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Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 10th Lesson Trail Balance Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 10th Lesson Trail Balance

Short Answer Questions

Question 1.
Define ‘TrialBalance’.
Answer:
“Trial Balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical accuracy of the books.” – J.R. Batliboi
“A Trial Balance is a list of all the balances standing on the ledger accounts and cash book of a concern at any given date.” – Spicer and Peglar

Question 2.
Give the format of Trial Balance.
Answer:
Trial Balance of ……. as on ……

Question 3.
What are the objectives of the Trial Balance ?
Answer:
Objectives of trial balance are :

1. To verify the arithmetical accuracy of ledger accounts.
2. To know the balances of various ledger accounts.
3. Final accounts can be prepared on the basis of trial balance.
4. Trial balances of various years are useful for comparison and get conclusions.

Question 4.
What are the methods of preparation of Trial Balance ?
Answer:
There are two methods to prepare trial balance.

1. Total Balances Method : Under this method total of debit side and total of credit side of each individual a/c is taken into trial balance. This method is not in use now.
2. Net Balances Method : Under this method, balance in each ledger a/c is taken into trial balance. All the ledger a/cs showing debit balances are put on the debit side of the trial balance and the accounts showing credit balances are put on the credit side.

Essay Type Questions

Question 1.
What is Trial Balance ? How it is prepared ?
Answer:
Trial balance is a statement of balances/totals of accounts of a business concern and prepared to check the arithmetical accuracy of the books.
Preparation of Trial balance : The following points are to be kept in the mind while preparing the Trial Balances.

1. Draw the pro forma of trial balance with the title.
2. Trial balance is a statement; hence we need not use the words ‘to’ or ‘by’.
3. Show all types of assets in debit column.
4. Show all types of liabilities in credit column.
5. Show all types of expenses in debit column,
6. Show all types of incomes in credit column.
7. Show reserves and surpluses / reserve funds / provisions in credit columns.
8. Show intangible assets in debit column E.g. good will, patents, royalties
9. Show purchases and sales returns in debit column.
10. Show sales, purchase returns in credit column.

Question 2.
Explain the merits and demerits of Trial Balance.
Answer:
Merits:

1. It helps in ascertaining the arithmetical accuracy of ledger accounts.
2. It helps in detecting errors.
3. It helps to get a summary of the ledger accounts.
4. It helps in the preparation of final accounts.

Limitations:

1. Certain type of errors remain even when the trial balance tallies.
2. It is possible to prepare trial balance in which double entry book-keeping system is followed which is very expensive.
3. Even if some transactions are omitted the trial balance tallies.

Problems

Question 1.
From the following balances taken from the books of Naveena as on December 2013, prepare a trial balance in proper form :

Answer:
Trial Balance of Naveena as on December 2013

Question 2.
Prepare a Trial Balance from the following balances of Swathi as on 31^st March 2013:

Answer:
Trial Balance of Swathi as on 31^st March 2013

Question 3.
The following Trial Balance has been prepared by an inexperienced accountant. Redraft it in a correct form :


Answer:
Correct Trial Balance

Question 4.
The following are the Balances extracted from the books ofRuthwik, prepare a Trial Balance as on 31-03-2013.


Answer:
Trial Balance of Ruthwik as on 31.03.2013

Question 5.
From the following balances, prepare Trial Balance of Harshini as at 31-12-2013.

Answer:
Trial Balance of Harshini as at 31.12.2013

Question 6.
The following are the balances extracted from the books ofSarayu on 31-08-2013 Prepare the Trial Balance.

Answer:
Trial Balance of Sarayu as on 31.8.2013

Question 7.
The following are the balances extracted from the books of Paddu as on 31 -01 – 2014. Prepare Trial Balance.

Answer:
Trial Balance of Paddu as on 31.1.2014

Question 8.
Prepare the Trial Balance of Renish as on 31.12.2013. (Mar. 2018 – A.P. ; May ’17 – A.P.)

Answer:
Trial Balance of Renish as on 31.12.2013

Question 9.
From the following balances prepare Trial Balance of Manas as on 31.12.2013.

Answer:
Trial Balance of Manas as on 31.12.2013

Question 10.
From the following balances prepare Trial Balance of Mridula as on 31.12.2013. (Mar. ’17 – A.P.)

Answer:
Trial Balance of Mridula as on 31.12.2013

Question 11.
Prepare Trial Balance of Prafulla from the following balances as on 31.12.2013. (Mar. 2019 – T.S.)

Answer:

Question 12.
Prepare Trial Balance of Suchitra as on 31.12.2013 from the following balances:

Answer:
Trial Balance of Suchitra as on 31.12.2013

Question 13.
Prepare trial Balance of Radha from the following balances:

Answer:
Trial Balance of Radha

Question 14.
Prepare Trial Balance of Snigdha form the following balances:

Answer:
Trial Balance of Snigdha

Question 15.
Prepare Trial Balance of Supreeth from the following balances as on 31-12-2010. [May – ’17 – T.S.]

Answer:
Trial Balance of Supreeth as on 31.12.2010

Question 16.
Prepare Trial Balance of Rohitha : (Mar. 2018 – T.S.)

Answer:
Trial Balance of Rohitha

Question 17.
Prepare Trial Balance ofSusmitha from the following balances as on 31.03.2013.

Answer:
Trial Balance of Smith as on 31.12.2013

Question 18.
Prepare Trial Balance of Sudha from the following particulars:

Answer:
Trial Balance of Sudha as on 31.12.2013

Question 19.
Prepare Trial Balance from the following balances.

Answer:
Trial Balance as on 31.12.2013

Student Activity

Visit any organisation and prepare a trial balance by extracting balances of accounts from its ledger.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 9th Lesson Bank Reconciliation Statement Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 9th Lesson Bank Reconciliation Statement

Short Answer Questions

Question 1.
What is meant by Bank Reconciliation Statement ? (May ’17 – T.S.)
Answer:
Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances as per the bank column of the cash book and the pass book on any given date.

Question 2.
What do you mean by Favourable Balance ? (Mar. ’17 – T.S.)
Answer:
It means cash book shows debit balance at the same time pass book shows credit balance. Favourable balance means our money is in the Bank Account. Hence cash book debit balance and pass book credit balance is called favourable balance.

Question 3.
What do you mean by Unfavourable Balance ?
Answer:
Sometimes a businessman withdraws/excess amount from the bank account and the closing bank balance of a month is a debit balance. This balance amount is called unfavourable balance or overdraft balance.

Question 4.
Describe the Overdraft. (Mar. 2019, ’18 – T.S.; Mar ’15 – A.P.)
Answer:
When withdrawals exceed deposits, cash book bank column shows credit balance and the pass book shows debit balance. It is called unfavourable or overdraft balance. Sometimes business¬man is allowed by the bank to withdraw the amount, in excess of what he has in his bank account after moving prior agreement with banker. This facility is called overdraft.

Question 5.
Cheques deposited with a bank for collection, what is the impact on Cash Book?
Answer:
When the cheques are deposited with a bank for collection, that the cheques amount was debited in the cash book, before sending them for collection. Hence the impact on cash book is the cash balance increased.

Essay Type Questions

Question 1.
Explain the nature and importance of the Bank Reconciliation Statement.
Answer:
A statement prepared to reconcile the balance of cash book and pass book is called the ‘Bank Reconciliation Statement’.
Generally the business concerns would like to maintain an account with a bank and prepare a Bank Reconciliation Statement.

Importance:

1. Locating the mistakes or errors either side of both cash book and pass book.
2. Preventing any fraud and misappropriations.
3. Enabling the business concern to get up-to-date record of transactions from the bank.
4. Ensuring a proper evidence of payment.
5. Help to know exact cash balance at bank.

Question 2.
Enumerate the reasons for differences between the balance shown in the Cash Book and Pass Book.
Answer:
I. Items entered in the bank columns of the Cash Book, but not entered in Pass Book or bank statement.

1. Cheques sent for collection, but not collected by the bank. This will appear only on the debit side of the cash book.
2. Cheques issued but not yet presented for payment. This appears only on credit side of the cash book.

II. Items entered in the bank statement or bank Pass Book, but not in Cash Book:

1. Direct payment into the bank by a customer. This appears only on the credit side of the bank statement.
2. Bank charges : Charges paid by the business for using some of the bank services. This will appear on the debit side of the pass book.
3. When the business instructs the bank to make regular payments of fixed amounts, rent, insurance premium, etc. These will appear on the debit side of the bank statement.
4. Interest on overdrafts or loans appears on the debit side of the bank statement.
5. Interest on deposits appears on the credit side of the bank statement.
6. Dishonour of cheques and bills – first appears on the debit side of the bank statement. But the firm records the same when it receives the information from the bank. As a result, the balance as per cash book and that of pass book will differ.

III. Difference caused by Errors:

1. Errors committed in recording transactions by the firm in cash book : Omission of transaction, wrong recording, wrong totaling, over / under casting, etc.
2. Errors committed in recording transactions by the bank : Sometimes bank may also commit errors. E.g. Omission or wrong recording of transaction, wrong totaling, over/ under casting, etc.

Question 3.
Explain the procedure of preparing the Bank Reconciliation Statement by taking imaginary items and figures.
Answer:
Bank reconciliation statement is prepared to reconcile the two balances of Cash Book and Pass Book. The preparation of Bank Reconciliation Statement starts with banking adjustments to one balance to reach the other balance, which ensures agreement between both the balances.

The BRS is prepared usually at the end of the period, i.e. a month, a quarter, half a year or a year whichever is convenient to the firm. When both the books, cash book and pass book are given in problem, then see whether the two books are related to the same period or different periods. If the books are for different periods, then common items should be considered and if it is for same period, then items not appearing in both the books should be taken into consideration.

The way how to prepare BRS may be illustrated as follows.
Bank Reconciliation Statement of …… as on …….

Problems

Question 1.
Pass Book of a trader shows a balance of Rs. 12,600. On comparing the Pass Book with the cash Book, the following discrepancies were noted. (Mar. 2018 – A.P.)
a) Cheques deposited in bank but not collected Rs. 2,100
b) Cheques issued but not presented for payment Rs. 1,800
c) Bank Charges Rs. 175
d) Bank paid insurance premium Rs. 1,500
e) The Debtor paid directly into bank account Rs. 1200
Answer:
Bank Reconciliation Statement

Question 2.
Murthy and Son’s Pass Book showed a balance of Rs. 21,700 as on 30^th September, 2013. On comparing the Cash Book the following discrepancies were noted.
a) Cheques issued but not yet presented for payment Rs. 2,500
b) Directly deposited by a customer Rs. 3,000
c) Interest credited by bank is found in Pass Book only Rs. 575
d) Cheques deposited in bank but not credited Rs. 3,500
e) Bank Charges Rs. 150
Prepare a Bank Reconciliation Statement showing balance as per Cash Book.
Answer:
Bank Reconciliation Statement of Murthy and Son as on 30th September 2013

Question 3.
Giri Ind Ltd’s bank balance as per Pass Book is Rs. $,900. There is disagreement between Cash Book and Pass Book balances as, on 31.3.2014. Prepare Bank Reconciliation statement by considering following transactions.
a) Cheque issued but not yet presented for payment Rs. 2100
b) Cheque deposited for collection, but not yet realized Rs. 900
c) A wrong debit given by bank in Pass Book Rs. 500
d) Bank charges debited only in Pass Book Rs. 210
e) Direct payment of insurance premium as per standing instructions Rs. 600
Answer:
Bank Reconciliation Statement of Giri lnd Ltd’s as on 31.03.2014

Question 4.
On comparing the bank Pass Book of BBR Ltd., with its Cash Book (bank column), the following differences were noticed. Prepare BRS with the help of Cash Book Balance Rs. 15,000.
a) Cheque sent for collection, notyet realized Rs. 5,600
b) Cheques issued but not yet presented for payment Rs. 4,200
c) The receipts side of Cash Book has been overcast by Rs. 300
d) A cheque drawn on firm’s current a/c, wrongly debited in its savings a/c, Rs. 2,100
e) A cheque ofRs. 900 deposited into bank, bit forgot to enter in Cash Book
Answer:
Bank Reconciliation Statement of BBR Ltd

Question 5.
Reddy’s Cash Book shows a favourable balance ofRs. 25,500 as on 31^st December, 2013. On comparing the same with his Pass Book following differences were noticed. Calculate bank balance as per Pass Book.
a) A cheque for Rs. 2,450 received from Saritha & Co was entered twice in the Cash Book.
b) The receipts column of the Cash Book has been over added by Rs. 1940.
c) Several cheques, totaling Rs. 6,000 were issued to different suppliers. Of these, cheques worth Rs. 1,500 were debited in Pass Book on 2nd January, 2014 and Rs. 2,500 on 4th January. The balance being debited before 31st December, 2013.
d) Bills discounted, got dishonored Rs. 750.
e) A cheque ofRs. 400 was credited in Pass Book, but was not recorded in Cash Book.
f) Uncredited cheque Rs. 1,000
Answer:
Bank Reconciliation Statement of Reddy’s as on 31^st December 2013

