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GNDU Question Paper-2021

Bachelor of Business Administration

B.B.A 1

Semester

Basic Accounting

Time Allowed: Three Hours Max. Marks: 50

Note: Attempt Five questions in all, selecting at least One question from each section. The

Fifth question may be attempted from any section. All questions carry equal marks.

SECTION-I

I Discuss who are the users and what is their interests in Accounting Information. What

are the limitations of Financial Accounting?

II Briefly discuss Accounting Concepts and Conventions.

SECTION-II

III. (a) Explain the Imprest System of Petty Cash Book.

(b) From the following information prepare Triple Columnar Cash Book.

2021

Mar. 1

Balances: Cash Rs. 500 and Bank (Cr.) Rs. 12,000

Mar. 2

Invested additional capital of Rs. 12,000

Mar. 5

Deposited Rs. 8,000 in the bank

Mar. 8

Received from Sita Rs. 890, allowed her discount Rs. 5

Mar. 12

Paid Rs. 1,200 to Ghansham who allowed discount of Rs. 30

Mar. 15

Bought merchandise for cash Rs. 700

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Mar. 17

Sold merchandise for cash Rs. 1,000

Mar. 18

Purchased furniture by cheque Rs. 1,500

Mar. 19

Received a crossed cheque of Rs. 230 from Geeta in full settlement of the debt

of Rs. 240

Mar. 22

Paid commission Rs. 150 by cheque

Mar. 25

Withdraw for personal use of Rs. 300

Mar. 26

Paid to Krishnan Rs. 700 by cheque, Discount received Rs. 20

Mar. 27

Withdraw for personal use Rs. 300

Mar. 29

Received dividend by an order cheque Rs. 30, deposited in bank on the same day

Mar. 30

Clear telephone bill Rs. 50

Mar. 31

Paid manager's salary Rs. 350, Rent Rs. 200 and Wages Rs. 150

IV. Explain the need and importances of providing Depreciation. Discus and illustrate

Straight Line Method of Depreciation.

SECTION-III

V. What is meant by Marshalling of Assets and Liabilities? What purpos does Final

Accounts serve ?

VI. Prepare Trading and Profit and Loss Account of M/s Sharma Sons for the year ended

March 31, 2021.

Particulars

Amt.(Rs.)

Particulars

Amt. (Rs.)

Stock (April 1, 2020)

15,100

Sales

1,67.200

Purchases

94,500

Returns Outwards

1,500

Wages

30,900

Provision for

Doubtful Debts

3,200

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Electricity

3.750

Sundry Creditors

35,600

Furniture

12,500

Capital

80,000

Machinery

18,000

Discount Received

1,280

Motor Car

10,240

Fuel

3,180

Rent @ Rs. 450 pm

4,050

Printing and

Stationery

5,200

Fixed Deposit (@

10% p.a.)

25,000

Sundry Debtors

42.000

Discount Allowed

1,400

Insurance Premium

4,800

Telephone Charges

3.750

Bad Debts

500

Bank

11,300

Cash

2,610

2,88,780

Other information:

(i) Stock on 31 March 2021 is Rs. 26,700. The stock includes goods returned by the

customer to the value of Rs. 2,200 for which no entry has been made.

(ii) Stock valuing Rs. 5,000 destroyed by fire Rs. 500 realised through sale of demaged

goods and insurance company paid Rs. 3,000 only against the complaint.

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(iii) M/s Sharma Sons has been providing for depreciation on Motor Car @ 20% under

Diminishing Balance Method. Now he wants to provide Depreciation @ 6% under Straight

Line Method w.e.f. April 1, 2018 (on the date of purchase of the Motor Car).

(iv) M/s Sharma Son's bank has debited Rs. 150 in the Pass Book as clearing charge which

has not been entered in the Cash Book.

(v) Creditors include a balance of Rs. 1,600 to the credit of S. Chand in respect of which it

has been decided and settled with the party to pay only Rs. 1,000.

(vi) Provide Depreciation on Machinery @ 15% and on Furniture @10% p.a.

(vii) A Debtors of Rs. 12,000 accepted a bill drawn by M/s Sharma Sons.

(viii) Create a provision for Doubtful Debts @ 5% on Sundry Debtors.

SECTION-IV

VIL Elaborate important provisions of Companies Act, 2013 w.r.t. preparation of Final

Accounts of a Company.

