ignou Eco 2-em-solved-assignment-2018-19

Bachelor’s Degree Programme
(BDP)
ASSIGNMENT
2018-19
Elective Course in Commerce
ECO – 02: Accountancy-I
For July 2018 and January 2019 admission cycle
School of Management Studies
Indira Gandhi National Open University
Maidan Garhi, New Delhi -110068
ECO - 02

Elective Course in Commerce
ECO – 02: Accountancy-I
ASSIGNMENT- 2018-19
Dear Students,
As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this
Course.
Assignment is given 30% weightage in the final assessment. To be eligible to appear in the
Term-end examination, it is compulsory for you to submit the assignment as per the schedule.
Before attempting the assignments, you should carefully read the instructions given in the
Programme Guide.
This assignment is valid for two admission cycles (July 2018 and January 2019). The validity is
given below:
1. Those who are enrolled in July 2018, it is valid up to June 2019.
2. Those who are enrolled in January 2019, it is valid up to December 2019.
You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For
appearing in June Term-End Examination, you must submit assignment to the Coordinator of your
study centre latest by 15th
March. Similarly for appearing in December Term-End Examination,
you must submit assignments to the Coordinator of your study centre latest by 15th
September.

TUTOR MARKED ASSIGNMENT
Course Code : ECO - 02
Course Title : Accountancy-I
Assignment Code : ECO – 02/TMA/2018-19
Coverage : All Blocks
Maximum Marks: 100
Attempt all the questions.
1. (a) What is Bank Reconciliation Statement? Explain the causes of disagreement in the
balances shown by cash Book and Pass Book. (10)
(b) Why do you maintain bill book separately? State the transactions recorded in Bill Receivable and
Bills Payable journals. (10)
2. (a) What is suspense Account? Why is it opened and how is it closed? Explain. (10)
(b) Why is provision for doubtful debts created? How is it shown in the Balance sheet? Explain
(10)
3. How would a not-for-profit organization deal with the following items. (4X5)
(a) Outstanding Subscriptions, (b) Donation, (c) Tournament Fund, (d) Legacy,
(e) Life Membership Fees
4. (a) What is joint venture ? Explain various methods of recording the joint venture transaction. Give
entries in each case. (10)
(b) Differentiate between : (10)
(i) General Commission and Del Creder Commission
(ii) Normal Loss and Abnormal Loss
5. “Incomplete records system is unscientific, incomplete, inaccurate and unsystematic”. Explain
(20)

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ANS. 1 ( a) . BANK RECOGNITION STATEMENT
Bank reconciliation statement is a report which compares the bank balance as per
company's accounting records with the balance stated in the bank statement.
It is normal for a company's bank balance as per accounting records to differ from the
balance as per bank statement due to timing differences. Certain transactions are
recorded by the entity that are updated in the bank's system after a certain time lag.
Likewise, some transactions are accounted for in the bank's financial system before the
company incorporates them into its own accounting system. Such timing differences
appear as reconciling items in the Bank Reconciliation Statement.
The purpose of preparing a Bank Reconciliation Statement is to detect any discrepancies
between the accounting records of the entity and the bank besides those due to normal
timing differences. Such discrepancies might exist due to an error on the part of the
company or the bank.
IMPORTANCE OF BANK RECONCILIATION
* Preparation of bank reconciliation helps in the identification of errors in the
accounting records of the company or the bank.
* Cash is the most vulnerable asset of an entity. Bank reconciliations provide the
necessary control mechanism to help protect the valuable resource through uncovering
irregularities such as unauthorized bank withdrawals. However, in order for the control
process to work effectively, it is necessary to segregate the duties of persons
responsible for accounting and authorizing of bank transactions and those responsible

