Chapter 2 Solutions: Recording of Transactions
Answers to the Chapter 2 exercises. Each answer is as long as its marks call for: a sentence or two for 1 mark, five clear points or a five-row table for 5 marks, and full working for numerical problems.
Group A: Very Short Answer Questions (1 Mark Each)
1. State the Golden Rules of debit and credit for Real and Nominal Accounts.
- Real Account: Debit what comes in, credit what goes out.
- Nominal Account: Debit all expenses and losses, credit all incomes and gains.
2. What is a Contra Entry? Give two examples.
A Contra Entry is a transaction that affects both the Cash Account and the Bank Account of the business at the same time, so it is recorded on both sides of a double or triple column Cash Book and marked C in the L.F. column. Examples: (1) cash deposited into the bank, and (2) cash withdrawn from the bank for office use.
3. Differentiate between a Debit Note and a Credit Note.
A Debit Note is prepared by a buyer when returning goods to a supplier, informing the supplier that their account has been debited; it is the source document for the Purchase Return Book. A Credit Note is prepared by a seller when a customer returns goods, informing the customer that their account has been credited; it is the source document for the Sales Return Book.
4. Why is the Cash Book called both a Subsidiary Book and a Principal Book?
It is a subsidiary book (book of original entry) because cash and bank transactions are first recorded in it in date order, and a principal book (ledger) because it also serves as the Cash Account and the Bank Account, so no separate Cash or Bank Account is opened in the Ledger.
5. What is meant by the Imprest System of Petty Cash Book?
Under the Imprest System, the petty cashier is given a fixed advance, the Imprest Amount, at the beginning of each period for small expenses; at the end of the period, the exact amount spent is reimbursed, so the petty cashier starts the next period with the original Imprest Amount again.
6. Why is Closing Stock generally excluded from the Trial Balance?
Closing Stock is generally excluded because its value is already contained in the Opening Stock and Purchases shown in the Trial Balance, so it is given as an adjustment outside the Trial Balance. It appears inside only when Purchases have already been adjusted (Opening Stock + Net Purchases - Closing Stock).
Group B & C: Short and Long Numerical Questions (5 / 8 Marks)
1. Journal, Ledger & Trial Balance (8 Marks): From the following transactions of Annapurna Traders, prepare (a) Journal Entries, (b) Ledger Accounts, and (c) a Trial Balance:
- Shrawan 1: Commenced business with cash Rs. 3,00,000 and bank balance Rs. 2,00,000.
- Shrawan 4: Purchased goods on credit from Everest Suppliers Rs. 1,20,000 at 10% trade discount.
- Shrawan 10: Sold goods on credit to Manakamana Store for Rs. 90,000.
- Shrawan 15: Paid Rs. 1,05,000 by cheque to Everest Suppliers in full settlement of their account.
- Shrawan 22: Received Rs. 88,000 in cash from Manakamana Store in full settlement of their account.
- Shrawan 30: Paid rent Rs. 15,000 and salary Rs. 25,000 in cash.
(a) Journal Entries
In the Books of Annapurna Traders
Journal
| Date | Particulars | L.F. | Debit Amount (Rs.) | Credit Amount (Rs.) |
|---|---|---|---|---|
| Shrawan 1 | Cash A/c ……………………………………………….. Dr. Bank A/c ……………………………………………….. Dr. To Capital A/c (Being business commenced with cash and bank balance) | 3,00,000 2,00,000 | 5,00,000 | |
| Shrawan 4 | Purchase A/c ……………………………………………. Dr. To Everest Suppliers’ A/c (Being goods of list price Rs. 1,20,000 purchased on credit from Everest Suppliers at 10% trade discount: 1,20,000 - 12,000 = 1,08,000) | 1,08,000 | 1,08,000 | |
| Shrawan 10 | Manakamana Store’s A/c …………………………………. Dr. To Sales A/c (Being goods sold on credit to Manakamana Store) | 90,000 | 90,000 | |
| Shrawan 15 | Everest Suppliers’ A/c …………………………………… Dr. To Bank A/c To Discount Received A/c (Being Rs. 1,05,000 paid by cheque to Everest Suppliers in full settlement of Rs. 1,08,000 and discount received) | 1,08,000 | 1,05,000 3,000 | |
| Shrawan 22 | Cash A/c ……………………………………………….. Dr. Discount Allowed A/c …………………………………….. Dr. To Manakamana Store’s A/c (Being Rs. 88,000 received in cash from Manakamana Store in full settlement of Rs. 90,000 and discount allowed) | 88,000 2,000 | 90,000 | |
| Shrawan 30 | Rent A/c ……………………………………………….. Dr. Salary A/c ……………………………………………… Dr. To Cash A/c (Being rent and salary paid in cash) | 15,000 25,000 | 40,000 | |
| Grand Total | 9,36,000 | 9,36,000 |
(b) Ledger Accounts
1. Dr. …………………………………………… Cash Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 1 | To Capital A/c | 3,00,000 | Shrawan 30 | By Rent A/c | 15,000 | ||
| Shrawan 22 | To Manakamana Store’s A/c | 88,000 | Shrawan 30 | By Salary A/c | 25,000 | ||
| Shrawan 30 | By Balance c/d | 3,48,000 | |||||
| Total | 3,88,000 | Total | 3,88,000 | ||||
| Bhadra 1 | To Balance b/d | 3,48,000 |
2. Dr. …………………………………………… Bank Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 1 | To Capital A/c | 2,00,000 | Shrawan 15 | By Everest Suppliers’ A/c | 1,05,000 | ||
| Shrawan 30 | By Balance c/d | 95,000 | |||||
| Total | 2,00,000 | Total | 2,00,000 | ||||
| Bhadra 1 | To Balance b/d | 95,000 |
3. Dr. …………………………………………… Capital Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 30 | To Balance c/d | 5,00,000 | Shrawan 1 | By Cash A/c | 3,00,000 | ||
| Shrawan 1 | By Bank A/c | 2,00,000 | |||||
| Total | 5,00,000 | Total | 5,00,000 | ||||
| Bhadra 1 | By Balance b/d | 5,00,000 |
4. Dr. …………………………………………… Purchase Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 4 | To Everest Suppliers’ A/c | 1,08,000 | Shrawan 30 | By Balance c/d | 1,08,000 | ||
| Total | 1,08,000 | Total | 1,08,000 | ||||
| Bhadra 1 | To Balance b/d | 1,08,000 |
5. Dr. …………………………………………… Everest Suppliers’ Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 15 | To Bank A/c | 1,05,000 | Shrawan 4 | By Purchase A/c | 1,08,000 | ||
| Shrawan 15 | To Discount Received A/c | 3,000 | |||||
| Total | 1,08,000 | Total | 1,08,000 |
(Note: Both sides total Rs. 1,08,000, so Everest Suppliers’ account is fully settled with no closing balance and does not appear in the Trial Balance.)
