Financial Accounting and Costing

Unit – 1

Management Accounting:-
“Management Accounting is the application of all professional
knowledge and skills in the preparation and presentation of accounting
information in such a way as to assist the management in the formulation
of policies, planning and control of the operations undertaken.”

Book - Keeping:-
Book – Keeping is defined as “the system of recording all the business
transactions in the books of accounts in accordance with the principles of
accountancy in order to ascertain the net profit or net loss of the business,
and the financial position of the business on any given day.”

Objectives of Book – Keeping:-

1. To have a permanent record of all business transactions for
future reference.
2. To ascertain the net results (profit or loss) of the business during
a particular year.
3. To know the exact reason leading to the net profit or net loss of
the business.
4. To know what amounts are due to the business and from where
and whom they are due.
5. To know the progress of the business from year to year.
6. To know the exact financial position of the business as on a
particular day.

Terminologies used in book - keeping:-

1. Purchases :
“Goods purchased by the business” are termed as ‘purchases’.

2. Sales:
“Goods sold by the business” are termed as ‘sales’.
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3. Purchase returns/ returns to suppliers/ returns outwards:
“Goods returned by the business to its suppliers out of the
purchases already made from them” are called ‘purchase returns’.

4. Sales returns/ returns from customers/ returns inwards :

“Goods returned to the business by its customers out of the sales
already made to them” are called ‘sales returns’

5. Assets :

a) Tangible/real Assets:
“Physical or real properties” are called tangible/real assets.
Ex: home, land, gold, etc.

b) Intangible Assets:
“Non-physical properties” are called intangible assets.
Ex: Trade mark, shares, goodwill.

6. Liability :
“Liability is the amount due from the business to others either for:
- money borrowed, or
- purchase of goods on credit.”
Ex: purchase of goods on credit.

7. Capital :
-“Initial investment by the business”,
-“Excess of assets over liabilities”, is called ‘capital’.

Capital = Assets – Liabilities.

8. Debtor:
Debtor is “a person who owes money to the business”. (Asset)

9. Creditor:
Creditor is “a person to whom the business owes money”.
(Liability)

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10.Debit:
- “The amount charged to an account”, or
- “The value recorded on the debit side (LHS) of an account for
the benefit received by that account”, is called Debit.

11.Credit:
- “The amount of discharge or reward given to an account”, or
- “The value recorded on the credit side (RHS) of an account for
the benefit given by that account”, is called Credit.

12. Accounting:
Accounting is “the art of recording, classifying and summarizing
the business transactions and interpreting the results thereof.”

13. Solvent:
“A business where the assets are greater than liabilities.”

14. Insolvent:
“A business where there is excess of liability over assets.”

15. Drawing:
Drawing refers to “the cash or goods or any other things withdrawn
by the proprietor from the business for his personal or domestic
use.”

16. On – account: “Purchase/sales of goods on credit” is termed ‘on –

account’.

17. Carry – forward (C/F):

It is used at the foot of the page in the journal/ledger in order to
indicate that the total amount at the bottom of a page has been
carried forward to the top of the next page.

18. Brought – forward (B/F) :

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 It is used at the top of the page in the journal/ledger in order to
indicate that the total amount at the top of a page has been brought
forward from the foot of the previous page.

19.Folio Number:
It indicates the page number of a journal/ledger.

Systems of Book – Keeping:-

There are 2 systems of book – keeping. They are:

1) Single Entry System &

2) Double Entry System (also called Credit and Debit Entry)

Single Entry System of Book – Keeping:-

 It is a system under which a complete record of each and
every transaction is not kept for most transactions.
 Only one aspect (debit or credit) of every transaction is
recorded, and therefore it is called “Single Entry System of
Book – Keeping.”

Double Entry System of Book – Keeping:-

 A system of making two entries in the two accounts in
opposite direction in each of the parties’ books for
recording a transaction completely is called the “Double
Entry System of Book – Keeping.”

Single Entry System of Book – Double Entry System of Book –

Keeping Keeping
1. Only one aspect of 1. Both aspects of transaction are
transaction is recorded (either recorded (i.e., both debit and
debit or credit). credit).

2. It does not give detailed 2. It gives detailed information.

information.

3. Simple and economical. 3. Complex and uneconomical.

4. Unscientific and impractical. 4. Scientific and Practical.

5. No final accounts can be 5. Final accounts can be prepared.

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 prepared.

Advantages of Double – Entry System (debit and credit entry) :-

1) It gives a complete record of all the transactions of the business as

it records both aspects of every transaction.
2) As both aspects of every transaction is recorded, Trial balance can
be easily prepared.
3) It is possible to check the arithmetical accuracy in the books of
accounts.
4) As the nominal books are maintained, it is possible to determine
the net profit or net loss of a business using profit and loss account,
for any particular year.
5) As the information about assets, liabilities and capital are
maintained in Double – entry system of book – keeping, it is
possible to determine the financial position of the business.

Classification of Accounts:-
Accounts are classified as follows:-
i. Personal account.
ii. Asset account.
iii. Nominal or Fictitious Account.
They are explained with the help of the following table:

Sl. No. Type of account Examples Rules

1. Personal a) Natural account.  Debtor is the
account (name of a person). receiver (DR!)
Ex: Sanjana’s account,  Creditor is the
etc. giver (CG!)

b) Artificial account.
Ex: HMT account.
Etc.

2. Real account/ Land account, Building  Whatever

Asset account account, Goods account, comes in is
Machinery account, etc. Debited.
 Whatever
goes out is
Credited.
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3. Nominal Wages account, Salaries  All expenses
account/ account, Rents account, and losses are
Fictitious Commission (whether Debited.
account paid/ received) account,  All incomes and
etc. profits are
Credited.

Examples for personal account:-

1) Received cash Rs.1000/- from Ram.

