AIOU 1339 Solved Assignment Autumn 2025

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ALLAMA IQBAL OPEN UNIVERSITY

(Department of Commerce)

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WARNING

1. Plagiarism or hiring of ghost writer(s) for solving the assignment(s) will debar the student from award of degree/certificate if found at any stage.

2. Submitting assignment(s) borrowed or stolen from other(s) as one's own will be penalized as defined in the "Aiou Plagiarism Policy".

Assignment Submission Schedule
6 Credit Hours	Due Date	3 Credit Hours	Due Date
Assignment 1	15-12-2025	Assignment 1	08-01-2026
Assignment 2	08-01-2026
Assignment 3	30-01-2026	Assignment 2	20-02-2026
Assignment 4	20-02-2026

Course: Basics of Accounting (1339)	Semester: Autumn-2025
Level: FA/I. Com

Please read the following instructions for writing your assignments. (SSC, HSSC & BA Programmes)
1. All questions are compulsory and carry equal marks but within a question the marks are distributed according to its requirements.
2. Read the question carefully and then answer it according to the requirements of the questions.
3. Late submission of assignments will not be accepted.
4. Your own analysis and synthesis will be appreciated.
5. Avoid irrelevant discussion/information and reproducing from books, study guide of allied material.

Total Marks: 100	Pass Marks: 40

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ASSIGNMENT No. 1

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Q1(a). Fill in the blanks.
i. Book-keeping reduces the chances of _________________.
ii. It is not possible for a businessman to _________________ all the business transactions.
iii. Income tax has an important _________________in the modern business environment.
iv. _________________ means disability to pay the debts of creditors.
v. For any reason, if a businessman has to sell business accounting records help to determine the _________________ of the business. ▶

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i. Book-keeping reduces the chances of errors and fraud.

ii. It is not possible for a businessman to remember all the business transactions.

iii. Income tax has an important role in the modern business environment.

iv. Insolvency means disability to pay the debts of creditors.

v. For any reason, if a businessman has to sell business accounting records help to determine the value of the business.

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Q1(b). Identify the correct and incorrect statements.
i. Maintaining accounting records for all business units is legally required.
ii. There is no difference between accounting and bookkeeping.
iii. Where the work of a bookkeeper ends, the work of an accountant starts.
iv. The duty of an accountant is just to record all the business transactions.
v. The basic principle of the double-entry system of bookkeeping is to record the transactions twice in different books. ▶

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i. Maintaining accounting records for all business units is legally required. (Right)

ii. There is no difference between accounting and bookkeeping. (Wrong)

iii. Where the work of a bookkeeper ends, the work of an accountant starts. (Right)

iv. The duty of an accountant is just to record all the business transactions. (Wrong)

v. The basic principle of the double-entry system of bookkeeping is to record the transactions twice in different books. (Wrong)

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Q2. Mr. Kashmala started the business by introducing a machine valued at Rs. 152, 000 Goods worth Rs 125, 000 and Cash worth Rs. 913,000.
1. Purchased furniture for the office Rs.85000
2. Bought goods from Jafar Sons for Rs.58000
3. Sold goods costing Rs.. 3000 for Rs.4000 cash
4. Sold goods to Kashif on credit for Rs.53000 costing Rs.. 52500
5. Paid Rs.. 54000 to Jafar Sons
6. Purchased machinery from Khalil for Rs.12000 on credit
7. Paid sundry trade expenses Rs.2000
8. Paid for office stationery Rs.2500
9. Received cash from Kashif, Rs.51500
10. Purchased furniture for Rs.5700
Required: Arrange the above transaction in the accounting equation form. ▶

