Category: Inter 1st Year

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 6th Lesson Joint Stock Company – Formation Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 6th Lesson Joint Stock Company – Formation

Essay Answer Questions

Question 1.
What is a joint stock company? What are its features of it?
Answer:
Business units may be classified into two types. They are :
1) Non-corporate business units
2) Corporate business units.
The basic demerits of non-corporate business units (i.e., sole proprietorship concerns, partnership firm, joint Hindu undivided family concerns) are limited sources, unlimited liability. To overcome these demerits new business units i.e. corporate business units came into existence.

Joint Stock Company is one of the kind of corporate business units. A joint stock company is a voluntary association of persons formed for undertaking some big business activity. It is established by law and can be dissolved by law. The company has a separate legal entity, so that even if its members die, the company remains in existence. The money so contributed constitutes capital of the company. The capital of the company is divided into small units called shares. Since members invest their money by purchasing the shares of the company they are known as shareholders and the capital of the company is known as share capital.

Company – Definition :
“A company is an artificial person created by law, having a separate legal entity with a perpetual succession and a common seal.” – Section 566 of the Companies Act, 1956

“A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.

Features:
1) An artificial person created by law :
A company is an aritficial person created by law and existing only in contemplation of law. It is intangible and invisible legal person having no body and soul. .

2) Seperate legal entity :
A company has an independent existence a part from its members. Its assets and liabilities belong to the company and not to its members. It can own property, have a bank account, take a loan, sue (file a case in court) and be sued in its own name.

3) Formation :
A company comes into existence through the operation of law. So, registration must be under the Companies Act.

4) Common seal as a substitute for signature:
A company cannot sign the documents as it is not a natural person. So, each company has a common seal which is like its signature. When any authorised person puts the seal on any paper or document, it is a legal evidence of an act done by the company.

5) Perpetual existence :
A company is an artificial person created by a process of law. Hence, it enjoys perpetual succession (permanent existences) i.e. it never dies. It is said that “members may come and members may go but the company goes on forever”. A company is not affected by death of a member or a new member coming in place of an old member. A company is wound up by law only. It has to act through its directors and employees.

6) Limited liability of members:
The liability of every shareholder is limited to issue price of the shares allotted to him. If the shares are fully paid up-, he is not subject to any further liability.

7) Transferability of shares:
The members of the company (public company) are free to transfer or dispose the shares held by them to any person as and when they like. They do not need the consent of other shareholders to transfer their shares. But in case of private company some restrictions are imposed for transfering shares.

8) Membership :
To form a joint stock company, a minimum of two members are required in case of private limited company and seven members in case to public limited company. The maximum limit is fifty in case of private limited company. There is no maximum limit on the number of members in case of a public limited company.

9) Democratic management:
Since the number share holders are very large and may be distributed at different geographical locations, it becomes difficult for them to carry on operational management of the company on day-to-day board. This gives rise to the need of separation of the management and ownership.

10) Statutory regulations are to be followed :
A company has to comply with and abide by a number of statutory requirements. A company is governed by the Companies Act and it has to invariably follow the various provisions of the Act. For ‘ instance, such companies should submit a number of returns to the government and also its accounts have to be audited by a Chartered Accountant.

Question 2.
Explain the advantages and disadvantages of a joint stock company.
Answer:
A joint stock company is an artificial person created by law with a fixed capital, divisible into transferable shares, with perpetual succession and common seal. The company has a separate legal entity. It must be compulsorily registered. The capital of a company is divided into small units called shares. Any one who holds or buys share in a company is called shareholder.

Joint Stock Company – Advantages:
1) Limited liability :
The liability of shareholders is limited. The risk of loss is limited to the issue price of theshares.

2) Large financial resources :
Company form of organisation enables to mobilise huge financial resources because of principles of limited liabilities and diffusion of ownership. It collects funds in the form of shares of small denominations so that people with small means can also buy them. Benefits of limited liability and transferability of shares attract investors.

3) Continuity of existence :
A company has perpetual or continuous existence. Members may go or new members may come in, but the company goes on for ever.

4) Benefits of large scale operation :
A joint stock company can undertake business on large scale. As a result it can derive all the advantages of large scale production.

5) Liquidity :
The transferability of shares act as an added incentive to investors. The shares of a public company can be traded easily in the stock exchange. The public can buy shares when they have money. The prospective investors can invest and convert shares into cash whenever they need money.

6) Professional management :
Companies, because of their complex nature of activities and large volume of business, require professional managers at every level of their operation. This leads to efficiency in management of their business affairs.

7) Research and development :
A company generally invests a lot of money on research and development for improved processes of production, designing and innovating new products, improving quality of product, new ways of training its staff, etc.

8) Tax benefits :
Although the companies are required to pay tax at a high rate, in effect, their tax burden is low as they enjoy many tax exemptions under Income Tax Act.

Joint Stock Company – Disadvantages :
1) Too many legal formalities:
Formation of a company is a time – consuming process and also expensive. Many legal formalities have to be observed and several legal documents have to be prepared and filed. Delay in formation may deprive the business the momemtum of an early start.

2) Lack of motivation :
The directors and other officers of a company have little personal involvement in the efficient management of a company. Separation between ownership and control and absence of a direct link between effort and reward may lead to lack of personal interest and incentive. It is difficult to keep peronal touch with all the customers and employees. As a result, efficiency of business operations may be low.

3) Delay in decisions :
Redtapism and bureaucratic hurdles do not permit quick decisions and prompt action in company form of organisation. There is little scope for personal initiative and a sense of responsibility. Paid employees like to play safe and tend to shift responsibility. There is lack of flexibility of operations in a company.

4) Economic oligarchy :
The management of company is supposed to be carried on according to the collective will of its members. But in practice, there is rule by a few (Oligarchy). Often directors try to mislead the members and manipulate voting power to maintain and continue their control.

5) Corrupt management:
In a company, there is often danger of fraud and misuse of property by dishonest management. Fake companies may be formed to deprive the investors of their hard-earned money. Unscrupulous people may manipulate annual accounts to show artificial profits or losses for their personal gain.

6) Excessive government control :
A company has to submit many statements and returns to the government. Excessive government control leads to waste of time for the company.

7) Unhealthy speculation :
A few individuals may corner the shares to gain control over the company.

8) Conflict of interests :
Company is the only form of business wherein a permanent conflict of interests may exist. In a company conflicts may continue between shareholders and board of directors or between shareholders and creditors or between management and workers.

9) Lack of secrecy :
Under the Companies Act, a company is required to disclose and publish a variety of information on its working. Widespread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection to public.

Question 3.
Distinguish between a private company and a public company. [Mar. 2019 – A.P. & T.S. – Mar. 2018 – T.S.]
Answer:
On the basis of number of members or public interest companies may be classified into

1. Public company
2. Private company

1) Public company :
According to Companies Act, Public company means a company which (a) is not a private company; (b) has a minimum paid-up capital of ₹ 5 lakhs or such higher paid-up capital and (c) is a private company which is a subsidiary of a company which is not a private company.

2) Private company:
According to Companies Act, Private company means a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed and by its articles. Restricts the right of members to transfer its shares. Limits the number of its members to 50. Prohibits any invitation to the public to subscribe to any shares in, or debentures of the company. Prohibits any invitation or acceptance of deposits from persons other than its members, directors, and relatives.

Differences between Private company and Public company

Basis of Comparison	Private Company	Public Company
1) Minimum number of persons	Two members	Seven members
2) Maximum number of members	50 members	No limit
3) Minimum paid up capital	₹ One lakh	₹ Five lakh
4) Identification	Must suffix ‘Private Limited’ to its name	Must suffix ‘Public Limited’ to its name
5) Transfer of shares	It cannot transfer their shares.	It can freely sell their shares to others.
6) Public issue of capital	It cannot secure capital irom the public.	It can secure capital from the public.
7) Commencement	It can start its business immediately upon its incorporation.	It cannot start its business immediately alter its incorporation. It has to obtain a certificate for starting.
8) Board of directors	Minimum: Two Maximum: No limit	Minimum: Three Maximum: 20
9) Appointment and Retirement of Directors	Single resolution is enough to appoint or retire the directors.	Separate resolution is required.
10) Managerial remuneration	There are no restrictions on the remuneration of Directors and Managing Directors.	There are restrictions.

Short Answer Questions

Question 1.
List out and briefly explain different types of companies.
Answer:

1) Chartered Companies:
The companies which are established by the Royal charter or special sanction of the Royal Head of the State are called chartered companies. Such companies are granted special privileges and powers to achieve the defined objectives.
E.g.: East India Company.

2) Statutory Company :
These companies are formed by the enactment of special Act by Parliament or State Assembly. The Reserve Bank of India, the State Bank of India, Life Insurance Corporation of India, etc. are the examples of Statutory Companies.

3) Registered Company:
All those companies that are registered under the Companies Act 2013 are called Registered Companies.

4) Government Company :
Government company means any company in which not less than 51% of the paid up capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a government company.

5) Private Company :
A private company is a very suitable form for carrying on the business of family and small concerns. It is registered under the Companies Act 2013.

6) Public Company :
According to the section 2 (71) of the Companies Act of 2013 a company is a said to be public company (a) It is not a private company (b) It has a minimum paid up capital of ₹ 5,00,000 and above (c) It is a private company which is subsidiary of any public company.

7) Companies limited by shares :
In these compaines the liability of the members is limited to the extent of the value of shares held by them.

8) Companies limited by guarantee :
In these companies the members’ liability is not only up to the face value of the shares but also extended to the amount guaranteed by them.

9) Unlimited Companies:
In these companies the liability of the members is unlimited. The members are fully liable for all the debts of the company.

10) Holding Company :
Where one company controls the management of another company, the controlling company is called ‘Holding Company’.
E.g.: If.company A holds more than 5,1% of paid1 up share capital of company B, the company A is called holding company.

11) Subsidiary Company :
Where one company controls the management of another company such- company so controlled fs called subsidiary company.
E.g. : If company A holds more than 51% of paid up share capital of company B, the company B is called subsidiaiy company.

12) Indian Company:
A company registered in Indian having place of business in India called Indian company. It may be a private company or a public company.

13) Foreign Company :
A foreign company is one that is incorporated outside India but has business operations in India.

14) National Company:
Such companies confine their operations within the boundaries of the country in which they are registered.

15) Multi-national Company :
Such companies which extend the areas of their operations beyond the country in which they are registered.

Question 2.
What are the features of a public company?
Answer:
A joint stock company is an artifical person created by law with a fixed capital, divisible into transferable shares, with perpetual succession and common seal. The company has a seperate legal entry. It must be compulsorily registered. The capital of the company is divided into small units called shares. Any one who holds or buys share in a company is called shareholder. Thus a company is defined as an association of persons, having a separate legal existence, perpetual sucession and a common seal.

On the basis of public interest company may be classified into two types.

1. Private Limited Company
2. Public Limited Company.

Public Limited Company – Features :
It is suitable form of company for carrying on the business at large scale involving huge amount of capital. According to section 2(71), Public company is one which has the following features.

• The minimum paid up capital is ₹ 5,00,000.
• The minimum number of members is seven.
• The maximum number of members is unlimited. Such a company must use the word “Ltd” as part of its name.

A public company must write public limited or simply limited after its name. Steel Authority of India Limited, Bajaj Auto Limited, Reliance Industries Limited, and Hindustan Lever Limited are the examples of public companies.

Question 3.
What are the features of a private company?
Answer:
Sole proprietorship, Joint Hindu family and partnership form of business organisations could not meet the needs of modern industry and commerce because of their limitations like limited resources, unlimited liability, etc. The need for another form of organisation free of the above limitations was felt thus joint stock type of company came into existence as it can raise large resources with risk of unlimited liability, deploy huge capital, use modern technology, introduce specializations and run with professionalism.

On the basis of public interest company may be classified into two types

1. Private limited company
2. Public limited company.

Private Limited Company – Features :
According to section 2(68) of the Companies Act 2013 private company means company which has a minimum paid up capital of one lakh rupees or such higher paid – up-capital as may be prescribed and by its articles.

1. Restricts the rights of members to transfer its shares.
2. Limits, the number of its member to 50.
3. Prohibit any invitation to the public to subscribe to any shares in, or debentures of the company.
4. Prohibits any invitation or acceptance of deposits from persons other than its members, directors, and relatives.

Very Short Answer Questions

Question 1.
Define company.
Answer:
The word ‘Company’ implies a group of people who voluntarily agree to form a company and derived from the Latin word ‘com’ i.e., with or together and ’panis’ i.e., bread. It refers to an association of persons discussing matters and taking food together. However, in law company is termed as a company which is formed and registered under the Companies Act 2013.

“A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.” -L.H. Haney

Question 2.
What is a Government company? [Mar. 2019 – A.P. & T.S.Q Mar. 2018 – A.P.]
Answer:
Government company means any company in which not less than 51% of the paid up capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a government company.

Question 3.
What do you mean by a statuatory company?
Answer:
There are companies formed by the enactment of special Act by Parliament or State Assembly. The Reserve Bank of India, the State Bank of India, Life Insurance Corporation of India, etc. are the examples of Statutory Companies.

Question 4.
Chartered Company
Answer:
The companies which are established by the Royal charter or special sanction of the Royal Head of the State are called chartered companies. Such companies are granted special privileges and powers to achieve the defined objectives.
iE.g.: East India Company.

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

AP Inter 1st Year Commerce Study Material 5th Lesson Partnership

Essay Answer Questions

Question 1.
Define Partnership. Discuss its merits and limitations. [Mar. 2019; May 17 – T.S. M Mar. 15 – A.P. & T.S.]
Answer:
Partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business with profit motive. The persons who are enter into partnership individually called ‘Partners’ and collectively known as ‘Firm’.

Partnership – Definition :
Partnership is “the relation between two or more persons who have agreed to share the profits of a business carried on by all or any one of them acting for all” – Section 4 of the Indian Partnership Act, 1932.

Merits:
1) Easy to form :
A partnership can be formed easily without many legal formalities. Since it is not compulsory to get the firm registered, a simple agreement, either in oral, writing or implied is sufficient to create a partnership firm.

2) Availability of larger resources :
A partnership firm consists of more than one person, it may be to pool more resources as compared to sole proprietorship.

3) Better decisions :
In partnership firm each partner has a right to take part in the management of the business. All important decisions are taken in consultation with and with the consent of all partners. Thus, collective wisdom prevails and there is less scope for reckless and hasty decisions.

4) Flexibility:
The partnership firm is a flexible organisation. Changes in the business can be adopted easily. At any time the partners can change the size or nature of business or area of its operation after taking the necessary consent of all the partners.

5) Sharing of risks:
The losses of the firm are shared by all the partners equally or as per the agreed ratio.

