Limited Departmental Competitive Examination-2022

Financial Rules and Procedures & Book-Keeping

Answer Key
Part A: Compulsory

1 i) Profit & Loss Account of Mangrove Ltd. as at 31 st March 2021

Particulars Amount (INR)

Income
Revenue from operations (Sales) 40,00,000
Total 40,00,000
Expenses
Cost of materials consumed(Adjusted purchase) 16,00,000
Employee Benefit Expenses
Wages - 4,80,000
Salaries - 3,20,000
Total - 8,00,000 8,00,000
Depreciation and Amortisation 64,000
Finance Cost (interest @ 10% on debentures) 40,000
Total 25,04,000
Profit before Tax (Income minus Expenses) 14,96,000

1 ii) Net Worth of the company = Total Assets Total Liabilities

Total Assets = Land + Plant & Machinery + Closing Stock
= 26,96,000 + 6,40,000 + 6,00,000
= 39,36,000
Total Liabilities = Equity Shares Capital + Preference Share Capital + Debentures + Bank
Overdraft
= 8,00,000 + 4,00,000 + 4,00,000 +8,00,000
= 24,00,000
So, Net Worth of the company = 39,36,000 24,00,000
= 15,36,000

Part B
Q 1 i) General principles for contract. The following general principles should be observed
while entering into contracts:
(I) The terms of contract must be precise, definite and without any ambiguities.
(II) Standard forms of contracts should be adopted wherever possible, with such modifications as
are considered necessary in respect of individual contracts. The modifications should be carried
out only after obtaining financial and legal advice.
(III) In cases where standard forms of contracts are not used, legal and financial advice should
be taken in drafting the clauses in the contract.
(IV) (a) A Ministry or Department may, at its discretion, make purchases of value up to Rupees
two lakh and fifty thousand by issuing purchase orders containing basic terms and conditions:

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 (b) In respect of Works Contracts, or Contracts for purchases valued between Rupees one
lakh to Rupees ten lakhs, where tender documents include the General Conditions of Contract
(GCC), Special Conditions of Contract (SCC) and scope of work, the letter of acceptance will
result in a binding contract.
(c) In respect of contracts for works with estimated value of Rupees ten lakhs or above or for
purchase above Rupees ten lakhs, a Contract document should be executed, with all necessary
clauses to make it a selfcontained contract.
(d) Contract document should be invariably executed in cases of turnkey works or agreements
for maintenance of equipment, provision of services etc.
(V) No work of any kind should be commenced without proper execution of an agreement as
given in the foregoing provisions.
(VI) Contract document, where necessary, should be executed within 21 days of the issue of
letter of acceptance. Nonfulfillment of this condition of executing a contract by the Contractor or
Supplier would constitute sufficient ground for annulment of the award and forfeiture of Earnest
Money Deposit.
Q 1 ii) Cost Plus Contract: A cost plus contract means a contract in which the price payable for
supplies or services under the contract is determined on the basis of actual cost of production of
the supplies or services concerned plus profit either at a fixed rate per unit or at a fixed
percentage on the actual cost of production.
Price Variation Clause: (a) Price Variation Clause can be provided only in long-term contracts,
where the delivery period extends beyond 18 months. In short-term contracts firm and fixed
prices should be provided for. Where a price variation clause is provided, the price agreed upon
should specify the base level viz. the month and year to which the price is linked, to enable
variations being calculated with reference to the price levels prevailing in that month and year.
(b) A formula for calculation of the price variations that have taken place between the Base level
and the Scheduled Delivery Date should be included in this clause. The variations are calculated
by using indices published by Governments or Chambers of Commerce periodically.
(c) The Price variation clause should also specify cut off dates for material and labour, as these
inputs taper off well before the scheduled Delivery Dates.
(d) The price variation clause should provide for a ceiling on price variations, particularly where
escalations are involved. It could be a percentage per annum or an overall ceiling or both. The
buyer should ensure a provision in the contract for benefit of any reduction in the price in terms
of the price variation clause being passed on to him.
(e) The clause should also stipulate a minimum percentage of variation of the contract price
above which price variations will be admissible.
(f) Where deliveries are accepted beyond the scheduled Delivery Date subject to levy of
liquidated damages as provided in the Contract, the liquidated damages (if a percentage of the
price) will be applicable on the price as varied by the operation of the Price variation clause.
(g) No price variation will be admissible beyond the original Scheduled Delivery Date for
defaults on the part of the supplier.
(h) Price variation may be allowed beyond the original Scheduled Delivery Date, by specific
alteration of that date through an amendment to the contract in cases of Force Majeure or
defaults by Government.
Q 1 iii)
a) False
b) True

