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CHAPTER-1
INTRODUCTION TO ACCOUNTING
Introduction
Accounting is the essential part of business, as it keeps the proper records
of business transactions.
Learning Objectives
After studying the chapter, you will be able to:
Explain the Accounting alongwith its objectives.
Explain the advantages & limitations of accounting.
Explain the users of accounting information and their needs.
Explain the basic accounting terms.
Suggested Teaching Method:
Discussion Method
Meaning of Accounting
Accounting is an information system that provides accounting information
to the users for correct decision-making.
“Accounting is the art of recording, classifying and summarising in a
significant manner and in terms of money, transactions and events which are,
in part at least, of financial character, and interpreting the results thereof..”
Objectives of Accounting
1. To maintain systematic and complete record of business transactions.
2. To know profitabilities of business by calculating profit or loss.
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3. To ascertain the Financial position of business.
4. To provide useful information to various users.
Interested users/parties of Accountings informations and their Needs
There are number of users interested in knowing about the financial
soundness and the profitability of the business.
Users Classification Information the user want
Internal 1. Owner Return on their investment, financial
health of their company/business.
2. Management To evaluate the performance to take
various decisions.
External 1. Investors and Safety and growth of their investments,
potential investors future of the business.
2. Creditors Assessing the financial capability, ability
of the business to pay its debts.
3. Lenders Repaying capacity, credit worthiness.
4. Tax Authorities Assessment of due taxes, true and fair
disclosure of accounting information,
5. Employees Profitability to claim higher wages and
bonus, whether their dues (PF, ESI, etc.)
deposited regularly.
6. Others Customers, Researchers etc., may seek
different information for different
reasons.
Qualitative Characteristics of Accounting Information
Accounting information is useful for interested users only if it posses the
following characteristics:
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1. Realiability : Means the information must be based on facts and be
verified through source documents by anyone. It must be free from
bias.
2. Relevance : To be relevant, information must be available in time and
must influence the decisions of users by helping them form prediction
about the outcomes.
3. Understandability : The information should be presented in such a
manner that users can understand it well.
4. Comparability : The information should be disclosed in such a manner
that it can be compared with previous years figures of business itself
and other firm’s data.
Limitations of Accounting
The accounting information suffers from the following limitations:
1. Based on historical data
2. Not free from bias
3. Qualitative information not shown
4. Ignores price level changes
5. Window Dressing
BASIC ACCOUNTING TERMS
Business Transaction
An economic activity that affects financial position of the business and can
be measured in terms of money e.g., sale of goods, paying for expenses etc.
Voucher
The documentary evidence in support of a transaction is known as voucher.
For example, if we buy goods for cash we get cash memo, if we buy on credit,
we get an invoice, when we make a payment, we get a receipt and so on.
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Capital
Amount invested by the owner in the firm is known as capital. It may be
brought in the form of cash or assets by the owner.
Drawings
The money or goods or both withdrawn by owner from business for
personal use, is known as drawings. Example: Purchase of car for wife by
withdrawing money from business.
Assets
Assets are valuable and economic resources of an enterprise useful in its
operations. Assets can be broadly classified as :
1. Current Assets : Current Assets are those assets which are held for
short period and can be converted into cash within one year. For example:
Debtors, stock etc.
2. Non-Current Assets : Non-Current Assets are those assets which are
hold for long period and used for normal business operation. For
example: Land, Building, Machinery etc.
3. Tangible Assets : Tangible Assets are those assets which have physical
existence and can be seen and touched. For Example: Furniture,
Machinery etc.
4. Intangible Assets : Intangible Assets are those assets which have no
physical existence and can be feel by operation. For example: Goodwill,
Patent, Trade mark etc.
Liabilities :
Liabilities are obligations or debts that an enterprise has to pay after some
time in the future.
Liabilities can be classified as :
1. Current Liabilities : Current Liabilities are obligations or debts that
are payable within a period of one year. For Example: Creditors, Bill
Payable etc.
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2. Non-Current Liabilities : Non-Current Liabilities are those obligations
or debts that are payable after a period of one year. Example: Bank
Loan, Debentures etc.
RECEIPTS
1. Revenue Receipts : Revenue Receipts are those receipts which are
occurred by normal operation of business like money received by sale
of business products.
2. Capital Receipts : Capital Receipts are those receipts which are occurred
by other than business operations like money received by sale of fixed
assets.
Expenses
Costs incurred by a business for earning revenue are known as expenses.
For example: Rent, Wages, Salaries, Interest etc.
Expenditure
Spending money or incurring a liability for acquiring assets, goods or
services is called expenditure. The expenditure is classified as :
1. Revenue Expenditure : If the benefit of expenditure is received within
a year, it is called revenue expenditure. For Example: Rent, Interest etc.
2. Capital Expenditure : If benefit of expenditure is received for more
than one year, it is called capital expenditure. Example: Purchase of
Machinery.
3. Deferred Revenue Expenditure : There are certain expenditures which
are revenue in nature but benefit of which is derived over number of
years. For Example: Huge Advertisement Expenditure.
Profit
The excess of revenues over its related expenses during an accounting
year is profit.
Profit = Revenue – Expenses
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Gain
A non-recurring profit from events or transactions incidental to business
such as sale of fixed assets, appreciation in the value of an asset etc.
Loss
The excess of expenses of a period over its related revenues is termed as
loss.
Loss = Expenses – Revenue
Goods
The products in which the business deal in. The items that are purchased
for the purpose of resale and not for use in the business are called goods.
Purchases
The term purchases is used only for the goods procured by a business for
resale. In case of trading concerns it is purchase of final goods and in
manufacturing concern it is purchase of raw materials. Purchases may be cash
purchases or credit purchases.
Purchase Return
When purchased goods are returned to the suppliers, these are known as
purchase return.
Sales
Sales are total revenues from goods sold or services provided to customers.
Sales may be cash sales or credit sales.
Sales Return
When sold goods are returned from customer due to any reason is known
as sales return.
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Debtors
Debtors are persons and/or other entities to whom business has sold goods
and services on credit and amount has not received yet. These are assets of the
business.
Creditors
If the business buys goods/services on credit and amount is still to be paid
to the persons and/or other entities, these are called creditors. These are liabilities
for the business.
Bill Receivable
Bill Receivable is an accounting term of Bill of Exchange. A Bill of
Exchange is Bill Receivable for seller at time of credit sale.
Bill Payable
Bill Payable is also an accounting term of Bill of Exchange. A Bill of
Exchange is Bill Payable for purchaser at time of credit purchase.
Discount
Discount is the rebate given by the seller to the buyer. It can be classified as :
1. Trade Discount : The purpose of this discount is to persuade the buyer
to buy more goods. It is offered at an agreed percentage of list price at
the time of selling goods. This discount is not recorded in the accounting
books as it is deducted in the invoice/cash memo.
2. Cash Discount : The objective of providing cash discount is to
encourage the debtors to pay the dues promptly. This discount is recorded
in the accounting books.
Account
Account refers to a summarised record of relevant transactions of particular
head at one place.
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Income
Income is a wider term, which includes profit also. Income means increase
in the wealth of the enterprise over a period of time.
Stock
The goods available with the business for sale on a particular date is
known as stock.
Cost
Cost refers to expenditures incurred in acquiring manufacturing and
processing goods to make it saleable.
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CHAPTER 2
THEORY BASE OF ACCOUNTING
Learning Objectives
After studying this chapter, students will be able to:
Describe the meaning of Accounting Assumptions and Accounting
Principles.
Explain the Accounting Standard and IFRS along with their objectives.
Describe the Bases of Accounting.
Distinguish between Cash Basis of Accounting and Accrual Basis of
Accounting
Main objective of accounting is to provide appropriate, useful and reliable
information about the financial performance of the business to its various users
to enable them in judicious decision-making. This objective can be achieved
only when accounting records are maintained on the basis of uniform rules and
principles.
Accounting principles, concepts and conventions are known as Generally
Accepted Accounting Principles (GAAP). These principles are the base of
Accounting. Generally Accepted Accounting Principles (GAAP) refers to the
rules or guidelines adopted for recording and reporting of business transactions,
in order to bring uniformity and consistency in the preparation and the
presentation of financial statements.
These principles have evolved over a long period of time on the basis of
experiences of the accountants, customs, legal decisions etc., and which are
generally accepted by the accounting professionals.
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FUNDAMENTAL ACCOUNTING ASSUMPTIONS
1. Going Concern Assumption :This concept assumes that an enterprise
has an indefinite life or existence. It is assumed that the business has
neither intention to liquidate nor to scale down its operations
significantly.
Relevance :
(a) Distinction is made between capital expenditure and revenue
expenditure.
(b) Classification of assets and liabilities into current and non-current.
(c) Depreciation is charged on fixed assets and fixed assets appear in the
Balance Sheet at book value, without having reference to their market
value.
2. Consistency Assumption : According to this assumption, accounting
practices once selected and adopted, should be applied consistently
year after year. This will ensure a meaningful study of the performance
of the business for a number of years.
Consistency of assumption does not mean that particular practices, once
adopted, cannot be changed. The only requirement is that when a change is
desirable, it should be fully disclosed in the financial statements along with its
effect on income statement and Balance Sheet.
Any accounting practice may be changed if the law or Accounting standard
requires so, to make the financial information more meaningful and transparent.
Relevance : It helps the management in decision-making by utilizing the
comparable financial information.
3. Accrual Assumption :Accrual concept applies equally to revenue and
expenses. As per this assumption, all revenue and costs are recognized
when they are earned or incurred.
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It is immaterial, whether the cash is received or paid at the time of
transaction or later date e.g., if a credit sale (Credit for two months) for
Rs. 15,000 is made on 15th Feb. 2013, then the revenue earned is to
be recorded on 15th Feb. 2013, not on the date of cash realized, i.e.,
after two months. In case of Expenses, if at the end of the year the two
months salary is due but not paid, then the expenses of salary will be
recorded in the current year in which salary is due, not in the next year
in which it will be paid.
Relevance : Earning of a revenue and consumption of a resource (expenses)
can be accurately matched to a particular accounting period.
ACCOUNTING PRINCIPLES
1. Accounting Entity : An entity has a separate existence from its owner.
According to this principle, business is treated as an entity, which is
separate and distinct from its owner. Therefore transactions are recorded;
analyzed and financial statements are prepared from the business point
of view and not of the owner.
The owner is treated as a creditor (Internal liability) for his investment
in the business, as if the firm has borrowed from its owner instead of
the outside parties. Interest on capital is treated as expense like any
other business expense. His private expenses are treated as drawings
leadings to reduction in capital.
2. Money Measurement Principle : According to this principle, only
those transactions that are measured in money or can be expressed in
term of money are recorded in the books of accounts of the enterprises.
Non-monetary events like death of any employee/Manager, strikes,
disputes etc., are not recorded at all, even though these also affect the
business operations significantly.
Limitation :
1. It ignores qualitative aspect e.g., efficient human resources (Assets),
satisfied customers (Assets) and dishonest employee (liabilities).
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2. Value of money (currency) is not stable.
To make accounting records simple, relevant, understandable and
homogeneous, facts are expressed in a common unit of measurement-
money.
3. Accounting Period Principle : According to this principle, the whole
indefinite life of an enterprise is divided into parts, known as accounting
period.
Accounting period is defined as interval of time, at the end of which
the profit and loss account and balance sheet are prepared, so that the
performance is measured at regular intervals and decision can be taken
at the appropriate time. Accounting period is usually a period of one
year and that year may be financial year or calendar year.
Relevance :
1. This Assumption requires showing the allocation of expenses between
Capital and Revenue.
2. Portion of Capital Expenditure that is consumed during the current year
is charged to Income statement and rest of the portion i.e., Unconsumed
portion is shown as an asset in the Balance Sheet.
3. As per income tax law, tax on income is calculated on annual basis
from 1st April to 31st March (Financial Year)
4. Timely action for corrective measures can be taken by the Management.
4. Full Disclosure Principle : According to this principle, apart from
legal requirements all significant and material information relating to
the economic affairs of the entity should be completely disclosed in its
financial statements and accompanying notes to accounts.
The financial statements should act as means of conveying and not
concealing the information. Disclosure of information will result in
better understanding and the parties may be able to take sound decisions
on the basis of the information provided.
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E.g., footnotes such as :
(1) Contingent liabilities in respect to a claim of a very big amount
against the business are pending in a Court of Law.
(2) Change in the method of providing depreciation.
(3) Market value of investment.
5. Materiality Principle : Disclosure of all material facts is compulsory
but it does not imply that even those figures which are irrelevant are
to be included in financial statements. According to this principle, only
those items or information should be disclosed that have material effect
and relevant to the users. So, item having an insignificant effect or
being irrelevant to user need not be disclosed separately, these may be
merged with other item.
If the knowledge of any information may affect the user's decision, it
is termed as material information.
It should be noted that an item material for one enterprise may not be
material for another enterprise. e.g., an item of expenses Rs. 50,000 is
material for an enterprise having turnover of Rs. 100 crore.
6. Prudence Principle : According to this principle, profit in anticipation
should not be recorded but loss in anticipation should immediately be
recorded. The objective of this principle is not to overstate the profit
of the enterprise in any case. When different equally acceptable
alternative methods are available, the method which having least
favourable immediate effect on profit should be adopted, e.g.,
(1) Valuation of stock at cost or realizable values, whichever is
lower.
(2) Provision for doubtful debts and provision for discount on
debtors is made.
7. Cost Principle : According to this Principle, an asset is recorded in the
books of accounts at its original cost comprising cost of acquisition
and all expenditure incurred for making the assets ready to use.
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This cost becomes the basis of all subsequent accounting transactions
for the asset, since the acquisition cost relates to the past, it is referred
to as Historical cost. Example: Machinery purchased for Rs. 1,50,000
in cash and Rs. 20,000 was spent on installation of machine then Rs.
1,70,000 be recorded as cost of machine in the books and depreciation
will be charged on this cost. If market value of machine due to inflation
has gone upto Rs. 2,00,000 then the increased value will not be recorded.
This cost is systematically reduced from year after year by charging
depreciation and the assets are shown in the balance sheet at book
value (cost-depreciation).
8. Matching Principle : According to this principle, all expenses incurred
by any enterprises during an accounting period are matched with the
revenue recognized during the same period.
The matching principle facilitates to ascertain the amount of profit or
loss incurred in a particular period by deducting the related expenses
from the revenue recognized that period.
The following treatment of expenses and revenue are done due to
matching principle:
(1) Ascertainment of Prepaid Expenses.
(2) Ascertainment of Income received in advance.
(3) Accounting of closing stock.
(4) Depreciation charged on fixed assets.
9. Dual Aspect Principle : According to this principle, every business
transaction has two aspects–a debit and a credit of equal amount. In
other words, for every debit there is a credit of equal amount in one or
more accounts and vice-versa.
The system of recording transaction based on this principles is called
as ‘‘Double Entry System’’.
Due to this principle, the two sides of Balance Sheet are always equal
and the following accounting equation will always hold good at any
point of time.
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Assets = Liabilities + Capital
Example : Ram started business with cash Rs. 1,00,000. It increases
cash in assets side and capital in liabilities side by Rs. 1,00,000.
Assets Rs. 1,00,000 = Liabilities + Capital Rs. 1,00,000
BASES OF ACCOUNTING
There are two bases of ascertaining profit or loss, namely (1) Cash Basis,
and (2) Accrual Basis.
1. Cash Basis of Accounting : Under this system of accounting
transactions are recorded in the books of accounts only on the receipt/
payment of cash. The income is calculated as the excess of actual cash
receipts (in respect of sale of goods, service, properties etc.) over actual
cash payments (regarding purchase of goods, expenses, rent, electricity,
salaries etc.)
Entry is not recorded when a payment or receipt merely due i.e.,
outstanding expenses, Accrued income are not treated.
This method is contrary to the matching principle.
2. Accrual Basis of Accounting : Under this system of accounting, revenue
and expenses are recorded when they are recognized i.e., Income is
recorded as Income when it is accrued (when transaction takes place)
irrespective of fact whether cash is received or not. Similarly expenses
are recorded when they are incurred or become due and not when the
cash is paid for them.
Under this system, expenses such as outstanding expenses, prepaid
expenses, accrued income and received in advance are identified and
taken into account.
Under the companies Act 1956, all companies are required to maintain
their accounts according to accrual basis of accounting.
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Difference between accrual basis of accounting and cash basis of accounting
Basis Accrual Basis of Accounting Cash Basis of Accounting
1. Recording Both cash and credit trans- Only cash transactions are recorded.
of transactions actions are recorded.
2. Profit or Loss Profit or Loss is ascertained Correct profit/loss is not ascertained
correctly due to complete because it records only cash
record of transactions. transactions
3. Distinction This method makes a dis- This method does not make a
between Capital tinction between capital and distinction between capital and
and Revenue and revenue items. revenue nature items.
4. Legal position This basis is recognized This basis is not recognized under
under the companies Act the companies Act. 1956.
1956
ACCOUNTING STANDARDS : CONCEPT AND OBJECTIONS
The accounting principles or GAAP in the form of concepts and
conventions have been developed to bring comparability and uniformity in the
financial statements. But GAAP also allow a large number of alternative
treatments for the same item. Different organizations may adopt different
accounting policies for the same transaction or an organization may follow
different accounting policies for the same item over different accounting periods.
As a result, the financial statements become inconsistence and incomparable.
So it was felt that certain minimum standards should be universally
applicable, so that the accounting statements have the qualitative characteristics
of realiability, relevance, understandability and comparability.
International Accounting Standard Committee (IASC) was set up in 1973.
(Now renamed as International financial Reporting Committee IFRC). The
Institute of Chartered Accountants of India (ICAI) and the Institute of Cost and
Works Accountants of India (ICWAI) are members of this committee. ICAI set
up the Accounting Standard Board (ASB) in 1977 to identify the areas in
which uniformity in accounting required. ASB prepares and submits a draft
accounting standard to the Council of ICAI. The Council of ICAI issues the
draft for the comments to the Govt., industry and professionals etc. After due
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consideration on comments received, the Council of ICAI notifies it for its use
in financial statements.
Concept of Accounting Standards
Accounting standards are written statements, issued from time-to-
time by institutions of accounting professionals, specifying uniform rules
or practices for drawing the financial statements.
Objectives of Accounting Standards
1. Accounting standards are required to bring uniformity in accounting
practices and policies by proposing standard treatment in preparation
of financial statements.
2. To improve realiability of the financial statement : Accounts prepared
by using accounting standards are reliable for various users, because
these standards create a sense of confidence among the users.
3. To prevent frauds and manipulation by codifying the accounting
methods and practices.
4. To Help Auditors : Accounting standards provide uniformity in
accounting practices, so it helps auditors to audit the books of accounts.
IFRS International Financial Reporting Standards
This term refers to the financial standard issued by International Accounting
standards Board (IASB). It is the process of improving the financial reporting
Internationally to help participants in the various capital markets of the world
and other users. Numbers of IFRS issued so far is 9.
IFRS Based financial Statements
Following financial statements are produced under IFRS:
1. Statement of financial position: The elements of this statement are
(a) Assets (b) Liability C. Equity
2. Comprehensive Income statement: The elements of this statement are
(a) Revenue (b) Expense
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3. Statement of changes in Equity
4. Statement of Cash flow
5. Notes and significant accounting policies
Main difference between IFRS and IAS (Indian Accounting Standards)
1. IFRS are principle based while IAS are rule based.
2. IFRS are based on Fair Value while IAS are based on Historical Cost.
QUESTIONS
1. Consider the following data pertaining to Ananya Ltd:
Particulars Rs.
Cost of Machinery purchased on 1st April, 2012 5,00,000
Installation charges 50,000
Market value as on 31st march, 2013 8,00,000
While preparing the annual accounts, if the company values the
machinery at Rs. 8,00,000 which principle is being violated by Ananya
Ltd.?
Ans. Historical cost concept.
2. Accounting to which concept, all expenses incurred to earn revenue of
a particular period should be charged against that revenue to determine
the net income?
Ans. Matching concept
3. A business purchased goods for Rs. 2,00,000 and sold 75% of such
goods during accounting year ended 31st March, 2013. The market
value of remaining goods was Rs. 48,000. He valued closing stock at
cost. Name the concept being violated in this situation.
Ans. Prudence or conservatism
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4. Under which concept, Owner of business is treated as creditor to the
extent of his capital?
Ans. Business entity concept
5. Financial statements of an entity are prepared at regular intervals in
accordance with which accounting concept?
Ans. Accounting period concept
6. According to which concept, each accounting transaction has at least
two effects?
Ans. Dual aspect concept
7. According to which convention, depreciation is being charged as per
one particular method year after year?
Ans. Consistency
8. Which accounting convention takes into account all prospective losses
but leaves all prospective Profits?
Ans. Conservatism/prudence
9. Name the concept under which the skills or quality of the management
team is not disclosed in the financial statements.
Ans. Money measurement concept
10. Name the concept under which assets are recorded in books at the cost
incurred for acquisition of such assets.
Ans. Historical cost concept
11. Name the concept under which advance received from the supplier is
not taken as income or Sale.
Ans. Revenue recognition concept
12. Under which basis of accounting only cash transactions are recorded in
the books?
Ans. Cash basis of accounting.
ACCOUNTANCY
CLASS : XI
LIST OF MEMBERS FOR SUPPORT MATERIAL
Sl.No. Name Designation School
1. Sanjeev Kumar Vice Principal Govt. Co-Ed. Sr. Sec. School,
(Group Leader) Preet Vihar, Delhi
2. Hem Chand Lecturer Govt. Boys Sr. Sec. School,
Commerce Chander Nagar, Delhi
3. Sunil Kumar Arora Lecturer Sarvodaya Vidyalaya
Commerce Sector-3, Rohini, Delhi
4. Vinod Kumar Lecturer Govt. Boys Sr. Sec. School,
Commerce Mata Sundri Road, New Delhi
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CHAPTER-3
RECORDING OF TRANSACTIONS
Learning Objectives
After studying this chapter, you will be able to :
Explain how to Prepare accounting vouchers.
Apply accounting equation to explain the effect of transactions.
Record transactions using rules of debit and credit.
Record transactions in journal and other subsidiary books.
Suggested Method : Discussion method, Illustration method, Problem
solving method etc.
ACCOUNTING EQUATION
An accounting equation is based on the dual concept of accounting,
according to which, every transaction has two aspects debit and credit. It hold
that for every debit there is a credit of equal amount and vice versa.
The total assets of the business firm are financed through the funds raised
from either the outsiders or the owners. Outsiders generally consist of creditors
and lenders. Thus, at any point of time, the total assets of a business are equal
to its total liabilities.
Liabilities to outsiders are known as liabilities but liability to the owners,
in accounting parlance, is referred to as Capital. The relationship between
assets, liabilities and the capital can be expressed in the form of an accounting
equation as follows:
Assets = Capital + Liabilities
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Assets and Liabilities are two independent variables and Capital is the
dependent variable, it is the difference between assets and liabilities.
A transaction may affect either both sides of the equation by the same
amount or on one side of the equation only, by both increasing or decreasing
it by equal amounts.
The accounting equation captures the essence of the business entity concept
i.e. the business entity is considered separate and distinct from the owners. The
accounting equation Assets = Capital + Liabilities holds good only when we
assume that the business unit is a separate entity.
Analysis of Business Transactions
1. Transactions affecting both sides of the equation
A. Commenced business with Cash Rs. 2,00,000.
This transaction will affect the assets as the firm is receiving
asset in the form of Cash and the owner of the business has
invested amount, this will affect the Capital of the business.
ASSETS = CAPITAL + LIABILITIES
Cash
Transaction 2,00,000 = 2,00,000 + 0
B. Bought goods from Rs. 25,000.
This transaction will affect both assets as well as liabilities of
the business. The goods and Creditors are increasing.
ASSETS = CAPITAL + LIABILITIES
Cash Goods Creditors
Old Equation 2,00,000 = 2,00,000 + 0
Transactions 0 + 25,000 0 + 25,000
New Eq. 2,00,000 + 25,000 = 2,00,000 + 25,000
2. Transactions affecting only assets side of the equation:
A. Bought goods for Cash Rs. 35,000
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This transaction will affect the Cash and Goods by Rs. 35,000.
The firm is paying the money resulting in decrease of Cash.
Goods are increasing.
ASSETS = CAPITAL + LIABILITIES
Cash Goods Creditors
Old Equation 2,00,000 + 25,000 = 2,00,000 + 25,000
Transaction - 35,000 + 35,000 0 + 0
New Eq. 1,65,000 + 60,000 = 2,00,000 + 25,000
B. Bought Furniture for cash Rs. 50,000
This transaction has brought about two changes in the assets
side only. One asset i.e. Cash is decreasing and other asset i.e.
Furniture is increasing.
ASSETS = CAPITAL + LIABILITIES
Cash Goods Furniture Creditors
Old Equation 1,65,000 + 60,000 = 2,00,000 + 25,000
Transaction - 50,000 + 0 + 50,000 0 + 0
New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 25,000
3. Transactions affecting only liabilities side of the equation.
A. Accepted a bill drawn by Ram for Rs. 25,000 for 3 months.
This transaction will affect Creditors and Bills Payable. As one
liability i.e. Creditors is decreasing and other liability i.e. Bills
payable is increasing.
ASSETS = CAPITAL + LIABILITIES
Cash Goods Furniture Creditors + B/P
Old Equation 1,15,000 + 60,000 + 50,000 = 2,00,000 + 25,000
Transaction 0 + 0 + 0 = – 2,50,000 – 25,000 + 25,000
New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000
4. Transaction affecting the Capital only
A. Interest on Capital provided Rs. 2,000
ASSETS = CAPITAL + LIABILITIES
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Cash Goods Furniture Creditors + B/P
Old Equation 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000
Transaction 0 + 0 + 0 = - 2,000
+ 2,000
New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000
B. Interest on Drawings charged Rs. 1,000
ASSETS = CAPITAL + LIABILITIES
Cash Goods Furniture Creditors + B/P
Old Equation 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000
Transaction 0 + 0 + 0 = - 1,000
+ 1,000
New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000
In the above transactions, Capital is increasing and decreasing
at the same time. It is owner’s duty to pay all the expenses and
it is the owner who takes all the profits arising out of business.
5. Transactions related to Expenses
A. Salary Paid Rs. 5,000
ASSETS = CAPITAL + LIABILITIES
Cash Goods Furniture Creditors + B/P
Old Equation 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000
Transaction - 5,000 = - 5,000
New Eq. 1,10,000 + 60,000 + 50,000 = 1,95,000 + 0 + 25,000
This transaction affects cash and capital because Cash is
decreasing and Capital (Owner) is responsible to pay all the
expenses.
6. Transactions related to Income
A. Commission Received Rs. 2,000
ASSETS = CAPITAL + LIABILITIES
Cash Goods Furniture Creditors + B/P
Old Equation 1,10,000 + 60,000 + 50,000 = 1,95,000 + 0 + 25,000
[XI – Accountancy] 24
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Transactions + 2,000 = + 2,000
New Eq. 1,12,000 + 60,000 + 50,000 = 1,97,000 + 0 + 25,000
This transaction affects cash and capital because Cash is
increasing and Capital (Owner) is rightful for every income.
7. Transactions related to outstanding Expenses
A. Rent outstanding Rs. 5,000
ASSETS = CAPITAL + LIABILITIES
Cash Goods Furniture Creditors + B/P + O/s Rent
Old Equation 1,12,000 + 60,000 + 50,000 = 1,97,000 + 0 + 25,000
Transaction = - 5,000 + 5,000
New Eq. 1,12,000 + 60,000 + 50,000 = 1,92,000 + 0 + 25,000 + 5,000
This transaction will decrease capital and a new liability
outstanding rent will be created.
8. Transactions related to accrued Income
A. Accrued interest Rs. 1,000
ASSETS =CAPITAL + LIABILITIES
Cash Goods Furniture Accrued Creditors + B/P + O/s Rent
Interest
Old Equation 1,12,000 + 60,000 + 50,000 = 1,92,000 + 0 + 25,000 + 5,000
Transaction + 1,000 = + 1,000
New Eq. 1,12,000 + 60,000 + 50,000 + 1,000 = 1,93,000 + 0 + 25,000 + 5,000
This transaction will increase assets in the form of Accrued
interest and Capital.
Illustration: 1
Prepare the Accounting Equation on the basis of the following
1. Ram started business with cash Rs. 2,00,000, stock Rs. 5,00,000,
Machine Rs. 8,00,000 and Furniture Rs. 4,00,000.
2. He sold Goods costing Rs. 2,00,000 at a profit of 20% on cost and
received half the payment in Cash and a Bill for Rs. 50,000 out of the
remaining balance.
25 [XI – Accountancy]
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3. He purchased goods for Rs. 50,000 from Ravi on credit.
4. He depreciate Machine @ 10% p.a. and Furniture @ 20% p.a.
5. He paid Salary Rs. 20,000 and Rent Rs. 25,000 but Rent Rs. 5,000 still
remain unpaid.
6. He paid Insurance Rs. 15,000 @ Rs. 1,000 p.m.
7. He withdrew Rs. 1,00,000 for purchasing Motor Cycle for his personal
use.
8. He paid to Ravi Rs. 19,000 in full settlement against the payment of
Rs. 20,000.
9. He received Rs. 50,000 as Security Deposit from his tenant.
10. He charge interest on Drawing @ 10% p.a.
[XI – Accountancy] 26
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Solu
tion
Tra
nsa
ctio
ns
Cash
sto
ckA
sset
sF
urn
iture
Deb
tors
B/r
Pre
-=
Ca
pit
al
Lia
bil
itie
s
mach
iner
ypa
id
Cre
di-
O/s
scu-
tors
rent
rity
dep
.
1.
Ram
sta
rted
busi
nes
s2,0
0,0
00
+5,0
0,0
00
+8,0
0,0
00
+400
,000
=19,0
0,0
00
wit
h c
ash R
s.2,0
0,0
00,
Goods
Rs.
5,0
0,0
00
Mac
hin
e R
s.800,0
00 &
Furn
iture
Rs.
4,0
0,0
00
2.
Sold
Goods
cost
ing
1,2
0,0
00
-2,0
0,0
00
+70,0
00
+50,0
00
=40,0
00
Rs.
2,0
0,0
00 a
t a
pro
fit
of
20%
on c
ost
and
rece
ived
hal
f th
e
pay
men
t in
cas
h &
a
bil
l fo
r R
s. 5
0,0
00 o
ut
of
the
rem
ainin
g
New
Equia
tion
3,2
0,0
00
+ 3
,00,0
00
+8,0
0,0
00
+4,0
0,0
00
+7,0
0,0
0+
50
000
=19,4
0,0
00
3.
Purc
has
ed g
oods
from
+50,0
00
=50,0
00
Rav
i fo
r R
s, 5
0,0
00 o
n
cred
it
New
Equat
ion
3,2
0,0
00
+3,5
0,0
00
+8,0
0,0
00
+4,0
0,0
00
+70,0
00
+50,0
00
=19,4
0,0
00+
50000
4.
Dep
reci
ate
Mac
hin
e-8
0,0
00
-80,0
00
=-1
60000
@ 1
0%
p.a
furn
tiure
@ 2
0%
p.a
New
E
quat
ion
3,2
0,0
00
+3,5
0,0
00
+7,2
0,0
00
+3,2
0,0
00
+70,0
00
+50,0
00
=17,8
0,0
00
+50,0
00
27 [XI – Accountancy]
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5.
Pai
d s
alar
y R
s. 5
0,0
00
-50,0
00
=-5
0,0
000
& r
ent
Rs.
25,0
00 a
nd
-25,0
00
-30,0
00
+5,0
00
rent
Rs.
5,0
00 s
till
rem
ain u
npai
d.
New
Equat
ion
2,4
5,0
00
+3,5
0,0
00
+7,2
0,0
00
+3,2
0,0
00
+70,0
00
+50,0
00
=17,0
0,0
00
+50,0
00
+5,0
00
6.
Pai
d i
nsu
rance
-15,0
00
-3,0
00
=-1
2,0
00
Rs.
15,0
00
@ R
s. 1
,000 p
.m.
New
Equat
ion
2,3
0,0
00
+3,5
0,0
00
+7,2
0,0
00
+3,2
0,0
00
+70,0
00
+50,0
00
+3,0
00
=16,8
8,0
00
+5,0
000
+5,0
00
7.
wit
hdre
w R
s.1,0
0,0
00
Purc
has
ing m
oto
r cy
cle-
1,0
0,0
00
=-1
,00,0
00
for
his
per
osn
al u
se.
New
Equat
ion
1,3
0,0
00
+3,5
0,0
00
+7,2
0,0
00
+3,2
0,0
00
+70,0
00
+50,0
00
+3,0
00
=15,8
8,0
00
+50,0
00
+5,0
00
8.
Pai
d t
o R
avi
Rs.
19,0
00
in f
ull
set
tlem
ent
of
-19,0
00
=+
1,0
00
-20,0
00
Rs.
20,0
00
New
Equat
ion
1,1
1,0
00
+3,5
0,0
00
+7,2
0,0
00
+3,2
0,0
00
+70,0
00
+50,0
00
+3,0
00
=15,8
9,0
00
+30,0
00
+5,0
00
9.
Rec
eived
Rs.
50,0
00
+50,0
00
=+
5,0
00
as s
ecuri
ty d
eposi
t
from
ten
ant
New
Equat
ion
1,6
1,0
00
+3,5
0,0
00
+7,2
0,0
00
3,2
0,0
00
+70,0
00
+50,0
00
+3,0
00
=15,8
9,0
00
+30,0
00
+5,0
00
+50,0
00
10
.in
tere
st o
n d
raw
ing
=-1
0,0
00
@ 1
0%
p.a
=+
10,0
00
New
Equat
ion
1,6
1,0
00
+3,5
0,0
00
+7,2
0,0
00
+3,2
0,0
00
+70,0
00
+50,0
00
+3,0
00
=15,8
9,0
00
+30,0
00
+5,0
00
+5,0
000
[XI – Accountancy] 28
Twinkle Graphics#Laxmi Printers-2013 #Accounts-3-4# 2nd Proof.
Every business transaction affects two or more accounts. An account is a
summarised record of transactions at one place relating to a particular head.
An account is divided into two parts i.e. debit and credit. Debit refers to the
left side of an account and credit refers to the right side of an account.
Traditional Approach
Under this approach, all ledger accounts are mainly classified into two
categories:
A. Personal accounts : It includes all those accounts which are related to
any person i.e. individuals, firms, companies, Banks etc. This can further
be classified into three categories:
1. Natural persons : All accounts of human beings/persons are
included such as Ram’s A/c, Shyam’s A/c etc.
2. Artificial persons : This includes all accounts related to
organizations which are treated as persons in the eyes of law
and having all the legal rights as a natural person have such as
buying/selling assets in its name, suing and be sued etc. Some
of the examples are Reliance Industries Ltd., Punjab National
Bank etc.
3. Representative persons : In this category, accounts which
represents some persons are included e.g. Capital a/c
(representing Owner),
Outstanding salary (representing the employee to whom salary
is due) etc.
B. Impersonal accounts: All ledger accounts which are not related to
persons are included in this category. This can be classified as:
1. Real accounts: Under this category, mainly assets (excluding
debtors) are included. These assets can be tangible (which can
be touched, seen and measured such as furniture, cash, stock
etc.) and intangible (which can’t be seen, touched or measured
but still have monetary value such as patents, trademark etc.)
29 [XI – Accountancy]
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2. Nominal accounts : In this category all accounts which are
related to income/gain and expenses/losses are included e.g.
Salary paid, Commission received etc.
RULES OF DEBIT/CREDIT UNDER TRADITIONAL APPROACH
Classification of Accounts Rules of Dr/Cr
1. Natural Persons
2. Artificial Persons Dr The Receiver
Personal 3. Representative Persons Cr The Giver
Impersonal
Real 1. Tangible Dr What comes in
2. Intangible Cr What goes out
Nominal 1. Expenses/Losses Dr Exp/Losses
2. Income/Gains Cr Income/Gains
Illustration 2 : Analyse the following transactions by using the
“TRADITIONAL APPROACH”
2013 Amount (in Rs.)
Jan 1 Prateek started business with cash 1,00,000
Jan 5 Bought goods for Cash 20,000
Jan 7 Bought goods from Pravesh 10,000
Jan 10 Sold goods for Cash 5,000
Jan 12 Sold goods to Vikas 12,000
Jan 15 Paid Salary 5,000
Jan 20 Received Commission 2,000
[XI – Accountancy] 30
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Solution : Analysis of Transactions
S.. Transaction Accounts Nature of Changes Debit Credit
No Affected Accounts (Rs.) (Rs.)
1. Commenced Business Cash Real Comes in 1,00,000
Capital Personal Giver 1,00,000
2. Purchased goods Purchase Nominal Expenses 20,000
Cash Real Goes out 20,000
3. Bought goods on Purchases Nominal Expenses 10,000
credit Pravesh Personal Giver 10,000
4. Sold goods for Cash Cash Real Comes in 5,000
Sales Nominal Income 5,000
5. Sold goods on Credit Vikas Personal Receiver 12,000
Sales Nominal Income 12,000
6. Paid Salary Salary Nominal Expenses 5,000
Cash Real Goes Out 5,000
7. Received Commission Cash Real Comes in 2,000
Commission Nominal Income 2,000
RULES OF DEBIT/CREDIT UNDER MODERN APPROACH
Assets Expenses Capital/Liabilities/Revenue
Dr. Cr. Dr. Cr.
Increase Decrease Decrease Increase
Illustration 3: Analyse the transactions given in Illustration 1 by using the
“MODERN APPROACH”
Solution:
S.. Transaction Accounts Nature of Changes Debit Credit
No Affected Accounts (Rs.) (Rs.)
1. Commenced Business Cash Asset Increase 1,00,000
Capital Capital Increase 1,00,000
2. Purchased goods Purchase Expenses Increase 20,000
Cash Asset Decrease 20,000
3. Bought goods on Purchases Expenses Increase 10,000
credit Pravesh Liabilities Increase 10,000
4. Sold goods for Cash Cash Asset Increase 5,000
Sales Income Increase 5,000
31 [XI – Accountancy]
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5. Sold goods on Credit Vikas Asset Increase 12,000
Sales Income Increase 12,000
6. Paid Salary Salary Expenses Increase 5,000
Cash Assets Decrease 5,000
7. Received Commission Cash Assets Increase 2,000
Commission Income Increase 2,000
SOURCE DOCUMENTS
A written document which provides evidence of the transactions is called
the Source Documents. Source document is the first evidence of a transaction
which takes place. Cash Memo, Invoice, Pay in Slip, Cheques are some
important Source Documents.
(a) Invoice (Bill) : An invoice is prepared by Seller at the time of sale of
goods on credit. It contains details such as the goods sold, the party to
whom goods are sold, sales amount, date etc.
(b) Cash Memo : It is prepared by the Seller at the time of Sale of goods
on Cash. It contains details such as goods sold, quantity, amount
received, date etc.
(c) Pay-in-Slip : It is used to deposit cash or cheque into bank. It has a
counterfoil which is returned to the depositor with the Signature of the
authorized person.
(d) Cheque : A cheque is a order in writing, drawn upon a specified
banker and payable on demand.
VOUCHER
A voucher is a document evidencing a business transaction. Recording in
books of accounts are done on the basis of voucher.
Classification of Accounting Vouchers
Vouchers Further classification Purpose
Debit Vouchers To show Cash Payment
Cash Vouchers
Credit Vouchers To show Cash Receipt
Non Cash Voucher Transfer Voucher To show Transactions not
involving cash
[XI – Accountancy] 32
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Debit Voucher
This voucher is prepared for all the cash payments made by the business
e.g. Payment of Salary, Purchase of Goods and Services, Payment made to any
Creditor etc.
Format of Debit Voucher
M/s Pratibha Furnitures
180, Nai Sarak, Delhi
Voucher No. ................... Date ....................
DEBIT ............................................................................ Amount
........................................................................................ (In Rs.)
...........................................................................
Total
Signature Signature
Manager Accountant
Credit Voucher
This voucher is prepared by the business in case of cash receipt from any
source such as Sale of goods for Cash, Payment received from any of Debtors,
Income received etc.
Format of Credit Voucher
M/s Pratibha Furnitures
180, Nai Sarak, Delhi
Voucher No. ................... Date....................
DEBIT ................................................................................................. Amount
............................................................................................................. (In Rs.)
............................................................................................................
Total
Signature Signature
Manager Accountant
Transfer Voucher/Non-Cash Voucher
This type of vouchers are prepared in those transactions which do not
involve Cash. Such as Credit Sales, Credit Purchases, Bad Debts, Depreciation
charged etc.
33 [XI – Accountancy]
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Format of Transfer Voucher
M/s Pratibha Furnitures
180, Nai Sarak, Delhi
Voucher No. ................... Date ....................
DEBIT ..................................................................................... Amount
.................................................................................................
.............................................................................................. Total
CREDIT ............................................................................... Amount
...............................................................................................
