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Financial Accounting full notes (1)

The document outlines the need and importance of accounting in business, emphasizing its role in recording, classifying, and summarizing financial transactions to provide essential information to various stakeholders. It details the objectives, processes, users, branches, and fundamental principles of accounting, including the double-entry system and journalization. Additionally, it discusses basic assumptions and concepts that guide accounting practices, ensuring accurate financial reporting and decision-making.
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0% found this document useful (0 votes)
47 views125 pages

Financial Accounting full notes (1)

The document outlines the need and importance of accounting in business, emphasizing its role in recording, classifying, and summarizing financial transactions to provide essential information to various stakeholders. It details the objectives, processes, users, branches, and fundamental principles of accounting, including the double-entry system and journalization. Additionally, it discusses basic assumptions and concepts that guide accounting practices, ensuring accurate financial reporting and decision-making.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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UNIT I - FINANCIAL ACCOUNTING- I

1
Need and Importance of Accounting
When a person starts a business, whether large or small, his main aim is to earn profit. He receives
money from certain sources like sale of goods, interest on bank deposits etc. He has to spend
money on certain items like purchase of goods, salary, rent, etc. These activities take place during
the normal course of his business. He would naturally be anxious at the year end, to know the
progress of his business. Business transactions are numerous, that it is not possible to recall his
memory as to how the money had been earned and spent. At the same time, if he had noted down
his incomes and expenditures, he can readily get the required information. Hence, the details of
the business transactions have to be recorded in a clear and systematic manner to get answers easily
and accurately for the following questions at any time he likes.
i. What has happened to his investment?
ii. What is the result of the business transactions?
iii. What are the earnings and expenses?
iv. How much amount is receivable from customers to whom goods have been sold on credit?
v. How much amount is payable to suppliers on account of credit purchases?
vi. What are the nature and value of assets possessed by the business concern?
vii. What are the nature and value of liabilities of the business concern?

Meaning
⚫ Accounting is a means of communicating the results of business operations to various
parties interested in or connected with the business viz., the owners, creditors, investors,
banks and financial institutions, Government and other agencies. Hence, it is rightly called
as the language of business.
Definition
⚫ The American Institute of Certified Public Accountants has defined accounting as “the art
of recording, classifying and summarizing in a significant manner and in terms of money
transactions and events which are, in part at least, of financial character, and interpreting
the results thereof.”

Objectives of accounting
⚫ The main objectives of accounting are
i. to maintain accounting records.
ii. to calculate the result of operations.
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iii. to ascertain the financial position.
iv. to communicate the information to users.
Process
The process of accounting as per the above definition is given below:

In order to accomplish its main objective of communicating information to the users, accounting
embraces the following functions.
i. Identifying: Identifying the business transactions from the source documents.

3
ii. Recording: The next function of accounting is to keep a systematic record of all business
transactions, which are identified in an orderly manner, soon after their occurrence in the journal
or subsidiary books.
iii. Classifying: This is concerned with the classification of the recorded business transactions so
as to group the transactions of similar type at one place. i.e., in ledger accounts. In order to verify
the arithmetical accuracy of the accounts, trial balance is prepared.
iv. Summarising : The classified information available from the trial balance are used to prepare
profit and loss account and balance sheet in a manner useful to the users of accounting information.
v. Analysing: It establishes the relationship between the items of the profit and loss account and
the balance sheet. The purpose of analysing is to identify the financial strength and weakness of
the business. It provides the basis for interpretation.
vi. Interpreting: It is concerned with explaining the meaning and significance of the relationship
so established by the analysis. Interpretation should be useful to the users, so as to enable them to
take correct decisions.
vii. Communicating: The results obtained from the summarised, analysed and interpreted
information are communicated to the interested parties.
Users of Accounting Information
The basic objective of accounting is to provide information which is useful for persons and groups
inside and outside the organization.
I. Internal users: Internal users are those individuals or groups who are within the organisation
like owners, management, employees and trade unions.
 Owners: To know the profitability and financial soundness of the business.
 Management: To take prompt decisions to manage the business efficiently.
 Employees and Trade unions: To form judgement about the earning capacity of the
business since their remuneration and bonus depend on it.
II. External users: External users are those individuals or groups who are outside the organisation
like creditors, investors, banks and other lending institutions, present and potential investors,
Government, tax authorities, regulatory agencies and researchers.
 Creditors, banks and other: To determine whether the principal and lending institutions
the interest thereof will be paid in when due.

4
 Present investors: To know the position, progress and prosperity of the business in order
to ensure the safety of their investment.
 Potential investors: To decide whether to invest in the business or not.
 Government and Tax :To know the earnings in order to assess authorities the tax
liabilities of the business.
 Regulatory agencies: To evaluate the business operation under the regulatory legislation.
 Researchers: To use in their research work.

Branches of Accounting
The economic development and technological advancements have resulted in an increase in the
scale of operations and the advent of the company form of business organisation. This has made
the management function more and more complex and increased the importance of accounting
information. This gave rise to special branches of accounting. These are briefly explained below:
1. Financial accounting : The purpose of this branch of accounting is to keep a record of all
financial transactions so that:
(a) the profit earned or loss sustained by the business during an accounting period can be
worked out,
(b) the financial position of the business as at the end of the accounting period can be
ascertained, and
(c) the financial information required by the management and other interested parties can be
provided.
2. Cost Accounting : The purpose of cost accounting is to analyse the expenditure so as to
ascertain the cost of various products manufactured by the firm and fix the prices. It also
helps in controlling the costs and providing necessary costing information to management
for decision-making.
3. Management Accounting : The purpose of management accounting is to assist the management
in taking rational policy decisions and to evaluate the impact of its decisons and actions.

5
CONCEPTUAL FRAME WORK OF ACCOUNTING

I. Basic Assumptions
The basic assumptions of accounting are like the foundation pillars on which the structure of
accounting is based. The four basic assumptions are as follows:
i. Accounting Entity Assumption
According to this assumption, business is treated as a unit or entity apart from its owners, creditors
and others. In other words, the proprietor of a business concern is always considered to be separate
and distinct from the business which he controls. All the business transactions are recorded in the
books of accounts from the view point of the business. Even the proprietor is treated as a creditor
to the extent of his capital.
ii. Money Measurement Assumption
In accounting, only those business transactions and events which are of financial nature are
recorded. For example, when Sales Manager is not on good terms with Production Manager, the
business is bound to suffer. This fact will not be recorded, because it cannot be measured in terms
of money.
iii. Accounting Period Assumption
The users of financial statements need periodical reports to know the operational result and the
financial position of the business concern. Hence it becomes necessary to close the accounts at
regular intervals. Usually a period of 365 days or 52 weeks or 1 year is considered as
the accounting period.

6
iv. Going Concern Assumption
As per this assumption, the business will exist for a long period and transactions are recorded from
this point of view. There is neither the intention nor the necessity to wind up the business in the
foreseeable future.
II. Basic Concepts of Accounting
These concepts guide how business transactions are reported. On the basis of the above four
assumptions the following concepts (principles) of accounting have been developed.
i. Dual Aspect Concept
Dual aspect principle is the basis for Double Entry System of book-keeping. All business
transactions recorded in accounts have two aspects - receiving benefit and giving benefit. For
example, when a business acquires an asset (receiving of benefit) it must pay cash (giving of
benefit).
ii. Revenue Realisation Concept
According to this concept, revenue is considered as the income earned on the date when it is
realised. Unearned or unrealised revenue should not be taken into account. The realisation concept
is vital for determining income pertaining to an accounting period. It avoids the possibility of
inflating incomes and profits.
iii. Historical Cost Concept
Under this concept, assets are recorded at the price paid to acquire them and this cost is the basis
for all subsequent accounting for the asset. For example, if a piece of land is purchased for
Rs.5,00,000 and its market value is Rs.8,00,000 at the time of preparing final accounts the land
value is recorded only for Rs.5,00,000. Thus, the balance sheet does not indicate the price at which
the asset could be sold for.
iv. Matching Concept
Matching the revenues earned during an accounting period with the cost associated with the period
to ascertain the result of the business concern is called the matching concept. It is the basis for
finding accurate profit for a period which can be safely distributed to the owners.
v. Full Disclosure Concept
Accounting statements should disclose fully and completely all the significant information. Based
on this, decisions can be taken by various interested parties. It involves proper classification and
explanations of accounting information which are published in the financial statements.

7
vi. Verifiable and Objective Evidence Concept
This principle requires that each recorded business transactions in the books of accounts should
have an adequate evidence to support it. For example, cash receipt for payments made. The
documentary evidence of transactions should be free from any bias. As accounting records are
based on documentary evidence which are capable of verification, it is universally acceptable.
III. Modifying Principles
To make the accounting information useful to various interested parties, the basic assumptions and
concepts discussed earlier have been modified. These modifying principles are as under.
i. Cost Benefit Principle
This modifying principle states that the cost of applying a principle should not be more than the
benefit derived from it. If the cost is more than the benefit then that principle should be modified.
ii. Materiality Principle
The materiality principle requires all relatively relevant information should be disclosed in the
financial statements. Unimportant and immaterial information are either left out or merged with
other items.
iii. Consistency Principle
The aim of consistency principle is to preserve the comparability of financial statements. The rules,
practices, concepts and principles used in accounting should be continuously observed and applied
year after year. Comparisons of financial results of the business among different accounting period
can be significant and meaningful only when consistent practices were followed in ascertaining
them. For example, depreciation of assets can be provided under different methods, whichever
method is followed, it should be followed regularly.
iv. Prudence (Conservatism) Principle
Prudence principle takes into consideration all prospective losses but leaves all prospective profits.
The essence of this principle is “anticipate no profit and provide for all possible losses”. For
example, while valuing stock in trade, market price or cost price whichever is less is considered.
Double Entry System
There are numerous transactions in a business concern. Each transaction, when closely analysed,
reveals two aspects. One aspect will be “receiving aspect” or “incoming aspect” or “expenses/loss
aspect”. This is termed as the “Debit aspect”. The other aspect will be “giving aspect” or
“outgoing aspect” or “income/gain aspect”. This is termed as the “Credit aspect”. These two

8
aspects namely “Debit aspect” and “Credit aspect” form the basis of Double Entry System. The
double entry system is so named since it records both the aspects of a transaction. In short, the
basic principle of this system is, for every debit, there must be a corresponding credit of equal
amount and for every credit, there must be a corresponding debit of equal amount.
Definition of Double Entry System
According to J.R.Batliboi “Every business transaction has a two-fold effect and that it
affects two accounts in opposite directions and if a complete record were to be made of each such
transaction, it would be necessary to debit one account and credit another account. It is this
recording of the two fold effect of every transaction that has given rise to the term Double Entry
System”.
Features of Double Entry System
i. Every business transaction affects two accounts.
ii. Each transaction has two aspects, i.e., debit and credit.
iii. It is based upon accounting assumptions concepts and principles.
iv. Helps in preparing trial balance which is a test of arithmetical accuracy in accounting.
v. Preparation of final accounts with the help of trial balance.
Approaches of Recording
There are two approaches for recording a transaction.
I. Accounting Equation Approach
II. Traditional Approach
I. Accounting Equation Approach
This approach is also called as the American Approach. Under this method transactions are
recorded based on the accounting equation,
i.e.,
Assets = Liabilities + Capital
This will be discussed in detail in the next chapter.
II. Traditional Approach
This approach is also called as the British Approach. Recording of business transactions under
this method are formed on the basis of the existence of two aspects (debit and credit) in each of
the transactions. All the business transactions are recorded in the books of accounts under the
‘Double Entry System’.

9
Accounting Rules
⚫ Personal Accounts (Natural person or Company)
◦ Debit the receiver
◦ Credit the giver
⚫ Real Accounts (cash , property or asset )
◦ Debit what comes in
◦ Credit what goes out
⚫ Nominal Accounts (Business expenses or losses and income or gains )
◦ Debit all expenses and losses
◦ Credit all income and gains
Journal
A journal may be defined as the book or original or prime entry containing a chronological
record of the transactions from which posting is done to the ledger. The transactions are recorded
first in the journal in the order in which they occur.

Explanation:
1. Date : In the first column, the date of the transaction is entered. The year and the month is
written only once, till they change. The sequence of the dates and months should be strictly
maintained.
2. Particulars : Each transaction affects two accounts, out of which one account is debited and the
other account is credited. The name of the account to be debited is written first, very near to the
line of particulars column and the word Dr. is also written at the end of the particulars column. In
the second line, the name of the account to be credited is written, starts with the word ‘To’, a few
space away from the margin in the particulars column to the make it distinct from the

10
debit account.
3. Narration : After each entry, a brief explanation of the transaction together with necessary
details is given in the particulars column with in brackets called narration. The words ‘For’ or
‘Being’ are used before starting to write down narration. Now, it is not necessary
to use the word ‘For’ or ‘Being’.
4. Ledger Folio (L.F): All entries from the journal are later posted into the ledger accounts. The
page number or folio number of the Ledger, where the posting has been made from the Journal is
recorded in the L.F column of the Journal. Till such time, this column remains blank.
5. Debit Amount : In this column, the amount of the account being debited is written.
6. Credit Amount : In this column, the amount of the account being credited is written.
Steps in Journalising
The process of analysing the business transactions under the heads of debit and credit and
recording them in the Journal is called Journalising. An entry made in the journal is called a
‘Journal Entry’.
Step 1 Determine the two accounts which are involved in the transaction.
Step 2 Classify the above two accounts under Personal, Real or Nominal.
Step 3 Find out the rules of debit and credit for the above two accounts.
Step 4 Identify which account is to be debited and which account is to be credited.
Step 5 Record the date of transaction in the date column. The year and month is written once, till
they change. The sequence of the dates and months should be strictly maintained.
Step 6 à Enter the name of the account to be debited in the particulars column very close to the left
hand side of the particulars column followed by the abbreviation Dr. in the same line. Against this,
the amount to be debited is written in the debit amount column in the same line.
Step 7 Write the name of the account to be credited in the second line starts with the word ‘To’ a
few space away from the margin in the particulars column. Against this, the amount to be credited
is written in the credit amount column in the same line.
Step 8 Write the narration within brackets in the next line in the particulars column.
Step 9 Draw a line across the entire particulars column to separate one journal entry from the
other.

11
Example 1:
January 1, 2004 – Saravanan started business with Rs. 1,00,000
Step 1 Determine the two accounts Cash Account Capital Account
involved in the transaction.
Step 2 Classify the accounts under Real Account Personal Account
personal, real or nominal.
Step 3 Find out the rules of debit and 2(a) Debit what 1(b) Credit the giver
credit. comes in.
Step 4 Identify which account is to be Cash A/c is to be Capital A/c is to be
debited and credited. debited credited

Solution :
Journal

Example 2
⚫ On 1st June 2016 goods sold for Rs. 2000
⚫ On 2nd June 2016 goods purchase from XYZ ltd for Rs.5000

12
Example 3
⚫ Journalise the following transactions in the books of Amar and post them in the Joural:-
2004
⚫ March1 Bought goods for cash Rs. 25,000
⚫ 2 Sold goods for cash Rs. 50,000
⚫ 3 Bought goods for credit from Gopi Rs.19,000
⚫ 5 Sold goods on credit to Robert Rs.8,000
⚫ 7 Received from Robert Rs. 6,000
⚫ 9 Paid to Gopi Rs.5,000
⚫ 20 Bought furniture for cash Rs. 7,000

Example 4

Mr. Nirmal has the following transactions in the month of April. Write Journal Entries for the
transactions.

10th April : Commenced business with a capital of 1,00,000


11th April : Purchased goods from Veeru for 20,000
13th April : Purchased Goods for Cash 15,000
14th April : Purchased Goods from Abhiram for cash 9,000

13
16th April : Bought Goods from Shyam on credit 12,000
17th April : Sold goods worth 15,000 to Tarun
19th April : Sold goods for cash 20,000
20th April : Sold goods to Utsav for cash 6,000
21st April : Sold goods to Pranav on credit 17,000
22nd April : Returned goods to Veeru 3,000
23rd April : Goods returned from Tarun 1,000
25th April : Goods taken by the proprietor for personal use 1,000
26th April : Bought Land for 50,000
27th April : Purchased machinery for cash 45,000
28th April : Bought computer from Intel Computers for 25,000
28th April : Cash sales 15,000
29th April : Cash purchases 22,000
30th April : Bought furniture for proprietor's residence and paid cash 10,000

Journal in the books of Mr. Nirmal for the period from 1st to 30th April

V/R Amount Amount


ate Particulars L/F
No. (Dr) (Cr)

April – Cash a/c Dr – 1,00,000


10th
To Capital a/c – 1,00,000

[Being the amount received from Mr. Nirmal in cash,


the proprietor as his capital contribution vide receipt
no: dated: ]

11th – Goods/Stock a/c Dr – 20,000


To Veeru a/c – 20,000

[Being the value of stock purchased from Mr. Veeru


on credit vide bill no: dated: ]

13th – Goods/Stock a/c Dr – 15,000


To Cash a/c – 15,000

14
V/R Amount Amount
ate Particulars L/F
No. (Dr) (Cr)

[Being the value of stock purchased for cash from


M/s vide bill no: dated: ]

14th – Goods/Stock a/c Dr – 9,000


To Cash a/c – 9,000

[Being the value of stock purchased for cash from


Mr. Abhiram vide bill no: dated: ]

16th – Goods/Stock a/c Dr – 12,000


To Shyam a/c – 12,000

[Being the value of stock purchased from Mr. Shyam


on credit vide bill no: dated: ]

17th – Tarun a/c Dr – 15,000


To Goods/Stock a/c – 15,000

[Being the value of stock sold on credit to Mr. Tarun


vide invoice no: dated: ]

19th – Cash a/c Dr – 20,000


To Goods/Stock a/c – 20,000

[Being the value of goods sold for cash vide receipt


no: dated: ]

20th – Cash a/c Dr – 6,000


To Goods/Stock a/c – 6,000

[Being the value of stock sold to Mr. Utsav for cash


vide receipt no: dated: ]

21st – Pranav a/c Dr – 17,000


To Goods/Stock a/c – 17,000

[Being the value of stock sold to Mr. Pranav on credit


vide bill no: dated: ]

15
V/R Amount Amount
ate Particulars L/F
No. (Dr) (Cr)

22nd – Veeru a/c Dr – 3,000


To Goods/Stock a/c – 3,000

[Being the value of goods returned to Mr. Veeru vide


returns bill no: dated: ]

23rd – Goods/Stock a/c Dr – 1,000


To Tarun a/c – 1,000

[Being the value of stock returned by Mr. Tarun vide


returns bill no: dated: ]

25rd – Drawings a/c Dr – 1,000


To Goods/Stock a/c – 1,000

[Being the value of stock taken by the proprietor vide


bill no: dated: ]

