ACCOUNTANCY

HIGHER SECONDARY FIRST YEAR

UntouchabilityisaSin
UntouchabilityisaCrime
UntouchabilityisInhuman.

TAMILNADU
TEXTBOOKCORPORATION

CollegeRoad,Chennai600006.
Governmentof
Tamilnadu
FirstEdition
2004

CHAIR
PERSO
N

Dr.
(Mrs
)R.

AM
UT
HA

Reader
in
Comm
erce
Justice
Basheer
Ahmed
Sayeed
College
for
Women
Chennai
600
018.
REVIE
WERS
Dr.K.

GOVINDARAJA
N
Dr.M.
SHANMUGAM

Readerin
Commerce
Readerin
Commerce
Annamalai
University
SIVETCollege
AnnamalaiNagar
608002.
Gowrivakkam,Che
nnai601302.
M
r
s.
R
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A
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AUTHOR
S
ThiruG.
RADHAKRISHN
AN

ThiruS.S.
KUMARAN

S.G.Lecturerin
Commerce
Coordinator,
PlanningUnit
SIVETCollege
(Budget&
Accounts)
Gowrivakkam,
Chennai601302.
EducationforAll
Project
CollegeRoad,
Chennai600006.
ThiruN.
MOORTHY
Mrs.N.RAMA

P.G.Asst.
(SpecialGrade)
P.G.Assistant
Govt.Higher
Secondary
School
LadyAndal
Venkatasubba
Rao
Nayakanpettai
631601
MatriculationHr.
Sec.School
Kancheepuram
District.
Chetpet,Chennai
600031.

Price:Rs.
Thisbookhas
beenprepared
bythe
Directorateof
School
Educationon
behalfofthe
Govt.of
Tamilnadu.
This
book
has
been
printe
don
60
G.S.
M.
paper
PrintedbyOffset
at:

PREFA
CE
Thebookon
Accountancy has
been written
strictly

in
accordance with
the new syllabus
framed by the
Government of
TamilNadu.
As
curriculum
renewal is a
continuous
process,
Accountancy
curriculum has
undergonevarious
types of changes
fromtimetotime
in accordance
withthechanging
needs of the
society. The
present effort of

reframing and
updating the
curriculum in
Accountancy at
the

Higher
Secondarylevelis
an exercise based
on the feed back
fromtheusers.

This
prescribed text
bookservesasa
foundation for
the

basic
principles of
Accountancy.
By introducing
thesubjectatthe
highersecondary
level, great care
has been taken
toemphasize on
minutedetailsto
enable the
studentstograsp
the concepts
with ease. The
vocabulary and
terminology
used in the text
book is in

accordance with
the
comprehension
and maturity
level of the
students.

This text
would serve as
a foot stool
while they
pursue their
higher studies.
Since the text
carries practical
methods of
maintaining
accounts the
students could
usethisfortheir
career.
Along with
examples
relating to the
immediate
environment of
the students
innovative
learning
methods like
charts, diagrams

and tables have

been presented
to simplify
conceptualized
learning.
As
mentionedearlier,
thistextservesas
a foundation
course which is
coupled with
sample questions
and examples.
These questions
and examples
serve for a better
understanding of
the subject.
Questions

for

examinations
need not be
restricted to the
exercisesalone.

Chairperson
iii

SYLL
ABUS
1.
Introduction
toAccounting
[14Periods]
Needand
Importanc
eBook
keeping
Accountin
g
Accountan
cy,
Accountin
gand
Book
keeping
Usersof
accounting
informatio
n
Branches
of
accounting
Basic
accounting

terms.
2.
Conceptual
Frameworkof
Accounting
[7Periods]
Basic
assumpti
ons
Basic
concepts

Modifyin
g
principles

Accounti
ng
Standards
.
3. Basic
Accountin
g
Procedure
sI
Double
Entry
Systemof

Book
Keeping
[7
Periods]
Double
entry
system
Account
Golden
rulesof
accounting.

4. Basic
Accountin
g
Procedure
sII
Journal
[21
Periods]
Source
documents

Accountin
gequation
Rulesfor
debiting
and
crediting
Booksof

original
entry
Journal
Illustration
s.

5. Basic
Accountin
g
Procedure
sIII
Ledger
[21
Periods]
Meaning
Utility

Format

Posting

Balancin
gan
account

Distincti
on
between
journal
and
ledger.

6. Subsidiar
yBooksI
Special
Purpose
Books
[21
Periods]
Need
Purchase
book
Sales
book
Returns
books
Billsof
exchange
Bills
book
Journal
proper.

7. Subsidiar
yBooksII
Cash
Book
[21
Periods]
Features
Advantage
sKinds
ofcash
books.
8. Subsidiar
y Books
III
Petty
Cash
Book
[7Periods
]
Meaning
Imprest
system
Analytical
pettycash
book
Format

Balancin
gofpetty
cashbook

Posting
ofpetty
cash
book
entries
Advantag
es.
9. Bank
Reconciliation
Statement
[21Periods]
Passbook

Difference
between
cashbook
andpass
book
Bank
reconciliat
ion
statement
Causes
of
disagreem
ent
between
balance
shownby
cashbook

andthe
balance
shownby
passbook

Procedure
for
preparing
bank
reconciliati
on
statement
Format.
10.Trial
Balanceand
Rectification
ofErrors
[21Periods]
Definition

Objectives

Advantage
s
Methods
Format
Sundry
debtorsand
creditors
Limitations

Errorsin
accounting

Steps
tolocate
the
errors
Suspens
e
account

Rectifica
tionof
errors.
11.Capital
andRevenue
Transactions
[7Periods]
Capital
transaction
s

Revenue
transaction
s

Deferred
revenue
transaction
s

Revenue
expenditur
e, Capital

expenditure
and
Deferred
revenue
expenditure

Distinction
Capital
profit and
revenue
profit
Capitalloss
and
revenue
loss.

12.Final
Accounts
[22Periods]
Partsof
Final
Accounts
Trading
account
Profitand
lossaccount

Balance
sheet
Preparatio
nofFinal
Accounts.

iv
v

CON
TEN
TS

12. FinalAccounts

Chapter
1.

IntroductiontoAccounting

2.

ConceptualFrameWorkofAccounting

3.

BasicAccountingProceduresI
DoubleEntrySystemofBookKeeping

4.

BasicAccountingProceduresIIJournal

5.

BasicAccountingProceduresIIILedger

6.

SubsidiaryBooksISpecialPurposeBooks

7.

SubsidiaryBooksIICashBook

8.

SubsidiaryBooksIIIPettyCashBook

9.

BankReconciliationStatement

10. TrialBalanceandRectificationofErrors
11. CapitalandRevenueTransactions

Booksfor
further
reference:
1. T.S.Grewal
Double
Entry Book
Keeping.
2. R.L.Gupta
Principles
andPractice
of
Accountancy
3. T.S.Grewal

Introduction
to
Accountancy
4. Patil &
Korlahalli
Principles
and
Practices of
Accountancy
5. S.Kr.Paul
Accountancy
Vol.I.
6. M.P.Vithal,
S.K.Sharma
&
S.S.Sehrawa
rt

Accountancy

Textbook for
Class XI
NCERT.
7. Institute of
Company
Secretaries
of India
Principleof
Accountancy
.
8. Vinayagam,
P.L.Mani,
K.L.Nagaraja
n

Principles of
Accountancy.

9. P.C.Tulsian,
S.D.Tulsian

ISC
Accountancy
forClassXI.
10. M.Jambuntha
n,
S.Arokiasam
y,
V.M.Gopala
Krishna,
P.Natrajan
Book
keeping and
Principlesof
Commerce.

11. Narayan

Vaish
Book
keeping and
Accounts.
12. Tamil Nadu
Textbook
Corporation

Accountancy
Higher
Secondary
FirstYear.
13. L.S.Porwal,
R.G.Saxena,
B.Banerjee,
ManMohan,
N.K.Agarwa
l

Accounting
A Textbook
for Class XI
Part I,
NCERT.
14. Jain &
Narang
Financial
Accounting.
vi

15. R.L.Gupta,
Radha
Swamy
Financial
Accounting.
16. R.K.Gupta,
V.K.Gupta
Financial
Accounting.
17. Basu Das
Practice in
Accountancy
.
18. S.Kr.Paul
Practical
Accounts
Vol.I.
19. Ghose
DostidarDas
Graded
Accounting
Problems.
20. M.C.Shukla
Advanced
Accountancy
.

CHAPTER - 1

INTRODUCTION TO ACCOUNTING
Learning Objectives
AfterstudyingthisChapter,youwillbeableto:
understandtheNeed,Meaning,Definition,Objectives
andAdvantagesofBookKeeping.
knowtheNeed,Definition,ObjectivesandProcessof
Accounting.
distinguishbetweenBookKeepingandAccounting.
identifytheUsersofAccountingInformationandtheir
Need.
knowtheBasicAccountingTerms.

Accountingisasoldasmoneyitself.Sinceinearlyages
commercial activities were based on barter system, record
keepingwasnotanecessity.TheIndustrialRevolutionof19th
centuryalongwithrapidriseinpopulation,pavedwayforthe
development of commercial activities, mass production and
creditterms.Thusrecordingofbusinesstransactionhasbecome
an important feature. In recent years with the change of
technologies and marketing along with stiff competition,
accountingsystemhasundergoneremarkablechanges.

vi
1

1.1 Need and

Importance of
Accounting
When a person
starts a business,
whetherlargeorsmall,
hismainaimistoearn
profit. He receives
money from certain
sources like sale of
goods, interest on
bank deposits etc. He
hastospendmoneyon
certain items like
purchase of goods,
salary,rent,etc.These
activities take place
during the normal
courseofhisbusiness.
Hewouldnaturallybe
anxious at the year
end, to know the
progress of his
business. Business
transactions

are
numerous,thatitisnot
possible to recall his
memoryastohowthe
money had been
earned and spent. At

the same time, if he

had noted down his
incomes

and
expenditures, he can
readily get the
required information.
Hence, the details of
the

business
transactionshavetobe
recordedinaclearand
systematic manner to
getanswerseasilyand
accurately for the
followingquestionsat
anytimehelikes.

i. What has
happenedto
his
investment?
ii. What is the
resultofthe
business
transactions
?
iii. What are
theearnings
and
expenses?
iv. How much
amount is

receivable
from
customers
to whom
goods have
been sold
oncredit?
v. How much
amount is
payable to
supplierson
account of
credit
purchases?
vi. What are
the nature
andvalueof
assets
possessed
by the
business
concern?
vii. What are
the nature
andvalueof
liabilitiesof
thebusiness
concern?
These and several
other questions are
answeredwiththehelp

ofaccounting.Theneed
for recording business
transactions in a clear
and systematic manner
isthebasiswhichgives
risetoBookkeeping.

1.2. Book-keeping

worth.

Bookkeeping is
that branch of
knowledgewhichtells
us how to keep a
record of business
transactions.Itisoften
routineandclericalin
nature. Itisimportant
tonotethatonlythose
transactions related to
businesswhichcanbe
expressed in terms of
money are recorded.
Theactivitiesofbook
keeping include
recording in the
journal,postingtothe
ledger and balancing
ofaccounts.

1.2.2 Objectives

1.2.1 Definition
R.N.Cartersays,
Bookkeeping is the
science and art of
correctly recording in
the books of account
all those business
transactionsthatresult
in the transfer of
money or moneys

Theobjectivesof
bookkeeping
are
i. to

have
permanent
recordofall
the business
transactions.

ii. to keep
records of
income and
expenses in
such a way
that the net
profitornet
lossmaybe
calculated.
iii. to keep
records of
assets and
liabilities in
such a way
that the
financial
position of
the business
may be
ascertained.

iv. to keep
control on
expenses
withaview
to minimise
the samein
order to
maximise
profit.

amount due
fromthem.
vi. toknowthe
names of
suppliers
and the
amount due
tothem.
vii. to have
important
information
forlegaland
tax
purposes.

v. toknowthe
names of
the
customers
and the
2
3

remembereverything.

1.2.3 Advantages

Fromtheabove
objectivesofbook
keeping,the
followingadvantages
canbenoted
i. Permanent and
Reliable Record:
Bookkeeping
provides permanent
recordforallbusiness
transactions,
replacingthememory
which fails to

ii. Arithmetical
Accuracy of the
Accounts:With the
helpof bookkeeping
trial balance can be
easily prepared. This
is used to check the
arithmetical accuracy
ofaccounts.
iii.

NetResultof
Business
Operations:
The
result(ProfitorLoss)

of business can be
correctlycalculated.
iv.

v.

Ascertainment
ofFinancialPosition:
It is not enough to
know the profit or
loss; the proprietor
should have a full
pictureofhisfinancial
position in business.
Once the full picture
(say for a year) is
known,thishelpshim
to plan for the next
yearsbusiness.

Ascertainmen
t of the Progress of
Business: When a
proprietor prepares
financial statements
eveyyear,hewillbe
in a position to
compare

the
statements. This will
enable him to
ascertain the growth
ofhisbusiness.Thus
bookkeepingenables
alongrangeplanning
of business activities
besidessatisfyingthe

short term objective

of calculation of
annual profits or
losses.
vi.

Calculation
ofDues: Forcertain
transactionspayments
may be made later.
Therefore,

the
businessman has to
know how much he
hastopayothers.

vii.

Control over
Assets: Inthecourse
of business, the
proprietor acquires
various assets like
building, machines,
furnitures, etc. He
has to keep a check
over them and find
out their values year
afteryear.

viii.
Control
over Borrowings:
Many businessmen
borrow from banks
and other sources.
These loans are
repayable. Just as he
must have a control
overassets,heshould
have control over
liabilities.
ix. IdentifyingDosand
Donts :
Book
keeping enables the
proprietortomakean
intelligent

and
periodic analysis of
variousaspectsofthe
business such as
purchases, sales,
expenditures and
incomes. From such
analysis, it will be
possible to focus his
attention on what
should be done and
what should not be
done to enhance his
profit

earning
capacity.
x. Fixing the Selling

Price : In fixing the

selling price, the
businessmen have to
consider many aspects
of

accounting
information such as
costofproduction,cost
of purchases and other
expenses. Accounting
informationisessential
in determining selling
prices.
xi. Taxation:Businessmen
pay sales tax, income
tax, etc. The tax
authoritiesrequirethem
to submit their
accounts. For this
purpose, they have to
maintainarecordofall
their

business
transactions.

xii. Management
Decisionmaking:
Planning, reviewing,
revising, controlling
and decisionmaking
functions of the
management are well
aidedbybookkeeping
recordsandreports.

xiii.
Legal
Requirements:
Claims against and
for the firm in
relation to outsiders
canbeconfirmedand
established

by
producingtherecords
as evidence in the
court.
1.3 Accounting
4
5

with the purpose of

giving

such
information that
accountingcameinto
being.
Accounting is
consideredasasystem
which collects and
processes financial
information of a
business.

These
informations

are
reportedtotheusersto
enable them to make
appropriatedecisions.

Bookkeeping
doesnotpresentaclear
financial picture of the
state of affairs of a
business.Whenonehas
to make a judgement
regarding the financial
positionofthefirm,the
information contained
in these books of
accounts has to be
analysed

and
interpreted.Itis

1.3.1 Definition

American
Accounting
Association defines
accounting as the
process

of
identifying,
measuring

and
communicating
economicinformation
to permit informed
judgments

and
decision by users of
theinformation.
1.3.2 Objectives

Themain
objectivesof
accountingare
i. tomaintain
accounting
records.
ii. tocalculate
the result
of
operations.
iii. toascertain
the
financial
position.
iv. to
communic
ate the
informatio
ntousers.
1.3.3
ss

Inter
Commu

Proce

Theprocessof
accountingasperthe
abovedefinitionis
givenbelow:
Input

Business
transactions
(monetaryvalue)

Process

Identifying
Recording
Classifying
Summarising
Analysing

Inorderto
accomplishitsmain
objectiveof
communicating
informationtothe
users,accounting
embracesthefollowing
functions.

i. Identifying:
Identifying the
business transactions
from the source
documents.
ii. Recording: The next
function

of
accountingistokeep
asystematicrecordof
all

business
transactions, which
are identified in an
orderlymanner,soon
aftertheiroccurrence
in the journal or
subsidiarybooks.
iii. Classifying: This is
concerned with the
classification of the
recorded business
transactions so as to
group the transactions
ofsimilartypeatone
place. i.e., in ledger

accounts. In order to
verifythearithmetical
accuracy of the
accounts,trialbalance
isprepared.
iv. Summarising : The
classified information
availablefromthe trial
balance are used to
prepare profit and loss
account and balance
sheet in a manner
useful to the users of
accounting
information.

v. Analysing:
It
establishes

the
relationship between
theitemsoftheprofit
andlossaccountand
the balance sheet.
The purpose of
analysing is to
identify the financial
strength

and
weakness of the
business. It provides
the basis for
interpretation.
vi. Interpreting: It is
concerned with

explaining

the
meaning
and
significance of the
relationship so
established by the
analysis.
Interpretation should
beusefultotheusers,
soastoenablethem
to take correct
decisions.
vii. Communicating:The
results obtainedfrom
the summarised,
analysed

and
interpreted
information are

communicated to the
interestedparties.
1.3.4Meaning of
Accounting
Cycle

An accounting
cycle is a complete
sequence

of
accounting process,
that begins with the
recordingofbusiness
transactions and
ends with the
preparation of final
accounts.

6
7

A
c
c
o
u
n
ti
n
g
C
y
c

le

Balanc
Sheet
Profit&
Loss
Account

(Closi

Ba

(Ope

Trading
Account

Tri

al

B
al
an
ce

L
e
d
g
er

When

a
businessman starts
his

business
activities, he records
the daytoday
transactions in the
Journal. From the
journal

the
transactions move
further to the ledger
where accounts are
writtenup.Here,the
combined effect of
debit and credit
pertaining to each
account is arrived at
in the form of
balances.

To prove the
accuracyofthework
done,thesebalances
are transferred to a
statementcalledtrial

balance. Preparation
oftradingandprofit
and loss account is
the next step. The
balancing of profit
and loss account
gives the net result
of the business
transactions. To
know the financial
position of the
business concern
balance sheet is
preparedattheend.
These
transactionswhich
havecompletedthe
currentaccounting
year,onceagain
cometothestarting
pointthejournal
andtheymovewith
newtransactionsof
thenextyear.Thus,
thiscyclicmovement
ofthetransactions
throughthebooksof
accounts(accounting
cycle)isacontinuous
process.

1.4 Accountancy,
Accounting and
Book-keeping
Accountancy
referstoasystematic
knowledgeof
accounting.It
explainswhytodo
andhowtodoof
variousaspectsof
accounting.Ittellsus
whyandhowto
preparethebooksof
accountsandhowto
summarizethe
accounting
informationand
communicateittothe
interestedparties.

Accounting
refers to the actual
processofpreparing
and presenting the
accounts. In other
words,itistheartof
puttingtheacademic
knowledge of
accountancy into
practice.
Bookkeeping
is a part of

accounting and is
concerned with
record keeping or
maintenance of
booksofaccounts.It
is often routine and
clericalinnature.
1.4.1 Relationshi
p

between

Accountancy,
Accounting
and

Book-

keeping

Bookkeeping
provides the basis
foraccountingandit
iscomplementaryto
accounting process.
Accounting begins
where bookkeeping
ends. Accountancy
includes accounting
and bookkeeping.
The

terms
Accounting and
Accountancy are
used synonymously.
Thisrelationshipcan
beeasilyunderstood
withthehelpofthe
followingdiagram.

OUNTA N

OUN T
C

- ke e
k

p
i

8
9

1.4.2 Distinction
between Bookkeeping and
Accounting

Ingeneralthe
followingarethe
differencesbetween
bookkeepingand
accounting.
Sl. Basisof
No. Distinction
1.

Scope

Bookkeeping
Recordingandmaintenance
ofbooksofaccounts.

5.

Responsi
bility

Abookkeeperisres
sibleforrecordingb
transactions.

6.

Supervision Thebookkeeperdo
supervise and
ch
workofanAccounta

7.

Staff
involved

Workisdonebythe
staffoftheorganisat

1.5 Users of
Accounting
Information
Thebasicobjective
of accounting is to
provide

2.

Stage

Primarystage.

3.

Objective

Tomaintain
records
of
transactions.

4.

Nature

Oftenroutineandclericalin
nature.

information

which is useful for

persons and groups
inside and outside the
organisation.

I. Internal
users: Internal users
are those individuals
or groups who are
within

the
organisation like
owners,management,
employees and trade
unions.
II.

External

users: External users

arethoseindividualsor
groupswhoareoutside
the organisation like
creditors, investors,
banksandotherlending
institutions,presentand
potential investors,
Government, tax
authorities, regulatory
agencies

and
researchers.

Theusersand
theirneedfor
informationare
asfollows:
Users

Internal
i.Owners

Toknowtheprofitabilityandfinancial
soundnessofthebusiness.

ii.Management

Totakepromptdecisionstomanagethe
businessefficiently.

iii.EmployeesandTradeunions Toformjudgementabouttheearning
capacityofthebusinesssincetheir
remunerationandbonusdependonit.

External
i.Creditors,banksandother
lending institutions

Todeterminewhethertheprincipaland
theinterestthereofwillbepaidinwhen
due.

ii.Present investors

Toknowtheposition,progressand
prosperityofthebusinessinorderto
ensurethesafetyoftheirinvestment.

iii.Potentialinvestors

Todecidewhethertoinvestinthe
businessornot.

iv.GovernmentandTax
authorities

Toknowtheearningsinordertoassess
thetaxliabilitiesofthebusiness.

v.Regulatoryagencies

Toevaluatethebusinessoperation
undertheregulatorylegislation.

vi.Researchers

Touseintheirresearchwork.

10
11

Users
of
Accou
nting
Inform
ation

Researchers

RegulatoryAgencies

Owners

Accounti
Informati

Governmentand
TaxAuthorities

Creditors,Banks&

LendingInstitutions

Potential
Investors
Present
Investors

1.6 Branches of
Accounting
Increased scale of
businessoperationshas
made the management
functionmorecomplex.
Thishasgivenraiseto
specialised branches in
accounting. The main
branches of accounting
are

Financial
Accounting, Cost
Accounting

and
Management
Accounting.
1.6.1 Financial
Accounting :

It is concerned
with recording of
business transactions
in the books of

accountsinsuchaway
thatoperatingresultof
aparticularperiodand
financialpositionona
particular date can be
known.
1.6.2 Cost
Accounting

It relates to
collection,
classification and
ascertainment of the
costofproductionor
jobundertakenbythe
firm.

1.6.3 Management
Accounting
Itrelatestotheuse
of accounting data
collected with the help
of financial accounting
and cost accounting for
the purpose of policy
formulation, planning,
control and decision
making by the
management.

B
r
a
n
c
h
es
of
A
c
c
o
u
n
ti
n
g

Acc
ount
ing

Financial
Accounting

1.7 Basic
Accounting Terms
The
understanding of the
subjectbecomeseasy
when one has the
knowledge of a few
important terms of
accounting. Some of
them are explained
below.
1.7.1 Transactions

Transactions are
those activities of a
business, which
involve transfer of
money or goods or
services between two
persons or two
accounts.
For
example, purchase of

Cost
Account

goods, sale of goods,

borrowing from bank,
lending of money,
salariespaid,rentpaid,
commission received
anddividendreceived.
Transactions are of
two types, namely,
cash and credit
transactions.
12
13

Credit
Transaction is one
where cash is not
involved immediately
but will be paid or
received later. In the
above example, if
Ram, does not pay
cashimmediatelybut
promisestopaylater,
it is credit
transaction.
1.7.2 Proprietor
A person who
owns a business is
calleditsproprietor.He
contributes capital to
the business with the

Cash
Transaction is one
wherecashreceiptor
payment is involved
in the transaction.
For example, When
Rambuysgoodsfrom
Kannan paying the
price of goods by
cash immediately, it
isacashtransaction.

intention of earning
profit.
1.7.3 Capital
It is the amount
invested by the
proprietor/s in the
business. This amount
is increased by the
amount of profits
earnedand the amount
of additional capital
introduced. It is
decreased by the
amount of losses
incurred and the
amounts withdrawn.
For example,
if
Mr.Anand

starts

business

with
Rs.5,00,000,hiscapital
wouldbeRs.5,00,000.
1.7.4 Assets

Assets are the

properties of every
descriptionbelonging
tothebusiness.Cash
in hand, plant and
machinery, furniture
and fittings, bank
balance,debtors,bills
receivable, stock of
goods, investments,
Goodwill

are
examples for assets.
Assets can be
classified

into
tangible

and
intangible.
Tangible
Assets: These assets
are those having
physical existence.It
can be seen and
touched.

For
example, plant &
machinery,cash,etc.
Intangible
Assets:
Intangible
assetsarethoseassets

having no physical
existence but their
possession gives rise
to some rights and
benefitstotheowner.
Itcannotbeseenand
touched. Goodwill,
patents, trademarks
are some of the
examples.
1.7.5 Liabilities
Liabilities refer to
thefinancialobligations
of a business. These
denote the amounts
whicha business owes
to others, e.g., loans
from

banks or other
persons,creditors for
goods supplied, bills
payable, outstanding
expenses, bank
overdraftetc.

credit from Mr.Babu

for

Rs.10,000.
Mr.Arulisadebtorto
Mr.Babu till he pays
the value of the
goods.

1.7.6 Drawings

1.7.8 Creditors

It is the amount
of cash or value of
goods withdrawn
fromthebusinessby
theproprietorforhis
personal use. It is
deducted from the
capital.

A person who
gives a benefit
without receiving
money or moneys
worth immediately
buttoclaiminfuture,
is a creditor. The
creditors are shown
as a liability in the
balance sheet. In the
above example
Mr.Babuisacreditor
to Mr.Arul till he
receive the value of
thegoods.

1.7.7 Debtors

person
(individual or firm)
who receives a
benefit without
giving money or
moneys worth
immediately, but
liabletopayinfuture
or in due course of
timeisadebtor.The
debtorsareshownas
an asset in the
balance sheet. For
example,
Mr.Arul
bought goods on

1.7.9 Purchases

Purchases refers
to the amount of
goods bought by a
businessforresaleor
for use in the
production. Goods
purchased for cash
are called cash

purchases. If it is
purchased on credit,
it is called as credit
purchases. Total
purchases include
both cash and credit
purchases.
1.7.10 Purchases
Return or Returns
Outward
14
15

When goods are

returned to the
suppliers due to
defective quality or
not as per the terms
of purchase, it is
called as purchases
return. To find net
purchases, purchases
return is deducted
from the total
purchases.

1.7.11 Sales

or Returns Inward

Sales refers to
the amount of goods
sold that are already
bought

or
manufactured by the
business. When
goods are sold for
cash, they are cash
salesbutifgoodsare
sold and payment is
not received at the
time of sale, it is
credit sales. Total
sales includes both
cashandcreditsales.

Whengoods are
returned from the
customers due to
defective quality or
not as per the terms
of sale, it is called
salesreturnorreturns
inward. To find out
netsales,salesreturn
isdeductedfromtotal
sales.

1.7.12 Sales Return

1.7.13 Stock

Stock includes
goods unsold on a
particulardate.Stock
may be opening and

closing stock. The

term opening stock
means goods unsold
in the beginning of
the

accounting
period. Whereas the
term closing stock
includes goods
unsold at the end of
the accounting perid.
Forexample,if4,000
units purchased @
Rs. 20 per unit
remain unsold, the
closing stock is
Rs.80,000. This will
be opening stock of
thesubsequentyear.
1.7.14 Revenue

Revenue means
theamountreceivable
or realised from sale
ofgoodsandearnings
from

interest,
dividend,
commission,etc.
1.7.15 Expense

It is the amount
spent in order to
produce and sell the

goods and services.

For

example,
purchase of raw
materials,paymentof
salaries,wages,etc.

1.7.16 Income

Incomeisthe
difference
betweenrevenue
andexpense.
1.7.17 Voucher
It is a written
documentinsupportof
a transaction. It is a
proof that a particular
transaction has taken
place for the value
statedinthevoucher.It
may be inthe form of
cash receipt, invoice,
cash memo, bank pay
inslip etc. Voucher is
necessary to audit the
accounts.
1.7.18 Invoice

Invoice is a
business document
which is prepared
when one sell goods
to another. The
statementisprepared
bythesellerofgoods.
It contains the
information relating

to name and address

of the seller and the
buyer,thedateofsale
and the clear
description of goods
with quantity and
price.
1.7.19 Receipt

Receipt is an
acknowledgementfor
cash received. It is
issued to the party
payingcash.Receipts
form the basis for
entriesincashbook.
1.7.20 Account

Account is a
summary of relevant
business transactions
at one place relating
to a person, asset,
expense or revenue
namedintheheading.
Anaccountisabrief
history of financial
transactions of a
particular person or
item.Anaccounthas
twosidescalleddebit
sideandcreditside.

16
17

Q
UE
ST
IO
NS
I. Objective Type :

a) Fillintheblanks:
1. Theamount
which the
proprietor
hasinvested
in the
business is
_________
_____.
2. Book
keeping is
an art of
recording
__________
_ in the
book of
accounts.
3. __________
_ is a
written

documentin
supportofa
transaction.
4. Accounting
begins
where
_______
ends.
5. Liabilities
refer to the
__________
_
obligations
of

a
business.
6. Owner of
thebusiness
is called
__________
.
7. An account
is

a
_________
of relevant
business
transactions
atoneplace
relatingtoa

person,
assets,
expense or
revenue
named in
theheading.
8. Receipt is
an
acknowledg
ement for
__________
.
9. Income is
the
difference
between
revenue and
________.