6) Protection of interest:
In partnership form of business organisation, the rights of each partner and his/her interests are fully protected. If a partner is dissatisfied with any decision, he can ask for dissolution of the firm or can withdraw from the partnership.

7) Secrecy :
Business secrets of the firm are known to the partners only. It is not required to disclose any information to the outsiders. It is also not mandatory to publish the annual accounts of the Partnership firm.

Limitations:
1) Unlimited liability :
The partners liability is unlimited. This is the most important drawback of partnership. The partners are personally liable for the debts and obligations of the firm. In other words, their personal property can also be utilised for payment of firm’s liabilities.

2) Limited capital:
Since the total number of partners cannot exceed 20, the capacity to raise funds remains limited as compared to a joint stock company where there is no limit on the number of share holders.

3) Non-transferability of share :
In partnership firm, the partners cannot transfer his share of interest to other without consent of remaining partners.

4) Possibility of conflicts:
Differences and disputes among the partners are common. These conflicts harm to the firm. Difference of opinion may give rise to quarrels and lead to dissolution of the firm.

Question 2.
Is registration of Partnership compulsory under the Partnership Act, 1932? Explain the procedure required for registration of a firm.
Answer:
Partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profits or losses. The persons who form a partnership are individually known as ‘Partners’ and collectively a firm or partnership firm.

The Indian Partnership Act, 1932 does not make it compulsory for a firm to be registered; but there are certain disabilities which attach to an unregistered firm. These disabilities make its virtually compulsory for a firm to be registered. Registration can take place at any time.

The procedure for registration of a firm is as follows:

1. The firm will have to apply to the Registrar of Firms of the state concerned in the prescribed form.
2. The firm will have to apply to the Registrar of firms of the state concerned in the prescribed form. For this, a form containing the following particulars, accompanied by a fee of ₹3/- has to be sent to the Registrar of Firms.
   a) The name of the firm
   b) Location of the firm
   c) Names of other places where the firm carries on business
   d) The name in full and addresses of the partners
   e) The date on which various partners joined the firm.
   f) The duration of the firm
3. The duly filled in form must be signed by all the partners. The filled in form along with prescribed registration fee must be deposited in the office of the Registrar of Firms.
4. The Registrar will scrutinise the application, and if he is satisfied that all formalities relating to registration have been duly complied with, he will put the name of the firm in his register and issue the Certificate of Registration.

Question 3.
Discuss different types of Partners. [Mar. 2019; May 17 – A.P. Mar. 17 – T.S.]
Answer:
A Partnership firm can have different types of partners with different roles and liabilities. Some of them may take part in the management while other may contribute capital.

1) Active Partners or Working Partners:
The partners who actively participate in the day-to-day operations of the business are known as active partners or working partners.

2) Sleeping Partners :
The partners, who simply provide capital and do not participate in the management activities of the firm are called sleeping partners.

3) Nominal Partners :
Nominal partners allow the firm to use their name as partner. They neither invest any capital nor participate in the day-to-day operations. They are not entitled to share the profits of the firm. However they are liable to third parties for all the acts of the firm.

4) Partners in Profits :
A person who shares the profits of the business without being liable for the losses is known as partner in profits. This is applicable only to the minors who are admitted to the benefits of the firm and their liability is limited to their capital contribution.

5) Limited Partners :
The partners whose liability is limitied in a firm are called limited partners. They are also known as special partners.

6) General Partners :
The partners having unlimited liability are called general – partners. According to Indian Partnership Act, 1932 the liability of the partner is unlimited. So they are general partners (excpet minor partner).

7) Partner by Estoppel:
A person, who behaves in the public is such a way as to give an impression that he/she is a partner of the firm, is called partner by Estoppel. Such partners are not entitled to share the profits of the firm, but are, fully liable if somebody suffers because of his/her false representation.

8) Partner by Holding out:
Sometimes, the firm may use the name of a person in its activities, creating a sense in the public that he is also a partner. If that person accepts the same, he becomes automatically responsible to the third parties. Such person is known as “Partner by Holding out”.

4. What is Partnership Deed? And also explain its contents. [Mar. 2018 – T.S.]
Answer:
Partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profits or losses. Partnership was established among partners through an agreement. Such agreement may be in the form of oral or written. If partnership agreement is in registration it is known as Partnership Deed.

Partnership Deed is a document containing the terms and conditions of a partnership. It is an agreement in writing signed by the partners duly stamped and registered. The Partnership deed defines certain rights, duties and obligations of partners and governs relations among them in the conduct of business affairs of the firm.

The Partnership deed must not contain any term which is contrary to the provisions of the Partnership Act. Each partner should have a copy of the deed.

The following points are generally included in the deed.

Partnership Deed – Contents

1. Name of the firm
2. Nature of the business
3. Names and addresses of partners
4. Location of business
5. Duration of partnership, if decided
6. Amount of capital to be contributed by each partner
7. Profit and loss sharing ratio
8. Duties, powers and obligations of partners
9. Salaries and withdrawals of the partners
10. Preparation of accounts and their auditing
11. Procedure for dissolution of the firm
12. Procedure for settlement of disputes

Short Answer Questions

Question 1.
Define Partnership and state its important features. [Mar. 17 – A.P.]
Answer:
Partnership is an agreement between two or more persons to carry on business with profit motive, carried on by all or any one of them acting for all.

Partnership – Definition :
“Partnership is the relation existing between persons competent to make contract, who agree to carry on a lawful business in common with a view to private gain.” – L.H. Haney

“The relation between persons who have agreed to share the profits of a business carried on by all of them acting for all.” – Indian Partnership Act, 1932, Section 4

Partnership Firm – Features:
The following are the important features of partnership organisation.

1. Formation
2. Unlimited liability
3. Existence of lawful business
4. Principal agent relationship
5. Voluntary registration

1) Formation :
The partnership form of business organisation is governed by the provision of Indian Partnership Act, 1932. It comes into existence through a legal agreement where in the terms and conditions governing the relationship among partners. Partnership formation is very easy.

2) Unlimited Liability :
The liability of partner is unlimited, joint and several. Personal assets may be used for repaying debts in cases the business assets are insufficient. All the partners are responsible for the debts and they contribute in proportion to their share in business and as such are Habile to that extent.

3) Existence of lawful business:
The business to be carried on by a partnership must always be lawful. Any agreement to indugle in sumuggling, black marketing, etc. cannot be called partnership business in the eyes of law.

4) Principal agent relationship :
Each partner is an agent of the firm. He can act on behalf of the firm. He is responsible for his own acts and also the acts on behalf of the other partners. There must be an agency relationship between the partners.

5) Voluntary registration :
The registration of a partnership firm is not compulsory. But an unregistered firm suffers from some limitations which make it virtually compulsory to be registered.

Question 2.
Discuss the registration procedure of partnership.
Answer:
The Indian Partnership Act, 1932 does not make it compulsory for a firm to be registered; but there are certain disabilities which attach to an unregistered firm. These disabilities make it virtually compulsory for a firm to be registered. Registration can take place at any time. The procedure for registration of a firm is as follows:

1. The firm will have to apply to the Rigistrar of Firms of the state concerned in the prescribed form.
2. The firm will have to apply to the Registrar of Firms of the state concerned in the prescribed form. For this, a form containing the following particulars, accompanied by a fee of Rs. 3/- has to be sent to the Registrar of Firms.
   a) The name of the firm
   b) Location of the firm
   c) Names of other places where the firm carries on business
   d) The name in full and addresses of the partners
   e) The date on which various partners joined the firm
   f) The duration of the firm
3. The duly filled in form must be signed by all the partners. The filled in form along with prescribed registration fee must be deposited in the office of the Registrar of Firms.
4. The Registrar will scrutinise the application, and if he is satisfied that all formalities relating to registration have been duly complied with, he will put the name of the firm in his register and issue the Certificate of Registration.

Question 3.
Briefly explain the rights of partners.
Answer:
The rights and duties of the partners of a firm are usually governed by the partnership agreement among the partners. In case the Partnership Deed does not specify them, then the partners will have rights and duties as laid down in the Indian Partnership Act, 1932.

Rights of Partners :

1. Every partner has a right to take part in the management of the business.
2. Right to be consulted and expressed his opinion on any matter related to the firm.
3. Partner has a right to inspect the books of accounts or to copy them.
4. Right to have an equal share in the profits or losses of the firm, unless and otherwise agreed by the partners.
5. Right to receive interest on loan and advances made by partner to the firm.
6. Right to the partnership property unless and otherwise mentioned in the partnership deed.
7. Every partner has power or authority, in an emergency, to do any such acts, for the purpose of protecting the firm from losses.
8. Right to prevent the introduction of a new partner without consent of other partners.
9. Right to act an agent of the partnership firm in the ordinary course of business.
10. Right to be indemnified for the expenses incurred and losses sustained by partner to the firm.

Question 4.
Briefly explain the duties of partners.
Answer:
Generally, the Partnership Deed contains rights and duties of the partners. If deed is not prepared, the provisions of the Partnership Act will apply. Also when deed is in silent on any point, the relevant provisions of the act will apply.

Duties of Partners

1. Every partner has to attend diligently to his duties in the conduct of the business.
2. Should act in a just and faithful manner towards other partner and partners.
3. Should bound to share the losses of the firm equally unless and otherwise agreed upon by all partners.
4. No partner shall carry on any business competing with the firm. If he does so, he has to render to the firm any profits arising out of such business.
5. Must maintain true and correct accounts relating to the firm’s business.
6. No partner should make secret profits by way of commission or otherwise from the firm’s business.
7. Every partner is bound to keep and render true and proper accounts of the firm to his copartners.
8. No partner is allowed to assign or transfer his rights and interest in the firm to an ‘ outsider without the consent of other partners.

Question 5.
Explain the ways of dissolution of a Partnership Firm.
Answer:
The partnership is established through an agreement among partners. The partnership firm is established through partnership. A distinction should be made between the “Dissolution of partnership” and “Dissolution of firm”.

Dissolution of Partnership:
Dissolution of partnership implies the termination of the original partnership agreement or change in contractual relationship among partners. A partnership is dissolved by the insolvency, retirement, incapacity, death, expulsion, etc. of a partner or on the expiry/ completion of the term of partnership.

A partnership can be dissolved without dissolving the firm.
In dissolution of partnership, the business of the firm does not come to an end. The remaining partners continue the business by entering into a new agreement. On the Other hand, dissolution of firm implies dissolution between all the partners. Thus, business of the partnership firm comes to an end. The remaining partners continue the business by entering into a new agreement.

Dissolution of Firm:
Dissolution of firm implies dissolution between all the partners. The business of the partnership firm comes to an end. Its assets are realised and the creditors are paid off. Thus, dissolution of firm always involves dissolution of partnership but the dissolution of partnership does not necessarily mean dissolution of the firm.

Dissolution of the firm takes place under certain circumstances.
1) Dissolution by agreement:
A partnership firm may be dissolved with the mutual consent of all the partners or in accordance with the terms of the agreement.

2) Dissolution by notice :
In case partnership-at-will, a firm may be dissolved, if any partner gives a notice in writing to other partners indicating his intention to dissolve the firm.

3) Contingent dissolution :
A firm may be dissolved on the expiry of the firm, completion of the venture, death of a partner, adjudication of a partner as insolvent.

4) Compulsory dissolution:
A firm stands automatically dissolved if all partners or all but one partner are declared insolvent, or business becomes unlawful.

5) Dissolution through Court:
Court may order the dissolution of a firm, when any partner becomes members unsound, permanently incapable of performing his duties, guilty of misconduct, wilfully and persistently commits breach of the partnership agreement, unauthorised transfers the whole of his interest or share in the firm to a third person.

Very Short Answer Questions

Question 1.
Partnership Firm
Answer:
Partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profits or losses. Partnership was established among partners through an agreement. Such agreement may be in the form of oral or written. If partnership agreement is in registration, it is known as partnership deed.

Question 2.
Partnership Deed [May 17 -A.P.]
Answer:
Partnership Deed is a document containing the terms and conditions of a partnership. It is an agreement in writing signed by the partners duly stamped and registered. The partnership deed defines certain rights, duties and obligations of partners and gov- erj^s relations among them in the conduct of business affairs of the firm.

Question 3.
Active Partner [Mar. 2018, -A.P. & T.S.]
Answer:
The partners who actively participate in the day-to-day operations of the business are knovyn as active partners or working partners.

Question 4.
Sleeping Partner
Answer:
The partners, who simply provide capital and do not participate in the management activities of the firm are called sleeping partners.

Question 5.
Partner by Estoppel
Answer:
A person who behaves in the public in such a way as to give an impression that he/she is a partner of the firm is called partner by estoppel. Such partners are not entitled to share the profits of the firm, but are fully liable if somebody suffers because of his/her false representation.

Question 6.
Prartner by Holding out
Answer:
Sometimes, the firm may use the name of a person in its activities, creating a sense in the public that he is also a partner. If that person accepts the same, he becomes automatically responsible to the third parties. Such person is known as “Partner by Holding Out”.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 4th Lesson Joint Hindu Family Business & Co-op Society Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 4th Lesson Joint Hindu Family Business & Co-op Society

Essay Answer Questions

Question 1.
What is Joint Hindu Family Business and discuss its main features? [May 17 – T.S.]
Answer:
A joint Hindu Family Business is a form of business, which is owned and managed by the members of a Joint Hindu Family. It is also known as a Hindu undivided family business. It is a unique Indian business institution, governed by the provisions of Hindu law. It is managed by the head of the family, known as Karta. The other members are called ‘Co-parceners’. All of them have equal ownership right over the properties of the business.

The membership of the JHF is acquired by virtue of birth in the same family. There is no restriction for minors to become members of the business. The Joint Hindu Family Business is governed by two Hindu laws. They are

1. Dayabhaga
2. Mitakshara

Features :
The important features of the Joint Hindu Family Business are as under.

1) Formation :
In JHF business there must be at least two members in the family, having some ancestral property. It is not created by an agreement but by operation of law.

2) Legal Status :
The Joint Hindu Family business is a jointly owned business. It is governed by the Hindu Succession Act, 1956.

3) Membership:
Outsiders are not allowed as members in the JHF. Only the members of undivided family acquire coparcenership rights by birth.

4) Profit Sharing :
Profits are distributed among coparceners in the JHF equally.

5) Management :
JHF is managed by the eldest male member of the family called Karta.

6) Liability:
The liability of Karta alone is unlimited while liability of other coparceners is limited to their share or interest in the coparcenary.

7) Continuity :
Death of any coparceners does not affect the continuity of business. Even on the death of the Karta, it continues to exist as the eldest of the coparceners takes position of Karta. However, JHF business can be dissolved either through mutual agreement or by partition suit in the court.

