Basic Concept of Accounting

Introductory Material
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Business (Hope you all understand what is Business.)
 Business is an occupation or trade and the purchase / manufacture and sale
of product or Services to make a profit.
OR
 A Business is an organization where people work to make and sell products or
Services.
Business is different from you. Business is separate from you even though you are
the owner of this business. Business has a different identity and thus is a different
entity than you.

Type of Business Organization (Generally)

1) Proprietorship -> One man is Owner.
2) Partnership -> Two or more man is Owner.
3) Company -> a) Private Limited company b) Public limited company.
4) Trust/ Society.
All such Organizations have to register in their respective Act/ Law and then they
become legal entity.

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Accounting: In simple words “Accounting is drawing conclusion out of a series of
activities.
Suppose, in a month, you have entered into the following transactions:
a) Purchased 5 watches @ Rs. 200 per watch
b) Sold all the Watches @ Rs. 250 per watch
c) Paid commission to salesman Rs. 50 in total.
Now if you want to understand the net effect of the transactions, what you to do is
“Accounting”.
Sales (Rs.250*5) Rs. 1250
Less: Purchases (Rs. 200*5) Rs. 1000
Rs. 250
Less: Commission Rs. 50
Profit Rs. 200
So, we can conclude that you have earned a profit of Rs. 200/-
Thus the function of accounting is recording the transactions and drawing
conclusions thereof.
In our personal life, we earn income from different sources like salary, business,
pension, interest etc. and incur different expenses like interest on home/car loans,
purchase of investment and other family expenses like food, education, clothing or
gift etc. We keep records of these incomes and expenses to know the total savings
for the month or year and the cash balance at the end of such period.
The owner of a business also keeps records of different transactions to know the
total profit or loss from the business in a particular month or year. Intentionally or
unintentionally, we do accounting in every sphere of life; it may be family, business
or professional life.
The accounting may be defined as the process of recording, classifying,
summarizing, analyzing and interpreting the financial transactions and
communicating the results thereof to the persons interested in such information.
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Objectives of Accounting:

 To provide a record of all business transactions in a systematic manner

 To find out the results of all such transactions
 To ascertain the amounts due to or due from others
 To find out the financial position of a business on a particular day
 To have valuable information for legal and taxation purposes
 To provide reports to owners and managers to help them in making decisions
for the business
 To prevent theft, frauds and errors.

Users of Accounting Information and their needs:

Proprietor - To know the profitability and financial soundness of the business
Manager - To improve the profitability and financial position of the business
Creditors/ lenders - To know that the business will be able to repay their dues on
time
Employees - To know the earning capacity of the business since their remuneration,
salary depends on it
Prospective Investors - To know the profitability and safety of their investment
Government – Compliances with several tax and other laws.

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 Transaction
Transaction: Event which has a monetary effect.
Example: Purchase of computer, Sale of computer, Payment of salary to staff,
Purchase of Stationary, Loan from Bank, Cash Payment/ Cheque, payment or
Online- Payment through Bank.
Following are the features of a Transaction:
 It involves an economic activity
 There must be at least two parties
 It brings about a change in the financial position of the parties
 The change must be capable of being expressed in terms of money

Ex: State whether the following events are transactions or not

(i) Mr. Ram started business with capital of Rs. 5,00,000/- Transaction
(ii) Paid salaries to staff Rs. 5000/- Transaction
(iii) Placed an order to Shyam Enterprise for goods of Rs. 5000/- Event
(iv) Opened a bank account by depositing Rs. 4000/- Transaction
(v) Opened a bank account by nil amount- Event
(vi) Appointed Mr. Amit as Manager at a salary of Rs. 12000/- per month – Event
(vii) Received interest from Bank Rs. 500/- Transaction
(viii)Talked on business deals with a supplier- Event

Classification of Transaction: Transaction may be in Cash or Credit.

Cash Transaction: A Transaction which involves immediate payment or receipt is
called cash transaction. For ex: Goods Purchased for Cash
Credit Transaction: A Transaction which does not involve immediate payment or
receipt is called credit transaction. For ex: Goods sold on credit to Shyam.
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 Accounting
Accounting is used by business organizations for keeping records of their monetary
or financial transactions. Or
Accounting is the art of recording, classifying and summarizing financial transaction.

Accounting = Recording + Classifying + summarizing of financial transaction.

Recording: Recording means systematically writing down the transactions in

account books. This is called passing the Journal.
Classifying: Classifying is the process of grouping transaction or entries of the same
type at one place. This is called Ledger.
Summarizing: summarizing involves the preparation of reports and statements from
the classified data. This is called preparation of final accounts (Balance sheet and
Profit & Loss Account)

Journal → Ledger → Trial Balance → Balance Sheet and Profit &

Loss Account
Before understanding above, we will first understand some commonly used terms
in Accounting.

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 Commonly used Terms in Accounting.

*Assets: Things on which you have control i.e. you own it and which will give you
future economic benefit.

Assets: A) Fixed Assets -> which will give benefit for more than one year.
B) Current Assets -> which benefit will end within one Year.
Fixed Asset: Land, Building, Plant and Machineries, Furniture & Fixtures, Computer,
Car, Truck, etc.
Current Asset: Cash, Bank, Stocks/ Inventory, Debtors

*Liability: Which the business has an obligation to pay/ return.

Liability: A) Long Term liability-> which you expect to pay- off after one year.
B) Current Liability -> which you expect to pay- off within one year.

Long Term Liability: Long Term loan from bank, Debenture

Current Liability: Creditors, Trade Payable, Outstanding Salary, Outstanding
Expenses, Tax Payable, Overdraft/ Cash Credit.

*Expenses: Expenses are what business spends money on.

*Income: Income are what through which business received money.
Expenses: Salary Payment, Rent Payment, Advertisement Expenses, Printing and
stationary expenses, Fuels, Insurance Expenses, Interest on Loan, Manufacturing
Expenses, Cost of goods sold, Bad Debts
Incomes: Sales, Service Charges/ Fees received, Interest Earned, Liability Waived

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 Try to differentiate between Asset and Expense

Expenses – Outflow of cash } Then what is difference?

Assets - Outflow of cash
Expenses- It has incurred. No future Benefit
Assets - Future Benefit.
Purchase of Car = Asset, Purchase of Petrol = Expenses
Receipt of Hire Charges of Car = Income, Purchase of car Perfume = Expenses
Purchase of Car on Loan = Loan is Liability
Purchase of computer= Asset, Purchase of A-4 Paper = Expenses
Purchase of Cartridge = Expenses, Computer Repairing Charges = Expenses
Receipt of cyber fee from user= Income

*Proprietor: The person who invests money and start the business and bears its
risk is the proprietor. Suppose Mr. Ram started business by investing Rs. 5,00,000/-.
Here Mr. Ram is the proprietor and Rs. 5,00,000/- is his capital.

*Capital: Owner’s contribution/ money/ Investment to the business is called

capital. It is also a liability but not of outsider.
The excess of assets over outsider liabilities of an enterprise is termed as capital. For
example, if on a particular day, the assets of the business amounts to Rs. 1,00,000/-
and outsider liabilities is Rs. 70,000/-, then the capital on that date is Rs. 70,000/-.
Owner’s liability – Capital
Outsider’s liability – Liability

*Drawing: Money or value of goods belonging to business used or taken by the

proprietor for his personal use is drawings. For example, the proprietor of the
business withdrew Rs. 10,000 cash from his business for his personal use. This is his
drawings. It may be in cash or kind also. It will reduce the claim of the proprietor
from the business.
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Ram has started business of Biscuit Manufacturing by investing Rs. 5, 00,000/-. (Five
Lac). He also takes loan from SBI Rs. 8, 00,000 (Eight Lac). He purchases plant &
Machinery of Rs. 4, 00,000 (Four Lac) and office furniture of Rs. 2, 00,000(Two Lac).
He has registered “Ram Enterprises” and registration expense was Rs. 1,500. He has
appointed two staff on salary of Rs. 5,000.

In the books of Ram Enterprises

Investment by Ram – 5, 00,000 = Capital

Loan from SBI - 8, 00,000= Liability (Long Term)
Purchase of plant & Machinery – 4, 00,000 = Asset (Fixed)
Purchase of Furniture – 2, 00,000 = Asset (Fixed)
Registration Charges - 1,500= Expenses
Salary of Staff- 5,000= Expenses
Purchase of Raw Material (Flour, Sugar etc.) - Expenses
Sales of biscuits – Income

*Revenue: It is the monetary value of the products sold or services provided to the
customers. It results from sale, services and sources like interest received, dividend,
commission etc.

*Expenses: Money spent by an enterprise to earn revenue is termed as expense.

For example, the business purchases goods for earning revenue by selling those
goods to the customers. Here purchase of goods is expense.

*Debtor: A debtor is a person or enterprise that owes money to another party.

Ram Enterprises sold 100 packets of Biscuits to Shyam on credit. Now for Ram
Enterprise, Shyam is a debtor.

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*Creditor: A creditor is a person or enterprises that has supplied goods or
materials on credit to another party or lent money to another party.
In the above example for Shyam Enterprise, Ram Enterprises is a Creditor.
Also in the previous example, Ram Enterprises has taken loan from SBI Rs. 8 Lac.
Ram Enterprises is the debtor and SBI is the creditor.

*Profit: The term “Profit” can be defined as what is left from revenue after all
expenses have been provided for. In other words, Profit = Revenue – Expenses.

*Loss: The term “Loss” can be defined as excess of expenses over revenue. In other
words, Loss = Revenue – Expenses.

*Inventory: Raw Materials, Finished and Unfinished Products of a business which

have not yet been sold are called Inventory or Stocks.
For example, out of 10 shirts manufactured, 3 shirts costing Rs. 100 each have not
been sold yet. So value of inventory is Rs. 300/-.

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 *Accounting Equation:

Assets= Liability+ Capital.

Every business transaction will have an effect on the enterprise financial position.
The financial position of an enterprise is measured by the following three items.
A) Assets ( What it Owns)
B) Liability (What it owes to others)
C) Capital/ Owner’s equity.
Assets are company/ Enterprises resources – things the company Owns. Ex. Cash,
Debtors, Inventory /Stocks, Investments, Land, Building, Equipments, Machinery
etc.
Liabilities are Company/ Enterprises obligations – amounts the company Owes. Ex.
Loan payable, Creditors, Salaries and wages payable, Interest payable etc.
Owner’s equity/ Capital is the amount left over after liability are deducted from
Assets. Assets (-) Liability= Owner’s equity/ Capital
If any enterprise keeps accurate records the accounting equation will always be “In
balance”. Meaning left side will always equal to the right side. A=L+C Always
Equal.
The balance is maintained because every business transaction affects at least two of
a company’s account.
For Example: When Ram Enterprises takes loan from SBI, its assets (Bank or Cash
Balance) will increase and its liability will also increase by same amount. Bank
balance will increase by 8 Lac and Loan from SBI will also increase by 8 Lac. Similarly
on purchase of furniture, one asset will increase and one asset will decreases i.e.
Furniture account will increase by Rs. 2 lac and Cash account will decrease by Rs. 2
Lac.
Because there are two or more accounts affected by every transaction, the
accounting system is referred to as double entry accounting.

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 What is Account and its Classification?
The business transactions are recorded under account heads.
An account is an individual record of:
 Real Account – (An item or thing) Machine a/c, Furniture a/c, Bank a/c,
computer a/c, Cash a/c, building a/c, Truck a/c etc.
 Personal Account- (A person or enterprise) – Shyam a/c, Loan from SBI a/c,
Ramesh Enterprises a/c, supplier a/c, customer a/c, etc.
 Nominal Account- (An item of income or expenses) - Rent received , Rent
payment, Interest earned a/c, Interest payment a/c, Salary a/c, Wages a/c,
Sales a/c, purchase a/c, petrol a/c, fuel a/c, printing a/c, etc.
Classification of Accounts: Personal Accounts
Real Accounts
Nominal Accounts
Personal Accounts: These types of accounts show the transactions with customers,
suppliers, Money lenders, the banks and the owner.
May be natural personal account (Naresh A/c) or artificial personal account (Shyam
Enterprise, SBI).
Real Accounts: these are account of such things which are tangible i.e. which can be
seen, touched or felt physically. Example: Land, Building, Furniture etc.
Nominal Accounts: Nominal accounts are opened in the books to explain the
expenses and incomes. Nominal accounts include accounts of all expenses losses,
income and gains.

Now we will understand concepts of:

 Dual aspect concept
 Double entry system
 Rules of Debit and Credit
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Dual Aspect Concept
The recognition of the two aspects of every transaction is known as dual aspect
concept, one entry consists of debit to one or more account and another entry
consists of credit to some other one or more accounts.
However, the total amount debited is always equal to the total amount credited.
Therefore at any point of the time total assets of a business are equal to its total
liabilities.
Liabilities to outsider are known as liabilities, but a liability to Owner is referred to
as capital. Thus dual aspect concept expresses the Accounting Equation among Asst,
Liabilities, and Capital as
Assts = liability + Capital

Double entry system

This system recognizes the fact that every transaction has two aspects and records
both aspects of each and every transaction.
If you have purchased a shirt for Rs. 1000, then you have paid cash of Rs. 1000 and
got a shirt of the same amount. So, one aspect is payment of cash and other aspect
is receipt of a shirt.
Therefore, in this system, for every debit entry, there is an equal and opposite
credit entry.
Under this system, in every transaction an account is debited and some other
account is credited.
An Accountant has to identity which of the two (or more) accounts are affected by
a particular transaction and out of these two accounts (or more) which account is to
be debited and which account is to be credited.