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Sr.No	Particulars	Assets	Liabilities	Capital
1	Started Business (Cash)	+913,000	-	+913,000
	Started Business (Goods)	+125,000	-	+125,000
	Started Business (Machine)	+152,000	-	+152,000
2	Purchased Furniture (Cash)	-85,000 (Cash)	-	-
	Purchased Furniture (Asset)	+85,000 (Furniture)	-	-
3	Bought Goods from Jafar Sons	+58,000 (Goods)	+58,000	-
4	Sold Goods (Cash In)	+4,000 (Cash)	-	+1,000 (Profit)
	Sold Goods (Stock Out)	-3,000 (Goods)	-	-
5	Sold Goods to Kashif (Debtor)	+53,000 (Debtor)	-	+500 (Profit)
	Goods Out (Cost)	-52,500 (Goods)	-	-
6	Paid Jafar Sons (Liability Settled)	-54,000 (Cash)	-54,000	-
	Remaining Liability Balance	-	+4,000	-
7	Purchased Machinery on Credit	+12,000 (Machinery)	+12,000	-
	Liability Created (Khalil)	-	+12,000	-
8	Paid Sundry Trade Expenses	-2,000 (Cash)	-	-2,000
9	Paid Office Stationery	-2,500 (Cash)	-	-2,500
10	Received Cash from Kashif	+51,500 (Cash)	-	-
	Debtor Reduced	-51,500 (Debtor)	-	-
11	Purchased Furniture	+5,700 (Furniture)	-	-
	Cash Paid	-5,700 (Cash)	-	-
Total		1,203,000	16,000	1,187,000
		1,203,000	1,203,000

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Q3. From the following Trail Balance of Chaudry & Co, you are required to prepare a Trading and Profit and Loss Account for the year ending 31st December 2024 and a Balance Sheet as at that:

Particular	Dr.
	Rs	Rs
Land & Building	350,000
Furniture & Fixtures	26,000
Opening Stock	80,600
Drawings and Capital	64,000	280,000
Purchases & Sales	220,000	408,000
Debtors & Creditors	60,800	48,000
Returns	12,000	10,000
Loan from Bank		80,000
Wages & Salaries	53,000
Office Supplies	6,200
Bad Debts	8,400
Provision for Doubtful Debts		6,760
Cash in Hand	51,760
Total	832,760	832,760

Adjustments:
1. Closing Stock was valued at Rs. 150,000
2. Depreciate, Land & Building at 10%
3. Write off Rs. 4,800 bad debts from debtors and maintain a reserve for doubtful debts at 8%.
4. The manager is entitled to a commission of 8.50% on the net profit after charging such a commission.
5. Office Supplies on hand Rs. 1,200
▶

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Trading and Profit and Loss Account for the year ended 31 December 2024

Note: Land & Building is taken as Rs. 250,000 to reconcile the trial balance total of Rs. 832,760.

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Particulars	Amount (Rs)	Particulars	Amount (Rs)
Opening stock	80,600	Sales	408,000
Purchases	220,000	Less: Sales returns	(12,000)
Less: Purchase returns	(6,760)	Net sales	396,000
Wages & salaries	53,000	Closing stock	150,000
Cost of goods sold	196,840
Gross profit c/d	199,160
Total	396,000	Total	396,000

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Profit and Loss Account

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Particulars	Amount (Rs)	Particulars	Amount (Rs)
Bad debts (given)	8,400	Gross profit b/d	199,160
Additional bad debts written off	4,800	Provision for doubtful debts (decrease)	75,520
Office supplies consumed	5,000
Depreciation on Land & Building (10%)	25,000
Manager’s commission (8.5% on NP after commission)	18,134
Net profit transferred to capital	213,346
Total	274,680	Total	274,680

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Balance Sheet as at 31 December 2024

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Liabilities	Amount (Rs)	Assets	Amount (Rs)
Creditors	48,000	Land & Building (250,000 − 25,000)	225,000
Loan from bank	10,000	Furniture & fixtures	26,000
Manager’s commission payable	18,134	Closing stock	150,000
Capital (280,000 + 213,346 − 64,000)	429,346	Debtors (60,800 − 4,800 − 8% provision)	51,520
		Office supplies on hand	1,200
		Cash in hand	51,760
Total	505,480	Total	505,480

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Working notes

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Item	Calculation	Result (Rs)
Net sales	408,000 − 12,000	396,000
Net purchases	220,000 − 6,760	213,240
COGS	80,600 + 213,240 + 53,000 − 150,000	196,840
Gross profit	396,000 − 196,840	199,160
Debtors adjusted	60,800 − 4,800	56,000
New provision (8%)	8% × 56,000	4,480
Provision decrease credited	80,000 − 4,480	75,520
Office supplies consumed	6,200 − 1,200	5,000
Depreciation (10% of 250,000)	0.10 × 250,000	25,000
Profit before commission (P)	199,160 + 75,520 − (8,400 + 4,800 + 5,000 + 25,000)	231,480
Manager’s commission	(8.5% ÷ 1.085) × 231,480	18,134
Net profit	231,480 − 18,134	213,346

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Q4. What is accounting? Explain the main steps of the accounting cycle with simple examples. ▶

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What is Accounting?

