Journal Ledger

Records chronological order of transactions Summarizes transactions from the journal

Transactions recorded in order of occurrence Transactions grouped by accounts

Recorded at the time of the transaction Recorded after the transactions in the journal
are posted

Entries made frequently throughout the Entries made periodically, typically after each
accounting period accounting period

Captures the complete record of financial Organizes and summarizes transactions by

transactions account for easy reference and analysis.

Capital Expenditure Revenue Expenditure

Investment in long-term assets or Routine expenses incurred for maintaining

improvements that benefit the business over the day-to-day operations of the business
multiple accounting periods

Benefits the business over multiple Benefits the business in the current
accounting periods, typically several years accounting period

Recorded as assets on the balance sheet and Recorded as expenses on the income
depreciated over their useful lives statement in the period they are incurred

Increases the value of assets or reduces Immediately reduces profit

liabilities

Acquiring, upgrading, or extending fixed Sustaining the ongoing operations of the

assets such as buildings, machinery, business, such as salaries, rent, utilities,
equipment, etc repairs, etc.
Q. Why balance sheet is prepared at the last date of the year?
Ans: The balance sheet is prepared at the last date of the year because of the following factors:

1. Completion of Accounting Period: By preparing the balance sheet at the end of the
accounting period, businesses can accurately reflect their financial status after all
transactions for the period have been recorded.

2. Preparation of Financial Statements: The balance sheet is one of the three primary
financial statements, along with the income statement and cash flow statement. By
preparing the balance sheet at the end of the accounting period, businesses can ensure
consistency and accuracy when preparing their financial statements.
3. Comparison and Analysis: By preparing the balance sheet at the end of each accounting
period, businesses can easily compare their financial position over time and analyze
trends in assets, liabilities, and equity.

Q. What is depreciation? What factors are considered in calculating depreciation?

Ans: Depreciation is the decrease in the value of the asset over a period of time due to wear
and tear or other factors. Depreciation is an important concept in accounting because it helps
match the cost of using assets with the revenue they generate over their useful lives.
The factors that are considered in calculating depreciation are:
1. Cost of the Asset: This is the initial cost incurred to acquire or construct the asset

2. Useful Life: Useful life refers to the estimated period over which the asset is expected to
be used by the business to generate revenue.

3. Salvage Value: Salvage value, also known as residual value is the estimated value of the
asset at the end of its useful life

Q. What is the main purpose of writing off depreciation? Is depreciation mandatory as per
company’s Act 1956?
Ans: The main purpose of writing off depreciation is to allocate the cost of tangible assets over
their useful lives to accurately reflect their declining value and the expense associated with
their usage in generating revenue. By writing off depreciation, businesses maintain accurate
records of the carrying value of their assets on the balance sheet. Writing off depreciation helps
companies optimize their tax positions and manage their cash flows more effectively. Writing
off depreciation helps align expenses with the revenues they help generate, following the
matching principle in accounting.
Regarding the Companies Act 1956, depreciation was indeed mandatory under this legislation
for companies in India. It required companies to provide for depreciation on fixed assets based
on rates specified in the Act or as per the rates prescribed by the relevant accounting
standards. The Act laid down specific requirements for the calculation, disclosure, and
treatment of depreciation in financial statements.

Q. Write the methods of depreciation.

Ans:

1. Straight-Line method: This is the simplest and most commonly used method. Under
straight-line depreciation, the same amount of depreciation expense is recognized each
accounting period over the asset's useful life. The formula for straight-line depreciation
is:
Annual Depreciation= (Cost of asset – salvage value) /Useful life

2. Written down value method: Also known as accelerated depreciation, this method
recognizes higher depreciation expense in the earlier years of an asset's life and lower
expense in later years. The formula for declining balance depreciation is:
Annual Depreciation = Book Value of the asset × Depreciation rate.

Q. Write the causes of depreciation

Ans: Following are the causes of depreciation:
1. Physical Wear and Tear: Assets deteriorate over time due to regular use, exposure to
environmental conditions, and friction.

2. Outdated asset: Assets may become outdated or inefficient compared to newer models,
reducing their value and usefulness

3. Expiry of Useful Life: Assets have a limited useful life, after which they become less
efficient or impractical to use.

4. Inadequate Maintenance: Poor maintenance practices can accelerate the deterioration

of assets and reduce their lifespan
5. Natural Causes: Natural disasters such as floods, earthquakes, fires, and storms can
cause damage to assets, leading to their depreciation.
 6. Market Conditions: Changes in market conditions, such as fluctuations in demand,
supply, or prices of goods and services, can impact the value of assets

Q. Write Short notes on

a) Capital Expenditure:
Investment in long-term assets or improvements that benefit the business over multiple
accounting periods. They benefits the business over multiple accounting periods, typically
several years. It includes buying land, buildings, machinery, equipment, vehicles, and other
fixed assets necessary for the company's operations. Expenditures related to developing new
products, processes, or technologies that enhance the company's operational efficiency also
comes under capital expenditure. It also include investment in software applications, patents,
and trademarks, copyrights that have long-term value and contribute to the company's
competitive advantage. Capital expenditures are typically recorded on the balance sheet as
assets and depreciated over their useful lives. Effective management of capital expenditures is
crucial for businesses to maintain and enhance their competitive position.

b) Revenue Expenditure:
Routine expenses incurred for maintaining the day-to-day operations of the business. They
Benefits the business in the current accounting period. It includes payments made to
employees for their services, including regular wages, salaries, bonuses, and commissions. It
also include purchases of materials, components, and supplies used in the production process
or for providing services. Costs incurred to maintain and repair equipment, machinery,
buildings, and other assets to keep them in working condition also comes under revenue
expenditure. They are recorded as expenses on the income statement in the period they are
incurred. Effective management of revenue expenditures is essential for businesses to control
costs, maintain profitability, and ensure smooth day-to-day operations.

Q. What are bad debts? Write the distinction between Bad debt and doubtful debt?
Ans: Bad debts refer to amounts owed to a company by customers or other parties that are
unlikely to be collected. These debts typically arise when a customer fails to pay their
outstanding within the agreed-upon credit terms, or when a debtor goes out of business.
Difference between bad debts and doubtful debts are:
 Bad debts Doubtful debts

Amounts owed that are considered Amounts owed that are uncertain and may
uncollectible and are considered as a loss become uncollectible in the future

Highly unlikely to be collected Uncertain whether it will be collected

Written off as an expense in the income Provision is made for potential losses in the
statement balance sheet

Reduces both assets and net income Reduces assets without affecting net income

Example: A customer declares bankruptcy and Example: A customer consistently pays late or
cannot pay their outstanding balance has financial difficulties, raising doubts about
their ability to pay