Pondicherry University

Directorate of Distance Education

MBA 1ST SEMESTER

ACCOUNTING FOR
MANAGER
Unit -1 - Financial
Accounting

Prepared by
Dr. V. Umasri,
Assistant Professor,
Directorate of Distance Education,
Pondicherry University
Bookkeeping and
Accounting
Bookkeeping is the systematic recording and is the part of
accounting that records transactions and business events in
the form of journal entries in the accounting system.
Accounting is the art of recording, classifying and summarizing in
a significant manner and in terms of money, the transactions
and events which are, in part at least of a financial character
and interpreting the results thereof.”
Bookkeeping and accounting are often heard being used
interchangeably, however, accounting is the overall practice of
managing finances of a business or individual, while
bookkeeping refers more specifically to the tasks and practices
involved in recording the financial activities.
 Bookkeeping
System
There are two types of bookkeeping i.e. Single entry and Double entry system of bookkeeping.
Single Entry system of Bookkeeping
 Under this system both debit and credit aspects of transaction are not recorded.
 Only Personal accounts & cash book are opened.
 Under this system balance sheet is not prepared.
 It is improper system of bookkeeping.
Double Entry system of Bookkeeping
The double entry system of bookkeeping is based on the fact that every transaction has two
aspects, which therefore affects two ledger accounts. Every transaction involves a debit* entry
in one account and a credit** entry in another account. Each and Every debit aspect has its
equal and corresponding credit aspect and vise versa.
 Based on principle of duel aspect of each transaction.
 For correct presentation both of them should be recorded.
 Requires maintenance of records of assets, liabilities, revenues and expenditure.
 Impact of each transaction can be seen or measured.
 Total assets are equal to total equities.

Accountants often use T-accounts to visualize the debit and credit effects on the accounts'
balances.
*To debit an account means to enter an amount on the left side of the account.
**To credit an account means to enter an amount on the right side of an account.
Classification of
Accounts Concept of Debit & Credit (Golden Rules)

PERSONAL ACCOUNT IMPERSONAL ACCOUNT

Debit the Receiver
REAL ACCOUNT NOMINAL ACCOUNT
Credit the Giver
Debit what comes in Debit all Expenses and Losses
Credit what goes out Credit all Incomes and Gains

 Personal Account: Personal accounts are accounts relating to persons or organisations with whom
the business has transactions.
E.g Customer, Supplier, Money lenders etc.
• Real Accounts: Real accounts refer to accounts in which property and possession are recorded.
E.g Land, Building, Plant & Machinery, Vehicle Cash, Bank etc.
 Nominal Accounts: Nominal accounts are revenue, expenses, gains, and losses.
E.g. Wages, Salary, Discount etc .
Accounting Concepts and
Conventions
These generally accepted accounting principles lay down accepted assumptions and
guidelines and are commonly referred to as accounting concepts.
Accounting Concepts:
1. Business entity
2. Money Measurement
3. Going Concern
4. Cost concept
5. Objectivity
6. Accruals/matching
7. Realization
8. Periodicity
9. Dual aspect
Accounting Conventions:
I. Materiality
II. Accounting for Conservatism
III. Consistency
IV. Accounting for full Disclosure
 Accounting Concepts
1.Business Entity: The business and its owner(s) are
two separate existence entity. Any private and
personal incomes and expenses of the owner(s)
should not be treated as the incomes and
expenses of the business. Economic Entity -
company keeps its activity separate from its
owners and other businesses.
- Example: Insurance premiums for the owner’s
house should be excluded from the expense of the
business.
2.Money Measurement: All transactions of the
business are recorded in terms of money and it
provides a common unit of measurement.
- Example: Market conditions, technological changes
and the efficiencyexistence
operational of management for would the
not be
disclosed
statements in should
the accounts.
be prepared on a going concern
foreseeable future. Financial
3.basis
Goingunless
Concernmanagement
Concept: The either intends
business willto
liquidate the enterprise or to cease trading, or has
nocontinue in
realistic alternative but to do so.
• Example: Possible losses form the closure of
business will not be anticipated in the
 Accounting Concepts
4. Cost Concept: Assets should be shown on the Balance sheet at the cost
of purchase instead of current value.
- Example: The cost of fixed assets is recorded at the date of acquisition cost.
The acquisition cost includes all expenditure made to prepare the asset for
its intended use. It included the invoice price of the assets, freight charges,
insurance or installation costs.
5. Objectivity: The accounting information should be free from bias and
capable of independent verification. The information should be based upon
verifiable evidence such as invoices or contracts.
- Example: The recognition of revenue should be based on verifiable
evidence such as the delivery of goods or the issue of invoices.
6. Accruals/Matching: Revenues are recognized when they are earned,
but not when cash is received. Expenses are recognized as they are
incurred, but not when cash is paid. The net income for the period is
determined by subtracting expenses incurred from revenues earned.
Matching - efforts (expenses) should be matched with accomplishment
(revenues) whenever it is reasonable and practicable to do so.
- Example: Expenses incurred but not yet paid in current period should be
treated as accrual/accrued expenses under current liabilities.
 Accounting Concepts
7. The Realization concept: This concept holds to the view that profit can
only be taken into account when realization has occurred. Generally, sales
revenue arising from the sale of goods is recognized when the goods are
delivered to the customers. Revenue Recognition - generally occurs
(1)when realized or realizable and (2) when earned.
- Example: Profit is earned when goods or services are provided to
customers. Thus it is incorrect to record profit when order is received,
or when the customer pays for the goods.
8. Periodicity: The life of an entity is divided into short economic time
periods on which reporting statements are fashioned. Periodicity - company
can divide its economic activities into time periods.
- Example: Based on this assumption assets are classified into current and
fixed Assets. Current assets have benefits within twelve months period and
fixed assets have benefits beyond 12 months.
9. Dual Aspect: Transaction has two fold effect: Debit &Credit. Each
and every debit aspect has equal and corresponding credit aspect
and vise versa. Accounting Equation: Assets = Capital + Liability
Accounting
Conventions
I. Materiality: Financial statement should separately disclose
significant items for they would influence decisions of users.
Accounting does not serve a useful purpose if the effort of
recording a transaction in a certain way is not worthwhile. In
other words do not waste your time in the elaborate
recording of trivial items.
e.g. A stock of stationery worth Rs.10 should be treated as an
expense when it was bought.