.............................................................................................Total
Signature Signature
Manager Accountant
JOURNAL
The first book in which the transactions of a business unit are recorded
is called Journal. Here, business transactions are recorded in chronological
order i.e. in the order in which they occur. Each record in a journal is called
an entry. As a journal is the first book in which entries are recorded, it is also
known as a book of original entry.
A Journal is divided by vertical lines into five columns i.e. (a) Date (b)
particulars (c) Ledger folio* (d) Amount (Debit) (e) Amount (credit)
Journal
Date Particulars * L.F. Dr Amount Cr Amount
(a) (b) (c) (d) (3)
* Ledger Folio (L.F.) : When the Debits and Credits are posted in the
ledger accounts, the page number of the ledger in which these accounts are
appearing are mentioned in this column.
TYPES OF ENTRIES
(1) Simple Entry : It is that entry in which only two accounts are affected
i.e. one account is debited and another account is credited with an equal
amount.
[XI – Accountancy] 34
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Example : Purchase of goods worth Rs. 5,000 from Ramesh by the business
firm.
The simple entry is.
Journal
Date Particulars L.F. Debit. Credit
Amount Amount
Purchases A/C Dr 5000
To Ramesh’s A/c 5000
(Being goods Purchased from
Ramesh on Credit)
(2) Compound Entry : It is that entry in which more than two accounts
are involved. Compound Entries can further be classified into single compound
entry and double compound entry.
In Single Compound Entry Several accounts are to be debited and only
one account is to be credited or only one account is to be debited and several
accounts are to be credited.
Example : A business firm pays rent Rs. 2,000, salaries Rs. 1,500, freight
Rs. 500 on 1 Jan. 2013, the single compound entry is
Journal
Date Particulars L.F. Debit. Credit
Amount Amount
2013 Rent A/c Dr. 2,000
Jan, 1 Salaries A/c Dr. 1,500
Freight A/c Dr. 500
To Cash A/c 4,000
(Being Expenses paid in cash)
In Double Compound Entry, several accounts are to be debited which
are accompanied by several credit accounts.
Example : A firm receives cash Rs. 20,000 and cheque Rs, 10,000 in
return of sale of goods for Rs. 25,000 and furniture Rs. 5,000.
35 [XI – Accountancy]
Twinkle Graphics#Laxmi Printers-2013 #Accounts-3-4 # 2nd Proof.
Journal
Date Particulars L.F. Debit. Credit
Amount Amount
Cash A/c Dr. 20,000
Bank A/c Dr. 10,000
To Sales A/c 25,000
To Furniture A/c 5,000
(Being payment received for
sale of goods & furniture.)
(3) Opening Entry : The entry passed to record the closing balances of
the previous year is called opening entry. While passing an opening entry, all
assets accounts are debited and all liabilities accounts are credited.
Example : The various balances of xyz ltd on 1st April 2013 were as
follows Debt Balance : Cash Rs. 20,000 furniture Rs. 50,000 Building Rs.
1,00,000 & Debtors Rs. 30,000 Credit Balance : Creditors Rs. 50,000, Bank
loan Rs. 25,000.
Journal
Date Particulars L.F. Dr. Balance Cr. Balance
2013
Apr. 1 Cash A/c Dr. 20,000
Furniture A/c Dr. 50,000
Building A/c Dr. 1,00,000
Debtors A/c Dr. 30,000
To creditors A/c 50,000
To Bank loan A/c 25,000
To Capital A/c 1,25,000
(Being recording of the
opening balances of assets,
Liabilities and capital)
Illustration 4 : Pass necessary Journal entries relating to Mr. Jitender
Bhati for the month of January 2013.
[XI – Accountancy] 36
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2013
Jan. 1 Started business with Rs. 20,000 and furniture Rs. 4,000
Jan. 1 Bought shop fitting Rs. 4,000 and a car Rs. 6,000 and payment made
in cash.
Jan. 2 Paid into Bank Rs. 8,000
Jan. 3 Paid rent Rs. 2,000 by cheque.
Jan.10 Purchased on credit goods for Rs. 5,000 from Mr. Khatana.
Jan.10 Cash Sales Rs. 10,000
Jan.12 Paid wages Rs. 500 and insurance Rs. 200 by cash.
Jan.15 Paid Rs. 5,000 to Mr. Khatana by cheque
Solution : In the books of Mr. Jitendra Bhati.
Journal
Date Particulars L.F. Dr. Balance Cr. Balance
2013
Jan 1 Cash A/c Dr. 20,000
Furniture A/c Dr. 4,000
To capital A/c 24,000
(Being business started with
cash and furniture).
Jan 1 Furniture & fittings A/c Dr. 4,000
Car A/c Dr. 6,000
To Cash A/c 10,000
(Being purchase of fitting & Car)
Jan. 2 Bank A/c Dr. 8,000
To cash A/c 8,000
(Being cash paid into Bank)
Jan. 3 Rent A/c Dr. 2,000
To Bank A/c 2,000
(Being rent paid by cheque)
37 [XI – Accountancy]
Twinkle Graphics#Laxmi Printers-2013 #Accounts-3-4 # 2nd Proof.
Jan. 10 Purchase A/c Dr. 5,000
To Mr. Khatana 5,000
(Being goods purchased on
Credit from Mr. Khatana)
Jan. 10 Cash A/c Dr. 10,000
To sales A/c 10,000
(Being goods sold for cash)
Jan. 12 wages A/c Dr. 500
Insurance A/c Dr. 200
To cash A/C 700
(Being wages & insurance paid
by cash)
Jan. 15 Mr. Khatana A/c Dr. 5,000
To Bank A/c 5,000
(Being payment mode to
Mr. Khatana by Bank)
Grand Total 64700 64700
Special Transaction related to Goods
1. Withdrawal of goods by owner for personal use.
Drawings A/c Dr.
To Purchases A/c
2. Goods given as charity
Charity A/c Dr.
To Purchases A/c
3. Goods distributed as free samples
Advertisement A/c Dr.
To Purchases A/c
4. Goods lost by fire/flood/theft etc.
Loss by fire/theft A/c Dr.
To Purchase A/c
Note : Purchases A/c is credited in the above entries because the goods are
going out of our business on cost and it is not a sale hence, deducted from the
purchases A/c.
[XI – Accountancy] 38
Twinkle Graphics#Laxmi Printers-2013 #Accounts-3-4# 2nd Proof.
Transaction Related Banks
1. Cash deposited into the bank
Bank A/c Dr.
To Cash A/c
2. Cash withdrawn for office use.
Cash A/c Dr
To Bank A/c
3. When cheque is received from customer and deposited into bank
same day.
Bank A/c Dr
To Customer’s personal A/c
4. When cheque is received from customer and not deposited into
bank same day.
Cash A/c Dr
To Customer’s personal A/c
5. When above cheque (Point 4) is deposited later into bank
Bank A/c Dr
To Cash A/c
6. When payment is made through cheque
Personal A/c Dr
To Bank A/c
7. When expense is paid through cheque.
Expense A/c Dr
To Bank A/c
8. When interest is allowed by the bank.
Bank A/c Dr
To Interest A/c
9. When Bank charges for the services provided.
Bank Charges A/c Dr
To Bank A/c
39 [XI – Accountancy]
Twinkle Graphics#Laxmi Printers-2013 #Accounts-3-4 # 2nd Proof.
Some Special Entries
1. Bad Debts (when customer is declared insolvent and amount is
irrecoverable from him)
Case A/c Dr. (If partial amount is recovered)
Bad Debts A/c Dr. (The irrecoverable part)
To Personal A/c (the due amount)
2. Bad debts recovered earlier written off as bad debts.
Cash A/c Dr.
To Bad debts recovered A/c
3. Outstanding Expenses (expenses due but not paid yet).
Expenses A/c Dr.
To Outstanding Expenses A/c
4. Prepaid Expenses (Expenses not due but paid in advance).
Prepaid expenses A/c Dr.
To Expenses A/c
5. Accrued income (income due but not received yet.)
Accrued Income A/c Dr.
To Income A/c
6. Unearned Income (Income not due but received in advance).
Income A/c Dr.
To Unearned Income A/c
7. Depreciation provided on fixed assets.
Depreciation A/a Dr.
To Related Asset’s A/c
8. Interest on Capital provided.
Interest on capital A/c Dr.
To Capital A/c
9. Interested on Drawings charged.
Drawings A/c
To interest on Drawings A/c
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Entries related to central sales Tax (CST)
(a) Central sales Tax (CST) collected on sales
Cash A/c Dr.
To Sales A/c
To Central sales Tax A/c
(b) When Central sales tax is deposited in Govt. A/c
Central sales Tax A/c Dr.
To Cash A/c
Journal Entries related to VAT (value added Tax).
(a) When VAT is paid on purchases.
Purchases A/c Dr.
VAT (Paid) A/c Dr.
To Cash A/c
(b) When VAT is collected at the time of sales.
Cash A/c Dr.
To sales A/c
To VAt (collected) A/c
(c) When VAT is paid to the Government.
VAT (collected) A/c Dr.
To Vat (paid) A/c
To Cash A/c
BOOKS OF ORIGINAL ENTRY/SPECIAL PURPOSE BOOKS
As size the business grows and number of transactions increase, it becomes
necessary for the business to divide the recording work. The books maintained
are illustrated below:
Transactions Further classification Subsidiary Books Maintained
Cash & Bank Related Only Cash Transactions Simple Cash Book
Transactions Cash & Bank Transactions Double Column Cash book
Cash payment of small amount Petty Cash Book
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Transaction Other Credit Sale Sales Book
than Cash & Bank Credit Purchases Purchases Book
Sales Returns Sales returns Book
Purchases Returns Purchases Returns Book
Any other transaction Journal Proper
Advantages of Maintaining Subsidiary Books
Division of work
Leads to Specialization
Easy to maintain Ledger
Check on frauds
Easy to fix responsibility
Quick availability of Required information.
Cash Book
Cash book shows all the transaction related to cash receipt and payments.
Cash book serves two purpose. First, all the cash transactions are recorded first
time in cash book it becomes Book or original entry. Second, there is no need
to prepare Cash a/c in ledger it also play the role of Principal Book.
Simple Cash Book
All the cash receipts are shown in left hand side i.e. Debit side and all
the cash payments are shown in right hand side i.e. Credit Side.
Points to Remember
• Cash in hand/opening balanced of cash is shown in Dr. side of the Cash
book as “To Balance b/d”
• Only transaction of cash receipts and payments are recorded in this
book.
• This book never shows a credit balance because one can’t pay more
than the cash one have.
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Illustrations 5 :
2013 Rs. 2013 Rs.
Jan. 1 Cash in Hand 12,000 Jan. 5 Received from Ram 3,000
Jan. 7 Paid rent 300 Jan. 8 Sold goods 3,000
Jan. 10 Paid to Shyam 7,000 Jan. 15 Purchased goods
from Mohan 5,000
Jan. 27 Purchased furniture 2,000 Jan. 31 Paid Salaries 1,000
In the Books of.....
Cash Book
Dr. Receipts Payment Cr.
Date Particulars L.F Rs. Date Particulars L.F. Rs.
2013 2013
Jan. 1 To Balance b/d 12,000 Jan.. 7 By Rent A/c 300
Jan. 5 To Ram 3,000 Jan. 10 By Shyam 7,000
Jan. 8 To Sales A/c 3,000 Jan. 27 By Furniture A/c 2,000
Jan. 31 By Salaries A/c 1,000
Jan. 31 By Balance c/d 7,700
18,000 18,000
Feb. 1 To Balance b/d 7,700
Notes : One can draw the following conclusions:
1. In a Simple Cash Book only cash receipts and cash payments are
recorded. Credit transaction are not recorded. Purchases from Mohan
of Rs. 5,000 on 15th Jan is a credit purchase hence, is not recorded in
the Cash Book.
2. The debit side is always bigger than the credit side since the payments
can never exceed the available cash. This is true even for daily balances.
3. It is like an ordinary account.
CASH BOOK WITH DISCOUNT COLUMN
Where cash discounts are allowed and received respectively, additional
columns are provided on the debit side for discount allowed and on the credit
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side for discount received. The discount columns in the cash book are not
parts of the cash book but are memoranda (provisional) columns because
discount account is a nominal account while cash account is a real account. On
balancing the cash book, the discount columns are singly totalled but not
balanced.
Illustration 6 : Enter the following transactions in the cash book with discount
column for the month of April 2013.
1. Cash in hand Rs 50,000
11. Cash Sales Rs 25,000
12. Goods sold to Aryan on credit for Rs. 20,000
13. Purchased goods from Khushi on credit for Rs. 30,000.
14. Purchased stationary for Rs. 1,000 in cash.
25. Received from Aryan Rs. 19,500 in full settlement.
26. Paid to Khushi Rs. 29,000 as full & final payment.
27. Deposited into bank Rs. 5,000.
30. Paid to Vishal, on old creditor Rs. 9,800 and received discount of Rs. 200.
Solution :
Dr. Cash Book with Discount Columns Cr.
Date Particulars V. L.F Dis- Amt. Date Particulars V. L.F. Dis Amt.
No. count No. count
2013 2013
Apr.1 To Balance b/d 50,000 Apr.14 By stationary A/c 1,000
Apr.11 To Sales A/c 25,000 Apr.26 By Khushi A/c 1,000 29,000
Apr.25 To Aryan A/c 500 19,500 Apr.27 By Bank A/c 5,000
Apr.30 By Vishal A/c 200 9,800
Apr.30 By Bal c/d 49,700
500 94,500 1200 94,500
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CASH BOOK WITH DISCOUNT AND BANK COLUMN
In this case the Cash Book is ruled with there amount columns on either
side of the cash book, namely, “Discount, cash and Bank”. Cash columns in
such a case will record actual cash received in the debit side and payments in
the credit side. Cheques received should be entered on the debit side of the
bank column on the assumption that cheques received are immediately deposited
with the bank. The payments by cheques should be entered on the credit side
in bank column and also when cash is withdrawn from the bank.
IMPORTANT ENTRIES
(1) Contra Entries : These entries affect cash and bank columns both at
the same time. To indicate contra entry “C” is mentioned in the L.F column
of the cash Book. Following two cases result in Contra entries.
(a) Depositing cash into Bank Rs. 1,000 It will increase bank balance, so
bank column is debited and cash balance will decrease, so cash column
is credited.
Cash Book (Extract)
Date Particulars V. L.F. Dis- Cash Bank Date Particular V.. L.F Dis- Cash Bank
No. count No. count
To cash A/c C 1,000 By Bank A/c C 1,000
(b) Withdrawn from Bank for office use Rs. 1,000. It will increase cash
balance, so cash column is debited and bank balance will decrease, so
bank column is credited.
Cash Book (Extract)
Date Particulars V. L.F. Dis- Cash Bank Date Particular V.. L.F Dis- Cash Bank
No. count No. count
To Bank A/c C 1,000 By Cash A/c C 1,000
(2) Entries relating to cheques :
(a) When any payment is made by cheque :
It will reduce the bank balance and thus bank column will be credited.
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(b) When any payment is received in the form of cheque and no information
about its deposit into bank is given.
In this case it is assumed that the cheque is deposited into bank on the
same day, when it is received & so bank A/c will be debited.
(c) When any payment is received in the form of cheque and it is deposited
into bank on some other day i.e. when two dates, one for the receipt
of cheque and the other for deposit,
In this case cheque received is treated as cash received and so cash
A/c will be debited. When cheque is paid or entries are made in which
bank A/c is debited while the cash A/c is credited
Illustration 7 : Record the following transactions in the cash book with cash,
Bank and discount columns.
2013
Jan.1 Cash balance Rs. 10,000 & Bank balance Rs. 7,000.
Jan.2 Cash received from sale of furniture Rs. 8,000 and paid into Bank
Rs. 5,000.
Jan. 5 Paid to Mr. Kasana by Cheque Rs. 2,000, who allowed discount of
Rs. 50.
Jan.10 Received cheque from Mr. Nagar for Rs. 2,400 and allowed him
discount of Rs. 100.
Jan.15 Paid wages by cash Rs. 500 and salaries by cheque Rs. 1,000.
Jan.20 Deposited Mr. Nagar Cheque into Bank.
Jan.22 Dawn from Bank for office use Rs. 2,000.
Jan.25 withdraw cash Rs. 1,000 and from bank Rs. 500 for personal use.
Jan.30 Received cheque from Mr. Lohiya for Rs. 2,500 and paid into Bank
[XI – Accountancy] 46
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Solu
tion
Dr.
Cas
h B
oo
k w
ith
Dis
cou
nt,
cas
h a
nd
Ban
k C
olu
mn
s
Da
teP
art
icula
rsV.
No.
L.F
.D
isco
unt
Cash
Ba
nk
Da
teP
art
icula
rsV.
No.
L.F
.D
isco
unt
Cash
Ba
nk
20
13
Jan
.1T
o B
alan
ce b
/d10,0
00
7,0
00
Jan
.2B
y B
ank A
/cC
5,0
00
Jan
.2T
o F
urn
iture
A./
c8,0
00
Jan
.5B
y M
r. K
asan
a A
/c5
02,0
00
Jan
.2T
o C
ash A
/cC
5,0
00
Jan
.5B
y w
ages
A./
c50
0
Jan
.10
To M
r. N
agar
A/c
10
02,4
00
Jan
.15
By S
alar
ies
A/c
1,0
00
Jan
.20
To C
ash A
/cC
2,4
00
Jan
.20
By B
ank A
/cC
2,4
00
Jan
.22
To B
ank A
/cC
2,0
00
Jan
.22
By c
ash A
/cC
2,0
00
Jan
.30
To M
r. L
ohiy
a A
/c2,5
00
Jan
.25
By D
raw
ing A
/c1,0
00
50
0
Jan
.31
By B
alan
ce c
/d13,5
00
11,4
00
10
022,4
00
16,9
00
50
22,4
00
16,9
00
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Petty Cash Book
Business has to incur small expenses which are repetitive in nature. To
save the time and efforts of head cashier, business appoints a petty cashier. He
is entrusted with the duty of paying these expenses.
Imprest System of Petty Cash Book
Under this system, Head cashier gives a fixed amount to petty cashier for
a definite period. At the end of given period, Head cashier reimburses the
amount actually spent by the petty cashier resulting the same amount with
petty cashier which he had in the beginning of the period. This can be illustrated
as under.
Gives Rs. 1,000 for a week Rs. 1,000 for a weak
Spent Rs. 900 for small expense
Balance left Rs. 100Reimburses Rs. 900
1.
2.
Balance for next weekRs. 1,000 (100 + 900)
Header Cashier Petty Cashier
Advantage of Petty Cash Book
Saving of time and efforts of Head cashier
Control on Petty expenses.
Less chances of fraud.
Illustrations 8 : Prepare a Petty Cash book on the imprest system from the
following transactions
2013 Amt. (Rs.)
Jan. 1 Received from Head cashier 500
Jan. 2 Bought stationary 50
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Jan. 3 Paid for registered post 30
Jan. 4 Bought Pen/Pencils for office use 80
Jan. 4 Paid for Telegram 60
Jan. 5 Paid for refreshment 50
Jan. 6 Bought postal stamps 30
Solutions
Petty Cash Book
Dr. Cr. Analysis of Payments
Receipts Date Particulars V.No. Total Stationary Postage Sundries
Payments
2013
500 Jan. 1 To Cash
Jan. 2 By Stationary 50 50
Jan. 3 By Postage 30 30
Jan. 4 By Stationery 80 80
Jan. 4 By Telegram 60 60
Jan. 5 By Refreshment 50 50
Jan. 6 By Postage 30 30
500 Total 300 130 120 50
Jan. 7 By Bal c/d 200
500
200 Jan. 8 To Bal b/d
300 Jan. 8 To Cash
Note :
V.N. stands for Voucher number,
The petty cashier can prepare different columns in “Analysis of
Payments” as per his requirement depending upon the number of
transactions.
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SPECIAL PURPOSE SUBSIDIARY BOOKS
Purchases Books
In this book, only those transactions are recorded which are related to
credit purchases of goods in which the business deals in. Recording is made
on the basis of Bills/ Invoices issued by the Suppliers.
Transactions not in purchases Book
Purchases of goods for cash.
Purchases of Assets meant for long term, not for resale.
Illustration : Enter the following transaction in the Purchase Book of M/s
Ramesh Stationers.
2013
Aug.1 Brought from Agarwal Book House (Invoice No. 205)
25 Dozen Pencils @ Rs. 30 per dozen
20 Dozen Ball pens @ Rs. 10 per pen
Trade discount@ 10%
Aug.5 Brought furniture of Rs. 20,000 on credit from M/s Interior
Decor (Invoice No. 109)
Aug.8 Shivani Bros. sold to us (Invoice No. 626)
30 Registers @ 50 each
50 Note Books @ Rs. 20 each
Aug.17 Brought from Tushar stationers : (Cash Memo No. 101)
300 Refills @ Rs. 5 each
10 Ink pads @ Rs. 50 each
Solution :
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In the books of M/s Ramesh Stationers
PURCHASES BOOK
Date Particulars Inv.No. L.F. Details Amount (Rs.)
2013
Aug. 1 Agarwal Book House 205
25 Dozen Pencils @ Rs. 30 per dozen 750
20 Dozen ball Pens @ Rs. 10 per pen 2400
3150
Less : Trade Discount @ 10% 315 2835
Aug.8 Shivani Bros.
30 Resisters @ Rs. 50 each 626 1500
50 Note Books @ Rs. 20 each 1000 2500
Aug.31 Purchases A/c Dr. 5335
1. Transaction of Aug. 5 is related to credit purchases of furniture i.e. an
Asset.
2. On Aug. 17, goods bought for cash, Hence both the transaction are not
recorded in Purchases Book.
Sales Books/Sales Journal
In this book, transactions for credit sales of goods are recorded. The
source documents for this book is duplicate copy of invoice/bills issued to the
customers.
Transactions not recorded in Sales Book
Sales of goods for cash
Sales of Assets.
Illustration : from the following transactions, Prepare a Sales Book of Alvin
Furnitures.
2013
Jul.7 Sold to Anil furniture house (Invoice No. 107)
200 Tables @ Rs.150 each
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100 Chairs @ Rs.100 each
Trade discount @ 10%
Jul.8 Sold Air Conditioner to Ram Rs. 12,000
Jul.20 Sold to Rama Furnitures (Cash Memo no. 3001)
10 Beds @ Rs. 2,500 each
Jul.29 Sold to Jitesh Woods (Invoice No. 506)
10 Dressing tables @ Rs. 1,700 each
5 tables @ Rs. 500 each
Trade Discount @ 10%
Solution :
In the books of M/s Alvin furnitures
Sales Book
Date Particulars Inv.No. L.F. Details Amount (Rs.)
2013
Jul. 7 Anil Furniture House 107
200 Tables @ Rs. 150 each 30,000
100 Chairs @ Rs. 100 each 10,000
40,000
Less : Trade Discount @ 10% 4,000 36,000
Jul.29 Jitesh Woods 506
10 Dressing tables @ Rs.1,700 each 17,000
5 tables @ Rs 500 each 2,500
Trade discount @ 10% 19,500 17,550
1,950
Jul.31 Sales A/c Cr. 53,500
Note :
Transaction of July15 is related to sale of asset,
Sale of Rama Furniture is made for cash, hence not recorded in Sales
Book.
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PURCHASES RETURNS/RETURNS OUTWARD BOOK
This book includes only those transactions which are related to returns of
goods bought on credit. The goods may be returned due to various reasons
such as goods bought being defective, supply of inferior quality goods etc.
Entries in this book are made on the basis of Debit Note. A Debit note
contains the name of the supplier to whom good are returned, details of goods
returned
Illustration 11 : Enter the following transactions in the Purchases Returns
Book of Ramesh Stationary House:
2013
Aug.5 Returned to Agarwal Book House (Debit Note No. 105)
5 Dozen Pencils @ Rs. 30 per Dozen
Trade Discount @ 10%
Aug.10Returned to Shivani Bros. (Debit Note No. 106)
5 Resisters @ Rs. 50 each.
Solution :
In the books of M/s Ramesh Stationers
Purchases return Book
Date Name of the supplier Debit Note. L.F. Detail Amount (Rs.)
2013
Aug.5 Agarwal Book House 105
5 Dozen @ Rs. 30 each 150
Less : Trade Discount @ 10% 15 135
Aug.10 Shivani Bros. 106
5 Resisters @ Rs. 50 each 250
Aug.31 Purchases Returns A/c Cr. 385
Note : Trade discount will be deducted if it was allowed a the time of purchase
of goods.
Sales Returns Book
This book includes all the returns by customers of credit sales of goods.
The Credit Note is used for recording entries in this book. The credit note
contains the details of customers and goods returned.
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Illustration 12 : From the following transactions, prepare Sales Returns Book
of Modern Furnitures for the month of July 2013:
2013
Jul.9 Returned by Anil furniture house (Credit Note No.209)
5 Table @ Rs. 150 each
10 Chairs @ Rs. 100 each
Trade discount @ 10%
Jul.30 Returned by Jitesh Woods (Credit Note No.210)
1 Dressing tables @ Rs. 1700 each
Trade discount @ 10%
Solution :
In the of M/s Modern furnitures
Sales Returns Book
Date Name of the Customers Cr. Note L.F. Details Amount (Rs.)
2013
Jul.9 Anil Furniture House 209
5 Tables @ Rs. 150 each 750
10 Chairs @ Rs.100 each 1,000
1,750
Less : Trade discount @ 10% 175 1,575
Jul.29 Jitesh Woods 210
1 Dressing tables @ Rs. 1700 each 1,700
Less : Trade Discount @ 10% 170 1,530
Jul.31 Sales Returns A/c Dr. 3,105
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CHAPTER-4
PREPARATION OF BANK RECONCILIATION
STATEMENT, LEDGER AND
TRIAL BALANCE
BANK RECONCILIATION STATEMENT
Bank Reconciliation Statement is prepared to reconcile the difference
between the bank Balance shown by the Cash Book and Bank Pass Book.
Learning objectives
(1) Meaning of Bank Reconciliation statement.
(2) Causes of Differences in Bank Balance as per Cash Book and Pass
Book.
(3) Importance of Bank Reconciliation Statement.
(4) Procedure of preparation of bank Reconciliation statement
(5) Preparation of Adjusted Cash Book.
Definition : A schedule showing the items of difference between the bank
statement and the bank column of Cash Book is known as Bank Reconciliation
Statement.
Causes of Differences in Cash Book and Pass Book
The difference may be caused by either
(A) Time gap in recording transactions or
(B) Errors Committed in recording transactions.
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(A) Difference Caused by the time gap
Reasons for the time gap in recording the transactions in the two books
(Cash Book and Pass Book) are as given below–
(1) Cheques issued but not yet presented for payment in the bank.
(2) Cheques deposited or paid into the bank for collection but not yet
credited by the bank.
(3) Cheques deposited but dishonoured.
(4) Interest allowed by the bank.
(5) Interest on overdraft, bank charges commission etc. charged by the
bank.
(6) Direct Deposit by the customers into the bank.
(7) Interest, Dividend etc. collected by the bank.
(8) Direct payments made by the bank on behalf of customer as per standing
instructions.
(B) Difference caused by Errors Committed
Such errors may be of two types
(1) Errors committed by the firm
(i) Cheques issued to some creditors but omitted to be recorded in
the Cash Book or recorded twice.
(ii) Cheques deposited into the bank omitted to be entered in the
Cash Book or recorded twice.
(iii) Error in totalling or balancing the bank column of the Cash
Book.
(2) Errors committed by the bank
Sometimes bank made a wrong entry in the customer’s account which
causes a difference in the two balances.
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Need and importance
It helps in locating and rectifying the errors or omissions committed
either by the firm or by the bank.
Customer becomes sure of the correctness of the bank balance shown
by the cash book.
Facilitates the preparation of amended or revised Cash Book.
Reduces the chances of fraud by the staff of the firm or bank.
Helps in keeping a track of the cheques deposited for collection.
Procedure of Preparing Bank Reconciliation Statement
A Bank Reconciliation Statement is prepared when we get the duly
completed Pass Book from the Bank.
(1) First of all tally the Debit side entries of the cash book with the Credit
side entries of the Pass Book and vice versa.
(2) Tick the items appearing in both the books.
(3) Unticked items will be the points of differences.
(4) A BRS is then prepared by taking either the balance as per Cash Book
or Pass Book as a starting point.
Important Points
(1) If the Starting point is Cash Book Balance then the ending point will
be Pass Book Balance.
(2) If the starting point is Pass Book Balance then the ending point will be
the Balance as per Cash Book.
(3) Debit Balance as per Cash Book or Credit Balance as per Pass Book,
means that the firm has that much amount of deposit at the bank also
called favourable balance write the amount under + items.
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(4) Credit Balance as per Cash Book of Debit Balance as per Pass Book,
means that this much amount has been withdrawn in excess of deposit
also called overdraft or unfavorable balance write the amount under
-items.
Method of Preparing BRS Starting with the Balance/overdraft as per
Bank Column of Cash Book.
Starting Point End Point
Cash Book Pass Book
Less Balance item More Balance
More Balance –item Less Balance
Note : To get more from less means something is to be added therefore + item
& To get less from more, something is to be deducted therefore-item.
1. First of all write
Under Plus Item – If the Cash Book Balance is debit or favourable or
simple balance.
Under Minus Item – If the Credit Balance or overdraft as per Cash Book
is given.
2. Now study the point of difference.
(a) If the entry is done in the Cash Book and not in the Pass Book then.
(i) If it is done on the debit side of Cash Book. Balance in the Cash
Book will be more as compared to Pass Book and hence the
item will be – item as shown in the box above.
(ii) Where as if entry is done on the Credit side of Cash Book, the
Balance in the Cash Book will be less as compared to Pass
Book and hence the item will be + items.
(b) If the entry is done in the Pass Book and not in the Cash Book then.
(i) If done on the Credit side of Pass Book –
Pass Book Balance is more as compared to Cash Book + item.
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(ii) It is done on the Debit side of Pass Book–
Pass Book Balance is less as compared to Cash Book (–)
item
3. At the end + items and–items are totalled.
(a) If total of Plus Items is more than the total of (–) items Difference
is Credit Balance or favourable balance as per Pass Book.
(b) Where as if the – items total is more than the + items total Difference
is Debit Balance or overdraft as per Pass Book.
Ready Reference
Items (items which increase the Pass Book Balance or decreases the
Cash Book Balance)
(1) Cheques issued but not yet presented.
(2) Credits made by the bank for Interest.
(3) Amount directly deposited by the customers in our bank A/c.
(4) Interest and dividend collected by the bank.
(5) Cheques paid into the bank but omitted to be recorded in the Cash
Book.
Items (Items which, decreases the Pass Book Balance or increase the
Cash Book Balance)
(1) Cheques sent to the bank for collection but not yet credited by the
bank.
(2) Cheques paid into the bank but dishonoured.
(3) Direct payments made by the bank.
(4) Bank charges, commission etc. debited by the bank.
(5) Cheques issued but omitted to be recorded in the Cash Book.
Example 1 : Balance as per Cash Book is given
Prepare Bank Reconciliation statement as on 31st July 2013
(1) Dr. Balance as per Cash Book is Rs. 20,000 as on 31st Jul 2013.
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(2) Cheques for Rs. 5,000 were deposited into the Bank in the month of
July but only cheques for Rs. 1,000 were credited by the bank till 31st
July 2013.
(3) Cheques issued for Rs. 33,000 in July, out of which a cheque for
Rs.13,800 was presented for payment on 3rd August.
(4) Bank charged Rs. 150 as Bank charges and credited interest of Rs. 400.
(5) A customer directly deposited Rs. 2,500 in firm’s bank A/c.
(6) Bank paid the Insurance Premium of Rs. 1,200 as per standing instruction
on 25.7.2013.
Solution :
Bank Reconciliating Statement
as on 31st July 2013
Particulars +Items –Items
(Rs.) (Rs.)
(1) Balance as per Cash Book. 20,000 -
(2) Cheques deposited but not yet collected by the
bank (5,000–1,000) - 4,000
(3) Cheques issued but not yet 13,800 -
Present for payment
(4) (a) Bank Charges - 150
(b) Interest credited by the bank 400 -
(5) Directly deposited by the customers 2,500 -
not recorded in the Cash Book
(6) Insurance Premium paid by the bank not
recorded in Cash Book. - 1,200
Total 36,700 5,350
Balance as per Pass Book (36,700-5,350) 31,350 -
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Explanation
1. Balance as per Cash Book means favourable Balance, hence + Item..
If nothing (i.e. Debit or Credit) is written the Balance given, it is
treated as favourable.
2. Cheques were deposited into the bank for Rs. 5,000 but credited by the
bank for Rs. 1,000 in the month of July, implies that cheques for Rs.
4,000 (5,000–1,000) are entered in the Cash Book but not in the Pass
Book Increasing the Cash Book Balance by Rs. 4,000 as compared to
Pass Book. Hence to get pass Book Balance from the Cash Book Rs.
4,000 will have to be deducted.
Item
3. Cheques issued but not presented for payment till 31st July is for
Rs. 13800 entered more on the credit side of Cash Book as compared to Pass
Book Cash book Balance is less by Rs. 13,800 as compared to Pass Book
Item
4. (a) Bank charges of Rs. 150 entered in the Pass Bookdecrease the
Balance of Pass Book. To reach Pass Book Balance from Cash Book Balance,
this item has to be deducted i.e. minus item.
(b) Interest credited by the Bank Rs. 400 interest in Pass Book Increases
the, balance of Pass Book, hence to reach the Balance from cash book and this
item is to be added+ item.
5. Direct deposit by a customer Rs. 2,500 Increase the Pass Book Balance
plus item.
6. Payment made by the bank for insurance premium decreases the Pass
Book Balance Minus Item.
7. Items total Rs. 36,700 is more than-item total Rs. 5,350 by Rs. 31,350
Hence the difference of Rs. 31,350 will be + item i.e. Favourable Balance or
Cr. balance as per Pass Book.
Example 2 : When overdraft as per Cash Book is given
Given
(1) Overdraft as per Cash Book is Rs. 40,500 on 30th June 2013.
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(2) Cheques deposited but not yet collected Rs. 12,000.
(3) Cheques issued but not yet presented for payment of Rs. 2,800.
(4) Bank charges of Rs. 50 and Interest on overdraft of Rs. 250 are charged
by the bank.
(5) A customer directly deposited Rs. 1,200 into the Bank.
(6) Insurance Premium of Rs. 1,500 is paid by the bank as per standing
instructions.
Prepare Bank Reconciliations Statement for the month of June 2013.
Solution :
Bank Recociliation Statement
as on 30th June 2013
Particulars +Items –Items
(Rs.) (Rs.)
(1) Overdraft as per Cash Book*. - 40,500
(2) Cheques deposited but not yet collected - 12,000
(3) Cheques issued but not yet 2,800 -
Presented for payment
(4) (a) Bank Charges - 50
(b) Interest on overdraft charged - 250
(5) Directly deposited by a customer in the bank. 1,200 -
(6) Insurance Premium paid by the bank not entered
in Cash Book. - 1,500
Total 4,000 54,300
Overdraft as per Pass Book 54,300-4,000 - 50,300
Overdraft means unfavorable balance or Negative Balance Hence
put it under-item.
Explanation for all other items is similar as example 1 except the
following.
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1. Item No. 4 (b)– Interest on overdraft decreases the Pass Book Balance
hence it is do be deducted from Cash Book Balance to reach at Pass
Book Balance – item.
2. This time the total of (–) items Rs. 54,300 is more to the total + items
is Rs. 4,000 by Rs. 50,300.
Hence this is a (–) item or in other words overdraft as per Pass Book
Case II-Starting with Pass Book Balance /overdraft.
Starting Point Ending Point
Pass Book Cash Book
Less Balance item More Balance
More Balance –item Less Balance
1. First all write under
+Item – If Cr. Balance favourable balance Simply Balance as per Pass
Book is given.
–Item – If Debit Balance or overdraft as per Pass Book is given.
2. Now study the point off difference between the Cash Book and Pass
Book.
(a) If the entry is done the Cash Book and not in the Pass Book then.
(i) If is done on the Debit side of Cash Book, Balance in the Cash
Book will be more as compared to Pass Book and hence the
item is to be added in the Pass Book Balance to get the Cash
Book Balance i.e.+Item.
(ii) Where as if the entry is done on the credit side of Cash Book
Cash Book Balance will be less as compared to Pass Book
hence(–)item
(b) If the entry is done in the Pass Book and not in the Cash Book then.
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(i) If it is done on the Debit side of Pass BookPass Book Balance
as less as compared to Cash Book item is to be added in Pass
Book balance to get the Cash Balance i.e. + item.
(ii) If it is done on the credit side of Pass Book : Pass book Balance
is more as compare Cash Bank book (–item).–
3. At the end + item and -item are totalled
(a) If total of (Balance) is more than the total of (–) Difference is
favourable Balance or Debit Balance as per Cash Book.
(b) Where as if the total of (–) items is more than the total of + items
Difference is unfavourable or overdraft as per Cash Book.
Ready Reference
+ Items [Items which increases the Cash Book Balance or decreases
the Pass Book Balance]
(1) Cheques deposited into the bank but dishonoured.
(2) Cheque sent for collection but not yet collected.
(3) Direct Payments made by the bank.
(4) Bank charges, commission etc. debited by the bank.
(5) Cheques issued but omitted to be recorded in the Cash Book.
–Item [Items which decreases the Cash Book Balance or increase the
Pass Book Balance]
(1) Cheques issued but not yet presented.
(2) Credits made by the bank for interest.
(3) Amount directly deposited by the customers into the Bank.
(4) Interest and dividend collected by the Bank.
(5) Cheques paid into the bank but omitted to be recorded in the Cash
Book.
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Examples 3 : Balance as per Pass Book is given
Given (1) Balance as per Pass Book is Rs. 70,000 Point No. (2) to (6) are
same as given in example (1) Prepare Bank Reconciliation Statement as on
July 31, 2013.
Solution :
Bank Reconciliation Statement
as on 31st July 2013
Particulars +Items –Items
(Rs.) (Rs.)
(1) Balance as per Pass Book (Cr). 70,000 -
(2) Cheques deposited but not yet collected
by the Bank (5,000–1,000). 4,000 -
(3) Cheques issued but not yet Presented for payment 13,800
(4) (a) Bank Charges 150 -
(b) Interest allowed by Bank. - 400
(5) Directly deposited by the customer, not recorded - 2,500
in the Cash Book.
(6) Insurance Premium paid by the Bank, not recorded
in Cash Book. 1,200 -
Total 75,350 16,700
Balance as per Cash Book 58,650 -
(75,350-16,700)
Important Points :
Starting and Ending points are reversed compared to Example No.1
Hence + items (×) items are interchanged.
Favourable balance whether of Cash Book or Pass Book is always a
+items
If + items total is more the-items total then the difference in the two
totals is always a favourable Balance
Where as if + items total is less than the - items total then the difference
in the two totals is overdraft.
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Example 4 : Overdraft as per Pass book is Rs. 45,000 Rest of the contents
(points 2 to 6) are same as given example No.2
Prepare Bank Reconciliation Statement as on June 30, 2013.
Bank Reconciliations Statement
as on 30th June 2013
Particulars +Items –Items
(Rs.) (Rs.)
(1) Over draft as per Pass Book. - 45000
(2) Cheques deposited but not yet collected 12,000 -
(3) Cheques issued but not yet presented
for payment - 2,800
(4) (a) bank Charges not entered in Cash Book 50 -
(b) Interest on overdraft charged by the bank 250 -
(5) Directly deposited by a customer in the Bank - 1,200
(6) Insurance Premium paid by the Bank 1,500 -
Total 13,800 49,000
Overdraft as per Cash Book (49,000-13,800) - 35,200
Important Points
Overdraft whether as per Cash Book or Pass Book is always a (–)
items.
Starting and Ending points are interchanged as compared to Example
No. 2 hence + items and (–) are also interchanged.
Here (–) items total is more as compared to(+) items total, therefore,
the difference in the two balance is a negative items i.e. overdrafts as
per Cash Book.
Amended Cash Book Method
Introduction : So far we have studied the preparation of Bank Reconciliation
Statement simply by reconciling the causes of differences between the Cash
Book and Pass Book. In actual practice adjustments are done in the Cash Book
by comparing the Bank column of Cash Book with the Bank Statement and
after that, B.R. Statement is prepared. It is called Amended Cash Book Method.
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Procedure
(1) Adjusted Cash book prepared starting with the Balance of the Cash
Book given in the question.
(2) All errors that have been committed in the Cash Book will have to be
rectified by passing adjusting entries in the Cash Book.
Usual of General Errors are
(a) Overcasting or Undercasting of Debit/Credit Column of Cash
Book.
(b) Cheques deposited or Issued but omitted to be entered in the
Cash Book.
(c) Incorrect amount (if any) entered in the Cash Book.
(d) Entries on the correct side or in the wrong column of Cash
Book.