Question 2.
Define the Cooperative Society. Explain its features.
Answer:
The term ’cooperation’ is derived from the Latin word ’co-operari’. The word ‘Co’ means ’with’ and ’operari’ means ’to work’. Thus, the term cooperation means working together. So, those who want to work together with some common economic objective can form a society, which is termed as Cooperative Society.

Cooperative Society – Definition : “A society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles.” – The Indian Cooperative Societies Act 1912, Section – (4).

Features:
1) Voluntary association :
In cooperative society the membership is voluntary. Anybody having a common interest is free to join a cooperative society.

2) Number of members :
A minimum of 10 members are required to form a cooperative society. In case of multi-state cooperative societies, the minimum number of members should be 50 from each state in case the members are individuals. However, after the formation of the society, the member may specify the maximum number of members.

3) Separate legal entity :
A cooperative society is based on the service motive of its members. Its main objective is to provide service to the members and not to maximize profit.

4) Limited liability :
The liability of the members of the cooperative society is restricted to the extent of shares subscribed by them.

5) Capital :
The capital of the cooperative society is contributed by its members. Since the members’ contribution is very limited, it often depends on the loan from government, and apex cooperative institutions or on the grants and assistance from state and central government.

6) Service motive :
The primary objective of all cooperative societies is to provide services to its members.

7) Equal voting rights:
In a cooperative society, the principle of one man one vote is adopted.

8) Democractic management:
The management of a cooperative society is based on democratic lines. The members of the society elect directors to conduct and control the business.

9) Distribution of surplus :
After giving a limited dividend to the members of the society, the surplus is distributed in the form of bonus, keeping aside a certain percentage as reserve and for general welfare of the society.

10) Registration of the society :
In India, cooperative societies are reistered under the Cooperative Society Act 1912 or under the State Cooperative Societies Act. The Multi-state Cooperative Societies are registered under the Multi-state Cooperative Societies Act 2002. Once registered, the society becomes a separate legal entity and attains certain characteristics.

Question 3.
A cooperative form of organisation is a method of ‘Self Help’ – Discuss.
Answer:
The term ‘cooperation’ is derived from the Latin word ‘co-operari’. The word ‘Co’ means ‘with’ and ‘operari’ means ‘to work’. Thus, the term cooperation means working together. So, those who want to work together with some common economic objective can form a society, which is termed as ‘Cooperative Society’.

Cooperative Society is a voluntary association of persons who work together to promote their economic interests. It works on the principle of slef-help and mutual help. The primary objective is to provide support to the members. The motto of a cooperative society is “Each for all and all for each”. People come forward as a group, pool their individual resources, utilise them in the best possible manner and derive some common benefits out of it.

The primary objective of all cooperative societies is to provide services to its members. The membership is open to all those haying a common economic interest. Any person can become a member irrespective of his/her caste, creed, religion, colour, sex, etc. Cooperative societies are started not for profit but for service. The members are provided with goods at cheaper rates. Financial help is also given to members at concessional rates. A feeling of cooperation is created among members. So, a cooperative form of organisation is a method of “self help through mutual help”.

Question 4.
State the advantages and disadvantages of Hindu undivided family business organisation.
Answer:
Joint Hindu Family Business in the form of business which is owned and managed by the members of a Joint Hindu Family. It is also known as Hindu undivided family business.

JHF – Advantages:
1) Continuity :
It is not dissolved by the death or insanity of a coparcener.

2) Centralized and efficient management:
The management of Joint Hindu Family firm is vested in the hands of Karta only. This results in the unity of command and disciplined management.

3) No limit to membership:
It can have any number of members unlike other organisations. The members of the family become members only by birth. So there is no limit to membership.

4) Better credit:
This form of business firm is having better credit worthiness than the sole trader.

5) Limited liability :
The liability of the members is limited. But the liability of Kartha is unlimited.

JHF – Disadvantages:
1) Lack of direct relationship :
Karta alone looks after the business of the firm. But benefits are shared by all the coparceners. Thus incentive to Karta for efficient and painstaking management may be lacking.

2) Limited managerial ability :
For expansion and growth of the business in Joint Hindu Undivided Family, the managment and control of the business becomes difficult, as the Kartha alone has to manage.

3) Limited resources :
The resources of a Joint Hindu Family are limited as compared with the patnership and joint stock company.

Question 5.
Discuss the merits and demerits of cooperative form of organization.
Answer:
Cooperative Societies – Merits:
1) Simple Formation :
It is easy and simple to form a cooperative society. There is no need to comply with a number of legal formalities as in the case of a joint stock company. Cooperative society can be formed with minimum 10 members. The procedure for registration is very simple.

2) Democractic management:
Every member has only one vote irrespective of the number of shares held by him. Meeting are well attended and voting by proxy is not allowed. As such the management of the society is democratic.

3) Voluntary service :
The members serve the society voluntarily. Hence the management expenses are minimized. “Self help#through mutual help” is the main principle.

4) Low operating cost :
The administrative expenses of a cooperative society are usually low. Many members provide administrative services honorarily.

5) Limited liability :
The liability of the members, is limited to the extent of the value of their shares.

6) Perpetual existence :
A cooperative enterprise is not effected by the retirement, death, or insanity by any .member. It has continuous existence.

7) State patronage :
The government is helping cooperative organisation to their r success. A number of concessions and tax relief are given by the government for encouraging society form of organization.

8) Aim of mutual prosperity :
Cooperatives function on the principle of “Each for all . and all for each” with the aim of mutual prosperity.

Cooperative Societies – Demerits :
1) Limited financial resources :
Restriction on divided and the principle of “one member, one vote” discourage rich people from joining the society. Due to shortage of funds, there is limited scope for expansion and growth.

2) Lack of unity among members:
Many cooperatives fail because of constant group rivalry and quarrels among members.

3) Non-transferability of shares :
A member cannot transfer his shares freely but he can be allowed to withdraw his capital.

4) Political interference :
Government nominates members to the managing commit¬tees. Every government tries to send their own party members to these societies.

Short Answer Questions

Question 1.
Briefly explain the different types of cooperative societies.
Answer:
The main object of cooperative society is rendering services to its members. The members associate together on the basis of equity. They contribute capital to the business on democratic lines. Every person has one vote irrespective of the capital contributed by him. They undertake reasonable risk.

Types of Cooperative societies :
According to services rendered, cooperatives may be classified into the following categories.

1. Consumers’ cooperative societies
2. Producers’ cooperative societies
3. Marketing cooperative societies
4. Housing cooperative societies
5. Farming cooperative societies
6. Credit cooperative societies

1) Consumers’ cooperative societies :
A consumers cooperative society is set up to ensure a steady supply of essential goods of standard quality at fair prices.

2) Producers’ cooperative societies :
These societies are formed to protect the interest of small producers and artisans by making available items of their need for production, like raw materials, tools and equipments, etc.

3) Marketing cooperative societies :
Small producers form together as marketing cooperative societies to solve the marketing problems of their products.

4) Housing cooperative societies :
The housing cooperative societies are formed to provide residential accommodation to their members either on ownership basis or at fair rents. Housing cooperative buys land and constructs flats which are allotted to members.

5) Farming cooperative societies:
These societies are formed by the small farmers to get the benefit of large scale farming.

6) Credit cooperative societies :
There societies are started by persons who are in need of credit. They accept deposits from the members and grant them loans at reasonable rate of interest.

Very Short Answer Questions

Question 1.
Karta
Answer:
The business of a Joint Hindu Family is managed by the senior most male member of the family Who is known as Karta. The Karta has only the legal right to enter into contracts on behalf of the family business. Other members cannot question the decisions taken by the Karta.

Question 2.
Coparcener
Answer:
In a Joint Hindu Family business, the members of a Hindu Joint Family own the business jointly. Only the male members of the family up to three successive genera¬tions become members by virtue of their birth. They are called “Coparceners”.

Question 3.
Dayabhaga
Answer:
This school of Hindu law prevails only in West Bengal, Assam states. According to this law, if the deceased male coparcener has not left behind a male issue his widow (or in her absence daughter) will become a coparcener.

Question 4.
Mitakshara
Answer:
This school of HUF prevails in entire India except in West Bengal and Assam. Family members of male line and their wives, unmarried daughters are its members. By birth in the family, he gets the right on existing property. By birth a member gets a share in common propety, it continues till his death. In this way shares in the property get fluctuated in accordance with number of coparceners.

Question 5.
What do you mean by Cooperative Society?
Answer:
Cooperative society is a voluntary association of persons who work together to promote their economic interest. It works on the principle of self-help and mutual help. The primary objective is to provide support to the members. The motto of a cooperative society is “Each for all and all for each”.

Question 6.
Consumers’ cooperative societies
Answer:
Consumers’ cooperative societies are set up to ensure a steady supply of essential goods of standard quality at reasonable rates.
Eg : Vijay Krishna super markets.

Question 7.
Producers’cooperative societies
Answer:
These societies are formed to protect the interest of small producers and artisans by making available items of their need for production, like raw material, tools and equipments, etc.

Question 8.
Credit cooperative societies
Answer:
These societies are started by persons who are in need of credit. They accept deposits from the members and grant them loans at reasonable rate of interest.

Question 9.
Housing cooperative societies
Answer:
The housing cooperative societies are formed to provide residential accommodation to their members either on ownership basis or at fair rents. Housing cooperative buys land and constructs flats which are allotted to members.

Question 10.
Farming cooperative societies
Answer:
These societies are formed by the small farmers to get the benefit of large scale farming.

Question 11.
Marketing cooperative societies
Answer:
Small produces form together as marketing cooperative societies to solve the marketing problems of their products.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 3rd Lesson Forms of Business Organization Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 3rd Lesson Forms of Business Organization

Essay Answer Questions

Question 1.
Define Sole Proprietorship and discuss its merits and demerits. [Mar. 17 ; May 17- A.P.]
Answer:
A business unit is commenced with a single person i.e. owned by a single person it is called “Sole proprietorship concern”. The person who does the business is called sole trader. The individual may run the business on his own or may obtain the assistance of employees.

Sole proprietorship concern is also known as individual entrepreneurship, it is easiest to form and is also the simplest in organisation. In the sole trading concerns the sole trader contributes capital and runs the business. There are no legal formalities to be followed except those required for a particular type of business.

A sole proprietor contributes and organises the resources in a systematic way and controls the activities with objective of earning profit.

Sole proprietorship – Definitions:
“A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for the management of the business.” – J.L. Hanson

“Sole proprietorship is a form of business where the individual proprietor is the supreme judge of all matters pertaining to his business.” – Kimball and Kimball

Merits:
The following are the merits of sole proprietorship concern.

1. Easy to form
2. Quick decision and prompt action
3. Direct contact with customers
4. Flexibility in operation
5. Maintence of business secrets
6. Motivation
7. Self employment

1) Easy to form :
It is very and simple to form a sole proprietorship form of business organisation. Less legal formalities are required to be observed. Naturally, the business can be wound up any time if the proprietor so decides.

2) Quick decision and prompt action :
Since he is the sole organizer, he can take quick decisions. He can act promptly according to the changes in the market. Because, nobody interferes in the affairs of the sole proprietory organisation.

3) Direct contact with customers :
He is the owner and manager of the concern. He will be in a position to study the tastes and needs of customers personally since he establishes good contacts with them.

4) Flexibility in operation :
It is very easy to initiate and implement charges as per the requirements of the business. The expansion or curtailment of Forms of Business Organization does not require many formalities as in the case of other forms of business organisation.

5) Maintenance of business secrets :
The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so decides. He is also not bound to publish his business accounts.

6) Motivation:
In this organisation the entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business effectively and efficiently.

7) Self-employment:
Small scale units can be easily started. Nationalised banks are also helping in this direction.

Demerits:
The following are the demerits.

1. Limited resources
2. Lack of continuity
3. Unlimited liability
4. Limited managerial skills

1) Limited resources :
The resources of a sole proprietor are always limited. Being the single owner, it is not always possible to arrange sufficient funds from his own sources. So, the proprietor has a limited capacity to raise funds for his business.

2) Lack of continuity :
The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.

3) Unlimited liability :
As per law, the proprietor and business are one and same. So personal proprietors of the owner can also be used to meet the business obligations and debts.

4) Limited managerial skills :
As there is only one man the managerial ability is limited. The sole trader has limited financial sources, administration, sale and marketing skills. However, all skills required to take decisions may not be present in a single person alone.

Question 2.
“One man management is best in the world provided one man is big enough to take care of everything.” Discuss.
Answer:
Business organisation is an organised entity having group of people working together to achieve or common goal. In order to achieve the desired goal, try to organisations mobilise capital or finance, employ labour or man power and other resources like land and building, plant and machinery, furniture and fitting, etc. Finally, all these resources are put together in a useful manner to achieve the end results.

Sole proprietorship concern is one of the business organisations. When a business organisation is owned by a single person, it is called sole trade in concern. It is also known as “one man’s business”. The person who does the business is called the sole trader or sole proprietor. The sole trader carries on business by himself and for himself. He is the proprietor, manager and controller of business. He enjoys all profits and bears all losses.

According to James Stephenson, a sole trader is a person who carries on business exclusively by and for himself. The leading feature of this kind of concern is that the individual assumes full responsibility for all risks connected with conduct of business. He is not only the owner of the capital of the undertaking, but is usually the organizer and manager and takes all the profits or responsibility for losses.

Sole proprietorship has several advantages but proves to be inadequate as the business expands. One man control is ideal if the man is competent enough to manage everything. But in reality, one man cannot look after every aspect of business. Therefore, sole proprietorship is suitable for small scale business.

In spite of all the limitations, a sole trading concern is a popular form of organisation in all parts of the world. Thus, we can say that it has its own place in the field of business even today. Its future is bright. In the words of William R. Basset, “One man control is the best in the world, if that one man is big enough to manage everything. But a business must be small, indeed to permit one man actually to know and to supervise everything. The danger is always present that he thinks he knows, when really he does not know. If the one man is away or ill, the business stops and when he dies, business vanishes or has to be rebuilt”. Thus, one man control is strictly limited to small business only.

Short Answer Questions

Question 1.
What is sole proprietorship?
Answer:
A sole proprietor contributes and organises the resources in a systematic way and controls the activities with the objective of earning profit.

The sole proprietorship is that form of business ownership which is owned and controlled by a single individual. He receives all the profits and bears risks of his property in the success of failure of the ent.erprises^It is the first stage in the evolution of the forms of organisation and is thus, the oldest among them,

Sole proprietorship also known as individual entrepreneurship, it is the easiest to form and is also the simplest in organisation. All that is required is that the individual concerned should decide to carry on some particular business and find the necessary capital. For this purpose, he may depend mostly on his own savings, or else, he may borrow part or whole from his friends or relatives. There are no legal formalities to be followed except those required for a particular type of business.