II. Accounting for Conservatism: The accountant should always

be on the side of safety. The prudence concept means that
normally he will take the figure which will understate rather
than overstate the profit. Provision is made for all known
liabilities. Conservatism means anticipate the expected
future losses
e.g. Provision for doubtful debts should be deducted from
debtors in balance sheet.
Accounting
Conventions
III. Consistency: When a firm has once fixed a method for the
accounting treatment of an item, it will enter all similar
items that follow in exactly the same way. Frequent changes
in the accounting methods would lead to misleading profits
calculated from the accounting records.
e.g. Depreciation method of certain fixed assets once
adopted should be used in the following years.

IV. Disclosure: The financial statements of a firm must include

all information necessary for the formation of valid
decisions by the users. Any information that might be
relevant to an investor or creditor should be disclosed,
either in the body of the financial statements or in the notes
attached thereto.
e.g. Method of Issue of stock (FIFO/LIFO/Weighted average),
Method of Depreciation (SLM/WDV) Method of Valuation of
Goodwill etc..
JOURN
Journal is a primary set of books in which daily business
ALtransactions are to be recorded.
According to Cropper “A journal is a book employ to classify or
sort out transactions in a form convenient for their subsequent
entry in the ledger”.

NECESSITY OF JOURNAL
 Convenient recording of transaction
 Maintaining and preserving the identity of transaction
 Ascertaining the true nature of transaction
 Maintaining permanent record of information

FUNCTIONS OF JOURNAL
• To analyze each transaction into debit and credit so as to
enable their posting in the ledger
• To arrange transaction, chronological i.e in order of date.
JOURN
AL
ADVANTAGES OF JOURNAL
• Show all necessary information relating to a transaction
• Provide the explanation of the transaction
• Date wise record of all the transaction can be obtained
• Help in locating and preventing the errors

