Explore topic-wise InterviewSolutions in Current Affairs.

World Economy is a borderless economy in which natural resources, profit, services, capital, labour and technology flow freely across the countries.

Decision of a capitalist economy is taken on the basis of cost, profit and minimum investment.

According to Lionel Robbins, Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

The economy in which the ownership and management of the means of production is in the hands of private individuals is called as a Capitalistic Economy.

The following are the difficulties that are encountered by a trader due to incompleteness of accounting records: 

a. Accuracy of accounts: Arithmetical accuracy of accounts cannot be ascertained, since proper records of accounts are not maintained. Consequently, Trial Balance cannot be prepared.

b. Encourages fraud: As the arithmetical accuracy cannot be determined; so, this encourages fraud and provides sufficient scope for bluffing and carelessness. 

c. Difficult to ascertain correct profit or loss: Since all expenses and income are not recorded, true profit or loss cannot be correctly ascertained.

d. Difficult to analyse the true financial position: As profit or loss cannot be ascertained. easily, so the balance sheet cannot be easily prepared. Hence, the absence of balance sheet will not reflect the true financial position of the business.

e. Difficulty in comparison: Due to the incomplete records and nonavailability of previous years’ data, comparison is not possible. By the same token, comparisons with other firms are also not possible. 

f. Unacceptable to tax authorities: It does not reflect the true and acceptable presentation of expenses and revenues. Hence, these are not acceptable by the tax authorities. 

g. Raising funds: Since analysis of solvency, profitability and liquidity of business cannot be done, it is difficult to raise fund from outside.

Correct option is (d) Contingent liability

Invoice is used for credit purchases and credit of sales. The date, amount and details of credit purchases and credit sales are given in the invoices. Invoice is generally prepared by the seller in three copies.

1. Rough book.

2. Nominal.

3. Double-entry.

4. Balance Account.

5. Debit – Credit

6. Credit.

7. Depreciation.

8. Capital.

There are three types of Accounts. They are : 

1. Personal Account 

2. Real Accounts 

3. Nominal Accounts. In personal account – Debiting the benefit receiver’s account and crediting to the benefit giver’s account. A debit is what comes in and credit is what goes out.

A short description of each transaction which is written under each entry is called narration.

Goods account appears as goods purchases account and goods sales account. These accounts are balanced but taken as purchases account, sales account, shown in the trial balance. So there is no need to find out the balance of goods sold account and goods purchases account.

Every business concern is started to earn a profit. The concern earns profit through transactions of the business such as the purchase of goods, sale of goods, receipt of incomes, expenses, incurring losses, etc. to know all these things is very important. Accounting is needful to know the net profit earned or the loss suffered. It is also required to know the amounts due by the firm to others or due to the firm by others. For all these purposes it is very essential to write down accounts.

The journal in which the full particulars of the journals are recorded first is called the book of original entry. The journal entries very important and they are original. Without these original entries, it is impossible to transfer them to the respective ledger accounts.

(a) Minimum of two accounts 

The balance sheet is the statement contains all assets and liabilities. Of these, the permanent assets lose their value every year. It is called the “Depreciation”. As a result of the depreciation of fixed assets, it is deducted from the asset and shown as a loss.

Trial Balance is prepared to ascertain the arithmetical accuracy of ledger accounts. After ascertaining accountancy of ledger, Final accounts are prepared. It is also called Financial Statements. 

Final accounts consists of two statements. They are

1. Trading and profit and loss a/c 

2. Balance Sheet 

Trading and Profit and Loss account may be divided into two accounts, namely,

• Trading account 
• Profit and Loss account

They may be prepared separately, but general practice is that they are prepared together. A trading account gives the result of buying and selling. It includes all the expenses incurred for buying and selling or manufacturing goods* The result is gross profit or gross loss. Profit and Loss account contains Gross Profit or Gross loss, brought down from trading account and also all the expenses and losses and all gains or profits which are of non-trading items.

The following steps are followed in journalising: 

1. Analyse the transactions and identify the accounts (based on aspects) which are involved in the transaction. 

2. Classify the above accounts under Personal account, Real account or Nominal account.

3. Apply the rules of debit and credit for the above two accounts. 

4. Find which account is to be debited and which account is to be credited by the application of rules of double entry system. 

5. Record the date of transaction in the date column. 

6. Enter the name of the account to be debited in the particulars column very close to the left hand side of the particulars column followed by the abbreviation ‘Dr.’ at the end in the same line. Against this, the amount to be debited is entered in the debit amount column in the same line. 

7. Write the name of the account to be credited in the second line starting with the word ‘To’ prefixed a few spaces away from the margin in the particulars column. Against this, the amount to be credited is entered in the credit amount column in the same line. 