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for preparing and monitoring bank reconciliation statements.
* If the bank balance appearing in the accounting records can be confirmed to be
correct by comparing it with the bank statement balance, it provides added comfort
that the bank transactions have been recorded correctly in the company records.
Monthly preparation of bank reconciliation assists in the regular monitoring of cash
flows of a business
CAUSES OF DISAGREEMENT BETWEEN CASHBOOK AND PASSBOOK
Checks Issued or Drawn to Creditors But Not Paid by Bank:
When a check is issued to a creditor, it is recorded on the credit side of the cash book in
bank column. The bank will record it on the date when it is paid. In most of the cases a
check cannot be presented for the payment by the creditor on the date on which it is
drawn. So long the check is not presented to the bank, the cash book balance and the
pass book balance will differ.
Checks Deposited for Collection But Not Yet Collected and Credited by the Bank:
When a check is received from a debtor, it is recorded in the cash book on the date
when it is deposited with the bank for collection. But the bank will record it in
depositor's account on the ate when it is actually collected by the bank from the
concerned bank. So long the bank cannot collect the amount, the cash book balance and
pass book balance will disagree.
Amount Deposited Directly into the Bank by Debtors:
Sometimes the debtors deposit the amount directly to our bank a/c instead of paying
cash to us. In such a case the bank will transfer the amount to our account and sends us
an intimation of this transaction. But usually, there is some delay in receiving this
information from the bank. So long the intimation is not received by us, the cash book

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balance and the pass book balance will disagree. For this, the cash book will show less
balance and the pass book will show more balance.
Income Collected by the Bank:
Sometimes the bank collects and credits our account with dividend on shares, interest
on govt. securities etc. as per our instructions and sends an intimation to us. But it takes
a few days to receive this intimation from the bank and we record it in cash book on the
date of receipt of this intimation. For this, the cash book will show less balance and the
pass book will show more balance.
Interest on Deposits:
The bank allows us interest on our deposits and credits the amount of interest to our
account and sends intimation to us On receipt of the intimation, we record it in the cash
book. So long the information is not received by us, the cash book balance and the pass
book balance will not agree. For this, the cash book will show less balance and pass book
will show more balance.
Expenses Paid by the Bank Directly:
Sometimes the bank pays insurance premium, factory rent, interest on debentures,
trade subscription etc. on our behalf as per standing order. The bank debits our
accounts and sends intimation to us. On receipt of intimation for the bank, we record it
in our cash book. For this, there will be a disagreement between cash book and pass
book.
The Bank Charges:
Our account is debited with bank charges and interest on overdraft and intimation is
sent to us by the bank. On receiving the intimation from the bank, we record them in
the cash book. For this the cash book will show more balance and the pass book will
show less balance.

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Errors and Omissions:
In business, errors and omissions are very common. Someone may forget to record
something or record it but in a wrong way. The cash book balance and the pass book
balance can also disagree if there is an error or mistake in the cash book or in the pass
book.
Ans. 1 ( b )

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BILL RECEIVABLE AND BILLS PAYABLE BOOKS :
Recoding the transactions in general journal is very convenient, if the transactions are a
few. But where numerous bills are drawn and accepted by a business man, than it is
advisable for him to record them in special journals (books) known as bills receivable
book and bills payable book. The bills drawn and received are recorded in bills
receivable books and bills accepted are recorded in bills payable book.
The total of the bills receivable book shows the total amount of the bills drawn and
received. This total will be posted to the debit side of bill receivable in ledger. The
parties from whom the bills have been received will be credited with the amount shown
against their names. In the same way, the total of the bills payable book will be posted
to the credit side of bills payable account in ledger. The parties to whom acceptances
have been given are debited.
When these two special books are maintained in a business, the general journal is used
only for the following bills transactions:
When a bill is endorsed in favor of a creditor.
When a bill receivable and a bill payable are dishonored.

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When a bill is renewed.
THE format of bills receivable and bills payable book is shown below:

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AnS -2. ( a. )
A suspense account is the section of a company's books where it records its unclassified
debits and credits. The suspense account temporarily holds these unclassified
transactions while the company makes a decision about their classification. Transactions
in the suspense account continue to appear in the general ledger for the company.
In investing, a suspense account is a brokerage account where an investor places cash or
short-term securities temporarily while deciding where to invest them for a longer
term.Suspense accounts are used when your trial balance is out of balance or when you
have an unidentified transaction. The suspense account is a general ledger account that
acts as a holding account until the error is discovered or the unknown transaction is
identified. When working with the trial balance, you can open one suspense account to
hold all of the discrepancies until you find them. However, suspense accounts are
temporary accounts that must be closed by the end of your accounting cycle.
Trial Balance Suspense Accounts
The suspense account is listed on the trial balance under the Other Assets heading. It
remains there until the reasons for the imbalance are discovered and corrected. If your
trial balance debits are larger than the credits, the difference is recorded in the
suspense account as a credit. Conversely, if the trial balance credits are larger than the
debits, the difference is recorded in the suspense account as a debit. Once you find the
reason for the trial balance and correct it, the account is closed and removed from the