LIMITATIONS OF JOURNAL
• Recording all the transaction in a journal requires:
1) writing down name of account involved
2) individual posting of each account debited and credited
• Does not provide information on prompt basis
• Does not facilitate the internal check system since the
journal can be handled only by one person
• Journal become bulky and voluminous
Journal
Problems
Problem 1:
• On April 01, 2016 Mr.Anees started business with Rs.
100,000 and other transactions for the month are:
• April 02. Purchase Furniture for Cash Rs. 7,000.
• April 08. Purchase Goods for Cash Rs. 2,000 and for Credit
Rs. 1,000 from Khalid Retail Store.
• April 14. Sold Goods to Khan Brothers Rs. 12,000 and Cash
Sales Rs. 5,000.
• April 18. Owner withdrew of worth Rs. 2,000 for personal
use.
• April 22. Paid Khalid Retail Store Rs. 500.
• April 26. Received Rs. 10,000 from Khan Brothers.
• April 30. Paid Salaries Expense Rs. 2,000
Journal solution for
Problem 1.
Journal
problem
Prepare 2
general journal entries for the following transactions of a
business called Pose for Pics in 2016:
• Aug. 1: Hashim Khan, the owner, invested Rs. 57,500 cash and
Rs.
32,500 of photography equipment in the business.
• Aug 04: Paid Rs. 3,000 cash for an insurance policy covering the
next 24 months.
• Aug 07: Services are performed and clients are billed for Rs. 10,000.
• Aug 13: Purchased office supplies for Rs. 1,400. Cash paid Rs. 400
and remaining outstanding.
• Aug 20: Received Rs. 2,000 cash in photography fees earned
previously.
• Aug 24: The client immediately pays Rs. 15,000 for services to
be performed at a later date.
• Aug 29: The business acquires photography equipment. The
purchase price is Rs. 100,000, pays Rs. 25,000 cash and signs a note
for the balance.
Journal
Problem 3
Problem 3:
• On March 2017, Farhan Rahim, starts wholesaling
business. Following transactions as follows:
• 1. He started business with capital of Rs. 15,000 and Land
worth Rs. 10,000.
• 8. Bought goods from Bilal and Friends Rs. 1,000 and by
cash from XYZ Co. Rs 2,000.
• 13. Sold goods to Rehman & sons Rs. 1,500 and sale by
cash Rs. 5,000.
• 17. Gave away charity of cash Rs. 50 and merchandising
worth Rs. 30.
• 21. Paid Bilal and Friends cash Rs. 975; discount received
Rs. 25.
• 28. Received cash from Rehman & Sons Rs. 1,450; allowed
him discount of Rs. 50.
Ledger
Accounts
General ledger accounts are used to post the economic activities. Posting is the name
of transferring accounts from the book of prime entry to related ledger accounts.
When all the transactions for a given period have been Journalized, the next step is
to classify them according to the account affected.
Ledger is a Book of Account that keeps separate record for each account. Ledger is
the book of secondary entry. An account in its simplest form is a T-shape. It should
be noted that journal contains a chronological record while Ledger contains a
classified record of all economic activities.
General Ledger Posting and
Balancing Process
The process of posting and balancing involves the following Steps:
• The debit part of journal entry is recorded on the debit side of the relevant
account by credit account name (Source).
• The credit part of Journal Entry is recorded on the credit side of the relevant
account by debit account name (Source).
• In the reference column of the general journal the code or page number of
ledger account are noted.
• In the reference column of the ledger account the page number of the journal
is noted.
• Find the total of debit side and find the total of credit side. Put bigger value
both sides in Total.
• Calculate the difference between the two sides. This is the Balance (The
balancing figure between the two sides).
• Write the balance on the smaller side with key words “Balance c/d”. However,
the balance will be known by the larger side i.e. if the debit side is greater
than the credit side, the balance will be known as debit balance and vice
versa.
• Bring down the debit balance on the debit side writing the words
in
Description column “Balance b/d”. Similarly, bring down the credit balance on
the credit side be writing the words in the Description column “Balance b/d”.
Problem No.2
Mr. Ramu has the following transactions in the month of July.
Record them into the journal and show postings in the ledger and balance the accounts.
July 1st Ramu started business with a capital of 75,000
1st Purchased goods from Manu on credit 25,000
2nd Sold goods to Sonu 20,000
3rd Purchased goods from Meenu 15,000
4th Sold goods to Tanu for cash 16,000
5th Goods retuned to Manu 2,000
6th Bought furniture for 15,000
7th Bought goods from Zenu 12,000
8th Cash paid to Manu 10,000
9th Sold goods to Jane 13,500
10th Goods returned from Sonu 3,000
11th Cash received from Jane 5,500
12th Goods taken by Ramu for domestic use 3,000
13th Returned Goods to Zenu 1,000
14th Cash received from Sonu 12,000
15th Bought machinery for 18,000
16th Sold part of the furniture for 1,000
17th Cash paid for the purchase of bicycle for Ramu's son 1,500
19th Cash sales 15,000
20th Cash purchases 13,500
 Cash a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
01/10/_5 To Capital a/c 75,000 06/10/_5 By Furniture a/c 15,000
04/10/_5 To Goods/stock a/c 16,000 08/10/_5 By Manu a/c 10,000
11/10/_5 To Jane a/c 5,500 15/10/_5 By Machinery a/c 18,000
14/10/_5 To Sonu a/c 12,000 17/10/_5 By Drawings a/c 15,000
16/10/_5 To Furniture a/c 1,000 20/10/_5 By Goods/stock a/c 13,500
19/10/_5 To Goods/stock a/c 15,000 30/07/_5 By Balance c/d 53,000
tl 1,24,500 tl 1,24,500
31/07/_5 To Balance b/d 53,000

