1

ACCOUNTANCY – XI
MODULE-1

AKASH JAIN
B.COM. MBA (finance)

Ex faculty

APS (naiad)

ABS(s)

SATYAM FASHION(noida)

INSOFT(noida)

Email- [email protected]

MOBILE – 09811410864

Whatsapp - 8285680299

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CHAPTER PAGE NO.

Introduction of accounting 3-9
Basic accounting term 9-13
Accounting principle 14-20
Bases of accounting 21-22
Accounting equation 23-25
Accounting procedures 26-27
Origin of transaction 28-30
Journal and lodger 31-38
Special purpose – book-1 (c.b) 39-42
Do – book-2 43-46
Bank reconciliation statement 47-48
Trial balance 49
Depreciation 50-53
Provision and reserves 54-57
Bills of exchange 58-64
Rectification of errors
65-67
Financial statements
68-75
Financial statements
(adjustments) 76-78
Accounts for incomplete records 79-81
Computers in accounting 82-84

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CHAPTER – 1
Meaning of accounting – accounting is an art of identifying, classifying,
recording, summarizing and interpreting business transaction of financial nature .

In 1941, the American institute of certified public accountants (AICPA) 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 a financial character and
interpreting the results there of.

The above definition contains four essential features i.e. collecting, recording, summarizing and
communicating financial information to the users for decision making.

ATTRIBUTES / CHARACTERISTICS OF ACCOUNTING

1. Identification of financial transactions and events
2. Measuring the identified transactions
3. Recording
4. Classifying
5. Summarizing
6. Analysis and interpretation
7. Communicating

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IS ACCOUNTING A SCIENCE OR AN ART?

Accounting is an art as well as a science art is the technique which helps us

to achieve our desired objectives. Accounting is an art of recording,
classifying and summarizing financial transactions. It helps us in knowing
the profitability and financial position of the business.

Accounting
process
Steps
Financial transaction

Recording

Classifying

Summarizing

Analyzing and interpreting

Communicating

BRANCHES OF
ACCOUNTING

Financial Cost Management

accounting accounting accounting

DIFFERENCE BETWEEN BOOK-KEEPING and ACCOUNTING

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BASIS BOOK KEEPING ACCOUNTING

1. SCOPE Book keeping is concerned Accounting is concerned with
with identifying financial summarizing the recorded
transactions, measuring them transaction interpreting them
in money terms and communicating
2. STAGE Primary Secondary
3. OBJECTIVES Systematic records maintain Ascertain net results
4. NATURE OF JOBS Routine in nature Analytical and dynamic
5. PERFORMANCE Junior staff Senior staff
6. SPECIAL SKILLS Not required required

ACCOUNTANCY
Accountancy is a systematic knowledge of accounting. It explains how to deal with
various aspects of accounting. It educates us how to maintain the books of
accounts.

OBJECTIVES OF ACCOUNTING
1. Record of financial transactions and events
2. Determine profit or loss
3. Determine financial position
4. Assisting the management
5. Communicating accounting information to users
6. Protecting business assets

FUNCTIONS OF ACCOUNTING
1. Maintaining systematic accounting records
2. Preparation of financial statement
3. Meeting legal requirements
4. Communicating the financial data
5. Assistance to management

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ADVANTAGES OF ACCOUNTING
1. Financial information about the business
2. Assistance to management
3. Replaces memory
4. Facilitates comparative study
5. Facilitates settlement of tax liabilities
6. Facilitates loans
7. Evidence in court
8. Facilitates sale of business
9. Helps in decision making

LIMITATIONS OF ACCOUNTING
1. Accounting is not fully exact
2. Accounting does not indicate the realizable value
3. Accounting ignores the qualitative elements
4. Accounting ignores the effect of price level changes
5. Accounting may lead window dressing

ACCOUNTING INFORMATION
“Accounting is a service activity. Its function is to provide qualitative information.
Primary financial in nature, about economic entities that is indented to be useful
in making economic decisions.”

TYPES OF ACCOUNTING INFORMATION

1. Information relating to profit or surplus
2. Information relating to financial position , and
3. Information about cash flow

USERS OF ACCOUNTING INFORMATION

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INTERNAL USERS EXTERNAL USERS

1. Owners 1. Banks and FI

2. Management 2. Investors and potential
3. Employees and workers investors

3. Creditors

4. Governments and its

Authorities

5. Researchers

6. Consumers

7. Public

QUALITATIVE CHARACTERISTICS OF ACCOUNTING

INFORMATION
1. Reliability
2. Relevance
3. Understandability
4. Comparability

SYSTEMS OF ACCOUNTING

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DOUBLE ENTRY SYSTEM SINGLE ENTRY SYSTEM

1. It maintains a complete record of each 1. Non maintain
transaction
2. It recognizes two fold aspect of every 2. only one aspect
transaction
3. In this system , ones aspect is debited 3. only one aspect is debited or credited
other is credited
4. Scientific system 4. non scientific
5. A check of accuracy 5. no check
6. Comparative study is possible 6. not possible

CHAPTER – 2

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BASIC ACCOUNTING TERMS

 Business transaction: the terms business transaction
means a financial transaction or event entered into by the
two parties and is recorded in the books of accounts.
 ACCOUNT: account is a summarized record of transactions
relating to a particular head at one place. It records only
the amount of transactions but also the amount of
transactions but also their effect and direction.
 CAPITAL: capital is the amount invested by the proprietor
or partner in the business capital is also called OWNER’S
EQUITY or NET WORTH.
 DRAWINGS: it is the amount withdrawn or goods taken by
the proprietor or partner for personal use.
 LIABILTIES: liability means amount owed (payable) by the
business.
Liability towards the owners of the business
is termed as INTERNAL LIABILTIES. On the other hand,
liabilities towards the outsiders than the owners are
termed as EXTERNAL LIABILTY.
LIABILITY CAN BE FURTHER CLASSIFIED

Noncurrent liability current liability

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 ASSETS: an asset is a property or legal rights owned by a business

to which money value can be attached.

ASSETS

Noncurrent assets current assets fictitious assets

Tangible assets intangible assets

Fictitious assets are neither those assets which are neither tangible assets nor
intangible assets. They are losses not written off in the year in which they are
incurred but in more than one accounting period.

 RECIEPTS: receipt is the amount receive or receivable for selling assets,

goods or services

RECIEPTS

Revenue receipts capital receipts

 EXPENDITURE: expenditure is the amount spent or liability incurred for

acquiring assets, goods or services.

EXPENDITURE

Capital expenditure revenue expenditure deferred revenue expenditure

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Deferred revenue expenditure is revenue expenditure in nature but is written off

(charged) in more than one accounting period. For example, large advertising
expenditure that will give benefit for more than one accounting period.

 EXPENSES: expense is the cost incurred for generating revenue.

An expense is charged (debited) to profit and loss a/c.
 OUTSTANDING EXPENSE: it is and expense that has been incurred but
has not been paid.
 PREPAID EXPENSE: It is an expense that has been paid in advance and
the benefit of which will be available in the following year or years.
 INCOME OR PROFIT: income is the profit earned during a period. In
other words, the difference between revenue and expense is termed as
INCOME.
 GROSS PROFIT: G.P. is the difference between revenue from sales and/or
services rendered over its direct cost.
 NET PROFIT: N.P. is the profit earned after allowing for all expenses. In
case expenses are more than revenue, it is loss.
 GAIN: gain is a profit of irregular or non – recurrent nature. It is a profit
that arises from transactions which are incidental to business such as profit
on scale of fixed assets or investment.
 PURCHASES: the term ‘purchases’ is associated with or used for
purchases of goods. Goods are articles purchased for resale or for
producing the finishes products, which are also to be sold.
 SALES : the term ‘sales’ is associated with or used for sale of goods that
are dealt with the firm.
 STOCK or (INVENTORY): stock is a tangible asset held by an
enterprise for the purpose of sale in the ordinary course of
business.

STOCK

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Stock of goods stock of RM (raw material) stock of WIP

(Work-in- process)

 TRADE RECEIVABLES: it is the amount receivable for the sale of

goods or services rendered in the ordinary course of business.
Trade receivables include debtors/bills receivables.
 DEBTORS: debtor is a person who owes amounts to the enterprise
against credit sales o goods or services.
 BILL RECIEVABLES: It is the amount payable for purchase of goods
or services taken in the ordinary course of business. Trade
payables include creditors and bills payable.
 CREDITORS: Creditor is a person to whom and enterprise owed
against credit purchases of goods or services.
 BILLS PAYABLE: B/P means bills of exchange accepted by a
creditor.
 COST: it is amount of expenditure incurred on or attribute to a
specific article, product or activity.
 VOUCHER: Voucher is an evidence of business transaction.
Example: cash memo, invoice or bill, receipts, debit/credit notes.
 DISCOUNT: when customers are allowed rebate in the prices of
goods by the business or from the amount paid by customers it is
known as a discount.
 BOOKS OD ACCOUNT: books of account are those books in which
transactions are recorded and include cash book, journal proper
and ledger.
 ENTRY: a transaction and event when recorded in the books of
account in known as the entry.

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 DEBIT: an account has two parts i.e., debit and credit. The side is
the debit side. It has been derived from an Italian word ‘debito’
 CREDIT: right side of account is the credit. It has been derived from
an Italian word ‘credito’.
 PROPRIETOR: the person who makes the investment and bears all
the risks associated with the business is called proprietor.
 DERPRECAITION: depreciation is a fall in the value of an asset
because of usages or with afflux of time or obsolesce or accident.
 COSTS OF GOODS SOLD: cost is the direct cost incurred on selling
goods and rendering services.
 BAD DEBTS: bad debt is the amount owed to the business that is
written off because it has become irrecoverable. It is a loss for the
business and is thus, debited to profit or loss account.
 INSOLVENT: insolvent is a person or enterprise which is not in a
position to pay its debts.
 SOLVENT: solvent is a person or an enterprise which is in a position
to pay its debts.
 BOOK VALUE: this is the amount at which an item appears in the
books of accounts or financial statement.
 BALANCE SHEET: it is a statement of the financial position of an
individual or enterprise at a given date, which exhibits its assets,
liabilities, capital, reserves and other account balances at their
respective book values.
 ENTITY: an entity means an economic unit which performs
economic activities (e.g. reliance industries, BAJAJ auto). A
business entity means an enterprise establishes in accordance
with law to engage in business activities. These include
proprietorship firms, partnership firms, and corporations.

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CHAPTER – 3
Theory base of accounting: accounting standards and international
financial reporting standards (IFRS).

GAAP: accounting principles, concepts and conventions commonly

known as Generally Accepted Accounting Principles.

MEANING and NATURE OF ACCOUNTING PRINCIPLES

Principles of accounting are the general law or rule adopted or

proposed as a guide to action, a settled ground or basis of conduct or
practice.