VIII. Discuss the application of Computers in Accounting.

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GNDU Answer Paper-2021

Bachelor of Business Administration

B.B.A 1

Semester

Basic Accounting

Time Allowed: Three Hours Max. Marks: 50

Note: Attempt Five questions in all, selecting at least One question from each section. The

Fifth question may be attempted from any section. All questions carry equal marks.

SECTION-I

I Discuss who are the users and what is their interests in Accounting Information. What

are the limitations of Financial Accounting?

Ans: Understanding the Users of Accounting Information and Their Interests

Imagine a big company as a bustling city. In this city, many different people come with

different needs, and they all want to know how the city is doing. The city’s “report card” is

the accounting information it produces. But who are these people, and what do they want

from the report card?

Users of accounting information are like visitors to this city. Each has a unique reason to visit

and specific questions to ask about the city’s health, wealth, and future. These users can

broadly be classified into two groups: internal users and external users.

1. Internal Users

These are like the city’s own officials and workers — the people inside the company who

use accounting information to make day-to-day decisions.

• Management: The CEO, managers, and department heads want to know how the

company is performing. They use accounting data to plan budgets, control costs,

decide on investments, and improve efficiency. For example, if the company is a

bakery, the manager would want to know which products are selling well and which

are causing losses. This helps them decide whether to introduce a new cake or cut

down on bread production.

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• Employees: Workers are also interested, especially when their salaries, bonuses, and

job security depend on the company’s financial health. If the bakery is making good

profits, employees feel confident about their jobs and maybe even expect bonuses.

2. External Users

These are the visitors outside the city who have an interest but no direct control over daily

affairs. They rely on financial statements to make important decisions.

• Investors: People who have invested or want to invest money in the company. They

want to know if the company is profitable and growing so that their investment can

earn good returns. If our bakery is expanding, investors might feel confident to buy

more shares or invest in a new branch.

• Creditors and Lenders: Banks and suppliers who lend money or sell goods on credit

want to be sure that the bakery can pay back loans or bills on time. They check the

financial information to judge the company’s ability to repay debts.

• Government: Tax authorities want to ensure that the company pays the right

amount of taxes. They also use accounting information to check if the company

complies with laws and regulations.

• Customers: Loyal customers might want to know if the bakery is stable enough to

provide consistent service. A sudden closure due to financial troubles could disrupt

their favorite treats!

• General Public: Sometimes, the community or media is interested in the company’s

economic impact, employment, and corporate responsibility.

The Interests of These Users

All these users look for different but overlapping types of information:

• Profitability: Is the company making money or losing it?

• Liquidity: Can it pay its bills on time?

• Financial Position: What assets and debts does the company have?

• Cash Flows: Where is the money coming from, and where is it going?

• Growth and Stability: Is the company expanding or shrinking?

A Small Story to Illustrate User Interests

Let’s say there is a small company called "Sunrise Tech." The owner, Mr. Sharma, wants to

expand but needs money. He approaches a bank for a loan. The bank manager looks at

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Sunrise Tech’s financial statements carefully. If the company shows good profits and low

debts, the bank will be happy to lend money. Meanwhile, a few investors, interested in tech

startups, also check the financial reports to decide if they want to invest. The employees

hope the company will grow so they can get better salaries and job security. Each of these

people uses the same accounting information but focuses on what matters to them.

Limitations of Financial Accounting

While financial accounting provides important information, it is not without its limitations.

Think of it as a map that shows where a city is but not the mood of its people or the weather

forecast. Here are some key limitations:

1. Historical Nature

Financial accounting mostly records past transactions. It tells what has happened,

not what will happen. So, while you know how much profit Sunrise Tech made last

year, you cannot be sure if it will succeed next year.

2. Does Not Capture Non-Monetary Information

Things like employee skills, brand reputation, customer satisfaction, or market

conditions are not recorded in financial statements. For example, if Sunrise Tech has

a very loyal customer base, that strength won’t appear in the balance sheet.

3. Ignores Inflation and Price Changes

Accounting numbers are often based on the original cost of assets, not their current

market value. So, if Sunrise Tech bought a machine 10 years ago for ₹1,00,000, the

balance sheet still shows that amount, even if the machine’s value has increased or

decreased.