26th – Land a/c Dr – 50,000cmd


To Cash a/c – 50,000

[Being the amount paid for land purchased on: ]

27th – Machinery a/c Dr – 45,000


To Cash a/c – 45,000

[Being the amount paid for the purchase of


machinery vide bill no: dated: ]

28th – Computers a/c Dr – 25,000


To Intel Computers a/c – 25,000

[Being the value of a computer purchased from M/S


Intel Computers on credit vide bill no: dated: ]

29th – Cash a/c Dr – 15,000


To Goods/Stock a/c – 15,000

16
V/R Amount Amount
ate Particulars L/F
No. (Dr) (Cr)

[Being the value of stock sold for cash vide receipt


no: dated: ]

29th – Goods/Stock a/c Dr – 22,000


To Cash a/c – 22,000

[Being the value of stock purchased for cash vide bill


no: dated: ]

30th – Drawings a/c Dr – 10,000


To Cash a/c – 10,000

[Being the amount of cash paid for furniture


purchased for proprietor's residence vide bill no:
dated: ]

Example 5

Journalise the following transactions in the books of Rama & Sons

3rd May : Cash deposited into bank 60,000


4th May : Loan given to Bhuvan 20,000
4th May : Paid cash to Veeru 20,000
5th May : Paid to Veeru by cheque 15,000
5th May : Cash received from Tarun 12,000
5th May : Took loan from Anush 15,000
6th May : Cheque received from Pranav 15,000
6th May : Paid to Intel Computers by cheque 17,000
6th May : Withdrew from bank 5,000
7th May : Withdrew from bank for office use 8,000
7th May : Cash received from Bhuvan on loan account 10,000
8th May : Withdrew from bank for personal use 1,000
8th May : Cash taken by proprietor for personal use 3,000

17
9th May : Bought furniture and paid by cheque 15,000
9th May : Paid to Anush by cheque on loan account 5,000
9th May : Brought additional capital of 25,000

Journal in the books of M/s Rama & Sons


for the period from 1st May to 10th May
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
May – Bank a/c Dr – 60,000
3rd To Cash a/c – 60,000
[Being the amount of cash deposited into bank vide
voucher no: dated: ]
4th – Loan to Bhuvan a/c Dr – 20,000
To Cash a/c – 20,000
[Being the amount of cash given as loan to Bhuvan vide
voucher no: dated: ]
4th – Veeru a/c Dr – 20,000
To Cash a/c – 20,000
[Being the amount of cash paid to Veeru vide voucher
no: dated: ]
5th – Veeru a/c Dr – 15,000
To Bank a/c – 15,000
[Being the amount paid to veeru on account by cheque
no. dated ]
5th – Cash a/c Dr – 12,000
To Tarun a/c – 12,000
[Being the amount of cash received from Tarun vide
cash receipt no: dated: ]
5th – Cash a/c Dr – 15,000
To Loan from Anush a/c – 15,000
[Being the amount of loan taken from Anush on:__]
6th – Bank a/c Dr – 15,000
To Pranav a/c – 15,000
[Being the amount received by cheque no. date
from Pranav]
6th – Intel Computers a/c Dr – 17,000
To Bank a/c – 17,000

18
Journal in the books of M/s Rama & Sons
for the period from 1st May to 10th May
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
[Being the amount paid by cheque no. date to
Intel Computers]
6th – Cash a/c Dr – 5,000
To Bank a/c – 5,000
[Being the amount of cash withdrawn from bank]
7th – Cash a/c Dr – 8,000
To Bank a/c – 8,000
[Being the amount of cash withdrawn from bank vide
bill no: dated: ]
7th – Cash a/c Dr – 10,000
To Loan to Bhuvan a/c – 10,000
[Being the amount of cash received from Bhuvan as
loan vide cash receipt no: dated: ]
8th – Drawings a/c Dr – 1,000
To Bank a/c – 1,000
[Being the amount of withdrawn from bank for personal
use vide cheque no: dated: ]
8th – Drawings a/c Dr – 3,000
To Cash a/c – 3,000
[Being the amount of cash taken by the proprietor for
personal purposes vide voucher no: dated: ]
9th – Furniture a/c Dr – 15,000
To Bank a/c – 15,000
[Being the amount paid by cheque no date
towards the purchase of furniture vide bill no:
dated: ]
9th – Loan from Anush a/c Dr – 5,000
To Bank a/c – 5,000
[Being the amount paid by cheque no date
towards repayment of loan from Anush vide voucher
no: dated: ]
9th – Cash a/c Dr – 25,000
To Capital a/c – 25,000

19
Journal in the books of M/s Rama & Sons
for the period from 1st May to 10th May
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
[Being the amount received from proprietor as capital
vide cash receipt no: dated: ]

Example 6

Write journal entries in the books of Chikky & Bros.

10th June : Paid wages 12,000


11th June : paid rent by cheque 10,000
13th June : Paid salary to Mr. Charan 12,000
14th June : Purchased stationery from Kagaz & Co. and paid by cheque 5,000
15th June : Received interest 14,000
17th June : Received commission by cheque 6,000
18th June : Rent received from Mr. Mody 8,000
19th June : Interest received from Mr.Bijju by cheque 10,000
20th June : Carriage paid on purchase of goods 3,000
22nd June : Carriage paid on sale of goods 2,000

Journal in the books of M/s Chikky & Bros.


for the period from 1st June to 30th June
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
June – Wages a/c Dr – 12,000
10th To Cash a/c – 12,000
[Being the amount of cash paid towards wages vide
voucher no: dated: ]
11th – Rent paid a/c Dr – 10,000
To Bank a/c – 10,000
[Being the amount paid by cheque no. date
towards rent vide voucher no: dated: ]
13th – Salaries a/c Dr – 12,000
To Cash a/c – 12,000

20
Journal in the books of M/s Chikky & Bros.
for the period from 1st June to 30th June
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
[Being the amount of cash paid towards Salary to Mr.
Charan vide voucher no: dated: ]
14th – Stationery a/c Dr – 5,000
To Bank a/c – 5,000
[Being the amount paid by cheque no. date
towards stationery purchased from Kagaz & co. vide
voucher no: dated: ]
15th – Cash a/c Dr – 14,000
To Interest Received a/c – 14,000
[Being the amount of cash received towards interest
vide receipt no: dated: ]
17th – Bank a/c Dr – 6,000
To Commission Received a/c – 6,000
[Being the amount received by cheque no.
date towards commission vide receipt no:
dated: ]
18th – Cash a/c Dr – 8,000
To Rent Received a/c – 8,000
[Being the amount of cash received towards rent from
Mr. Mody vide receipt no: dated: ]
19th – Bank a/c Dr – 10,000
To Interest Received a/c – 10,000
[Being the amount received by cheque no.
date towards interest from Bijju vide receipt
no: dated: ]
20th – Carriage Outwards a/c Dr – 3,000
To Cash a/c – 3,000
[Being the amount of cash paid towards carriage on
goods purchased vide voucher no: dated: ]
22nd – Carriage Inwards a/c Dr – 2,000
To Cash a/c – 2,000
[Being the amount of cash paid towards carriage on
goods sold vide voucher no: dated: ]

21
Compound Journal Entry
⚫ When two or more transactions of similar nature take place on the same date, such
transactions can be entered in the journal by means of a combined journal entry is called
Compound Journal Entry.
⚫ The only precaution is that the total debits should be equal to total credits.

On March 2017, Farhan Rahim, starts wholesaling business. Following transactions as follows:
1. He started business with capital of Rs. 15,000 and Land worth Rs. 10,000.
8. Bought goods from Bilal and Friends Rs. 1,000 and by cash from XYZ Co. Rs 2,000.
13. Sold goods to Rehman & sons Rs. 1,500 and sale by cash Rs. 5,000.
17. Gave away charity of cash Rs. 50 and merchandising worth Rs. 30.
21. Paid Bilal and Friends cash Rs. 975; discount received Rs. 25.
28. Received cash from Rehman & Sons Rs. 1,450; allowed him discount of Rs. 50.

22
LEDGER
Collection of an entire group of similar accounts in double-entry bookkeeping. Also called
book of final entry, a ledger records classified and summarized financial information from
journals.
A Ledger is a book which contains all the accounts whether personal, real or nominal, which are
first entered in journal or special purpose subsidiary books.
According to L.C. Cropper, ‘the book which contains a classified and permanent record of all the
transactions of a business is called the Ledger’.

Format
Name of the Account

Explanation:
i. Each ledger account is divided into two parts. The left hand side is known as the debit side and
the right hand side is known as the credit side. The words ‘Dr.’ and ‘Cr.’ are used to denote Debit
and Credit.
ii. The name of the account is mentioned in the top (middle) of the account.
iii. The date of the transaction is recorded in the date column.
iv. The word ‘To’ is used before the accounts which appear on the debit side of an account in the
particulars column. Similarly, the word ‘By’ is used before the accounts which appear on the credit
side of an account in the particulars column.
v. The name of the other account which is affected by the transaction is written either in the debit
side or credit side in the particulars column.
vi. The page number of the Journal or Subsidiary Book from where that particular entry is
transferred, is entered in the Journal Folio (J.F) column.
vii. The amount pertaining to this account is entered in the amount column.

23
Example 1
Mr. Ram started business with cash Rs. 5,00,000 on 1st June 2003.
The transaction will appear in Journal and Ledger as under.

Example 2

Mr. Ramu has the following transactions in the month of July.

Record them into the journal and show postings in the ledger and balance the accounts.

July 1st : Ramu started business with a capital of 75,000


1st : Purchased goods from Manu on credit 25,000
2nd : Sold goods to Sonu 20,000
3rd : Purchased goods from Meenu 15,000

24
4th : Sold goods to Tanu for cash 16,000
5th : Goods retuned to Manu 2,000
6th : Bought furniture for 15,000
7th : Bought goods from Zenu 12,000
8th : Cash paid to Manu 10,000
9th : Sold goods to Jane 13,500
10th : Goods returned from Sonu 3,000
11th : Cash received from Jane 5,500
12th : Goods taken by Ramu for domestic use 3,000
13th : Returned Goods to Zenu 1,000
14th : Cash received from Sonu 12,000
15th : Bought machinery for 18,000
16th : Sold part of the furniture for 1,000
17th : Cash paid for the purchase of bicycle for Ramu's son 1,500
19th : Cash sales 15,000
20th : Cash purchases 13,500

Journal in the books of M/s Rama & Sons


for the period from July 1st, _5 to July 31st, _5
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
July – Cash a/c Dr – 75,000
1st To Capital a/c – 75,000
[Being the amount received from Mr. Ramu, the
proprietor as his capital contribution vide receipt no:
dated: ]
July – Goods/stock a/c Dr – 25,000
1st To Manu a/c – 25,000
[Being the value of stock purchased from Mr. Manu
vide bill no: dated: ]
July – Sonu a/c Dr – 20,000
2nd To Goods/stock a/c – 20,000
[Being the value of stock sold to Mr.Sonu vide bill
no: dated: ]

25
Journal in the books of M/s Rama & Sons
for the period from July 1st, _5 to July 31st, _5
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
July – Goods/stock a/c Dr – 15,000
3rd To Meenu a/c – 15,000
[Being the value of stock purchased from Mr.Meenu on
credit vide bill no: dated: ]
July – Cash a/c Dr – 16,000
4th To Goods/stock a/c – 16,000
[Being the value of stock sold to Mr. Tanu for cash vide
receipt no: dated: ]
July – Manu a/c Dr – 2,000
5th To Goods/stock a/c – 2,000
[Being the value of stock returned to Mr. Manu vide bill
no: dated: ]
July – Furniture a/c Dr – 15,000
6th To Cash a/c – 15,000
[Being the value of furniture purchased from M/s
vide bill no: dated: ]
July – Goods/stock a/c Dr – 12,000
7th To Zenu a/c – 12,000
[Being the value of stock Purchased from Mr. Zenu
vide bill no: dated: ]
July – Manu a/c Dr – 10,000
8th To Cash a/c – 10,000
[Being the amount paid to Mr. Manu vide voucher
no: dated: ]
July – Jane a/c Dr – 13,500
9th To Goods/stock a/c – 13,500
[Being the value of stock Sold to Ms.Zane vide bill
no: dated: ]
July – Goods/stock a/c Dr – 3,000
10th To Sonu a/c – 3,000
[Being the value of stock returned from Mr. Sonu vide
bill no: dated: ]
July – Cash a/c Dr – 5,500
11th To Jane a/c – 5,500

26
Journal in the books of M/s Rama & Sons
for the period from July 1st, _5 to July 31st, _5
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
[Being the amount of cash received from Ms. Jane vide
cash receipt no: dated: ]
July – Drawings a/c Dr – 3,000
12th To Goods/stock a/c – 3,000
[Being the amount of stock taken by Ramu for domestic
use vide bill no: dated: ]
July – Zenu a/c Dr – 1,000
13th To Goods/stock a/c – 1,000
[Being the amount of stock returned to Mr. Zenu vide
bill no: dated: ]
July – Cash a/c Dr – 12,000
14th To Sonu a/c – 12,000
[Being the amount of cash received from Mr. Sonu vide
cash receipt no: dated:_]
July – Machinery a/c Dr – 18,000
15th To Cash a/c – 18,000
[Being the amount paid for machinery purchased to M/s
vide voucher no: dated: ]
July – Cash a/c Dr – 1,000
16th To Furniture a/c – 1,000
[Being the amount received on sale of furniture vide
cash receipt no: dated: ]
July – Drawings a/c Dr – 15,000
17th To Cash a/c – 15,000
[Being the amount of cash paid for bicycle purchases
for proprietor's son vide voucher no: dated: ]
July – Cash a/c Dr – 15,000
19th To Goods/stock a/c – 15,000
[Being the value of stock sold for cash vide receipt
no: dated: ]
July – Goods/stock a/c Dr – 13,500
20th To Cash a/c – 13,500
[Being the value of stock Purchased for vide voucher
no: dated: ]

27
General Ledger
[Books of Mr. Ramu]

Cash a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

01/10/_5 To Capital a/c – 75,000 06/10/_5 By Furniture a/c – 15,000


04/10/_5 To Goods/stock a/c – 16,000 08/10/_5 By Manu a/c – 10,000
11/10/_5 To Jane a/c – 5,500 15/10/_5 By Machinery a/c – 18,000
14/10/_5 To Sonu a/c – 12,000 17/10/_5 By Drawings a/c – 15,000
16/10/_5 To Furniture a/c – 1,000 20/10/_5 By Goods/stock a/c – 13,500
19/10/_5 To Goods/stock a/c – 15,000 30/07/_5 By Balance c/d – 53,000

tl 1,24,500 tl 1,24,500

31/07/_5 To Balance b/d – 53,000


Capital a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

30/07/_5 To Balance c/d – 75,000 01/10/_5 By Cash a/c – 75,000

tl 75,000 tl 75,000

31/07/_5 By Balance b/d – 75,000

Goods/stock a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

01/10/_5 To Manu a/c – 25,000 02/10/_5 By Sonu a/c – 20,000


03/10/_5 To Meenu a/c – 15,000 04/10/_5 By Cash a/c – 16,000
07/10/_5 To Zenu a/c – 12,000 05/10/_5 By Manu a/c – 2,000
10/10/_5 To Sonu a/c – 3,000 09/10/_5 By Jane a/c – 13,500
12/10/_5 By Drawings a/c – 3,000

28
Goods/stock a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

20/10/_5 To Cash a/c – 13,500 13/10/_5 By Zenu a/c – 1,000


30/07/_5 To Balance c/d – 2,000 19/10/_5 By Cash a/c – 15,000

tl 70,500 tl 70,500

31/07/_5 By Balance b/d – 2,000


Manu a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

05/10/_5 To Goods/stock a/c – 2,000 01/10/_5 By Goods/stock a/c – 25,000


08/10/_5 To Cash a/c – 10,000
30/07/_5 To Balance c/d – 13,000

tl 25,000 tl 25,000

31/07/_5 By Balance b/d – 13,000


Sonu a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

02/10/_5 To Goods/stock a/c – 20,000 10/10/_5 By Goods/stock a/c – 3,000


14/10/_5 By Cash a/c – 12,000
30/07/_5 By Balance c/d – 5,000

tl 20,000 tl 20,000

31/07/_5 To Balance b/d – 5,000

29
Meenu A/c

Dr Cr

Date Particulars J/F Amount Date Particulars J/F Amount

30/07/_5 To Balance c/d – 15,000 03/10/_5 By Goods/stock a/c – 15,000

tl 15,000 tl 15,000

31/07/_5 By Balance b/d – 15,000

Furniture a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

06/10/_5 To Cash a/c – 15,000 16/10/_5 By Cash a/c – 1,000


30/07/_5 By Balance c/d – 14,000

tl 15,000 tl 15,000

31/07/_5 To Balance b/d – 14,000

Zenu a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

13/10/_5 To Goods/stock a/c – 1,000 07/10/_5 By Goods/stock a/c – 12,000


30/07/_5 To Balance c/d – 11,000

tl 12,000 tl 12,000

31/07/_5 By Balance b/d – 11,000

30
Jane a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

09/10/_5 To Goods/stock a/c – 13,500 11/10/_5 By Cash a/c – 5,500


30/07/_5 By Balance c/d – 8,000

tl 13,500 tl 13,500

31/07/_5 To Balance b/d – 8,000


Drawings a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

12/10/_5 To Goods/stock a/c – 3,000 30/07/_5 By Balance c/d – 18,000


17/10/_5 To Cash a/c – 15,000

tl 18,000 tl 18,000

31/07/_5 To Balance b/d – 18,000


Machinery a/c
Dr Cr

Date Particulars J/F Amount Date Particulars J/F Amount

15/10/_5 To Cash a/c – 18,000 30/07/_5 By Balance c/d – 18,000

tl 18,000 tl 18,000

31/07/_5 To Balance b/d – 18,000

Example 3

Journalise the following transactions in the books of Moon and post them into the ledger for the
month of August

Aug 10th : Moon commenced business with a capital of 1,50,000


11th : Cash deposited into bank 50,000
12th : Bought equipment for 15,000

31
13th : Bought goods worth 20,000 from Star and payment made by
cheque
14th : Sold goods to Sun for 15,000 and payment received through
cheque
16th : Paid rent by cheque 5,000
17th : Took loan from Mr. Storm 25,000
18th : Received commission from Mr. Air by cheque 5,000
19th : Wages paid 15,000
20th : Withdrew from bank for personal use 3,000
21st : Withdrew from bank for office use 10,000
22nd : Bought goods for 25,000
23rd : Cash paid into bank 30,000
24th : Interest paid through cheque 2,000
25th : Gave loan to Mr.Wind 10,000
26th : Amount paid to Mr. Storm on loan account 15,000
27th : Salary paid to Manager Mr. Liquid 5,000
28th : Postage paid 1,000
29th : Received cheque from Mr. Wind on loan account 3,000
30th : Sold part of the equipment for 2,000

