Solutions-Class-11-Commerce-Book Keeping and Accountancy-Chapter-2-Meaning and Fundamentals of Double Entry Book-Keeping-Maharashtra Board

Double Entry System is a scientific method of recording the two-fold aspects of every monetary transaction in the books of accounts using debits and credits.

An account is a summarized record of transactions relating to a specific person, asset, liability, expense, or income maintained at one place.

Single Entry System is an unscientific and incomplete method of accounting that typically records only personal accounts and cash book transactions.

A Personal Account represents accounts of individuals, groups of persons, or organizations with whom the business deals.

The rule of Nominal Account is to debit all expenses and losses and credit all incomes and gains.

Two examples of intangible assets are Goodwill and Patents.

A Real Account represents the various assets and properties owned by the business.

Two examples of income and gains are Commission Received and Interest Received.

The rule of Personal Account is to debit the receiver and credit the giver.

There are two main methods of recording accounting information: the Indian System and the English System.

(a) 10th November

(c) Indian system

(b) Credit

(b) Personal

(d) Real

(c) an intangible

(b) Personal

(b) Giver

(c) Goes out

(b) Expenses and losses

Statement is : False

Reason:
Outstanding expense is a Personal Account, not a nominal account. It represents an amount of expense that is due but not yet paid to a person or party. Since it shows a liability (amount payable), it is treated as a Personal Account under accounting rules.

• Nominal Accounts record expenses, losses, incomes, and gains (e.g., Salary A/c, Rent A/c).
• Outstanding Expenses represent a person or party to whom the payment is due, so it is considered a representative personal account.

Therefore, the statement “Outstanding expense is a nominal account” is False.

Statement is : False

Reason:

A Capital Account represents the owner of the business. Therefore, it is treated as a Personal Account, not a Real Account.

• Real Accounts relate to assets and properties of the business (e.g., Cash A/c, Building A/c, Machinery A/c).
• Capital Account shows the amount invested by the owner, so it belongs to the owner’s account, which is a Personal Account.

Statement is : True

Reason:

This statement is based on the Double Entry System of Accounting.

• According to this system, every financial transaction affects at least two accounts. One account is debited and another account is credited with the same amount.
• This ensures that the total debits are always equal to the total credits in the books of accounts.

Therefore, the statement “Every debit has equal and corresponding credit” is True.

Statement is : True

Reason:

Discount received is an income (gain) for the business because it is the discount allowed by the supplier to the business.

In accounting:

• Nominal Accounts record incomes, gains, expenses, and losses.
• Since discount received is a gain, it is classified as a Nominal Account.

Therefore, the statement “Discount received is a nominal account” is True.

Statement is : False

Reason:

A Drawings Account records the amount withdrawn by the owner from the business for personal use. It represents the owner, so it is treated as a Personal Account.

• Nominal Accounts record expenses, losses, incomes, and gains.
• Drawings Account is related to the owner of the business, therefore it is a Personal Account.

Statement is : False

Reason:

Outstanding salary means salary that is due but not yet paid. It represents an amount payable to employees, so it is a liability. Therefore, it is treated as a Representative Personal Account, not a nominal account.

• Nominal Accounts record expenses, losses, incomes, and gains (e.g., Salary A/c).
• Outstanding Salary represents a person to whom salary is payable, so it is a Personal Account.

Statement is : False

Reason:

A Loan Account represents the person, bank, or institution from whom the loan is taken or to whom the loan is given. Since it relates to a person or organisation, it is classified as a Personal Account.

• Personal Accounts include accounts of individuals, banks, companies, or institutions.
• Example: Bank Loan A/c, Ram’s Loan A/c.

Therefore, the statement “Loan account is a personal account” is True.

Statement is : True

Reason:

Goodwill is an intangible asset of a business. Real accounts include all assets and properties of the business, whether tangible (like machinery, building) or intangible (like goodwill, patents).

Since Goodwill is an asset, it is classified as a Real Account.

Therefore, the statement “Goodwill account is a real account” is True.

Statement is : True

Reason:

A Discount Account records discount allowed or discount received, which are considered expenses or incomes of the business.

• Nominal Accounts deal with expenses, losses, incomes, and gains.
• Since discount relates to expense (discount allowed) or income (discount received), it is classified as a Nominal Account.

Therefore, the statement “Discount account is a nominal account” is True.

[Note : Trade discount is not recorded in the books of accounts. It is deducted from the list price of goods directly on the invoice, and only the net amount is entered in the books.

Since no separate Trade Discount Account is maintained, it cannot be classified as a nominal account.

The statement “Trade discount account is a nominal account” is False.]

Statement is : False

Reason:

According to the Business Entity Concept, the business and the owner (proprietor) are treated as separate entities. Therefore, only business transactions are recorded in the books of accounts of the business.

The personal transactions of the proprietor are not recorded in the business books, except when the proprietor withdraws money or goods for personal use (Drawings).

Statement is : True

Reason:

A Motor Car is a tangible asset of the business. Real accounts include all assets and properties owned by the business, whether tangible or intangible.

Since Motor Car is a tangible asset, its account is classified as a Real Account.

Therefore, the statement “Motor Car Account is a Real Account” is True.

Statement is : False

Reason:

The rule “Debit the receiver and Credit the giver” belongs to a Personal Account, not a Nominal Account.