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 Rules of Debit (Dr) and Credit (Cr)
Golden Rules:
Personal Account : “Debit the receiver and Credit the giver”.
Real Account : “Debits what comes in and Credit what goes out”.
Nominal Account : “Debit all expense and losses and Credit all incomes and
gains”.

Personal Account: Debit the receiver and Credit the giver i.e. Debit (Dr) the account
of the person who receives something and Credit (Cr) the account of the person
who gives something.

For Example: If Ram Enterprise purchase furniture from Shyam on credit, the two
accounts involved are Furniture account and Shyam’s account.
Now for Ram enterprise, since Shyam is the giver in this transaction, his account will
be credited. Similarly when Ram Enterprise pay cash to the Shyam, it will debit the
Shyam account, since he is the receiver.

You have to understand in which book you are making the entries, you have to
think accordingly. As in above example, for Shyam, Ram Enterprises is the receiver
of furniture. So in Shyam book Ram Enterprise a/c will be debited. Similarly when
Ram Enterprise will pay cash, Ram Enterprise a/c will be credited since it is the
giver. We will discuss it later.

Real Account: Debit what comes in and Credit what goes out, i.e debit (Dr.) the
account of the thing which comes in and credit (Cr.) the account of the thing which
goes out.

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For Example: in the previous example, for Ram Enterprise, Furniture is coming,
Furniture a/c will be debited and later on when it pays cash to Shaym, Cash a/c will
be credited since it is going out. Suppose furniture was purchase on 1st May 2019
and cash was paid on 3rd May 2019.

In the book of Ram Enterprises

Date
01.05.2019 Furniture a/c Dr. Rs. 2,00,000/-
To Shyam a/c Rs. 2,00,000/-

01.05.2019 Shyam a/c Dr. Rs. 2,00,000/-

To Cash a/c Rs. 2,00,000/-

Above is called passing journal entries, we will discuss it later.

Nominal Accounts: Debit (Dr.) all expense and losses and Credit (Cr.) all income
and gains.
For Example, if Ram Enterprises pays salary to its accountant, the two account
involved are Salary a/c and Cash a/c. Salary is an expense, hence it will be debited.
Similarly if interest is received, Interest a/c will be credited since it is an income.

Important Note: Analyzing Transactions for recording.

If the three fundamental rules describe above are kept in mind, it would be possible
to record all the transactions:
 Identify the two (or more) accounts involved in the transaction.
 Find out the type of account for both the accounts involved in the
transaction.
 Apply the rules of debit (Dr.) and credit (Cr.)
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 For Example: Payment of salary is a transaction. It involves salary account and Cash
account. Salary a/c is a nominal account whereas as, cash account is a real account.
The rule of nominal account says “Debit all expense and losses”. So salary account
being expense, will be debited.
Whereas rule of real account says “Credit what goes out”. Here cash is going out. So
cash account will be credited.
Ex: From the following transactions, identify the nature of accounts involved and
state which account will be debited and which account will be credited.
Type of
S.N. Transaction Account involved Debit/ credit
Account
Mr. Anit Started Business Cash a/c Real Debit Incomings
1
with Rs. 60,000 Capital a/c Personal Credit Giver
Debit Incomings
Purchased Goods for Cash Purchases A/c Real
2 Credit Out
Rs. 25,000 Cash A/c Real
goings
Debit Incomings
Sold goods for cash Rs. Cash a/c Real
3 Credit Out
20,000 Sales a/c Real
goings
Debit Incomings
Purchased Goods from Mr Purchases A/c Real
4 Credit Out
Bansal for cash Rs. 10,000 Cash A/c Real
goings
Debit Receiver
Sold goods to Mr. charles Charles Personal
5 Credit Out
for cash Rs. 8,000 on credit. Sales A/c Real
goings
Debit Incomings
Purchased Furniture for Rs. Furniture a/c Real
6 Credit Out
16,000 Cash A/c Real
goings
Debit Expenses
Rent a/c Nominal
7 Paid Rent Rs. 2000 Credit
Cash a/c Real
Outgoings
Debit Expenses
Wages a/c Nominal
8 Paid Wages Credit
Cash a/c Real
Outgoings

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 Purchase good from Ajit on Purchases a/c Real Debit Incomings
9
Credit Ajit a/c Personal Credit Giver
Cash a/c Real Debit Incomings
10 Dividend Receive
Dividend a/c Nominal Credit Income
Debit Incomings
Cash a/c Real
11 Machinery Sold Credit Out
Machinery a/c Real
goings
Salaries a/c
Nominal Debit Expenses
12 Outstanding For salaries Outstanding
Personal Credit Giver
Salaries a/c

Now we will again go to the definition of Accounting and learn Accounting Process
and understand concept of Journal, Ledger, Cash Book and the Trial Balance.

Journal, ledger and Cash Book

Please recall definition of Accounting:

Accounting = Recording + Classifying + Summarizing of financial transaction.

Journal Ledger Trail Balance and Balance Sheet P&L a/c

Accounting process and Accounting cycle:

1) Identify the transaction from source documents like bills, invoices,

agreements, etc.

2) Recording the transaction in journal proper and other subsidiary books.

3) Classifying all entries posted in journal or subsidiary books and posting to
appropriate Ledger account.

4) Summarizing all the ledger balances and preparing the trial balance and
Final Accounts. (Balance Sheet and Profit & Loss Account)
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 Journal
Journal is the book of primary entry in which every transaction is recorded before
being posted into the Ledger.
Journal: Every/All transactions are recorded.
Ledger: Individual account wise transactions recorded.
A Journal book is generally kept in a columnar form.
Journal book (Book of Ram Enterprise)
Date Particulars Debit (Dr) Credit (Cr)
(Amount) (Amount)

For Example: Ram Enterprise has purchased Computers from Shyam on Credit. The
two accounts involved in this transaction are Computers and Shyam Account.
Computer is Real Account and Shyam is Personal Account. For Ram Enterprise
Computer is coming in (Dr. what comes in and Cr. what goes out), hence Computer
a/c will be debited and since Shyam is the giver (Dr. the receiver and credit the
giver) Shyam a/c will be Credited. Later on when Ram Enterprise pays cash to
Shaym, Cash a/c will be credited since it is going out and Shyam a/c will be debited
since he is the receiver. Suppose Computer were purchased on 02nd May 2019 and
cash was paid on 4th May 2019.
In the book of Ram Enterprises
Date
02.05.2019 Computer a/c Dr. Rs. 2,00,000/-
To Shyam a/c Rs. 2,00,000/-

04.05.2019 Shyam a/c Dr. Rs. 2,00,000/-

To Cash a/c Rs. 2,00,000/-
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 Journal
In the book of Ram Enterprises
Date Particulars Debit (Dr) Credit (Cr)
(Amount in Rs.) (Amount in
Rs.)
02.05.2019 Computer A/C Dr. 2,00,000
To Shyam A/C 2,00,000
(Being Computer Purchased from
Shyam on Credit)
04.05.2019 Shyam A/C Dr. 2,00,000
To Cash A/C 2,00,000
(Being Payment made to Shyam)

Particulars: The two aspects of a transaction are recorded in this column i.e. the
accounts which have to be debited and credited. The name of the account(s) to be
debited is entered at the extreme left of the particulars column next to the date
column. The abbreviation ‘Dr.’ is written at the right end of the particulars column
on the same line of the account debited. The name of the account to be credited is
entered in the next line with a prefix ‘To’. A brief explanation of the transaction
known as narration is written below the account titles of the transaction. Finally,
a thin line is drawn all through the particulars column to indicate that the entry of
the transaction has been completed.

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 Procedure of Journalising
The following procedure is followed for passing journal entries-
– Analyze each transaction in terms of accounts affected. As a rule every
transaction has at least two accounts.
– Find out the type of accounts affected in a transaction i.e. personal, real or
nominal.
– Apply the rules of debit and credit to each type of accounts involved.
– The debit and credit accounts must be equal.

Some Specimen Transactions:

Capital: Started business with capital of Rs. 50,000/- on April 1, 2018
Cash is debited as it comes in. On the other hand, the owner is the giver, and
owner’s share in business is Capital, so Capital A/C should be credited.
Date Particulars Debit (Dr) Credit (Cr)
1.4.18 Cash A/C Dr. 50,000
To Capital A/C 50,000
(Being commencement of New Business and capital
introduced)

Purchase: Purchased goods from Sunil on credit for Rs. 14,000/- on April 3, 2018
Goods (Purchase) come in and Sunil is the giver. Purchase A/c is therefore debited
and Sunil is credited.
Date Particulars Debit (Dr) Credit (Cr)
3.4.18 Cash A/C Dr. 14,000
To Capital A/C 14,000
(Being Purchase of Goods on Credit from Sunil)

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Sale: Sold Goods to Amitabh on credit for Rs. 5,000/- on April 4, 2018
Amitabh is the receiver, therefore his account has to be debited. Goods (Sale) goes
out, hence Sales A/C is credited.
Date Particulars Debit (Dr) Credit (Cr)
4.4.18 Amitabh A/C Dr. 5,000
To Sales A/C 5,000
(Being sale of Goods on Credit to Amitabh)

Purchase Return/ Debit Note:

If after purchase of goods, the purchaser returned the goods for any reason like,
defect, excess than ordered or not according to sample, it is purchase return. The
Purchaser sends a debit note to the supplier for adjustment. The supplier’s account
is debited in the books of the purchaser.
So, Debit Note is a document notifying a supplier that a debit has been made to his
account in the books of the purchaser. It is generally sent when a bill is overcharged
for the amount of difference. It is prepared after the supplier agrees to grant a price
reduction. One copy of the debit note is sent to the supplier.
For example, out of goods purchased from Sunil on April 3, 2018, Goods valuing
Rs. 2000/- is returned on 5th April because of inferior quality.
Hence, Sunil is receiving the returned goods. So Sunil A/C will be debited and
Purchase Return A/C will be credited by the amount of the value of returned goods
as it is goes out. The Journal entry will be:
Date Particulars Debit (Dr) Credit (Cr)
5.4.18 Sunil A/C Dr. 2,000
To Purchase Return A/C 2,000
(Being Goods Returned because of Inferior quality)

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Sales Return/ Credit Note:
The seller after receiving the goods returned, will credit the account of the
purchaser in his books and will issue a credit note. Hence Credit Note is an evidence
that a credit entry has been made to a debtor’s account. When goods are supplied
to a customer, a bill is sent. If the customer requests for a correction in the bill for
any discrepancy, a Credit Note may be issued.
A transaction (sales return or purchase return) is complete when a party issues a
credit note against a debit note and vice versa.
Suppose, out of the goods sold to Amitabh on 4th April 2018, Goods valuing Rs. 1000
was returned by Amitabh on 6th April being excess of order. The Journal will be:
Goods (Sales Return) come in and Amitabh is the giver. Sales Return A/c is therefore
debited and Amitabh is credited.
Date Particulars Debit Credit
6.4.18 Sales Return A/C Dr. 1,000
To Amitabh A/C 1,000
(Being Goods Received from Amitabh because excess order)

Receipt: Received cash from Amitabh Rs. 5000 on April 10, 2018.
Cash comes in, hence Cash A/C is debited, and Amitabh is the Giver, hence credited.
Date Particulars Debit (Dr) Credit (Cr)
10.4.18 Cash A/C Dr. 5,000
To Amitabh A/C 5,000
(Being Cash Received from Amitabh)

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Payment: Paid cash to Sunil Rs. 5000 on April 12, 2018.
Sunil is the receiver, hence his account is debited, and cash goes out and thus Cash
A/C is credited.
Date Particulars Debit (Dr) Credit (Cr)
12.4.18 Sunil A/C Dr. 5,000
To Cash A/C 5,000
(Being Cash Paid to Sunil)

Contra: Deposited cash into Bank Rs. 49,000 on April 14, 2018.
When the amount is deposited into Bank, the Bank becomes the receiver as it
receives cash. Bank is therefore debited and as Cash goes out, it is credited.
Date Particulars Debit (Dr) Credit (Cr)
14.4.18 Bank A/C Dr. 49,000
To Cash A/C 49,000
(Being Cash deposited in Bank)

Simple and Compound Journal Entries:

A journal entry, which contains only one debit and one credit entry is called a Simple
Journal Entry. If it contains more than one debit or more than one credit entries or
both, the entry is a compound or combined journal entry.
Regardless of the number of debits or credits in a compound journal entry, the
aggregate amount of debits should be equal to the aggregate amount of credits.
Transactions which are inter-connected and have taken place simultaneously are
recorded by means of a compound or combined journal entry. For example receipt
of cash from a debtor and allowance of discount to him are recorded by means of a
single journal entry. Similarly transactions of the same nature are recorded by
means of a combined entry provided they take place the same day. For example, if
amount is spent on the same day for salaries, wages, stationery, rent, etc. a

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combined entry can be passed debiting all the relevant nominal accounts with
respective amounts and crediting cash account with the total amount spent.

