I.Com part 1 short notes Questions and Answers

Chapter No.1

Journal, Ledger and Trial      balance                                                

What is accounting?

“Accounting is act of Recording, classifying, Summarizing and interpreting the monetary transactions.

What is bookkeeping?

“Book keeping is the act of recording monetary transactions in the books of account.”

Define business?

Any legal activity undertaken for the purpose of earning profit is called business

e.g General Store, Book shop.

Define proprietor

“The owner of business who actually invests money in the business.”

e.g Mr. Ahmad started a business, Mr. Ahmad is Proprietor of the business.

Define capital?

“Investment by the owner of business to start a business”

e.g Mr. Ahmad started a business with Rs.100000, Rs. 100000 is his Capital.

What is drawing?

“The cash or goods taken away by the proprietor from the business for his personal use are called drawings”

What is a transaction?

“Any dealing between two persons or things is called transaction”

Mr. Ahmad sales goods to Mr. Ishaq at certain price is called transaction between Mr.Ahmad and Mr. Ishaq

Define double entry system?

A system in which we consider both aspects (Dr and Cr) of transactions.

What is trade discount?

“A Trade discount is allowed by the manufacturer or the wholesaler on the list price/Retail price of goods or services from one party to other party.”

What is cash discount?

Any Deduction which is allowed by the seller to the purchaser at the time of Payment is called cash Discount.”

What is sale?

“When goods are sold to customer at specific price it is called a sale”

e.g when books sold by book shop to students

What is sale return/return inward?

“When goods are returned by customer to business, it is recorded in sales return book”

What are purchases?

“Goods purchased by business for selling purpose are called purchases”

 e.g books purchased by book shop for sales.

 Types of Purchases

1.      Cash Purchases

“Goods purchased by business for selling purpose on credit are called Cash Purchases”

2.      Credit Purchases

“Goods purchased by business for selling purpose on Cash are called Credit Purchases”

What is purchases return/return outward?

“Goods returned by Business to supplier due to any defects are called purchase returns.”

What is account?

“A summarized record of business transactions relating to a person or a thing.”

What are assets?

“Assets are Economic resources of business.” Or” An asset is a resource controlled by the entity as a result of past events and from which economic benefits are expected to flow to the entity.”

 (Cash. Account receivable and debtors)

Define liabilities?

“Any kind of debts of business is liabilities” or “A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.”

”

e.g (Account Payable, creditors)

Accounting equation?

“Assets = Liabilities + Capital (Owner’s Equity)”

Define debtors or Account Receivables?

“A Person to whom goods are sold on credit, it is consider as assets of the business”

e.g Mr.A Sold Goods to B for Rs. 10000, B is Debtors from A Point of View.

Define creditors or Account Payable?

“A Person who sold the goods to business on credit and to whom Money is payable (Due), it is considered as Liability of the business”

e.g Mr.A Sold Goods to B for Rs. 10000, A is Creditors from B Point of View.

What is commission?

“It is a form of remuneration for services rendered by one person to another”

What is difference between double entry system and single entry system?

“A system in which we follow two folded aspects (debit and credit) of entry is called double entry system one is debit (Dr) and other is credit (Cr)”

“A system in which we follow only one aspect (debit or credit) is called single entry system. It is only partial record of small business”

 What are dual aspect concepts?

“Dual aspect concepts may be stated as for every debit there is a credit, and for every credit there is a debit.”

How many kinds of account?

The four types of account

·         Personal account

·         Impersonal account

·         Real account or property account

·         Nominal account

What are personal accounts?

“Accounts relating to person or firms are called personal accounts.”

e.g Like ahmed account, bank alfalah.

What are real accounts?

“All those accounts which keep record of properties or things owned by a trader are called real accounts.”

e.g  building account, furniture account

What are nominal accounts?

Nominal accounts are for those that record income, expenses, gains and losses “

e.g such as Discount account, Salaries, Rent, Repair account.