Question 2.
Explain the features of sole proprietor.
Answer:
“Sole proprietorship is a form of business where the individual proprietor is the supreme judge of all matters pertaining to his business.” – Kimball and %imball

The important features of sole proprietorship :

1. The business is owned by only one person.
2. The business is controlled by a single individual.
3. The risk is borne by a single person only i.e. sole trader.
4. The liability of the sole trader is unlimited.
5. The business concern has no separate legal entity, i.e. as per law the sole trader and firm both are same.
6. To commencement of business, legal formalities are very less. So it is easiest form.
7. Decisions are made by sole trader only.

Thus, a sole proprietor or trader is a person who sets up his business with his own resources. He is the owner, entreprenuer, financier, manager, controller of Lie business and sole responsible for the results of its operations.

Question 3.
Explain the limitations of sole trader.
Answer:
The following are the limitations of sole trading concern.

1. Limited resources
2. Lack of continuity
3. Unlimited liability
4. No suitable for large scale operations
5. Limited managerial skills

1) Limited resources :
The resources of a sole proprietor are always limited. Being the single owner, it is not always possible to arrange sufficient funds from his own sources. So, the proprietor has a limited capacity to raise funds for his business.

2) Lack of continuity :
The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.

3) Unlimited liability :
As per law, the proprietor and business are one and same. So personal proprietors of the owner can also be used to meet the business obligations and debts.

4) Not suitable for large scale operations :
Since the resources and the managerial ability is limited, sole proprietorship form of business organisation is not suitable for large scale business.

5) Limited managerial skills :
As there is only one man the managerial ability is limited. The sole trader has limited financial sources, administration, sale, and marketing skills. However, all skills required to take decisions may not be present in a single person alone.

Very Short Answer Questions

Question 1.
No separate entity
Answer:
The sole proprietorship unit does not have an entity separate from the owner. The businessman and its enterprise are one and the same, and the businessman is responsible for everything that happens in his business firm.

Question 2.
Unlimited liability
Answer:
The liability of the sole proprietor is unlimited. In case of loss, if his business assets are not enough to make the payment of business liabilities, his personal property can also be utilised to pay off the liabilities of the business.

Question 3.
Forms of business organisation
Answer:
Arrangement of ownership and management of business organisations is termed as “Form of business organisation”. Business organisations may be owned and managed by a single individual (sole proprietorship) or a group of individuals (partnership) or in the form of a company (joint stock company).

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 2nd Lesson Business Activities Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 2nd Lesson Business Activities

Essay Answer Questions

Question 1.
What is meant by Industry? Explain various types of industries with suitable. [Mar. 2019, 18 – T.S. Mar. 16 – A.P.]
Answer:
Industry – Meaning :
Industry is concerned with the production of goods and services. Industry is involved to convert raw materials into finished goods. It creates form utility to goods.

Classification of Industries :
Industries can be classified into various types. They are

1. Primary industry
2. Genetic industry
3. Extractive industry
4. Manufacturing industry
5. Construction industry
6. Service industry

1) Primary Industry :
Primary industry is concerned with the production of goods with the help of nature. E.g : Agriculture, Farming, Fishing, Horticulture, etc.

2) Genetic industry :
This industry is concerned with the breeding of plants or animals, which are used in reproduction. E.g. : Poultry forms,’ Cattle breeding farms, Fish hatcheries, etc.

3) Extractive Industry :
This is concerned with extraction or drawing out goods from the soil, air or water. Generally products of extractive industries come in raw material, they are used for manufacturing and construction industries for produc¬ing finished products. E.g. : Mining, Fishing, Coal, Mineral, Iron ore, Oil industry, Timber, Rubber from forests, etc.

4) Manufacturing Industry :
This industry is engaged in the conversion of raw materials into semi-finished or finished goods. E.g.: Cotton Textiles, Sugar, Cement, etc.

Manufacturing industries are also sub-divided into four types. They are given below:

i) Analytical Industry :
In an analytical industry the basic raw material is broken into several useful materials. E.g.: Oil refinery. Crude oil is refined and several petroleum products are obtained.

ii) Synthetic Industry:
In this type of manufacturing industry two or more materials are mixed to form a new product. E.g. : Cosmetics, Soaps, Fertilizers, Paint industry etc.

iii) Processing Industry :
In this industry material is processed through various stages.
E.g.: The textile industry. Cotton passes through the spinning, weaving, dyeing, bleaching and printing processes.

iv) Assembling Industry :
In this type of industry, manufactured components or parts are combined together mechanically or chemically to produce a new product.
E.g.: Manufacturing of TV sets, and automobiles industries.

5) Construction Industry :
This industry is concerned with the construction and erection.
E.g.: Construction of Buildings, Roads, Dams, Bridges, and Canals.

6) Service industry:
These type of industries are engaged in the provision of essential services to the community. Service sector plays an important role in the development of the nation. E.g.: Hotels, Tourism, Entertainment industry, etc.

Question 2.
What is Commerce? Describe the various branches of Commerce.
Answer:
Commerce – Meaning:
Commerce is the part of business. It deals with the buying and selling of goods. Commerce is concerned only with the exchange of goods. It includes all those activities which are related to the transfer of goods from production place to the consumption place. Commerce includes trade and aids to trades. Trade means buying and selling of goods. Aids to trade include transport, banking, insurance, warehousing, etc.
(Commerce = Trade + Aids to Trade )

Commerce – Definition:
“Commerce is an organized system for the exchange of goods between the members of the industrial world.” – James Stephenson

Branches of Commerce :
Commerce is divided into two branches. They are :

1. Trade
2. Aids to trade

1) Trade:
Trade is branch of commerce. It means purchase and sale of goods with profit motive. It involves exchange of goods and services between buyers and sellers. Trade may be classified into two types, i) Home trade ii) Foreign trade

i) Home trade :
This is also known as inland trade or internal trade. Purchase and sale of goods with profit motive within the boundaries of the country is called internal trade.

Home trade is also divided into two types. They are :

1. Wholesale trade
2. Retail trade

1) Wholesale trade :
It implies buying and selling of goods in large quantities. Traders who engage themselves in wholesale trade are called “Wholesalers”. Wholesale serves as a connecting link between the producers and retailers.

2) Retail trade :
It involves buying and selling in small quantities. Traders engaged in retail trade are called “Retailers”. They serve as a connecting link between the wholesalers and consumers. Retail trade is the final stage of distribution.

ii) Foreign trade:
It refers to buying and selling of goods and services between two or more countries, it is called foreign trade. In other words, the trade beyond the boundaries of the country is known as foreign trade.

Foreign trade is also known as “External trade” and “International trade”. Foreign trade may be classified into three types. They are
i) Export trade
ii) Import trade
iii) Entrepot trade

i) Export trade:
When domestic goods are sold to the other country it is called export trade. Selling and sending goods by Indian firms to other firms located outside India.

ii) Import trade :
In this type of trade, wherein goods are purchased from foreign countries. Purchasing goods by an Indian trader from a trader of the USA, the. UK, Japan, etc., is an example for import trade.

iii) Entrepot trade :
When the goods imported from one country are exported to an other country, it is known as entreport or re-export trade. E.g.: Oil import from Iraq by an Indian firm and export the same to Nepal, is called entrepot trade.

2) Aids to Trade :
Commercet is the sum total of those processes, which are engaged in the removal of hindrance of persons, place and time in the exchange of commodities, it is called Aids to trade.
Aids to trade is also called “Auxiliaries to trade.” Aids to trade include Transport, Communication, Warehousing, Banking, Insurance, Advertising.

i) Transport :
It means for the movement of commodities from one place to another place. The development of road, rail, air and water transport allows to move commodities all over the world. They create place utility to goods. Transport is broadly classified into three types – Land transport, Water transport, Air transport.

ii) Insurance :
Insurance reduces the problem of risks. Business is subject to risks and uncertainties. These are inevitable in the field of business. Risks may be due to fire, theft, accident or any other natural calamity. Insurance plays a vital role in removing risks. Insurance tries to reduce risks by spreading them out over a larger number of people.

iii) Warehousing :
There is a time gap between production and consumption. In other words, goods which are produced at one time, are not consumed at the same time. Hence it becomes necessary to make arrangements for storage or warehousing. Warehousing creates time utility and removes the hindrances of time.

iv) Banking :
Banking solves the problem of finance. Businessmen receive money and also pay money in large amounts. It is risky to carry large amount to cash from one place to another. Here comes banking as a solution. Banking and financial institutions solve the problem of payment and facilitate exchange between buyer and seller. Banks provide many services like accepting deposits, advance loans, agency services, overdraft facilities, etc.

v) Advertising :
Advertising means giving publicity regarding goods or services which are offered to the public for sale. It is intended to retain the existing market. Advertising creates mass market for the product. Advertisements can be made through different media.” E.g. : Newspaper, Magazines, Television, Radio, Outdoor publicity, etc.

Question 3.
Define trade explain the various types of aids to trade.
Answer:
Trade :
Trade is branch of commerce. It means purchase and sale of goods with profit motive. It involves exchange of goods and services between buyers and sellers.
Trade may be classified into two types.

1. Home trade
2. Foreign trade

1) Home trade :
This is also known as inland trade or internal trade. Purchase and sale of goods with profit motive within the boundaries of the country is called internal trade. Home trade is also divided into two types. They are :
i) Wholesale trade
ii) Retail trade

i) Wholesale trade :
It implies buying and selling of goods in large quantities. Traders who engage themselves in wholesale trade are called “Wholesalers”. Wholesale serves as a connecting link between the producers and retailers.

ii) Retail trade :
It involves buying and selling in small quantities. Traders engaged in retail trade are called “Retailers”. They serve as a connecting link between the wholesalers and consumers. Retail trade is the final stage of distribution.

2) Foreign trade :
It refers to buying and selling of goods and services between two or more countries, it is called foreign trade. In other words, the trade beyond the boundaries of the country is known as foreign trade.

Foreign trade is also known as “External trade” and “International trade”. Foreign trade may be classified into three types. They are
i) Export trade
ii) Import trade
iii) Entrepot trade

i) Export trade :
When domestic goods are sold to the other country it is called export trade. Selling and sending goods by indian firms to other firms located outside india.

ii) Import trade :
In this type trade, wherein goods are purchased from foreign countries. Purchasing goods by an Indian trader from a trader of the USA, the UK, Japan, etc. is an example for import trade.

iii) Entrepot trade :
When the goods imported from one countiy are exported to an other country, it is known as entrepot or re-export trade. E.g.: Oil import from Iraq by an Indian firm and export the same to Nepal, is called entrepot trade.

Aids to trade :
Commerce is the sum total of those process, which are engaged in the removal of hindrance of persons, place and time in the exchange of commodities, it is called Aids to trade.

Aids to trade is also called “Auxiliaries to trade.” Aids to trade include, Transport, Communication, Warehousing, Banking, Insurance, Advertising.

i) Transport:
It means for the movement of commodities from one place to another place. The development of road, rail, air and water transport allows to move commodities all over the world. They create place utility to goods. Transport is broadly classified into three types – Land transport, Water transport, Air transport.

ii) Insurance:
Insurance reduces the problem of risks. Business is subject to risks and uncertainties. These are inevitable in the field of business. Risks may be due to fire, theft, accident or any other natural calamity. Insurance plays a vital role in removing risks. Insurance tries to reduce risks by spreading them out over a larger number of people.

iii) Warehousing :
There is a time gap between production and consumption. In other words, goods, which are produced at one time, are not consumed at the same time. Hence it becomes necessary to make arrangements for storage or warehousing. Warehousing creates time utility and removes the hindrances of time.

iv) Banking :
Banking solves the problem of finance. Businessmen receive money and also pay money in large amounts. It is risky to carry large amount to cash from one place to another. Here comes banking as a solution. Banking and financial institutions solve the problem of payment and facilitate exchange between buyer and seller. Banks provide many services like accepting deposits, advance loans, agency services, overdraft facilities, etc.

v) Advertising :
Advertising means giving publicity regarding goods or services which are offered to the public for sale. It is intended to retain the existing market. Advertising creates mass market for the product. Advertisements can be made through different media.
E.g.: Newspaper, Magazines, Television, Radio, Outdoor publicity, etc.

Question 4.
Explain the inter-relationship between Trade, Commerce and Industry, and also state differences between them.
Answer:
Inter-relationship between Industry, Trade and Commerce :
Business:
Business deals with production or purchase and sale of goods and services undertaken with the object of earning profit and acquiring wealth, through the satisfaction of human wants. .

Industry :
Industry deals with production of goods and services.

Commerce :
Commerce deals with distribution or exchange of goods and services.

Trade :
Trade deals with the buying and selling of goods and services.

Short Answer Questions

Question 1.
Define industry.
Answer:
Industry – Meaning :
Industry is concerned with the production of goods and services. Industry is involved to convert raw materials into finished goods. It creates form utility to goods.

Industry is a business activity which is related to the extracting, producing, processing or manufacturing of goods.

The goods may be consumer goods or producer goods. Consumer goods are the goods, which are used finally by consumers, e.g., Food grains, textiles, cosmetics, VCR, etc. Producer’s goods are the goods used by manufacturers for producing some other goods. E.g. Machinery, tools, equipment, etc.

Question 2.
What do you understand by commerce?
Answer:
Commerce is the part of business. It deals with buying and selling of goods and services and includes all those activities which directly or indirectly facilitate that exchange.

Commerce includes trade and aids to trade i.e. deals with the distribution aspect of the business. Whatever is produced it must be consumed, to facilitate this consumption there must be a proper distribution channel. Here comes the need for commerce which is concerned with the smooth buying and selling of goods and services.

Commerce is a very wide term. It involves the process of bringing goods from the place of production to the place of consumption. In other words, it supplies goods to ultimate consumers. Thus commerce in the sum total of those processes, which are engaged in the removal of hindrances of persons as place, time in the exchange of commodities. Importance of commerce :

1. Commerce helps to increase our standard of living.
2. Commerce links producers and consumers.
3. Commerce generates employment opportunities.
4. Commerce increases national income and wealth.
5. Commerce encourages international trade.

COMMERCE = TRADE + AIDS TO TRADE”

Question 3.
What is trade?
Answer:
Trade :
Trade means purchase and sale of goods with profit motive. It involves exchange of goods and services between buyers and sellers. Trade is a branch of commerce. It connects buying and selling activities. An individual who does trade is called a trader. Trader transfers the goods from the producer to the consumer. He earns profit from this activity.

Trade may be classified into (a) home trade (b) foreign trade.