4. Does Not Provide Detailed Information

Financial statements summarize information. They do not give details about specific

transactions or internal operations, which might be necessary for deeper analysis.

5. Subject to Accounting Policies and Estimates

Different companies may apply different accounting methods, which can affect

comparability. Also, estimates like depreciation or bad debts rely on judgment,

which may introduce errors or bias.

6. Ignores Future Uncertainties

Financial statements do not forecast risks, competition, or changes in laws that

might impact the company’s future.

7. Focus on Monetary Aspects Only

Many important factors influencing a company’s performance, such as

environmental impact or social responsibility, are not reflected in traditional

financial accounting.

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Wrapping It Up

Accounting information is like a window into a company’s financial world, and the users are

people looking through this window, each trying to find answers to their own questions.

Managers want to steer the company well, investors want to protect their money, lenders

want assurance of repayment, and many others have their own reasons to look inside.

But remember, this window isn’t perfect. It shows us past events and financial facts but can

miss the bigger picture—the feelings, hopes, risks, and stories behind the numbers. That is

why accounting is important but also limited. To truly understand a company, one must use

accounting information along with other insights, research, and sometimes, a bit of

intuition.

II Briefly discuss Accounting Concepts and Conventions.

Ans: Imagine you are starting a small business selling delicious homemade cookies in your

neighborhood. You decide to keep a notebook where you write down everything: how much

money you spent buying ingredients, how many cookies you sold, how much money you

earned, and what you still owe to your friends who helped you.

Now, what if you and your best friend want to keep track of your cookie business together?

You both need to agree on how you will write things down so that there is no confusion.

Should you count the money when you get it or when you promise to get it? Should you

count the ingredients you bought even if you haven’t used them yet? This is where

Accounting Concepts and Conventions come in — they are like the rules of the game that

everyone follows so the story of your business is told clearly, honestly, and fairly.

What Are Accounting Concepts?

Accounting concepts are the basic rules or principles that guide how financial information is

recorded and reported. Think of them as the foundation or the grammar of the accounting

language.

These concepts ensure that the financial statements — like the profit you made selling

cookies — are prepared consistently and meaningfully. Without these concepts, every

business might record transactions differently, making it impossible to compare or

understand their financial health.

Let me tell you a story to illustrate one of these concepts:

Story: The Case of the Missing Shoes

Raj owns a shoe store. One day, he buys 100 shoes but only sells 20 by the end of the

month. Raj’s friend suggests counting all 100 shoes as sales for that month because he

bought them. But Raj remembers the Matching Concept — which says expenses must be

recorded in the same period as the revenues they help generate. So Raj records sales only

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for the 20 shoes sold and keeps the cost of remaining shoes as inventory. This way, the

profit is shown correctly for the month.

Important Accounting Concepts

Here are some of the most important accounting concepts explained simply:

1. Business Entity Concept

The business is separate from the owner. Just like your cookie business has its own

notebook, your personal expenses or savings are kept separate from business

money. This helps in clearly knowing how the business is doing.

2. Going Concern Concept

This assumes the business will continue operating for a long time, not closing

tomorrow. So, you don’t record assets like ovens or furniture at their scrap value;

you assume they will be useful for many years.

3. Money Measurement Concept

Only things that can be measured in money are recorded. So, your happy customers

or your excellent baking skills aren’t recorded in the books, but the money they pay

you is.

4. Cost Concept

Assets are recorded at their original purchase price, not at current market price. For

example, if you bought an oven for ₹10,000 two years ago, you keep that cost in the

books, not what it might be worth today.

5. Matching Concept

Expenses are recorded in the period in which they help earn revenue. Like Raj’s shoe

story, if you pay for flour in July but bake cookies in August, you record flour expense

in August.

6. Accrual Concept

Transactions are recorded when they happen, not when cash is received or paid. So

if you sold cookies on credit, you record the sale immediately, not when your friend

actually pays.

7. Conservatism Concept

When in doubt, do not overstate profits or assets. If you’re unsure whether all

cookies will be sold, you record the possible loss rather than possible profit.

What Are Accounting Conventions?

While concepts are the basic principles, accounting conventions are like accepted customs

or practices that accountants generally follow to make financial reporting practical and

comparable.

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These conventions are not laws but are widely accepted habits based on experience.