Date Particulars Debit (Dr) Credit (Cr)

30.4.18 Rent A/C Dr. 1,000
Wages A/C Dr. 2,000
Salary A/C Dr. 3,000
To Cash A/C 6,000
(Being Payment of expenses)

Actually a compound journal entry is a combination of two or more simple journal

entries. The journal entries on 30th April is a combination of the following three
simple journal entries.
Date Particulars Debit (Dr) Credit (Cr)
30.4.18 Rent A/C Dr. 1,000
To Cash A/C 1,000
(Being payment of Rent in cash)

Date Particulars Debit (Dr) Credit (Cr)

30.4.18 Wages A/C Dr. 2,000
To Cash A/C 2,000
(Being payment of wages in Cash )

Date Particulars Debit (Dr) Credit (Cr)

30.4.18 Salary A/C Dr. 3,000
To Cash A/C 3,000
(Being payment of salary in cash)

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Illustration 1:
Journalise the following transactions:
2019 March `
‘’ 2 Commenced business with cash 2,50,000
”4 Purchased furniture for cash 20,000
”4 Cash purchases 1,45,000
”5 Deposited with bank 30,000
”6 Purchase from Patil 40,000
Sold to Natarajan for cash 14,300
”7 Stationery purchased 1,050
”7 Purchase from Salil 26,000
”7 Sold to Mukherjee 8,080
”9 Rent for two years paid in advance 24,000
”9 Drawings by the proprietor for household expenses 4,000
Goods taken out by the proprietor for domestic use 500
”9 Cash withdrawn from Bank 25,000
” 10 Sold to Mathur on credit 9,850
” 11 Purchases made, payment through cheque 2,900
” 14 Cash received from Patil on account 10,000
” 14 Cash paid to Salil after deduction of discount Rs. 1300 24,700
” 17 Cash received from Mathur in full settlement of his account 9,750
” 18 Mukherjee becomes insolvent. A dividend of 50 paise in a rupee is received 4,040
” 18 Purchase of a Scooter for cash 30,000
” 20 Sold goods to Aggarwal 8,640
Sales to Nayak 3,780
” 24 Cartage paid in cash 150
” 24 Repairs to Scooter, payment not yet made 170
” 26 Payment of cash for petrol 550
” 26 Purchases of goods for cash 12,000
” 26 Purchases of Office Equipment for cash 12,100
” 27 Repairs bill paid in cash 170
” 28 Aggarwal returns goods 400
” 31 Depreciation on furniture 100
Depreciation on Scooter 200
” 31 Salary to clerk outstanding 1,800
” 31 Adjustment for the month’s outstanding rent 1,000
” 31 Bank charges for the month 50
” 31 Interest on capital for the month 1,250
Salary to be credited to proprietor 2,000
” 31 Salil agrees to take some defective goods purchased from him and immediately
refunds the money 700

24
 Journal
In the book of Ram Enterprises
Date Particulars Debit (Dr) Credit (Cr)
(Amount in Rs.) (Amount in Rs.)
02.03.2019 Cash Account Dr. 2,50,000
To Capital Account 2,50,000
(Being cash brought in by proprietor as
capital)
04.03.2019 Furniture Account Dr. 20,000
To Cash Account 20,000
(Being purchase of furniture for cash)
04.03.2019 Purchases Account Dr. 1,45,000
To Cash Account 1,45,000
(Being purchase of goods-in-trade for cash)
05.03.2019 Bank Account Dr. 30,000
To Cash Account 30,000
(Being cash deposited with bank)
06.03.2019 Purchases Account Dr. 40,000
To Patil Account 40,000
(Being purchases of goods in trade, on credit,
Patil being the supplier)
06.03.2019 Cash Account Dr. 14,300
To Sales Account 14,300
(Being cash sales made to Natarajan)

25
07.03.2019 Stationery Account Dr. 1,050
To Cash Account 1,050
(Being purchase of stationery for cash)
07.03.2019 Purchases Account Dr. 26,000
To Salil Account 26,000
(Being credit purchases of goods from Salil)
07.03.2019 Mukherjee Account Dr. 8,080
To Sales Account 8,080
(Being sales of goods on credit to Mukherjee)
09.03.2019 Rent Paid in Advance Account Dr. 24,000
To Cash Account 24,000
(Being Rent paid in advance)
09.03.2019 Drawings Account Dr. 4,500
To Cash Account 4,000
To Purchases Account 500
(Being For drawings in cash and goods taken
by the proprietor for personal use)
09.03.2019 Cash Account Dr. 25,000
To Bank Account 25,000
(Being cash withdrawn from Bank)
10.03.2019 Mathur Account Dr. 9,850
To Sales Account 9,850
(Being sales of goods on credit to Mathur)

26
11.03.2019 Purchases Account Dr. 2,900
To Bank Account 2,900
(Being purchases of goods, payment being
made by means of a cheque)
14.03.2019 Cash Account Dr. 10,000
To Patil Account 10,000
(Being cash received from Patil)
14.03.2019 Salil Account Dr. 26,000
To Cash Account 24,700
To Discount Account 1,300
(Being cash paid to Salil and discount
received from him)
17.03.2019 Cash Account Dr. 9,750
Discount Account Dr. 100
To Mathur Account 9,850
(Being cash received from Mathur and
discount allowed to him)
18.03.2019 Cash Account Dr. 4,040
Bad Debts Account Dr. 4,040
To Mukherjee Account 8,080
(Being cash received from Mukherjee on his
insolvency and balance amount written off
as bad debt)

27
18.03.2019 Scooter Account Dr. 30,000
To Cash Account 30,000
(Being purchase of a scooter for cash)
20.03.2019 Aggarwal Account Dr. 8,640
Nayak Account Dr. 3,780
To Sales Account 12,420
(Being sales of goods on credit to Aggarwal
and Nayak)
24.03.2019 Cartage Account Dr. 150
To Cash Account 150
(Being Cartage Paid in cash)
24.03.2019 Repairs Account Dr. 170
To Repairs Outstanding Account 170
(Being Repairs charges)
26.03.2019 Petrol Expense Account Dr. 550
To Cash Account 550
(Being petrol expenses paid in cash)
26.03.2019 Purchases Account Dr. 12,000
To Cash Account 12,000
(Being Purchases of Goods in cash)
26.03.2019 Office Equipment Account Dr. 12,100
To Cash Account 12,100
(Being Purchase of Office Equipment in cash)

28
27.03.2019 Repairs Outstanding Account Dr. 170
To Cash Account 170
(Being Repairs outstanding paid)
28.03.2019 Sales Return Account Dr. 400
To Aggarwal Account 400
(Being sales return from Aggarwal)
31.03.2019 Depreciation Account Dr. 100
To Furniture Account 100
(Being depreciation on furniture)
31.03.2019 Depreciation Account Dr. 200
To Scooter Account 200
(Being depreciation on scooter)
31.03.2019 Salary Account Dr. 1,800
To Salary Outstanding Account 1,800
(Being salary outstanding)
31.03.2019 Rent Account Dr. 1,000
To Rent Outstanding Account 1,000
(Being Rent outstanding)
31.03.2019 Bank Charges Account Dr. 50
To Bank Account 50
(Being bank Charges deducted by Bank)
31.03.2019 Interest on Capital Account Dr. 1,250
Salary to Proprietor Account Dr. 2,000

29
 To Capital Account 3,250
(Being interest on capital, Rs. 1250 and salary
for the proprietor credited with Rs. 2,000)
31.03.2019 Cash Account Dr. 700
To Purchases Return Account 700
(Being cash received from Salil on return of
some defective goods sold to him)

While learning Journal entries in the above illustration, we also learn the concepts
of:

 Expenses Paid in Advance i.e. Expenses not incurred but paid (Rent paid in
Advance A/C)
 Expenses incurred but not paid i.e. Outstanding Expenses (Salary Outstanding
A/C)
 Discount Account (Discount Allowed A/C (Expenses/Loss) and Discount
Received A/C (Income/ Gain)
 Concept of Bad Debts
 Purchase Return A/C and Sales Return A/C
 Depreciation Account
 Drawing Account
 Concept of Periodicity in Accounting

30
 LEDGER - PRINCIPAL BOOK OF ACCOUNTS
Ledger is the principal book of accounts where similar transactions relating to a
particular account are recorded.
The main function of a ledger is to classify or sort out all the items appearing in the
journal or other subsidiary books under their appropriate accounts so that at the
end of the accounting period each account will contain the entire information of all
the transactions relating to it in a summarized or condensed form.
For instance, all the transactions that have taken place with Mr. Mathur will be
entered in Mathur’s Account. Similarly, all items relating to cash, sales, purchases,
salaries, discount, etc. appear in their respective accounts.
SPECIMEN RULING OF LEDGER ACCOUNT
Name of the Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
To, Credit Aspect By, Debit Aspect

Features of the Ledger Account:

(i) The ledger account is divided into two sides - the left hand side is known as
debit side while the right hand side is known as credit side. The abbreviations ‘Dr.’
and ‘Cr.’ are placed at the top left and right hand corners respectively as a custom.
(ii) The name of account is written in the top middle of the account.
Difference between Journal and Ledger:
Ledger Journal
It is the book of final entry It is the book of original entry
Journal is the basis of ledger posting Journal is based on primary documents
Condensed and classified record of Chronological record of transactions
transactions
Can give complete and ready answer Cannot give any complete and ready answer
31
Posting:
Posting means transferring the debit and credit items from the journal to their
respective accounts in the ledger.

Rules of Posting
The names of accounts used in the journal carried to the ledger should be exactly
the same.
Separate accounts should be opened in the ledger for posting transactions relating
to different accounts recorded in the journal.
The concerned account which has been debited in the journal should also be
debited in the ledger and the account which has been credited in the journal, should
also be credited in the ledger i.e., but a reference should be given of the other
account (Journal Folio (J.F.) or Voucher No. in Computer Accounts)
It is customary to use the words ‘To’ and ‘By’ while making posting in the ledger.
The words ‘To’ is used with the accounts shown on the debit side of the ledger
account while the word ‘By’ is used with accounts which appear on the credit side of
the ledger account.

Balancing Ledger Accounts:

Balancing of an account means the process of equalizing the two sides of an account
by putting the difference on the side where amount is short.
Where the debit side of an account exceeds the credit side, the difference is put on
the credit side, and the account is said to have a debit balance. This balance is
brought down on the debit side while reopening the account. Similarly, where the
credit side of an account exceeds the debit side, the difference is put on the debit
side, and the account is said to have a credit balance. This is brought down on credit
side while reopening the account.

32
The following steps are followed for balancing the accounts:
(i) Total the amounts of debit and credit entries in the account.
(ii) If the debit and credit sides are equal then there is no balance. The account
stands automatically balanced or closed.
(iii) If the debit side total is more, put the difference on the credit side amount
column, by writing the words in particulars column “By Balance c/d”. If the credit
side total is more, put the difference on the debit side amount column by writing
the words in the particulars column “To Balance c/d”.
(iv) After putting the difference in the appropriate side of the account, add both
sides of the account and draw a thin line above and below the total.
(v) Bring down the debit balance on the debit side by writing the words in
particulars column “To Balance b/d”. Similarly bring down the credit balance on the
credit side by writing the words in the particulars column “By Balance b/d”.

Illustration 2:
Journalise the following transactions, post them in the ledger and balance the
accounts in the books of Mr. Rajesh.
2019 `
Jan. 1 Started business with cash 2,00,000
Jan. 3 Purchased goods for cash 60,000
Jan. 5 Sold goods to Shyam 60,000
Jan. 6 Sold goods for cash 20,000
Jan. 9 Received cash from Shyam 40,000
Jan. 13 Goods purchased from Ram 40,000
Jan. 20 Cash paid to Ram 20,000
Jan. 25 Paid office rent 4,000
Jan. 31 Paid salaries to staff 20,000
Jan. 31 Returned goods by Shyam 10,000

33
 In the Books of Mr. Rajesh
Journal Entries
Date Particulars Debit (Dr) Credit (Cr)
01.01.19 Cash A/C Dr. 2,00,000
To Capital A/C 2,00,000
(Being capital introduced by the proprietor in cash)
03.01.19 Purchases A/C Dr. 60,000
To Cash A/C 60,000
(Being goods purchased for cash)

05.01.19 Shyam A/C Dr. 60,000

To Sales A/C 60,000
(Being goods sold on credit to Shyam)

06.01.19 Cash A/C Dr. 20,000

To Sales A/C 20,000
(Being goods sold for cash)
09.01.19 Cash A/C Dr. 40,000
To Shyam A/C 40,000
(Being the cash received from Shyam)
13.01.19 Purchases A/C Dr. 40,000
To Ram A/C 40,000
(Being goods purchased on credit from Ram)
20.01.19 Ram A/C Dr. 20,000
To Cash A/C 20,000
(Being Cash Paid to Ram)
25.01.19 Rent A/C Dr. 4,000
To Cash A/C 4,000
(Being office rent paid in cash)
31.01.19 Salaries A/C Dr. 20,000
To Cash A/C 20,000
(Being salaries paid to staff)
31.01.19 Sales Return A/C Dr. 10,000
To Shyam A/C 10,000
(Being goods returned by Shyam)
34
 Ledger Accounts
Dr. Cash Account Cr.
Date Particulars Amount Date Particulars Amount
01.01.19 To Capital A/C 2,00,000 03.01.19 By Purchases 60,000
A/c
06.01.19 To Sales A/C 20,000 20.01.19 20,000
By Ram
09.01.19 To Shyam A/C 40,000 25.01.19 4,000
By Rent A/c
31.01.19 20,000
By Salaries A/c
31.01.19 1,56,000
By Balance c/d
2,60,000 2,60,000
01.02.19 To Balance b/d 1,56,000

Dr. Capital Account Cr.