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trial balance.
Received Payments Suspense Accounts
A suspense account is opened whenever you receive a payment and you cannot identify
which invoice the customer wants paid or which customer made the payment. If your
customer sent in a partial payment, contact the customer to find out which items or
invoices the payment covers. If you do not know who made the payment, review the
open invoices to try to match up the payment. Before posting the payment, call your
customer to verify the payment is correct. If you cannot identify the customer, hold the
payment in suspense until a customer comes forward to claim the payment.
Accounts Payable Suspense Accounts
Accounts payable suspense accounts are opened when you purchase a fixed asset by
making payments but will not receive the asset until it is fully paid off. The suspense
account lets you record your payments without assigning the payments to a specific
equipment or machinery account. Otherwise, combining the payments with an existing
fixed asset would distort the value of that asset. Once the final payment is made and the
asset is received, you close the suspense account and open a separate account for the
new fixed asset.
Suspense Account Journal Entries
Open a suspense account by recording the full amount in question. For example, you
might receive an unknown payment for $500. To account for the payment, open a
Suspense Account and credit the account with the full $500. To balance the transaction,

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make a debit to Cash for $500. When you find out which customer made the payment,
debit the Suspense Account for $500 and credit your Account Receivable customers
account for $500. This closes out your suspense account and posts the payment to the
correct customer account.
ANS -2 ( b. ) A bad debt is an account receivable that has been clearly identified as not
being collectible. This means that you remove that specific account receivable from the
accounts receivable account, usually by creating a credit memo in the billing software
and then matching the credit memo against the original invoice; doing so removes both
the credit memo and the invoice from the accounts receivable report.
When you create the credit memo, credit the accounts receivable account and debit
either the bad debt expense account (if there is no reserve set up for bad debts) or the
allowance for doubtful accounts (which is a reserve account that is set up in anticipation
of bad debts). The first alternative for creating a credit memo is called the direct write
off method, while the second alternative is called the allowance method for doubtful
accounts.
A doubtful debt is an account receivable that might become a bad debt at some point in
the future. You may not even be able to specifically identify which open invoice to a
customer might be so classified. In this case, create a reserve account (also known as a
contra account) for accounts receivable that may eventually become bad debts,
estimate the amount of accounts receivable that may become bad debts in any given
period, and create a credit to enter the amount of your estimate in this reserve account,
which is known as the allowance for doubtful accounts. The debit in the transaction is to
the bad debt expense. When you eventually identify an actual bad debt, write it off (as

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described above for a bad debt) by debiting the allowance for doubtful accounts and
crediting the accounts receivable account.
For example, ABC International has $100,000 of accounts receivable, of which it
estimates that $5,000 will eventually become bad debts. It therefore charges $5,000 to
the bad debt expense (which appears in the income statement) and a credit to the
allowance for doubtful accounts (which appears just below the accounts receivable line
in the balance sheet). A month later, ABC knows that a $1,500 invoice is indeed a bad
debt. It creates a credit memo for $1,500, which reduces the accounts receivable
account by $1,500 and the allowance for doubtful accounts by $1,500. Thus, when ABC
recognizes the actual bad debt, there is no impact on the income statement - only a
reduction of the accounts receivable and allowance for doubtful accounts line items in
the balance sheet (which offset each other).
Thus, a bad debt is a specifically-identified account receivable that will not be paid and
so should be written off at once, while a doubtful debt is one that may become a bad
debt in the future and for which it may be necessary to create an allowance for doubtful
What is Balance Sheet ?
A balance sheet (also called the statement of financial position), can be defined as a
statement of a firm’s assets, liabilities and net worth. It provides a snapshot of a
business at a point in time. These are prepared at the end of an accounting period like a
month, quarter or year end. Comparison of balance sheets over years helps to gauge the
financial health of a business. It got its name as assets minus liabilities (net assets) must
equal the owner’s equity (they must balance). Every business will generally need a