What is journal/Book of original entry?

“The book of accounts in which business transactions are originally recorded in chronological order is called journal.”

Define narration?

“A short explanation of each transaction in journal in written form at the end of each entry. “

What is journalizing?

“The act of recording transaction in journal is called journalizing.”

What is simple entry?

“The entry which involves only one debit and only one credit is called simple entry.”

What in compound entry?

“The entry in which more than one account is debited or credited is known as compound entry.”

What is ledger?

“A book in which all the transactions of a business concern are finally recorded in the concerned accounts in summarized and classified form is called ledger.”

Explain the term balancing?

“The process of equalizing the two side of account is known as balancing.”

Define zero balance?

“If the two sides of an account are equal the account will show zero balance.”

Define Debit balance?

“Debit balance meant where total of debit side exceeds than credit side is written on credit side of account.

Define Credit balance?

“Credit balance meant where total of credit side exceeds than credit side is written on debit side of account”

What is trial balance?

“An accounting schedule that lists the ledger account balance at a point in time and total of debit balances is equal to the total of credit balance.”

Define the term merchandise?

“Merchandise are the Goods which are purchased by business for selling.”

e.g Books purchased by Shopkeeper are the Merchandise for the business.

What is inventory?

“Goods on hand those remaining unsold at the end of the year is also called stock.”

e.g Book Remain unsold at the end of the year called stock or ending inventory.

Define bank?

“A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it.”

.What is cheque?

“A cheque is unconditional order in writing drawn by customer on his bank, requesting to pay on demand certain sum of money.”

How many kinds of cheques?

Bearer cheques is one on which “bearer” is written after the name of payee. It is payable to bearer.

Order cheques           is one on which “order “ is written after the name of payee. It is payable to person whose name is written before order.

Crossed cheques when two parallel line are drawn on the side of cheque is payable only through a collecting banker and not directly at the counter of the bank.

What is bank draft?

“A bank draft is mean of transferring money from one place to another, is a written order in the form of a check instructing the payment of money to the individual named on the bank draft.”

 How many functions of bank.

Primary function is to borrow and lend money.

General function is to issue important documents, and keep valuable things in safe custody.

Agency function is bank collect and pay cheques and realizes interest and dividend on customer behalf.

How may kinds of accounts?

Current accounts in this case the customer can deposit or withdraw money any time within banking hours. Bank does not pay any interest or Profit/Loss.

Saving account customer deposits its saving into the bank for specific period,Bank will share profit and loss with customer.

Fixed Deposit account in which money is deposit for fixed time period, Banks Pay very high interest rates.

Pay in slip a printed form which is filled in when money is being deposited in a bank.

Cheque book A booklet of cheques which enable holder to draw money from his/her account deposits.

Bank pass book issued by a bank  to record deposits, withdrawals and balance in Account holder account.

Bank Overdraft

“Any Excess amount withdrawn from bank by the account holder is called bank overdraft”

Accounting Cycle

1.             Transaction

2.             Journal

3.             Ledger

4.             Trial Balance

5.             Final Account (Trading and Profit and Loss, Balance Sheet)

Chapter no 2

Bill of exchange                                   

Define bill of exchange?

“A bill of exchange is an instrument in writing containing an unconditional order by one person (seller) to another person (purchaser) signed by the both parties having fixed amount payable after fixed future Time.”

How many parties involves in bill of exchange?

There are three parties involve in bill of exchange

·                     Drawer

·                     Drawee

·                     Payee

Define drawer, drawee and payee?

·                     Drawer: the person who writes/draw the bill of exchange. He is the seller/Debtor.

·                     Drawee: the person to whom the bill is drawn

·                     Payee: the person who receives the amount of bill is called payee. He may be drawer, bank or endorsee.

Difference between inland bill and foreign bill

Inland bill are drawn in a country upon person same country.

Foreign bill is drawn in a drawn in one country and payable in another country.

Define promissory notes?