[Answers: 1. capital;
2. business
transaction
s; 3.
voucher;
4.book
keeping;5.
financial;
6.
Proprietor;
7.
summary;
8. cash
received;

9.expense]
b)Choosethe
correctanswer:
1. The debts
owing to
others by
thebusiness
isknownas
a)liabilities
b)expenses
c)debtors

2. Assets
minus
liabilitiesis
a)drawings
b)capital
c)credit

3. A written
documentin
supportofa
transaction
iscalled
a)receipt

returned to
the supplier
dueto
a)good
quality
b)defective
qualityc)
superquality

b)credit
note

6. Amount
spentinorder
to produce
and sell the
goodsand
servicesis
called
a)expense

c)voucher

b)income

4. Business
transactions
may be
classified
into
a)three

c)revenue

b)two
c)one
5. Purchases
return
means
goods

[Answers:1.(a),2.
(b),3.(c),4.(b),5.
(b),6.(a)]
AI. Other Questions:

1. What is
book
keeping?
2. Define
Book

keeping.
3. What are
the
objectives
of book
keeping?
4. What are
the
advantages
of book
keeping?
5. What
information
can a
18
19

businessma
n obtain
from his
book
keeping?
6. What do
you mean
by
accounting?
7. Define
Accounting.
8. What is
accounting
process?

9. What are the differences between bookkeeping and

accounting?
10. Explain the interrelationship between bookkeeping,
accountingandaccountancy.
11. Brieflyexplaintheusersandtheirneedforaccounting
information.
12. Whatarethebranchesofaccounting?
13. Writeshortnoteson:
a) Debtorsb)Creditorsc)Stock
14. Brieflyexplainthefollowingterms
a) Voucherb)Invoicec)Account
15. Writeshortnoteon
a) Revenueb)Purchasec)Assets

20

CHAPTER - 2

CONCEPTUAL FRAME WORK

OF ACCOUNTING

Learning Objectives
Afterlearningthischapter,youwillbeableto:
knowtheBasicAssumptionsofAccounting.
understandtheBasicAccountingConcepts.
knowtheModifyingPrinciplesofAccounting.

Accountingisthelanguageofbusiness.Itrecordsbusiness
transactions taking place during the accounting period.
Accountingcommunicatestheresultofthebusinesstransactions
in the form of final accounts. With a view to make the
accountingresultsunderstoodinthesamesensebyallinterested
parties,certainaccountingassumptions,conceptsandprinciples
havebeendevelopedoveracourseofperiod.
2.1 Basic Assumptions
The basic assumptions of accounting are like the
foundationpillarsonwhichthestructureofaccountingisbased.
Thefourbasicassumptionsareasfollows:

21

2.1.1 Accounting
Entity Assumption

Accordingtothis
assumption, business
istreatedasaunitor
entity apart from its
owners,creditorsand
others. In other
words, the proprietor
ofabusinessconcern
is always considered
to be separate and
distinct from the
business which he
controls. All the
business transactions
are recorded in the
books of accounts
from the view point
ofthebusiness.Even
the proprietor is
treated as a creditor
to the extent of his
capital.
2.1.2 Money
Measurement
Assumption

In accounting,
only those business
transactions and

events which are of

financial nature are
recorded.

For
example, when Sales
Manager is not on
good terms with
Production Manager,
thebusinessisbound
to suffer. This fact
willnot berecorded,
because it cannot be
measuredintermsof
money.
2.1.3 Accounting
Period Assumption

The users of
financial statements
need periodical
reports to know the
operationalresultand
the financial position
of the business
concern. Hence it
becomesnecessaryto
close the accounts at
regular intervals.
Usually a period of
365daysor52weeks
or 1 year is
considered as the
accountingperiod.

2.1.4 Going
Concern
Assumption

As per this
assumption, the
businesswillexistfor
a long period and
transactions are
recorded from this
point of view. There
is neither the
intention nor the
necessity to wind up
the business in the
foreseeablefuture.
2.2 Basic
Concepts of
Accounting
These concepts
guide how business
transactions

are
reported.Onthebasis
of the above four
assumptions the
following concepts
(principles)

of
accounting have been
developed.

2.2.1 Dual Aspect

Concept

Dual aspect
principle is the basis
for Double Entry
System of book
keeping.Allbusiness
transactions recorded
inaccountshavetwo
aspects receiving
benefit and giving
benefit.Forexample,
when a business
acquires an asset
(receivingofbenefit)
it must pay cash
(givingofbenefit).
2.2.2 Revenue
Realisation Concept
According to this
concept, revenue is
considered as the
income earned on the
datewhenitisrealised.
Unearnedorunrealised
revenue should not be
takenintoaccount.The
realisation concept is
vital for determining
incomepertainingtoan
accounting period. It

avoidsthepossibilityof
inflating incomes and
profits.
2.2.3 Historical Cost
Concept
Underthisconcept,
assetsarerecordedatthe
price paid to acquire
themandthiscostisthe
basis for all subsequent
accountingfortheasset.
For example, if a piece
oflandispurchasedfor
Rs.5,00,000 and its
market value is
Rs.8,00,000 at the time
of preparing final
accounts the land value
is recorded only for
Rs.5,00,000. Thus, the
balance sheet does not
indicate the price at
whichtheassetcouldbe
soldfor.

2.2.4 Matching
Concept
Matching the
revenues earned during
an accounting period
with the cost associated
with the period to
ascertaintheresultofthe
business concern is
called the matching
concept. It is the basis
for finding accurate
profitforaperiodwhich
canbesafelydistributed
totheowners.

2.2.5 Full Disclosure

Concept
Accounting
statements

should

disclose fully and

completely all the
significant information.
Basedonthis,decisions
canbetakenbyvarious

22
23

interested parties. It

explanations

involves

proper

accounting information

and

which are published in

classification

of

thefinancialstatements.

2.2.6 Verifiable and

Objective Evidence
Concept
This principle
requires that each
recorded business
transactions in the
books of accounts
should have an
adequate evidence to
supportit.Forexample,
cash receipt for
payments made. The
documentary evidence
of transactions should
be free from any bias.
As accounting records
are based on
documentary evidence
which are capable of
verification, it is
universallyacceptable.

2.3 Modifying
Principles
To make the
accounting information
useful to various
interested parties, the
basic assumptions and

concepts discussed
earlier have been
modified.

These
modifying principles
areasunder.
2.3.1 Cost Benefit
Principle

This modifying
principlestatesthatthe
cost of applying a
principleshouldnotbe
more than the benefit
derivedfromit.Ifthe
cost is more than the
benefit then that
principle should be
modified.
2.3.2 Materiality
Principle
The materiality
principle requires all
relatively relevant
information should be
disclosedinthefinancial
statements. Unimportant
and

immaterial
information are either
left out or merged with
otheritems.

2.3.3 Consistency

Principle
The aim of
consistency principle is
to preserve the
comparability

of
financialstatements.The
rules,practices,concepts
and principles used in
accounting should be
continuously observed
and applied year after
year. Comparisons of
financial results of the
businessamongdifferent
accountingperiodcanbe
significant

and
meaningful only when
consistentpracticeswere
followed in ascertaining
them. For example,
depreciation of assets
can be provided under
different methods,
whichever method is
followed, it should be
followedregularly.

2.3.4 Prudence
(Conservatism)
Principle

Prudence
principletakesinto
considerationall
prospectivelossesbut
leavesallprospective
profits.Theessence
ofthisprincipleis
anticipatenoprofit
andprovideforall
possiblelosses.For
example,while
valuingstockin
trade,marketpriceor
costpricewhichever
islessisconsidered.
Fr
a
m
e
W
or
k
of
Ac
co
un
tin
g

Assumptions

t
i
v
e

e
v
i
d
e
n
c
e

Concepts

1.AccountingEntity
1.DualAspect
2.MoneyMeasurement 2.RevenueRealisation
3.AccountingPeriod
3.HistoricalCost
4.GoingConcern
4.Matching
5. F
u
ll
D
i
s
c
l
o
s
u
r
e
6.

V
e
r
i
f
i
a
b
l
e

a
n
d

o
b
j
e
c

2.4 Accounting
Standards
Topromote
worldwide
uniformityin
published
accounts,the
InternationalAccounting
Standards Committee

(IASC)hasbeen setup
in June 1973 with nine
nations as founder
members. The purpose
of this committee is to
formulateandpublishin
public

interest,
standardstobeobserved
in the presentation of
audited

financial

statements and to
promote their world
wide acceptance and
observance. IASC exist
toreducethedifferences
between different
countries accounting
practices. This process
of harmonisation will
make it easier for the
users and preparers of
financial statement to
operate

across
24
25

Q
U
E
S
TI
O
N
S

internationalboundaries.
In our country, the
Institute of Chartered
Accountants ofIndia has

constituted Accounting
Standard Board (ASB)
in 1977. The ASB has
been empowered to
formulate and issue
accounting standards,
thatshouldbefollowed
byallbusinessconcerns
inIndia.

whicheverisless
is based on
_____________
principle.

a)FillintheBlanks:

2. The assets are

recorded in
books

of
accounts in the
cost

of
acquisition is
based

on
_____________
concept.

1. Stock in trade
are to be
recorded at cost
or market price

3. The benefits to
be derived from
the accounting
information

I. Objective Type :

shouldexceedits
cost is based on
_____________
principle.

4. Transactions
between owner
andbusinessare
recorded
separatelydueto
_____________
assumption.
5. Business
concern must
prepare financial
statements at
least once in a
yearisbasedon
___________
assumption.
6. _____________
principle
requires that the
sameaccounting
methods should
be followed
from

one
accounting
period to the
next.
[Answers:1.
prudence,
2.

historical
cost,3.
cost
benefit,4.
business
entity,5.
accountin
gperiod,
6.
consisten
cy]
b)Choosethe
correctanswer:
1. As per the
business entity
assumption, the
business is
different from
the
a)owners
b)banker
c)government

2. Going concern
assumption tell
usthelifeofthe
businessis
a)veryshort
b)verylong

c)none

i. Cost incurred
should

be
matched with
the revenues of
the particular
period is based
on
a)matching
concept
b)historicalcost
concept
c)fulldisclosure
concept

4. As per dual
aspect concept,
every business
transactionhas
a)threeaspects
b)oneaspect
c)twoaspects
[Answe
rs:1
(a),2.
(b),3.
(a),4.
(c)]
II. Other Questions :

1. What are the

basic
assumptions of
accounting?
2. What do you
mean

by
business entity
assumption?
3. Writeshortnotes
onthefollowing
assumption.
a)Money
measurementb)
Accounting
period

4. What do you
mean by going
concern
assumption?
5. What are the
basicconceptsof
accounting?
6. What do you
understand by
revenue
realisation
concept?
7. What do you
mean

by
historical cost
concept?
8. Describe the
following
concepts
a)Matching
b)Fulldisclosure

9. What do you
understand by
verifiable and
objective
evidence
26
27

concept?
10. Explainindetail
the modifying
principles of
accounting.
11. What do you
mean

by
materiality
principle?
12. What do you
understand by
consistency
principle?
13. Writeshortnotes
on
a)Prudence
principle
b)Dualaspect
concept

14. Briefly explain

the various
accounting
concepts.
15. Briefly explain
the various
accounting
assumptions.

CH
AP
TE
R3

BASIC
ACCOUNTING
PROCEDURE

System.
know the

Meaning
and Types
of
Accounts.
identify the

Accounting
Rules.

S - I DOUBLE
ENTRY
SYSTEM OF
BOOK
KEEPING
Learning
Objectives
Afterstudying
thisChapter,you
willbeableto:
understand

the
Meaning,
Features
and
Advantages
of Double
Entry

Recording of
business transactions
hasbeeninvogueinall
countries of the world.
In India, maintenance
of accounts was
practised not insucha
developed form as we
have today. Kautilyas
famous Arthasastra
not only relates to
PoliticsandEconomics,
butalsoexplainstheart
ofaccountkeepingina
separate

chapter.
Written in 4th century
BC, the book gives
details about account
keeping, methods of
supervising

and

checking of accounts
and also about the
distinction between
capital and revenue,
income and expenses
etc.
Double

entry

systemwasintroducedto
thebusinessworldbyan
Italian merchant named
Lucas Pacioli in 1494
A.D.Thoughthesystem

of recording business
transactions in a
systematicmannerhas
originated in Italy, it
was perfected in
England and other

European countries
duringthe18thcentury
only i.e., after the
Industrial Revolution.
Many countries have
adopted this system
today.

3.1 Double Entry

System
Thereare
numeroustransactions
inabusinessconcern.
Eachtransaction,when
closelyanalysed,
revealstwoaspects.
Oneaspectwillbe
receivingaspector
incomingaspector
expenses/lossaspect.
Thisistermedasthe
Debitaspect.The
otheraspectwillbe
givingaspector
outgoingaspector
income/gainaspect.

This

istermedasthe
Creditaspect.
Thesetwoaspects
namelyDebit
aspectandCredit
aspectformthe
basisofDoubleEntry
System.Thedouble
entrysystemisso
namedsinceit
recordsboththe
aspectsofa
transaction.
Inshort,thebasic
principle of this
system is, for every
debit,theremustbea
corresponding credit
of equal amount and
for every credit, there
must be a
correspondingdebitof
equalamount.
3.1.1 Definition

According

to
Every
business transaction
J.R.Batliboi
28
29

has a twofold effect

andthatitaffectstwo
accounts in opposite
directions and if a
complete record were
to be made of each
such transaction, it
wouldbenecessaryto
debitoneaccountand
creditanotheraccount.
It is this recording of
the two fold effect of
every transaction that
has given rise to the
term Double Entry
System.
3.1.2Features

i. Every
business
transaction
affects two
accounts.
ii. Each
transaction
has two
aspects, i.e.,
debit and
credit.

iii. It is based
upon
accounting
assumptions
conceptsand
principles.
iv. Helps in
preparing
trial balance
which is a
test of
arithmetical
accuracy in
accounting.
v. Preparation of
finalaccounts
with the help
of

trial
balance.
3.1.3 Approaches of
Recording

Therearetwo
approachesfor
recordinga
transaction.
I. Accounting
Equation
Approach
AI. Traditional
Approach
I.

Accounting

Equation Approach

Thisapproachis
also called as the
American Approach.
Under this method
transactions are
recordedbasedonthe
accounting equation,
i.e.,
Assets
=
Liabili
ties+
Capita
l
Thiswillbe
discussedin
detailinthenext
chapter.
II. Traditional
Approach

This approach is
also called as the
British Approach.
Recordingofbusiness
transactionsunderthis
methodareformedon
the basis of the
existence of two
aspects (debit and

credit) in each of the

transactions. All the
business transactions
are recorded in the
books of accounts
under the Double
EntrySystem.

3.1.4 Advantages
Theadvantages
ofthissystem
areasfollows:
i. Scientific
system: This
is the only
scientific
system of
recording
business
transactions.
It helps to
attain the
objectivesof
accounting.

ii. Complete
record of
transactions:
This system
maintains a
complete
record of all
business
transactions.

iii. A check on
theaccuracy
of accounts:
By the use
of this
system the
accuracy of
the
accounting
workcan be
established
by the
preparation
of trial
balance.
iv. Ascertainme
nt of profit
or loss: The
profitearned
or loss
occured
during a
period can

be
ascertained
by the
preparation
ofprofitand
lossaccount.
v. Knowledge of
the financial
position :
The
financial
position of
the concern
can be
ascertained
attheendof
each period
through the
preparation
of balance
sheet.
vi. Full details
for control:
This system
permits
accounts to
be kept in a
verydetailed
form, and
thereby
provides
sufficient

informations
for the
purpose of
control.
vii. Comparativ
e study :
The results
of one year
may be
compared
with those
of previous
years and
the reasons
for change
may be
ascertained.
viii.
Helps
in decision
making:
The
mangement
maybeable
to
obtain
sufficient
information
foritswork,
especially
for making
decisions.
Weaknesses
can be

detectedand
remedial
measures
may be
applied.
ix. Detection of
fraud: The
systematic
and
scientific
recording of
business
transactions
on the basis
of this
system
30
31

3.2.1 Classification
of Accounts

Transactionscan
bedividedinto
threecategories.
i. Transactions
relating to
individuals
andfirms
ii. Transaction
srelatingto
properties,

minimises
the chances
offraud.
3.2 Account
Every
transaction has two
aspects and each
aspect has an
account. It is stated
thatanaccountisa
summary

of
relevant
transactions at one
place relating to a
particularhead.

goods or
cash
iii. Transaction
srelatingto
expenses or
losses and
incomes or
gains.
Therefore,
accountscanalsobe
classifiedinto
Personal,Realand
Nominal.The

classificationmaybe
illustratedasfollows

Acco
unts
Personal
Imperson
al

Natural Artificial
Representative
Real
Nominal

Tangible
Intangible
I. Personal
Accounts : The
accounts which
relate to persons.
Personal accounts
include

the
following.
i. Natural
Persons :
Accounts
which relate

to
individuals.
For example,
Mohans
A/c,Shyams
A/cetc.
ii. Artificial
persons :
Accounts
which relate
toagroupof
persons or
firms or
institutions.
For example,
HMT Ltd.,
Indian
Overseas
Bank, Life
Insurance
Corporation
of India,
Cosmopolita
nclubetc.

iii. Representativ
e Persons:
Accounts
which
represent a
particular
person or
group of
persons. For
example,
outstanding
salary
account,
prepaid
insurance
account,etc.

The business
concern may keep
business relations
with all the above
personal accounts,
because of buying
goods from them or
sellinggoodstothem
or borrowing from
them or lending to
them. Thus they
become

either
DebtorsorCreditors.
The proprietor
being an individual

his capital account

and his drawings
account are also
personalaccounts.

AI. Impersonal
Accounts:
All
those accounts
which are not
personalaccounts.
This is further
divided into two
types viz. Real
and Nominal
accounts.
i. Real
Accounts:
Accounts
relating to
properties
and assets
which are
ownedbythe
business
concern.Real
accounts
include
tangible and
intangible
accounts.For
example,
Land,

Building,
Goodwill,
Purchases,
etc.
ii. Nominal
Accounts:
These
accounts do
not have any
existence,
form or
shape. They
relate to
incomes and
expenses and
gains and
losses of a
business
concern. For
example,
Salary
Account,
Dividend
Account,etc.
Illustration:1
Cl
as
sif
y
th
e

fo
llo
wi
ng
ite
m
s
in
to
Pe
rs
on
al,
R
ea
l
an
d
N
o
mi
na
l
A
cc
ou
nt
s.

1. Capital

2.

Sales

3. Drawings

4.

Outstandingsalary

5. Cash

6.

Rent

7. Interestpaid

8.

IndianBank

9. Discountreceived

10. Building

32
33

11. Bank

S.No. NameofAccount

13. MuruganLendingLibrary14.
15. Purchases
Solution:

1.

Personal

Th

2.

Real

Wh

3.

Nominal

All
and

1. Personalaccount

2.

3. Personalaccount

4.

5. Realaccount

6.

7. Nominalaccount

8.Personal(LegalBody)account

9. Nominalaccount

10.Realaccount

11. Personalaccount

12.Personalaccount

13. Personalaccount

14.Nominalaccount

15. Real
account
3.3 Golden Rules
of Accounting
Allthebusiness
transactionsare
recordedonthebasis
ofthefollowing
rules.

Deb

Q
U
E
S
T
I
O
N
S
I. Objective Type :

a)Fillintheblanks:
1. Theauthorofthe
famous book
Arthasastra is
__________.

2. Every business
transaction
reveals
__________
aspects.
3. The incoming
aspect of a
transaction is
called_________
and the outgoing
aspect of a
transaction is

called
_________.
4. Traditional
approach of
accounting is also
called

as
_________

approach.
5. The American
approach is
otherwiseknown
as_________
approach.
6. Impersonal
accounts are
classified into
_________
types.
7. Plant

and
machinery is an
example of
_________
account.
8. Capital account
isanexampleof
_________
account.
9. Commission
received will be
classified under
_________
account.

[Answers: 1.Kautilya,
2.two,3.
debit,credit,
4.British,5.
Accounting
equation,6.
two,7.real,
8.personal,
9.nominal]

b)Choosethe
correctanswer:
1. The receiving
aspect in a
transaction is
calledas
a)debitaspect
b)creditaspect
34
35

4. Capital account
is classified
under
a)personalA/c
b)realA/c
c)nominalA/c

5. Goodwill is an

c)neitherofthe
two

4. The giving
aspect in a
transaction is
calledas
a)debitaspect
b)creditaspect
c)neitherofthe
two

3. Murali account
isanexamplefor
a)personalA/c
b)realA/c
c)nominalA/c

exampleof
a)tangiblereal
A/cb)
intangiblereal
A/cc)nominal
A/c
6. Commission
received is an
exampleof

a)realA/c
b)personalA/c
c)nominalA/c

7. Outstanding rent
A/c is an
examplefor
a)nominal
account
b)personal
account
c) representativ
e personal
account
8. Nominal
Account is
classifiedunder
a)personalA/c
b)impersonalA/c

c) neitherofthe
two
9. Drawings
account is
classifiedunder
a)realA/c.
b)personalA/c.
c)nominalA/c.

[Answers:1.(a),2.
(b),3.(a),4.(a),5.

(b),6.(c),7.(c),
8. (b), 9.
(b)].
AI. Other Questions:

1. Explain the
meaning of
Double Entry
System.
2. Define Double
EntrySystem.
3. What are the
advantages of
Double Entry
System?
4. How

accounts
classified?

are

5. Write notes on
personal
accounts.
6. Write notes on
realaccounts.

7. Explain nominal
accounts.
8. What are the
golden rules of
Accounting?
9.

Classify

the
followingitemsinto
real, personal and
nominalaccounts

a.
b.
c.
d.
e.
[Answers:
Pe
rs
on
al
ac
co
un
t

(a
36
37

Capital
Purchases
Goodwill
Copyright
Latha

),
(e
),
(f)
,
(i)
,
(j)
R
ea
l
ac
co
un
t

(b
),
(c
),
(d
)
Nominal
account
(g),(h)]

CH
AP
TE
R4

BASIC
ACCOUNTI
NG
PROCEDUR
ES - II
JO
U
R
N
AL
Learning
Objectives
Afterlearning
thischapter,you
willbeableto:
understa
nd the
Origin

of
Transac
tions
Source
Docume
nts.
understa
nd the
Concept
of
Accounti
ng
Equation
.
knowthe
Rules of
Debit
and
Credit.
knowthe
Meaning
and the
Preparat
ion of
Journal.
bringout
the
Advanta
ges of
Journal.

Accounting
process starts with
identifying

the
transactions to be
recordedinthebooks
of

accounts.
Accounting identifies
only

those
transactions and
eventswhichinvolve
money. They should
be of financial
character.Accountant
doessobysortingout
various cash memos,
invoices,

bills,
receipts

and
vouchers.
Intheaccounting
process,thefirststep
is the recording of
transactions in the
books of accounts.
The origin of a
transactionisderived
from the source
document.

4.1 Source
Documents
Source documents

are the evidences of

business transactions
which

provide
information about the
natureofthetransaction,
thedate,theamountand
thepartiesinvolvedinit.
Transactions

are
recordedinthebooksof
accounts when they
actually take place and
are duly supported by
source documents.
According to the
verifiable objective
principle of Accounting,
each

transaction
recordedinthebooksof
accounts should have
adequate proof to
support it. These
supporting documents
are the written and
authentic proof of the
correctness of the
recorded transactions.
These documents are
required for audit and
tax assessment. They

also serve as the legal

evidence in case of a
dispute. The following
are the most common
sourcedocuments.

4.1.1 Cash Memo

When a trader
sells goods for cash,
hegivesacashmemo
and when he
purchases goods for
cash, he receives a
cash memo. Details
regarding the items,
quantity,rateandthe
price are mentioned
inthecashmemo.
Cash
Mem
o

V
i
n
o
t
h
W
a
t
c
h

C
o
.
135,South
UsmanRoad,
Thyagaraya
Nagar,Chennai
17.

No:52
To

Date:18.8.2003

..............................................................

Qty.
3
2

Description
TitanRegulia
TitanRaga

Less:Discount10%
5
Total
Goodsoncesoldarenottakenback.

38
39

4.1.2 Invoice or Bill

When a trader
sells goods on credit,
he prepares a sale
invoice. It contains
full details relating to
theamount,theterms
of payment and the
name and address of
the seller and buyer.
The original copy of
thesaleinvoiceissent
to the purchaser and
its duplicate copy is
kept for making
recordsinthebooksof
accounts.

Similarly, when
a trader purchases

Rate
Rs.
1,800
1,200

Amount
Rs.
5,400
2,400
7,800
780
7,020

Manager
forVinothWatchCo.
goods on credit, he
receives a credit bill
from the supplier of
goods.
INVOI
CE

R
a
m
e
s
h

E
l
e
c

t
r
o
n
i
c
s
306,
Anna
Salai,
Chenn
ai
600
002.

(RupeesTwolakhs
sixteenthousand
only)
E&O.E
forRamesh
Electronics

43,Eldams
Road,
Teynampet,
Chennai18.
Terms:5%cash
discountifpayment
ismadewithin30
days.

5
10

15

Handling&deliverycha
Total

Partner

No.405
Date:20.8.2003
Name&addressof
theCustomer:
BhanuEnterprises

Qty.

SalesTax@10%

Description
Refrigerators
WashingMachines

Note : E.&O.E.,
means errors and
omissions excepted.
In other words, if
there is any error in
theinvoice,thesame
has to be adjusted
accordingly.

a
v
a
n
a
B
o
o
k

H
o
u
s
e

4.1.3 Receipt
When a trader
receives cash from a
customer, he issues a
receipt containing the
date, the amount and
the name of the
customer. The original
copyishandedoverto
the customer and the
duplicate copy is kept
forrecord.Inthesame
way, whenever we
make payment, we
obtain a receipt from
the party to whom we
makepayment.
RECEI
PT

S
a
r

43,
1st
Main
Road
,
Chen
nai
35.
ReceiptNo.315
Date:16.9.2003
Received with
thanksasumofRs.
15,000 (Rupees
fifteen thousand
only) from M/s.
Sulthan & Sons

beingthesupplyof
books as per the
listenclosed.

and it contains the

date of of the goods
returned,nameofthe
supplier, details of
Cheque/DD/No.:10345Dt.:10.9.2003
the goods returned
CanaraBank,Trichy.
and reasons for
returning the goods.
Seal
Each debit note is
Note:Iftheamount
serially numbered. A
ismorethanRs.500,
duplicate copy or
affixarevenue
counter foil of the
stamp.
debitnoteisretained
bythebuyer.Onthe
4.1.4 Debit Note
basis of debit note,
the suppliers account
A debit note is
is debited in the
preparedbythebuyer
books.
40
41
DEB
IT
NOT
E

GaneshTraders
22,RamNagar,
Chennai600015
Name&AddressofSupplier:

Terms:5%cash

discountifpayment
ismadewithin30
days.
Date
2003
June14

Particulars

20FMRadiosetspurc
underyourinvoiceNo
dated,2ndJune,2003
returned,asthesetsar
inworkingconditions
@Rs.75perset.
Add:Packingexpens

Total

E&O.,E

4.1.5 Credit Note

A credit note is
prepared by the seller
anditcontainsthedate
on which goods are
returned, name of the
customer,detailsofthe
goods received back,
amount of such goods
and reasons for
returning the goods.
Each credit note is
serially numbered. A
duplicatecopyofthe

creditnoteisretained
for the record
purpose.Onthebasis
of credit note, the
customersaccountis
creditedinthebooks.

CREDIT N

No:243

COTTONW
22,MethaNagar,Ch

Name&AddressoftheCustome

Terms:2%cashdiscountifpaym
Date
2003
Sept15

Particulars

TShirts32200N
@Rs.100each
Less:Discount@10%

(Returnduetoinferior

To
E&O.E.,

4.1.6 Pay-in-slip
Payinslip is a
form available in

banks and is used to

deposit money into a
bank account. Each
payinslip has a
counterfoil which is
returned to the
depositor duly sealed
andsignedbythebank
official. This source
42
43

document relates to
bank transactions. It
givesdetailsregarding
date, account number,
amount deposited (in
cash or cheque) and
name of the account
holder.

specified sum to the

bearer or the person
namedinitandpayable
on demand. Each
.............................
cheque book has a
IndianOverseasBank
counterfoilinwhichthe
.............................
Branch CreditCurrentAcountNo.
same details in the
200..............
of(name)
CurrentAcountNo............
cheque are filled. The
of(name)...........................
counterfoil remains
.................................................
Cheque/Cash Rs
withtheaccountholder
asperdetailsfurnishedoverleaf
Rupees
forhisfuturereference.
.................................................
The counterfoil forms
...................
...................
CashierClerk
AuthorisedOfficial
the source document
..................................................................................................
Thiscounterfoilisnotvalidunless
for entries to be made
DepositorsSignature
signedbyanauthorisedofficialofthe
Bank(inadditiontothecashierincase Name&Address
in the books of
.............................................................................................
ofdepositbycash).
accounts.

Pay
in
slip

Rupees..............................................................................

4.1.7 Cheque
A cheque is a
document in writing
drawnuponaspecified
banker to pay a

Cheq
ue

PAY........................................................
. .. ... ... ....

RUPEES
4.1.8 Vouchers
.................................................................................................
.................................................................................

INTL.

A/c.No.

A voucher is a

written document in

TheTamilNaduStateApexCooperativeBankLtd.,
support of a business
AshokNagar,273B,10thAvenue,
transaction. Vouchers
CHENNAI600083.

3 0 8 8 9 4 600091007

are prepared by an
accountant and each
voucher is counter
signedbyanauthorised
person of the
organisation.
No.