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balance sheet while applying for loans or grants, submitting taxes or seeking potential
investors.
balance sheet
Balance sheet is based on the formula: Assets = liabilities + Net worth
Components of the Balance Sheet
The three major components of the balance-sheet that indicate what the company
owns and owes are Assets, Liabilities and Owner’s Equity.
Assets:
Assets can be defined as the valuables that the company owns to benefit from or are
used to generate income. They are the resources of the company that have future
economic value. These are categorized into tangible and intangible assets. The tangible
assets are further bifurcated into current, long term and other assets. The intangible
assets are trademark, copyrights, goodwill to mention a few.
Current assets include the cash, accounts receivable, prepaid expenses and all that can
be converted into cash within a year.
Long term assets are also called fixed assets. They are distinguished from the current
assets due to their longevity in generating revenues. All fixed assets except for land are
shown on the balance-sheet at original cost less depreciation.

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Liabilities:
Liabilities are debts owed by the business. These are claims of the creditors against the
assets of the business. These are claims or obligations that arise out of past or current
transactions. Liabilities are classified into current and long term liabilities.
Current liabilities are accounts payable, accrued expenses, taxes payable, the current
due within one year portion of long term debt and any other obligations due within a
year.Long term liabilities are debts that must be repaid by the business in more than
one year from the date of the balance sheet.
Net worth (Owner’s Equity): Owner’s equity (called when it’s sole proprietorship)
sometimes is also referred to as the book value of the company because owner’s equity
is equal to the reported asset minus the reported liability.
Assets = liabilities + Net worth, this can be reposed to yield the definition of net worth,
which is the balance after the liabilities are subtracted from the assets of the business.
This section of the balance sheet includes:
Paid up capital
Retained earnings
Treasury stock
balance sheet

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Preparing a Balance Sheet
The two most common formats of reporting the balance sheet are the vertical balance
sheet (where all line items are presented down the left side of the page) and the
horizontal balance sheet (where asset line items are listed down the first column and
liabilities and equity line items are listed in a later column). The vertical format is easier
to use when information is being presented for multiple periods.
Example of Balance Sheet
balance sheet of Indian Hume Pipes Ltd
What can be analysed from a Balance Sheet?
The general financial state of the business at a specific point in time
The amount of capital retained in the business
The productivity, growth and solvency of the business
The pace at which the assets can be converted to capital
Advantages of reporting the balance sheet
Business snapshot:
Balance Sheet provides an accurate picture of the business status. While the profit and
loss statement provides the profit made in a transaction, balance sheet gives the details
of the bills the business owes to the vendors. Every balance sheet is unique; while a
business may experience a high profit account, it can simultaneously have a poor
balance sheet if the total net asset value is low and vice versa. Balance sheet determines
the financial strength of a business and helps in future financial planning.

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Provides information for apt decision making:
Balance-Sheet provides the investors and potential lenders with the information needed
to take decisions while lending money or resources. It reflects the company’s ability to
collect and pay debts on time. On the basis of this, one can form an opinion of the
company’s risk and return prospects.
Provides helpful financial ratios:
Balance Sheet helps to calculate the ratios to determine a company’s long-term
profitability and short-term financial outlook. Ratios like the current ratio and the acid
test or liquidity ratio are calculated using information from the balance sheet. These
ratios help obtain a very thorough summary of the company’s financial health by
analyzing its cash position, working capital, liquidity and leverage. It also provides insight
into the company’s likelihood of defaulting on its credit obligations or even its
bankruptcy risk.
Disadvantages of the balance sheet
Numbers could be misleading:
As the balance-sheet gives the financial snapshot at a given point of time, it could be
misleading sometimes. For e.g. the analysis could get distorted if the company’s cash
position at year end is high, indicating high reserves, but the company may intend to
distribute it in the form of dividends.
Doesn’t give true value of assets:
The balance sheet does not provide the true value of the assets as they are reported at
the historical costs. It does not reflect the current market valuation.