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c) True
d) True
e) True

Q 2 i) Various Contents of Annual Financial Statements: In accordance with the provisions of

Article 112 (1) of the Constitution, the Finance Minister shall arrange to lay before both the

estimated receipts and expenditure of the Central Government in respect of a financial year,
before the commencement of that year.
The Ministry of Finance, Budget Division, shall issue guidelines for preparation of budget
estimates from time to time. All the Ministries/Departments shall comply in full with these
guidelines.
Annual Financial Statements shall contain the following:
(a) Estimates of all revenues expected to be raised during the financial year to which the budget
relates;
(b) Estimates of all expenditure for each programme, scheme and project in that financial year;
(c) Estimates of all interest and debt servicing charges and any repayments on loans in that
financial year;
(d) Any other information as may be prescribed.

Q 2(ii) Non-Tax Revenue: Non-tax revenue is the revenue government collects in return for
providing/facilitating any goods or services. It also includes interest charged on loans advanced
by the government for various purposes to state governments, union territories, Public Sector
Enterprises, Port Trusts and other statutory bodies etc. and dividends and profits from PSEs as
well as the transfer of surplus from RBI. While the tax revenues, non-debt capital receipts
including disinvestments and borrowings are managed by the various Departments of the
Ministry of Finance, the non-tax revenues are collected through all Ministries/Departments and
other autonomous bodies and implementing agencies and comprise an important source of
revenue for the Government.
Dividends and Profits: Dividends and profits from Public Sector Enterprises including the
transfer of surplus from RBI is a major component of the non-tax revenues. Payment of
dividends/profits etc. by the Central Public Sector Enterprises shall not be delayed and Ministries
or Departments have to monitor timely payments of dividends and profits. The dividend shall be
payable as per the guidelines issued by DIPAM in this regards.

Q2 iii) Capital Expenditure & Revenue Expenditure: Expenditure incurred with the object of
acquiring tangible assets of a permanent nature (for use in the organisation and not for sale in the
ordinary course of business) or enhancing the utility of existing assets, shall broadly be defined
as Capital expenditure. Capital account should bear all charges for the first construction and
equipment of a project as well as charges for intermediate maintenance of the work while not yet
opened for service. Purchase of land for business, construction of office building, purchase of
Plant & Machinery and purchase of office furniture etc. are examples of capital expenditure.

Subsequent charges on maintenance, repair, upkeep and working expenses, which are required to
maintain the assets in a running order, are revenue expenditure. Revenue expenditure also
includes all other expenses incurred for the day to day running of the organisation, including

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establishment and administrative expenses. Capital and Revenue expenditure shall be shown
separately in the Accounts. Salaries of employees, purchase of raw material, rent, taxesand
expenditure on selling and distribution of goods etc. are examples of revenue expenditure.

Q2 iv) The following are the important points which must be attended to by the Disbursing
Officer when verifying the Cash Book in accordance with Rule 116:
(a) Each entry of payment should be compared with the connected voucher and the voucher
should be examined to see that it bears a payment order recorded by himself or by other
Competent Authority and a certificate of disbursement signed by himself or an authorized
subordinate. Each voucher should be ticked off as it is compared.
(b) Where any deductions from the gross amount of a voucher are to be recorded, under the
rules, as receipts on the 'Receipt' side of the Cash Book, the entries of such receipts in the Cash
Book should be compared with the amounts of deductions in the voucher.
(c) Each entry of receipt should be verified with the counterfoil or office copy of the receipt
granted when the money was received. The totaling of the Cash Book should be checked by the
Disbursing Officer or by some responsible subordinate other than the writer of the Cash Book,
who should initial and date the Cash Book as correct.
(d) Entries of drawings from treasuries should be compared with the counterfoils of Cheque
Books or the duplicate copies of the vouchers, as the case may be. Similarly, entries of
remittances to Treasury should be checked with the entries in the Treasury Remittance (or Pass)
Book or with the individual challans or memorandum of remittances.