Accounting principles are the rules of action or conduct adopted

by accountants universally while recording accounting transactions.

These principles are classified into two categories:

ACCOUNTING CONCEPTS ACCOUNTING CONVENTION

Or

ASSUMPTIONS
1. Going concern assumptions 1. Accounting entity or business entity

2. Consistency assumption principle

3. Accrual assumptions 2. Money measurement principle

3. Accounting period principle

4. Full disclosure principle

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5. Materiality principle

6. Prudence or conservatism principle

7. Cost concept or historical cost

Principle

8. Matching concepts principles

9. Dual aspect or duality

10. Revenue recognition principle

11. Verifiable objective principle

ACCOUNTING CONCEPTS: Accounting concepts are the basic

assumptions or fundamental propositions within which accounting operate.

ACCOUNTING CONVENTIONS: accounting conventions are the outcome of

accounting practices or principles being followed by the enterprises over a period of time.

FEATURES OF ACCOUNTING PRINCIPLES

1. Accounting principles are man made
2. Accounting principles are flexible
3. Accounting principles are generally accepted

The general acceptance of accounting principles usually depends on how it meets

three criteria:
1. Relevance
2. Objective
3. Feasible

NECESSITY OF ACCOUNTING PRINCIPLES

Accounting information is better understood if it is prepared following the set of
Accounting principles uniformly. It means the same accounting principles are
followed by all entities in preparing their final accounts.

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GOING CONCERN ASSUMPTIONS:

According to this assumption, it is assumed that business shall continue for a
foreseeable period and there is no intention to close the business or scale down
its operation significantly. This implies that it will not be dissolved in the
immediate future unless there is a clear evidence of closure.
For example, a vehicle purchased is expected to last 15 years. The cost of
vehicle is spread on a suitable basis over the next 15 years for ascertaining the
profit / loss for each years.

CONSISTENCY ASSUMPTIONS:
According to this assumption accounting practices once selected and adopted,
should be applied consistently year after year. The concept helps in better
understanding of accounting information and makes it comparable with that of
previous years.
For example, two methods of valuation of stock (inventory) LIFO, FIFO.
Under this assumption method once chosen and applied should be applied
consistently after year.

ACCURAL ASSUMPTION:
According to this assumption, a transaction is recorded in the books of accounts
at the time when it is entered into and not when the settlement takes place.
Thus, revenue is recognized when it is realized, i.e., when scale is complete or
services are rendered.
For example, ABC make a purchase of goods from shyam limited on 6th march
2014 , for rs 10000 on credit for one month, the purchase must be recorded on
26th march 2014 although the amount will be paid after one month.

ACCOUNTING PRINCIPLES
ACCOUNTING ENTITY OR BUSSINESS PRINCIPLE:
According to this principle, business is considered to be separate
and distinct from its owners. Business transactions, therefore, are
recorded in the books of accounts from the business point of view
And not from that of the owners.

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MONEY MEASUREMENT PRINCIPLE:

According to the money measurement principle transactions and
events that can be measured in money terms are recorded in the
books of accounts of the enterprise.

However, the principle suffers from two major limitations:

a) Transactions and events that cannot be measured in monetary terms

are not recorded in the books of accounts, howsoever, important
they may be to the enterprise.

ACCOUNTING PERIOD PRINCIPLE:

According to the accounting period principle, the life of an
enterprise is broken into smaller periods so that its performance is
measured at regular intervals.
In view of the above, the life of the enterprise is broken into
smaller periods (usually in year) which are termed as the ‘accounting
period’.

FULL DISCLOSURE PRINCIPLE:

According to this principle ‘there should be complete and under
sable reporting on the financial statement of all significant
information relating to the economics of the entity’

MATERIALITY PRINCIPLE:
This principle stated “an item should be regarded as material if there
is a reason to believe that knowledge of it would influence the
decision of an informed inventor.
For example, amount spent on repairs of building, say rs 500000
is material for an enterprise having a turnover of say rs 5000000. On
the other hand, closure of a production plant, even temporarily say
because of an envirmental problem is material.

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PRUDENCE OR CONSERVATISM:
This principle refer to this phrase “do not anticipate a profit, but
provide for all possible losses.”
In other words, it takes into consideration all prospective losses but
not the prospective profits.
For example, closing stock is valued at lower of cost or net realizable
value.

COST CONCEPT OR HISTORICAL COST PRINCIPLE:

According to the cost concept, an asset is recorded in the books of
accounts at the price paid to acquire it and the cost is the basis for all
subsequent accounting of the assets. Assets are recorded at cost at
time of its purchase but I systematically reduced in value by charming
depreciation.

MATCHING CONCEPT OR MATCHING PRINCIPLE:

This concept is based on the accounting period concept. An
important objective of business is to determine profit periodically. It
is necessary to match ‘revenue of the period with the ‘expenses’ of
that period to determine correct profit (or loss) for the accounting
period.

DUAL ASPECT OR DUALTIY PRINCIPLE:

According to this concept, every transaction entered into by an
eEnterprise has two aspects, a debit and a credit of equal amount OR
we can say
Assets = capital + liabilities

REVENUE RECOGNITION CONCEPT:

According to this concept, revenue is considered to have been
realized when a transaction has been entered into and the obligation
to receive the amount has been establishes, it is to be noted that

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recognizing revenue and receipts of an amount are two separate

aspects.

VERIFIABLE OBJECTIVE CONCEPTS:

The verifiable objective concept held’s that accounting should be free
from personal bias. Measurements that are based on verifiable
evidence are regarded as objective. It means all accounting
transactions should be evidenced and supported by business
documents.

ACCOUNTING STANDARDS
The rise in diversity, complexity and globalization of business made
the study of accounting information essential. But the diversity in the
accounting policies being followed and the accounting treatment of
transactions and events made the accounting information less
meaningful and also incomparable. A need was thus felt that c retain
minimum standards should be universally applicable so that the
accounting statement have the qualitative characteristics of
reliability, relevance, understandability and comparability.

MEANING: Kohler has defined accounting standards as “a code of

conduct imposed on an accountant by custom, law and a professional
body.”
NATURE:
1) Accounting standards are guidelines providing the framework so that
credible financial statements can be provided.
2) Accounting standards are mandatory in nature
3) The objectives of setting accounting standards are to bring uniformity
in accounting practices and to ensure transparency, consistency and
comparability.

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OBJECTIVE

1) Understand significant accounting policies adopted and applied.

2) Promote better understanding of financial statement
3) Enhancing reliability of financial statements

UTILITY (AS- Accounting Standards)

1) As provide the norms on the basis of which financial statements should be

prepared.
2) As create a sense of confidence among the users of accounting information
3) As helps auditors in auditing the accounts. They help accountants to follow
uniform practice and policies

IFRS – international financial reporting standards

GAAP – generally accepted accounting practice

IASB – international accounting standards boards

SIC – standing interpretation committee

IFRIC – international financial reporting interpretations

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CHAPTER – 4
BASES OF ACCOUNTING
BASIS ACCURAL BASIS CASH BASIS
1. RECORDING OF Both cash and Cash
TRANSACTION
credit transaction transactions are
are recorded recorded
2. Prepaid and Not adjusted
PREPAID/OUTSTANDING outstanding
EXPENSES, ACCURAL adjusted in profit
INCOME/ INCOME and loss a/c
RECEIVED IN ADVANCE
3. PROFIT/LOSS Correct profit or Correct profit or
loss is ascertained loss is not
because it ascertained
records both cash because it
and credit records only
transactions cash
transactions
4. TECHNICAL Required Not requires
KNOWLEDGE
5. LEGAL POSITION Accrual basis on Not recognized
accounting is
recognized by the
company act
2013
6. ACCEPTABILTY More acceptable Not acceptable
in business

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7. RELIABILTY more reliable Less reliable

8. SUITABILTY More suitable in Suitable in NPO
all type of and
business professionals
only

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CHAPTER – 5
ACCOUNTING EQUATION
An accounting equation is a mathematical expression which shows that the
assets and liabilities of a firm are equal.

WE CAN EXPRESS IT AS FOLLOWS:

ASSETS=equities (total claims)

OR

ASSETS = liabilities + capital

OR

CAPITAL = assets – liabilities

Rules for accounting equations:

1) CAPITAL – when capital is increased, it is credited (+) and when a part of

the capital is withdrawn, i.e., drawings are made it is debited (-).
2) REVENUE – owner’s equity (capital) is increased by the amount of
revenue
3) EXPENSES – owner’s equity (capital) is decreased by the amount of
expenses.
INCOME=revenue- expense
TREATMENT OF SPECIAL TRANSACTION

1) OUTSTANDING EXPENSES

(+) liabilities (-) capital

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2) INCOME RECEIVED IN ADVANCE

Cash (-) capital (+)

3) ACCURED INCOME

Assets (+) capital (+)

4) PREPAID EXPENSES

Cash (-) assets (+)

5) INTEREST ON CAPITAL AND INTEREST ON DRAWING

Capital (-) capital (+)

6) DEPRECIATION CHARGED ON FIXED ASSETS

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Capital (-) fixed assets (-)

7) GOODS TAKEN BY PROPRITIER FOR OWN USE

Capital (-) stock (-)

8) GOODS SOLD TO DEBTORS (CREDIT)

Assets (+) stock (-)

9) B/R RECEIVED FROM DEBTORS

Assets (+) assets (-)

10) B/P ISSUED TO CREDITORS

Liability (+) liability (-)

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Chapter – 6
ACCOUNTING PROCEDURES- RULES OF DEBIT AND CREDIT

CLASSFICATION OF ACCOUNTS

Traditional classification modern classification

Accounts

Personal impersonal

Natural artificial representative real nominal {nominal / expenses}

Assets liabilities capital revenue expenses

RULES FOR DEBIT AND CREDIT {MODERN}

TYPES OF ACCOUNT DEBIT CREDITED

Assets + -
Liabilities - +
Capital - +
Revenue - +
Expenses + -

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RULES FOR DEBIT AND CREDIT {TRADITIONAL}

Three golden rules for accounting

REAL A/C – debit what comes IN credit what goes OUT

PERSONAL A/C – debit the RECIEVER credit the GIVER

NOMINAL A/C – debit all EXPENSES and LOSSES credit all INCOME and GAINS

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CHAPTER – 7

ORIGIN OF TRNSACTIONS – SOURCE DOCUMENTS AND PREPARATION OF

VOUCHERS
SOURCE DOCUMENTS: a source document is a written document containing details of the
transaction.

A source document is of prime importance in accounting because accounting is based on

factual information, i.e., evidence.

Some common source documents:

CASH MEMO: cash memo is p [prepared by the seller when goods are sold against cash

INVOICE OF BILL: an invoice or bill is prepared by the seller when the goods are sold on credit.

RECIEPT: when cash or cheque is received from a customer a receipt for the amount received is
issued. The receipt is prepared in duplicate.