Date Particulars Amount Date Particulars Amount
31.01.19 To Balance c/d 2,00,000 01.01.19 By Cash A/C 2,00,000
2,00,000 2,00,000
01.02.19 By Balance b/d 2,00,000

Dr. Purchases Account Cr.

Date Particulars Amount Date Particulars Amount
03.01.19 To Cash A/C 60,000 31.01.19 By Balance c/d 1,00,000
13.01.19 To Ram A/C 40,000
1,00,000 1,00,000
01.02.2019 To Balance b/d 1,00,000

35
 Dr. Sales Account Cr.
Date Particulars Amount Date Particulars Amount
05.01.19 By Shyam A/C 60,000
31.01.19 To Balance c/d 80,000 06.01.19 By Cash A/C 20,000
80,000 80,000
01.02.19 By Balance b/d 80,000

Dr. Shyam Account Cr.

Date Particulars Amount Date Particulars Amount
05.01.19 To Sales A/C 60,000 09.01.19 By Cash A/C 40,000
31.01.19 By Sales Return A/C 10,000
31.01.19 By Balance c/d 10,000
60,000 60,000
01.02.19 To Balance b/d 10,000
Dr. Ram Account Cr.
Date Particulars Amount Date Particulars Amount
20.01.19 To Cash A/C 20,000 13.01.19 By Purchases A/C 40,000
31.01.19 To Balance c/d 20,000
40,000 40,000
01.02.19 By Balance b/d 20,000

Dr. Rent Account Cr.

Date Particulars Amount Date Particulars Amount
25.01.19 To Cash A/C 4,000 31.01.19 By Balance c/d 4,000
4,000 4,000
01.02.19 To Balance b/d 4,000

36
 Dr. Salaries Account Cr.
Date Particulars Amount Date Particulars Amount
31.01.19 To Cash A/C 20,000 31.01.19 By Balance c/d 20,000

20,000 20,000
01.02.19 To Balance b/d 20,000

Dr. Sales Return Account Cr.

Date Particulars Amount Date Particulars Amount
31.01.19 To Shyam A/C 10,000 31.01.19 By Balance c/d 10,000

10,000 10,000
01.02.19 To Balance b/d 10,000

37
 CASH BOOK
Cash book is the book in which all transactions concerning cash receipts and cash
payments are recorded.
Cash Book is in the form of an account. It serves the purpose of Cash Account also.
On the debit side, all cash receipts are recorded while on the credit side, all cash
payments are recorded. Cash Book thus serves the purpose of a book of original
entry as well as that of a ledger account.
A cash book has the following features:
(a) Only cash transactions are recorded in chronological order in the cash book.
(b) It performs the functions of both journal and ledger at the same time.
(c) All cash receipts are recorded on the debit side and all cash payments are
recorded on the credit side.
(d) Cash balance can never be negative.

Illustration 3:
Record the following transactions in Cash Book of Mr. Mohan Lal Singh:
2019 `
April 1 Mohan Lal commenced business with cash Rs.1,00,000/-
” 2 Bought goods for cash Rs.65,700/-
” 3 Sold goods for cash Rs.4,320/-
” 6 Received cash from Fateh Singh Rs.1,800/-
” 6 Allowed him discount Rs.50/-
” 9 Paid cash to Shugan Chand Rs.19,500/-
Discount allowed by Shugan Chand Rs.500/-
” 12 Paid for Office Furniture Rs.5,680/-
” 18 Sold goods for cash Rs.7,810/-
38
 ” 23 Received cash from Subramam Rs.9,870/-
” Discount allowed to him Rs.120/-
” 27 Paid for advertising Rs.500/-
” 28 Cash paid to Asia Trading Co. Rs.20,300/- Discount received Rs.250/-
” 30 Cash sales Rs.1,280/-
” 30 Cash received from Fateh Singh Rs.2,850/- Discount allowed to him Rs.100/-
Salary paid in cash Rs.3,150/-
Mr. Singh
Dr. Cash Book Cr.
Date Particulars Discount Amount Date Particulars Discount Amount
2019 2019
1.4 To Capital A/C 1,00,000 2.4 By Purchases A/c 65,700
3.4 To Sales A/C 4,320 9.4 By Shugan Chand 500 19,500
6.4 To Fateh A/C 50 7,810 12.4 By Furniture A/c 5,680
18.4 To Sales A/C 1,800 27.4 By Advertising A/c 500
23.4 To Subrama 120 9,870 1,56,000
A/C
30.4 1,280 28.4 By Asia Trading co 250 20,300
To Sales A/C
30.4 100 2,850 30.4 By Salary 3,150
To Fateh A/C
30.4 By Balance c/d 13,100

270 1,27,930 750 1,27,930

1.5 To Balance b/d
13,000

39
Double Column Cash Book:
Sometimes, the organization maintains cash book as shown above with an extra
column to record Bank transactions also, so that we can know both the cash and
bank balances from a single book.
The cash column contains details of the receipts and payments made in cash
whereas the bank columns contain details of payments made by cheque and money
received through Bank (through cheque/DD/PO etc.) and deposited in Bank.
Three Columnar Cash Book: This type of cash book contains the following three
amount columns on each side:
(a) Discount column for discount received and allowed;
(b) Cash column for cash received and cash paid; and
(c) Bank column for money deposited and money withdrawn from the bank.
Contra Entry: If a transaction involves both Cash and Bank A/C, it is entered on
both sides of the cash book, one in the cash column and other in the bank column,
though on opposite sides. These are called contra entries e.g. when cash is
withdrawn from the bank, it is recorded on the debit side in cash column and on the
credit side in the bank column. Similarly, when cash is deposited with the bank, the
amount is recorded on the debit side in bank column and on the credit side in the
cash column.
Ex: From the following transactions, prepare a double column cash book and find
out the balance as on 07.04.2019
1.4.2019 Cash in Hand 1500
1.4.2019 Cash at Bank or Bank Balance 9000
2.4.2019 Sold Goods for Cash 4000
2.4.2019 Received from Amit Rs. 5000 by cheque and deposited in Bank 5000
3.4.2019 Withdrawn from Bank 2000
3.4.2019 Paid Wages in Cash 1500
4.4.2019 Deposited cash into Bank 1800
5.4.2019 Paid Pravesh by Cheque 4000
40
 In the books of________________
Dr. Cash Book Cr.
Date Particulars Cash Bank Date Particulars Cash Bank
2019 2019
1.4 To Balance 1500 9000 3.4 By Cash A/c 2000
b/d
2.4 4000 (Being cash withdrawn
To sales A/C from Bank)
(Being goods
sold for cash)
By Wages A/c
3.4 1500
(Being wages paid by
2.4 5000
To Amit A/C cash)
(Being
Cheque
Received By Bank A/C
4.4 1800
from Amit) (Being Cash deposited
3.4 2000
in Bank)

To Bank A/C By Pravesh A/C

5.4 4000
(Being Cash (Being Amount paid by
withdrawn Cheque)
4.4 from Bank) 1800 4,200 9,800
7.4 By Balance c/d
To Cash A/C
(Being cash
deposited in
Bank)
7,500 15,800 7,500 15,800
8.4 To Balance 4,200 9,800
b/d

41
 Trial Balance
A Trial Balance is a schedule or list of debit and credit balances extracted from
various accounts in the ledger including cash and bank balances from cash book.
Since every transaction has a dual effect i.e. every debit has a corresponding credit
and vice versa, the total of the debit balances and credit balances extracted from
the ledger must tally.
Thus, at the end of the accounting period or at the end of each month, the balances
of the ledger accounts are extracted and trial balance is prepared to test as to
whether the total debits are equal to total credits or not.

Features of a Trial Balance:

1. It is a statement prepared in a tabular form. It has two amounts columns one for
debit balances and other for credit balances.
2. The balances at the end of the period as shown by ledger accounts are shown in
the statement.
3. It can be prepared on any date provided accounts are balanced.
4. It is a method of verifying the arithmetical accuracy of entries made in the
ledger.
5. It brings together the balances of all the accounts at one place and this facilitates
the preparation of Final Accounts and Balance Sheet.

The balances of ledger accounts are taken to respective debit and credit columns
of the trial balance and then grand totals are taken out. The total of balances in
the debit column must be equal to the total balances in the credit column of the
trial balance.

Illustration discussion: Prepare the Trial balance on the basis of Illustration II.

42
 Some Accounting Concepts
Business Entity Concept: According to this concept, business is treated as an entity
separate from its owners. All transactions of the business are recorded in the books
of the business from the point of view of the business. Transactions are also
recorded between the owner and the business, for instance, when capital is
provided by the owner, the accounting record will show the business as having
received so much money and as owing to the proprietor.
– Only the business transactions are recorded and reported and not the personal
transactions of the owners.
– Income or profit is the property of the business unless distributed among the
owners.
– The personal assets of the owners or shareholders are not considered while
recording and reporting the assets of the business entity.
Accrual System or mercantile system of Accounting: Business transactions are
recorded when they occur and not when the related payments are received or
made. This concept is called accrual basis of accounting.
Accrual basis of accounting attempts to record the financial effects of the
transactions, events, and circumstances of an enterprise in the period in which they
occur rather than recording them in period(s) in which cash is received or paid by
the enterprise.
– Revenue is recognized as it is earned irrespective of whether cash is received or
not;
– Costs are matched against revenues on the basis of relevant time period to
determine periodic income, and
– Costs which are not charged to income are carried forward and are kept under
continuous review. Any cost that appears to have lost its utility or its power to
generate future revenue is written off as a loss.

43
Accounting Period Concept: Life of the business is divided into appropriate parts or
segments for analyzing the results shown by the business. Each part or segment so
divided is known as an accounting period.
It is an interval of time at the end of which the income or revenue statement and
balance sheet are prepared in order to show the results of business operations and
changes in the resources which have occurred since the previous statements have
been prepared. Normally, the accounting period consists of twelve months.

Some Concepts
Closing Entries: Closing entries are passed at the end of the accounting year for
closing of accounts relating to expenses and revenues. These accounts are closed by
transferring their balances to the Trading and Profit & Loss Account.
Adjustment Entries: At the end of the accounting year, adjustments entries are
passed for outstanding/prepaid expenses, accrued income/income received in
advance etc. Entries for all these adjustments are passed in the journal proper.
Transfer Entries: Transfer entries are passed in the general journal for transferring
an item entered in one account to another account.
Rectification Entries: Rectification entries are passed for rectifying errors which
might have committed in the books of account.
Bad Debts
Most businesses sell goods on credit basis, i.e., buy now and pay later. A business
enterprise gives credit facilities to its customers in order to compete with others, to
increase sales and hence profit. Credit sales inevitably involve the risk of some
debtors not paying even though considerable effort will be made to collect the
payment. When it is decided that all possible means to obtain payment from the
debtor have failed, the debt is eliminated from the books of accounts. Elimination of
debt which is bad from the books of account is called bad debt written off.
A bad debt occurs when the debtor fails to pay either the whole or part of the debt.
In such a case whatever sum is not received is bad debt.