Capital a/c
DrCr
Date Particulars Amount Date Particulars Amount
30/07/_5 To Balance c/d 75,000 01/10/_5 By Cash a/c 75,000
tl 75,000 tl 75,000
31/07/_5 By Balance b/d 75,000
 Purchases a/c
Dr
Cr
Date Particulars Amount Date Particulars Amount
01/10/_5 To Manu a/c 25,000 02/10/_5 By Sonu a/c 20,000
03/10/_5 To Meenu a/c 15,000 04/10/_5 By Cash a/c 16,000
07/10/_5 To Zenu a/c 12,000 05/10/_5 By Manu a/c 2,000
10/10/_5 To Sonu a/c 3,000 09/10/_5 By Jane a/c 13,500
20/10/_5 To Cash a/c 13,500 12/10/_5 By Drawings a/c 3,000
30/07/_5 To Balance c/d 2,000 13/10/_5 By Zenu a/c 1,000
19/10/_5 By Cash a/c 15,000
tl 70,500 tl 70,500
31/07/_5 By Balance b/d 2,000
Manu a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
05/10/_5 To Goods/stock a/c 2,000 01/10/_5 By Goods/stock a/c 25,000
08/10/_5 To Cash a/c 10,000
30/07/_5 To Balance c/d 13,000

tl 25,000 tl 25,000
31/07/_5 By Balance b/d 13,000
 Sonu a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
02/10/_5 To Goods/stock a/c 20,000 10/10/_5 By Goods/stock a/c 3,000
14/10/_5 By Cash a/c 12,000
30/07/_5 By Balance c/d 5,000
tl 20,000 tl 20,000
31/07/_5 To Balance b/d 5,000

Meenu a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
30/07/_5 To Balance c/d 15,000 03/10/_5 By Goods/stock a/c 15,000
tl 15,000 tl 15,000
31/07/_5 By Balance b/d 15,000
Furniture a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
06/10/_5 To Cash a/c 15,000 16/10/_5 By Cash a/c 1,000
30/07/_5 By Balance c/d 14,000
tl 15,000 tl 15,000
31/07/_5 To Balance b/d 14,000
Trial Balance
Problems
Problem 1: Prepare a Trial Balance for Shining Brothers Pvt. Ltd. at March
31st, 2017?
Final
Popularly, the Trading and Profit & Loss Account and the Balance Sheet are together
Accounts
called the final accounts. The trading and profit & loss account is prepared to show
the financial results of a business, may be in the form of profit or loss during
an accounting period or year. Balance sheet is prepared to show the financial
position or conditions of business in terms of position of assets and liabilities of a
business as on a particular date.
Trading Account
Trading means buying and selling. The trading account shows the result of buying
and selling of goods. End result of trading account is gross profit or
gross loss. Following are format for Trading Account.
Profit and Loss Account
After calculating the gross profit or gross loss the next step is to prepare the profit
and loss account. To earn net profit a trader has to incur many expenses apart from
those spent for purchases and manufacturing of goods. If such expenses are less
than gross profit, the result will be net profit. When total of all these expenses are
more than gross profit the result will be net loss.
Balance Sheet
Balance sheet is prepared by taking up all personal accounts and real accounts
(assets and properties) together with the net result obtained from profit and loss
account. On the left hand side of the statement, the liabilities and capital are
shown. On the right hand side, all the assets are shown. Balance sheet is not an
account but it is a statement prepared from the ledger balances. Balance sheet is
defined as ‘a statement which sets out the assets and liabilities of a business firm
and which serves to ascertain the financial position of the same on any particular
date’.
Trading Account format
Profit and Loss Account
format
Balance Sheet
format
MEANING AND NEED OF ADJUSTMENT ENTRIES