VOUCHER

Date
Rs.
Payto
Rs.inWords
being
anddebit
Authorisedby
Paidby

Cash(or) DrawnonBank
Cheque

Thevouchersare
properly

filed
according to their
serialnumberssothat
the auditors may
easily vouch them
and these may also
serveasdocumentary
evidenceinfuture.

Receivedth

Bills receivable,
bills payable, wage
sheet/salaries pay
acquittance,
correspondence etc.,
also serve as the
source documents.
Thus,theremustbea
source document for
each transaction
recordedinthebooks
ofaccounts.
Note:Theformatsof
the source
documents
are given
above, only
to know the
details but
not for the
44
45

effect i.e., on the

assets and claims on
assets. Always the
totalclaims(thoseof
outsiders and of the
proprietors) will be
equal to the total
assetsofthebusiness
concern. The claims

preparation.

4.2 Accounting
Equation
The

source

document is the origin

of a transaction and it
initiates the accounting
process, whose starting
point is the accounting
equation.
Accounting
equationisbasedondual
aspect concept (Debit
and

Credit).

It

emphasizes on the fact

that every transaction
hasatwosided

are also known as

equities, are of two
types: i.) Owners
equity (Capital); ii.)
Outsiders equity
(Liabilities).
Assets = Equities
Assets = Capital +
Capital = Assets

Liabilities = Assets
4.2.1 Effect of
Transactions on
Accounting
Equation :

Illustration1
Ifthecapital
ofabusinessis
Rs.3,00,000andother
liabilitiesare
Rs.2,00,000,calculate
thetotalassetsofthe
business.

Solution
Assets = Capital
Capital + Liabilities
Rs.3,00,000+ Rs.2,00,000
Illustration2
Ifthetotal
assetsofabusiness
areRs.3,60,000and
capitalis
Rs.2,00,000,calculate
liabilities.
Solution
Assets = Capital
Liabilities = Assets
Assets Capital
Rs.3,60,000 Rs.2,00,000=

Illustration3
Ifthetotal
assetsofabusiness
areRs.4,50,000and
outsideliabilitiesare
Rs.2,50,000,
calculatethecapital.

Solution:
Capital = Assets
Assets Liabilities
Rs.
4,50,000
Rs.
2,50,000=
Rs.2,00,00
0
Illustration4
Transaction1:
Muruganstarted
businesswith
Rs.50,000ascapital.

The business
unit has received
assets totalling
Rs.50,000intheform
of cash and the
claims against the
firm are also
Rs.50,000intheform
of capital. The
transaction can be
expressedintheform
of an accounting
equationasfollows:

Assets =Capital
Cash =Capital
Rs.50,000 =Rs.50,000
Transaction2:
Muruganpurchased
furnitureforcash
Rs.5,000.
The cash is
reduced by Rs,5,000
but a new asset
(furniture) of the same
amount has been
acquired.

This
transaction decreases
oneasset(cash)andat
thesametimeincreases
the other asset
(furniture) with the
same amount, leaving
thetotaloftheassetsof
the

business
unchanged.

The
accounting equation
nowisasfollows:

Assets

= Capital +Liabilities

Cash + Furniture

= Capital +Liabilities

Transaction1

50,000 +

Transaction2

()5,000 +

5,000

= 50,000 +

0+

Equation

45,000 +

5,000

= 50,000 +

46
47

Transaction3:He
purchasedgoodsfor
cashRs.30,000.

Cash + Furniture

Asaresult,cash
balanceisreducedby
thegoodspurchased,
leaving the total of
theassetsunchanged.

Transaction13
Transaction4
Equation

Cash + Furniture
Transaction1&245,000 +
Transaction3
Equation

5,000

()30,000 +

15,000 +

5,000

Transaction4:He
purchasedgoodson
creditforRs.20,000.
The above
transaction will
increasethevalueof
stock on the assets
sideandwillcreatea
liability in the form
ofcreditors.

15,000 +

5,000

0 +

15,000 +

5,000

Transaction5:Goods
costingRs.25,000sold
oncreditforRs.35,000.
The

above
transaction will give
rise to a new asset in
theformofDebtorsto
theextentofRs.35,000.
Butthestockofgoods
will be reduced by
Rs.25,000i.e., the cost
of goodssold. Thenet
increaseofRs.10,000is
the amount of revenue
whichwillbeaddedto
thecapital.

Cash +Furniture +

Transaction14
Transaction5

15,000 +
0+

5,000 +
0 +()25,000

Equation

15,000 +

5,000 +

Transaction6:Rent
paidRs.3,000.
It reduces cash
and the rent is an
expense, it results in
a loss which
decreasesthecapital.
Cash +Furniture +
Transaction15

15,000 +

5,000 +

Transaction6

3,000 +

0 +

Equation

12,000 +

5,000 +

From the above

transactions, it may be
concluded that every
transactionhasadouble
effectandineachcase
Assets = Capital +
Liabilities,

i.e.,
Accountingequationis
trueinallcases .The
last equation appearing
in the books of

Mr.Murugan may also

bepresentedintheform
of a statement called
Balance Sheet. It will
appearasbelow:

Bal
anc
e
She
et
of
Mr.
Mu
rug
an
a
s
o
n

.
.
.
.
.
.
.
.
.
.
.
.
.

Liabilities
Capital
Creditors

Rs.
57,000
20,000

Assets
Cash
Stock
Debtors
Furniture

77,000

Rs.
12,000
25,000
35,000
5,000
77,000

48
49

Note : Increase in
one asset will be
automatically either
decrease in another
asset or increase in
liability or increase
in capital. Likewise
decrease in asset by
way of either in
increase in another
asset or decrease in
liabilityorcapital.
Illustration5
Show the
AccountingEquation
on the basis of the
following
transactions and
prepare a Balance
Sheetonthebasisof
thelastequation.

1.

Maharajancommencedbu

2.

Purchasedgoodsforcash

3.

Purchasedgoodsoncredi

4.

Purchasedfurnitureforca

5.

Paidrent

6.

Soldgoodsforcashcostin

7.

Paidtocreditors

8.

Withdrewcashforprivate

9.

Paidsalaries

10. Soldgoodsoncredit(cost

Purchasedgoodsoncredit
PurchasedFurniture
PaidRent
Soldgoodsforcash
Paidtocreditors
Withdrewcashforprivateuse
PaidSalaries
Soldgoodsoncreditcosting
Rs.60,000

3.
4.
5.
6.
7.
8.
9.
10.

Equation

Purchasedgoodsforcash

2.

S.No. Transaction
1.
Maharajancommenced
businesswithRs.1,00,000/

Solution:

Assets
Cash+Stock+Furniture+
1,00,000+0+0+
1,00,000+0+0+
()70,000+70,000+0+
30,000+70,000+0+
0+80,000+0+
30,000+1,50,000+0+
()3,000+0+3,000+
27,000+1,50,000+3,000+
()2,000+0+0+
25,000+1,50,000+3,000+
(+)60,000()45,000+0+
85,000+1,05,000+3,000+
()20,000+0+0+
65,000+1,05,000+3,000+
()10,000+0+0+
55,000+1,05,000+3,000+
()5,000+0+0+
50,000+1,05,000+3,000+
0()60,000+0+
50,000+45,000+3,000+

AccountingEquation
Capital
Capital
1,00,000
1,00,000
0
1,00,000
0
1,00,000
0
1,00,000
()2,000
98,000
15,000
1,13,000
0
1,13,000
()10,000
1,03,000
()5,000
98,000
(+)20,000
1,18,000
1,78,000= 1,78,000

=
Debtors=
0=
0=
0=
0=
0=
0=
0=
0=
0=
0=
0=
0=
0=
0=
0=
0=
0=
0=
80,000=
80,000=

+Liabilities
+Creditors
+0
+0
+0
+0
+80,000
+80,000
+0
+80,000
+0
+80,000
+0
+80,000
+()20,000
+60,000
+0
+60,000
+0
+60,000
+0
+60,000

50
51

Explanation:
S.No.

1,78,000

Transactions

1.

Capitalbroughtin

Cashincreases
(comesin)

2.

Cashpurchases

Stockincreases
Cashdecreases

3.

Creditpurchases

Stockincreases

4.

Furniturebought

Cashdecreases
Furnitureincreases
(comesin)

5.

Rentpaid

Cashdecreases

6.

CashSales

7.
8.
9.

Paymenttocreditors
Withdrawalofcashfor
privateuse(Drawings)
Salariespaid

Cashincreases
Stockdecreases
Cashdecreases
Cashdecreases

10.

CreditSales

Cashdecreases

Stockdecreases
Debtorsincrease

BalanceSheetofMr.Maharajan
ason............................
Capital&Liabilities
Capital
Creditors

Rs.
1,18,000
60,000

4.3 Rules for

Debiting and
Crediting
In

actual
practice,

the
individual
transactions

of
similar nature are
recorded, added and
substracted at one
place. Such place is
customarily the
meaningofdebitand
credit, it is essential
to understand the
meaningandformof
anaccount.
Anaccount isa
recordofallbusiness
transactions relating
toa particularperson
orassetorliabilityor
expenseorincome.In
accounting, we keep
a separate record of
eachindividual,asset,
liability, expense or
income. The place
where such a record
is maintained is
termed as an

Account.
All accounts are
divided into two
sides. The left hand
sideofanaccountis
calledDebitsideand
therighthandsideof
an account is called
Credit side. In the
abbreviated form
DebitiswrittenasDr.
and Credit is written
as Cr. For example,
the transactions
relating to cash are
recorded in an
account, entitled
Cash Account and
its format will be as
givenbelow:
Debit(Dr.)
CashAccount
Credit(Cr.)

In order to
decidewhentowrite
onthedebitsideofan
account and when to
write on the credit
side of an account,

there are two

approaches.Theyare:
1)

Accounting
Equation Approach,
2)

Traditional
Approach.
Nature of Account

The accounting
equation is a statement
52
53

1. Assets
Accounts
2. Capital
Account
3. Liabilities
Accounts
4. Revenues
or Incomes
Accounts
5. Expenses
or Losses
Accounts

If there is an
increase or decrease
inoneaccount,there
willbeequaldecrease
orincreaseinanother
account.Accordingly,

of equality between the

debits and the credits.
The rules of debit and
credit depend on the
natureofanaccount.For
this purpose, all the
accounts are classified
into the following five
categories in the
accounting equation
approach:

thefollowingrulesof
debit and credit in
respectofthevarious
categories

of
accounts can be
obtained.
Therulesmay
be
summarised
asbelow:
1.
Incr
e
a
s
e
s

a
s
s
e
t
s

a
r
e

d
e
b
i
t
s
;

d
e
c
r
e
a
s
e
s

i
n

a
s
s
e
t
s

a
r
e

c
r
e
d
i
t
s
.

2.
Incr
e
a
s
e
s

i
n

c
a
p
i
t
a
l

a
r
e

c
r
e
d
i
t
s
;

d
e
c
r
e
a
s
e
s

c
a
p
i
t
a
l

a
r
e

d
e
b
i
t
s
.

3.
Incr
e
a
s
e
s

t
s
.

4.
Incr
e
a
s
e
s

i
n

i
n
c
o
m
e
s

a
n
d

g
a
i
n

a
r
e

c
r
e
d
i
t
s
;

d
e
c
r
e
a
s
e
s

i
n

i
n
c
o

m
e
s

a
n
d

g
a
i
n
s

a
r
e

d
e
b
i
t
s
.

5.

I
ncr
eas
es
in

ex
pe
ns
es
an
d
los
ses
are
de
bit
s;
de
cre
ase
s
in
ex
pe
ns
es
an
d
los
ses
are
cre
dit
s.

Elementsof
AccountingEquation

Deb

Assets
Liabilities
Capital
Revenues
Expenses

Increase
Decrease
Decrease
Decrease
Increase

Inthetraditional
approach, all the
accounts

are
classified into the
followingthreetypes.
1.Personal
Accounts2.Real
Accounts3.
Nominal
Accounts

GoldenRulesfor
DebitandCredit:

1. PersonalAccounts a)
b
2. RealAccounts

a)
b

3. NominalAccounts a)
b
4.4. Books of
Original Entry

The books in
whichatransactionis
recorded for the first
time from a source
document are called
Books of Original
Entry or Prime Entry.
Journal is one of the
booksoforiginalentry
in which transactions

areoriginallyrecorded
in a chronological
(daytoday) order
according to the
principles of Double
EntrySystem.
4.4.1. Journal
Journal is a date
wise record of all the
transactionswithdetails
oftheaccountsdebited
and credited and the
amount of each
transaction.

4.4.2. Format
Journa
l

Date

Particulars

54
55

Explanation:
1.

Date : In the first

column,thedateof
the transaction is
entered. The year
and the month is
written only once,
till they change.
Thesequenceofthe
dates and months
should be strictly
maintained.
2. Particulars : Each

transaction affects
two accounts, out
of which one
account is debited
and the other
accountiscredited.
The
nameoftheaccount
to be debited is

L.F.

Debit
Amount
Rs.

Credit
Amount
Rs.

written first,
very near to
the line of
particulars
column and
the word Dr.
isalsowritten
at the end of
the

particulars
column. In
the second
line, the
name of the
accounttobe
credited is
written,starts
with the
wordTo,a
few space
away from
themarginin
the

particularscolumn
to the make it
distinct from the
debitaccount.
3. Narration:

After each
entry, a
brief
explanatio
nofthe
transaction
together with
necessary details
is given in the
particularscolumn
with in brackets
called narration.
The words For
or Being are
used before
starting to write
down narration.
Now, it is not
necessary to use
the wordForor
Being.
4. Ledger Folio
(L.F): All entries

from the journal

are later posted
into the ledger
accounts. The

page number
or folio
number of
the Ledger,
where the
posting has
been made
from the
Journal is
recorded in
the L.F
column of
the Journal.
Till such
time, this
column
remains
blank.
5. Debit
Amount : In

this column,
the amount
of

the
account
being
debited is
written.
6. Credit
Amount : In

this column,
the amount
of

the

account
credited
written.

being

is

4.4.3.
Ste
ps
in
Journalisin
g
Theprocess
of analysing the
business
transactions under
the heads of debit
and credit and
recording them in
theJournaliscalled
Journalising. An
entry made in the
journal is called a
JournalEntry.

Step 1 Determine the

twoaccounts
which are
involved in
the
transaction.
Step 2 Classify the

above two
accounts
under
Personal,
Real or
Nominal.
Step 3 Find out the

rulesofdebit
andcreditfor
the above
two
accounts.
Step 4 Identify which

accountisto
be debited
and which
account isto
becredited.
Step5 Recordthedate

of
transaction
in the date
column. The

yearandmonthis
written once, till
they change. The
sequence of the
dates and months
should be strictly
maintained.
Step 6 Enter the name of the

account to be
debited in the
particulars column
veryclosetotheleft
hand side of the
particulars column
followed by the
abbreviation Dr. in
the same line.
Against this, the
amount to be
debitediswrittenin
the debit amount
columninthesame
line.
Step7 Writethenameofthe

account to be
credited in the
second line starts
with the word
To a few space
away from the
56

margininthe
particulars
column.
Against this,
the amount
tobecredited
is written in
the credit
amount
column in
the same
line.
Step 8 Write the

narration
within
brackets in
the next line
in

the
particulars
column.
Step 9 Draw a line

across the
entire
particulars
column to
seperate one
journal entry
from the
other.

57

against Cash Account

which means that Cash
Example 1:
Accountisfoundinpage
12intheledgerandthis
January1,2004
debit of Rs.1,00,000 to
Saravananstarted
CashA/ccanbeseenon
businesswithRs.
1,00,000.
that page. Similarly 45
against Capital A/c
AnalysisofTransaction
indicates the page
Step1
Determinethetwoaccounts
numberinwhichCapital
involvedinthetransaction.
accountisfoundandthe
credit of Rs.1,00,000
Step2
Classifytheaccountsunder
personal,realornominal.
indicatedtherein.

4.5 Illustrations

Step3

Findouttherulesofdebitand
credit.

Step4

Identifywhichaccountistobe
debitedandcredited.

Solution:
Date
2004
Jan1

Journal
Particulars

CashA/c
ToCapitalA/c
(Theamountinvestedinthe
business)

The Ledger Folio

column indicates 12

Dr.

Example 2:

Jan.3,2004:
Receivedcash
fromBalanRs.
25,000
Analysisof
Step1

Determinethetwoaccounts
involvedinthetransaction.

Step2

Classifytheaccountsunder
personal,realornominal.

Step3

Findouttherulesofdebitand
credit.

Step4

Identifywhichaccountistobe
debitedandcredited.

Solution:
Journal

Date

Particulars

2004

CashA/c

Jan3

ToBalansA/c
(Cashreceivedfrom
Balan)

The Ledger Folio

column indicates 12
against Cash Account

Dr.

whichmeansthatCash
Account is found in
page 12 in the ledger
and this debit of
Rs.25,000 to Cash A/c
can be seen on that
page. Similarly 81
against Balan A/c
indicates the page
numberinwhichBalan
Account is found and
thecreditofRs.25,000
indicatedtherein.

58
59
Example 3: July7,

Step4

2004Paidcashto
PerumalRs.37,000.

Identifywhichaccountisto
debitedandcredited.

Analysisof
Step1

Determinethetwoaccounts
involvedinthetransaction.
Classifytheaccountsunder
personal,realornominal.
Findouttherulesofdebitand
credit.

Step2
Step3

Step4

Identifywhichaccountistobe
debitedandcredited.

Solution:
Date

Journal
Particulars

2004

PerumalA/c

July7

ToCashA/c
(CashpaidtoPerumal)

Example 4:

Dr.

Feb.7,2004BoughtgoodsforcashRs.80,000.
Analysisof

Step1

Determinethetwoaccounts
involvedinthetransaction.

Step2

Classifytheaccountsunder
personal,realornominal.

Step3

Findouttherulesofdebitand
credit.

Solution:
Date
2004
Feb7

AnalysisofTr

Journal
Step1

Determinethetwoaccounts
involvedinthetransaction.

Step2

Classifytheaccountsunder
personal,realornominal.

Step3

Findouttherulesofdebitan
credit.

Step4

Identifywhichaccountisto
debitedandcredited.

Particulars
PurchasesA/c
ToCashA/c
(Cashpurchaseof
goods)

Example 5:

March
10,2004Cashsales
Rs.90,000.

Dr.

Solution:
Date
2004
Mar10

Journal
Particulars
CashA/c

L.F
Dr.

Debit

Credit

Rs.P.

Rs. P.

90,000

ToSalesA/c

90,000

(CashSales)
60
61
Example 6: March

Step2

15,2004Sold
goodstoJaleelon
credit Rs.1,00,000.

Step3

A
n
al
y
si
s
o
f
T
r
a
n
s
a
ct
io
n
Step1

Determinethetwoaccounts
involvedinthetransaction.

Step4

Classifytheaccountsunder
personal,realornominal.
Findouttherulesofdebitan
credit.

Identifywhichaccountisto
debitedandcredited.

Solution:
Date
2004
March15

Journ
Particulars
JaleelA/c
ToSalesA/c
(Creditsales)

Example 7: March

18,2004
Purchasedgoods
fromJamesoncredit
Rs.1,50,000.
A
n

Dr

al
y
si
s
o
f
T
r
a
n
s
a
ct
io
n
Step1
Step2
Step3

Step4

Determinethetwoaccounts
involvedinthetransaction.
Classifytheaccountsunder
personal,realornominal.
Findouttherulesofdebitand
credit.
Identifywhichaccountistobe
debitedandcredited.

Solution:
Date
2004
March18

Journ
Particulars
PurchasesA/c
ToJamesA/c
(Creditpurchases)

Dr

Example 8: March20,

2004Returned
goodsfromJaleel
Rs.5,000.

AnalysisofTr
Step1

Determinethetwoaccounts
involvedinthetransaction.

Step2

Classifytheaccountsunder
personal,realornominal.

Step3

Findouttherulesofdebitand
credit.

Step4

Identifywhichaccountistobe
debitedandcredited.

Solution:
Date
2004
March20

Journal
Particulars
SalesreturnA/c
ToJaleelA/c
(Returnedgoods)

L.F
Dr.

Debit
Rs. P.

Credit
Rs.

P.

5,000
5,000

62
63
Example 9: March25,

2004Goods
returnedtoJames
Rs.7,000.

Step2
Step3

Analysisof
Step1
Step2
Step3

Step4

Determinethetwoaccounts
involvedinthetransaction.
Classifytheaccountsunder
personal,realornominal.
Findouttherulesofdebitand
credit.
Identifywhichaccountistobe
debitedandcredited.

Solution:
Date
2004
March25

Journal
Particulars
JamesA/c
Dr.
ToPurchasesreturnA/c
(Goodsreturned)

Example 10: March

25,2004Paid
salariesincash
Rs.6,000.

Analysisof
Step1

Determinethetwoaccounts

Step4

involvedinthetransaction.
Classifytheaccountsunder
personal,realornominal.
Findouttherulesofdebit
andcredit.
Identifywhichaccountis
tobedebitedandcredited.

Solution:
Date

Journal
Particulars

2004

SalariesA/c

March25

ToCashA/c
(Salariespaid)

Solution:
Date

Dr.

Journ
Particulars

2004
CashA/c
April14 ToCommissionA/c
(Commissionreceived)

4.5.1 Capital and

Example 11: April14,2004CommissionreceivedRs.5,000.
Analysisof
Step1
Step2
Step3

Step4

64
65

Determinethetwoaccounts
involvedinthetransaction.
Classifytheaccountsunder
personal,realornominal.
Findouttherulesofdebitand
credit.
Identifywhichaccountistobe
debitedandcredited.

point of view. The

amountwithwhicha
trader starts the
businessisknownas
Capital.

The
proprietor may
withdraw certain
amounts from the
business to meet
personal expense or

Drawings

It is important to
note that business is
treated as a separate
entityfromthebusiness
man.Alltransactionsof
thebusinesshavetobe
analysed from the
business point of view
and not from the
proprietors

goods for personal

use. It is called
Drawings.
D
r
a
w
i
n

Dr

g
s

f
r
o
m

B
u
s
i
n
e
s
s

n
a
l
y
si
s
o
f
T
r
a
n
s
a
c
ti
o
n

Cash

Cheque

Cashgoesout

BankThegiver

DebitDrawingsA/c DebitDrawingsA/c
CreditCashA/c
CreditBankA/c
Example 12:

January
31, 2004
Saravanan withdrew
for personal use Rs.
20,000.
A

Step1

Determinethetwoaccounts
involvedinthetransaction.

Step2

Classifytheaccountsunder
personal,realornominal.

Step3

Findouttherulesofdebitand
credit.

Step4

Identifywhichaccountistob
debitedandcredited.

Solution:
Date

Journal
Particulars

2004
DrawingsA/c
Dr.
Jan.31
ToCashA/c
(Theamountwithdrawnfor
personaluse)

4.5.2 Bank
Transactions

Bank
transactions that
occur often in the
businessconcernsare
cash paid into bank,
cheques and bills
received

from
customers paid into
bank for collection,
payment of cheques
for expenses and
cheques issued to
suppliersorcreditors.
When a cheque is
received treat it as
cash.
Example 13: January

18,2004Openeda
currentaccountwith
Indian Overseas
BankRs.10,000.
AnalysisofTransaction

Step1
Step2
Step3

Step4

Determinethetwoaccounts
involvedinthetransaction.
Classifytheaccountsunder
personal,realornominal.
Findouttherulesofdebitand
credit.

Identifywhichaccountistob
debitedandcredited.

Solution:
Date

Journal
Particulars

L.F

2004 IndianOverseasBankA/cDr.
Jan18
ToCashA/c
(OpenedacurrentA/c.)
66
67
Example 14: Feb3,

Debit
Rs.

P.

10,000

Rs.20,000.
A
n
a
l
y
si
s
o
f
T
r
a
n
s
a
c
ti
o
n

Analysisof

Step2
Step3

Step4

Determinethetwoaccounts
involvedinthetransaction.
Classifytheaccountsunder
personal,realornominal.
Findouttherulesofdebit
andcredit.
Identifywhichaccountis
tobedebitedandcredited.

Solution:
Date
2004
Feb3

Journal
Particulars
RentA/c
Dr.
ToBankA/c
(RentpaidbychequeNo.)

Example 15: March

5,2004Received
chequefrom
Elavarasan

Rs. P.
10,000

2004Rentpaidby
chequeRs.5,000.
Step1

Credit

Step1

Determinethetwoaccounts
involvedinthetransaction.

Step2

Classifytheaccountsunder
personal,realornominal.

Step3

Findouttherulesofdebitand

credit.
Step4

Identifywhichaccountistobe
debitedandcredited.

Solution:
Date
2004
March5

Journ
Particulars

CashA/c
Dr
ToElavarasanA/c
(Chequereceivedbutnotpai
intobank)

Example 16: March

15,2004Cheque
receivedfrom
Santhosh Rs.30,000
andimmediately
banked.

AnalysisofTr
Step1

Determinethetwoaccounts
involvedinthetransaction.

Step2

Classifytheaccountsunder
personal,realornominal.

Step3

Findouttherulesofdebitand
credit.

Step4

Identifywhichaccountistobe
debitedandcredited.

Solution:
Date
2004

Journal
Particulars
BankA/c

March15

L.F
Dr.

Debit

Credit

Rs.P.

Rs.

P.

30,000

ToSanthoshA/c

30,000

(Chequereceivedand
immediatelybanked)
68
69

4.5.3 Compound
Journal Entry
Whentwoormore
transactions of similar
naturetakeplaceonthe
same date, such
transactions can be
enteredinthejournalby
means of a combined
journal entry is called
Compound

Solution:
Date
2004
June1

Journ
Particulars

CashA/c
Dr
ToAnjusCapitalA/c
ToManjusCapitalA/c
(Theamountinvested
byAnju&Manju)

Example 18:

July1,2004 Ajaycontribut

Journal

The only
precaution is that the
total debits should be
equaltototalcredits.

Vijaycontribut

Entry.

Example 17:

June1,
2004Anju
contributedcapital
Rs.50,000

Solution:
Date

Journ
Particulars

2004

CashA/c

Dr

July1

StockA/c

Dr

FurnitureA/c

Dr

ToAjaysCapitalA/c
ManjucontributedcapitalRs.70,000
ToVijaysCapitalA/c

(Capitalintroducedby
Ajai&Vijay)

Example 19:

July13,
2003Receivedcash
Rs.24,700 from
Shanthi
in full
settlement of her
accountofRs.25,000.
Here cash
receivedisRs.24,700
in full settlement of
Rs.25,000 so the
difference Rs.300 is
discountallowed.
Solution:
Date
2003
July13

Journ
Particulars
CashA/c
DiscountallowedA/c
ToShanthisA/c

Dr
Dr

(Shanthisettledheraccount)
Example 20:

July14,
2003Paidcashto
Thenmozhi
Rs.14,500, in full
settlement of her
account

of
Rs.15,000.
Here cash paid
Rs.14,500

in
settlement

of
Rs.15,000 so the

difference Rs.500is
discountreceived.
Solution:
Date
2003
July14

4.5.4 Bad Debts

Journal

Particulars
ThenmozhiA/c
Dr.
ToCashA/c
ToDiscountreceivedA/c.
(SettledThenmozhisaccount)

When the goods

aresoldtoacustomeron
creditandiftheamount
becomes irrecoverable
duetohisinsolvencyor
for some other reason,
the amount not
recovered is called bad
debts. For recording it,
the

70
71

bad debts account is

debited because the
unrealised amount is
alosstothebusiness
and the customers
accountiscredited.
Example 21 :

Jamuna
who owed us
Rs.10,000 is declared
insolvent and25paise
inarupeeisreceived
fromheron15thJuly,
2003.
Solution:
Journa
l
Date

Particulars

2003
July15

CashA/c
Dr
BadDebtsA/c
Dr
ToJamunaA/c
(25paiseinarupeereceivedon
insolvency)

Bad Debts Recovered

Sometimes,itso
happens that the bad
debts previously
written off are
subsequently
recovered. In such
case,cashaccountis
debitedandbaddebts
recovered account is
credited because the
amountsoreceivedis

againtothebusiness.

4.5.5 Opening Entry

Example 22:

Opening Entry is
anentrywhichispassed
inthebeginningofeach
currentyeartorecordthe
closingbalanceofassets
and liabilities of the
previous year. In this
entry asset accounts are
debited and liabilities
and capital account are
credited.Ifcapitalisnot
giveninthequestion,it
will be found out by
deducting total of
liabilities from total of
assets.

Received
cash for a Bad debt
written off last year
Rs.7,500 on 18th
January,2004.
Solution:
Date
2004
Jan18

Journal
Particulars
CashA/c

Dr.

ToBaddebtsrecoveredA/c
(Baddebtsrecovered)

Example

23:

The
following balances
appearedinthebooks
of Malarkodi as on
1st January 2004
CashRs.7,000,Bank
Rs.70,000, Stock
Rs.80,000, Furniture
Rs.10,000, Computer
Rs.50,000, Debtors
Rs.33,000

and
CreditorsRs.90,000.
Theopening
entryis
Journa

l
Date
2004
Jan1

Particulars
CashA/c
Dr.
BankA/c
Dr.
StockA/c
Dr.
DebtorsA/c
Dr.
FurnitureA/c
Dr.
ComputerA/c
Dr.
ToCreditorsA/c
ToCapitalA/c(Balacingfigure)
(Assetsandliabilitiesbrought
forward)

4.5.6 Advantages

Themain
advantagesof
theJournalare:
1. It reduces
the
possibility
oferrors.
2. It provides
an
72
73

Q
U
E
S
T
I

explanation
of the
transaction.
3. Itprovidesa
chronologic
al record of
all
transactions.
4.5.7 Limitations

Thelimitations
oftheJournal
are:
1. It will be
too long if
all
transactions
arerecorded
here.
2. Itisdifficult
to ascertain
the balance
of each
account.