44
Example
Goods sold to Raj Traders Rs 60,000 on 1st May, 2008. Raj Traders became insolvent
on 31st October, 2010. Amount recovered on 31st January, 201O Rs 40,000 in full.
Therefore, the amount of bad debt will be Rs.20, 000. The entry will be –

31.1.2010 Bank A/c Dr 40,000

Bad Debt A/c Dr 20,000
To, Raj Traders A/c 60,000
Adjustment Entries
Before preparation of final accounts, you should know about adjustment entries.
Because, these are passed before they are transferred to Trading and Profit and
Loss Account and Balance Sheet. These adjustment entries always have a dual
effect. They affect either the Trading Account or the Profit and Loss Account but
definitely the Balance Sheet.
Outstanding Expenses
Outstanding Expenses refer to those expenses which have become due during the
accounting period for which the Final Accounts have been prepared but have not
yet been paid. This happens particularly regarding those expenses which accrue
from day to day business but which are recorded only when they are paid. Examples
of such expenses are rent, salaries, interest etc. Here expense account will be
charged to Profit & Loss Account and Outstanding Expense account will be shown in
the Balance Sheet in the liabilities side.
Example
Salary of March'10 Rs. 4,000 not paid. The entry will be –
31.3.2010 Salary A/C Dr 4,000
To, Outstanding Salary A/C 4,000
Prepaid Expenses
Prepaid Expenses are those expenses which have been paid in advance. In other
words, these are the expenses which have been paid during the accounting period
for which the Final Accounts are being prepared but they relate to the next period.
For Example, during the accounting year ending 31st March, 2010, salaries for the
month of April'201o of Rs. 10,000 has been paid. This amount of Rs. 10,000 relates

45
to the year 2010-11 which has been paid in the year 2009-10. This is prepaid
expenses.
Only expense relating to the current accounting period should be charged to Profit
& Loss Account and the amount of prepaid expense will be shown in the Balance
Sheet in the assets side.
Example
Rent of Apr '10 paid on 31st Mar'10 - Rs 2,000. The entry will be -
31.3.2010 Rent A/c Dr 2,000
To, Cash A/c 2,000
Prepaid rent A/c Dr 2,000
To, Rent A/c Dr 2,000
Accrued Income
Accrued income means income which has become due during the accounting year
but which has not so far been received by the firm. For Example, a loan of Rs. 1,
00,000 has been given @12% p.a. and interest is payable monthly. If interest for one
month, i.e Rs. 1,000 has not been received by the business, the income will be
termed as accrued income. The income part will come in Profit & Loss account and
accrued income will be shown in the Balance Sheet in the assets side.
Example
Rent of Rs. 1,000 for March'2010 not received. The entry will be -
31.3.2010 Accrued Rent A/c Dr 1,000
To, Rent A/c 1,000
Pre received Income
Pre received income means income which has been received by the business before
it is being earned by the business. This includes certain prepayments which the
business may receive during the accounting year. Only income relating to the
current accounting period will come in the Profit & Loss Account and pre received
income will come in the liabilities side of the Balance Sheet. ·
Example
Rent of April'10 Rs 4,000 received on 31st March, 2010. The entry will be –
31.3.2010 Cash A/c Dr 4,000
To, Rent A/c 4,000
Rent A/c Dr 4,000
To, Pre Received Rent A/c 4,000
46
 ERRORS
Accounting errors are the errors committed by Accountant in the course of
accounting process.
These errors may be in the form of omitting the transactions to record, recording in
wrong books, or wrong account or wrong totaling and so on.
While discussing about the trial balance, we have seen that preparation of trial
balance is a method of verifying the arithmetical accuracy of entries made in the
ledger.
But it may be noted that tallying of the trial balance does not prove that- (i) all
transactions have been recorded in the books of original entry; and (ii) all
transactions have been correctly analyzed and recorded in the proper accounts.
Hence, we can say that a trial balance should not be regarded as a conclusive proof
of the correctness of the books of account that is if the trial balance does not agree,
there are errors or mistakes but even if the trial balance agrees, there still may be
errors in the accounts.
1. Errors of Omission: These errors arise as a result of some act of omission on the
part of the Accountant. It refers to the omission of a transaction at the time of
recording in subsidiary books or posting to ledger.
(a) Complete Omission: When any particular transaction has not at all been entered
in the journal or in the book of original entry, it cannot be posted into the ledger at
all and complete error of omission will occur. The trial balance is not affected at all
by such errors e.g. failure to record completely credit sales in sales book. However,
the trial balance will agree, if debit side as well as credit side of a journal entry is not
posted to ledger.
(b) Partial Omission: This means that the transaction is entered in the subsidiary
book, but is not posted to the ledger, such errors affect the agreement of trial
balance e.g. omitting to post the discount columns of the cash book.
2. Errors of Commission: These errors arise due to some positive act of commission
on the part of Accountant because of ignorance, lack of proper accounting
knowledge and carelessness of the accounting staff. They are committed while
47
recording transactions. These errors may or may not affect the agreement of trial
balance.
For example:
– Mistake in posting in so far as the amount is wrongly written. A common mistake,
for example, is to transpose figures - to write Rs. 115 instead of Rs. 151. This will
cause a mistake of Rs. 36.
– Making an entry on the wrong side. For example, if instead of debiting an account
with Rs. 500 it is credited with the amount, the debit balance, in the trial balance
will be shorter by Rs. 1,000. A mistake on the wrong side causes the difference to be
double of the amount involved.
– A mistake in the casting (totaling) of subsidiary books.
3. Compensating Errors: They are group of errors, the total effect of which is not
reflected in the trial balance. These errors are neutralizing in nature, hence one
error is compensated by other error or errors of opposite nature. For example, an
extra debit in purchase account may be compensated by an extra credit in sales
account. Thus, compensating errors do not affect the agreement of trial balance.
4. Errors of Principle: Errors of principle like furniture purchased debited to
purchase account, building sold credited to sales account, commission paid for
purchase of land debited to commission account etc. will not affect trial balance as
they are related to allocation of amount received or spent between revenue and
capital. There will be no effect on trial balance because double entry will be passed
and one account will be debited and other credited. So the debit and credit side of
trial balance will definitely agree.
For example, debiting purchase of furniture to office expenses account, crediting
sale of furniture to sales account, etc.

48
 RECTIFICATION OF ERRORS

For rectification of these types of errors, following steps may be taken:

(i) Write down in the rough sheet, the correct entry necessary for recording the
transaction.
(ii) Write down in the rough sheet the entry that has actually been passed.
(iii) Compare and pass in the journal the requisite rectification entry.

Example: A purchase of Rs. 5,000 from Rajesh entered in the purchases day book as
Rs. 500. The rectification of this error shall involve:
(a) Purchases A/c Dr. Rs. 5,000/- (correct entry)
To Rajesh Rs. 5,000/-
(b) Purchases A/c Dr. Rs. 5,00/- (entry passed)
To Rajesh Rs. 5,00/-
(c) The rectifying entry in the journal will be:
Purchases A/c Dr. Rs. 4,500/- (rectifying entry)
To Rajesh Rs. 4,500/-
Under Computerized Accounting Rather than to delete the entry, it will be better if
you pass a reverse entry with narration and then pass a fresh entry.
Exercise:
Pass journal entries necessary to rectify the following errors:
1. An amount of Rs. 2,000/- withdrawn by the proprietor for his personal use has
been debited to Trade Expenses Account.
2. A purchase of goods from Nathan amounting to Rs. 3,000/- has been wrongly
entered in the Sales Book.
3. A credit sale of Rs. 1,000/- to Santhanam has been wrongly passed through the
Purchases Book.

49
4. Rs. 1,500/- received from Malhotra have been credited to Mehrotra.
5. Rs. 3,750/- paid on account of salary to the cashier Dhawan stands debited to his
personal account.
6. A contractor’s bill for extension of premises amounting to Rs. 2,75,000/- has been
debited to Building Repairs Account.
7. On 25th March, goods of the value of Rs. 5,000/- were returned by Akash Deep
and were taken into stock but the returns were entered in the books under date 3rd
April, i.e.; after the expiration of the financial year on 31st March.
8. A bill of Rs. 2,000/- for old office furniture sold to Sethi was entered in the Sales
Day Book.
9. An amount of Rs. 800/- received on account of interest was credited to
Commission Account.
Rectification Entries
1. Drawings Account Dr. 2,000
To Trade Expenses Account 2,000
(For the amount withdrawn for personal use wrongly charged to the trade expenses
account)
2. (a) Sales Account Dr. 3,000
To Nathan 3,000
(Being the cancellation of the entry passed through the Sales Book)
(b) Purchases Account Dr. 3,000
To Nathan 3,000
(To record the credit purchases from Nathan)
Alternatively: It is better to pass a combined entry:
Sales Account Dr. 3,000
Purchases Account Dr. 3,000
To Nathan 6,000
(For cancellation of entry passed through the Sales Book and record the credit
purchases from Nathan)
3. Santhanam Dr. 2,000
To Purchases Account 1,000
To Sales Account 1,000
(Rectification of the mistake caused by entering sale for Rs. 1,000 to Santhanam in
the Purchases Book)
50
4. Mehrotra Dr. 1,500
To Malhotra 1,500
(Being the rectification of wrong credit given to Mehrotra instead of Malhotra)
5. Salaries Account Dr. 3,750
To Dhawan 3,750
(Being the adjustment of salary wrongly debited to the personal account of the
cashier)
6. Building Account Dr. 2,75,000
To Building Repairs Account 2,75,000
(Being the adjustment of amount wrongly debited to the building account for
building repairs)
7. Returns Inwards Account Dr. 5,000
To Akash Deep 5,000
(Being the entry necessary to record the return inwards within the financial year)
Entry in the books of next accounting year’s
Akash Deep Dr. 5,000
To Return Inwards Account 5,000
(Cancellation of unwanted entry)
8. Sales Account Dr. 2,000
To Office Furniture Account 2,000
(Being the sale of old office furniture wrongly passed through the sales book)

9. Commission Account Dr. 800

To Interest Account 800
(Being the adjustment of amount wrongly credited to the commission account for
interest received)

51
 Suspense Account:
When a trial balance does not agree, efforts are made to locate errors and rectify
them. However, if reason for disagreement of trail balance cannot be found, a new
account called suspense account is opened in order to give trial balance an
appearance of agreement. Then final accounts are prepared. Debit balance in
suspense account is shown on assets side while credit balance is recorded on
liabilities side.
A suspense account is opened in two instances i.e.
(i) To balance a disagreed trial balance – In the trial balance, if the debits are short
the difference has to be debited to Suspense Account and if the credits are short,
Suspense Account has to be credited to make trial balance agree apparently. Thus
trial balance is tallied and final accounts are prepared.
Later, when errors are detected, the rectifying entries are passed. The suspense
account will show balance until all entries are corrected. When all errors affecting
the trial balance have been rectified by means of journal entries, the Suspense
Account will show no balance.
(ii) To post uncertain items: Sometimes, an item cannot be posted to the correct
account because of lack of information. In this case, the error is rectified by means
of journal entry opening suspense account. Thus, suspense account is opened and is
given the debit or credit as the case may be. When debit is short of credit, the
difference is debited to Suspense Account making the debits equal to the credits.
Similarly, if in a rectifying journal entry, credit is otherwise short of debit, the
difference is credited to Suspense Account. Later when error is detected, the
rectifying entry is passed.

52
You received a remittance of Rs. 2,000, but you may not know who has sent the
amount. Therefore, for the time being you may pass the following entry:
Cash/Bank Account Dr. 2,000
To Suspense Account 2,000
(Being remittance received from unknown person)
Later when you get the information that Mr. Ram Singh had sent the amount, then
pass the following entry:
Suspense Account Dr. 2,000
To Ram Singh 2,000
(Being credit given for the sender for remittance which had been credited previously
to suspense)
Example:
Pass journal entries to rectify the following errors assuming the existence of
Suspense Account:
(i) Goods bought from Mukesh amounting to Rs. 5,500 was posted to the credit of
his account as Rs. 5,000.
(ii) Sales book was overcast by Rs. 10,000.
(iii) While carrying forward the total of one page of the Purchases Book to the next,
the amount of Rs. 2,12,350 was written as Rs. 2,13,250.
(iv) Cartage Rs. 780 paid on machinery newly acquired was debited to carriage
inward account.
(v) Purchases returns to Shivalker Bros. Rs. 3,100 were not recorded in purchases
returns book but the account of Shivalker Bros. was duly debited with the amount.
(vi) Drawings of goods costing 300 were not recorded in the books of account.
(vii) Whitewashing expenses, Rs. 670 were posted from cash book to the nominal
account as Rs. 760.
Also prepare Suspense Account starting it with debit balance of Rs. 320. Have you
any comments to offer on Suspense Account?
53
Journal
(i) Suspense Account Dr. 500
To Mukesh 500
(For rectification of short credit to Mukesh)
(ii) Sales Account Dr. 10,000
To Suspense Account 10,000
(For rectification of wrong total of Sales Book)
(iii) Suspense Account Dr. 900
To Purchases Account 900
(For rectification of wrong carry forward of total from one page to another in the
Purchases Book)
(iv) Machinery Account Dr. 780
To Carriage Inwards Account 780
(For rectification of wrong debit to carriage inwards for cartage paid on newly
acquired machinery)
(v) Suspense Account Dr. 3,100
To Purchases Returns Account 3,100
(For rectification of omission of credit to Purchases Returns Account for goods
returned to Shivalkar Bros.)
(vi) Drawings Account Dr. 300
To Purchases Account 300
(For rectification of omission of drawings of goods costing ` 300 by the proprietor)
(vii) Suspense Account Dr. 90
To Whitewashing Account 90
(For rectification of excess debit to whitewashing account)

54
 LEDGER
Dr. Suspense Account Cr.
Particulars Rs. Particulars Rs.
To Differnce in trial balance 320 By sales A/C 10000
To Mukesh 500
To Purchases Account 900
To Purchases Return 3100
To Whitewashing Account 90
To Balance c/d 5090
10000 10000
By Balance b/d 5090

Comment: As suspense account still shows a balance, it means all errors have not
yet been rectified.

