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Semester “Fall 2012”

“Financial Accounting-MGT101”

Concept to be Tested: Recording Journal Entries

Discussion Question

From the following journal entries, you are required to identify the mistake therein and also support your answer with logical reason.

 

1.      Machinery sold for Rs. 10,000 has been recorded as:

 

Cash A/C                    10,000

Sales A/C                    10,000

 

2.      Furniture Showroom purchased furniture costing Rs. 8,000 recorded as:

 

Furniture A/C              8,000

Cash A/C                    8,000

 

Note: Your comments should be according to requirement and not be more than 300 words.

 

Instructions:

Read the following instructions before giving your comments on GDB:

1.      Use the font style “Times New Roman” and font size “12”.

2.      Your answer should be relevant to the topic i.e. clear and concise.

3.      Do not copy or exchange your answer with other students.  Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4.      Books, websites and other reading material may be consulted before posting your comments but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0).

5.      Obnoxious or ignoble answer should be strictly avoided.

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Replies to This Discussion

as per my opinion there are mistakes in both entry step#1 their are no mention that purchase and sale are made by cash or on account .so it is clear in accounts that if transactions are not clear it will consider on account so entries will be

                                       Debtor A/C 10000    (Dr.)

                                              Machinery A/C   10000 (Cr.) because sale of an assets will show with its name

 

                                      Furniture   A/C  8000 (Dr.)

                                                Creditor A/C 8000(Cr.)

 

1. The first entry is wrong it should be

Cash A/C                    10,000

Machinery A/C                    10,000

Because it is an asset of the company. The company doesn’t deal with sales purchase of machineries.

2. Second Entry is correct. Furniture is purchased and Cash is paid.




1. The first entry is wrong it should be

Cash A/C 10,000

Machinery A/C 10,000

Because it is an asset of the company. The company doesn’t deal with sales purchase of machineries.

2. Second Entry is correct. Furniture is purchased and Cash is paid. 

Answer:

     Journal Entry No. 1 Entry No. 1
Identification of Mistake:
Machinery a/c was credited instead of Sales a/c with 10,000.
Logical Reason:
We have sold a Fixed Asset so that as per the accounting rule "decrease in assets is credit" Machinery a/c recorded on the credit side
J    Journal Entry No. 2
Identification of Mistake:
Purchases a/c was debited instead of Furniture a/c with 8,000.
Logical Reason:
Because furniture was bought by a Furniture Showroom and it is bought for resale purpose not to retain in the business so that it is assumed as purchases of that particular business.



Read more: MGT 101 gdb solution - Virtual University of Pakistan http://vustudents.ning.com/group/mgt101financialaccounting1/forum/t...

100% true solution hae

 

Solution:-

 

           Entry no. 1

 

                         In this entry machinery is sold for cash so cash is increase and machinery is sold so we record the machinery in machinery account instead of sale account so record the entry as in the books of accounts.                                                                            

                                                                                     Debit ( Rs)                   Credit( Rs)

 

                        Cash Account                                        10000

 

                                   Machinery account                                                           10000 

 

                       Machinery sold for cash.

 

 

Entry no. 2

 

               In this the furniture is purchased for cash and for resale purpose so we record the furniture in purchase account with debit so we record that entry as in the books of account.

 

                       Purchase Account                          8000

 

                                 Cash Account                                                              8000

 

              Furniture is purchased for cash.



Read more: MGT 101 gdb solution - Virtual University of Pakistan http://vustudents.ning.com/group/mgt101financialaccounting1/forum/t...

Solution for Q # 1

Cash                             10,000

Sale of Machinery                       10,000

Reason: Asset sold, means providing benefit to business in terms of cash account will be credited.

Solution Q#2

Purchase of Furniture        8,000

Cash                                             8,000

Reason: Purchasing of furniture is a liability. in this situation business is providing benefit to liability account so business (cash) will be credited.

Statement (1)

“Narration Machinery sold “is related to Asset account. The nature of Asset is that when it increases we record it in debit or vice versa. Because fixed asset are subject to depreciation, during each year we calculate depreciation for fixed assets to allocate cost of tangible assets during its useful life.

Machinery comes under Tangible Fixed assets. Account like machinery lasts for more than one year but not indefinitely and therefore, recorded separately under its own name of account so that every year its depreciation may be carried out. Any movement in such accounting head like inward (purchased) or outward (sold) will be recorded in books accordingly and not as Sales.