(e) Any amount recorded twice in the Cash Book.
(3) Certain amounts for which Bank has debited our A/c will be recorded
on the Credit side of Cash Book. Such items are
(a) Interest charged by the bank on overdraft. etc.
(b) Debits made by the bank for the bank charges, commission etc.
(c) Direct payments made by the Bank on behalf of the A/c holder.
(d) Cheques sent for collection but dishonoured.
(4) Cash Book is then balanced : and the new Balance of the Cash book
is taken as the starting point for preparing the B.R. Statement.
Important :
It should be noted that the following items must not be recorded in the
Amended Cash Book.
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Cheques deposited into the Bank but not yet credited by the Bank.
Cheques Issued but yet not presented for payment.
Example : The cash Book of Mr. Sharma showed a balance. of 3,560 as on
31st Dec. 2013 at the bank where as Pass Book showed a balance of Rs. 4,230.
Comparison of the Cash Book and Pass Book revealed the following :
(1) The Bank has debited Mr. Sharma With Rs. 460, the annual premium
of his life Policy according to his standing instructions and Rs. 20 as
Bank charges.
(2) Mr. Sharma paid into the Bank cheques totalling Rs, 3,100 on Dec. 26,
2013 of which those for Rs. 2,500 were collected in December. One
cheque for Rs. 200 was returned dishonored on 2nd Jan. 2014.
(3) The Bank has credited Mr. Sharma by Rs. 1,600, the proceeds of a bill.
(4) Cash collected on 31st Dec. 2013 totalling Rs. 850 was entered in the
Cash Book in the Bank column on the same date but banked on 2.1.2014.
(5) Mr.Sharma issued cheques totalling Rs. 2,300 in the month of Dec. out
of which cheques for Rs. 1,000 have not been presented for payment
for payment till 31st Dec.
Solution :
Amended Cash Book (Bank Column only)
as on 31st Dec. 2013
Receipt side Payment side
Particulars Rs. Particulars Rs.
Top Balance b/d 3,560 By Drawings 460
To B/R (Proceeds of a Bill) 1,600 By Bank charges 20
By Balance c/d/ 4,680
5,160 5,160
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Bank Reconciliation Statement
Particulars +Items –Items
(Rs.) (Rs.)
(1) Balance as per Adjusted Cash Book (Dr.) 4,680 –
(2) Cheques paid into the Bank but not Credited
by Dec. 31, 2013 (3,100-2,500) – 600
(3) Cheques issued but not presented till date 1,000 –
(4) Cash collected entered in the Cash Book
but not banked. – 850
Total 5,680 1,450
Balance as per Pass Book 4,230 –
(5,680-1,450)
Points to Remember
Amended or adjusted Cash Book is started with the given balance of
bank as per Cash Book.
Closing Balance of the adjusted Cash Book is the opening balance of
bank Reconciliations statement.
Entry for the dishonour of the cheques of Rs. 200 is not done.
(a) In the Cash Book as it was dishonoured after 31st Dec.
(b) In Bank Reconciliation Statement it is included in the adjustment
(Rs. 3,100-2,500)
Methodology Suggested
Teachers are suggested to show the actual Bank Statement to students and
the topic can be explained through discussion and Project Method.
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CHAPTER-5
LEDGER AND TRIAL BALANCE
LEARNING OBJECTIVES
After studying this chapter Students will be able to tell:
Meaning and Importance of Ledger.
Format of Ledger.
Posting from Journal.
Postings from Cash Book and other Subsidiary Books.
Closing and Balancing of Ledger Accounts.
Trial Balance — Meaning, objectives and Preparation.
LEDGER
Meaning : After recording the business transactions in the Journal or
special purpose Subsidiary Books, the next step is to transfer the entries to the
respective accounts in the Ledger. Ledger is a book where all the transactions
related to a particular account are collected at one place.
Definition : The Ledger is the main or Principal book of accounts in
which all the business transactions would ultimately find their place under
various accounts in a duly classified form.
Utility of Ledger
To know the collective effect of all the transactions pertaining to one
particular account.
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By this classification/collective effect, we are able to know the following—
It provides complete information about all accounts.
It provides position of Assets and Liabilities.
It facilitates to prepare Trial Balance.
Important : Ledger is also called the Principal Book of Accounts
Performa for Ledger
Each ledger account is divided into two equal parts.
Left Hand Side Debit side (Dr.)
Right Hand Side Credit side (Cr.)
Name of the Account
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
(Rs.) (Rs.)
Posting in the Ledger : This will be dealt separately from Journal Entries and
each Subsidiary Book.
Case I : Posting from Journal Entries
If an account is debited in the journal entry, the posting in the ledger
should be made on the debit side of that particular account. In the
particulars column the name of the other account (which has been
credited in the Journal entry) should be written for reference.
For the A/c credited in the Journal entry, the posting in the ledger
should be made on the credit side of that particular A/c. In the particulars
column, the name of the other account that has been debited (in the
Journal entry) is written for reference.
Important
‘To’ is written before the A/cs which appear on the debit side of Ledger
“By” is written before the A/cs appearing on the credit side Ledger.
Use of these words ‘To’ and ‘By’ is optional.
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Example 1 : Simple Journal Entry
On 1st August 2013, goods are sold for cash Rs. 12,000.
Solution :
Journal Entry
Date Particulars Dr. (Rs.) Cr. (Rs.)
2013 Cash A/c Dr. 12,000
Aug., 1 To Sales A/c 12,000
(For cash sales)
Ledger A/c
Dr. Cash A/c (extract) Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
Aug.1 To Sales A/c 12,000
Sales A/c (extract)
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
Aug. 1 To Sales A/c 12,000
Example 2 : Compound Journal Entry
Received Rs 14,000 in full settlement of a debt of Rs. 15,000 from Ram
on Aug 8, 2013.
Solution Journal Entry
Date Particulars Dr. (Rs.) Cr. (Rs.)
2013 Cash A/c Dr. 14,000
Aug. 8 Discount Allowed A/C Dr. 1,000
To Ram 15,000
(Cash received and discount allowed)
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Ledger A/c
Cash Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
Aug.8 To Ram 14,000
Discount Allowed Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
Aug.8 To Ram 10,000
Ram’s Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
Aug.8 By Cash A/c 14,000
By Discount 1,000
Allowed A/c
Case II : Ledger Postings from Cash Book
Important Points
(1) Cash Book itself serves as a cash A/c also, therefore when cash book
is maintained, cash A/c is not opened in the ledger.
(2) When Bank column is maintained in the Cash Book, Bank A/c is also
not opened in the ledger. The Bank column itself serves the purpose of
Bank A/c.
(3) Opening and closing balances of Cash Book will not be entered in the
ledger.
(4) As Cash Book serves the purpose of Cash/Bank A/c, it means that,
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only the second A/c (other than Cash A/c or Bank A/c) is to be opened
in the ledger and posting is to be made for each entry in the Cash Book.
Rules of Posting
(a) Posting from the Debit Side of Cash Book
Entries appearing on the debit side of Cash Book are to be posted to
the Credit Side of respective accounts in the Ledger by writing the
words.
‘By Cash A/c’ if it is from the Cash Column
By Bank A/c if it is from the Bank Column.
(b) Posting from the Credit Side of Cash Book
‘By Cash A/c’ if it is from the Cash Column
‘By Bank A/c’ if it is from the Bank Column
(c) All contra entries marked ‘C’ are ignored while posting from the
Cash Book to the Ledger because double aspect of such transactions
is completed in the Cash Book itself.
Example : Given some Cash Book entries Post them into ledger Accounts.
Date Particulars Vr. L.F. Cash Bank Date Particulars Vr. L.F. Cash Bank
(Rs.) (Rs.) (Rs.) (Rs.)
2013 2013
Jan 10 To Capital 40,000 - Jan,12 By Purchases 5,000 -
A/c A/c
Jan 15 To Cash A/c C - 10,000 Jan, 15 By Bank A/c C 10,000 -
Jan 22 To Cash A/c 3,000 - Jan, 25 By Sumit - 4,500
Jan 28 To Anil - 2,900 Jan, 31 By Balance C/d 28,000 8,400
43,000 12,900 43,000 12,900
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Solution:
15th Jan. entry will not be posted (Contra Entry).
Closing Balance will not be posted in the ledger.
Capital Account
Dr. Cr.
Date Particulars J.F. Amt. Date Particulars J.F. Amt..
Rs. Rs.
2013
Jan. 10 By Cash A/c 40,000
Sales Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
Jan. 22 By Cash A/c 3,000
Anil’s Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
Jan. 28 By Bank A/c 2,900
Purchases Account
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
Jan.12 To Cash A/c 5,000
Sumit Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
Jan.,25 To Bank A/c 4,500
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Case III : Ledger posting from Purchases book
Journal Entry for Credit Purchases is
Purchases A/c Dr
To Supplier
Therefore the rules of posting from Purchases Book are.
1. The total of the Purchase Book will be posted to the Debit side of
Purchase A/c and the words “To Sundries as per Purchase Book”
will be written in the particulars column.
2. Each of the Supplier’s A/c will be Credited and the words. “By
Purchases A/c” will be written in the particulars column.
Example :
Purchases Book
Date Particulars Inv. No. L.F. Detail Total Amount
(Rs.) (Rs.)
2013
June 4 Sahil & Co. 10,000
June 14 Geeta Industries 20,000
Less : Trade Discount 20% (4,000) 16,000
June 26 Vijay & Co. 12,000
Less : 20% Trade Discount (2,400) 9,600
June 30 Purchases A/c Dr 35,600
Solution: LEDGER A/cs
Purchases Account
Dr. Cr.
Date Particulars J.F. Amt. Date Particulars J.F. Amt.
Rs. Rs.
2013
Jun.30 To Sundries as 35,600
Per Purchases
Book
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Sahil & Co.
Dr. Cr.
Date Particulars J.F. Amt. Date Particulars J.F. Amt.
Rs. Rs.
2013
June 4 By Purchases A/c 10,000
Geeta Industries
Dr. Cr.
Date Particulars J.F. Amt. Date Particulars J.F. Amt.
Rs. Rs.
2013
June 14 By Purchases A/c 16,000
Vijay & Co.
Dr. Cr.
Date Particulars J.F. Amt. Date Particulars J.F. Amt.
Rs. Rs.
2013
June 26 By Purchases A/c 9,600
Case IV : Ledger Posting from Sales Book
Journal Entry for Credit sales is
Customer Dr.
To Sales A/c
Hence rules for posting from sales Book are
1. Total of the Sales book will be posted to the credit side of sales A/
c by writing the words “By Sundries as per Sales Book”
2. Customer’s personal A/cs are debited by writing the words “To Sales
A/c”
Case V : Ledger Posting from Purchase Return Book
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Journal Entry for purchase Return is
Personal A/c of Supplier Dr.
To Purchase Returns A/c
Hence the rules for posting are
1. Supplier’s A/c (to whom the goods are returned) is debited by writing
the words “To Purchase Return A/c”)
2. The total of the Purchases return Book is credited to the Purchases
Return A/c by writing the words “By Sundries as per Purchases Return
Book”.
Case VI : Ledger Postings of Sales Returns Book
Journal Entry for the Sales Return is-
Sales Returns A/c Dr.
To Customer
Hence the Rules for Posting are
1. Individual Customer’s A/cs by whom the goods are returned are
Credited by writing the words “By Sales Return A/c.”
2. The total of the Sales Returns Book is posted to the Debit of Sales
Returns A/c by writing the words. “To Sundries as per Sales Returns
Book”.
CLOSING AND BALANCING OF ACCOUNT
Normally after every month or whenever a businessman is interested in
knowing the position of various A/cs, the accounts are balanced. Various steps
for this purposes are:
1. Debit and Credit sides of each A/c are totalled.
2. The difference between the two sides is inserted on the side which
is shorter so as to make their totals equal.
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3. The words ‘Balance C/d’ i.e., the balance carried down and written
against the amount of difference.
4. In the next period, the balance is brought down on the other side by
writing the words ‘Balance b/d’.
5. If the Debit side exceeds the Credit Sides the difference is a Debit
Balance where as.
6. If the Credit side exceeds the Debit side the difference is a Credit
Balance.
Important
1. Debit Balance of a Personal A/c means the person is a Debtor of the
firm whereas Credit Balance of a Personal A/c indicates that the person
is a Creditor of the firm.
2. Real A/cs (which include Cash and all other Assets A/cs) will usually
show Debit Balances.
3. Nominal A/cs (A/cs of Income and Expenses) are transferred to Trading
and Profit and Loss A/c of the firm at the end of the Accounting
Period.
4. Debit Balance of any A/c means an Asset or an Expense whereas
Credit Balance means a liability, Capital or Income earned.
TRIAL BALANCE
I. Meaning : When posting of all the transactions into the Ledger is
completed and accounts are balanced off, then the balance of each
account is put on a list called Trial Balance.
II. Definition : Trial Balance is the list of debit and credit balances taken
out from ledger. “It also includes the balances of Cash and bank taken
from the Cash Book”.
III. Preparation : Steps (Only Balance Method)
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(1) Ledger A/cs which shows a debit balance is put on the Debit
side of the trial balance.
(2) The A/c Showing credit balance is put on the Credit side of
Trial Balance.
(3) Accounts which shows no balance i.e. whose Debit and Credit
totals are equal are not entered in Trial Balance.
(4) Then the two sides of the Trial Balance are totalled. If they are
equal it is assumed that there is no arithmetical error in the
posting and balancing of Ledger A/cs.
Objectives or Functions of Trial Balance
It helps in ascertaining the arithmetic accuracy of ledger accounts.
Helps in locating errors.
Provides the summary of Ledger A/cs.
Helps in the preparation of Final A/cs.
Recording in the journal and Subsidiary Books, Posting into the
Ledger and Preparation of Trial Balance can be clearly understood with
the help of the example given on next pages.
Problem : Enter the following transactions in proper Subsidiary Books, post
them into Ledger Accounts, balance the accounts and prepare a Trial Balance,
2013
Jun.1 Assets : Cash in hand Rs. 50,000; Debtors : Amit and Co. Rs.
15,000, Sumit Bros. Rs. 30,000, Stock Rs. 1,75,000, Machinery Rs.
1,20,000, Furniture 40,000.
Liabilities : Bank overdraft Rs. 33,000, Creditors : Viral and Co. Rs. 24,000,
Vishal Rs. 16,000.
Jun. 2 Purchased from Ramesh and Sons goods of the list price of
Rs. 20,000 at 10% trade discount.
Jun. 5 Returned to Ramesh & Sons goods of the list price of Rs. 2,000.
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Jun.10 Issued a cheque to Ramesh and Sons in full settlement of their
account.
Jun.12 Solid to Amit and Co., goods worth Rs. 25,000.
Jun.15 Received cash Rs. 10,000 and cheque for Rs. 8,000 from Amit and
Co. The cheque was immediately deposited into the bank.
Jun.16 Withdraw for personal use cash Rs. 5,000 and goods for Rs. 3,000.
Jun.19 Sold to Mohit Bros., goods for Rs. 16,000.
Jun.20 Cash purchases Rs. 15,000.
Jun.22 Withdraw from bank for office use Rs. 10,000.
Jun.23 Purchased from Vishal goods valued Rs. 24,000.
Jun.24 Amit and Co. returned goods worth Rs. 2,000.
Jun.25 Received from Mohit Bros. Rs. 10,000.
Jun.27 Paid by cheque, Rent Rs. 2,800.
Jun.27 Received Commission in Cash Rs. 800.
Jun.30 Paid salaries Rs. 5,000.
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/d5
0,0
00
-Ju
ne
1*B
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alan
ce b
/d-
33
,00
0
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e 1
5T
o A
mit
& C
o.
10
,00
08
,00
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ne
10
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ames
& S
ons
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0
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e 2
2*T
o B
ank
A/c
C1
0,0
00
-Ju
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By D
raw
ings
A/c
5,0
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o M
oh
it B
roth
ers
10
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Jun
e 2
0B
y P
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es A
/c15
,00
0-
Jun
e 2
7T
o C
om
mis
sion
A/c
80
0-
Jun
e 2
2*B
y C
ash
A/c
C-
10
,00
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Jun
e 2
7B
y R
ent
A/c
-2,8
00
Jun
e 3
0T
o B
alan
ce C
/d-
54
,00
0Ju
ne
30
By S
alar
ies
A/c
5,0
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alan
ce C
/d55
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0-
To
tal
80
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06
2,0
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To
tal
80
,80
062
,00
0
July
1T
o B
alan
ce b
/d5
5,8
00
July
1*B
y B
alan
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(Ban
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Note
:
1.
Entr
ies
mar
ked
wit
h *
wil
l not
be
post
ed a
ny w
her
e in
the
ledger
.
2.
Clo
sing B
alan
ces
of
Cas
h a
nd B
ank w
ill
be
show
n i
n t
he
Tri
al B
alan
ce.
3.
All
oth
er A
/cs
show
n i
n t
he
Deb
it s
ide
wil
l be
cred
ited
& A
ll o
ther
A/c
s sh
ow
n i
n t
he
Cre
dit
sid
e w
ill
be
deb
ited
.
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Purchases Book
Date Name of the Supplier Inv. No. L.F. Detail Total Amount
(Account to be Credited) (Rs.) (Rs.)
2013
June 2 Ramesh & Sons 20,000
Less Trade Discount 10% 2,000 18,000
June 23 Vishal 24,000
June 30 Purchases A/c Dr. 42,000
Sales Book
Date Name of the Supplier Inv. No. L.F. Detail Total Amount
(Account to be Credited) (Rs.) (Rs.)
2013
June 12 Amit & Co. 25,000
June 19 Mohit Bros. 16,000
June 30 Sales A/c Cr. 41,000
Sales Return Book
Date Name of the Supplier Inv. No. L.F. Detail Total Amount
(Account to be Credited) (Rs.) (Rs.)
2013
June 24 Amit & Co. 2,000
June 30 Sales Return A/c Dr. 2,000
Purchases Return Book
Date Name of the Supplier Inv. No. L.F. Detail Total Amount
(Account to be Credited) (Rs.) (Rs.)
2013
June 5 Ramesh & Sons 2,000
Less Trade Discount 10% 200 1,800
June 30 Purchases Return A/c Cr. 1,800
Posting of opening Entries :
1. Fist of all opening Journal Entry is done in the Journal proper.
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2. All Assets A/cs are Debited and Liabilities A/cs are Credited. Difference
between the totals of the two sides is the Capital.
Important : Besides opening Journal entries, any transaction which is not
covered under any of the Subsidiary Book is recorded in Journal proper.
Journal Proper
Date Particulars L.F. Amount. Cr. Rs.
Dr. Cr.
2013
June 1 Cash A/c Dr 50,000
Amit & Co. Dr 15,000
Sumit Brothers Dr 30,000
Stock A/c Dr 1,75000
Machinery A/c Dr 1,20,000
Furniture A/c Dr 40,000
To Bank (Overdraft) A/c 33,000
To Virat & Co. 24,000
To Vishal 16,000
To Capital A/c (Balancing fig) 3,57,000
(opening Balances, brought forward
from the previous years books)
June 16 Drawings A/c Dr. 3,000
To Purchases A/c 3,000
(Goods withdrawn for personal use)
Ledger Accounts
Amit & Co.
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
Jun.1 To Balance b/d 15,000 June 15 By Cash A/c 10,000
Jun.12 To Sales A/c 25,000 June 15 By Bank A/c 8,000
June 24 By Sale Return A/c 2,000
June 30 By Balance c/d 20,000
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40,000 40,000
July 1 To Balance b/d* 20,000
Sumit Bros.
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
June 1 To Balance b/d* 30,000
Stock Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
June 1 To Balance b/d* 1,75,000
Machinery Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
June 1 To Balance b/d 1,20,000 June 30 By Balance/d 1,20,000
1,20,000 1,20,000
July 1 To Balance b/d* 1,20,000
Furniture Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
June 1 To Balance b/d 40,000 June 30 By Balance c/d 40,000
July 1 To Balance b/d 40,000 40,000
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Virat & Co.
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
June 1 To Balance b/d 24,000
Balance on June 30th is Nil in this A/c (Virat & Co.) Vishal’s A/c
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
June 1 By Balance A/c 16,000
Jun.30 To Balance c/d 40,000 June 23 By Purchases A/c 24,000
40,000 40,000
July 1 By Balance b/d* 40,000
Capital Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
Jun.30 To Balance c/d 3,27,000 June 1 By Balance b/d 3,27,000
July 1 By Balance b/d 3,27,000
Drawings Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
Jun.16 To Cash A/c 5,000 June 30 By Balance b/d 8,000
Jun.16 To Purchases A/c 3,000
8,000 8,000
July 1 To Balance b/d* 8,000
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Ramesh & Sons
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
June 5 To Purchase 1,800 June 2 By Purchase A/c 18,000
Return A/c
Jun.10 To Bank A/c 16,200
18,000 18,000
Purchases Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
Jun.20 To Cash A/c 15,000 June 16 By Drawings A/c 3,000
Jun.30 To Sundries as per 42,000
Purchase Book July 30 By Balance c/d 54,000
57,000 57,000
July 1 To Balance b/d* 54,000
Mohit Brothers
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
Jun.19 To Sales A/c 16,000 June 25 By Cash A/c 10,000
June 30 By Balance c/d 6,000
16,000 16,000
July 1 To Balance b/d* 6,000
Rent Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
Jun.27 To Bank A/c 2,800 June 30 By Balance c/d 2,800
Jun.30 To Balance b/d* 2,800
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Commission Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
June 27 By Cash A/c 800
Salaries Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013 2013
Jun.30 To Cash A/c 5,000
Sales Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
June 30 By Sundries as
per Sales Book 41,000
Sales Return Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
Jun.30 To Sundries as
per Sales Return
Book 2,000
Purchase Return Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2013
June 30 By Sundries as
per Purchase
Return Book 1,800
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TRIAL BALANCE
as on 30th June, 2011
Name of the Accounts L.F Debit Credit
Balances Balances
(Rs.) (Rs.)
Cash A/c 55,800 –
Bank (overdraft) A/c – 54,000
Amit & Co. 20,000 –
Stock A/c 1,75,000 –
Machinery A/c 1,20,000 –
Furniture A/c 40,000 –
Vishal’s A/c – 15,000
Capital A/c – 3,57,000
Drawings A/c 8,000 –
Purchases A/c 54,000 –
Mohit Brothers 6,000 –
Rent A/c 2,800 –
Commission A/c – 800
Salaries A/c 5,000 –
Sales A/c – 41,000
Sales Return A/c 2,000 –
Purchase Return A/c – 1,800
Sumit Brothers 30,000 –
Virat & Co. – 24,000
Vishal – 25,000
Total 5,18,600 5,18,600
Suspense Account :
When Trial Balance does not agree, then first of all we try to locate the
errors. Sometimes, inspite of the best efforts, all the errors are not located and
the Trial Balance does not tally. Then in order to avoid delay in the preparation
of final accounts, a new account is opened which is known as “Suspense
Account” Difference in Trial Balance is posted to this Account.
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1. If there is Excess Debit Difference is posted
in the Trial Balance to the Credit side of Suspense A/c
2. If there is Excess Credit Difference is posted
in the Trial Balance to the Debit side of Suspense A/c.
Example :
S. Trial Balance Difference Posted to the Suspense A/c?
No. Dr. Total (Cr. Total) (Rs.) (Debit Side of Suspense A/c
(Rs.) (Rs.) (Rs.)
1. 2,25,00 2,16,500 8,500 Credit Side of Suspense A/c
(Excess Debit)
2. 2,16,500 2,25,000 8,500 Debit Side of Suspense A/c
(Excess Debit)
Closing of Suspense A/c
The errors which led to the difference still remains to have to be located.
These errors will be rectified through Suspense A/c (One sided errors)
which will be explained in the topic Rectification of Errors.
When all the errors are rectified, this Account closes down automatically.
If the difference in Trial Balance persist, it is shown in the Balance
Sheet.
(a) Debit Balance of Suspense Account is shown in the Asset Side
of the Balance Sheet.
(b) Credit Balance of Suspense Account is shown in the Liability
Side of the Balance Sheet.
Suggested Methodology
1. Explanation and Illustration Method.
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CHAPTER-6
DEPRECIATION, PROVISIONS
AND RESERVES
LEARNING OBJECTIVES
After studying this lesson you will be able to:
State the meaning and concept of depreciation.
Explain the need and factors affecting depreciation.
Explain the methods of charging depreciation.
Show the Accounting Treatment of Depreciation.
State the meaning of Provision and Reserve.
Differentiate between Provision and Reserve.
Teaching Methods
Teachers are advised to use various examples from daily life in order to
clear the concept of depreciation.
Depreciation : Concept
Fixed assets are held on a long term basis and used to generate periodic
revenue. That portion of assets, which is believed to have been consumed or
expired to earn the revenue, needs to be charged as cost. Such an appropriate
proportion of the cost of fixed assets is called Depreciation.
Business enterprises require fixed assets for their business operations such
as furniture and fixtures, office equipments, plant and machinery, motor vehicles,
land and building etc. In the process of converting Raw material into finished
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products, the fixed assets depreciate in value over a period of time, i.e. its
useful life.
In other words, the process of allocation of the cost of a fixed asset over
its useful life is known as depreciation.
Need or objectives of providing Depreciation
1. Ascertaining true profit or loss :
(i) The true profit of an enterprise can be ascertained when all
costs incurred for the purpose of earning revenues have been
debited to the profit and loss account.
(ii) Fall in the value of assets used in business operations is a part
of the cost and should be shown in the profit and loss account
of concerned accounting period.
(iii) Keeping this in view, depreciation must be debited to profit &
loss account, since loss in value of fixed assets is also an expense
like other expenses.
2. Presentation of True and Fair value of assets : If depreciation is not
provided, the value of assets shown in Balance sheet will not present
the true and fair value of assets because assets are shown at the cost
price but actual value is less than cost price of the assets.
3. To ascertain the accurate cost of the production : Depreciation is an
item of expense, the correct cost of production cannot be calculated
unless it is also taken consideration. Hence, depreciation must be
provided to ascertain the correct cost of production.
4. Computation of correct income tax :
(i) Income tax of an enterprise is determined after charging all the
costs of production.
(ii) If depreciation is not charged, the profits will be higher and the
income tax will also be higher.
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(iii) If depreciation is charged, Tax liability is reduced.
5. Provision of funds and replacement of assets : Depreciation is a non
cash expense. So that amount of depreciation charged to profit and loss
accounts is retained in business every year. These funds are available
for replacement of the assets when its useful life is over.
Methods of providing depreciation
1. Straight line method
(i) This method is also known as ‘original cost method’
(ii) Under this method, depreciation is charged at fixed percentage
on the original cost of the asset, throughout its estimated life.
(iii) Under this method of the amount of depreciation is uniform
from year to year. That is why this method is also known as
‘Fixed Installment Method’ or ‘Equal installment method’.
(iv) The annual amount of depreciation can be easily calculated by
the following formula:
Original cost – Estimated scrap value
Annual DepreciationEstimated life in Years
For example : A firm purchases a machine for Rs. 2,25,000 on April 1, 2013.
The expected life of this machine is 5 years. After 5 years the scrap of this
machine would be realized Rs. 25,000. Under straight line method, the amount
of depreciation can be calculated as under :
2, 25, 000 – 25, 000Annual Depreciation
5
= Rs. 40,000
Hence Rs. 40,000 will be charged every year as depreciation on this
machine.
2. Diminishing balance method : Under this method, depreciation is
charged as a fixed percentage on the book value of the asset every
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year. In first year the depreciation will be charged at the end of the year,
on the total cost of the asset.
For example : A machine is purchased for Rs. 2,00,000 on April 1, 2009. It
is decided to charge depreciation on this machine @ 10% p.a. The amounts of
depreciation for first four years by using both the methods (Straight line
method and Diminishing balance method) are shown as under :
Straight Line Method Diminishing balance method
Year Book Value Dep @ 10% Book Value Dep @ 10%
2009-10 20,000 2,000 20,000 2,000
2010-11 18,000 (20,000-2,000) 2,000 18,000 (20,000-2,000) 1,800
2011-12 16,000 (18,000-2,000) 2,000 16,200 (18,000-1,800) 1,620
2012-13 14,000 (16,000-2,000) 2,000 14,580 (16,200-1,620) 1,458
Hence, in Straight Line method, amount of depreciation is same but in
Diminishing Balance Method amount of depreciation goes on decreasing
every year.
Illustration 1 : On January 1, 2011, a firm bought a machine for Rs. 90,000
and spend Rs. 6,000 on its installation and Rs. 4,000 on its carriage. It is
decided to charge depreciation @ 10% on straight @ 10% on straight line
method. Books are closed on December 31st each year. Show Machinery
Account for the year 2011 to 2013.
Solution :Machinery Account
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2012 2012
Jan 1 To Bank A/c 90,000 Dec 31 By Depreciation A/c 10,000
Jan 1 To Cash A/c 6,000 Dec 31 By Balance c/d 90,000
Jan 1 To Cash a/c 4,000
10,000 1,00,000
2012 2012
Jan 1 To Balance b/d 90,000 Dec 31 By Depreciation A/c 10,000
Dec 31 By Balance c/d 80,000
90,000 90,000
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2013 2013
Jan 1 To Balance b/d 80,000 Dec 31 By Depreciation A/c 10,000
Dec 31 By Balance c/d 70,000
80,000 80,000
Illustration 2 : On the basis of information given in Illustration I, show
machinery Account for the year 2011 to 2013 if depreciation is charged @
10% on diminishing balance method.
Solution :
Dr. Machinery Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2011
Jan 1 To Bank A/c 90,000 Dec 31 By Depreciation A/c 10,000
Jan 1 To Cash a/c 6,000 Dec 31 By Balance c/d 90,000
Jan 1 To Cash a/c 4,000
1,00,000 1,00,000
2012 2012
Jan 1 To Balance b/d 90,000 Dec 31 By Depreciation A/c 9,000
Dec 31 By Balance c/d 81,000
90,000 90,000
2013 2013
Jan 1 To Balance c/d 81,000 Dec 31 By Depreciation A/c 8,100
Dec 31 By Balance c/d 72,900
81,000 81,000
Illustration 3 : On April, 1, 2011 Kannu bought Machinery costing Rs. 80,000.
On only 1, 2013 Machinery was sold for Rs. 40,000. Prepare Machinery Account
assuming depreciation was charged @ 10% per annum on March 31, every
year on the basis of Original cost method.
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Solution :
Dr. Machinery Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2012
Apr 1 To Bank A/c 80,000 Mar 31 By Depreciation A/c 8,000
Mar 31 By Balance c/d 72,000
80,000 80,000
2012 2013
Apr 1 To Balance b/d 72,000 Mar 31 By Depreciation A/c 8,000
Mar 31 By Balance c/d 64,000
72,000 72,000
2013 2013
Apr 1 To Balance b/d 64,000 Jul. 1 By Bank A/c 40,000
Jul. 1 By Depreciation A/c 2,000
Jul. 1 By Loss on sale
of Mach. A/c 22,000
64,000 64,000
Illustration 4
On the basis of information given in Illustration 3, prepare Machinery
Account assuming depreciation was charged @ 15% per annum on reducing
installment method.
Solution
Dr. Machinery Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2012
Apr 1 To Bank A/c 80,000 Mar 31 By Depreciation A/c 12,000
Mar 31 By Balance c/d 68,000
80,000 80,000
2012 2013
Apr 1 To Balance b/d 68,000 Mar 31 By Depreciation A/c 10,200
Mar 31 By Balance c/d 57,800
68,000 68,000
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2013 2013
Apr 1 To Balance b/d 57,800 Jul 1 By Bank A/c 40,000
Jul 1 By Depreciation A/c 2168
Jul 1 By Loss on sale A/c 15,632
57,800 57,800
There is another treatment for charging Depreciation. In this treatment,
Provision for Depreciation Account is opened and depreciation charged in this
account instead of Asset Account.
In this treatment the balance of Asset Account remains same throughout
its useful life. Provision for Depreciation is shown in the liabilities side of
Balance Sheet.
Illustration 5 : Vinod limited purchased a machine for Rs. 2,50,000 including
installation cost on January 1, 2011. On October 1, 2013, machine was sold
for Rs. 1,50,000. Depreciation was provided @ 10% p.a. on Fixed Installment
method and accounts are closed on December 31, each year.
Show the Machinery Account and Provision for Depreciation Account for
the year, 2011 to 2013.
Solution :
Dr. Machinery Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2011
Jan 1 To Bank A/c 2,50,000 Dec 31 By Balance c/d 2,50,000
2012 2012
Jan 1 To Balance b/d 2,50,000 Dec 31 By Balance c/d 2,50,000
2013 2013
Jan 1 To Balance b/d 2,50,000 Oct 1 By Provision for
Dep. A/c 68,750
Oct 1 By Bank A/c 1,50,000
Oct 1 By Profit & Loss
A/c 31,250
250,000 2,50,000
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Dr. Provision for Depreciation Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2011
Dec.31 To Balance c/d 25,000 Dec 31 By Depreciation A/c 25,000
2012 2012
Dec.31 To Balance c/d 50,000 Jan 1 By Balance b/d 25,000
Dec 31 By Depreciation A/c 25,000
50,000 50,000
2013 2013
Oct 1 To Machinery 68,750 Jan 1 By Balance b/d 50,000
Oct 1 By Depreciation A/c 18,750
68,750 68,750
Important Point : Total Depreciation charged on Machinery from Jan 1, 2011
to Oct 1, 2013 : Rs. 25,000 + Rs. 25,000 + Rs. 18,750 = Rs. 68,750.
Illustration 6 : On the basis of information given in Illustration 5, show the
Machinery Account and Provision for Depreciation is provided @ 20% p.a. on
Written Down Value Method.
Solution :
Dr. Machinery Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2011
Jan 1 To Bank A/c 2,50,000 Dec 31 By Balance c/d 2,50,000
2012 2012
Jan 1 To Balance b/d 2,50,000 Dec 31 By Balance c/d 2,50,000
2013 2013
Jan 1 To Balance b/d 2,50,000 Oct 1 By Provision for
Dep. A/c 1,14,000
Oct 1 To Profit & Loss A/c 14,000 Oct 1 By Bank A/c 1,50,000
264,000 264,000
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Dr. Provision for Depreciation Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2010 2011
Dec.31 To Balance c/d 25,000 Dec 31 By Depreciation A/c 25,000
2012 2012
Dec.31 To Balance c/d 90,000 Jan 1 By Balance b/d 25,000
Dec 31 By Depreciation A/c 40,000
90,000 90,000
2013 2013
Oct. 1 To Machinery 1,14,000 Jan 1 By Balance b/d 90,000
Oct 1 By Depreciation A/c 24,000
1,14,000 1,14,000
Important Point : Total Depreciation charged on Machinery from Jan 1, 2010
to Oct 1, 2012 : Rs. 50,000 + Rs. 40,000 + 24,000 = Rs 1,14,000.
Illustration 7 : A Company purchased a machine for Rs. 40,000 on January
1, 2011. On July 1, 2012 it was sold for Rs. 13,000. The company charges
depreciation @ 10% p.a. on straight line method.
Show Machinery Account, Provision for Depreciation Account and
Machinery Disposal account if books are closed on December 31 each year.
Solution :
Dr. Machinery Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2011
Jan 1 To Bank A/c 40,000 Dec 31 By Balance c/d 40,000
2012 2012
Jan 1 To Balance b/d 40,000 July 1 By Machinery
Disposal A/c 40,000
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Dr. Provision for Depreciation Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2011
Dec.31 To Balance c/d 4,000 Dec 31 By Depreciation A/c 4,000
2012 2012
Dec.31 To Machinery 6,000 Jan 1 By Balance b/d 4,000
Disposal A/c
July 1 By Depreciation A/c 2,000
6,000 6,000
Dr. Machinery Disposal Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2012 2012
July 1 To Machinery A/c 40,000 Jul 1 By Prov. For Dep.
A/c 6,000
July 1 By Cash A/c 13,000
July 1 By profit & loss A/c 21,000
40,000 40,000
Important Point : Total Depreciation charged on Machine : Rs. 4,000 + Rs.
2,000 = Rs. 6,000
Illustration 8 : On July 1, 2011, Arora Auto Limited purchased Furniture for
Rs. 1,00,000 and spent Rs. 4,000 towards its installation. On April 1, 2012, the
Furniture was disposed off for Rs. 59,820 and on the same day furniture
costing Rs. 1,60,000 were purchased.
Show the Furniture Account, Provision for Depreciation Account and
Furniture Disposal Account for the year 2011, 2012 and 2013 if the rate of
Depreciation is 15% per annum by Diminishing Balance method.
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Solution :
Dr. Furniture Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2011
July 1 To Bank A/c 1,00,000 Dec 31 By Balance c/d 1,04,000
July 1 To Bank A/c 4,000
1,04,000 1,04,000
2012 2012
Jan 1 To Balance b/d 1,04,000 Apr 1 By Furniture
Disposal A/c 1,04,000
Apr 1 To Bank A/c 1,60,000 Dec 31 By Balance c/d 1,60,000
2,64,000 2,64,000
2010 2010
Jan 1 To Balance b/d 1,60,000 Dec 31 By Balance c/d 1,60,000
Dr. Provision for Depreciation Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2011 2011
Dec.31 To Balance c/d 7,800 Dec 31 By Depreciation A/c 7,800
2012 2012
Apr.1 To Furniture 11,408 Jan 1 By Balance b/d 7,800
Disposal A/c
To Balance c/d 18,000 Apr 1 By Depreciation A/c 3,608
Dec 31 By Depreciation A/c 18,000
29,408 29,408
2013 2013
Dec.31 To Balance c/d 39,300 Jan 1 By Balance b/d 18,000
Dec 31 By Depreciation A/c 21,300
39,300 39,300
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Dr. Furniture Disposal Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2012 2012
Apr 1 To Furniture A/c 1,04,000 Apr 1 By Prov. For Dep.
A/c 11,408
Apr 1 By Bank A/c 59,820
Apr 1 By profit & loss A/c 32,772
1,04,000 1.04,000
Important Point : Total Depreciation charged on Machinery sold : Rs. 7,800
+ Rs. 3,608 = Rs. 11,408.
Illustration 9 : A firm purchased on 1st January, 2011 certain Machinery for
Rs. 5,82,000 and spent Rs. 18,000 on its erection. On 1st July, 2011, additional
machinery costing Rs. 2,00,000 was purchased. On 1st July, 2013, the machinery
purchased on 1st January, 2011 was auctioned for Rs. 2,86,000 and a fresh
machinery for Rs. 4,00,000 was purchased on same date. Depreciation was
provided annually on 31st December at the rate of 10% on written down value
method. Prepare Machinery account from 2011 to 2013.
Solution :
Dr. Machinery Account Cr.
DateParticulars J.F. Rs. Date Particulars J.F. Rs.
2011 2011
Jan 1 To Bank A/c (i) 6,00,000 Dec 31 By Depreciation A/c
July 1 To Bank A/c (ii) 2,00,000 (i) (600,000×10/100) 60,000
(ii) (200,000×10/100×6/12)10,000 70,000
Dec 31 By Balance c/d
(5,40,000+1,90,000) 7,30,000
8,00,000 8,00,000
2012 2012
Jan 1 To Balance b/d Dec 31 By Depreciation A/c
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(5,40,000+1,90,000) 7,30,000 (i) (5,40,000×10/100) 54,000
(ii) (1,90,000510/100) 19,000 73,000
Dec 31 By Balance c/d
(4,86,000+1,71,000) 6,57,000
7,30,000 7,30,000
2013 2013
Jan 1 To Balance b/d July 1 By Bank A/c (sale) 2,86,000
(4,86,000+1,71,000) 6,57,000 By Dep.
July 1 To Bank A/c (iii) 4,00,000 (4,86,000×10/100×6/12) 24,300
By P&L A/c (loss) 1,75,700
Dec 31 By Dep. A/c
(ii)(1,71,000510/100) 17,100
(iii)(400,000510/10056/12) 20,000 37,100
By Balance c/d 5,33,900
10,57,000 10,57,000
Working Notes :
Cost of 1st Machine = Rs. 5,82,000 + Rs. 18,000 = Rs. 6,00,000
Profit/Loss on sale of 1st Machine = Cost on 1st July - Sale Value
(Rs. 4,86,000 – Rs. 24,300) Rs 4,61,700 – Rs. 2,86,000
Loss on Sale of Machine = Rs. 1,75,700
Illustration 10 : The following balances appear in the books of Sankalp on
01-01-2012
Machinery A/c Rs. 8,00,000
Provision for Depreciation a/c Rs. 3,18,000
On 01-01-2012 they decided to sell a machine for Rs. 34,500. This machine
was purchased for Rs. 1,20,000 on 01-01-2008.
Show the machinery A/c, Provision for Depreciation A/c for the year
ended Dec 31, 2012 assuming that depreciation was charged at 10% p.a. on
Written Down value method.