Journal in the books of M/s Rama & Sons


for the period from August 10th, _5 to August 30th, _5
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
August – Cash a/c Dr – 1,50,000
10th To Capital a/c – 1,50,000
[Being the amount received from Mr. Moon, the
proprietor as his capital contribution vide receipt
no: dated: ]
11th – Bank a/c Dr – 50,000
To Cash a/c – 50,000
[Being the amount of cash deposited into bank
vide bill no: dated: ]
12th – Equipment a/c Dr 15,000

32
To Cash a/c –
– 15,000
[Being the value of equipment purchased from
M/s for cash vide bill no: dated: ]
13th – Goods/stock a/c Dr – 20,000
To Bank a/c – 20,000
[Being the payment made for stock purchased vide
Cheque no: dated: ]
14th – Bank a/c Dr – 15,000
To Goods/stock a/c – 15,000
[Being the amount received for stock sold to Mr.
Sun vide Cheque no: dated: ]
16th – Rent a/c Dr – 5,000
To Bank a/c – 5,000
[Being the amount paid for rent vide voucher
no: dated: ]
17th – Cash a/c Dr – 25,000
To Loan from Storm a/c – 25,000
[Being the cash received from Mr. Storm as loan
vide receipt no: dated: ]
18th – Bank a/c Dr – 5,000
To Commission a/c – 5,000
[Being the amount received for commission vide
cheque no: dated: ]
19th – Wages a/c Dr – 15,000
To Cash a/c – 15,000
[Being the amount paid for wages vide voucher
no: dated: ]
20th – Drawings a/c Dr – 3,000
To Bank a/c – 3,000
[Being the amount withdrawn from bank fo r
personal use vide cheque no: dated: ]
21st – Cash a/c Dr – 10,000
To Bank a/c – 10,000
[Being the amount withdrawn from bank for office
purpose vide cheque no: dated: ]
22nd – Goods/stock a/c Dr – 25,000
To Cash a/c – 25,000

33
[Being the amount of cash paid for stock purchases
vide voucher no: dated: ]
23rd – Bank a/c Dr – 30,000
To Cash a/c – 30,000
[Being the amount deposited into bank vide
voucher no: dated: ]
24th – Interest a/c Dr – 2,000
To Bank a/c – 2,000
[Being the amount of interest paid vide cheque
no: dated: ]
25th – Loan to Mr. Wind a/c Dr – 10,000
To Cash a/c – 10,000
[Being the amount of cash given to Mr. Wind as
loan vide voucher no: dated: ]
26th – Loan from Strom a/c Dr – 15,000
To Cash a/c – 15,000
[Being the amount paid to Mr. Storm for
repayment of loan vide voucher no: dated: ]
27th – Salary a/c Dr – 5,000
To Cash a/c – 5,000
[Being the amount paid for salary to Mr. Liquid
vide voucher no: dated: ]
28th – Postage a/c Dr – 1,000
To Cash a/c – 1,000
[Being the amount paid for purchase of postage
vide voucher no: dated: ]
29th – Bank a/c Dr – 3,000
To Loan to Mr. wind a/c – 3,000
[Being the Cheque no: date received from
Mr. Wind for repayment of loan]
30th – Cash a/c Dr – 2,000
To Equipment a/c – 2,000
[Being the amount received on sale of equipment
vide receipt no: dated: ]

General Ledger
[Books of M/s Rama & Sons]

34
Cash a/c
Dr
Cr
Date Particulars J/F Amount Date Particulars J/F Amount

10/10/_5 To Capital a/c – 1,50,000 11/10/_5 By Bank a/c – 50,000


17/10/_5 To Loan from Storm – 25,000 12/10/_5 By Equipment a/c – 15,000
21/10/_5 a/c – 10,000 19/10/_5 By Wages a/c – 15,000
30/10/_5 To Bank a/c – 2,000 22/10/_5 By Goods/stock a/c – 25,000
To Equipment a/c 23/10/_5 By Bank a/c – 30,000
25/10/_5 By Loan to Mr. – 10,000
26/10/_5 Wind a/c – 15,000
27/10/_5 By Loan from Strom – 5,000
28/10/_5 a/c – 1,000
31/08/_5 By Salary a/c – 21,000
By Postage a/c
By Balance c/d

tl 1,87,000 tl 1,87,000

01/09/_5 To Balance b/d – 21,000

Capital A/c

Dr Cr

Date Particulars J/F Amount Date Particulars J/F Amount

31/08/_5 To Balance c/d – 1,50,000 10/10/_5 By Cash a/c – 1,50,000

tl 1,50,000 tl 1,50,000

01/09/_5 By Balance b/d – 1,50,000

35
Bank a/c
Dr
Cr
Date Particulars J/F Amount Date Particulars J/F Amount

11/10/_5 To Cash a/c – 50,000 13/10/_5 By Goods/stock – 20,000


14/10/_5 To Goods/stock a/c – 15,000 16/10/_5 a/c – 5,000
18/10/_5 To Commission a/c – 5,000 20/10/_5 By Rent a/c – 3,000
23/10/_5 To Cash a/c – 30,000 21/10/_5 By Drawings a/c – 10,000
29/10/_5 To Loan to Mr. wind – 3,000 24/10/_5 By Cash a/c – 2,000
a/c 31/08/_5 By Interest a/c – 63,000
By Balance c/d

tl 1,03,000 tl 1,03,000

01/09/_5 To Balance b/d – 63,000


Equipment a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

12/10/_5 To Cash a/c – 15,000 30/10/_5 By Cash a/c – 2,000


31/08/_5 By Balance c/d – 13,000

tl 15,000 tl 15,000

01/09/_5 To Balance b/d – 13,000

Goods/stock a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

13/10/_5 To Bank a/c – 20,000 14/10/_5 By Bank a/c – 15,000


22/10/_5 To Cash a/c – 25,000 31/08/_5 By Balance c/d – 30,000

tl 45,000 tl 45,000

01/09/_5 To Balance b/d – 30,000

36
Rent a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

16/10/_5 To Bank a/c – 5,000 31/08/_5 By Balance c/d – 5,000

tl 5,000 tl 5,000

01/09/_5 To Balance b/d – 5,000

Loan from Storm a/c


Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

31/08/_5 To Balance c/d – 25,000 17/10/_5 By Cash a/c – 25,000

tl 25,000 tl 25,000

01/09/_5 By Balance b/d – 25,000


Commission a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

31/08/_5 To Balance c/d – 5,000 18/10/_5 By Bank a/c – 5,000

tl 5,000 tl 5,000

01/09/_5 By Balance b/d – 5,000


Wages a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

19/10/_5 To Cash a/c – 15,000 31/08/_5 By Balance c/d – 15,000

tl 15,000 tl 15,000

01/09/_5 To Balance b/d – 15,000

37
Drawings a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

20/10/_5 To Bank a/c – 3,000 31/08/_5 By Balance c/d – 3,000

tl 3,000 tl 3,000

01/09/_5 To Balance b/d – 3,000


Interest a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

24/10/_5 To Bank a/c – 2,000 31/08/_5 By Balance c/d – 2,000

tl 2,000 tl 2,000

01/09/_5 To Balance b/d – 2,000


Loan to Mr. Wind a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

25/10/_5 To Cash a/c – 10,000 31/08/_5 By Balance c/d – 10,000

tl 10,000 tl 10,000

01/09/_5 To Balance b/d – 10,000


Loan from Strom a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

26/10/_5 To Cash a/c – 15,000 31/08/_5 By Balance c/d – 15,000

tl 15,000 tl 15,000

01/09/_5 To Balance b/d – 15,000

38
Salary a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

27/10/_5 To Cash a/c – 5,000 31/08/_5 By Balance c/d – 5,000

tl 5,000 tl 5,000

01/09/_5 To Balance b/d – 5,000


Postage a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

28/10/_5 To Cash a/c – 1,000 31/08/_5 By Balance c/d – 1,000

tl 1,000 tl 1,000

01/09/_5 To Balance b/d – 1,000


Loan to Mr. wind a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

31/08/_5 To Balance c/d – 3,000 29/10/_5 By Bank a/c – 3,000

tl 3,000 tl 3,000

01/09/_5 By Balance b/d – 3,000

TRIAL BALANCE
⚫ Trial balance is a statement which shows debit balances and credit balances of all accounts
in the ledger. The total of the debit balances and credit balances should tally (agree).
⚫ In case, there is a difference, one has to check the correctness of the balances brought
forward from the respective accounts.
⚫ Trial balance can be prepared in any date provided accounts are balanced.

39
Definition
⚫ “Trial balance is a statement, prepared with the debit and credit balances of ledger accounts
to test the arithmetical accuracy of the books” – J.R. Batliboi.
Objectives
i. To check the arithmetical accuracy of the ledger accounts.
ii. To locate the errors.
iii. To facilitate the preparation of final accounts.
Methods
A trial balance can be prepared in the following methods.
i. The Total Method : According to this method, the total amount of the debit side of
the ledger accounts and the total amount of the credit side of the ledger accounts are
recorded.
ii. The Balance Method : In this method, only the balances of an account either debit or
credit, as the case may be, are recorded against their respective accounts.
The balance method is more widely used, as it supplies ready figures for preparing the final
accounts.
Format

Format of Trail Balance


i) a debit balance is either an asset or loss or expense; and

ii) a credit balance is either a liability or income or gain.

40
Example 1

Prepare a Trial Balance with the following information:


Balance Balance
Sr. No Name of Account Sr. No Name of Account
(₹) (₹)
(i) Capital 2,00,000 (ii) Stock 70,000
(iii) Cash 1,80,000 (iv) Debtors 3,00,000
(v) Creditors 1,00,000 (vi) Bank Loan 1,50,000
(vii) Sales 3,00,000 (viii) Purchases 2,00,000

Solution 1
Trial Balance
Debit Credit
S. No. Account Title Balance Balance
(Rs) (Rs)
(i) Capital 2,00,000
(ii) Stock 70,000
(iii) Cash 1,80,000
(iv) Debtors 3,00,000
(v) Creditors 1,00,000
(vi) Bank Loan 1,50,000
(vii) Sales 3,00,000
(viii) Purchases 2,00,000
7,50,000 7,50,000

41
Example 2

Journalise the following transactions , post them into Ledger and prepare a Trial Balance :

(₹) (₹)
2018 2018
Apr. Mohan commenced 1,00,000 Apr. 20 Received cash from 3,950
1 business with cash Gopal
Apr. Bought goods 5,000 Discount Allowed 50
3
Apr. Sold goods to Gopal 4,000 Apr. 25 Paid Wages 700
4
Apr. Bought goods from Ram 8,000 Apr. 27 Paid to Ram in full 7,700
10 settlement
Apr. Paid trade expenses 2,000 Apr. 30 Paid rent 1,500
15

Solution 2
Books of Mohan
Journal
Debit Credit
Date Particular L.F. Amount Amount
(Rs) (Rs)
2018
April 01 Cash A/c Dr. 1,00,000
To Capital A/c 1,00,000
(Commenced business with Cash)

April 03 Purchases A/c Dr. 5,000


To Cash A/c 5,000
(Bought goods)

April 04 Gopal Dr. 4,000


To Sales A/c 4,000
(Goods Sold to Gopal)

April 10 Purchases A/c Dr. 8,000


To Ram 8,000
(Bought goods from Ram)

April 15 Trade Expenses A/c Dr. 2,000


To Cash A/c 2,000
(Paid trade expenses)

April 20 Cash A/c Dr. 3,950

42
Discount Allowed A/c Dr. 50
To Gopal 4,000
(Cash received from Gopal and discount allowed)

April 25 Wages A/c Dr. 700


To Cash 700
(Paid Wages)

April 27 Ram Dr. 8,000


To Cash A/c 7,700
To Discount Received A/c 300
(Paid to Ram and discount received from him)

April 30 Rent A/c Dr. 1,500


To Cash A/c 1,500
(Paid Rent)
Cash Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Capital 1,00,000 April Purchases 5,000
01 03
April Gopal 3,950 April Trade Expenses 2,000
20 15
April Wages 700
25
April Ram 7,700
27
April Rent 1,500
30
Balance c/d 87,050
1,03,950 1,03,950

Capital Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Balance c/d 1,00,000 April Cash 1,00,000
30 01
1,00,000 1,00,000

43
Purchases Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Cash 5,000 April Balance c/d 13,000
03 30
April Ram 8,000
10
13,000 13,000

Sales Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Balance c/d 4,000 April Gopal 4,000
30 04
4,000 4,000

Gopals’ Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Sales 4,000 April Cash 3,950
04 20
April Discount 50
20 Allowed
4,000 4,000

Ram’s Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Cash 7,700 April Purchases 8,000
27 10
Discount 300
Received
8,000 8,000

44
Trade Expenses Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Cash 2,000 April Balance c/d 2,000
15 30
2,000 2,000

Discount Received Account


Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F
(Rs) (Rs)
2018 2018
April 20 Balance c/d 300 April Ram 300
20
300 300

Wages Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Cash 700 April Balance c/d 700
25 30
700 700

Discount Allowed Account


Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Gopal 50 April Balance c/d 50
27 01
50 50

Rent Account
Dr. Cr.
Amount Amount
Date Particulars J.F Date Particulars J.F.
(Rs) (Rs)

45
2018 2018
April Cash 1,500 April Balance c/d 1,500
30 30
1,500 1,500

Trial Balance
Debit Credit
S. No. Account Title L.F. Balance Balance
(Rs) (Rs)
(i) Cash 87,050
(ii) Capital 1,00,000
(iii) Sales 4,000
(iv) Trade Expenses 2,000
(v) Discount Received 300
(vi) Wages 700
(vii) Discount Allowed 50
(viii) Rent 1,500
(ix) Purchases 13,000
1,04,300 1,04,300

Example 3

Prepare the Trial Balance of Ankit as on 31st March, 2018. He has omitted to open a Capital
Account:

₹ ₹
Bank Overdraft 85,000 Purchases 4,45,000
Sales 8,10,000 Cash in Hand 8,500
Purchases Return 22,500 Creditors 2,15,000
Debtors 4,00,500 Sales Return 15,750
Wages 96,000 Equipment 25,000
Capital ? Opening Stock 3,00,500

SOLUTION 3
Trial Balance
as on March 31, 2018
S.No. List of Items Debit Balances Credit
Balances
1 Bank Overdraft 85,000
2 Sales 8,10,000

46
3 Purchases Return 22,500
4 Debtors 4,00,500
5 Wages 96,000
6 Capital 1,58,750
7 Purchases 4,45,000
8 Cash in hand 8,500
9 Creditors 2,15,000
10 Sales Return 15,750
11 Equipment 25,000
12 Opening Stock 3,00,500
Total 12,91,250 12,91,250

Example 4

Prepare a Trial Balance from the following items:

₹ ₹
Capital 24,000 Building 12,000
Opening Stock 8,500 Returns Inward 1,900
Furniture 2,600 Returns Outward 350
Purchases 8,950 Trade Expenses 1,000
Cash 7,300 Discount Received 970
Carriage 300 Salary 3,000
Sales 22,500 Office Rent 2,270

SOLUTION:4
Trial Balance
as on March 31, 2018
S.No. List of Items Debit Balances Credit
Balances
1 Capital 24,000
2 Opening Stock 8,500
3 Furniture 2,600
4 Purchases 8,950

47
5 Cash 7,300
6 Carriage 300
7 Sales 22,500
8 Building 12,000
9 Returns Inward 1,900
10 Returns Outwards 350
11 Trade Expenses 1,000
12 Discount Received 970
13 Salary 3,000
14 Office Rent 2,270
Total 47,820 47,820
Example 5
The following are the balances extracted from the books of Mr. A. Mukhopadhyay. Prepare a
Trial Balance as on 31st March, 2018:

₹ ₹
Cash 2,000 Sundry Creditors 40,000
Capital 80,000 Investment 8,000
Purchases 85,000 Plant and Machinery 15,000
Sales 1,08,400 Building 20,000
Purchases Return 6,000 Furniture 6,000
Sales Return 4,000 Electricity 700
Transportation 1,800 Postage 400
Discount Allowed 500 Drawings 8,000
Printing 5,000 Salaries 6,000
Sundry Debtors 70,000 Travelling Expenses 2,000
Input CGST A/c 2,500 Output CGST A/c 1,500
Input SGST A/c 2,500 Output SGST A/c 1,500
Input IGST A/c 4,000 Output IGST A/c 6,000

SOLUTION:5
Trial Balance
as on March 31, 2018
S.No. List of Items Debit Credit
Balances Balances
1 Cash 2,000
2 Capital 80,000
3 Purchases 85,000
4 Sales 1,08,400

48
5 Purchases Return 6,000
6 Sales Return 4,000
7 Transportation 1,800
8 Discount Allowed 500
9 Printing 5,000
10 Sundry Debtors 70,000
11 Input CGST A/c 2,500
12 Input SGST A/c 2,500
13 Input IGST A/c 4,000
14 Sundry Creditors 40,000
15 Investments 8,000
16 Plant & Machinery 15,000
17 Building 20,000
18 Furniture 6,000
19 Electricity 700
20 Postage 400
21 Drawings 8,000
22 Salaries 6,000
23 Travelling Expenses 2,000
24 Output CGST A/c 1,500
25 Output SGST A/c 1,500
26 Output IGST A/c 6,000
Total 2,43,400 2,43,400

CASH BOOK

A cash book is a special journal which is used to record all cash receipts and cash payments. The
cash book is a book of original entry or prime entry since transactions are recorded for the first
time from the source documents. The cash book is a ledger in the sense that it is designed in the
form of a cash account and records cash receipts on the debit side and cash payments on the credit
side.

49
Advantages
1. Saves time and labour: When cash transactions are recorded in the journal a lot of time and
labour will be involved. To avoid this all cash transactions are straight away recorded in the cash
book which is in the form of a ledger.
2. To know cash and bank balance: It helps the proprietor to know the cash and bank balance at
any point of time.
3. Mistakes and frauds can be prevented: Regular balancing of cash book reveals the balance
of cash in hand. In case the cash book is maintained by business concern, it can avoid frauds.
Discrepancies if any, can be identified and rectified.
4. Effective cash management: Cash book provides all information regarding total receipts and
payments of the business concern at a particular period. So that, effective policy of cash
management can be formulated.

Types of Cash Book:

1. Single Column Cash Book: A single column Cash Book contains one column of amount
on both sides, i.e., one in the debit side and other in the credit side. In the single column
Cash Book, only cash transactions are recorded. In the debit side of the Cash Book, all cash
receipts are recorded, while in the credit side all cash payments are recorded.