PAY – IN – SLIP: it is a source document used for depositing cash or cheques into bank.

CHEQUE: a cheque is document in writing drawn upon the bank with which the account is held
and is payable on demand.

CREDIT NOTE: a credit note is made out evidencing that credit has been granted to a debtor.

DEBIT NOTE: a debit note is made out evidencing that debit has been made to the account of
the party named in the debit.

VOUCHER: a voucher is a document evidencing a business transaction

TYPES OF VOUCHERS

Source voucher accounting voucher

Or

Source documents

Or cash voucher non- cash voucher

Supporting documents or

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Transfer voucher

Debit voucher credit voucher

FEATURES OF SOURCE VOUCHER

1. It is a written document
2. It contains complete details of the transactions
3. It is a proof of a transaction having take place
4. It is signed by the maker

FEETURES OF ACCOUNTING VOUCHERS:

1. It is a written document
2. It is prepared on the basis of evidence of the transaction
3. It is prepared and signed usually by an accountant and countersigned by the authorized
signatory
4. In the case of cash/bank voucher , it is a receipt

CASH VOUCHERS: cash voucher refers to the voucher prepared at the time of receipts or
payment of cash and includes receipt and payment through cheques.

CREDIT VOUCHERS: credit vouchers are prepared when cash is received.

DEBIT VOUCHERS: debit vouchers are prepared when cash is paid.

NON CASH VOUCHERS OR TRANSFER VOUCHER: non cash vouchers refer to vouchers
prepared for transactions not involving cash.

FORMATES

CREDIT VOUCHER

Sultan chand 4 sons {P} to

24, Darya Ganj, New Delhi -110002

Voucher no. xxx date xxx

Akash jain sir Credit

MOBILE – 9811410864
: sales a/c EMAIL ID- [email protected]
amount

{---------} 20000
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DEBIT VOUCHER

Sultan chand 4 sons {P} to

24, Darya Ganj, New Delhi -110002

Voucher no. xxx date xxx

Debit : purchase a/c amount

{---------} 10000

Total 1000000

Sd/- Sd/

manager accountant
CHAPTER – 8

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CHAPTER 8
JOURNAL AND LEDGER
MEANING: a journal is the primary book of accounts in which
transactions are first recorded in a chronological order i.e., as they are
entered into.

An entry recorded in the journal is called a JOURNAL ENTRY.

The process of recording a transaction in a journal is known as
JOURNALISING.

The transfer of journal entry to a ledger account is called POSTING.

CHARACTERISITICS

1. A journal contains day to day transactions in a chronological

order.
2. It is a book of original entry in which transactions are written
before they are posted in ledger
3. It records both the debit and credit aspects of a transaction by
using the DOUBLE ENTRY SYSTEM OF BOOK-KEPING.
4. Journalizing means recording a transaction in the journal and the
form in which it is recorded is known as a JOURNAL ENTRY
FORMAT

DATE PARTICULAR L.F. Dr rs Cr rs

S

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STEPS IN JOURNALISING:
1. Ascertain the accounts that are affected by a transaction.
2. Ascertain the nature of the accounts affected.
3. Ascertain the account to be debited and credited by
applying the rules of debit and credit.

SIMPLE and COMPUND JOURNAL ENTRIES

1. SIMPLE J.E.: simple J.E. is an entry in which only two accounts are
affected.
2. COMUND J.E.: compound J.E. is an entry in which two or more
accounts are debited and one or more accounts are credited or
vice – versa.

SPECIAL JOURNAL ENTRIES

1. Goods taken by proprietor for Personal use

Drawings A/c ------ Dr
To purchase a/c
2. Goods lost/ destroyed by fire
Goods lost by fire a/c ------ Dr
To purchase a/c
3. Goods distributed as free sample
Advertisement A/c ------ Dr
To purchase a/c
4. Goods given as charity
Charity A/C ------- Dr
To purchase ac
5. Unsold stock at the end of the year
Closing stock a/c ------- Dr

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To purchase a/c
6. Depreciation charged on fixed assets
Depreciation a/c -------- Dr
To fixed assets a/c
7. Interest on capital
Interest on capital a/c ------- Dr
To capital a/c
8. Interest charged on drawings
Drawings a/c ------ Dr
To interest on drawings
9. Freight/ wages/installation paid on newly purchased fixed assets
Fixed assets a/c ------ Dr
To cash a/c
10. Bad debt/amount due to debtor is not recoverable
Bad debts a/c ------ Dr
To debtor
11. Bad debts recovered
Cash a/c -------- Dr
To bad debts recovered
12. Goods used to make an asset
Assets a/c ---------- Dr
To purchase a/c
13. Sale of fixed assets
Bank/cash a/c --------- Dr
To fixed assets a/c
14. Cheque deposit in bank unpaid/dishonored
Debtors a/c------ Dr
To bank a/c

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15. Outstanding expenses

Expenses a/c ----- Dr
To outstanding expenses
16. Prepaid expenses
To expense
17. Accrued income a/c ------ Dr
To income a/c
18. Income received in advance
Cash a/c --------- Dr
To income received in advance
19. Value added tax {VAT}
a) When VAT is paid at the time of purchases
Purchases a/c --- Dr
VAT paid a/c ------ Dr
To cash/bank a/c
b) When VAT is collected at the time of sales
Cash/bank a/c ------- Dr
To sales a/c
To VAT collected a/c
c) When VAT is paid to the government
VAT collected a/c --------- Dr
To VAT paid
To cash/ bank a/c {with the difference}

GOODS AND SERVICE TAX [ GST ]

MEANING: goods and service tax [GST] is a comprehensive indirect tax levied at the prescribed rate on
every supply, i.e., sale of goods and/or services except on petroleum and alcohol for human

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consumption. Supply of goods means sale of goods whereas supply of services means rendering of
services.

CHARACTERISTICS OF GOODS AND SERVICES TAX [GST]

1. Gist is a comprehensive indirect tax

2. Gst is a value added tax
3. Gst paid is not cost
4. Uniform GST rate on goods and services across all states

OBJECTIVES OF GOODS AND SERVICES TAX [GST]

1. Developing common national market

2. Ease of doing business
3. No cascading effect of GST
4. To simplify indirect tax regime by having one tax and fewer rates of taxes
5. Better tax management
6. Goods becoming cheaper
7. Attracting foreign investors
8. Uplifting GDP

CLASSIFICATION OF GOODS AAND SERVICES [GST]

GST is levied under following three categories

1. Central GST [CGST]

2. State GST [SGST] or union territory GST [UTGST]
3. Integrated GST [IGST]

CAATEGORISING GST FOR ACCOUNTING PURPOSE

The GST accounts maintained are:

1. Input CGST
2. Input SGST
3. Input IGST
4. Output CGST
5. Output SGST
6. Output IGST

SETTING OFF INPUT GST AGAINST OUTPUT GST

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input [paid] input [paid] input [paid]

IGST CGST SGST

adjust against adjust against output adjust against

output IGST
CGST output SGST
output CGST
output SGST output IGST output IGST
[in that order ] [in that order] [in that order]

carry forward the balance in carry forward the balance carry forward the balance in
input IGST account or pay , in input CGST account or input SGST account or pay , if
if the balance is outstanding pay , if the balance is the balanece is outstanding
in output IGST account outstanding in output CGST in output SGST account

SUPPLY OF FOLLOWING GOODS AND/OR SERVICES ARE EXEMPT FROM LEVY OF GST:

i. Salaries and wages

ii. Supply of services to government
iii. Supply to embassies of other countries
iv. UNO
v. Educational services
vi. Health services
vii. Electricity and water bills

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OPENING ENTRY
Books of accounts are closed at the end of each year and a new set of books in the
beginning of the new year is started first entry in the journal is to record the closing balances of
the previous year as they become the opening balances of new year . The entry passed to
record closing balances of the previous year is called the OPENING ENTRY.

LEDGER
MEANING: a ledger may be defined as a “book or register which contains, in a summarized and
classified form, a permanent record of all transactions.”

FORMAT

Dr Ledger ------------ Cr

DATE PARTICULAR F AMOUNT DATE PARTICULAR F AMOUNT

S S

FEATURES:

 The ledger is a master record of all the accounts of a business firm.

 It is prepared from journal
 Ledger accounts show the current balance in all accounts
 Trial balance and final accounts are prepared from Ledger accounts
 Ledger accounts summaries the effect of transactions upon assets liabilities, capital,
incomes and expenditures.

UTLITY:

 How much amount is due from a particular customer?

 How much amount is owed to particular creditors?
 How much is the amount of purchase and sales during a given period?
 How much amount has been incurred?

POSTING OF OPENING ENTRY:

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All assets will show a debit balance. Such account will be opened and relevant amount
will be written on the debit side as “to balance brought down [b/d]: on the contrary, the
account of liabilities shows credit balance. An account for each liability will be opened and the
relevant amount will be written on the credit side as ‘By balance brought down [b/d]’.

TYPES OF ACCOUNTS THAT ARE BALANCED:

Normally, assets, liabilities and capital accounts are balanced; revenue and expenses
accounts are not balanced but are closed by transferring to ‘trading or profit and loss account
at the end of the accounting year.’

TRIAL BALANCE

MEANING : after posting the transaction in the accounts and balancing them, a statement is
prepared to show separately the debit and credit balance such a statement is known as ‘TRIAL
BALANCE’ : it must be remembered that equalizing two two sides of a TRIAL BALANCE is not the
sole and conclusive proof of the complete correctness of accounting work.

OBJECTIVE:

1. The accounts are arithmetically accurate

2. Both aspect of all the transactions have been recorded and
3. Both the debit and credit entries are posted in ledger.

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CHAPTER – 9
SPECIAL PURPOSE BOOK – 1
CASH BOOK

Books of original entry or Prime entry –

It is a special form of journal a sub-division of it. Journal entry is not passé for the
transaction recorded in such books. They are posted to the ledger accounts. The system
is called the Practical system of Accounting.

SUBSIDIARY BOOKS OR SUB-DIVISION OF JOURNAL

CASH BOOK: to record receipts and payments of cash including receipts into and
payments out of the bank.

PURCAHSES BOOK: to record credit purchases of goods dealt in by the firm. All credit
purchases of goods are recorded in this book.

SALES BOOK: to record the credit sales of goods dealt in by the firm.

PURCHASES RETURN BOOK: to record the return of goods previously purchased on

credit.

SALES RETURN BOOK: to record the return of credit sales made by customers.

JOURNAL PROPER: to record the transactions which cannot be recorded in any of the
books mentioned above?

ADVANTAGES OF SUBSIDIARY BOOKS:

1. Division of work
2. Specialization and efficiency
3. Saving of time
4. Availability of information
5. Facility in checking
6. Responsibility

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CASH BOOK
FEATURES:

a) Only cash and bank transactions are recorded in the cash book.
b) It records only one aspect of the transaction, i.e., cash.
c) It performs the function of both journal and the ledger at the same time.