An instrument in writing containing an unconditional promise by the maker (purchaser) to pay a certain sum of money only to other person (seller) after fixed future time period.

How many parties involves in promissory notes?

They are two parties to a promissory note.

·                     The maker (purchaser)

·                     The payee (seller)

Tenor

Tenor is period of time after which a bill becomes payable, also called duration of bill.

How many kind of acceptance?

There are two types of acceptance

General acceptance when accept the bill without any condition.      

Qualified acceptance when accept is accept with condition/qualification (time, place).

Define bill receivable and bill payable?

When a bill is written then a bill from the view of drawer is bill receivable

When a bill is written then a bill form the view of drawee is called bill payable

Define grace days

It is customary to allow three days of grace to the drawee to pay the amount in the case of a term bill.

Holder of the Bill

Holder of a bill means that Drawer, Endorsee and bank whole is entitled to receive the payment on due date.

Define discounting a bill

If the holder of a bill is in need of money before the due date of bill he may sell it to the bank. The bank will give cash after deduction of some charges.

e.g A draw the bill on B, A is drawer and B is drawee. When A Discount the Bill form Bank is Called discounting of Bill.

Define the endorsement of a bill

Endorsement of the bill means when drawer transfer the bill to his creditor for settlement of debts.

A draw the bill on B, A is drawer and B is drawee. When A endorsee Bill to C. C is Endorsee.

When a bill become dishonored

When Drawee fail/refuse to make the payment on the due date is called dishonour of bill

e.g A draw the bill on B, A is drawer and B is drawee. When B Fail to Make the Payment is called Dishonoured of Bill.

Notary Public

Notary Public is an officer who maintains record of then Dishonour Bills.

Define noting charges

In case of bill dishonored the notary pubic will charge a small fee from the holder of the bill This fee is known as noting charges.

What is meant by retiring of a bill

Retiring a bill means making payment before of maturity of the bill

e.g A draw the bill on B, A is drawer and B is drawee. When B make the payment before date.

Define Trade Bill

Trade bill is drawn and accept on Credit purchase and sale of goods.

Define accommodation bill.

accommodation bill drawn to help or to accommodate someone for certain period.

Insolvency

Insolvency mean the on the due date of the bill, the person is unable to pay the whole the bill.

Renewal of bill

Drawee request the drawer to issue new bill with condition to cancel the old bill before due date by paying some interest.

Chapter # 3

Cash book and bank reconciliation statement

Define Subsidiary book?

some transactions which are of repetitive nature which need to record separately, So journal is subdivided into different journal known as subsidiary books

Important subsidiary books

Cash book: it is used to record all cash receipts and payments Receipts are recorded on Debit side and Payment on Credit side.

Purchases book: It is used to record all credit purchases

Sales book: It is used to record all credit sales

Purchases return book: It is used to record all goods return by us to supplier

Sales return book: It is used to record all goods return to us by our supplier.

Bill receivable book: It is used to record all accepted bills received us

Bill payable book: It is used to record all bill accepted by us to our creditors

Journal proper: It is used to record all those transitions for which there is no separate book

Define vouchers?

Answer: Vouchers are documents containing evidences of payments and receipts.

How many kinds of cash book?

Answer:

There are three types of cash books

·                     Single column cash book: which is used to record cash receipts and payments.

·                     Double column cash book: which has two column on both sides of cash. One is to record cash and other is to record banking transaction.

·                     Triple column cash book which has three columns on both sides of cash. One is to record cash Second is to record banking transaction and thirds is for discount

What is contra entry?

A transaction in which cash account and bank account are involved is recorded on both sides of cash book.

What is a petty cash book?

Answer: The book in which small payments which are not convenient to record in the main cash book the record is called petty cash book.

Imprest system

Under this system the total petty expenses for particular period are estimated and that amount is advance by the cashier.

What is bank reconciliation statement?

Bank reconciliation statements a statement which contains a complete and satisfactory explanation of differences in balance as per the cash book and bank statement

What is pass book?

