Description

Financial Accounting

Dec 2026 Examination

 

 

Q1 Riya commenced a business on 1 April 2026 with the following opening balances:

Cash Rs.80,000;

Bank Rs.1,20,000;

Inventory Rs.60,000;

Furniture Rs.40,000;

Creditors Rs.50,000.

During April 2026, the following transactions took place:

1. Purchased goods on credit from Neha Traders for Rs.45,000.
2. Sold goods for cash Rs.30,000.
3. Paid rent Rs.8,000 and salaries Rs.12,000 through bank.
4. Purchased office equipment for Rs.50,000, paying Rs.20,000 by cheque and agreeing to pay the balance later.
5. Received Rs.18,000 from a customer in full settlement of a claim of Rs.20,000.

Prepare the Journal Entries for the above transactions, including the Opening Entry wherever applicable. (10 Marks)

Ans 1.

Introduction

Every transaction Riya records this month follows the same basic rule. Every debit needs an equal credit somewhere else. Starting from her opening balances, each entry below applies this rule carefully to her April transactions, keeping her books balanced from day one.

Concept and Application

The Opening Entry and Why It Matters

An opening entry brings forward balances from before the books were formally started. Assets are debited, since they represent what the business owns. Liabilities are credited, and the

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Q2 (A) A business follows different accounting practices from year to year. In one year, it changes its method of depreciation without a clear justification. It also decides not to disclose a relatively small item in its financial statements because management considers it insignificant. Analyse the accounting principles/conventions involved in these decisions and explain how consistency and materiality contribute to reliable and comparable financial reporting. (5 Marks)

Ans 2(A).

Introduction

Changing a depreciation method without good reason is not a small choice. It quietly breaks a promise accounting makes to its readers. Consistency and materiality exist precisely to protect that promise, and this business is quietly testing both conventions at the same time.

Concept and Application

The Consistency Convention Protects Comparability

Consistency means using the same accounting method across periods, unless a genuinely better

 

Q2 (B) A business purchased machinery costing Rs.50,000 for cash, but the amount was incorrectly debited to the Repairs Expense Account. The Trial Balance nevertheless agreed. Analyse the error, explain why the Trial Balance still agrees, and pass the necessary rectification entry. (5 Marks)

Ans 2(B).

Introduction

A Trial Balance that agrees feels reassuring. But agreement only proves the underlying arithmetic is correct, not that every single entry went to the right account. This machinery purchase shows exactly how a real, genuine error can hide behind a perfectly balanced total.

Concept and Application

Identifying This as an Error of Principle