Transactions omitted relate to the current year must be entered in books. If a

transaction entered is not related to the current year, fully or partly, that
portion of income or expense must be excluded. This process is made
through adjustment entries in the books of accounts. If we ignore to make
the necessary adjustments, the trading, profit & loss accounts do not show
the true profit or loss and in consequence balance sheet fails to depict true
financial position of the business. This situation defeats the very purpose of
final accounts. Hence, adjustment entries play an important role in
presenting correct picture of accounts.
Accounting Treatment:
Trading and Profit and Loss and Balance sheet, together, are called as final
accounts. Item appearing in the trial balance appears only once in final
accounts, either on the debit or credit. Any adjustment entry requires two
postings, debit and credit for the same amount. Important point is students
should do the posting (debit and credit) in the concerned accounts,
simultaneously.
Accounting treatment for adjustment
entries
1. Closing -Stock:
1 Every concern prepares a list of unsold goods at the end of the period and
puts value against it. It is to be remembered that stock is valued at cost or market price,
whichever is less.
Note: Closing Stock appears below the Trial Balance as an adjustment entry
For example, if the value of stock at the end of the period is Rs. 30,000 and is shown below the
trial balance, then the following adjusting entry will be passed:
Closing Stock A/c … Dr. 30,000
To Trading Account 30,000 The
two-fold effect of this entry will be:
(i) Stock will have a debit balance. Being a real account, it will be shown on the assets side of the
Balance Sheet.
(ii) Closing stock will be shown on the credit side of the Trading Account
Trading Account for the year ending…..
Particulars Amount Particulars Amount
By Closing Stock 30,000

Balance Sheet as on …….

Liabilities Amount Assets Amount
Closing Stock 30,000
Accounting treatment for adjustment
entries
2. - 2Expenses There are certain expenses, which have been incurred but
Outstanding
not paid. These expenses are called outstanding expenses.
For example, salary to the clerk Rs. 10,000 is due for the month of December. Books
are closed at the end of December. In order to bring this transaction into
accounts, the following adjustment entry will be passed:
Salary Account …..Dr. Rs. 10,000
To Outstanding Salary A/c. Rs. 10,000
The two fold effect of this entry will be:
(i) Outstanding salary will be added to salary, if any, on the debit side of Profit &
Loss Account.
(ii) Outstanding Salary Account, being personal and having credit balance, will be
shown on the liabilities side of the Balance Sheet.
Profit and Loss Account for the year ending…..
Particulars Amount Particulars Amount
To Salary Account 10,000

Balance Sheet as on …….