Question 4.
State the types of foreign trade.
Answer:
Foreign trade :
It refers to buying and selling of goods and services between two or more countries through international airports and sea ports. Foreign trade is also known as ‘External Trade’ or ‘International Trade’.

Foreign trade may be classified into three types. They are :

1. Import trade
2. Export trade
3. Entrepot trade

1) Import trade :
In this type of trade, wherein goods are purchased from foreign countries. Purchasing goods by an Indian firm from a trader of the USA, the UK, Japan, etc. is an example for import trade.

2) Export trade :
When domestic goods are sold to the other country it is called export trade. Selling and sending goods by Indian firms to other firms located outside India.

3) Entrepot trade :
When the goods imported from one country are exported to an other country, it is known as entrepot trade or re-export trade.
E.g.: Electronic goods are imported from Singapore and the same are exported to Bangladesh.

Question 5.
Explain the classification of industries.
Answer:
Classification of Industries : Industries can be classified into various types. They are

1. Primary industry
2. Genetic industry
3. Extractive industry
4. Manufacturing industry
5. Construction industry
6. Service industry

1) Primary industry :
It is concerned with the production of goods with the help of nature. E.g : Agriculture, Farming, Horticulture, etc.

2) Genetic industry :
This industry is concerned with the breeding of plants or animals, which are used in reproduction.
E.g. : Poultry forms, Cattle breeding farms, Fish hatcheries, etc.

3) Extractive industry :
This is concerned with extraction or drawing out goods from the soil, air or water. Generally products of extractive industries come in raw material, they are used for manufacturing and construction industries for producing finished products.
E.g. : Mining, Fishing, Coal, Mineral, Iron ore, Oil industry, Timber, Rubber from forests, etc.

4) Manufacturing Industry:
This industry is engaged in the conversion of raw materials into semi-finished or finished goods. E.g.: Cotton Textiles, Sugar, Cement, etc.

Manufacturing industries are also sub-divided into four types. They are given below :

i) Analytical Industry :
In an analytical industry the basic raw material is broken into several useful materials. E.g.: Oil refinery. Crude oil is refined and several petroleum products are obtained.

ii) Synthetic Industry:
In this type of manufacturing industry two or more materials are mixed to form a new product. E.g. : Cosmetics, Soaps, Fertilizers, Paint industry, etc.

iii) Processing Industry:
In this industry material is processed through various stages. E.g.: The textile industry. Cotton passes through the spinning, weaving, dyeing, bleaching, and printing processes.

iv) Assembling Industry:
In this type of industry, manufactured components or parts are combined together mechanically or chemically to produce a new product. E.g.: Manufacturing of TV sets, and automobiles industries.

5) Construction Industry:
This industry is concerned with the construction and erection. E.g.: Construction of Buildings, Roads, Dams, Bridges, and Canals.

6) Service industry:
These type of industries are engaged in the provision of essential services to the community. Service sector plays an important role in the development of the nation. E.g.: Hotels, Tourism, Entertainment industry, etc.

Question 6.
Define entrepot trade.
Answer:
Entrepot trade :
It means importing (buying) goods from one country for the purpose of exporting (selling) them to another country. This type of trade is also known as re-export trade.

Entrepot trade refers to a trade in one centre for the goods of other countries. Merchandise can be imported and exported without paying import duties in entrepot trade. Because of favorable trade conditions, profit is possible in entrepot trade.

Question 7.
What are the hindrances involved in commerce?
Answer:
Commerce is an organised system which facilitates free flow of goods and services. In busi¬ness, products and services are produced through industry. The produced goods and ser¬vices face various types of hindrances to reach the customers. Commerce removes all these hindrances and helps to distribute products and reach business desired goal.

Hindrances	Removed By
Persons	Trade
Place	Transportation
Time	Warehousing
Finance	Banking
Risk	insurance
Promotion	Advertisement
Information	Communication

Following are some important hindrances in commerce :

1. Hindrance of person
2. Hindrance of place
3. Hindrance of exchage
4. Hindrance of time and duration
5. Hindrance of knowledge

1) Hindrance of person :
Trade treaty is done by buyers and sellers. In exchange of money, the sellers sell the value of the goods and services to the buyers. Therefore through the handover of products personal hindrances can be removed.

2) Hindrance of place :
The goods are produced at one place but their consumption in different places. The hindrance of distance is removed by various means of transport such as rail, road, air, and sea. Transport helps in removing the hindrance of place. It creates place utility.

3) Hindrance of exchange :
The payment of goods and services is generally made possible through banks. Bank as a part of commerce, acts to remove the hindrance of exchange. Bank helps in removing the hindrance of exchange.

4) Hindrance of time and duration :
There is a time gap between production and consumption. The goods produced are not immediately required for consumption. Warehousing removes the hindrances of time and duration. It preserves the goods from the time of production to the time of consumption. It creates time utility.

5) Hindrance of risk :
Business involves risk. Risk is involved in transporting goods from one place to another place. There can be a risk due to fire, theft, accident, etc. The risk of loss will removed by insurance. Insurance helps in the removal of hindrance of risk.

6) Hindrance of knowledge :
Advertisement removes the hindrance of knowledge. It informs to the customers about the availability of various products. Communication helps in the efficient operation of commercial activities. The hindrances of knowledge will be removed by advertisements.

Very Short Answer Questions

Question 1.
Industry tf
Answer:
Basically industry is concerned with manufacturing of goods and services. Industry deals with extractive, genetic, manufacturing, construction, and service type industries.

Question 2.
Commerce.
Answer:
It deals with buying and selling of goods. Commerce is concerned only with the exchange of goods and services.

(Commerce = Trade + Aids to Trade)

Question 3.
Trade
Answer:
Trade is the central activity of commerce. Trade means purchase and sale of goods with profit motive. It involves exchange of goods and services between buyers and sellers.

Question 4.
Home trade
Answer:
Purchase and sale of goods with profit motive within the boundaries of the country is called home trade. It is also known as Inland trade or Internal trade.

Question 5.
Entrepot trade.
Answer:
It is one of types of the foreign trade. When goods are imported from one country and the same are exported to another country such trade is called entrepot trade.
E.g.: Electronic goods are imported from Taiwan and same are exported to Nepal.

Question 6.
Transportation
Answer:
There is a vast distance between centers of production and centers of consumption. This difficulty is removed by transport. Transportation creates place utility.

Question 7.
Warehousing
Answer:
It is very important function of commerce. It involves storage or accumulation of goods for the purpose of equalizing supplies over a period of time. So, it creates time utility.

Question 8.
Genetic industries
Answer:
These industries are concerned with the breeding of plants or animals, which are used in reproduction. Eg : Poultry farms, etc.

Question 9.
Extractive industries
Answer:
These are concerned with extraction or drawing out goods from the soil, air or water. Eg : Mining, Fishing, Coal, Minerals, Iron ore, Oil industries, etc.

Question 10.
Banking
Answer:
Banking is one of the aids to trade. It solves the problem of finance. Businessmen receive money and also pay money in large amounts. It is risky to carry money from one place to another place. Here comes banking as a solution.

Question 11.
Ana lytica l industry
Answer:
In an analytical industry the basic raw material is broken into several useful materials. E.g.: Oil refinery. Crude oil is refined and several petroleum products are obtained.

Question 12.
Synthetic Industry
Answer:
In this type of manufacturing industry two or more materials are mixed to form a new product. E.g.: Cosmetics, Soaps, Fertilizers, Paint industry, etc.

Question 13.
Processing industry
Answer:
In the industry material is processed through various stages. E.g.: The textile industry. Cotton passes through the spinning, weaving, dyeing, bleaching and printing processes.

Question 14.
Assembling industry
Answer:
In this type of industry, manufactured components or parts are combined together mechanically or chemically to produce a new product.
E.g.: Manufacting of TV sets and automobile industries.

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 1st Lesson Concept of Business Textbook Questions and Answers.

AP Inter 1st Year Commerce Study Material 1st Lesson Concept of Business

Essay Answer Questions

Question 1.
Define Business. What are its characteristics? [A.P. Mar. 2019, 17]
Answer:
The term Business refers to “the state of being busy”. Every individual is engaged in some activities to fulfill his/her set of needs and wants. All these activities are intended to satisfy human needs. Business is one of the human economic activities.

Business – Definitions :
“A human activity directed towards producing or acquiring wealth through buying and selling of goods.” -L.H. Haney

“Business is an institution organized and operated to provide goods and services to society under the incentive of private gain.” -B.O. Wheeler

“Business is a sum of all activities involved in the production and distribution of goods and services for private profits.” – Keith and Carlo

Business – Characteristics :
Following are the essential characteristics of the business.

1. Creation of utilities
2. Deals with goods and services
3. Continuity in dealings
4. Sale, transfer or exchange
5. Profit motive
6. Risk and uncertainty
7. Economic activity
8. Art as well as science

1) Creation of utilities :
Business makes goods more useful to satisfy human wants. It adds to production, the utilities of person, time, place, form, knowledge, etc. Businessman is able to satisfy the customer’s demands effectively and economically with the help of business transactions.

2) Deals with goods and services :
Business deals with goods and services. The goods may be consumer goods such as cloths, soaps, milk, shoes, furniture, etc. They may be industrial goods such as machinery, equipment, etc. which are used for further production. Business also deals with services such as transport, warehousing, banking, insurance, etc.

3) Continuity in dealings :
Dealings in goods and services become business only if undertaken on a regular basis. A single isolated transaction of purchase and sale does not constitute business. Recurring or repeated transactions of purchase and sale constitutes business. E.g.: If a person sells his old scooter or a car, it is not business though the seller gets money in exchange. But if he opens a shop and sells scooters or cars regularly, it will become business. Therefore, regularity of dealings in an essential feature of business.

4) Sale, transfer or exchange :
In a business activity there should be two parties i.e. a buyer and a seller. There should be exchange, sale, transfer of goods or services between these two parties for money. For instance, cooking food for personal consumption does not constitute business. But cooking food and selling it to others for a price becomes business. E.g.: Students’ mess.

5) Profit motive:
The primary objective of business is to earn profits. Profits are essential for the survival as well as growth of business. Profits must, however, be earned through legal and fair means. Business should never exploit society to make money.

6) Risk and uncertainty :
Profit is the reward for assuming risk. Risk implies uncertainty of profit or the possibility of loss. Risk is a part and parcel of business. Business enterprises function in uncertain and uncontrollable environment. E.g.: Changes in customers’ tastes and fashions, demand, competition, government policies, etc. create risk. Flood, fire, earthquake, strike by employees, theft, etc. also cause loss. A businessman can reduce risks through correct forecasting and insurance. But all risks cannot be eliminated.

7) Economic activity:
Business is primarily an economic function. It involves production and distribution of goods and services for the satisfaction of human wants. However, business is a part of society and it reflects on aspiration, values and beliefs of people. Therefore, business may be described as a socio-economic function.

8) Art as well as science :
Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws.
The above mentioned features are common to all business enterprises irrespec¬tive of their nature, size and form of ownership.

Question 2.
Explain the objectives of a business.
Answer:
Objectives of business mean the purposes for which business is established and carried on. Proper selection of objectives is essential for the success of a business. Therefore, every businessman must select and define his business objectives carefully and clearly.

Objectives of business are classified as given below.

1) Economic Objectives:
Business is basically an economic activity. Therefore, its primary objectives are economic in nature. The main economic objectives of business are as follows.

i) Earning profits :
Every business enterprise’s main object is profit. It is the hope of earning profits that inspires people to start business. Profit is essential for the survival of every business unit. Profit also serves as the barometer of stability, efficiency and progress of a business enterprise.

ii) Creating customers :
Profits arise from the businessman’s efforts to satisfy the needs and wants of customers. A businessman can earn profits only when there are enough customers to buy and pay for his goods and services. The customer is the foundation of business and keeps it in existence. Business exists to satisfy the wants, tastes and preferences of customers.

iii) Innovation :
Innovation refers to “creation of new things resulting from the study and experimentation, research and development”. In these days of competition a business can be successful only when it creates new designs, better machines, improved techniques, new varieties, etc. Modern science and technology have created a great scope for innovation in the business world.

2) Social Objectives:
Business does not exist in a vaccum. It is a part of society. It cannot survive and grow without the support of society. So, business must have some social objectives. They are given below.

i) Supplying desired goods at reasonable prices :
Business is expected to supply the goods and services required by the society. Goods and services should be of good quality and these should be supplied at reasonable prices. It is also the social obligation of business toaKoid malpractices tike smuggling, black makreting and misleading advertising.

ii) Fair Remuneration to employees:
Employees must be given fair compensation for their work. In addition to wages and salary a reasonable part of profits should be distribuited among employees by way of bonus. Such sharing of profits will help to increase the motivation and efficiency of employees.

It is the obligation of business to provide healthy and safe work environment for employees. Employees work day and night to ensure smooth functioning of business. It is, therefore, the duty of employers to provide hygienic working and living conditions for workers.

iii) Employment generation :
Business should provide opportunities for gainful employment to members of the society. In a country like India unemployment has become a serious problem and no government can offer jobs to all. Therefore, provision of adequate and full employment opportunities is a significant service to society.

iv) Social welfare :
Business should provide support to social, cultural and reli¬gious organisations. Business enterprises can build schools, colleges, libraries, dharamshalas, hospitals, sports bodies and research institutions. They can help non-government organisations (NGOs) like CRY (Child Relief and You), Help Age, and others which render services to weaker sections of society.

v) Payment of government dues :
A business should not shut its eyes to its obligations towards the government. Therefore, business owes it to the government to pay its tax dues honestly and in time. It must also dutifully abide by the laws of the land.

3) Human Objectives:
i) Labour welfare :
Business must recognise the dignity of labour and human factor should be given due recognition. Adequate provisions should be made for their health, safety and social security.

ii) Developing human resources :
Employees must be provided with the opportunities for developing new skills and attitudes. This can be done by training the employees and conducting workshops on skill development and attitude. Human resources are the most valuable asset of business and their development will help in the growth of business.

iii) Participative management :
Employees should be allowed to take part in decision making process of business. This will help in the development of employees. Workers’ participation in management will usher in industrial democracy.

iv) Labour – Management cooperation :
Business should strive for creating and maintaining cordial employer- employee relations so as to ensure peace and progress, in industry.

4) National Objectives:
i) Optimum utilisation of resources :
Business should use the nation’s resources in the best possible manner. Judicious allocation and optimum utilisation of scarce resources is essential for rapid and balanced economic growth of the country. Business should produce goods in accordance with national priorities and interests. It should minimise the wastage of scarce natural resources.

ii) National self-reliance :
It is the duty of business to help the government in increasing exports and in reducing dependence on imports. This will help a country to achieve economic independence. .

iii) Development of small scale industries :
Big business firms are expected to encourage growth of small scale industries which are necessary for generating employment. Small scale firms can be developed as ancillaries which provide inputs to large scale industries.

iv) Development of backward areas :
Business is expected to give preference to the industrialisation of backward regions of the country. Balanced regional development is necessary for peace and progress in the country. It will also help to raise standard of living in backward areas. Government offers special incen¬tives to the businessmen who set up factories in notified backward areas.