Important Accounting Conventions

1. Consistency

Use the same methods every year so that your business’s progress can be compared

over time. For example, if you decide to value your inventory by the cost price this

year, you should do the same next year.

2. Disclosure

You must tell everything important in your financial statements so that users can

understand the true picture. If your cookie business borrowed money but forgot to

mention it, the financial statements won’t be reliable.

3. Materiality

Only significant information that can influence decisions needs to be recorded or

disclosed. If you bought a pen for your notebook, it’s not necessary to record every

tiny expense if it won’t affect your overall profit.

4. Conservatism (also considered a concept sometimes)

It’s better to be cautious and record expected losses but not expected gains. This

avoids giving a false impression of how well the business is doing.

Another Simple Story: The Lost Ingredients

Imagine you are baking cookies, but one day you realize some sugar packets got spoiled and

can’t be used. Should you ignore this loss because it’s small, or should you record it?

Here, the Materiality Convention helps you decide. If the spoiled sugar cost ₹10 and your

monthly profit is ₹10,000, you might ignore it. But if your profit is ₹20, then it becomes

important to note it. This way, the financial statements show a fair and true picture.

Why Are Concepts and Conventions Important?

Accounting without concepts and conventions would be like a story without a plot or

grammar — confusing and unclear. These rules help business owners, investors, banks, and

others understand the real financial situation.

Think of it like this: If your friend lent you money for your cookie business, they’d want to

know if you are doing well and can repay them. The accounting concepts and conventions

ensure your notebook is honest, clear, and consistent — so everyone trusts the story it tells.

Summary in Simple Terms

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• Accounting Concepts = Basic rules to record business transactions fairly and

consistently.

• Accounting Conventions = Customs and practical guidelines to make financial

reporting easier and trustworthy.

Together, they make sure that the financial story of your business is clear, reliable, and easy

to understand.

SECTION-II

III. (a) Explain the Imprest System of Petty Cash Book.

Ans: A Fresh Chapter at Riverside Stationery: Understanding the Imprest System of Petty

Cash

Imagine stepping into Riverside Stationery, a small shop buzzing with orders for pens,

notebooks, and staplers. The owner, Mr. Kapoor, watches as his new clerk, Anita, carefully

hands out change to a customer. In her pocket jingles a small pouch of coins and notes. That

pouch is Anita’s world—the petty cash fund that keeps the shop running smoothly. But how

does Mr. Kapoor ensure Anita never runs out of coins and yet never ends up with too much

cash idle? Enter the Imprest System of Petty Cash, a simple yet powerful method that

transforms small, everyday expenditures into a well-oiled financial routine.

What Is Petty Cash?

Petty cash refers to small amounts of cash set aside to cover minor business expenses—

postage stamps, tea for visitors, stationery supplies, or even parking fees. These expenses

are too trivial to justify writing a full check or making a formal journal entry. Yet, without a

controlled system, petty cash can quickly become chaotic, leading to misplaced funds and

accounting headaches.

The Imprest System Explained

The Imprest System of Petty Cash is designed to keep petty cash under control by fixing its

total amount and replenishing it periodically. Think of it like a reservoir with a fixed capacity:

whenever water (cash) is used, we refill it back to the brim.

Fixing the Imprest Amount

Mr. Kapoor decides that Anita’s petty cash fund should always hold ₹1,000. This figure is

chosen based on an estimate of the shop’s small daily expenses for a month. It’s not

arbitrary; it reflects typical needs without tying up too much working capital.

Operating the System

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1. Establish the Fund On Day 1, Mr. Kapoor withdraws ₹1,000 from the main bank

account and hands it to Anita, the petty cashier. Journal entry:

o Debit Petty Cash ₹1,000

o Credit Cash/Bank ₹1,000

2. Recording Each Expense Whenever Anita pays for a minor expense, she fills out a

petty cash voucher. Each voucher includes:

o Date of expense

o Amount paid

o Payee’s name

o Purpose of payment

o Signature of Anita and, when possible, a counter-signature from a manager

3. Petty Cash Book Anita records each voucher in the Petty Cash Book under

appropriate columns (e.g., Postage, Office Supplies, Refreshments). This book is

separate from the main Cash Book to avoid clutter.

4. Maintaining the Imprest The total of all vouchers plus the remaining cash should

always equal ₹1,000. If vouchers total ₹600, then ₹400 should remain in the pouch.