Liabilities Amount Assets Amount
Outstanding Salary 10,000
 Accounting treatment for adjustment
3.entries
Prepaid or Unexpired
- 3 Expenses: Those expenses which have been paid, in full, but their
utility or benefit has not expired during the accounting period are called prepaid or
unexpired expenses.
For example, annual premium Rs. 12,000 is paid on 1st July, where accounting year closes
on 31st December. Rs. 6000 will be insurance paid in advance. To bring this into account,
the following adjusting entry will be passed:
Prepaid Insurance Premium Account…..Dr. Rs. 6,000
To Insurance Premium Rs. 6,000
The double effect of this adjusting entry will be:
(i) Prepaid insurance will be deducted from the insurance premium on the debit side of
the Profit & Loss Account.
(ii) Prepaid insurance, being personal account and having debit balance, will be shown
on the assets side of the Balance Sheet.
Profit and Loss Account for the year ending…..
Particulars Amount Particulars Amount
To Insurance Premium 12,000
Less: Prepaid Insurance 6,000 6,000
Balance Sheet as on …….
Liabilities Amount Assets Amount
Prepaid Insurance 6,000
Accounting treatment for adjustment
entries
4. -4
Accrued Income: Income earned but not received during the accounting period is
called accrued Income.
Example: the interest on investments shown in the trial balance is Rs. 19,500. The adjustment
may run like this. Interest @10% is due on investments of Rs. 10,000 for 6 months, though
accrued, has not been yet been received. This interest Rs. 500 will be accrued income. In order
to bring this into account, the following adjusting entry will be passed:
Accrued Interest on Investments Account …..Dr. Rs. 500
To Interest on Investment Account Rs. 500 The
two fold effect of this entry will be:
(i) Interest on Investment account (accrued interest) will be added to the interest account on
the credit side of the profit & loss account.
(ii) (ii) Accrued interest, being personal account and having debit balance, will be shown on the
debit side of the Balance Sheet.
Profit and Loss Account for the year ending…..
Particulars Amount Particulars Amount
By Interest 19,500
Add: Interest Accrued 500 20,000
Balance Sheet as on …….
Liabilities Amount Assets Amount
Accrued Interest on Investments 500
Accounting treatment for adjustment
entries
5. Unearned-Income
5 or Income Received in Advance:
Sometimes, the amount received in respect of an income during the year pertains, partially, to
the next year. Suppose a landlord collects rent for one quarter, in advance, and closes his
account on 30th June each year. Suppose, a tenant has occupied a house on 1st June and pays
Rs. 1,800 as rent for 3 months. The landlord must not treat the whole of the rent received as
income for the current year. Two months’ rent pertains to the next year and should be credited
to the Profit and Loss Account of next year. This will ensure that the income for the current
year is not overstated. The required entry is:
Rent Account ….Dr. Rs. 1,200
To Rent Received in Advance Account Rs. 1,200
The double effect of this adjusting entry will be:
(i) Rent Received in advance account will be deducted from the Rent received account on the
credit side of the Profit & Loss Account.
(ii) (ii) Rent Received in advance account is a liability and having credit balance, will be shown
on the Liabilities side of the Balance Sheet.
Profit and Loss Account for the year ending…..
Particulars Amount Particulars Amount
By Rent Account 1,800
Add: Rent Received in advance 1,200 600
Balance Sheet as on …….
Liabilities Amount Assets Amount
 Accounting treatment foradjustment
6.entries - 6The value of fixed assets goes on reducing year by year because of
Depreciation:
wear, tear and efflux of time. This fall in the value should be treated as a loss or
expense, to be considered before profit or loss is ascertained. The value to be
shown in the Balance Sheet must also be reduced.
Depreciation is usually computed on the basis of the life of the assets. Suppose, a
machine costs Rs. 1,00,000 and has a life of 5 years. Then, each year 1/5th of the
cost, i.e., Rs. 20,000 should be treated as an expense; only the remaining amount is
to be shown in the balance sheet. The entry is:
Depreciation Account …Dr. 20,000
To Machinery Account 20,000
Depreciation is debited to the Profit & Loss Account. In the final accounts, the item
will figure as shown below:
Profit and Loss Account for the year ending…..
Particulars Amount Particulars Amount
To Depreciation Account 20,000
Balance Sheet as on …….
Liabilities Amount Assets Amount
Machinery Account 1,00,000
Less: Depreciation 20,000 80,000
 Accounting treatment for adjustment
entries - 7
7. Interest on Capital: The proprietor may wish to
ascertain his profit, after considering the interest for the
amount invested in the firm.
Suppose, the capital is Rs. 2,00,000 and the rate of interest is 5%. Then, the interest
will be Rs. 10,000. It will be treated like other expenses and debited to the Profit
and Loss Account; the amount will also be credited to the Capital Account.
The entry is:
Interest on Capital Account …Dr. 10,000
To Capital Account 10,000
In the final statements of account, the item will appear as shown below:
Profit and Loss Account for the year ending…..
Particulars Amount Particulars Amount
To Interest on Capital Account 10,000
Balance Sheet as on …….
Liabilities Amount Assets Amount
Capital 2,00,000
ADD: Interest on capital 10,000 2,10,000
 Accounting treatment for adjustment
entries - 8
8. Interest on Drawings: The proprietor may also realize that when he draws money for private
use, the firm loses interest as funds for business are reduced. Therefore, the proprietor’s
capital may be debited with the interest on the money drawn by him. Interest will depend on
the amount and the date of withdrawal concerned.
In absence of information about the date of drawings, it should be assumed that the drawings
were made, evenly, throughout the year; therefore, interest should be charged for six months
on the full amount. Suppose, capital is Rs. 2,00,000 and the total drawings are Rs. 10,000. The
rate of interest is 6% on the drawings. So, interest @ 6% for six months on drawings Rs. 10,000
will be Rs. 300.
The entry to be passed is:
Interest on Drawings ...Dr. Rs. 300
To Profit & Loss Account Rs. 300
Profit and Loss Account for the year ending…..
Particulars Amount Particulars Amount
By Interest on drawings 300
Balance Sheet as on …….
Liabilities Amount Assets Amount
Capital 2,00,000
Less: Drawings 10,000
Less: Interest on Drawings 300 1,89,700
 Accounting treatment for adjustment
entries
9. - 9Loan: Interest must be paid on loans, whether there is profit or loss. It is
Interest on
calculated by reference to the rate of interest agreed to be paid by the firm.
Suppose a loan of Rs. 20,000 is taken on 1st May 2008 at 18%, if the accounts are
closed on 31st December, the interest for the year will be Rs. 2,400 i.e., Rs. 20,000 ×
18/ 100 × 8/ 12.
The amount of the interest, if not paid, the entry is:
Interest on Loan Account …. Dr. Rs. 2,400
To Outstanding Interest Account Rs. 2,400
The item will figure as follows in the final accounts:
Profit and Loss Account for the year ending…..
Particulars Amount Particulars Amount
To Interest on loan 2,400
Balance Sheet as on …….
Liabilities Amount Assets Amount
Loan Account 20,000
Outstanding Interest on loan 2,400
Accounting treatment for adjustment
entries - 10
10. Bad Debts: An unrecovered debt is called as Bad Debt and it occur, when there
are credit sales. The following journal entry should, therefore, be passed in the
event of a debt becoming bad.
Bad Debts A/c Dr.
To Debtor’s Personal A/c
e.g. Kalyan & Co. has been running its cloth business. At the end of Dec. 2008, the
firm’s books of accounts show the debtors at Rs. 4,00,000. Out of those debtors, Rs.
20,000 have been recognized as bad debts.
Note: Bad debts, appearing in Trial Balance, have already seen provided for. Now, the
adjustment relates to additional bad debts for the amount appearing in sundry
debtors.

