Questions for Practice
Short Answer Questions
1. State the three fundamental steps in the accounting process.
Answer: The three fundamental steps in the accounting process are identifying economic events relevant to the business, recording those events systematically in the books of accounts, and communicating the financial information through statements like the Profit and Loss Account and Balance Sheet.
2. Why is the evidence provided by source documents important to accounting?
Answer: Evidence from source documents is important because it serves as proof that a transaction occurred. It ensures accuracy and authenticity in recording, prevents errors and frauds, and is useful during audits and verifications.
3. Should a transaction be first recorded in a journal or ledger? Why?
Answer: A transaction should be first recorded in the journal because it is the book of original entry. From the journal, transactions are then posted to ledger accounts.
4. Are debits or credits listed first in journal entries? Are debits or credits indented?
Answer: Debits are listed first in journal entries, and credits are indented to the right.
5. Why are some accounting systems called double accounting systems?
Answer: Some systems are called double accounting systems because every transaction affects at least two accounts. One account is debited and another is credited, keeping the accounting equation balanced.
6. Give a specimen of an account.
Answer:
| Dr. | Cash Account | Cr. | ||||
|---|---|---|---|---|---|---|
| Date | Particulars | Amount | Date | Particulars | Amount | |
| 01-04-25 | Capital A/c | ₹50,000 | 03-04-25 | Purchase A/c | ₹10,000 | |
| 05-04-25 | Rent A/c | ₹5,000 | ||||
7. Why are the rules of debit and credit same for both liability and capital?
Answer: The rules are the same because both liabilities and capital represent sources of funds for the business. An increase in either is credited, and a decrease is debited.
8. What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts?
Answer: The Journal Folio (J.F.) number helps in cross-referencing between the journal and ledger. It ensures accuracy and traceability of accounting entries.
9. What entry (debit or credit) would you make to:
Answer: (a) Increase revenue – Credit (b) Decrease in expense – Credit (c) Record drawings – Debit (d) Record the fresh capital introduced by the owner – Credit
10. If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as a debit or as a credit?
Answer: A decrease in an asset is recorded as a credit, and a decrease in a liability is recorded as a debit.
Long Answer Questions
1. Describe the events recorded in accounting systems and the importance of source documents in those systems.
Answer: Accounting systems record business transactions such as purchases, sales, expenses, and incomes. These transactions are verified using source documents like invoices, bills, and receipts. Source documents are important because they provide evidence of the transaction, ensure accuracy, help in audits, and prevent errors or manipulation.
2. Describe how debits and credits are used to analyse transactions.
Answer: Debits and credits help identify the dual effect of each transaction. For example, when machinery is purchased for cash, the Machinery Account is debited (increase in asset), and the Cash Account is credited (decrease in asset). The rules are: Assets increase with debits and decrease with credits; Liabilities and Capital increase with credits and decrease with debits; Expenses are debited; Incomes are credited.
3. Describe how accounts are used to record information about the effects of transactions.
Answer: Accounts are used in the ledger to record the financial effects of transactions. Each account has a debit and a credit side. For example, if rent is paid in cash, the Rent Account is debited and the Cash Account is credited. This helps in summarizing the movement of individual items over time.
4. What is a journal? Give a specimen of journal showing at least five entries.
Answer: A journal is the book of original entry in which transactions are recorded in chronological order.
Specimen Journal:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| 01-04-25 | Cash A/c Dr. To Capital A/c (Being capital introduced) | 50,000 | 50,000 | |
| 03-04-25 | Purchase A/c Dr. To Cash A/c (Being goods purchased) | 10,000 | 10,000 | |
| 05-04-25 | Rent A/c Dr. To Cash A/c (Being rent paid) | 5,000 | 5,000 | |
| 06-04-25 | Salaries A/c Dr. To Bank A/c (Being salary paid through bank) | 7,000 | 7,000 | |
| 07-04-25 | Furniture A/c Dr. To Cash A/c (Being furniture purchased) | 15,000 | 15,000 |
5. Differentiate between source documents and vouchers.
Answer: Source documents are original records of transactions, such as invoices and receipts. Vouchers are prepared based on source documents and serve as authorization for making accounting entries. While source documents provide evidence, vouchers are used for internal control and processing.
6. Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.
Answer: The accounting equation, which is Assets = Liabilities + Capital, remains balanced with every transaction. For instance, if the owner invests ₹1,00,000 in cash, assets (cash) increase by ₹1,00,000 and capital increases by the same amount. If goods worth ₹20,000 are purchased for cash, one asset (inventory) increases and another (cash) decreases, keeping the equation intact.
7. Explain the double entry mechanism with an illustrative example.
Answer: The double entry system means that every transaction affects at least two accounts, with one being debited and the other credited. For example, when rent of ₹5,000 is paid in cash, the Rent Account is debited (expense increases), and the Cash Account is credited (asset decreases). This ensures total debits equal total credits, maintaining accurate financial records.