Question 6.
On 31^st December, 2013 the Cash Book showed an unfavourable balance Rs. 29,000. Prepare a Reconciliation Statement with the following information.
a) Cheques had been deposited into the bank but were not collected Rs, 4,530
b) A cheque issued to Karthik Reddy, the supplier, has not been encashed Rs. 5,040.
c) There was a debit entry in the Pass Book ofRs. 600 for bank charges.
d) Bills worth Rs. 2000 were discounted but dishonored.
Answer:
Bank Reconciliation Statement as on 31^st December 2013

Question 7.
From the following particulars prepare a Bank Reconciliation Statement.
a) Bank Overdraft as per Cash Book Rs. 16,100
b) Debit side of the bank column of Cash Book cast short Rs. 200
c) Bills collected directly by bank Rs. 3,500
d) Bank charges recorded twice in the Cash Book Rs. 240
e) A cheque deposited as per bank statement but not recorded in the Cash Book Rs. 1100
f) The cheques of 6,000 deposited but collections as per statement Rs. 2,600
g) Interest on investment collected by the banker, same was shown only in Pass Book Rs. 2,000
Answer:
Bank Reconciliation Statement

Question 8.
From the following particulars prepare Bank Reconciliation Statement as on 31^st March, 2014.
a) Overdraft balance as on 31-3-2014 as per Bank statement Rs. 22,470.
b) As per standing instructions given to bank, Chamber of Commerce fee Rs. 2,530 was paid by the bank but was not recorded in the Cash Book.
c) On 23-3-2014, the credit side of the bank column of the Cash Book was cast Rs. 1,900 short.
d) Cheque deposited into the bank but not recorded in Cash Book Rs. 2,500
e) In the Cash Book, a Bank charge ofRs. 290 was recorded twice while another bank charge of Rs. 120 was not recorded at all.
f) Divided on shares Rs. 3,200 was collected by bank directly the trader has no information.
g) Two cheques ofRs. 1850 and Rs. 1,500 were issued but out of them only one cheque ofRs. 1850 was presented for payment up to reconcile day.
Answer:
Bank Reconciliation Statement as on 31.03.2014

Question 9.
Prepare Bank Reconciliation statement ofKarthik as on 31 – 03 – 2014.
a) Bank overdraft as per Pass Book Rs. 6,500
b) Cheques deposited into bank Rs. 5,000, but only Rs. 2,000 was collected.
c) Cheques issued but not presented for payment Rs. 1500
d) A customer directly deposited in our bank Rs. 1200
e) Bank charges Rs. 200; Insurance premium Rs. 300 has debited in the Pass Book only
f) Divided Rs. 300 collected by the bank has credited in the Pass Book only
Answer:
Bank Reconciliation Statement of Karthik as on 31.03.2014

Question 10.
Prepare Bank Reconciliation Statement of P.R.G. Rao & Sons as on 31.03.2014
a) Bank overdraft as per Cash Book Rs. 14,500
b) Cheques issued but not yet presented for payment Rs. 4,500
c) Directly deposited by a Customer in our bank account Rs. 3,500.
d) Cheques deposited in bank but not credited Rs. 7,500
e) Bank charges debited in pass book only Rs. 200
f) Interest debited in the pass book only Rs. 500
Answer:
Bank Reconciliation Statement of P.R.G. Rao as on 31.03.2014

Student Activity

Visit any business careers and enquire about what discrepancies generally they notice in the items. Make a list of the discrepancies and show the effect on the bank balance.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 8th Lesson Cash Book Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 8th Lesson Cash Book

Essay Type Questions

Question 1.
Describe the meaning and importance of cash book.
Answer:
Among the entire subsidiary books cash book is one of the important books. In this book we record cash receipts and cash payments. The main objective of cash book is to know the balance of cash at any given time. The person who maintains cash book is known as cashier. Business transactions are mainly two kinds.

1. Cash Transactions
2. Credit Transactions

All cash transactions are two types :

1. Cash receipts
2. Cash payments

Cash receipts should be recorded on debit side and cash payments are on the credit side. Generally cash book shows debit balance, because a business unit cannot pay more than its receipts.

Question 2.
Briefly explain the different types of cash books.
Answer:
The form of the cash book depends on the need, nature and scope of activities of a business firm.
They are as follows :

1) Simple cash book
2) Double column cash book
i) With cash and discount columns
ii) With bank and discount columns
3) Triple column cash book
4) Analytical petty cash book

1) Simple Cash Book: The simple cash book is maintained by small business concern. Only cash transactions are recorded in this book. Cash receipts are to be recorded on the debit side and cash payments are on credit side. After entering all the transactions, the balance is ascertained like other accounts.

2) Double Column Cash Book:

a) Cash Book with Cash and Discount Columns: The transactions pertaining to cash and cash discounts are also recorded. To record the discount involved in any transactions one additional column on both sides of the cash book is provided. Discount column on the debit side should be named as discount allowed, and on the credit side discount received. They should not be balanced.

b) Cash Book with Bank and Discount Columns : Modern business organisations carry their transactions in the form of cheques through banks. The receipts and payments of the business are made through cheques. They maintain bank column in the cash book. The traders deposit money and cheques into bank account and make payments by cheques. The traders’ deposit through bank is having advantages of safety and convenience.

3) Triple Column Cash Book: This book also known as cash book with cash discount and bank columns. It contains three columns on both the sides. Three column cash book is used by big trading organisations, to record large number of cash and bank transactions of different nature.

4) Analytical Petty Cash Book: In large scale business organisation cash is paid and received through banks, but every day the organisation has to pay various small payments. It is not possible to pay small payments through cheques and enter in the cash book. Hence all petty payments of the business are recorded in a separate cash book which is called a Petty Cash Book.

Question 3.
Write the importance of Triple column cash book and draw its pro forma.
Answer:
Triple column cash book contains three columns on both sides (debit and credit) in addition to date, particulars and L.F columns. Three column cash book is very useful to the big trading organisations for the following reasons.

1. It helps to record cash Receipts and also Receipts through cheques.
2. It is useful to record Cash Payments and also Payments by Cheques.
3. It helps to record large number of cash and bank transactions of different nature.
4. It is useful to record Contra Entries.
   

Question 4.
Explain the important points to be followed in the preparation of three column cash book.
Answer:
The following points are to be noted carefully while preparing three column cash book.

1. Opening cash and bank balances are recorded on the debit side of the cash and bank column as “To Balance b/d” in the particulars column.
2. If the overdraft is given as opening bank balance, it should be recorded on the credit side of Bank column.
3. All cash receipts should be recorded on the debit side cash column and cash payments are recorded in the cash column on the credit side.
4. If any cheque is received from customers and if it was not deposited in the bank on the same day, it should be debited to cash column.
5. If cheque is received and sent to bank on the same day, it should be debited to bank column.
6. Any payment made through cheque, should be credited to bank column on the credit side.
7. If discount amounts are involved either in cash or in bank transactions, discount allowed should be recorded on the debit side and discount received should be recorded on the credit side in the discount column.
8. If the cheques sent to bank for collection are dishonoured, it should be recorded in the bank column on debit side.
9. The transaction which is passed on both sides of the cash book is called ‘Contra Entry’. While opening bank a/c, cash deposited in bank, cash withdrawn from bank for personal use and cheque received on one day but deposited on another day. Contra entries will appear on both sides. It is denoted by “C”.

Short Answer Questions

Question 1.
Explain the advantages of cash book.
Answer:
Advantages of Cash Book:

1. It helps to know the amount of cash received and the amount of cash paid by the Business Unit.
2. It gives the Cash and Bank balances of a business unit at any given period.
3. Mistakes or Fraud can be detected by verifying the closing balance of cash book with the actual amount of cash in hand.
4. As cash book acts as Cash A/c, preparation of a separate Cash A/c (ledger) is not required.

Question 2.
Give the characteristics of cash book.
Answer:
Characteristics of Cash Book :

1. Cash book is a Subsidiary Book.
2. It records only Cash Transactions.
3. Cash book serves as Cash Account.
4. It records cash receipts on the debit side and cash payments on the credit side.
5. Cash book will show Debit Balance only.

Very Short Answer Questions

Question 1.
Cash Discount (Mar. ’17 – T.S.)
Answer:
It is given for prompt and early payment. If a debtor pays the amount to the creditor on or before the due date, he may receive discount in the form of cash. It is known as cash discount. It is discount received for the debtor and discount allowed for the creditor. The discount column is maintained on both sides of the cash book.

Question 2.
Discount Allowed
Answer:
Discount given or allowed by the creditor is known as discount allowed. It is a loss for the ‘ creditor. This was allowed to the debtor for prompt payment.

Question 3.
Discount Received
Answer:
If a debtor pays the amount on or before the due date, he may receive discount in the form of cash. It is gain for the debtor. It is called discount received.

Question 4.
Contra entry (Mar. 2019 ; May ’17 – T.S.) (Mar. 2018 – A.P.)
Answer:
The transaction which is recorded on both sides of Triple column cash book i.e. Cash and Bank on the opposite sides is called contra entry. Contra means opposite side. It should be denoted by “C” in the L.F column on both sides of Triple Column Cash Book.

Question 5.
Imprest System
Answer:
In this system petty cash payments for a period is estimated and that amount is given to the petty cashier as advance. The cashier makes payments from this amount and records them in petty cash book. At the end of a particular period the petty cashier submits petty cash book to the Head Cashier. The Head Cashier scrutinizes the petty payments and issues a fresh cheque equal to the amount of petty expenses paid. This system of book keeping is called Imprest System.

Problems

Question 1.
Prepare süaple cash book as on 1.1.2014 from the following particulars:

Answer:

Question 2.
Enter the following transactions in single column cash book of Farma traders

Answer:

Question 3.
Prepare Simple Cash Book as on 31.3.2014.

Answer:

Question 4.
Record following transactions in Two Column Cash book as on 31.1.2014:

Answer:

Question 5.
Prepare Double Column Cash Book with Cash and Discount Columns:

Answer:

Question 6.
Prepare Double Column Cash Book from the following:

Answer:

Hint: Transaction dated 20th is a credit Transaction.

Question 7.
Prepare Two column cash book with Bank and Discount columns from the following: (Mar. 17 T.S.)

Answer:

Question 8.
Prepare Three Column Cash Book. (Mar. 2019, ’17 – A.P.)

(Hint: Transactions dated 25^th and 28^th are Contra entries.)
Answer:

Question 9.
Prepare three column cash book from the following particulars :

Answer:

Question 10.
Prepare Triple Column Cash Book from the following:

Answer:

Question 11.
Record the following transactions in Cash, Bank, and Discount Columns Cash Book

Answer:

Question 12.
From the following particulars, prepare three column cash book:

Answer:

Question 13.
Prepare triple column cash book from the following information, 2014 (May -17 – T.S.)

Answer:

Question 14.
Prepare triple column cash book from the following particulars: (Mar. 2019, 18 – T.S.)

Answer:

Question 15.
Prepare Three Column Cash Book from the following: (Mar. 2018 – A.P.)

Answer:

Question 16.
Prepare Three Column Cash Book from the following:

Answer:

Question 17.
Prepare Three Column Cash book from the following particulars.

Answer:

Question 18.
Prepare Three Column Cash book of Mr.Stephen from the following particulars.

Answer:

Question 19.
Prepare Three Column Cash book of Mrs. Vijaya from the following particulars 2010

Answer:

Question 20.
Prepare Analytical Petty Cash from the following particulars:

Answer:

Question 21.
Prepare Analytical Petty Cash Book.

Answer:

Question 22.
From the following information, prepare Analytical Petty Cash Book and also prepare ledger:

Answer:

Student Activity

1. Collect Cash and Bank transactions during a month from any organisation or firm and prepare Cash Book.
2. Collect daily expenses of small amount and prepare petty Cash Book.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 7th Lesson Journal Proper Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 7th Lesson Journal Proper

Questions

Question 1.
What is Journal Proper?
Answer:
There are some transactions which cannot be recorded in any of the remaining seven subsidiary books, are entered in special book known as “Journal proper”.

Question 2.
Explain various kinds of transactions that are recorded in Journal Proper.
Answer:
The following are the transactions recorded in journal proper.
1) Opening entries : Opening entries are passed at the commencement of the new year, to record the balances of assets and liabilities brought forward from the previous year.
The rule to be applied as
Assets A/C
To Liabilities a/c
To Capital a/c
(Being last year balance brought forward).

2) Purchase and sale of fixed assets: Business organisations either purchase or sell the assets for cash and sometimes on credit. If it is purchased on credit, then the entry should be recorded in the journal proper.
Example : Purchased machinery from Godrej Company 40,000.

3) Rectification entries : Sometimes errors may occur while recording transactions, posting them into the ledger or while balancing the ledger accounts. In such cases certain entries should be passed in order to rectify the errors. Such entries are called “Rectification entries”.
Example : Rama paid Rs. 1000. This was credited to Bheema’s A/c.

4) Adjustment entries: At the time of preparation of final accounts of the business firm some adjustments are to be made. The journal entries relating to these adjustments are known as “Adjustment entries”.
Example: Outstanding expenses, prepaid expenses, incomes receivable, income received in advance, depreciation, etc.