KINDS:

a) Simple cash book

b) Double column cash book
c) Triple column cash book
d) Petty cash book

FORMATS

Simple cash book

Dr Cr

DATE PARTICULARS C.F. AMOUNT DATE PARTICULARS C.F. AMOUNT

DOUBLE COLUMN CASH BOOK

Dr Cr

DAT PARTICULAR C.F DISCOUN CAS DAT PARTICULAR C.F DISCOUN CAS
E S . T H E S . T H

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TRIPLE COLUMN CASH BOOK

Dr Cr

DAT PARTICULARS C.F. DISCOUN CASH BANK DAT PARTICULARS C.F. DISCOUN CASH BANK
E T E T

IMPORTANT

1. Transactions in which party name is not given is treated as cash transaction. For
example, goods purchased or goods sold, these transactions are treated as cash
transactions and are recorded in cash book.
2. Transactions are which party name [example, goods purchased from Rahul or
goods sold to Parul] are treated as credit transactions and are not recorded in
cash book.
3. Transactions in which both party name and cash are given [example, goods
purchased in cash from Parvesh or goods sold in cash to Anita] are treated as
cash transactions.
4. Contra entry are those transactions which are recorded in three- column cash
book which relate to both cash and bank i.e., balance of one decreases and that
of the other increases due to such transactions . Such transactions are entered
on both sides of the cash book. Against such entries, the letter ‘C’ is written in
the L.F. column to indicate that these are contra entries and are not posted in
the ledger account.

Examples are:

a) Cash deposit in bank

b) Cash withdrew from bank
5. Cash column will always have a ‘debit balance’ which is shown on the assets side
of the balance sheet or nil balance. But the bank column may have either debit
or credit balance which is shown or credit balance which is shown on the assets
or liabilities side of the balance sheet respectively.

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SYSTEM OF PETTY CASH

Petty cash book may be maintained by ordinary system or by impress system.

In case of ordinary system of petty cash, petty cashier is given appropriate amount of cash and
after spending the whole of that amount, he submits the amount to the head cashier.

ADVANTAGES OF IMPREST SYSTEM OF PETTY CASH

1. Control over mistakes

2. Control over petty expenses
3. Control over fraud

TYPES OF PETTY CASH BOOK

1. Simple petty cash book

2. Analytical petty cash book

FORMAT
SIMPLE PETTY CASH BOOK

Dr Cr

AMOUNT CASH BOOK DATE PARTICULARS VOUHER AMOUNT

RECIEVED FOLIO NO. PAID

ANALYTICAL PETTY CASH BOOK

Dr Cr

RECIEPTS DATE VOUCHER PARTICULARS TOTAL 1 2 3 4 5 6

NO. PAYMENT

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CHAPTER – 10
SPECIAL PURPOE BOOK 2
OTHERR BOOKS

JOURNAL IS SUB DIVIDED INTO:

1. Cash book
2. Purchase book
3. Sales book
4. Purchase return book
5. Sales return book
6. Journal proper

The above books called SPECIAL JOURNAL OF BOOKS OF ORIGINAL ENTRY

SUB DIVISION OF JOURNAL

SPECIAL JOURNAL PROPER

Cash book purchase book sales book purchase return sales return book

Book

PURCHASE BOOK OR PURCHASE JOURNAL

Credit purchase of goods dealt in or of materials and stores used in the factory is recorded on the basis
of the invoices In the Purchase Book.

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FEAATURES OF PURCHASE BOOK:

1. Only credit purchases of goods recorded

2. Cash purchases are not recorded in the purchases book since they are recorded in the cash
book.

FORMAT

DATE PARTICULARS INVOICE NO. L.F. DETAILS AMOUNT

DISTINCTION BETWEEN PURCHASES BOOK and PUCHASE ACCOUNT

BASIS PURCHASE BOOK PURCHASE ACCOUNT

1. PART It is a part of journal It is a part of a ledger
2. FORMAT Like ledger a/c , it does not have It has debit and credit columns
debit and credit columns
3. CONTENTS Only credit purchases are Both cash and credit purchases
recorded are recorded
4. AMOUNT Total of PB is posted to the Balance in the account is
purchase a/c transferred to the trading a/c

SALES BOOK OR SALES JOURNAL

Credit sales of goods dealt in by the firm are recorded in a separate register called the SALES BOOK or
SALES JOURNAL. Cash sales are entered in the cash book and not in the sales book. Credit sales of items
other than goods dealt in by the firm are not entered in the sales book, they are journalized. Entries in
the sales book are on the basis of invoices issued to the customers with the net amount after Trade
discount.

FEATURES OF A SALES BOOK:

1. Credit sales of goods dealt in are recorded in the sales book. sale of assets is not recorded in the
sales book
2. Credit sales of goods other than goods dealt in are recorded in the sales book. They are
journalized
3. Cash sales are not recorded in sales book since they are recorded in the cash book.

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DISTINCTION BETWEEN SALES BOOK AND SALES ACCOUNT

BASIS SALES BOOK SAALES A/C

1. Part It is a part of a ledger book It is a part of a ledger
2. Format Like a ledger a/c, it does not It has debit and credit column
have debit and credit columns.
3. Content Credit sales only Credits as well as cash

SOME IMPORTANT ITEMS:

1. CENTRAAL SALES TAX: CST is charged on inter – state sales from the customers on the
net sales value.
2. VALUE ADDED TAX [VAT]: VAT is the tax charged on local [within the state] sales. The
VAT paid on purchases in set – off against VAT collected on sales and balance in the VAT
collected account is deposited in the government account.
3. Freight and packaging charges: sometimes freight and packaging charges are charged
from the customer along with the cost of goods sold in the sale invoice itself.

PURCHASE RETURN OR RETURN OUTWARD BOOK

Purchases return or return outward book is maintained to record the goods or materials returned to the
supplier from whom they had been purchased. Goods may be returned because of any of the following
reasons:

1. Goods are not as per sample

2. Goods are defective
3. Goods are not as per order
4. Goods have been delivered late and the customers has refused to accept them

SALES RETURN OR RETURN INWARD BOOK

Sales return or return inward book is maintained to record the goods or materials returned by the
purchaser [customers] that had been sold on credit.

When goods are returned by the customer a document is prepared called credit note and sent to the
customer to intimate that his account has been credited.

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DIFFERENCE BETWEEN DEBIT NOTE AND CREDIT NOTE

DEBIT NOTE CREDIT NOTE

Debit note is prepared by the customer on the Credit note is prepared by the supplier
supplier
Debit note is an intimation for debit made in the Credit note is n intimation of credit made in the
account of supplier containing the reasons for it account of the customers containing the reason
for it

JOURNAL PROPER OR GENRAL JOURNAL

Apart from the transactions, [which are recorded in cash book, PB, SB, PRB, SRN] there are other
transactions which have to be recorded. For them, the proper place in the JOURNAL PROPER. The role of
the journal proper is thus, usually restricted to the following types of entries.

1. Opening entry
2. Closing entry / entries
3. Rectification entries
4. Transfer entries
5. Adjusting entries
6. Entries for dishonor of bills
7. Miscellaneous entries

DISTINCTION BETWEEN SPECIAL JOURNAL AND GENERAL JOURNAL

BASIS SPECIAL JOURNAL GENERAL JOURNAL

NATURE It records transactions of similar It does not record transactions
nature of a similar nature
FORMAT It is a form of statement It is a form of a journal
NEED A business unit may not have A business unit must have a
special journal journal proper

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CHAPTER – 11

BANK RECONCILATION STATEMENT

MEANING: BRS is a statement prepared by the account holder on a particular date to reconcile the bank
balance as per cash book with the balance as per bank statement or bank pass showing entries causing
difference between the two balances.

NEED AND IMPORTANCE OF BRS

1. It brings to light errors that may have been committed either in the cash book or in the bank
statement or pass book.
2. Under delay in the clearance of cheques deposited is known from the reconciliation.
3. Regular reconciliation discourages embezzlement
4. Reconciliation helps the management to verify the accuracy of entries recorded in the cash
book.
5. It shows actual book balance.

BANK STATEMENT OR BANK PASS BOOK

Bank statement or bank pass book is a copy of account of the account holder in the books of the
bank. It is issued by the bank to the account holder so that entries in the bank statement or bank pass
book can be compared with the entries in the cash book.

REASONS OF DIFFERENCE BETWEEN BALANCES AS PER CASH BOOK AND BANK STATEMENT OR BANK
PASS BOOK

1. Difference due to timing

2. Transaction recorded by the bank
3. Errors

LET US ELABORATE ON THE REASONS OF DIFFERENCES

DIFFERENCE DUE TO TIMING

1. Cheques issued but not yet presented for payment

2. Cheques deposited into the bank but not yet cleared

TRANSACTION RECORDED BY THE BANK

3. Interest credited by the bank but not recorded in the cash book
4. bank charges and interest charged by bank but not recorded in the cash book
5. interest and dividend collected by the bank
6. direct payment by the bank
7. direct deposit into bank by a customer

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8. dishonor of a bill discounted with the bank

9. bills collected by the bank on behalf of the customer

ERRORS

10. errors and omissions

METHODS OF PREPARING BANK RECONCILATION STATEMENT

1. date
2. balance[opening]

PARTICULARS C.B. P.B.

Debit balance + -
Credit balance - +
Overdraft - -
Normal + +

3. preparing bank reconciliation statement

BANK RECONCILATION STATEMENT

PATICULARS CB PB
1. cheques issued but not presented + -
2. cheques deposited into the bank - +
but not yet collected
3. interest allowed by the bank but not + -
entered into the cash book
4. bank charges are not entered in the - +
CB
5. direct deposit into the bank by a + -
customer
6. direct payment by the bank - +
7. direct collection made by the bank + -
8. cheque issued and payment - +
received by the creditors but not
entered in the cash book
9. cheque paid into the bank but + -
omitted to be entered in C B

10. dishonor of a cheque and - +

B/R
11. Cheque entered in the CB but not - +
sent to the bank
12. post dated cheques - +

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CHAPTER – 12

TRIAL BALANCE

MEANING: a trial balance is a statement prepared with the debit and credit balances of the ledger
accounts to test the arithmetical accuracy of the book -- J.R. BATLIBOI

CHARACTERISTICS OR FEATURES OF A TRIAL BALANCE

1. it is a list of balances of ledger accounts and cash book

2. It is not a part of the double entry system of book keeping. It is a result of double entry system
of book keeping. it is only a working paper
3. it can be prepared on any date
4. it verifies the arithmetical accuracy of posting of entries from the journal to the ledger
5. it is not a conclusive proof of the accuracy of the book of accounts since some errors are not
disclosed by the trial balance

OBJECTIVES OR FUNCTIONS OF TRIAL BALANCE:

1. to ascertain the arithmetical accuracy of ledger account

2. to help prepare the final accounts
3. summary of each accounts
4. to help in locating errors

FORMAT OF A TRIAL BALANCE

PATICULARS CF DEBIT CREDIT

LIMITATION OF A TRIAL BALANCE:]

1. Errors of complete omission

2. Errors of principles
3. Compensating errors
4. Incorrect amount entered n Journal
5. Posting to the wrong account
6. An entry posted twice in the ledger

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CHAPTER – 13
DEPRECIATION
MEANING: depreciation as a part of cost of a fixed asset which has expired due to its usage
and/or efflux of time due to obsolescence or accident.