 In the above transaction, the personal account involved is
Ram’s account.
 Ram gives benefit, i.e., cash. Hence the personal account of
ram should b credited.

2) Paid to Lakshman Rs.2000/-

 In the above transaction, the personal account involved is
Lakshman’s account.
 Lakshman receives benefit. Hence the personal account of
Lakshman should be debited.

3) Sold machinery for Rs.5000/- on credit to Mr. Ray.

 In the above transaction, the personal account involved is
Mr. Ray’s account.
 Mr. Ray receives benefit, i.e., machinery. Hence the personal
account of Mr. Ray should be credited.

Examples for real/asset account:-

1) Bought machinery from ABC Co. Ltd., Rs.10000/-

 In the above transaction, the asset account involved is
‘machinery account’.
 Since machinery comes in, the ‘machinery account’ is
debited.

2) Received cash Rs.1000/-

 In the above transaction, the asset account involved is ‘cash
account’.
 Since cash comes in, the ‘cash account’ is debited.

3) Sold goods for cash Rs.800/-

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  In the above transaction, the asset accounts involved are
‘goods account’ and ‘cash account’.
 Since cash is coming in, ‘cash account’ is debited. Hence,
‘goods account’ is credited.

Examples for nominal account:-

1) Paid rent Rs.1000/-

 In the above transaction, the nominal account involved is
‘rent account’.
 Since rent is an expense, ‘rent account’ is debited.

2) Received commission of Rs.200/-

 In the above transaction, the nominal account involved is
‘commission account’.
 Since commission is received, it is an income and hence
‘commission account’ is credited.
Transactions:-

1) Cash Transaction:-

“In a transaction, when money is either paid or received, the

transaction is called a ‘cash transaction’”.

Ex: a) Purchased goods for Rs.100/-

Particular Amount Amount (Cr.) in
(Dr.) in Rs. Rs.
Purchase account 100/-
To Cash account 100/-

b) Sold goods for Rs.200/-

Particular Amount Amount (Cr.) in

(Dr.) in Rs. Rs.
Cash account 200/-
To Sales account 200/-

c) Purchased building for Rs.1000000/-

2) Credit Transaction:-

“In a transaction, when money is not paid or received, but names are
given, then it is called a ‘credit transaction’”.

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Ex: a) Sold goods to X for Rs.100/-

Particular Amount Amount (Cr.) in

(Dr.) in Rs. Rs.
Cash account 100/-
To Sales account 100/-

b) Purchased goods from Y for Rs.200/-

Particular Amount Amount (Cr.) in

(Dr.) in Rs. Rs.
Purchase account 200/-
To Cash account 200/-

c) Bought machinery for Rs.10000/- from Hindustan Co.

3) Cash and Name Transactions:-

“When cash is paid or received, and names are also given, they are
taken as ‘Cash and Name Transactions’”.

Ex: a) Purchased goods for cash from X Co., Rs.100/-

Particular Amount Amount (Cr.) in

(Dr.) in Rs. Rs.
Purchase account 100/-
To Cash account 100/-

b) Sold goods for cash to Rahim Rs.200/-

Particular Amount Amount (Cr.) in

(Dr.) in Rs. Rs.
Cash account 200/-
To Sales account 200/-

Journal:-
 A journal is a book of original (or prime) entry in which every
transaction is recorded before being posted into the ledger.
 It is a rough book in which all transactions are recorded in the
chronological order, i.e., in the order of date.
 The format of a journal is as follows:
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Date Particulars LF Dr. Cr.
Amount in Rs. Amount in Rs.

 Date: This is the first column which records the date on which
the transaction has taken place.
The year is written at the top of the date column at each page of
the journal.
On the next line of the date column, the month and day of the
first entry are written.
Unless the month or year changes or until a new page is begun,
neither the month nor the year is repeated on the page.

 Particulars: This is the second column which is meant for

recording the two aspects of transactions, i.e., the names of the
accounts which have to be debited and credited.
In order to explain why one account is credited and the other
account is debited, a short explanation beginning with the word
‘being’ or ‘for’ is written. This brief explanation is called
‘narration’.
The abbreviation ‘Dr.’ is written at the right end of the
particulars column on the same line of the account debited.

 Ledger Folio: This is the third column which is meant for

recording the page no. of the ledger where the accounts in the
particulars column are finally transferred or posted.

 Amount (debit): This is the fourth column in which the debit

amount is recorded opposite to the title of the account debited.

 Amount (credit): This is the fifth column in which the credit

amount is recorded opposite to the title of the account credited.

 In order to separate one journal entry from another, a line is

drawn below every journal entry, only in the particulars column.

 Need for a journal:

1. Journal contains a consolidated record of various

transactions everyday, as the transactions are recorded
in the journal in the order of dates.

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 2. Journal provides a complete record of every transaction
in one place as both the debit and credit aspects are
entered together in one entry of the journal.

 Journalizing:
The process of entering the debit and credit aspects of each
business transaction in the journal is known as journalization.

COMPARISONS:
1. Book – keeping vs. Accounting:-

Book – keeping Accounting

1. Mere recording of business 1. Actual recording as well as
transactions in appropriate the preparation, analysis, and
account books. interpretation of financial
statements. So, “Accounting
begins where Book – keeping
ends”.
2. Accounting lays down even
2. Actual record of only the principles or rules to be
business transactions. followed in recording business
transactions.
3. The work does not require 3. Complicated nature. Requires
any special knowledge or special knowledge and skill.
skill.
4. Usually carried out by book - 4. Done by qualified
keepers or clerks. accountants.

2. Assets vs. Liabilities:-

Assets Liabilities
1. Properties or things owned by a 1. Amounts due from a business to
business, and amounts due to a others are called Liabilites.
business from others are called
Assets.
2. Useful to the business. 2. Burden to the business.
3. Assets make others indebted to 3. Liabilities make the business
the business. indebted to others.
4. A concern must have some 4. A concern need not have
assets. liabilities.
5. Assets > Liabilities means that 5. Liabilities > Assets means that
the business is strong. the business is weak.
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6. Accounts of assets always show 6. Accounts of liabilities always
Debit balance. show Credit balance.