O
N
S
I. Objective Type:

a)Fillinthe

Blanks:
1. The source
document gives
informationabout
thenatureofthe
_________.

2. The accounting
equation is a
statement of
_________
between the
debits and
credits.
3. In double entry
bookkeeping,
everytransaction
affects at least
two_________.
4. Assets are
always equal to
liabilities plus
_________.
5. A transaction
which increases
the capital is
called
_________.

6. The journal is a
book

of

_________.
7. Recording of
transactioninthe
journal is called
_________.
8. The _________
column of
journal
represents the
place of posting
ofanentryinthe
ledgeraccount.
9. _________
account is
debited for the
amount not
recovered from
thecustomer.
10. The assets of a
business on31st
December, 2002
were worth
Rs.50,000andits
capital was
Rs.35,000. Its
liabilitiesonthat
date were Rs.
_________.
[Answer : 1.

transactio
ns, 2.
equality,
3.
accounts,
4.capital,
5.
revenue
or
income,
6.
original
entry, 7.
journalisi
ng, 8.
L.F, 9.
bad
debts,10.
Rs.15,00
0]

b)Choosethe
correctanswer:
1. The origin of a
transaction is
derivedfromthe
a)Source
document
b)Journal
c) Accounting
equation
2. Which of the
following is
correct?
a) Capital =
Assets +
Liabilities
b) Capital =
Assets
Liabilities
c) Assets =
Liabilities
Capital
3. Amount owned
bytheproprietor
iscalled
a)Assets
b)Liabilities
c)Capital

4. The Accounting
Equation is

connectedwith
a)Assetsonly

b)Liabilitiesonly

c)

Assets,
Liabilities and
capital
5. Goods sold to
Srinivasan
should

be
debitedto
a)CashA/c
b)Srinivasan
A/c.
c)SalesA/c.

6. Purchased goods
from Venkat for
cash should be
creditedto
a)VenkatA/c
b)CashA/c

c)PurchasesA/c

7. Withdrawals of
cash from bank
bytheproprietor
for office use
should

be
creditedto
a)DrawingsA/c
b)BankA/c
c)CashA/c
8. Purchased goods
from Murthy on
credit should be
creditedto

a)MurthyA/c
b)CashA/c

c)PurchasesA/c
9. Anentryispassed
inthebeginningof
each current year
iscalled

a)Originalentry
b)Finalentry
c)Openingentry

74
75

10. Theliabilitiesof
a business are
Rs.30,000; the
capital of the
proprietor is
Rs.70,000. The
totalassetsare:

a)Rs.70,000
b)Rs.1,00,000
c)Rs.40,000
[Answers:1.(a),2.
(b),3.(c),
4.(c),5.

(b),6.
(b),7.
(b),8.(a),
9.(c),10
(b)]
AI. Other Questions :

1. Explain the
meaning of
source
documents.
2. What is
cashmemo?
3. What is an
invoice?
4. What is a
receipt?
5. What is
payinslip?
6. What is a
debitnote?
7. What is a
creditnote?
8. Explain the
meaning of
Accounting
Equation.
9. What is a
Journal?
10. Mention the

five
categories
of
Accounts.
11. How is the
Journal
ruled?
12. What is
Journalising
?
13. Whatdoyou
mean by
L.F.? How
doyoufillin
thiscolumn?

14. What is a
narration?
15. What
capital?

is

16. What is
drawings?
17. What is a
Compound
Journal
Entry?
18. Explain the
rules for
journalising.
19. Explain the
steps in
journalising
?

20. Bring out

the
advantages
and the
limitations
ofjournal.

III. Problems:

1. On

31st
December 2003,
the total assets
and liabilities
were
Rs.1,00,000 and
Rs.30,000
respectively.
Calculate
capital.
2. Indicate how
assets, liabilities
and capital are
affected by each
of the following
transactions with
an accounting
equation:

i. Purchase of
machinery
forcashRs.
3,00,000.
ii. Receipt of
cashfroma
debtor Rs.
50,000.
iii. Cash
payment of
a creditor
Rs.30,000.

3. Give transactions
with imaginary
figures involving
thefollowing:

i. Increase in
assets and
capital,
ii. Increaseand
decrease in
assets,
iii. Increase in
anassetand
aliability,
iv. Decrease of
anassetand
owners
capital.
4. Supply

the

missingamounts
on the basis of
Accounting
Equation Assets

Capital
i.
ii.
iii.

Assets
20,000
?
10,000

= Liabilities
= 15,000
=
5,000
=
?

5. State the nature

of account and
show which
account will be
debited and
which account
willbecredited?
1. Rent
received
2. Building
purchased
3. Machinery
sold
4. Discount
allowed
5. Discount
received

= Liabilities +
76
77

6. Correct the
followingentries
wherever you
think:
i. Brought

capitalinto
business:
CapitalA/c
Dr.

To

Cash
A/c
ii. Cash
Purchases:
CashA/c
Dr.

To
Sales
A/c
iii. Salaries
paidtoclerk
Mr.Kanniya
ppan:
SalariesA/c
Dr.

To
Kanni
yappa
nA/c
iv. Paid
carriage:
Carriage
A/c
Dr.

To
Cash
A/c
7. What do the
following
Journal Entries

mean?
i. CashA/c
Dr.
ToFurnitureA/c
ii. RentA/c
Dr.
ToCashA/c
iii. BankA/c
Dr.
ToCashA/c
iv. TamilselviA/c
Dr.
ToSalesA/c
8.Showthe
accountingequation
onthebasisofthe
following
transactions.

i. Ramyastartedbusinessw
ii. PurchasedgoodsfromSh
iii. SoldgoodstoAmalacost
iv. Ramyawithdrewfrombu
[AssetsRs.47,000
=Capital
Rs.27,000+
Liabilities
Rs.20,000]

9.Prepareaccounting
equationandbalance
sheetonthebasisof
thefollowing:
i.

Pallavanstartedbusinesswithcash

ii. Hepurchasedfurniture
iii. Hepaidrent
iv. Hepurchasedgoodsoncreditfrom
Mr.Mahendran
v. Hesoldgoods(costpriceRs.20,000)forcash
[AssetsRs.93,000=CapitalRs.63,000+LiabilitiesRs.30,000]
10.JournalisethefollowingOpeningEntry:
Cashinhand
Plant
Furniture
Creditors
Debtors
11.JournalisethefollowingtransactionsinthebooksofTmt.AmuthaRs.

2004,Jan.1 Tmt.Amuthacommencedbusiness
withcash
50,000
2 Purchasedgoodsforcash
10,000
5 PurchasedgoodsfromMohanoncredit 6,000
7 PaidintoBank
5,000
10 Purchasedfurniture
2,000
20 SoldgoodstoSureshoncredit
5,000
78
79

25 Cashsales
26 PaidtoMohanonaccount
31 Paidsalaries

12.JournalisethefollowingtransactionsofMrs.Rama
2004,Jan1 Mrs.Ramacommencedbusiness
withcash
2 Paidintobank
3 Purchasedgoodsbycheque
7 Drewcashfrombankforofficeuse
15 PurchasedgoodsfromSiva
20 Cashsales
25 PaidtoSiva
DiscountReceived
31 Paidrent
PaidSalaries
13.JournalisethefollowingtransactionsofMr.Moorthi
2004,June3 ReceivedcashfromRamkumar

3,500
3,000
2,800

Rs.
30,000
21,000
15,000
3,000
15,000
30,000
14,750
250
500
2,000
Rs.
60,000

4
11
13
17
20
27
30

Purchasedgoodsforcash
SoldgoodstoDamodaran
PaidtoRamkumar
ReceivedfromDamodaran
BoughtfurniturefromJagadeesan
Paidrent
Paidsalary

15,000
22,000
40,000
20,000
5,000
1,200
2,500

14.JournalisethefollowingintheJournalofThiru.GowriShankar

2003,Oct.1
7
10
12
15

ReceivedcashfromSiva
PaidcashtoSayeed
Boughtgoodsforcash
BoughtgoodsoncreditfromDavid
Soldgoodsforcash

Rs.
75,000
45,000
27,000
48,000
70,000

15. Record the following transactions in the Journal of

Tmt.Bhanumathi.
2004,Feb.3BoughtgoodsforcashRs.84,500
7 SoldgoodstoDhanalakshmioncreditRs.55,000
9 ReceivedcommissionRs.3,000
10 CashSalesRs.1,09,000
12 BoughtgoodsfromMahalakshmiRs.60,000
6 ReceivedfivechairsfromRevathi&
Co.atRs.400each
20 PaidRevathi&Co.,cashforfivechairs
28 Paid Salaries Rs.10,000
PaidRentRs.5,000

16. Journalise the following transactions in the books of

Thiru.Kalyanasundaram.

2004,March1SoldgoodsoncredittoMohanasundaram
Rs.75,000.
12 Purchased goods on credit from Bashyam
Rs.70,000.
15 SoldgoodsforcashtoDavidRs.50,000.
20 ReceivedfromMohanasundaramRs.70,000.
25 PaidtoBashyamRs.50,000.
80
81

Learning
Objectives
CH
AP
TE
R5

BASIC
ACCOUNTIN
G
PROCEDUR
ES - III
LE
DG
ER

Afterstudying
thischapter,you
willbeableto:
understand
the
Meaning
and
Procedure
forposting.
know the
Procedure
for
Balancing
and the
Significanc
e

of
Balances.
know the

Relationshi
p between
Journaland
Ledger.

IntheJournal,each
transaction is dealt with
separately. Therefore, it
is not possible to know
ataglance,thenetresult
ofmanytransactions.So,
inordertoascertainthe
net effect of all the
transactionsrelatingtoa
particular account are
collectedatoneplacein
theLedger.

A Ledger is a
book which contains
all the accounts
whetherpersonal,real
ornominal,whichare
first entered in
journal or special
purpose subsidiary
books.
According to
L.C. Cropper, the

book which contains

a classified and

permanent record of
allthetransactionsof
a business is called
theLedger.

The ledger that is

normally used in a
majority of business
concernisaboundnote
book. This can be
preserved for a long
time. Its pages are
consequently
numbered.

Each
accountintheledgeris
openedpreferablyona
separate page. If one
page is completed, the
account will be
continuedinthenextor
someotherpage.Butin
bigger concerns, it is
notpracticaltokeepthe
ledgerasaboundnote
book,Looseleafledger
nowtakestheplaceofa
bound note book. In a
looseleaf ledger,
appropriateruledsheets
of thick paper are
introducedandfixedup
with the help of a
binder. Whenever
necessary additional
pagesmaybeinserted,
completedaccountscan
be removed and the

accounts may be
arranged

and
rearranged in the
desired

order.
Therefore, this type of
ledger is known as
LooseleafLedger.

5.1 Utility
Ledger is a
principal or main book
which contains all the
accounts in which the
transactions recorded in
the books of original
entry are transferred.
Ledgerisalsocalledthe
BookofFinal Entry or
Book of Secondary
Entry, because the
transactions are finally
incorporated in the
Ledger. The following
are the advantages of
ledger.
i. Complete
information at a
glance:

All

the
transactions pertaining
to an account are
collectedatoneplacein

the ledger. By looking

at the balance of that
account, one can
understand

the
collective effect of all
such transactions at a
glance.

It facilitates the
preparation of final
accounts

for
ascertaining

the
operatingresultandthe
financialpositionofthe
businessconcern.

ii. Arithmetical
Accuracy

iv. Accounting
information

Withthehelpof
ledgerbalances,Trial
balance can be
preparedtoknowthe
arithmetical accuracy
ofaccounts.

The data supplied

by various ledger
accounts

are
summarised, analysed
and interpreted for
obtaining various
accountinginformation.

iii. Result of Business

Operations
82
83

5.2 Format
NameofAccount
Dr.

Cr.

Date

Particulars

Year
Month
Date

J.F Amount Date

Rs.P.
To(Nameof
Year
CreditAccount
Month
inJournal)
Date

Particulars

J.F Amount
Rs.P.

By(Nameof
Debitaccount
inJournal)

Explanation:
i. Eachledgeraccountisdividedintotwoparts.Theleft

handsideisknownasthedebitsideandtherighthand
sideisknownasthecreditside.ThewordsDr.and
Cr.areusedtodenoteDebitandCredit.
ii. The name of the account is mentioned in the top
(middle)oftheaccount.
iii. Thedateofthetransactionisrecordedinthedatecolumn.
iv. ThewordToisusedbeforetheaccountswhichappearonthe
debitsideofanaccountintheparticularscolumn.Similarly,
thewordByisusedbeforetheaccountswhichappearonthe
creditsideofanaccountintheparticularscolumn.

v. Thenameoftheotheraccountwhichisaffectedbythe
transactioniswritteneitherinthedebitsideorcredit
sideintheparticularscolumn.
vi. ThepagenumberoftheJournalorSubsidiaryBook
from where that particular entry is transferred, is
enteredintheJournalFolio(J.F)column.
vii. Theamountpertainingtothisaccountisenteredinthe
amountcolumn.
Personal Accounts

SanthoshAccount
Dr.
Cr.
DebitSanthoshwhenhereceives CreditSanthoshwhenhegives
goods,moneyorvaluefromthe goods,moneyorvaluetothe
business
business

Real Accounts

Dr.
DebitPurchaseofasset

ComputerAccount
CreditSaleofasset

Cr.

Nominal Accounts

SalariesAccount
Dr.
Debitexpensesorlosses

Cr.

CommissionReceivedAccount
Dr.

Creditincomesorgains

Cr.

5.3 Posting
Theprocessoftransferringtheentriesrecordedinthejournal
orsubsidiarybookstotherespectiveaccountsopenedintheledger
iscalledPosting.Inotherwords,postingmeansgroupingofallthe
transactions relating to a particular account at one place. It is
necessarytopostallthejournalentriesintovariousaccountsinthe
ledgerbecausepostinghelpsustoknowtheneteffectofvarious
transactionsduringagivenperiodonaparticularaccount.
84
85

has been debited

5.3.1 Procedure of
posting

in

Theprocedure
ofpostingis
givenas
follows:
I.

Procedure

of

posting

an

Account

for

which

the

journal

entry.

Step1Locateinthe
ledger,
the
accountto
bedebited
and enter

the date
of the
transactio
n in the
date
column
on the
debit
side.
Step 2 Record the
name of
the
account
credited
in the
Journalin
the
particular
s column
on the
debit side
as To.....
(name of
the
account
credited)
.
Step 3 Record the
page
number
of the
Journalin

the J.F
column
on the
debit side
andinthe
Journal,
write the
page
numberof
theledger
on which
a
particular
account
appearsin
the L.F.
column.
Step 4 Enter the
relevant
amountin
the
amount
column
on the
debit
side.
AI. Procedure

of

posting

an

Account

for

which

has
credited

been
in

the

journal entry.

Step 1 Locate in
theledger
the
account
to be
credited
and enter
the date
of the
transactio
n in the
date
column
on the
credit
side.
Step2 Recordthe
name of
the
account
debitedin
the
Journalin
the
particular
s column
on the
credit
side as
By......
(name of

the
account
debited)
Step 3 Record the
page
numberof
the
Journalin
the J.F
column
on the
creditside
andinthe
Journal,
write the
page
numberof
theledger
on which
a
particular
account
appearsin
the L.F.
column.
Step 4 Enter the
relevant
amountin
the
amount
column
on the

credit
side.

Illustration1
Mr.Ramstarted
businesswithcash
Rs.5,00,000on1st
June2003.
Theabove
transactionwill
appearinJournal
andLedgeras
under.
Solution:

Date

2003
June1

IntheBooks
Journ
Particulars

CashA/c.
ToRamsCapitalA/c
(Ramstartedbusinesswi
Rs.5,00,000)

Note:Heretwo
accountsareinvolved,
CashAccountand
Ramscapitalaccount,
soweshouldallotinthe
ledgerapageforeach
account.

Ledger

Dr.

CashAccount

Date

Particulars

2003

ToRams

J.F.

Amount
Rs.

Date

Cr.
Particulars

J.F. Amount
Rs.

June1 CapitalA/c

5,00,000

Dr.

RamsCapitalAccount

Date

Particulars

J.F.

Amount
Rs.

Date

Particulars

Cr.
J.F.

Amount
Rs.

2003
June1 ByCashA/c

86
87

Illustration2:
Journalisethe
following
transactionsinthe
booksofAmarand
posttheminthe
Ledger:
2004
March1 Bought
goodsforcashRs.
25,000
2 Sold
goods
for cash
Rs.
50,000
3 Bought
goods
for
credit
from

5,00,000

Gopi
Rs.19,00
0
5 Sold
goods
oncredit
to
Robert
Rs.8,000
7 Receive
d from
Robert
Rs.
6,000
9 Paid to
Gopi
Rs.5,000
20 Bought
furniturefor
cashRs.
7,000

Solution:
Date

JournalofAmar
Particulars

2004
PurchasesA/c
Mar1
ToCashA/c
(Cashpurchases)
2 CashA/c
ToSalesA/c
(CashSales)
3 PurchasesA/c
ToGopiA/c
(Creditpurchases)
5 RobertA/c
ToSalesA/c
(CreditSales)
7 CashA/c
ToRobertA/c
(Cashreceived)
9 GopiA/c
ToCashA/c
(Cashpaid)
20 FurnitureA/c.
ToCashA/c
(furniturepurchased)

Explanation :

There are six

accounts involved:
Cash, Purchases,
Sales, Furniture,
Gopi & Robert, so
sixaccountsaretobe
openedintheledger.

Ledger of

CashAcc
Dr.
Date
2004
Mar5

Particulars

ToSalesA/c
7 ToRobertA/c

J.F

Amount
Rs.

2
50,000 M
6,000

PurchasesA
Dr.
Date
2004
Mar1
3

Particulars

J.F Amount
Rs.

ToCashA/c
ToGopiA/c

25,000
19,000

SalesAccount
Dr.
Date

Cr.
Particulars

J.F Amount
Rs.

Date Particulars
2004
Mar2 ByCashA/c
5 ByRobertA/c

88
89

Entries

Particulars

2004
Mar20 ToCashA/c

J.F Amount
Rs.
7,000

GopiAccount
Dr.
Date
2004
Mar9

Particulars
ToCashA/c

J.F Amount
Rs.

5,000

RobertAccount
Dr.
Date
2004
Mar5

50,000
8,000

FurnitureAccount Compound Journal

Dr.
Date

J.F Amount
Rs.

Particulars
ToSalesA/c

5.3.2 Posting of

J.F Amount
Rs.

8,000

Compound or
Combined Journal
Entry is one where
more than one
transactions are
recorded by passing
onlyonejournalentry
instead of passing
several journal
entries. Since every
debit must have the
corresponding equal
amount of credit,
special care must be
taken in posting the
compound journal
entry, where there
maybeonlyonedebit
aspect but many
corresponding credit
aspectsofequalvalue
or vise versa. The

posting of such
transactions is done
in the same way as
alreadyexplained.

Illustration3:Jan.12,
2003,
Cash
sales
Rs.10,0
00,
Cash
receive
dfrom
Kannan
Rs.5,00
0and
commis
sion
earned
Rs.2,50
0.

Journ
al
Date

Particulars

2003
Jan12

CashA/c.
ToSalesA/c.
ToKannansA/c.
ToCommissionA/c.

Dr

17,500
10,000
5,000
2,500

(Receivedcashforsale,from
Kannanandascommission)

Solution:

Ledger

CashAccount
Dr.
Date

Cr.
Particulars

J.F. Amount Date

Particulars

J.F. Amount

Rs.
2003
Jan12 ToSalesA/c
ToKannansA/c
ToCommission
A/c

Rs.

10,000
5,000
2,500

SalesAccount
Dr.
Date

Cr.
Particulars J.F

Amount
Rs.

Date

Particulars

J.F

2003
Jan12 ByCashA/c
90
91

Rs.
10,000

KannansAccount

Dr.
Date

Amount

Cr.
Particulars J.F

Amount

Date

Particulars

Rs.

J.F

Amount
Rs.

2003
Jan12 ByCashA/c

5,000

CommissionAccount
Dr.
Date

Cr.
Particulars J.F

Amount

Date

Particulars

Rs.

J.F

Amount
Rs.

2003
Jan12 ByCashA/c

2,500

Note: In the above transactions, there is only one debit aspect

namely cash account and three credit aspects. Therefore, while
postinginthecashaccount,thenamesofthreecreditaspectsare
enteredinthecashaccount onthedebitside,thushavingatotalof
Rs.17,500whichisequaltotheamountinthedebitcolumnofthejournal.
The cash account is written on the credit side of the three
accounts,namely,Sales,KannanandCommissionreceived,asitacts
as an opposite and corresponding accounts for Sales Rs.10,000,
Kannan Rs.5,000 and Commission Rs.2,500 respectively which are
equaltotheamountinthecreditcolumnofthejournal.
5.3.3 Posting the Opening Entry
Theopeningentryispassedtoopenthebooksofaccountsforthe
newfinancialyear.Thedebitorcreditbalanceofanaccountwhatwe
getattheendoftheaccountingperiodisknownasclosingbalanceof
thataccount.This closingbalancebecomestheopeningbalancein
thenextaccountingyear.
Theprocedureofpostinganopeningentryissameasinthecase
ofanordinaryjournalentry.Anaccountwhichhasa debitbalance,
thewords Tobalanceb/darerecordedonthedebitsideinthe

particularscolumn.Anaccountwhichhasacreditbalance,thewords
Bybalanceb/darerecordedintheparticularscolumnonthecredit
side.Infact openingentryisnotactuallypostedbuttheaccountsare
merelyincorporatedintheledger,iftheledgerisanewoneorold.
Illustration4
PosttheopeningentryintotheledgerofRajanason1stApril
2003,cashinhandRs.10,000;LoanRs.1,00,000.
Solution:
IntheBooksofRajan
CashAccount

Dr
Date

Particulars

J.F

2003
Apr1 ToBalanceb/d

Amount
Rs.

Cr.

Date Particulars

J.F

Amount
Rs.

10,000

LoanAccount
Dr
Date

Cr.
Particulars

J.F

Amount
Rs.

Date
2003
Apr1

92
93

5.4 Balancing an
Account

Particulars J.F

ByBalance
b/d

Amount
Rs.

1,00,000

Balance is the
difference between the
total debits and the

total credits of an
account.Whenposting
isdone,manyaccounts
may have entries on
theirdebitsideaswell
as credit side. The net
result of such debits
and credits in an
accountisthebalance.
Balancing means
the writing of the
difference between the
amount columnsofthe
twosidesinthelighter
(smaller total) side, so
thatthegrandtotalsof
the two sides become
equal.
5.4.1 Significance of
balancing
There are three
possibilities while
balancing an account
during a given period.
It may be a debit
balance or a credit
balanceoranilbalance
depending upon the
debit total and the
credittotal.
i. Debit Balance :
Theexcessofdebittotal

over the credit total is

calledthedebitbalance.
Whenthereisonlydebit
entriesinanaccount,the
amount itself is the
balance of that account,
i.e.,thedebitbalance.It
is first recorded on the
credit side, above the
total. Then it is entered
onthedebitside,below
thetotal,asthefirstitem
forthenextperiod.
Dr.
Date

CashAcc
Particulars

2003
Mar2 ToSalesA/c
12 ToKumarsA/c

J.F

Amount
Rs.

20
15,000 M
4,000

19,000
Apr1 ToBalanceb/d

8,500

ii.

Credit
Balance:Theexcess
of credit total over
the debit total is
called the credit
balance.Whenthere
is only credit entries
in an account, the
amount itself is the
balance of that
account i.e., the
credit balance. It is
first written in the
debitside,asthelast
item,abovethetotal.
Then it is recorded
on the credit side,
belowthetotal,asthe
firstitemforthenext
period.
Dr.
Date

iii.NilBalance:
When the total of
debits and credits are
equal, it is closed by
merelywritingthetotal
on both the sides. It
indicates the equality
of benefits received
and given by that
account.

CapitalAccount
Particulars

2004
Mar31 ToBalancec/d

J.F

Amount
Rs.

50,000
50,000

Dr.
Date
2003
Mar20

ShankarAccount
Particulars

J.F

ToSalesA/c

Amount
Rs.

Date

Cr.
Particulars

6,000

6,000

when final accounts are

being

prepared.
However, cash account
isfrequentlybalancedto
knowthecashonhand.
A debit balance in an
asset account indicated
the value of the asset
owned by the business.
Assets accounts always
showdebitbalances.

Balancingisdone
periodically,i.e.,
weekly,monthly,
quarterly,halfyearlyor
yearly,dependingon
therequirementsofthe
business.

ii.

Real
Accounts : These
accounts are generally
balancedatthe
endofthefinancialyear,

Rs.

6,000

5.4.2 Balancing of
different accounts

Personal
Accounts : These
accounts are generally
balanced regularly to
know the amounts due
to the persons
(creditors)orduefrom
thepersons(debtors).

Amount

2003
6,000 Mar25 ByCash

94
95

i.

J.F

iii.

Nominal
Accounts : These
accountsareinfact,not
tobe
balancedastheyareto
beclosedbytransferto
final accounts. A debit
balance in a nominal
accountindicatesthatit
is an expense or loss.
A credit balance in a
nominal

account

indicates that it is an
incomeorgain.
All such balances
in personal and real
accounts are shown in
the Balance Sheet and
thebalancesinnominal
accounts are taken to
the Profit and Loss
Account.
5.4.3 Procedure for
Balancing
While
balancingan
account,the
followingsteps
areinvolved:
Step 1 Total the
amount
column of
the debit
side and
the credit
side
separately
and then
ascertain
the
difference
ofboththe
columns.
Step 2 If the debit
side total

exceeds
the credit
side total,
put such
difference
on the
amount
column of
the credit
side, write
thedateon
which
balancing
is being
done in
the date
column
and the
words
By
Balance
c/d ( c/d
means
carried
down) in
the
particulars
column.
OR

Ifthecredit
side total
exceedsthe
debit side
total, put
such
difference
on the
amount
column of
the debit
side, write
thedateon
which
balancing
is being
doneinthe
date
columnand
thewords
To
Balance
c/d in the
particulars
column.
Step 3 Total again
both the
amount
columns,
put the
total on
both the
sides and
drawaline
above and

a line
below the
totals.

Step4 Enterthedate
of the
beginning
ofthenext
period in
the date
column
and bring
down the
debit
balance on
the debit
side along
with the
words
To
Balance
b/d ( b/d
means
brought
down) in
the
particulars
column
and the
credit
balance on
the credit
side along
with the
words
By

balance
b/dinthe
particulars
column.
Note: In the place of
c/d and b/d,thewords
c/f or c/o (carried
forward or carried
over) and b/f or b/o
(brought forward or
broughtover)mayalso
be used. When the
balanceiscarrieddown
inthe same page,the
words c/d and b/d are
used, while balance is
carriedovertothenext
page,thetermc/oand
b/o are used. When
balance is carried
forward tosomeother
page either in same
book or some other
book,the abbreviations
c/f (carried forward)
and b/f (brought
forward)areused.
Illustration5:Balance
the
follo
wing
Ledge
r

Acco
unt as
on
31st
Marc
h
2003.

SivasAccount
Dr.

Cr.

Date

Particulars J.F

2003
Mar5
21

ToSalesA/c
ToSalesA/c

96
97

Explanation:The
stepsinvolvedin
balancingSivas
Account.

Amount
Rs.

Date Particulars

J.F

Amount
Rs.

2003
1,50,000 Mar.8 BySales
10,000
ReturnsA/c
12 ByCashA/c

10,000
25,000

20 ByBankA/c

50,000

Step2Enterthedate
of
balancing,
whichis
normally
Step1Totaltheamountcolumnofthedebitside
thelast
Totaltheamountcolumnofthecreditside
dateofthe
Balance/Difference
accountin
gperiod
Sincethe
(i.e.,31st
totalof
March
debit
2003)in
amount
thedate
column
exceeds
column,
thetotalof
By
credit
Balance
amount
c/dinthe
column,
particulars
the
column,
difference
andthe
isDebit
difference
balance.
inthe
amount

columnon
thecredit
side.
Step3Totalboththe
amount
columns
and draw
a line
above and
a
line
below the
totals.
Step4Enterthedate
of the
beginning
ofthenext
period in
the date
column
(i.e., 1st
April
2003) ,
To
Balance
b/dinthe
particulars
column
and enter
the
balance
amount in
the
amount
column on
the debit

side.
After taking
into consideration of
theabovesteps,Sivas
Accountwillappearas
follows:
Solution:

SivasAcc

Dr.
Date

Particulars

J.F

Amount
Rs.

2003
Mar5 ToSalesA/c
21 ToSalesA/c

2003
April1 ToBalanceb/d

1,50,000 M
10,000

1,60,000
75,000

Illustration6:
Balancetheledger
accountsfor
Illustration2.

56,000
Apr1 ToBalanceb/d

Solution:
CashAccount
Dr.
Date

PurchasesA
Dr.
Date

Particulars

2004
Mar5 ToSalesA/c
7 ToRobertA/c

J.F

Amount
Rs.
50,000
6,000

19,000

Particulars

2004
Mar1
3

ToCashA/c
ToGopiA/c

Apr1

ToBalanceb/d

J.F

Amount
Rs.

25,000
19,000
44,000
44,000

SalesAccount
Dr.

Cr.