50
2. Double Column Cash Book: A double column Cash Book contains two columns of
amount, namely cash column and bank column on both sides. In the cash column of Cash
Book, all cash receipts and payments are recorded, according to the rule of Real Accounts.
All deposits either in cash or through cheques into the bank account of the business are
debited in the bank column and all withdrawals of cash and payments through cheques are
credited in the bank column.

3. Triple Ccolumn Cash Book: In a triple column Cash Book, there are three columns of
amount namely, cash, bank and discount. Discount allowed and discount received are
recorded in the discount column. While in the debit side, discount allowed is recorded
along with the receipts, either in cash or through cheque; whereas, in the credit side,
discount received is recorded, along with the payments made either in cash or by issuing
cheques.

4. Petty Cash Book: This book is used for recording payment of petty expenses, which are
of smaller denominations like, postage, stationery, conveyance, refreshment, etc. is known
as Petty Cash Book.

Following is the format of the single column cash book:

Explanation :
i. Date : This column appears in both the debit and credit side. It records the date of receiving cash
at debit side and paying cash at credit side.

51
ii. Particulars : This column is used at both debit and credit side. It records the names of parties
(personal account), heads (nominal account) and items (real account) from whom payment has
been received and to whom payment has been made.
iii. Receipt Number (R.N): This refers to the serial number of the cash receipt.
iv. Voucher Number (V.N) : This refers to the serial number of the voucher for which payment
is made.
v. Ledger Folio (L.F): This column is used in both the debit and credit side of cash book. The
ledger page (folio) of every account in the cash book is recorded against it.
vi. Amount : This column appears in both sides of the cash book. The actual amount of cash
receipt is recorded on the debit side. The actual payments are entered on the credit side.
Balancing :
The cash book is balanced like any other account. The total of the receipt (debit side) column will
always be greater than the total of the payment column (credit side). The difference will be written
on the credit side as “By Balance c/d”. In the beginning of the next period, to show the cash balance
in hand, the balance amount is recorded in the debit side as “To balance b/d”.
Example:1
Write the following transactions in the simple cash book and post into the ledger:
1991
Jan. 1 Cash in hand 15,000
" 6 Purchased goods for cash 2,000
" 16 Received from Akbar 3,000
" 18 Paid to Babar 1,000
" 20 Cash sales 4,000
" 25 Paid for stationary 60
" 30 Paid for salaries 1,000
" 31 Purchased office furniture 2,000
Solution:1
Cash Book
Date Particulars L.F. Amount Date Particulars L.F. Amount
1991
Jan. 1 To Balance b/d 15,000 Jan. 6 By Purchases a/c 2,000
16 To Akbar 3,000 18 By Babar 1,000
20 To sales a/c 4,000 25 By stationary 60
30 By Salaries a/c 1,000
31 By Furniture a/c 2,000
By Balance c/d 15,940

22,000 22,000

52
15,940
To Balance b/d

Example:2
Enter the following transactions in a simple cash book for December 2016:

Rs
01 Cash in hand 12,000
05 Cash received from Bhanu 4,000
07 Rent Paid 2,000
10 Purchased goods Murari for cash 6,000
15 Sold goods for cash 9,000
18 Purchase stationery 300
22 Cash paid to Rahul on account 2,000
28 Paid salary 1,000
30 Paid rent 500

Solution;2

Cash Book
Dr. Cr.
Amount Amount
Date Particulars L.F. Rs Date Particulars L.F. Rs
2016 2016
Dec.01 Balance b/d 12,000 Dec.07 Rent 2,000
Dec.05 Bhanu 4,000 Dec.10 Purchases 6,000
Dec.15 Sales 9,000 Dec.18 Stationery 300
Dec.22 Rahul 2,000
Dec.28 Salaries 1,000
Dec.30 Rent 500
Dec.31 Balance c/d 13,200

25,000 25,000

53
Example 3
Record the following transaction in simple cash book for November 2016:

Rs
01 Cash in hand 12,500
04 Cash paid to Hari 600
07 Purchased goods 800
12 Cash received from Amit 1,960
16 Sold goods for cash 800
20 Paid to Manish 590
25 Paid cartage 100
31 Paid salary 1,000

Solution:
Cash Book
Dr. Cr.
Amount Amount
Date Particulars L.F. Rs Date Particulars L.F. Rs
2016 2016
Nov.01 Balance b/d 12,500 Nov.04 Hari 600
Nov.12 Amit 1,960 Nov.07 Purchases 800
Nov.16 Sales 800 Nov.20 Manish 590
Nov.25 Cartage 100
Nov.30* Salaries 1,000
Nov.30* Balance c/d 12,170

15,260 15,260

Note: There is a misprint in the question as there is a transaction on November 31, which is
not possible as there are only 30 days in the month of November.

Example 4

Enter the following transaction in Simple cash book for December 2017:

Rs
01 Cash in hand 7,750
06 Paid to Sonu 45
08 Purchased goods 600
15 Received cash from Parkash 960
20 Cash sales 500
25 Paid to S. Kumar 1,200
30 Paid rent 600

54
Solution: 4
Cash Book
Dr. Cr.
Amount Amount
Date Particulars L.F. Rs Date Particulars L.F. Rs
2017 2017
Dec.01 Balance b/d 7,750 Dec.06 Sonu 45
Dec.15 Prakash 960 Dec.08 Purchases 600
Dec.20 Sales 500 Dec.25 S. Kumar 1,200
Dec.30 Rent 600
Dec.31 Balance c/d 6,765

9,210 9,210

Format of the Double Column Cash Book:

A double column cash book or two column cash book is one which consists of two separate
columns on the debit side as well as credit side for recording cash and discount. In many concerns
it is customary for the trader to allow or to receive small allowance off or against the dues. These
allowances are made for prompt settlement of accounts. In certain business almost all receipts or
payments are accompanied by such discounts and in order to avoid unnecessary postings separate
columns in the cash book are introduced to record the discounts received or allowed. These
discount columns are memorandum columns only. They do not form the discount account. The
discount column on the debit side of the cash book will record discounts allowed and that on the
credit side discounts received.

Debit Side Credit Side

Date Particulars V.N. L.F. Discount Cash Date Particulars V.N. L.F. Discount Cash

55
Example 5

From the following transactions write up a two column cash book and post into ledger:

1991
Jan. 1 Cash in hand $2,000
" 7 Received from Riaz & Co. $200; discount allowed $10
" 12 Cash sales $1,000
" 15 Paid Zahoor Sons $500; discount received $15
" 20 Purchased goods for cash $300
" 25 Received from Salman $500; discount allowed $15
" 27 Paid Hussan & Sons $300.
" 28 Bought furniture for cash $100
" 31 Paid rent $100
Solution:5
Cash Book
Debit Side Credit Side

Date Particulars V.N. L.F. Discount Cash Date Particulars V.N. L.F. Discount Cash
1991 1991
Jan.1 To 2,000 Jan.5 By Zahoor & 15 500
" 7 Balance 10 200 " 20 Sons 300
" 12 b/d 1,000 " 27 By purchase 300
" 25 To Riaz & 15 500 " 28 a/c 100
Co. " 31 By 100
To Sales Hussan&Sons 2,400
a/c 25 3,700 By Furniture 15 3,700
To Salman a/c
1991 2,400 By Rent a/c
Feb1 By Balance
c/d

To
Balance
b/d

56
Three column Cash Book:
Opening Balance:
Put the opening balance (if any) on cash in hand and cash at bank on the debit side in the cash
book and bank columns. If the opening balance is credit balance (overdraft) then it will be put in
the credit side of the cash book in the bank column.
Cheque/Check or Cash Received:
If a cheque is received from any person and is paid into the bank on the same date it will appear
on the debit side of the cash book as "To a Person". The amount will be shown in the bank column.
If the cheque received is not deposited into the bank on the same date then the amount will appear
in the cash column. Cash received will be recorded in the usual manner in the cash column.
Payment By Cheque/Check or Cash:
When we make payment by cheque, this will appear on the credit side "By a person" and the
amount in the bank column. If the payment is made in cash it will be recorded in usual manner in
the cash column.
Contra Entries:
If an amount is entered on the debit side of the cash book, and the exact amount is again entered
on the credit side of the same account, it is called "contra entry". Similarly an amount entered on
the credit side of an account also may have a contra entry on the debit side of the same account.
Contra entries are passed when:
1. Cash is deposited into bank by office: It is payment from cash and receipt in bank.
Therefore, enter on credit side, cash column "By Bank" and on debit side bank column "To
Cash". The reason for making two entries is to comply with the principle of double entry
which in such transactions is completed and therefore, no posting of these items is
necessary. Such entries are marked in the cash book with the letter "C" in the folio column
2. Cheque/Check is drawn for office use: It is payment by bank and receipt in cash.
Therefore, enter on the debit side, cash column "To Bank" and on credit side, bank column
"By Cash".
Bank Charges and Bank Interest Allowed: Bank charges appear on the credit side, bank column
"Bank Charges." Bank interest allowed appear on the debit side, bank column "To Interest".
Posting:
The method of posting three column cash book into the ledger is as follows:

57
1. The opening balance of cash in hand and cash at bank are not posted.
2. Contra Entries marked with "C" are not posted.
3. All other items on the debit side will be posted to the credit of respective accounts in the
ledger and all other items on the credit side will be posted to the debit of the respective
accounts.
4. As regards discounts the total of the discount allowed will be posted to the debit of the
discount account in the ledger and total of the discount received to the credit side of the
discount account.
Format of the Three Column Cash Book:
Debit Side Credit Side
Date Particulars V.N. L.F. Dis- Cash Bank Date Particulars V.N. L.F. Dis- Cash Bank
count count

Example: 6

On January 1, 1991 Noorani Stores cash book showed debit balance of cash $1,550 and bank
$13,575. During the month of January following business was transacted.
1991
Jan.1 Purchased office typewriter for cash $750; cash sales $315
" Deposited cash $500
" 4 Received from A. Hussan a cheque for $2,550 in part payment of his account
" 6 Paid by cheque for merchandise purchased worth $1,005
" 8 Deposited into bank the cheque received from A. Hussan.
" 10 Received from Hayat Khan a cheque for $775 in full settlement of his account and
allowed him discount $15.
" 12 Sold merchandise to Divan Bros. for $1,500 who paid by cheque which was deposited
in the bank.
" 16 Paid Salman $915 by cheque, discount received $5
" 27 Paid to Gulzar Ahmad by cheque $650
" 30 Paid salaries by cheque $1,750
" 31 Deposited into bank the cheque of Hayat Khan.
" 31 Drew from bank for office use $250.

58
You are required to enter the above transactions in three column cash book and balance it.
Noorani Stores
Cash Book

Debit Side Credit Side

Date Particulars V.N. L.F. Dis- Cash Date Particulars V.N. L.F. Dis- Cash
count count
1991 1991
Jan.1 To 1,550 13,575Jan.1 By Office 750
" 1 Balance 1,315 " 3 Equip. C 500
" 3 b/d C 500 " 6 By Bank 1,005
" 4 To Sales 2,550 " 8 By C 2,550
" 8 a/c C 2,550 " 16 Purchases 5 915
" 10 " 27
To Cash 15 775 a/c 650
" 12 " 30
a/c 1,500 By Bank 1,750
" 31 " 31
" 31 To A C 775 " 31 By C 775
Hussan C 250 Salman C 250
To Cash By Gulzar 1,865 14,330
To Hayat By
Khan 15 6,440 18,900 Salaries 5 6,44018,900
To Sales a/c
a/c By Bank
To Cash 1,865 14,330 By Cash
To Bank By
1991 Balanced
Feb.1 c/d
To
Balance
b/d

PETTY CASH BOOK


Petty means ‘small’. The petty cash book is a book where small recurring payments like carriage,
cartage, postage and telegram, printing and stationery etc., are recorded by the petty cashier, a
person other than the main cashier.
8.1 Imprest System
Imprest means ‘money advanced on loan’. Under this system the amount required to meet out
various petty expenses is estimated and given to the petty cashier at the beginning of the specified
period, usually a month. All the payments are supported by vouchers. At the end of the given
period or earlier, when the petty cashier has spent the petty cash amount, he closes the petty cash

59
book for the period and balances it. Then he submits the accounts to the cashier. He verifies the
petty cash book with the vouchers. After satisfying himself as to the correctness and genuiness of
the payments an amount equal to the cash spent is given to the petty cashier. This amount together
with the unspent amount will bring up the cash in hand to the amount with which he originally
started i.e., the imprest amount. Thus the system of reimbursing the amount spent by the petty
cashier at fixed period, is known as the imprest system of petty cash.
For example, On June 1, 2002, Rs.1,000 was given to the petty cashier. He had spent Rs.940
during the month. He will be paid Rs.940 on 30th June by the cashier so that he may again have
Rs.1,000 for the next month i.e., July.
Analytical Petty Cash Book
As in the case of any other cash book, petty cash book also has the debit side and the credit side.
The debit side is smaller and has very infrequent entries because cash receipt by the petty cashier
is mainly from the cashier at the beginning or close of a specified period. The credit side is bigger
and thus has many columns. For each important petty expenses there is a seperate column, and
therefore columnar cash book is another name for this petty cash book. These analytical columns
helps to know the actual amount spent on each and every type of petty expenses for the specified
period. Each petty payment is first entered in the total payments column, and then recorded in the
respective analytical column, so that :
i. the total amount spent on each expenses for a particular period can be easily
ascertained by adding up the respective column.
ii. ii. only the periodical total of each column is posted to the ledger.
iii. iii. the total petty payment for any period can be easily ascertained from the
total payments column.
The analytical petty cash book may be designed according to the requirements of the business.
Format of Petty Cash Book

60
Example: 7
Prepare petty cash book from the following transactions. The imprest amount is Rs 2,000.
January Rs
2017
01 Paid cartage 50
02 STD charges 40
02 Bus fare 20
03 Postage 30
04 Refreshment for employees 80
06 Courier charges 30
08 Refreshment of customer 50
10 Cartage 35
15 Taxi fare to manager 70
18 Stationery 65
20 Bus fare 10
22 Fax charges 30
25 Telegrams charges 35
27 Postage stamps 200
29 Repair on furniture 105
30 Laundry expenses 115
31 Miscellaneous expenses 100

Petty Cash Book


Amo Analysis of Payments
Dat Amoun
unt Vouc
e t
Recei Particulars her
201 Paid Telephone Post Convey Refresh Cart Miscella
ved No. Telegram age ance ment age neous
7 Rs
Rs
2,00 Jan.
0 01 Cash
Jan.
01 Cartage 50 50
Jan.
02 STD charges 40 40
Jan.
02 Bus Fare 20 20
Jan.
03 Postage 30 30
Jan. Refreshment for
04 Employees 80 80
Jan.
06 Courier charges 30 30
Jan. Refreshment of
08 customer 50 50
Jan.
10 Cartage 35 35

61
Jan. Taxi Fare to
15 Manager 70 70
Jan.
18 Stationery 65 65
Jan.
20 Bus Fare 10 10
Jan.
22 Fax Charges 30 30
Jan. Telegram
25 Charges 35 35
Jan.
27 Postage stamps 200 200
Jan. Repair to
29 Furniture 105 105
Jan. Laundry
30 Expense 115 115
Jan. Miscellaneous
31 Expenses 100 100
1,065 105 260 100 130 85 385
Jan.
31 Balance c/d 935
2,00
0 2,000
Feb.
935 01 Balance b/d
1,06 Feb.
5 01 Cash

Example 8
Record the following transactions during the week ending January. 30, 2017 with a weekly
imprest Rs 500

Rs
24 Stationery 100
25 Bus fare 12
25 Cartage 40
26 Taxi fare 80
27 Wages to casual labour 90
29 Postage 80

62
Petty Cash Book
Amou Analysis of Payments
Amou
nt
Voucher nt
Receiv Date Particulars
No. Paid Statione Conveya Carta Posta Miscellane
ed ry nce ge ge ous
Rs
Rs
2017
Jan
500 .24 Cash
Jan
.24 Stationery 100 100
Jan
.25 Bus Fare 12 12
Jan
.25 Cartage 40 40
Jan
.26 Taxi Fare 80 80
Jan Wages to
.27 Casual labour 90 90
Jan
.29 Postage 80 80
402 100 92 40 80 90
Jan
.30 Balance c/d 98
2017 500
Jan
98 .31 Balance b/d
Jan
402 .31 Cash

63
FINANCIAL ACCOUNTING-

1
FINAL ACCOUNT
Financial accounting is a well-defined sequential activity which begins with Journal
(Journalising), Ledger (Posting), and preparation of Trial Balance (Balancing and
Summarisation at the first stage). The next step is the preparation of financial statement.
Financial Statements:- It has been emphasised that various users have diverse
informational requirements. Instead of generating particular information useful for specific
users, the business prepares a set of financial statements, which in general satisfies the
informational needs of the users.
The basic objectives of preparing financial statements are:
(i). To present a true and fair view of the financial performance of the business;
(ii).To present a true and fair view of the financial position of the business;

For this purpose, the firm usually prepares the following financial statements:
 Trading and Profit and Loss Account
 Balance Sheet

Trading and Profit and Loss account, also known as Income statement, shows the
financial performance in the form of profit earned or loss sustained by the business. Balance
Sheet shows financial position in the form of assets, liabilities and capital. These are prepared
on the basis of trial balance and additional information, if any.
Meaning of Final Accounts:
• Final accounts gives an idea about the profitability and financial position of a business
to its management, owners, and other interested parties The term "final accounts"
includes the trading account, the profit and loss account, and the balance sheet.
Objectives of Final Accounts:
• The following are the main objectives of final accounts: - To determine gross profit and
net profit of the business during the year. To present true financial position of the
business on a given date. To make effective control on financial activities of the
business.
• Financial managers make final accounts as well as corporate balance sheets in order to
get a clear and summarizing picture of the current financial condition of the company.
Final accounts, as well as balance sheets, assist shareholders to recognize an
organization's financial viability

ITEMS TO KNOW BEFORE PREPARATION OF FINANCIAL STATEMENT:

i) Expenditures: Whenever payment and/or incurrence of an outlay are made for a

2
purpose other than the settlement of an existing liability, it is called expenditure. The
expenditures are incurred with a viewpoint they would give benefits to the business.
The benefit of an expenditure may extend up to one accounting year or more than one
year. If the benefit of expenditure extends up to one accounting period, it is termed as
revenue expenditure. If the benefit of expenditure extends more than one accounting
period, it is termed as capital expenditure.
ii) Receipts: The similar treatment is given to the receipts of the business. If the receipts
imply an obligation to return the money, these are capital receipts. If a receipt does not
incur an obligation to return the money or is not in the form of a sale of fixed asset, it
is termed as revenue receipt.
iii) Usually Trading and Profit and Loss account includes revenue incomes and
expenditures and Balance sheet includes capital incomes and expenditures.
iv) Closing Entries: The preparation of trading and profit and loss account requires that
the balances of accounts of all concerned items are transferred to it for its compilation.
 Opening stock account, Purchases account, Wages account, Carriage inwards account
and direct expenses account are closed by transferring to the debit side of the trading
and profit and loss account. This is done by recording the following entry:

Trading A/c Dr.