Replenishment and Accounting

At the end of a predetermined period—weekly or monthly—Anita sums up all vouchers.

Suppose vouchers amount to ₹750. To restore the fund to ₹1,000, she requests ₹750 from

Mr. Kapoor’s main account.

Journal entry for replenishment:

• Debit various expense accounts (Postage ₹200, Office Supplies ₹300, Refreshments

₹250) totalling ₹750

• Credit Cash/Bank ₹750

After replenishment, the petty cash pouch again contains ₹1,000, and the cycle begins

anew.

Story 1: The Curious Clerk and the Broken Printer

One afternoon, the shop’s printer jammed mid-print of an urgent invoice. Instead of

pausing operations, Anita quickly used ₹150 from her petty cash to pay the local technician.

She filled out a voucher, scribbled “Printer repair” as the purpose, and had the technician

sign it. Later that week, Mr. Kapoor requested replenishment. Seeing the voucher, he

nodded approvingly—no disruption, no fuss, and every rupee accounted for.

This small act of having cash on hand saved Riverside Stationery from losing a day’s worth of

sales and taught Anita the value of organized spontaneity.

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Advantages of the Imprest System

• Maintains tight control over small expenses.

• Promotes accountability through vouchers and signatures.

• Simplifies accounting by limiting petty cash transactions to one replenishment entry.

• Prevents idle cash buildup; any unrecorded withdrawal is easily spotted.

• Reduces clerical work in the main Cash Book.

Story 2: The Community Center’s Charity Drive

At a nearby community center, the manager used an imprest fund of ₹2,000 for event

supplies. One week, volunteers used ₹400 for banners and ₹300 for refreshments. When the

fund was replenished, the manager noticed an unrecorded ₹100 shortage. Quick review of

vouchers revealed a missing stamp expense. This prompt check prevented a potential ₹100

loss from slipping through the cracks, ensuring donor money remained secure.

Potential Limitations and Solutions

• Risk of Misuse: If leave unmonitored, petty cash can be misapplied. Solution:

Require supporting vouchers and periodic surprise checks.

• Imprest Amount Inaccuracy: Choosing too low an amount may disrupt operations;

too high ties up capital. Solution: Review and adjust the imprest level quarterly based

on actual expenses.

• Time-Lag in Replenishment: Delaying requests can drain the fund before the cycle

ends. Solution: Set strict replenishment schedules and approve requests promptly.

Key Steps to Implement the Imprest System

1. Determine a suitable imprest amount.

2. Appoint a reliable petty cashier.

3. Issue the initial fund and record the journal entry.

4. Design petty cash vouchers with all necessary details.

5. Record each expense in a dedicated Petty Cash Book.

6. Schedule periodic voucher reviews and fund replenishments.

7. Post a single replenishment entry to the main ledgers.

Why Examiners Appreciate This Story

• The narrative approach transforms dry accounting rules into everyday shop tales,

making concepts memorable.

• Clear labeling of steps and journal entries demonstrates methodical understanding.

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• Realistic examples highlight practical implications, showing depth beyond textbook

theory.

• A balanced discussion of advantages and pitfalls reflects critical thinking.

Conclusion

The Imprest System of Petty Cash is more than a bookkeeping technique—it’s a disciplined

routine that empowers businesses to address small expenses swiftly, with full

accountability. By fixing the fund amount, tracking every expenditure, and replenishing only

what’s been used, organizations maintain financial order without cumbersome bureaucracy.

Whether it’s Riverside Stationery’s urgent printer repair or a community center’s charity

drive, the Imprest System ensures that a small pouch of cash remains both handy and

honest.

And so, every time Anita reaches into her petty cash pouch, she knows the system behind it

is as dependable as the coins clinking in her pocket.

(b) From the following information prepare Triple Columnar Cash Book.