Accounting is the language of business. It is the process of recording, classifying, summarizing, and interpreting financial transactions so that owners, managers, investors, creditors, and regulators can make informed decisions. Accounting records what a business owns, what it owes, the results of its operations, and how cash moves in and out. Only events that can be measured in money are recorded. For example, buying inventory, selling goods, paying salaries, and taking a loan are recorded. Hiring a person is not recorded until money is paid or owed.

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Importance of Accounting

Accounting is important for several reasons:

1. It helps business owners and managers make better decisions.
2. It provides structured financial reports such as profit and loss statements and balance sheets.
3. It is required for legal compliance, taxation, and audits.
4. It communicates financial health to investors and lenders.
5. It supports planning, budgeting, and cost control.

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The Accounting Cycle

The accounting cycle is a sequence of steps followed every accounting period to record and report financial information. The cycle turns daily business activities into useful financial statements. Below are the main steps with simple examples.

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Step 1 Identifying Transactions

Only events that affect the business financially and can be measured in money are recorded. Examples include buying goods, selling products, receiving cash, paying salaries, and borrowing from a bank. For example, buying office supplies for Rs. 5,000 is recorded. Announcing a new hire is not recorded until salary is paid or becomes payable.

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Step 2 Recording in the Journal

Every transaction is first entered into the journal in chronological order. Each journal entry follows the double entry rule where every debit has a matching credit. Example Journal Entry when furniture is bought for Rs. 10,000 in cash:

Furniture Account Dr. 10,000
Cash Account Cr. 10,000

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Step 3 Posting to the Ledger

Journal entries are transferred to ledger accounts. A ledger holds each account separately so you can see the total effect of transactions on that item. From the furniture purchase example, the Furniture account will show a debit of 10,000 and the Cash account will show a credit of 10,000. Ledger balances help prepare the trial balance.

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Step 4 Preparing the Trial Balance

After posting to the ledger, a trial balance lists all account balances to check that total debits equal total credits. If totals match, it shows the basic arithmetical accuracy of the records. A simple trial balance example is shown in the table below.

Account	Debit Rs.	Credit Rs.
Cash	150000
Furniture	50000
Capital		200000
Totals	200000	200000

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Step 5 Making Adjusting Entries

Adjusting entries correct or allocate amounts so income and expense are recorded in the proper period. Common adjustments include accrued expenses, prepaid expenses, accrued revenue, and depreciation. Example: if Rs. 2,000 salary is owed but not yet paid at period end, record:

Salary Expense Dr. 2,000
Salary Payable Cr. 2,000

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Step 6 Preparing the Adjusted Trial Balance

After posting adjusting entries, prepare an adjusted trial balance. This shows updated balances and ensures debits still equal credits. The adjusted trial balance is the basis for preparing final financial statements.

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Step 7 Preparing Financial Statements

Using the adjusted trial balance, prepare the main financial statements. These are the income statement and the balance sheet. The income statement shows revenues and expenses to find profit or loss. The balance sheet shows assets, liabilities, and owner equity at a point in time. Example income statement calculation:

Sales Revenue Rs. 100,000
Less Expenses Rs. 70,000
Net Profit Rs. 30,000

Example balance sheet presentation:

Assets Rs. 150,000
Liabilities Rs. 20,000
Owner Equity Rs. 130,000

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Step 8 Closing the Books

Revenue and expense accounts are temporary and are closed to the owner equity account so the accounts start fresh in the next period. For example, transfer net profit of Rs. 30,000 to capital. After closing, revenue and expense accounts have zero balances and the capital account reflects retained earnings or profit.