Q2 v) Match the following items of Column A with Column B according to P&T FHB VOL-I

A B

Appendix-1 Different classes of receipts exempted from

stamp duty

Appendix-2 Instructions for regulating the enforcement

of responsibility for losses etc.

Appendix-4 Rules regarding the preparation of Last Pay

Certificate in case of transfer on duty, or of
return from leave

Appendix-5 Miscellaneous rulings relating to office

expenses

Appendix-8 Rules regarding the purchase of Stationery

Stores for the public service

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Q2 vi) Remittances between Head Post Offices Rule 137. (a) The Head of the Circle or the
Superintendent of Post Offices will prescribe the manner in which cash remittances are to be
exchanged between two head Post Offices, that is to say whether they are" to be sent by post, or
in the charge of special carriers, such as postmen, village postmen, overseers, or other
subordinates, and also, in the latter case, whether the money is to be made over loose to the
carrier or enclosed in a cash bag.
(b) For every remittance sent by one head post office to another, a remittance advice and
acknowledgment (Form A. C. G.-15) should be prepared by the remitting office, and dispatched
in a cover registered on Postal Service, addressed to the Head Postmaster of the office to which
the remittance is made. The remittance advice should be filed in the receiving office in a separate
bundle, while the remittance acknowledgement should be impressed with the oblong money
order stamp, signed under returned to the remitting office, where it should be pasted to its
counterfoil.
(c) When a remittance is to be sent by post, the money should be enclosed in a cash bag in the
presence of the Postmaster or deputy Postmaster. The cash bag should be sealed with the cash
seal; its weight should be noted on the remittance advice and acknowledgment, and it should
then be made over to the sorting clerk under receipt (to be taken in the treasurer's cashbook), for
dispatch inside the mail bag.
(d) When a remittance is to be sent in charge of a special carrier, the amount should be made
over to the carrier, either loose or enclosed in a cash bag, in accordance with the method
prescribed by the Head of the Circle or the Superintendent of Post Offices. If the remittance is
made over loose to the carrier, he should be required to grant a receipt for the sum in the
treasurer's Cash Book. If the remittance is to be enclosed in a cash bag, the money together with
a memo, giving full particulars of the remittance should be placed inside the bag and the bag
should be closed and weighed in the presence of the carrier, who should be required to grant a
receipt for the bag in the treasurer's Cash Book, where the carrier should himself enter weight of
the bag. The cash bag should be closed and sealed with the cash seal and its weight entered on
the remittance advice and acknowledgment.

Q3 i) Conditions for changing Date of Birth: -The date on which a Government servant attains
the age of fifty eight years or sixty years, as the case may be, shall be determined with reference
to the date of birth declared by the Government servant at the time of appointment and accepted
by the appropriate authority on production, as far as possible, of confirmatory documentary
evidence such as High School or Higher Secondary or Secondary School Certificate or extracts
from Birth Register. The date of birth so declared by Government servant and accepted by the
appropriate authority shall not be subject to any alteration except as specified in this note.
An alternation in date of birth of a Government servant can be made, with the sanction of
Ministry or Department of the Central Government or the Comptroller and Auditor General in
regards to person serving in Indian Audit and Accounts Department, or an administrator of a
Union Territory under which the Government servant is serving, if-
(a) A request in this regard is made within five years of his entry in the Government service;
(b) It is clearly established that a genuine bona-fide mistake has occurred; and
(c) The date of birth so altered would not make him ineligible to appear in any school or
university or UPSC examinations in which he had appeared or for entry into Government service
on the date on which he entered Government service.