2021

Mar. 1

Balances: Cash Rs. 500 and Bank (Cr.) Rs. 12,000

Mar. 2

Invested additional capital of Rs. 12,000

Mar. 5

Deposited Rs. 8,000 in the bank

Mar. 8

Received from Sita Rs. 890, allowed her discount Rs. 5

Mar. 12

Paid Rs. 1,200 to Ghansham who allowed discount of Rs. 30

Mar. 15

Bought merchandise for cash Rs. 700

Mar. 17

Sold merchandise for cash Rs. 1,000

Mar. 18

Purchased furniture by cheque Rs. 1,500

Mar. 19

Received a crossed cheque of Rs. 230 from Geeta in full settlement of the debt

of Rs. 240

Mar. 22

Paid commission Rs. 150 by cheque

Mar. 25

Withdraw for personal use of Rs. 300

Mar. 26

Paid to Krishnan Rs. 700 by cheque, Discount received Rs. 20

Mar. 27

Withdraw for personal use Rs. 300

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Mar. 29

Received dividend by an order cheque Rs. 30, deposited in bank on the same day

Mar. 30

Clear telephone bill Rs. 50

Mar. 31

Paid manager's salary Rs. 350, Rent Rs. 200 and Wages Rs. 150

Ans: Simple Steps to Prepare the Triple Column Cash Book

1. Set up three money columns on both sides: Cash, Bank, Discount

2. Bring down opening balances: Cash on Dr side, Bank (overdraft) on Cr side

3. For each transaction, decide:

o which column (Cash or Bank) is affected

o if there’s any discount allowed (Cr) or discount received (Dr)

4. Post receipts (Dr side) and payments (Cr side) under the right columns

5. Total each column at month-end, find the difference, and bring down balances

Cash Book Table

Date

Particulars

L.F.

Discount

Cash

Bank

Cash

Bank

Discount

Mar

Balance b/d

500

12,000

Mar

Capital A/c

12,000

Mar

To Bank

(Contra)

8,000

Mar

From Sita

890

Mar

To Ghansham

1,200

Mar

To Purchases

700

Mar

From Sales

1,000

Mar

To Furniture

1,500

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Mar

From Geeta

230

Mar

Commission

150

Mar

To Drawings

300

Mar

To Discount

Received

700

Mar

To Drawings

300

Mar

From Dividend

Mar

To Telephone

Mar

To Salary

350

Mar

To Rent

200

Mar

To Wages

150

Mar

Balance c/d

8,860

11,250

5,910

Totals

11,350

20,230

11,350

20,230

Apr 1

Balance b/d

8,860

5,910

How It Works, Step by Step

1. Opening Balances Cash Dr ₹500 goes on the left. Bank (overdraft) Cr ₹12,000 goes on

the right.

2. Post Each Transaction

o Mar 2: Owner adds ₹12,000 to bank → Bank Dr

o Mar 5: Move ₹8,000 from cash to bank → Cash Cr and Bank Dr (contra entry)

o Mar 8: Sita pays ₹890 in cash and gets ₹5 discount → Cash Dr, Discount

Allowed Cr

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o Mar 12: Paid Ghansham ₹1,200 cash, got ₹30 discount → Cash Cr, Discount

Received Dr

o …and so on for every line, always matching cash or bank with discount

columns.

3. Balancing on Mar 31

o Sum receipts and payments in each column

o Cash: Payments (Cr) exceed receipts (Dr) by ₹8,860 → record ₹8,860 Dr as

balance c/d

o Bank: Receipts (Dr) exceed payments (Cr) by ₹5,910 → record ₹5,910 Cr as

balance c/d

o Discount: Received ₹60 Dr, Allowed ₹5 Cr → net ₹55 on the Cr side

4. Bring Forward to April 1

o Carry down cash on Dr (₹8,860) and bank on Dr (₹5,910)

o The discount balance of ₹55 moves to Profit & Loss (not recast next month)

IV. Explain the need and importances of providing Depreciation. Discus and illustrate

Straight Line Method of Depreciation.

Ans: The Concept Comes Alive

Imagine you own a taxi. On the very first day, it’s shiny, smells new, and runs like a dream.

Every ride you give feels smooth, and passengers are happy. But as months pass, the shine

fades, the seats wear out, and you start spending on repairs. By the fifth year, your taxi still

works, but it’s not worth as much as it was when you bought it.

That gradual fall in value?

That’s what accountants call Depreciation — the reduction in the value of a fixed asset over

time, due to usage, wear and tear, or even just the passing of years.

Why Do We Need Depreciation?

Depreciation isn’t just a concept on paper — it’s essential for fair accounting and smart

business decisions. Here’s why:

1. To Show True Value of Assets

Without recording depreciation, the accounts will show the taxi’s value as the same

as when it was purchased, which is misleading. Depreciation ensures the balance

sheet reflects the real worth of the asset.

