AIOU 0438 Principles of Accounting Solved Assignment 1 Spring 2025
AIOU 1431 Assignment 1
Q1.(a Define the term “Accounting” and its objectives.(10 Marks)
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business or organization. It provides a clear picture of financial health, helping stakeholders make informed decisions. Accounting plays a crucial role in financial management by ensuring accuracy and compliance with legal and regulatory requirements.
Objectives of Accounting:
1. Recording Financial Transactions – To systematically document all financial activities.
2. Summarizing and Classifying Data – To organize financial information for easy interpretation.
3. Assessing Financial Performance – To evaluate profitability and financial position.
4. Ensuring Accuracy and Compliance – To follow financial regulations and standards.
5. Facilitating Decision-Making – To aid management and stakeholders in strategic planning.
6. Managing Financial Resources – To ensure efficient allocation and utilization of funds.
7. Preventing Fraud and Errors – To maintain transparency and accountability.
Q2.(b Demonstrate how certain business transactions affect the elements of the accounting equation:Assets Liabilities + Owner’s Equity.(10 Marks)
1. Owner Invests Capital
Impact: Increases Assets and Owner’s Equity
Example: The owner invests $10,000 cash in the business.
Equation Change:
Assets (Cash) ↑ $10,000
Owner’s Equity (Capital) ↑ $10,000
2. Purchase of Equipment on Credit
Impact: Increases Assets and Liabilities
Example: The business buys equipment worth $5,000 on credit.
Equation Change:
Assets (Equipment) ↑ $5,000
Liabilities (Accounts Payable) ↑ $5,000
3. Revenue Earned from Sales
Impact: Increases Assets and Owner’s Equity
Example: The business earns $3,000 in revenue from sales.
Equation Change:
Assets (Cash/Accounts Receivable) ↑ $3,000
Owner’s Equity (Revenue) ↑ $3,000
4. Paying Off Debt
Impact: Decreases Assets and Liabilities
Example: The business repays a $2,000 loan.
Equation Change:
Assets (Cash) ↓ $2,000
Liabilities (Loan Payable) ↓ $2,000
5. Owner Withdraws Cash
Impact: Decreases Assets and Owner’s Equity
Example: The owner withdraws $1,500 for personal use.
Equation Change:
Assets (Cash) ↓ $1,500
Owner’s Equity (Drawings) ↓ $1,500
Q2. What is a single-entry system of bookkeeping? Also, describe the characteristics and limitations of a single-entry system.(20 Marks)
Single-Entry System of Bookkeeping
The single-entry system of bookkeeping is a simple accounting method where financial transactions are recorded in only one account. It is commonly used by small businesses and sole proprietors.
Characteristics of a Single-Entry System
1. Simplicity – Transactions are recorded in a straightforward manner, usually in a cash book or ledger.
2. Limited Accounts – Only cash receipts, cash payments, and personal accounts are recorded.
3. Lack of Formal Rules – There are no strict accounting principles applied as in double-entry bookkeeping.
4. Primarily for Small Businesses – Mostly used by sole proprietors or small-scale businesses with fewer financial transactions.
5. Focuses on Cash Transactions – Mainly tracks cash inflows and outflows without detailing assets and liabilities extensively.
Limitations of a Single-Entry System
1. Lack of Accuracy – Since transactions are recorded only once, errors and omissions are harder to detect.
2. Incomplete Financial Picture – It does not track liabilities, assets, or expenses systematically, making it difficult to assess financial health.
3. Unsuitable for Larger Businesses – Large organizations require comprehensive financial tracking, which this system cannot provide.
4. Difficulty in Preparing Financial Statements – Preparing balance sheets or profit & loss accounts is challenging as transactions are not recorded in a structured way.
5. Increased Risk of Fraud – Without proper double-entry tracking, it is easier for mistakes or fraudulent activities to go unnoticed.
Q3. Mr. Bilal started a sole proprietorship business. The business is newly established, and Mr. Bilal hired an accountant to keep the journal updated. Suppose you are the accountant of Mr. Noman’s business and prepare the journal book for October 2024. You are also required to post journal entries into the ledger and prepare the trial balance. Detailsof the transactions during October 2018 are given as follows:(20 Marks)
October 1. Invested Cash Rs.2, 000, 000 and Equipment Rs.300, 000 in the business.
October 3. Purchased supplies for cash Rs.70, 000.
October 8. Purchased a Truck for Rs.2, 200,000 paying cash Rs. 1,000,000 and a note payable for the balance.
October 15. Purchased office equipment on account Rs.150, 000.
October 18. Paid rent for October Rs.75, 000.
October 19. Received cash for job completed Rs.120, 000.
October 22, Purchased supplies on account Rs.260, 000.
October 23. Wages paid to employees Rs.410, 000.
October 25. Paid premium on property insurance Rs.29, 6000.
October 26. Paid cash to the creditors Rs.240, 000.
October 28. Received cash Rs.140, 000 for job completed.
October 29. Received an invoice for truck expenses, to be paid in November, Rs.41, 000.
October 29. Paid miscellaneous expenses Rs.33, 000.
October 30. Paid wages to employees Rs.430, 000.