Issued by a bank  to record deposits, withdrawals and balance in Account holder account

Define bank statement?

A summary of customer’s account is sent by bank periodically or on the request to know about transactions with bank

Unpresented Cheque

Cheques which have been issued for payment but may not be presented to bank by the creditor.

Uncredited cheque

Cheques which have been received from customer and deposited into bank but may not have been credited by bank

 Chapter # 4

Final Accounts

What are final accounts?

Final account Consist of Trading and Profit and Loss Account which finally show the profit and loss for a particular period and Balance Sheet which show financial position for a particular date.

What is profit and loss account or income statement?

A statement which shows the financial position of a business for a particular period

What is balance sheet?

A statement which shows the financial position of a business on a particular date

Trading Profit and Loss Account

            Trading Account

            Profit and Loss Account

What do you understand by direct expenses?

Expenses connected with purchases of goods or to bring the goods in saleable condition are called direct expenses e.g Wages, carriage inward.

What do you understand by indirect expenses?

All these expenses which have no concern with purchases of goods or to bring the good in saleable condition are known as indirect expenses salaries, carriage outward.

Define gross profit/Gross Loss, Net Profit and Net Loss?

• Gross Profit means Excess of Sales over cost of goods sold.
• Gross Loss Means Excess of Cost of Goods Sold over Sales
• Net Profit Excess of gross profit over all indirect expenses
• Net Loss Excess of Indirect expenses over gross profit.

Define the closing entries?

The journal entries made for the purpose of closing the temporary account called closing entries.

What are adjusting entries?

The entry at the end of the period to record internal transactions are called adjusting entries.

What are assets?

All Economic resources of business are called assets of business e.g. Building, Land, Debtors

Define liabilities?

Any kind of debts of business are liabilities e.g Accounts Payable, Creditor, bank overdraft

Carriage inward

Carriage means conveyance charges incurred to bring the good in the shop by road.

Dock Charges

These are the charges paid when ship left the port.

Freight inward

Conveyance Charges incurred to bring the good in the shop by sea, Railway, Airplane.

Custom duty

A tax levied imports of good from one country to other country.

Excise duty

It is a tax imposed by government of production of goods.

Octori duty

It is a tax imposed on bringing goods to certain town or cities.

Store consumed

This includes the items like lubrication oil, grease and cotton required for running of business.

Motive power

Any source of energy used to produce motion in machinery e.g. cock gas, water electricity energy

Royalty

Royalty is an amount paid to a person for exploiting rights possessed by him.

Manufacturing expenses

This includes factory rent, factory insurance and factory repairs.

What is marshalling?

The term marshalling means the order in which assets and liabilities are stated on the balance sheet.

1.             The order of liquidity          

2.             The order of performance

3.             Mixed order of arrangement

Define the term debt?

When a customer becomes business debtor the amount due from him is called Debts

What is the bad debt?

The debts which cannot recover from the debtor are called dad debts.

What are doubtful debts?

The debts the recover or realization of which is doubtful or uncertain are known as doubtful debt.

Wasting Assets

Wasting assets are that whole value gradually reduces with usage. Like, mine

Contingent Liabilities

Liabilities that may or may not be incurred by an entity depending on the outcome of a future event such as a court case

What Depreciation

Gradually decrease in the value of fixed assets is called depreciation.

What is inventory?

Goods or merchandise on hand that is a goods remaining unsold is also called stock.

Define outstanding expenses/ Accured Expenses /Expenses Payable/Amount Due/Not Paid/Unpaid

The expenses incurred but have not been actually paid till the end of current accounting year

Define outstanding income/Accured Income/Income Receivable/ Amount Due/Not received/Un received

Income earned but has not received till the end of current accounting year

Define prepaid expense/ Paid in Advance/ Paid Upto

Expenses paid in advance before they have fallen due.

Define income received in advance/unearned income/ received in advance

Income received in advance but not earned.