5) Closing entries: At the end of every financial year the balances of all the Nominal accounts are transferred to the Trading and Profit & Loss accounts. These transferred entries are known as Closing entries. All expenses and losses are debited and incomes and gains are credited to Trading, Profit & Loss account.

6) Transfer entries: Sometimes the trader transfers the amount from one account to another account. This type of journal entries are known as ‘Transferred journal entries’.
Example : Transfer of Profit to Reserve Fund.

7) Other entries : It is not possible to enter same transactions in journal and hence they are recorded in Journal Proper.
Example: Interest on drawings, interest on capital, goods lost due to fire & theft, goods sent on consignment, etc.

Question 3.
Explain the following in not more than 5 lines.
a) Opening Entries
b) Rectification Entries
c) Adjustment Entries
d) Closing Entries
Answer:
a) Opening Entries : Opening entries are passed at the commencement of the new year, to record the balances of assets and liabilities brought forward from the previous year.
The rule to be applied as
Assets a/c Dr
To Liabilities a/c
To Capital a/c
(Being the last year balance brought forward).

b) Rectification Entries : Sometimes errors may occur while recording transactions, posting them into the ledger or while balancing the ledger accounts. In such cases certain entries should be passed in order to rectify the errors. Such entries are called “Rectification entries”.
Example : Rama paid Rs. 100. This was credited to Somu’s A/c.

c) Adjustment Entries: At the time of preparation of final accounts of the business firm some adjustments are to be made. The journal entries relating to these adjustments are known as “Adjustment entries”.
Example: Outstanding expenses, prepaid expenses.

d) Closing Entries: At the end of every financial year the balances of all the Nominal accounts are transferred to the Trading and Profit & Loss accounts. These transferred entries are known as Closing entries. All expenses and losses are debited and incomes and gains are credited to Trading, Profit & Loss account.

Problems

Question 1.
Record the Opening entry from the following particulars on 1st April 2013: (Mar. 2019 – T.S.) (Mar. 2018 : May 17 – A.P.)

Answer:

Question 2.
Write the Opening entry on 1st Jan. 2013 in the books of Ram from the following:

Answer:

Question 3.
Record the Opening entry from the following assets and liabilities as on Jan. 1st, 2014:

Answer:

Question 4.
Pass Opening Journal Entry from the following particulars on 1^st April, 2013.

Question 5.
Record Opening entry on 1^st Jan. 2014 from the following assets and liabilities:


Answer:

Question 6.
Rectify the following errors dated on Dec. 31^st, 2013:
1. Machinery purchased Rs. 20,000, wrongly debited to Purchases a/c,
2. Commission received Rs. 3,000, wrongly credited to Interest received a/c,
3. Salaries paid to Accountant Prakash Rs. 10,000, debited to his personal a/c,
4. Purchased goods for Rs. 8,000, recorded as Rs. 80,000,
5. Paid cash to Rohit Rs. 5000, wrongly debited to Mohit a/c.
Answer:

Question 7.
Pass adjustment journal entries for the following:
1. Salaries Outstanding Rs. 2,000,
2. Insurance Paid in Advance Rs. 500,
3. Credit 5% Reserve for Bad and Doubtful Debts on Debtors amounted to Rs. 10,000,
4. Provide 10% Depreciation on Machinery. Machinery Value Rs. 20,000,
5. Closing Stock Rs. 15,000.
Answer:

Question 8.
Record the Closing Entries from the following Ledger Balances ofAshrith :

Answer:

Question 9.
Write Opening Entry as on Jan. 1^st 2014 from the following balance sheet of Venkat: Balance Sheet of Venkat as on 31^st Dec. 2013

Answer:

Question 10.
Write Opening Journal Entry from the following as on 1^st April 2013 : (Mar. 2018-T.S.)

Answer:

Student Activity

Visit any organisation/firm and record opening, closing and other entries of Journal proper.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 6th Lesson Subsidiary Books Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 6th Lesson Subsidiary Books

Questions

Question 1.
Explain the various Subsidiary Books with suitable examples.
Answer:
Separate Books or special books which are maintained to record a particular category of trans¬actions are known as “Subsidiary books”.
The journal is divided into eight subsidiary books. They are :
a) Purchase book : This book records all the goods purchased on credit. Cash purchases and purchase of assets are not recorded in this book.
Whenever goods are bought on credit we receive an invoice from the seller. It is called “Inward Invoice”. It is evidence for recording in purchase book.

b) Sales book : The goods sold on credit are recorded in this book. Cash sales and assets sold for cash or credit are not recorded in this book.
Whenever goods are sold on credit we send an Invoice to the customer. It is called “Outward Invoice”. It is evidence for recording in sales book.

c) Purchase returns book: This book is also known as returns outward book. This book records the goods returned to the suppliers. When goods are returned to their sellers a Debit Note’ is prepared and sent to the suppliers along with goods.

d) Sales returns book: This book is also known as returns inward book. This book records the goods returned by the customers. When the sellers receive goods back from the customer along with a debit note, then he prepares a credit note and sends to the customer.

e) Cash book: Cash book is used for recording all cash transactions i.e. cash receipts and cash payments either in cash or by cheque are recorded in this book.

f) Bills receivable book: This book is used to record all the bills received from the customers for the amount due. It contains details of acceptor of the bill, its due date, date bill, the amount due, etc.

g) Bills payable book: If the goods are purchased on credit and bills are accepted for the due amounts, all these bills payable are recorded in this book. It contains the amount due, date of bill, place of payment, due date, etc .

h) Journal proper : This book is used to record only those transactions, which cannot be recorded in any one of the seven subsidiary books side above.

Question 2.
Give the advantages of subsidiary books.
Answer:
Subsidiary Book Advantages:
a) Saving of Time : No need of writing the Journal Entries. Transactions are directly entered into their respective journals.
b) Division of Work: By entrusting different Subsidiary Books to different persons, division of principle can be implemented.
c) Easy Recording: Transactions can be recorded very fast and easy.
d) Improves Efficiency: Accounting work will be done efficiently by allotting work to different experts who prepare the Special Books.
e) Detection of Errors : Since Separate Books are maintained to record a particular set of transactions, errors can be easily noticed.

Question 3.
Explain about Purchases book and draw the pro forma of it.
Answer:
This book records all the goods purchased on credit. Cash purchases and purchase of assets are not recorded in this book.

Whenever goods are bought on credit we receive an invoice from the seller. It is called “Inward Invoice”. It is evidence for recording in purchase book. It is numbered serially and filed in a separate file.
Proforma of purchase book:

Purchase book contains five columns, such as Date, Particulars, Invoice No., L.F.No. and Amount.

Question 4.
Explain about Sales book and draw the pro forma of it.
Answer:
The goods sold on credit are recorded in this book. Cash sales and assets sold for cash or credit are not recorded in this book.
Whenever goods are sold on credit we send an invoice to the customer. It is called “Outward invoice”. It is evidence for recording in sales book. It is serially numbered and kept in a separate file.

Proforma of sales book:

Sales book contains five columns, such as Date, Particulars, Invoice No., L.F.No. and Amount.

Question 5.
Answer the following in not more than 5 lines. (Mar. ’17 – A.P.)
a) Invoice
b) Debit Note
c) Credit Note
d) Trade Discount
e) Journal Proper
Answer:
a) Invoice:
It is the document prepared by the supplier of goods with all the details like quantity, price discount offered and other terms and conditions. This is also known as “Inward Invoice”.

b) Debit Note: (Mar. 2019 – A.P.) (Mar. 2018 – T.S.)
If goods are returned to the supplier, a debit note or letter is sent along with goods, informing the supplier about the debit given to his account for the value of the goods returned. This note is known as debit note.

c) Credit Note:
If the customer returned the goods, a credit note is sent to him by the traders informing the customer that his account has been credited with the value of the goods returned.

d) Trade Discount:
It is a reduction in the catalogue price of an article. This is given by the wholesaler to the retailer to enable him to sell at a catalogue price and make a profit. It is not entered in books.

e) Journal Proper: (May ’17 – A.P.)
This book is used for recording only those transactions which cannot be recorded in any one of the seven subsidiary books said above.
Examples: Opening entries, closing entries, adjustment entries, transfer entries.

Problems

Question 1.
Record the following transactions in the purchase book.

Hint 1: For transaction dated on 11^th Calculate trade discount @ 10% on Rs. 5,000/- i.e. 5000 × \(\frac{10}{100}\) = 500, and take net purchases as 5000 – 500 = 4500.
Hint 2: Transaction dated 17^th March is a cash transaction. So, it is not to be taken in purchase book.
Answer:

Question 2.
Prepare Purchase Book from the following:

Hint 1: For transaction dated on 10^th calculate discount @ 10% on 10,000/-
i.e. 1,000 and takes net purchases as 10,000 – 1,000 = 9,000.
Hint 2: Transaction dated on 12^th is a cash transaction. So, it is not entered in purchases book.
Answer:

Question 3.
Record the following in Purchases Book:
2012
March 1^st Purchase goods on credit from Chand traders Invoice No. 301.
120 reams of white paper @15 per ream
60 dozen ink pots @ 25 per dozen

March 8^th Purchased from Gupta traders Invoice No. 403
10 Drawing boards @ 30 each
40 Notebooks @ 20 each

March 10^th Purchased goods from Goyal and Company for cash 3,000.

March 15^th Purchased goods from Ankit Rs. 10,000 as per Invoice No. 450.

Hint 1 : Transaction dated on March 1^st Net Purchases amount is to be calculated as, (120 × 15) + (60 × 25) = 1800 + 1500 = 3300
Hint 2 : Transaction dated on March 8^th Net Purchases amount is,
(10 × 30) + (40 × 20) = 300 + 800 = Rs. 1100
Answer:

Question 4.
Enter the following in Purchase Book and Purchase Returns Book: (Mar. 2019 – A.P. & T.S.)

Answer:

Question 5.
Prepare Sales Book (May 17 – T.S.)

Hint 1: Trade discount is 4000 × 5/100. Net sales = 3,800.
Hint 2: Transaction dated on 14th is a Cash transaction.
Answer:

Question 6.
Enter the following transactions in Sales Book and prepare Ledger.

Hint 1: For transaction dated on 18^th calculate trade discount i.e. 8000 × 10/100 = 800, net sales = 7200.
Hint 2: Transaction dated on 20th is a cash transaction.
Answer:

Ledgers:

Question 7.
Prepare Sales Book and Sales Returns Book from the following. (Mar. 2018 – A.P. & T.S.)

Answer:

Question 8.
Record the following transactions in Proper Subsidiary Books.

Answer:

Question 9.
Enter the following transactions in the related Subsidiary Books.

Hint 1: For transaction dated on 10^th Trade discount is 15000 × 10/100 = 1500
Net purchases = 13500
Hint 2: Transaction dated on 18^th is a cash transaction.
Hint 3: For transaction dated on 20^th Trade discount is 3000 × 5/100 = 150
Net sales = 2850
Hint 4: Transaction dated on 26^th is to be entered in journal proper.
Hint 5: For transaction dated on 27^th Trade discount is 8000 × 15/100 = 1200
Net sales = 6,800
Answer:

Question 10.
Prepare Purchases Book.

Answer:

Question 11.
Enter the following transactions in Purchases Book and post them in Ledger.

Answer:

Ledgers:

Question 12.
Record the following in Sales Book and Sales Returns Book.


Answer:

Question 13.
Enter the following transactions in Proper Subsidiary Books: (May ’17 – A.P.)

Hint : Transaction dated Nov. 19^th trade discount 15% of 10000 i.e.,
10000 × 15/100 = 1500 is to be deducted from purchase amount Rs. 10000.
Net purchases 10000 – 1500 = 8500

Question 14.
From the following transactions prepare Sales Book and Sales Returns Book. (IPE. Mar. 14)

Answer:

Question 15.
Enter the. following transactions in proper Subsidiary Books. (IPE. Mar. 14)

Answer:

Student Activity

Collect the invoices, debit notes, credit notes from any business organization.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 5th Lesson Ledger Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 5th Lesson Ledger

Short Answer Questions

Question 1.
Define ledger and explain the advantages of ledger.
Answer:
Ledger is a book which facilitates recording of all types of transactions related to Personal, Real and Nominal. All the debit and credit aspects which are recorded in the journal are transferred to the respective accounts in the ledger.
According to L.C.Cropper, “the book which contains a classified and permanent record of all transactions of a business is called the Ledger”.

Advantages:

The following are the advantages of ledger.

1. Complete information at a glance : All the transactions pertaining to an account are collected at one place in the ledger. By looking at the balance of that account, one can understand the collective effect of all such transactions at a glance.
2. Arithmetical accuracy: With the help of ledger balances, Trial balance is prepared to know the arithmetical accuracy of accounts.
3. Result of business operations: It facilitates the preparation of final accounts for ascertaining the operating result and the financial position of the business concern.
4. Accounting information : The data supplied by various ledger accounts are summarized, analyzed and interpreted for obtaining various accounting information.

Question 2.
What do you mean by posting ? Explain the rules relating to posting.
Answer:
The process of transferring the entries recorded in the journal or subsidiary books to the respective accounts opened in the ledger is called ‘Posting’. In other words’, posting means process of grouping of all the transactions relating to a particular account at one place.