55
 Capital and Revenue Items
Capital Expenditure:
Capital expenditure is that expenditure which results in acquisition of an asset or
which results in an increase in the earning capacity of a business. The benefit of
such expenditure lasts for a long period of time. Examples: Purchases of land,
buildings, machinery, furniture, patents, etc. All these assets stay in business and
are used again and again. Money spent to reduce working expenses like conversion
of hand-driven machinery to power-driven machinery and expenditure enabling a
firm to produce a large quantity of goods.
Expenditure which does not result in an increase in capacity or in reduction of day-
to-day expenses is not capital expenditure, unless there is a tangible asset to show
for it.
All sums spent up to the point an asset is ready for use should also be treated as
capital expenditure.
Examples are: fees paid to lawyer for drawing a purchase deed of land, overhauling
expenses of second hand machinery, cartage paid for bringing machinery to the
factory from supplier’s premises and money spent to install a machinery; and even
interest on loans taken to acquire fixed assets only for the period before the asset
becomes operational.
Revenue Expenditure:
Expenses whose benefit expires within the year of expenditure and which are
incurred to maintain the earning capacity of existing assets are termed as revenue
expenditure. Amounts paid for wages, salary, carriage of goods, repairs, rent and
interest, etc., are examples of revenue expenditure. Depreciation on fixed assets is
also a revenue expenditure. To the extent the materials are used up, they will be
revenue expenditure.
Similarly, cost of goods sold is revenue expenditure. Costs incurred to acquire an
asset are capital but costs incurred to keep them in working condition or to
defend their ownership are revenue. Fee paid to a lawyer for checking whether all

56
the papers are in order before land is purchased is capital expenditure. But if later a
suit is filed against the purchaser, the legal costs will be of revenue type.
Difference between Capital and Revenue Expenditure:
The following are the points of distinction between capital expenditure and revenue
expenditure:
(i) Capital expenditure is incurred in acquiring or improving permanent assets which
are not meant for resale. But revenue expenditure is a routine expenditure incurred
in the normal course of business and includes cost of sales as also the upkeep of
fixed assets etc.
(ii) Capital expenditure seeks to improve the earning capacity of the business
whereas revenue expenditure is incurred to maintain the earning capacity of the
business.
(iii) Capital expenditure is normally a non-recurring outlay but revenue expenditure
is usually a recurring features.
(iv) Capital expenditure produces benefits over several years. Hence, only a small
part is charged as depreciation to income statement and the rest appears in the
balance sheet. But revenue expenditure is consumed within an accounting year and
the entire amount is charged to the (current year’s) income statement. Hence, it
does not appear in the balance sheet. Deferred revenue expenditure is however an
exception to this rule.

Capital and Revenue Receipts

Capital receipts comprise of payments or contributions into the business by the
proprietor, partners or companies towards the capital of the firm and also any sum
received from debenture-holders, any loans and the proceeds of sale of any fixed
assets of a business enterprise.
Revenue receipts are the outcome of a firm’s activity in the accounting period, part
of its rewards for offering goods or services to the public e.g. sales, commission,
fees received for services, interest on investment, etc.
Revenue receipts must be set off against the revenue expenses in order to calculate
the profit or loss of the business in an accounting period. Capital receipts and
57
expenditure have no bearing on the profit or loss for the accounting period. The
distinction between capital receipts and revenue receipts can be drawn as follows:
Difference between Capital Receipts and Revenue Receipts:
Capital Receipts Revenue Receipts
Amount realized by the sale of fixed Amount realized by sale of goods or
assets or by issue of shares or rendering services is always a revenue
debentures is a capital receipt. receipt.
Amount realized from the sale of a Amount realized from the sale of an
capital asset or investment is capital asset kept for sale is revenue receipt.
receipt.

Capital and Revenue Profits:

While preparing the final accounts, distinction has to be made between capital
profits and revenue profits.
Revenue profits are earned in the ordinary course of business. They appear in the
profit and loss account and are available for distribution as profit, or for creating
reserves and funds, or for being used in the business.
However, capital profits are those which are earned as a result of selling some fixed
assets, or in connection with raising capital for the firm. For instance, a building
purchased for Rs. 4,50,000 was subsequently sold for Rs. 4,75,000, this Rs. 25,000
will be profit of capital nature. Capital profits are either capitalized i.e. transferred
to capital account or transferred to capital reserve account which may be utilized
for meeting capital losses.
Capital and Revenue Losses:
Revenue losses are the losses which arise during the normal course of business
whereas capital losses are those which occur when selling fixed assets or raising
share capital. If a building purchased for Rs. 5,00,000 is sold for Rs. 4,50,000, there
will be capital loss of Rs. 50,000.

58
Treatment of capital losses is not different from that of capital profits. Just as capital
profits are not shown in the profit and loss account, similarly capital losses are not
shown in the profit and loss account. They are shown in the balance sheet on the
assets side. As and when capital profits arise, capital losses are gradually written off
against them. If however, capital losses are huge, the common practice is to spread
them over a number of years and charge a part thereof to profit and loss account of
each such year. But if they are negligible, they are debited to profit and loss account
of the year in which they occur.
Capital Expenditure: Expenditure incurred in acquiring or improving an asset which
is not meant for sale.
Revenue Expenditure: Expenditure of a routine nature and incurred to maintain an
asset.
Deferred Revenue Expenditure: Heavy expenditure of revenue nature
Capital Receipts: Payments or contributions into the business by the sole
proprietor, partners or other shareholders towards the capital of the firm.
Revenue Receipts: Outcome of a firm’s activity as rewards for offering goods or
services to the public.
Revenue Profits: Earned in the ordinary course of business.
Capital Profits: Earned as a result of selling some fixed assets or raising capital for
the firm.
Revenue Losses: They arise during the normal course of business
Capital Losses: They occur on selling the fixed assets or in raising of share capital.
Example:
State which of the following expenditures are capital, revenue, deferred revenue
expenditures and capital loss:
(i) Cost of overhauling and painting a second-hand truck newly purchased.
(ii) Cost of making more exits in a cinema hall under order of the Government.
(iii) Rs. 25,000 were spent on air conditioning the office of the General Manager.

59
(iv) An old machine which stood in the books at Rs. 15,000 was sold for Rs. 13,000.
(v) Rs. 2,000 were paid as municipal tax in connection with a building which was
purchased last year for Rs. 2,00,000.
(vi) Rs. 30,000 were spent on heavy advertising in connection with the introduction
of a new product.
(vii) Rs. 500 was paid out in connection with carriage on goods purchased.
(viii) A temporary room constructed for Rs. 25,000 for storing raw material for the
construction of a big building.
(ix) Rs. 5,00,000 was spent on putting up a gallery in a theatre hall.
(x) Freight and cartage amounting to Rs. 4,000 were paid on purchase of a new plant
and a sum of Rs. 2,000 was spent as erection charges of that plant.
Solution:
(i) When a second hand machine is purchased, the entire expenditure incurred in
the beginning to make it fit for working is treated as capital expenditure. The value
of the machine is increased by the amount spent. Therefore, the cost of overhauling
and painting the truck will be treated as capital expenditure.
(ii) Making more exits in a cinema hall does not increase the capacity of the hall and
therefore, it should be treated as revenue expenditure.
(iii) The sum of Rs. 25,000 spent on air conditioning the office of General Manager is
capital expenditure because it represents a fixed asset. Moreover, the effect of air
conditioning will be available for several years to come, and it can possibly be
disposed of, if desired, at a future date, when it will fetch some amount.
(iv) The old machine costing Rs. 15,000 was sold for Rs. 13,000 only, and the loss of
Rs. 2,000 is clearly a capital loss.
(v) Rs. 2,000 paid by way of municipal tax on a building purchased is an item of
revenue nature. It is an expenditure of routine nature, which was necessary for
using the building.
(vi) Since the benefit of Rs. 30,000 spent on advertising will occur for several years,
it is of capital nature. It may be treated as a deferred revenue expenditure and be
written off against the profit and loss account of a number of years.

60
(vii) The expenditure of Rs. 500 incurred on carriage on goods purchased is of
revenue nature because the goods are meant for resale.
(viii) Rs. 25,000 spent on construction of temporary room should be treated as
capital expenditure because it was necessary for the construction of the main
building. The cost of the room will be added to the cost of the building.
(ix) When a new gallery is put up, it will increase the number of seats (capacity) of
the hall. Therefore, this cost of Rs. 5,00,000 should be treated as a capital
expenditure.
(x) The expenditure incurred by way of freight and cartage amounting to Rs. 4,000
and the erection charges of Rs. 2,000 are both of capital nature. The former has
been incurred in connection with the receipt of a capital asset while the latter has
been incurred for erecting it so that it may be used for business purposes.

Example:
State whether the following expenses are capital, revenue or deferred revenue
expenditure:
(i) A Ltd. spent Rs. 2,00,000 for overhauling the machinery which improved the
capacity utilization and saved running expenditure by ` 15,000 p.a.
(ii) M/s Capital Properties, property dealers, purchased ten flats @ Rs. 7,00,000
each.
(iii) A firm incurred Rs. 10,000 to retain the title of a land purchased for business in
litigation with third party.
(iv) Compensation paid to undesirable employees.
(v) M/s Durga & Co. spent Rs. 2,50,000 for organizing an Inter-school Cricket
Tournament in Delhi. This was held for advertising their new school bag and certain
books and stationery which they wanted to market.
(vi) Rs. 12,000 paid to Mahanagar Telephone Nigam Ltd. for installing a telephone in
the office.
(vii) Damages paid on account of breach of contract to supply certain goods.

61
(viii) Rs. 25,000 has accrued during the year on term loan obtained and utilized for
the construction of factory building and purchase of machinery, however, the
production did not commence till the last date of the year.
(ix) Imported goods worth Rs. 1,75,000 confiscated by customs authorities for non-
disclosure of material facts.
(x) Rs. 20,000 spent for the trial run of newly installed machinery.
Solution:
(i) Expenses for overhauling the machinery increased capacity utilization which
contributes to increase the revenue generating capacity. Also, saving in revenue
expenditure for more than one accounting period will accrue from this overhauling
which will increase future profits. Hence, this expense is capital in nature.
(ii) Purchase of flats in the ordinary course of business by property dealers is
revenue expenditure as flats are stock in trade for it.
(iii) Legal expenses incurred to retain the title of land are expenses for maintaining
the asset. The expenses will not generate any revenue in future directly. Hence, it is
revenue in nature.
(iv) Compensation paid to retrench undesirable employees is expected to increase
revenue earning capacity of the business because such undesirable employees
would either waste resources or time with adverse effect on profit. The expenditure
is capital in nature.
(v) The purpose of expenses incurred for organizing the Inter-School Cricket
Tournament is to advertise for some new products. This advertisement has some
enduring effect so far as the marketability of the new products is concerned. The
expense may be treated as deferred revenue expenditure.
(vi) The money deposited with Mahanagar Telephone Nigam Ltd. for acquiring a
telephone connection is treated as an asset; hence it is a capital expenditure.
(vii) Damages paid on account of the breach of contract to supply certain goods are
treated as revenue expenditure incurred in the ordinary course of the business.
(viii) Interest accrued on term loan obtained and utilized for the construction of
factory building and purchase of machinery should be treated as capital expenditure
since commercial production did not start till the last date of the accounting year.

62
(ix) The confiscation of imported goods by the customs authorities is a loss arisen on
account of negligence and is of abnormal nature. It is appropriate to write it off to
profit and loss account over a period of 2 to 5 years treating it as a deferred revenue
expenditure.
(x) Expenses incurred for trial-run of newly installed machinery is capital
expenditure in nature.

Bank Reconciliation Statement

A bank is an institution which deals in money. Its main business is to accept deposits
and to lend money. It also collects money and makes payments on behalf of its
clients. Bank account is a personal account and the account-holders record their
transaction with the bank in a similar manner as they do with any other person.
Deposits:
A deposit is made by filling up a form called pay-in-slip. There is a counterfoil which
is stamped by the bank’s cashier and signed by him and returned to the client. This
counterfoil is evidence that money has been duly received by the bank. Separate
pay-in-slips have to be filled in for depositing cash and cheques. Also, there are
different pay in slips for local and out-station cheques.
Withdrawals:
Withdrawals are made by means of cheques.
The money deposited with bank is debited to bank account while money
withdrawn from the bank is credited to bank account. The record of money
deposited and withdrawn from the bank is maintained by the business in its cash
book with bank columns which can be balanced on any date and the balance so
arrived at is known as bank balance as per cash book.
Bank Pass Book:
The bank on its part maintains in its ledger the account of its customers. Pass book
is a copy of the client’s account in the bank’s ledger. Bank issues pass book to its
client. The money deposited by the customer is credited to his account and the
money withdrawn from the bank is debited to his account. The balance as per bank
ledger indicated in the bank pass book is called the bank balance as per pass book.
63
 Bank Reconciliation Statement
The bank pass book and bank columns of the cash book record the same
transactions.
In the pass book, the transactions are recorded from the point of view of the bank
whereas in cash book they are recorded from the point of view of the client or us.
The bank balance as per pass book, can therefore, be expected to be equal to the
bank balance as revealed by the cash book.
However, in actual practice the two balances rarely agree because of the time-lag of
a few days between the entries made by the firm in cash book and by the bank in
the pass book.
Thus, a comparison is necessary to find out the items on account of which
difference has arisen and a need to reconcile the two balances. Thus, a bank
reconciliation statement is a statement which is prepared as on a particular date to
reconcile the bank balance as per cash book with balance as per pass book by
showing all causes of difference between the two.