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Dr. Machinery Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2012 2012
Jan 1 To Balance b/d 8,00,000 Jan 1 By Bank A/c 34,500
Jan 1 By Provision for
Depreciation A/c 41,268
Jan 1 By Profit & Loss A/c 44,232
Dec 31 By Balance c/d 6,80,000
8,00,000 8,00,000
Dr. Provision for Depreciation Account Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2012 2012
Jan 1 To Machinery A/c 41,628 Jan 1 By Balance b/d 3,18,000
Dec 31 To Balance c/d 3,17,059 Dec 31 By Depreciation A/c 40,327
3,58,327 3,58,327
Working Notes :
Depreciation charged on Sold Machinery
Cost of the Machinery on 01-01-2008 1,20,000
Less : Depreciation on 31-12-2008 –12,000
Book Value on 01-01-2009 1,08,000
Less : Depreciation on 31-12-2009 –10,800
Book Value on 01-01-2010 97,000
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Less : Depreciation on 31-12-2010 –9,720
Book Value on 01-01-2011 87,480
Less : Depreciation on 31-12-2011 –8,748
Book Value on 01-01-2012 78,732
Loss on sale of Machinery
Cost of sale of Machinery 1,20,000
Less : Dep. Charged till Sale –41,268
(12,000+10,800+9,720+8,748)
Book Value on 01-01-2012 78,732
Less : Sale Price –34,500
Loss on sale of Machinery 44,232
Depreciation on Remaining Machinery
Cost of Remaining Machinery (800,000–120,000) 6,80,000
Less : Accumulated Depreciation thereon till 31-12-2011 –2,76,372
(318,000–41,268)
Book Value on 01-01-2012 4,03,628
Depreciation (403,628×10/100)=40,362.8 say 40,363
Provisions
Provision is to be made is respect of a liability, which is certain to
be incurred, but its accurate amount is not known.
It is charged in the Profit and loss Account on estimate basis. It
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should be clearly understood that if the amount of a known liability can
be determined with reasonable accuracy, it can not a provision.
Notes : Provision is a charge against profits it means provision has to be made
irrespective of business enterprise it earning enough profits or incurring losses.
Examples of Provisions : Provision for Depreciation on assets, Provision for
Repairs and Renewals of assets, Provision for Taxation, Provision for Discount
on Debtors, Provision for Bad and doubtful Debts.
Reserves
Reserves are the amount set aside out of profits. It is an appropriation
of profits and not a charge on the profits.
The amount of profit retained is used in the business when difficult
time comes. Since reserves are neither expenses nor losses, so these are
not charged to profit & loss Account rather these are debited to Profit
& Loss Appropriation Account which is prepared after Profit and Loss
Account.
Reserves are also known as ‘Plough Back of Profits’.
Reserves are created to strengthening the financial positions of the
business enterprise.
Examples are General Reserves, Dividend Equalization Reserve etc.
If the amount of reserve is invested outside the business then, it is
called ‘Reserve Fund’.
Creation of reserve does not reduce the net profit but only reduced
the divisible profits.
DIFFERENCE BETWEEN PROVISIONS AND RESERVE
Basis Provision Reserve
1. Meaning It is created to meet a It is created to strengthen the financial
known liability. position of business enterprise.
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2. Charge or Provisions are charge Reserve is an appropriate of profit.
Appropriation against profits.
3. Objective The object is to provide It is created to strengthen the but
for known liability cannot financial position and to meet unforeseen
be calculated accurately liability.
4. Effect on It is debited to the Profit Reserve reduces divisible profits.
Profit & Hence, profit is reduced.
Loss A/c
5. Creation Provisions are to be Reserve is created out of adequate
created even if there are are profits only.
insufficient profits.
6. Mode of Provisions are created by It is created through Profit & Loss
creation debiting the Profit & loss Appropriation Account.
account.
7. Investment It cannot be invested Reserve can be invested outside the
outside the business business.
8. Necessity Creation of provision is Its creation is not necessary.
necessary as per law. It is created as a matter of prudence.
Types of Reserve
General Reserve/Revenue Reserves : If the purpose of creating the
reserve is to meet any unforeseen contingency (Liability which is not known)
in future, the reserve is called ‘General Reserve’. These are retained for strength-
ening the financial position of the enterprise. These reserves are also known
as Revenue Reserves.
Specific Reserves : Specific reserves are those reserves which are created
for a specific purpose and can be utilized only for that purpose. ‘Dividend
Equalization Reserve’ and ‘Reserve for Replacement of Asset’ are the ex-
amples of Specific Reserve.
Capital Reserve : In addition to the normal profits, capital profits are
also earned in the business from many sources. Reserves created out of capital
profits which are.
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1. Not of recurring nature.
2. Not readily available for distribution as dividend among the
shareholders.
3. These reserve can be utilized for writing off capital losses.
Capital Reserves may be created out of profits such as Profit on sale
of any fixed asset, Profit on revaluation of assets, Profit from forfeiture of
shares, Profit prior to incorporation of company.
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CHAPTER-7
ACCOUNTING FOR BILLS OF EXCHANGE
Learning objectives
After studying this chapter, students shall be able to:
Explain the concept of Bill of Exchange and Promissory Note.
Distinction between Bill of Exchange and Promissory Note.
Define Important terms of Bill Exchange and Promissory Note.
Record the Accounting Treatment of Bill of Exchange under different
Circumstances
Suggested Methodology
Illustration-cum-Explanation Method.
A Bill of Exchange and Promissory Note both are legal Instruments which
facilitate the credit sale of goods by assuring the seller that the amount will be
recovered after a certain. Both of these are legal instruments under the
Negotiable Instruments Act, 1881.
BILL OF EXCHANGE
“A Bill of Exchange is an instrument in writing containing an unconditional
order signed by the maker, directing a certain person to pay a certain sum of
money only to, or the order of, a certain person or to the bearer of the
instrument.”
Section 5 of the Negotiable instrument Act, 1881
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Features of a Bill Exchange are
1. A Bill of Exchange must be in writing
2. It must contain an order (and note a request) to make payment.
3. The order of payment must be unconditional.
4. The amount of bill of exchange must be certain.
5. The date of payment should be certain.
6. It must be signed by the drawer of the bill.
7. It must be accepted by the drawee by signing on it.
8. The amount specified in the bill exchange in payable either on demand
on the expiry of a fixed period.
9. The amount specified in the bill is payable either to a certain person or
to his order or to the bearer of the bill.
10. It must be stamped as per legal requirements.
PARTIES TO A BILL OF EXCHANGE
1. Drawer : Drawer is the person who makes or writes the bill of exchange.
Drawer is a person who has granted credit to the person on whom the
bill of exchange is drawn. The drawer is entitled to receive money from
the drawee (acceptor).
2. Drawee : Drawee is the person on whom the bill of exchange is drawn
for acceptance. Drawee is the person whom credit has been granted by
the drawer. The drawee is liable to pay money to the creditor/drawer.,.
3. Payee : Payee is the person who receives the payment from the drawees.
Usually the drawer and the payee are the same person. In the following
cases, drawer and payee are two different persons.
(i) When the bill is discounted by the drawer from his bank-payee
in the bank.
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(ii) When the bill is endorsed by the drawer to his creditors, payee
is the endorsee.
Specimen of Bill of exchange
4Rs. 50,000 New Delhi6th August,2013
4Stamp
Three months after day pay to me or my order, the sum ofFifty thousand only
23 Value received
6
for
“Accepted,,
(Signed)
(Mukesh Chand.)(Signed)
ToMukesh ChandD-24, Sector-15Rohini Delhi-39
5SANT KANWAR151-, Sector-9Rohini Delhi-39
CONTENTS OF BILL OF EXCHANGE
1. Date : The date on which a bill is drawn, is written on the top right
corner of the bill. It helps in determining the date of maturity of the
bill.
2. Term/Tenure : Term specifies the time period for which a bill is written.
It should be specified in the body of the bill.
3. Amount : Amount in figure should be mentioned in the top lelf corner
and amount in words should be mentioned in body of the bill.
4. Stamp : Stamp of proper value depending upon the amount of bill
must be affixed on the bills of exchange.
5. Name of Parties : The name and addresses of the drawer and the
drawee should be mentioned in the bill of exchange.
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6. For Value Received : It means the bill has been issued in exchange of
some consideration. These words are very important because law does
not consider those agreements which have been made without
considerations.
ADVANTAGES OF BILL OF EXCHANGE
1. It helps in purchases and sales of goods on credit basis.
2. It is a legally valid Document in the eyes of law. It assures uneasier
recovery to the drawer if drawee fails to make the payments.
3. A Bill can be discounted from the bank before its date maturity. By
discounting with the bank, drawer can get the money before due date
if required.
4. It can be easily transferred from one person to another by endorsement.
5. It helps in recovery of debt without sending reminders to the debtor.
6. It assures the seller about the timely recovery of debt. So a drawer and
drawn can plan about its cash management.
PROMISSORY NOTE
A Promissory note is an instrument in writing (not beings a bank note or
a currency note) containing an unconditional undertaking signed by the maker
to pay a certain sum of money only or to the order of a certain person or to
be the bearer of the instrument.
FEATURES OF PROMISSORY NOTE
1. There must be an unconditional promise to pay a certain sum of money
on a certain date.
2. It must be signed by the maker.
3. The name of the payee must be mentioned on it.
4. It must be stamped according to its value.
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PARTIES TO PROMISSORY NOTE
1. The maker : The maker is the person who makes the promise to pay
the amount on a certain date. Maker of a bill must sign the promissory
note before giving it to the payee.
2. The Payee : The payee is the person who is entitled to get the payment
from the maker of promissory note. Payee is the person who has granted
the credit.
New Delh i7th Aug.2013
(Signed)Rajiv Verma95,Sector-16Rohini Delhi-85
GulabSingh18, Paschim ViharNew Delhi-63
To
Stamp
Rs. 2,00,000
Distinction between Bills of Exchange and Promissory Note:
Basis of difference Bills of Exchange Promissory Note
1. Drawer The Drawer is the creditor. The Drawer is the debtor.
2. No. Of Parties It has three parties namely: It has two parties namely:
• The drawer • The Maker
• The drawee • The payee
3. Order or It contains an order to It contains a promise to
Promise Make the payment. make the payment
4. Acceptance It is valid only when It does not require any
accepted by the drawee. acceptance from the drawee.
5. Payee It case of bill of exchange, Drawer or maker cannot
drawer can be the payee the payee of
of the bill Promissory note.
6. Noting It case of dishonour of bill Noting is not necessary
Noting becomes important. in case of dishonour of
7. Liability The liability of the drawer promissory note.
arises only if the drawee The liability of the drawer
fails to make payment (maker) is primary
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IMPORTANT TERMS
1. Term of Bill :.The period intervening between the date on which a bill
is drawn and the date on which it becomes due for payment is called
“Term of Bill’.
2. Due Date : Due date is the date on which the payment of the bill is
due.
(i) In case of ‘Bill at Sight’
Due date is the date on which a bill is presented for the payment
(ii) In case of ‘Bill after date’-
Due Date - Date of Drawing + Term of Bill.
(iii) In case of ‘Bill after sight’-
Due date - Date of Acceptance +Term of Bill.
3. Days of Grace : Drawee is allowed three extra days after the due
date of bill for making payments. Such 3 days are know as ‘Days of
Grace’. It is a custom to add the days of grace.
4. Date of Maturity : The date which comes after adding three days
of grace to the due date of a bill is called “Date of maturity’.
Illustration 1 : A bill of exchange for Rs. 25,000 is drawn by A on B on 1st
April, 2013 for 3 Months, B accepted the bill on 10th April, 2013.
Find the DUE DATE and DATE OF MATURITY if
Cash I : The bill is Bill After date
Cas II : The bill is Bill After Sight
Solution:
Due Date Date of Maturity
Case I -When the Bill is
“Bill After date” 1st July 2013 4th July, 2013
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Case II-When the Bill is
“Bill After Sight” 10th July 2013 13th July, 2013
• In case a bill is “Bill after Sight” term of bill starts from the date of
acceptance.
5. Discounting of Bill : When the bill is encashed from the bank before
its due date, it is known as discounting of bill. Bank deducts its charges
from the amount of bill and is disburses the balance amount.
Illustration 2 : Ram sold goods to shyam for Rs. 30,000 at credit on 1st April,
2013 Ram discounts the bill with his bank on 4th May 2013 @ 9% per annum
find out :
(i) The amount of discounting charges.
(ii) The amount that Ram will receive from his bank at the time of
discounting the bill.
Solution :
(i) Discounting Charges =
Amount of Bill Discounted Rate
100 Unexpired Period
9 230,000
100 12 Rs. 450
(ii) Ram will receive from his bank Rs. 29,550 (i.e. Rs.30,000–Rs. 450) at
the time of discounting the bill.
6. Endorsement of Bill : Endorsement of bill means the Process of
transferring the title of bill from the drawer or holder to their
creditors. The person transferring the title is called “ Endorser” and
the person to whom the bill is transferred called “Endorsee’. The
endorsee can further endorse the bill in favour of his creditors.
Endorsement is executed by putting the signature at the back of the
bill.
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7. Bill sent for Collection : It is a process when the bill is sent to bank
with instruction to keep the bill till maturity and collect its amount
from the acceptor on the date of maturity.
8. Dishonour of Bill : When the drawee (or acceptor) of the bill fails
to make payment of the bill on the date of maturity, it is called
Dishonour of Bill.
9. Noting of Bill : To obtain the proof of dishonour of a bill, it is re-sent
to the drawee through a legally authorized persons called Notary Public
charges a small fee for Providing this service known as Noting charges.
Noting charges are paid to the Notary Public first by the holder of
the bill but are ultimately recovered from the drawee, because he
is the person responsible for the dishonour.
10. Retirement of a Bill : When the drawee makes the payment of the
bill before its due date it is called ‘Retirement of a bill’. In such a
case, holder of the bill usually allow a certain amount as Rebate to the
drawee.
Amount of rebate is calculated at a fixed percentage for the unexpired
period only.
Illustration 3 : On 1st January, 2013 A sold good to B for Rs. 30,000 and
drew upon him a bill at 3 months for the amount. B accepted the bill and
returned it to A. On 4th March, Calculate the amount of Rebate.
Solution :
Rebate = Amount of Bill Rate
100 Unexpired Period
12 130,000
100 12
= Rs. 300
B will pay Rs. 29,700 (Rs 30,000–Rs.300) to A at the time of retiring the bill.
11. Renewal of a Bill : Sometimes, the drawee of a bill finds himself
unable to meet the bill on due date. To avoid dishonouring of bill, he
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may request the holder of the bill to cancel the original bill and draw
a new bill in place of old one. It the holder agrees, the old bill is
cancelled and a new hill with new terms is drawn on the drawee and
also accepted by him. This process is called ‘Renewal of a bill’.
In this case, Noting of the bill is not required as cancellation of the
bill is mutually agreed upon by both the parties of the bill.
Normally, the drawer charge interest for the period of new bill. The
interest may be paid in cash or may be added in the amount of new bill.
If any part payment is made at the time of renewal of a bill, interest is
calculated only on the outstanding amount.
Illustration 4 : Narender requests Rajnesh to renew his acceptance for
Rs. 25,000 for 3 month together with interest @ 18% p.a.
Calculate the amount of new bill drawn on Narender
Solution :
InterestRateAmount * Period of
Outstanding New Bill100
18 325,000 Rs.1,125
100 12
Amount of New Bill =Rs. 25,000 + Rs. 1,125
= Rs. 26,125
* Amount Outstanding = Amount of Bill cancelled- any part payment made
in cash at the time of renewal of bill
ACCOUNTING TREATMENT OF BILL TRANSACTIONS
A. On the Due Date bill is Honoured
The accounting treatment under this heading is based on the assumption
that bills duly honoured at maturity of the bill. The drawer can treat the bill
in the following ways :
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Case-I : Bill is retained by the drawer till date of maturity
Transaction In the books of In the books of
Drawer Dravee
1. When Goods Drawee Dr. Purchases A./c Dr.
are sold on Credit To Sales A.c To Drawer
(Being goods Sold (Being goods purchased
on credit)from Drawer)
2. When Bill Bills Receivable A/c Dr. Drawer Dr.
is Drawn To Drawee To Bills Payable A/c
(Being acceptance (Being acceptance
received from drawee) given to drawer)
3. When Bills is Cash/Bank A/c Dr. Bills Payable A./c Dr.
Honoured on To Bills To Cash/Bank A/c
date of Maturity Receivable A/c
(Being payment of Bill (Being payment of bill
received from Drawee) made to drawer)
Case- II When the bill is discounted from the Bank by the Drawer
Transaction In the books of In the books of
Drawer Dravee
1. When the bill Bank A.c Dr.
is discounted Discounting
from Bank Charges A/c Dr. No Entry
To Bills
Receivable A/c
(Being bill discounted
for the Bank
2. When the bill Bills Payable A/c Dr.
is honoured on No Entry To Cash/Bank A/c
date of maturity (Being the Payment of
bill made
Note :
• Discounting charges are always recorded (i.e. debited) in the books of
Drawer.
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• In the books of Drawee, there is no effect of discounting the bill.
Case III : When bill is endorsed in favour of a creditor
Transaction In the books of In the books of
Drawer/Endorser Dravee
1. When bill Endorsee Dr.
is endorsed To Bills
Receivable A/c No Entry
(Being bill receivable
endorsed)
2. When bill is Bills Payable A/c Dr.
Honoured on No Entry To Cash/Bank A/c
dated of maturity (Being the payment of bill
(made)
Transaction In the Books of Endorsee
1. When bill is endorsed Bills Receivable A/c Dr.
To Endorser
(Being bill received from debtor through
endorsement
2. When bill is honoured Cash/Bank A/c Dr.
on date of maturity To Bills Receivable
(Being Bill realised on date of maturity
Case- IV When Bill is sent to the Bank for collection
Transaction In the books of In the books of
Drawer Dravee
1. When bill is Bills Sent for
sent for Collection A/c Dr.
collection To Bills No Entry
to Bank Receivable A/c
(Being bill sent for collection)
2. When the Bank A/c Dr. Bill Payable A/c Dr.
amount is To Bill Sent To Cash/Bank A/c
realised on for Collection A/c (Being bill paid
Date of (Being the bill sent for on date maturity.)
Maturity collection realised on
Maturity)
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Note :
• There will be no effect in the books of Drawee either the bill is
discounted from the bank or endorsed to a creditor or sent to the bank
for collection. The drawee makes the payment in normal manner.
• It is only in the books of drawer where an additional entry is passed to
record the effect of the above transaction.
Illustration 5 : X sold goods to Y on 1st April, 2013 for Rs. 20,000 on credit
and drew upon him a bill for the same amount payable after 3 months. Y
accepted the bill and returned it to X. On the date of maturity bill was presented
to Y for the payment and he honoured it.
Pass the Journal Entries in the books of both the parties when:
Case I :Bill is retained by the X till the date of maturity.
Case II : Bill is discounted by X from his bank on 4th April @ 6% per annum.
Case III : Bill is endorsed in favour of Z on 4th May, 2013.
Case IV : Bill is sent to Bank for collection on 1st July, 2013.
Also record the Journal Entries in the books of Z (Case-III)
Solution :
In the book of X (Drawer)
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
April, 1 Y Dr. 20,000
To Sales A/c
(Being goods sold to Y on credit) 20,000
April, 1 Bills Receivable A/c Dr. 20,000
To Y
(Being acceptance received from Y) 20,000
Case-1 When bill is retained by X
till the date of maturity
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July, 4 Cash/Bank A/c Dr. 20,000
To Bills Receivable A/c 20,000
(Being amount received from B
against bill)
Case-II When bill is discounted by
X from his bank
April, 4 Bank A/c Dr. 19,700
Discounting Charges A/c Dr. 300
To Bills Receivable A/c 20,000
(Being the bill discounted
from the bank, discounting
charges are
6 320,000 Rs.300
100 12
Case-III when bill is Endorsed
in favour of Z
Z Dr. 20,000
May, 4 To Bills receivable A/c 20,000
(Being bill endorsed in favour of Z)
Case-IV When bill is sent to
bank for collection
Date Particulars L.F. Dr. Rs. Cr. Rs.
July, 1 Bills Sent for Collection A/c Dr. 20,000
To Bills Receivable A/c 20,000
(Being bill sent for collection to bank)
July, 4 Bank A/c Dr. 20,000
To Bill sent for
Collection A/c 20,000
(Being amount realised
from bill sent for Collection)
Note :
1. First two entries passed on April 1,2013 will be same in the books of
X (Drawer) in all the 4 cases.
2. If a bill is honoured on the date of maturity.
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NO ENTRY is passed on the date of maturity in the books drawer, if.
• Bill is discounted from the bank ; or
• Bill is endorsed in favour of creditor.
(in all 4 cases)
In the Books of Y (Drawee)
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
April,1 Purchases A/c Dr. 20,000
To X 20,000
(Being goods purchased
from X on credit)
April,1 X Dr. 20,000
To Bills Payable A/c 20,000
(Being the acceptance
given to X)
July,4 Bills Payable A/c Dr. 20,000
To Cash /Bank 20,000
(Being payment made
on date of maturity)
(cases-III)
In the Books of Z (Endorsee)
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2011
May,4 Bills Receivable A/c Dr. 20,000
To X 20,000
(Being bill received from X
through endorsement)
July,4 Cash/Bank A/c Dr. 20,000
To Bills Receivable A/c
(Being payment received 20,000
against bill)
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B. When Bill is dishonoured on date of maturity.
Case I : Bill is retained by the drawer till date of maturity.
Transaction In the Books of Drawer In the Book of Drawee
When bill is Drawee Dr. Bills Payable A./c Dr.
dishonoured To Bills Noting charges A/c Dr.
Receivable A/c To Drawer
To cash A/c (with (Being bill dishonoured)
noting charges)
(Being bill dishonoured
Note :
Entry passed in the book of Drawee will be SAME in all cases.
Case II : Bill is discounted from the Bank
In the books of Drawer
Date Particulars L.F. Dr. Rs. Cr. Rs.
Drawee Dr.
To Bank A/c
(Including noting charges)
(Being bill discounted from
bank dishonoured)
Case III- When bill is endorsed in favour of a creditor
(At the time of Dishonour of a Bill)
In the books of Drawer
Date Particulars L.F. Dr. Rs. Cr. Rs.
Drawee Dr
To Endorsee
(Including noting charges)
(Being bill dishonoured,
Earlier endorsed in favour
of creditor
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(At the time of Dishonour of a Bill)
In the books of Drawer
Date Particulars L.F. Dr. Rs. Cr. Rs.
Endorser Dr
To Bills Receivable A/c
To Cash A/c (Noting charges)
(Being bill dishonoured, received
through endorsement)
Case IV : When bill is sent for collection to Bank
(At the time of Dishonour of a Bill)
In the books of Drawer
Date Particulars L.F. Dr. Rs. Cr. Rs.
Drawee Dr
To Bills Sent for
Collection A/c
To Bank A./c (Noting charges)
(Being bill sent to bank for
collection, dishonoured)
Notes :
1. Same Entry is passed in the books of Drawee at the time of dishonour
of a bill/
2. In the books of Drawer
(At the time of Dishonour of Bill)
Drawee Dr. (In all Cases)
To Bills Receivable A/c (Case-I)
To Cash A/c (Noting Charges)
OR
To Bank A/c (case -II)
(Including Noting Charges)
OR
To Endorsee A/c (case-III)
(Including Noting charges)
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OR
To Bills Sent for Collection A/c (case-IV)
To Bank A/c (Noting Charges)
Illustration 6 : A sold good to B on April 1, 2013 for Rs. 20,000 on credit
and drew upon him a bill for the same amount payable after 3 months. B
accepted the bill and returned into to A. On the due date bill was dishonoured.
Case I : Bill is retained by A till the date of maturity.
Case II : Bill is discounted by A from his bank on 4th April, 2013 @ 6% per
annum.
Case III : Bill is endorsed in favour of C on April, 4th, 2013.
Case IV : Bill is sent to bank for collection on July 1, 2013.
Solution:
In the books of A (Drawer)
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
April, 1 B Dr 20,000
To Sales A/c 20,000
(Being goods sold to B
on credit)
April,1 Bill Receivable A/c Dr. 20,000
To B 20,000
(Being bill received from B)
Case-I : When bill is retained by A
July, 4 B Dr. 20,000
To Bills Receivable A/c 20,000
(Being bill received from B
dishonoured)
Case -II : When bill is discounted
from the Bank
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April, 4 Bank A/c Dr. 19,700
Discounting Charges A/c Dr. 300
To Bills Receivable A/c 20,000
(Being bill discounted from the
Bank ; discounting charges are
62000 300)
100
July, 4 B Dr. 20,000
To Bank 20,000
(Being bill discounted from,
dishonoured on date of maturity)
Case-III : When bill is endorsed in
favour of ‘C’
April, 4 C Dr. 20,000
To Bills Receivable A/c 20,000
(Being bill endorsed in favour of C)
July, 4 B Dr. 20,000
To C 20,000
(Being bill received from B and
endorsed to C dishonoured on
maturity date)
Case - IV : When bill sent for
collection
July, 1 Bill Sent for Collection A/c Dr. 20,000
To Bills Received A/c 20,000
(Being bill received from B sent
for collection)
July, 4 B Dr. 20,000
To Bills Sent for Collection A/c 20,000
(Being bill sent for collection to bank,
dishonoured on date of maturity.
In the Books of (Drawee) (In All Cases)
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
April, 1 Purchases A/c Dr 20,000
To A 20,000
(Being goods purchased on credit)
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April, 1 A Dr. 20,000
To Bill Payable A/c 20,000
(Being acceptance give to A)
July, 4 Bills Payable A/c Dr. 20,000
To A 20,000
(Being bill Payable to
A dishonoured on date of Maturity)
Illustration 7 : A sold goods to B on May 1st, 2013 for Rs. 30,000 on credit
and drew upon him a bill for the same amount payable after 2 months. B
accepted the bill and returned it to A. On date of maturity, B fails to make
payment of bill. Noting charges amounted to Rs.100.
Pan Journal Entries in the books of A and B if.
Case 1: A retains the bill till the date of maturity and also paid the noting
charges.
Case 2: A discounts the bill from his bank on 4th June @12% per annum.
Noting charges has been paid by bank.
Case 3: A endorses the bill in favour of C on June 1. C paid the noting
charges.
Case 4: A sent the bill to his bank for collection on July 1. Bank paid the
noting charges.
Solution
In the Books of a (Drawer)
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
May, 1 B Dr 30,000
To Sales A/c 30,000
(Being goods sold to B on Credit)
May, 1 Bills Receivable A/c Dr. 30,000
To B 30,000
(Being acceptance received from B)
Case 1 : When A retains the bill
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July, 4 B Dr. 30,100
To Bills Receivable A/c 30,000
To Cash A/c 100
(Being bill dishonored and noting
charges paid by A)
Case 2 : When bill is discounted
from the bank
June, 4 Bank A/c Dr. 29,700
Discounting Charges A/c Dr. 300
To Bills Receivable A/c
(Being bill discounted from the 30,000
bank, discounting charges amount
to12 1
* 30,000 Rs. 300)100 12
July, 4 B Dr. 30,100
To Bank A/c 30,100
(Being bill discounted from bank
dishonoured and noting charges
Paid by bank)
Case 3 : When bill is endorsed
in favour of C
June, 1 C Dr. 30,000
To Bills Receivable A/c 30,000
(Being bill sent to bank for
collection)
July, 4 B Dr. 30,100
To C 30,100
(Being bill received from B and
endorsed to C dishonoured on
maturity)
Cash 4 : When bill sent for collection
July, 1 Bill Sent for Collection A/c Dr. 30,000
To Bills Receivable A/c 30,000
(Being bill sent to bank for
collection)
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July, 4 B Dr. 30,100
To Bills Sent for
Collection A/c 30,000
To Bank 100
(Being bill received from B
dishonoured on maturity)
In the Book of B (DRAWEE)
(in all Cases)
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
May, 1 Purchases A/c Dr 30,000
To A 30,000
(Being goods purchased from A)
May, 1 A Dr. 30,000
To Bills Payable A/c 30,000
(Being acceptance given to A)
July, 4 Bills Payable A/c Dr. 30,000
Noting Charges A/c Dr. 100
To A 30,100
(Being bill dishonoured and
noting charges debited)
C. Renewal of a Bill
Transaction In the Books of Drawer In the Book of Drawee
Cancelling the Drawee Dr. Bills Payable A./c Dr.
Original Bill To Bills Receivable A/c To Drawer
(Being the cancellation of bill (Being the bill payable cancelled)
receivable)
Recording Drawee Dr. Interest A/c Dr.
Interest for To Interest A/c To Drawer
extended (Being interest charged for (Being interest payable for
Period extended period) extended period)
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Part Payment Cash or Bank A/c Dr. Drawer Dr.
Received/made To Drawee To Cash Bank A/c
(Being the part payment (Being the part payment
received) received)
New Bill Bills Received A/c Dr. Drawer Dr.
Drawn To Drawee To Bills Payable A/c
Accepted (Being a new bill drown) (Being a new bill accepted)
Note :
No Entry for Noting charges is passed at the time of cancellation of
original bill because both the parties are mutually agreed the old bill.
Illustration 8 : On 1st April, 2013 Anil accepts a bill drawn by Sunil for 2
months for Rs. 15,000, in payment of a debt. On the date of maturity bill was
dishonoured and Sunil had to pay Rs. 150 as noting charges. On the 4th June
2013, Anil requested to Sunil to draw a new bill for the amount due. Sunil
agreed to draw a new bill for 73 days but he charged interest @ 15% per
annum in cash. This bill is duly met on its maturity.
Pass Journal entries in the books of both the parties.
Solution :
In the books of Sunil
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
April, 1 Bills Receivable A/c Dr 15,000
To Anil 15,000
(Being acceptance received)
June, 4 Anil Dr. 15,150
To Bills Receivable A/c 15000
To Cash A/c 150
(Being bill dishonoured and noting
charges paid)
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June, 4 Anil Dr. 454.50
To Interest A/c 454.50
(Being interest charged)
15 7315150 )
100 365
June, 4 Cash A/c Dr. 454.50
To Anil 454.50
(Being interest received in cash)
June, 4 Bills Received A/c Dr. 15,150
To Anil 15,150
(Being a new bill drown M Anil
and acceptance received)
Aug., 19 Bank A/c Dr. 15,150
To Bills Receivable A/c 15,150
(Being amount received on
Maturity of bill)
In the books of Anil (DRAWEE)
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
April, 1 Sunil Dr. 15,000
To Bills Payable 15,000
(Being acceptance gave)
June, 4 Bills Payable A/c Dr. 15,000
Noting Charges A/c Dr. 150
To Sunil 15,150
(Being bill dishonoured and
noting charges due)
June, 4 Interest A/c Dr. 454.50
To Sunil 454.50
(Being interest payable to Sunil)
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June, 4 Sunil Dr. 454.50
To Cash A/c 454.50
(Being interest paid in cash)
June, 4 Sunil Dr. 15,150
To Bills Payable A/c 15,150
(Being acceptance of new bill given)
Aug., 19 Bills Payable A/c Dr. 15,150
To Bank A/c 15,150
(Being bill accepted, paid on
maturity
Illustration 9 : P sold goods to Q for Rs. 10,000 on January 1, 2013 and on
the same day draws a bill on Q for the same amount for 3 months. Q accept
it and returns it to P, who discounts it on 10th January, 2013 with his bank for
Rs. 9850. The acceptance is dishonoured on the due date and the Noting
charges were paid by bank being Rs.50.
On 4th April, Q paid Rs. 2,050 (including Noting charges) in cash and
accepted new bill at 3 months for the amount date P together with interest @
12% per annum.
Make Journal Entries in the books of P and Q to record transaction.
Solution :
Journal of P
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
Jan., 1 Q Dr. 10,000
To Sales A/c 10,000
(Being goods sold to Q)
Jan., 1 Bills Receivable A/c Dr. 10,000
To Q 10,000
(Being acceptance received)
Jan.,10 Bank A/c Dr. 9,850
Discounting Charges A/c Dr. 150
To Bills Receivable A/c 10,000
(Being bill discounted from Bank)
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April 4 Q Dr. 10,050
To Bank 10,050
(Being bill discounted from bank
dishonoured and noting charges
Paid by bank)
April 4 Cash A/c Dr. 2,050
To Q 2,050
(Being part payment received in cash)
April 5 Q Dr. 240
To Interest A/c 240
(Being interest charged)
12 3Rs. 8000 )
100 12
April 4 Bills Receivable A/c Dr. 8,240
To Q 8,240
(Being a new bill drawn on
Q together with interest)
Journal of Q (DRAWEE)
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
Jan. 1 Purchases A/c Dr. 10,000
To P 10,000
(Being goods purchased on credit)
Jan. 1 P Dr. 10,000
To Bills Payable A/c 10,000
(Being acceptance given to P)
April 4 Bills Payable A/c Dr. 10,000
Noting Charges A/c Dr. 50
To P 10,050
(Being bill dishonoured and noting
charges due)
April 4 P Dr. 2,050
To Cash A/c 2,050
(Being part payment made in cash)
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Interest A/c Dr. 240
To P 240
(Interest payable for 3 months)
April 4 P Dr. 8,240
To Bills Payable A/c 8,240
(Being acceptance given to P)
D. Retiring a bill under Rebate
Transaction In the Books of Drawer In the Book of Drawee
When Drawee Cash/Bank A/c Dr. Bills Payable A./c Dr.
retires the bill Rebate A/c Dr. To Cash/Bank A/c
before date of To Bill Receivable A/c To Rebate A/c
maturity (Being the amount received (Being the amount paid before
before date of maturity and date of maturity and rebate
rebate allowed. received.)
Note :
1. In the books of Drawer, Rebate Account is DEBITED because it is a
loss for Drawer.
2. In the books of Drawee, Rebate Account si CREDITED because it is
a gain for Drawer.
Illustration 10 : Mukesh sold goods to Jitender on July 1,2013 for Rs. 30,000
and drew a bill for the same amount for 3 months. Jitender accepted the bill
and returned it to Mukesh, Jitender retired his acceptance on 4th August, 2013
under rebate of 8% per annum. Give Journal entries in the books of Mukesh
and Jitender.
In the books MUKESH
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
July 1 Jitender Dr. 30,000
To Sales A/c 30,000
(Being goods sold on credit)
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July 1 Bill Receivable A/c Dr. 30,000
To Jitender 30,000
(Being acceptance received)
Aug. 4 Cash A/c Dr. 29,600
Rebate A/c Dr. 400
To Bills Receivable A/c 30,000
(Being amount received on bill
before maturity and rebate allowed,
Rebate 2 8
Rs. 30,000 Rs. 400)12 100
In the books of JITENDER
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
July 1 Purchases A/c Dr. 30,000
To Mukesh 30,000
(Being goods purchased on credit)
July 1 Mukesh 30,000
To Bills Payable A/c 30,000
(Being acceptance given to Mukesh
Aug. 4 Bill Payable A/c Dr. 30,000
To Cash A/c 29,600
To Rebate A/c 400
(Being acceptance retired with rebate)
Illustration II : Rajiv sold goods to Pankaj for Rs. 40,000 on January 1st,
2013. On the same date Rajiv drew a bill of the same amounted 3 months on
Pankaj. The bill was accepted by Pankaj. Rajiv discounted the bill with his
bank on 4th February, 2013 @ 12% per annum. On date of maturity, the bill
was dishonoured and Noting charges Rs. 200
Pankaj agreed to Pay Rs. 10,200 and accepted another bill for the remaining
amount for 3 months together with interest @ 9% per annum. On due date
Pankaj make the payment.
Give Journal Entries in the books of Rajiv and Pankaj.
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Solution
In the books of RAJIV (DRAWER)
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
Jan. 1 Pankaj Dr. 40,000
To Sales A/c 40,000
(Being goods sold on credit)
Jan. 1 Bill Receivable A/c Dr. 40,000
To Pankaj 40,000
(Being acceptance received)
Feb. 4 Bank A/c Dr. 39,200
Discounting Charges A/c Dr. 800
To Bill Receivable A/c 40,000
(Being bill discounted from
bank and discounting charges
are Rs. 800 :
12 240,000 )
100 12
April 4 Pankaj Dr. 40,200
To Bank A/c 40,200
(Being bill dishonoured and noting
charges paid by bank).
April 4 Cash A/c Dr. 10,200
To Pankaj 10,200
(Being part payment received
from Pankaj)
April 4 Pankaj Dr. 675
To Interest A/c 675
(Being Interest charged on
remaining amount :
9 330,000 )
100 12
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April 4 Bills Receivable A/c Dr. 30,675
To Pankaj 30,675
(Being new acceptance received)
July 7 Cash A/c Dr. 30,675
To Bills Receivable A/c 30,675
(Being bill met on maturity)
In the books of PANKAJ (DRAWEE)
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
Jan. 1 Purchases A/c Dr. 40,000
To Rajiv 40,000
(Being goods purchased on credit)
Jan. 1 Rajiv Dr. 40,000
To Bills Payable A/c 40,000
(Being acceptance given)
April 4 Bills Payable A/c Dr. 40,000
Noting Charges A/c Dr. 200
To Rajiv 40,200
(Being bill dishonoured and
noting charges due)
April 4 Rajiv Dr. 10,200
To Cash A/c 10,200
(Being part payment made)
April 4 Interest A/c Dr. 675
To Rajiv 675
(Being interest due)
April 4 Rajiv Dr. 30,675
To Bills Payable A/c 30,675
(Being the new acceptance
given to Rajiv)
July 4 Bills Payable A/c Dr. 30,675
To Cash A/c 30,675
(Being bill met on maturity)
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Points of Remember
1. When calculating Date of Maturity the following point must be
considered:
(i) In case “Bill at Sight” or “Bill on demand” 3 days of grace are
NOT allowed.
(ii) When the term of bill is mentioned in no of days, then
Date of drawing the bill is not included.
Date of payment is included in determining date of
maturity.
If date of maturity falls on a day which is public holiday,
the maturity date of the bill shall be “PROCEEDING
DAY’.
If maturity date is on an emergent holiday declared under
the Negotiable Installment Act. 1881, the next. working
day immediately after the holiday will be considered as
the date of maturity.
(iii) When the period is stated in months the date of maturity shall
be calculated in terms of calender months ignoring the no. of
days in a month.
2. Noting Charges
(i) Noting charges are not inexpensive for the drawer.
(ii) It is always debited as ‘Noting charges’ in the books of drawee.
(iii) Noting charges are recovered by drawer from drawee.
(iv) Noting charges are paid only when noting of the bill is necessary
at the time of DISHONOUR of bill.
(v) Noting of the bill is NOT required when the bill is CANCELLED
with the mutual consent of both the parties, specially at the time
of RENEWAL of Bill.
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CHAPTER-8
RECTIFICATION OF ERRORS
Introduction
Accounts are prepared by accountant, a human being is likely to commit
mistakes at time of recording and posting in the books. However, such errors
are located after some time and should be corrected by passing corrective
journal entry, which is known as rectification if errors.
Learning Objectives : After studying this topic the students will be able to:
Explain Types of Errors and their examples
Rectify the Errors : Two i.e. Errors not affecting Trial Balance and One
sided i.e. Errors which affect Trial Balance.
To Explain Meaning and Utility of Suspense A/c
Maintain Suspense A/c.
Important : The errors whether affecting the Trial Balance or not must be
detected and rectified.
Need of Rectification
1. For the preparation of correct Accounting Records.
2. Preparation of P & LA/c with corrected figures to ascertain correct
Profit or Loss.
3. To find out the true financial position of the firm by preparing Balance
Sheet with corrected figures.
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Classification of Errors
(on the basis of Nature)
Type of Error with Meaning Sub-Types with Examples
1. Error of Omission (a) Error of Complete Omission
(When a transaction is completely Goods sold to X on Credit but not recor-
or partially omitted to be record ded in Sales Book.
in the books) (b) Partial Commission
Purchase machinery Rs. 5,000 in cash
recorded in cash Book but not recorded in
Machinery A/c
II. Error of Commission (a) Error of Recording in the Book of
Original Entry
(These errors are caused due to Goods purchased from Ravi for Rs. 450,
wrong recording of transactions, Goods as Rs. 540, in the Purchases Book
wrong totalling of subsidiary (b) Wrong Totalling of Subsidiary Book
books or Ledger A/cs, Wrong Example : Purchase Book has been
posting and wrong carry forward) undercast (short totalled) by Rs.100.
(c) Error in Totalling or Balancing of
Ledger A/cs*
Example : Creditors A/c has been
balanced short by Rs. 500.
(d) Error of Posting
(i) Posting to the wrong side but correct
account.
Goods sold to X for Rs. 550, entered to the
credit of X’s A/c instead of posting to the
debit side of his account.
(ii) Posting with wrong amount.
(iii) Posting twice in an A/c/
(iv) Errors in posting to the wrong A/c
but correct side don’t affect Trial
Balance.
(e) Error in carrying forward.