RULES:

Following steps should be taken into account while making posting.

A) Opening of separate accounts: Each transaction affects minimum two accounts for which separate accounts are to be opened in the ledger. All transactions relating to an account, debit as well as credit, are to be posted to know the net position of the account.

B) Posting journal entry to concerned side: If an account is debited in the journal, posting will be made on the debit side of the account in the ledger. Similarly, if an account is credited in the journal, that account would be credited in the ledger.

C) Use of word ‘To” and “By” : While writing the debit side, commence with word “To” and write the name of the account, which is credited in the journal. Write the word “By” on the credit side before writing the name of the account that is debited in the journal.

D) Balance in account: The difference between debit and credit totals of an account is the net position of the account, known as balance of the account.

Very Short Answer Questions

Question 1.
What is ledger ? (Mar. ’15 – T.S.)
Answer:
Ledger is a book which facilitates recording of all types of transactions related to Personal, Real and Nominal accounts separately in related accounts. In other words, the group of accounts recorded in a book is called Ledger’. Ledger is also called ‘Book of Final Entry’.

Question 2.
What is posting ? (Mar. ’17 – T.S.)
Answer:
The process of transferring the entries recorded in the journal or subsidiary books to the respective accounts opened in the ledger is called Posting’. It is also process of grouping of all the transactions relating to a particular account at one place.

Question 3.
What do you mean by balancing of an account ?
Answer:
Balancing means the writing of the difference between the amount columns of the two sides in the ledger (smaller total) side, so that the totals of the two sides become equal.

Question 4.
What is debit balance ?
Answer:
The excess of debit total over the credit total is called the debit balance.

Question 5.
What is credit balance ?
Answer:
The excess of credit total over the debit total is called the credit balance.

Problems

Question 1.
Journalise the following transactions of Mr. Prahlad and post them in the ledger and balance the same.
2013
February 01 Prahlad invested Rs. 5,00,000 cash in the business
February 03 Paid into Bank Rs. 60,000
February 05 Purchased building for Rs. 2,00,000
February 07 Purchased goods for Rs. 50,000
February 10 Sold goods for Rs. 80,000
February 15 Withdrew cash from bank Rs. 12,000
February 25 Paid internet Rs. 2,000
February 28 Paid Salary Rs. 18,000
Answer:
Journal Entries in the books of Mr. Prahlad


Ledger Accounts :

Question 2.
Prepare Pavan account from the following: (May ’17 – T.S.)

Answer:

Question 3.
Prepare Sudha account from the following: (Mar. 2019 – T.S.) (May 17 – A.P.)

Answer:

Question 4.
Prepare Swami’s account from the following: (Mar. 2018 – T.S.)

Answer:

Question 5.
Prepare Machinery account from the following:

Answer:

Question 6.
Prepare the Ledger account of Bhavya from the following particulars:

Answer:
Journal Entries in the books of Bhavya

Question 7.
From the following information prepare Praveen’s Account as on 31-3-2014. (Mar. 2018 – A.P.)

Answer:

Question 8.
Prepare Vamsi’s Account from the following.

Answer:

Question 9.
Prepare Anurudh ‘s Account from the following. (Mar. 2019 – A.P.)

Answer:

Student Activity

Visit any bank or any organisation and find the process of preparation of accounts.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 4th Lesson Journal Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 4th Lesson Journal

Very Short Answer Questions

Question 1.
What is Journal ?
Answer:
The word ‘Journal, is derived from the Latin word Journ’ which means a day. Therefore journal means a day book where in day-to-day business transactions are recorded in chronological order. This is also known as ‘Book of original entry’ or ‘Book of primary entry’.

Question 2.
What is Journalizing ?
Answer:
The process of recording the transaction in the Journal is called “Journalizing”.

Question 3.
What is Journal Entry ?
Answer:
The entry made in the Journal is called “Journal entry”.

Question 4.
What is Narration ?
Answer:
Narration means a brief explanation of the transaction for which the entry is recorded is written within the brackets known as ’narration’.

Problems

Question 1.
Mr. Anil started business with cash Rs. 75,000 on 1^st January 2014. The details of business transactions for the month of January are as follows.

Answer:

Question 2.
Pass journal entries in the books of Mr. Varan.

Answer:

Question 3.
Journalize the following transactions.

Answer:

Question 4.
Journalize the following transactions in the books of Bhagat.

Answer:

Question 5.
Journalize the following transactions.

Answer:

Question 6.
Journalize the following transactions in the books of Atma Ram.

Answer:
Journal Entries in the books of Atma Ram

Question 7.
Journalize the following transactions.
March 01 Commenced business with cash Rs. 13,000 and stock 7,000
March 02 Bought plant Rs. 5,000
March 03 Paid for postage Rs. 500
March 04 Withdrew cash for office use Rs. 1000
March 05 Paid for Sundry Expenses Rs. 500
March 06 Paid into bank Rs. 10,000
March 07 Paid salaries Rs 5,000
Answer:

Question 8.
Write journal entries in the books of Sudha & Co.

Answer:
Journal Entries in the book of Sudha & Co

Student Activity

Visit any organisation and find journal entries from its journal.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 3rd Lesson Double Entry Book Keeping System Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 3rd Lesson Double Entry Book Keeping System

Short Answer Questions

Question 1.
Define double entry system Of accounting and explain its features.
Answer:
According to J.R. Batliboi “Every business transaction has two-fold effect and that it affects two accounts in opposite directions and if a complete record were to be made of each such transaction, it would be necessary to debit one account and credit another account. This recording of the two-fold effect of every transaction has given rise to the term Double Entry System”.

Features:

1. Every business transaction affects two accounts.
2. Each transaction has two aspects i.e. debit and credit.
3. It is based upon accounting assumptions, concepts and principles.
4. It helps in preparing balance which is a test arithemetical accuracy in accounting.
5. Finally it helps in preparation of final accounts with the help of trial balance.

Question 2.
Explain different types of accounts along with their debit, credit rules. (Mar. 2019; May ’17 – A.P. & T.S.) (Mar. 2018, ’17 – A.P.)
Answer:
All the transactions are divided into two types of accounts. Personal accounts and Impersonal accounts. The impersonal accounts are further subdivided into Real accounts and Nominal accounts. There are three types of accounts in all. They are Personal accounts, Real accounts and Nominal accounts.

1) Personal accounts : The accounts which relate to individuals or persons are known as “Personal accounts’. Personal accounts are of two types. They are Natural persons and Artificial persons.
Ex: Ramesh a/c, Sita a/c, Andhra bank a/c, capital a/c, drawing a/c, outstanding salaries a/c.
Rule :
Debit the receiver
Credit the giver

2) Real accounts : Accounts relating to properties and assets which are owned by the business concern are, real accounts which include tangible and intangible assets.
Ex: Cash a/c, bills receivable a/c, goods a/c, furniture a/c, goodwill a/c.
Rule : Debit what comes in
Credit what goes out

3) Nominal accounts : These accounts do not have any existence, form or shape. They relate to incomes and expenses or gains and loss of a business concern.
Ex : Salaries a/c, commission a/c, rent a/c, discount a/c, bad debts a/c.
Rule : Debit all expenses and losses
Credit all incomes and gains

Question 3.
Explain the advantages of double entry system.
Answer:
Advantages : The following are the main advantages of double entry system.

1. Complete record of transactions : Double entry system maintains a complete record of all business transactions, because it records both the aspects of financial transaction.
2. Scientific system : This is the only scientific system of recording business transactions. It helps to attain the objectives of accounting.
3. Ascertainment of profit or loss : It helps in ascertainment of profit or loss for a particular period by preparing the profit and account.
4. Ascertainment of the financial position : The financial position of the concern can be as¬certained at the end of each period by preparing balance sheet.
5. Full details for control : This system permits accounts to be kept in a very detailed form, and thereby provides sufficient information for the purpose of control.
6. Comparative study: The results of one year may be compared with those of previous years and the reasons for change may be ascertained.
7. Helps in decision making: This system provides sufficient information to the management for making decision.

Very Short Answer Questions

Question 1.
Double entry book keeping system (May. ’17 – A.P. ; Mar. ’15 – T.S.)
Answer:
According to J R. Batliboi Every business transaction has a two-fold effect that it affects two accounts in opposite directions and if a complete record were to be made of each such transaction, it would be necessary to debit one account and credit another account. This recording of the two-fold effect of every -transaction has given rise to the term Double Entry System”.

Question 2.
What is an account ? (Mar. 2019 – T.S.)
Answer:
Every transaction has two aspects and each aspect has an account. It is stated that an account is ‘a summary or relevant transactions at one place relating to a particular head’.

The common form of an account has three parts.

1. A Title’ that describes the name of the asset, liability or equity account.
2. A ‘left side’ or the “debit” side
3. A right side’ or the “credit” side

Format of Account

Question 3.
Explain accounting equation.
Answer:
Accounting equation is based on dual aspect concept (Debit and Credit). The accounting equa¬tion shows the relationship between the economic resources of a business and the claims against those resources.
Economic Resources = claims
Another term for economic resources is assets.
The claims consist of liabilities and owners claims or equity.
Assets = Equities or Capital + Liabilities

Question 4.
Impersonal accounts
Answer:
Impersonal accounts are two types i.e. Real accounts and Nominal accounts.

1. Real accounts: Accounts relating to properties and assets which are owned by the business concern are, Real accounts, which include tangible and intangible accounts.
   Ex: Cash a/c, bill receivable a/c, goodwill a/c, goods a/c, furniture a/c.
2. Nominal accounts: These accounts do not have any existence, form or shape. They relate to incomes and expenses or gains, and losses of a business concern.
   Ex: Salaries a/c, bad debts, rent a/c, commission a/c, discount a/c etc.

Student Activity

Visit a nearest business organization and make a list of various personal, real and nominal accounts from the books of accounts.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 2nd Lesson Accounting Principles Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 2nd Lesson Accounting Principles

Essay Type Questions

Question 1.
What are accounting concepts? Explain any four accounting concepts in detail.
Answer:
The term concept means an idea or thought. Basic accounting concepts are the fundamental ideas underlying the theory and practice of financial accounting. The Ifnpdftant accounting concepts are –

1. Business Entity Concept: Business is treated as separate form the proprietor. All the transactions are recorded in the books of business and not in the books of the proprietor. The accounting system gives information only about the business and not its owner. The proprietor is also treated as a creditor for the business.
2. Dual Aspect Concept: Dual aspect concept principle is the basis for Double Entry System of book-keeping. All business transactions recorded in accounts have two aspects : receiving benefit and giving benefit.
   For example, when a business acquires as asset: receiving of benefit. It must pay cash : giving of benefit.
3. Going Concern Concept: According to this concept it is assumed that the business will continue for long time. All transactions are recorded from this point of view. The investors lend money and the creditors supply goods with the expectation that the enterprise would continue for long period of time. Hence financial statements are prepared on a going concern basis and not on liquidation basis.
4. Money Measurement Concept: This concept suggests that accountancy should record only the transactions which can be measured in terms of money. The transactions which cannot be measured in terms of money fall beyond the scope of accountancy.
   For example the events of machinery breakdown is not recorded as it does not have monetary value. However, the expenditure incurred for the repair of the machinery can be measured in monetary value.

Question 2.
What are accounting conventions ? Explain them briefly.
Answer:
Conventions mean customs or traditions. These conventions provide useful guidance in preparing accounts or financial statements. The important accounting conventions are –

1. Convention of Disclosure : Accounting statements should disclose fully and completely and significant information, based on which, decisions can be taken by various interested parties. It involves proper classification and explanations of accounting information which are published in the financial statements.
2. Convention of Materiality : According to this convention only those events should be recorded which have a significant bearing and insignificant things should be ignored. The avoidance of insignificant things will not materially off the records of the business.
3. Convention of Consistency: The accounting practices should be remained same from one year to another year. This is useful to the entrepreneur to compare the financial statements of one year with that of the other years. For example, an organization should not change its method of depreciation every year.
4. Convention of Conservation : According to this convention the accountant has to record the actual financial position. We should be careful in calculating profits. Profits should never be anticipated or exaggerated. But losses should be anticipated and provided for. Example : While taking the value of the closing stock the market cost or actual cost which ever is less is to be taken into the books of accounts.

Short Answer Questions

Question 1.
Explain business entity concept of accounting. (Mar. 2018 – A.P. & T.S.; Mar. ’17 – A.P.; May 17 – T.S.)
Answer:
Business is treated as separate from the proprietor. All the transactions are recorded in the books of business and not in the books of the proprietor. The accounting system gives information only about the business and not its owner. The proprietor is also treated as a creditor for the business.

Question 2.
Explain money measurement concept. (Mar. 2019 – T.S.)
Answer:
This concept suggests that accountancy should record only the transactions which can be measured in terms of money. The transactions which cannot be measured in terms of money fall beyond the scope of accountancy.
For example the event of machinery breakdown is not recorded as it does not have monetary value. However, the expenditure incurred for the repair of the machinery can be measured in monetary value.