To Opening stock A/c

To Purchases A/c

To Wages A/c

To Carriage inwards A/c

To All other direct expenses A/c

 The purchases returns or return outwards are closed by transferring its balance to the
purchases account. The following entry is recorded for this purpose:

Purchases return A/c Dr.

To Purchases A/c
 The sales returns or returns inwards account is closed by transferring its balance to the
sales account as:

Sales A/c Dr.

3
To Sales return A/c

 The sales account is closed by transferring its balance to the credit side of the trading
and profit and loss account by recording the following entry:

Sales A/c Dr.

To Trading A/c

 Items of expenses, losses, etc. are closed by recording the following entries:

Profit and Loss A/c Dr.

To Expenses (individually) A/c

To Losses (individually) A/c

 Items of incomes, gains, etc. are closed by recording the following entry:

Incomes (individually) A/c Dr.

Gains (individually) A/c Dr.

To Profit and Loss A/c

TRADING AND PROFIT AND LOSS ACCOUNT

Trading accounting is an account prepared to ascertain the trading results of a business


i.e., the gross profit earned or gross loss incurred from buying and selling of goods during a
particular period. The excess of net sales [total sales less returns] over cost of goods sold is
termed as gross profit.
Trading and Profit and Loss account is prepared to determine the profit earned or loss
sustained by the business enterprise during the accounting period. It is basically a summary of
revenues and expenses of the business and calculates the net figure termed as profit or loss.
The trading and profit and loss can be seen as combination of two accounts, viz. Trading
account and Profit and Loss account. The trading account or the first part ascertains the gross
profit and Profit and loss account or the second part ascertains net profit.

1) Trading Account:- The trading account ascertains the result from basic operational
activities of the business. The basic operational activity involves the manufacturing,
purchasing and selling of goods. It is prepared to ascertain whether the selling of goods
and/or rendering of services to customers have proved profitable for the business or not.
Purchases is one of the main constituents of expenses in business organisation. Besides

4
purchases, the remaining expenses are divided into two categories, viz. direct expenses
and indirect expenses. Direct expenses means all expenses directly connected with the
manufacture, purchase of goods and bringing them to the point of sale. Direct expenses
include carriage inwards, freight inwards, wages, factory lighting, coal, water and fuel,
royalty on production, etc. Similarly, sales constitute the main item of revenue for the
business. The excess of sales over purchases and direct expenses is called Gross Profit.
If the amount of purchases including direct expenses is more than the sales revenue, the
resultant figure is Gross Loss. The computation of gross profit can be shown in the
form of equation as:

Gross Profit = Sales – (Purchases + Direct Expenses)

2) Profit and Loss account:-


Accounting to Prof. Carter “Profit and loss account is an account into which all gains and
losses are calculated in order to ascertain the excess of gains over the losses or vice versa”.
Profit and loss account is an account which prepared to calculate the final profit or loss of the
business. All operating expenses and other non-operating income and expenditures and losses
are charged to profit and loss account to find out the net profit.
The gross profit or the gross loss is transferred to profit and loss account. The indirect
expenses are transferred to the debit side of the second part, viz. profit and loss account.
All revenue/gains other than sales are transferred to the credit side of the profit and loss
account. If the total of the credit side of the profit and loss account is more than the total
of the debit side, the difference is the Net Profit for the period of which it is being
prepared. On the other hand, if the total of the debit side is more than the total of the
credit side, the difference is the Net Loss incurred by the business firm.
Objectives of P/L Accounts
 To know the trading result
 To Identify Net Profit or Loss
 To know the relation between profits and turnover
 To Know components of Income & Expenditure
 To determining efficiency
 To Control over expenses
 To prepare future profit planning

5
Items on the debit side

Debit Side
I. Operating expense
• Office & Admn. Expense
• Selling, distb. Expense
• Financial expense
• Maintenance Expense
II. Non Operating expense
• Losses
• Written off of fictitious assets
Credit Side
I. Operating Income
• Interest, commission, discount
II. Non operating income
• Profit sale of assets
• Refund tax
• Rent received
In an equation form, it is shown as follows:

Net Profit = Gross Profit + Other Incomes – Indirect Expenses

Net profit or net loss so computed is transferred to the capital account in the balance
sheet by way of the following entry:

i) For transfer of net profit

Profit and Loss A/c Dr.

To Capital A/c

ii) For transfer of net loss

Capital A/c Dr.

To Profit and Loss A/c

6
Relevant Items in Trading and Profit and Loss Account

The different items appearing in the trading and profit and loss account are explained
hereunder:

(i). Opening stock: It is the stock of goods in hand at the beginning of the accounting year.
This is the stock of goods which has been carried forward from the previous year and
remains unchanged during the year and appears in the trial balance. In the trading
account it appears on the debit side because it forms the part of cost of goods sold for
the current accounting year.
(ii). Purchases less returns: Goods, which have been bought for resale appears as
purchases on the debit side of the trading account. They include both cash as well as
credit purchases. Goods which are returned to suppliers are termed as purchases return.
It is shown by way of deduction from purchases and the computed amount is known as
Net purchases.
(iii). Wages: Wages refer to remuneration paid to workers who are directly engaged in
factory for loading, unloading and production of goods and are debited to trading
account.
(iv). Carriage inwards/Freight inwards: These expenses are the items of transport
expenses, which are incurred on bringing materials/goods purchased to the place of
business. These items are paid in respect of purchases made during the year and are
debited to the trading account.
(v). Fuel/Water/Power/Gas: These items are used in the production process and hence are
part of expenses.
(vi). Packaging material and Packing charges: Cost of packaging material used in the
product are direct expenses as it refers to small containers which form part of goods
sold. However, the packing refers to the big containers that are used for transporting the
goods and is regarded as an indirect expense debited to profit and loss account.
(vii). Salaries: These include salaries paid to the administration, godown and warehouse staff
for the services rendered by them for running the business. If salaries are paid in kind
by providing certain facilities (called perks) to the employees such as rent free
accommodation, meals, uniform, medical facilities should also be regarded as salaries
and debited to the profit and loss account.

7
(viii). Rent paid: These include office and godown rent, municipal rates and taxes, factory
rent, rates and taxes. The amount of rent paid is shown on the debit side of the profit
and loss account.
(ix). Interest paid: Interest paid on loans, bank overdraft, renewal of bills of exchange, etc.
is an expense and is debited to profit and loss account.
(x). Commission paid: Commission paid or payable on business transactions undertaken
through the agents is an item of expense and is debited to profit and loss account.
(xi). Repairs: Repairs and small renewals/ replacements relating to plant and machinery,
furniture, fixtures, fittings, etc. for keeping them in working condition are included
under this head. Such expenditure is debited to profit and loss account.
(xii). Miscellaneous expenses: Though expenses are classified and booked under different
heads, but certain expenses being of small amount clubbed together and are called
miscellaneous expenses. In normal usage these expenses are called Sundry expenses or
Trade expenses.

Items on the credit side

(i). Sales less returns: Sales account in trial balance shows gross total sales (cash as well
as credit) made during the year. It is shown on the credit side of the trading account.
Goods returned by customers are called return inwards and are shown as deduction
from total sales and the computed amount is known as net sales.
(ii). Other incomes: Besides salaries and other gains and incomes are also recorded in the
profit and loss account. Examples of such incomes are rent received, dividend received,
interest received, discount received, commission received, etc.
(iii). Closing stock: It may be noted that closing stock does not normally form part of trial
balance and is brought into books with the help of the following journal entry :

Closing stock A/c Dr.

To Trading A/c
This entry opens a new account of asset, which is transferred to the balance sheet. The
closing stock shall be an opening stock for the next year and shall be sold during the
year.

8
BALANCE SHEET

The balance sheet is a statement prepared for showing the financial position of the
business summarising its assets and liabilities at a given date. The assets reflect debit balances
and liabilities (including capital) reflect credit balances. It is prepared at the end of the
accounting period after the trading and profit and loss account have been prepared. It is called
balance sheet because it is a statement of balances of ledger accounts that have not been
transferred to trading and profit and loss account and are to be carried forward to the next year
with the help of an opening entry made in the journal at the beginning of the next year.
According to Howard, a Balance sheet may be defined as – ‘a statement which reports
the values owned by the enterprise and the claims of the creditors and owners against these
properties’.
It is showing the financial position of the concern as on the last day of the accounting
year. It comprises of a list of assets, liabilities and capital.
Balance Sheet Equation:
• Assets = Liabilities + Capital
• Capital = Assets – Liabilities
Objectives and Functions of Balance Sheet
 To identify the financial position of a company
 To know the liquidity picture of the concern
 To know the solvency position of the concern
 To identify nature and value of assets
 To get Nature and extent of liabilities and actual capital

Preparing Balance Sheet

All the account of assets, liabilities and capital are shown in the balance sheet. Accounts
of capital and liabilities are shown on the left hand side, known as Liabilities. Assets and other
debit balances are shown on the right hand side, known as Assets. There is no prescribed form
of Balance sheet, for a proprietary and partnership firms. (However, Schedule VI Part I of the
Companies Act 1956 prescribes the format and the order in which the assets and liabilities of a
company should be shown). The horizontal format in which the balance sheet is prepared is
shown below.

Relevant Items in the Balance Sheet

9
Items which are generally included in a balance sheet are explained below:

1) Current Assets: Current assets are those which are either in the form of cash or a can
be converted into cash within a year. The examples of such assets are cash in hand/bank,
bills receivable, stock of raw materials, semi-finished goods and finished goods, sundry
debtors, short term investments, prepaid expenses, etc.
2) Current Liabilities: Current liabilities are those liabilities which are expected to be
paid within a year and which are usually to be paid out of current assets. The examples
of such liabilities are bank overdraft, bills payable, sundry creditors, short-term loans,
outstanding expenses, etc.
3) Fixed Assets: Fixed assets are those assets, which are held on a long-term basis in the
business. Such assets are not acquired for the purpose of resale, e.g. land, building, plant
and machinery, furniture and fixtures, etc. Sometimes the term ‘Fixed Block’ or ‘Block
Capital’ is also used for them.
4) Intangible Assets: These are such assets which cannot be seen or touched. Goodwill,
Patents, Trademarks are some of the examples of intangible assets.
5) Investments: Investments represent the funds invested in government securities, shares
of a company, etc. They are shown at cost price. If, on the date of preparation the
balance sheet, the market price of investments is lower than the cost price, a footnote
to that effect may be appended to the balance sheet.
6) Long-term Liabilities: All liabilities other than the current liabilities are known as
long-term liabilities. Such liabilities are usually payable after one year of the date of the
balance sheet. The important items of long term liabilities are long-term loans from
bank and other financial institutions.
7) Capital: It is the excess of assets over liabilities due to outsiders. It represents the
amount originally contributed by the proprietor/ partners as increased by profits and
interest on capital and decreased by losses drawings and interest on drawings.
8) Drawings: Amount withdrawn by the proprietor is termed as drawings and has the
effect of reducing the balance on his capital account. Therefore, the drawings account
is closed by transferring its balance to his capital account. However it is shown by way
of deduction from capital in the balance sheet.

OPENING ENTRY
The balances of various accounts in balance sheet are carried forward from one
accounting period to another accounting period. In fact, the balance sheet of an accounting

10
period becomes the opening trial balance of the next accounting period. Next year an opening
entry is made which opens these accounts contained in the balance sheet. The opening entry
with various assets and liabilities will be recorded as follows:
Fixed assets A/c Dr.
Current assets A/c Dr.
Fictitious assets A/c Dr.
Investments A/c Dr.
To Capital A/c
To Long-term liabilities A/c
To Current liabilities A/c

FINAL ACCOUNT FORMAT

Dr. Trading account for the year ended . . . Cr.


Particulars Amount Amount Particulars Amount Amount
To Opening stock xxx By Sales xxx
Less:
To Purchases xxx Sales returns xxx Xxx

Less: By Closing stock xxx


Purchases returns xxx xxx

To Direct expenses: By Gross loss c/d* xxx


Carriage/ xxx
Freight inwards xxx

Wages xxx
Dock charges xxx
Octroi xxx
Royalty xxx
Import duty xxx
To Gross profit c/d* xxx

xxx xxx

11
Profit and loss account for the year ended …….
Dr. Cr.
Particulars Amount Particulars Amount
To Gross loss b/d xxx By Gross profit b/d xxx
To Office and administrative By Indirect incomes:
expenses:
Salaries xxx Rent earned xxx
Rent, rates and taxes xxx Discount received xxx
Printing and stationery xxx Commission earned xxx
Postage xxx Interest on investments xxx
Legal charges xxx Dividend on shares xxx
Audit fees xxx Bad debts recovered xxx
Establishment expenses xxx Profit on sale of fixed xxx
assets
Trade expenses xxx Apprenticeship xxx
premium
General travelling expenses xxx Miscellaneous receipts xxx
Lighting xxx By Net loss* xxx
Insurance premium xxx (transferred to capital
account)
To Selling and distribution
expenses:
Carriage outwards xxx
Advertisement xxx
Commission xxx
Brokerage xxx
Bad debts or provision for bad xxx
debts
Export duty xxx
Packing charges xxx
To Other expenses and losses:
Repairs xxx
Depreciation xxx
Interest charges xxx
Discount allowed xxx
Provision for discount on debtors xxx
Bank charges xxx
Interest on capital xxx
Donation and charity xxx
Loss on sale of fixed assets xxx
Abnormal loss due to fire, theft xxx
etc. not covered by insurance xxx
To Net profit* xxx
(transferred to capital account)
xxx xxx

12
Balance sheet of ... as on...
Liabilities Amount Assets Amount Amount

Fixed assets:
Capital xxx i) Intangible
assets:
Add: Net profit/ Less: Net xxx Goodwill xxx
loss
xxx Patent rights xxx
Less: Drawings xxx Copy rights xxx
xxx Trade marks xxx
Reserves xxx Computer software xxx
Long term loans xxx ii) Tangible assets:
Current liabilities: Land xxx
Bank overdraft, Cash credit xxx Buildings xxx
Outstanding expenses xxx Less: Depreciation xxx xxx
Unearned income xxx Plant and xxx
machinery
Short term loans from banks xxx Less: Depreciation xxx xxx
Sundry creditors xxx Vehicles xxx
Bills payable xxx Less: Depreciation xxx xxx
Provisions: Furniture and xxx
Fittings
Provision for employee xxx Less: Depreciation xxx xxx
benefits
Provision for tax xxx Investments xxx
xxx Current assets:
Stock xxx
Advances given xxx
Sundry debtors xxx
Bills receivable xxx
Prepaid expenses xxx
Accrued income xxx
Cash at bank xxx
Cash in hand xxx
Fictitious assets:
Preliminary xxx
expenses
Miscellaneous xxx
expenses
xxx xxx

13
Example 1

Following are the balances extracted from the books of Manish Gupta on 31st March, 2018:

₹ ₹
Capital 1,90,000 Cash at Bank 26,000
Drawing 7,000 Salaries 8,000
Plant and 1,20,000 Repairs 1,900
Machinery
Delivery 26,000 Stock on 1st April, 2017 16,000
Vehicle
Sundry 36,000 Rent 4,500
Debtors
Sundry 26,000 Manufacturing Expenses 1,500
Creditors
Purchases 20,000 Bills Payable 23,500
Sales 42,000 Bad Debts 5,000
Wages 8,000 Carriage 1,600

Prepare Trading and Profit and Loss Account and balance Sheet as at 31st March, 2018
after following adjustments are made:
(i) Closing Stock was ₹ 16,000.
(ii) Depreciate Plant and Machinery @ 10% and Delivery Vehicle @ 15%.
(iii) Unpaid Rent amounted to ₹ 500.
Solution 1

Trading Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Opening stock 16,000 Sales 42,000
Purchases 20,000 Closing Stock 16,000
Wages 8,000
Manufacturing Expenses 1,500
Carriage 1,600
Gross Profit (Balance Figure) 10,900
58,000 58,000

14
Profit and Loss Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Salaries 8,000 Gross Profit 10,900
Repairs 1,900 Net Loss (Balancing 24,900
Figure)
Rent 4,500
Add: Unpaid Rent 500 5,000
Bad Debts 5,000
Depreciation on:
Plant and machinery 12,000
Delivery Vehicle 3,900 15,900

35,800 35,800

Balance Sheet
as on March 31, 2018
Amount Amount
Liabilities Assets
(Rs) (Rs)
Capital 1,90,000 Fixed Assets
Less: Drawings (7,000) Plant and Machinery 1,20,000
Less: Net Loss (24,900) Less:10% (12,000) 1,08,000
Deprecation
1,58,100 Delivery Vehicle 26,000
Less:15% (3,900) 22,100
Depreciation
Current Liabilities
Sundry Creditors 26,000 Current Assets
Bills Payable 23,500 Closing Stock 16,000
Unpaid Rent 500 Sundry Debtors 36,000
Cash at Bank 26,000
2,08,100 2,08,100

Example 2

Prepare Trading and Profit and Loss Account and Balance Sheet from the following balances
relating to the year ended 31st March, 2018:

₹ ₹
Capital 1,00,000 Wages 50,000
Creditors 12,000 Bank 10,000

15
Returns 5,000 Repairs 500
Outward
Sales 1,64,000 Stock on 1st April, 2017 20,000
Bills Payable 5,000 Rent 4,000
Plant and 40,000 Manufacturing Expenses 8,000
Machinery
Sundry 24,000 Trade Expenses 7,000
Debtors
Drawing 10,000 Bad Debts 2,000
Purchases 1,05,000 Carriage 1,500
Returns 3,000 Fuel and Power 1,000
Inward

Additional Information:

(i) Closing Stock was valued at ₹ 14,500.

(ii) Depreciate Plant and Machinery by ₹ 4,000.

(iii) Write off Bad Debts ₹ 5,000.

(iv) A sum of ₹ 400 is due for repairs.