3. Cash Transaction vs. Credit Transaction:-

Cash Transaction Credit Transaction

1. In a Cash transaction, there is 1. In a Credit transaction, the
always immediate payment of payment or receipt of money is
money. always postponed to a future
date.
2. A person may carry out business 2. A person cannot carry out
with only cash. business with only credit
transactions.
3. In a cash transaction, personal 3. In a credit transaction, personal
account may or may not be account is always involved.
involved.

4. Debit vs. Credit:-

Debit Credit
1. Amount of charge given to an 1. Amount of discharge or reward
account for some benefit given to an account for some
received by that account is benefit given by that account is
called ‘Debit’. called ‘Credit’.
2. Entry is made on the Left Hand 2. Entry is made on the Right Hand
Side. Side.
3. Debit is given to an account 3. Credit is given to an account
when that account has received when that account has given
some benefit. some benefit.
4. Debit results in: 4. Credit results in:
 Increase in amount of assets  Decrease in amount of assets
 Decrease in amount of  Increase in amount of
liability liability
 Decrease in amount of  Increase in amount of
owner’s capital owner’s capital
 Increase in amount of  Decrease in amount of
expenditure or decrease in expenditure or increase in
amount of income amount of income.

5. Debtor vs. Creditor:-

Debtor Creditor
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1. Debtor is a person who owes 1. Creditor is a person to whom the
money to the business. business owes money.
2. A person becomes debtor of a 2. A person becomes creditor of a
business when he has received business when he has given some
some benefit. benefit.
3. Debtors constitute asset for 3. Creditors constitute liabilities for
business. a business.
4. Accounts of debtors show debit 4. Accounts of creditors show
balances. credit balances.

6. Personal account vs. Real account vs. Nominal account:-

Personal account Real account Nominal account

1. Personal account 1. Real account always 1. Nominal accounts
represents either represents only do not represent
assets or liabilities assets. anything tangible.
2. Personal account 2. Real account always 2. Nominal accounts
may show either shows only debit always show only
debit or credit balances. credit balances.
balances.

NOTE:
1. Increase in assets = Debit.
2. Increase in Liabilities = Credit.
3. Increase in owner’s capital = Credit.
4. Increase in revenues = Credit.
5. Real accounts are properties of business.

Difference Between Journal and Ledger

Journal vs Ledger

Journal and ledger are two main words that often one come across either when
studying the concepts of financial accounting or preparing financial statements. In the
double entry system of accounting, ledgers and journals are playing a vital and
important role. Before the preparation of final accounts, all the transactions occurred
must be passed through in both of these books.

Journal

Journal is a book of prime entry; that is, whenever a transaction occurs it must be
recorded soon after in the journal. The entry made is known as a journal entry. The
process of recording in the journal is called journalizing. The journal entry says that

12
 what account to be debited and what account to be credited, also it contains a
narration that says for what reason the corresponding entry has been made. Some
main types of journals are general journal, purchase journal, sales journal, etc. A
transaction must be recorded in the general journal, or one of the other special
journals. Journal contains data in the historical order of occurrence.

Ledger

A ledger can be defined as an accounting book of final entry where transactions are
listed in separate accounts. Ledger contains many accounts (normally known as T-
accounts). The transactions, which are recorded in the journals, are grouped
accordingly and transformed to the corresponding correct accounts in the ledger. This
process of recording data is known as posting. Financial statements (also known as
final accounts) like statement of comprehensive income (income statement), statement
of financial position (balance sheet) are often derived from ledger. Ledger accounts
can be checked for the accuracy, that is, when add up all the debit balances in ledger
at any given date or time must be equal to the summation of all credit balances in the
ledger.

What is the difference between Journal and Ledger?

Not only in names, but also in the underlying characteristics both books have differences.
The main differences are listed below.

• Journal is the book of prime (first) entry, while Ledger is the book of final entry.

• In other words, ledger contains analytical records, while journal contains chronological
records.

• Narration is required in a journal that is not the case in the ledger.

• Transactions are recorded in the sequence of occurrence in the journal, whereas

transactions are classified and recorded in relevant accounts in the ledger.

• Data can be classified based on transaction in the ledger, while the basis of
classification of data are accounts in the ledger.

• A transaction is firstly recorded in the journal soon after the occurrence of it; it is only
then transferred to the ledger.

• Final accounts cannot directly be prepared from journal, but ledgers form the basis for
easy preparation of final accounts.

• Accuracy of journal cannot be tested, but accuracy of ledger can be tested to a certain
extent using trial balance.

• Journal has two columns for debit and credit, whereas a ledger has two sides of an
account one for debit and the other for credit.

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• Journals are not balanced at the end of a period, but accounts in the ledger are balanced
at the end of a specific period.

PROBLEMS:

1) Journalize the following transactions in the books of James:

1.1.95, James commenced the business with cash Rs.10,000/-

3.1.95, paid into bank Rs.1000/-
4.1.95, bought goods for cash Rs.2000/-
5.1.95, bought office furniture for cash Rs.500/-
6.1.95, sold goods for cash Rs.600/-
7.1.95, bought goods from Raman on credit Rs.500/-
10.1.95, paid rent to the landlord Rs.500/-
12.1.95, paid salary to the manager Rs.200/-
15.1.95, sold office furniture for cash Rs.500/-
16.1.95, received commission Rs.50/-
18.1.95, bought goods Rs.400/-
20.1.95, sold goods Rs.600/-
22.1.95, sold goods to Gopal Rs.500/-
23.1.95, bought goods from Ramu Rs.500/-
24.1.95, bought goods from Lodhi Rs.500/- cash
25.1.95, paid postage Rs.50/-
26.1.95, sold goods to Srinivas for cash Rs.1000/-
27.1.95, paid cartage Rs.80/-
31.1.95, withdrew cash from office for personal use Rs.200/-

Ans.: The journal is as follows:-

Date Particulars LF Amount(Dr.) Amount(Cr.)

in Rs. In Rs.