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Q3 ii) Maintenance of Service Book in Duplicate: - The Service Book of a Government
Servant shall be maintained in duplicate. First Copy shall be retained and maintained by the
Head of the Office and the second copy should be given to the Government servant for safe
custody as indicated below:
(a) To the existing employees: - within six months of the date on which these rules become
effective (i.e. from 1st July, 2005- vide G.I MF OM no. 8/9/E.II (A)/2003 dated the 1st July,
2005)
(b) To new Appointees: - within one month of the date of appointment [Rule 288 (2), General
Financial Rules 2017]
In January, each year, the Government servant shall hand over his copy of the Service Book to
his office for updating. The office shall update and return it to the Government servant within
thirty days of its receipt.
Inclusion of Aadhar/Unique Identification number (UID) in Service Book of Government
servants: As per G.I DoPT O.M No. Z-20025/9/2014-Estt (AL), dated the 3rd November, 2014,
it has been decided to include the respective Aadhar numbers also of all Government servants in
their Service Books. The e-Service Book format already provides fields for Aadhar number of
the Government servant. All Ministries/Departments of the Government of India are requested to
ensure that the Service Books of all employees have
The attached and subordinate offices under their control may also be suitably instructed for
compliance.

Q3 iii) The term 'Contingent Charges' or 'Contingencies' means and includes all incidental
and other expenses, which are incurred for the management of an office as an office or for the
technical working of a department, other than those which under prescribed rules of
classification of expenditure fall under s
plants', etc.
Classification of Contingencies: Contingent charges incurred on the public service may be
divided into the following classes:
(a) Contract Contingencies: Those for which a lump sum is placed annually at the disposal of a
Disbursing Officer for expenditure without further sanction of any kind. They generally consist
of charges the annual incidence of which can be averaged with reasonable accuracy.
(b) Special Contingencies: To include such contingent charges, whether recurring or
nonrecurring and cannot be incurred without the previous sanction of a superior authority.
(c) Countersigned Contingencies: To include such contingent charges as may require the
approval of some controlling authority before they can be admitted as legitimate expenditure
against the Government, such approval usually taking the form of counter signature after
payment on a detailed bill submitted to the Account Officer.
(d) Full Vouched Contingencies:To comprise contingent charges, which require neither special
sanction countersignature, but may be incurred by the Head of the Office on his own authority
subject to the necessity of accounting for them. These may be passed on fully vouched bills
without countersignature.
Q3 iv) Service Discharge Benefit Scheme (SDBS) [For Gramin Dak Sevaks engaged under
GDS (Conduct and Employment) Rules, 2001]
The scheme came into effect with effect from the 1st day of the month of April 2011.

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Eligibility to Join:- (1) All existing regularly engaged GDS who have been selected after due
process in accordance with the GDS (Conduct and Employment) Rules, 2001 and rendered at

(2) The scheme shall be mandatorily applicable to all GDS engaged on a regular basis under the
prescribed GDS (Conduct and Employment) Rules, 2001 on or after introduction of the scheme,
on completing one year of satisfactory service.
Subscription for SDBS: (i) The monthly contribution to SDBS shall be Rs. 300/- for both sides

(ii) No contribution/subscription shall be made by the Department in respect of GDS during the
n on unauthorized absence from duty.
(iii) Subscriptions to Service Discharge Benefit System can be received from such GDS, the
recoveries being made ordinarily by deduction from pay bills of the Government servants
concerned.

Part C
Q1 i)
Depreciation: Depreciation may be described as a permanent, continuing and gradual shrinkage
in the book value of fixed assets. According to Accounting Standard AS-6 (Revised),
Depreciation able
asset arising from use, effluxion of time or obsolescence through technology and market-

The subject matter of depreciation, or its base, is

used during more than one accounting period.

Two main methods of calculating depreciation amount are:

1. Straight line method, and

2. Written down value method

Selection Criteria of appropriate method: It depends upon the following factors:

i). Type of the asset

ii). Nature of the use of such asset

iii). Circumstances prevailing in the business.

The selected depreciation method should be applied consistently from period to period. Change
in depreciation method may be allowed only under specific circumstances.