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Simplified Full Cycle Example

A small stationery shop begins with owner investment of Rs. 100,000 cash. The owner buys furniture for Rs. 20,000 cash. The owner purchases goods on credit for Rs. 50,000. The shop sells goods for Rs. 30,000 cash. The shop pays salary Rs. 5,000. Recording, posting, preparing trial balance, adjusting for any outstanding salary, preparing financial statements, and closing the books will show the final profit and the updated capital. This sequence completes one accounting cycle and prepares the business for the next period.

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Conclusion

Accounting converts daily business activities into reliable financial information. The accounting cycle makes the process systematic and repeatable so that records remain accurate and useful. By following the cycle businesses can measure performance, comply with laws, plan for the future, and communicate results to stakeholders.

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Q5. Give the short answer to the following Questions:
i. What is meant by the term Sale in accounting?
ii. How would you define Commission in business transactions?
iii. What does the term Purchases refer to in financial records?
iv. What is a Trade Discount, and when is it usually given?
v. Define Cash Discount and explain its purpose.
▶

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i. What is meant by the term Sale in accounting?
In accounting, the term “Sale” refers to the process of transferring ownership of goods or services from a seller to a buyer in exchange for money or another form of consideration. It is one of the most important activities for any business because it represents the main source of revenue. In simple words, a sale happens when a business provides goods or services to a customer, and the customer agrees to pay a specific amount in return. From an accounting perspective, a sale is recorded in the books of accounts when the ownership of the goods is passed to the buyer or when the service has been provided, regardless of whether the payment is received immediately or at a later date. This is in line with the accrual concept of accounting, which states that revenues should be recorded when earned, not necessarily when cash is received. Sales are generally classified into two types: cash sales and credit sales. A cash sale occurs when payment is received instantly, while a credit sale occurs when payment will be made later, usually within an agreed period. For example, if a company sells furniture to a customer and the customer pays on the spot, it is a cash sale. If the customer promises to pay after 30 days, it is a credit sale. Both transactions are treated as sales, but they affect accounting records differently. Sales are also significant because they form the starting point of a business’s income statement. The total sales made during a period, less any sales returns and allowances, give the figure known as net sales. Net sales are then used to calculate gross profit by subtracting the cost of goods sold. This shows how essential sales are to understanding a company’s profitability. Sales transactions may also include terms like trade discounts and cash discounts. A trade discount is given at the time of sale to encourage bulk buying or loyalty, while a cash discount is given to encourage quick payment. These elements are usually adjusted in sales accounting records. In short, “Sale” in accounting means more than just exchanging goods for money. It is a well-defined transaction that signifies the earning of revenue, influences financial statements, and plays a central role in evaluating the success of a business. Without sales, a company cannot generate income, which makes it a vital concept in both business operations and accounting practices.

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ii. How would you define Commission in business transactions?
In business transactions, “Commission” refers to the monetary reward or fee given to an agent, broker, salesperson, or intermediary for successfully carrying out a service, such as selling goods, arranging a deal, or introducing clients. It is usually calculated as a percentage of the value of sales or transactions completed. For example, if a salesperson sells goods worth Rs. 100,000 and their commission rate is 5 percent, they earn Rs. 5,000 as commission. The purpose of commission is to motivate agents and salespersons to work harder and generate more sales, since their income directly depends on their performance. Unlike a fixed salary, commission is a variable expense for the business because it rises with higher sales and decreases when sales are low. This system aligns the interests of both the employer and the agent, creating a win-win situation: the business benefits from higher sales and the agent earns more for their effort. Commission can take different forms. The most common is sales commission, but businesses also use brokerage commission, insurance commission, or performance-based commission depending on the industry. In some cases, commission is fixed at a standard percentage, while in others it may involve a sliding scale where the percentage increases as sales volume increases. For example, a salesperson may earn 3 percent commission on the first Rs. 50,000 of sales and 5 percent on sales above that amount. From an accounting perspective, commission paid by the business is treated as an expense and appears in the Profit and Loss Account. On the other hand, commission received by a business for providing services as an agent or broker is treated as income and is also shown in the Profit and Loss Account but on the income side. This dual treatment makes commission an important item in financial reporting. Commission is also influenced by legal agreements and contracts between the parties. Clear terms about rate, timing of payment, and conditions under which commission is earned are usually stated to avoid disputes. For example, some agreements specify that commission is payable only when the buyer has paid in full, while others state that it becomes due as soon as the sale is confirmed. In short, commission in business is a performance-based payment system that rewards effort, drives sales growth, and creates accountability. It benefits businesses by increasing revenues while providing agents with a direct financial incentive. Accounting for commission ensures transparency and accuracy in financial records.