Question 3.
Explain convention of conservatism. (Mar. ’17 – T.S.)
Answer:
According to this convention the accountant has to record the actual financial position. We should be careful in calculating profits. Profits should never be anticipated or exaggerated. But losses should be anticipated and provided for.
Example : While taking the value of the closing stock the market cost or actual cost whichever is less is to be taken into the books of accounts.

1. Convention of Disclosure : Accounting statements should disclose fully and completely and significant information, based on which, decisions can be taken by various interested parties. It involves proper classification and explanations of accounting information which are published in the financial statements.
2. Convention of Materiality : According to this convention only those events should be recorded which have a significant bearing and insignificant things should be ignored. The avoidance of insignificant things will not materially off the records of the business.
3. Convention of Consistency: The accounting practices should be remained same from one year to another year. This is useful to the entrepreneur to compare the financial statements of one year with that of the other years. For example, an organization should not change its method of depreciation every year.
4. Convention of Conservation : According to this convention the accountant has to record the actual financial position. We should be careful in calculating profits. Profits should never be anticipated or exaggerated. But losses should be anticipated and provided for.
   Example : While taking the value of the closing stock the market cost or actual cost which ever is less is to be taken into the books of accounts.

Short Answer Questions

Question 1.
Explain business entity concept of accounting. (Mar. 2018 – A.P. & T.S.; Mar. ’17 – A.P.; May 17 – T.S.)
Answer:
Business is treated as separate from the proprietor. All the transactions are recorded in the books of business and not in the books of the proprietor. The accounting system gives information only about the business and not its owner. The proprietor is also treated as a creditor for the business.

Question 2.
Explain money measurement concept. (Mar. 2019 – T.S.)
Answer:
This concept suggests that accountancy should record only the transactions which can be measured in terms of money. The transactions which cannot be measured in terms of money fall beyond the scope of accountancy.
For example the event of machinery breakdown is not recorded as it does not have monetary value. However, the expenditure incurred for the repair of the machinery can be measured in monetary value.

Question 3.
Explain convention of conservatism. (Mar. ’17 – T.S.)
Answer:
According to this convention the accountant has to record the actual financial position. We should be careful in calculating profits. Profits should never be anticipated or exaggerated. But losses should be anticipated and provided for.
Example : While taking the value of the closing stock the market cost or actual cost whichever is less is to be taken into the books of accounts.

Question 4.
Explain convention of consistency.
Answer:
The accounting practices should be remained same from one year to another year. This is useful to the entrepreneur to compare the financial statements of one year with that of other years. For example, an organization should not change its method of depreciation every year.

Question 5.
Write a brief note on accounting standards.
Answer:
Accounting standard is a principle that guides and standardizes accounting practices. The Generally Accepted Accounting Principles (GAAP) are a group of accounting standards that are widely accepted as appropriate to the field of accounting. Accounting standards are necessary so that financial statements are meaningful across a wide variety of businesses; otherwise, the accounting rules of different companies would make comparative analysis almost impossible.

Student Activity

Visit a nearest business organization and observe the book keeping and accounting systems adopted by it.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 1st Lesson Book Keeping and Accounting Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 1st Lesson Book Keeping and Accounting

Short Answer Questions

Question 1.
Explain the advantages and limitations of Accounting.
Answer:
Advantages of Accounting: The following are the main advantages of accounting.

1. Permanent and Reliable Record : Accounting provides permanent record for all business transactions and provides reliable information to different interested parties.
2. Net Result of Business Operations: Accounting provides the final result (Profit or Loss) of business for a given period of time.
3. Ascertainment of Financial Position: It is not enough to know only the profit or loss, but the proprietor requires a full picture of his financial position to plan for the next year’s business.
4. Facility of Comparative Study: Accounting provides the facility of comparative study of the various aspects of the business such as profits, sales, expenses, etc.
5. Control over Assets: In the course of business, the proprietor acquires various assets like building, machinery, furniture, etc. which are well protected by generating records.

Limitations of Accounting: The following are the limitations of Accounting.

1. Records only monetary transactions : Accounting considers monetary transactions only, non-monetary transactions like quality, organization culture, units of production sales, etc. are ignored in accounting.
2. Historical in nature : Accounting considers only historical transactions, i.e transactions which have occurred in the past only recorded in accounting books.
3. Price level changes are not considered: Accounting does not consider price level changes which may occur from time to time, thus, it does not reflect the current position.
4. Does not provide realistic information: While preparing the books of account, subjectivity of the accountant may influence the final results of the business enterprise. This may not provide realistic information which in turn affects the overall results of the business concern.

Question 2.
Distinguish between Book-keeping and Accounting.
Answer:

Question 3.
Explain the steps involved in Accounting process.
Answer:
Accounting process:

1. Identifying: Identifying the business transactions from the source documents.
2. Recording: The next function of accounting is to keep a systematic record of all business transactions, which are identified in an orderly manner, soon after their occurrence in the journal or subsidiary books.
3. Classifying : This is concerned with the classification of the recorded business transactions so as to group the transactions of similar type at one place.
4. Summarizing : It is the process of finding the totals of balances of all accounts so as to prepare trial balance.
5. Reporting : The classified information available from the trial balance is used to prepare – profit and loss account and balance sheet in a manner useful to the users of accounting
   information.
6. Analysing: It establishes the relationship between the items of the profit and loss account and the balance sheet.
7. Interpreting : It is concerned with explaining the meaning and significance of the relationship so established by the analysis. Interpretation should be useful to the users.

Very Short Answer Questions

Question 1.
What is Book-keeping ? (Mar. 2018 – A.P. ; Mar. ’17 – T.S. ; May ’17 – A.P. & T.S.)
Answer:
Book-keeping is the art of recording business transactions in a systematic manner. It covers four activities i.e. identifying the transactions, measuring the identified transactions, recording in a chronological order and classifying the recorded transactions.

Question 2.
Define Accounting. (Mar. 2019, ’17 – A.P.)
Answer:
The American Institute of Certified Public Accountants has defined the Accounting as “the art of recording, classifying and summarizing in a significant manner in terms of money transactions and events which in part, at least of a financial character and interpreting the results thereof”.

Question 3.
What is an Accounting cycle ? (Mar. 2018 – T.S. ; Mar. ’15 – A.P. & T.S.)
Answer:
An accounting cycle is a complete sequence beginning with the recording of transaction and ending with preparation of financial statements. It involves journalizing, ledger posting, balancing, trial balance, preparation of trading, profit and loss account and balance sheet.

Student Activity

1. Goto nearest business organizations and observe the book keeping and accounting systems adopted by them.
2. Observe the accounting procedures adopted by large size or medium size organizations located nearby them.

Andhra Pradesh BIEAP AP Inter 1st Year Economics Study Material 10th Lesson Economic Statistics Textbook Questions and Answers.

AP Inter 1st Year Economics Study Material 10th Lesson Economic Statistics

Essay Questions

Question 1.
What is the relationship between Economics and Statistics? [March 18, 16]
Answer:
There is a close relationship between statistics and economics. In the words of Tugwell “The science of economics is becoming statistical in its method”. All economic laws are pronounced on the basis of statistical facts and figures. The theory of the population of Malthus, the law of family expenditure of Engels, etc., were propounded after statistical tests. Statistics help economics to become an exact science.

In the study of theoretical economics, the application and use of statistical methods are of great importance. Most of the doctrines of economics are based on the study of a large number of units and their analysis. This is done through statistical methods. The Law of demand was formulated because of statistical methods.

The importance of statistics is felt in all branches of knowledge- in accountancy and auditing in banking, in insurance in research, and many fields. Without statistics no branch of knowledge is complete.

Question 2.
Explain the Geometric diagrams. What are Bar diagrams and Pie diagrams ?
Answer:
Diagrams are more suitable to illustrate the data which is discrete, while continuous data is better represented by graphs.

BAR DIAGRAM and PIE DIAGRAM come in the category of geometric diagrams.
The bar diagram are 3 types. Simple, Multiple and Component bar diagrams.

Simple Bar Diagrams : Bar diagrams are very commonly used and is better for representation of quantitative data. Bars are simply
corresponding numerical values.
Ex: Maximum temperature recorded in Hyderabad in the 1st six months in a year in a bar diagram.

Multiple Bar Diagram : Multiple bar diagrams are used for comparing two or more sets of data.
Ex : The multiple bar diagram depicts the number of students in a college studying two foreign languages, French and German for the period 1960 – 2010 is given below.

Component Bar Diagram : Component bar diagram charts also called sub-divided bar diagram, are very useful in comparing the sizes of different component parts.
Ex : Enrolment at primary level in a district of Bihar. Boys, girls and total children in the given age group are denoted in the component bar diagram is given below.

Pie – Diagram : This diagram enables us to show the partitioning of total into component parts. It is also called a pie chart.
Ex : Draw the pie digram for following data.

Total area = 16 + 24 + 10 + 8 + 5 = 63
Area changed into Degrees =
Paddy =\(\frac{16 \times 360}{63}\) = 91°
Wheat = \(\frac{24 \times 360}{63}\) = 137°
Maize = \(\frac{10 \times 360}{63}\) = 57°
Jower = \(\frac{8 \times 360}{63}\) = 46°
Millets = \(\frac{5 \times 360}{63}\) = 29°
Total = 360°

Question 3.
Calculate the AM in direct method of the following data.

Answer:

\(\overline{\mathrm{X}}=\frac{\Sigma \mathrm{fx}}{\mathrm{N}}\)
Where N is total frequency
Σfx = 7160; N = 200
\(\overline{\mathrm{X}}\) = \(\frac{7160}{200}\) = 35.8
∴ \(\overline{\mathrm{X}}\) = 35.8

Question 4.
Calculate the A.M. in Direct method.

Answer:

\(\overline{\mathrm{X}}=\frac{\Sigma \mathrm{fx}}{\mathrm{N}}\)
\(\overline{\mathrm{X}}\) = \(\frac{3300}{100}\) = 33
∴ \(\overline{\mathrm{X}}\) = 33

Question 5.
Calculate the A.M. in Deviation method or Shortcut method.

Answer:

Here class interval (C) = 10
Assumed mean = 55
A.M. (or) \(\overline{\mathrm{X}}\) = A + \(\frac{1}{N}\) Σfiμi × C
= 55 + \(\frac{1}{90}\) (-44) × 10
= 55 + (-4.8)
∴ \(\overline{\mathrm{X}}\) = 50.2

Question 6.

Answer:
Calculation of Mean :

\(\overline{\mathrm{X}}\) = \(\frac{\Sigma \text { fixi }}{\mathrm{N}}=\frac{4530}{100}\) = 45.3
∴ \(\overline{\mathrm{X}}\) = 45.3
Calculation of Median :

Here N = 100; \(\frac{\mathrm{N}}{2}\) = \(\frac{100}{2}\) = 50
50^th value included in the cumulative frequency 40-49 class intervals. But here class intervals are unequal. So we can adjust that lower limit is \(\frac{39+40}{2}=\frac{79}{2}\) = 39.5.
F = 31; f = 38, C = 10
Median = L + \(\left[\frac{\frac{N}{2}-F}{f}\right]\) × C
Median = 39.5 + \(\left[\frac{50-31}{38}\right]\) × 10
= 39.5 + \(\left[\frac{19}{38}\right]\) × 10
= 39.5 + 0.5 × 10
= 39.5 + 5
= 44.5
∴ Median = 44.5
Calculation of Mode:

Here the maximum frequency occurs in 40 – 49 class.
f = 38; f₁ = 16; f₂ = 15; C = 10
L = \(\frac{39+40}{2}=\frac{79}{2}\) = 39.5 (Lower boundary of the model class)
Mode = L + \(\left[\frac{f-f_1}{2 f-f_1+f_2}\right]\) × C
= 39.5 + \(\left[\frac{38-16}{2(38)-(16+15)}\right]\) × 10
= 39.5 + \(\left[\frac{22}{76-31}\right]\) × 10
= 39.5 + 0.48 × 10
= 39.5 + 4.5
Mode = 44.38

Short Answer Questions

Solve the problems for the following datas.

Question 1.
Calculate the Median for the following data.

Answer:

Here N = 100 ; \(\frac{\mathrm{N}}{2}=\frac{50}{2}\) = 25
25^th value included in the cumulative frequency 21-30 class intervals.
Lower limit = \(\frac{20+21}{2}=\frac{41}{2}\) = 20.5
F = 15; f = 16; C = 10 N
Median = L + \(\left[\frac{\frac{N}{2}-F}{f}\right]\) × C
Median = 20.5 + \(\left(\frac{25-15}{16}\right)\) × 10
= 20.5 + \(\left(\frac{10}{16}\right)\) × 10
= 20.5 + 0.62 × 10
= 20.5 + 6.25 = 26.75
Median = 26.75

Question 2.
Calculate the Median for the following data.

Answer:

Here N = 125 ; \(\frac{\mathrm{N}}{2}=\frac{125}{2}\) = 62.5
65^th value included in the cumulative frequency 7.6
Therefore 30 – 40 in the median class
65^th value appears in 30 – 40 class.
Lower limit = 30; F = 40; f = 36; C = 10 N
Median = L + \(\left[\frac{\frac{N}{2}-F}{f}\right]\) × C
Median = 30 + \(\left(\frac{62.5-40}{36}\right)\) × 10
= 30 + \(\left(\frac{22.5}{36}\right)\) × 10
= 30 + 0.625 × 10
= 30 + 6.25
= 36.25

Question 3.
Calculate the Mode for the following data.