Q1 ii) Annual Depreciation =( Cost of asset - Estimated net residential value)/ Estimated useful
life of the asset

Rate of Depreciation = (Annual depreciation amount /Acquisition cost) × 100

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The original cost of the Car is 10,50,000. The useful life of the asset is 9 years and net residual
value is estimated is 70,000.
Annual Depreciation Amount = (Acquisition cost of car- Estimated net residential value) /
Useful life of car
= (10,50, 000 - 70, 000)/9
= 1, 08,889

The rate of depreciation = (1, 08,889/10, 50,000) × 100

= 10.37%

Q2 i) Proforma Accounts: The operations of some departments of Government sometimes

include undertakings of a commercial or a quasi-commercial character e.g., an industrial factory
or a store. Even though they may be maintained almost entirely for the benefit of the
Department, it is still necessary that the financial results of the undertaking should be expressed
in the normal commercial form so that the cost of the service or undertaking may be accurately
known.

This implies the maintenance of suitable Capital, Manufacturing, Trading and Profit and Loss
accounts and as the Government system of account being on a purely cash basis is unsuitable for
each commercial accounts, they will usually be kept on a pro forma basis outside the general
accounts of Government.

The actual transactions entering these pro forma accounts, except those adjusted on a liability
basis, will find a place primarily in the regular accounts and the commercial accounts will be
additional as well as separate. These pro forma accounts shall be maintained by the Departmental
authorities themselves in such form as may be prescribed. Pro forma accounts are also
sometimes required to be prepared for transactions which do not relate to commercial or quasi-
commercial undertakings of Government e.g., transactions of the Famine Relief Fund. The form
in which any pro forma accounts are prepared in Accounts Offices will be determined by the
Government concerned on the advice of the Comptroller and Auditor General of India.

Q2 ii) Major, Minor and Detailed Heads of Accounts

(a) The main unit of classification in accounts shall be the major head which shall be divided into
minor heads, each of which shall have a number of subordinate heads, generally shown as sub-
heads. The subheads are further divided into detailed heads. Sometimes major heads may be
divided into 'sub-major heads' before their further division into minor heads. The Sectors, Major
heads, Minor heads, Sub-heads and Detailed heads together constitute a five tier arrangement of
the classification structure of Government Accounts.

(b) Major heads of account falling within the Consolidated Fund shall generally correspond to
'Functions' of Government, such as different services like "Crop Husbandry", 'Defence' provided
by Government, while minor heads subordinate to them shall identify the 'Programme'

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undertaken to achieve the objectives of the function represented by the major head. A
programme may consist of a number of schemes or activities and these shall, generally,
correspond to 'sub-heads' below the minor head represented by the programme. In certain cases,
especially in regard to non-developmental expenditure or expenditure of an administrative
nature, the sub-heads may denote the components of a programme, such as 'Organisations' or the
different 'Wings of Administration'.

A "detailed head'', is termed as an object classification. On the expenditure side of the accounts
particularly in respect of heads of accounts within the Consolidated Fund, detailed heads are
primarily meant for itemized control over expenditure and indicate the object or nature of
expenditure on a scheme or activity or organisation in terms of inputs such as 'Salaries', 'Office
Expenses', 'Grants-in-aid', 'Loans', 'Investments'. (d) The detailed classification of account heads
in Government Accounts and the order in which the Major and Minor heads shall appear in all
account records shall be such as are prescribed by the Central Government from time to time on
the advice of the Comptroller and Auditor General of India.

Q2 iii). Reasons of Difference between bank balance as per Cash book and pass book:
Reconciliation of the cash book and the bank passbook balances amounts to an explanation of
differences between them. The differences between the cash book and the bank passbook are
caused by:

1. Timing differences on recording of the transactions, and

2. Errors made by the business or by the bank.

1. Timing Differences: When a business compares the balance of its cash book with the balance
shown by the bank passbook, there is often a difference, which is caused by the time gap in
recording the transactions relating either to payments or receipts. The factors affecting time gap
includes:

(a) Cheques issued by the bank but not yet presented for payment. When cheques are issued
by the firm to suppliers or creditors of the firm, these are immediately entered on the credit side
of the cash book. However, the receiving party may not present the cheque to the bank for
en these cheques are
actually paid by the bank. Hence, there is a time lag between the issue of a cheque and its
presentation to the bank which may cause the difference between the two balances.