Chapter#5                                                                                                       Capital and revenue

Define capital Transactions?

Transactions having long term effect are known as capital transactions. Like purchase of Building

What are revenue transactions?

Transactions having short term effect are known as revenue transactions. Like payment of Salaries

What do you mean by capital expenditures?

Expenditures incurred on acquiring fixed assets and having Long term effect are known as capital Expenditure. Like expenditure on purchase of Building, Land and Furniture

Describe the revenues expenditure

All the expenditures which are incurred in the day to day conduct and administration of a business and have short term effects Like, purchases of stationery, payment of salaries

Give any three examples of capital expenditures

·                     Addition or extension of assets

·                     Wages paid for the construction of building

·                     Premium given for lease

Give the three examples of revenue expenditures

·                     Wages paid to factory workers

·                     Bad debt

·                     Stationery

Describe the deferred revenue expenditures?

Revenue expenditure benefits of which is likely to more than one year but it is non recurring by nature are called deferred revenue expenditure

Give examples of deferred revenue expenditures?

·                     Preliminary expenses

·                     Heavy expenditures on advertisement for making the new product.

Define capitalized expenditures?

Some revenue expenditure are connected with fixed assets and are full added to cost of that assets whatever is the amount. Like repairs of newly purchased machinery

What are capital receipts?

Receipts which are non recurring by nature, received from Sale of fixed assets are known as capital Receipts. Like Receipts from sale of of Building, Land and Furniture

What are revenue receipts?

Receipts which are recurring by nature receive from the day to day conduct and administration of a business and have short term effects Like inertest received, Discount Received

What is capital payment?

Payments which are non recurring by nature, incurred on acquiring fixed assets and having Long term effect are known as capital Payment. Like Payment for purchases of Building, Land and Furniture

What is revenue payment?

 Payments which are recurring by nature which are incurred in the day to day conduct and administration of a business and have short term effects

What do you mean by capital profit?

Capital profit is a profit which is earned on the sale of a fixed asset for example a machinery worth of Rs. 10000 is sold for Rs. 15000. the profit is 5000/- is capital profit.

What do you mean by Revenue profit?

Revenue profit is a profit which is earned during the day to day course of business is called revenue profit is a regular Profit.

What is capital loss?

The loss suffered by a business on the sale of a fixed asset or it incurred or raising capital or a joint stock company. for example a machinery worth of Rs. 10000 is sold for Rs. 8000. the Loss is 2000/- is capital Loss.

What is revenue loss?

Revenue Loss is a Loss which is earned during the day to day course of business is called revenue loss.

Chapter # 6

Rectification of Errors

How many kinds of errors?

There are two kinds of errors

1.             Book keeping error ( in books of original documents that are journal and ledger).

2.             Trial balance error (errors which are made in preparation of trial balance

How many kinds of book keeping error?

1.             Error of omission: Where Transaction is completely omitted from the accounting records.

2.             Error of commission: An error of commission accrues when a transaction is partly or wholly incorrectly in the books of accounts

o   Wrong amount posting to ledger

o   Wrong side posting to ledger

o   Making wrong entry in book of original entry

3.             Error of principle: Mistakes arises out of ignorance of fundamental principles of accountancy e.g (wrong allocation of depreciation, inadequate provision of dad debts, and wrong allocation of revenue and capital and revenue expenditure)

4.             Compensating error: Compensating error which are cancelled by an other error of same amount in opposite direction

What is trial balance error?

Errors which are made in preparation of the trail balance are called trial balance. Like

·                     Omission of balance form the trial balance

·                     Wrong transfer of balance (amount)

·                     Wrong side transfer of amount

·                     Wrong additions of trial balance

What is suspense account?

Suspense account is an account in which we entered transaction which cannot be placed to their proper account for want sufficient information.

What is error of posting?

These errors are committed when a journal entry is posited in to ledger.

What is error of casting?

It is error of posting where as the error occur due to short casting or excess casting of an accounts