The entry in statement 1 is not correctly booked. Hence the correct Entry is

                                                Dr.        Cr.

Cash a/c                                   8000

            Machinery a/c                          8000   

(Cash realized with the sale of Machinery)

 

Statement (2)

The entry in statement 2 is also booked incorrectly. Fixed assets are not those assets which are bought with the main purpose to resale.

The Narration depicts that the sole nature of business for the Furniture Showroom is to make or sell furniture. Furniture should be treated as goods and not Asset for Furniture Showroom.  Therefore the furniture or goods purchased by showroom will be resold and should be treated as purchases. Hence the correct entry should be:

                                                Dr.        Cr.

Purchases a/c                           8,000

Cash a/c                                              8,000

(Goods purchased on cash) 

Solution:

 

 

    Statement no.1;

   

                         

             Cash A/c              10,000

 

                    To machinery A/c        10,000

 

(Narration is being machinery sold for cash)

 

Reason;

   

         Debit means receive benefit, so cash take benefit for business and credit means

   providing benefit in this way machinery give benefit. Machinery is sold

so we record machinery in machinery account.

 

 

Statement no. 2;

 

       Purchase A/c   8000

 

                    To cash A/c   8000

 

 (Narration is being purchase furniture for cash)

 

Reason is furniture should be treated as goods and not Assets for Furniture Showroom.

Therefore furniture or goods purchase by showroom will be resold and should be treated as purchase. 

Statement No1:

Cash Account

Cash a/c 10,000 Dr.

Machinery/Vehicle a/c 10,000 Cr.

It is known that selling is always written in credit because something has gone from us, here we have sold the machine our furniture or machine account will be in the credit, the money which we have got will be written in cash and cash will be debit.

Statement No2:

Purchase Account

Purchase a/c 8,000 Dr.

Cash 8,000 Cr.

Whenever we purchase something it is know that we have got any asset so it will be written Purchase account as debit and the money which we lost for purchasing will be written in Cash account in credit.

Machinery sold for Rs. 10,000 has been recorded as: Cash A/C 10,000 Sales A/C 10,000


Original entry:

Cash dr. 10000

To machinery cr. 10000





Wrong entry :



Cash dr. 10000

To sale cr. 10000



Correct entry:

Sale dr. 10000

To machinery cr. 10000





2.Furniture Showroom purchased furniture costing Rs. 8,000 recorded as:

Furniture A/C 8,000

Cash A/C 8,000





Correct entry :

Furniture dr. 8000

To Cash A/C 8,000

  1. The first journal entry is incorrect

Comments:

Machinery is our fixed asset. As in this transaction, the machinery is sold so it should be booked in the Credit. Similarly, machinery is declared as Tangible Fixed Assets; hence, it is subject to depreciation and recorded separately under its own name of account so that every year its depreciation may be carried out. In this entry machinery is sold for cash so cash is increased, therefore, we record it in machinery account instead of sale account.

The correct entry is;

Debit (Rs)                   Credit (Rs)

Cash Account                                     10,000

 

Machinery Account                                                    10,000

 

(Machinery sold for cash)

 

  1. The second journal entry is also incorrect.

Comments:

Furniture is not fixed asset here as it has been bought for resale purpose. As we know that the nature of business of the Furniture Showroom is to sell furniture. So, the furniture purchased by showroom will be resold and be treated as goods or merchandise. This furniture is inventory of our business and inventory is always our current asset. We will debit purchases account.

Therefore, the correct entry is;

Debit (Rs)                   Credit (Rs)

Purchases account                  8,000

 

Cash account                                                  8,000

(Merchandise Purchased on cash)

MGT101

GDB

Name: SONIA LATIF

Id: 120401340

  

 Solution:

 

 

    Statement no.1;

   

                         

             Cash A/c              10,000

 

                    To machinery A/c        10,000

 

(Narration is being machinery sold for cash)

 

Reason;

   

         Debit means receive benefit, so cash take benefit for business and credit means

   providing benefit in this way machinery give benefit. Machinery is sold

so we record machinery in machinery account.

 

 

Statement no. 2;

 

       Purchase A/c   8000

 

                    To cash A/c   8000

 

 (Narration is being purchase furniture for cash)

 

Reason is furniture should be treated as goods and not Assets for Furniture Showroom.

Therefore furniture or goods purchase by showroom will be resold and should be treated as purchase. 

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