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Other limitations:
The balance sheet has some of the current assets valued on estimated basis, so it does
not reflect the true financial position of the business. Also there is complete omission of
the valuable non monetary assets from the balance-sheet.
Conclusion
Balance-sheet is one of the essential financial statements needed to take appropriate
and sound financial decisions. Blended with the other components (Profit and Loss
Statement, Cash Flow Statement and Statement of Owner’s Equity) of financial
reporting, one can decide whether the business under focus is right as an investment
option.
ANS. 3. ( a )
It is a primary source of income of a non-profit organisation. It is usually collected every
month from all the ordinary members. Subscription is the amount paid by the members
to keep their membership alive.
The subscription amounts are treated as revenue receipts. Subscription received from
members is credited to Income and Expenditure Account on accrual basis i.e. total
amount receivable from all the members as subscription should be considered as
income for the year.
( b ) Donations:
Charitable institution may receive donations from time to time. If the amount is small

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and if such collections are frequent, then they may be treated as an income. Donations
may also be of two types— General Donations and Specific Donations. Any donations
received, not for a specific purpose, are treated as General Donations.
The General Donations of comparatively small amount may be taken to Income and
Expenditure Account. General Donations of comparatively huge amount, which are of
non-recurring nature, may be added to the Capital Fund. The nature and size of the
organisation decide about the amount of donation being small or big.
In case of donations received for any specific purpose then it is termed Specific
Donations. Such amount cannot be used for any other purpose, except the purpose of
donor. Therefore, such amount may be shown in Balance Sheet (liability side).
All the Donations debited to Receipts and Payments Account and these amounts may be
credited to Income and Expenditure Account or Liability side of the Balance Sheet, if it is
for a specific purpose.
( c ) Legacy:
It is like donation. It is the amount given to a non-trading concern as per the will of
deceased person. It is taken to the Receipts and Payments Account as Capital Receipts.
These are not income but may appear in Balance Sheet. These types of receipts are of
non-recurring nature.
( d ) Life Members Fee:
Non-trading concerns usually collect subscriptions every month from their ordinary
members. There are another category of members called “Life Members”, from whom

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the subscriptions are collected as a lump sum.
Such subscriptions are called life subscription and are capital receipts. This can also be
kept in a separate account and an amount equal to annual subscription can be
transferred to subscription account. The balance in such account, on the death of the
member must be transferred to Capital Fund.
( e) ) tournament fund
it is a Real Account. It is a consolidated summary of Cash Book. It is prepared at the end
of the accounting period. All cash receipts are recorded on the debit side and all cash
payments are recorded on the credit side.
Cash Book consisting of entries of receipts and payments in a chronological order while
the Receipts and payments is a summary of total cash receipts and cash payments.
It starts with opening balance of Cash and Bank and ends with closing balance of Cash
and Bank. It does not take into account outstanding amounts of receipts and payments.
Receipts and Payments may be of Capital or Revenue nature; they may relate to the
current or previous year or subsequent year; so long as they are actually received or
paid, they must appear in this account.

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ANS 4. ( a. ) a joint venture (JV) is a business arrangement in which two or more
parties agree to pool their resources for the purpose of accomplishing a specific task.
This task can be a new project or any other business activity. In a joint venture (JV), each
of the participants is responsible for profits, losses and costs associated with it.
However, the venture is its own entity, separate from the participants' other business
interests.
Methods Of Keeping Joint Venture Account
Mainly there are two ways of keeping joint venture account. Those are 1. Without
keeping separate separate set of books, 2. With keeping separate set of books.
1. Without Keeping Separate Set Of Books
A separate set of books for joint venture transaction is not made under this method. in
this method, every co-ventures record all the transactions in his books in connection
with the joint venture. Two types of accounts are maintained under this method
namely joint venture account and co-venture's account. There are again three
variations.
i. Each co-venture records his own transactions as well as the transactions of the other
co-venture and also opening other co-venture's account for final settlement.
ii. Only one co-venture records the account
iii. Each co-venture records his own transactions only, which is known as memorandum