Solution 2
Trading Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Opening stock 20,000 Sales 1,64,000
Purchases 1,05,000 Less: Return Inwards (3,000) 1,61,000
Less: Return out words (5,000) 1,00,000 Closing Stock 14,500
Wages 50,000 Gross Loss (Balancing Figure) 5,000
Manufacturing Expenses 8,000
Carriage 1,500
Fuel and Power 1,000
1,80,500 1,80,500

Profit and Loss Account


for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Gross Loss 5,000
Repairs 500
Add: outstanding 400 900

16
Rent 4,000
Miscellaneous Expenses 7,000
Bad Debts 2,000 Net Loss (Balancing Figure) 27,900
Add: Additional bad debts 5,000 7,000
Depreciation on Plant and 4,000
Machinery
27,900 27,900

Balance Sheet
as on March 31, 2018
Amount Amount
Liabilities Assets
(Rs) (Rs)
Capital 1,00,000 Fixed Assets
Less: Drawings (10,000) Plant and Machinery 40,000
Less: Net Loss (27,900) 62,100 Less: Depreciation (4,000) 36,000
Current Liabilities Current Assets
Creditors 12,000 Closing Stock 14,500
Bills Payable 5,000 Sundry Debtors 24,000
Outstanding Repairs 400 Less: Further Bad Debts (5,000) 19,000
Bank 10,000
79,500 79,500

Example 3

Following Trial Balance has been extracted from the books of M/s. Ram Prasad & Sons on 31st
March, 2018:

Dr. Cr.
Particulars Particulars
₹ ₹
Machinery 4,00,000 Capital 9,00,000
Cash at Bank 1,00,000 Sales 16,00,000
Cash in Hand 50,000 Sundry Creditors 4,50,000
Wages 1,00,000 Interest Received 30,000
Purchases 8,00,000
Stock on 1st 6,00,000
April, 2017
Sundry 4,40,000
Debtors
Bills 2,90,000
Receivable
Rent 45,000
Commission 25,000
General 80,000
Expenses
Salaries 50,000
29,80,000 29,80,000

17
Additional Information:
(i) Outstanding salaries were ₹ 45,000.
(ii) Depreciate Machinery at 10%.
(iii) Wages outstanding were ₹ 5,000.
(iv) Rent prepaid ₹ 10,000.
(v) Provide for interest on capital 5% per annum.
(vi) Stock on 31st March, 2018 ₹ 8,00,000.
Prepare Trading and Profit and Loss Account for the year ended 31st March, 2018 and Balance
Sheet as at that date.
Solution 3
Financial Statement of M/s. Ram Prasad & Sons
Trading Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Opening Stock 6,00,000 Sales 16,00,000
Purchases 8,00,000 Closing 8,00,000
Stock
Wages 1,00,000
Add: Outstanding Wages 5,000 1,05,000
Gross Profit (Balancing Figure) 8,95,000

24,00,000 24,00,000

Profit and Loss Account


for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Rent 45,000 Gross Profit 8,95,000
Less: Prepaid Rent (10,000) 35,000 Interest Received 30,000
Commission 25,000
General Expenses 80,000
Salaries 50,000
Add: Outstanding 45,000 95,000
Salaries
Depreciation on Machinery 40,000
Net Profit (Balancing Figure) 6,50,000
9,25,000 9,25,000

18
Balance Sheet
as on March 31, 2018
Amount Amount
Liabilities Assets
(Rs) (Rs)
Capital 9,00,000 Fixed Assets
Add: Net Profit 6,50,000 15,50,000 Machinery 4,00,000
Current Liabilities Less: 10%
Depreciation (40,000) 3,60,000
Sundry Creditors 4,50,000 Current Assets
Outstanding Salary 45,000 Closing Stock 8,00,000
Outstanding Wages 5,000 Sundry Debtors 4,40,000
Bills Receivable 2,90,000
Prepaid Rent 10,000
Cash at Bank 1,00,000
Cash in Hand 50,000
20,50,000 20,50,000

Example 4

Following balances are taken from the books of Mr. Niranjan. You are required to prepare
Trading and Profit and Loss Account and Balance Sheet for the year ended 31st March, 2018:

Particulars ₹ Particulars ₹
Capital 1,20,000 Drawings 21,000
Opening 45,000 Plant and Machinery 24,000
Stock
Furniture 1,500 Purchases 2,95,000
Sales 4,35,000 Insurances 1,500
Purchases 4,000 Sales Return 7,000
Return
Rent 5,000 Trade Expenses 2,000
Salaries 24,000 Wages 40,000
Bad Debts 1,000 6% Investments 50,000
Sundry 40,000 Sundry Creditors 19,000
Debtors
Bills Payable 800 Cash 12,200
Advertisement 6,000 Miscellaneous Receipts 1,200
Expenses
Patents 4,800

Adjustments:
(i) Closing Stock ₹ 75,000.
(ii) Depreciate Machinery by 10% and Furniture by 20%.
(iii) Wages ₹ 5,000 and salaries ₹ 2,000 are outstanding.
(iv) Write off ₹ 5,000 as further Bad Debts and create 5% Provision for Doubtful Debts.
(v) Investments were made on 1st July, 2017 and no interest has been received so far.

19
Solution 4
Financial statements of Mr. Niranjan
Trading Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(₹) (₹)
Opening Stock 45,000 Sales 4,35,000
Purchases 2,95,000 Less: Sales (7,000) 4,28,000
Return
Less: Purchases Return (4,000) 2,91,000 Closing Stock 75,000
Wages 40,000
Add: Outstanding wages 5,000 45,000
Gross Profit (Balancing Figure) 1,22,000

5,03,000 5,03,000

Profit and Loss Account


for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(₹) (₹)
Rent 5,000 Gross Profit 1,22,000
Salaries 24,000
Add: Outstanding Salaries 2,000 26,000
Bad Debts 1,000 Interest Accrued on
Investment
Add: Further Bad Debts 5,000 (50,000 × 6% × 9/12) 2,250
Add: Provision for Doubtful 1,750 7,750 Miscellaneous Receipts 1,200
Debts
Advertisement expenses 6,000
Provision for discount on debtors 665
Insurances 1,500
Trade Expenses 2,000
Depreciation on:
Machinery 2,400
Furniture 300 2,700
Net Profit (Balancing Figure) 73,835
1,25,450 1,25,450

Balance Sheet
as on March 31, 2018
Amount Amount
Liabilities Assets
(₹) (₹)
Capital 1,20,000 Fixed Assets
Less: Drawings (21,000) Patents 4,800
Add: Net Profit 73,835 1,72,835 Plant and Machinery 24,000
Current Liabilities Less: 10% Depreciation (2,400) 21,600

20
Sundry Creditors 19,000 Furniture 1,500
Wages Outstanding 5,000 Less: 20% Depreciation (300) 1,200
Salaries Outstanding 2,000 6% Investment 50,000
Bills Payable 800 Add: Accrued Interest 2,250 52,250
Current Assets
Closing Stock 75,000
Debtors 40,000
Less: Further Bad Debts (5,000)
Less: Provision for
(1,750)
Doubtful Debts
33,250
Less: Provision for (665) 32,585
Discount
Cash 12,200
1,99,635 1,99,635

INTRODUCTION
Accounts are prepared by accountant, a human being is likely to commit mistakes at time
of recording and posting in the books. However, such errors are located after some time and
should be corrected by passing corrective journal entry, which is known as rectification if errors.
Need of Rectification
1. For the preparation of correct Accounting Records.
2. Preparation of P & LA/c with corrected figures to ascertain correct Profit or Loss.
3. To find out the true financial position of the firm by preparing Balance Sheet with
corrected figures.

CLASSIFICATION OF ERRORS (ON THE BASIS OF NATURE)

I. Error of Omission (a) Error of Complete Omission


(When a transaction is completely Goods sold to X on Credit but not recorded
partially omitted to be record in Sales Book.
in the books) (b) Partial Commission
Purchase machinery Rs. 5,000 in cash
recorded in cash Book but not recorded in
Machinery A/c
II. Error of Commission (a) Error of Recording in the Book of Original
Entry
(These errors are caused due to Goods purchased from Ravi for Rs. 450,
wrong recording of transactions, Goods as Rs. 540, in the Purchases Book
wrong totalling of subsidiary (b) Wrong Totalling of Subsidiary Book
books or Ledger A/cs, Wrong Example : Purchase Book has been
posting and wrong carry forward) undercast (short totalled) by Rs.100.
(c) Error in Totalling or Balancing of

Ledger A/cs*
Example : Creditors A/c has been balanced
short by Rs. 500.
(d) Error of Posting
(i) Posting to the wrong side but correct
account.
Goods sold to X for Rs. 550, entered to the
credit of X’s A/c instead of posting to the
debit side of his account.
(ii) Posting with wrong amount.
(iii) Posting twice in an A/c/
(iv) Errors in posting to the wrong A/c but
correct side don’t affect Trial Balance.
(e) Error in carrying forward.
Total of purchase book Rs. 2,500 is carried
forward as Rs. 2050
III. Errors of Principal. (a) Treating capital items as revenue item
(These errors are caused due to Example : Wages paid for the installation of a new
the violation of accounting machinery charged to Wages A/c instead of
principles i.e. allocation between machinery A/c.
Capital and Revenue items. (b)Treating Revenue Items as Capital Item
Example : Rs. 200 paid for the repairs of an old
Machinery but debited to Machinery A/c instead of
Repairs A/c.
Compensating Errors Example : Cash paid to Ram Rs. 5,000 but debited
(Two or ore errors committed such a way him as Rs. 500 and paid to Mohan Rs. 500 but
that the net effect of these errors is nil). debited him as Rs. 5,000 so, net effect will be nil

TYPES OF ERRORS FROM RECTIFICATION POINT OF VIEW


From Rectification point of view, errors are classified into the following two categories only:
Case I: Errors which don’t affect the Trial Balance
Or
Two Sided Errors
Case II: Errors which affect the Trial Balance
Or
One Sided Errors.
Errors don’t Affecting Trial Balance
 Errors of complete commission.
 Wrong recording in the books of original entry.
 Complete omission from posting.
 Errors of posting to the wrong A/c but on the correct side.
 Compensating errors.
 Errors of principle.
Errors Affecting Trial Balance
Shown by Star in the Table showing.
 Error in totalling of subsidiary books as under cast or over cast.
 Error in the balancing of ledger accounts.
 Error in posting to the correct Account but wrong amount.
 Error of partial omission.

Rectification of Errors
When the errors are detected, these have to be rectified in the books of accounts. Rectification
of errors depends upon.
 The type of error and
 The time of depiction of an error.
Time of Depiction of an error means.
(i) Errors of detected before the preparation of Trial Balance.
(ii) Errors detected after preparing Trial Balance but before preparing final Accounts.
(iii) Errors detected after preparing Final Accounts.

RECTIFICATION OF TWO SIDED ERRORS


Two sided errors are those errors which affect two sides of Accounts. These errors don’t affect
trial Balance as discussed earlier.
These Errors are rectified by passing a Journal entry irrespective of the time of depiction. In
other words their rectifying entry will be same whether
(a) the error is depicted before Trial Balance or
(b) after the preparation of Trial Balance but before the Final A/c s are prepared.
Steps for Rectification
 Locate the effect of Error on Different Accounts.
 The Account showing excess credit should be debited.
 The Account showing excess Debit should be credited.
 The Account showing short Debit should be debited.
 The Account showing short Credit should be credited.
Examples (with Explanation)
(I) When an account has wrongly been debited in place of another A/c.
● Rectification will be done by debiting the correct account and Crediting the A/c which
was wrongly debited.
Example: Machinery purchased for Rs. 10,000 has been debited to Purchases A/c
Solution: Here two accounts are affected
● Machinery A/c is not debited hence its debit side is short by Rs. 10,000 whereas
purchases A/c debited by mistake. Purchases A/c debit side is in excess by Rs. 10,000.
● While rectifying this mistake Machinery A/c will be debited by Rs. 10,000 because it
was not debited earlier and Purchases A/c will be credited because it was wrongly
debited.
Rectifying Entry is
Machinery A/c Dr. 10,000
To Purchases A/c 10,000
(For purchases of machinery wrongly debited to Purchases A/c)
(II) When an account has wrongly been credited in place of another account.
Example: Rs. 5,000 received from the sale of old furniture has been credited to Sales A/c.
Solution: This error also affects the two A/c
● Furniture A/c is not credited hence its credit side is short by Rs. 5,000. Sales A/c is
credited by mistake its credit side is excess of Rs. 5,000.
● Therefore fore rectifying this mistake Sales A/c will be debited because it was wrongly
credited and Furniture A/c which was not credited earlier will now be credited by Rs.
5,000.
Hence Rectifying entry is
Sales A/c Dr. 5,000
To Furniture A/c 5,000
(Sales of old Furniture wrongly credited to Sales A/c)
(III) When there is a short debit in one A/c and a short Credit another A/c.
Example: Goods sold to Seema for Rs. 540 was entered in the Sales Book as Rs. 450.
Solution:
● Here Seema’s A/c is debited by Rs. 90 short and Sales A/c is credited by Rs. 90 short.
(Instead of Rs. 540 by Rs. 450)
● Therefore rectification will be done by Debiting Seema’s A/c and Crediting Sales A/c.
Hence Rectifying entry is:

Seema Dr. 90
To Sales A/c 90
(For Goods sold to Seema for Rs. 540 wrongly entered Rs.450)

(IV) When there is an Excess Debit in one A/c and Excess Credit in another A/c.
Example : Goods purchased from Mohan for Rs. 300 was recorded in Purchases Book as Rs.
3,000.
Solution :
 Here Purchases A/c is Debited by Rs. 3,000 instead of Rs. 300, i.e. Rs. 2,700, more.
 Mohan’s A/c is also Credited by Rs. 2,700 more.
 Rectification will be done by debiting Mohan’s A/c and Crediting purchases A/c by Rs.
2,700, i.e., the entry in the reverse direction.
Rectifying Entry
Mohan Dr. 2,700
To Purchases A/c 2,700
(For Purchase of goods from Mohan for Rs. 300 wrongly entered Rs.3,000)

Problem :
Rectify the following Errors :
1. Rs. 5,000 Paid for furniture purchased has been debited to purchases account.
2. Wages paid Rs. 7,000 for installation of new machinery were recorded in wages account.
3. Goods sold to Hari Rs. 10,000 not recorded.
4. Rs. 2,500 received from Monu has been credited to Sonu A/c.
5. Rent paid Rs. 1,000 wrongly debited to Landlord Account.
6. Credit Purchase from Raman Rs. 15,000 were wrongly recorded in sales book.
7. Credit sales to Geeta Rs. 8,.800 were recorded as Rs, 8,800
8. Goods Rs. 5,000 withdrawn by proprietor has not been recorded.

Solution :
Error No. Particulars L.F. Dr. Rs. Cr. Rs.
1. Furniture A/c Dr. 5,000
To Purchases A/c 5,000
(The furniture purchase wrongly
debited to purchase A/c)

2. Machinery A/c Dr. 7,000


To wages A/c 7,000
(The wages for installation machinery
wrongly debited to wates A/c

3. Hari Dr. 10,000


To Sales A/c 10,000
(The goods sold to Hari not recorded.)

4. Sonu Dr. 2,500


To Monu 2,500
(The amount wrongly credited to Sonu
instead of Monu)

5. Rent A/c Dr. 1,000


To Landlord 1,000
(The rent paid but wrongly debited to
landlord A/c)

6. Purchases A/c Dr. 15,000


Sales A/c Dr. 15,000
To Raman 30,000
(The Credit purchase but
wrongly credit to sale A/c.

7. Geeta Dr. 800


To sales A/c 800
The Credit sales to Geeta Rs.880
but recorded 8000

8. Drawings A/c Dr. 5,000


To Purchases A/c 5,000
The goods withdraw by Proprietor for
personal use
Important : Rectification of double sided errors can easily be understood by the students. These
are rectified by passing the journal entries as given irrespective of the time of detection of the
errors.
RECTIFICATION OF ONE SIDED ERRORS
These errors affect only one side of An Account either debit or credit. Therefore these
errors the Trial Balance.
Rectification of these errors is done differently, in these two cases i.e.
(i) Before preparing the Trial Balance

(ii) After preparing the Trial Balance

Case 1 : Rectification of one sided errors before preparing Trial Balance.


When there errors are rectified before preparing Trial Balance i.e. transferring the
difference in the Trial Balance to the Suspense Account.
(Which will be explained later on), then it is done directly by debiting or crediting the
concerned ledger account.
For Short Debit -> Concerned A/c is debited.
For Excess Credit -> Concerned A/c is debited
For Short Credit -> Concerned A/c is credited
For Excess Debit -> Concerned A/c is credited
Example : (1) Purchases Book understand by Rs. 150
Analysis : It means that the total of the Purchases, Book is Rs. 150 short.
● This total is posted to purchases A/c- Debit side

● Hence Purchases A/c is debited short by Rs. 150

● No effect on any other A/c

● Therefore purchases A/c will be debited by Rs. 150 to rectify this error as given below.

Purchases A/c
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
To Undercast of 150
purchase book
Here debit side of the Purchase A/c was short therefore the rectification is done by debiting the
A/c.
Example 2 : Purchases Book is overcast by Rs. 300
Analysis
● Means total of the Purchases Book is in excess by Rs. 300 which is posted to the debit
side of purchases A/c
● Hence purchases A/c is debited in excess by Rs. 300.
● No effect on any other A/c.
● Therefore to rectify this error Rs. 300 will be credited to purchases A/ c (i.e. opposite
side)
Purchases A/c
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
By Overcast of 300
Purchases Book
● Here debit side of the purchases A/c was in access, therefore the rectification is done by
entering the amount on the opposite side i.e., Credit side of the Purchases A/c.

Case II : Rectification of one Sided Error after Preparing Trial Balance


When the errors are detected after the preparation of Trial Balance then every single sided
error is rectified by passing a Journal entry through Suspense Account.

 For short Debit Income Account -> Debit that Account and Credit the Suspense A/c
 Excess Credit in one Account -> Debit that Account and Credit the Suspense A/c
 Short Credit in one Account -> Credit that A/c and Debit the Suspense A/c
 Excess Debit in one Account -> Credit that A/c and Debit the Suspense A/c
Example : Hence for the same error as given in example No. in case I, the following Journal
Entry will be passed.
Rs. Rs.
Purchases A/c Dr. 150
To Suspense A/c 150
(For undercast of purchase book, now corrected)

Example 4 : Sales Book was undercast by Rs. 200


Analysis
● Sales book totalled short by Rs. 200 which is posted to the credit side of sales A/c.
● Therefore Sales A/c credit side is short by Rs. 200.
● Hence rectification will be done by crediting the sales A/c and Debiting the Suspense
A/c by Rs. 200.
Rs. Rs.

Suspense A/c Dr. 200


To Sales A/c 200
(For undercast of Sales Book, now corrected)
Note : When nothing is mentioned in the question about the time of detection of an error, the
student are advised to rectify one sided errors through Suspense A/c.

Problem : Rectify the following error


(A) Without opening a Suspense A/c

(B) By passing Journal entries through Suspense A/c.

(1) Rs. 5,000 paid to Mohit were entered in the cash Book but omitted to be posted
to the ledger.

(2) Rs. 5,000 paid to Mohit were debited to his A/c as Rs. 500.

(3) Rs. 5,000 paid to Mohit were debited to his A/c as Rs. 50,000.