Causes of Difference between Bank Balance Shown By Cash Book and

that Shown By Pass Book

(i) Cheques issued but not presented for payment:

When a cheque is drawn or issued in favour of a third party, it is immediately
recorded in the cash book by debiting the party and crediting the bank and this has
the effect of reducing the bank balance in the cash book. But the bank will not debit
client’s account until that cheque is presented for payment, and honoured.
So long as it is not presented, the balance shown in the pass book is more than the
balance shown by the cash book.
(ii) Cheques deposited for collection but not yet collected:
The client debits bank column of cash book as soon as he deposits cheques with the
bank for collection, but the bank credits client’s account only when it has collected
cash on the cheque so deposited. It results in bank balance as per cash book being
higher than the balance as per pass book.
(iii) Bank charges not entered in the cash book:
The bank charges some amount from each customer by way of incidental charges,
collection charges, etc. and debits his account for this reason from time to time. As
64
soon as these charges are made, the bank debits the customer’s account in its own
books and this reduces the bank balance. But the customer will know such charges
only when he receives a statement of account from the bank, until then, bank
balance as per pass book will be less than bank balance as per cash book.
(iv) Interest credited or debited by bank, not entered in the cash book:
When bank allows interest to a customer for deposits, it will credit customer’s
account and his bank balance as per pass book will increase. But the customer will
not pass the entry in cash book simultaneously till he knows the fact, thus the
balances will differ. Likewise, interest on overdraft is debited to the customers’
account and till the same is not entered in the cash book, it will result in a difference
in the balances.
(v) Direct collections on behalf of customers:
A banker may receive amounts due to the customer by way of dividends, rent,
interests etc. directly from the persons concerned on account of standing
instructions of the customer to such persons. Similarly, debtors may also deposit the
amounts directly to the bank. The bank credits the account of the customer for such
collections as soon as it gets such payments. But same will be entered in the cash
book only when customer receives the statement from the bank. Thus the balances
differ.
(vi) Direct payment by bank:
Usually, the bank is given standing instructions for certain payments to be made,
such as payment of insurance premium, interest on loan, electricity bill etc. Bank,
while making payments, debits pass book but the customer has no information of
the same till he is informed. It results in a difference in balances.
(vii) Dishonour of cheques/bills:
When cheque or bill of exchange discounted with the bank is dishonoured, the same
is debited in the pass book but not given effect in the cash book until the intimation
is received. It will cause a difference in the two balances.
(viii) Cheques received and entered in the cash book but omitted to be deposited
into the bank.
When cheque is received, the same is entered in the cash book but it may not be
deposited into the bank immediately. This will cause a difference in the two
balances.
(ix) Errors:
There may be errors in the accounts maintained by the customer or/ and by the
bank. A wrong debit or credit given by the customer or the bank leads to a
difference in the balances.
65
 Significance of Bank Reconciliation Statement:

(i) It highlights the causes of difference between the bank balance as per
cash book and the balance as per pass book. Necessary adjustments
can, therefore, be carried out at an early date.
(ii) It reduces the chance of fraud by the staff dealing with cash and cash
bring.
(iii) It acts as a moral check on the staff of the organization to keep the cash
records always up to date.
(iv) Bank balance as per cash book cannot be accepted as final unless it is
supported by statement of passbook. When these two balances do not
tally, reconciliation becomes essential to determine the correct bank
balance that can be used while finalizing the accounts.
(v) It helps in finding out actual position of the bank balance.

Steps for preparing a bank reconciliation statement:

(i) The cash book should be completed and the balance as per bank column on a
particular date should be found out covering the period for which the statement has
to be prepared.
(ii) The bank should be requested to complete and send to the firm the bank pass
book.
(iii) Check the entries of the debit and credit sides of the bank columns of the cash
book with corresponding entries on the credit and debit sides of the pass book
relating to the same period.
(iv) The items not tallying should be classified into common groups according to
their characteristics.
(v) The balance as shown by any one book (i.e. the cash book or the bank pass book)
should be taken as the base. This is, as a matter of fact, the starting point for
determining the balance as shown by the other book after making suitable
adjustments taking into account the causes of difference.
(vi) The effect of the particular cause of difference on the balance shown by the
other book should be noted.
(vii) In case, the cause has resulted in an increase in the balance shown by the other
book, the amount of such increase should be added to the balance as per the
former book which has been taken as the base.

66
(viii) In case, the cause has resulted in a decrease in balance shown by the other
book, the amount of such decrease should be deducted from the balance as per the
former book which has been taken as the base.

Preparation of Bank Reconciliation Statement

Transactions Starting with the Bank Starting with the Bank

Balance Balance as per Cash Book
as per Pass Book
Cheques issued but not Deduct: The amount of Add : The amount of
presented unpresented cheques. Unpresented cheques.
Cheques deposited but not yet Add : The amount of Deduct : The amount of
collected cheques deposited cheques deposited
Cheques received and Add: The amount of Deduct: The amount of
entered in the bank column of cheques. cheques.
the cash book but not
deposited
Dishonour of cheques Add : The amount of Deduct : The amount of
deposited with banks earlier dishonoured cheques dishonoured cheques
Collection of interest and Deduct : The amount of Add : The amount of these
dividends and interest allowed these items items.
by the banker not yet recorded
in the cash book.
Bank charges Add: The amount of Deduct: The amount of
bank charges bank charges.
Balance Bank Balance as per Bank Balance as per Pass
Cash Book Book
Example:
On 31st March, 2013 the pass book of Mitra showed a credit balance of Rs.2,16,000.
A comparison of pass book and cash book revealed the following:
(i) Cheques deposited but not cleared by 31st March Rs. 1,08,150
(ii) Cheques issued by Mitra but not presented for payment before 1st April, 2013
Rs. 26,000
(iii) Insurance premium paid by bank on behalf of Mitra but not yet recorded in cash
book Rs. 52,075
(iv) Commission charged by bank not yet recorded in cash book Rs. 750
67
(v) Interest on bonds collected by bank on behalf of Mitra not yet recorded in cash
book Rs. 25,000
Bank balance as per cash book as on 31st March, 2013 is Rs. 3,25,975/-. Prepare a
Bank Reconciliation Statement as on 31st March, 2013.

Bank Reconciliation Statement of Mitra

as on 31st March, 2013
Particulars Rs. Rs.
Balance as per Pass Book 2,16,000
Add :
 Cheques deposited with bank but not yet collected 1,08,150
 Commission charged 52,075
 Insurance premium paid by the bank 750 1,60,975
3,76,975
Less:
 Cheques issued but not yet presented for payment 26,000
 Interest on bonds received by the bank 25,000 51,000

Balance as per Cash Book 3,25,975

Alternatively:
Bank Reconciliation Statement of Mitra
as on 31st March, 2013
Particulars Rs. Rs.
Balance as per Cash Book 3,25,975
Add :
 Cheques issued but not yet presented for payment 26,000
 Interest on bonds received by the bank 25,000 51,000
3,76,975
Less:
 Cheques deposited with bank but not yet collected 1,08,150
 Commission charged 52,075
 Insurance premium paid by the bank 750 1,60,975

Balance as per Pass Book 2,16,000

68
 Depreciation:
Meaning of Depreciation: A business enterprise acquires different types of fixed
assets depending upon its requirements and financial conditions. Fixed assets have
a long life and are held for use in the business for production of goods and services.
Whenever an asset is used in business its value gets reduced and sooner or later the
asset becomes useless. Depreciation is a permanent, continuous and gradual
shrinkage in the book value of a fixed asset. It is the fall in the quality or value of a
fixed asset through physical wear and tear due to use or passage of time or from
any other cause. Depreciation takes place irrespective of regular repairs and
maintenance.
As the asset is used for business purpose, the annual loss in the value of the asset is
like any other expenditure. Hence, the cost of fixed assets has to be written off over
its useful economic life as a loss.
Thus, depreciation is a process of allocating the cost of a fixed asset over its
estimated useful life in a rational and systematic manner.

Depreciable Assets are assets which:

– are expected to be used for more than one accounting period;
– have a limited useful life and
– are held by the organization for use in the production or supply of goods and
services.

When a fixed asset is purchased, it is recorded in the books of accounts at its

original cost. But, the fixed asset is used to earn revenues for a number of
accounting periods in future with the same acquisition cost until the concerned
fixed asset is sold or discarded. It is therefore, necessary that a part of the
acquisition cost of the fixed asset is treated or allocated as an expense in each of the
accounting periods in which the asset is used. This allocation of cost in the form of
an expense is known as depreciation in accounting.
Suppose, a business purchases a machinery for Rs. 10,00,000/- and after using it for
five years, it is sold for Rs. 2,00,000/-. The cost of the machinery used in the
business is Rs.8,00,000/- (Rs. 10,00,000 – Rs. 2,00,000). This cost must be allocated
as an expense of the business at the rate of Rs. 1,60,000 (8,00,000 ÷ 5 ) for each of

69
five accounting periods in which the machinery has been used to earn revenues.
This Rs.1,60,000 charge as expense is called accounting concept of depreciation.
It is the cost for the services obtained from the use of the asset in the same manner
as the cost of wages, rent, etc. Depreciation is the expense charged to profit and
loss account before arriving at the net profit for the year. In other words, the cost of
fixed asset in the form of depreciation has to be matched against the revenues of
the years over which the asset is used.
Thus, in accounting, depreciation means apportionment or allocation of the cost of
the fixed asset over its useful life. Its aim is to spread over and allocate or distribute
the cost of the fixed asset to the years of its use and charge the depreciable cost to
profit and loss account before arriving at the profits of each of the accounting
periods in which the fixed asset utilized.

Purpose of Depreciation Accounting: The primary purpose of depreciation

accounting is cost allocation.
Provision for depreciation in the profit and loss account does not involve the
outflow of cash and hence funds to the extent of depreciation charged over the
years will remain in the business and these funds can be easily used for replacement
of asset.

Causes of Depreciation:

(i) Physical Wear and Tear Resulting from Use: Tangible fixed assets like,
machinery, buildings, furniture etc. get worn out or torn out on account of friction,
strain, weathering, intensity of use, chemical reaction, handling etc. This is the most
important cause of charging depreciation in respect of such assets which are in
constant use.
(ii) Physical Deterioration Resulting from Atmospheric Exposure: Number of assets
deteriorates for being continually exposed nature.
(iii) Passage of Time: A machine also becomes potentially useless by the passage of
time. It is so even if the machine is kept continuously idle.
(iv) Depletion: Wasting assets such as mines and quarries lose their value because
they get exhausted on account of continuous extractions.
(v) Obsolescence: Sometimes an asset becomes useless because of technical
changes within the industry, technical progress in other industries, changes in tastes
and habits of consumers, changes in supply and locations of natural resources etc.

70
Objectives of Providing Depreciation:

The objectives of providing depreciation are as follows:

(i) To ascertain the correct profit: When a particular asset is used for earning the
income of the business, the depreciation in the value of assets should be deducted
from the income in order to calculate the correct and real profit of the business.
(ii) To present true financial position: In order to show the true financial position of
the business in the balance sheet, it is necessary that assets must be shown at their
true values after deducting reasonable depreciation. If depreciation is not provided,
the assets will be overstated in the financial statements and it will be against sound
business principles.
(iii) To make provision for replacement of assets: Since depreciation is a non-cash
expense, the amount charged can be kept separately and utilised for the
replacement of the fixed asset after the expiry of the useful life of the asset.
(iv) To ascertain the proper cost of the product: In order to ascertain the cost of
production, it is necessary to charge depreciation as an item of cost of production.
(v) To maintain the capital invested in the cost of the asset intact in the business so
that it can be reinvested in profit earning process.
(vi) To derive maximum tax benefit.
(vii) To meet the legal requirements: In the case of joint stock companies, it is
necessary to charge depreciation on fixed assets before declaring dividends.

71
 Methods Of Calculating Depreciation

Straight Line Method Diminishing Balance Method

Straight Line Method:-
It is the simplest method of charging depreciation. Every year a fixed amount is written off as
depreciation. The amount is arrived at by dividing the original cost (less the estimated scrap value)
of the asset by the number of years of the estimated life. For example, if a company has a
machine costing Rs 5, 20,000 which has an estimated life of 10 years and scrap or salvage value of
Rs 20,000, the annual depreciation will be calculated as follows.
(Cost)- (Estimated scrap value) (Rs.5,20, 000)-(Rs20,000)

Depreciation =--------------=-------- =Rs.50, 000

(Estimated useful life) (10years)

Depreciation calculated on straight line method can be expressed as a fixed
percentage of original cost as under
(Annual Depreciation) Rs.50, 000
X 100 = --------X 100 =10%
(Original Cost)- (scrap value) Rs.5, 00,000

Diminishing Balance Method

Also known as reducing balance method or written down value method. Under his method, a
larger amount of depreciation is charged in the earlier years of asset's life than in the later years.
Depreciation is calculated by applying a fixed percentage of the diminishing value and not on the
original cost of the asset. In the above example, if the rate of depreciation is 20%, then in 1st year,
amount of depreciation will be Rs. 1,04,000 (20% of Rs. 5,20,000 ) and in 2nd year, the amount of
depreciation will be Rs.83,200 [Rs.20% on Rs. 4,16,000 (5,20,000-1,04,000)] i.e. the balance
amount after charging 1st year's depreciation).