CHARACTERISTICS
1. Depreciation is a reduction in the book value of a tangible fixed asset
2. It reduces the book value of the asset but not its market value
3. Depreciation is a non – cash expense
4. Depreciation is an expense and there

DEPRECIATION AND OTHER RELATED CONCEPTS

1. DEPRECIATION – depreciation means decreases in the book value of tangible fixed assets due to
their use in business efflux [passage] of time or obsolescence.
2. DEPLETION – the term depletion is use in relation of natural resources like quarries, oil wells,
miens, etc... When natural resources are extracted or exhausted their stock value is reduced.
This reduction is termed as DEPLETION.
3. AMORTISATION – amortization means writing off of intangible fixed assets like goodwill, patent,
trade mark, copy right etc.
4. OBSOLOSCENCE – it refers to decline in the economic value of the assets due to innovation or
improved technique change in taste or fashion or inadequacy of the existing asset due to
improved demand.

CAUSES OF DEPRECIATION

1. USE OF ASSETS : constant use of asset leads to its wear and tear and thus fall in value
2. EFFLUX OF TIME : some assets have a definite life period like lease ; on the expiry of the life
period the asset will cease to exist
3. OBSOLESCENCE: if a better machine comes in the market, old machines may have to be
scrapped even though they are capable of being used. It is a reduction in the usefulness of the
asset
4. ACIDENT : accidental loss may be permanent but is not continuing and gradual

NEED OR OBJECTIVES FOR PROVIDING DEPRECIATION

1. To ascertain the correct profit or loss

2. To show a true and fair value of the financial position
3. To retain, out of profits funds for replacement
4. To ascertain the correct cost of production
5. To meet the legal requirement

FACTOR OR BASIS OF PROVIDING DEPRECIAITON

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1. Original [historical] cost of assets

OC = purchase price +freight + installation
2. The estimated residual or scrape value at the end of its life
3. Estimated useful life or the legal life whichever is shorter
Book value = original cost – total depreciation till date

METHOD OF RECORDING DEPRECIATION

i. When depreciation is charged to credited to the assets account , and
ii. When depreciation is credited to provision for depreciation / accumulated depreciation

JE [1st method]

i. Depreciation a/c –--- Dr

To assets a/c [being the depreciation charged]
ii. Profit and loss a/c ---- DR
To depreciation a/c [being the depreciation transferred]

[2nd method]

i. Depreciation a/c ------- Dr

To provision for depreciation a/c
ii. Profit and loss a/c -------- Dr
To depreciation a/c

DISTINCTION BETWEEN DEPRECIATION AND PROVISION FOR DEPRECIATION ACCOUNTS

DEPRECIATION A/C PROVSION FOR DEPRECIATION

1. it is a nominal account It is a valuation a/c
2. it always has a debit balance Credit balance
3. it is a temporary A/c Permanent a/c
4. this a/c is opened when an asset is shown as S.L.M.
its W.D.V.
5. this account is charged against the assets This account is not charged against the assets
6. this a/c appears In the profit and loss This a/c appears in the B/ sheet , but not in
account but not in the B/sheet profit and loss a/c

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METHODS OF DEPRECIATION

Fixed installment method written down value method

OR OR

Original cost value method diminishing balance value method

OR OR

Straight line method reducing balance value method

SALE OF ASSETS

JE

1. ON THE DATE OF SALE OF THE ASSET

Cash/bank/debtors a/c ------------- Dr

To assets a/c

2. PROVSION FOR DEPRECIATION A/C IS TRANSFERREED TO THE ASSETS ACCOUNT

Provision for depreciation a/c ------------- Dr

To profit or loss a/c

OR

Profit or loss a/c ------------ Dr

To assets a/c
[In case of loss]

ASSET DISPOSAL ACCOUNT

1. JOURNAL ENTRIES WHEN PROVISION FOR DEPRECIATION ACCOUNT IS MAINTAINED

a) Assets disposal a/c ------- Dr
To assets a/c
[Being original cost of assets]
b) Provision for depreciation

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Provision for depreciation a/c ------- Dr

c) Cash/bank a/c ----------- Dr
To assets disposal a/c
[Being sale value of the asset sold]
d) Assets disposal a/c -------- Dr
To profit and loss a/c
[In case of profit]
OR
Profit and loss a/c ---------- Dr
To assets disposal a/c
[In case of loss]

2. J.E. WHEN PROVISION FOR DEPRECIATION ACCOUNT IS NOT MAINTAINED

a) Assets disposal a/c ---- Dr
To assets a/c
[Being W.D. value of the asset at the beginning of the current year in which the
asset is sold]
b) Depreciation a/c ------- Dr
To asset disposal account a/c
[Being depreciation [total] charged]
c) Cash/bank
To asset disposal a/c
d) Assets disposal a/c
To profit and loss [profit]
OR
Profit and loss a/c
To assets disposal a/c [loss]

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CHAPTER – 14
PROVISION AND RESERVES

Provisions [meaning]: according to the companies act the term ‘provision’ refer to
any of the following amount –
a) The amount written off or retained by way of providing for depreciation , renewals
or diminution in value of assets or,
b) The amount retained by way of providing for any known liability of which the
amount cannot be determined with substantial accuracy

EXAMPLES:

1. Provision for depreciation of assets

2. Provision for taxation
3. Provision for bad and doubtful debts
4. Provision for discount on debtors
5. Provision for repairs and renewals of assets

CHARACTERISTICS OR FEATURES OF PROVISIONS

1. Provision is made to meet a known liability

2. Te liability is known but the amount of such liability cannot be determined with reasonable
accuracy
3. Provision is a charge against profits and as such reduces the profits of the year in which it is
created

PURPOSE OR IMPORTANCE

1. To ascertain the true net profit of the business

2. To ascertain the rue financial position of the business
3. To provide for known losses in the future
4. For the equitable distribution of expenses

RESERVES

MEANING: reserves mean amount set aside out of profits and other surpluses to meet future
uncertainties.

Examples of reserves are:

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a. General reserve
b. Capital reserve
c. Dividend equalization reserve
d. Investment fluctuation fund
e. Reserves for redemption of debentures

CHARACTERISTICS OR FEATURES

1. It is created out of net profits or divisible profits

2. Creation of reserves is not a legal necessity
3. It is not created to meet any known liability or depreciation in the value of assets but for
meeting an unknown liability or loss in the future
4. When the amount of reserve is invested in outside securities it is known as reserve fund

PURPOSE OR IMPORTANCE OF RESERVES

1. Helpful in meeting the unforeseen liability or loss

2. Helpful in strengthening the financial position of the business
3. Equalization of dividends over the year
4. To provide funds for meeting a specific liability

TYPES OF RESERVES

Revenue reserves capital reserves

General reserves specific reserves

GENERAL RESERVE: usually, the businessmen do not withdraw the entire profits from the business but
retain a part of it in the business to meet unforeseen future uncertainties. Profits so retained in the
business for a ‘rainy day’ are known as general reserve.

SPECIFIC RESERVE: such a reserve is created for a specific purpose and can be utilized only for the
purpose.

Example;

SPECIFIC RESERVE

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a) Dividend equalization reserve

b) Reserve for replacement of asset
c) Investment fluctuation fund
d) Workmen compensation fund
e) Debenture redemption reserve

SECRET RESERVE: a secret reserve is one which is not disclosed by the balance sheet. These reserves are
created by showing profit at figure much lower than actual and by showing the assets at a lower figure
and liabilities at a higher figure. Secret reserves may be created in the following ways:

1. Writing off excessive depreciation

2. Charging capital expenditure to profit and loss account
3. Under valuation of assets
4. Showing an actual asset as a contingent asset
5. Suppressing the sales

ADVANTAGES OF SECRET RESERVES:

1. Financial stability
2. Helpful in absorbing unforeseen losses
3. Regularity of dividends
4. Avoidance of competition

DISAVANTAGES OF SECRET RESERVES:

1. unfair presentation of financial statement

2. loss to shareholders
3. misuse by management
4. cover for misdeeds of management

DIFFERENCE BETWEEN PROVISION AND RESERVES

BASIS PROVISIONS RESERVE

meaning It is created to meet a known liability It is created to meet an unknown
liability
necessity Creation of provisions is a legal necessity. Creation of reserves is discretionary.
Provisions have to be provided doe even It can be created only if adequate
if there are no profits refits have been earned
Object The object is to provide for depreciation , The object of reserves is to
doubtful debts and other specific strengthen the financial position of
liabilities the business
Mode of creation It is created by debiting to profit and loss It is created not by debiting P / L
a/c , hence , net profit cannot be account but through P / L
calculated unless all provisions have been appropriation. s such it is reacted
debited to profit and loss a/c after the calculation of net profit
Investment outside the Provisions are never invested outside the Reserves may be invested outside

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business business the business

Balance sheet It is either shown on the assets side by It is shown on the liabilities side
way of deduction from the assets for under the head ‘reserves and
which it is created or on the liabilities surplus’
side

DISTINCTION BETWEEEN REVENUE RESERVES AND CAPITAL RESERVES

BASIS REVENUE RESERVES CAITAL RESERVES

Sources of creation
Usages A specific reserve can be utilized Normally these reserves cannot
only for the earmarked purpose be utilized for distribution of
while a general reserve can be dividends to share holder
utilized for any purpose including
distribution of dividends
purpose These reserves are created for These reserves are created to
meeting unforeseen losses and met capital losses or may be
for strengthening the financial used for purpose laid down by
position of businesses companies act

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CHAPTER – 15

BILLS OF EXCHANGE
DEFINITION OF BILLS OF EXCHANGE : according to Indian negotiable instrument act 1881 – a BOE is an
instrument is writing , an unconditional order signed by the maker directing to pay a certain sum of
money only to or to the order of a certain person or to the bearer of instrument.