Total of purchase book Rs. 2,500 is carried
forward as Rs. 2050
III. Errors of Principal. (a) Treating capital items as revenue item
(These errors are caused due to Example :Wages paid for the installation
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the violation of accounting of anew machinery charged to Wages A/c
principles i.e. allocation between instead of machinery A/c.
Capital and Revenue items. (b) Treating Revenue Items as Capital Item
Example : Rs. 200 paid for the repairs of
an old Machinery but debited to Machinery
A/c instead of Repairs A/c.
IV. Compensating Errors Example : Cash paid to Ram Rs. 5,000
(Two or ore errors committed but debited him as Rs. 500 and paid to
such a way that the net effect Mohan Rs. 500 but debited him as Rs. 5,000
of these errors is nil). so, net effect will be nil.
TYPES OF ERRORS FROM RECTIFICATION POINT OF VIEW
From Rectification point of view, errors are classified into the following
two categories only :
Case I : Errors which don’t affect the Trial Balance
or
Two Sided Errors
Case II : Errors which affect the Trial Balance
Or
one Sided Errors.
Errors don’t Affecting Trial Balance
(1) Errors of complete commission.
(2) Wrong recording in the books of original entry.
(3) Complete ommission from posting.
(4) Errors of posting to the wrong A/c but on the correct side.
(5) Compensating errors.
(6) Errors of principle.
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Errors Affecting Trial Balance
Shown by Star in the Table showing.
1. Error in totalling of subsidiary books as undercast or over cast.
2. Error in the balancing of ledger accounts.
3. Error in posting to the correct Account but wrong amount.
4. Error of partial ommission.
Rectification of Errors
When the errors are detected, these have to be rectified in the books of
accounts. Rectification of errors depends upon.
The type of error and
The time of depiction of an error.
Time of Depiction of an error means.
(i) Errors of detected before the preparation of Trial Balance.
(ii) Errors detected after preparing Trial Balance but before preparing final
Accounts.
(iii) Errors detected after preparing Final Accounts.
Rectification of Errors detected after preparing Final Accounts is not in
the syllabus. Hence we will discuss only type (i) and (ii)
RECTIFICATION OF TWO SIDED ERRORS
Two sided errors are those errors which affect two sides of Accounts.
These errors don’t affect trial Balance as discussed earlier.
These Errors are rectified by passing a Journal entry irrespective of the
time of depiction. In other words their rectifying entry will be same whether
(a) the error si depicted before Trial Balance or (b) after the preparation of
Trial Balance but before the Final A/cs are prepared.
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Steps for Rectification
(1) Locate the effect of Error on Different Accounts.
(2) The Account showing excess credit should be Debited.
(3) The Account showing excess Debit should be Credited.
(4) The Account showing short Debit should be Debited.
(5) The Account showing short Credit should be Credited.
Examples (with Explanation)
(I) When an account has wrongly been debited in place of another A/c.
Rectification will be done by debiting the correct account and Crediting
the A/c which was wrongly debited.
Example : Machinery purchased for Rs. 10,000 has been debited to Purchases
A/c
Solution : Here two accounts are affected
Machinery A/c is not debited hence its debit side is short by Rs. 10,000
whereas purchases A/c debited by mistake. Purchases A/c debit side is
in excess by Rs. 10,000.
While rectifying this mistake Machinery A/c will be debited by Rs.
10,000 because it was not debited earlier and Purchases A/c will be
credited because it was wrongly debited.
Rectifying Entry is
Machinery A/c Dr. 10,000
To Purchases A/c 10,000
(For purchases of machinery
wrongly debited to Purchases A/c)
(II) When an account has wrongly been Credited in place of another
account.
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Example : Rs. 5,000 received from the sale of old furniture has been Credited
to Sales A/c.
Solution : This error also affects the two A/c
Furniture A/c is not Credited hence its credit side is short by Rs. 5,000.
Sales A/c is credited by mistake its credit side is excess of Rs. 5,000.
Therefore fore rectifying this mistake Sales A/c will be debited because
it was wrongly Credited and Furniture A/c which was not Credited
earlier will now be credited by Rs. 5,000.
Hence Rectifying entry is
Sales A/c Dr. 5,000
To Furniture A/c 5,000
(Sales of old Furniture
wrongly Credited to Sales A/c)
(III) When there is a short debit in one A/c and a short Credit another
A/c.
Example : Goods sold to Seema for Rs. 540 was entered in the Sales Book
as Rs. 450.
Solution :
Here Seema’s A/c is debited by Rs. 90 short and Sales A/c is credited
by Rs. 90 short.
(Instead of Rs. 540 by Rs. 450)
Therefore rectification will be done by Debiting Seema’s A/c and
Crediting Sales A/c. Hence Rectifying entry is:
Seema Dr. 90
To Sales A/c 90
(For Goods sold to Seema for
Rs. 540 wrongly entered Rs.450)
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(IV) When there is an Excess Debit in one A/c and Excess Credit in
another A/c.
Example : Goods purchased from Mohan for Rs. 300 was recorded in Purchases
Book as Rs. 3,000.
Solution :
Here Purchases A/c is Debited by Rs. 3,000 instead of Rs. 300, i.e. Rs.
2,700, more.
Mohan’s A/c is also Credited by Rs. 2,700 more.
Rectification will be done by debiting Mohan’s A/c and Crediting
purchases A/c by Rs. 2,700, i.e., the entry in the reverse direction.
Rectifying Entry
Mohan Dr. 2,700
To Purchases A/c 2,700
(For Purchase of goods from Mohan for
Rs. 300 wrongly entered Rs.3,000)
Problem :
Rectify the following Errors :
(1) Rs. 5,000 Paid for furniture purchased has been debited to purchases
account.
(2) Wages paid Rs. 7,000 for installation of new machinery were recorded
in wages account.
(3) Goods sold to Hari Rs. 10,000 not recorded.
(4) Rs. 2,500 received from Monu has been credited to Sonu A/c.
(5) Rent paid Rs. 1,000 wrongly debited to Landlord Account.
(6) Credit Purchase from Raman Rs. 15,000 were wrongly recorded in
sales book.
(7) Credit sales to Geeta Rs. 8,.800 were recorded as Rs, 8,800
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(8) Goods Rs. 5,000 withdrawn by proprietor has not been recorded.
Solution :
Error No. Particulars L.F. Dr. Rs. Cr. Rs.
1. Furniture A/c Dr. 5,000
To Purchases A/c 5,000
(The furniture purchase wrongly
debited to purchase A/c)
2. Machinery A/c Dr. 7,000
To wages A/c 7,000
(The wages for installation machinery
wrongly debited to wates A/c
3. Hari Dr. 10,000
To Sales A/c 10,000
(The goods sold to Hari not recorded.)
4. Sonu Dr. 2,500
To Monu 2,500
(The amount wrongly credited to Sonu
instead of Monu)
5. Rent A/c Dr. 1,000
To Landlord 1,000
(The rent paid but wrongly debited to
landlord A/c)
6. Purchases A/c Dr. 15,000
Sales A/c Dr. 15,000
To Raman 30,000
(The Credit purchase but wrongly
credit to sale A/c.
7. Geeta Dr. 800
To sales A/c 800
The Credit sales to Geeta Rs.8800
but recorded 8000
8. Drawings A/c Dr. 5,000
To Purchases A/c 5,000
The goods withdraw by Proprietor for
personal use
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Important : Rectification of double sided errors can easily be understood by
the students. These are rectified by passing the journal entries as given
irrespective of the time of detection of the errors.
RECTIFICATION OF ONE SIDED ERRORS
These errors affect only one side of An Account either debit or credit.
Therefore these errors the Trial Balance.
Rectification of these errors is done differently, in these two cases i.e.
(i) Before preparing the Trial Balance
(ii) After preparing the Trial Balance
Case 1 : Rectification of one sided errors before preparing Trial Balance.
When there errors are rectified before preparing Trial Balance i.e.
transferring the difference in the Trial Balance to the Suspense Account.
(Which will be explained later on), then it is done directly by debiting or
crediting the concerned ledger account.
Fore Short Debit Concerned A/c is Debited.
Fox Excess Credit Concerned A/c is Debited
For Short Credit Concerned A/c is Credited
For Excess Debit Concerned A/c is Credited
Example : (1) Purchases Book understand by Rs. 150
Analysis : It means that the total of the Purchases, Book is Rs. 150 short.
This total is posted to purchases A/c- Debit side
Hence Purchases A/c is debited short by Rs. 150
No effect on any other A/c
Therefore purchases A/c will be debited by Rs. 150 to rectify this error
as given below.
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Purchases A/c
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
To Undercast of 150
purchase book
Here debit side of the Purchase A/c was short therefore the rectification
is done by debiting the A/c.
Example 2 : Purchases Book is overcast by Rs. 300
Analysis
Means total of the Purchases Book is in excess by Rs. 300 which is
posted to the debit side of purchases A/c
Hence purchases A/c is debited in excess by Rs. 300.
No effect on any other A/c.
Therefore to rectify this error Rs. 300 will be credited to purchases A/
c (i.e. opposite side)
Purchases A/c
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
By Overcast of 300
Purchases Book
Here debit side of the purchases A/c was in access, therefore the
rectification is done by entering the amount on the opposite side i.e.,
Credit side of the Purchases A/c.
Case II : Rectification of one Sided Error after Preparing Trial Balance
When the errors are detected after the preparation of Trial Balance then
every single sided error is rectified by passing a Journal entry through Suspense
Account.
For short Debit Income Account Debit that Account and Credit
the Suspense A/c
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Excess Credit in one Account Debit that Account and Credit the
Suspense A/c
Short Credit in one AccountCredit that A/c and Debit the Suspense A/c
Excess Debit in one AccountCredit that A/c and Debit the Suspense A/c
Example : Hence for the same error as given in example No. in case I, the
following Journal Entry will be passed.
Rs. Rs.
Purchases A/c Dr. 150
To Suspense A/c 150
(For undercast of purchase book,
now corrected)
Example 4 : Sales Book was undercast by Rs. 200
Analysis
Sales book totalled short by Rs. 200 which is posted to the credit side
of sales A/c.
Therefore Sales A/c credit side is short by Rs. 200.
Hence rectification will be done by crediting the sales A/c and Debiting
the Suspense A/c by Rs. 200.
Rs. Rs.
Suspense A/c Dr. 200
To Sales A/c 200
(For undercast of Sales Book, now corrected)
Note : When nothing is mentioned in the question about the time of detection
of an error, the student are advised to rectify one sided errors through Suspense
A/c.
Problem :Rectify the following error
(A) Without opening a Suspense A/c
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(B) By passing Journal entries through Suspense A/c.
(1) Rs. 5,000 paid to Mohit were entered in the cash Book but
omitted to be posted to the ledger.
(2) Rs. 5,000 paid to Mohit were debited to his A/c as Rs. 500.
(3) Rs. 5,000 paid to Mohit were debited to his A/c as Rs. 50,000.
(4) Rs. 5,000 paid to Mohit were credited to his A/c
(5) Rs.5,000 paid to Mohit were credited to his A/c as Rs. 500.
(6) Sales Book was overcast by Rs. 2,000
(7) Sales Return Book undercast by Rs. 4,000
(8) Purchase Return Book undercast by Rs. 5,000.
Solution :
(A) Without opening a suspense A/c. These errors are rectified in the
concerned ledger A/c, as these errors before trial Balance.
(1) Mohit’s A/c will debited by Rs. 5,000 as it is a case of partial
ommission.
(2) Mohit’s A/c was debited Rs. 45,000 (5,000-500) therefore the
rectification will be done by debiting Mohit’s A/c by 4,500.
(3) Mohit’s A/c was debited in excess by Rs. 45,000 (50,000-5,000)
therefore ratification will be done by crediting the Mohits A/c
by Rs. 45,000.
(4) Mohit’s A/c was credited by Rs. 5,000 instead of debited by Rs.
5,000 therefore rectification will be done by debiting Mohit’s
A/c by Rs. 10,000 (5,000+5,000)
(5) Mohit’s A/c was wrongly credited by Rs. 500 instead of debiting
it by Rs. 5,000, so rectification will be done by debiting the
Mohit’s A/c by 5,500.
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(6) Sales book overcast means sales A/c is credited is excess by Rs.
2,000. Hence rectification will be done by debiting sales A/c by
2,000.
(7) Sales Return Book total undercast by Rs. 4,000 means sales
return A/c is a debited short by Rs. 4,000 Hence rectification
will be done by debiting sales Return A/c by 4,000.
(8) Purchase Return Book undercast by Rs. 5,000 means purchase
Return A/c is credited short by Rs. 5,000.
Hence rectification will be done by crediting the purchase Return
A/c by Rs. 5,000
(B) By opening suspense A/c.
Rectifying Journal Entry
Error No. Particulars L.F. Dr. Rs. Cr. Rs.
1. Mohit Dr. 5,000
To Suspense A/c 5,000
(For cash paid to Mohit committed
to be posted to his A/c)
2. Mohit Dr. 4,500
To Suspense A/c 4,500
(for Mohit A/c was debited with excess
amount)
3. Suspense A/c Dr. 45,000
To Mohit 45,000
(fro Mohit A/c was debited with
excess amount)
4. Mohit, Dr. 10,000
To Suspense A/c 10,000
(For posting to Mohit’s A/c
was done on wrong side
5. Mohit Dr. 5,500
To Suspense A/c 5,500
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(For posting made with wrong
wrong amount and wrong side)
6. Sales A/c Dr. 2,000
To Suspense A/c 2,000
(For overcast of sales Book rectified)
7. Sales Return A/c Dr. 4,000
To Suspense A/c 4,000
(For undercast of sales return book
rectified)
8. Suspense A/c Dr. 5,000
To Purchase Return A/c 5,000
(For undercast of purchase return
Book, rectified)
Suspense Account and its Disposal
In the chapter of Trial Balance we have learn about the Suspense A/c
Important
When inspite of all the efforts the Trial Balance does not tally, the
difference is put to a newly opened account named Suspense A/c.
Suspense A/c is an imaginary account, opened temporarily for the
purpose of reconciling a Trial Balance.
Later on when the errors affecting the Trial Balance are located,
rectification entries are passed through the Suspense A/c.
When all the errors are located and rectified, the Suspense A/c will be
auto material closed i.e., it will show zero balance.
But if suspense A./c still shows a balance it will indicate that some
errors are still to be discovered and rectified.
Problem : An accountant of a trading concern could not agree the Trial Balance.
There was an excess credit of Rs. 100 which he transferred to the suspense A/c
The following errors were subsequently discovered.
(1) Received Rs. 550 from X, were posted to the debit of his account.
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(2) Rs.100 being purchase return were pointed to the debit of purchases A/c.
(3) Discount received Rs. 200 Correctly entered in the Cash Book but
posted to the debit of the discount A/c.
(4) Salary paid Rs. 3,500 to X were posted to the salary A/c as Rs 2,500.
(5) A purchase of Rs. 400 has been passed through Sales Book. However
the customer’s account has been correctly credited.
Give Rectifying entries and Suspense A/c
Rectifying Journal Entries
Date No. Particulars L.F. Dr. Rs. Cr. Rs.
1. Suspense A/c Dr. 1,100
To X 1,100
(Amount received from X was Posted
to the wrong side now corrected)
2. Suspense A/c Dr. 200
To Purchase A/c 100
To Purchase Returns A/c 100
(For the purchases return wrongly posted
to the purchases A/c)
3. Suspense A/c Dr. 400
To Discount A/c 400
(Discount received was posted to the
wrong side of discount A/c)
4. Salary A/c Dr. 1,000
To Suspense A/c 1,000
(Salary paid was posted to Salary A/c
with lesser amount)
5. Purchases A/c Dr. 400
Sales A/c Dr. 400
To Suspense A/c 800
(Purchases has been passed through sales
book but the customer’s A/c has been
correctly credited)
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Dr. Suspense A/c Cr.
Date/Error Particulars J.F. Rs. Date Particulars J.F. Rs.
To Difference in 100 (4) By Salary A/c 1,000
the Trials Balance (5) (i) By Purchases A/c 400
(ii) By Sales A/c 400
(1) To X 1,100
(2) To Purchases A/c 100 Balance c/d Nil
(3) To Return A/c 100
(4) To Discount A/c 400
1,800 1,800
Since the Balance of the suspense A/c is nil, indicates that all the errors
have been certified.
Suggested methodology
Discussion Explanation method is suggested.
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CHAPTER-9
FINANCIAL STATEMENTS OF
SOLE PROPRIETORSHIP
Learning Objectives
After studying this lesson you will be able to;
State the nature of the financial statements;
Distinguish between the capital and revenue expenditure and receipts;.
Explain the concept of trading and profit and loss account and its
preparation;
State the nature of gross profit, net profit and operating profit;
Describe the concept of balance sheet and its preparation;
Explain grouping and marshalling of assets and labilities;
Prepare profit and loss account and balance sheet of a sole proprietor
firm.
Teaching methodology
For teaching this topic the teacher should use discussion method,
explanation method, illustration method etc.
Financial Statements
Financial statements serves as a means of communicating information
about the profitability (income statement) and the financial position (Balance
Sheet) of the business in a concise and understandable manner at the end of
accounting period.
Financial statements include these statements :
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(i) Income statement (Trading and Profit and Loss Account)—prepared
to ascertain gross profit and net profit/loss during an accounting period.
(ii) Statement of Financial Position (Balance Sheet)—prepared to
ascertain position (assets, liabilities and capital) of an enterprise at a
particular point of time.
(iii) Schedules and notes forming part of Balance sheet and Profit and
Loss A/c—to give detail of various items shown in both the statements.
Capital Expenditure
The non-recurring expenditure whose benefit is derived by he business
for more than a year is called Capital Expenditure.
It includes amount spent or liabilities incurred to acquire or improve
any fixed assets or acquiring any legal rights or first-time expenses incurred
to make fixed assets workable e.g. purchase of machinery/building/furniture
etc., expenses incurred to acquired Patients, Trade-mark etc. and expenditure
incurred for getting an asset ready to use (like installation exp., carriage, first
time expenses incurred on second hand fixed asset for making it ready to use).
Capital expenditures are recorded on the assets side of the Balance
sheet.
Revenue Expenditure
The recurring and routine nature expenditures which are incurred for
operating the business smoothly and which help to maintain business’s
earning capacity, are called Revenue expenditure e.g. expenses incurred for
producing finished goods such as direct expenses, purchase of raw material
and other expenses as rent, salary, repairs etc.
The benefit of these expenses last in one year (give benefit up to one
year). These expenses are shown in Debit side of income statement (trading
and profit and loss account).
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Deferred Revenue Expenditure
The expenditure which is revenue in nature, but the heavy amount
spent and benefit likely to be derived over a number of years called deferred
revenue expenditure e.g. heavy expenses on advertising on launching of a new
product and hence it is capitalized like any fixed asset. Sometimes heavy
losses due to natural calamities can also be treated as deferred revenue expenses.
Accounting treatment of Deferred Revenue Expenditure
As per matching principle, expenses incurred in an accounting period
are matched with the revenue recognized in that accounting period. So the
whole deferred revenue expenditure should be spread over the number of years
over which benefit is likely to be derived.
During the current accounting year (a) Only that portion of the
expenditure should be charged to the profit and loss account which has
facilitate the enterprise to earn revenue during current year (b) Remaining
amount of expenditure be carried forward to the next year and shown in the
assets side of balance sheet (It is also called a fictitious asset).
Capital Receipt
Capital receipts are those irregular receipts that don’t affect profit or
loss of business; it either increases the liabilities (raising of loan) or reduces
the fixed assets (by sale of fixed assets), so it will be shown in balance sheet.
Capital receipts are not made available for distribution of profit to the
owner.
Revenue Receipt
Revenue receipts are received in the normal and regular course of
business like Receipts from sale of goods and rendering services to customers.
Income from non-operating business activities (like income from investment
i.e. interest and dividend received and rent received, Commission and other
fees received for non-operating business etc. These receipts increases profit
and shown in the credit side of the Trading and Profit and Loss account.
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Types of Expenses
Direct Expenses : Those expenses which are incurred on purchasing of
goods and for converting raw material into the finished goods e.g.
Manufacturing wages, Expenses on purchases (including all duty and tax
paid on purchases), Carriage/Freight/Cartage inwards, Production expenses (such
as power and fuel, water etc.), factory expenses (e.g. lighting, rent and rates),
Royalty based on Production etc.
Note : All direct expenses are debited to Trading account.
Indirect Expenses : Those expenses which are not directly related to
production or purchase of the goods are called indirect expenses. It includes
those expenses which are related to office and administration, selling and
distribution of goods and financial expenses etc.
These expenses are shown in the debit side of the Profit and Loss A/c.
Calculation of Gross Profit
Gross Profit = Net Sales – Cost of Goods Sold
Cost of goods sold = Opening Stock + Purchases + Direct Expenses –
Closing Stock.
Calculation of Operating Profit
Operating profit = Net sales – Operating cost
Or = Gross Profit – (Office and Administrative Expenses +
Sell ing and distribution exp.)
Operating Cost = Cost of Goods Sold + Office and Administrative Expenses
+ Selling and distribution exp.
Net Profit = Operating Profit + Non-operating profit – Non-operating expenses.
Operating expenses : The expenses which are related to the main or normal
activities of the business e.g. office and Administrative expenses, selling and
distribution expenses Operating profit is also called EBIT (Earnings before
interest and taxes).
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Illustration 1
Calculate the amount of operating profit from the following balances:
Rs.
Net sales 5,00,000
Cost of goods sold 3,00,000
Operating Expenses 1,20,000
Solution
Operating Cost = Cost of Goods Sold + Operating expenses
= Rs. 3,00,000 + Rs. 1,20,000
= Rs. 4,20,000
Operating profit = Net sales – Operating cost
= Rs. 5,00,000 – Rs. 4,20,000
= Rs. 80,000
FORM OF TRADING ACCOUNT
TRADING ACCOUNT
Dr. For the year ended...... Cr.
Particulars Rs. Particulars Rs.
To Opening Stock By Sales
To Purchases Less : Return Inwards
/Sales Returns
Less : Purchases Returns By Closing Stock
To Wages/Wages and Salaries By Gross Loss
To Carriage Inwards (Transferred to Profit &
Loss Account)
To Freight Inwards
To Gas & Fuel
To Power & Water
To Factory Rent & Rates
To manufacturing Expenses
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To Import and Customs Duty
To Royalties on Production
To Gross Profit (Transferred to
Profit & Loss Account)
Illustration 2: Calculate the value of closing stock from the following
information:
Rs. Rs.
Purchases 93,000 Wages 20,000
Sales 1,20,000 Carriage Outward 3,200
Rate of Gross Profit 40% on sales
Solution :
Trading Account
Dr. for the year ended........ Cr.
Particulars Rs. Particulars Rs.
To Purchases 93,000 By Sales 1,20,000
To Wages 20,000 By Closing Stock (Bal. Fig.) 41,000
To Gross Profit (Transferred to
Profit & Loss Account) 48,000
1,61,000 1,61,000
Illustration 3 : This information is provided by Mr. Ojas
Stock as on 01.04.,2012 Rs. 20,000
During the year Sales was Rs. 4,00,000; Purchases Rs. 2,90,000;
Carriage Inwards Rs. 8,000; Clearing charges Rs. 10,000; Sales Returns Rs.
3,000; Purchases Returns Rs. 4,000; Carriage Outwards Rs. 5,000 and
Stock on 31,03.2013 was Rs. 30,000.
Calculate cost of goods sold and prepare Trading Account for the year
ending 31.03.2013.
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Solution :
Trading Account
Dr. for the year ended on March 31, 2013 Cr.
Particulars Rs. Particulars Rs
To Opening Stock 20,000 By Sales 4,00,000
To Purchases 2,90,000 Less : Sales Returns (3,000) 3,97,000
Less: Returns 4,000 2,86,000 By Closing Stock 30,000
To Carriage Inwards 8,000
To Clearing Charges 10,000
To Gross Profit (Transferred to
Profit & Loss Account) 1,03,000
4,27,000 4,27,000
Cost of goods sold = Net Sales – Gross Profit
= Rs. 3,97,000– Rs. 1,03,000
= Rs. 2,94,000
Formal of Profit & Loss Account
Profit & Loss Account
Dr. For the Year Ended......... Cr.
Particulars Rs. Particulars Rs.
To Gross Loss By Gross Profit
(Transferred from Trading A/c) (Transferred from Trading A/c)
Office & Admin. Expenses By Rent Received
To Salaries By Discount Received
To Rent Rates Taxes By Rebates
To Printing and Stationery By Commission Received
To Salaries & Wages By Interest Received
To Postages and Telephones By Dividend Received
To Office Lighting By Bad Debts Recovered
To Insurance Premium By Apprentice fees or premium
To Legal Expenses By Gain on Sale of Fixed Asset
To Audit Fees By Miscellaneous Receipts
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To Travelling Expenses By Net Loss (If Dr. side>Cr. side)
Selling & Distribution Exp. (Transferred to capital Account)
To Carriage and Freight Outwards
To Commission
To Brokerage
To Advertisement
To Publicity
To Bad Debts
To Export Duty
To Packing Expenses
To Salaries of Salesman
To Delivery Van Expenses
Financial Exp.
To Interest paid on loans
To Discounts Allowed
To Rebate Allowed
To Bank Charges
Miscellaneous Exp.
To Repairs
To Depreciation on Fixed Assets
To Entertainment Expenses
To Donations & Charity
To Loss on Sale of Fixed Assets
To Stable Expenses
To Loss by Fire
To Loss by theft
To Unproductive Expenses
To Net Profit Transferred to
Capital Account
(If Cr. side > Dr, side)
Illustration 4 : From the following information, prepare a Profit & Loss
Account for the year ending 31st March 2013:
Gross Profit Rs. 70,000; Rent Rs. 5,000; Salary Rs. 15,000; Wages
Rs. 8,000; Commission paid Rs. 7,000; Interest on loans Rs. 5,000; Advertising
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Rs. 3,000; Discount Received Rs. 2,000; Printing & Stationery Rs. 1,000;
Legal charges Rs. 2,500; Bad Debts Rs. 1,500; Depreciation s. 1,000; Income
received on Investment rs. 3,000; Loss by Fire Rs. 2,200; Bad Debts recovered
Rs. 200; Freight outward Rs. 600; Audit Fee Rs. 450.
Solution :
Profit and Loss A/C
Dr. for the year ended 31.03.2013 Cr.
Particulars Rs. Particulars Rs
To Rent 5,000 By Gross Profit 70,000
To Salary 15,000 By Discount received 2,000
To Commission 7,000 By Bad debts Recovered 200
To Interest on Loans 5,000 By Income from Investment 3,000
To Advertising 3,000
To Printing and
Stationery 1,000
To Legal Charges 2,500
To Bad Debts 1,500
To Depreciation 1,000
To Loss by Fire 2,200
To Freight outward 600
To Audit Fee 450
To Net Profit 30,950
(to transferred to Capital A/C
75,200 75,200
Illustration 5 : From the following balances obtained from the accounts of
Mr. Ranjeet, Prepare the Trading and Profit & Loss Account:
Particulars Rs. Particulars Rs
Stock on April 01,2012 8,000 Bad debts 1,200
Purchases for the year 22,000 Rent 1,200
Sales for the year 42,000 Discount (Dr.) 600
Wages 2,500 Commission paid 1,100
Salaries & Wages 3,500 Sales Expenses 600
Advertisement 1,000 Repairs 600
163 [XI – Accountancy]
Closing stock on March 31, 2013 is Rs. 4,500.
Books of Mr. Ranjeet
Trading and Profit & Loss Account
Dr. for the year ended on March 31, 2013 Cr.
Receipts Rs. Payments Rs
Opening stock 8,000 Sales 42,000
Purchases 22,000 Closing stock 4,500
Wages 2,500 Gross Profit c/d 14,000
46,500 46,500
Salaries and Wages 3,500 Gross Profit b/d 14,000
Rent 1,200
Advertisement 1,000
Commission 1,100
Discount 600
Bad debts 1,200
Sales Expenses 600
Repairs 600
Net Profit
(transferred to capital) 4,200
14,000 14,000
GROUPING AND MARSHALLING OF ASSETS AND LIABILITIES
Grouping : The term ‘Grouping’ means putting together items of a similar
nature under a common heading. For example, under the heading ‘trade
Creditors’ the balances of the ledger accounts of all the suppliers from whom
goods have been purchased on credit, will be shown.
Marshalling : It refers to the order in which the various assets and liabilities
are shown in the Balance Sheet. The assets and liabilities can be shown either
in the order of liquidity or in the order of permanence.
Order of Liquidity
1. The assets are arranged in the order of their liquidity i.e., the most
liquid asset (e.g., cash-in-hand), is shown first. The least liquid asset
(e.g., goodwill) is shown last.
[XI – Accountancy] 164
2. The liabilities are arranged in the order of timing i.e., the liabilities
which are to be paid immediately (e.g., Creditors) are shown first and
which are to be paid later are shown at last (long-term loans).
A general format of a Balance Sheet in order of liquidity is shown
below:
Balance Sheet of ..............
Dr. As at ........... Cr.
Liabilities Rs. Assets Rs
Current Liabilities: Current Assets:
Bank Overdraft Cash-in hand
Bills Payable Cash at Bank
Outstanding Expenses Bills Receivable
Sundry Creditors Sundry Debtors
Income received-in-advance Prepaid Expenses
Accrued Income
Long-term Liabilities: Closing Stock
Loan Investment:
Capital: Fixed Assets:
Opening balance xxxx Furniture an Fixture
Add: Net Profit xxxx Plant & Machinery
(Less: Net Loss) Building
Less: Drawing (xxxx) Land
Goodwill
Order of Permanence : This order is exactly reverse of the liquidity order.
1. The assets are arranged in the order of their permanence i.e., the least
liquid asset (e.g., goodwill) is shown first and the most liquid asset
(e.g., Cash-in-hand) is shown last.
2. The least urgent payment to be made (e.g., short-term creditors) is
shown last.
3. A company is required to prepare the balance sheet in order of
permanence.
165 [XI – Accountancy]
A general format of a Balance Sheet in the order of performance is
shown below :
Dr. Balance Sheet of ........ as at ......... Cr.
Liabilities Rs. Assets Rs
Capital : Fixed Assets:
Opening Balance xxxx Good will
Add: Net Profit xxxx Land
(Less: Net Loss) Building
Less: Drawings (xxxx) Plant & Machinery
Long-term Liabilities: Furniture & Fixtures
Loan Investment:
Current liabilities: Current Assets:
Income received-in-advance Closing stock
Sundry Creditors Accrued income
Outstanding Expenses Prepaid expenses
Bills Payable Sundry Debtors
Bank Overdraft Bills Receivable
Cash at Bank
Cash in Hand
Adjustment in preparation of financial statements of Sole-proprietor
Meaning of Adjustment entries : Those entries which need to be passed
at end of the accounting year to show the accurate profit or loss and fair
financial position of the business.
Need of Adjustment : There are number of transactions that may not find
the place in the Trial Balance due to any reason such as Closing Stock (because
it is valued at the end of the year), Manager’s Commission based on Net
profits (because its calculation requires preparation of Income Statement first).
These transactions can only be taken into account by passing Adjustment
entries so that their impact on the profitability and financial position can be
shown.
Closing Stock : the closing stock represents the cost of unsold goods
lying in the stores at the end of the accounting period.
[XI – Accountancy] 166
Outstanding Expenses : When expenses of an accounting period remain
unpaid at the end of an accounting period, they are termed as outstanding
expenses.
As they relate to the earning of revenue during the current accounting
year, it is logical that they should be duly charged against the revenue for
computation of the correct amount of profit or loss.
Prepaid Expenses : At the end of the accounting year, it is found that the
benefits of some expenses have not yet been fully received; a portion of its
benefit would be received in the next accounting year. This portion of expenses,
is carried forward to the next year and is termed as prepaid expenses.
Accrued Income : It may sometime happen that certain items of income
such as a interest on loan, commission, rent, etc. are earned during the current
accounting year but have not been actually received by the end of the same
year. Such incomes are known as accrued income.
Income Received in Advance : Sometimes, a certain income is received
but the whole amount of it does not belong to the current period. The portion
of the income which belongs to the next accounting period is termed as income
received in advance or an Unearned Income.
Depreciation : It is the decline in the value of assets on account of wear
and tear and passage of time. It is treated as a business expense and is debited
to profit and loss account.
This, in effect, amounts to writing-off a portion of the cost of an asset
which has been used in the business for the purpose of earning profits.
Closing Stock Closing Stock A/c Dr. (i) Credit side of Trading A/c.
To Trading A/c (ii) Show on the assets side of
BALANCE SHEET.
Outstanding/Unpaid Expenses A/c Dr. (i) Add to the concerned item on
Expenses to Outstanding Expenses the Debit side of Trading/Profit
& Loss A/c.
(ii) Shown on the liabilities side of
BALANCE SHEET.
Prepaid expenses/ Prepaid Expenses A/c Dr. (i) Deduct from the concerned
Unexpired expenses To Expenses A/c expenses on the debit side of
Profit & Loss A/c
167 [XI – Accountancy]
(ii) Show on the assets side of
BALANCE SHEET.
Accrued income/ Accrued Income A/c Dr. (i) Add to the concerned income on
Income due but not To Income A/c Credit side of Profit and Loss A/c
received (ii) Show on the assets side of
BALANCE SHEET.
Unearned income/ Income A/c Dr. (i) Deduct from the concerned
Income received in To Unearned Income A/c income on the credit side of
Advance Profit & Loss A/c
(ii) Show on the liabilities side of
Balance Sheet.
Depreciation Depreciation A/c Dr. (i) Show on the debit side of Profit
To Asset A/c & Loss A/c
(ii) Deduct from the concerned asset
in the Balance Sheet.
Note : Sometimes the opening and closing stock are adjusted through purchases
account. In that case, the entry recorded is as follows :
Closing stock A/c Dr.
To Purchase A/c
This entry reduces the amount in the purchases account and is also known
as adjusted purchases which is shown on the debit side of the trading and
profit and loss account.
When the opening and closing stocks are adjusted through purchases, the
trial balance does not show any opening stock. Instead, the closing stock shall
appear in the trial balance (not as additional information or as an adjustment
item) and so also the adjusted purchases.
Illustration 6 : The following were the balances extracted from the books of
Kanta as on March 31, 2013.
Debit Balance Rs. Credit Balance Rs
Cash in hand 540 Sales 98,780
Cash at bank 2,630 Return 500
Purchases 40,675 outwards
Return inwards 680 Capital 62,000
Wages 8,480 Sundry 6,300
[XI – Accountancy] 168
Fuel and Power 4,730 creditors
Carriage on sales 3,200 Rent 9,000
Carriage on purchases 2,040
Opening stock 5,760
Building 32,000
Freehold land 10,000
Machinery 20,000
Salaries 15,000
Patents 7,500
General expenses 3,000
Insurance 600
Drawings 5,245
Sundry Debtors 14,500
176580 176580
Taking into account the following adjustments, prepare Trading and Profit
ad loss account and Balance Sheet as on March 31, 2013 :
(a) Stock in hand on March 31, 2013 was Rs. 6,800.
(b) Machinery is to be depreciated at the rate of 10% and patents @ 20%.
(c) Salaries for the month of March, 2013 amounting to Rs. 1,500 were
outstanding.
(d) Insurance includes a premium of Rs. 170 on a policy expiring on
September 30, 2013.
(e) Rent receivable Rs. 1,000.
Solution :
Books of Kanta
Trading and Profit and Loss Account
for the year ended March 31, 2013
Particulars Amount Particulars Amount
Opening stock 5,760
Purchases 40,675 Sales 98,780
Less Return outwards (500) 40,175 Less Return inwards 680 98,100
Wages 8,480 Closing stock 6,800
169 [XI – Accountancy]
Fuel and Power 4,730
Carriage on purchases 2,040
Gross profit c/d 43,715
1,04,900 1,04,900
Salaries 15,000 Gross profit b/d 43,715
Add Outstanding salaries 1,500 16,500 Rent 9,000
Carriage 3,200 Add Accrued rent 1,000 10,000
General expenses 3,000
Insurance 600
Less Prepaid insurance (85)
515
Depreciation : machinery 2,000
Patent 1,500 3,500
Net profit 27,000
(transferred to capital account)
53,715 53,715
Balance Sheet as at March 31, 2013
Liabilities Rs. Assets Rs
Sundry creditors 6,300 Cash in hand 540
Cash at bank 2,630
Salaries outstanding 1,500 Sundry debtors 14,500
Insurance prepaid 85
Capital 62,000 Stock 6,800
Add Net profit 27,000 Rent accrued 1,000
89,000 Freehold land 10,000
Building 32,000
Less Drawings (5,245) 83755 Machinery 20,000
Less Depreciation (2,000) 18,000
Patents 7,500
Less Depreciation (1,500) 6,000
91,555 91,555
To write off bad debts Bad Debts A/c Dr. (i) Debit side of P&L A/c.
To Debtors (ii) Deduct from debtors on the
assets side of Balance Sheet.
[XI – Accountancy] 170
Provision for bad and P & L A/c Dr. (i) Debit side of P & L A/c.
doubtful debts To Debtors A/c (ii) Deduct from debtors on the
assets side of Balance Sheet.
Provision for discount P & L A/c Dr. (i) Debit side of P & L A/c.
on debtors To Provision for (ii) Deduct from debtors on the
Discount on Debtors assets side of Balance Sheet.
Debtors A/c
Further Bad Debts : These Bad debts is a loss that occurred after
preparation of Trial Balance. Further bad debts be added in the bad debts
already appearing in the Profit and Loss A/c and Debtors would be reduced
with the same amount.
Provision for Bad Debts : In the balance sheet, debtors appears on the
assets side of the Balance Sheet, which is their estimated realisable value
during next year. It is quite possible that the whole of the amount may not be
realized in future. However, it is not possible to accurately know the amount
of such bad debts.
Hence, a reasonable estimate of such loss is provided in the book. Such
provision is called provision for bad debts. Provision for doubtful debts is
shown as a deduction from the debtors on the asset side of the balance sheet.
Note : The provision for doubtful debts brought forward from the previous
year is called the opening provision or old provision. When such a provision
already exists, the loss due to bad debts during the current year are adjusted
against the same and while making provision for doubtful debts required at the
end of the current year is called new provision. The balance of old provision
as given in trial balance should also be taken into account.
Provision for discount on Debtors : Discount is allowed to customers
to encourage them to make prompt payment. The discount likely to be allowed
to customers in an accounting year can be estimated and provided for by
creating a provision for Discount on debtors.
Provision for discount on debtors is made on good debtors which are
arrived at by deducting further bad debts and provision for bad debts out of
Debtors shown in the Balance sheet.
Illustration 7 : An extract from a trial balance on March 31, 2013 is given
below :
171 [XI – Accountancy]
Rs.
Sundry Debtors 32,000
Bad Debts 2,000
Provision for Bad Debts 3,500
Additional Information
Write-off further Bad Debts Rs. 1,000 and create a provision for Doubtful Debts @ 5%
on debtors.
Journal
Date Particulars L.F. Rs. Rs.
2013 (a) Bad Debts A/c Dr. 1,000
Mar. 31 To Sundry debtors 1,000
(Further Bad Debts)
(b) Provision for Doubtful Debts A/c Dr. 3,000
To Bad Debts A/c 3,000
(Bad debts adjusted against the provision)
Profit and Loss A/c Dr. 1,050
To Provision for Doubtful Debts 1,050
(Amount charges from Profit and Loss account).
Profit and Loss Account*
for the year ended March 31,2013
Rs. Rs
Provision for doubtful debts:
Bad debts 2,000
Further bad debts 1,000
New provision 1,550
4,550
Less Old provision 3,500
1,050
*Only relevant items.
[XI – Accountancy] 172
Balance Sheet* as at March 31, 2013
Receipts Rs. Payments Rs
Sundry debtors 32,000
Less Further (1,000)
Bad debts 31,000
Less Provision for
doubtful debts (1,550) 29,450
*Only relevant items.
Note : The amount of new provision for doubtful debts has been calculated as
follows : Rs. 31,000×5/100 = Rs. 1,550
Illustration 8 : The following balances were extracted from the books of Shri
R. Lal on March 31, 2013.
Name of the Ledger A/c Rs. Name of Ledger A/c Rs
Name of Ledger A/c Rs. Name of Ledger A/c Rs.
Capital 1,00,000 Rent (Cr.) 2,100
Drawings 17,600 Railway freight on sales 16,940
Purchases 80,000 Carriage inwards 2,310
Sales 1,40,370 Office expenses 1,340
Purchases return 2,820 Printing and Stationery 660
Stock on April 01, 2012 11,460 Postage and Telegram 820
Bad debts 1,400 Sundry debtors 62,070
Bad debts Provision on Sundry creditors 18,920
April 01, 2012 3,240 Cash in bank 12,400
Cash in hand 2,210
Rates and Insurance 1,300 Office furniture 3,500
Discount (Cr.) 190 Salaries and Commission 9,870
B/R 1,240 Addition to buildings 7,000
Sales returns 4,240
Wages 6,280
Buildings 25,000
Prepare the trading and profit and loss account and a balance sheet as on
March 31, 2013 after keeping in view the following adjustments:
173 [XI – Accountancy]
(i) Depreciate old building by Rs. 625 and addition to building at 2% and
office furniture at 5%.