Difference between Straight Line and Diminishing Balance Method

Straight Line Method Diminishing Balance Method

The asset may or may not have scrap value The asset must have a scrap value

A fixed amount of depreciation is charged A fixed rate of depreciation is charged

The amount of depreciation per year is same The amount of depreciation per year goes on reducing

In the first year, depreciation is charged on the In the first year, depreciation is charged on the
cost of the asset less the scrap value original cost of the asset.

72
Methods of recording Depreciation

Provision for Deprecation Account is Provision for Deprecation Account is not

maintained maintained

When no provision for depreciation A/c is maintained

Example
On 1st April, 2007, ABC ltd. Purchased machinery costing Rs.2, 50,000. Its life was estimated to be
4 years and estimated Scrap value to be Rs. 10,000. Show Machinery A/c and Depreciation A/c for
3 years to 31st March, 2010 when the machinery was sold for Rs.20,000.
Solution In book of ABC LTD
Machinery Account.
Date Particulars J.F Rs. Date Partculars J.F Rs.

1 April To, Bank A/c 2,50,000 2008 mar By, Depreciation A/c 60,000
2007 31

By Balance c/d 1,90,000

2,50,000 2,50,000

1 April To, Balance b/d 1,90,000 2009 mar By, Depreciation A/c 60,000
2008 31

By Balance c/d 1,30,000

1,90,000 1,90,000

1 April To, Balance b/d 1,30,000 2010 mar By, Depreciation A/c 60,000
2009 31

By, Bank A/c 20,000

By,Profit & Loss A/c 50,000

Loss on sale

1,30,000 1,30,000

73
 Depreciation Account
Date Particulars J.F Rs. Date Particulars J.F Rs.

2008 To, Machinery A/c 60,000 2008 mar 31 By, profit & loss A/c 60,000
mar 31

60,000 60,000

2009 To, Machinery A/c 60,000 2009 mar 31 By, profit & loss A/c 60,000
mar 31

60,000 60,000

2010 To, Machinery A/c 60,000 2010 mar 31 By, profit & loss A/c 60,000
mar 31

60,000 60,000

Amount of Depreciation =Rs 2 50 000 – Rs. 10 000/4 years=60 000

When provision for depreciation A/c is maintained
Example- Basak & Co.purchased a machine for Rs. 1,50,000 on 1.1.2008. Additional machinery
costing Rs.50,000 was purchas1ed On 1.7.2008. Certain machinery, which was purchased for Rs.
50,000 on 1.7.2008, was sold for Rs.30,000 on 30.6.200. Prepare Machinery A/c and Provision for
Depreciation Ne for 3 years ending on 31st December every year. The company charged
depreciation under the straight line method @ 10%.
Machinery Account

Date Particulars Rs. Date Particulars Rs.

2008 Jan 1 To, Bank a/c 1,50,000

1-July To, Bank a/c 50,000 2008 Dec-31 By Balance c/d 2,00,000

2,00,000 2,00,000

1.Jan 2009 To, Bank a/c 2,00,000 2009 Dec-31 By Balance c/d 2,00,000

2,00,000 2,00,000

2010 Jan-1 To, Bank a/c 2010 Jun 20 By machinery Disposal 50,000
account

31 Dec By Balance c/d 1,50,000

2,00,000 2,00,000

74
 Provision for Deprecation Account

Date Particulars J. Rs. Date Particulars J.F Rs.

F

2008 To Balance c/d 17,500 2008 Dec By Deprecation 17,500

Dec 31 31 Account

17,500 17,500

2009 To Balance c/d 37,500 2009 Jan-1 By Balance c/d 17,500

Dec-31

Dec-31 By Deprecation 20,000

Account

2,00,000 2,00,000

2010 To machinery 7,500 2010 JAn-1 By Balance c/d 37,500

Jun-30 Disposal account

31 Dec To Balance c/d 45,000 31 Dec By Deprecation 15,000

Account

52,500 52,500

75
 Final Accounts
When the trial balance is prepared, the immediate task is to prepare the final
accounts. Preparation of final accounts involves the following:
a) Preparation of Trading Account;
b) Preparation of Profit and Loss Account and
c) Preparation of Balance Sheet.
Trading Account is prepared to know the gross profit or loss of the business and
Profit and Loss Account discloses net profit or loss of the business. The Balance
Sheet shows the financial position of the business on a given date.
Trading Account:
A Trading Account shows the result of buying and selling of goods and services. This
account shows only the total sales less the Cost of Goods Sold and any changes in
the value of Stock. It gives the Gross Profit or Loss of the business. For example,
total sales of the business during a particular period is Rs 1,00,000 and total
purchases is Rs 80,000 and at the end of the period, value of the stock is Rs 10,000,
then the gross profit from the business is Rs 30,000 (1,00,000 + 10,000- 80,000).
Specimen of a Trading Account:
Trading A/c of...for the year ended...........
Dr. Cr.
Particulars Amount Particulars Amount
To Opening ------------- By Sales ……………..
To Purchase ………. Less: return Inwards….. ………………..
Less: Return outward….. …………..
To Wages ………….. By Other Direct Income ………………….
To Carriage Inward ……………..
To Fright …………. By Stock Destroyed ………………
To Royalty on Production …………. (e. g. by fire)
To Direct Expenses ………….
To Gross Profit ………... By Closing …………….
(Gross Profit transferred)
-------------- ---------------

76
Profit and Loss Account:
The Profit and loss Account shows the Net profit or loss for an accounting period,
which is the difference between total income and total expenses. This account
shows how successfully and how efficiently the business is being run.
Specimen of Profit and Loss Account
Profit Loss A/c of……………
for the year ended……………
Dr. Cr.
To Salary ………. By Gross Profit b/d ……..
To Carriage Outward ……… By Interest earned ……..
To Selling/ Trading Expenses ……… By Discount earned …….
To Export Duty …….. By Commission earned ……..
To Packing cost of finished Goods …….. By Bad Debt Recovery ……..
To Advertisement …….. By Miscellaneous Income ……...
To Sales Tax ……... By Profit on Sale of Asset ………
To Rent, Rates & taxes ……… By Rent Received ………
To Stationery ………
To Conveyance I Travelling ……..
To Repairs ……..
To Interest Paid ……..
To Bad Debt ……...
To Depreciation on Assets ………
To Discount Allowed ………
To Loss on Sale of Assets . ……...
To Miscellaneous/General Expenses ……...
To Net Loss of Stock ………
To Charity/Donation ……..
To Net Profit …………….. …………….

Difference between Trading Account and Profit and Loss Account

Trading Account Profit and Loss Account
Prepared to find out the trend of the business Prepared to know the ultimate result of the
business
Shows Gross Profit or Loss Shows Net Profit or Loss
Reflects efficiency in purchase and sale only Reflects all-round development of the business
Balance transferred to Profit and Loss Account Balance transferred to Capital Account

77
Different Between Gross Profit and Net Profit
Gross Profit Net Profit
Excess of Sale Proceeds over Cost of Goods Excess of Gross Profit over all the expenses and
Sold charges
Revealed by Trading Account Revealed by Profit and Loss Account

Not available for distribution Available for distribution

Used to measure the trend of the business Used to measure the return on capital invested

Transferred to the Profit and Loss Account Transferred to Capital Account

From the following particulars, prepare Trading and Profit & Loss Accounts. Rs

Purchase of goods 10,000

Returns Inward 200
Stock on 01.01.09 2,000
Direct Wages 2500
Salaries 2500
General Expenses 1700
Stock on 31.12.09 1,500
Depreciation on Machinery 2100
Depreciation on Furniture 1250
Sales 35000
Carriage Outward 500
Sale of Scrap 1200
Solution
Particulars Amount Particulars Amount
To Opening stock 2,000 By Sales 35,000
To Purchases 10,000 Less: Returns Inward 200 34,800
To Direct Wages 2,500 1,500
To Gross Profit c/d 21,800 By Closing Stock ------------
36,300 36300
To Salaries 2,500
To General Expenses By Gross Profit b/d 21,800
1,700
To Depreciation on Machinery
2,100 1,200
To Depreciation on Furniture 1,250 By Sale of Scrap
To Carriage Outward 500
To Net Profit
14,950
23,000 23,000

78
Balance Sheet:
This from of balance sheet also goes by the name account form or T form. This type
of Balance Sheet has two sides. The assets are normally placed on the right hand
side and the capital and liabilities on the left hand side. The horizontal form of
balance sheet is as follows.
Balance Sheet as at 31.3.2010

Liability Rs. Rs. Assets Rs Rs.

Share Capital 1,00,000 Fixed Assets
Reserve and Surplus Computer 600,000
Profit and Loss 250,000 Less: Deprecation 360,000 240,000
Reserve 100,000 350,000 Office Equipments 500,000
Loan Fund Less: Depreciation 50,000 450,000
Secured Loan 500,000 Furniture and Fixture 800,000
Current Liability and Less: Depreciation 80,000 720,000
Provision: Current Assets, loan
and
Sundry Creditors 400,000 Advances
Sundry Expenses 300,000 700,000 Stock 220,000
Debtors 700,000
Cash at Bank 207,250
Cash in hand 12,750 1,140,000
2,550,000 2,550,000

79
Example on Preparation of a Final Accounts on the basis of a Trial Balance.
Trail Balance of Mr. Parimal as on 31.3.2009 is as under— Rs. Rs.

Capital and Drawings 44,000 1,64,000

Opening Stocks 56,000
Secured Loans 50,000
Sundry Creditors 1,12,000
Misc. Expenses 5,600
Office Expenses 24,00
Interest on loan 6,000
Commissions 1,200
Insurance 2,400
Office rent 3,600
Salaries 18,000
Wages 18,000
Sales 1,28,000
Purchases 72,000
Goods return 8,000 4,000
Travelling Expenses 5,000
Bad debts 9,000
Cash at Bank 52,000
Cash in Hand 3,000
Sundry Debtors 1,06,300
Furniture 14,000
Buildings 20,000
Plant and Machinery 20,000

Additional Information:
AAdd

1.Closing stock was valued at Rs.88,000;

2.Insurance paid during the year was for 18 months;
3.Bonus declared but not paid Rs.1,800;
3.Rent paid during the year was for 10 months;
4.Wages outstanding were Rs.600;
5.Totalbad debts to be written off during the year were Rs.'1,200;
6.B_ad Debts written off during the year Rs.1,200;
7.Depreciation to be provided -
Furniture & fixture – 10%, plant & Machinery- 10% and Building- 2.5%

Prepare Trading and Profit & Loss Account for the year ending 31st March, 2009 and Balance
Sheet as on that date.

80
Solution
Mr. Parimal
Trading and Profit & Loss Account for the year ending 31st March, 2009
Particulars Rs Rs Particulars Rs. Rs
To, Opening Stock 56,000
To, Purchase 72,000 By Sales 1,28.000
Less: Returns 4,000 68,000 Less: 8,000 1,20,000

To, Wages 18,000 By Closing Stock 88,000

Add: Outstanding 600 18,600

To Gross Profit c/d 65,400

2,08,000
2,08,000
To, Salary 18,000 By Gross Profit b/d 65,400
Add: bonus 1,800 19,800

To office Rent 3,600

Add: outstanding 720 4,320

To, bad debts 1,200

To travelling Expenses 5,000
To, insurance 2,400
Less: Prepaid 800 1,600

To, commission 1,200

TO, Interest on loan 6,000
To, Office Expenses 2,400
To, Misc. Expenses 5,600
To, Depreciation on 500
Building
On Plant and 2,000
Machinery
On furniture 1,400 3,900

To Net profit 14,380

Transfer to capital 65,400

81
 Balance as on 31 March 2009
Liabilities Rs Rs Assets Rs. Rs
Opening Capital 1,64,400 Fixed Assets
Add: Net Profit 14,380 Buildings 20,000
1,78,780
Less: Drawing 44,000 1,34,780 Less: Deprecation 500 19,500

Secured Loans 50,000 Plant & machinery 20,000

Currents Liabilities Less: Deprecation 2,000 18,000

Sundry Creditors 1,12,000 Furniture 14,000

Out Standing Expenses Less: Deprecation 1,400 12,600

Rent 720 Current Assets

Wages 600 Stock in trade 88,000
Bonus 1,800 3,120 Sundry Debtors 1,06,300

Less: Bad Debts

1,200 - 900 300 1,06,000

Cash at bank 52,000

Cash in Hand 3,000
Prepaid Insurance 800

2,99,900 2,99,900

82