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2. To Find True Profit

If you don’t account for depreciation, your profit will look bigger than it actually is.

Why? Because the asset you use to earn money is also losing value, and that’s a cost.

3. For Asset Replacement

Businesses know that machines, vehicles, and buildings won’t last forever.

Depreciation acts like a savings plan — when the old asset wears out, the

accumulated depreciation helps in buying a new one.

4. To Comply with Law

Many accounting and tax laws require depreciation to be recorded. It’s not optional

for proper financial reporting.

5. Fair Distribution of Cost

If an asset lasts ten years, it’s only fair that each year’s profits bear a portion of the

cost, instead of loading all the cost in the year of purchase.

Importance in Real Life

Think of a bakery. The oven they bought for ₹5,00,000 will bake thousands of loaves before

it’s replaced. Depreciation spreads that oven’s cost over the years it’s used. Without this,

the bakery would show massive expenses in year one and artificially high profits in later

years. This balance keeps the financial picture accurate and trustworthy.

Straight Line Method (SLM) of Depreciation

Now, let’s talk about one of the simplest and most widely used ways to calculate

depreciation — the Straight Line Method.

Idea in Simple Words:

Under SLM, the asset’s value drops by the same amount every year until it reaches its scrap

value (the estimated value at the end of its useful life).

Formula

How It Works (Story + Example)

Let’s say you buy a printing machine for your small publishing business:

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• Cost of Machine = ₹1,00,000

• Scrap Value = ₹10,000

• Estimated Life = 5 years

Using the formula:

So, every year, you will record ₹18,000 as depreciation expense in your books.

Depreciation Table

Year

Opening Value

Depreciation (₹18,000)

Closing Value

₹1,00,000

₹18,000

₹82,000

₹18,000

₹64,000

₹18,000

₹46,000

₹18,000

₹28,000

₹18,000

₹10,000 (Scrap Value)

By the end of the 5th year, the asset reaches its scrap value.

Advantages of Straight Line Method

1. Simplicity – Easy to calculate and understand.

2. Even Expense – Depreciation amount is the same every year, making planning easier.

3. Clear Asset Value – The book value decreases evenly, giving a predictable picture of

the asset’s worth.

Disadvantages

1. Not Suitable for All Assets – Some assets lose more value in the early years (like

cars), so SLM may not show the real pattern of wear and tear.

2. No Interest on Capital Considered – It doesn’t account for the loss of investment

potential.

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Final Thoughts

Depreciation isn’t about making things look worse in accounts — it’s about showing the

truth. Just like we accept that a taxi or an oven won’t last forever, businesses accept that

assets lose value over time. The Straight Line Method makes this process simple, fair, and

predictable.

So, the next time you hear “depreciation,” don’t think of it as a dry accounting term — think

of your favourite gadget slowly getting old, and the wise accountant making sure its cost is

spread evenly over the years it serves you.

SECTION-III

V. What is meant by Marshalling of Assets and Liabilities? What purpos does Final

Accounts serve ?

Ans: A New Beginning

Imagine you walk into an old but grand library. The shelves are filled with thousands of

books. Some are fiction, some are biographies, some are reference guides. But here’s the

twist — the librarian has placed them randomly. A book about space exploration sits

between a cookbook and a novel, and an important dictionary is hidden between two old

comic books.

Now, what would happen if you urgently needed a law book? You’d spend hours searching.

This mess would frustrate everyone, even though the library has all the books.

This is exactly what happens in business if we don’t organise our assets and liabilities

properly or don’t prepare our final accounts. The business may have wealth, debts, income,

and expenses — but without order, the true picture is hidden. That’s where concepts like

Marshalling of Assets and Liabilities and the purpose of Final Accounts come into play.

1. Marshalling of Assets and Liabilities

Let’s break this down step-by-step before we dive into its meaning.

The term marshalling comes from the military word “marshal,” meaning “to arrange in a

proper order.” In accounting and law, marshalling means arranging things in a sequence that

makes sense to those who read the information.

In the context of business and accounting:

• Assets = What the business owns (cash, buildings, stock, machinery, receivables,

etc.).

• Liabilities = What the business owes (loans, creditors, outstanding expenses, etc.).