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iii. What does the term Purchases refer to in financial records?
In financial records, the term “Purchases” refers to the buying of goods and materials by a business for the purpose of resale or production. Purchases are recorded in the books of accounts as part of the cost of goods sold, and they play a central role in determining a company’s profitability. It is important to note that “purchases” in accounting usually refers to goods bought for trading or manufacturing, not items like office equipment or buildings. Such assets are treated differently and are recorded under fixed assets instead of purchases. For a trading business, purchases mean goods bought for resale. For a manufacturing business, purchases may include raw materials, parts, and components required for production. For example, if a bookstore buys 500 novels from a publisher to resell, that amount is recorded as purchases. Similarly, a shoe factory buying leather to produce shoes also records it as purchases. Purchases can be made in cash or on credit. A cash purchase occurs when the buyer pays immediately, while a credit purchase occurs when payment will be made later, according to agreed terms. Both types are important, and in accounting, all purchases are first recorded in the Purchases Book. At the end of the accounting period, total purchases are adjusted by subtracting purchase returns (goods returned to suppliers) to calculate net purchases. The treatment of purchases is directly linked to the Trading Account. In the Trading Account, purchases are added to opening stock and other direct expenses, and after deducting closing stock, the cost of goods sold is derived. This calculation helps determine the gross profit of the business. Purchases also affect cash flow and working capital. A business that relies heavily on credit purchases may face higher liabilities, while one that buys mostly in cash may need larger liquidity reserves. Good purchasing management is therefore vital for maintaining financial stability. In short, “Purchases” in accounting refers to the cost of goods acquired for resale or for use in production. They are a key component in calculating cost of goods sold and ultimately the gross profit. Proper recording and monitoring of purchases ensure accurate financial results and efficient business operations.

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iv. What is a Trade Discount, and when is it usually given?
A trade discount is a reduction in the listed price of goods granted by a seller to a buyer, usually when goods are bought in bulk or when the buyer is a regular customer in the same trade. It is a common practice in wholesale and manufacturing businesses to encourage large orders, build long-term relationships, and promote customer loyalty. Unlike a cash discount, which is related to payment terms, a trade discount is given at the time of sale itself. For example, if a manufacturer lists a machine at Rs. 100,000 but offers a 10 percent trade discount to a wholesaler, the wholesaler will only pay Rs. 90,000. Importantly, trade discounts are not recorded in the books of accounts separately. Only the net amount after discount is recorded as the purchase or sale. This is because the discount is seen as a reduction in the selling price rather than an expense or income. Trade discounts are usually given under three main circumstances. First, they are offered to buyers who purchase in large quantities. Second, they are granted to retailers or wholesalers who belong to the same industry and are expected to resell the goods. Third, they may be given to promote specific products or to clear stock quickly. From the business’s perspective, trade discounts help attract bulk buyers and keep them coming back. They also allow sellers to control market prices, since only authorized buyers, such as wholesalers, can access discounted rates. From the buyer’s perspective, trade discounts reduce costs and increase their potential profit margin. In conclusion, a trade discount is an allowance deducted from the list price at the time of sale, designed to encourage bulk buying and strengthen business relationships. It is not recorded in the financial accounts separately, only the net price is entered. Trade discounts are an important tool in wholesale trade and help businesses maintain steady sales and market reach.