(b) Cheques paid into the bank but not yet collected When firm receives cheques from its
customers (debtors), they are immediately recorded in the debit side of the cash book. This
increases the bank balance as per the cash book. However, the bank credits the customer account
only when the amount of cheques are actually realised. The clearing of cheques generally takes
few days especially in case of outstation cheques or when the cheques are paid-in at a bank
branch other than the one at which the account of the firm is maintained. This leads to a cause of

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difference between the bank balance shown by the cash book and the balance shown by the bank
passbook.

(c) Direct debits made by the bank on behalf of the customer: Sometimes, the bank
knowledge. The firm
comes to know about it only when the bank statement arrives. Examples of such deductions
include cheque collection charges, incidental charges, interest on overdraft, unpaid cheques
deducted by the bank i.e., stopped or bounced, etc. As a result, the balance as per passbook will
be less than the balance as per cash book.

(d) Amounts directly deposited in the bank account: there are instances when debtors

intimation from any source till it receives the bank statement. In this case, the bank records the

Q2 iv) Meaning of Trial Balance: A trial balance is a statement showing the balances, or total
of debits and credits, of all the accounts in the ledger with a view to verify the arithmetical
accuracy of posting into the ledger accounts. Trial balance is an important statement in the
accounting process as it shows the final position of all accounts and helps in preparing the final
statements. The task of preparing the statements is simplified because the accountant can take the
balances of all accounts from the trial balance instead of going through the whole ledger. It may
be noted that the trial balance is usually prepared with the balances of accounts.

Objectives of Preparing the Trial Balance

The trial balance is prepared to fulfill the following objectives:
1. To ascertain the arithmetical accuracy of the ledger accounts.
2. To help in locating errors.
3. To help in the preparation of the financial statements (Profit & Loss account and Balance
Sheet).
1. To Ascertain the Arithmetical Accuracy of Ledger Accounts: The purpose of preparing a
trial balance is to ascertain whether all debits and credit are properly recorded in the ledger or not
and that all accounts have been correctly balanced. As a summary of the ledger, it is a list of the
accounts and their balances. When the totals of all the debit balances and credit balances in the
trial balance are equal, it is assumed that the posting and balancing of accounts is arithmetically
correct.

2. To Help in Locating Errors: When a trial balance does not tally (that is, the totals of debit
and credit columns are not equal), we know that at least one error has occurred. The error (or
errors) may have occurred at one of those stages in the accounting process: (1) totaling of
subsidiary books, (2) posting of journal entries in the ledger, (3) calculating account balances, (4)
carrying account balances to the trial balance, and (5) totaling the trial balance columns.

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3. To help in the Preparation of the Financial Statements: Trial balance is considered as the
connecting link between accounting records and the preparation of financial statements. For
preparing a financial statement, one need not refer to the ledger. In fact, the availability of a
tallied trial balance is the first step in the preparation of financial statements. All revenue and
expense accounts appearing in the trial balance are transferred to the trading and profit and loss
account and all liabilities, capital and assets accounts are transferred to the balance sheet.

Q2 v) Types of Errors: From the point of view of rectification, the errors may be classified into
the following two categories:

(a) Errors which do not affect the trial balance.

(b) Errors which affect the trial balance.

This distinction is relevant because the errors which do not affect the trial balance usually take
place in two accounts in such a manner that it can be easily rectified through a journal entry
whereas the errors which affect the trial balance usually affect one account and a journal entry is
not possible for rectification unless a suspense account has been opened.

Steps Taken to rectify one-sided errors using Suspense Account:

(i) Identify the account affected due to error.

(ii) Ascertain the amount of excess debit/credit or short debit/credit in the affected account.

(iii) If the error has resulted in excess debit or short credit in the affected account, credit the
account with the amount of excess debit or short credit.

(iv) If the error has resulted in excess credit or short debit in the affected account, debit the
account with the amount of excess credit or short debit.

(v) Complete the journal entry by debiting or crediting the suspense account as another account
affected otherwise.