Answer:

Here the maximum frequency occurs in 59 – 60 class.
L = \(\frac{59+60}{2}=\frac{119}{2}\) = 59.5
f = 31, f₁ = 20; f₂ = 17; C = 10
Mode = L + \(\left[\frac{f-f_1}{2(f)-\left(f_1+f_2\right)}\right]\) × C
= 59.5 + \(\left[\frac{31-20}{2(31)-20+17}\right]\) × 10
= 59.5 + \(\left(\frac{11}{62-37}\right)\) × 10
= 59.5 + \(\left(\frac{11}{25}\right)\) × 10
= 59.5 + 0.44 × 10
= 59.5 + 4.4
= 63.9

Additional Questions

Question 4.
Marks of 10 students 43, 45, 68, 55, 33, 57, 40, 48, 77, 60. Calculate A.M by direct method.
Answer:
\(\overline{\mathrm{X}}=\frac{\Sigma \mathrm{x}}{\mathrm{N}}\)
Where Σx = 526 ; N = 10
∴ \(\overline{\mathrm{X}}\) = 52.6

Question 5.
Calculate A.M from the following data by direct method.

Answer:

\(\overline{\mathrm{X}}=\frac{\Sigma \text { fixi }}{\mathrm{N}}\) (or) \(\frac{\Sigma \mathrm{fx}}{\mathrm{n}}\)
where = Σfixi = 1870; N = 100
\(\overline{\mathrm{X}}=\frac{1870}{100}\) = 18.7

Question 6.
Find Median from the following data.
10, 15, 18, 21, 25, 30, 35
Answer:
Arrange asscending order
10, 15, 48, 21, 25, 30, 35
Median = \(\left(\frac{N+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{7+1}{2}\right)^{\text {th }}\) item = \(\left(\frac{8}{2}\right)^{\text {th }}\) item = 4^th item
4^th item = 21
∴ Median = 21

Question 7.
Find median from the following data.

Answer:

Where \(\) = 32.5 it lies in the 20 – 30 class interval.
So lower limit = 20; F = 15; f = 18; N = 65; C = 10
Median = L + \(\left[\frac{\frac{N}{2}-F}{f}\right]\) × C
= 20 + \(\left[\frac{32.5-15}{18}\right]\) × 10
= 20 + 9.722 = 29.72
∴ Median = 29.72

Question 8.
Find the mode when median is 125.6 and mean is 128
Answer:
Mode = 3 Median – 2 Mean
= (3 × 125.6) – (2 × 128)
= 376.8 – 256
= 120.8

Very Short Answer Questions

Question 1.
What is meant by Arithmetic Mean ? [March 16]
Answer:
Arithmetic Mean of a statistical data is defined as the quotient of the sum of all, the items or entries divided by the number of items.

Question 2.
Find the A.M. for the data 30, 20, 32, 16, 27. [March 18, 17, 16]
Answer:
\(\overline{\mathrm{X}}=\frac{\Sigma \mathrm{x}}{\mathrm{N}}=\frac{30+20+32+16+27}{5}=\frac{125}{5}\) = 25
∴ \(\overline{\mathrm{X}}\) = 25

Question 3.
Find the Median for the data 10, 20, 15, 29, 35, 42.
Answer:
The values arranged in ascending order
(i.e,) 10, 15, 20, 29, 35, 42
Median = \(\left(\frac{n+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{6+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{7}{2}\right)^{\text {th }}\) item = 3.5^th item
= \(\frac{20+29}{2}\) = 24.5

Question 4.
Find the value of Median for the data 19, 1, 3, 17, 6, 12, 11, 8.
Answer:
The values arranged in ascending order
i.e., 1, 3, 6, 8, 11, 12, 17, 19
Median = \(\left(\frac{n+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{8+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{9}{2}\right)^{\text {th }}\) item = 4.5^th value
= \(\frac{8+11}{2}=\frac{19}{2}\) = 9.5
∴ Median = 9.5

Question 5.
Find the Mode for the data 17, 6, 19, 14, 8, 6, 12, 15, 6, 10.
Answer:
Mode is 6 is occuring many items i.e., 3

Question 6.
Find the Mode for the data 12, 11, 15, 11, 12 ,12, 15, 12, 9, 12. [March 18]
Answer:
Mode is 12 is occuring many items i.e 5

Question 7.
What is a Pie diagram ? [March 18, 17, 16]
Answer:
It is also called a pie chart. The circle is divided into many parts as there are compo-nents by drawing straight lines from the centre to the circumference.

Question 8.
What is a Bar diagram ?
Answer:
Bars are simply vertical lines, where the lengths of bars are proportional to their corresponding numerical values.

Question 9.
Find the median of the observation – 3,- 5, -8, 0, 2, -10,
Answer:
Arrange data in ascending order – 10, – 8, – 5, – 3, 0, 2
Median = \(\left(\frac{n+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{6+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{7}{2}\right)^{\text {th }}\) item = 3.5
= \(\frac{-5+(-3)}{2}=\frac{-8}{2}\) = -4
∴ Median = – 4

Additional Questions

Question 10.
What is mode if data is Bio-modal?
Answer:
Mode = 3 Median – 2 Mean

Question 11.
What is Median ?
Answer:
The median is a measure of central tendency, which appears in the centre of an ordered data. It is aften described as the “middle most” value. It is called a position average.

Question 12.
What is Mode?
Answer:
Mode is most frequently occuring value in data.

Question 13.
What is Simple Bar Diagram ?
Answer:
Bar diagram comprising a group of equi-spaced and equi-width rectangular bars for each class of data.

Question 14.
What is Multiple Bar Diagrams ?
Answer:
Multiple bar diagrams are used for comparing two or more set of data.

Question 15.
What is Component Bar Diagram or Sub-Divided Bar Diagram ?
Answer:
These diagrams are used to represent various parts of the total.

Andhra Pradesh BIEAP AP Inter 1st Year Economics Study Material 9th Lesson Money, Banking and Inflation Textbook Questions and Answers.

AP Inter 1st Year Economics Study Material 9th Lesson Money, Banking and Inflation

Essay Questions

Question 1.
Examine the difficulties of the barter system.
Answer:
Barter system means exchange of goods. This system was followed in old days. But the population and its requirements are increasing, the system became very complicated. The difficulties of barter system are :

1) Lack of coincidence of wants : Under the barter system, the buyer must be willing to accept the commodity which the seller is willing to offer in exchange. The wants of both the buyer and the seller just coincide. This is called double coincidence of wants. Suppose the seller has a good and he is willing a exchange it for rice. Then the buyer must have rice and he must be willing to exchange rice for goat. If there is no such coincidence direct exchange between the buyer and the seller is not possible.

2) Lack of store value : Some commodities are perishables. They perish within a short time. It is not possible to the value of such commodities in their original form under the barter system. They should be exchanged before they actually perish.

3) Lack of divisibility of commodities : Depending upon its quantity and value, it may become necessary to divide a commodity into small units and exchange one or more units for other commodity. But all commodities are not divisible.

4) Lack of common measure of value : Under the barter system, there was no common measure value. To make exchange possible, it was necessary to determine the value of every commodity interms every other commodity.

5) Difficulty is making deferred,payments : Under barter system furture payments for present transaction, was not possible, because future exchange involved some difficulties. For example suppose it is agreed to sell specific quantity of rice in exchange for a goat on a future date keeping in view the recent value of the goat. But the value of goat may decrease or increase by that date.

Question 2.
Explain the functions of money.
Answer:
Money plays a vital role in modem economy. A modem economy is rightly known as monetary economy because of the crucial position that money occupies.

1. According to ‘Robertson’ – “Anything which is widely accepted in payment for goods or it discharges of other kinds of business obligations”
2. According to ‘Seligman’ – “One that possesses general acceptability”.
3. According to Waker’ – “Money is what money does”.

Functions of money :
1. Primary functions :
a) Medium of exchange : Money serves as a medium of exchange. It removes the inconveniences of the barter system in which exchange of goods was possible if only there was double coincidence of wants. But money facilitates exchange of commodities without double coincidence watns. Any commodity can be exchange for money. People can exchange goods and services through the medium of money.

b) Measure of value : Money serves as a measure of the value of goods and services. As common measure of value it has removed the difficulty of the barter system and has made transactions simple and easy. The value of each commodity is expressed in the units of money. We call if the price.

2. Secondary functions : .
a) Store of value : The value of commodities and services can be stored in the form of more. Certain commodities are perishable. If they are exchanged for money before they perish, their value be preserved in .the form of money.

b) Standard of deferred payments : Money serves as a standard of deferred payments. The modern economies most of the business transactions take place on the basis of credit. An individual consumer or a business man may now purchase a commodity and pay for it in future as this function makes it possible to express future payments in terms of money.

c) Transfer of money : Money can be transferred from one person to another at any time at any place.

3. Contingent functions :
a) Measurement and distribution of National income : National income of a country be measured in money by aggregating the value of all commodities. This is not possible in a barter system similarly national income can be distributed to different factors of production making payment them in money.

b) Money equalises marginal utilises / productivities : The consumers can equalize marginal utilities of different commodities purchased by them with the help of money. We know how consumers equalize the marginal utility of the taste rupee they speed on each commodity. Similarly firms can also equalize the marginal productivities of different factors of production and maximize profits.

c) Basis of credit : Credit is created by banks from out of the primary deposits of money supply of credit, in an economy is dependent on the supply of nominal money

d) Liquidity : Money is the most important liquid asset. Interms of liquidity it is superior other assets. Money is centpercent liquid.

Question 3.
Write a note on the supply of money.
Answer:
The term supply of money is related to stock concept. There may be increase or decrease in the money stock over a period of time. Money supply determines the various factors i.e., rate of interest, credit availability, investment, national income and employment. This affects the general price level.
Components of money supply :
1) Currency issue by the Central Bank : Central Bank is the apex bank and enjoys the power of issue of currency. Currency consists of paper notes and coins. In India, RBI is the Central Bank and issue notes in the denominations of 1000, 500, 100, 50, 20, 10, 5 and 2 rupees. The one rupee note and coins are issued by the finance department of the government of India.

2) Demand deposits created by Commercial banks : Bank deposits are also considered as money supply. Commercial banks collect deposits from the public and creates credit out those deposits. Credit in this form is called derived or secondary deposits. This constitute nearly 80% of total money supply.
Monetary aggregates : In India money supply measured in terms of the following monetary aggregates.
M₁ = Currency + demand deposits + other deposits
M₂ = M₁ + time liability portion of saving deposits with banks + certficates of deposits issued by banks + terms deposits maturing within one year.
M₃ = M₂ + term deposits over one year maturity + call term borrowings of banks,
M₁, M₂ and M₃ as monetary measures.

Question 4.
Describe the functions of the commercial banks.
Answer:
Functions of commercial banks :
Primary functions :
a) Accepting deposits : The commercial bank just like any other money lender is doing money lending business bank receives public money in the form of deposits. The deposits mainly are of the following steps.

1) Current deposits : These deposits have two characteristics. One, there are no restrictions with regard to the amount of withdrawl and number of withdrawls. Banks normally do not pay any interest on current account deposits.

2) Savings deposits : The sole aim of banks in receiving these deposits is to promote the habit of thrift among low income groups. They have the following characteristics :

1. two or three withdrawls per week are permited
2. banks pay 4 to 5% interest (nominal) per annum or savings deposits.

3) Recurring deposits: People will deposit their money in these deposits as monthly installments for a fixed period of time. The bank after expiry of the said period will return the total amount with interest thereon. The rate of interest will be higher than the savings deposits.

4) Fixed deposits : Deposits received on fixed accounts are called fixed or time deposits. They are left with the bank for a fixed period. The following are the characteristics.

1. The amount cannot be withdrawn before the expiry of the fixed period.
2. Banks pay high rate of interest than any other deposits.

b) Advancing loans : Commercial banks release funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credits, overdrafts and by discounting bills of exchange.
1) Cash credit: In this case, the borrower is given a loan. The amount of the loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of this account as per his needs.

2) Overdraft: It means allowing the depositor to overdraw his account upto a previous agreed limit. Banks allow overdrafts only to those persons who have their accounts in the bank. The overdraft is granted only for short period for customers.

3) Loans : Usually a loan is granted against the securities of assets or the personal security of the borrower bank loans and advances carry a high rate of interest. In addition, banks grant call loans for every short period, term loans for longer period and also grant consumer credit for buying durable goods.

4) Discounting bills of exchange : The banks facilitate trade and commerce by dis-counting the bills of exchange. This is the most popular form of bank lending.