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v. Define Cash Discount and explain its purpose.
A cash discount is a reduction in the amount payable by a customer, offered by the seller as an incentive for prompt payment. It is also called a settlement discount and is commonly given in credit transactions. The main objective of a cash discount is to encourage customers to pay their dues quickly, thereby improving the seller’s cash flow and reducing the risk of bad debts. For example, a supplier may sell goods worth Rs. 50,000 on credit with terms “2/10, net 30.” This means the buyer will receive a 2 percent discount if payment is made within 10 days; otherwise, the full amount is due within 30 days. If the buyer pays within the 10-day period, they only need to pay Rs. 49,000. If they pay after 10 days but within 30 days, they must pay the full Rs. 50,000. In accounting, cash discounts are recorded differently from trade discounts. A cash discount allowed by the seller is recorded as an expense in the Profit and Loss Account because it reduces income. For the buyer, a cash discount received is recorded as income because it lowers the cost of purchases. Unlike trade discounts, cash discounts are always entered in the books of accounts. Cash discounts serve several purposes. First, they encourage quick payments, which strengthens the seller’s liquidity position. Second, they reduce the chances of defaults or bad debts by motivating customers to pay early. Third, they can help build stronger business relationships, as buyers also benefit from cost savings. However, sellers must plan carefully, because if discounts are too high, they may reduce overall profitability. In summary, a cash discount is an allowance given to buyers for settling their accounts quickly. It is recorded in financial statements and helps businesses maintain cash flow, reduce risks, and promote timely payments. It benefits both parties: sellers receive faster payments, and buyers save money.

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ASSIGNMENT No. 2

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Q1. The trial balance of Rahim did not agree. Rahim takes the difference in suspense into account. Subsequently, he located the following errors:
i. Wages paid for the installation of Machinery, Rs. 5600, were posted to the wages account.
ii. Repairs to truck Rs. 10400 debited to truck account.
iii. Repairs paid for the overhauling of second-hand machinery purchased, Rs. 1,000 was debited to the Repairs account.
iv. Own business materials Rs. 8,000, and wages Rs. 2,000, were used for the construction of the building. No adjustment was made in the books.
v. Furniture purchased for Rs. 7,000 was posted to the purchase account as Rs. 700.
vi. Old machinery sold to Karim at its book value of Rs. 5,000 was recorded through the sales book.
vii. The total of sales returns book Rs. 3,000 was not posted to the ledger. ▶

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Sr. No.	Particulars	Debit (Rs.)	Credit (Rs.)
i	Machinery	5600
	Wages		5600
Wages paid for installation of machinery wrongly debited to wages account, now rectified.
ii	Truck	10400
	Repairs		10400
Repairs to truck wrongly debited to truck account, now rectified.
iii	Repairs on second-hand machinery	1000
	Repairs Account		1000
Repairs paid for overhauling second-hand machinery wrongly debited, now rectified.
iv	Building Materials	8000
	Wages	2000
Materials and wages used for building, not recorded earlier, now adjusted.
v	Furniture	7000
	Purchases		700
Furniture purchased posted to purchases wrongly, now rectified.
vi	Cash/Bank		5000
	Machinery	5000
Old machinery sold recorded through sales book, now rectified.
vii	Sales Returns	3000
	Debtors		3000
Sales returns not posted earlier, now adjusted.

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Q2(a). What is the double-entry system of accounting? Why is it considered reliable? ▶

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The double-entry system of accounting is a method where every financial transaction affects at least two accounts, maintaining the accounting equation: Assets = Liabilities + Equity. In this system, each transaction has a debit entry in one account and a corresponding credit entry in another account. This method ensures that the books are always balanced, as the total debits always equal total credits. It provides a complete record of all business transactions and helps in detecting errors easily.

For example, if a business buys machinery for cash, the Machinery account will be debited, and the Cash account will be credited. Similarly, if goods are sold on credit, the Accounts Receivable account will be debited, and the Sales account will be credited. This dual effect gives a clear picture of both where resources come from and where they are applied.

The double-entry system is the foundation of modern accounting, providing accurate financial information for decision-making, reporting, and taxation purposes. It helps track the financial health of a business, monitor profit and loss, and prepare financial statements like the Balance Sheet and Profit & Loss Account.

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The double-entry system is considered highly reliable for several reasons. First, it reduces the chance of errors because every transaction must be recorded twice, ensuring that the sum of debits equals the sum of credits. If the books are unbalanced, it immediately signals that an error has occurred, prompting a review of the accounts.

Second, it provides a complete record of transactions. This transparency allows businesses to trace every financial movement, making it easier to audit accounts and ensure accuracy. It also prevents fraud, as any unauthorized transaction would disrupt the balance of the accounts.

Third, the double-entry system provides meaningful financial information. Since each account shows both its increases and decreases, managers can understand the financial position of the business clearly. This system also allows for the preparation of trial balances, financial statements, and management reports with confidence.