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joint venture method.
Each co-venture will open two principal accounts under this method. Those are Joint
venture account and personal accounts of the co-venture.
Joint Venture Account
This account is prepared to ascertain the profit or loss on joint venture. Hence, it can be
treated as nominal account. Goods purchased, goods supplied by the co-ventures,
expenses incurred etc. are debited and sale proceeds, unsold stock, stock taken over by
co-venture etc. are credited to joint venture account. The final balance of joint venture
account shows profit or loss which is transferred to co-ventures' account according to
their profit sharing ratio.
Personal Account Of Co-venture
The co-venture's account is debited with goods and sales proceeds taken over,
remittance share of profit. Similarly, the personal account is credited with cash, goods
supplied by the co-ventures.
2. With Keeping Separate Set Of Books
When the size of the venture is considerably large, then a separate set of books of
accounts may be maintained. Under this system, accounts are maintained just like in the
case of partnership. While preparing the accounts, the principle of double entry must be
followed. Under this method, the following ledgers are maintained.
i. Joint Venture Account
ii. Joint Bank Account

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iii. Co-venture's Account
Joint Venture Account
The joint venture account is very unique one where all the purchases, procurement
related expenses, selling and distribution expenses as well as expenses related to the
joint ventures are being debited like trading and profit and loss account. No any
separate account of purchases, wages or any other expenses are opened. The goods
supplied by co-ventures etc. are also debited to it. Likewise, sale proceeds, closing stock,
goods taken over by co-ventures are credited to joint venture account. If the joint
venture account shows credit balance, it means profit and if it shows debit balance, it is
loss and transferred to co-ventures personal account.
Joint Bank Account
It is just like a cash book. It records all the cash and bank transactions. It is opened with
the contribution of cash made by co-ventures. The investment made by then are
deposited into a bank account and will operate this in their joint name. Any receipts of
cash and any expenses related to venture are recorded in their account. The joint bank
account is closed by transferring balance to the personal account of co-ventures.
Co-ventures Account
Like the capital accounts in partnership, co-venture account is opened in joint venture. it
is credited with the investment of each co-venture and debited with the drawings made
by them. The profits of the venture is credited and loss of venture is debited. This
account comes to end by cash payment from joint bank account

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AnS. 4 ( b ) ( i )
( ii ) Normal Loss:
Normal loss means that loss which is inherent in the processing operations. It can be
expected or anticipated in advance i.e. at the time of estimation.
Accounting Treatment:
The cost of normal loss is considered as part of the cost of production in which it occurs.
If normal loss units have any realisable scrap value, the process account is f credited by
that amount. If there is no abnormal gain, then there is no necessity to maintain a
separate account for normal loss.

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Journal Entry:
(i) Normal Loss A/c …Dr.
To Process A/c
(ii) Cost Ledger Control A/c …Dr.
(Scrap value) To Normal Loss
Abnormal Loss:
Abnormal loss means that loss which is caused by unexpected or abnormal conditions
such as accident, machine breakdown, substandard material etc. From accounting point
of view we can say that abnormal loss is that loss which occurred over and above
normal loss. These losses are segregated from process costs and investigated to prevent
their occurrence in future.
Process account is to be credited by abnormal loss account with cost of material, labour
and overhead equivalent to good units and the loss due to abnormal is transferred to
Costing Profit and Loss Account.
Journal Entries:
(i) Abnormal Loss A/c …Dr.
To Process A/c

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(ii) Cost Ledger Control A/c …Dr. (Scrap value)
Costing Profit & Loss A/c …Dr.
To Abnormal Loss
ANS. -5 Accounting records not strictly based on principles of double entry system
but based on incomplete records and mere memory is known as accounting from
incomplete records. Single entry is a misnomer, as no such system exists for recording
transaction in accounting. Actually, accounting from incomplete records is a mixed
system of recording business transactions in which some transactions are recorded as
per double entry system and for certain transactions only a single entry is made in the
books of accounts.
It is worth mentioning that for certain transactions no recording is made in the books of
accounts. Under this system, records related to cash account and personal accounts of
debtors and creditors are maintained as per double entry system. Information relating
to cash sales, cash purchases are recorded partially and information related to
depreciation etc. are not recorded at all. In other words, we can say that accounting