1995
1st Cash account Dr. 10000/-
jan to Capital account
(being capital brought in) 10000/-
rd
3 Bank account Dr. 1000/-
to Cash account 1000/-
(being cash paid into bank)
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4th Purchase account Dr. 2000/-
To cash account 2000/-
(Being goods purchased for
cash)
5th Office furniture account Dr. 500/-
To cash account 500/-
(Being furniture bought for
cash)
7th Goods account Dr. 500/-
To Raman’s account 500/-
(Being goods purchased on
credit)
10th Rent account Dr. 500/-
To Cash account 500/-
(Being rent paid to landlord)
12th Salaries account Dr. 200/-
To Cash account 200/-
(Being Salary paid to
manager)
15th Cash account Dr. 500/-
To Sales account 500/-
(Being office furniture sold)
16th Cash account Dr. 50/-
To Commission account 50/-
(Being commission received)
18th Purchase account Dr. 400/-
To cash account 400/-
(Being goods bought for cash)
20th Cash account Dr. 600/-
To Sales account 600/-
(Being goods sold)
22nd Gopal’s account Dr. 500/-
To goods account 500/-
(Being goods sold on credit)
23rd Purchase account Dr. 500/-
To Rama’s account 500/-
(Being goods purchased on
credit)
24th Purchase account Dr. 500/-
To Cash account 500/-
(Being goods purchased on
cash from Lodhi)
25th Postage account Dr. 50/-
To Cash account 50/-
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 (Being postage paid)
th
26 Cash account Dr. 1000/-
To Sales account 1000/-
(Being goods sold to Srinivas)
27th Carriage account Dr. 80/-
To Cash account 80/-
(Being carriage paid)
31st Drawing account Dr. 200/-
To Cash account 200/-
(Being cash withdrawn)
19680/- 19680/-

2) Journalize the following transactions in the books of Mr. X.:

1.1.96, Mr. X commenced the business with cash Rs.50,000/-

3.1.96, paid into bank Rs.4000/-
4.1.96, bought goods for cash Rs.5000/-
5.1.96, bought office furniture for cash Rs.5000/-
6.1.96, sold goods for cash Rs.6000/-
8.1.96, sold goods to Murthy on credit Rs.4000/-
bought goods from Narayan on credit Rs.5000/-
10.1.96, paid rent to landlord Rs.3000/-
12.1.96, paid salary to manager Rs.1000/-
15.1.96, sold office furniture for cash Rs.2000/-
16.1.96, received commission from Suresh Rs.200/-
18.1.96, bought goods for Rs.4000/-

Ans.: The journal is as follows:-

Date Particulars LF Amount(Dr.) Amount(Cr.)

in Rs. in Rs.
1996
1st jan Capital account 50000/-
Dr. 50000/-
To Cash account
(Being capital brought in)
3rd Bank account 4000/-
Dr. 4000/-
To Cash account
(Being cash paid into bank)
4th Purchase account 5000/-
Dr. 5000/-
To Cash account
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 (Being goods purchased)
th
5 Purchase account 5000/-
Dr. 5000/-
To Cash account
(Being office furniture
purchased)
6th Cash account 6000/-
Dr. 6000/-
To Sales account
(Being goods sold)
8th Murthy’s account 4000/-
Dr. 4000/-
To Goods account
(Being goods sold on credit) 5000/-
Goods account 5000/-
To Narayan’s account
(Being goods sold to
Narayan on credit)
10th Rent account 3000/-
Dr. 3000/-
To Cash account
(Being rent paid to landlord)
12th Salary account 1000/-
Dr. 1000/-
To Cash account
(Being salary paid to
manager)
15th Cash account 2000/-
Dr. 2000/-
To Sales account
(Being office furniture sold)
16th Cash account 200/-
Dr. 200/-
To Commission account
(Being commission
received)
18th Purchase account 4000/-
Dr. 4000/-
To Cash account
(Being goods purchased)
89200/- 89200/-

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 3)Journalize the following transactions in the
books of Pradeep:-

1.5.95, Pradeep commenced business with

cash Rs.10000/-
2.5.95, paid into bank Rs.4000/-
4.5.95, purchased goods from Krishna
Rs.4000/-
6.5.95, sold goods to Raman Rs.2000/-
7.5.95, returned goods to Krishna Rs.100/-
9.5.95, Raman returned goods Rs.50/-
10.5.95, bought cards and stamps Rs.20/-
13.5.95, received from Raman on account
Rs.1500/-
14.5.95, paid to Krishna on account Rs.3000/-
15.5.95, cash sales Rs.300/-
16.5.95, cash purchases Rs.7000/-
17.5.95, purchased stationery Rs.30/-
19.5.95, purchased machinery from HMT
Rs.3000/-
20.5.95, advanced Govind Rs.1000/- as a loan
24.5.95, paid for repairs of machinery Rs.100/-
25.5.95, withdrew cash for personal use
Rs.1000/- from his business
26.5.95, bought office furniture Rs.1000/-
27.5.95, received cash from Raman Rs.150/-
29.5.95, paid to Krishna Rs.900/-
31.5.95, paid advertisement Rs.50/-
Paid rent Rs.100/-
Paid electricity charges Rs.100/-

Date Particulars LF Amount(Dr.) Amount(Cr.)