(4) Rs. 5,000 paid to Mohit were credited to his A/c

(5) Rs.5,000 paid to Mohit were credited to his A/c as Rs. 500.

(6) Sales Book was overcast by Rs. 2,000

(7) Sales Return Book undercast by Rs. 4,000

(8) Purchase Return Book undercast by Rs. 5,000.

Solution :
(A) Without opening a suspense A/c. These errors are rectified in the concerned ledger A/c,
as these errors before trial Balance.

(1) Mohit’s A/c will debited by Rs. 5,000 as it is a case of partial ommission.

(2) Mohit’s A/c was debited Rs. 45,000 (5,000-500) therefore the rectification will
be done by debiting Mohit’s A/c by 4,500.

(3) Mohit’s A/c was debited in excess by Rs. 45,000 (50,000-5,000) therefore
ratification will be done by crediting the Mohits A/c by Rs. 45,000.

(4) Mohit’s A/c was credited by Rs. 5,000 instead of debited by Rs. 5,000 therefore
rectification will be done by debiting Mohit’s A/c by Rs. 10,000 (5,000+5,000)

(5) Mohit’s A/c was wrongly credited by Rs. 500 instead of debiting it by Rs. 5,000,
so rectification will be done by debiting the Mohit’s A/c by 5,500.
(6) Sales book overcast means sales A/c is credited is excess by Rs. 2,000. Hence
rectification will be done by debiting sales A/c by 2,000.

(7) Sales Return Book total undercast by Rs. 4,000 means sales return A/c is a
debited short by Rs. 4,000 Hence rectification will be done by debiting sales
Return A/c by 4,000.

(8) Purchase Return Book undercast by Rs. 5,000 means purchase Return A/c is
credited short by Rs. 5,000.

Hence rectification will be done by crediting the purchase Return A/c by Rs.
5,000
(B) By opening suspense A/c.
Rectifying Journal Entry
Error No. Particulars L.F. Dr. Rs. Cr. Rs.
1. Mohit Dr. 5,000
To Suspense A/c 5,000
(For cash paid to Mohit
committed to be posted to his
A/c)

2. Mohit Dr. 4,500


To Suspense A/c 4,500
(for Mohit A/c was debited with excess
amount)

3. Suspense A/c Dr. 45,000


To Mohit 45,000
(from Mohit A/c was debited
with excess amount)

4. Mohit, Dr. 10,000


To Suspense A/c 10,000
(For posting to Mohit’s A/c
was done on wrong side

5. Mohit Dr. 5,500


To Suspense A/c 5,500
(For posting made with wrong amount and
wrong side)

6. Sales A/c Dr. 2,000


To Suspense A/c 2,000
(For overcast of sales Book rectified)
7. Sales Return A/c Dr. 4,000
To Suspense A/c 4,000
(For under cast of sales return book
rectified)

8. Suspense A/c Dr. 5,000


To Purchase Return A/c 5,000
(For under cast of purchase
return
Book, rectified)

Suspense Account and its Disposal


In the chapter of Trial Balance we have learn about the Suspense A/c
Important
● When inspite of all the efforts the Trial Balance does not tally, the difference is put to a
newly opened account named Suspense A/c.
● Suspense A/c is an imaginary account, opened temporarily for the purpose of
reconciling a Trial Balance.
● Later on when the errors affecting the Trial Balance are located, rectification entries are
passed through the Suspense A/c.
● When all the errors are located and rectified, the Suspense A/c will be auto material
closed i.e., it will show zero balance.
● But if suspense A./c still shows a balance it will indicate that some errors are still to be
discovered and rectified.

Problem: An accountant of a trading concern could not agree the Trial Balance. There was an
excess credit of Rs. 100 which he transferred to the suspense A/c. The following errors were
subsequently discovered.
(1) Received Rs. 550 from X, were posted to the debit of his account.
(2) Rs.100 being purchase return were pointed to the debit of purchases A/c.

(3) Discount received Rs. 200 Correctly entered in the Cash Book but posted to the debit of
the discount A/c.

(4) Salary paid Rs. 3,500 to X were posted to the salary A/c as Rs 2,500.
(5) A purchase of Rs. 400 has been passed through Sales Book. However the customer’s
account has been correctly credited.

Give Rectifying entries and Suspense A/c Rectifying Journal Entries


Date No. Particulars L.F. Dr. Rs. Cr. Rs.
1. S uspense A/c Dr. 1,100
To X 1,100
(Amount received from X was
Posted to the wrong side now
corrected)

2. Suspense A/c Dr. 200


To Purchase A/c 100
To Purchase Returns A/c 100
(For the purchases return wrongly
posted to the purchases A/c)

3. Suspense A/c Dr. 400


To Discount A/c 400
(Discount received was posted to the
wrong side of discount A/c)

4. Salary A/c Dr. 1,000


To Suspense A/c 1,000
(Salary paid was posted to Salary A/c
with lesser amount)

5. Purchases A/c Dr. 400


Sales A/c Dr. 400
To Suspense A/c 800
(Purchases has been passed through sales
book but the customer’s A/c has been
correctly credited)

Dr. Suspense A/c Cr.


Date/Error Particulars J.F. Rs. Date Particulars J.F. Rs.
To Difference in 100 By Salary A/c 1,000
the Trials Balance By Purchases A/c 400
By Sales A/c 400
To X 1,100
To Purchases A/c 100 Balance c/d Nil
To Return A/c 100
To Discount A/c 400
1,800 1,800
Since the Balance of the suspense A/c is nil, indicates that all the errors have been
certified.
BANK RECONCILIATION STATEMENT
The cash Book and Pass Book are prepared separately. The Businessman prepares the Cash
Book and the Pass Book is prepared by the Bank (here by cash book we mean three column cash
Book). But as both the books are related to one person and same transactions are recorded in
both the books so the balance of both the books should match i.e. the balance as per Pass Book
should match to balance at bank as per cash book. But many a times these two balances do not
agree then, it becomes necessary to reconcile them by preparing a statement which is called
Bank Reconciliation Statement. A BANK RECONCILIATION STATEMENT may be defined
as a statement showing the items of differences between the cash Brook balance and the pass
book balance, prepared on any day for reconciling the two balances.

CAUSES FOR DIFFERENCES


A transaction relating to bank has to be recorded in both the books i.e. Cash Book and Pass
Book but sometimes it happens that a bank transaction is recorded only in one book and not
recorded simultaneously in other book this causes difference in the two balances. The causes for
difference may be illustrated in detail as follows:

Causes Cash Book Pass Book


Entry is made No entry is made till the
Cheques issued but
cheques are presented
1. not yet presented
for payment.
for payment
Balance =Decreased Balance= Same as before
Cheques paid into Entry is made No entry is made till the
2. the bank but not cheques are cleared
yet cleared. Balance = Increased Balance = same
No entry is made till Entry is made
Interest allowed the Pass Book is
3.
by the Bank checked
Balance = Same Balance = Increased
Interest and Entry is made
No entry is made
4. Expenses Charged
till the Pass Book is
by the Bank
checked Balance = Balance = Decreased
Same

No entry is made till Entry is made


Interest and
the Pass Book is
5. dividends collected
checked
by Bank
Balance = Same Balance = Increased
No entry is made till Entry is made
Direct payments by the Pass Book is
6.
the bank checked
Balance = Same Balance = decreased
No entry is made till Entry is made
Direct payments
the Pass Book is
7. into the bank by a
checked
customer
Balance = Same Balance = Increased
No entry is made till Entry is made
Dishonor of a bill
the pass Book is
8. discounted with
checked
the bank
Balance = Same Balance = decreased
No entry is made till Entry is made
Bills collected by
the Pass Book is
9. the bank on behalf
checked
of the customer
Balance = Same Balance = Increased
Errors committed
10 either in Cash Back
or Pass Book

NEED AND IMPORTANCE OF BANK RECONCILIATION STATEMENT


The need and importance of the bank reconciliation statement may be given as follows:

1. The reconciliation process helps in bringing out the errors committed either in cash Book
or Pass Book.

2. Bank reconciliation statement may also show any undue delay in the clearance of
cheques.
3. Sometimes the cashier may have the tendency of cheating like he may made entries in
the Cash Book only but never deposit the cash into bank. These types of frauds by the
entrepreneur’s staff or bank staff may be detected only through bank reconciliation
statement. So this way bank reconciliation statement acts as a control technique too.

PROCEDURE FOR PREPARATION OF BANK RECONCILIATION STATEMENT

A. bank reconciliation statement is prepared to reconcile the two balances of Cash Book and
Pass Book. So, when you will prepare a bank reconciliation statement you will start it with one
balance make adjustments and then you will reach to the other balance. This way both the
balances will agree. The way the adjustments should be made may be illustrated as follows:

Note: If you start the question with balance as per pass book all the adjustments will be reversed.
Example :

From the following prepare a bank reconciliation statement on 31st March 2005.

1. Balance as per Cash Book 1,80,000

2. Cheques paid into Bank March 2005 but credited by the 7,900 bank in April 2005

3. Cheques issued in March 2005 but cashed in April 2005, 11,000

4. Cheques entered in the Cash Book in March 2005 but 1,000


paid into bank in April 2005

5 Interest allowed by the bank 2500

6 Interest charged by the bank 500Solution

Bank Reconciliation Statement

As on March 31, 2005


Particulars

Balance as per Cash Book 1,80,000


Add. 1. Cheques issued but not cashed 11,000
2. Int. allowed by bank 2500 + 13,500
1,93,500
Less: 1. Cheques paid into bank but not yet cleared 7,900
2. Cheques entered into Cash Book 1,000
3. Interest charged by Bank 500
Balance as per Pass Book
MEANING AND DEFINITION
Depreciation is the reduction in the value of the assets due to constant use. This is a process of spreading
the cost of fixed assets is termed as depreciation.
L.C. Cropper defines depreciation as, “the diminution in the financial value of an asset owing to wear
and tear, effluxion of time, obsolescence’s or similar causes”.

NEED FOR PROVIDING DEPRECIATION


The need for providing depreciation in accounting records arises due to any one or more of the following
reasons.

1. To ascertain correct profit / loss


For proper matching of cost with revenues, it is necessary to charge depreciation against revenue in
each accounting year, to calculate the correct net profit or net loss.

2. To present a true and fair view of the financial position


If the amount of depreciation is not provided on fixed assets in the books of accounts, the value of fixed
assets will be shown at a higher value than it’s real value in the balance sheet. As such it will not reflect
the true and fair financial position of the business, it is necessary that depreciation must be deducted
from the book value of the assets in the balance sheet.

3. To ascertain the real cost of production


Ascertaining the real cost of production, it necessary to provide depreciation.
4. To comply with legal requirements
As per Section 205(1) of the Companies Act 1956, it is compulsory for companies to provide
depreciation on fixed assets before it declares dividend.

5. To replace assets
Depreciation is provided to replace the assets when it becomes useless.

CAUSES OF DEPRECIATION
Causes of depreciation may be divided into
1) Internal causes
2) External causes
1) Internal causes
a) Wear and tear
It arises due to constant use of the assets. It arises mainly in case of fixed assets like buildings,
machines, furniture, etc.,
b) Depletion

It arises due to the extraction of assets. It arises mainly in case of wasting assets like mines, quarry, oil,
well, etc.,

2) External causes

a) Obsolescence

It arises due to new invention, change of style, legislation, etc.,

b) Effluxion of time

Some assets decrease in the value due to paste of time. Example leasehold property, patents, copy
rights.

OBJECTIVES (OR) PURPOSE OF PROVIDING DEPRECIATION


1. To find out correct cost of production
If a machine is used to manufacture an article, the depreciation of the machine should also be added
with the cost of calculate correct cost of production.

2. To calculate proper profits


The correct profit can be calculated only after providing for depreciation.
3. To show the asset at reasonable value
If the depreciation is not provided the assets will not show the real value.
4. To replace the old asset
Provision of depreciation is made to replace the old plant with the latest model available.

5. To declare the dividend properly


If the deprecation is not provided, dividend cannot be declare properly.

FACTORS INFLUENCING THE TOTAL AMOUNT OF DEPRECIATION


The following three factors are to be considered for the determining the total amount of depreciation.

1) Total cost of assets


2) Scrap value
3) Estimated useful life of the assets
1) Total cost of assets
It includes invoice price less cash discount.
2) Scrap value
It is an estimated value of the assets at the end of the economic life of the assets.

3) Estimated useful life of the assets


It can be calculated in terms of time or output.

a) Depreciation and Depletion

Depreciation is the gradual diminution in the value of assets due to wear and tear and / or lapse
of time. But depletion is the decrease in the value of assets due to extraction.

Depreciation is used for fixed assets where as depletion is used for wasting assets.

b) Depreciation and obsolescence


Depreciation is the gradual diminution in the value of assets due to wear and tear and / or lapse
of time. But obsolescence is the loss in the value of asset due to new invention.

Depreciation arises due to internal or external causes whereas obsolescence arises due to
external causes.

METHODS OF DEPRECIATION
1. Straight Line Method (or) Original Cost Method (or) Fixed Installment Method
Under this method a fixed percentage is calculated on original cost and written off as depreciation
every year during the life time of the assts.

Original cost – Scrap value


Depreciation Amount =
No. of years or Life of the assets

Depreciation Amount
Depreciation Rate = × 100
Cost of the Assets
This method is simple to adopt. But his method does not consider the seasonal fluctuations. The total
charge in respect of an asset is not equal from year to year through the depreciation is the same for all
the years.

Illustration:
ABC company purchased machinery for Rs. 10,00,000. Its installation costs amounted to Rs. 1,00,000.
It‟s estimated life is 5 years and the scrap value is Rs. 5,000. Calculate the amount and rate of
depreciation.

Solution:

Total cost = Purchase price + Installation charges


= 10,00,000 + 1,00,000
= Rs. 11,00,000
Total cost – Scrap value
Amount of depreciation = Estimated life

11,00,000 – 50,00,000
5
10,50,000
5
= Rs. 2,10,000

Amount of depreciation
Rate of depreciation = × 100
Original cost

= 2,10,000
11,00,000 × 100
2.
= 19.09%
Diminishing balance method (or) Reducing balance method (or) Written down value method
Under this method depreciation is charged at fixed rate on the reducing balance (cost depreciation)
every year.

Illustration:
XYZ Limited assets purchased for machinery of Rs. 5,00,000 and depreciation is to be provided 10%
p.a. on reducing balance method. Calculate the three year depreciation.

Solution:
First year depreciation
= Rs. 5,00,000 on 10%
10
= 5,00,000 ×
100
= Rs. 50,000
Second year depreciation
= Rs. 4,50,000 on 10%
(5,00,000 – 50,000)
10
= 4,50,000 ×
100
= Rs. 45,000
Third year depreciation
= Rs. 4,05,000 on 10%
(4,50,000 – 45,000)
10
= 4,05,000 ×
100

= Rs. 40,500
Demerits
 Asset is never reduced to zero.
 This method can be applied only when there is some residual value of assets.

3. Annuity method
Under this system the amount of total depreciation is determined by adding the cost of the asset and
interest there on at an expected rate. The annual amount of the depreciation is determined with the help
of annuity table.

Illustration:
A trader takes a lease for five years for Rs. 4,00,000. He decides to write off lease by annuity method
presuming the rate of interest at 5% p.a. The annuity table show that the annuity amount necessary to
write of Re. 1in 5 years at 5% is Re. 0.230975. Calculate amount of depreciation

Solution:
Depreciation = Cost price × Annuity table value
= 4,00,000 × 0.230975
= Rs. 92,390
4. Depreciation fund method
Under this system, the amount written off as depreciation should be debit aside and invested in
government securities. The securities accumulate. When the life of the asset expires, the securities are
sold and a new asset is purchased with the help of sale proceeds. So this system incorporates the
advantages of deprecating the asset as well as accumulating the necessary amount for its replacement.

5. Insurance policy method


Under this method the business take a policy form an insurance company. The objective is to replace
the asset when it is workout. Every year premium is paid (equal to the amount of depreciation) to the
insurance company. On the date of maturity the insured sum will be received from the insurance
company, with this sum, new asset will be purchased.

6. Revaluation method
According to the method assets are revalued at the end of each year. The difference between the past
estimated (as per the past balance sheet) and at the present estimated value represents depreciation. It
is followed in the case of small items such as loose tools etc.,

7. Depletion method
This method is applied in recording the extraction of natural resources. It is used in case of
mines, quarries etc., where an estimates of total quantity of output likely to be calculated.
Illustration:
It a mine is purchased for Rs. 2,00,000 and its estimated that quantity taken from the mine is
50,000 tonne.

Cost of the mine


Depreciation =
Total quantity

2,00,000
Depreciation =
50,000

=4
8. Sum of years digit method
In this method, the amount of depreciation goes no decreasing in the future years.

The rate of depreciation is determined by the fraction, where the denominator (it does not change) is
the sum of the digits representing the life of the asset and the numerators are individual digits used in
the life of the asset taken in the reverse order.

9. Machine hour method


This method taken into consideration the life time of the asset in terms of machine hours for the purpose
of calculating the amount of depreciation.

Depreciation per service hour Cost of the asset – Scrap value


=
No. of hours

Difference between straight line method & Diminishing balance method


S. No. Straight Line Method Diminishing Balance Method
1. The total amount of depreciation is fixed The amount of depreciation decreases as
the asset value decreases.

2. The depreciation is calculated on the Depreciation is calculated on the


original cost of the asset. diminishing balance of the asset.

3. The system is not accepted by the income The system is accepted by income tax
tax authorities. authorities.

Difference between annuity method and depreciation fund method


S. No. Insurance Policy Method Sinking Fund Method
1. The amount received is certain The amount received depends on the
quality of investments and market
conditions.

2. The premium is paid in the beginning of The investment is made at the end of the
the year. year.

Differences between a provision and a reserve


1) A reserve is an amount which is setatside for any unknown liability whereas a provision is an
amount setaside for a known liability.
2) The purpose of creating a reserve is to strengthen the financial position of a business whereas
the purpose of creating a provision is to meet out a specific loss or a specific liability or to a
replace an asset.
3) A reserve is created only when there is sufficient profit whereas a provision is created even if
there is a loss.
4) The amount which is kept in a reserve may be utilized to distribute dividend to the shareholders.
But the amount which is kept in a provision may not be used like reserve.
5) Reserve is an appropriation of profits. So it is recorded in the profit and loss appropriation
account.
A provision is charge against profits. Therefore, it is recorded in the profit and loss account.

Journal entries
Straight Line Method
S. No. Particulars Debit Rs. Credit Rs.
1. When assets is purchased
Assets a/c Dr. ***
To Cash a/c ***
(Being asset is purchased)
2.
When depreciation is provided ***
Depreciation a/c Dr.