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from incomplete records is just an attempt to record business transactions on the lines
of double entry system.
Reasons of Incomplete Records:
The reasons for incomplete records in the business organizations are as under:
(i) Improper Knowledge:
The mechanism of keeping incomplete records is due to improper knowledge of
accounting principles.
(ii) Inexpensive:
This method is less expensive as compared to keeping records as per double entry
system. As people having specialized knowledge in accounting are not appointed and
the staff engaged in other activities and sometimes the owner himself maintains the
records.
(iii) Time Saving:
This method is time saving in the sense that only a few records are maintained under
such system. The information related to profit can be immediately ascertained without
going with the lengthy process of preparation of trial balance first.
(iv) Convenient and Need Based:
This method is very convenient in the sense that no rules and principles are to be
followed. Business entities depending on the need, adapt different techniques for

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recording business transactions in the books of accounts.
Features of Incomplete Records:
The features of incomplete records are as under:
(i) Unsystematic Method:
This is an unsystematic method for recording business transactions in the books of
accounts. There are no rules and principles which are applicable for recording business
transactions in the case of incomplete records.
(ii) Mixed System for Recording Business Transactions:
Accounting from incomplete records is a mixed system of recording business
transactions in which some transactions are recorded as per double entry system and
for certain transactions only a single entry is made in the books of accounts. In some
cases no recording is made in the books of accounts.
(iii) Lack of Uniformity:
The system of recording business transactions under this mechanism differs from
organization to organization as recording is made as per their need and convenience.
(iv) Personal Transactions are Mixed up with Business Transactions:
Personal transactions of the owners are usually mixed up with business transactions.
Sometimes it is very difficult to segregate the business expenses and personal expenses
of the owners. For example, maintenance expense of a car which is used by the owner
for business and domestic purposes both.

27

(v) Based on Estimates:
The profit is based on estimation, hence cannot be relied upon. Similarly, the position of
assets and liabilities does not show true and fair view of the business concern.
(vi) Highly Flexible:
This mechanism is not based on any set rules, principles and accounting standards, so it
can be modified and changed as per the need and availability of time.
(vii) Suitable for very Small Business Entities:
Though the information provided by this system is inaccurate and not authentic yet this
system is time and cost saving, hence adapted by those small business entities that are
not bound to keep records of business transactions as per double entry system.
(viii) Mainly Personal Accounts are Maintained:
Under this system, mainly personal accounts are maintained and no record of real and
personal accounts is maintained.
Advantages of Incomplete Records:
Following are some advantages of incomplete records:
(i) Simple and Time Saving:
This method is time saving in the sense that only a few records are maintained under
such system.

28

(ii) Cost Effective:
This method is less expensive as compared to keeping records as per double entry
system.
(iii) Convenient:
This method is very convenient in the sense that no rules and principles are to be
followed.
(iv) Highly Flexible:
This mechanism is not based on any set rules, principles and accounting standards, as
such it can be modified and changed as per the need and availability of time.
Limitations of Incomplete Records:
The limitations of incomplete records are as under:
(i) Arithmetical Accuracy cannot be Checked:
Under this method all ledger accounts related to real, personal and nominal are not
maintained as such trial balance cannot be prepared. Hence, arithmetical accuracy
cannot be checked.
(ii) Figures of Profits cannot be Relied Upon:
The profit is based on estimation, hence cannot be relied upon.
(iii) True and Fair View of the Business Concern not Shown:
The position of assets and liabilities does not show true and fair view of the business

29

concern as very often recording is made on the basis of memory and sometimes on the
basis of information available.
(iv) Improper Analysis of Profitability and Solvency:
In the absence of complete books of accounts, based on double entry system, proper
analysis of profitability and solvency cannot be made. Hence, it may cause a great
problem in raising loans from financial institutions.
(v) Errors and Frauds not Detectable:
Under this system it is very difficult to detect errors and frauds because various checks
which are imposed by double entry system are not available.
(vi) Users’ Dissatisfaction:
Under this system, legal requirements cannot be complied with. Hence, taxation
authorities and other governmental agencies do not satisfy with the incomplete
information.

ignou Eco 2-em-solved-assignment-2018-19

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