(ii) Write-off further Bad Debts Rs. 570.
(iii) Increase the Bad Debts Reserve to 6% of Debtors.
(iv) Rs. 570 are outstanding for salary.
(v) Rent receivable Rs. 200 on March 31, 2013.
(vi) Interest on capital charged @ 5%.
(vii) Unexpired insurance Rs. 240.
(viii) Stock was valued at Rs. 14,290 on March 31, 2013.
Solution :
Trading and Profit & Loss Account
for the year ended on March 31, 2013
Particulars Rs. Particulars Rs
Opening stock 11,460 Sales 1,40,370
Purchases 80,000 Less Sales Return (4,240) 1,36,130
Less Purchase return (2,820) 77,180
Carriage inwards 2,310
Wages 6,280 Closing stock 14,290
Gross profit c/d 53,190
1,50,420 1,50,420
Railway freight on sales 16,940 Gross profit c/d 53,190
Office expenses 1,340 Rent 2,100
Postage and Telegram 820 Add Accrued rent 200 2,300
Printing and Stationery 660 Discount 190
Salary and Commission 9,870
Add Outstanding salary 570 10,440
Rates and Insurance 1,300
Less unexpired insurance (240) 1,060
Bad debts 1,400
Add Further bad debts 570
Add New bad debts 3,690
provision 5660
[XI – Accountancy] 174
Less Old provision (3,240)
for bad debts 2,420
Interest on capital 5,000
Depreciation on building 625
Depreciation on additions 140
Depreciation on furniture 175
Net profit (transferred to 16,060
capital account)
55,680 55, 680
Balance Sheet
as on March 31, 2013
Liabilities Rs. Assests Rs
Sundry creditors 18,920 Cash at bank 12,400
Outstanding salaries 570 Cash in hand 2,210
B/R 1,240
Capital 1,00,000
Add Net profit 16,060 Debtors 62,070
Add Interest on capital 5,000
1,21,060 Less Further Bad Debts (570)
61,500
Less Drawings (17,600) 1,03,460
Less New provision (3,690)
for Bad Debts 57,810
Accrued Rent 200
Prepaid Insurance 240
Building 25,000
Less Depreciation (625) 24,375
Addition to building 7,000
Less Depreciation (140) 6,860
Office furniture 3,500
Less Depreciation (175) 3,325
Closing stock 14,290
1,22,950 1,22,950
175 [XI – Accountancy]
Manager’s Commission
The manager of the business is sometimes given the commission on the
net profit of the company. The percentage of the commission is applied on the
profit either before charging such commission or after charging such
commission. In the absence of any such information, it is assumed that
commission is allowed as a percentage of the net profit before charging such
commission.
1. Commission on net profits before charging such commission
Net profit before commission Rate of CommissionCommission
100
2. Commission on net profits after charging such commission
Net profit before commission Rate of CommissionCommission
100 Rate of Com.
Interest on capital Interest on Capital A/c Dr. (i) Debit side of P & L A/c.
To Capital A/c (ii) Add to capital on the
liabilities side of Balance Sheet.
Interest on drawings Capital/Drawings A/c Dr. (i) Credit side of P & L A/c.
To Interest on Drawings A/c (ii) Deduct from capital on the
liabilities side of Balance Sheet.
Interest payable on Interest on Loan A/c Dr. (i) Debit side of P & L A/c.
loans (borrowed) To Loan A/c (ii) Add to loan on the liabilities
side of Balance Sheet.
Commission payable P & L A/c Dr. (i) Debit side of P & L A/c.
to manager To Commission payable to (ii) Show on the liabilities side of
Manager A/c Balance Sheet.
Abnormal loss of goods by fire, theft, accident, etc.
For gross loss Loss by...........A/c Dr. (i) Gross Loss : Deduct from
(Total loss) To Trading A/c Purchases or show on the
(or) To Purchases A/c credit side of Trading A/c.
For insurance claim Insurance Claim Dr. (ii) Net Loss : Debit side of P & L
accepted, if any To Loss by..........A/c A/c.
For net loss
(Total loss-Claim P & L A/c Dr. (iii) Insurance claim: Assets side of
accepted by Ins.Co.) to Loss by........A/c Balance Sheet.
[XI – Accountancy] 176
Goods taken by Drawings A/c Dr. (i) Deduct the amount of goods from
the proprietor To Purchases A/c the purchases in Trading A/c.
for his personal (ii) Deduct the amount from the
use capital on the liabilities side of
Balance Sheet.
Goods given as Charity A/c Dr. (i) Deduct the amount from the
charity To Purchases a/c purchases on the debit side of
Trading A/c.
(ii) Show on the debit side of P & L A/c.
Goods Advertising A/c Dr. (i) Deduct the amount of goods from
distributed as To Purchases A/c the purchases in Trading A/c.
free samples (ii) Show on the debit side of P & L A/c.
Illustration 9 : From the following balances of Mr. Naveen. You are required
to Prepare trading and profit and loss account and a balance sheet on March
31, 2013.
Debit Balance Rs. Credit Balances Rs
Plant and Machinery 1,30,000 Sales 3,00,000
Debtors 50,000 Return outwards 2,500
Interest 2,000 Creditors 2,50,000
Wages 1,200 Bills payable 70,000
Salary 2,500 Provision for bad debts 1,550
Carriage inwards 500 Capital 2,20,000
Carriage outwards 700 Rent received 10,380
Return inwards 2,000 Commission received 16,000
Factory rent 1,450
Office rent 2,300
Insurance 780
Furniture 22,500
Buildings 2,80,000
Bills receivable 3,000
Cash in hand 22,500
Cash at bank 35,000
Commission 500
Opening stock 60,000
177 [XI – Accountancy]
Purchases 2,50,000
Bad debts 3,500
8,70,430 8,70,430
Adjustment
1. Provision for Bad Debts @ 5% and further Bad Debts Rs. 2,000.
2. Rent received in Advance Rs. 6,000.
3. Prepaid insurance Rs. 200.
4. Depreciation on furniture @ 5%, plant and machinery @ 6%, building
@ 7%.
5. Closing stock amounting Rs. 70,000 on 31.03.2013.
Solution :
Books of Mr. Naveen
Trading and Profit and Loss Account
for the year ended March 31, 2013
Particulars Amt. z Particulars Amt.
Rs. Rs.
Opening stock 60,000 Sales 3,00,000
Purchases 2,50,000 Less Return (2,000) 2,98,000
Less Returns (2,500) 2,47,500 Closing Stock 70,000
Wages 1,200
Carriage inwards 500
Factory rent 1,450
Gross profit c/d 57,350
3,68,000 3,68,000
Interest 2,000 Gross profit b/d 57,350
Salary 2,500 Rent received 10,380
Carriage outwards 700 Less Advance rent (6,000) 4,380
Office Rent 2,300 Commission received 16,000
Insurance 780
Less Prepaid insurance (200) 580
Depreciation on furniture 1,125
Depreciation on Plant and 7,800
Machinery
Depreciation on building 19,600
Commission 500
[XI – Accountancy] 178
Bad debts 3,500
Add : Further bad debts 2,000
Add : New provision 2,400
7,900
Less Old provision (1,550) 6,350
Net Profit (transferred to 34,275
capital account)
77,730 77,730
Balance Sheet
as at March 31, 2013
Liabilities Amt.. Assets Amt.
Rs Rs.
Creditors 2,50,000 Cash in hand 22,500
Bills payable 70,000 Cash at Bank 35,000
Advance rent 6,000 Bills receivable 3,000
Capital 2,20,000 Prepaid insurance 200
Add Net profit 34,275 2,54,275 Debtors 50,000
Less Further (2,000)
bad debts 48,000
Less New provision (2,400) 45,600
Plant and Machinery 1,22,200
Furniture 21,375
Buildings 2,60,400
Closing stock 70,000
5,80,275 5,80,275
Illustration 10 : From the following Adjustments and with the help of Trial
Balance prepare a Trading A/c Profit and Loss A/c and Balance sheet as on
31st Dec. 2013.
Dr. Balance Rs. Cr. Balance Rs
Insurance charges 2,400 Capital 1,70,000
Salaries & wages 19,400 S. Creditors 20,000
Cash in hand 200 Sales 1,20,000
179 [XI – Accountancy]
Cash at Bank 26,500 Returns outwards 1,200
Trade Expenses 400 Provision for doubtful debts 400
Postage & Telegrams 800 Discount 800
Drawings 6,000 Rent of Premises, Subject for 1,200
one year to 30th June 2013
Plant & Machinery :-
Balance on 1st Jan 2013 1,20,000
Addition on 1st July, 2013 5,000
Stock on 1st Jan. 2013 15,000
Purchases 82,000
Returns Inward 2,000
S. Debtors 20,800
Furniture & Fixtures 5,000
Freight & Duty 2,000
Carriage outwards 500
Rent, Rates & taxes 4,600
Printing & stationery 1,000
Adjustments
1. Stock on 31st Dec. 2013 was valued at Rs. 24,000 and stationery
unused at the end was Rs. 250.
2. The provision for Doubtful Debts is to be maintained at 6% on Sundry
Debtors.
3. Create a provision for discount on Sundry Debtors at 2%.
4. Write off Rs. 800 as Bad-Debts.
5. Provide depreciation on Plant and Machinery @ 10% p.a.
6. Insurance is paid up to 31st March 2014.
7. A fire occurred on 25th Dec. 2013 in the Godown and Stock of the
value of Rs. 6,000 was destroyed. It was insured and the Insurance co.
admitted a claim of Rs. 4,000.
[XI – Accountancy] 180
Solution :
Trading and Profit & Loss Account
for the year ending 31st Dec. 2013
Particulars Amount. Particulars Amount
To Opening Stock 15,000 By Sales 1,20,000
Less Return 2,000 1,18,000
To Purchases 82,000 By Closing stock 24,000
Less: Return (1,200)
80,800
Less : Loss by fire (6,000) 74,800
To Freight & duty 2,000
to Gross Profit c/d 50,200
1,42,000 1,42,000
To Insurance charges 2,400 By Gross Profit 50,200
Less : Prepaid insurance (600) 1,800
To Salaries & wages 19,400 By Discount 800
To Trade expenses 400 By Rent of premises sub-let1,200
Less : Rent received in adv.(600) 600
To Postage & telegram 800
To Carriage outwards 500
To Rent, Rates & Taxes 4,600
To Printing & Stationery 1,000
Less : Unused (250) 750
To Bad debts 800
Add : New reserve 1,200
2,000
Less : Old reserve (400) 1,600
To Provision for
discount on debtor 376
To Depreciation on
Plant & Mac. 12,250
(12,000+250)
To loss by fire 6,000
181 [XI – Accountancy]
Less : Insurance Claim 4,000 2,000
To Net Profit transferred
to Capital 7,124
51,600 51,600
Balance Sheet
As on 31st Dec. 2013
Liabilities Amt. Assests Amt.
S. creditor 20,000 Cash in hand 200
Rent received in advance 600 Cash at Axis Bank 26,500
Capital 1,70,000 S. Debtor 20,800
Add : Net Profit 7,124 Less : Bad Debts (800)
1,77,124 20,000
Less : Drawings 6,000 1,71,124 Less : New Reserve (1,200)
18,800
Less : Discount (376) 18,424
Insurance company (Claim) 4,000
Closing stock 24,000
Stationery unused 250
Prepaid insurance 600
Furniture & Fixture 5,000
Plant & Mac. 1,20,000
Add : Addition (5,000)
1,25,000
Less : Depreciation (12,250) 1,12,750
191,724 191,724
Illustration 11 : The following balances were extracted from the books of Mr.
G.S. Kushwaha on 31st Dec. 2013.
Ledger Accounts Dr. Cr.
Balance Balance
Capital 24,500
Drawings 2,000
General Expenses 2,500
[XI – Accountancy] 182
Building 11,000
Machinery 9,340
Stock (1.1.2013) 16,200
Power 2,240
Taxes and Insurance 1,315
Wages 7,200
Sundry Debtors 6,280
Sundry Creditors 2,500
Charity 105
Bad Debts 550
Bank overdraft 11,180
Sales 65,360
Purchases 47,000
Scooter 2,000
Bad debts provision 900
Commission 1,320
Trade expenses 1,780
Bills payable 3,850
Cash 100 24,500
Total 1,09,610 1,09,610
Prepare final accounts for the year ended 31st Dec. 2013 after taking into
account the following :
1. Stock on 31st Dec. 2013 was valued at Rs. 23,500
2. Write off further Bad Debts Rs. 160 and maintain the provision for Bad
Debts at 5% on Sundry Debtors.
3. Depreciate Machinery by 10% and Scooter by Rs. 240.
4. Provide Rs. 750 for outstanding interest on bank overdraft.
5. Prepaid insurance is to the extent of 50, Commission receivable
amounting to Rs. 50
6. Provide Manager’s commission at 10% on net profit after charging
such commission.
183 [XI – Accountancy]
Solution :
Trading and Profit & Loss Account
Dr. For the year ending 31st Dec. 2013 Cr.
Particulars Rs. Particulars Rs
To Opening Stock 16,200 By Sales 65,360
To Purchases 47,000 By Closing Stock 23,500
To Power 2,240
To Wages 7,200
To Gross Profit (B.F.) 16,220
88,860 88,860
To General Expenses 2,500 By Gross Profit 16,220
To Taxes & Insurance 1,315 By Commission 1,320
Less : Prepaid (50) 1,265 Add : Receivable Com. 50 1,370
To Interest on Bank Overdraft 750
To Dep. On Machinery 934
Scooter 240 1,174
To Bad Debts 550
Add : Further bad debts 160
Add : New Reserve (306)
1,016
Less : Old Reserve (900) 116
To Charity 105
To Trade Expenses 1,780
To Manager Commission Payable 900
(9,900 × 10/110)
To Net Profit transferred to 9,000
Capital a/c
17,590 17,590
[XI – Accountancy] 184
Balance Sheet
As on Dec. 31, 2012
Liabilities Rs. Assets Rs
S. Creditor 2500 Cash 100
Bank Overdraft 11,180 Debtors 6,280
Add : O/s Interest (750) 11,930 Less : Further Bad Debts (160)
6,120
Less : New Reserve (306) 5,814
Bills Payable 3,850 Prepaid Insurance 50
Manager Commission Payable 900 Closing Stock 23,500
Capital 24,500 Machinery 9,340
Add : Net Profit 9,000 Less : Depreciation (934) 8,406
Less : Drawings (2,000) 31,500
Scooter 2,000
Less : Depreciation (240) 1,760
Building 11,000
Commission Receivable 50
50,680 50,680
Note :
1. If closing stock shown in Trial Balance then it will be shown in balance
sheet only. It is assumed that purchases amount already get adjusted in
trial balance.
2. Salary and wages will be shown in profit and loss A/c debit side
(assuming that salary is prominent) while wages and salary will be
shown in trading A/c debit side. (wages are prominent).
3. Freight, carriage, cartage will be shown in Dr. side of trading A/c. if
inward word attached with these then it also debited to trading A/c, if
outward word attached with these item then it will be debited to profit
and loss account.
4. Any expenses related to factory are debited to trading account like
factory lighting, factory rent if factory word is not given then lighting
and rent will be debited to profit and loss account.
185 [XI – Accountancy]
5. Trade expenses always debited to profit and loss A/c not as name
indicate trading A/c.
6. Packaging material : cost of packaging material used in product are
direct expenses as it refers to small containers which form part sold, it
will debited to trading A/c.
7. Packing : the packing refers to the big containers that are used for
transporting the goods and regarded as indirect expenses and debited to
profit and loss account.
8. Adjusted purchases mean the amount of purchases is adjusted by way
of adding opening stock and reduced by the amount of closing stock,
e.g., purchases Rs. 1,00,000; opening stock Rs. 12,000, closing stock
Rs. 8,000. Calculate adjusted purchases.
Adjusted purchases = purchases + opening stock – closing stock
= Rs. 1,00,000 + Rs. 12,000 – Rs. 8,000 = Rs. 1,04,000
When adjusted purchases is given in trail balance, then there is no need
of debiting opening stock and crediting closing stock in trading A/c.
In this case closing stock will be shown in balance sheet only.
Remember
While preparing Final Account the items which are given inside the Trial
Balance are written only once either in Income Statement or in the Balance
Sheet. (Assuming that they have been already adjusted in the respective account).
On the other hand, the items which are given outside the Trial Balance (known
as adjustment) are to be written twice because the double entry in respect of
all adjustments is to be completed in the final accounts itself.
[XI – Accountancy] 186
CHAPTER-10
ACCOUNTS FROM INCOMPLETE RECORDS
Learning Objectives
After studying this lesson you will be able to :
Define the concept of incomplete records.
Distinguish between Double entry system and Accounts from Incomplete
records.
Ascertain the amount of profit or loss using “Statement of Affairs”
method.
Differentiate between Balance Sheet and Statement of Affairs.
Prepare Statement of Affairs using given data.
Suggested Methodology
Illustration Method
Discussion Method
Some small size business entities do not follow the double entry system
of maintaining the accounting records because :
1. It is very costly system
2. It is a time consuming method, and
3. It requires expert staff to adhere to principles and accounting standards
of system.
Due to the above mentioned reasons, some business entities maintains
books of accounts under the system Accounting from Incomplete records. The
system in which no set rules of double entry system are followed is called
187 [XI – Accountancy]
Accounts from Incomplete records.
Under this system only the following accounts are maintained
cash book, and
The personal accounts
Some Real Account according to need
Note : Nominal accounts are not maintained under this system.
Under this system of maintaining accounts :
Both the aspects of only certain transactions are recorded e.g. cash
received from debtors or cash paid to creditors.
One aspect of some transactions are recorded e.g. cash paid for purchase
of goods.
Some financial events are not recorded at all e.g. depreciation charged
on fixed assets.
Points to Remember
Accounting Principles and Accounting Standards are not followed
properly under this system.
Original vouchers provide base for preparing the accounts.
This method is highly flexible because it can be adjusted according to
the needs of the orgnanisation.
Profit or less is ascertained by either Statement of Affairs method or
‘Conversion into Double Entry System Method.’
Use of Incomplete Records
Books according to this system can be maintained only by those small
entities in the form of Sole Proprietorship or Partnership firms that are not
bound to keep records of business transactions as per double entry system.
Companies cannot maintain books under this system because of legal provisions.
[XI – Accountancy] 188
Limitations of Incomplete Records
1. Incomplete method : This method is incomplete method of maintaining
the accounting records as the aspects, debit and credit, of every
transaction are not recorded.
2. Unscientific System : This system is an unscientific system as not set
rules are followed for recording the business transactions.
3. Arithmetical Accuracy cannot be checked : Under this system no
real and nominal accounts are maintained. As such a trial balance cannot
be prepared to check the arithmetical accuracy of the books of accounts.
4. True Profit or Loss cannot be ascertained : In the absence of Trial
balance, a trading and profit and loss account cannot be prepared and
hence the profit or loss ascertained during a particular period is based
on estimates, hence cannot be relied upon.
5. True financial position of the business cannot be Judged : Since
real accounts are not maintained, it is not possible to prepare a balance
sheet showing the true financial position of the business. A Statement
of Affairs is prepared to show the financial position of the business
which itself shows the estimated values of assets and liabilities.
6. Chances of Errors and Frauds : Under this system the principles of
double entry system are not followed hence internal checking is not
possible. It leads to chances of errors and frauds. Also, it becomes very
difficult to detect them.
Ascertainment of Profit or Loss
The main objective of any business enterprise is to earn profits. Business
persons are always interested to know the amount of profit earned or loss
beared during an accounting period. In case of organizations maintaining
accounts under incomplete records the amount of profit or loss can be ascertained
by Statement of Affairs method or Net Worth method.
Statement of Affairs Method
Under this method, profits or losses of the business are ascertained by
comparing the Capital at the end, Capital at the beginning of the accounting
period.
189 [XI – Accountancy]
Note :
1. When Capital at the end of an accounting is more than the capital in
the beginning of the Accounting period
Profits = Capital at the end – Capital at the beginning
2. When Capital at the Capital at the Beginning is more than capital at
the End of an Accounting Period.
Losses = Capital at the Beginning – Capital at the End
For ascertainment of profit or loss, the following steps shall be taken :
Step 1 : Calculate the amount of ‘Opening capital’ (If not given in the
Question) by preparing Statement of Affairs at the beginning of the
accounting period.
Step 2 : Calculate the amount of ‘Closing Capital’ by preparing ‘Statement of
Affair’ at the end of the accounting period.
Step 3 : Calculation of Profit or Loss by preparing Statement of Profit of
Loss in the following manner :
Statement of Profit or Loss for the year ended on..
Particulars Rs.
Closing Capital xxxx
(As ascertained by closing statement of affairs)
Add - Drawings during the year xxxx
Less - Additional capital introduced during the year (xxxx)
Adjusted capital at the end xxxx
Less - Opening Capital
(As ascertained by Opening Statement of Affairs) (xxxx)
Profit or loss for the year xxxx
STATEMENT OF AFFAIRS
A Statement of affairs is a statement showing the balances of assets
(including cash and bank balance) on the right hand side and the balance of
liabilities on the left hand side, on a particulars date. The difference in the total
[XI – Accountancy] 190
of two sides is known as capital.
Capital = Total Assets – Total liabilities
A statement of affairs is very similar to Balance Sheet as prepared for the
business entities maintaining accounts under double entry system, though it
should not be described as a Balance Sheet.
A Statement of Affairs is prepared as follows :
Statement of Affairs
as on...................
Liabilities Rs. Assets Rs
Bank Overdraft xxxx Cash in hand xxxx
Sundry Creditors xxxx Cash at bank xxxx
Bills Payable xxxx Bills Receivables xxxx
Outstanding Expenses xxxx Sundry Debtors xxxx
Income Received in Advance xxxx Stock xxxx
Prepaid Expenses xxxx
Capital xxxx Accrued Income xxxx
(Balancing figure) Furniture xxxx
Q. 1 Anil who keeps his books on single entry, tells you that his capital on
31-12-2013 was Rs. 18,700 and his capital on 1-1-2013 was Rs. 19,200.
He further informs you that during the year he withdrew for his
household purposes Rs. 8,420. He sold his investments of Rs. 2,000 at
2% premium and brought that money into the business. You are required
to calculate Profit or Loss for the year 2013.
Ans. Statement of Profit & Loss
For the year ended on 31-12-2013
Particulars Rs.
1. Statement of profit and loss 18,700
Add : Drawing during the years 8,420
27,120
Less : Capital introduced during the years 2,040
(2,000 × 102/100)
191 [XI – Accountancy]
25,080
Less : Capital in the beginning 19,200
Net profit for the year (B/F) 5,880
Q. 2 Ms. Anna started firm with a capital of Rs. 4,00,000 on 1st July 2013.
She borrowed from her friends a sum of Rs. 1,00,000 @ 10% per
annum (interest paid) for business and brought a further amount to
capital Rs. 75,000. On Dec. 31, 2013, her position was :
Particulars Rs.
Cash 30,000
Stock 4,70,000
Debtors 3,50,000
Creditors 3,00,000
She withdrew Rs. 8,000 per month during the year. Calculate profit or loss for the year
2013 and show your workings clearly.
Solution :
Statement of Affairs
as on 31st Dec. 2013
Particulars Rs. Assets Rs
Creditors 3,00,000 Cash 30,000
Loan 1,00,000 Stock 4,70,000
Closing Capital (B/F) 4,50,000 Debtors 3,50,000
8,50,000 8,50,000
Statement of Profit & Loss
For the year ended 31st Dec. 2013
Particulars Rs.
Capital at the end 4,50,000
Add : Drawing during the years (8,000×6) 48,000
4,98,000
Less : Additional Capital introduced during the year 75,000
4,23,000
Less : Capital in the beginning 4,00,000
Net profit for the year (B/F) 23,000
[XI – Accountancy] 192
Q. 3 Mr. Rajesh keeps his books by ‘Single Entry Method’. His position
on 31st December, 2012 was as follows :
Cash in hand Rs. 500, Cash at Bank Rs. 6,000, Stock Rs. 5,000, Debtors
Rs. 3,300, Furniture Rs. 1,200, Creditors Rs. 4,000. During the year he
introduced Rs. 4,000 as further capital in the Business, and withdrew Rs.
9,000 out of which he purchased a machine for Rs. 6,000 for the business.
On 31 Dec., 2013 his position was as follows :
Cash in hand Rs. 500, Cash at Bank Rs. 5,000, Stock Rs. 6,000, Debtors
Rs. 4,600, Furniture Rs. 1,500 and Creditors Rs. 6,000.
Prepare necessary statements showing the Profit or Loss earned by Mr.
Rajesh during the year and a Balance Sheet as at 31st December, 2013 after
making the following adjustments :
Depreciate Furniture and Machine at 10% (on closing balance), write off
bad debts Rs. 200 and provide 5% for doubtful debts.
Solution :
Statement of Affairs
as on 31 Dec., 2012
Liabilities Rs. Assets Rs
Creditors 4,000 Cash in Hand 500
Opening Capital 12,000 Cash at Bank 6,000
(B/F)
Stock 5,000
Debtors 3,300
Furniture 1,200
16,000 16,000
Statement of Affairs
as on 31st Dec. 2013
Liabilities Rs. Assets Rs
Creditors 6,000 Cash in Hand 500
Machine 6,000
193 [XI – Accountancy]
Less : Dep. 600 5,400
Opening Capital (B/F) 16,430 Cash at Bank 5,000
Stock 6,000
Debtors 4,600
Less : Bad Debts 200
4,400
Less : Provision 220 4,180
Furniture 1500
Less : Dep. 150 1,350
22,430 22,430
Statement of Profit & Loss
For the year ended on 31st Dec., 2013
Particulars Rs.
Capital at the end 16,430
Add : Drawing during the years (9,000–6,000) 3,000
19,430
Less : Capital introduced during the years 4,000
15,430
Less : Capital in the beginning 12,000
Net profit for the year (B/F) 3,430
[XI – Accountancy] 194
CHAPTER – 11
NON-FOR PROFIT ORGANIZATION
IMPORTANT POINTS
Learning Objectives
After studying this lesson you will be able to
State the meaning of Not - for - Profit organization :
Explain the various items of accounting in Not-for-Profit organization
Explain about the Financial Statements of No-for-profit organization.
Show the According Treatment of various items of accounting in Not-
for-profit organization.
Teaching Methods
Teachers are advised to use a various examples of Not-for-profit
organizations.
Story telling method can also be used for various items of Not-for-
profit organization.
Meaning of Not-for-profit Organization
The primary motive of not-for-profit organization is to render services to
their members to promote culture, art, education and other religious, social and
charitable activities. These institute or organizations do not maintain their
accounts on the same basis as of business enterprises. The non-profit seeking
entitles exists with a primary objective of providing service. For this reason,
these institutions do not prepare Profit and Loss Account.
Examples of not-for organization :
195 [XI – Accountancy]
Hospitals, dispensaries, sports clubs, recreation clubs, temples,
dharamshalas, orphanage, school and College etc.
Such organization prepares following financial statement at the end of
accounting period :
1. Receipts and Payments Account
2. Income and Expenditure Account
3. Balance Sheet
Receipts and Payments Account
The account is merely a summary of the transaction appearing in the
cash book. After preparation of this account, it is easy to prepare the income
and expenditure account as well as the balance sheet. All receipt are shown
on its debit side and all payments are shown on its credit side. All the
receipts and payments during an accounting period are included in it under
appropriate headings. For example, if a club receives subscription from its
members on different dates, it will be recorded in the cash book in chronological
order, where as the receipts and payments account will contain the total
subscriptions received during the year.
Features of Receipts and Payment Account
It is clear from above discussion that the Receipt and Payment Account
is merely a summary of the all receipt and all payment during the year. Special
features of Receipts and Payment Account are as follow :
1. It is a real account. Thus Receipts are shown on its debit side and
payments on the credit side.
2. Excess receipt over payment is the closing balance of cash which is
shown in Balance sheet on asset side.
3. This account begins with the opening balance of cash or bank.
4. An item may be repeated many times in a cash book, but it is shown
once in ‘Receipts and Payment Account’.
5. All cash payments are shown on its credit side irrespective of the fact
whether these are of capital nature or of revenue nature and whether
[XI – Accountancy] 196
they relate to current year, previous or next year.
6. Receipt and payment Account records only the actual receipt and
payment of cash. Non-cash items such as depreciation, outstanding
expense and accrued incomes are ignored while preparing it.
Income and Expenditure Account
Income and Expenditure Account serves the same purpose for a Not-for
profit organization as the Profit and Loss Account for a business enterprise.
This account is a nominal account. This account is prepared by Not-for-profit
organization. So, we can say that it is the summary of Income and Expenditure
of a particular accounting period whether income received or not and whether
expenditure paid or not.
Features of Income and Expenditure Account :
1. It is a nomial account.
2. No capital item is entered in this account.
3. Its debit side includes all the expenses pertaining to the particular
period and credit side includes all the income pertaining to the same
period.
4. No opening and closing balance are recorded in it.
5. No item, either revenue or expenditure, pertaining to the past period
or the future period is entered in this account.
6. This account is prepared in the same manner in which a profit and loss
Account is prepared.
7. Credit balance is called “Excess of Income over Expenditure’ and debit
balance is called “Expenditure over Income”.
Concept of Fund based Accounting
Not for profit organization receive some funds for some specific purposes
and these funds are used only for those purpose for which they have been
contributed. Fund Based Accounting refers to the accounting whereby receipt
and income pertaining to a particular fund are credited to that particular fund
197 [XI – Accountancy]
and payments and expenses are debited to it. These funds are created for some
specified purpose such as prize fund, building fund, sports fund etc.
Thus, a separate accounting is needed for these specific funds. This type
of accounting is called Fund based accounting.
Important Items of Not for Profit Organizations
1. Legacy : Legacy represents the amount property received by
organization under a will on death of the contribution. In other
words we can say that legacies are the donations made by a person in
his will, so their donation are called legacy.
(i) Legacies received for a specific purpose must be capitalized in
the name of concerned fund for which it is received.
(ii) Legacies received not for any specific fund may beaded to the
capital fund.
Example : Mr. Shyam Lal writes his will his property will be transferred
(after his death) to a Not-for-profit Organization. After death of Mr.
Shyam Lal, his property will be treated as capital receipt by concerned
Not-for-profit Organization under the head legacy.
2. Entrance Fees : Entrance fee is called admission fee. It refers to the
amount received from the persons for becoming members. It is a fee
paid by members at the time of joining a not-fore-profit organization.
(i) It is an item of recurring nature.
(ii) Generally Entrance fees are treated as income.
3. Grant : Grants are an aid issued be any Govt. agency to any Not-for-
profit organization for specific purpose or general purpose.
(i) It is an aid from Government.
(ii) Specific grant should be capitalized.
(iii) General grant should be treated as revenue income and shown
on the credit side of Income and Expenditure Account.
[XI – Accountancy] 198
4. Donation : Donation is the amount received by Not-for-profit
Organization from any person or institution without any
consideration and not periodically.
Donation can be categorized as under :
(i) General Donation : If donation received for not a specific
purpose and can be utilized for any purpose, is known as general
donation.
It is treated as Revenue Receipt.
(ii) Specific Donation : If donation received for a particular purpose
and can be used/spent for the same purpose only, it known as
specific donation. For example donation received for the
construction of the building.
It is treated as Capital Receipt.
5. Subscription : Subscription is the amount payable by members of No-
for-profit Organization for renewal of membership periodically.
(i) It is recurring in nature.
(ii) It is treated as Revenue Receipt.
Example : There are 60 members of a Not-for-profit Organization and
each member is required to pay a sum of Rs. 300 per annum to
continue his/her membership. Hence this amount is known as
Subscription.
6. Life Membership Fee : Life membership fee is the fee received from
those members who do not periodic fee or subscription but pay a lump
sum amount to become life time members.
(i) These members are generally permanent members.
(ii) Life membership fees can be added to capital fund or
separately on the liabilities side of Balance sheet.
7. Endowment Funds :
1. This fund is created from the bequest, legacy or gifts received
199 [XI – Accountancy]
by the Not-for-profit organization. These funds are invested
outside.
2. The income from the investment of such funds is used for
some specific purposes only.
3. Endowment funds shall be shown on the Liabilities side of the
balance sheet of Not-for-profit organization.
Example : An amount of Rs. 5,00,000 is received as Donation with
condition that this amount will be invested as Fixed Deposit in a Bank.
Income from this Investment will be used to distribute prizes to
meritorious students of the society.
8. Honorarium : Honorarium is an amount paid to a person (other than
employee) for rendering some special services for Not-for-profit
organization. It is treated as an expense of Not-for-profit organization.
I. Calculation of Subscription to be shown in the Income and Expenditure Account
for current year.
(a) Statement of Actual amount of subscription for the current year.
Particulars
Amount received during the year
Add : (i) Outstanding at the end of current year XXXX
Advance received in previous year XXXX
Less : (i) Outstanding in the beginning of the current year
(Out of this, the actual amount received in current year) (XXXX)
(ii) Advance received i current year (XXXX)
Subscriptions to be shown in the Income and Expenditure A/c
(b) Preparing ledger Account.
Dr. Subscription Account. Cr.
Particulars Rs. Particulars Rs
To Balance be/d XX By Balance be/d XX
(outstanding subscriptions (Advance subscription
of last year.) relating to current year
[XI – Accountancy] 200
received last year)
To Income & Expenditure A/c XX By Cash/ Bank A/c XX
(Balancing figure to be posted (Subscription received in
in the credit side as subscription) current year)
To Balance c/d XX By Balance c/d XX
(Advance subscriptions received (Total amount of subscription
in current year for the next year) outstanding at the end of
of the current year)
Note : Subscription A/c can have both Debit as well as credit opening balances
and also closing balances.
II. Calculation of Rent (An Expense) to be shown in expenditure side of income
and Expenditure Accounts.
Particulars
Rent paid during the year
Add : (i) Outstanding at the end of current year XXXX
(ii) Advance paid in previous year XXXX
Less : (i) Rent paid in current year but pertains to previous year (XXXX)
(ii) Rent paid in current year but pertains to next year (XXXX)
Rent to be shown in the Income and Expenditure A/c
III. Calculation of Stationary (A consumable item) to be shown in income and
expenditure Account.
Particulars
Amount paid for stationary during current year
Add : (i) Opening stock of the stationary XXXX
(ii) Creditors for stationary at the end of current year XXXX
Less : (i) Creditors for stationary in the beginning of current year (XXXX)
(ii) Closing stock of the stationary (XXXX)
Stationary to be shown in the Income and Expenditure A/c XXXX
Illustration I : From the following extracts of the Receipt and Payments
Account and the additional information, you are required to computer the
income from subscription for the ended March 31, 2013 and show it in the
Income and Expenditure Account for the year ended on March 31, 2013.
201 [XI – Accountancy]
Receipt and Payments Account
Dr. for the year ended on March 31, 2013. Cr.
Receipts Rs. Payments Rs
To subscription 50,000
Mar. 31, 2012 Mar. 31, 2013
Rs. Rs.
Subscriptions outstanding 10,000 20,000
Subscriptions received in advance 15,000 10,000
Solution :
Income and Expenditure Account.
for the year ended on March 31, 2013
Expenditure Rs. Income Rs
By Subscriptions 50,000
Add : Outstanding 20,000
Add : Advance received
in 2009-10 15,000
85,000
Less : Advance received
in 2010-11 10,000
75,000
Less : For 2009-10 10,000 65,000
65,000
Important Point : Subscription for the current year only is shown in Income
and Expenditure Account for the same year, whether received or not.
The above amount can also be calculated by means of subscription A/c
Particulars Rs. Particulars Rs
To Balance b/d 10,000 By Balanced b/d 15,000
(subscription outstanding (Subscription received in
for last year) advance last year)
To Income and Expenditure A/c 65,000 By Bank A/c 50,000
(Balancing fig.) (Subscription received during
the current year)
[XI – Accountancy] 202
To Balance c/d 10,000 By Balance c/d 20,000
(Subscription received in (subscription outstanding at
advance for next year) the end of current year)
85,000 85,000
llustration 2 : On the basis of the following information, calculate the amount
of stationery to be debited to Income and expenditure A/c for the year ended
on March 31, 2013
Stock Stationary on April 1,2012 Rs 6,000
Creditors for stationary on April 1, 2012 Rs. 4,000
Amount Paid for Stationary on March 31, 2013 Rs. 21,600
Stock of stationery on March 31, 2013 Rs. 1,000
Creditors for stationary on March 31, 2013 Rs. 3,600
Solution :
Particulars Rs.
Amount paid for stationary during current year 21,600
Add : Opening stock of stationary 6,000
Creditors at the end of current year 3,600
Less : Closing Stock 1,000 31,200
Creditors For 2011-12 4,000 5,000
Stationary used during 2012-13 36,200
Importance Points : Amount of Stationary consumed during the year is shown
in Income and Expenditure Account irrespective of that whether it is paid or not.
Illustration 3 : Following is the Receipts and Payments Account of women
club for the year ended March 31, 2013. Prepare the Income and Expenditure
Account for the year ended on March 31, 2013 and also the balance sheet as
at the date :
Receipts Rs. Payments Rs
To Balance b/d 28,260 By Rent Taxes 17,220
To Entrance Fee 11,040 By Salaries 18,800
To Subscriptions 44,000 By Electricity Charges 840
203 [XI – Accountancy]
To Donations 21,220 By General Expenses 2,500
To Interest 820 By Books 6,240
To Profit from By Office Expenses 9,000
Entertainment 1,640 By Investments 28,000
By Balance c/d 24,380
1,06,980 1,06,980
Additional Information :
(i) In the beginning of the year, the club had books worth Rs. 60,000 and
Furniture worth Rs. 11,600.
(ii) Subscription in arrears on April 1, 2012 were Rs. 1,200 and on March
31, 2013 Rs. 1,400.
(iii) Rs. 3,600 were due by Rent in the beginning as well as at the end of
the year.
(iv) Write off Rs. 1,000 as depreciation on Furniture and Rs. 6,000 on
Books.
(v) On March 31,2013 Salaries Rs. 3,000 and Electricity Charges Rs. 4,000
were outstanding.
Liabilities Rs. Assets Rs
Rent outstanding 3,600 Cash 28,260
Capital Fund (Bla. Fig.) 97,460 Subscription
Outstanding 1,200
Books 60,000
Furniture 11,600
1,01,060 1,01,060
Income and Expenditure Account
Dr. for the year ended on March 31, 2013 Cr.
Expenditure Rs. Income Rs
Total Rent and Taxes 17,220 By Subscriptions 44,000
Add : Outstanding 3,600 Add : Outstanding 1,400
20,820 45,400
[XI – Accountancy] 204
Less : for 2011-12 3,600 Less : for 2011-12 1,200
17,220 44,200
To Salaries 18,800 By Entrance Fees 11,040
Add : Outstanding 3,000 By Donations 21,220
21,800 By Interest 820
To Electricity Charges 840 By Profit from
Add : Outstanding 400 Entertainment 1,640
1,240
To General Expenses 2,500
To Office Expenses 9,000
To Depreciation on :
Books 6,000
Furniture 1,000 7,000
To Surplus 20,160
78.920 78.920
Balance Sheet
Dr. as on March 31, 2013 Cr.
Liabilities Rs. Assets Rs
Capital Fund (Bal.) 97,460 Cash is hand 24,380
Add : Surplus 20,160 Investments 28,000
1,17,620 Books 60,000
Rent Outstanding 3,600 Add : Additions 6,240
Salaries outstanding 3,000 66,240
Electricity charges Less : Depreciation 6,000
Outstanding 400 60,240
Furniture 11,600
Less : Depreciation 1,000
10,600
1,400
1,24,620 1,24,620
Important Point : Expenses for the current year only is shown in Income and
Expenditure Account for the same year, whether paid or not.
205 [XI – Accountancy]
Illustration 4 : Following is the Receipts and Payments Account of Literary
Society for the year ended March 31, 2013
Dr. Cr.
Receipts Rs. Payments Rs
To Balance b/d 3,075 By Salaries 12,000
T subscriptions By Rent 3,600
2011-12 500 By Postage 150
2012-13 21,500 By Printing and
2013-14 750 Stationary 1,275
22,750 By Electricity Charges 1,500
To Interest on Investments 10,000 By Meeting Expenses 750
To Bank Interest 125 By Library Books 5,000
To Sale of Furniture 1,5000 By Investments 5,000
By Balance c/d 8,175
37,450 37,450
Following additional information is to be considered:
(i) On April 1, 2012 the society had the following assets and liabilities:
Investments Rs. 2,00,000; Furniture Rs. 15,000; library books Rs.