Secondary functions :
a) Agency services : Banks act as agents, correspondents and representatives of their
customer. As an agent a commercial bank collect and pay cheques, drafts, bills and pay insurance premium subscriptions, rent, income tax etc, as per the instruction of their customers, Banks also act as trusties executors and attorneys. .

b) General utility services : Banks provide some general utility services like :

1. Locker facility the safe custody and valuables.
2. Issue traveller’s cheques and drafts
3. Transfer of funds.
4. Acting a referee to the financial standing of customers
5. Issue letters of credit
6. Finance foreign trade by discounts foreign bills of exchange.

Question 5.
Explain the functions of the central bank.
Answer:
Central bank is the apex bank of the banking system of a country. It controls, regulates, monitors all the activities of the banks in the banking system. The following are the functions performed by the central bank.
a) Note issue : In any country central bank alone is authorised to issue the currency notes. It has monopoly power of note issue. It not only issue the currency. It also controls the supply of money in the economy.

b) Banker to government: Central bank renders certain services to the government it acts as a banker, agent and financial advisor to the government. It maintains the accounts of the government funds, receives money and pay money on behalf of the government. It performs all foreign exchange transactions on behalf of the government and maintains the public debt and advises the government on all financial matters.

c) Banker’s bank : Central bank acts as banker’s bank it controls all the transactions of all banks and every bank must maintain a certain minimum cash reserve with central bank.

d) Lender of last resort: It serves as a lender of last resort to all the financial institutions viz. Commercial banks discount houses and other credit institutions. All these institutions approach central bank if they face the problem of liquidation. It also help the banks and other financial institutions by providing loans and advances against certain approved securities and rediscounts the bills on certain terms and conditions.

e) Controller of credit: This is the most important function of central bank. It controls the volume of credit in the economy through various monetary and fiscal policies. It takes some steps to increase or reduce the volume of credit as per the inflationary conditions of the economy. It controls the inflation by reducing the volume of credit and recession by expanding the supply in the economy.

f) Custodian of foreign exchange reserve : Central bank regulates all foreign exchange transactions in a country. It is responsible for exchange rate so it acts against the fluctuations in exchange rates and maintain standard exchange rate.

Question 6.
Describe the role played by the Reserve Bank of India.
Answer:
The Central Bank of our country is Reserve Bank of India. It was established in April 1935, with a share capital of ₹ 5 crores. It was originally owned by private shareholders but was nationalised by the government of India in 1949. It performs all its activities under the Reserve Bank of India Act 1934.

The main aim of. RBI is to achieve the monetary stability and to control the credit system of an economy. It performs the following functions.
1) Note issue : Reserve Bank of India enjoys the monopoly of note issue in the country. It maintains a minimum ₹ 200 crores of gold and foreign exchange reserves of which gold should be ₹ 115 crores. It issue notes in the denominations of ₹ 1,000, ₹ 500, ₹ 100, ₹ 50, ₹ 20, ₹ 10, ₹ 5 and ₹ 2. One rupee note and coins are issued by the finance department of the Government of India. Reserve Bank of India prints all the currency notes in the security press of the Government of India.

2) Banker to Government : Reserve Bank of India acts as the banker, agent and adviser to the Government of India. It receives money and makes payments on behalf of the government and gives temporary advances to the government. It advises the government in all financial matters.

3) Banker’s Bank : Reserve Bank serves as a banker not only to the government but also to the banks. It provides financial assistance to the commercial banks by giving loans and rediscounting the bills of exchange. It helps the banks by acting as a clearing house for settlement of inter bank transactions and controls the supply of money in the economy through cash reserve ratio.

4) Lender of last resort : It acts as lender of last resort by granting loans and advances to the commercial banks against some securities viz., treasury bonds, treasury bills and other approved securities. It also provides financial help to banks by rediscounting the eligible bills of exchange.

5) Custodian of foreign exchange reserves : Reserve Bank of India as a member of the International Monetary fund. It regulates all foreign exchange transactions in the country. It controls and regulates the purchase and sale of foreign exchange through restrictions on exports and imports to maintain the official rate of exchange.

6) Credit controller : Reserve Bank of India controls the volume of credit in the country. It controls the credit through different methods by appropriate monetary or fiscal policies. It announces credit policy for every six months based on the credit needs of the country. Through this it controls the inflation and deflation.

7) Promotional and development functions: Reserve Bank of India inorder to achieve economic development performs certain promotional and developmental functions.
They are :

1. Promoting various financial institutions to provide industrial finance.
2. It takes steps for establishment of banks throughout the country and expansion of their branches.
3. Encourage the financial institution to provide financial help to agriculture and rural credit.

Question 7.
Define inflation. Explain the causes of inflation.
Answer:
Inflation means a rise in the general price level over a long period of time. It occur due to the following reasons.

1. Increase in the aggregate demand of commodities.
2. Inadequate supply of commodites.
3. Increase in the cost of production.

I. The factors that the effect the increase in demand.

1. Heavy pressure of population.
2. Increase in economy’s money supply.
3. More public expenditure towards various welfare schemes.
4. Reduce in rates of direct taxes.
5. Increase in the income levels of individuals.
6. Deficit financing by government.
7. Conspicious spending by the people having black money.
8. Production in direct tax rates.

II. Factors that increase the cost of production :

1. Increase in costs of various factors of production.
2. Increase in tax rates.
3. Increase in the prices of technology.
4. Devaluation of domestic currency.
5. Inefficient management and no control on expenditure.
6. Lack of optimum allocation of resources.
7. Devaluation of domestic currency.

III. Factors that cause inadequate supply :

1. Irregular monsoons, floods, interior seeds in agriculture.
2. Non-availability of scarcity of inputs and raw materials.
3. Under-utilisation of productive capacity.
4. Shortage of investment due to non-availability of institutional credit.
5. Artificial scarcity due to black-marketing.
6. Exports at the cost of domestic supply.
7. Long gestation period of certain industries.

Question 8.
Discuss the impact of inflation.
Answer:
Inflation refers to a persistent upward movement in the general price level rather than once for all rise in it.
The effects of inflation can be divided into two sub-heads.

1. Effects of production
2. Effects of distribution

It will affect all economic activities in the economy.
A) On production :
a) Mild inflation stimulates production and it increases the profit margin of entrepreneurs.
b) High inflation rate hinders production. ;
c) Inflation discourages savings. This affects the capital formation which in turn affects production.

B) On distribution :
Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of rich and affluent classes of society. The concrete effects of inflation on various groups of society are as follows.

Effects on distribution : Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of inflation on various groups of society are as follows.
1) Debtors and creditors : During inflation debtors are generally the gainers while the creditors are the losses. The reason is that the debtors had borrowed when the purchasing power of money was high and now return the loans when the purchasing power of money is low due to rising prices.

2) On fixed income groups : Those who get fixed income lose from inflation. Salaried persons people living oh past savings, pensioners, interest earners are the worst suffers during inflation because their income remain fixed.

3) On working class: During inflation working class also suffers worst because wages do not rise as much as the prices of commodities. In addition there is a time lag between the rise in prices and rise in wages. If the trade unions are strong they may get equal increase in money incomes compared to rise in prices.

4) Entrepreneurs : They experience windfall gains as the prices at their stocks suddenly go up. Inflation thus re-distributes income and wealth in such away as to harm the interest of creditors, labours, fixed income groups and favours the businessmen, traders and debtors. By meaning the rich richer and poor poorer, inflation is socially undesirable.

C) Social impact: Economic inequality leads to unequal opportunities in matters of health, education and employment. This results in social injustice.

D) Political effect: Inflation widens social and economic disparities. It leads to for political movements and if government is not responsive. This movement may threaten the stability of governments. .

Short Answer Questions

Question 1.
State any three definitions of money, which definition do you consider better and why ?
Answer:
Money plays a vital role in modem economy. A modem economy is rightly known as monetary economy because at the crucial position that money occupies. In the olden days goods were exchanged for goods. Such system is called barter system. However when economics grew there was a tremendous increase in the wants of the people as well as in the number of transactions then barter system became more difficult, in order to eliminate the difficulties in the barter system money came into existence.

Definition of money: Several economists have defined money in several ways. Some of the prominent definitions are given below.
According to Waker’ – “Money is what money does”.
According to ‘Robertson’ – Money as” anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations”.
According to ‘Seligman’ – Money as “one that possesses general acceptability”.
According to “Crowther” – Money as “anything that is generally acceptable as a medium of exchange and which at the same time acts as a measure and store of value”.

It may be found from the above definitions that the main focus is on general acceptability. Anything that used as money should have the general acceptance of the public as medium of exchange because it is for direct exchange of commodities money is fundamentally required. It acts as a common measure of value. However its suitability as a store of value is equally important. Therefore we can consider Crowther’s definition as relatively more comprehensive. It is elaborate and covers the most important functions of money.

Question 2.
Distinguish between different types of money.
Answer:
Money can be grouped into various items based on the value, material used and the legal status. They are :
1) Commodity money and representative money: Money is classified into commodity money and representative money on the basis of the intrinsic value it possess. If the intrinsic value is equal to the face value of coin is called commodity money and if the value is less than the face value is called representative money.

2) Legal tender money and optional money : On the basis of legality money is divided into legal tender money and optional money. If money is accepted as per law by every one is called legal tender money. If the acceptance is optional and not according to law is called optional money.
Ex: Cheques.

3) Metallic money and paper money : Based on the material used money can be divided into metallic and paper money. If money is made up of metals such as silver, nickle, steel etc., all coins are metallic money and if money is printed on papers is called paper money. ^

4) Standard money and token money: If the face value and intrinsic value are same. The money is called standard money and if the face Value is higher than the intrinsic value is called token money.

5) Credit money : It is also called as bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and can be transferred from one person to other through cheques.

Question 3.
Explain the concept of the legal tender money.
Answer:
Based on the legality money is divided into legal tender money and optional money.
Legal tender money is that money which is accepted by the people as per Jaw while paying the amount for goods and services. This is further divided into two types. They are :

1. Limited legal tender money.
2. Unlimited legal tender money.

1) Limited legal tender money : The money which no persons can be forced to accept beyond a certain limit. The maximum limit for acceptance will be decided by the government.
Ex : 5 paise, 10 paise, 25 paise. The limit in case of these Coins is 25 rupees.

2) Unlimited legal tender money : This money which everyone should accept without any limit in payment of goods and services.
Ex : 1 rupee paper note, 5 rupee coins, 2 rupee coins, 1 rupee and 50 paise coins.

Question 4.
State the contingent functions of money.
Answer:
Money plays a vital role in modem economy.
According to Waker’ – “Money is what money does”.
According to ‘Robertson’ – “Anything which is widely accepted in payment for goods discharge of other kinds of business obligations”.
Contingent functions :
a) Measurement and distribution of National income: National income of a country be measured in money by aggregating the value of all commodities. This is not possible in a barter system similarly national income can be distributed to different factors of production by making payment then in money.

b) Money equalises marginal utilises / productivities : The consumers can equalize marginal utilities of different commodities purchased by them with the help of money. We know how consumers equalize the marginal utility of the taste rupee they speed on each commodity Similarly firms can also equalize the marginal productivities of different factors of production and maximize profits.

c) Basis of credit: Credit is created by banks from out of the primary deposits of money supply of credit, in an economy is dependent on the supply of nominal money.

d) Liquidity : Money is the most important liquid asset. Interms of liquidity it is superior other assets. Money is cent percent liquid.

Question 5.
Explain different hinds of deposits accepted by the commercial banks.
Answer:
Commercial banks pay a very important role in the economic growth of a country. Commercial banks are the most important source of institutional credit in the money market. Banks attract savings from the people and encourage investment in industry, trade and commerce. Bank is a profit seeking business firm dealing in money and credit.

The word bank is derived from the “German” word “bankco” which means joint stock or joint fund. Banking in Britain originated with the lending of money by wealthy individuals to merchants who wished to borrow.

According to ‘Richard Sydney’ sayers – “Banks are institutions whose debts .usually referred to as “Bank deposits” are commonly accepted in final settlement of other people’s debts”.
Accepting deposits : The commercial bank just like any other money lender is doing money lending business. Bank receives public money in the form of deposits. The deposits mainly are of the following types.
a) Current deposits : These deposits have two characteristics.

1. There are no restrictions with regard to the amount of withdrawal and number of withdrawls.
2. Banks normally do not pay any interest on current account deposits.

b) Savings deposits : The sole aim of banks in receiving these deposits is to promote the habit of thrift among low income groups. They have the following characteristics :

1. Two or three withdrawals per week are permitted.
2. Banks pay 4% to 5% interest per annum on savings deposits.

c) Recurring deposits : People will deposit their money in these deposits as monthly installments for a fixed period of time. The bank after expiry of the said period will return the total amount with interest thereon. The rate of interest will be higher than the saving deposits.

d) Fixed deposits : Deposits are fixed accounts are called fixed or time deposits they are left with the bank for a fixed period. The following are the characteristics.

1. The amount cannot be withdrawn before expiry of fixed period.
2. Bank pay high rate of interest than any deposits.

Question 6.
Explain different types of loans and advances paid by the commercial banks.
Answer:
According to “Crowther”- “A bank is a dealer in debts his own and other people”.
Banking means the accepting for the purpose of lending or investment of deposits of money from the public repayable or demand or otherwise and withdrawable by cheque, draft or otherwise.

