount of capital at the end of the year.
c) Drawings made by the proprietor during the year should be added to the amount of
Capital at the end of the year for the reason that the capital at the end would have been more
if there is no such withdrawal by the proprietor.
d) Similarly, Capital introduced during the year should be deducted from the Capital at the
end of the year for the reason that the capital at the end would have been less if there is no
such addition by the proprietor.
e) Capital at the beginning of the year should be deducted from the closing capital as
adjusted in step (c) and (d) above and the difference will be either a trading profit or loss. If
the adjusted capital exceeds the opening capital, the excess will be profit for the year. But if
the adjusted capital is less than the capital at the beginning of the year, the difference will be
loss for the year.
f) Interest on capital and interest on drawings (if any) are to be adjusted in profit or loss as
derived in step (e) to arrive at the net profit or loss for the year.
Specimen of Statement of Affairs
Statement of Affairs (Prepared on the 1st and last day of the Accounting Year)
As on ________________
Liabilities
Amount
Assets
Sundry Creditors
Cash
Loan
Bank Balance
Bills Payable
Car
Outstanding Expenses
Furniture
Capital (Balancing Figure)
Building
Land

Amount

Specimen of Statement of Profit or Loss to determine profit for the year:

Particulars
Closing Capital
Add:
(i) Drawings
(ii) Interest on Drawings
Less:

Amount
Xxxxxxxx
Xxxxxxxx
Xxxxxxxx

(i) Opening Capital

(ii) Additional Capital
(iii) Interest on Capital
Profit (Loss) for the year

---------------------------------Xxxxxxxx

(b) Reserves and Its Types:

A part of the profit may be set aside and retained in the business to provide for certain future
needs like growth and expansion or to meet future contingencies such as workmen
compensation are called reserves. Unlike provisions, reserves are the appropriations of profit
to strengthen the financial position of the business. Reserve is not a charge against profit as it
is not meant to cover any known liability or expected loss in future. However, retention of
profits in the form of reserves reduces the amount of profits available for distribution among
the owners of the business. It is shown under the head Reserves and Surpluses on the
liabilities side of the balance sheet after capital.
Types of Reserves:
According to the method and object of creation, reserves may be of the following types:
a) Revenue Reserve
b) Capital Reserve
a) Revenue Reserve: Profit earned by a business through its normal activities is determined
at the yearend through profit and loss account. The portion of such profit which is not paid to
the proprietor, but kept apart is known as revenue reserve. From the view point of its creation
revenue reserve may again be classified into two types:
1. General Reserve: Reserve which is created not for any specific purpose, but for
strengthening the financial position of the business is known as general reserve, e.g.,
reserve fund, contingency fund etc. It is a matter for the proprietor or management of the
business to decide whether general reserve will at all be created or if created, with what
amount. Usually there is no compulsion on this point. But in case of Joint Stock Company a
specific % of profit is to be transferred to general reserve before it pays dividend to its
shareholders. General reserve is also known as free reserve. General reserve is not created
for specific purposes. It is usually created to strengthen the financial position of the business.
2. Specific Reserve: Reserve created for any specific purpose is known as specific reserve.
For example, dividend equalization fund, debenture sinking fund etc. This reserve will be
utilized for the very purpose for which it has been created. It cannot be used for other
purposes. Specific reserve is also known as special reserve.
b) Capital Reserve: Profit may arise from sources other than normal trading activities. Such
profit is known as capital profit. Any reserve created out of such profit is called capital
reserve. It is usually not available for payment to shareholders as dividend. It is usually
utilized for meeting capital losses. "The expression 'capital reserve' shall not include any
amount regarded as free for distribution through the profit and loss account". Such profit is
earned in the following ways: Sale of fixed asset, Revaluation of assets and liabilities, Issue of
shares and debentures at a premium.

In addition to this, another type of reserve is created, the existence of which is not disclosed
through balance sheet or the books of account. It is called secret reserve. Generally the type
of business whose success is dependent on public confidence (e.g. banks,
insurance companies and other financial institutions) create such reserve in order to
strengthen financial position of their concern. Secret reserve is usually created by
undervaluing assets and overvaluing liabilities. It may be noted that no special entries are
made in the books of account in order to create such a reserve.
Difference between Provisions and Reserves
1. Provision is made to meet known liability the amount of which cannot be ascertained with
substantial accuracy. Whereas, Reserve is created to meet unexpected losses and
contingencies likely to arise in future.
2. Provision can be used only for meeting the specific purpose for which it has been made.
But, Reserve can be used for any purpose unless it is created for a specific purpose.
3. Provision is a charge on profits and reduces the amount of net profits. But, Reserves is an
appropriation of profits and reflects undistributed profits.
4. Provision is to be made even if there are no profits.
Whereas, Reserve is
created only when there are profits.
5. Provision creation is compulsory. But, Reserves creation is at the discretion of
management with the exception of debenture redemption reserve for which the Companies
Act has made a provision in certain cases.
6. Provision is meant for meeting expected losses and cannot be used for dividend
distribution.
But, Reserves is a part of owners funds and can be used for distribution of
dividends.

Q.N-05 A of Surat consigns goods to B of Jaipur to be sold at or above invoice price. B

is entitled to get a commission of 8% on sales at invoice price plus 25% of any surplus
price realized. B accepted a bill of exchange drawn by A amounting to 50% of the
invoice price. In the year 2013 goods consigned by A were invoiced at Rs. 2,50,000.
These goods cost to A Rs. 2,00,000 (including freight). Sales made by B during the year
amounted to Rs. 2,35,000. At the end of the year goods unsold with B represented an
invoice value of Rs. 60,000. During the year, A had received from B Rs. 40,000 by bank
drafts, certain remittances being in transit on 31ST Dec. 2013. Prepare necessary ledger
accounts in the books of both the parties. Also show how will the consignment stock
appear in the Balance Sheet.
(20)
Answer of Q.N.5.
In the Books of A
Consignment to Jaipur Account

Particulars

Amount

To Goods Sent on Consignment(IP)

A/c
To Bs A/c (Commission)
To Stock Reserve

Particulars

Amount

2,50,000 By Bs A/c (Sales)

2,35,000

26,450 By Consignment Stock

60,000

12,000 By Goods Sent on Consignment A/c

(Loading)
56,550

50,000

To Profit and Loss Account

3,45,000

3,45,000

Bs Account
Particulars

Amount

To Consignment to Mumbai A/c

Particulars

Amount

2,35,000 By Bills Receivable A/c

1,25,000

By Bank A/c (Bank draft)

By Consignment
(Comm.)

to

40,000
Jaipur

A/c

26,450
43,550

By Bank A/c (Remittance in transit)

2,35,000
Goods Sent on Consignment Account
Amount
Particulars

Particulars
To Consignment
(Loading)

to

2,35,000

Jaipur

A/c

Amount

50,000 By Consignment to Jaipur A/c

2,50,000

2,00,000

To Trading Account
2,50,000

Liabilities

2,50,000

Balance sheet
As On 31st Dec., 2013
Amount
Assets

Amount

Stock
Consignment:
Less:
Reserve

Particulars
To Bills Payable Account
To Bank Account

on
60,000
Stock
12,000

In the Books of B
As Account
Amount
Particulars
1,25,000 By Cash/Customers Account
40,000

48,000

Amount
2,35,000

To Commission Account

26,450

To Bank Account (Remittance in

transit)

43,550
2,35,000

W.N. 1. Calculation of Bs Commission:

8% on Normal Sales = (250000 60000)*8%
= 15,200
25% on Surplus Sales = (235000 190000)*25% = 11,250
26,450

2,35,000