Lastly, it ensures consistency over time. As transactions are recorded systematically, comparing financial data across periods becomes reliable, helping businesses make informed decisions, plan budgets, and analyze trends effectively.

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Example of a Double-Entry Transaction

Sr. No.	Particulars	Debit (Rs.)	Credit (Rs.)
i	Machinery	50000
	Cash		50000
Machinery purchased for cash, recorded as a debit to Machinery and a credit to Cash.

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In conclusion, the double-entry system is reliable because it ensures accuracy, provides a full record of transactions, prevents fraud, and supports meaningful financial reporting. This system is indispensable for any business aiming for transparency and proper financial management.

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Q2(b). What is accounting? Explain its importance in business activities. ▶

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Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions of a business. It provides a systematic way to track the flow of money in and out of a business and helps in preparing financial statements like the Balance Sheet, Income Statement, and Cash Flow Statement. Accounting allows businesses to understand their financial position, performance, and cash situation at any given time.

It involves maintaining detailed records of all business activities, including purchases, sales, receipts, and payments. By organizing financial data, accounting helps in monitoring business operations, making informed decisions, and ensuring compliance with legal and tax requirements. In simple terms, accounting turns raw financial data into meaningful information that business owners, managers, and stakeholders can rely on.

Importance of Accounting in Business Activities

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Accounting plays a vital role in the success and sustainability of a business. One of its key benefits is helping managers make informed decisions. Accurate financial records show how resources are being used, which areas are profitable, and where costs can be reduced.

It also ensures proper financial control by tracking income, expenses, and liabilities. Businesses can detect errors, prevent fraud, and maintain transparency through accounting records. This is crucial not only for internal management but also for building trust with investors, lenders, and regulatory authorities.

Accounting is also essential for planning and budgeting. By analyzing past and current financial data, businesses can forecast future performance, set realistic targets, and allocate resources efficiently. This helps in achieving long-term growth and sustainability.

Another significant aspect is compliance. Businesses are required by law to maintain proper accounts and report taxes accurately. Accounting ensures that these legal obligations are met, reducing the risk of penalties or legal issues.

In addition, accounting provides a clear picture of profitability. By understanding which products, services, or departments generate revenue, businesses can focus on areas that maximize profit. It also helps in managing cash flow effectively, ensuring that the business has enough liquidity to meet its obligations.

In short, accounting is not just about numbers; it is a powerful tool that supports decision-making, financial control, planning, legal compliance, and business growth. Without proper accounting, a business cannot measure its success, identify problems, or plan for the future effectively.

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Q3(a). What are the main objectives of maintaining accounting records? ▶

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Main Objectives of Maintaining Accounting Records

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Maintaining accounting records is an essential part of running a business efficiently. These records provide a clear and organized way to track financial transactions, helping business owners and managers understand the financial health of their organization. The main objectives of maintaining accounting records are as follows:

1. Systematic Recording of Transactions

One of the primary objectives is to record all business transactions in a systematic and chronological manner. This ensures that no financial activity, whether income, expense, or asset purchase, is missed. Accurate recording makes it easier to retrieve information when needed for analysis, reporting, or auditing purposes.

2. Determination of Financial Position

Accounting records help in determining the financial position of a business at any given time. By analyzing assets, liabilities, and equity, business owners can know how much the business owns, owes, and the net worth. This information is crucial for planning future investments and making strategic decisions.

3. Calculation of Profit or Loss

Maintaining detailed records allows a business to calculate its profit or loss accurately. By comparing revenue and expenses recorded in the books, managers can assess whether the business is making a profit or incurring a loss. This helps in evaluating business performance and implementing corrective measures if necessary.

4. Facilitation of Decision Making

Accounting records provide reliable financial information that supports decision-making. Whether it’s deciding on expansion, reducing costs, or investing in new projects, accurate records ensure that decisions are based on real data rather than guesswork.

5. Compliance with Legal Requirements

Businesses are legally required to maintain proper accounting records and report taxes accurately. Keeping organized books helps ensure compliance with local laws, tax regulations, and auditing requirements. This reduces the risk of penalties or legal disputes.

6. Control Over Business Operations

Accounting records help in monitoring and controlling business operations. By keeping track of expenses, income, and cash flow, management can prevent fraud, detect errors, and ensure that resources are used efficiently.