18
 in Rs. in Rs.
1995
1st Capital account 10000/-
May Dr. 10000/-
To Cash account
(Being capital brought in)
2nd Bank account Dr. 4000/-
To Cash account 4000/-
(Being paid into bank)
4th Purchase account Dr. 4000/-
To Cash account 4000/-
(Being goods purchased)
6th Cash account Dr. 2000/-
To Sales account 2000/-
(Being goods sold)
7th Krishna’s account Dr. 100/-
To Purchase returns account 100/-
(Being goods returned)
9th Goods account Dr. 50/-
To Raman’s account 50/-
(Being goods returned)
10th Cards and stamps account 20/-
Dr. 20/-
To Cash account
(Being cards and stamps
purchased)
13th Cash account 1500/-
Dr. 1500/-
To Raman’s account
(Being cash received from
Raman)
14th Krishna’s account 3000/-
Dr. 3000/-
To Cash account
(Being cash paid)
15th Cash account 300/-
Dr. 300/-
To Sales account
(Being cash sales)
16th Purchase account 7000/-
Dr. 7000/-
To Cash account
(Being Cash purchases)
17th Purchase account 30/-
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 Dr. 30/-
To Cash account
(Being stationery purchased)
19th Purchase(machinery) 5000/-
account 5000/-
To Cash account
(Being Machinery
purchased)
20th Govind’s loan account 1000/-
Dr. 1000/-
To Cash account
(Being loan advanced)
24th Machinery repairs account 100/-
Dr. 100/-
To Cash account
(Being machinery repairs)
25th Drawing account 1000/-
Dr. 1000/-
To Cash account
(Being cash drawn for
personal use)
26th Purchase account 1000/-
Dr. 1000/-
To cash account
(Being office furniture
purchased)
27th Cash account 150/-
Dr. 150/-
To Raman’s account
(Being cash recieved)
29th Krishna’s account 900/-
Dr. 900/-
To Cash account
(Being cash paid)
31st Advertisement account 50/-
Dr. 100/-
Rent account 100/-
Dr. 250/-
Electricity account
Dr.
To Cash account
(Being cash paid)
40,650/- 40,650/-

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 4) Journalize the following transactions in the books of
Sharath:

1.1.95, Sharath invested in the business Rs.50,000/-

Paid rent advance Rs.3600/-
Paid into bank Rs.40000/-
2.1.95, purchased merchandise (goods) on credit
from Mr. X. Rs.30000/-
3.1.95, purchased furniture for cash from Jaya &
Co., Rs.6000/-
4.1.95, sold merchandise for cash Rs.40000/-
5.1.95, purchased merchandise on credit from Mr.
Y. Rs.50000/-
6.1.95, purchased typewriter from Godrej paid by
cheque Rs.4000/-
7.1.95, send back merchandise damaged to Mr.Y.
during the transit Rs.5000/-
8.1.95, sold merchandise on credit to Bright
Brothers, Rs.30000/-
9.1.95, sold merchandise for cash Rs.25000/-
10.1.95, paid by cheque to Mr. X. in full settlement
of his account Rs.29500/-
11.1.95, Paid advertisement charges Rs.1500/-
12.1.95, withdrew cash for his personal use
Rs.1500/-
15.1.95, received a cheque from Bright Brothers in full settlement
of their account, Rs.29500/-
20.1.95, paid rent Rs.500/-
31.1.95, paid electricity charges Rs.200/-

Ans.: The journal is as follows:

Date Particulars LF Amount(Dr.) Amount(Cr.)

In Rs. In Rs.
1995
21
1st Cash account 50000/-
May Dr.
To Capital account
(Being capital brought in) 3600/-
Rent advance account
Dr.
To Cash account 40000/-
(Being rent advance paid)
Bank account 93600/-
Dr.
To Cash account
(Being account opened in
bank)
2nd Purchase account 30000/-
Dr. 30000/-
To Mr. X’s account
(Being goods purchased on
credit)
3rd Purchase account 6000/-
Dr. 6000/-
To Cash account
(Being office furniture
purchased)
4th Cash account 40000/-
Dr. 40000/-
To Sales account
(Being goods sold)
5th Purchase account 50000/-
Dr. 50000/-
To Mr. Y’s account
(Being goods purchased on
credit)
6th Typewriter account 4000/-
Dr. 4000/-
To Bank account
(Being purchased by cheque)
7th Purchase returns account 5000/-
Dr. 5000/-
To Mr. Y’s account
(Being goods returned)
8th Bright Brothers account 30000/-
Dr. 30000/-
To Sales account
(Being goods sold on credit)
22
9th Cash account 25000/-
Dr. 25000/-
To Sales account
(Being goods sold)
10th Mr. X’s account 30000/-
Dr. 29500/-
To Bank account 500/-
To Discount account
(Being paid by cheque to
Mr. X in full settlement)
11th Advertisement account 1500/-
Dr. 1500/-
To Cash account
(Being paid for
advertisement)
12th Drawing account 1500/-
Dr. 1500/-
To Cash account
(Being cash withdrawn)
15th Bank account 29500/-
Dr. 500/-
Discount account 30000/-
Dr.
To Bright Bros. account
(Being cheque received in
full settlement)
20th Rent account 500/-
Dr. 500/-
To Cash account
(Being rent paid)
31st Electricity charges account 200/-
Dr. 200/-
To Cash account
(Being electricity charges
paid)

5) Journalize the following transactions in the books of Mr.

Vishwanath.