6. Dr. …………………………………………… Sales Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 30 | To Balance c/d | 90,000 | Shrawan 10 | By Manakamana Store’s A/c | 90,000 | ||
| Total | 90,000 | Total | 90,000 | ||||
| Bhadra 1 | By Balance b/d | 90,000 |
7. Dr. …………………………………………… Manakamana Store’s Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 10 | To Sales A/c | 90,000 | Shrawan 22 | By Cash A/c | 88,000 | ||
| Shrawan 22 | By Discount Allowed A/c | 2,000 | |||||
| Total | 90,000 | Total | 90,000 |
(Note: Both sides total Rs. 90,000, so Manakamana Store’s account is fully settled with no closing balance and does not appear in the Trial Balance.)
8. Dr. …………………………………………… Discount Received Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 30 | To Balance c/d | 3,000 | Shrawan 15 | By Everest Suppliers’ A/c | 3,000 | ||
| Total | 3,000 | Total | 3,000 | ||||
| Bhadra 1 | By Balance b/d | 3,000 |
9. Dr. …………………………………………… Discount Allowed Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 22 | To Manakamana Store’s A/c | 2,000 | Shrawan 30 | By Balance c/d | 2,000 | ||
| Total | 2,000 | Total | 2,000 | ||||
| Bhadra 1 | To Balance b/d | 2,000 |
10. Dr. …………………………………………… Rent Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 30 | To Cash A/c | 15,000 | Shrawan 30 | By Balance c/d | 15,000 | ||
| Total | 15,000 | Total | 15,000 | ||||
| Bhadra 1 | To Balance b/d | 15,000 |
11. Dr. …………………………………………… Salary Account …………………………………………… Cr.
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
|---|---|---|---|---|---|---|---|
| Shrawan 30 | To Cash A/c | 25,000 | Shrawan 30 | By Balance c/d | 25,000 | ||
| Total | 25,000 | Total | 25,000 | ||||
| Bhadra 1 | To Balance b/d | 25,000 |
(c) Trial Balance
Annapurna Traders
Trial Balance
As on Shrawan 30
| S.N. | Particulars (Account Heads) | L.F. | Debit Balance (Rs.) | Credit Balance (Rs.) |
|---|---|---|---|---|
| 1. | Cash A/c | 3,48,000 | — | |
| 2. | Bank A/c | 95,000 | — | |
| 3. | Capital A/c | — | 5,00,000 | |
| 4. | Purchase A/c | 1,08,000 | — | |
| 5. | Sales A/c | — | 90,000 | |
| 6. | Discount Allowed A/c | 2,000 | — | |
| 7. | Discount Received A/c | — | 3,000 | |
| 8. | Rent A/c | 15,000 | — | |
| 9. | Salary A/c | 25,000 | — | |
| Grand Total | 5,93,000 | 5,93,000 |
Answer: The Trial Balance agrees, with a Grand Total of Rs. 5,93,000 on both the Debit and Credit sides.
Working notes:
- Shrawan 4 and 10: The purchase and the sale are on credit, so Everest Suppliers becomes a creditor and Manakamana Store a debtor until each account is settled.
- Trade discount:
10% of 1,20,000 = 12,000. Trade discount is deducted on the invoice and never recorded, so Purchase A/c is debited with1,20,000 - 12,000 = 1,08,000only. - Shrawan 15: Payment is by cheque, so Bank A/c is credited. Discount received =
1,08,000 - 1,05,000 = 3,000. - Shrawan 22: Discount allowed =
90,000 - 88,000 = 2,000. - Cash balance:
3,00,000 + 88,000 - 15,000 - 25,000 = 3,48,000. - Bank balance:
2,00,000 - 1,05,000 = 95,000. - Debit side of the Trial Balance: Assets (Cash, Bank), Purchases and the expenses and losses (Discount Allowed, Rent, Salary):
3,48,000 + 95,000 + 1,08,000 + 2,000 + 15,000 + 25,000 = 5,93,000. - Credit side of the Trial Balance: Capital and the incomes and gains (Sales, Discount Received):
5,00,000 + 90,000 + 3,000 = 5,93,000.