Question 3.
Discuss the social responsibility of business.
Answer:
Business organisations are obliged to consider social impact of their decisions. The obligation of any business to protect and serve public interest is known as social responsibility of business. Any responsibility business has, particularly towards members of the society with whom they interact or towards the society in general called is social responsibility.

The Concept of Social Responsibility:
Every business operates within a society. It uses the resources of the society and depends on the society for its functioning. This creates an obligation on the part of business to look after the welfare of society. Therefore, all the activities of the business should be such that they will not harm, rather they will protect and contribute to the interests of the society.

Social responsibility of business refers to all such duties and obligations of business directed towards the welfare of society. So, every business must contribute in some way or the other for their benefit. E.g. : Every business must ensure a satisfactory rate of return to investors, provide good salary, security and proper working condition to its employees, make available quality products at reasonable price to its consumers, maintain the environment properly, etc. Social responsibility implies that a business should not do anything harmful to the society in course of business activities of a businessman.

Social Responsibility Towards Different Interest Groups :
The business generally interacts with owners, investors, employees, suppliers, customers, competitors, gov-ernment and society. They are called interest groups. Such interest groups are given below.

Social responsibility towards different interest groups

• Responsibility towards owners
• Responsibility towards employees
• Responsibility towards suppliers
• Responsibility towards customers
• Responsibility towards government
• Responsibility towards society

1) Responsibility towards owners :
Owners are the persons who own the business. They contribute capital and bear the business risks. The primary responsibilities of business towards its owners are to :

1. Run the business efficiently.
2. Proper utilisation of capital and other resources.
3. Growth and appreciation of capital.
4. Regular and fair return on capital invested by way of dividends.

2) Responsibility towards employees :
Business needs employees or workers to work for it. These employees put their best effort for the benefit of the business. The responsibility of business towards its employees include:

1. Timely and regular payment of wages and salaries.
2. Proper working conditions and welfare amenities.
3. Opportunity for better career prospects.
4. Job security as well as social security like facilities of provident fund, group insurance, pension, retirement benefits, etc.

3) Responsibility towards suppliers :
Suppliers are businessmen who supply raw materials and other items required by manufacturers and traders. Certain suppliers, called distributors, supply finished products to the customers. The responsibilities of business towards these suppliers are :

1. Giving qualitative goods at reasonable prices.
2. Dealing on fair terms and conditions.
3. Availing reasonable credit period.
4. Timely payment of dues.

4) Responsibility towards customers :
No business can survive without customers. As a part of the responsibility of business towards them the business should provide the following facilities.

1. Products and services must be qualitative
2. Giving delivery of goods within stipulated time
3. Reasonable price
4. There must be proper after-sales services.
5. Complaints and grievances of the customers, if any, must be settled quickly.
6. Unfair means like underweighing the product, adulteration, etc. must be avoided.

5) Responsibility towards government:
Business activities are governed by the rules and regulations framed by the government. The various social responsibilities of the government are:

1. Setting up units as per guidelines of the government.
2. Payment of fees, duties and taxes regularly as well as honestly.
3. Conforming to pollution control norms set up by government.
4. Not to indulge in corruption through bribing and other unlawful activities.

6) Responsibility towards society :
A society consists of individuals, groups, organizations, families, etc. They all are the members of the society. Thus, it has certain responsibilities towards society, which may be as follows :

1. to help the weaker and backward sections of the society
2. to preserve and promote social and cultural values
3. to generate employment
4. to protect the environment
5. to conserve natural resources and wildlife
6. to promote sports and culture

Question 4.
Classify and describe each type of Economic activities.
Answer:
All the activities in which the people participate from morning till night are called human activities. Every individual is engaged in some activities to fulfil his/her set of needs and wants. All these activities are intended to satisfy human needs.

All the activities of human beings can be classified into two types. They are :

Non – economic Activities :
Those human activities do not involve money or money’s worth, such activities are termed as non-economic activities. Human beings engage themselves in non-economic activities due to love, affection, patriotism, charity, sympathy, and other such sentiments.
E.g. : A mother looks after her children, young man helps a blind man to cross the road, etc.

Economic Activities:
Human beings undertake certain economic activities for earning money or livelihood. Working as a teacher in a school, a doctor in a hospital, a worker in a factory, a farmer in a field, an emloyee in an office, a merchant selling goods, etc.

In other words, an human being involves in any activity together with money or money’s worth, such activities are termed as human economic activities. Such human economic activities are classified into three types. They are given below ;

1. Profession
2. Employment
3. Business

1) Profession:
An activity which involves the rendering of personalized services of a specialized nature based on professional knowledge, education and training is called a profes¬sion. Services rendered by doctors, lawyers, chartered accountants, engineers, etc. come under this category.

2) Employment:
An employment is a contract of service. A person who works under the contract for a salary is called an employee and the person who has given the job to the employee is called employer. An employee works under an agreement as per the rules of service and performs tasks assigned to him by the employer. The relationship between the employer and the employee is that of a ‘Master’ and ‘Servant’.

3) Business:
Business is one of the human economic activities. Business is an economic activity involving production, exchange, distribution and sale of goods and services with an objective of making profits.

Short Answer Questions

Quelition 1.
Business objectives.
Answer:
Objectives of business mean the purposes for which business is established and carried on. Proper selection of objectives is essential for the success of a business. Objectives serve as the guidelines for the future direction and management of business. Therefore, every businessman must select and define his business objectives carefully and clearly.

Objectives of business may be classified into four broad categories. They are :

1. Economic objectives
2. Social objectives
3. Human objectives
4. National objectives

Every businessman seeks to earn profits by satisfying the wants of people. It is the hope of earning profits which induce people to enter into business. No business can survive without making adequate profits. Thus profit is the fundamental economic objective of business.

If profit maximization is regarded as the sole objective of business, it is likely to result in unfair practices such as hoarding, black marketing, etc. The profit making and social service objectives are not contradictory to each other.

Business must discharge social responsibilities in addition to earning profits. It should aim at servicing the community.

Quelition 2.
Social objectives.
Answer:
Business does not exist in a vacuum. It is a part of society. It cannot survive and grow without the support of society. Business must therefore discharge social responsibilities in addition to earning profits.

Social objectives – Definition :
“The primary aim of business should be service and subsidiary aim should be earning of profit.” – Henry Ford

Some important social objectives are given below :

1. Business is expected to supply the goods and services required by the society. Goods and services should be of good quality and these should be supplied at reasonable prices.
2. Employees must be given fair compensation for their work. In addition to wages and salary a reasonable part of profits should be distributed among employees by way of bonus. Such sharing of profits will help to increase the motivation and efficiency of employees. So, fair remuneration to employees is an important social objective.
3. Business should provide job opportunities to the members of the society. In a country like India unemployment has become a serious problem and no government can offer jobs to all. So, employment generation is also one of the social objectives.
4. Business should provide support to social, cultural and religious organisations. Business enterprises can build schools, colleges, libraries, hospitals, etc.
5. Every business enterprise should pay tax dues to the government honestly and at the right time. These direct and indirect taxes provide revenue to the government for spending on public welfare. So, payment of government dues is also one of the important social objectives.

Quelition 3.
Role of profit in business.
Answer:
A business enterprise is established for earning some income. It is the hope of earning profits that inspires people to start business. Profit is essential for the survival of every business unit. Just as a person cannot live without food, a business firm cannot survive without profit. Profits enable a businessman to stay in business by maintaining intact the wealth producing capacity of its resources.

Profit is also necessary for the expansion and growth of business. Profits ensure continuous flow of capital for the modernisation and extension of business operations in future. Profit also serves as the barometer of stability, efficiency and progress of a business enterprise.

Quelition 4.
Brief explaination of economic activities.
Answer:
The term business refers to “the state of being busy”. Every business individual is engaged in some activities to fulfil his/her set of needs and wants. All these activities are intended to satisfy human needs. E.g.: A farmer engages himself in agricultural activities and an employee works in the office, a teacher teaches in the classroom, etc. for satisfying his needs, comforts and luxuries.

All the activities of human being can be divided into two types. They are :

1. Economic Activities
2. Non-economic Activities

Economic activities :
Those human activities that are involved in money, such activities are termed as economic activities. Human beings undertake certain economic activities for earning money or livelihood. Working as a teacher in a school, a doctor in a hospital, a worker in a factory, a merchant selling goods or an industrialist manufacturing goods, all these are economic activities. These economic activities are concerned with production, exchange and distribution of goods and services.

Very Short Answer Questions

Quelition 1.
Define Business. [Mar. 2018, 17 ; May 17 – A.P.]
Answer:
A business is an economic institution. It is concerned with production and distribution of goods and rendering of service in order to earn profits and acquire wealth. Business may be defined as “a human activity directed towards producing or acquiring wealth through buying and selling of goods”. – L.H. Haney

Profits are consideration of Business.

Quelition 2.
What is a Profession?
Answer:
Profession is one of the human economic activities. An activity which involves the rendering of personalised services of a specialized nature based on professional knowledge, education and training is called a profession. E.g. : Doctors, Lawyers, Chartered Accountants, Engineers, etc.

Remuneration is consideration of Profession.

Quelition 3.
What is Employment?
Answer:
Employment is also one of human economic activities. Any activity assigned to a person by the employer under an agreement or rules of services comes under the category of employment.

A person who undertakes such activity is called employee.

Salary is consideration of Employment.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 13th Lesson Final Accounts with Adjustments Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 13th Lesson Final Accounts with Adjustments

Essay Type Questions

Question 1.
Describe the various types of adjustments with examples.
Answer:
Types of Adjustments:
1. Adjustments relating to closing stock: Closing stock means, the stock of goods unsold at the end of the accounting year.
Adjustment entry:

(Being the closing stock transfer to the trading account)

Accounting treatment in final accounts:

1) Show on the credit side of trading A/c

2) Show on the assets side of balance sheet.

Note : If closing stock is given in Trial Balance, show it on the Assets side of Balance sheet.

2. Adjustments relating to expenses:
a) Outstanding expenses : Expenses relating to the current accounting year but not yet paid and are to be paid in the next year e.g: Salary for the month of December is due but not paid.

Adjustment entry:

(Being the expenses due)

Accounting treatment in final accounts:

1) Add either in trading A/c or in profit & loss A/c to the concerned expenditure item.
Trading A/c

2) Show it as a liability on the liabilities side of Balance sheet.

Note : If outstanding expenses are given in trial balance show as liability in Balance sheet.

b) Prepaid expenses : Expenses relating to the next accounting year but paid in the current accounting period are called prepaid expenses. (May. ’17 – A.P.)

Adjustment entry:

(Being expenses paid in advance)

Accounting treatment in final accounts: If prepaid expenses are given as an adjustment.

1. Deduct it from the concerned expenditure either in trading A/c or in Profit & Loss A/c for the first instance and
2. Record as asset on assets side of the balance sheet as second time.

1) Add either in trading A/c or in profite & loss A/c to the concerned expenditures item.

Trading A/c

Balance Sheet

Note: If prepaid expenditure is given only in Trial balance, show it as asset in Balance sheet.

3. Income:
a) Accrued Income: Income relating to current year which is not received during the current year but to be received in the next year is called Accured income or income receivable.
Adjustment entry:

(Being the income receivable)

Accounting treatment in final accounts: If accrued income is given as adjustment –

1. For the first instance add to the concerned income in profit and loss a/c on credit side and then.
2. Show it as an asset in balance sheet on assets side.

Profit & Loss A/c

Balance Sheet

Note : If accrued income is given in trial balance, show it on assets side of Balance sheet.

b) Income Received in Advance : The income relating to the next year but received in the current year is called income received in advances.
Adjustment entry:

(Being the income received in advance)

Accounting treatment in final accounts: When income received in advance is given adjustment

1. Deduct it from the concerned income in Profit & Loss a/c on credit side and
2. Record it as a liability on the liabilities side in the balance sheet.

Profit & Loss A/c

Balance Sheet

Note: If Income received in advance is given in the trial balance show it on liabilities side in the balance sheet.

4. Depreciation: Decline in the value of fixed assets is called “Depreciation”.
Adjustment entry:

(Being the depreciation provided on asset)

Accounting treatment in final accounts: When depreciation is given as an adjustment:

1. Debit it to profit & loss A/c.
2. Deduct it from the value of concerned asset in balance sheet on assets side.

Trial Balance

Adj : Provide depreciation on machinery 10%

Profit & Loss A/c

Note : If depreciation is given in trial balance, it should be shown on debit side in P & L A/c only.

5. Debtors : In final accounts bad debts, provision for bad debts may be given as adjustments relating to debtors.
A) Bad debts: To debts which are not collected or irrecoverable are known as bad debts.

Adjustment entry:

(Being bad debts written off)

Accounting treatment in final accounts:

a) When bad debts are given, only in the adjustments –

1. Debit to profit & loss A/c and
2. Deduct from debtors in the balance sheet on assets side.

Trial Balance

Adjustment: Bad debts : 500

Note : If the bad debts are given in trial balance only, it should be shown on debit side in Profit & Loss A/c.

b) When Bad debts are given in both Trial Balance and adjustments:

1. In Profit & Loss A/c, both the bad debts (Bad debts given in Trial balance and given in adjustment) are to be shown on debit side.
2. Bad debts given only in the adjustments are to be deducted from debtors in the balance sheet.

Trial Balance

Adjustments: 1) Bad debts : 400

B) Provision for bad and doubtful debts: Some debts of a particular year may or may not be recovered in the next year. These debts are known as doubtful debts. So traders create same amount on current year debtors and keep the same to meet the doubtful bad debts of the next year, which is called provision for bad and doubtful debts.

a) When provision for doubtful debts is given as adjustment:
Adjustment entry:

(Being provision created on debtors)

Accounting treatment in final accounts:

1. Show it on debit side in profit & Loss A/c and
2. Deduct it from debtors in Balance sheet,

e.g.:
Trial Balance

Adjustment: Create provision for bad and doubtful debts 5%.

Profit & Loss A/c

Balance Sheet

b) When provision for doubtful debts is given in Trial Balance and also in adjustments: Accounting treatment in final accounts:

1. Compare the old provision (given in trial balance) with new provision (given in the adjustments), if the new provision is more than the old provision, the difference amount (New provision – old provision) should be debited to the Profit & Loss A/c.
On the other hand, new provision is less than the old provision, the difference amount (old provision – new provision) should be recorded on the credit side of Profit & Loss A/c.