October 31. Withdraw cash for personal use Rs.300, 000.
| Date | Account Title | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|
| Oct 1 | Cash | 2,000,000 | |
| Equipment | 300,000 | ||
| Owner’s Capital | 2,300,000 | ||
| Oct 3 | Supplies | 70,000 | |
| Cash | 70,000 | ||
| Oct 8 | Truck | 2,200,000 | |
| Cash | 1,000,000 | ||
| Notes Payable | 1,200,000 | ||
| Oct 15 | Office Equipment | 150,000 | |
| Accounts Payable | 150,000 | ||
| Oct 18 | Rent Expense | 75,000 | |
| Cash | 75,000 | ||
| Oct 19 | Cash | 120,000 | |
| Service Revenue | 120,000 | ||
| Oct 22 | Supplies | 260,000 | |
| Accounts Payable | 260,000 | ||
| Oct 23 | Wages Expense | 410,000 | |
| Cash | 410,000 | ||
| Oct 25 | Property Insurance Expense | 296,000 | |
| Cash | 296,000 | ||
| Oct 26 | Accounts Payable | 240,000 | |
| Cash | 240,000 | ||
| Oct 28 | Cash | 140,000 | |
| Service Revenue | 140,000 | ||
| Oct 29 | Truck Expense | 41,000 | |
| Accounts Payable | 41,000 | ||
| Oct 29 | Miscellaneous Expense | 33,000 | |
| Cash | 33,000 | ||
| Oct 30 | Wages Expense | 430,000 | |
| Cash | 430,000 | ||
| Oct 31 | Owner’s Drawings | 300,000 | |
| Cash | 300,000 |
| Trial Balance as of October 31, 2024 | ||
|---|---|---|
| Account | Debit (Rs.) | Credit (Rs.) |
| Equipment A/c | 300,000 | - |
| Truck A/c | 2,200,000 | - |
| Supplies A/c | 330,000 | - |
| Office Equipment A/c | 150,000 | - |
| Accounts Payable A/c | - | 451,000 |
| Notes Payable A/c | - | 1,200,000 |
| Rent Expense A/c | 75,000 | - |
| Wages Expense A/c | 840,000 | - |
| Service Revenue A/c | - | 260,000 |
| Miscellaneous Expense A/c | 33,000 | - |
| Property Insurance Expense A/c | 296,000 | - |
| Drawings A/c | 300,000 | - |
| Capital A/c | - | 2,300,000 |
| Truck Expense A/c | 41,000 | - |
Q4. The following Trial Balance has been extracted from the general ledger of Mr. Ahmed.(20 Marks)
| PARTICULARS | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|
| Cash | 500,000 | |
| Accounts Receivable (Debtors) | 1,000,000 | |
| Inventory (January 1, 2024) | 850,000 | |
| Office Equipment | 460,000 | |
| Accounts Payable (Creditors) | 800,000 | |
| Notes Payable (Bills Payable) | 300,000 | |
| Insurance | 20,000 | |
| Office Supplies | 10,000 | |
| Rent Expenses | 60,000 | |
| Office Salary Expenses | 120,000 | |
| Ahmed's Capital | 1,250,000 | |
| Ahmed's Drawings | 90,000 | |
| Advertising Expenses | 30,000 | |
| Delivery Expenses | 50,000 | |
| Purchases | 1,500,000 | |
| Sales | 23,000,000 | |
| Freight In | 20,000 | |
| Purchases Returns | 50,000 | |
| Sales Returns | 60,000 | |
| Cost of Goods Sold | 150,000 | |
| Depreciation Expense | 60,000 | |
| Insurance Expense | 60,000 | |
| Office Supplies Expense | 30,000 | |
| Prepaid Insurance | 20,000 | |
| Accumulated Depreciation | 60,000 | |
| Accounts Payable | 10,000 | |
| Total | 4,700,000 | 4,700,000 |
Q5. On 1st January 2021, Mr. Noman purchased Machinery for Rs. 139,000. The machine has an estimated salvage value of Rs. 13,000 and an estimated useful life of 5 years. The depreciable cost of the asset is Rs. 136,000 (139,000-3,000). The machine will produce 720,000 units during its useful life. The units produced first through the fifth year are 180,000 units, 156,000 units, 138,000 units, 126,000 units, and 120,000 respectively.
You are required to prepare the Depreciation schedule using the units of production method.
(20 Marks)
Depreciation Schedule Using Units of Production Method
Formula for Depreciation Expense:
Depreciation Expense = (Depreciable Cost / Total Estimated Production) × Units Produced in the Year
Given Data:
- Cost of Machine: Rs. 139,000
- Salvage Value: Rs. 13,000
- Depreciable Cost: Rs. 126,000 (Rs. 139,000 - Rs. 13,000)
- Total Estimated Production: 720,000 units
Step 1: Calculate the Depreciation Rate per Unit
126,000 / 720,000 = 0.175 Rs. per unit
Step 2: Compute Annual Depreciation Expense
| Year | Units Produced | Depreciation Expense (Rs.) | Accumulated Depreciation (Rs.) | Book Value at Year-End (Rs.) |
|---|---|---|---|---|
| 1st | 180,000 | 180,000 × 0.175 = 31,500 | 31,500 | 139,000 - 31,500 = 107,500 |
| 2nd | 156,000 | 156,000 × 0.175 = 27,300 | 58,800 | 139,000 - 58,800 = 80,200 |
| 3rd | 138,000 | 138,000 × 0.175 = 24,150 | 82,950 | 139,000 - 82,950 = 56,050 |
| 4th | 126,000 | 126,000 × 0.175 = 22,050 | 105,000 | 139,000 - 105,000 = 34,000 |
| 5th | 120,000 | 120,000 × 0.175 = 21,000 | 126,000 | 139,000 - 126,000 = 13,000 |
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