Q2 vi) Objectives of Financial Accounting: As an information system, the basic objective of

accounting is to provide useful information to the interested group of users, both external and
internal. The necessary information, particularly in case of external users, is provided in the form
of financial statements, viz., profit and loss account and balance sheet. Besides these, the
management is provided with additional information from time to time from the accounting
records of business. Thus, the primary objectives of accounting include the following:

1. Maintenance of Records of Business Transactions: Accounting is used for the maintenance

of a systematic record of all financial transactions in book of accounts. Even the most brilliant
executive or manager cannot accurately remember the numerous amount of varied transactions

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such as purchases, sales, receipts, payments, etc. that takes place in business every day. Hence,
proper and complete records of all business transactions are kept regularly.

2. Calculation of Profit and Loss: The owners of business are keen to have an idea about the
net results of their business operations periodically, i.e. whether the business has earned profits
or incurred losses. Thus, another objective of accounting is to ascertain the profit earned or loss
sustained by a business during an accounting period which can be easily workout with help of
record of incomes and expenses relating to the business by preparing a profit or loss account for
the period.

3. Depiction of Financial Position: Accounting also aims at ascertaining the financial position
of the business concern in the form of its assets and liabilities at the end of every accounting
period. A proper record of resources owned by business organisation (Assets) and claims against
such resources (Liabilities) facilitates the preparation of a statement known as balance sheet
position statement.

4. Providing Accounting Information to its Users: The accounting information generated by

the accounting process is communicated in the form of reports, statements, graphs and charts to
the users who need it in different decision situations. There are two main user groups, viz.
internal users, mainly management, who needs timely information on cost of sales, profitability,
etc. for planning, controlling and decision-making and external users who have limited authority,
ability and resources to obtain the necessary information and have to rely on financial statements
(Balance Sheet, Profit and Loss account).

Q3 i) Single entry recording in cash book of M/s Garg Traders:

Date Receipts L.F Amount Date Payments L. Amount

2021 . 2021 F.
April 1 Balance b/d 90,000 April 8 Insurance Pre. 8,000
April 14 Furniture 25,900
April 5 Rohit Rampal 24,000 April 17 Purchase 36,000
April 20 Stationery 5,200
April Sales 50,000 April 24 Sheela 20,000
16 April 30 Rent 11,000
April Sales 30,000 April 30 Salary 6,500
26 April 30 Bank 15,000
April 30 Balance c/d 66,400
1,94,000 1,94,000

May 1 Balance b/d 66,400

Q3 ii) a) Accounting Equation: Accounting equation is a statement of equality between debits

and credits signifying that the assets of a business are always equal to the total liabilities and
capital. The equation reads as follows:

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A = L + C where, A = Assets, L = Liabilities and C = Capital
The accounting equation depicts the fundamental relationship among the components of the
balance sheet.

Q3 ii) b) Journal: This is the basic book of original entry. In this book, transactions are recorded
in the chronological order, as and when they take place. Afterwards, transactions from this book
are posted to the respective accounts. Each transaction is separately recorded after determining
the particular account to be debited or credited.

Q3 ii) c) Ledger: Ledger is the principal book of accounting system. It contains different
accounts where transactions relating to that account are recorded. A ledger is the collection of all
the accounts, debited or credited. A ledger is very useful and is of utmost importance in the
organisation. The net result of all transactions in respect of a particular account on a given date
can be ascertained only from the ledger.

Q3 ii) d) Cash Book: Cash book is a book in which all transactions relating to cash receipts and
cash payments are recorded. It starts with the cash or bank balances at the beginning of the
period. Generally, it is made on monthly basis. This is a very popular book and is maintained by
all organisations, big or small, profit or not-forprofit. It serves the purpose of both journal as well
as the ledger (cash) account. When a cashbook is maintained, transactions of cash are not
recorded in the journal, and no separate account for cash or bank is required in the ledger.

Q3 ii) e) Business Entity Concept: The concept of business entity assumes that business has a
distinct and separate entity from its owners. It means that for the purposes of accounting, the
business and its owners are to be treated as two separate entities. Keeping this in view, when a
person brings in some money as capital into his business, in accounting records, it is treated as
liability of the business to the owner.

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