Profit and Loss Account for the year ending…..

Particulars Amount Particulars Amount
To Bad Debts A/c 20,000
Balance Sheet as on …….
Liabilities Amount Assets Amount
Debtors 4,00,000
Less: Bad debts 20,000 3,80,000
Accounting treatment for adjustment
entries
11. - 11
Provision for Bad and Doubtful Debts: Prudent accounting principle is to
make provision for expected losses. All credit sales would not be realized in
the year in which the sales are made. A firm, therefore, makes provision at
the end of the accounting year, for likely bad debts, which may happen
during the course of the next year.
The following journal entry is passed for creating a provision for bad debts.
Profit & Loss A/c Dr.
To Provision for Bad and Doubtful Debts
The provision for bad and doubtful debts is charged to the Profit & Loss
Account and is deducted from debtors in the Balance Sheet.
Calculation of Provision for Bad and Doubtful Debts:
Normally, problem states the % of Provision for Bad and Doubtful Debts. On
which amount of debtors, this % of Provision for Bad and Doubtful Debts is
to be calculated?
• Provision for Bad and Doubtful Debts is to be calculated on that amount of
debtors, after deducting bad debts written off given in the adjustments .
Adjustments:
1. Provide for wages Rs.5000.
2.Write off 5% depreciation on
freehold premises and 10% on office
furniture.
3. Insurance to the extent of Rs.200
belongs to 2010.
4.Closing stock as on 31.12.2009 is
Rs.52000.
5. Charge interest on capital @ 5%.
Prob.2 From the following particulars taken out from the books of Abdul Hanan & Co. You are
required to prepare Trading and Profit & Loss Account and Balance Sheet as at December 31st, 2019

Adjustments:
(a) Closing stock Rs, 35,000.
(b) Provision for doubtful debts at 5% of sundry debtors.
(c) Depreciation furniture and machinery by 10%.
(d) Commission of Rs. 3,600 has been earned but not received till the closing of
accounts.
 Prob: 3 From the following trial balance of Faris Ali Qureshi & Bros. and additional
information, prepare Trading and Profit & Loss account and Balance sheet for the year
ended June 30th, 2019.

Additional Information
1. Depreciation furniture by 10% by written down method (WDM).
2. A provision for doubtful debts is to be created to the extent of 5% on sundry debtors.
3.Salaries for the month of June, 2019 amounting to Rs. 3,000 were unpaid which must be provided for. However,
salaries included Rs. 2,000 paid in advance. Office expenses outstanding Rs. 8,000.
4. Insurance amounting to Rs. 2,000 is prepaid.
5. Stock use for private purpose Rs. 6,000 and closing stock Rs. 60,000.
Solutio
n:
 Problems 4: The following are the balances taken from the books of Muhammad Zain Ammar Safdar & Co. on
May 31st, 2020. You are required to prepare Trading and Profit and Profit and Loss Account / Income Statement
for the year ended May 31st, 2020 and Balance Sheet as on that date.