Advancing loans : Commercial banks refease funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credit, overdrafts and by discounting bills of exchange. ‘

a) Cash credit: In this case, the borrower is given a loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of this account as per his needs.

b) Overdraft: It means allowing the depositor to overdraft his account upto a previously agreed limit. Banks allow overdraft only to those persons who have their accounts in the bank. The overdraft is granted only for a short period for customers.

c) Loans : Usually a loan is granted against the securities of assets or personal security of the borrowed bank loans and advances carry a high rate of interest. In addition, banks grant call loans for every short period: Term loans for longer period and also grant consumer credit for buying durable goods.

d) Discounting bills of exchange : The bank facilitates ‘trade and commerce’ by ‘ discounting the bills of exchange. This is the most popular form of bank lending.

Question 7.
Distinguish between the roles of a commercial bank and a central bank with reference to credit.
Answer:
Controlling credit is the most important function of the central bank. It controls the volume of credit in the economy through various monetary and fiscal policies. It takes . some qualitative and quantitative step to increase or reduce the volume of credit as per the conditions of the economy.

It controls the inflation by reducing the volume of credit and controls recession by expanding the supply of credit in the economy.

Commercial bank also provide credit facilities in the form of loans and .advances. Commercial banks release funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credits, overdrafts and by discounting bills of exchange.
a) Cash credit: In this case, the borrower is given a loan. The amount of the loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of his account as per his needs.

b) Overdraft: It means allowing the depositor to overdraft his account upto a previously agreed limit. Bank allow overdraft only to those persons who have their accounts in the bank. The overdraft is granted only for short period for customers.

c) Loans : Usually a loan is granted against the securities of assets or the personal security of the borrower bank loans and advances carry a high rate of interest. In addition, bank grant call loans for every short period. Term loans for a longer period and also grant consumer credit for buying durable goods.

d) Discounting bills of exchange : The bank facilitates trade and commerce by discounting th,e bills of exchange. This is the most popular form of bank lending.

Question 8.
Explain why the central bank is called banker’s bank ?
Answer:
The central bank acts as a banker’s bank because of the following functions.
a) Every bank maintained a certain minimum of cash reserves with the central bank as a statutory obligation. The ratio of cash reserve to the deposits of the commercial banks will be prescribed by the central bank.

b) It serves as a lender of last resort and provides financial assistance to the scheduled bank by rediscounting the eligible bills of exchanges and provides loans and advances, against approved securities. This helps the commercial banks to over come the problems of liquidity.

c) It acts as cleaning house for The commercial banks to settle their inter bank accounts. Each and every commercial banks to maintains accounts with the central bank. Because of this central bank transfer funds from one bank to another bank very easily.

Question 9.
What do you understand by lender of last resort’ ?
Answer:
The central bank serves as a lender of last resort to all the financial institutions i.e., commercial banks, discount houses and other credit institutions. These institutions can also approach the central bank when they face the problem of liquidity. The central bank helps the commercial banks by providing loans and advances against some approved securities and also help to rediscount the commercial banks bills subject to certain terms and conditions.

Question 10.
State the objectives of a central bank. [March 18, 17, 16]
Answer:
Central bank is the apex bank of the baning system in a country. It controls, regulates and supervises the activities of the banks in the banking system of a country. The following are the objectives of the central bank.

1. Maintaining the internal value of currency.
2. Preserve the external value of currency.
3. Ensure price stability.
4. Promote economic development.
5. Develop financial institutions.

Question 11.
Write a note on the Reserve Bank of India. [March 18, 16]
Answer:
Reserve Bank of India is the central bank of India. It was established in April 1935, with a share capital of ₹ 5 crores. It was originally owned by private shareholders and was nationalised by the government of India in 1949. It performs all the functions of central bank according to the “Reserve Bank of India Act 1934”. .
The main objectives of Reserve Bank of India are :

1. Regulating the issue of currency notes.
2. Providing guidance to the commercial banks.
3. Controlling the credit system of the economy
4. Achieving the monetary stability in the economy.
5. Implementing the uniform credit policy throughout the country.

Question 12.
Explain any three definitions of inflation.
Answer:
Inflation we mean a general rise in the prices in the ordinary language it is rapid upward movement of prices in a broader sense. The term inflation refers to persistent rise in the general price level over a long period of time.
According to Prof.Hawtrey “Issue of too much currency”
According to ’Dalton’: Defined inflation as “Too much Money is chasing too few goods”.
According to ‘Pigou’: “Inflation exists when money income is expanding more than in proportion to increase in earning activity”.
According to Irving Fisher : “Inflation occurs when the volume of money increases faster than the available supply of goods”.
According to Samuelson : “Inflation denotes a rise in the general level of prices”.

Question 13.
Distinguish between demand – pull and cost – push inflation.
Answer:
It refers to a persistent upward movement in the “general price level rather than once for all rise in it. If results in a decline of the purchasing power. There is no generally accepted definition to inflation.

According to “Hawtrey” is “issue of too much currency”.

According to “Dalton” as “too much money chasing too few goods”.

Demand – pull inflation : The most common cause of inflation is pressure of even increasing aggregate demand for goods and services compared to the rise of aggregate supply. If aggregate demand for goods and services exceeds aggregate supply of goods and services prices rise. This is called “demand – pull inflation”.

Cost – push inflation : As the result of rise in the cost of production of goods and services, prices. This is. called cost – push inflation. It is caused by increase in wage enforced by trade unions through strikes or increase in other factor costs.

On this two types of inflations – cost – push inflation is much more difficult to control than demand – pull inflation the reason is obvious. Any attempt to cutdown wages by the authorities will be met by stiff resistance on the part of the workers.

Question 14.
State the types of inflation. [March 17]
Answer:
Inflation means a general rise in prices. Based on the rate of inflation, it may be divided into four types.

1. Creeping inflation : When rise in the prices is very slow and small, it is called creeping inflation.
2. Walking inflation : This is the second stage of inflation. The inflation rate will be between 2% and 4%.
3. Running inflation : When the rate of inflation is in the range of 4-10% per annum, it is called running inflation.
4. Galloping inflation or hyper inflation : If the inflation rate exceeds 10%, gallop-ing inflation occurs. It may also called hyper inflation.

Question 15.
Explain the effects of inflation on distribution.
Answer:
Effects of inflation : A period of prolonged persistent and continuous inflation affects everyone in the economy it effects production and distribution. Income and employment etc., it is goods so long as it is under control of the economy.The effects of inflation can be discussed under two sub-heads.

1. Effects on production
2. Effects on distribution

Effects on distribution : Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of inflation on various groups of society are as follows.
1) Debtors and creditors : During inflation debtors are generally the gainers while the creditors are the losses. The reason is that the debtors had borrowed when the purchasing power of money was high and now return the loans when the purchasing power of money is low due to rising prices.

2) On fixed income groups : Those who get fixed income lose from inflation. Salaried persons people living on past savings, pensioners, interest earners are the worst suffers during inflation because their income remain fixed.

3) On working class: During inflation working class also suffers worst because wages do not rise as much as the prices of commodities. In addition there is a time lag between the rise in prices and rise in wages. If the trade unions are strong they may get equal increase in money incomes compared to rise in prices.

4) Entrepreneurs : They experience windfall gains as the prices at their stocks suddenly go up. Inflation thus re-distributes income and wealth in such away as to harm the interest of creditors, labours, fixed income groups and favours the businessmen traders and debtors. By meaning the rich richer and poor poorer, inflation is socially undesirable.

Question 16.
Enumerate the measures for control of inflation. [March 18, 16]
Answer:
To control the inflation the government has taken various steps. They are :

1. Increase the production in the long run.
2. Implementing proper monetary and fiscal policies to reduce the supply of money • and credit.
3. Controlling prices and eliminating black markets.
4. Importing the goods which are scares in supply from outside countries.
5. Introducing rationing and quota system in case of mass consumption of goods.
6. Distribution of goods to all the needy sections of the people.

Very Short Answer Questions

Question 1.
Double coincidence of wants
Answer:
Under Barter system a buyer should be able to find a seller who is not only requires the same commodity but should possess the commodity required by the buyer the want of both the buyer and the seller must coincide. This is called coincidence of wants.

Question 2.
Standard of deferred payments
Answer:
Money serves as a measure of deferred payments. Deferred payments refers to future payments. As such money is helpful not only in current transaction but also in conducting future transaction thus money acts as a bridge from present to the future, i.e., an efficient store of value.

Question 3.
Store of value
Answer:
Money acts par excellence as a store of value money preserves and carries values through time and place it is convenient to store money rather than goods. Money does not come down in value by being stored up like commodities.

Question 4.
Liquidity [March 18, 17, 16]
Answer:
Liquidity means the ease with which one can convert a financial asset into a medium of exchange. Liquidity is greatest for money as an asset because money itself is a medium of exchange. In fact money is the only asset which possess perfect liquidity.

Question 5.
Currency
Answer:
Currency consists of paper notes and coins. Paper notes are. issued by government or the central bank of a country. In India, the Reserve Bank which is the central bank of India issue currency notes at all denominations. Except one rupee notes. The government of India issues them coins are metallic tokens and are produced in the limits of government.

Question 6.
Near money
Answer:
The near money refers to those highly liquid assets which are not accepted as money but then can be easily converted into money within a short period.
Ex : Saving bank deposit, shares, treasury bills, bonds etc.

Question 7.
Credit money
Answer:
This is also called bank money. This is created by commercial banks. This is refers to the bank deposits that are repayable on demand and which can be transferred from one individual to the other through cheques.

Question 8.
Limited legal tender
Answer:
Money which no person can be forced to accept beyond certain limit. The maximum limit for acceptance is decided by the government. In India small coins 5 paise, 10 paise, 25 paise are limited legal tender the maximum limit of ₹ 25.

Question 9.
Token money
Answer:
It is the money or unit of currency whose face value is higher than the intrinsic value. It is not convertible it facilitates transactions and accepted by the public as medium of exchange.

Question 10.
Time deposits
Answer:
Time deposits are deposits that are not payable on demand. They are repayable only after their maturity period. These deposits are called term deposits. They are two types, i) Fixed deposits ii) Recurring deposits.

Question 11.
Recurring deposits
Answer:
These are called fixed deposits but the deposits money is paid not in lumpsum. But every month for various periods from 12 to 120 months.

Question 12.
Demand deposits
Answer:
The deposits which are payable on demand without any prior notice demand deposits they can be transferred from one person to person. All current deposits are demand deposits.

Question 13.
Cash credit
Answer:
Bank give cash credit to business form and industries against current assets. Such as shares, bonds, etc., cash credit is an open credit.

Question 14.
Overdraft [March 18, 17, 16]
Answer:
Overdraft is allowed on current account only the current account holders are given the facility overdraft by which they are allowed to draw an amount above their balances.

Question 15.
Discounting of bills of exchange
Answer:
Bills of exchange are the written undertaking received by the seller from the buyer against the credit transaction. The person one who possesses bill can discount the bill in the bank. If they need money.

Question 16.
Creation of credit [March 18]
Answer:
It means the process of creating credit from the depositor received by the bank from the customers to those who is in need of money in the form of loans and advances.

Question 17.
Clearance house
Answer:
Central Bank acts as a clearing house for the commercial banks to settle their interbank accounts all commercial banks maintain their accounts with the central bank.

Question 18.
Lender of last resort
Answer:
The central bank serves as lender of last resort not only to commercial banks but also other credit institutions they approach central bank when they face the problem of liquidity and rediscounting the bills and taking loans.

Question 19.
Reserve money
Answer:
The amount kept by the banks in the bank to use in the future to face the unfore seen events these reserves will be used by banks to lend loans and reduce the losses in the future.

Question 20.
Reserve Bank of India
Answer:
Reserve Bank of India is the Central Bank of India. It was established in April 1935 with a share capital of ₹ 5 crore. It was nationalised by government of India in 1949 it acts under the Reserve Bank of India 1934.

Question 21.
Meaning of inflation
Answer:
The term inflation refers to persistent rise in the general price level over a long period of time. Money supply increase, money value will be fallen, result in purchasing power will be decline.

Question 22.
Consumer Price Index (CPI)
Answer:
This is the index of prices of a given basket of commodities which are brought by the representative consumer. CPI is expressed in percentage terms.

Question 23.
Wholesale Price Index (WPI)
Answer:
Whole sale price is that price at which goods are traded in bulk. The index for wholesale price is called Wholesale Price Index (WPI).

Question 24.
Demand – Pull inflation
Answer:
Inflation caused by the increase in the aggregate demand for commodities over aggregate supply is called demand – pull inflation. Aggregate demand increases due to increase in the income level of the people.

Question 25.
Cost-push inflation
Answer:
Inflation caused by the rise in cost of production is called cost – push inflation. Cost of production may rise due to the increase in wages forced by the trade unions of government.

Question 26.
Hyper inflation [March 16]
Answer:
Hyper inflation is also known as galloping inflation. If the inflation rate exceeds 10% per annum is called hyper inflation.

Question 27.
Inflation and value of money.
Answer:
Inflation and value of money are important aspects of macro economics. They play a major role in the functioning of the economy and bear large influence on all economic activities affecting the levels of output, income, employment etc.