CHARACTERISTICS OR FEATURES:

1. a BOE must be in writing

2. it must contain n order [not request] to make a payment
3. the order must be unconditional
4. the amount of BOE must be definite
5. to date of payment must be a fixed one
6. it must be signed by the maker [drawer] of the bill
7. it must be signed by the acceptor [drawer]
8. the amount mentioned in the bill is payable either or demand or on the expiry of a fixed period
9. the amount is payable either to the bearer of the bill or to be a specified person or to his order
10. it bear stamps according to its amount or is drafted on a stamped paper of the court

PARTIES OF BILL OF EXCHANGE

DRAWER: he is the seller or creditor entitled to receive money from someone he writes or draws the
bill and is known as drawer. The BOE is signed by the drawer of the bill

DRAWER OR ACCCEPTOR: he is the purchaser or the debtor on whom the bill is drawn and who is
liable to pay the amount mentioned in the bill. He accepts to pay the amount by writing the word
“accepted” on the bill and then signs it. An ill is called a draft before it is accepted.

PAYEES: the person to whom the payment is to be made is called payee. The drawer itself or a third
party may be the payer of the bill.

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SPECIMEN OF A BILL OF EXHANGE

New Delhi

Rs 25000 1st July 2015

Two months after date, pay to me or my

STAMPS
Order, the sum of rupees Twenty Five

Thousand only, for value received

Accepted [signed]

[Signed] Raadhika Sharma

Arvind E- 8 , Modal Town

28,Rajpura road New Delhi -75

Luck now

ADVANTAGES OF BILLS OF EXCHANGE

1. helpful in purchase or sales of goods on credit

2. legal document
3. discounting facility
4. endorsement possible
5. relief from sending reminders
6. helpful in planning cash operations
7. convenient means of making foreign payment

PROMISSORY NOTE: sometimes, the purchaser of the goods or debtor himself writes an n6te, signs it
and gives it to the seller of the goods. It is called a ‘Promissory Note’. According to Indian negotiable
instrument act , “ a Promissory note is an instrument in writing [note being a bank note or currency]
containing an unconditional undertaking signed by the maker to pay a certain sum of money to , or to
the order of, a certain person.

FEATURES

1. it must be in writing
2. there must be a promise to pay a certain sum of money
3. the promise to make payment must be
4. proper stamps duty is paid on the promissory note

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PARTIES TO A PROMISSORY NOTE:-

1. The maker: the maker is the person who makes the promise to pay the amount. it is a person
who has availed the credit
2. The payee: the payee is the person to whom payment is to be made. It is a person who has
granted the credit

SPECIMEN OF A PROMISSORY NOTE

Rs 20000 New Delhi

15th OCTOBER, 2015

STAMP
Three months after date we promise to pay M/S Tara Chand
+ company or order a sum of Twenty thousand with interest at twelve
percent per annum, value received

Raj and Paul

BASIC TERMS

1. drawer , drawer , payee

2. Negotiation or endorsement: endorsement means transfer of BOE or promissory note to
another person. the person receiving the BOE or promissory note becomes authorized to
receive the payment
3. endorser : endorser is the person who transfers the BOE or promissory note in favor of other
person
4. endorsee : endorsee is the person to whom the BOE or promissory note is endorsed
5. bill at sight or demand : the bills which are drawn ‘on demand’ and ‘at sight’ are payable on
presentation to the drawer or acceptor
6. bill after date/after sight : bill after date in which the period is counted from the date of
drawings of the bill after sight the period is counted from the date of acceptance of the bill
7. Tenor or tenure of the bill: days of grace: days of grace are three extra days added to the period
of bill. It is a custom to add the days of grace
8. Date of maturity/due date: due date is the date on which the prepayment of the bill is due. It is
also known as the DATE OF MATURITY. it is calculating by adding days of grace
9. retiring a bill under rebate : when the drawer makes the payment of the bill before due date , it
is called retiring the bill

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10. Noting charges: to establish the fact that the bill was properly presented and dishonored the bill
is usually handed over to a person called ‘notary public’. The notary public charges a small fee
which is called ‘noting charges’.
11. Renewal of bill: sometimes, the acceptor of a bill finds himself unable to meet to bill on a due
date. sin such a case, he may request the holder of the bills to cancel the original bill and draw a
new bill in place of the old one
12. Insolvency of the acceptor : when the acceptor of a bill become insolvent , it implies that he will
not be in a position to meet his acceptance on due date

DISTINCTION BETWEEN BOE AND PROMISORRY NOTE

BASICS BOE PROMISSORY NOTE

1. PARTIES Three [drawer, drawer and Two [maker and payee]
payee]
2. DRAWER It is drawn by the creditors It is drawn by the debtor
3. ORDER AND PROMISE It is an order to make payment It is a promise to make payment
4. ACCEPTANCE It need acceptance by the Ne need
drawee
5. LIABILTY The liability of the drawer is The liability of the drawer
secondary. he will be liable only [maker] is primary
if the acceptor does not pay
6. PAYEE Drawer can be payee of the bill Maker cannot be the payee of it
7. NOTING It is better to get it noted in case Not necessary
of dishonor
8. COPIES In case of local bills only one Only one copy in both case
copy is prepared but in foreign
bill three copies

JOURNAL ENTRIES

IN THE BOOKS OF DRAWER [LET A]

retained Discounted with bank endorsement Bill sent for

collection
1. B 1000 B 1000 B 1000 B 1000
TO SALES 1000 To sales 1000 To sales 1000 To sales 1000
2. B 1000 B/R 1000 B/R 1000 B/ 1000
TO B 1000 TO B 1000 TO B 1000 TO B 1000
Bank 990
Discount 10
To B/R 1000 C 1000 BFC 1000
TO B/R 1000 TO B/R 1000

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On due date the bill honored by B

3. cash 1000 X X 4. cash
To B/R 1000 To BFC

OR

When bill discounted by drawer [ B ]

B 1010 B 1010 B 1010 B 1010
TO B/R 1000 TO B A\c 1010 TO C 1010 TO BFC 1000
TO CASH 10 TO CASH 10

When drawer paid whole amount when drawer need to new bill

[Interest charged by A for further time]

Cash 1010 1. B 15

To A 1010 to interest 15

X 2. B/R 1025

To B 1025

[NEW BILL]

IN THE BOOKS OF DRAWER [B]

1. Purchase 1000

To A 1000

2. A 1000
To B/P 1000

When bill honored on DUE DATE when bill dishonored on DUE DATE

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B/P 1000
To cash 1000 B/P 1000
Noting charges 10
To A 1010

WHEN B cleared his all account when B request to A for renewal of bill

1. Interest 15
A 1010 to A 15
To cash 1010 2. A 1025
To B/P 1025
X
DUE DATE

Honored dishonored

On DUE DAATE WHEN DRAWER BECOME INSOLVENT

DRAWER DRAWER

Cash [amount received] B/P

Bad debt [amount not received] to cash
To B/R [TOTAL] to profit and loss account

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When at the time of renewal of bill there are two treatments for interest and noting charges

When drawer paid the interest and when drawer added the amount
Noting charges in cash of NC and interest with new bill

A B A B
Cash N.C B/R A
To noting charges to cash To B To B/P
OR OR [old bill +N.C.+ interest] [same]
Cash interest
To interest to cash

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CHAPTER 16

RECTIFICATION OF ERRORS
A trial balance is prepared to check the arithmetical accuracy of transaction in a journal , posting them
into ledger and balancing the ledger accounts. If a trial balance agrees, it is assumed that recording,
posting and balancing have been carried out correctly. However if it does not agree, efforts are made to
locate the errors.

Classification of errors

Errors of commission errors of omission errors of principal compensation errors

ERRORS OF OMMISSION: an error of omission is an error when a transaction is completely or partially

omitted from being recorded in the books of accounts

ERROR OF COMPLETE OMMISSION: arises if a transaction is not recorded in the books of accounts or a
transaction recorded in the Journal is not posted in the ledger

ERROR OF PARTIAL OMMISSION: arises if a transaction is not completely recorded or if completely

recorded has been completely posted into ledger accounts

As a result the Trial Balance does not agree

ERRORS OF COMMISION: errors of commission are those errors which arise due to wrong recording,
wrong posting, wrong carrying forward, wrong casting [totaling] of subsidiary books, wrong balancing
etc...

Errors of commission may be classified

a) Errors of recording
b) Errors of casting
c) Error of carrying forward
d) Error of posting

ERROR OF PRINCIPAL: when a transaction is recorded in contravention of accounting principal, it is

known as an ERROR OF PRINCIPAL. Such errors do not affect the Trial Balance as amounts are placed on
the correct side but in a wrong account

COMPENSATING ERRORS: compensating errors are those errors the effect of which is nullified by other
errors of equal amount

Besides the above classifications of errors they may be categorized into following two categories:-

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a) Errors affecting the trial balance or one sided errors and

b) Errors not affecting the trial balance or two sided errors

ONE SIDED ERRORS OCCUR:

a) Posting only one aspect of the journal entry in the ledger

b) Posting a Journal entry on the wrong side on an account
c) Wrong totaling of subsidiary books
d) Posting the correct amount in one account and wrong amount in the other account
e) Wrong totaling or balancing of a ledger account
f) Omitting to post the totals of subsidiary books in the ledger
g) Omission in writing the cash book balances in the trial balance
h) Omission in writing the balance of an account in the trial balance
i) Writing a balance in the wrong column of the trial balance
j) Totaling the trial balance wrongly

TWO SIDED ERRORS OR ERRORS NOT AFFECTING TRIAL BALANCE

1. Error of principal
2. Compensating errors
3. Errors of compete omission
4. Posting correct amount on the correct side but in wrong account
5. Recording wrong account in the books of original entry [but the recorded amount is debited and
credited]
6. Recording both aspects of a transaction twice in the books of accounts

STEPS TO LOCATE THE ERRORS OR DETECTION OF ERRORS

1. Two columns of the trial balance should be totaled again

2. Exact difference in the trial balance should be established
3. Ledger accounts should e balanced again
4. If it is not possible to locate the errors, the difference in the trial balance is temporarily
transferred to a suspense account. Whenever any ne sided error is detected. it is subsequently
rectified through the suspense account

SUSPENSE ACCOUNT

Suspense account is the account to which the amount being the difference in trial balance is placed. If
the total of debit side is short, suspense account will show debit balance or vice-versa.

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SOME EXAMPLE

CE WE RE
1. Mohan 1000 Mohan 1000 Suspense 900
To sales 1000 To sales 100 To sales 900

2. Mohan 1000 Mohan 100 Suspense 9000

To sales 1000 To sales 1000 To suspense 900
3. Mohan 1000 Mohan 10000 Suspense 9000
To sales 1000 To sales 1000 To Mohan 900
4. Mohan 1000 Mohan 1000 Sales 9000
To sales 1000 To sales 10000 To suspense 9000
5. Mohan 1000 Purchase 1000 Mohan 2000
To sales 1000 To mohan 1000 To purchase 1000
To sales 1500
6. Mohan 1000 Ram 1000 Mohan 1000
To sales 1000 To sales 1000 To Ram 1000
7. Mohan 1000 ---- Mohan 1000
To sales 1000 To sales 1000
8. Furniture 500 Repair 500 Furniture 500
To cash 500 To cash 500 To repair 500
9. furniture 500 To furniture 500 Furniture 1000
To cash 500 To cash 500 To suspense 1000
10. Ram 1000 Purchase 1000 Ram 1000
To sales 1000 To shyam 1000 Shyam 1000
To sales 1000
To purchase 1000

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CHAPTER – 17

FINANCIAL STATEMENTS
MEANING: financial statements refer to such statements which report the profitability and the financial
position of the business at the end of accounting period. The term financial statements include at least
two basic statements which are as under:

1. Income statement [or trading and profit and loss account]

2. Statement of financial position [or balance sheet]

These two financial statements are termed as ‘final accounts’.