8. Write the narration within brackets in the next line in the particulars column.

Every business transaction involves two aspects. Of these one aspect gives the benefit and the other aspect receives the benefit. Both of these aspects are to be recorded in books. For every aspect, there is an account in the ledger. Every ledger account has two sides, one account receives the benefit and the other account gives the benefit. While entering the aspects, we enter two aspects on opposite sides. This system is called the Double entry system of book-keeping.

Following are the principles of double entry system: 

1. In every business transaction, there are two aspects.

2. The two aspects involved are the benefit or value receiving aspect and benefit or value giving aspect. 

3. These two aspects involve minimum two accounts; at least one debit and at least one credit. 

4. For every debit, there is a corresponding and equivalent credit. If one account is debited the other account must be credited.

Correct option is (a) partner

(i) In partnership firm, minimum two members are required.

(ii) In Joint Hindu Family business, the senior most member of family is called as Karta.

(iii) Indian Partnership Act, 1932 is applicable in India.

1. Partners

2. Bye-laws

At least two persons are required to form a partnership firm.

Explanation: 

A partnership is not meant for one person. It involves an agreement between two or more persons. Under partnership, two or more person comes into contact which each other and agrees to share profit or loss equally or in some decided ratio.

Correct option is (b) increase in asset – increase in liability.

Correct option is (d) decrease in asset – decrease in capital.

Correct option is (d) decrease in asset – decrease in capital.

The Drawee of a bill is the person on whom the bill is drawn.

Correct option is (c) one would increase – another would decrease.

A bill of exchange that is drafted and accepted in one country and made payable in another country is called a Foreign bill of exchange.

The Drawer of a bill is the person who draws or makes the bill.

The definition of a bill of exchange as per the Indian Negotiable Instruments Act, 1881 is as follows :

“A bill of exchange is an instrument in writing containing an unconditional order, signed by the drawer, directing a certain person to pay a certain sum of money only at a specified time to a certain person or according to his order or to the holder of the instrument.”

The definition of a promissory note as per the Indian Negotiable Instruments Act, 1881 is as follows :

“A promissory note is an instrument in writing containing an unconditional undertaking, signed by the drawer to pay a certain sum of money only at a specified time to a certain person or according to his order or to the holder of the instrument.”

There are three parties to a bill of exchange, viz.,

1. Drawer 

2. Drawee 

3. Payee

There are three parties in a bill:

1. Drawer of a bill,
2. Acceptor of a bill and
3. Receiver of money, it means payee of a bill.

The following three parties are involved in a bill of exchange. 

1. Drawer who makes the bill 

2. Drawee who accepts the bill 

3. Payee who receives the payment

There are two parties in a promissory note :

1. Drawer or Maker of a promissory note and
2. Payee or Receiver of money.

Maturity of a bill means a date on which the bill is due for payment. Maturity date of the bill differs on the basis of the terms and conditions of the bill. There are three types of bill, viz. after date bill, after sight bill.

The parties to a promissory note are given below. Promissor, who makes the note and undertakes to pay the amount of promissory note. Payee, who receives the payment.

When a bill is presented for payment and acceptor fails to make payment, the bill gets dishonoured. In order to keep a legal proof of dishonor, the bill gets noted by the Notary public (which is approved by the government). In exchange of the Notary service, Notary public charges fees, known as Noting charges. 

Notary public notes the following facts: 

a. Date and amount of the bill 

b. Reasons for dishonor 

c. Amount of Noting charges

A bill drawn in favour of a person from whom the amount is due. In other words, a bill of exchange is drawn by the creditors on his/her debtors to make payment of specific amount, on a mentioned date. Generally, as bill is drawn by a seller to a purchaser.

Purchaser accepts the bill for the amount due on account of the credit sales. The bill may be accepted for the amount due other than credit purchases, such as commission payable, salary outstanding, etc. A bill cannot come into existence without the acceptance of a debtor.

Dishonour of a bill happens when the acceptor of the bill fails to make the payment of the date of maturity of the bill. Hence, liability of the acceptor is restored.

(i) James sells goods on credit to increase the sales volume and reduce the stock.

(ii) Yes, there are many ways to encourage his debtors to make the payment on time by way of cash discount and trade discount.

(iii) If the debtors do not pay, the bad debts will be increased in the business.

(i) Prudence principle can be applied for the business here closing stock was valued on cost price or market price whichever is lower under the prudence principle. Matching principle can be applied here for revenue and expense.

(ii) Outstanding expenses to be added with the concerned expenditure in the income Statement and the outstanding expenses will be recorded in liabilities side.

(iii) The unsold washing machine should be valued at cost price or market price, whichever is lower under prudence principle. Managerial commission can be given to motivate the new manager to retain him in the business of James.