1.12.95, Vishwanath started his business with the following:

Cash in hand Rs.1500/-
Cash at bank Rs.1500/-
Goods in hand Rs.3000/-
Furniture Rs.2000/-
23
 Buildings Rs.10000/-
2.12.95, gave charity Rs.500/-
6.12.95, purchased a Motor car in exchange for goods Rs.2000/-
and a
cheque of Rs.5000/-
10.12.95, withdrew from bank for petty cash Rs.500/-
10.12.95, introduced further capital Rs.10000/-
12.12.95, bought shares in Mangalore Fertilizers Ltd., Rs.1000/-
16.12.95, cash received on the sale of shares Rs.1000/-
17.12.95, received from Krishna a Rs.100/- note and gave him
change for it
18.12.95, invested in NSC Rs.600/-
20.12.95, bought goods from Lakshman on account Rs.2500/-
25.12.95, sold goods to Raman on account Rs.1000/-
29.12.95, paid rent Rs.150/-
31.12.95, closing stock on hand Rs.1000/-

Date Particulars LF Amount(Dr.) Amount(Cr.)

in Rs. in Rs.
1995
1st Cash account Dr. 1500/-
Dec Bank account Dr. 1500/-
Opening balance account Dr. 3000/-
Furniture account Dr. 2000/-
Buildings account Dr. 10000/-
To Capital account 18000/-
(Being cash, bank accounts,
furniture, buildings brought in
as capital)
nd
2 Charity account Dr. 500/-
To Cash account 500/-
(Being paid to charity)
th
6 Motor car account Dr. 5000/-
To Sales account 2000/-
To Bank account 5000/-
(Being motor car purchased in
exchange of…..)
th
10 Petty cash account Dr. 500/-
To Bank account 500/-
(Being cash withdrawn)
th
10 Capital account Dr. 10000/-
To Cash account 10000/-
(Being capital re-introduced)
th
12 MF Ltd. Shares account Dr. 1000/-
24
 To Cash account 1000/-
(Being shares purchased)
16th Cash account Dr. 1000/-
To Shares account 1000/-
(Being shares sold)
18th NSC account Dr. 600/-
To Cash account 600/-
(Being shares bought in NSC)
20th Purchase account Dr. 2500/-
To Lakshman’s account 2500/-
(Being goods purchased on
account)
25th Raman’s account Dr. 1000/-
To Sales account 1000/-
(Being goods sold on account)
29th Rent account Dr. 150/-
To Cash account 150/-
(Being rent paid)
31st Closing stock account Dr. 1000/-
To Trading account 1000/-
(Being closing stock)
42650/- 42650/-

6. Journalize the following transactions:

2009 July 1st, commenced business with capital Rs.10000/-

July 2nd, purchased goods for Rs.1000/-
4th, sold goods for Rs.500/-
5th, purchased goods from Krishna Rs.5000/-
6th, sold goods to Rama Rs.3000/-
7th, goods returned to Krishna Rs.100/-
8th, Rama returned goods Rs.200/-
10th, paid into bank, opened a current account Rs.2000/-
11th, drawn for personal use Rs.200/-
12th, drawn from bank for office use Rs.1000/-
15th, paid cartage Rs.100/-
16th, purchased a typewriter for Rs.1000/-
18th, paid salaries Rs.500/-
20th, purchased machinery for Rs.2000/-
22nd, sold goods to Y for cash Rs.500/-
25th, purchased goods from X for cash Rs.800/-
30th, paid to landlord Rs.500/- as rent
31st, paid for service charges for machinery (repair) Rs.100/-
25
Ans.: The journal is as follows:

Date Particulars LF Amount Amount

(Dr.) in Rs. (Cr.) in Rs.
2009
1st Cash account Dr. 10000/-
July To Capital account 10000/-
(Being capital brought in)
nd
2 Purchase account 5000/-
Dr. 5000/-
To Cash account
(Being goods purchased)
th
4 Cash account 500/-
Dr. 500/-
To Sales account
(Being goods sold)
th
5 Purchase account 5000/-
Dr. 5000/-
To Cash account
(Being goods purchased)
th
6 Cash account 3000/-
Dr. 3000/-
To Sales account
(Being goods sold)
th
7 Krishna’s account 100/-
Dr. 100/-
To Purchase returns account
(Being goods returned
outwards)
th
8 Sales returns account 200/-
Dr. 200/-
To Rama’s account
(Being goods returned
inwards)
th
10 Bank account 2000/-
Dr. 2000/-
To Cash account
(Being bank account opened)
th
11 Drawing account 200/-
Dr. 200/-
To Cash account
(Being cash drawn)
th
12 Office account 1000/-
26
 Dr. 1000/-
To Bank account
(Being cash drawn)
15th Cartage account 100/-
Dr. 100/-
To Cash account
(Being cartage paid)
16th Typewriter account 1000/-
Dr. 1000/-
To Cash account
(Being typewriter purchased)
18th Salaries account 500/-
Dr. 500/-
To Cash account
(Being salaries paid)
20th Machinery account 2000/-
Dr. 2000/-
To Cash account
(Being machinery purchased)
22nd Cash account 500/-
Dr. 500/-
To Sales account
(Being goods sold to Y)
25th Purchase account 800/-
Dr. 800/-
To Cash account
(Being goods bought from X)
30th Rent account 500/-
Dr. 500/-
To Cash account
(Being rent paid to landlord)
31st Service charges account 100/-
Dr. 100/-
To Cash account
(Being service charges paid)
28500/- 28500/-

7. Journalize the following transactions:

1st Jan 2009, commence business for Rs.10000/-

2nd Jan, paid into bank Rs.2000/-
3rd, purchased goods Rs.3000/-
4th, sold goods Rs.1000/-
6th, purchased goods from Raman Rs.2000/-
27
7th, sold goods to Rahim Rs.1000/-
8th, paid wages Rs.200/-
10th, received commission Rs.100/-
12th, Rahim returned goods Rs.500/-
13th, goods returned to Raman Rs.300/-
15th, drawn for personal use Rs.500/-
16th, paid salaries Rs.500/-
17th, purchased ink and paper Rs.100/-
18th, paid Raman Rs.1000/- and he allowed discount Rs.100/-
19th, received from Rahim Rs.500/- and allowed him a discount of
Rs.100/-
20th, paid telegram charges Rs.10/-
22nd, purchased furniture for office use Rs.500/-
25th, purchased goods for cash Rs.100/- from X.
26th, sold goods to Y Rs.50/- for cash
30th, paid cartage Rs.100/-
31st, paid cartage Rs.50/-, commission Rs.100/-
31st, paid brokerage Rs.50/-