In modern terms, in addition to the aforesaid two basic financial statements, two other statements
namely a statement of retained earnings and a cash flow statement are also generally included in
financial statements.

OBJECTIVE:

1. To present a true and fair view of the financial performance [i.e., profit/loss] of the business
2. To present a true and fair view of the financial position [balance sheet] of the business
3. Determine the gross profit or gross loss
4. Determine the net profit or net loss
5. Comparison with the previous year’s profit
6. Analysis of individual items
7. Calculating ratios

USERS OF FINANCIAL STATEMENTS

INTERNAL USERS:

 Owners
 Management
 Employees and workers

EXTERNAL USERS:

 Banks and financial institutions

 Creditors
 Government and its authorities
 Researchers
 Product pricing
 Public

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Deferred revenue expenditure: deferred revenue expenditure is a revenue expenditure that is incurred
during an accounting period but its benefit extends beyond that accounting period, i.e. ., is not
exhausted within the accounting period. Such expenditure is unusually larger than the normal
expenditure under the head.

Treatment of deferred revenue expenditure:

Amount not to be written off in the current year is shown on the assets side of balance sheet as
fictitious asset.

Differed revenue expenditure is a fictitious asset:

Although it appears on the assets side of the balance sheet.

CLOSING ENTRIES RELATING TO TRADING ACCOUNT

1. Purchase returns account is closed

Purchase return A/C ------------ Dr

To purchase A/C

2. Sales returns account is closed

Sales A/C ------------- Dr

To sales return A/C

3. Closing entry for those accounts which are to be transferred to the Dr side of the trading
account :
Trading a/c --------- Dr
To opening stock a/c
To purchases a/c
To wags a/c
To direct expenses a/c
To carriage a/c
To gas, fuel and power a/c
To freight, octroi and carriage a/c
To manufacturing a/c
To factory rent and lightning a/c
To custom duty a/c
To royalty a/c

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4. Closing entry for those accounts which are to be transferred to the credit side of trading account
Sales a/c --------- Dr
To trading a/c
5. To close the trading a/c
Trading a/c -------- Dr
To profit and loss a/c
[For gross profit]

OR
Profit and loss a/c
To trading a/c
[For gross loss]

CLOSING ENTRIES FOR PROFIT AND LOSS A/C

1. Accounts of various items of expenses [indirect transferred to the debit side of profit and loss
account ] :
Profit and loss a/c -------- Dr
To all indirect expenses
2. Income [indirect]
Indirect income a/c ------- Dr
To profit and loss a/c
3. Transferred of profit or loss to capital a/c
Profit and loss a/c ------------- Dr
To capital a/c [net profit]
OR
Capital a/c ----------- Dr
To profit and loss a/c [net loss]

PROFITS MAY BE OF TWO TYPES:

1. Operating profit is the profit earned through normal operating activities of the business.
Operating profit = gross profit – operating expenses
OR
Net profit + non operating expenses – non operating income
2. Net profit – is arrived at y deducting operating as well as non operating expenses from the gross
profit.

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DISTINCTION BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURE

BASIS CAPITAL EXPENDITURE REVENUE EXPENDITURE

1. PURPOSE It is incurred for acquisition of It is incurred for running of
fixed assets for use in business business
2. CAPACITY It increases capacity of the It is incurred for earning profits
business
3.PERIOD Its benefit extends to more than Its benefit is exhausted within
one year the year
4. DEBITED It is debited to an assets account It is debited to expense account
5. NATURE OF ACCOUNT It is an assets a/c It is an expense a/c
6. DEPICTION It is shown in the balance sheet It is shown in the trading or
profit and loss account
7. EXAMPLES Cost of plant and machinery Depreciation on P/L account and
machinery

DISTINCTION BETWEEN CAPITAL RECIEPT AND REVENUE RECEIPT

CAPITAL RECEIPTS REVENUE RECEIPTS

1 It is the amount realized by scale It is the amount realized by scale
of fixed assets or receipt as of goods or services rendering
capital or loan taken
2 It is shown in balance sheet It is shown in trading or profit
and loss account
3 Capital receipts are normally of Revenue receipts are normally or
non-recurring nature recurring nature
4 Capital receipts are the receipts Revenue receipts are the
which are not received in course receipts which are received in
of normal business activities course of normal business
activities

DIFFERENCE BETWEEN TRADING CCOUNTS AND PROFIT AND LOSS ACCOUNT

BASIS TRADING ACCOUNTS PROFIT AND LOSS A/C

1. RELATION Trading a/c is a part of profit Profit and loss account is the
and loss account main account
2. NATURE Gross profit or gross loss is Profit and loss account is
ascertained from trading prepared to ascertain net profit
account or net loss of the business
3. TRANSFER OF BALANCE Balance of the trading account is Balance of profit and loss
transferred to profit and loss a/c account is transfer to capital a/c
4. ITEMS Direct expenses are recorded Indirect expenses / income are
[income also] recorded

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PROFIT AND LOSS ACCOUNT AND BALANCE SHEET

BASIS PROFIT AND LOSS A/C BALANCE SHEET

1. NATURE It is an account It is a statement
2. PERIOD It is prepared for an accounting It is prepared for the last day of
period the accounting period
3. RECORDING It records only income and It records only assets and
expenses liabilities
4. ACCOUNT Accounts that are transferred to Not closed
profit and loss a/c are closed
5. BALANCE Balance transferred to capital Balance of this statement
a/c become opening balance for
next year

FORMAT

TRADING AND LOSS ACCOUNT

Dr

PARTICULAR AMOUNT PARTICULAR AMOUNT

To opening stock XXX by sales XX

To purchases xx C-1 sales return xx XXX

C-1 purchase return xx XXX by closing stock XXX

To wages XXX

To carriage inwards XXX

To freight inwards XXX

To power and fuel XXX

To motive power XXX

To heating and lighting XXX

To octroi XXX

To import duty XXX

To factory expenses XXX

To manufacturing expenses XXX by gross loss

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To gross profit [balance] XXX transferred to profit

Transferred to P and L A/C and loss a/c XXX

XXXXXX XXXXXXX

To gross loss XXX by gross profit XXX

To freight outwards XXX by rent received XXX

To carriage outward XXX by discount received XXX

To rent paid XXX by commission received XXX

To salaries paid XXX by interest received XXX

To commission paid XXX

To advertisement XXX

To postage XXX

To repair XXX

To depreciation XXX

To interest paid XXX

To discount allowed XXX

Too bad debt XXX

To bank charges XXX

To NET PROFIT [balance] XXX by NET LOSS [balance] XXX

Transferred to capital a/c XXXXXXXX transferred to capital a/c XXXXX

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BALANCE SHEET OF M/S ----------- AS ON ------------

LIABILTIES AMOUNT ASSETS AMOUNT

Capital a/c XXX Goodwill XXX

[-] drawings [xxx] Trademarks XXX

+ Net profit xxx XXX patent Land XXX

Reserve fund XXX building XXX

Debenture XXX plant and machinery XXX

Loan XXX furniture and XXX

Creditors XXX fixture XXX

Bills payable XXX motor vehicle XXX

Outstanding expenses XXX debtors XXX

Income received in advance XXX bill receivable investment XXX

Provisions a/c XXX inventories XXX

Payable a/c XXX cash in hand XXX

Bank overdraft XXX cash at bank XXX

Prepaid expenses XXX

Accrued income XXX

XXXXX xxxxx

Grouping and marshalling [arrangement] of assets and liabilities:

Assets and liabilities should be shown in a certain order in the balance sheet. Therefore, they
should be arranged in certain groups and in a particular order. This is called grouping and marshalling of
the balance sheet.

Grouping means putting items of a similar nature under a common accounting head. The arrangement
of assets and liabilities in a particular order in the balance sheet called ‘MARSHALLING’.

MARSHALLING: assets and liabilities are shown in the balance sheet either in order of liquidity or in
order of permanence.

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a) Order of liquidity: means the facility with which the assets may be converted into cash; those
assets which take more time to convert into cash are written last. Liabilities are to be shown
first as short – term liabilities and then as long term liabilities and last of all are capital.
b) Order of permanence: means the assets, which are to be used permanently in the business and
are not meant to be sold Aare written first. Assets, which are most liquid such as cash – in –
hand written last. Liabilities may also be shown according to their performance arrangement.
In this method, capital is shown first, and then long term liabilities and short term liabilities, like
amounts due to suppliers of goods or bills payable in the last.

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CHAPTER – 18

ADJUSTMENT IN PREPARATION OF FINANCIAL STATEMENT

1. CLOSING STOCK

Assets [B/S] trading a/c [credit]

2. DEPRECIAITING CHARGED ON FIXED ASSETS

Profit and loss fixed assets [-]

[Debit] [B/S]

3. OUTSTANDING / UNPAID EXPENSES

Trading or profit and loss [expenses +] liabilities [B/S]

Debit

4. INCOME RECEIVED IN ADVANCE

Liabilities Income [-]

5. ACCURED [ outstanding] INCOME

Assets [B/S] profit and loss [credit]

6. PREPAID EXPENSES

Assets [B/S] expenses [-]

7. INTEREST CHARGED ON DRAWINGS

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Capital [-] profit and loss a/c

Credit

8. INTEREST ON CAPITAL

Profit and loss a/c capital

Debit [+]

9. DISCOUNT ON CREDITORS

Creditors [-] profit and loss a/c

Credit

10. GOODS LOST BY FIRE

Profit and loss a/c purchase [-]

Debit

11. Bad debt

12. Provision for doubtful debt

13. Discount on debtors

Profit and loss debtors [B/S]

Debit [-]

14. Manager commission payable

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Profit and loss liabilities [B/S]

Debit

Calculation

Commission on net profit [before] commission on net profit

After charging such comm.

Commission = NP [ before commission ] * R

100

NP [ before] * R

100 + R

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CHAPTER – 19

ACCOUNTS FROM INCOMPLETE RECORDS – SINGLE ENTRY SYSTEM

MEANING : according records that are not maintained according to double entry system are known as
accounts from incomplete records or single entry system of accounting.