7. Facilitation of Auditing

Proper accounting records make it easier to conduct audits. Auditors can review organized and complete records to verify financial statements and confirm the accuracy of the information. This adds credibility to the business’s financial reporting.

In summary, maintaining accounting records is not just a formality; it serves multiple objectives, including accurate recording of transactions, determination of financial position, calculation of profit or loss, informed decision-making, legal compliance, operational control, and ease of auditing. These objectives collectively help businesses operate efficiently and grow sustainably.

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Q3(b). Define the terms assets, liabilities, and capital with simple examples. ▶

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1. Assets

Assets are resources owned by a business that have economic value and can be used to generate income. They represent what the business owns. Assets can be tangible, like machinery, buildings, and cash, or intangible, like patents or trademarks.

Example: If a shop owns cash of Rs. 50,000, a delivery van worth Rs. 400,000, and furniture worth Rs. 100,000, all of these are assets because they have value and help the business operate.

2. Liabilities

Liabilities are obligations or debts that a business owes to others, usually in the form of money. They represent what the business owes and must be settled in the future, often to suppliers, banks, or employees.

Example: If the same shop takes a loan of Rs. 200,000 from a bank and owes Rs. 50,000 to its suppliers, these amounts are liabilities because the shop has to pay them back.

3. Capital

Capital is the owner’s investment in the business. It represents the amount contributed by the owner plus any profits retained in the business. Capital shows the owner’s claim on the assets after liabilities have been paid.

Example: If the shop owner invests Rs. 300,000 in the business and the business earns a profit of Rs. 50,000 that is kept in the business, the total capital becomes Rs. 350,000. This is what the owner owns in the business after paying all liabilities.

In simple terms, assets are what the business owns, liabilities are what it owes, and capital is the owner’s share in the business. Together, they form the basic accounting equation:

Assets = Liabilities + Capital

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Q4. From the following particulars of Hamza & Sons, prepare a three-column cashbook for March 2025.
March 1: Cash in hand Rs.280,000, Cash at bank (overdraft) Rs.80,000.
March 2: Cash deposited into bank Rs.150,000.
March 4: Received a cheque from Javaid for Rs.12,000 less cash discount of 5%.
March 10: Dividend collected by the bank Rs.4,000.
March 13: Received cheque from Kabir and paid into bank Rs.3000.
March 18: Javaid’s Cheque was deposited into the bank.
March 20: Bought furniture from Lahore furniture for Rs.15000.
March 24: Javaid’s cheque was dishonored by the bank.
March 29: Paid Haseeb by Cheque Rs.6000.
March 30: Issued an order to the bank to stop the payment of the cheque issued to Haseeb.
March 31: Cash sales Rs.150000 and deposited Rs.50000 into the bank out of them.
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Debit (Receipts)						Credit (Payments)
Date	Particulars	Discount Allowed	Cash	Bank		Date	Particulars	Discount Received	Cash	Bank
Mar 01	Balance b/d		280,000			Mar 01	Bank Overdraft			80,000
Mar 02	Cash deposited into bank			150,000
Mar 04	Received cheque from Javaid	600	11,400
Mar 10	Dividend collected by bank			4,000
Mar 13	Received cheque from Kabir & deposited into bank			3,000
Mar 31	Cash sales		150,000	50,000
						Mar 20	Bought furniture from Lahore Furniture			15,000
Total			441,400	207,000		Total			6,000	18,000

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Q5. State whether the following receipts are of a Capital or Revenue nature:
a) Sale of goods.
b) Money received as a loan from a bank.
c) Interest received on deposits.
d) Dividend received.
e) Sale of machinery.
f) Rent received from a tenant.
g) Money received from the proprietor as additional capital.
h) Amount received from the issue of shares. ▶

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Sr. No.	Particulars	Capital / Revenue
a)	Sale of goods	Revenue
b)	Money received as a loan from a bank	Capital
c)	Interest received on deposits	Revenue
d)	Dividend received	Revenue
e)	Sale of machinery	Capital
f)	Rent received from a tenant	Revenue
g)	Money received from the proprietor as additional capital	Capital
h)	Amount received from the issue of shares	Capital

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