Date Particulars LF Amount Amount

(Dr.) in Rs. (Cr.) in Rs.
1st Capital account 10000/-
Jan Dr. 10000/-
2009 To Cash account
(Being capital brought in)
nd
2 Bank account 2000/-
Dr. 2000/-
To Cash account
(Being cash paid into bank)
rd
3 Purchase account 3000/-
Dr. 3000/-
To Cash account
(Being goods purchased)
th
4 Cash account 1000/-
Dr. 1000/-
To Sales account
(Being goods sold)
th
6 Purchase account 2000/-
Dr. 2000/-
To Cash account
(Being goods purchased)
th
7 Cash account 1000/-
Dr. 1000/-
To Sales account
28
 (Being goods sold to Rahim)
th
8 Wages account 200/-
Dr. 200/-
To Cash account
(Being wages paid)
10th Cash account 100/-
Dr. 100/-
To Commission account
(Being commission received)
12th Sales returns account 500/-
Dr. 500/-
To Rahim’s account
(Being goods returned)
13th Raman’s account 300/-
Dr. 300/-
To Purchase returns account
(Being goods returned
outwards)
15th Drawing account 500/-
Dr. 500/-
To Bank account
(Being drawn for personal use)
16th Salaries account 500/-
Dr. 500/-
To Cash account
(Being salaries account)
17th Purchases account 100/-
Dr. 100/-
To Cash account
(Being ink and paper
purchased)
18th Raman’s account 1100/-
Dr. 1000/-
To Cash account 100/-
To Discount account
(Being payment and discount)
19th Cash account and discount 500/-
account 500/- 600/-
Dr.
To Rahim’s account
(Being receipt and discount)
20th Telegram account 100/-
Dr. 100/-
To Cash account
29
 (Being telegram payment)
nd
22 Purchase account 500/-
Dr. 500/-
To Cash account
(Being furniture purchased)
25th Purchase account 100/-
Dr. 100/-
To Cash account
(Being goods purchased)
26th Cash account 50/-
Dr. 50/-
To Sales account
(Being goods sold to Y)
30th Carriage account 100/-
Dr. 100/-
To Cash account
(Being carriage paid)
31st Cartage account 50/-
Dr. 100/-
Commission account 50/-
Dr. 200/-
Brokerage account
Dr.
To Cash account
(Being cartage, commission,
brokerage paid)
23950/- 23950/-

Ledger and Trial Balance:-

 Every business transaction is first recorded in the journal. Thus, a

journal is simply a chronological listing of transactions.
 From the journal, the transactions related to each person or firm are
sorted out, classified and entered into a book called ‘Ledger’.
 Thus a ledger contains the same information as given in the
journal, but the information is properly arranged according to each
person or firm it is related to.
 Ledger furnishes a record of transactions grouped according to
accounts.
 The ruling of a ledger is as follows:

Dr. Account Cr.

30
 Date Particulars LF Amount Date Particulars LF Amount
in Rs. in Rs.

 The ledger is split into two halves:-

1. The Debit side (Dr.) on the left, and
2. The Credit side (Cr.) on the right.

Differences between Journal and Ledger:-

Journal Ledger
1. A journal is a book of primary 1. A ledger is a book of final
entry as transactions are recorded entry as transactions are
first in the journal. recorded finally in the ledger.
2. It is a daily record and hence 2. Preparation (posting) of ledger is
transactions are entered in the done periodically.
journal.
3. The information relating to an 3. The information relating to an
account is not found in one place. account is found in one place.
4. It is a subsidiary work because it 4. It is a principal book of accounts.
does not provide final accounting
information relating to a business.

Points to be remembered while preparing ledger accounts:-

1. In a ledger, a separate account should be opened for every

account that is found in the journal.
2. All the transactions relating to a particular account should b
entered in the account already opened.
3. The name of the account should be written in bold letters at the
center.
4. The word Dr. should be written at the left hand top corner of
each account.
The word Cr. should be written at the right hand top corner of
each account.
5. On the debit side, every entry in the ‘particulars’ column should
begin with the word “To”.
On the credit side, every entry in the ‘particulars’ column
should begin with the word “By”.
6. The amount which is debited on the journal should be posted on
the debit side of the concerned ledger account.

31
 The amount which is credited on the journal should be posted
on the credit side of the concerned ledger account.
7. Every ledger account must be balanced at the end of every
month or any other fixed period.

Balancing ledger account:-

 In order to balance an account, one should total up the two sides

of the concerned account roughly and find out the difference
between their totals.
 The difference between the totals is entered in the accounts
column of the lighter side to make both sides equal.
 While entering the difference in the amounts column of the
lighter side:
- The words “To balance carried down” (To balance
c/d), or
- The words “By balance carried down” (By balance
c/d)
should be written against the ‘particulars’ column to indicate
the balance.
 After entering the balance on the lighter side, the two sides are
totaled and lines are drawn above and below the totals.
 Then the balance is written on opposite sides with words “To
balance brought down” (To balance b/d) or “By balance brought
down” (By balance b/d), in the ‘particulars’ column in order to
continue the account during the next period.