Date

Particulars

J.F Amount Date Particulars J.F Amount

Rs.
Rs.
2004
2004
Mar31 ToBalancec/d
58,000 Mar2 ByCashA/c
50,000
5ByRobertA/c
8,000
58,000

Apr1 ByBalanceb/d

58,000
58,000

98
99
FurnitureAccount
Dr.
Date

Particulars

J.F Amount

2004
Mar20 ToCashA/c

7,000

Apr1

7,000
7,000

ToBalanceb/d

GopiAccount
Particulars

J.F Amount

2004
Mar19 ToCashA/c

5,000

Rs.

31 ToBalancec/d

14,000
19,000

RobertAccount
Dr.
Date

Particulars

2004
Mar5

ToSalesA/c

8,000

Rs.

Dr.
Date

Rs.

J.F

Amount

8,000
Apr1

ToBalanceb/d

2,000

5.5 Distinction
between Journal
and Ledger :

Booksof
originalentry
(Journal)andLedger
canbedistinguished
asfollows:

Basisof
Distinction
1.Book
2.Stage

3.Process

Journal
Itisthebookofprime
entry.
Recordingofentriesin
thesebooksisthefirst
stage.
Theprocessofrecording
entriesinthesebooksis
calledJournalising.

4.Transactions

Transactionsrelatingto
apersonorpropertyor
expensearespreadover.

5.Neteffect

Thefinalpositionofa
particularaccountcan
notbefound.

6.NextStage

Entriesaretransferredto
theledger.

7.Taxauthorities

Donotrelyuponthese
books

100
101

Q
U
E
S

Ledger
Itisthemainbookof
account.
Recordingofentriesin
theledgeristhe
secondstage.
Theprocessof
recordingentriesinthe
ledgeriscalled
Posting.
Transactionsrelating
toaparticularaccount
arefoundtogetheron
aparticularpage.
Thefinalpositionofa
particularaccountcan
beascertainedjustat
aglance.
FromtheLedger,first
theTrialBalanceis
drawnandthen
finalaccounts
areprepared.
Relyontheledgerfor
assessmentpurpose.

TI
O
NS
I. Objective Type:

a) Fill in the
blanks:
1. Ledger is the
_________
book of
account.
2. The process
of
transferring
entries from
Journaltothe
Ledger is
called
_________.

side.
6. The left
handsideof
an account
isknownas
_________a
nd the right
handsideas
_________.
7. Credit
Balance
means
_________ is
heavier than
_________.

3. c/d means
_________
and b/d
means
_________.

8. Real
accounts
cannot have
_________
balance.

4. c/f means
_________
andb/fmeans
_________.

9. Account
having debit
balance is
closed by
writing
_________.

5. Debiting an
account
signifies
recording the
transactionson
the

_________

10. L.F. column

inthejournal
isfilledatthe
time of
_________.

[Answers:

1.
principal
, 2.
posting,
3.
carried
down;
brought
down, 4.
carried
forward;
brought
forward,
5. debit
side, 6.
debit
side;
credit
side, 7.
credit
total;
debit
total, 8.
credit, 9.
By
Balance
c/d, 10.
posting]

b)Choosethe
correctanswer:
1. Ledgerisa
bookof:

a
.

o
r
i
g
i
n
a
l

e
n
t
r
y

b
.

f
i
n
a
l

e
n
t
r
y

c
.


a
l
l
c
a
s
h
t
r
a
n
s
a
c
t
i
o
n
s
.

2. Personaland
realaccountsare:
a.closed
b.balanced
c. closed and
transferred
3. The column of
ledger which
links the entry
withjournalis
a.L.Fcolumn
b.J.Fcolumn
c. Particulars
column

4. Posting on the
credit side of
an account is
writtenas
a.To
b.By
c.Being
5. Nominal
account having
credit balance
represents
a.income/
gain
b.expenses/
losses
c.assets
6. Nominal
account having

debit balance
represents
a.income/gain
b.expenses/
losses
c.liability
7. Real accounts
alwaysshow
a.debitbalances
b.credit
balances
c.nilbalance.
8. Account having
credit balance is
closed

by
writing
a.ToBalance
b/d
b.ByBalance
c/d
c. To Balance
c/d
102
103

AI. Other Questions:

1. What
ledger?

is

9. When the total

of debits and
credits are
equal,

it
represents
a.debit
balance
b.credit
balance
c.nilbalance
10. Thebalancesof
personal and
real accounts
areshowninthe
a. profitandlossaccount
c. both.

[Answers:1(b),2.(b),
3.(b),4.
(b),5.(a),
6.(b),7.
(a),8.(c),
9.(c),10.
(b)]

utilities of a
ledger.

2. Defineledger.

4. What is a
LooseLeaf
Ledger?

3. Explain the

5. What

is

posting?
6. What are the
steps in
posting?
7. Explain the
meaning of
balancing an
account.
8. Explain the
steps in
balancing.
9. What is debit
balance?
10. What is credit
balance?
11. Explain the
significanceof
debit and
creditbalances
of various
types of
accounts.
12. Indicate the
natureofnormal
balance in the
following
accounts.

a. Cash
b. Creditors

c. Sales
d. Furniture
e. Commissionreceived
13. Explain the
posting of a
compound
journal entry
with

an
example.
14. Distinquish
Journal with
Ledger.

III. Problems:

1. Journalise the
following
transactions of
Mr.Ravi and
posttheminthe
ledger and
balance the
same.

Ban
k
Rs.8
0,00
0
5

sted

Purchase
d
building
for
Rs.3,00,
000

Rs.5

,00,

Purchase
dgoods
for
Rs.70,00
0

2004,June1
Ravi
inve

000
cash
in
the
busi
ness
3
Paid
into

10 Sold
goodsfor
Rs.80,000
15 With
drewcash
frombank
Rs.10,000
25

Paid

electric
charges
Rs.3,000
30 Paid
Sala
ry
Rs.
15,0
00
2. Record the
following
transactions in
the Journal of
Mr.Radhakrishn
anandpostthem
intheledgerand
balance the
same.
2004,Jan.1

Radh
akris
hnan
com
menc
ed
busin
ess
with
cash,
Rs.15
,00,0
00.

3 Paid
into
Bank
Rs.5,00,
000
5
Bought
goods
for
Rs.3,60,
000
7 Paid
travellin
g
charges
Rs.5,000
10 Sold
goodsfor
Rs.2,50,0
00
15 Sold
goodsto
Balan
Rs.2,40,0
00
20
Purchased
goods

from
Narayana
n
Rs.2,10,0
00
104
105

3. Journalise the
following
transactions in
the Journal of
Mr.Shanmugam,
posttheminthe
ledger and
balancethem.
Rs.
3,00,000
50,000
90,000
90,000
1,26,000

2003,Aug.1
Start
ed
busi

25
Withdrew
cash
Rs.60,000
d
Rs.7
0,00
0
5
Goods
sold
Rs.51,00
0
10

003

Goods
purchased
from
Rangasam
y
Rs.2,00,0
00

Goo

16

ness
with
Rs.4
,50,0

ds
purc
hase

Goods
returned
to

Rangasam
y
Rs.5,000
23
Drew
frombank
Rs.30,000
26 Furn
iture
purc
hase
d
Rs.1
0,00
0
27 Settl
ed
Ran
gasa
my
s
acco
unt
31 Sala
ries
paid,
Rs.1
2,00
0
4. Journalise
following

the

transactions in
Tmt.Ranis
Journal and post
themtoledgerand
balancethem.

2003,Sept.1Tmt.
Ranistartedbusiness
with
5
O
p
e
n
e
d

c
u
r
r
e
n
t

a
c
c
o
u

n
t

w
i
t
h

I
n
d
i
a
n

O
v
e
r
s
e
a
s

B
a
n
k
12
Bought
goodsfrom
Tmt.Sumat
hi

18 Paid
toTmt.
Sumathi
20 Sold
goodsto
Tmt.Chitr
a

28 Tmt.
Chit
ra
settl
ed
her
acco
unt
5.

Journalise

the

following
transactions

in

Thiru.Manikandans
booksandpostthem
to ledger and
balancethem.

2003,Aug5Sold
goodsto
Arumugamon
CreditRs.17,500
9

B
o
u
g
h
t


g
o
o
d
s

f
o
r

c
a
s
h

f
r
o
m

C
h
e
l
l
a
p
p
a
n

s
.
2
2
,
5
0
0

12 Met
Travelling
expenses
Rs.2,500
15
Received
Rs.80,000
from
Sivakuma
rasloan
21 Paid
wag
esto
wor
kers
Rs.3
,000
6. Enter

the
following
transactions in
journal and post
them in the
ledger

of
Mr.Govindarajan
and balance
them.
2003,Aug1

Gov
inda
raja
n

com
men
ced
his
busi
ness
with
the
follo
win
g
asse
ts
and
liabi
litie
s.
Plan
tand
Mac
hine
ry
Rs.2
,50,
000.
Stoc
k
Rs.
90,0
00.
Furn
iture
Rs.7

,000
.

Rs.6
5,00
0.

Cas
h
Rs.
50,0
00.

Sun
dry
cred
itors
Rs.
1,50
,000
.
2

Sold
goo
dsto
Sun
dar
Rs.
1,50
,000
.
Bou
ght
goo
ds
from
Nata
raja
n

Sun
dar
paid
cash
Rs.
1,25
,000
.

6
Returned
damaged
goodsto
Nataraja
n
Rs.2,000.

10 Paid
to
Natarajan
Rs.28,000
.
31
Pai
d

r
e

i
d

s
a
l
a

7. Post

the
following
transactions
directintoledger
of Thiru.Karthik
and balance
them.
2003,Oct
1

7 Sold
to
Suresh
Rs.30,00
0.

a
s
h

R
s
.
6
106
107

15
Bought
from
Dayalan
Rs.40,000
.

18SoldtoGanesanRs.50,000.
20WithdrewcashforpersonaluseRs.18,000.
25ReceivedcommissionRs.20,000.
30PaidrentRs.5,000.
31PaidsalaryRs.10,000.

Preparethenecessaryaccountsintheledgerandbringthe
balancesfor
8.ProblemNo.11inChapter4.
9.ProblemNo.12inChapter4.
10.ProblemNo.13inChapter4.
11.ProblemNo.14inChapter4.
12.ProblemNo.15inChapter4.

108

CHAPTER - 6

SUBSIDIARY BOOKS I SPECIAL PURPOSE BOOKS

Learning Objectives
AfterstudyingthisChapter,youwillbeableto:
understand the Meaning, Kinds and Advantages of

SubsidiaryBooks

knowthePurpose,Format,PostingandBalancingof

Purchases,Sales,PurchasesReturnandSalesReturn
Books.
understandBillofexchangeandtheDifferentTerms

involvedinBilltransactions.

knowtheMeaning,PurposeandPostingofentriesin

JournalProper.

Forabusinesshavingalargenumberoftransactionsitis
practically impossible towritealltransactions in onejournal,
becauseofthefollowinglimitations.
i. Periodical details of some important business
transactionscannotbeknown,fromthejournaleasily,
e.g.,monthlysales,monthlypurchases.

109

ii. Such a
systemdoes
not
facilitate
the
installation
of an
internal
check
system
since the
journal can
be handled
byonlyone
person.
iii. The journal
becomes
bulky and
voluminous.

6.1 Need
Moreover,
transactions can be
classifiedandgrouped
conveniently
according to their
nature, as some
transactions

are
usuallyofrepetitivein
nature. Generally,
transactionsareoftwo
types:
Cash and

Credit.

Cash
transactions can be
grouped in one
category
whereas
credittransactionscan
begroupedinanother
category. Thus, in
practice, the main
journal is subdivided
in such a way that a
separate book is used
for each category or
group of transactions
which are repetitive
and sufficiently large
innumber.

Each one of the

subsidiarybooksisa
special journal and a
book of original or
prime entry. Though
the usual type of
journalentriesarenot
passed in these sub
divided journals, the
double

entry
principles

of
accounting

are
strictlyfollowed.
6.1.1 Kinds of

Subsidiary Books

6.1.2
se

The number of
subsidiarybooksmay
varyaccordingtothe
requirements of each
business.

The
following are the
special purpose
subsidiarybooks.
Tra
nsa
ctio
ns
DayBooks
Purchases
Book

i. Purchases Book
records only credit
purchases of goods
bythetrader.
ii. Sales Book is meant
for entering only
credit sales ofgoods
bythetrader.
iii. Purchases Return
Book records the
goodsreturnedbythe
tradertosuppliers.

BillsBooks
Sales
Book

Purchases
Return
Book

Purpo

Sales
Return
Book

iv. Sales Return Book

deals with goods
returned (out of
previoussales)bythe
customers.
v. BillsReceivableBook
records the receipts
of bills (Bills
Receivable).
vi. Bills Payable
Book records
the issue of
bills (Bills
Payable).

vii.CashBookis
usedforrecording
onlycashtransactions

i.e.,receiptsand
paymentsofcash.
viii.Journal
Properisthejournal
whichrecordsthe
entrieswhichcannotbe
enteredinanyofthe
abovelistedsubsidiary
books.
6.1.3 Advantages

Theadvantages
ofmaintaining
subsidiarybookscan
besummarisedas
under:
i. Division of Labour :
The division of
journal, resulting in
division of work,
ensures more clerks
working
independently in
recording original
110
111

iv. Easy Reference : It

facilitates easy
references to any
particular item. For
instance total credit
salesforamonthcan

entries in the
subsidiarybooks.
ii. Efficiency : The
division of labour
also helps the
reduction in work
load, saving in time
andstationery.Italso
gives advantages of
specialisation leading
toefficiency.
iii.

PreventsErrors
and Frauds :

The

accountingworkcanbe
divided in such a
mannerthattheworkof
one person is
automatically checked
byanotherperson.With
the use of internal
check,thepossibilityof
occurrance of errors
and frauds may be
avoided.

be easily obtained
fromtheSalesBook.
v. EasyPostings:Posting
from the subsidiary
books are made at

convenient intervals
depending upon the
natureofthebusiness.

6.2 Purchases
Book
Purchases book
alsoknownasBought
Day Book is used to
record all credit
purchases of goods
which are meant for
resaleinthebusiness.
Cash purchases of
goods,cashandcredit
purchases of assets
arenotenteredinthis
book.
Before discussing
thePurchaseDayBook,
in detail we are to
explain the most
significantterms,Trade
Discount and Cash
Discount.
6.2.1 Trade
Discount
Trade discount is

an allowance or
concessiongrantedby

the sellertothebuyer,
if the customer
purchasesgoodsabove
a certain quantity or
above a certain
amount. The amount
ofthepurchasemade,
is always arrived at
after deducting the
trade discount, ie.,
onlythenetamountis
considered.

For
example, if the list
price(priceprescribed
by the manufacturers
or wholesalers) of a
commodity is Rs.100,
and trade discount
granted

by
manufacturer to the
wholesaler is 20%
then cost price of the
commodity to the
wholesaler is Rs.80.
Trade discount is not
recordedinthebooks.
They are used for
determining the net
price.
6.2.2 Cash Discount

Saleofgoodson

credit is a common
phenomenon in any
business.Whengoods
are sold on credit the
customers enjoy a
facility of making
paymentonsomedate
inthefuture.Inorder
to encourage them to
make the payment
before the expiry of
the credit period a
deduction is offered.
The deduction so
madeisknownas

cash discount. For

example, If Ram
purchases goods worth
Rs.5,000 on 30 days
credit then, as per the
termsofcontract,heis
authorised to make
payment 30 days after
thedateofpurchase.If
he is offered a cash
discount of 2% on
paymentwithin10days
andifhedoesso,heis
entitled to deduct
Rs.100fromtheinvoice
priceandpayRs.4,900.
In this case Rs.100 is
cashdiscount.Butifhe
does not choose to
make payment within
10daysthenhewillnot
get any cash discount.
Inthiscasehewillpay
Rs.5,000after30days.
6.2.3 Distinction
between cash
discount and trade
discount

Trade discount
differs from cash
discount in the

followingrespects.

S.No BasisofDistinction
TradeDiscount
1. Parties
Itisareductiongranted
byamanufacturer/
supplier
2.
3.

4.

5.
6.

112
113

CashDiscount
Itisareduction
grantedbyawhole
saler(creditor)tothe
buyer(debtor).
Purpose
Tohelptheretailerto
Toencourageprompt
earnsomeprofit.
paymentwithina
stipulatedperiod.
Timewhenallowed Itisallowedonthe
Itisallowedwhen
purchaseofgoods.
paymentismade
withinthespecified
period.
Variation
Itisusuallygivenat
Itvariesfromcustomer
thesameratewhichis
tocustomerdepending
applicabletoall
onthetimeandperiod
customersandwillvary ofpayment.
withthequantity
purchased.
Disclosure
Itisshownbywayof
Itisnotshowninthe
deductioninthe
invoice.
invoiceitself.
LedgerAccount
AseparateAccountis
AseparateAccount
notopenedinthe
isopenedinthe
Ledger.
Ledgerfordiscount
receivedanddiscount
allowed.

6.2.4 Format

Date

P
u
rc
h
as
es
B
o
o
k
Inward

Particulars

Invoice
No.

i. DateColumn

R
t

ii. ParticularsColumn

Th
t
g

iii. InwardInvoiceNo.
Column

Rev

iv.LF.Column

v. DetailsColumn

vi.TotalColumn

vii.RemarksColumn
At the end of
each month, the
purchase book is
totalled. The total
shows the total
amount of goods or
materials purchased
oncredit.

6.2.5 Posting and

Balancing
Thiscolumnshowsthepage

Once
transactions are
Revealstheamountofgoods
properly recorded in
purchases journal,
they are posted into
Thiscolumnrepresentsthenet
the ledger. The
procedureforposting
isstatedasunder.
Step1 Entrieswill
be
Containsanyextrainformation.
posted
to the
credit
side of
the
respectiv
e
creditors
(supplier
)
account
in the
ledger
by
writing
By
Purchase
sA/cin
the
particula

rs
column.
Step 2 Periodic
total is
posted
to the
debit of
purchase
s
account
by
writing
To
sundries
as per
purchase
s book
in the
particula
rs
column.
Illustration 1: From
the

following
transactions of Ram
forJuly,2003prepare
the Purchases Book
and ledger accounts
connected with this
book.
2003

July 5Purchasedon
creditfromKannan&
Co.
50Ironboxes
10Grinders

@
@

6 Purchased
forcashfrom
Siva&Bros.
25Fans

10 Purchased
fromBalan&
Sonsoncredit
20Grinders
10Mixie

@
@

20 P
u
r
c
h
a
s
e
d
,
o
n
c
r


K
u
m
a
r
f
o
r
R
s
.
3
5
,
0
0
0
.

e
d
i
t,
o
n
e
C
o
m
p
u
t
e
r
f
r
o
m
114
115
Solution:
Date

InthebooksofRam
PurchasesBook
Inward L.F.
Amount
Particulars
Invoice
Details
Total
No.

2003
July

5 Kannan&Co.
[email protected]
[email protected],000
Goodspurchasedvidetheir
billNo.......Dated......

Rs.
25,000
30,000

Rs.

55,000

10 Balan&Co.
20Grinders
@Rs.2,500
[email protected],000
Goodspurchasedvidetheir
billNo.......Dated......
Total
LedgerAccounts
PurchasesAccount

Dr.
Date

Particulars

2003
July ToSundriesas
31
perPurchases
Book
Particulars

Cr.
Particulars

Rs.

Particulars

J.F Amount
Rs.

1,35,000
J.F.Amount Date

Particulars

2003
July
5

ByPurchases
A/c

Rs.

Balan&Co.Account

Dr.
Date

J.F.Amount Date

80,000
1,35,000

Kannan&Co.Account

Dr.
Date

50,000
30,000

J.F.Amount Date
Rs.

Cr.
J.F Amount
Rs.

55,000
Cr.

Particulars

J.F Amount
Rs.

2003
July
ByPurchases
80,000
10
A/c
Note:July6thtransactionisacashtransactionandJuly20thtransactionis
purchaseofanasset,sobothwillnotberecordedinthepurchasesbook.
116

6.3 Sales Book

Thesalesbookisusedtorecordallcreditsalesofgoodsdealt
withbythetraderinhisbusiness. Cashsales,cashandcreditsales of
assetsarenotenteredinthisbook.Theentriesinthesales bookare
onthebasisoftheinvoicesissuedtothecustomerswiththenet
amountofsale.Theformatofsalesbookisshownbelow:

6.3.1 Format

SalesBook
Date

Particulars

Outward
Amount
Invoice L.F. Details
Total
No.
Rs.
Rs.

Remarks

i. DateColumn

Representsthedateonwhichthe
transactiontookplace.

ii. ParticularsColumn

Thiscolumnincludesthenameof
purchasersandtheparticularsof
goodssold.

iii.OutwardInvoiceNo.
Column

Revealstheserialnumberofthe
outwardinvoice.

iv.L.F.Column

Thepagenumberofthecustomers
accountsintheLedgeris
recorded.

v. DetailsColumn

Containstheamountofgoods
soldandtheamountoftrade
discountifany.
117

vi.TotalColumn
Thiscolumn
showsthenet
amountwhichis
receivablefrom
the

customers.
vii.Remarks
Column
Anyotherextra
informationwill
be

recorded.

thecredit
ofsales
account
by
writing
By
Sundries
asper
Sales
Bookin
the
particular
scolumn.

6.3.2 Posting and

Balancing

Attheendofthe
monththeindividual
entriesandthetotal
ofthesalesbook
columnareposted
intotheledgersas
under.
Step1Individual
amounts
aredaily
postedto
thedebit
of
Customer
s
Accounts
by
writing
ToSales
A/cin
the
particular
scolumn.
Step2Grandtotal
ofthe
sales
bookis
postedto

Illustration2From
thetransactionsgiven
belowpreparethe
SalesBookofRam
forJuly2003.
2003
July5

8
20

23 S
ol
d
o
n

SoldoncredittoS.S.Tr
10Chairs
@
10Tables
@
SoldtoRajaforcash
15Chairs
@
SoldtoMohan&Co.
5Almirah
@
10Tables
@

Solution:

cr
ed
it
to
N
ar
ay
an
an
ol
d
co
m
p
ut
er
fo
r
R
s.
5,
0
0
0
28 Soldto
Kumaranforcash
15Chairs

Date

Inthebook
SalesBo
Particulars

2003
July 5 S.S.Traders&Co.
[email protected]
[email protected]
Less:10%Discount
SoldtoS.S.Traders,Invoice
No.......dated
20 Mohan&Co.
[email protected],200
[email protected]
Salesasper
InvoiceNo......dated
Total
Dr.
Date

Particulars

S.S.TradersA

Dr.
Date

Particulars

2003
@Rs.250July ToSalesA/c
5
118

J.F. Amount D
Rs.

9,900

Mohan&Co.

Dr.
Date

LedgerAc
SalesAcc
J.F. Amount D
Rs.
2
Ju
31

Particulars

2003
July ToSalesA/c
20

J.F. Amount D
Rs.

19,500
119

6.4 Returns Books

Returns Books

are those books in

which the goods
returned to the
suppliers and goods
returned by the
customers

are
recorded.

The
reasonsforthereturn
ofgoodsare
i. not according
to the order
placed.
ii. notuptothe
samples
which were
already
shown.
iii. due to
damage
condition.
iv. due to
difference
intheprices
charged.
v. unduedelay
in the
delivery of
thegoods.
6.4.1 Kinds of

Returns Books

Thefollowing
arethekindsof
ReturnsBooks;
i. Purchases
Return or
Returns
outward
book

ii. SalesReturn
or Returns
inwardbook
Whenthebusiness
concern returns a part
ofthegoodspurchased
on credit, the returns
fall under the category
PurchasesReturnor
ReturnsOutward.

When

the
business concern
receivesapartofthe
goodssoldoncredit,
thereturnsfallunder
the category of Sales
Return or Returns
Inward.
6.4.2 Purchases
Return Book

This book is
used to record all
returns of goods by
the business to the
suppliers.Theentries
in the Purchases
Returns Book are
usually made on the
basis of debit note
issuedtothesuppliers
or credit note
received from the
suppliers.Wecallita
debitnotebecausethe
partys (supplier)
account is debited
with the amount
written in this note.
The same note is
termedascreditnote
from the receiving
partyspointofview
becausehewillcredit
the account of the
party from whom he
hasreceivedthenote
together with goods.
The flow of notes is
asfollows.

To

Purchase

CreditNote
Sends

Seller

6.4.2.1 Format

Purchases Re
Date

Particulars

Note:Thereasonfor
goodsreturnedis
recordedinRemarks
column.
Posting and
Balancing

The individual
entries and the
periodic total of the
Purchase Return
Bookarepostedinto
theLedgerasunder:
Step 1 Individual
amounts
are daily
posted to
the debit
of

Debit
Note
No.

supplier
accounts
by
writing
To
Purchases
Return
A/c in
the
particular
scolumn.
Step 2 Periodic
total is
posted to
the credit
of
purchases
return
account
by
writing
By
Sundries
as per
Purchases
Return
Book in
the
particular
scolumn.
120
121

Illustration3
Enter

the
following
transactions in the
purchasesreturnbook
ofHariandpostthem
intotheledger.
2003Jan5Returned
goods to
Anand 5
chairs@
Rs.200
each,not
in
accordan
ce with
order.
14 Returned
goods to
Chandra
n 4
chairs @
Rs.200
each and
10 tables
@
Rs.350
each,due
to
inferior
quality.

Solution:

Date
2003
Jan

InthebooksofHari
PurchasesReturnBook
Debit
Note L.F.
No.

Particulars

Amount
Details Total
Rs.
Rs.

Notin
accordance
1,000 withorder

5 Anand
[email protected]
14 Chandran
[email protected]

800

[email protected]

Date

4,300
5,300
LedgerAccounts
PurchasesReturnAccount

Particulars

J.F. Amount Date

Rs.
2003
Jan
31

Particulars

BySundriesas
perPurchases
returnbook

J.F. Amount Date

Rs.

2003
Jan To Purchases
5
ReturnA/c

Particulars

2003
Jan
To Purchases
14
ReturnA/c.

Cr.
J.F Amount
Rs.

5,300
Cr.

Particulars

J.F Amount
Rs.

1,000

ChandranAccount

Dr.
Date

Particulars

AnandAccount

Dr.
Date

Dueto
inferior
quality

3,500

Total

Dr.

Remarks

J.F. Amount Date

Rs.

6.4.3 Sales Return Book

4,300

Cr.
Particulars

J.F Amount
Rs.

This book is used to record all returns of goods to the

businessbythecustomers.Theentriesinthesalesreturnbook
areusuallyonthebasisofcreditnotesissuedtothecustomersor
debitnotesissuedbythecustomers.
Seller

To

Sends

DebitNote
Sends

CreditNote
Purchaser

To

6.4.3.1 Format
Sales Returns Book
Date

Particulars

Credit
Note
No.

L.F.

Amount
Details
Total
Rs.
Rs.

Remarks

Note:Remarkscolumnismeanttorecordthereasonforreturn
ofgoods.
Posting and Balancing

Theindividualentriesandtheperiodictotalofsalesreturn
bookarepostedintotheledgerasunder.
Step1Individualamountsaredailypostedtothecreditof
customersaccountbywritingBySalesreturnA/c
intheparticularscolumn.
Step2Periodictotalispostedtothedebitofsalesreturn
accountbywritingToSundriesaspersalesreturn
bookintheparticularscolumn.

122
123

Illustration4

each
costing
Rs.200,
being not
in
accordance
withorder.

Enterthefollowing
transactionsin
ReturnsInward
Book:
2003
April6Returnedby
Shankar
30shirts
each
costing
Rs.150,
dueto
inferior
quality.
8

Amar
Tailors
returned 10
Baba suits,
eachcosting
Rs.100, on
account of
beingnotin
accordance
with their
order.

21 T.N.Stores
returned12
Salwarsets

Solution:
S
a
l
e
s

R
e
t
u
r
n

B
o
o
k
Date

Particulars

2003
April
6

Shankar
[email protected]

Credit
NoteNo.

LedgerA
SalesReturn

Dr.
8

21

AmarTailors
10Babasuits
@Rs.100
T.NStores
12Salwarsets
@Rs.200

Date

Purticulars

J.F. Amount D
Rs.

2003
April ToSundriesas
30
perSales
returnbook

7,900

ShankarA

Dr.
Date

Particulars

J.F. Amount D
Rs.

2
A

Total

AmarTailor

Dr.
Date

Particulars

J.F. Amount D
Rs.
2
A
T.N.Stores

Dr.
Date

Particulars

J.F. Amount D
Rs.
2
A

6.5 Bill of
exchange
Whenonewants
to increase the
businesstransactions,
credits may be
allowed and the

amountsarereceived
after some time. If
the amount involved
in the credit
transaction is large,
the seller needs
124
125

6.5.1 Definition

Accordingtothe
Negotiable
Instruments Act,
1881, Bill of
Exchange
is an
instrument in writing
containing

an
unconditional order,
signedbythemaker,
directing a certain
person to pay a
certainsumofmoney
only to, or to the
order of a certain
person or to the
bearer of the
instrument.
An analysis of
the definition given
above highlights the
following important
features of a bill of

securityandevidence
over the dealings.
Here the Bill of
Exchange solves the
problems of the
seller.

exchange.
i. Itisawritten
document.
ii. It is an
unconditiona
lorder.
iii. Itisanorder
to pay a
certain sum
ofmoney.
iv. It is signed
by the
drawer.
v. Itbearsstamp
or it is
drafted on a
stamppaper.
vi. Itisaccepted
by the
acceptor.
vii. The amount
is paid to
drawer or
endorsee.