25,000; liability for Rent Rs. 300 and for Salaries Rs. 1,000. Subscription
in Arrears was Rs. 600.
(ii) On March 31, 2013 Rent of Rs. 400 and Salaries Rs. 1,250 were in
arrears. All the Subscription for the year 2012-13 has been received.
(iii) The book value of Furniture sold was Rs. 1,250.
Prepare the Income and Expenditure Account of the society for the year
ended on March 31, 2013 and the Balance Sheet as at that date.
Solution :
Balance Sheet
as on April 1, 2012
Liabilities Rs. Assets Rs
Outstanding expenses Furniture 15,000
[XI – Accountancy] 206
Rent 300 Library Books 25,000
Salaries 1,000 1,300 Investments 2,00,000
Cash 3,075
Capital Fund 2,42,375 Subscription in arrears 600
2,43,675 2,43,675
Income and Expenditure Account
for the year ended on March 31, 2013
Expenditure Rs. Income Rs
To Salaries 12,000 By Subscriptions 22,750
Less : For 2011-12 1,000 Less : For 2011-12 500
11,000 22,250
Add : Outstanding 1,250 Less : For 2013-14 750
12,250 21,500
To Rent 3,600 By Interest on Investment 10,000
Less : For 2011-12 300
3,300 By Bank Interest 125
Add : Outstanding 400 3,700 By profit on Sales of 250
furniture (1,500–1,250)
To Postage 150
To Printage and Stationary 1,275
To Electricity Charges 1,500
To Meeting Expenses 750
To Surplus 12,250
31,875 31,875
Balance Sheet as on March 31, 2013
Liabilities Rs. Assets Rs
Subscription in advance 750 Furniture 15,000
Outstanding expenses : Less : sold 1,250
Salaries 1,250 13,750
Rent 400 Library books 25,000
1,650 Add : Additions 5,000
30,000
Capital Fund 2,42,375
Add : Surplus 12,250 Investments 2,00,000
207 [XI – Accountancy]
2,54,625 Add : Additions 5,000
2,05,000
Cash 8,175
Subscription in
Arrears (2011-12) 100
2,57,025 2,57,025
Important Points : In the beginning of the year, Subscription of Rs. 600 was
in arrear but out of this amount, only Rs. 500 has been received during current
year. Hence only R. 500 is deducted from the amount received on account os
subscription.
Illustration 5 : On the basis of the information given below, calculate the
amount of stationary to be shown in the ‘Income and Expenditure Account’ of
‘Vishvamitra Literary Society’ for the year ended March 31, 2013.
Apr. 1, 2012 Mar. 31, 2013
Rs. Rs.
Stock of stationary 4,000 3,000
Creditors for stationary 4,500 5,500
Stationary purchased during the year ended March 31, 2013 was Rs.
23,500.
Solution :
Income and Expenditure Account
Dr. for the year ended on March 31, 2013 Cr.
Expenditure Rs. Income Rs
To Stationary 23,500
Add : Opening Stock 4,000
27,500
Less : Closing Stock 3,000 24,500
24,500
Important Point : 1. Stationary used during current year only is shown in
Income and Expenditure Account for the same year. 2. Creditors for Stationary
[XI – Accountancy] 208
is not considered because ‘Stationary purchased during the year’ is given and
not ‘Amount paid to Creditors during the year’.
Illustration 6 : From the following informations of Arjun Sports Club, show
the Sports Material’ in the ‘Income and Expenditure Account’ for the year
ending March 31, 2011 and the Balance Sheets as on March 31, 2012 and
March 31, 2013 :
Mar. 31, 2012 Mar. 31, 2013
Rs. Rs.
Stock of sports material 4,400 11,600
Creditors for sports material 15,600 18,400
Advance to supplier of sports material 30,000 50,000
Payment to suppliers for the Sports Material during 2012-2013 was Rs.
2,40,000. No sports material purchased on cash basis during the year 2012-13
Balance Sheet
as on April 1, 2012
Liabilities Rs. Assets Rs
Creditors for sports Advance to suppliers of
Material 15,600 Sports Material 30,000
Stock of sports material 4,400
Income and Expenditure Account
Dr. for the year ended on March 31, 2011 Cr.
Expenditure Rs. Income Rs
To Sports Material 2,40,000
Less : For 2011-12 15,600
2,24,400
Add : Advance in 2011-12 30,000
Add : Opening stock 4,400
2,58,800
Less : For 2013-14 50,000
209 [XI – Accountancy]
2,08,800
Less : Closing Stock 11,600
1,97,200
Add : Creditors at the End 18,400
2,15,600
Balance Sheet
As on March 31, 2013
Liabilities Rs. Assets Rs
Creditors for sports material 18,400 Advance to Suppliers 50,000
Stock of Sports Material 11,600
Important Point : 1. Stationary used during current year only is shown in
Income and Expenditure Account for the same. 2. Creditors Stationary is
considered because ‘Stationary purchased during the year’ is not given and
‘Amount paid to Creditors during the year’ is given
Illustration 7 : The following is the ‘Receipts and Payments Account’ of
Galaxy Hospital, for the year ended on March 31, 2013.
Receipts and Payments Account
Receipts Rs. Payments Rs
To Balance b/d 17,000 By Payment for Medicines 66,000
To Subscriptions 96,000 By Fees to Doctors 48,000
To Donations 30,000 By Salaries 54,000
To Interest on By Equipments 30,000
Investments By Charity Show Expenses 8,000
@ 9% p.a.. for 1 year 18,000 By Sundry Expenses 2,400
To Proceeds from By Balanced c/d 16,600
Charity show 24,000
To Grant 40,000
2,25,000 2,25,000
Other information : Apr. 1, 2012 Mar. 31, 2013
Rs. Rs.
(i) Subscriptions in Arrears 1,000 2,000
[XI – Accountancy] 210
(ii) Subscriptions in Advance 2,000 1,000
(iii) Stock of Medicines 20,000 30,000
(iv) Amount due to Suppliers of Medicine 16,000 24,000
(v) Value of Equipments 50,000 66,000
(vi) Value of Building 1,40,000 1,30,000
You are required to prepare ‘Income and Expenditure Account’ for the
year ended on March 31, 2013 and ‘Balance Sheet’ as on that date.
Balance Sheet
as on March 31, 2012
Liabilities Rs. Assets Rs
Amount due for Medicines 16,000 Cash 17,000
Subscriptions in Advance 2,000 Investments 2,00,000
Capital Fund (Bal. Fig.) 4,10,000 Subscriptions in Arrears 1,000
Stock of Medicines 20,000
Equipments 50,000
Building 1,40,000
4.28,000 4,28,000
Income and Expenditure Account
Dr. for the year ended on March 31, 2013 Cr.
Expenditure Rs. Income Rs
To Medicines 66,000 By Subscriptions 96,000
Add : Opening Balance 20,000 Add : for 2011-12 1,000
86,000 95,000
Less : Closing Stock 30,000 Less : For 2013-14 1,000
56,000 94,000
Less : For 2011-12 16,000 Add : Arrears 2,000
40,000 Add. Advance received
Add : Creditors at end 24,000 in 2011-12 2,000
64,000 98,000
To Fees to Doctors 48,000 By Donations 30,000
To Salaries 54,000 By Interest on investments 18,000
To Charity Show Exp. 8,000 By Proceeds from Charity show 24,000
211 [XI – Accountancy]
To Sundry Expenses 2,400 By Grant in Aid 40,000
Equipment :
Opening Balance 50,000
Add : Additions 30,000
80,000
Less : Closing Balance 66,000
To Depreciation on Buildings: 14,000
Opening Balance 1,40,000
Less : Closing Balance 1,30,000
10,000
To Surplus 9,600
2,10,000 2,10,000
Balance Sheet
as on March 31, 2013
Liabilities Rs. Assets Rs
Amount due for Medicines 24,000 Cash 16,600
Subscriptions in Advance 1,000 Investments 2,00,000
Capital Fund (Bal. Fig.) 4,10,000 Subscriptions in Arrears 2,000
Add : Surplus 9,600 419,600 Stock of Medicines 30,000
Equipments 66,000
Buildings 1,30,000
4,44,600 4,.44,600
Important Points : Interest on Investment is given in the question but value
of investment si not shown in ‘Receipts and Payments Account’, it means this
investment was purchased before the current year and was mentioned in the
Balance Sheet at the beginning of the year. Therefore the value of the investment
is calculated as under. Value of investment =
1018,000 2,00,000
9
Illustration 8 : From the following information related to Amar Nath Charitable
Society, prepare Income and Expenditure Account for the year ended March
31, 2013
[XI – Accountancy] 212
Receipt and Payments Account
for the year ended March 31, 2013
Receipts Rs. Payments Rs
To Balance b/d 4,400 By Furniture 6,000
To Interest on Investments 4,600 By Sales 29,000
To Donations 34,000 By Miscellaneous Exp. 400
To Subscriptions 56,000 By Telephone charges 25,800
To Rent Received 24,000 By Fax Machine 12,000
To Sale of old Newspaper 600 By Investments 30,000
By Printing and stationary 800
By Balance c/d 19,600
1,23,600 1,23,600
Additional Information : Subscription received includes Rs. 1,200 for 2013-
14. The amount of subscription outstanding on March 31, 2013 Rs. Rs. 1,000;
Salaries unpaid for the year 2012-13 Rs. 1,400;60% of the Donations are to be
capitalized.
Solution :
Income and Expenditure Account
Dr. for the year ended on March 31, 2013 Cr.
Expenditure Rs. Income Rs
To Salaries 29,000 By Subscriptions 56,000
Add : outstanding 1,400 Add : outstanding 1,000
30,400 57,000
To Miscellaneous Expenses 400 Less : Received in
Advance 1,200
To Telephone charges 25,800 55,800
to Printing and Stationery 800 By Interest on
investments 4,600
To Surplus 41,600 By Donations (40%) 13,600
By Rent Received 24,000
Add : Receivable 400
24,400
By Sale of old Newspapers 600
99,000 99,000
213 [XI – Accountancy]
Important Points : Only 60% Donation is to be Capitalised as clear instruction
is given in question, Remaining 40% Donation is to be treated as income.
Illustration 9 : Following is the Receipt and Payment Account of Tulsi Literary
Society for the ended March 31, 2013. Prepare Income and Expenditure Account
for the year March, 31, 2013 and the Balance Sheet as on that date.
Receipt and Payment Account
for the year ended on March 31, 2013
Receipts Rs. Payments Rs
To Balance b/d 65,000 By Honorarium to cashier 4,000
To Life Membership Fee 30,000 By Stationary 1,000
To Subscriptions 14,000 By Books 6,000
To Sale of old Newspaper 1,000 By Telephone charges 2,400
To Lockers Rent 1,400 By Computer 90,000
To Entrance Fee 10,000 By Repairs 2,000
By Wages 5,000
By Balance c/d 11,000
1,21,400 1,21,400
On April 1, 2012 the society had Books of Rs. 10,000 Investments Rs.
20,000 and Furniture Rs. 10,000. Subscriptions outstanding as on April 1,
2012 were Rs. 1,200 and as March 31, 2013 were Rs. 1,400.
Creditors for stationary on April 1, 2012 were Rs. 400.
Additional books and computers are purchased on April 1, 2012.
Bills outstanding for repairs on March 31, 2013 were Rs. 2,200 and
wages outstanding were Rs. 1,000.
75% of the Entrance Fee is to be capitalized.
Depreciation is to be provided on computers @ 25% p.a. and books @
10% p.A
Solution :Balance Sheet
as on April 1, 2012
Liabilities Rs. Asset Rs
Creditors for Stationary 400 Cash 65,000
[XI – Accountancy] 214
Capital Fund (Bla. Fig.) 1,05,800 Subscriptions in Arrears 1,200
Books 10,000
Investments 20,000
Furniture 10,000
1,06,200 1,06,200
Income and Expenditure Account
for the year ended on March 31, 2013
Expenditure Rs. Income Rs
To Honorarium to cashier 4,000 By Entrance Fees 2,500
To Stationary 1,000 By Subscriptions 14,000
Less : For 2011-12 400 Add : Outstanding 1,400
600 15,400
To Depreciation on Less : For 2011-12 1,200
Computer 22,500 14,200
Books 1,600 By Sale of old
Newspaper 1000
24,100 By Locker Rent 1,400
To Telephone charges 2,400 By Deficit Investments 22,200
To Repairs 2,000
Add : Outstanding 2,200
4,200
To wages 5,000
Add : Outstanding 1,000
6,000
41,300 41,300
Balance Sheet
as at March 31, 2013
Liabilities Rs. Assets Rs
Outstanding Wages 1,000 Cash 11,000
Outstanding repairs 2,200 Subscriptions in Arrears 1,400
Capital Fund 1,05,800 Computers 90,000
Add : Entrance Fee 7,500 Less : Depreciation 22,500
215 [XI – Accountancy]
Add : Life Membership
Fee 30,000 67,500
1,43,300 Books 10,000
Less : Deficit 22,200 Add : Purchases 6,000
1,21,100 16,000
1,600
14,400
Investments 20,000
Furniture 10,000
1,24,300 1,24,300
Illustration 10 : From the following receipts & Payments Account of Sonic
Club & from the given additional information; prepare Income & Expenditure
Account for the year ending 31st December, 2012 & the Balance Sheet as on
that date :
Receipt & Payment Account
Dr. for the year ended on March 31, December 2012 Cr.
Receipts Rs. Payments Rs
To Balance b/d 1,90,000 By Salaries 3,30,000
To Subscriptions 6,60,000 By Sports Equipment 4,00,000
To Interest on investment @ 8% By Balance c/d 1,60,000
p.a. For full year 40,000
8,90,000 8,90,000
Additional Information
(i) The club received Rs. 20,000 for subscriptions in 2011 for 2012.
(ii) Salaries had been paid only for 11 months.
(iii) Stock of Sports Equipment on 31st December, 2011 was Rs. 3,00,000
& on 31st December, 2012 Rs. 6,50,000.
Solution :
[XI – Accountancy] 216
Balance Sheet
Dr. as on 31st December, 2011 Cr.
Liabilities Rs. Assets Rs
Subscription Received in Cash in Hand 1,90,000
Advance 20,000 Investment (Note 1) 5,00,000
Capital Fund (Balancing Fig.) 9,70,000 Stock of Sports Equipment 3,00,000
9,90,000 9,90,000
Note : (1) Value of Investment has been calculated as below :
If interest in 8, the value of Investments = 100
If interest is 40,000, the value of Investments
10040,000 Rs. 5,00,000
8
Income and Expenditure Account
Dr. for the year ending 31st December 2012 Cr.
Receipts Rs. Payments Rs
To Salaries 3,30,000 By Subscription 6,60,000
Add : Outstanding Add : Advance
For one month Subscription
(3,30,000 / 11) 30,000 3,60,000 received in 2011
for 2012 20,000 6,80,000
To Sports Equipment By Interest on
Consumed : Investments 40,000
Opening Stock 3,00,000
Add Purchases 4,00,000
7,00,000
Less Closing Stock 6,50,000 50,000
To Surplus (Excess of
Income over Expenditure) 3,10,000
7,20,000 7,20,000
217 [XI – Accountancy]
Balance Sheet
Dr. as on 31st December, 2011 Cr.
Receipts Rs. Payments Rs
Salaries Outstanding 30,000 Cash in Hand 1,60,000
Capital Fund 9,70,000 Investment (Note 1) 5,00,000
Add Surplus 3,10,000 12,80,000 Stock of Sports Equipment 6,50,000
13,10,000 13,10,000
[XI – Accountancy] 218
CHAPTER-12
COMPUTERS IN ACCOUNTING
Meaning of Computers: A computer is an electronic device, which is
capable of performing a variety of operations as directed by a set of instructions.
This set of instructions is called a computer programme.
Elements of Computer System
A computer system is a combination of six elements:
1. Hardware
2. Software
3. People
4. Procedure
5. Data
6. Connectivity
1. Hardware : Hardware of computers consists of physical components
such as keyboard, mouse, monitor, processor etc. These are electronic
and electromechanical components.
2. Software : In order to solve a particular problem with the help of
computers, a sequence of instructions written in proper language will
have to be feed into the computers. A set of such instructions is called
a 'Program' and the set of programs is called 'Software'.
For example, a computer by feeding a particular software can be used
to prepare pay-roll, whereas by feeding a second software it can be
used to prepare accounts, by feeding a third software it can be used for
inventory control and so on.
219 [XI – Accountancy]
3. People : People are basically those individuals who use hardware and
software to develop, maintain and use the information system residing
in the computer memory. They constitute the most important part of the
computer System. The main categories of people involved with the
computer system are :
(a) System Analysis
(b) Operators
(c) Programmers
4. Procedures : The Procedure means a series of operations in a certain
order or manner to achieve desired results. These are of three types:
(a) Software-Oriented : Provides a set of instructions required for
using the software of a computer system.
(b) Hardware-Oriented : Provides details about the components
and their methods of operations.
(c) Internal Procedure : Helps to ensure smooth flow of data to
computers sequencing the operations of each sub-system of over
all computer system.
5. Data : These are facts (may consist of numbers, text etc.) gathered and
entered into a computer system. The computer system in turn stores,
retrieves, classifies, organises and synthesis the data to produce
information when desires.
Examples :
1. Bio-data of various applicants when the computer is used for
recruitment of staff.
2. Marks obtained by various students in various subjects when
the computer is used to prepare results.
6. Connectivity : the manner in which a particular computer system is
connected to others (say through telephone lines, microwave
transmission-satellite link etc.) is called element of connectivity.
[XI – Accountancy] 220
Capabilities or Advantage of Computer System
A Computer system posses the following advantages in comparison of
human beings:
1. High Speed : Computers are known for their lightening speed of
operations and requires less time in comparison to human beings in
performing a task. Most of modern computers perform millions of
operations in one second.
2. Accuracy : Computers are extremely accurate. Their operations are
error free and as such the information obtained from it is highly reliable.
But sometimes errors occur due to bad programming or in accurate
data feeding. In computer terminology, it refers is called Garbage in,
garbage out (GIGO).
3. Reliability : Its reliability refers to the ability with which computer
remains functional to serve the user. Unlike human beings these are
immune to tiredness, boredom or fatigue, and can perform jobs of
repetitive nature any number of times.
4. Versatility : It refers to the ability of computers to perform a variety
of tasks. It can switch over from one programme to another. The same
computer can be used for accounting work, stock control, sales analysis
and even for playing games by the use of different softwares.
5. Storage : Memory or Storage capacity of a computer is so large that
it can store any volume of information or data. Such data can be stored
in it on magnetic discs, floppy discs, punched cards or microfilms etc.
The information stored can be recalled at any time and also correction
can be done within no time.
Limitations : Inspite of so many qualities, computers suffer from the
following limitations.
(1) Lack of Common sense : Since computer work according to the stored
programms, they simply lack of common sense.
(2) Zero I.Q. : Computers are dumb devices with zero Intelligence Quotient
(IQ). They can't visualize and think what exactly to do under a particular
situation unless they are programmed to tackle that situation.
221 [XI – Accountancy]
(3) Lack of Feeling : Computers lack feelings like human beings be cause
they are machines. No computer passes the equivalent of a human heart
and soul.
(4) Lack of Decision-making : Decision making is a complex process
involving information, knowledge, intelligence, wisdom & ability to
judge, Computers cannot make decisions of their own.
Some more limitations related to computerised System in Accounting
(1) High Cost of Training : Besides the high cost of computer system,
huge money is required to get the trained specialised staff to ensure
efficient and effective use of computerised systems.
(2) Danger of System Failure : The danger of system crashing due to
hardware failure and the subsequent loss of word is a serious limitation
of this system.
(3) Staff Opposition : Whenever the Accounting System is computerised,
there is a significant degree of resistance from the existing staff because
of the fear that they shall be less important to the organisation.
(4) Disruption : The accounting process suffer a significant loss of work
and time when an organisation switches over to this system. This is due
to the changes in the working environment that requires accounting
staff to adapt to new system and procedures.
COMPONENTS OF COMPUTERS
The functional components consists of Input Unit, Central Processing
Unit (CPU) and the out Unit relation as follows:
(1) Input Unit : It is for entering the data into the computer system.
Keyboard and Mouse are the most commonly used input devices. Other
such devices are magnetic tapes, disc, light pen, optical scanner, smart
card reader etc. Besides there are some devices which respond to voice
and physical touch.
[XI – Accountancy] 222
(2) Central Processing Unit (CPU) : It is the main part of computer
hardware that actually processes the date according to the instructions
it receives. It has three units:
Output Output
Key Board& (Mouse)
Disc, Floppyetc.
C.P.U.
Input
Monitor Printer
Input and Output
(a) Arithmetic and Logic Unit (ALU) : Responsible for performing
all the arithmetic calculations such as addition, subtraction etc.
and logical operations involving comparison among variables.
(b) Memory Unit : For storing the date.
(c) Control Unit: Responsible for controlling and co-ordinating the
activities of all other units of the computer system.
(3) Output Unit : After processing the data, the information produced is
required in human readable and understandable form. Output devices
perform this function. The commonly used devices are monitor, printer,
graphic plotter (external) and magnetic stage devices (internal). A new
device which is capable of producing verbal output that sound in human
speech is also developed.
Operating Software
Operating Software is a set of programmes that is used by computers for
various purposes. Operating Software is essential part of computer system in
absence of operating software computer can not operate. There are many
operating softwares like Windows, Excel etc.
223 [XI – Accountancy]
Utility Software
Utility Software is a set of computer programmes used to perform
supporting operations in a computer. Utility Software are highly specialised
and designed to perform only a single task or a small range of tasks.
Application Software
Application Software is the set of programmes which is designed and
developed for performing certain task like accounting, word processing etc. for
example Tally is the application software.
Accounting Information System (AIS)
Accounting Information System is a system of collecting, processing,
summarising and reporting information about a business organisation in
monetary terms. It maintains a detailed financial record of the business
operations and transfer the data into valuable information.
So, Accounting Information System (AIS) is a sub-system of MIS. AIS is
a structure that allow its users to collect and use business data.
Application of Computers in Accounting
1. Recording of transactions : Record the all business transactions
properly and timely.
2. Draw all ledger accounts : Computers prepares all ledger accounts by
given transactions, like cash, bank, debtors, sales a/c etc.
3. Preparation of Trial Balance: It prepares the Trial Balance according
to ledger accounts.
4. Preparation of Final A/c : It has utility to prepare Trading A/c, P&L
A/c and Balance Sheet.
Features of Computerised Accounting System
Computerised accounting system is based on the concept of database.
This system offers the following features:
[XI – Accountancy] 224
(1) Online input and storage of accounting data.
(2) Printout of purchase and sales invoices.
(3) Every account and transaction is assigned a unique code.
(4) Grouping of accounts is done from the beginning.
(5) Instant reports for management, for example: Stock Statement, Trial Balance,
Income Statement, Balance Sheet, Payroll Reports, Tax Reports etc.
Automation of Accounting Process
When accounting functions are done by computerised accounting software
that is known as automation of accounting process under the automation of
accounting process human activity is less but accounting software is more
used.
So, accounting functions like posting into ledger, Balancing, Trial Balance
and Final Accounts are prepared by computer.
Stages of Automation
There are different stages of automation as:
(i) Planning : Under this stage the assessment of size, and business
transactions is done for which automation has to be made.
(ii) Selection of Accounting Software : As there are many accounting
softwares available in the market. So, in this stage appropriate accounting
software is to be selected according to company's need.
(iii) Selection of Accounting Hardware : Under this stage of automation
the computer hardware is selected. This hardware should be such which
can fullfil the accounting requirement and support the accounting
software.
(iv) Chart of Accounts : Under this stage list of required heads of accounts
is prepared.
(v) Grouping of Accounts: There are various transactions for Expenses,
Income, Assets, Liabilities. All these transactions can not be shown
directly. So, these transactions are grouped as salary, wages, discount
and commission etc.
225 [XI – Accountancy]
(vi) Generation of Reports: This is final stage of automation under this
final reports are prepared in from of Cash Book, Journal, Ledger, Trial
Balance, P&L A/c and Balance Sheet etc.
Comparison of Manual and Computered Accounting System
Base Manual Accounting Computerised Accounting
1. Identifying In this system, it is done In this system, it is also done
Financial manually according to principles. manually according to principles.
Transactions
2. Recording In this system, entries are In this, entries are recorded
recorded manually and other manually but other calculations
calculations also done manually. are done by computers.
3. Adjustment In this system, all adjustments In this system entries related to
Entries entries are done manually. posting are done by computers.
4. Financial In this system, final statements In this system final statements is
statement is prepared manually prepared by computer with help
of software.
Sourcing of Accounting Software
India is one of software making country. So, accounting softwares are
easily available in Indian Market. But it is more important to know what is
your need of accounting software.
Generally, Tally accounting software is used in India which is easily
available in market.
Accounting Softwares
(1) Readymade Software : Readymade Software are the software that are
developed not for any specific user but for the users in general. Some
of the readymade softwares available are Tally, Ex, Busy. Such softwares
are economical and ready to use. Such softwares do not fulfill the
requirement of very user.
(2) Customised Software : Customised software means modifying the
readymade softwares to suit the specific requirements of the user.
Readymade softwares are modified according to the need of the business.
Cost of installation, main tenance and training is relatively higher than
[XI – Accountancy] 226
that of readymade user. There packages are used by those medium or
large business enterprises in which financial transactions are some what
peculiar in nature.
(3) Tailor-made Software : The softwares that are developed to meet the
requirement of the user on the basis of discussion between the user and
developers. Such softwares help in maintaining effective management
information system. The cost of these softwares in very high and specific
training for using these packages is also required.
Generic Considerations Before Sourcing Accounting Software
(i) Flexibility : a computer software system must be flexible in respect of
data handling and report preparing.
(ii) Maintenance Cost : The accounting software must be such which has
less maintenance cost.
(iii) Size of organisation : The accounting software must be according to
need and size of organisation.
(iv) Easy to adaptation : The accounting software must be such which is
easy to apply in organisation.
(v) Secrecy of data : The accounting software must be such which provide
the secrecy of business data, from others.
Preparation of Accounts Groups
Groups of accounts means classifying the accounting transactions into
different heads like Assets Group, Liabilities Group, Income Group and
Expenses Group. By these grouping of accounts the final Accounts are
meaningful for its users.
Generation of Accounting Reports
After collecting business data, it is converted into meaningful informations.
Such summarised and converted information is known as a report.
The report is more effective if it is based on accurate and timely data.
A report must be relevant to users and contain all relevant information
like Debtor's Report, Creditor's Report, Trial Balance and Financial Statement
Report and others.
227 [XI – Accountancy]
Scope
(i) The scope of the unit is to understand accounting as an information
system for the generation of accounting information and preparation of
accounting reports.
(ii) It is advised that the working knowledge of Tally software will be
given to the students for generation of accounting software. For this,
the teachers may refer chapter 4 of Class XII NCERT text book on
Computerised Accounting System.
PROJECT - I
PROJECT WORK IN ACCOUNTANCY CLASS XI
In Accounting, Project Work is introduced at XI class for 10 marks. At
this level, the accountancy teachers require to help the students in the project
in the following ways:
1. To provide knowledge to the students about Accounting Process.
2. Give the imaginary transactions data.
3. Show the original source document (Which is easily available).
4. To train the students for preparing vouchers.
5. Tell the students how to record transactions from vouchers.
6. To motivate students to collect various source documents.
7. To encourage students to prepare books of accounts with the help of
vouchers.
So, the commerce teacher will play a important role in preparation of
project in class XI. The teacher may provide various transactions to the students.
Some transactions are given below:
Ayan started business under the name AYAN & BROTHERS at NOIDA
on April 1, 2011 to deal in Books and Stationary material. He introduced Rs.
5,00,000 as capital out of which Rs. 1,00,000 was in cash and balance by
cheque. He enclosed the original papers relating to his business transactions
for the month of April, 2011.
[XI – Accountancy] 228
Students should analyse the transactions on the basis of these papers and
process the information through:
Various stages of accounting cycle.
Preparation of vouchers for each financial transaction.
Recording in the journal and subsidiary books.
SOURCE DOCUMENTS
Transaction 2
229 [XI – Accountancy]
Transaction 3
CASH MEMORama Stores
[XI – Accountancy] 230
231 [XI – Accountancy]
Transaction 9
[XI – Accountancy] 232
Transaction 12M/s Aryan & Brothers Noida
No. 1 Receipt (Original) Date : 14.04.2011
Received with thanks from M/s Ramesh Trading Co. sum of Rupees one lacfifty thousand only as part payment of Invoice no. 1, dated April 12, 2011 through cheque no. 486958 on ICICI BANK LTD. DELHI.
FOR AYAN & BROTHERS
Transaction 14
Carriage paid for unloading of goods Rs. 500 cash.
233 [XI – Accountancy]
Transaction 16
BILL OF EXCHANGENOIDA
Stamp Date : 19.04.2011
one month after date pay M/s Ayan & Brothers or order the sum of Rupeestwenty thousand only, value received.
for AYAN & BROTHERSRs. 20,000To,M/s Vikas Ltd.
AYAN
Transaction 17
Mr. Ayan withdraw Rs. 3,000 from Bank Account for personal use
vide cheque no. 186930 on 20th April, 2011.
Transaction 18
Rs. 25,000 Wages paid to worker vide cheque No. 186931 on 20th
April 2011.
Transaction 19PROMISSORY NOTENOIDA
Date : 19.04.2011
Rs. 10,000Two month after date, I/We promise to pay M/s Sunlight Ltd. Or ordersum of Rupees Ten Thousand only for the value received.
for AYAN & BROTHERSAYAN
[XI – Accountancy] 234
Transaction 20
Payment made for purchasing Printing and Stationary Material vide
cheque no. 186932, HDFC BANK LTD. on 25th April, 2011
Transaction 21
Salary of Rs. 15,000 paid for the month of April, 2011 by cheque
No. 186935.
Event as on 30th, April 2011
Inventory was counted and valued Rs. 1,08,950.
235 [XI – Accountancy]
[XI – Accountancy] 236
237 [XI – Accountancy]
4,00,000
Sd/-Manager
Sd/-Accountant
[XI – Accountancy] 238
239 [XI – Accountancy]
[XI – Accountancy] 240
1,50,000
Sd/-Manager
Sd/-Accountant
241 [XI – Accountancy]
17
19.7
[XI – Accountancy] 242
AYAN AND BROTHERS
VOUCHER for Transaction 21
243 [XI – Accountancy]
Pu
rch
ase
Boo
k
Date
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rtic
ula
rsB
ill
No
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.F.
Det
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xer
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(12
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@R
s.60
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ote
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nli
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ket
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ract
ical
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t (2
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Rs.
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15
,00
0
30
-Apr
To P
urc
has
e A
/c (
Tra
nsf
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d t
o P
urc
has
es A
/c)
..D
r.2
,49,0
00
[XI – Accountancy] 244
Sale
s B
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k
Date
Pa
rtic
ula
rsIn
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e N
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L.F
.D
etail
s (R
s).
Am
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(Rs)
2011
Ram
esh T
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12
-Apr
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0 S
ket
ch B
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k @
Rs.
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57
,00
0
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Rs.
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0
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Rs.
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,00
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2 L
ong E
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Bo
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(12
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.) @
Rs.
65
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,37,8
00
84
Note
Pad
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(12 P
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@ R
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-Apr
Vik
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X27 c
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Pra
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Rs.
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Note
Pad
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(12 P
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@ R
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s: 1
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Tra
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Dis
cou
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-5,0
00
45
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30
-Apr
To S
ales
A/c
(T
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.Cr.
29
000
0
245 [XI – Accountancy]
In t
he
Bo
ok
s of
Ay
aan
& B
roth
ers
Jou
rna
l E
ntr
ies
Date
Pa
rtic
ula
rsL
.F.
Det
ail
s (R
s).
Am
ou
nt
(Rs)
2011
Fu
rnit
ure
& F
ixtu
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A/c
Dr.
95
,00
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2-A
pr
To R
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ns
95
,00
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(Bei
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re a
nd f
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pu
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edo
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ng g
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and
ch
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o.
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1 o
n
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IS B
ank i
s re
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dis
cou
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allo
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)
19
-Apr
Bil
ls R
ecei
vab
le A
/cD
r.2
0,0
00
To V
ikas
Ltd
.2
0,0
00
(Bei
ng a
ccep
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ecei
ved
fro
m S
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gh
t L
td.)
21
-Apr
Su
nli
gh
t L
td.
Dr.
10
,00
0
To B
ills
Pay
able
A/c
10
,00
0
(Bei
ng a
ccep
tan
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iven
to
Su
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gh
t L
td.)
[XI – Accountancy] 246
Ledger Accounts
Dr. Capital Account Cr.
Date Particulars J.F. Amt. Rs. Date Particular J.F. Amount Rs.
2011 2011
30-Apr To Balance c/d 5,00,000 1-Apr By Bank A/c 4,00,000
1-Apr By Cash A/c 1,00,000
5,00,000 5,00,000
2011
1-May By Balance b/d 5,00,000
Dr. Drawings Account Cr.
Date Particulars J.F. Amt. Rs. Date Particular J.F. Amount Rs.
2011 2011
20-Apr To Bank A/c 3,000 30-Apr By Balance c/d 3,000
3,000 3,000
2011
1-May To Balance b/d 3,000
Dr. Furniture & Fixtures Account Cr.
Date Particulars J.F. Amt. Rs. Date Particular J.F. Amount Rs.
2011 2011
2-Apr To Ram & Sons 95,000
8-Apr To Cash A/c 5,000 30-Apr By Balance c/d 1,00,000
1,00,000 1,00,000
2011
1-May To Balance b/d 1,00,000
Dr. Purchases Account Cr.
Date Particulars J.F. Amt. Rs. Date Particular J.F. Amount Rs.
2011 2011
3-Apr To Bank A/c 85,000
15-Apr To Bank A/c 25,000
30-Apr To Purchases Book 2,49,000 30-Apr By Balance c/d 3,59,000
3,59,000 3,59,000
2011
1-May To Balance b/d 3,59,000
247 [XI – Accountancy]
Dr. Office Equipment Account Cr.
DateParticulars J.F. Amt. Rs. Date Particular J.F. Amount Rs.
2011 2011
5-Apr To Bank A/c 75,000 30-Apr By Balance c/d 75,000
75,000 75,000
2011
1-May To Balance b/d 75,000
Dr. Bill Receivable Account Cr.
Date Particulars J.F. Amt. Rs. Date Particular J.F. Amount Rs.
2011 2011
19-Apr To Vikas Ltd. 20,000 30-Apr By Balance c/d 20,000
2011
1-May To Balance b/d 20,000
Dr. Ram & Sons Account Cr.
Date Particulars J.F. Amt. Rs. Date Particular J.F. Amount Rs.
2011 2011
12-Apr To Bank A/c 50,000 2-Apr By Furniture & 95,000
30-Apr To Balance c/d 45,000 Fixtures A/c
95,000 95,000
2011
1-May By Balance b/d 45,000
Dr. Discount Allowed Account Cr.
Date Particulars J.F. Amt. Rs. Date Particular J.F. Amount Rs.
2011 2011
7-Apr To Sales A/c 500 30-Apr By Balance c/d 500
500 500
2011
1-May To Balance b/d 500
[XI – Accountancy] 248
Dr. Sales Account Cr.
Date Particulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
30-Apr To Balance c/d 3,15,000 7-Apr By Bank A/c 24,500
7-Apr By Discount Allowed 500
30-Apr By sales book 2,90,000
3,15,000 3,15,000
2011
1-May By Balance b/d 3,15,000
Dr. Sunlight Ltd. Cr.
Date Particulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
21-Apr To Bills Payable A/c 10,000 6-Apr By Purchases A/c 2,34,000
30-Apr To Balance c/d 2,39,000 14-Apr By Purchases A/c 15,000
2,49,000 2,49,000
2011
1-May By Balance b/d 2,39,000
Dr. Bills Payable (Promissory Note) Account Cr.
DateParticulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
30-Apr To Balance c/d 10,000 21-Apr By Sunlight Ltd. 10,000
10,000 10,000
2011
1-May By Balance b/d 10,000
Dr. Vikas Ltd. Cr.
Date Particulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
12-Apr To Sales A/c 45,000 19-Apr By Bills Receivable A/c 20,000
30-Apr By Balance c/d 25,000
45,000 45,000
2011
1-May To Balance b/d 25,000
249 [XI – Accountancy]
Dr. Ramesh Trading Co. Cr.
Date Particulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
12-Apr To Sales A/c 2,45,000 14-Apr By Bank A/c 1,50,000
30-Apr By Balance c/d 95,000
2,45,000 2,45,000
2011
1-May To Balance b/d 95,000
Dr. Advt. Expenses Account Cr.
Date Particulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
10-Apr To Cash A/c 2,500 30-Apr By Balance c/d 2,500
2,500 2,500
2011
1-May To Balance b/d 2,500
Dr. Printing & Stationary Account Cr.
Date Particulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
25-Apr To Bank A/c 2,000 30-Apr By Balance c/d 2,000
2,000 2,000
2011
1-May To Balance b/d 2,000
Dr. Carriage Inward Account Cr.
Date Particulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
15-Apr To Cash A/c 500 30-Apr By Balance c/d 500
500 500
2011
1-May To Balance b/d 500
[XI – Accountancy] 250
Dr. Wages Account Cr.
Date Particulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
20-Apr To Bank A/c 25,000 30-Apr By Balance c/d 25,000
25,000 25,000
2011
1-May To Balance b/d 25,000
Dr. Salaries Account Cr.
Date Particulars J.F. Amount Rs. Date Particular J.F. Amount Rs.
2011 2011
30-Apr To Bank A/c 15,000 30-Apr By Balance c/d 15,000
15,000 15,000
2011
1-May To Balance b/d 15,000 15,000
Trial Balance
Particulars Dr. Rs. Cr. Rs.
Cash A/c 92,000
Bank A/c 2,94,500
Capital A/c 5,00,000
Drawings A/c 3,000
Furniture & Fixtures 1,00,000
Purchases A/c 3,59,000
Sales A/c 3,15,000
Office Equipment A/c 75,000
Printing & Stationary A/c 2,000
Advertisement Exp. A/c 2,500
Carriage Inward A/c 500
Bill Receivable A/c 20,000
Bills Payable (Promissory Note) A/c 10,000
Discount Allowed A/c 500
Wages A/c 25,000
Salaries A/c 15,000
Ram & Sons 45,000
Sunlight Ltd. 2,39,000
Vikas Ltd. 25,000
Ramesh Trading Co. 95,000
Total 11,09,000 11,09,000
251 [XI – Accountancy]
AYAN & BROTHERS
TRADING AND PROFIT AND LOSS ACCOUNT
For the period 1st April 2011 to 30th April 2011
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Purchases 3,59,000 By Sales 3,15,000
To Carriage Inward 500 By Closing Stock 1,08,950
To Wages 25,000
To Gross Profit c/d 39,450
4,23,950 4,23,950
To Advt. Expenses 2,500 By Gross Profit b/d 39,450
To Discount Allowed 500
To Printing & Stationary 2,000
To Salary 15,000
To Net Profit 19,450
39,450 39,450
AYAN & BROTHERS
BALANCE SEET
As at 30th April 2011
Liabilities Amt. (Rs.) Assets Amt. (Rs.)
Capital Account Fixed Assets
Introduced 5,00,000 Office Equipment 75,000
Add: Net Profit 19,450 Furniture & Fixtures 1,00,000
For the period 5,19,450
Less: Drawings 3,000 5,16,450 Current Assets
Sundry Debtors 1,20,000
Current Liabilities Cash In Hand 92,000
Sundry Creditors (Goods) 2,39,000 Cash At Bank 2,94,500
Sundry Creditors (Others) 45,000 Bill Receivable 20,000
Bills Payable (Promissory note) 10,000 Closing Stock 1,08,950
8,10,450 8,10,450
[XI – Accountancy] 252
PROJECT - II
Project work 2 (procedure)
Preparation of Bank Reconciliation Statement with the help of given
Cash Book and Pass Book.
If both the books (Cash Book and Pass Book) are given, the following
procedure will be adopted.
Step 1 : Tick off the items which are found both in the cash book and passbook/
bank statement. Put sign () before such items.
Items ticked () will neither be recorded in amended cash book nor in
Bank Reconciliation Statement.
Step 2 : The unticked items in the passbook will indicate that have not yet
been recorded in cash book.
These items will usually consist of:
(i) Direct deposits by customers in bank.
(ii) Bank charges.
(iii) Interest charged by bank.
(iv) Interest allowed by bank.
Step 3 : Balance the bank column of cash bok to know an updated balance.
Bank Reconciliation Statement is to be prepared on the basis of this updated
balance.
Step 4: Identify the unticked items on the Receipts side of the Cash Book.
These items generally consist of 'cheques deposit to the bank but not collected'.
Step 5 : Amended Cash Book is to be prepared on the basis of items identified
in step 1, 2, 3.
Bank reconciliation statement is to be prepared on the basis of items
identified in steps 4 and 5.