FEATURES: the features of single entry system are:

1. SUITABILTY : this system is suitable for small size business where the number of transaction is
less
2. NO UNIFORMITY : this system may differ from firm to firm as it is a mere adjustment of double
entry system according to requirements and convenience
3. MAINTAINENCE OF PERSONAL ACCOUNTS: usually under this system, only personal accounts are
maintained and real and nominal accounts are avoided. therefore sometimes, it is defined as a
system where only personal accounts are kept
4. MAINTAINENCE OF CASH BOOK : generally a cash book is maintained in this system which mixes
up business as well as private transaction

ADVANTAGES:

1. Simple method
2. Less expensive
3. Suitable for small businesses
4. No need of expert knowledge of principles of book keeping
5. Easy to ascertain profit or loss

DISADVANTAGES:

1. Arithmetical accuracy cannot be proved

2. No control on assets
3. Correct profit or loss cannot be determined
4. Financial position of the business cannot be assessed
5. No internal check
6. Difficult to ascertain the value of business
7. Incomplete and unscientific system
8. Comparative study is difficult

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STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED

PARTICULARS RS
Capital at the end -----

Add: drawings during the year ----

Less: additional capital --------

--------

-------

Less: opening capital -------

Profit / loss for the year ------

BASIS DOUBLE ENTRY SYSTEM SNGLE ENTRY SYSTEM

1. both aspect Under this system, both aspects Under this system, both aspects
of a transaction are recorded of a transaction are not
recorded, in fact for some
transactions, both, for someone
and for some o aspect at all are
recorded.
2. account Under this system , real, Under this system, only personal
personal and nominal etc all the accounts and cash book are
accounts are maintained maintained

3. trial balance Under this system, trial balance Under this system, TB cannot be
is prepared and thus, the prepared therefore arithmetical
arithmetical accuracy of the accuracy of the books account
books of account is verified cannot be verified.
4. profit or loss Under this system, after a certain under this system, profit and loss
period , net profit or loss can be account is not prepared
ascertained
5. financial position Under this system , correct Under this system, B/S is not
financial position of the business prepared. Only statement of
can be ascertained by preparing affair is prepared
balance sheet
6. adjustment Under this system, adjustments There is no provision to make
are made at the time of adjustments primarily because

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preparing the final account of incomplete records

7. use This system is used by almost all This system is used by only tiny
the business businesses

DISTINCTION BETWEEN B/S AND STATEMENT OF AFFAIRS

BASIS BALANCE SHEET STATEMENT OF AFFAIRS

1. OBJECTIVE The main objective of preparing The main objective of the
B/S is to know about the preparing statement is to know
financial position of the business about capitals
2. ACCOUNTING METHOD B/S is prepared when accounts Statement of affair is prepared
are maintained under double when accounts are maintained
entry system under single entry system
3. ACCOUNTS AND This is prepared exclusively on In view of incomplete accounts,
INFORMATION the basis of ledger accounts its preparation is based on
limited accounts , calculations,
estimated and other information
4. RELIABILITY Being based on actual figures , It is not regarded as reliable
balance sheet is regarded as a
reliable statement
5. TRIA BALANCE Trial balance is prepared before In the case of statement of
balance sheet and the latter affairs, trial balance is not
bases on the former prepared
6. ARITHEMETICAL CCURACY The tallying of balance sheet But, statement of affairs does
implies arithmetical accuracy of not prove in any sense the
accounting arithmetical accuracy of the
accounting
7. OMMISSION Omission of any asset or liability The disagreement in the totals of
can easily be traced out because statements of affairs can in no
the totals of B/S will not tally way imply the omission of any
assets/liabilities

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CHAPTER – 21

COMPUTERS IN ACOUNTING

COMPUTER - a computer is a data process that can perform substantial computation including
numerous arithmetic and logic operation without intervention of human operator during the run

COMPONENTS OF A COMPUTER SYSTEM

1. Hardware
2. Software
3. Human ware

HARDWARE: computer components that can be physically touched, such as keyboard, CPU, monitor,
mouse etc. are known as computer hardware.

BASIC COMPONENTS:

1. Motherboard
2. Processor
3. Primary storage memory OR [RAM]
4. Secondary storage devices
 Online storage media
 Near line storage device
 Offline storage media or
 Distribution media
5. Keyboard
6. Sound card and speakers
7. Monitor and liquid crystal display [LCD]
8. Printers
 Impact printers
 Non – impact printers

SOFTWARE

The hypothetical or imaginary part of the computer which is used with hardware to perform computer
applications is known as software. Computer software can be divided into the following parts:

I. Operating system: a set of specialized programs that makes a necessary interface between the
user and the computer hardware is known as OPERATING SYSTEM.

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II. Utility software: a set of computer programs to perform certain supporting operations in a
computer is called utility software. example – disk cleaners
III. Application software : the user – oriented program which is designed and developed for
performing certain jobs such as accounting, word process and designing , is known as
application software
IV. Language processors : this is a software which is used as an interpreter or translator to convert a
program language into machine language
V. Connectivity software : this type of software is used to connect one computer to other computer

HUMANWARE: people interacting with the computer and executing the program or software are
known as human ware
PROCEDURE : a procedure is a specified series of action or operations which have to be
executed in the same manner in order to always obtain the same the result under the same
circumstances [ for example , emergency procedure ]

UTILITIES OR CHARACTERICTICS OF A COMPUTER SYSTEM

 Sped
 Accuracy
 Reliability
 Versatility
 Storage and retrieval

LIMITATIONS OF A COMPUTER SYSTEM

 Common sense
 Intelligence
 Decision – making

COMPONENTS OF COMPUTER HARDWARE

 Input unit
 Processing unit
 Output unit

KINDS OF COMPUTERS

Classification by size:

 Micro – computers [ personal computers ]

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 Mini – computers [ midrange computers ]

 Mainframe computers

Classification by function:

 Severs
 Workstations
 Information appliances
 Embedded computers

ACOUNTING SOFTWARES

A. READYMADES – readymade software’s are the software’s that are developed not for any specific
user but for the users in generals. Since, the readymade software’s are for general user.
Examples are tally, ex, busy, etc.
ADVANTAGES –
 Economical
 Developed by a group of experienced professionals
 Used by numbers of users
B. CUSTOMISED SOFTWARE – the term customized software means making changed in the
readymade software to suit the specific requirements of the users, i.e. making it user-specific.
The software available off – the shelf is modified to suit requirements of the users, for examples,
the design of the invoice is changed to specifications of the users.
The advantages and disadvantages are the same as the readymade software.
C. TAILOR – MADE SOFTWARE – the term tailor made software refers to designing and developing
user-specific software. These software’s , being user – specific, are not variable off – the – shelf
but the developed to meet the requirements of the user on the basis of discussion between the
susers and developers
ADVANTAGES –
 It being user specific, takes care of the accounting reports and MIS that may
be required by the user
 The software being tailor made the enterprises made have to engage a
software engineer to maintain it
 Well – trained users use the software and therefore, they can maximize
software utilization

DISADVANTAGES –

 The development cost is much higher

 The maintenance cost is much higher
 In case of accounting person leave the job , it takes sometime before the
new one replaces

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TEST – NOT FOR PROFIT ORGANISATION

Q.1 how are following items accounted in case of as not-for-profit organization?

a) Tournament fund rest 20,000 ; tournament expenses rs 6000 ; receipts from tournament rs
8000
b) Billiard match expenses rs 2500
c) Prize fund rs 10,000 ; interest on prize fun investment rs 1000 ; prize paid rs 2000; prize fund
investment rs 8000
d) Receipts from cinema show tickets rs 5000; expenses on cinema show rs 1500
e) Expenditure on construction of pavilion rs 6,00,000 . the construction work is in progress and
not yet completed . pavilion fund as on 31st march , 2013 rs 8,00,000 ; donation for pavilion
received on 15th September , 2013 rs 10,00,000 ; capital fund as on 31st march , 2013 rs
20,00,000

Q.2. from the following particulars, calculate amount of subscriptions to be credited to the income and
expenditure account for the year ended 31st march 2104

a) Subscription outstanding on 31-3-2103 rs 500

b) Subscription received in advance on 31-3-2013, for the year ended on 31-3-14 rs 1100
c) Total subscription received during 2103-14 [including rs 400 for 2012-13
Rs 1200 for 2011-12
Rs 300 for 2014-15 ] rs 35,400
d) Subscription outstanding on 31-3-14 rs 400

Q.3. from the following particulars relating to the Rama Hospital, prepare income and expenditure
account for the year ended 31st march, 2014 and balance sheet as at that date:

Receipt and payment account for the year ended 31-3-2014

Dr Cr

RECIEPT Rs PAYMENT Rs
To cash in hand [1-4- 7130 By medicine 30,590
2013]
To subscription 47,996 By doctors honorarium 9000
To interest on 7000 by salaries 27,500
investment at 7% for by petty expenses 461
full year by equipment 15,000
To proceeds from 10,450 By expenses on charity 750
charity show show
By cash in hand on 31- 3775
3-2014
87076 87076

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Additional information: -

As at 1-4-2012 [ Rs ] as at 31-3-14 [ rs ]

Subscription due 240 280

Subscription received in advance 64 100

Stock of medicines 8810 9740

Estimated value of equipments 21200 31600

Building [cost less dep] 40000 38000

10

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TEST – RECTIFICATION OF ERRORS

Q.1. rectify the following errors found in the books of Mr. Sunil . the trial balance showed Rs 250 as
debit excess . The difference has been posted to the suspense account

1. Total of debit side of expenses account has been cast in excess of rs 150
2. Sales account has been totaled short by rs 200
3. One item of purchase of rs 25h has been posted from the purchases book to the ledger as rs 350
4. Sales return of rs 200 from a party has not been posted to that account , though the part’s
account has been credited
5. A cheque of rs 600 issued to the suppliers account [ shown under sundry creditors ] towards his
dues has been wrongly debited to the purchases account
6. Credit sale of rs 100 has been credited to the sales and also to the sundry debtor’s account

REQUIRED; pass the necessary J.E. for correcting the above and prepare a suspense account. {6+2}

Q.2. why is a compensating error not disclosed by the trial balance. {1}

Q.3. what do you mean by suspense account? Why is it opened? {1+2}

Q.4. pass the journal entries to rectify the following errors detected during preparation of the trial
balance.

1. Purchase book is under cast by rs 1000

2. Wages paid for construction of office debited to wages account rs 20,000
3. A credit sale of goods rs 1,200 to Ramesh has been wrongly passes through the purchases book
4. Goods purchased for rs 5000 were posted as rs 500 to the purchase account
5. An amount of rs 2000 due from Mahesh Chand which had been written off as a bad debt in
previous year was unexpectedly recovered has been posted to the personal account of Mahesh
Chand
6. A credit purchase of rs 1040 from Ramesh was passed in the books as rs 1400
7. Goods [ cost rs 5000 ; sales price rs 6000 ] distributed as free samples were not recorded
8. Goods worth rs 1500 returned by green and co. have not been recorded. {8}

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