Preparation of Trial Balance:-

 Trial Balance is a list of ledger balances taken at the end of the

year when all the accounts are balanced.
 Trial Balance enables us to detect the errors and frauds and in
the preparation of final accounts: trading account, profit and
loss account, and balance sheet.
 If the total debit balances of all the accounts tally with the total
credit balances of all the accounts, we can be reasonably sure
that the entries are correctly made in the ledger account.
 Thus a Trial Balance provides a means for verifying the
correctness of entries in the book of account.
 The trial balance is ruled as follows:
Sl.no Heads of accounts LF Debit totals Credit totals
or Debit or Credit
balances balances
(Rs.) (Rs.)
32
 NOTE:
1. Only those ledger accounts which show balances should
appear in the trail balance.
2. Opening stock will show a debit balance.
3. Closing stock will not appear in the trial balance.
[Closing stock is an asset]

PROBLEM:

1. From the following transactions, prepare:

a) Journal
b) Ledger account
c) Trial Balance

Jan 1st: commenced business with cash Rs.5000/-, furniture Rs.2000/-

and machinery Rs.5000/-
nd
Jan 2 : paid into bank, Rs.2000/-
Jan 3rd: purchased goods Rs.2000/-
Jan 4th: purchased goods from Krishna Rs.3000/-
Jan 5th: sold goods Rs.3000/-
Jan 6th: goods returned to Krishna Rs.1000/-
Jan 7th: sold goods to Rama Rs.2000/-
Jan 8th: paid rent Rs.100/-, wages Rs.100/- and salaries Rs.500/-

Ans.: a) The journal is as follows:

Date Particulars LF Amount Amount

(Dr.) in Rs. (Cr.) in Rs.
1928
Jan Cash account Dr. 5000/-
st
1 Furniture account Dr. 2000/-
Machinery account Dr. 5000/-
To Capital account 12000/-
(Being cash, furniture,
machinery brought in as
capital)
nd
2 Bank account 2000/-
To Cash account 2000/-
(Being cash paid into bank)
33
3rd Purchase account 2000/-
To Cash account 2000/-
(Being goods purchased)
4th Purchase account 3000/-
To Krishna’s account 3000/-
(Being goods purchased from
Krishna on Cr.)
5th Cash account 3000/-
To Sales account 3000/-
(Being goods sold)
6th Krishna’s account 1000/-
To Purchase returns account 1000/-
(Being goods returned to
Krishna)
7th Rama’s account 2000/-
To Sales account 2000/-
(Being goods sold to Rama on
Cr.)
8th Rent account 100/-
Wages account 100/-
Salaries account 500/-
To Cash account 700/-
(Being rent, wages, salaries
paid)
25700/- 25700/-

b) The ledger is as follows:

Date Particulars LF Amount Date Particulars LF Amount

in Rs.

CASH ACCOUNT
st
1 To Capital 5000/- 2nd By Bank 2000/-
Jan account Jan account
5th To Sales 3000/- 3rd By Purchase 2000/-
Jan account Jan account
8th By Rent 100/-
Jan account
8th By Wages 100/-
Jan account
8th By Salary 500/-
Jan account
31st By balance 3300/-
Jan carried down
34
 8000/- 8000/-
st
1 To balance 3300/-
Feb brought
down

FURNITURE ACCOUNT
st
1 To Capital 2000/- 31st By balance 2000/-
Jan account Jan carried down
2000/- 2000/-
st
1 To balance 2000/-
Feb brought
down

MACHINERY ACCOUNT
st
1 To Capital 5000/- 31st By balance 5000/-
Jan account Jan carried down
5000/- 5000/-
st
1 To balance 5000/-
Feb brought
down

CAPITAL ACCOUNT
st
31 To balance 12000/- 1st By Cash 5000/-
Jan carried down Jan account
1st By Furniture 2000/-
Jan account
1st By 5000/-
Jan Machinery
account
12000/- 12000/-
st
1 By balance 12000/-
Feb brought down

BANK ACCOUNT
2nd To Cash 2000/- 31st By balance 2000/-
Jan account Jan carried down
2000/- 2000/-
st
1 To balance 2000/-
Feb brought
down

PURCHASE ACCOUNT
rd
3 To Cash 2000/- 31st By balance 5000/-

35
Jan account Jan carried down
4th To Krishna’s 3000/-
Jan account
5000/- 5000/-
st
1 To balance 5000/-
Feb brought
down

KRISHNA’S ACCOUNT
th
6 To Purchase 1000/- 4th By Purchase 3000/-
Jan returns Jan account
account
31st To balance 2000/-
Jan carried down
3000/- 3000/-
1st By balance 2000/-
Feb brought down

SALES ACCOUNT
st
31 To balance 5000/- 5th By Cash 3000/-
Jan carried down Jan account
7th By Rama’s 2000/-
Jan account
5000/- 5000/-
st
1 By balance 5000/-
Feb brought down

PURCHASE RETURNS ACCOUNT

st
31 To balance 1000/- 6th By Krishna’s 1000/-
Jan carried down Jan account
1000/- 1000/-
1st By balance 1000/-
Feb brought down

RAMA’S ACCOUNT
th
7 To Rama’s 2000/- 31st By balance 2000/-
Jan account Jan carried down
2000/- 2000/-

RENT ACCOUNT
th
8 To Cash 100/- 31st By balance 100/-
Jan account Jan carried down
100/- 100/-
36
1st To balance 100/-
Feb brought
down

WAGES ACCOUNT
th
8 To Cash 100/- 31st By balance 100/-
Jan account Jan carried down
100/- 100/-
st
1 To balance 100/-
Feb brought
down

SALARY ACCOUNT
th
8 To Cash 500/- 31st By balance 500/-
Jan account Jan carried down
500/- 500/-
st
1 To balance 500/-
Feb brought
down

c) The trial balance is as follows:

Sl.no Particulars Amount (Dr.) in Amount (Cr.) in

Rs. Rs.

1. Cash account 3300/-

2. Furniture account 2000/-

3. Machinery account 5000/-

4. Capital account 12000/-

5. Bank account 2000/-

6. Purchase account 5000/-

7. Krishna’s account 2000/-

8. Sales account 5000/-

9. Purchase returns account 1000/-

10. Rama’s account 2000/-

37
11. Rent account 100/-

12. Wages account 100/-

13. Salary account 500/-

20000/- 20000/-

-x–x–x-

38