To Assets a/c ***


(Being depreciation is provided)
3.
When assets sold as a profit
i)For sales ***
Cash a/c Dr.
To Assets a/c ***

ii) For profit ***


Assets a/c Dr.
To Profit & Loss a/c ***
4.
When assets sold as a loss
Cash account a/c Dr. ***
Profit & Loss a/c ***
To Assets a/c ***

Recording Depreciation
Depreciation is directly charged against the asset by debiting depreciation account and crediting the
asset account. Depreciation account is closed by transferring to profit and loss account at the end of the
year. The entries will be as under.

1) For the amount of depreciation to be provided at the end of the year


Depreciation a/c Dr. (With the amount of
To Assets a/c depreciation)

2) For transferring the amount of depreciation at the end of the year


Profit and Loss a/c Dr. (With the amount of
To Depreciation a/c depreciation)
Asset account will be shown at cost less depreciation i.e. written down value at the end of the year in
the balance sheet.

Illustration:
Rahavan& Co., purchased a fixed asset on 1.4.2010 for Rs. 2,50,000. Depreciation is to be provided
@ 10% annually according to the Straight line method. the books are closed on 31st March every year.
Pass the necessary journal entries, prepare fixed asset account and depreciation account for the
first three years.

Solution:
Amount of Depreciation
10
= 4,50,000 ×
100
= Rs. 25,000

In the books of Rahavan& Co.,


Journal Entries
Date Particulars L.F. Debit Rs. Credit Rs.
2010 April
1 Fixed asset a/c Dr. 2,50,000
To Bank a/c 2,50,000
(Fixed asset purchased)
2011 Depreciation a/c
Mar. 31 Dr. 25,000
To Fixed asset a/c 25,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 25,000
To Depreciation a/c 25,000
(Depreciation transferred to profit and
loss account)
2012
Mar. 31 Depreciation a/c Dr. 25,000
To Fixed asset a/c 25,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 25,000
To Depreciation a/c 25,000
(Depreciation transferred to profit and
loss account)
2013
Mar. 31 Depreciation a/c Dr. 25,000
To Fixed asset a/c 25,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 25,000
To Depreciation a/c 25,000
(Depreciation transferred to profit and
loss account)

Ledger Accounts Fixed assets account


Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2010 2011
April 1 To Bank a/c 2,50,000 Mar. 31 By Depreciation a/c 25,000
” By Balance c/d 2,25,000
2,50,000 2,50,000

2011 2012
April 1 To Balance b/d 2,25,000 Mar. 31 By Depreciation a/c 25,000
” By Balance c/d 2,00,000
2,25,000 2,25,000

2012 2013
April 1 To Balance b/d 2,00,000 Mar. 31 By Depreciation a/c 25,000
” By Balance c/d 1,75,000
2,00,000 2,00,000

2013
1,75,000
April 1 To Balance b/d

Depreciation Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2011 2011
Mar. 31 To Fixed Asset a/c 25,000 Mar. 31 By Profit and
Loss a/c 25,000
25,000 2012 25,000

2012
Mar. 31 To Fixed Asset a/c 25,000 Mar. 31 By Profit and
Loss a/c 25,000
25,000 25,000

2013 2013
Mar. 31 To Fixed Asset a/c 25,000 Mar. 31 By Profit and
Loss a/c 25,000
25,000 25,000

Illustration:
A company purchased machinery for Rs. 50,000 on 1st April 2012. It is depreciated at 20% per annum
on written down value method. The accounting year ends on 31 st March of every year. Pass necessary
journal entries, prepare machinery account and depreciation account for three years.

Solution:
Journal Entries
Date Particulars L.F. Debit Rs. Credit Rs.

2012 April
1 Machinery a/c Dr. 50,000
To Bank a/c 50,000
(Fixed asset purchased)
2013
Mar. 31 Depreciation a/c Dr. 5,000
To Machinery a/c 5,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 5,000
To Depreciation a/c 5,000
(Depreciation transferred to profit and
loss account)

2014
Mar. 31 Depreciation a/c Dr. 4,500
To Fixed asset a/c 4,500
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 4,500
To Depreciation a/c 4,500
(Depreciation transferred to
profit and loss account)
2015
Mar. 31 Depreciation a/c Dr. 4,050
To Fixed asset a/c 4,050
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 4,050
To Depreciation a/c 4,050
(Depreciation transferred to profit and
loss account)

Ledger Accounts Machinery account


Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2012 2013
April 1 To Bank a/c 50,000 Mar. 31 By Depreciation a/c 5,000
” By Balance c/d 45,000
50,000 50,000
2013 2014
April 1 To Balance b/d 45,000 Mar. 31 By Depreciation a/c 4,500
” By Balance c/d 40,500
45,000 45,000

2014 2015
April 1 To Balance b/d 40,500 Mar. 31 By Depreciation a/c 4,050
” By Balance c/d 36,450
40,500 40,500

2015
36,450
April 1 To Balance b/d

Depreciation Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2013 2011
Mar. 31 To Machinery a/c 5,000 Mar. 31 By Profit and
Loss a/c 5,000
5,000 2012 5,000
2014
Mar. 31 To Machinery a/c 4,500 Mar. 31 By Profit and
Loss a/c 4,500
4,500 4,500
2015 2013
Mar. 31 To Machinery a/c 4,050 Mar. 31 By Profit and
Loss a/c 4,050
4,050 4,050

Illustration:
Deepak manufacturing company purchased on 1st April 2012, Machinery for Rs. 2,90,000 and spent
Rs. 10,000 on its installation. After having used it for three years it was sold for Rs. 2,00,000.
Depreciation is to be provided every year at the rate of 15% per annum on the fixed instalment method.

Pass the necessary journal entries, prepare machinery account and depreciation account for
three years ends on 31st March every years.

Solution:
Calculation of profit or loss on sale of machinery
Rs.
Cost price (Rs.2,90,000 + Rs. 10,000) 3,00,000
Less: Depreciation for (2012 – 13) @ 15% 45,000

2,55,000
Less: Depreciation for (2013 – 14) @ 15% 45,000

2,10,000
Less: Depreciation for (2014 – 15) @ 15% 45,000
Book value as on the date of sale 1,65,000
As book value is less than selling price the difference is profit.

Rs.
Machinery selling price 2,00,000
Less: Book value as on the date of sale 1,65,000
Profit 35,000
Solution:
Journal Entries in the books of Deepak Manufacturing Company
Date Particulars L.F. Debit Rs. Credit Rs.
2012 April
1 Machinery a/c Dr. 3,00,000
To Bank a/c 3,00,000
(Machinery purchased and installation
charges paid)
2013
Mar. 31 Depreciation a/c Dr. 45,000
To Machinery a/c 45,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 45,000
To Depreciation a/c 45,000
(Depreciation transferred to profit and loss
account)
2014
Mar. 31 Depreciation a/c Dr. 45,000
To Machinery a/c 45,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 45,000
To Depreciation a/c 45,000
(Depreciation transferred to profit and loss
account)
2015
Mar. 31 Depreciation a/c Dr. 45,000
To Machinery a/c 45,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 45,000
To Depreciation a/c 45,000
(Depreciation transferred to profit and loss
account)
2012
April 1 Bank a/c Dr. 2,00,000
To Machinery a/c 2,00,000
(Machinery sold)
2013
Mar. 31 Machinery a/c Dr. 35,000
To Profit and Loss a/c 35,000
(Profit on sale of machinery)

Ledger Accounts Machinery account


Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2012 2013
April 1 To Bank a/c 3,00,000 Mar. 31 By Depreciation a/c 45,000
” By Balance c/d 2,55,000
3,00,000 3,00,000
2013 2014
April 1 To Balance b/d 2,55,000 Mar. 31 By Depreciation a/c 4,500
” By Balance c/d 2,10,000
2,55,000 2,55,000
2014 2015
April 1 To Balance b/d 2,10,000 Mar. 31 By Depreciation a/c 45,000
To Profit and ” By Bank 2,00,000
loss a/c 35,000
(profit on sale)
2,45,000 2,45,000

Depreciation Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2013 2011
Mar. 31 To Machinery a/c 45,000 Mar. 31 By Profit and
Loss a/c 45,000
45,000 2012 45,000

2014
Mar. 31 To Machinery a/c 45,000 Mar. 31 By Profit and
Loss a/c 45,000
45,000 45,000

2015 2013
Mar. 31 To Machinery a/c 45,000 Mar. 31 By Profit and
Loss a/c 45,000
45,000 45,000

Illustration:
Machinery account showed a balance of Rs. 80,000 on 1st April 2011. On 1st October 2013, another
machinery was purchase for Rs. 48,000. On 30th September 2013, a machinery which has book value
Rs. 80,000 on 1.4.2011 was sold for the Rs. 48,000. Depreciation is to be provided at 10% per annum
on written down value method. The accounting year ends on 31st March.

Prepare machinery account and depreciation account for three years.


Solution:

Calculation of profit or loss on sale of machinery


Rs.
Cost of machinery (1.4.2011) 80,000
Less: Depreciation for 2011 – 12 8,000

72,000
Less: Depreciation for 2012 – 13 7,200

64,800
Less: Depreciation till the date of sale (30.9.13) 3,240

Book value as on the date of sale 61,560

As book value is greater than selling price the difference is loss.


Rs.
Book value as on the date of sale 61,560
Less: Machinery selling price 48,000
Loss 13,560

Ledger Accounts Machinery account


Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2011 2012
April 1 To Bank a/c 80,000 Mar. 31 By Depreciation a/c 45,000
” By Balance c/d 2,55,000
80,000 3,00,000
2012 2013
April 1 To Balance b/d 72,000 Mar. 31 By Depreciation a/c 4,500
” By Balance c/d 2,10,000
72,000 2,55,000
2013 2013
April 1 To Balance b/d 64,800 Sep. 30 By Depreciation a/c 45,000
Oct. 1 To Bank a/c 48,000 ” By Bank 2,00,000
To Profit and loss a/c
(loss on sale) 35,000

2014
Mar. 31 By Depreciation a/c 2,400
” By Balance c/d 45,600
1,12,800 1,12,800

2014
April 1 To Balance b/d 45,600

Depreciation Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2012 2011
Mar. 31 To Machinery a/c 8,000 Mar. 31 By Profit and
Loss a/c 8,000

8,000 2012 8,000


2013
Mar. 31 To Machinery a/c 7,200 Mar. 31 By Profit and
Loss a/c 7,200
7,200 7,200

2015 2013
Mar. 31 To Machinery a/c 3,240 Mar. 31 By Profit and
2015 Loss a/c 5,640
Mar. 31 To Machinery a/c 2,400
5,640 5,640

Illustration:
Vimal& Brothers purchased a machinery for Rs. 3,75,000 on 1st July 2012. It is depreciated at 20% per
annum on Straight Line Method for three years. Having became obsolete was sold for Rs. 75,000 on
31.3.2015. Pass the journal entries, prepare machinery account and depreciation account.

Accounts are closed 31st March every year.


Solution:

Calculation of profit or loss on sale of machinery


Rs.
Cost of machinery (1.7.2012) 3,75,000
Less: Depreciation for 2012 – 13
(for 9 months at the rate of 20%) 56,250

3,18,750
Less: Depreciation for 2013 – 14 75,000

2,43,750
Less: Depreciation for 2014 – 15 75,000
Book value as on the date of sale 1,68,750
As book value is greater than selling price the difference is loss.
Rs.
Book value as on the date of sale 1,68,750
Less: Machinery selling price 48,000
Loss 93,750
Journal Entries in the books of Vimal& Brothers
Date Particulars L.F. Debit Rs. Credit Rs.

2012 July
31 Machinery a/c Dr. 3,75,000
To Bank a/c 3,75,000
(Machinery purchased)
2012
Mar. 31 Depreciation a/c Dr. 56,250
To Machinery a/c 56,250
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 56,250
To Depreciation a/c 56,250
(Depreciation transferred to profit and
loss account)
2014
Mar. 31 Depreciation a/c Dr. 75,000
To Machinery a/c 75,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 75,000
To Depreciation a/c 75,000
(Depreciation transferred to profit and
loss account)
2015
Mar. 31 Depreciation a/c Dr. 75,000
To Machinery a/c 75,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 75,000
To Depreciation a/c 75,000
(Depreciation transferred to profit and
loss account)
Mar. 31 Bank a/c Dr. 75,000
To Machinery a/c 75,000
(Machinery sold)
Mar. 31 To Profit and Loss a/c Dr. 93,750
Machinery a/c (Loss on 93,750
sale of machinery)

Ledger Accounts Machinery account


Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2012 2013
July 1 To Bank a/c 3,75,000 Mar. 31 By Depreciation a/c 56,250
” By Balance c/d 3,18,750
3,75,000 3,75,000

2013 2014
April 1 To Balance b/d 3,18,750 Mar. 31 By Depreciation a/c 75,000
” By Balance c/d 2,43,750
3,18,750 3,18,750

2014 2015
April 1 To Balance b/d 2,43,750 Sep. 30 By Depreciation a/c 75,000
” By Bank 75,000
To Profit and loss a/c
(loss on sale) 93,750

2,43,750 2,43,750

Depreciation Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2013 2011
Mar. 31 To Machinery a/c 56,250 Mar. 31 By Profit and
Loss a/c 56,250
56,250 2012 56,250

2014
Mar. 31 To Machinery a/c 75,000 Mar. 31 By Profit and
Loss a/c 75,000
75,000 75,000

2015 2013
Mar. 31 To Machinery a/c 75,000 Mar. 31 By Profit and
Loss a/c 75,000
75,000 75,000

Illustration:
On April 1, 2011 Machinery was purchased for Rs. 4,00,000. On 1 st October 2012, a new machine
costing Rs. 2,40,000 was purchased. On 30th September 2013, the machinery purchased on 1st April
2011 having became obsolete was sold for Rs. 2,40,000. The accounting year ends on 31 st March and
depreciation is to be provided at 10% p.a. on straight line method.
Pass journal entries and prepare important ledger accounts for three years.
Solution:

Calculation of profit or loss on sale of machinery


Rs.
Cost of machinery (April, 2011) 4,00,000
Less: Depreciation for 2011 – 12 40,000

3,60,000
Less: Depreciation for 2012 – 13 40,000

3,20,000
Less: Depreciation till the date of sale (30.9.13) 20,000

Book value as on the date of sale 3,00,000


As book value is greater than selling price the difference is loss.

Rs.
Book value as on the date of sale 3,00,000
Less: Machinery selling price 2,40,000
Loss 60,000

Journal Entries
Date Particulars L.F. Debit Rs. Credit Rs.
2012
April 31 Machinery a/c Dr. 4,00,000
To Bank a/c 4,00,000
(Machinery purchased)
2012
Mar. 31 Depreciation a/c Dr. 40,000
To Machinery a/c 40,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 40,000
To Depreciation a/c 40,000
(Depreciation transferred to profit and
loss account)

2012
Oct 1 Machinery a/c Dr. 2,40,000
To Bank a/c 2,40,000
(Machinery purchased)
2014
Mar. 31 Depreciation a/c Dr. 52,000
To Machinery a/c 52,000
(Depreciation provided)
Mar. 31 Profit and loss a/c Dr. 52,000
To Depreciation a/c 52,000
(Depreciation transferred to profit and
loss account)

2013
Sep. 30 Depreciation a/c Dr. 20,000
To Machinery a/c 20,000
(Depreciation provided on first
machine till the date of sale)
Bank a/c Dr. 2,40,000
To Machinery a/c 2,40,000
(First machinery sold)
Mar. 31 Profit and loss a/c Dr. 60,000
To Machinery a/c 60,000
(Loss on sale of machinery)
2014
Mar. 31 Depreciation a/c Dr. 24,000
To Machinery a/c 24,000
(Depreciation provided on second
machine)
Mar. 31 To Profit and Loss a/c Dr. 44,000
To Depreciation a/c 44,000
(Depreciation transferred to profit and
loss account)

Dr. Ledger Accounts Machinery account Cr.


Date Particulars Amount Date Particulars Amount
Rs. Rs.
2011 2012
July 1 To Bank a/c 4,00,000 Mar. 31 By Depreciation a/c 40,000
3,60,000
4,00,000 ” By Balance c/d 4,00,000

2012 2013
April 1 To Balance b/d 3,60,000 Mar. 31 By Depreciation a/c 52,000
Oct 1 To Bank a/c 2,40,000 ” By Balance c/d 5,48,000
6,00,000 6,00,000

2013 2013
April 1 To Balance b/d 5,48,000 Sep. 30 By Depreciation a/c 20,000
” By Bank 2,40,000
” To Profit and loss a/c
(loss on sale) 60,000

2014
Mar. 31 By Depreciation a/c 24,000
” By Balance c/d 2,04,000
5,48,000 5,48,000

2014
2,04,000
April 1 To Balance b/d

Dr. Depreciation Account Cr.


Date Particulars Amount Date Particulars Amount
Rs. Rs.
2012 2012
Mar. 31 To Machinery a/c 40,000 Mar. 31 By Profit and
Loss a/c 40,000
40,000 40,000

2013 2013
Mar. 31 To Machinery a/c 52,000 Mar. 31 By Profit and
Loss a/c 52,000
52,000 52,000

2013 2014
Sep. 30 To Machinery a/c 20,000 Mar. 31 By Profit and
2014 Loss a/c 44,000
Mar. 31 To Machinery a/c 24,000
44,000 44,000

Illustration:
Aravinth& Brothers purchased a Machinery for Rs. 90,000 on 1st April 2011. They spent Rs. 10,000
for installation charges. But the machinery was brought into use from 1st October 2011. It further
purchased a machinery costing Rs. 20,000 on 1st January 2014. Accounts are closed 31st March every
year. Depreciation is to be provided at the rate of 10% per annum on written down value method.

Prepare Machinery account & Depreciation account for three years.


Solution:

Ledger Accounts Machinery account


Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2011 2012
April 1 To Bank a/c 1,00,000 Mar. 31 By Depreciation a/c 5,000
(1,00,000×10/100
×6/12)
” By Balance c/d 95,000
1,00,000 1,00,000

2012 2013
April 1 To Balance b/d 95,000 Mar. 31 By Depreciation a/c 9,500
” By Balance c/d 85,500
95,000 95,000

2013 2014
April 1 To Balance b/d 85,500 Mar. 31 By Depreciation a/c 9,050
2014 ” By Balance c/d 96,450
Jan 1 To Bank a/c 20,000
1,05,000 1,05,000

2014
96,450
April 1 To Balance b/d
Depreciation Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2012 2012
Mar. 31 To Machinery a/c 5,000 Mar. 31 By Profit and
Loss a/c 5,000
5,000 2013 5,000

2013
Mar. 31 To Machinery a/c 9,500 Mar. 31 By Profit and
Loss a/c 9,500
9,500 9,500

2014 2014
Mar. 31 To Machinery a/c 9,050 Mar. 31 By Profit and
Loss a/c 9,050
9,050 9,050

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