6.5.2 Format
Bill of Exchange

Stamp
Rs.10,000/
Threemonths
afterdatepay
tomeorto
myorderthe
sumofRupees
TenThousand
onlyforvalue
received.
To
Damodaran
Thiru.Sundaram,
430,MintStreet,
Chennai1.

Accepted
Sundaram
4/6/2003

6.5.3 Important
terms

Explanation of
some

terms
connectedwithbillof
exchange is given
below.
1. Drawing of a Bill

The seller
(creditor) prepares
the bill in the form
presentedabove.The
act of preparing the
bill in its complete
form with the
signatureisknownas
drawingabill.
2. Parties

Therearethree
partiestoabill
ofexchangeas
under.
i. Drawer: The
person who
preparesthe
billiscalled
the drawer
i.e., a
creditor.

ii. Drawee:
The person
who has to
make the
payment or
whoaccepts
tomakethe
payment is
called the
drawee i.e.,
adebtor.

In a bill drawee
gives his acceptance
bywritingtheword
accepted and also
putshissignatureand
thedate.Nowthebill
becomes a legal
documentenforceable
inthecourtoflaw.

iii. Payee: The

person who
receives the
payment is
payee. He
may be a
third party
or the
drawer
himself.

When a bill is
drawn payable after a
specified period the
date on which the
payment should be
made is called Due
Date.
In the

In the above
format drawer and
payeeisDamodaran.
Sundaram is the
drawee.
3. Acceptance

4. Due date and Days

of grace

calculationofthedue
datethreeextradays
are added to the
specified period of
thebillareknownas
Days of Grace. If
the date of maturity
fallsonaholiday,the
bill will be due for
payment on the
preceedingday.

126
127

Example:

DateofBill

PeriodofBill

Days

1stMarch

2month

12thJuly

1month

1stOct.

30days

5. Endorsement

Endorsement
means writing of
ones signature on
thefaceorbackofa
billforthepurposeof
transferring the title
ofthebilltoanother
person. The person
who endorses is
called the
Endorser. The
persontowhomabill
is endorsed is called
the Endorsee.The
endorseeisentitledto
collectthemoney.

with his banker. This

process is referred to
as discounting of bill.
The banker deducts a
small amount of the
bill which is called
discount and pay the
balance in cash
immediately to the
holderofthebill.
7. Retiring of Bill

Anacceptormay
makethepaymentof
a bill before its due
date and discharge
his liability, it is
called as retirement
of a bill.Usuallythe
holder of the bill
allows a concession
called rebate to the
drawee for the
unexpired period of
thebill.

6. Discounting

8. Renewal

When the holder

ofabillisinneedof
moneybeforethedue
date of a bill he can
convertitintocashby
discounting the bill

When

the
acceptor of a bill
knowsinadvancethat
hewillnotbeableto
meetthebillonitsdue

date,hemayapproach
thedrawer

with a request for

extension of time for
payment. The drawer
of the bill may agree
to cancel the original
bill and draw a new
billfortheamountdue
with interest thereon.
This is referred to as
renewal.
9. Dishonour

Dishonourofthe
bill means the non
paymentofbill,when
it is presented for
payment.
10. Noting and
Protesting

If a bill is
dishonoured, the
drawer may approach
the court, and file a
suit against the
drawee. In order to
collect documentary
evidence, the drawer
may approach a
lawyerandexplainthe
fact of the dishonour
ofthebill.Thelawyer
willtakethebilltothe

draweeandaskforthe
payment.Ifthedrawee
does not make the
payment, the lawyer
willnotethestatement
ofthedraweeandget
the statement signed
by him. The lawyer
will then put his
signature.

The
statementnotedbythe
lawyer will be the
documentary evidence
for the dishonour of
the bill. Writing this
statement by the
lawyer is known as
noting ofthebill.The
lawyerperformingthis
workofnotingthebill
is called as the
Notary Public. A
notary public is an
official appointed by
theGovernment.

Afterrecordinga
noteofdishonouron
the dishonoured bill,
the Notary Public
128
129

6.6.1 Bills

issuesacertificateto
this effect which is
called protest. A
protestisacertificate
issuedbytheNotary
Public attesting that
the bill has been
dishonoured.
6.6 Bills Books
When

the
number of bills
received or issued is
large journalising of
all bill transactions
will result in
enormous waste of
time. Hence, suitable
registers like bills
receivable book and
billspayablebookare
maintained to record
the receipt of bills
receivable and issue
of bills payable
respectively. These
booksarealsocalled
Bills Journals /
Books.
Receivable Book

Bills receivable
(B/R)bookisusedfor

the purpose of
recording the details
of bills receivable.
The

individual
accounts of parties
from whom bills are
received will be
credited with the
amount in the bills
receivable book. The
periodic total is
postedtothedebitof
bills receivable
accountintheledger
by writing To
sundries as per Bills
ReceivableBook.
6.6.2 Bills Payable
Book
Bills payable
(B/P)bookisusedfor

the purpose of
recording the details
of bills payable. The
individual accounts
of the parties to
whom the bills are
issuedwillbedebited
with

the

corresponding
amount in the bills
payable book. The
periodic total is
postedtothecreditof
bills payable account
in the ledger by
writingBySundries
as per Bills Payable
Book.
6.7 Journal Proper
Journal proper is

used for making the

original recordof such
transactions for which
no special journal has
been kept in the
business. The usual
entries that are put
through this journal is
explainedbelow.
1. Opening Entries

Opening entries
are used at the
beginning of the
financialyeartoopen
the books by
recording the assets,
liabilities and capial

appearing in the
balance sheet of the
previousyear.
Example:
Mr. Ramnath
commenced business
with the following
items, make the
opening entries in
journal proper as on
1stJanuary2003.

Cash
Stock
Furniture
Sundrycreditors
Date
2003
Jan.1

Particulars

CashA/c
StockA/c
FurnitureA/c
ToSundrycreditors
ToCapitalA/c

(Commencementofbusi
withassets&liabilities)
2. Closing Entries

Closing entries
are recorded at the
endoftheaccounting
year for closing
accounts relating to
expenses

and
revenues. These
accounts are closed
by transferring the
balances to the
Trading, Profit and
LossAccount.
Example : Salaries
paidRs.15,000.Give

the closing entry as

onDec.31,2003.

Date

Particulars

2003

Profit&LossA/c

Dec.31

ToSalariesA/c
(Closingentryforsalaries
paid)

L.F.
Dr.

Debit
Rs.

Credit
Rs.

15,000
15,000

130
131
3. Adjusting Entries

To arrive at a
correct figure of
profits and loss,
certain accounts
require

some
adjustments. Entries
for making such
adjustments are
called as adjusting
entries. These are
neededatthetimeof
preparing the final
accounts.
Example : Provide
depreciation on
furniture Rs.1,00,000
@ 10% per annum.
Give adjustment
entryasonDec.31,
2003.
Date

Particulars

2003
Dec.31

DepreciationA/c
ToFurnitureA/c

(Depreciationwrittenoff)

4. Transfer Entries

Transfer entries
are passed in the
journal proper for
transferring an item
entered in one
account to another
account.
Example: Whenthe
proprietor takes
goods Rs.5,000 for
personal use. Give
transferentryonDec.
31,2003.

Date
2003
Dec.31

Particulars
DrawingsA/c
ToPurchasesA/c
(Goodswithdrawnfor
personaluse)

5. Rectifying Entries

Rectifying
entriesarepassedfor
rectifyingerrors
whichmighthave
committedinthe
bookofaccounts.
Example:Purchase
offurniturefor
Rs.10,000was
debitedtoPurchases
Account.Pass
rectifyingentryon
Dec.31,2003.
Date
2003
Dec.31

Particulars
FurnitureA/c
ToPurchasesA/c

(Wrongdebittopurchas
accountrectified)
6. Miscellaneous
Entries or Entries of
Casual Nature

Theseareentries
of casual nature
which do not occur
so frequently. Such
transactions include
thefollowing:

dishonour
of bill of
exchange
which
cannot be
recorded
through
billsbook.

i. Credit
purchases
and credit
sale of
assets
which
cannot be
recorded
through
purchases
or sales
book
ii. Endorseme
nt, renewal
and

iii. Other
adjustments
like interest
on capital
and loan,
bad debts,
reserves
etc.

132
133

Q
U
E
S
T
I
O
N
S
I. Objective Type:

a) Fillintheblanks:
1. Sub division
of

the
journals into
various
books for
recording
transactions
of similar
nature are
called
________.

2. Thetotalof
the
________
book is
posted to
thedebitof
purchases
account.
3. The person
who
prepares a
billiscalled
the
________.
4. Days of
grace are
________in
number.
[Answers:1.
subsidiarybooks,2.
purchases,3.
drawer,4.three]

b)Choosethe
correctanswer:
1. Purchase of
machinery
is recorded
in
a)sales
book

b)journal
proper

c)purchases
book
2. Purchases
bookiskept
torecord
a)all
purchases

b)onlycash
purchases

c) only
credit
purchases
3. Credit sales
arerecorded
in
a)sales
book
b)cashbook
c) journal
proper
4. Goods
returned by
customers
arerecorded
in
a)sales
book
b)sales

returnbook

c)purchases
returnbook

5. On 1st
January
2003,
Chandran
drawsabill
on Sundar
for

3
months, its
due date is
__________
__
a)31st
March2003
b)1stApril
2003

c)4thApril
2003
[
A
n
s
w
e
r
s
:
1
.
(
b
)
,
2
.
(

c
)
,
3
.
(
a
)
,
4
.
(
b
)
,
5
.
(
c
)
AI. Other Questions:

1. What are
the various
types of
subsidiary
books?
2. What are
the
advantages
of
subsidiary
books?

3. What is
cash
discount?
4. What are
the
differences
between
Trade
Discount
and Cash
Discount?
5. What is
Purchases
Book?
6. What is
Sales
Returns
Book?
7. Defineabill
of
exchange.
Whatareits
features?
8. Write notes
on parties
involved in
a bill of
exchange.
9. What is
Days of
grace?

10. What is
endorsemen
t?
11. Write notes
on retiring
ofabill.
12. Write notes
on renewal
of a bill of
exchange.
13. What is

Journal
Proper? For
what
purposeitis
used?
14. Write notes
on closing
entries.
15. Write notes
on
rectifying
entries.

134
135

e
seeds
from
Sure
sh@
Rs.4
0per
Kg.

III. Problems:

1. Enter

the
following
transactions in
the Purchase
Book

of
M/s.Subhashree.
2003
March1

5
Purc
hase
d
100
Kg.
of
coffe

Purc
hase
d 80
Kg.
of
tea
dust
from
Hari

@
Rs.2
0per
Kg.
12 Boug
ht
from
Rekh
a
Suga
rs,
Trich
y
1,20
0
Kg.o
f
Suga
r@
Rs.8
per
Kg.
18 Bou
ght
from
Peru
mal
Swe
ets,
Chen
nai,
40
tins

of
Swe
ets
@
Rs.2
00
per
tin.
20. Purc
hase
d
from
Govi
nda
Bisc
uit
Com
pany
,
Chen
nai
20
tins
of
biscu
its@
Rs.4
00
per
tin.
[
A
ns

w
er
:
P
ur
c
h
as
es
b
o
o
k
to
ta
l
R
s.
3
1,
2
0
0]

2. From

the
following
particulars
preparethesales
bookofModern
FurnitureMart
2003
June5Sold
o
n

c
r
e
d
i
t

t
o

A
r
v
i
n
d

&

C
o
.

2
0

t
a
b
l
e
s

R
s
.
6
0
0

p
e
r

t
a
b
l
e

2
0

c
h
a
i
r
s

R
s
.

3
0
0

p
e
r

c
h
a
i
r
7

C
a
s
h

s
a
l
e
s

t
o

A
n
a
n
d

&

C
o
.
,

1
0

t
a
b
l
e
s

R
s
.
3
0
0

p
e
r

t
a
b

l
e

2
0

c
h
a
i
r
s

R
s
.
1
5
0

p
e
r

c
h
a
i
r

10 Sold

to
Bask
ar &
Co.,
on
credi
t
10
almir
ahs
@
Rs.3,
000
per
almir
ah
10
table
s@
Rs.2
00
per
table

15 Sold
old
typewriter
for
Rs.1,000
toMadan
oncredit

20. Sold
to
Gopi
nath
on
credi
t.
10
table
s@
Rs.1,
000
per
table
2
revol
ving
chair
s@
Rs.1,
200
per
chair
[Answer:
Salesbook
Rs.62,400]

3. Enter

the
following
transactions in
proper
subsidiary
books.

2003
March1
Purchasedgoods
fromBalaraman
Rs.2000

Sold
good
s to
Sent
hil
Rs.1,
000
Goo
ds
purc
hase
d
from
Dura
i
Rs.1,
000
Sold
good
s to
Sara

10

14

20

vana
n
Rs.7
00
Sold
good
s to
Sent
hil
Rs.5
00
Purc
hase
d
good
s
from
Elan
gova
n
Rs.6
00
Purc
hase
d
good
s
from
Parth
iban
Rs.3
00
Sold

good
s to
Suku
mar
Rs.6
00
[Answer:Purchase
bookRs.3,900;Sales
bookRs.2,800]
4. Record the
following
transactions in
the proper
subsidiary books
of M/s.Ram &
Co., and post
them to the
ledger.
2003
April 1
Goods
soldtoRamesh
Rs.1,000
5 Sold
goodsto
Kumar
Rs.2,200
8 Sold
goodsto
136
137

Shankar
Rs.300
10
Goods
returned
byKumar
Rs.600
15 Cred
it
Note
sent
to
Shan
kar
for
Rs.2
00
bein
gthe
invoi
ce
over
char
ged.
[Answer:
Salesbook
Rs.3,500;
Salesreturn
bookRs.800]

5. Write

the
following
transactions in
proper
subsidiarybooks
of
Mr.Rajasekaran.
2003
May 10
Purchasedgoods
fromRaman
Rs.15,000
14
Returned
goodsto
Raman
Rs.500
18
Purchased
goods
from
Sekaran
Rs.10,000
20
Pradeep
sold
goodsto
us
Rs.20,000

24 Sent
a
debit
note
to
Seka
ran
for
good
s
dam
aged
in
trans
it
Rs.1,
000.
[Answ
er
:
P
ur
ch
as
es
b
o
o
k
R
s.
4
5,

0
0
0;
P
ur
ch
as
es
re
tu
rn
b
o
o
k
R
s.
1,
5
0
0]

6. Enter

the
following
transactions in
the proper
subsidiary books
ofMr.Somu
2003
Nov.1Bought
from
Gopa
l300

bags
of
whea
t
Rs.1,
000
per
bag
less
trade
disco
unt
10%
3

Purc
hase
d
from
Mad
hava
n
150
bags
of
rice
Rs.9
00
per
bag
less
trade
disco
unt
10%

Retu
rned
to
Gop
al10
bags
of
whea
t
whic
h
were
purc
hase
d on
1.11.
03.
Sold
to
Shiv
a 50
bags
of
rice
Rs.1,
200
per
bag
less
Trad
e
Disc
ount

5%.
12 Sold
to
Shar
ma
25
bags
of
Whe
at
Rs.1,
300
per
bag
less
Trad
e
Disc
ount
10%.
14 Retur
ned
15
bags
of
rice
to
Mad
hava
n.
15 Shiv
a
retur

ned5
bags
of
rice.

17 Boug
ht
from
Raja
n
200
bags
of
whea
t
Rs.9
50
per
bag
24 50
bagsof
wheat
returned
toRajan
[Answer : Purchases
book
Rs.5,81,5
00; Sales
book
Rs.86,250
;
Purchases
return
book
Rs.68,650
; Sales
return
book

Rs.5,700]
7. Enter

the
following
transactions in
the appropriate
Special Journal
of M/s. Sita &
Co.
2002
Oct2Bought
good
s
from
Satis
h
Rs.2,
400
as
per
invoi
ce
No.6
3.
4

Sold
to
Siva
gami
good
s
Rs.1,
600
as

per
invoi
ce
No.7
1.
7

Retu
rned
to
Satis
h
good
s of
Rs.2
50as
per
debit
note
No.4

Siva
gami
retur
ned
good
s
Rs.1
50as
per
credi
t
note
No.8

12 Sold
toVijaya

goodsof
Rs.950as
perinvoice
No.72

14
Purchased
from
Velan
goods
worth
Rs.1,100
18 Retu
rned
to
Sam
path
good
s of
Rs.1
50as
per
debit
note
138
139

No.5
22
Vijaya
returned
goodsof
Rs.240
Credit
NoteNo.9
[Answer:Purchases
book
Rs.3,500;
Salesbook
Rs.2,550;
Purchases
return
book
Rs.400;
Sales
return
book
Rs.390]

AP
TE
R7
CH

SUB
SIDI
ARY
BO
OKS
II -

various
Kinds of
Cash
Book.

C
A
S
H
B
O
O
K
Learning
Objectives
Afterlearning
thischapteryou
willbeableto:
understan
d the
Need and
Meaning
of the

prepare
the
various
Kinds of
Cash
Books.
Ineverybusiness
house there are cash
transactionsaswellas
credittransactions.All
credittransactionswill
become

cash
transactions when
paymentsaremadeto
creditors or cash
receivedfromdebtors.
Since,

cash
transactions will be
numerous, it is better
to keep a separate
book to record only
thecashtransactions.

7.1 Features
A cash book is a

specialjournalwhichis

usedtorecordallcash
receipts and cash
payments. The cash
book is a book of
original entry or prime
entrysincetransactions
are recorded for the
first time from the
source documents. The
cashbookisaledgerin
the sense that it is
designedintheformof
a cash account and
recordscashreceiptson
thedebitsideandcash
payments on the credit
side. Thus, the cash
book is both a journal
andaledger.CashBook
willalwaysshowdebit

balance, as cash

payments can never

exceed

cash
available. In short,
cashbookisaspecial
journalwhichisused
forrecordingallcash
receipts and cash
payments.
7.2 Advantages
1. Saves time and
labour: When
cash
transactionsare
recorded inthe
journalalotof
timeandlabour
will

be
involved. To
avoid this all
cash
transactionsare
straight away
recordedinthe
cash book
whichisinthe
form of a
ledger.

2. To know cash
and bank
balance:
It

helps the
proprietor to
knowthecash
and bank
balanceatany
pointoftime.
3. Mistakes and
frauds can be
prevented:

Regular
balancing of
cash book
reveals the
balanceofcash
inhand.Incase
the cash book
is maintained
by business
concern, it can
avoid frauds.
Discrepancies
if any, can be
identified and
rectified.

4. Effective cash
management:

Cash book
provides all
information
regardingtotal
receipts and
payments of

the business
concern at a
particular
period. So
that, effective
policyofcash
management
can

be
formulated.
7.3 Kinds of Cash
Book
Thevarious
kindsofcashbook
fromthepointof
viewofusesmaybe
asfollow:
K
i
n
d
s
o
f
c
a
s
h

b
o
o
k

I
Singlecolumn
cashbook

140
141

II
Doublecolumn
cashbook
a)Withdiscountand
cashcolumns
b)Withcashand
bankcolumns

III
IV
Triplecolumn
Pettycash
cashbook
book
withdiscount,
cashandbank
columns

7.3.1 Single Column

Cash Book
Single column
cashbook(simplecash
book) has one amount
column in each side.
All cash receipts are
recorded on the debit
side and all cash
paymentsonthe credit
side.Infact, this book
is nothing but a Cash
Account. Hence, there
isnoneedtoopencash
account in the ledger.
The format of asingle
column cash book is
givenbelow.
Format
DebitSide
Date

Particulars

Explanation :

i. Date : This
column
appears in
both the
debit and
creditside. It
records the
date of
receiving
cash at debit
side and
SingleColumnCashBookof................ paying cash
atcreditside.
R.
N.

L.
F.

Amount
Rs.

ii. Particulars :
This column
is used at
both debit
and credit
side. It
records the
names of
parties
(personal
account),
heads
(nominal
account) and
items (real
account)
from whom
payment has
been
received and
to whom
payment has
beenmade.
iii. Receipt
Number
(R.N): This

refers to the
serialnumber
of the cash
receipt.

iv. Voucher
Number
(V.N) : This

refers to the
serialnumber
of
the
voucher for
which
payment is
made.
v. Ledger Folio
(L.F): This
column is
used in both
thedebit and
creditsideof
cash book.
The ledger
page (folio)
of every
account in
the cash
book is
recorded
againstit.
vi. Amount : This
column
appears in
both sides of
thecashbook.
The actual
amount of

cashreceiptis
recorded on
the debit side.
The actual
payments are
enteredonthe
creditside.
Balancing :

Thecashbookis
balancedlikeany
otheraccount.The
totalofthereceipt
(debitside)column
willalwaysbegreater
thanthetotalofthe
paymentcolumn
(creditside).The
differencewillbe
writtenonthecredit
sideasByBalance
c/d.Inthebeginning
ofthenextperiod,to
showthecashbalance
inhand,thebalance
amountisrecordedin
thedebitsideasTo
balanceb/d.
Illustration1
Enterthe
followingtransactions

inasinglecolumn
cashbookof
Mr.Kumaran.

2004Jan1
3
4
5
12
14
15
20
24
28

Startedbusinesswithcash
Purchasedgoodsforcash
Soldgoods
CashreceivedfromSiva
PaidBalan
Boughtfurniture
Purchasedgoodsfrom
Kalaoncredit
Paidelectriccharges
Paidsalaries
Receivedcommission

142
143

Solution:
CashBook
ofMr.Kumaran

Dr.
Date

Particulars

R. L.
N. F.

Amount
Rs.

2004
Jan1 ToCapitalA/c
4

ToSalesA/c

ToSivaA/c

28

ToCommissionA/c

1,000
1,700
200
75

2,975
2004
Feb1 ToBalanceb/d

1,650

...
...
...
...
...
...

Rs.
Rs.
Rs.
Rs.
Rs.
Rs.

1,000
500
1,700
200
150
200

...
...
...
...

Rs.
Rs.
Rs.
Rs.

2,000
225
250
75

Note: Thetransaction
datedJanuary15th will
not be recorded in the
cash book as it is a
credittransaction.
7.3.2 Double
Column Cash Book

Themost
commondouble
columncash
booksare
i. Cash book
with
discount
and cash
columns
ii. Cash book
with cash

and bank
columns.
i.

Format
Do
ubl
e
Col
um
n
Ca
sh
Bo
ok
(Cashbook
with
Discount
andCash
Column)

Cash Book with

discount and cash
columns

Oneithersideof
the single column
cash book, another
column is added to
record discount
allowedanddiscount
received. The format
isgivenbelow.
Debit
Date

......................................

Parti
culars

R.
N.

L. Dis Amount
Rs.
D
F. count
Allowed
Rs.

Itshouldbenoted
that in the double
column cash book,
cash column is
balanced like any
other ledger account.
But the discount
columnoneachsideis
merely totalled. The

total of the discount

column on the debit
side shows the total
discount allowed to
customers and is
debited to Discount
AllowedAccount.The
total of the discount
column on the credit
side shows total
discount received and
iscreditedtoDiscount
ReceivedAccount.

Illustration 2:
Prepare a Double
Column Cash Book
from the following
transactions of
Mr.Gopalan:

Rs.
2004
Jan.1
6
10
11
12

Cashinhand
CashPurchases
Wagespaid
CashSales
CashreceivedfromSureshand
allowedhimdiscount
19 CashpaidtoMeena
anddiscountreceived
27 CashpaidtoRadha
28 Purchasedgoodsforcash

4,000
2,000
40
6,000
1,980
20
2,470
30
400
2,070

Rs.

Date

Particulars

11,980
30

5,000

2,070

400

2,470
30

40

2,000

Cr.

Discount Amount
V.N FL. Received Rs.

144
145

5,000

2011,980

31ByBalancec/d

28ByPurchasesA/c

ToSureshA/c
12

27ByRadhaA/c

6,00010ByWagesA/c

ToSalesA/c
11

201,98019ByMeenaA/c

4,000Jan6ByPurchasesA/c

Jan1 ToBalanceb/d

2004

Allowed

DiscountAmount

Feb1 ToBalanceb/d

2004

Date

Dr.

Particulars

NR. L.F

DoubleColumnCashBookofMr.Gopalan(CashbookwithDiscountColumn)

Solution:

ii. Cash Book with Cash and Bank Columns

Whenbanktransactionsaremoreinnumber,itisadvisable
toopenacashbookbyprovidingaseparatecolumnoneither
sideofthecashbooktorecordthebanktransactionstherein.
Insuchcase,itisnotnecessarytoopenaseparateBank
AccountintheLedgerbecausethetwocolumnsinthecashbook
serve the purpose of Cash Account and Bank Account
respectively. It is a combination of Cash Account and Bank
Account.Theformatofthiscashbookisgivenbelow.
DebitSide
Date

Parti
culars

DoubleColumnCashBook
(CashbookwithCashandBankColumns)
R. L.
N. F.

Cash
Rs.

Bank
Rs.

Date

Parti
culars

V. L.
N. F.

CreditSide
Cash
Rs.

Bank
Rs.

Therearetwoamountcolumnsondebitsideoneforcashreceipts
andtheotherforbankdeposits(i.e.,paymentmadeintoBankAccount).
Similarly there are two amount columns on the credit side, one for
paymentsincashandtheotherforpaymentsbychequesrespectively.
Contra Entry

When an entry affect both cash and bank accounts it is

calledacontraentry.ContrainLatinmeans opposite.Incontra
entries both the debit and credit aspects of a transaction are
recordedinthecashbookitself.
146
147

Example1:Cash
paidintobank
BankA/c
Dr.
xxx

ToCash
A/c
xxx

(Cashpaid
intobank)

This is a contra
entry.Asthecashbook
with cash and bank
columns is a combined
cash and bank account,
both the aspects of the
transaction will be
entered in the same
book. In the debit side
To Cash A/c will be
enteredintheparticulars

column and the amount

will be entered in the
bank column. In the
credit side By Bank
A/c will be entered in
the particulars column
and the amount will be
entered in the cash
column.

Such contra
entries are denoted
by writing the letter
C in the L.F.
column,onbothsides
of the cash book.
Theyindicatethatno
posting in respect
thereof is necessary
intheledger.
Example2:Cash
withdrawnfrombank
forofficeuse.
CashA/c
Dr.
xxx

ToBank
A/c
xxx

(Cash
withdrawnfor

officeuse)
This is also a
contra entry. In the
debit side To Bank
A/cwillbeenteredin
the particulars column
andtheamountwillbe
entered in the cash
column. In the credit
sideByCashA/cwill
be entered in the
particulars column and
the amount will be
entered in the bank
column.

Such contra
entries are denoted
by writing the letter
C in the L.F.
column,onbothsides
of the cash book.
Theyindicatethatno
posting in respect
thereof is necessary
intheledger.

Illustration3
Enterthe
following
transactionsinthe
doublecolumncash
bookofMr.Rajesh
andbalanceit.
2003
Aug.1OpeningBalance:Cash
in
Hand
Rs.4,2
50
Cash
at
Bank
Rs.13,
750

Babu
Rs.4,500
paid into
bank.
5 Received
cheque from
Mr.Jayarama
n Rs.6,000
paid into
bank
8Cash
purchases
Rs.2,500
8 Paid rent by
cheque Rs.
2,500

2 Paid to petty
cashier
Rs.2,500

9 Cash
withdrawn
from bank
for office
useRs.2,500

2 Cash sales
Rs.1,750

10 Cash sales
Rs.3,750

3 Paid to Arun
by cheque
Rs.3,750

14Stationery
purchased
Rs.1,000

3 Received a
cheque from
Mr.Ram

20 Cash sales
Rs.6750
21 Paid into

R.
N.

3,00015,500

19,00034,250

Cash
Rs.

Bank
Rs.

Date

Particulars

N.

V.

L.F.

15,500

9,000

1,000

2,500

2,500

3,750

Bank
Rs.

19,000 34,250

3,000

10,000

1,000

2,500

2,500

Cash
Rs.

Cr.

23Withdrew
cashforpersonal

31,,Balancec/d

25,,SalaryA/c

C10,00023,,DrawingsA/c

6,75021,,BankA/c

3,75014,,StationeryA/c

C2,5009,,CashA/c

6,0008,,RentA/c

45008,,PurchasesA/c

1,7503,,ArunsA/c

4,25013,750Aug2ByPettyCashA/c

2003

L.F.

(CashbookwithCashandBankColumn)

shDoubleColumnCashBookofMr.Raje

bank
Rs.10,000
useRs.1,000

25Salariespaid
bycheque
Rs.9000.

148
149

,,
21

Sep1 To Balanceb/d

,,
20

CashA/c

,,

SalesA/c

,,
9

10

SalesA/c

,,
5

BankA/c

,,
3

JayaramansA/c

,,
2

RamBabusA/c

Balanceb/d

SalesA/c

Aug1 To

2003

Particulars
Date

Dr.

Solution:

Points to be remembered while preparing cash book:

S.
No.

Transaction

Debit/Credit
sideofcashbook

Thecolumnin
whichtheamount
tobeentered

1.

Cash/M.O./P.O.received

Debit

Cash

2.

Cashpaid

Credit

Cash

3.

Discountallowed

Debit

Discountallowed

4.

Discountreceived

Credit

Discountreceived

5.

Cashdepositedinthebank

Debit(C)
Credit(C)

Bank
Cash

6.

Cashwithdrawnfor
officeuse

Debit(C)
Credit(C)

Cash
Bank

7.

Chequereceived

Debit

Cash

8.

Chequedeposited
intobank

Debit(C)
Credit(C)

Bank
Cash

9.

Chequereceivedand
depositedintobank
forcollectionimmediately

Debit

Bank

10.

Chequeissued

Credit

Bank

11.

Customerdirectlypaid
intobank

Debit

Bank

12.