2. In balance sheet, deduct the amount of new provision of bad and doubtful debts from sundry debtors.

Trial Balance

Adjustments : Create 5% provision for doubtful debts.

Profit & Loss A/c

Balance Sheet

c) If the bad debts are given both in trial balance and in adjustments, and also provision for bad debts given in adjustments.
Accounting treatment in final accounts:

1. Don’t calculate the provision directly on sundry debtors.
2. Calculate the provision after deducting the further bad debts.

Trial Balance

Adjustments:

1. Further bad debts : Rs. 600
2. Provision for bad debts : 5%

Profit & Loss A/c

6. Interest on capital : It is the amount of interest payable on owner’s capital by the business organisation.

Adjustment entry:

(Being the interest payable on capital)

Accounting treatment in final A/cs:

1. Debit in profit & Loss A/c and
2. It should be added to the capital in balance sheet.

Trial Balance

Adjustment: Interest on capital: 12%

7. Interest on Drawings : Drawings mean the amount of cash or goods taken by the trader for personal use. The amount of interest payable by the owner to the business is called interest on drawings.
Adjustment entry:

(Being the interest on drawings)
Accounting treatment in final A/cs:

1. It is to be recorded on credit side of P & L a/c and
2. It should be deducted from capital in balance sheet.

Trial Balance

Adjustment: Interest on drawings : 5%

Note: When interest on drawings is given in trial balance, it should be shown on credit side in Profit & Loss A/c only.

Short Answer Questions

Question 1.
Write the following:
a) Interest on Capital:
Answer:
The amount of interest payable on owner’s capital by the business organisation is called interest on capital.
Adjustment entry:

(Being the interest payable on capital)
Accounting treatment in final accounts:
When interest on capital is given as an adjustment.
1. Debit in P & L A/c and
2. It should be added to the capital in balance sheet.
Note : When it is given in trial balance, debit it in P & L A/c only.

b) Interest on Drawings :
Answer:
Drawings mean the amount of cash or goods taken by the trader for personal use.
The amount of interest payable by the owner to the business is called Interest on drawings.
Adjustment entry:

(Being the interest on drawings)
Accounting treatment In final accounts:

When interest on drawings given as adjustment.

1. It is to be recorded on credit side of P & L A/c and
2. Deduct the amount from capital in Balance sheet.

Note: When interest on drawings is given in trial balance, it should be shown on credit side in Profit & Loss A/c.

Very Short Answer Questions

Question 1.
What is the meaning of adjustment ?
Answer:
To find out net profit and true financial position, all expenses relating to current year whether actually paid or not, all incomes received or yet to be received should be taken into account. Some of the incomes and expenses relating to next year, but received and paid in the current year should not be included in the accounts of current year. The amount to be adjusted to the concerned items is called adjustment. e.g: Outstanding salaries, prepaid insurance, etc.

Question 2.
Explain the importance of adjustment:
Answer:

1. Expenses or incomes relating to the accounting period can be known accurately.
2. Profit or loss can be ascertained accurately.
3. Real value of assets and liabilities can be ascertained easily.

Question 3.
Give the meaning of bad debts. (Mar. 2018 T.S.)
Answer:
The debts which are not collected or Irrecoverable are known as bad debts.
Adjuštment entry:

(Being bad debts written off)

Adjustments Summary

Problems

Question 1.
From the following trial balance, prepare final accounts of Praveen Traders as on 31.12.2013:

Adjustments:

1. Closing stock: 4500;
2. Outstanding wages : 390;
3. Outstanding salaries : 500
4. Prepaid Insurance: 400

Answer:

Question 2.
From the following particulars, prepare final accounts : (May ’17 – T.S.)

Adjustments:

1. Closing stock: 6000
2. Prepaid Insurance: 200
3. Outstanding salaries :600
4. Accrued interest : 500

Answer:

Question 3.
From the following particulars, prepare final accounts of Giri for the year ending 31.12.2013.

Adjustments:

1. Closing stock value: 3500
2. Outstanding wages : 860
3. Prepaid insurance: 100
4. Provide depreciation on furniture: 10% and on land & buildings : 10%
5. Interest received in advance : 500

Answer:

Question 4.
From the following Trialbalance o1 Mr.kapil, prepare Trading P & L A/c and Balance Sheet or the year ended (Mar. 2018 – A.P.)
Trial Balance

Adjustments:

1. Outstanding wages: 2000;
2. Outstanding salaries: 1000;
3. Prepaid insurance: 50;
4. Create 5% reserve for bad debts on debtors;
5. Depreciation on furniture: 150, Dep. on machinery: 500;
6. Closing stock: 11,000.

Answer:

Question 5.
From the following particulars, prepare final accounts for the year ended 31.3.2010.
Trial Balance

Adjustments:

1. Closing stock: 16,800;
2. Interest on capital :9%;
3. Write off : 2,000 as bad debt and provide 5% reserve for doubtful debts;
4. Outstanding wages: 1,000.

Answer:

Question 6.
Prepare final accounts of Praveen Traders for the year ending 31.03.2014.
Trial Balance

Adjustments:

1. Closing stock : 5,800;
2. Depreciation on motor van: 10%;
3. Reserve for bad & doubtful debts : 5%;
4. Outstanding rent Rs. 500;
5. Prepaid taxes: Rs. 200/-.

Answer:

Question 7.
Prepare final accounts from the following trial balance for the year ended 31.12.2013.
Trial Balance

Adjustments:

1. Closing stock: 2,100
2. Outstanding stationery bill : 600
3. Depreciation on machinery: 10%
4. Bad Debts : 500
5. Prepaid wages :500

Answer:

Question 8.
From the following Trial balance of Vinod Traders, prepare final accounts:
Trial Balance

Adjustments:

1. Closing stock: 9,500
2. Bad debts : 1,500
3. Provide reserve for bad debts : 5%
4. Outstanding wages : 300
5. Depreciation on machinery: 10%
6. Interest received in advance : 500.

Answer:

Question 9.
Prepare sole traders final accounts for the year ending 31.03.2014.
Trial Balance

Adjustments:

1. Closing stock value : 7,500;
2. Depreciation on machinery : 12%;
3. Commission received in advance : 1,200;
4. Interest receivable : 1,500;
5. Further bad debts : 400;
6. Prepaid insurance: 500.

Answer:

Question 10.
Prepare Final Accounts of Ramakrishna Traders as on 31.12.2013:

Adjustments:

1. Closing stock: 3,500
2. Outstanding rent: 500
3. Prepaid salaries & wages : 400
4. Interest received in advance: 300
5. Depreciation on machinery: 10%

Answer:

Question 11.
Prepare Ravi Traders’ Final Accounts for the fear ended 31.12.2013:
Trial Balance

Adjustments:

1. Closing Stock Value : 5,100
2. Reserve for Bad Debts : 5%
3. Depreciation on patents : 20%
4. Outstanding Rent :300
5. Commission Receivable : 200

Answer:

Question 12.
Prepare Final Accounts of Srinivasa Traders as on 31.12.2012.
Trial Balance

Adjustments:

1. Closing stock value: Rs. 5,000
2. Calculate Interest on Capital : 8%
3. Interest on Drawings: 10%
4. Provide Reserve for Debts : 5%
5. Depredation on premises: 10%

Answer:

Question 13.
From the following Trial Balance prepare Final Accounts.
Trial Balance

Adjustments:

1. Closing Stock Value : Rs. 16,800;
2. Outstanding Salaries : 400
3. Prepaid Rent & Taxes: 201
4. Provide Reserve on Sundry Debtors : 5%
5. Depreciation on Machinery: 10%
6. Interest on Capital: 5%

Answer:

Question 14.
From the following Trial Balance of Vishnu traders prepare Final Accounts for the year ended 31.3.2014.
Trial Balance

Adjustments

1. Closing Stock Value: Rs. 14,000;
2. Depreciation on Furniture: 250, on Machinery: 750
3. Outstanding Wages : Rs. 500;
4. Bad Debts : 600;
5. Interest on Drawings : 5%

Answer:

Question 15.
Prepare Final Accounts:
Trial Balance

Adjustments:

1. Closing Stock Value : Rs. 56,000
2. Outstanding Salaries : 6,000
3. Bad Debts : 2000, and Create Reserve for Bad debts : 3%
4. Depreciation on Machinery: 5%
5. Interest on Capital: 5%

Answer:

Question 16.
From the following Trial Balance and additional information of Latha, prepare Trading and Profit and Loss Account for the year ended 3l Dec. 2008 and Balance Sheet as on that date.
Trial Balance

Adjustments:

1. Closing Stock : Rs. 26,800
2. Depreciate 10% on Machinery and 20% on Patents
3. Outstanding Salaries : Rs. 1,500
4. Unexpired Insurance: Rs. 170
5. Provide 5% provision for bad debts on Debtors

Answer:

Question 17.
From the following Trial Balance of Mr. Paramesh, prepare the Trading, Profit and Loss account and Balance Sheet for the year ended 31.12.2012.
Trial Balance as on 31.12.2012

Adjustments:

1. Closing Stock : Rs. 34,500
2. Outstanding salaries : Rs. 5,500
3. Depreciate plant and machinery by 5%
4. Prepaid insurance: Rs. 1,500
5. 5% provision is to be made for bad debts on debtors

Answer:

Student Activity

Visit any organisation and note the adjustments made during the last year’s final accounts.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 12th Lesson Final Accounts Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 12th Lesson Final Accounts

Essay Type Questions

Question 1.
List out advantages of Final accounts.
Answer:
List out advantages of Final accounts :

1. To know the profit or loss: Business profit or loss can be known to the trader through the trading account and profit and loss account.
2. Financial position: Balance sheet reflects the financial position of the organization.
3. Financial planning : Final accounts are important source of finance information which helps the management to plan the financial activities of the business concern.
4. Decision making: Financial statements of current year can be compared with results of the previous year statements, which helps the trader to take business decisions.
5. To pay the taxes: Final accounts help in completion of tax.
6. To borrow money : Final accounts reveal the solvency position of the organization. This helps to take loan from banks.

Question 2.
Explain the capital and revenue expenditures and incomes with examples.
Answer:
Capital and Revenue Expenditures: Business expenditure of an enterprise are of three kinds as :

1. Capital Expenditure,
2. Revenue Expenditure,
3. Deferred Revenue Expenditure.

1) Capital Expenditure : It is the expenditure which is normally incurred for acquiring fixed assets or assets which increase the earning capacity of the business. Benefits of this expenditure are extended over a number of years. E.g.: Purchase of furniture, Machinery, Buildings, etc.

2) Revenue Expenditure : It is the expenditure incurred in the normal course of business activities. The benefit of this expenditure is restricted to only one accounting year.
E.g.: Rent, Salaries, Selling expenses.

3) Deferred Expenditure : It consists of revenue and capital items. Benefits from these expenses are spread over several years.
E.g.: Huge amount of expenditure on advertisement.

Capital and Revenue Incomes: The business incomes are of three kinds as :

1. Capital Income,
2. Revenue Income and
3. Deferred Income.

1) Capital Income: Any amount received as investment by the owners, raised by way of loans and incomes received on sale of fixed assets is called capital income.
E.g.: Capital, Sale of machinery, etc.
2) Revenue Income: It means an income which arise, during normal course of regular business transactions. E.g.: Commission received, Sale of goods, etc.
3) Deferred Income : This consists of items of revenue and capital nature and spread over several years. E.g.: Rent or Interest received for more than a year.

Question 3.
Draw an imaginary Balance Sheet Pro forma.
Answer:
Balance sheet may be prepared in any one of the following orders.

1. Liquidity order
2. Permanency order

Proforma of Balance sheet on the basis of Liquidity order:
Balance sheet of ____ as on _____

Balance sheet on the order of Permanency: Balance sheet of ____ as on ____

Short Answer Questions

Question 1.
Write the meaning and uses of final accounts.
Answer:
Final accounts (Final statements) are the statements that are prepared at the end of an accounting period. These consist of trading account, profit and loss account and balance sheet.

Uses:

1. To know the profit or loss at the end of a particular period.
2. To know the financial position of the organization.
3. It helps to plan the financial activities of business concern.
4. It helps to take business decision.
5. With the help of financial statements business concerns can get the loans from the banks.

Question 2.
Explain the meaning and advantages of trading account.
Answer:
An account is to be prepared to know the results of trading activities carries during the accounting period. This account is termed as Trading Account.

Advantages:

1. It reveals either gross profit or gross loss
2. Gross profit / loss ratio can be calculated
3. Trading expenses and incomes of the current year can be compared with that of previous year.
4. The trader can estimate his trade revenue for future years.

Question 3.
Write the meaning and importance of profit and loss account.
Answer:
After trading account, the Profit & Loss a/c is to be prepared to find out the net profit or net loss of the business. It is a nominal account. Hence all the expenses and losses should be debited and all the incomes and gains to be credited to this account.

Importance of Profit & Loss Account

1. It reveals net profit or net loss.
2. Net profit ratio can be calculated.
3. Current year’s administrative, selling and other expenses can be compared with the previous year’s amounts.
4. It facilitates for the preparation of balance sheet.

Question 4.
Explain the following with examples:
a) Current Assets
b) Current Liabilities
Answer:
a) Current Assets : The assets which are held for resale or can be converted into cash on a later date are called current assets. E.g.: Stock, Debtors, Bills receivable, etc.
b) Current Liabilities : These liabilities payable by the organization within one accounting period (short term liabilities) not more than 12 months from the date of balance sheet E.g.: Bills payable, Trade creditors, Bank overdraft, etc.

Very Short Answer Questions

Question 1.
Define capital expenditure and give two examples.
Answer:
Capital expenditure is the expenditure which is normally incurred for acquiring fixed assets or assets which increase the earning capacity of the business. Benefits of capital expenditure are extended over a number of years. E.g,: Purchase of fixed assets like furniture, Machinery and Buildings.

Question 2.
Define revenue expenditure with two examples. (Mar. ’17 – A.P.)
Answer:
Revenue expenditure means an expenditure incurred in the normal course of business activities. The benefit of revenue expenditure is restricted to only one accounting year.
E.g.: Office expenses like rent, Salaries, etc.

Question 3.
Define capital income and give two examples. (Mar. 2019, 15 – A.P.)
Answer:
Any amount received as investments by the owners, raised by way of loans and income received on sale of fixed assets is called capital income. E.g.: Capital, Sale of machinery, etc.

Question 4.
Explain the terms tangible and intangible assets with examples.
Answer:
Assets which can be seen and touch are called tangible assets E.g.: Furniture, Machinery, etc. Assets which can neither be seen nor touched are called intangible assets. E.g.: Patents, Good will etc.