The correct rule for Nominal Accounts is:

• Debit all expenses and losses
• Credit all incomes and gains

Statement is : False

Reason:

A Bank Loan Account represents the bank from which the loan is taken. Since it relates to a bank (an organisation/person), it is classified as a Personal Account.

• Nominal Accounts record expenses, losses, incomes, and gains.
• Bank Loan Account represents a party (bank), so it is a Personal Account.

Statement is : True

Reason:

This statement represents the Accounting Equation, which shows the relationship between assets, capital, and liabilities in a business.

According to the accounting equation:
Assets = Capital + Liabilities

• Assets are the properties or resources of the business.
• Capital is the owner’s investment in the business.
• Liabilities are the amounts payable to outsiders.

This equation always remains balanced for every business transaction.

Therefore, the statement “Assets = Capital + Liabilities” is True.

Statement is : False

A Trademark is an intangible asset of a business. Real accounts include all assets and properties, whether tangible or intangible.

Since Trademark is an intangible asset, it is classified as a Real Account, not a personal account.

Credited

Capital

Debited

Double entry system

Incomes and gains

Real

Single entry system

Real

Nominal

Two fold

Real

Real

Accounting Equation (Assets = Liabilities + Capital)

[Explanations for the Table:

1. Started business: Cash (an asset) increases by ₹ 50,000, and Capital increases by the same amount.
2. Purchased goods: This is treated as an internal change in assets where Cash decreases by ₹ 10,000 and Stock increases by ₹ 10,000. The total value of Assets remains ₹ 50,000.
3. Goods stolen: A loss reduces both the asset (Stock) and the proprietor's Capital. Thus, both sides of the equation decrease by ₹ 1,000.
4. Sold goods for cash: Similar to the purchase, this is an exchange of assets (Stock goes out, Cash comes in). Assuming the goods were sold at cost (as no profit/loss is mentioned), the total Assets remain ₹ 49,000.
5. Loan taken: Taking a loan increases the business's Cash (Asset) while simultaneously creating a Bank Loan (Liability). Both Assets and Liabilities increase by ₹ 7,000.]

[Explanations :

(1) Increase in Assets, Decrease in Assets

• Explanation: In this transaction, the asset "Machinery" increases (comes in), while the asset "Cash" decreases (goes out). Another example is depositing cash into a bank, where bank balance (asset) increases and cash (asset) decreases.

(2) Increase in Capital, Increase in Assets

• Explanation: When the proprietor starts a business, the "Cash" account (asset) increases because money comes into the business, and the "Capital" account increases because the proprietor is the giver of that fund. Bringing in additional capital also has this same effect.

(3) Decrease in Liabilities, Decrease in Assets

• Explanation: According to the modern approach, a decrease in liabilities is debited and a decrease in assets is credited. If you pay a liability like a Bank Loan or a Sundry Creditor using cash, your total liabilities decrease and your cash (asset) also decreases.

(4) Decrease in Assets, Decrease in Capital

• Explanation: Paying an expense like salaries reduces "Cash" (asset) and also reduces "Capital" because expenses and losses result in a decrease in the owner's equity. Other examples include withdrawing cash for personal use (Drawings) or goods being destroyed by fire.]

Analysis of Transactions (Traditional Approach) :

*Note: Since no specific name is mentioned for the credit sale in transaction 3, "Customer A/c" or "Debtors A/c" is used to represent the receiver. In transactions involving expenses (like Rent) or incomes (like Interest), the person's name (landlord, Radhika) is ignored as the focus is on the nature of the expense or income.

Analysis of Transactions (Modern Approach) :

*Note: Under the Modern Approach, Drawings are treated as a reduction in Capital.

Accounting equation Assets = Liabilities + Capital

Accounting Equation Table

[Explanation of Transactions:

1. Started business: Cash (Asset) increases and Capital increases by ₹ 1,00,000.
2. Credit Purchase: Goods (Asset) increase and Sundry Creditors (Liability) increase by ₹ 9,000.
3. Purchase Laptop: This is an exchange of assets. The asset "Laptop" comes in (+10,000) and "Cash" goes out (-10,000). The total assets remain unchanged.
4. Credit Sale: This involves an exchange of assets where "Stock" goes out (-12,000) and a "Debtor" (Rina) is created (+12,000). As no profit or loss is mentioned, capital remains unchanged.
5. Received Interest: Cash (Asset) increases by ₹ 2,500. Since interest is a revenue/gain, it increases the Capital.
6. Paid Telephone bill: Cash (Asset) decreases by ₹ 1,300. As an expense, it reduces the total Capital.]

Accounting equation Assets = Liabilities + Capital

Accounting Equation Table

[Explanation of Transactions:

1. Commenced business: The bank balance (Asset) increases, and Capital increases by the same amount as the proprietor is the giver of funds.
2. Furniture on credit: This creates a new asset (Furniture) and a new liability (Sundry Creditors).
3. Goods on credit: Similar to transaction 2, this increases assets (Stock) and increases liabilities (Creditors).
4. Purchased Machinery: This is an internal exchange of assets. Machinery comes in (+10,000) and Bank/Cash goes out (-10,000), leaving total assets unchanged.
5. Paid Electricity bill: As an expense, this reduces assets (Bank/Cash) and also reduces Capital.
6. Goods destroyed by fire: A loss reduces the asset (Stock) and directly reduces the proprietor's Capital.]

Accounting equation Assets = Liabilities + Capital

Accounting Equation Table :