Chequedepositedand
dishonoured

Credit

Bank

13.

Chequeissuedand
dishonoured

Debit

Bank

150
151
14.

Bankcharges

15.

Interestallowedbybank

16.

Interestonoverdraft

17.

Paymentsdirectlymade
bythebankasperstanding
instructions

18.

Amountsdirectlyreceived
bybankasperstanding
instructions

7.3.3 Triple Column

Cash Book

Large business
concerns receive and
make payments in
cashandbycheques.
Where cash discount
isaregularfeature,a
Triple Column Cash
Book is more

advantageous. This
cash book has three
amount columns
(cash, bank and
discount) on each
side. All cash
receipts, deposits
into bank and
discountallowedare
recorded on debit
side and all cash
payments,
withdrawals from
bank and discount
received

are
recorded on credit
side.
Theformatis
giveninthe
nextpage.

Date

Dr.

Format:

152

Particulars

Dis.
R. L. Allo Cash
N. F. wed Rs.
Rs.

Bank
Rs.

Date

Particulars

Dis.
V. L. Recei
N. F. ved
Rs.

TripleColumnCashBookofMr..........................(CashbookwithDiscount,CashandBankColumns)

Cash
Rs.

Bank
Rs.

Cr.

153

from
Mano
Rs.490,
Discount
allowed
Rs.10.

Illustration4
Compilethree
columncashbookof
Mr.Sundarfromthe
following
transactions:
2002
Aug1
Sundar
startedbusinesswith
cashRs.2,00,000
2
Deposited
intoBank
Rs.50,000.
4

Cash
purchases
Rs.5,000.

Purchases
by cheque
Rs.6,000.

Goods
sold to
Nathan on
credit Rs.
5,000.

Received
cheque

10
Paid
carriage
Rs.1,000.
12
Withdrewfrom
Bankforoffice
useRs.10,000.
15 Paid to
Sundari
Rs.4,960
,
Discount
allowed
by her
Rs.40.
20 Received
a cheque
for
Rs.4950
from
Nathanin
full

155

,,BankA/c

12

10,00010,,CarriageA/c

4905,,PurchasesA/c

,,ManosA/c

10

50,0004,,PurchasesA/c

,,CashA/c

Cash
Rs.
2002
2,00,000Aug2ByBankA/cC

R.N.

Aug1 ToCapitalA/c

2002

Particulars

Dis.
L.F. Allo
wed

rTripleColumnCashBookofMr.Sunda

Bank
Rs.

Date

Particulars

154

Date

Dr.

Solution:

V.N.

1,000

5,000

50,000

Dis.
L.F iRece Cash
ved Rs.

6,000

Bank
Rs.

Cr.

settlement
of his
account,
which is
deposited
intoBank.

Illustration5

,000.

Enterthe
followingtransactions
inthreecolumncash
bookofMr.Muthu
andbalancethesame.

8 R
e
c
e
i
v
e
d

f
r
o
m

M
o
h
a
n

R
s
.
2
,
5
6
0

D
i

2003
Aug1Cash
i
n

h
a
n
d

R
s
.
7
5
,
0
0
0

C
a
s
h

s
c
o
u
n
t

a
l
l
o
w
e
d

R
s
.

4
0
.

10 Paid to
Somu by
cheque
Rs.3,970
in full
settlement
of his
account
Rs.4,000.

c
h
e
q
u
e

f
r
o
m

B
a
l
a
n

R
s
.
4
,
9
0
0
.

A
l
l
o
w

e
d

h
i
m

d
i
s
c
o
u
n
t

R
s
.
1
0
0
.

19
Balans
chequedeposited
intoBank
24 Anandan
our
customer
has paid
directly

3,000.

Dr.

TripleColumnCashBookofMr.Muthu

Cr.

N.

R.

.L.F

5
Parthiban
settledhis
account
for
Rs.3,750
by giving
a cheque
for
Rs.3,690.
,, BalansA/c
,, CashA/c
,, AnandansA/c

ToBalanceb/d

15
19
24

Sep1

10,000

4,900

057,56 52,930

,, Balancec/d

31

15

.L.F

Solution: Dr.

,, RentA/c

,, BankA/c

,, DrawingsA/c

,, SomusA/c

27

19

11

10

,, MachineryA/c

By BankA/c

N.

V.

30

ved
Rs.

iDis.Rece

30

14

082,46 74,900

4,900

2,560

Aug4

Particulars

3,000

5,000

3,970

10,000

Bank
Rs.

82460 74900

57,560 52,930

4,900

20,000

Cash
Rs.

Illustration6

140

100

,, MohansA/c

20,000

075,00 40,000

2003

Date

June1
Cashin
handRs.50,000
Bank
overdraft
Rs.15,000
Bank
Rs.

Preparethree
columncashbookof
Mrs.Eswarifromthe
followingtransactions
andbalancethecash
bookon30thJune
2003.

40

,, CashA/c

Cash
wed Rs.
Rs.
Dis.Allo

3
Paidinto
bankRs.25,000

ToBalanceb/d

Particulars

2003

Aug1

2003

Date

156
157

Dis.

N.

500

3,690

C
C

25,000

ved Rs.

V. L.F.
Cash
Rece
i

150

3,690

8,000

15,000

Bank
Rs.

book.Note:Transactiondated15thJunewillnotberecordedinthecash
158
159

Illustration7
Enterthe
followingtransactions
inthreecolumncash
bookofMrs.Anu
Radha.

2002

1 Sent

to
Bharathi by
money order
Rs.460, the
money order
commission
beingRs.20.

160

,,SalesA/c
,,ElangovansLoan
,,CashA/c
,,DividendA/c
,,SalesA/c

ToBalanceb/d

2
9
12
16
18

Oct1

Date

5,000

2,000

5,000

67,670 23,948

150 74,850 27,000

10,000

150 14,850

30

20

20

14

12

Sept3

Bank
Rs.
50,000 15,000

Dis.
Al Cash
low Rs.

Sept1 ToBalanceb/d

R. L.F.
N.

2002

Particulars

2002

Date

,,Balancec/dA/c

,,MoneyOrderCommissionA/c

,,BharathiA/c

A/c

,,Aravind&Co.

,,BankA/c

,,PurchasesA/c

ByTaxA/c

Particulars

48

48

700

2,352

Bank
Rs.

74,850 27,000

67,670 23,948

460
20

700

5,000

1,000

Dis.
V. L.F
Recei Cash
N.
ved Rs.

161

Illustration8
From

the
followinginformation
show how Mr.Venu
Gopalstriplecolumn
cash book would
appear for the week
ended 7th October
2002 and close the
cashbookfortheday.
2002
Oct1Cashinhand
Rs.30,000
Bank
balance
Rs.1,000
2 Sivan,
our
custom
er has
paid
directly
into
our
bank
accoun
t
Rs.5,00
0.

3
4
5

6
7

Solution: Dr.

162

ToBalanceb/d

Oct8

75

,,BharathiA/c

,,BankA/c

,,CashA/c

2,400

4,000

30,225 7,500

34,225 12,400

2,000

2,225
6

75

,,VinothsA/c

,,SivansA/c

5,000

Oct3

30,000 1,000

Date

ToBalanceb/d

Bank
Rs.

Oct1

Dis.
R.
Cash
L.F. Al
N.
Rs.
low

2002

Particulars

2002

Date

,, Balancec/d

,, CashA/c

,, BankA/c

4,000
C

34,225 12,400

30,225 7,500

2,000

2,400

,, BharathiA/c

Bank
Rs.

500
C

Dis.
V.
Cash
L.F iRece
N.
Rs.
ved
By RentA/c

Particulars

163

7.3.4 Postings from

cash book to
concerned ledger
accounts

1. Opening(Cash
and Bank)
balance
appearing in
the cash book
isnotpostedto
anyaccountin
theledger.
2. Contra entries
are not posted
toanyaccount.
3. Each item of
discount
allowed
appearing on
the debit side
of the cash
book will be
posted to the
credit of
respective
personal
account. Total
of discount
allowed
column should

be posted to
the debit side
of discount
allowed
account with
the words To
Sundry
Accounts.
4. Each item of
discount
received
appearing on
the credit side
of the cash
book will be
posted to the
debit

of
respective
personal
account. Total
of discount
received
column should
be posted to
the credit of
discount
received
account with
the words By
Sundry
Accounts.

5. The other
transactions
recorded on
the debit side
of the cash
book are
posted to the
credit of the
respective
accountsinthe
ledger.
6. The other
transaction
recorded on
the credit side
of the cash
book are
posted to the
debit of the
respective
accountsinthe
ledger.

Q
U
E
S
T
I
O
N
S
I. Objective Type:

a)FillintheBlanks:
1. Discount
allowed column
appears in
_______ side of
thecashbook.
2. In the triple
column cash
book, when a
cheque

is
received the
amount

is
entered in the
_______
column.
3. Discount
received column

appearsin_____
side of the cash
book.

bank,5.debited,
6. subsidi
ary]

4. A

cheque
receivedandpaid
into the bank on
the same day is
recorded in the
______ column
of the three
column cash
book.

b) Choose the
correctanswer:
1. The cash book
records
a)allcash
payments
b)allcash
receipts
c) all cash
receipts &
payments

5. When a cheque
received from a
customer is
dishonoured, his
account is
________.

2. When goods are

purchased for
cash, the entry
will be recorded
inthe
a)cashbook
b)purchases
book
c)journal

6. Cash Book is
one of the
_______books.
[Answers:1.debit,
2.cash,3.credit,4.
164
165

3. The balance of
cash book
indicates
167

a)netincome
b)cashinhand
c) difference
between

debtors and
creditors
4. In triple column
cash book, cash
withdrawn from
bank for office
use will appear
in
a) debit side of
thecashbook
only
b) both sides of
the cash
book.
c) creditsideof
thecashbook
only.
5. If a cheque sent
for collection is
dishonoured, the
debitisgivento
a)suppliersA/c
b)bankA/c
c) customers
A/c
6. If a cheque
issued by us is
dishonoured the
creditisgivento
a) suppliersA/c

c) bankA/c
[Answer
s:1(c),
2.(a),3.
(b),4.
(b),5.
(c),6.
(a)]
II. Other Questions:

1. What is cash
book? What are
itsfeatures?
2. What are the
advantages of
cashbook?
3. What are the
various kinds of
cashbook?
4. What is single
column cash
book?
5. What is double
column cash
book?
6. What is triple
column cash
book?
7. Write notes on

contraentry.
8. Give

the
specimen of
triple column
cashbook.

9. What are the

rulesformaking
entries in the
double column
cash book with
cash and bank
column?
10. How

are
postings made
from the cash
book?
III. Problems:

1. From

the
following
particulars,
prepare single
column cash
book

of
Ms.Kokila.
2002
Mar.
1

C
a
s
h

h
a
n
d

R
s
.
2
0
,
0
0
0
.

C
a
s
h

p
u
r
c

h
a
s
e
s

R
s
.
4
,
0
0
0
.
7

Cash sales
Rs.8,000.
8 Paid to
Balan Rs.
5,000
9 Received
cash from
Cheran
Rs.10,000.
13 Paid into
bank
Rs.10,000.
14 Cash
withdrawn
from bank

Rs.4,000.
18 Paid
salaries
Rs.1,000.
20 Bought
furniture
Rs.3,000.
a Rent paid
Rs.1,000.
(Answ
er:
Cash
balanc
eRs.
18,000
)
2. Enter

the
following
transactions in
the

single
column cash
book of Mrs.
Lalitha.

2002
Aug.1
3
4
5
7
9
166

CashinhandRs.46,000.
PaidintoBankRs.12,000
CashsalesRs.24,000.
CreditsalestoManiRs.3,000.
PrintingchargesRs.3,000.
ReceivedchequefromNatesanRs.8,000.

12 Dividend
received
Rs.2,000.
14 Computer
purchased
Rs.35,000.
17 Cash
receivedfrom
ManiRs.3,000.
24 Cash
withdrawnfrom
bankRs.2,000.

Mr.Chandran.
2002
Dec1
7
9
12
14
17
20

(Answer
:Cash
balance
Rs.35,0
00)

3. Prepare a single
column cash
book from the
following
particulars of

CashbalanceRs.80,000
BoughtgoodsforcashR
Purchasedgoodsoncred
SoldgoodstoSomuon
PaidGuruRs.6,000.
CashreceivedfromSom
Paid trade
expenses
Rs.10,000.
21 Received
cheque
from
Krishna
Rs.10,000.
27 Commissio
n received
Rs.5,000.
(Answer
:Cash

balance
Rs.62,0
00)

4. Enter

the
following
transactions in
the double
column cash
book

of
Mr.Srinivasan.

a
j
a
n

R
s
.

2002

May1
Cashin
handRs.50,000.

0
0

Cas
h

p
a
i
d

t
o

0
.

D
i
s
c
o
u
n
t

a
l
l
o
w
e
d

b
y

h
i
m

R
s
.

1
0
0
.

6
Cash
purchases
Rs.10,000.

10 Received
cash from
Arun
Rs.2,900
and
allowed
him
discount
Rs.100.
13 Cashsales
Rs.15,000.

cash book with

cash

and
discount column
of
Mr.Nandakumar
.
2003
Jan1
Cashin
handRs.60,000.
3

Bought
goodsfrom
Premnath
Rs.10,000.

Opened a
current
account
with bank
Rs.15,000.

Withdraw
from bank
Rs.5,000.

Soldgoods
to Kandan
for
Rs.10,000
credit on
terms 2%
cash
discount if
payable
within two

15 Electricity
chargespaid
Rs.1,000.
18 Paidfor
miscellaneous
expenses
Rs.2,000.
20 Received
cash from
Murali
Rs.3,450
Discount
allowed
Rs.50.
(Answer:Cash
balanceRs.52,350)

5. Enter

the
following
transactions in

weeks.

him
discount
Rs.100.

10 Paidcash
toPremnath,less
1%C.D.
14 Receiveda
cheque
from Arul
Rs.3,400,
allowed
168
169

6. Enter

the
following
transactioninthe
Cash Book with
Discount and
CashColumnsof
Mr.Guru.
Sep1
Cashin
handRs.19,000.
3

(Answer:Cash
balanceRs.53,300)

Rec
e
i
v
e
d

2003

170

15 Kandan
settled his
account.

Soldgoods
for cash
Rs.10,000.
Credit
purchases
from
Venkat
Rs.18,000.

f
r
o
m

M
o
h

a
l

Paid for
Electricity
charges
Rs.850.

Cash
deposited
in bank
Rs.20,000.

columns:
Balancethecash
book.
2003

14 Paid cash
to Venkat
Rs.17,600
in full
settlement.

May1

CashinhandRs.30,000

PaidintobankRs.10,00

CashpurchasesRs.2,50

LoanobtainedfromVasa

24 Received
cash from
Vel
Murugan
Rs.4,800.

Cashdepositedinbank

CashsalesRs.2,500.

26 Salaries
paid
Rs.4,000.
28 Cash
drawn
from bank
Rs.5,000.
[Answer:
Cash
balance
Rs.510]
7. Enter

the
following
transactions in
Cash Book with
cash and bank

8
Rentpaid
bycheque
Rs.2,000.
10 Cash
withdrewfor
officeuse
Rs.4,000.
14 Paid
Nataraj
Rs.300 by
M.O.
15 Akilan
directly
paid into
our bank
account
Rs.3,000.
25 Cash
withdrawn
from bank
Rs.5,000.
(Answer:
Cashbalance
31,200,Bank
balanceRs.
9,500)

8. Record the
following
transactions in

Sujathas cash
book with cash
and

bank
columns.
2002
Mar1
Cash
BalanceRs.45,000.
Bank
Balance
Rs.42,000.
3
Cashpaid
intobank
Rs.5,000.
5
Purchases
bycheque
Rs.9,000.
8
Cashsales,
depositedinthe
bankRs.13,500.
10 Furniture
purchased
Rs.600.
14 Cheque
receivedfrom
RamuRs.2550.
17 Ramus
cheque
deposited
inthebank
for

collection.
18 Cash
withdrawn
for
personal
use by
cheque
Rs.750.
20 Cash
withdrawn
from bank
Rs.3,000.
171

9. Prepare Double
Column Cash
Book with cash
and

bank
columns from
thefollowing:
2003
Jan1
Cashin
handRs.22,000
Cashat
bank
Rs.5,000.
2
Soldgoods
forcash
Rs.15,000.
4 Cash
withdrawn

26 Ramus
cheque
was
returnedby
bank as
dishonoure
d.
(Answer:Cash
balance
Rs.42,400;Bank
Balance
Rs.47,750)

from bank
Rs.2,000.
5 Credit
purchases
from
Deena
Rs.15,000.
6 Cash
deposited
into bank
Rs.5,000.
10 Paidwages
bycheque
Rs.10,000.
14 Cash
received
from sale
of

furniture
Rs.10,000
and out of
itpaidinto
bank
Rs.2,000.
18 Bank
chargescharged
bythebank
Rs.1,300.
20 Cheque
issuedtoDeena
Rs.15,000.
24 Received a
cheque for
Rs.1,000
from
Pasubathy,
deposited
into the
bank.
28 Deena,to
whomwe
haveissued
acheque
forcredit
purchases
has
reported
thatour
chequeis
dishonoure

d.

(Answer:Cash
balanceRs.42,000;
Bankbalance(Cr)
Rs.300)
10. Prepare a cash
book with cash,
bank

and
discount
columns from
the transactions
givenbelow:
2002
Jan1CashBalance
Rs.75,000.
Bank
BalanceRs.
45,000.
3 Depositedinto
bank
Rs.60,000.
4 Bought
furniture and
paid by
cheque
Rs.7,500

5 Paidforrepair
Rs.650.
6 Goods
purchased
and paid by
cheque
Rs.12,500.
10 Received
a cheque
for
Rs.21,00
0 from
Chandra
n and
allowed
him
discount
Rs.200.
13 Gave
Muthua
cheque
for
Rs.11,5
00 and
receive
d a
discoun
t of
Rs.150.
15Sarathy
directlypaidinto
ourbankaccount

Rs.15,000.
20Withdrew
frombankfor
officeuse
Rs.2,500.
28Withdrew
frombankfor
personaluse
Rs.500.
(Answer:Cash
balance
Rs.37,850;Bank
balance
Rs.85,500)

11. Enter

the
following
transactions in
Muralis cash
book with
column for
discount,cash&
bank.
2002
April1
Cash
balanceRs.4,000.
Bank
overdraft
Rs.10,500.
4

Received

Rs.2,000
from
Manojin
cash.
Allowed
him
discount
of
Rs.100.

12 Paidrent
bycheque
Rs.1,500.
15PaidRs.2,500
toKarthikeyan
halfcashand
halfbycheque.

7
Cashsales
Rs.2,000.

18Cashsales
Rs.15,000.

10 Furniture
purchased
Rs.800by
cheque.
172
173

20 Paid
packingcharges
Rs.500.

24 Paid
Murugan
Rs.4,000.
Discountallow
byhimRs.50.

26 Paidinto
bankRs.5,000.
(Answer
:
Ca
sh
bal
anc

e
Rs.
12,
25
0;
Ba
nk
bal
anc
e
(Cr
.)
Rs.
9,0

50)

12. Enter

the
following
transactions in
the

Three
Column Cash
Book

of
Mr.Albert.
2002
May1
Cashin
handRs.30,000.
Cashat
bank
Rs.2,000
3

Received
cheque for
goods sold
to Arun
and
banked it
Rs.1000.

5
Paidinto
bankRs.4,000.
9

Paid cash
to David
from
whom
goods
worth
Rs.6,000
were

purchased
for credit
on1stMay
on term
2% cash
discount
within two
weeks.
10 Paid to
Robert by
cheque
Rs.2,400
in full
settlement
of his
account of
Rs.2,500.
12 Received
cash from
Nathan
Rs.4,750.
Discount
allowed
Rs.250.
19 Interest
allowed by
bank
Rs.200.
20 Robert to
whom we
have
issued a

chequehas
reported
that our
cheque is
dishonoure
d.
22 Roshangot
exchangeafive
hundredrupee
note.
31 Paidinto
bankallcashin
excessof
Rs.5,000.
(Answer:CashbalanceRs.5,000.Bank
balance
Rs.27,070.
Depositedinto
bankRs.19,870)

13. Enter

the
following
transactions in
the Triple
Column Cash
BookofMr.Raja
Durai.
2002
May1
Cash
balanceRs.6,000.
Bank
balance
Rs.4,000.
2

Withdrew
from Bank
Rs.2,000.

Abdulla
directly
paid into
our bank
account
Rs.3,000.

Cheque
received
from
Daniel
Rs.5,000
sent to
bank.

Cheque
received

from
Ramakrish
nan for
sales
Rs.8,000.

Received
cash from
Subramani
yam
Rs.2,800.
Discount
allowed
Rs.200.

10

Balu by
cheque
Rs.13,900.
Discount
received
Rs.100.
17 Withdrew
cash for
personal
use
Rs.1,500
and by
cheque
Rs.12,500.
27 Rentpaid
Rs.2,000.

Ramakrishnans
chequesentto
bankfor
collection.

(Answer:Cash
balanceRs.7,300;
Bankbalance(cr)
Rs.8,400)

14 Paid to
174
175

R8

CH
AP
TE

SUB
SIDI
ARY
BOO

KS
III PE
TT
Y
CA
SH
BO
O
K
Learning
Objectives
Afterstudying
thischapter,you
willbeableto:
understand
the
Meaning
andUsesof
Petty Cash
Book.
know the
Procedure
for
Recording

in Petty
CashBook.

Ineverybusiness,
ofwhateversize,there
are many small cash
payments such as
conveyance, carriage,
postage,telegram,etc.
These expenses are
generally repetitive in
nature. If all these
small payments are
recorded in the cash
book, it will be
difficultforthecashier
tomaintaintherecords
allbyhimself.Inorder
tomakethetaskofthe
cashier easy, these
small and recurring
expenses are recorded
inaseparatecashbook
called Petty Cash
Book and the person
who maintains the
pettycashiscalledthe
PettyCashier.

Petty means
small. The petty

cash book is a book

wheresmallrecurring
payments

like
carriage, cartage,
postageandtelegram,
printing

and
stationery etc., are
recordedbythepetty
cashier, a person
other than the main
cashier.

8.1 Imprest
System
Imprest

means

money advanced on
loan. Under this
system the amount
required to meet out
various petty expenses
is estimated and given
to the petty cashier at
the beginning of the
specified

period,
usuallyamonth.Allthe
paymentsaresupported
byvouchers.Attheend
of the given period or
earlier, when the petty
cashier has spent the
petty cash amount, he
closes the petty cash
bookfortheperiodand
balances it. Then he
submitstheaccountsto
thecashier.Heverifies
the petty cash book
withthevouchers.After
satisfyinghimselfasto
the correctness and
genuiness of the
payments an amount
equaltothecashspent
is given to the petty

cashier. This amount

together with the
unspent amount will
bring up the cash in
hand to the amount
with which he
originally started i.e.,
the imprest amount.
Thus the system of
reimbursingtheamount
spent by the petty
cashieratfixedperiod,
isknownastheimprest
systemofpettycash.

Forexample,On
June 1, 2002,
Rs.1,000wasgivento
the petty cashier. He
had spent Rs.940
duringthemonth.He
will be paid Rs.940
on 30th June by the
cashiersothathemay
again have Rs.1,000
for the next month
i.e.,July.
8.2 Analytical
Petty Cash Book
As in the case of
any other cash book,

pettycashbookalsohas
the debit side and the
credit side. The debit
sideissmallerandhas
very infrequent entries
becausecashreceiptby
the petty cashier is
mainlyfromthecashier
at the beginning or
close of a specified
period. The credit side
is bigger and thus has
many columns. For
each important petty
expenses there is a
seperate column, and
thereforecolumnarcash
book is another name
forthispettycashbook.
These

analytical
columnshelpstoknow
theactualamountspent
oneachandeverytype
of petty expenses for
the specified period.
Each petty payment is
firstenteredinthetotal
payments column, and
then recorded in the
respective analytical
column,sothat:

176
177

i. thetotalamountspentoneach
expenses for a particular
period can be easily
ascertained by adding up
therespectivecolumn.
ii. onlytheperiodicaltotalof
each column is posted to
theledger.

iii. thetotalpettypayment
for any period can be
easily ascertained from
the total payments
column.
Theanalyticalpettycash
bookmaybedesignedaccording
totherequirementsofthe
business.
8.3 Format
Theformatisgiveninthe
nextpage.
Explanationofcolumnsin
theanalyticalpettycash
book
1. Receipts: This is the
first column of the
petty cash book.

A
m
o
u
n
t
r
e
c
e
i
v
e
d
b
y
t
h
e
p
e
tt
y
c
a
s
h
i
e
r
f

or
me
etin
g
pett
y
exp
ens
es
and
the
ope
nin
g
bal
anc
eof
pett
y
cas
h
will
be
rec
ord
ed
in
this
col
um
n.

2. C.B.F.N: This refers

to Cash Book Folio
Number. In this
column we write the
page number of the
cashbookwherecash
paidbythecashieris
recorded.
3. Date:Inthiscolumn,
the date of receipt /
payment of cash is
recorded.
4. Particulars:
This
column records the
details of the
receipts / payments.
Cash received in the
beginning is shown
as To cash and all
thepettyexpensesare
shown as By
expenses (name of
theexpense).

exp

ense

are

s
e.
A
t
t
h
e
e
n
d
o
f
t
h
e
w
e

5. V.N.: The serial

number of the
voucher

(cash
payment)iswrittenin
thiscolumn.

6. Total Payments: This

k
o
r
m

column records the

amount of every

Dr.

Cr.

Analytical

AnalysisofPayments

Petty
CashBookof.......................

Sundries

&Repairs
OfficeExpenses
expenses
Travelling
Carriage

Stationery
Printingand
Telegrams
Postageand
Payments
Total
.N.V

Particulars

Date

N.F.B.C

Receipt

Rs.P.Rs.P.Rs.P.Rs.P.Rs.P.Rs.P.Rs.P.Rs.P.

Accounts
Personal
.F.L

Rs.P.

178
179

totalled and
afterwards
balanced. The
total expenses
of the week or
the month is
compared with
the total of the
receiptscolumn
andthebalance
isobtained.
7. Postage and
Telegrams:
This column
records postal
expenses like
post card,
envelope,
inland letter,
postagestamps,
registeredletter,
parcel,
telegrams and
telephone
charges.
8. Printing &
Stationery: It
includes

expenses incurred
for
purchasing
materials such as
paper, ink, pencil,
eraser, carbon
paper and other
itemsofstationery.
9. Cartage/Freight/
Carriage: In this
column carriage
inwardofgoodsis
recorded.

It
includes cartage
paid to coolie,
tempochargesetc.
10. TravellingExpenses
/Conveyance:Inthis
column fare for
hiring autorickshaw,
bus, train, taxi etc.,
arerecorded.

11. OfficeExpenses&
Repairs:
Minor
repairing charges
and petty office
expenses like
cleaning

are

includedinthis
column.
12. Sundry
Expenses /
Sundries:
Generally
columns of
important petty
expenses of the
business
according to the
nature and type
of business are
prepared. In
addition to these
important
expenses, there
may be certain
expenses, which
may not have
specific columns
for

them.
Expenses like
refreshment,
charity, tips,
amount paid to
scavangers etc.,
are recorded in
thiscolumn.

13. L.F.:
This
refers to the

pagenumberofthe
ledger where the
respective account
isrecorded.
14. PersonalAccounts
: Small amount of
money paid to
individuals are
entered in this
column.

8.4 Balancing
Petty Cash Book
At the end of
theperiodi.e.,week
or month the total
payments column
and individual
expenses columns
aretotalled.Itshould
be ascertained that
the total of petty
expenses column
mustbeequaltothe
total of payments
column. The total
payments column is
compared with the
total of receipts
column and balance
is obtained. The
closing balances is
shown as By
Balance c/d. The
closing balance is
carried forward to
thebeginningofthe
nextweekormonth.
It is shown as To
Balanceb/d.

Illustration 1 : A
Petty cash book is

keptonImprestsystem,
the amount of imprest
beingRs.1,000andhas
sevenanalysiscolumns
for Postage and
Telegrams, Printing
and

Stationery,
Travelling Expenses,
Repairs, Carriage,
Sundry Expenses and
Personal Accounts.
Enter the following
transactions:
2003
March1.Pettycash
inhandRs.350
1. Received
cash to
makeup
imprest
Rs.650
3. Paid for
stationery
Rs.155
5. Paid office
expenses
Rs.78
8. Bought
stamps Rs.
50

13.Paidfor
railwayfare
Rs.256

20.Paidfor
carriageRs.45
25.Paidfor
printingcharges
Rs.175

16.Paidto
ShankarRs.
100

27.Paidfor
telegramRs.65

180
181
Accounts
Personal

Particulars

.F.L

Date
Sundries

.N.F.B.C

Repairs

AnalyticalPetty CashBook
Solution: Dr.