Adjustments:
1.Depreciation furniture and machinery at 10% p.a.
2.Insurance is paid in advance to the extent of Rs. 200.
3.Reserve for discount is no longer required and is to be written back.
4.Closing stock is valued at Rs. 100,000.
5.Interest on bank loan is outstanding.
Capital And Revenue Expenditure
and Receipts
The aim of accounting is to ascertain the financial performance of a firm. To do so the transactions
have to be identified as capital or revenue in nature. This will determine whether they are placed
in the Profit and Loss Account or the Balance Sheet. Determining capital or revenue nature is
undoubtedly very important in the field of accounting.
Capital Nature and Revenue Nature
The capital nature and the revenue nature differ from each other on the basis of the time for which
the purchases will be used.
Capital Nature
• Capital expenditures include large purchases of fixed assets that can be used for a longer
duration. In other words, the acquisition of fixed assets for certainly longer durations represents
the capital nature of expenditure. For example, the expenditures that are made for buying
manufacturing equipment and as a result, the equipment can be used for longer durations.
• Also, the company providing the equipment cannot deduct the full cost and the cost is required
to be updated according to the year-by-year devaluation of the product. These are basically non-
recurring in nature.
Capital expenditures are classified into three main sections:
• Expenditures made to reduce the costs
• Expenditures made to increase the revenue
• Expenditure which is explainable on the non- economic grounds, that is, the expenses made
without any relation to the money related profits.
Some examples of Capital Expenditures are
• The expenditures related to social activities.
• The expenses made for buying machinery.
• The investments made for doing research work and innovations.
Revenue Nature
In contrast to capital nature, short-term expenses represent the revenue nature. Unlike capital
nature, this one is related to the expenditures that are made for specific operating periods.
Furthermore, such expenses neither generate assets nor the liabilities. For example, the
expenditures made to facilitate the current operation that is, repair costs and maintenance
expenses.
Revenue nature Expenditure is of two types
• Expenditure for generating revenue: This type of expenditure is for the ongoing operational
processes. Likewise, the operating expenses meet the running business or factory cost
requirements. In the same year in which the expenses are occurring, in the revenue expenses,
the tax liabilities also lowers.
• Expenditure for maintaining the revenue-producing assets: The expenses for the generic and
ordinary repairing and preservation costs are revenue expenditure. The expectations are to
keep the asset in the working condition without any involvement in increasing the life and
workability of the asset.
Examples of the Revenue Expenditure are
• Paying rent for houses, shops, etc.
• Salaries for the various jobs.
• Advertising costs
• Legal expenses
• Insurance costs such as, vehicle insurance, life insurance etc.
• Water and electricity bill payments.
• Unlike capital nature expenses, revenue nature expenditures are recurring in nature.
Determining Capital Nature and Revenue Nature
There are certain basic considerations when we are determining
the nature of a financial transaction, i.e. capital nature or
revenue nature. Some such considerations are as follows.
• Nature of Business
The capital or revenue nature is dependent on the type of
business a person does. It is different for different types of
business. For instance, a business that provides car insurance
to people comes under the revenue nature but the
manufacturer buying the machinery for his factory is capital
expenditure.
• Recurring Nature of Expenditure
Revenue nature expenditures are recurring in nature and
capital nature expenditures are non-recurring in nature.
• Purpose of Expenditure
The manufacturing process is an illustration of capital nature
while renovation and repairing processes are expenses of
revenue nature.
Capital Receipt and Revenue
Receipt
Capital receipt and revenue receipt, both are the very important components of accounting. It is
important to correctly differentiate between the two. Classification of these transactions
reflects in the final statements of the company.
Capital Receipt
• These have a nature of non-recurrence, besides that, they are situated in the balance sheet in
the liabilities portion of them. The capital receipt is always in the interchange for the income.
The capital receipt is a kind of cash-flow in the business that does not occur over and over
again and this eventually, leads to the creation of liabilities in the future and also, the
decrement of assets takes place in the future.
• All of the capital receipts are free from taxation unless there is a provision to tax it. Various
types of Gifts and loans are the types of the capital receipts that do not attract tax and are tax-
free. So, in addition to non-recurring, Capital receipts are those non-routine receipts which
either becomes a load and responsibility or cause a vivid depletion in the assets of the
government or any organization and business.
The following sources are the generators of the capital receipt:
• Additional capital and mentioned assets introduced by the owner or the possessor
• Debentures and the other issues of debt instruments
• Loans borrowed from a bank or from a financial institution.
• Various insurance Claims.
• Issue of Shares
• So, basically, capital receipts are those that are the derivation of the not so normal operations
of a business. Besides that, the effect of capital receipt is depicted in the balance sheet.
These receipts are not at all a part of normal operations of government business. For example,
a sale of fixed assets, etc.
Revenue Receipt
These receipts are a major source of income for any kind of a business
and without it, a business can’t survive for long. This is a result of the
normal and core business activities. Being a normal business result is
the reason for its recurring nature. However, there is a little
shortcoming associated with it. The benefits of revenue receipts are
enjoyable only for the current accounting year and not possibly after
that.
The income received from the daily and periodic activities of business
includes all the operations that indulge cash into the business like:
• The sale of any kind of an inventory
• Income from services rendered
• Different types of discount Received from the suppliers
• Sale of scrap
• Interest received.
• Rent received
• To sum it all, Revenue receipts are recurring receipts and their effect
is shown on the income statement. For a successful business, both
receipts play a prominent role as they both compliments each other.
Thank You