Question 5.
Define the term drawings. (Mar. 2019 – T.S.)
Answer:
Drawings may be defined as the amount withdrawn by the proprietor from the business either in cash or in kind for personal use. Drawings should be deducted from capital in the balance sheet on liabilities side.

Problems

Question 1.
Prepare trading account of Srikanth Traders for the year ended 31.12.2013.

Answer:
Dr. Tracing Account of Srikanth Traders for the year ended 31.12.2013

Question 2.
Prepare trading account from the following particulars for the year ended 31.03.2014:

Answer:

Question 3.
Prepare trading account.
Purchases

Answer:

Question 4.
Prepare trading account of Hyderabad Traders as on 31.12.2012:

Answer:

Question 5.
From the following particulars, prepare Profit & Loss A/c as on 31.12.2013:

Answer:

Question 6.
Prepare Profit & Loss A/c from the following particulars:

Answer:

Question 7.
From the following Particulars, prepare Profit & Loss A/c.

Answer:

Question 8.
Prepare Trading A/c, Profit & Loss A/c of Suresh Traders for the year ending 31.12.2012.

Answer:

Question 9.
From the following trial balance, prepare Trading A/c, Profit & Loss A/c for the year ended 31.12.2013:

Answer:

Question 10.
Prepare Trading account and Profit & Loss A/c. (amounts in rupees)

Answer:

Question 11.
Prepare Balance sheet from the following;

Answer:

Question 12.
Prepare balance sheet of Kiran Traders from the following as on 31.03.2913:

Answer:

Question 13.
Prepare balance sheet of Vamsi Traders for the year ended 31.12.2013:

Answer:

Question 14.
From the following Trial Balance, prepare Trading, P& L Account and Balance Sheet:

Answer:

Question 15.
From the following a trial balance prepare final accounts for the year ending 31.03.2014 :

Answer:

Balance sheet for the year ending 31.3.2014

Student Activity

Visit any small undertaking and collect its expenses, income, assets and liabilities during the latest accounting period, and prepare Trading and Profit & Loss A/c and Balance Sheet in vertical form.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 11th Lesson Rectification of Errors Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 11th Lesson Rectification of Errors

Short Answer Questions

Question 1.
Give two examples of Errors of Omission.
Answer:
When a transaction is completely or partly omitted from the books of accounts such error is known as Error of Omission.

1. When no entry is made for a transaction in journal
   E.g.: Purchase of goods are not recorded in the books of original entry.
2. If an entry is not made for a transaction in the Subsidiary Book
   E.g.: Paid cash to Ganesh traders not entered in Cash Book.

Question 2.
Explain the errors of commission with two examples.
Answer:
The errors arise due to wrong recording, wrong posting, wrong casting, wrong entry forwarding, wrong balancing, etc.

1. Wrong recording: When a transaction is incorrectly recorded in the books of original entry E.g.: Slaes of goods to Rama of Rs. 150 recorded as Rs. 50.
2. Wrong casting : If the mistake is committed in totaling, it is called error of commission.
   E.g.: Sales book is overcast by Rs. 100.

Question 3.
Explain the errors of Principle with two examples.
Answer:
Errors which are committed by violating or defective knowledge of accounting principles (rules). These errors may arise, when the clear distinction is not made between the Capital and Revenue nature items.
E.g.:

1. Purchase of land & buildings – debited to purchases a/c instead of land & buildings a/c.
2. Rent paid to landlord – debited to landlord a/c instead of rent a/c.

Question 4.
Explain the compensating errors. (Mar. 2018 – A.P.)
Answer:
If two or more errors are arised and one error nullifies the another error, the net effect is unchanged, these are Called compensating errors.
E.g.: Amount paid to Teja Rs. 2000 recorded as Rs. 200 and Amount received from Krishna Rs. 10,000 recorded as Rs. 9,500.

Question 5.
Define suspense account.
Answer:
Sometimes, despite an accountant’s best efforts, the trial balance may not agree. In such circumstances, the differnce between the debit and credit Totals should be transferred to an account called Suspense Account. It is an imaginary account, opened and used as a temporary measure to make two sides of the trial balance agree.

Essay Type Questions

Question 1.
What are the various types of errors ? Explain. (Mar. 2018 – A.P. – May ’17 – A.P. & T.S.; Mar. 17. ’15 – T.S.)
Answer:
Errors may be classified as:

1) Errors of Principle
2) Errors of Omission
3) Errors of Commission
4) Compensating Errors
5) Writing to wrong head of account

1) Errors of Principle : Errors which are committed by violating or defective knowledge of accounting principles (rules). These errors may arise, when the clear distinction is not made between the Capital and Revenue nature items.
E.g.:

1. Purchase of land & buildings – debited to purchases a/c instead of land and buildings a/c.
2. Rent paid to landlord – debited to landlord a/c instead of rent a/c.

2) Errors of Omission : When a transaction is completely or partly omitted from the books of accounts such error is known as Error of Omission.

1. When no entry is made for a transaction in journal
   E.g.: Purchase of goods are not recorded in the books of original entry.
2. If an entry is not made for a transaction in the Subsidary Book E.g.: Paid cash to Ganesh not entered in Cash Book.

3) Errors of Commission : The errors arise due to wrong recording, wrong posting, wrong casting, wrong entry forwarding, wrong balancing, etc.

1. Wrong recording : When a transaction is incorrectly recorded in the books of original entry E.g.: Sales of goods to Rama of Rs. 150 recorded as Rs. 50.
2. Wrong Casting : If the mistake is committed in totaling is called error of commission. E.g.: Sales book is overcast by Rs. 100.

4) Compensating Errors: If two or more errors are arised and one error nullifies the another error, the net effect is unchanged, these are called compensating errors.
E.g.: Amount paid to Teja Rs. 2000 recorded as Rs. 200. and amount received from Krishna Rs. 10,000 recorded as 9,500.

5) Writing to wrong head of account: Instead of recording one account, recording another account is known as writing to wrong head of a/c.
E.g.: Paid to Vijay Rs. 1,000 is debited to Vinay a/c.

Question 2.
What are the errors disclosed by Trial Balance and not disclosed by Trial balance ? (Mar. 2019 – A.P. & T.S.)
Answer:
Errors may be classified as

I) Errors not disclosed by Trial Balance
II) Errors disclosed by Trial Balance .

I) Errors not disclosed by trial balance :

1. Errors of Principle
2. Errors of Omission
3. Errors of Commission
4. Compensating Errors
5. Writing to wrong head of account

II) Errors disclosed by Trial Balance :

1. Posting of transaction to wrong side of an account
2. Posting of wrong amount to an account
3. Errors in totaling
4. Errors of carrying forward
5. Posting of only one aspect of journal entry into ledger
6. Recording one aspect twice

Question 3.
What is meant by Suspense Account? Why Is It opened ?Explain. (Mar. ’17, ’15 – A.P.)
Answer:
Sometimes, despite an accountant’s best efforts, the trial balance may not agree. In such circumstances, the difference between the debit and credit Totals should be transferred to an account called ‘Suspense Account’. It is an imaginary account, opened and used as a temporary measure to make two sides of the trial balance agree.
The suspense account may show any balance, suspence account will be written off after the errors are detected and rectified. If the opening balance of suspense a/c is not given, the difference of suspense account is to be considered as opening balance.

Problems

Question 1.
Rectify the following errors:
a) A sale of goods to Adithya for Rs. 2500 was passed through the purchases book.
b) Salary of Rs. 800 paid to Sandeep was wrongly debited to his personal account.
c) Furniture purchased on credit from Sekhar for Rs. 1000 was entered in the purchases book.
d) Rs. 5000 spent on the extension of buildings was debited to buildings repairs account.
e) Goods returned by Shailesh Rs. 1200 were entered in the Return Outwards book.
Answer:
Rectification Entries

Question 2.
Rectify the following errors;
a) Furniture purchased for Rs. 10,000 wrongly debited to purchase account.
b) Machinery purchased on credit from Ramana for Rs. 20,000 was recorded through purchases book.
c) Repairs on machinery Rs. 1,400 debited to machinery account.
d) Repairs on overhauling of secondhand machinery purchased Rs. 2,000 was debited to repairs account.
e) Sale of old machinery at book value of Rs. 3,000 was credited to sales account.
Answer:
Rectification Entries

Question 3.
Pass journal entries to rectify the following errors:
a) Machinery purchased for Rs. 5,000 has been debited to purchases a/c.
b) Rs. 700paid to Ruchira as legal charges were debited to his personal account.
c) Rs. 10,000 paid to Escorts Company for machinery purchased stand debited to Escorts company account.
d) Typewriter purchased for Rs. 6,000 was wrongly passed through purchase book.
e) Rs. 20,000 paid for the purchase of Motor-Cycle for proprietor has been charged to General Expenses’a/c.
f) Rs. 15,000 paid for the purchase of Gas engine’ were debited to ‘Purchases’ a/c.
g) Cash paid to Saritha Rs. 400 was debited to the account of Amani.
Answer:
Rectification Entries

Question 4.
Give rectification entries for the following errors:
a) Wages payable to furniture maker Rs. 670 debited to Wages a/c.
b) A credit sale of Rs. ISO to Srinivas debited to Shiva Ram.
c) Payment of salary to Varshini not passed through books at all.
d) A credit purchase ofRs. 140 to Harshini, recorded in the books as Rs. 410.
Answer:
Rectification Entries

Question 5.
Pass journal entries to rectify the following errors:
a) The purchases book of the trader is overadded by Rs. 200. (Overcast by)
b) Old furniture sold for Rs. 100 was wrongly credited to sales a/c.
c) Rs. 100 paid on account of interest was debited to commission account.
d) An amount of Rs. 125 received from Soni was wrongly credited to his account as Rs. 152.
Answer:
Rectification Entries

Question 6.
Rectify the following errors:
a) Purchases of furniture costing Rs. 1,200 have been passed through purchases book.
b) Repairs to machinery Rs. 200 were debited to machinery account.
c) A credit sale ofRs. 200 to Ramesh Kodur through properly entered in the sales book has been credited to his account.
d) The total of purchases book, was overcast by Rs. 200.
e) Salary paid to Sheshu, manager stands debited to his account.
Answer:
Rectification Entries

Question 7.
Rectify the following errors:
a) Sale of old machinery Rs. 500 has been entered in the sales book.
b) Rakesh Vedantam pays 300. This amount has been credited to Rajesh.
c) A sale ofRs. 250 to Shah & Co., has been debited to them as Rs. 520.
d) Returns to Ramanuji Rs. 350 have not been posted to his account.
e) Salary of Rs. 1500 paid to Ramana has been debited to his account.
f) A purchase ofRs. 700 from Gupta & Co., has been entered in the sales book.
Answer:
Rectification Entries

Question 8.
Rectify the following errors:
a) An amount of Rs. 100 paid for the repairs of furniture was debited to furniture account,
b) Sales book total was overcast by Rs. 500.
c) Expenses 15 were posted in the ledger as 150.
d) A sale ofRs. 200 to Mr. S. was wrongly debited to the account of Mr. V.
e) Old furniture sold has been credited to sales a/c Rs. 500,
Answer:
Rectification Entries

Question 9.
Write the entries for the rectification of the following errors:
a) Sales book was overcast by Rs. 300.
b) Sales of Rs. 100 to Madhavi was wrongly debited to account of Sharath.
c) General expenses of Rs. 20 were posted in the general ledger as Rs. 30.
d) Rs. 100 received from Yada was debited to Sandhya.
e) Legal expenses Rs. 200 paid to Saritha was debited to her personal account.
f) An amount of Rs. 200 paid of Ramesh is not posted to his account.
Answer:
Rectification Entries

Question 10.
Pass Journal en fries for rectification of the following errors:
a) The total of purchases book was undercast by Rs. 200.
b) A credit purchase from Vaishnavi for Rs. 1000 has been wrongly passed through the sales book
c) Wages paid Rs. 200 was wrongly debited to salaries account.
d) Rs. 100 receIved on account interest stands wrongly credited to commission account.
e) Salary of Rs. 500 paid to manager Mr. Krishna (s debited to his personal account.
Answer:
Rectification Entries

Question 11.
Rectify the following errors before preparation of trial balance:
a) Purchase book was undercast by Rs. 2000.
b) Rent paid Rs. 350 was debited to that account as Rs. 530.
c) Discount received from Rama & Co. Rs. 250 was not posted to their account.
d) Interest paid Rs. 89 was wrongly credited to that account as Rs. 98.
e) Sales book was overcast byRs. 1700.
f) Purchase returns book undercast by Rs. 275.
Answer:
Rectification Entries

Question 12.
Rectify the following errors discovered before preparation of the trial balance.
a) The sales book has been totaled Rs. 1000 short.
b) Sale of old furniture Rs. 4000 was credited to sales account.
c) Rs. 250 paid towards interest was debited to commission account.
d) Rs. 125 paid by Sandeep but was entered in his account Rs. 152.
e) The purchase a/c was overcast by Rs. 750.
f) Rs. 4500 salary paid to Mr. Shekar head clerk stands debited to his personal account.
Answer:
Rectification Entries

Question 13.
Rectify the following errors dicovered before preparation of the trial balance.
a) Furniture purchased Rs. 3,500 has been passed through the purchases book.
b) The returns inward book was overcast by Rs. 250.
c) Rs. 800 paid for repairs to machinery was debited to machinery account
d) A sale ofRs. 750 made to Srimannarayana was entered in sales book but was credited to his account.
e) A purchase ofRs. 760 made from Radhika was credited to his account Rs. 670.
Answer:
Rectification Entries

Question 14.
Rectify the following errors before preparation of trial balance.
a) Rs. 250paid for proprietors medical bill was debited to sundry expenses account.
b) Sale of goods to Sandhya & Co. for Rs. 2900 was entered through the purchase book.
c) Sale of old machinery Rs. 5000 was posted to the credit of sales account.
d) The total of purchase book was overcast by Rs. 2000.
e) Salary ofRs. 4500 paid to Kittu has been debited to his account.
Answer:
Rectification Entries

Question 15.
Pass necessary entries to rectify the following errors. After the preparation of trial balance.
a) Rs. 1500 received from Gopal has been wrongly credited to Chandu’s a/c.
b) The purchase book was undercast by Rs. 1000.
c) Repairs to machinery Rs. 800 were debited to machinery account.
d) Discount allowed to Chiru Rs. 200 correctly entered in cash book, has not been posted to his account.
e) Bills payable from Mr. Gopichand Rs. 1000 was entered in the bills payables book.
Answer:
Rectification Entries

Student Activity

Visit any small organisation and note down its experiences in rectifying the errors.

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.