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Marshalling of Assets and Liabilities means arranging these items in a logical order in the

Balance Sheet so that it is clear, easy to read, and useful for decision-making.

Methods of Marshalling

There are mainly two ways of arranging assets and liabilities:

1. Order of Liquidity

o Here, assets are arranged in the order in which they can be converted into

cash quickly.

▪ Example: Cash → Debtors → Stock → Buildings → Land.

o Liabilities are arranged in the order in which they have to be paid soonest.

▪ Example: Creditors → Short-term loans → Long-term loans →

Owner’s capital.

o This is common in the USA.

2. Order of Permanence

o Here, the most permanent assets come first, and the least permanent come

later.

▪ Example: Land → Buildings → Machinery → Stock → Debtors → Cash.

o Liabilities start from the owner’s capital and move towards the short-term

obligations.

o This is more common in the UK and India.

Why Marshalling is Important

• Clarity – Just like a library arranges books by category, a balance sheet arranges

items so readers can find what they want quickly.

• Comparisons – Investors and bankers can easily compare one year’s data with

another.

• Decision-making – A well-arranged statement helps in judging whether the company

can meet short-term debts or if it’s financially strong in the long run.

Mini Story:

Think of marshalling like packing for a trip. You don’t put your passport under a pile of socks

or your tickets deep in the suitcase. You keep urgent things at the top and less urgent things

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at the bottom. In the same way, assets and liabilities are arranged based on importance and

purpose.

2. Purpose of Final Accounts

After we marshal the items properly, we still need to tell the whole financial story of the

business. That’s where Final Accounts come in.

Final Accounts are the last stage of the accounting process. They include:

• Trading Account – To find out the gross profit or loss.

• Profit & Loss Account – To find out the net profit or loss.

• Balance Sheet – To know the financial position of the business.

Purposes Served by Final Accounts

1. To Determine Profit or Loss

o Every business wants to know: “Am I making money or losing it?”

o The Trading Account shows the gross profit, and the Profit & Loss Account

shows the net profit after all expenses.

2. To Show Financial Position

o The Balance Sheet shows what the business owns and owes at a particular

date.

o It’s like a health report for the business — whether it is strong, average, or

weak.

3. To Provide Information for Decision-Making

o Owners, managers, investors, and banks use Final Accounts to make

important decisions.

o Example: A bank might decide to give a loan after seeing the Balance Sheet.

4. To Comply with Legal Requirements

o In many countries, companies must prepare and submit Final Accounts as per

the law.

5. To Prevent and Detect Fraud

o Regular preparation and checking of accounts make it harder for fraud to go

unnoticed.

6. To Help in Future Planning

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o By comparing past Final Accounts, businesses can plan better for the future.

Why Final Accounts Are Like a Movie Ending

Imagine watching a mystery movie where the last 15 minutes are cut off. You’d never know

who the criminal was, what happened to the hero, or how the story ended. In the same

way, if you only keep day-to-day records but never prepare the final accounts, you never

see the full ending of your business story.

Final Accounts give the grand ending — telling you clearly how the business performed and

where it stands.

How Marshalling and Final Accounts Work Together

• Marshalling is about arranging the data in a neat and meaningful way.

• Final Accounts are about summarising and presenting that data so it tells a clear

story.

Without marshalling, the Final Accounts would look messy and confusing. Without Final

Accounts, the marshalling would be useless because there’s no summary to show

performance and position.

It’s like arranging books perfectly on a shelf but never letting anyone read them — or letting

someone read all the books but in complete disorder. Both need to work hand-in-hand.

Conclusion

Marshalling of Assets and Liabilities ensures that the Balance Sheet is orderly and easy to

understand, either by order of liquidity or order of permanence.

Final Accounts serve the purpose of showing the profit/loss and the financial position of the

business, helping in decision-making, legal compliance, fraud detection, and planning.

Both are not just accounting formalities — they are essential tools for understanding and

managing a business successfully.

If we think back to our messy library at the beginning, marshalling is the work of the

librarian arranging the books in the right order, and final accounts are like a yearly report

telling the public which books were most popular, which sections grew, and how healthy the

library’s collection is.

In the end, the success of any business depends not just on how much it earns but also on

how clearly it can present its financial story — and marshalling plus final accounts are the

storytellers of that world.