253 [XI – Accountancy]
Project 1
The cash book of Shivalik Global Limited, showing the bank columns
only, is given below along with a copy of the Pass Book of its bank account
with Allahabad Bank for April, 2013.
You are required to prepare amended Cash Book and reconcile it with
Pass Book.
Shivalik Global Limited
Cash Book (Bank Column only)
Date Receipts L.F. Rs. Date Particulars L.F. Rs.
2013 2013
Apr. 1 Balance b/d 5,70,000 Apr. 1 Bishan Hari Bros. 39,200
Apr. 1 Bishambar & Co. 62,800 Apr. 1 Maruti Suzuki India 20,000
Apr. 4 P.L. Kataria 97,200 Apr. 3 J.P. Infra Ltd. 2,16,000
Apr. 8 Reliance Power Ltd. 36,400 Apr. 9 Surendra Pal 16,800
Apr. 13 Meena Singh 30,000 Apr. 9 India Visions Ltd. 1,96,000
Apr. 20 Krishna & Company 1,68,000 Apr. 10 Reliance Insurance 1,20,000
Apr. 28 House of Fashions Ltd. 37,600 Apr. 16 Shivam Garage 44,000
Apr. 23 Peddy Cash 20,000
Apr. 27 Sanjay & Co. 48,000
Apr. 28 Balance c/d 2,82,000
10,02,000 10,02,000
Allahabad Bank, Sansad Marg, New Delhi
Statement of Account No. 5984758722: Shivalik Global Limited
Date Details Debit Credit Balance
2013
Apr. 1 Balance 5,70,000 cr.
Apr. 2 Bishambar & Co. 62,800 6,32,800 cr.
Apr. 4 Maruti Suzuki India Ltd. 20,000 6,12,800 cr.
Apr. 5 Bishan Hari Bros. 39,200 5,73,600 cr.
Apr. 6 P.L. Kataria 97,200 6,70,800 cr.
Apr. 10 Reliance Power Ltd. 36,400 7,07,200 cr.
[XI – Accountancy] 254
Apr. 14 Reliance Insurance 1,20,000 5,87,200 cr.
Meena Singh 30,000 6,51,200 cr.
Apr. 23 India Vision Ltd. 1,96,000 4,21,200cr.
Apr. 25 Krishna & Co. 1,68,000 5,89,200cr.
Apr. 25 Someshwar 41,200 5,48,000cr.
Apr. 25 Self 20,000 5,28,000cr.
Apr. 27 Chandramani 88,000 6,16,000cr.
Apr. 28 Bank Charges 15,200 6,00,800cr.
Solution :
Step 1 : Tick off the items which are found both in cash and pass book. Put
() sign before such items. Items ticked () will neither be recorded
in amended cash book nor in Bank Reconciliation Statement.
Step 2 : Unticked items in the Pass Book indicate items that have not yet been
recorded in the cash Book. These are :
(i) Payment of Rs. 41, 200 made to Someshwar on April 25.
(ii) Direct deposit by Chandramani Rs. 88,000 on April 27.
(iii) Bank charges of Rs. 15,200 charged by bank on April 28.
These items are to be recorded in Cash Book to update it.
Amended Cash Book
Date Receipts Rs. Date Payment Rs.
Apr. 28 Balance b/d 2,82,000 Apr. 28 Someshwar 41,200
Apr. 28 Chandramani 88,000 Apr. 28 Bank Charges 15,200
Apr. 28 Balance c/d 3,13,600
3,70,000 3,70,000
2013
Apr. 28 Balance b/d 3,13,600
Step 3 : Balance the bank columns of amended cash book to know an update
balance.
Step 4 : Identify the unticked items on receipt side of cash book. It is' cheque
deposited into bank but not collected'; 'House of fashions Ltd.' Rs.
255 [XI – Accountancy]
37,600.
Step 5 : Identify unticked items on the payment side of cash book, These are:
JP infra Ltd. 2,16,000
Surendra Pal 16,800
Shivam Garage 44,000
Sanjay & Co. 48,000
Items identified in step 4 and 5 are to be shown in Bank Reconciliation
Statement.
Bank Reconciliation Statement
as on April 30, 2013
Particulars Plus items Minus Items
Balance as per Cash Book 3,13,600
Less : Cheques deposited but not cleared, 37,600
house of fashions Ltd.
Add: Cheques issued but not yet
Present for payment
J.P Infra Ltd. 2,16,000
Surendra Pal 16,800
Shivam Garage 44,000
Sanjay & Co. 48,000
3,24,800
Balance as per Pass Book 6,00,800
6,38,400 6,38,400
[XI – Accountancy] 256
PROJECT-1
COMPREHENSIVE
Problem
Mr. Antriksh Samrat has completed his diploma in Textiles Now he has
started a cloth business after inspired by his uncle's cloths business.
He has invested Rs. 10,00,000 as capital out of which Rs. 5,00,000 as
cash and Rs. 5,00,000 by cheque on dated 1. April 2013.
The transactions related to business are as:-
2 April : Furniture purchased Rs. 1,80,000 from Gupta Furnitures.
4. April : Goods purchased Rs. 70,000 by Cheque.
5 April : Purchased office equipment Rs.70,000 by bank.
7 April : Goods sold Rs. 3,25,000 and deposited the same into Bank.
8 April : Purchased Furniture in cash Rs. 3,20,000.
9 April : Goods Purchased from Gwalior Textiles on credit.
Trouser cloths - 80,000
Shirt cloths - 10,000
Coat cloths - 1,40,000
T. Shirts - 30,000
Less 10% Trade Discount.
10 April : Paid Advertisement expense Rs. 12,500.
12 April : Goods sold to Bhola sons
285 Trousers Pieces @ 200 - 57,000
255 Shirts Pieces @ 100 - 25,500
257 [XI – Accountancy]
40 S.P. White cloth pieces @ 500 - 20,000
137 coat pieces @ 1000 - 1,37,000
105 T. Shirts @ 100 - 10,500
13 April : Paid Rs. 1,50,000 to Gupta Furniture by cheque
14 April : Goods sold to star cloths store
50 Trousers piece @ 200 - 10,000
50 shirts peice @ 100 - 5,000
20 coat peice @ 1,000 - 20,000
24 White cloths @ 500 - 12,000
30 T. Shirts peice @ 100 - 3,000
15 April : Received a cheque Rs. 1,50,000 from Bhola sons and deposited
into bank.
16 April : Goods purchased from Gwalior Textiles :
White cloths - 5,000
Grey cloths - 10,000
16 April : Paid Rs.500 as Carriage inward.
16 April : Purchased goods Rs. 50,000 by cheque.
18 April : Antriksh withdraw from Bank Rs. 3,000 for personal use.
22 April : Paid wages Rs. 25,000 by cheque
23 April : Paid Rs. 2,000 for printing and stationary by cheque.
30 April : Paid salary to Employees Rs. 1,00,000 by cheques.
Stock at the end was Rs. 75000.
Prepare the followings :
- Journal
- Ledger is Accounts
- Trial Balance
- Trading and Profit and Loss Account
- Balance sheet.
[XI – Accountancy] 258
Solution :
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
Apr.., 1 Cash A/c Dr. 5,00,000
Bank A/c Dr. 5,00,000
To Capital A/c 10,00,000
(The business started with cash
and Bank by Antriksh
Apr., 2 Furniture A/c Dr. 1,80,000
To Gupta Furnitures 1,80,000
(The furniture purchased on credit)
Apr., 4 Purchases A/c Dr. 70,000
To Bank A/c 70,000
(The goods purchased by cheque)
Apr., 5 Office Equipment A/c Dr. 70,000
To Bank A/c 70,000
(The Office equipment Purchased)
Apr., 7 Bank A/c Dr. 3,25,000
To sales A/c 3,25,000
(The goods sold and deposit
in Bank)
Apr., 8 Furniture A/c Dr. 3,20,000
To Cash A/c 3,20,000
(The furniture purchased in cash)
Apr., 9 Purchases A/c Dr. 2,34,000
To Gwalior Textiles 2,34,000
(The goods Purchased from Gwalior)
Textile at 10% Discount
Apr., 10 Advertisement Exp. A/c Dr. 12,500
To Cash A/c 12,5000
(The paid for advertisement
expense)
Apr., 12 Bhola sons Dr. 2,45,000
To Sales A/c 2,45,000
259 [XI – Accountancy]
(The goods sold to Bhola sons)
AT 2% Trade discount
Apr., 13 Gupta Furnitures Dr. 1,50,000
To Bank A/c 1,50,000
(The amount paid by cheque)
Apr., 14 Star cloth Store Dr. 45,000
To sales A/c 45,000
(The goods sold at 10% Discount)
Apr., 15 Bank A/c Dr. 1,50,000
To Bhola Sons 1,50,000
(The cheque receive and deposit)
Apr., 16 Purchases A/c Dr. 15,000
To Gwalior Textiles 15,000
(The goods purchased on credit)
Apr., 16 Carriage Inwards A/c Dr. 500
To Cash A/c 500
(The carriage inward paid)
Apr., 16 Purchases A/c 50,000
To Bank A/c 50,000
(The goods purchase and paid
by cheque)
Apr. 18 Drawings A/c Dr. 3,000
To Bank A/c 3,000
(The amount withdraw from
Bank for personal use)
Apr., 22 Wages A/c Dr. 25,000
To Bank A/c 25,000
(The Paid for wages)
Apr. 23 Printing and stationery A/c Dr. 2,000
To Bank A/c 2,000
(The paid for printing and
Stationary)
Apr., 30 Salaries A/c Dr. 1,00,000
To Bank A/c 1,00,000
(The paid for salary)
[XI – Accountancy] 260
Dr.
Cash
Boo
k i
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of
An
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shC
r.
Date
Pa
rtic
ula
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.F.
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art
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L.F
.C
ash
Ba
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201
32
01
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1 A
pr.
To C
apit
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A/c
5,0
0,0
00
5,0
0,0
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4 A
pr.
By P
urc
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/c-
70
,00
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7 A
pr.
To S
ales
A/c
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,25
,00
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Ap
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apr.
To B
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ons
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apr.
By F
urn
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/c3
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00
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By A
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Exp
ense
A/c
12
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13 A
pr.
By G
upta
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16 A
pr.
By C
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Inw
ard
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16 A
pr.
By P
urc
has
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/c-
50
,00
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18 A
pr.
By D
raw
ings
A/c
-3,0
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22 A
pr.
By w
ages
A/c
-2
5,0
00
23 A
pr.
By P
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tionar
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2,0
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30 A
pr.
By S
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30 A
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By B
alan
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,67,0
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5,0
0,5
00
5,0
0,0
00
9,7
5,0
00
5,0
0,0
00
9,7
5,0
00
261 [XI – Accountancy]
Purchases Book
Date Particulars Bill No. L.F. Detail Amount
2013
9 Apr.., Gwalior Textiles - 27
Trouser cloths 80,000
Shirt cloths 10,000
Coat cloth 1,40,000
T. Shirt 30,000
2,60,000
Less 10% Trade Discount – 26,000 2,34,000
16 Apr. Gwalior Textiles: 171
White Cloths 5,000
Grey cloths 10,000 15,000
30 Apr. Purchases A/c Dr. 2,49,000
Sales Book
Date Particulars Inv.. L.F. Detail Amount
2013
12 Apr. Bhola Sons
285 Trousers @ 250 57,000
255 Shirts @ 100 25,500
40 Sp. White cloth @ 500 20,000
137 Coat peices @ 1000 1,37,000
105 T. Shirts @ 100 10,500
2,50,000
Less 2% Trade Discount – 5000 2,45,000
14 Apr. Star cloths Store
50 Trousers @ 200 10,000
50 Shirt @ 100 5,000
20 Coat cloth @ 1000 20,000
24 white cloths @ 500 12,000
30 T. Shirt @ 100 3,000
50,000
Less 10% Trade Discount – 5000 45,000
30 Apr. Sales A/c Cr. 2,90,000
[XI – Accountancy] 262
Ledger
Dr. Capital Accoutns Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
30, Apr. To Balance c/d 10,00,000 Apr. 1 By cash A/c 5,00,000
Apr. 1 By Bank A/c 5,00,000
10,00,000 10,00,000
2013
1 May By Balance b/d 10,00,000
Dr. Drawings A/c Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
18, Apr. To Bank A/c 3,000 Apr.30 By Balance c/d 3,000
3,000 3,000
2013
1, May To Balance B/d 3,000
Dr. Furniture Accoutns Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
2, Apr. To Gupta Furn. 1,80,000 Apr. 30 By Balance c/d 5,00,000
8, Apr. To Cash A/c 3,20,000
5,00,000 5,00,000
2013
1 May To Balance b/d 5,00,000
Dr. Purchases Accoutns Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
4, Apr. To Bank A/c 70,000 Apr. 30 By Balance c/d 3,69,000
16, Apr. To Balance A./c 50,000
30, Apr. To Purch. Book 2,49,000
3,69,000 3,69,000
2013
1 May To Balance b/d 3,69,000
263 [XI – Accountancy]
Dr. Offie Equipment Accoutns Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
5, Apr. To Bank A/c 70,000 Apr. 30 By Balance c/d 70,000
70,000 70,000
2013
1 May To Balance b/d 70,000
Dr. Gupta Furnitures Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
13, Apr. To Bank A/c 1,50,000 Apr. 2 By Furniture A/c 1,80,000
30 Apr. To Balance c/d 30,000
1,80,000 1,80,000
1 May By Balance b/d 30,000
Dr. Sales Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
30, Apr. To Balance c/d 6,15,000 Apr. 7 By Bank A/c 3,25,000
30 Apr. By Sales Book 2,90,000
61,5000 6,15,000
2013
1 May By Bal b/d 6,15,000
Dr. Gwaliar Textiles Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
30, Apr. To Balance c/d 2,49,000 Apr. 9 By Purchases A/c 2,34,000
Apr. 16 By Purchases A/c 15,000
2,49,000 2,49,000
2013
1 May By Balance b/d 2,49,000
[XI – Accountancy] 264
Dr. Star Cloths Store Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
12, Apr. To Sales A/c 45,000 Apr. 30 By Balance c/d 45,000
45,000 45,000
2013
1 May To Balance b/d 45,000
Dr. Bhola Sons Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
12, Apr. To Sales Book 2,45,000 Apr. 15 By Bank A/c 1,50,000
Apr. 30 By Balance c/d 95,000
2,45,000 2,45,000
2013
1 May To Balance b/d 95,000
Dr. Advertisement Expenses Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
10, Apr. To Cash A/c 12,500 Apr. 30 By Balance c/d 12,500
12,500 12,500
2013
1 May To Balance b/d 12,500
Dr. Printing & Stationary Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
23, Apr. To Bank A/c 2,000 Apr. 30 By Balance c/d 2,000
2013
30 May To Balance b/d 2,000
Dr. Carriage Inward Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
16, Apr. To Cash A/c 500 Apr. 30 By Balance c/d 500
2013
1 May To Balance b/d 500
265 [XI – Accountancy]
Dr. Wages Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
22, Apr. To Bank A/c 25,000 Apr. 30 By Balance c/d 25,000
2013
1 May To Balance b/d 25,000
Dr. Salaries Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
2013 2013
30, Apr. To Bank A/c 1,00,000 Apr. 30 By Balance c/d 1,00,000
1,00,000 1,00,000
2013
1 May To Balance b/d 1,00,000
Trial Balance as on April 30, 2013
Particulars Dr. R.s Cr. Rs.
Cash A/c 1,67,000 -
Bank A/c 5,05,000 -
Capital A/c - 10,00,000
Drawing A/c 3,000 -
Furniture A/c 5,00,000 -
Purchases A/c 3,69,000 -
Sales A/c - 6,15,000
Office equipment A/c 70,000 -
Printing & Stationary A/c 2,000 -
Advertisement Expenses A/c 12,500 -
Carriage Inward A/c 500 -
Wages A/c 25,000 -
Salary A/c 1,00,000 -
Gupta Furniture - 30,000
[XI – Accountancy] 266
Gwalior Textile - 2,49,000
Star cloth store 45,000
Bhola Sons 95,000
Total 18,94,000 18,94,000
Trading and Profit & loss Account
Dr. for Month of April 2013 Cr.
Particulars Amount Particulars Amount
To Purchase 3,69,000 By Sales 6,15,000
To carriage inward 500 By closing stock 75,000
To wages 25,000
To Gross Profit 2,95,500
6,90,000 6,90,000
To Salary 1,00,000 By Gross Profit 2,95,500
To Printing & Stationary 2,000
To Advertise Exp. 12,500
To Net Profit transfered 1,81,000
2,95,500 2,955,00
Dr. Balance Sheet as on April 30, 2013 Cr.
Liabilities Amount Assets Amount
Capital 10,00,000 Fixed Assets
Add.No. Brofit +1,81,000 Furniture 5,00,000
11,81,000 Office exquipment 70,000
Less Drawing -3,000 11,78,000 Current Assets
S. Debtors 1,40,000
Current Liabilities Cash 1,67,000
Bank 5,05,000
S.Creditors 2,79,000 Stock 75,000
14,57,000 14,57,000
267 [XI – Accountancy]
PIE CHART
Comparison of Direct Expenses and Gross profit with Net Sales.
Gross profit
48.05%Direct Exp
51.95%
Amount Percentage Degree
Sales 6,15,000 100% 360°
Direct Exp. 3,19,500 51.95% 187°
Gross Profit 2,95,500 48.05% 173°
Comparision of all Expenss, net profit with Sales.
D irected & Indirect
Ex p.70.6%
N et P ro fit
29.4 %
Amount Percentage Degree
Sales 6,15,000 100% 360°
Direct & Indirect Exp. 4,34,000 70.6% 254°
Net Profit 1,81,000 29.4% 106°
[XI – Accountancy] 268
PROJECT - 2
COMPREHENSIVE
Source Material : ‘Lakshika Herbal Beauty products’ project statement
A reputed Management Institute in assistance with Entrepreneur Skill
Development Ltd. (ESDL) Organised a camp for the students pursuing BBA,
BBS, MBA or other professional courses to encourage entrepreneurial skills.
This Institute and ESDL, displayed 50 small business projects which could be
started with an investment of Rs. 20,00,000. The ESDL also promised to buy
the entire production of the first year. It promised to supply the required
machinery and at a much subsidised rates. It also had a scheme to give loans
up to 50% of the working capital requirement.
A large number of people visited the camp. There were project
demonstrations by ESDL advisors and experts. Lakshika who was pursuing
BBS from the same Management Institute, also attended the Camp because
she was inclined to start her own business. Lakshika was very impressed by
the demonstration of the small business project on Herbal beauty products.
The project was economically viable. She was convinced that she will defiitely
succeed in carrying out the project. She entered into agreement with the ESDL
who agreed to arrange supplier of the necessary plant for Rs. 60,000 on turnkey
basis. She had sufficient open space at her residence in a colony. She got the
machine fixed and the payment was made in the installments of Rs. 10,000
annually over a period of six years, She went through the literature provided
by the ESDL and searched various websites to know the addresses of the raw
materials. She placed necessary orders for the raw material and arranged for
workers who will operate the machine and do other necessary orders for the
raw material and arranged for workers who will operate the machine and do
other necessary production work. She set up a small workable office and
decided to do all office work herself. All supplies were on a credit for two
weeks.
269 [XI – Accountancy]
She formally inaugurated the production on April 1,2001. She invited all
her friends, relatives and neighbor and other residents of her colony on the
very first day and distributed free samples of the herbal face wash produced
in her small factory. It was very reasonably priced. The price was very much
lower than other brands in the market. She visited ten other colonies around
her colony. She told the people there, as to how her herbal beauty products are
better than others. She liberally distributed free samples to all the residents of
colony. Her product was really good and was accepted by all those who used.
It. Within three months she could sell whatever she produced every week.
Her initial investment was Rs. 80,000 out of which she paid the first
installment of plant on April I, 2011. She opened a Bank Account with Rs.
60,000 on the same date. She had an old e-bike worth Rs. 20,000 which she
decided to use in her business. She also purchased furniture for Rs. 12,000.
Thus, her total investment was Rs. 1,00,000. The payments to suppliers were
made on the 15th and 30th of each months. The salaries and wages were paid
only on the 7th of each month. The sales were mostly for cash. The cash sale
was deposited in the bank the next day. The sale to local customers was on
credit for one week. All the customers were honest and paid the amount as and
when due.
The following expenses incurred and revenue realized during the year
ended march 31, 2012.
Rs.
1. Raw Material purchased on credit 12,00,000
2. Cash paid to the suppliers 9,80,000
3. Cash sales 16,00,000
4. Wages paid for eleven months 2,31,000
5. Office expenses 19,000
6. Power bills paid 25,000
7. Drawings 2,52,000
8. Packing and distribution expenses 10,000
9. Cash received from customers 4,25,000
[XI – Accountancy] 270
Other balances as on March 31, 2012 were as follows :
Rs.
1. Closing stock 25,000
2. Plant 60,000
3. Furniture 12,000
4. Debtors 75,000
5. E-bike 20,000
Depreciation was charged @ 10% p.a. on both plant and furniture and @
20% on e-bike. Salaries are outstanding for one month. Free samples were
distributed amounting Rs. 12,000.
Required
Judge the performance of Lakshita during her first year in business.
Processing the information
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2011
Apr.., 1 Plant A/c Dr. 60,000
To vender (ESDL) A/c 60,000
(Being a plant purchased on
installment basis from the ESDL)
E-bike A/c Dr. 20,000
Cash A/c Dr. 80,000
To capital A/c 1,00,000
(Being the amount introduced
as capital both in cash and in
the from of e-bike)
Vendor (ESDL) A/c Dr. 10,000
To cash A/c 10,000
(Being the first installment paid to the ESDL)
271 [XI – Accountancy]
Bank A/c Dr. 60,000
To cash A/c 60,000
(Being the bank account opened)
Furniture A/c Dr. 12,000
To Bank A/c 12,000
(Being furniture purchased)
Bank A/c Dr. 16,00,000
To Sales A/c 16,00,000
(Being cash sales during the year)
Debtors A/c Dr. 5,00,000
To Sales A/c 5,00,000
(Being credit sales during the year.
See debtors accounts)
Bank A/c Dr. 4,25,000
To Debtors A/c 4,25,000
(Being cash received from debtors)
Purchases A/c Dr. 12,00,000
To creditors A/c 12,00,000
(Being raw material purchased in
credit)
Creditors A/c Dr. 9,80,000
To Bank A/c 9,80,000
(Being of payment made to creditors)
Wages A/c Dr. 2,31,000
To Bank A/c 2,31,000
(Being wages paid for 11 months)
Office expenses A/c Dr. 19,000
To Bank A/c 19,000
(Being office expenses paid)
Power expenses A/c Dr. 25,000
To Bank A/c 25,000
(Being power expenses paid)
Drawings A/c Dr. 2,52,000
[XI – Accountancy] 272
To bank A/c 2,52,000
(Being the amount drawn for
personal use)
Packing and Distribution A/c Dr. 10,000
To Bank A/c 10,000
(Being packing and distribution expenses paid)
Ledger
Dr. Capital Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012 To Balance c/d 1,00,000 2011
31, Mar. April 1 By Cash A/c 80,000
April 1 By E-bike A/c 20,000
1,00,000 1,00,000
2002
April 1 By Balance b/d 1,00,000
Dr. Cash Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012 To Capital 80,000 2011
1, Apr. Apr. 1 By Bank A/c 60,000
Apr. 1 By Vendor (ESDL) 10,000
2012
Mar. 31 By balance c/d 10,000
80,000 80,000
Dr. Bank Account Cr.
Date Particulars Rs. Date Particulars Rs.
2011
2012 To Cash A/c 60,000 Apr. 1 By furniture A/c 12,000
Apr. 1 To sales 16,00,000 Apr. 1 By creditors A/c 9,80,000
To debtors 4,25,000 By wages A/c 2,31,000
By office expenses A/c 19,000
By power expenses A/c 25,000
By drawings A/c 2,52,000
273 [XI – Accountancy]
By packing and
distribution expenses A/c 10,000
2012
Mar. 31 By Balance c/d 5,56,000
2012 20,85,000 20,85,000
Apr.1 To Balance 5,56,000
Dr. Plant Account Cr.
Date Particulars Rs. Date Particulars Rs.
2011 2012
Apr. 1 To Vendor (ESDL) 60,000 Mar. 31 By Balance c/d 60,000
Dr. Vendor (ESDL) Cr.
Date Particulars Rs. Date Particulars Rs.
2011 2011
Apr. 1 To Cash A/c 10,000 Apr. 1 By Plant A/c 60,000
2012
Mar. 31 To Balance c/d 50,000
60,000 60,000
2012
Apr. 1 By Balance b/d 50,000
Dr. Furniture Account Cr.
Date Particulars Rs. Date Particulars Rs.
2011 2012
Apr. 1 To Bank A/c 12,000 Mar. 31 By Balance c/d 12,000
12,000 12,000
2012
Apr. 1 To Balance b/d 12,000
Dr. Sales Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012 -
Mar., 31 To Trading A/c 21,00,000 - By Bank A/c 16,00,000
By debtors A/c 5,00,000
21,00,00 21,00,000
[XI – Accountancy] 274
Dr. Debtors Account Cr.
Date Particulars Rs. Date Particulars Rs.
- To sales A/c 5,00,000 - By Bank A/c 4,25,000
(Balancing fig.)
2012
Mar. 31 By balance c/d 75,000
5,00,000 5,00,000
2012
Apr.1 To balance b/d 75,000
Dr. Wages Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012
- To Bank A/c 2,31,000 Mar. 31 By Trading A/c 2,31,000
2,31,000 2,31,000
Dr. E-Bike Account Cr.
Date Particulars Rs. Date Particulars Rs.
2011 2012
Apr. 1 To Capital A/c 20,000 Mar. 31 By Balance c/d 20,000
20,000 20,000
2012
Apr. 1 To Balance b/d 20,000
Dr. Purchases Account Cr.
Date Particulars Rs. Date Particulars Rs.
12,00,000 2012
- To creditors Mar. 31 By Trading A/c 12,00,000
12,00,000 12,00,000
Dr. Creditors Account Cr.
Date Particulars Rs. Date Particulars Rs.
- To Bank A/c 9,80,000 - By Purchase A/c 12,00,000
2012
Mar. 31 To Balance c/d 2,20,000
12,00,000 12,00,000
2012
Apr. 1 By balance b/d 2,20,000
275 [XI – Accountancy]
Dr. Office Expenses Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012
- To Bank A/c 19,000 Mar. 31 By profit and loss A/c 19,000
19,000 19,000
Dr. Power Expenses Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012
- To bank A/c 25,000 Mar. 31 By profit and loss A/c 25,000
25,000 25,000
Dr. Drawings Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012
- To Bank A/c 2,52,000 Mar. 31 By Balance A/c 2,52,000
2,52,000 2,52,000
2012
Apr. 1 To Balance b/d 2,52,000
Dr. Packing and Distribution Expenses Account Cr.
Date Particulars Rs. Date Particulars Rs.
2012
- To Bank A/c 10,000 Mar. 31 By Profit and Loss A/c 10,000
10,000 10,000
Trial Balance
Particulars Rs. Particulars Rs
Cash A/c 10,000 Capital A/c 1,00,00
Bank A/c 5,56,000 Vendor (ESDL) 50,000
Plant A/c 60,000 Sales A/c 21,00,000
Furniture A/c 12,000 creditors 2,20,000
Debtors A/c 75,000
Wages A/c 2,31,000
E-bike A/c 20,000
Purchase A/c 12,00,000
[XI – Accountancy] 276
Office expense A/c 19,000
Power expenses A/c 25,000
Drawings A/c 2,52,000
Packing and distribution
expenses A/c 10,000
24,70,000 24,70,000
Adjustments required :
• Unsold stock is Rs.25,000
• Free samples were distributed worth Rs. 12,000
• Depreciation at the rate of 10% on plant and furniture and at the rate
of 20% on e-bike
• Wages are outstanding for one month.
Adjustment entries :
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2012 Stock A/c Dr. 25,000
Mar. 31 Free Samples A/c Dr. 12,000
37,000
To Trading A/c
(Being the amount of closing stock
and stock distributed as free samples)
i. Depreciation A/c Dr. 11,200
To Plant (@ 10%) 6,000
To Furnitures (@ 10%) 1,200
To e-bike (@ 20%) 4,000
(Being the amount of depreciation
charged)
ii. Wages A/c Dr. 21,000
To wages outstanding A/c 21,000
(Being the wages due for one month)
Note : the wages paid Rs. 2,31,000 are
for eleven month.
Therefore wages for one month are
2,31,000/11 = Rs. 21,000
277 [XI – Accountancy]
Trading and Profit & Loss account
Dr. for the year ended on March 31, 2012 Cr.
Particulars Rs. Particulars Rs
To Purchases 12,00,000 By Sales 21,00,000
To Wages 2,31,000 By Closiong Stock 25,000
Add : Outstanding 21,000 2,52,000 By Stock Distributed as
To Power Expenses 25,000 Free Samples 12,000
To Gross Profit 6,60,000
21,37,000 21,37,000
To Free Samples (Advertising) 12,000 By Gross Profit 6,60,000
To Office Expenses 19,000
To Packing and Distribution 10,000
Expenses
To Depreciation on :
Plant 6,000
Furniture 1,200
E-bike 4,000 11,200
To Net Profit 6,07,800
6,60,000 6,60,000
Balance sheet of Lakshika
As on 31st March, 2012
Liabilities Rs. Assets Rs
Capital 1,00,000 Plant 60,000
Add : Net profit 6,07,800 Less : depreciation 6,000 54,000
7,07,800
Less : drawings 2,52,000 4,55,800 Furniture 12,000
Vender (ESDL) 50,000 Less : depreciation 1,200 10,800
Wages outstanding 21,000 E-bike 20,000
Creditors 2,20,000 Less : depreciation 4,000 16,000
Debtors 75,000
Stock 25,000
Cash 10,000
Bank 5,56,000
7,46,800 7,46,800
[XI – Accountancy] 278
PROJECT -3
COMPREHENSIVE PROJECT
Mr. Deepak, after completing his graduation wants to start his own business
but he was little bit confused which business to start. Moreover, he was short
of funds also as only Rs.2,00,000 (to be used in business) were available with
him, which he saved by doing part time jobs during his graduation. He discussed
the matter with his father, Mr. Mahesh, a Bank Manager and decided to start
a shop dealing in man’s wear from 1st April 2012 His father also help him
in raising loan of Rs.10,00,000 from xyz Bank against his personal guarantee.
On 5th April 2012, Mr. Deepak opens a Bank A/c with Rs. 5,000 in xyz Bank
credited his Bank A/c with the amount of loan on 1st June 2012, after completing
all formalities, which is to be repaid in Ten equal yearly installments alongwith
with interest @ 12% p.a. on 31st March every year. Same day he purchased
a computer for Rs. 50,000 to maintain all the records regarding purchase, sales
and stock and make the payment by cheque. He also deposited Rs. 45,000 in
Bank.
It was also decided that all the purchases are to be made by cheques and
all receipts on account of sales were to be deposited into Bank. He named his
business as M/s Rajasthan Man’s wear and entered into a contract with a
distributer of Man’s wear on 15th June 2012. The distributer want him to make
all the payments with regard to the orders in advance. Mr. Deepak’s transactions
for the year ending on 31st March 2013 were as follows.
Rs.
Purchases (on 15 June 12) 15,00,000
Sales 25,00,000
Staff Salary 2,00,000
Telephone Expenses 50,000
Electricity charges 1,00,000
279 [XI – Accountancy]
Packing charges 25,000
Insurance 1,00,000
Rent (Rs. 10,000 p.m.) 1,20,000
Carriage Inward. 55,000
Furniture purchased (on 1st June 12) 1,00,000
25% payment for furniture was made by cash and rest by cheque. All the
expenses were paid by cheque. Furniture and computer were depreciated @12%
p.a. The closing stock on 31st Mar. 2013 was valued at Rs. 1,00,000. A plot/
land for Rs.10,00,000 was also purchased on that day to construct shop in
future. you\are required to :
(1) journalise the transactions.
(2) Post all the items to the relevant Ledger Accounts
(3) Prepare Trial Balance.
(4) Prepare Trading and Profit & Loss A/c and Balance sheet at the end of
the year.
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2012
Apr.. 1 Cash A/c Dr. 2,00,000
T Capital A/c 2,00,000
(Being business commenced)
Apr. 5 Bank A/c Dr. 5,000
To cash A/c 5,000
(Being Bank A/c opened)
June 1 Bank A/c Dr. 10,00,000
To Bank Loan A/c 10,00,000
(Being Bank Loan raised)
June 1 Computer A/c Dr. 50,000
To Bank A/c 50,000
(Being computer, purchased)
[XI – Accountancy] 280
June 1 Bank A/c Dr. 45,000
To cash A/c 45,000
(Being cash deposited into Bank)
June 1 Furniture A/c Dr. 1,00,000
To Cash A/c 25,000
To Bank A/c 75,000
(Being furniture purchased & Payment
made in cash & by cheque)
June 15 Purchases A/c Dr. 15,00,000
To Bank A/c 15,00,000
(Being purchase made)
Mar. 31 Bank A/c Dr. 25,00,000
To Sales A/c 25,00,000
(Being sales made)
Mar. 31 Staff salary A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being staff salary paid)
Mar. 31 Telephone expenses A/c Dr. 50,000
To Bank A/c 50,000
(Being Telephone Expenses Paid)
Mar. 31 Electricity charges A/c Dr. 1,00,000
To Bank A/c 1,00,000
(Being electricity charges Paid)
Mar. 31 Packing charges A/c Dr. 25,000
To Bank A/c 25,000
(Being Packing Charges Paid)
Mar. 31 Insurance A/c Dr. 1,00,000
To Bank A/c 1,00,000
(Being Insurance Paid)
Mar. 31 Rent A/c Dr. 1,20,000
To Bank A/c 1,20,000
(Being rent Paid)
Mar. 31 Carriage Inward A/c Dr. 55,000
To Bank A/c 55,000
(Being carriage inward Paid)
281 [XI – Accountancy]
Mar. 31 Bank loan A/c Dr. 1,00,000
Interest on loan A/c Dr. 1,00,000
To Bank A/c 2,00,000
(Being installment & interest
loan paid)
Mar. 31 Depreciation A/c Dr. 15,000
To Furniture A/c 10,000
To Computer A/c 5000
(Being depreciation charged on
furniture and computer)
Mar. 31 Land A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Being plot land Purchased)
Dr. Capital Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Balance c/d 2,00,000 1.4.12 By Cash A/c 2,00,000
2,00,000 2,00,000
1.4.13 By Balance b/d 2,00,000
Dr. Cash Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
1.4.12 To Capital A/c 2,00,000 5.4.12 By Bank A/c 5,000
1.6.12 By Bank A/c 45,000
1.6.12 By Furniture A/c 25,000
By Balance 1,25,000
2,00,000 2,00,000
1.4.13 To Balance b/d 1,25,000
Dr. Bank Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
5.4.12 To Cash A/c 5,000 1.6.12 By Computer A/c 50,000
1.6.12 To Bank Loan
A/c 10,00,000 1.6.12 By Furniture A/c 75,000
1.6.12 To Cash A/c 45,000 15.6.12 By Purchase A/c 15,00,000
31.3.13 To sales A/c 25,00,000 31.3.13 By staff salary A/c 2,00,000
[XI – Accountancy] 282
31.3.13 By Telephone A/c 50,000
31.3.13 By Electricity A/c 1,00,000
31.3.13 By Packing Charge
A/c 25,000
31.3.13 By Insurance 1,00,000
31.3.13 By Rent A/c 1,20,000
31.3.13 By Carriage A/c 55,000
31.3.13 By Bank loan A/c 1,00,000
31.3.13 By Interest on loan
A/c 1,00,000
31.3.13 By Land A/c 10,00,000
31.3.13 By Balance c/d 75,000
35,50,000 35,50,000
To Balance b/d 75,000
Dr. Bank Loan Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 1,00,000 1.6.12 By Bank A/c 10,00,000
T Balance c/d 9,00,000
10,00,000 10,00,000
1.4.13 By Balance b/d 9,00,000
Dr. Purchases Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
15.6.12 To Bank A/c 15,00,000 31.3.13 By Balance c/d 15,00,000
15,00,000 15,00,000
1.4.13 To Balance b/d 15,00,000
Dr. Sales Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Balance c/d 25,00,000 31.3.13 By Bank A/c 25,00,000
25,00,000 25,00,000
1.4.13 By Balance b/d 25,00.000
Dr. Computer Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
1.6.12 To Bank A/c 50,000 31.3.13 By Depreciation A/c 5,000
283 [XI – Accountancy]
31.3.13 By Balance c/d 45000
50,000 50,000
1.4.13 To Balance b/d 45,000
Dr. Furniture Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
1.6.12 To Cash A/c 25,000 31.3.13 By Depreciation A/c 10,000
1.6.12 To Bank A/c 75,000 31.3.13 By Balance b/d 90,000
1,00,000 1,00,000
1.4.13 To Balance b/d 90,000
Dr. Staff Salary Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 2,00,000 1.6.12 By Balance c/d 2,00,000
2,00,00 2,00,000
1.4.13 To Balance b/d 2,00,000
Dr. Telephone Expenses Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 50,000 31.3.13 By Balance c/d 50,000
50,000 50,000
1.4.13 To Balance b/d 50,000
Dr. Electricity Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 1,00,000 31.3.13 By Balance A/c 1,00,000
1,00,000 1,00,000
1.4.13 To Balance b/d 1,00,000
Dr. Packing Charges Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 25,000 31.3.13 By Balance c/d 25,000
25,000 25,000
1.4.13 To Balance/d 25,000
[XI – Accountancy] 284
Dr. Insurance Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 1,00,000 1.6.12 By Computer A/c 1,00,000
1,00,000 1,00,000
1.4.13 To Balance b/d 1,00,000
Dr. Rent Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 1,20,000 1.6.12 By Computer A/c 1,20,000
1,20,000 1,20,000
1.4.13 To Balance b/d 1,20,000
Dr. Carriage Inward Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 55,000 31.3.13 By Balance A/c 55,000
55,000 55,000
1.4.13 To Balanace b/d 55,000
Dr. Interest Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 1,00,000 31.3.13 By Balance A/c 1,00,000
1,00,000 1,00,000
1.4.13 To Balance b/d 1,00,000
Dr. Depreciation Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Furniture A/c 10,000 31.3.13 By Balance c/d 15,000
To Computer A/c 5,000
15,000 15,000
1.4.13 To Balance b/d 15,000
Dr. Land Account Cr.
Date Receipts J.F. Rs. Date Particulars J.F. Rs.
31.3.13 To Bank A/c 10,00,000 31.3.13 By Balance A/c 1,00,000
10,00,000 1,00,000
1.4.13 To Balance b/d 10,00,000
285 [XI – Accountancy]
Trial Balance as on 31.3.2013
Particulars Debit Balance Credit Balance
Capital A/c 2,00,000
Cash A/c 1,25,000
Bank A/c 7,5000
Bank Loan A/c 9,00,000
Purchase A/c 15,00,000
Sales A/c 25,00,000
Computer A/c 45,000
Furniture A/c 90,000
Staff Salary A/c 2,00,000
Telephone Expenses A/c 50,000
Electricity Charges A/c 1,00,000
Packing charges A/c 25,000
Insurance A/c 1,00,000
Rent A/c 1,20,000
Carriage inward A/c 55,000
Interest on Loan A/c 1,00,000
Depreciation A/c 15,000
Land A/c 10,00,000
36,00,000 36,00,000
Dr. Trading and profit & loss A/c for the year ending on 31.3.2013 Cr.
Particulars Rs. Particulars Rs
To Purchases 15,00,000 By Sales 25,00,000
To carriage 55,000 By closing Stock 1,00,000
To Gross Profit 10,45,000
26,00,000 26,00,000
To Staff salary 2,00,000 By Gross profit 10,45,000
To Telephone expenses 50,000
To Electricity charges 1,00,000
To Packing charges 25,000
To Insurance 1,00,000
To Rent 1,20,000
[XI – Accountancy] 286
To Interest on loan 1,00,000
To Depreciation 15,000
To Net profit 3,35,000
10,45,000 10,45,000
Dr. Balance sheet as at 31.3.2013 Cr.
Particulars Rs. Particulars Rs
Capital 2,00,000 Land 10,00,000
Add : Net Profit 3,35,000 5,35,000 Furniture 90,000
Computer 45,000
Bank Loan 9,00,000 Closing Stock 1,00,000
Bank 75,000
Cash 1,25,000
14,35,000 14,35,000
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
287 [XI – Accountancy]
Data relating to year 2012-13 of M/s Rajasthan Men’s wear
Cost of Goods sold = Opening Stock + Net Purchases
+ Direct Expenses – Closing stock
= 0 + 15,00,000 + 5,000 – 1,00,000
= 14,55,000
OR
Cost of Goods Sold = Net Sales – Gross Profits
= 25,00,000 – 10,45,000
= 14,55,000