Receipt
expensesTravelling
Carriage
Stationery
Printingand
Telegrams
Postageand
Payments
Total

.N.V

P.
Rs.
Rs . P. Rs . P.
P.
Rs.
Rs. P.
P.
P. Rs.
P. Rs.
To balanceb/d

Rs.
00
350

2003
Mar1
P.
Rs.

8.
5
P
os
ti
n
g
of
E
nt
ri
es
in
th
e
Pe
tt
y
C
as
h
A
cc
o
u
nt
I.
W

hen
petty
cash
is
adva
nced
atthe
begin
ning
A

s
e
p
a
r
a
t
e

p
e
t
t
y

c
a
s
h

account is
opened in
the ledger.
When
advance is
received by
the petty
cashier
petty cash
account
will be
debited and
cash
account
will be
credited.
II.When
individual
expensescolumn
areperiodically
totalled
Thetotalof
various
petty
expenses
are debited
and

the

petty cash
account is
credited

with
ca thece.

sh. of
total
theTh

Illustration
is
payment
2: Record
bal
smade.
the

an
T ce
he wi
pe ll
tty be
ca sh
sh ow
ac n
co in
un the
t
bal
wi an
ll
ce
sh sh
o
eet
w as
th pa
e
rt
ba of
la ca
nc sh
e
bal
of an
182
183

following
transactions
in

the

analytical
petty cash
book of
Mr.Manoha
ran.
Balance the
bookon6th
May, 2003.
Give
Journal
entries and
post the
balances to
concerned
ledger
accounts.

2003

May 1.Received
forpettycash
paymentRs.1,500
2. Paid taxi
hire Rs.
250
3. Bought
stamps
Rs.75
4. Paid for
carriage
Rs.120
4. Paidfor
Telegrams
Rs.75
4. Paid for
auto Rs.
125
5. Paid for
carriage
Rs.300
6. Bought
revenue
stamps
Rs.50

expensesTravelling

By balancec/d

By Autofare

By Telegrams

By Carriage

By Carriage

By revenue
stamps

By Stamps

By TaxiHire
3

To cashA/c.

00

00 200
505

00 50
995

00

00

00 75

00

00 75

00

50

300

125

75

120

75

250

Receipts

2003May

R
e
p
a
i
r
s

N.F.B.C

Date

00

00

00

00

00

Particulars

420 00

375 00

125 00

250 00

300 00

120 00

P.

.N.V
Rs.

Rs . P. Rs . P.

Total

P. Rs. P.

Payments

P.

Rs.

S
u
n
d
ri
es
P. Rs.

F.
L

Rs.

Telegrams
Postageand

1500

AnalyticalPetty CashBook ofMr.Manoharan

Rs. P.

Stationery
Printingand

P.

C
a
r
ri
a
g

Rs.

Solution: Dr.

A
c
c
o
u
n
ts
P
e
rs
o
n
al

IntheBooks
ofMr.
Manoharan
Journal
Date
2002
May1

Ledger

PettyCashAccount

Dr.

Cr.

Date

Particulars

J.F.

2002
May1 TocashA/c

Amount Date
Rs.
1500

Particulars

2002

BySundries:
May6 Postageand
telegram
Carriage
TravelExp.
ByBalc/d

1500
7 Tobalanceb/d

J.F. Amount
Rs.

200
420
375
505
1500

505

184
185

Post
age
and
Tele
gra
ms
Acc
ount

Dr.
Date

Particulars

Particulars

J.F. Amount
Rs.

2002
May6 ToPettycashA/c

Dr.
Date

cc
ou
nt

J.F. Amount
Rs.

2002
May6 ToPettycashA/c

200

C
ar
ri
ag
e
A

Tr
av
ell
in
g
Ex
pe
ns
es
Ac
co

420

un
t
Dr.
Date

Particulars

J.F. Amount
R.s

2002
May6 ToPettycashA/c

8.6 Advantages
Theadvantages
ofanalyticalpetty
cashbookis
givenbelow:

i. Simple
Method: It is
a simple
method of
recording
petty
expenses.The
maintenance
of petty cash
bookdoesnot
require
specialised
knowledge of
accounting.
ii. Economy of
Time:
It

375

requireslesser
time in
recording and
alsosavesthe
time of the
maincashier.

iii. Lesser
chances of
mistakes: The
petty cash
book is
checked by
the main
cashier at the
end of the
specified
period. This
process
minimises the
chances of
mistakes.
iv. Frauds can
be
minimised:
Recording
transactions
on the basis
of vouchers
and checking
of cash book
by the main
cashier
minimisesthe
chances of
fraud.

Illustration3:
PreparePettyCash
Bookonimprest
systemfromthe
followingparticulars.
2003
Sept. 1.Received
forpettycash
paymentsRs.1,000
4. Paid for
stationer
yRs.140
9. Paid for
postage
Rs.80
10. Paid for
printing
charges
Rs.150
11. Paid for
carriage
Rs.125
17.Paidfor
telegrams
Rs.25
20. Purchase
d
envelops

Rs.30

22. Paid for

office
cleaning
Rs.50

21. Paid for

coffee to
office
staff Rs.
30

30.Paidto
RajeshRs.
200

186
187
Accounts
Personal

Particulars

.F.l

Solution:

Date
Sundries
N.F.B.C

Stationery
Printing&

AnalyticalPettyCashBook

Repairs

Expenses
Travelling
Carriage

Telegrams
Postageand
Payments
Total
.N.V

Receipt

Rs.

P.

reco
QUESTIONS

P.

Rs.

P. Rs.

P. Rs.

P. Rs . P.

I.
O
bj
e
ct
iv
e
ty
p
e
:

Sep1 To Cash

1. T
h
e

b
o
o
k

t
h
a
t

1000 00

Rs.

P.

2003

Rs.

P. Rs.

P. Rs.

a) Fill
in
the
bla
nks
:

rds
all
smal
l
pay
men
ts is
calle
d
___
___
___
_.

2. The
pers
on
who
mai
ntai
ns
pett
y
cas
h
boo
k is
kno
wn
as
___
___
___
_.

3. Analytical
petty cash
book is just
like

the
__________.
4. The periodic
total of each
column in the
analytical petty
cash book is
posted to the
concerned
__________
accounts.

5. The petty
cashier
generally
works on
__________
system.
[Answers:1.Petty
cashbook,2.Petty
cashier,3.Cash
book,
4. Nomin
al, 5.
Imprest
]
b) Choose

the
correctanswer:

1. P
e
t
t
y

c
a
s
h

m
a
y

b
e

u
s
e
d

t
o

p
a

a)

b)

nit
ure
an
d
fitt
ing
s
c) ex
pe
nse
s
rel
ati
ng
to
po
st
an
d
tel
egr
am
s

the petty cash

bookis
a)anasset
b)aliability
c)anincome

3. On Jan 1st
2002, Rs.1,000
given to petty
cashier. He has
spent Rs.860
during the
month

of
January.OnFeb
1sttomakethe
imprest he will
receive cheque
forRs.______.
a)Rs.1,000
b)Rs.860

2. The
balan
ce in

c)Rs.1,860

II. Other Questions:

2. Explain the
imprestsystem.

188
189

1. What is petty
cashbook?

[Answer:1.(
2.(a),3(b)]

3. Giveaspecimen

of analytical
pettycashbook.
4. Write notes on
postingthepetty
cashbook.

Labourchargesforb

10 Repairchargestofax
12 Postagestamps
15 Cleaningtheoffice

5. What are the

advantages of
pettycashbook?

17 Stationarypurchased

6. What purpose
does

an
analytical petty
cashbookserve?

[Answer:Bal
Rs.40]

III. Problems:

1. Enter

the
following
transactions in a
petty cash book
of Mr.Jack with
analytical
columns. The
petty cashier
begins with an
imprest amount
ofRs.1,000.
2002
June4

Postagestamps

Travellingexpenses

Lunchexpenses

27 PaidtoRavi

2. Prepare petty
cash book on
imprest system
from

the
following
particulars given
below:

3. Prepare the
analytical petty
cash book of
Mrs.Mala from
thefollowing:

2002
Dec.1
2002
1
Dec.1 Balanceonhand
4
1 Receivedchequetomaketheimprest
7
2 Paidforpostage
8
4 Paidforstationery
13
6 Paidforwages
8 Paidforcarriage
20
10 Paidfortravellingexpenses
21
11 Paidfortelegramsexpenses
24
12 Coffeetoofficestaff
26
19 Taxihire
29.
[Answer:BalanceRs.
70]

Cashinhand
Receivedfromcashi
Boughtpostagestam
Paidforstationery
PaidtoManimarano
Teatosalesagents
Boughtink&paper
Paidforcarriage
SentatelegramtoM
Paidforstationery
Paidforregisteredp

[Answer:Bala
Rs.507]

190
191

4. Enter

the
following Petty
transactions in
the Analytical
PettyCashBook
of

Mr.
Elangovan
2002
Oct.1

Balanceinhand

1.
3.
5.
8.
9.
13.
14.
15.

Receivedfromtheh
Paidelectricitycharg
Boughtstationery
Printingcharges
Postagestampspurc
Repairstofurniture
Telegramsenttosup
Repairstocomputer

[Answer:Bal

Rs.397]

5. Prepare petty
cash book of
Mr.Nandakumar
with suitable
columns and
enter therein the
following
transactions.
Balancethebook
on 10th March
2001.
2001
Mar1 Balanceinhand
Receivedfromchiefcashier
2 Paidforpostagestamps
5 Paidforstationery
6 Paidforcarriage
7 Paidforpostagestamp
Paidfortelegrams
8 Paidforcarriage
9 Paidforstationery
[Answer:Balance
Rs.292]

6. Record the
following
transactions in
an analytical
petty cash book
of Mr.Senthil
and balance the

same. On 1st
April 2003 the
petty cashier
started with an
imprest of Rs.
1,500.

Mr.Murugan

2003
April1
3
5
6
7
10
13
18
19
22
24
27
28

maintained on
Postagestampspurchased
Sweeperandscavangerpaid
imprest system
Conveyancetomanager
with analytical
TelegramtoMumbai
columns:
Stationerypurchased
2003
Lorryhireforgoodssent
July15 Cashinhand
Cartageandcoolyongoodsbought
Receivedfromthec
Repairtocycles
16 Boughtstamps
ServicechargestoTypewriters
17 Paidcartage
InkandGumpurchased
18 Teaandlunchexpen
Advertisementcharges
19 Telegramsent
SubscriptionpaidtoTheHindu
20 Paidtaxihire
Teatocustomers
21 Purchasedenvelops
[Answer:
22 Paidforrepairsofty
BalanceRs.166]
23 Purchasedonebottle
27 PaidRailwayfareto
7. Enterthefollowing
31 Paidtocoolie
transactions in a

[Answer:Bal
Rs.132]

petty cash book of

192
193

CH
AP
TE
R9

BANK
RECONCILI
ATION
STATEMEN
T
Learning

Objectives
Afterstudying
thisChapter,
youwillbeable
to:
know the
Importance
andNeedof
Bank
Reconciliati
on
Statement.
understand
the Causes
for
Disagreeme
nt between
Cash Book
and Pass
Book
Balances.
prepare
Bank
Reconciliati
on
Statement.
Cash book with
cash and bank
columns have been
explained in the

earlier chapter. On
the debit side of the
cash book, the bank
columnrepresents:
1. Cheques
depositedinto
bank for
collection.
2. Cashpaidinto
bankand
3. Some entries
thataremade
only after
receiving the
information
fromthebank
viz.,
i. Amounts
collected
by the
bank on
our behalf
as per the
standing
instruction
s, for
example,
Interest
collected
on
investment
.

ii. Interest
given by
the banker
for the
balance
kept by us
inourbank
account.

iii. The
amount
paidbyour
customers
directly
into our
bank
account.
Ontheotherhand,on
thecreditsideofthe
cashbook,represents:

1. Cheques
issued for
payment.
2. Cash
withdrawn
from bank for
office use and
personaluse.

3. In addition,
some entries
aremadeafter
receiving
information
fromthebank
viz.,
i.

Amounts
paidbythe
bank on
our behalf
as per the

standing

bank.

instruction
s,

9.1 Bank
Book

for

example,
paymentof

Bank Pass Book

(statement of account)
ismerelyacopyofthe
customers account in
thebooksofabank.It
shows all the deposits,
withdrawals and the
balanceavailableinthe
customersaccount.

insurance
premium.

ii. Interest
charged
by the
bank for
the
amount
drawn
over and
above the
actual
balance
keptinthe
bank
account.

iii. Bank
charges
payable
for the
agency
and
utility
services
rendered
by the

Pass

9.1.1

Format
Ban
k
Pas
s
Boo
k
Dr.
Cr.
Balanc
e

Date

Particulars

Withdrawals
Rs.
Rs.
Rs.

194
195

In the date
column, the dates of
the transactions are
recorded. In the
particulars column
withdrawals and
depositsarerecorded.
The balance after
each transaction is
recorded in the next
columnandthebank
official signs in the
lastcolumn.
Following the
principles of Double
Entry,bankercreditsthe
accountof the customer
for all the amounts
received from the
customer and on his
behalf. Similarly the
banker debits the
accountof the customer
for all withdrawals and
amounts paid to others
on behalf of the
customers.

Themainpointto
berememberedisthat

entries are made only

after cash is received
or paid, except in the
case of interest and
bank charges. Interest
and bank charges are
mere

book
adjustments and in
these,thereareneither
receipt of cash nor
paymentofcash.
9.2 Difference
between Cash Book
and Pass Book

S.No

Basisof

Cash

Distinction

(BankC

1.

Maintainedby

Cashier

2.

DepositsofCash

Enteredonth
sideofthecas

3.

Withdrawalsof
Cash

Enteredonth
sideofthecas

4.

Chequesdeposited Enteredonth
forcollection
debitsideoft
bookonthed
depositingthe

intothebank.

5.

Chequesissued

6.

Collectionsand
Enteredinthe
paymentsasper
bookaftersee
customersstanding passbook.
instructions

7.

Signature

Itisnotsigne
cashier

8.

Balancing

Itisbalanced
ofaspecified

9.3 Bank
Reconciliation
Statement
The balance of
thebankcolumninthe
double or triple
column cash book
represents

the
customers

cash
balance at bank. It
shouldbethesameas
shown by his bank
pass book on any
particular day. For
every entry made in
thecashbookifthere

Enteredonth
ofthecashbo
dateofissuing
chequetothe

is a corresponding
entry in the pass
book(maintained by
the banker) or vice
versa, the bank
balance will be the
same in both the
books.
However, it must
be noted that the cash
bookandthepassbook
are maintained by two
different parties and
hence it is not certain
that entry in one book
will always have a
196
197

Importance

9.3.1Definition

Bank
reconciliation
statement is a list in

which the various

items that cause a
difference between
bank balance as per
cash book and pass
book on any given
dateareindicated.
9.3.2 Need

corresponding entry in
the other. Normally
entriesinthecashbook
should tally (agree)
with those in the pass
book and the balances
shown by both the
books should be the
same. But in practice,
the balances generally
differ. In case of
disagreement in the
balance of the cash
bookandthepassbook,
the need for preparing
Bank Reconciliation
Statementarises.

and

Aftertracingthe
various items of
difference, a bank
reconciliation
statementisprepared.
Thefollowingareits
advantages in which
liesitsimportance.
i.

The errors
that might
have taken

place in the
cashbookin
connection
with bank
transactions
canbeeasily
found.

9.4 Causes

ii. Regular
preparation
of bank
reconciliatio
n statement
prevents
frauds.

balance

iii. It indirectly
imposes
moral check
on the
accounting
staff.

iv. By the
preparation
of bank
reconciliatio
n statement,
uncredited
cheque can
be detected
and steps
canbetaken
for their
collection.

of

disagreement
between

the

balance

shown

by
book
by

the

cash

and
the

the

shown
pass

book

1.Chequespaidinto
bankbutnotyet
collected

Thecheques
paidintobankfor
collectionbutnot
creditedintothe
accountofthe
customer,becausethe
chequeis
i. not collected
andcredited
tillthatdate.
ii. collectedbut
the bank
staff has
forgotten to
makeentry.

iii. collected
but credited
to wrong

account.
iv. dishonoure
d.
v. collected
for No.I
account but
credited to
No.II
account of
the same
customer.

As soon as the
chequesaresenttothe
bank, entries are made
inthedebitsideofthe
cash book (bank
column). But, usually
bank credit the
customersaccountonly
when they have
received payment from
the bank concerned, in
other words, when the
cheques have been
collected. Hence, there
will be a time gap
between the depositing
ofthechequesandthe
collectionbythebank.

For example,
Bharat Company
Limited deposited a
cheque on March 28,
2003 for a sum of
Rs.3,000. The cheque
wascollectedonApril
4, 2003. In case the
banksendsastatement
ofaccountuptoMarch
31,2003,therewillbe
a difference of Rs
3,000 between the
balance shown by the

cashbookandthepass
book.

the same
customer.

2.Chequesissuedbut
notyetpresentedfor
payment

Inalloftheabove
cases, the entry in the
cash book is made
immediately on the
issue of cheque but
naturallytheentrywill
be made by bank only
when the cheque is
presented for payment.
Thustherewillbeagap
of some days between
the entry for issue of
chequeinthecashbook
and the entry for
payment made in the
passbook.

The cheques
issuedbutnotdebited
customers account
may be because the
chequeis
i. notcashedtill
date.
ii. not presented
tilldate.
iii.presented but
dishonoured
for some
reasons or
other.
iv. lost by the
party to
whom the
cheque was
issued.
v. cashed out of
No.I account
but wrongly
debited to
No.II
account of

For example,
Bharat Company
Limited issued a
cheque in favour of
Mr.Krishna on March
28, 2003 for a sum of
Rs.5,000.Thechequeis
presented for payment
atthebankonApril4,
2003. In case, bank
sends a statement of
accountuptoMarch31,
2003,therewillbea

198
199

differenceof
Rs.5,000betweenthe
balanceasshownby
thecashbookandthe
balanceasshownby
thepassbook.
3.Amountcreditedby
thebankerinthe
passbookwithout
theimmediate
knowledgeofthe
customer
Thefollowingare
someofthe
examplesforthe
abovestatement

i. The bank
might have
collected
rent,
dividend,
bills of
exchange,
interestetc.,
due for the
customer as
perstanding
instructions
.

ii. Some
debtors
might have
directlypaid
intobank.
iii. Bank
credits
interest on
the credit
balance of
the
customers
account.
iv. The banker
haswrongly
creditedthis
account
instead of
some other
account.
In all the above
cases, the entry will
befirstenteredinthe
pass book. The
customer will know
this only after he
verifiestheentriesin
the pass book. So
there may be a time
gap of some days

before the customer

includesentriesmade
inthepassbook.

aresomeofthe
examplesfor
this.

For example, the

bank has credited
Bharat Company
Limiteds account for
interest amounting to
Rs.500 on March 31,
2003. The bank
prepares and sends a
statement of account
onMarch31,2003.If
the customer receives
the statement of
account on April 4,
2003, there will be a
difference of Rs 500
bewteen the balance
shown by the cash
book and the balance
shown by the pass
book.

i. The banker
has recorded
bankcharges,
interest on
overdraftetc.

4. Amounts debited
by the banker in
the pass book
without

the
immediate
knowledge of the
customer

Thefollowing

ii. The banker

has paid
insurance
premium,
subscription
for
periodicals,et
c. on behalf
of

the
customer as
per the
standing
instructions.
iii.The banker
has wrongly
debited this
account
instead of
some other
account.
iv. The banker
has paid the
bills payable
of

the
customer as
per standing
instructions.
v. Dishonour of
a cheque
deposited
and
discounted

bills
receivable
In all the above
cases, the entry will
befirstenteredinthe
pass book of the
customer. And the
customer will know
onlyafterheverifies
theentriesinthepass
book or statement of
account . So there
maybeatimegapof
somedaysbeforethe
customerincludesthe
entries made in the
passbook.
For example, the
bank has debited
Bharat Company
Limiteds account for
its charges amounting
to Rs. 250 on March
31,2003. In case, the
banksendsastatement
ofaccountuptoMarch
31,2003,therewillbe
adifferenceofRs.250
betweenthebalanceas
perthecashbookand
thebalanceasperthe
passbook.

For example, A
cheque for Rs.5,000
dishonoured on March
28, 2003. In case, the
banksendsastatement
of account uptoMarch
31,2003therewillbea
difference of Rs.5,000
betweenthebalanceas
shownbythecashbook
and the balance as
shown by the pass
book.
After tracing the
200
201
Bank Overdraft
Bank overdraft is

an amount drawn over

and above the actual
balance kept in the
bank account. This
facility is available
only to the current
account

holders.
Interestwillbecharged
for the amount
overdrawn

i.e.,
overdraft. The Cash
bookwillshowacredit
balance

i.e.,

various items of
differences, a Bank
reconciliation statement
is prepared by starting
with the balance shown
byanyofthetwobooks.
Butinactualpractice,a
Bank reconciliation
statementispreparedby
the customer starting
with the balance as per
cash book and will
ensure that the balance
as per pass book is
arrivedat.

unfavourable balance.
The pass book will
showadebitbalance.

A summary of
the transactions and
the reconciliation
procedureisgivenin
thetablebelow.
9.5 Procedure
for Preparing
Bank
Reconciliatio
n Statement

S.No Transactions

Entriesby
customerin
thecashbook

Entriesby
Bankinthe
passbook

(Bankcolumn)

1.

Whencash
isdeposited

Customerenters Bankenters
inthedebitside inthecredit
column

2.

Whencashis
withdrawn

Customerenters Bankenters
inthecreditside indebit
column

3.

Issueofcheque

Customerenters Bankenters
inthecreditside inthedebit
immediately
columnonly
onthedate
whenpre
sentedfor
payment

4.

5.

6.

7.

8.

202

Chequereceived Customerdebits Onlyafter

Cashbook
andenteredin
cashbook
collection, >Passbook
cashbookand
theamount
senttobankfor
willbe
collection
enteredin
thecredit
columnof
thepass
bookbecause
theprocess
takessome
time
Bankcharges
Noentrycanbe
forservices
foundincash
renderedbybank booktillthe
passbookis
verified.

Enteredin Cashbook
thedebit
>Passbook
columnof
thepassbook
immediately.

Interest,
dividendetc
collectedby
bankonbehalf
ofcustomer

Theseare
Cashbook
enteredin
<Passbook
thecredit
columnof
thepassbook
immediately
after
receivingthe
amount

Noentrycanbe
foundincash
booktillthe
passbook
isverified.

Interestallowed Noentryis
Enteredin
bybank
madeunlesspass thecredit
bookisverified. columnof
thepass
bookfirst.
Amountdirectly Noentryis
remittedinto
foundincash
bank
booktillthe
passbookis
verified.

Less

Add

Less

Add

Add

Less

Add

Less

Add

Less

Cashbook
<Passbook

Enteredin Cashbook
thecredit
<Passbook
columnof
thepass
bookonthe
sameday
ofreceipt.

203
9.

Subscription,
premiumetc
paidbythe
bankerasper
thestanding
instructionsof
thecustomer

Entryismade
onlyafterthe
passbookis
verified.

Enteredin Cashbook
thedebit
>Passbook
columnof
thepass
bookonthe
samedayof
payment

10.

Dishonourof
billsreceivable
orchequespaid
intobank

Noentryinthe
cashbooktill
thecustomeris
intimatedbythe
banker

Enteredin Cashbook
thedebit
>Passbook
columnof
thepass
book
immediately

11.

Dishonourof
billspayableor
chequesissued

Noentryinthe
cashbooktill
thecustomeris
intimatedbythe
banker

Enteredin Cashbook
thecredit
<Passbook
columnof
thepass
book
immediately

Less

Add

Less

Add

Add

Less

12.

Wrongcredit
Noentryis
inthepassbook foundincash
bookunlessit
isverifiedwith
thepassbook.

Entered
Cashbook
(wrongly)in <Passbook
thecredit
columnin
thepass
book

Add

Less

13.

Wrongdebit
Noentryis
inthepassbook foundincash
bookunlessitis
verified.

Entered
Cashbook
(wrongly)in >Passbook
thedebit
columnin
thepass
book

Less

Add

9.6 Format

TheformatofBankReconciliationStatementwhenbank
balanceaspercashbookistakenasthestartingpoint.

BankReconciliationStatementason..
Amount Amount
Rs.
Rs.

Particulars
A

BalanceasperCashBook

**

B Add:Chequesissuedbutnotpresented
forpayment

**

Interestcreditedbybankbutnot
recordedincashbook

**

Debtorsdirectlypaidintobankbut
notrecordedincashbook

**

Wrongcreditbybanker

**

Collectionsbybankeraspercustomer
standinginstructions

**

Total(B)

**

(TotalA+B)

**

D Less:Chequesdepositedbutnotcredited
bythebank

**

Dishonouredchequesappearedinthepass
bookbutnotenteredinthecashbook

**

Bankchargesasperpassbook

**

Wrongdebitbybanker

**

Paymentsasperstandinginstructions

**

Total(D)
E

204
205

Balanceasperpassbook(CD)

Pointstobenoted:

**
**

Toworkoutthe
problemsonBank

Reconciliation
Statement,the
followingpointsare
toberemembered.
i. The heading
is given as
Bank
Reconciliat
ion
Statement
as on
_________
___
ii. Allitemsto
beaddedare
grouped
togetherand
shown in
the inner
column and
the total is
takentothe
outer
column for
the purpose
of addition
(B).
iii. Allitemsto
be deducted
are grouped
together in
the inner

column and
thetotalcan
beshownin
the outer
column for
deduction.
(D).
iv. Favourable
balance

means the
cash book
will have a
debit
balance and
the
passbook
will have a
credit
balance.

v. Bank
overdraft or
unfavourabl
e balance

means cash
book will
have a
credit
balance and
passbook
will have
debit
balance.

Rs.

Foreasy
referencethe
tablegiven
belowwillbe
useful.

1. Cheques
depositedbutnotyet
collectedbythebank
1,500

Book

FavourableBalance

Cash

Debit

2. Chequeissuedto
Mr.Raju has not
yet

been
presented
forpayment

Pass

Credit

3. Bankchargesdebitedinthepas
4. Interestallowedbythebank

Illustration1:When
balanceaspercash
bookisfavourable.
From

the
following details,
make out a bank
reconciliation
statement

for
M/s.Elavarasan &
Company as on
December31,2003to
find out the balance
asperpassbook.

5. Insurance
premium directly
paidbythebank
asper
standinginstructions
6.Balanceaspercashbook

Solution
Bank
Reconciliation
Statementason
December31,
2003

Particulars
A

Amount Amount
Rs.
Rs.

BalanceasperCashBook

B Add:ChequesissuedtoMr.Rajubutnot
presentedforpayment
Interestallowedbybankbutnot
recordedincashbook

200
2,500
100

2,600
2,800

C Less:Chequesdepositedbutnotcredited
bythebank

1,500

Bankhaspaidinsurancepremium
asperstandinginstructions

500

Bankchargesasperpassbook

200
2,200

BalanceasperPassBook

206
207

Illustration2:When
balanceasperpass
book(favourable)is
given

Mrs.James pass
book showed a
balanceofRs25,000
onJune30,2003.Her
cash book shows a
differentbalance.On
examination, it is
foundthat

600

1. No record
has been
madeinthe
cash book
for

a
dishonour
ofacheque
forRs.250
2. Cheques
paid into
bank
amounting
toRs.3,500

were paid
into the
bank on
June 28,
2003andthe
same had
not been
entered in
the pass
book.
3. Bank
charges of
Rs. 300
have not
been
entered in
the cash
book.
4. Cheques
amounting
toRs.9,000
issued to
Ms.Devi
hasnotbeen
presented
forpayment
still.
5. Mr. Balu
who owed
Rs. 3,000
has directly
paid the
sum into

the bank
account.
Youarerequired
toprepareaBank
reconciliation
statementand
ascertainthebalance
aspercashbook.
Solution
Bank
Reconciliatio
nStatement
asonJune30,
2003
Particulars

BalanceasperPassbook
Add:Dishonourofchequenotrec
incashbook
Chequespaidintobank,not
Bankchargesasperpassbo
notenteredinthecashbook

Less:Chequesissuedbutnotpresented Solution
forpayment
Bank
AmountdirectlypaidbyMr.Balu
Reconciliatio
intothebank
nStatement
asonJune
30,2003
Balanceaspercashbook
Illustration3:When
overdraftaspercash
bookisgiven
Prepare a Bank
Reconciliation
Statement as at June
30, 2003 for M/s.Jothi
Sales Private Limited
from the information
givenbelow

Rs.
1. Bankoverdraft
aspercashbook
1,10,450
2. Cheques
issuedonJune
20, 2003 but
notyet
presentedforpayment
3. Chequesdepositedbutnotyetcreditedbybank
4. Billsreceivabledirectlycollectedbybank
5. Interestonoverdraftdebitedbybank
6. Amountwronglydebitedbybank

Particulars
Overdraftbalanceaspercashbook
Add:Chequesdepositedbutnotyetcredited
Interestonoverdraftdebitedbybank
Wrongdebitbybank

Amount Amount
Rs.
Rs.
1,10,450
22,750
12,115
2,400
37,265
1,47,715

208
209

Less:Chequesissuedbutnotpresented
forpayment
Billsreceivablecollectedbybank
Overdraftbalanceasper
bankpassbook
Illustration4:When
overdraftasperPass
Bookisgiven

Ms.Harithagives
you the following
information
regarding her bank
account. It shows an
overdraft balance of
Rs.6,500 on March
31, 2003. This does
not agree with the
cashbookbalance.

1. Cheques
amounting
toRs.15,000
were paid
into bank
out of
which, only
cheques
amounting
to Rs.4,500
were
credited by
thebank.
2. Cheques
issued
during
March
amounted in
all

to
Rs.11,000,
outofthese,

cheques
amounting
to Rs.3000
were unpaid
till March
31,2003.
3. The bank has
wrongly
debited
account
No.1 with
Rs.500 in
respect of a
cheque
drawn on
account
No.2.
4. The account
stands
debited with
Rs.150 for
interest and
Rs.30 for
bank
charges.
5. The bank has
paid the
annual
subscription
ofRs.100to
club

according to
instructions.
Youarerequired
toascertain
balanceasper
cashbook

Solution
Bank
Reconciliation
Statementas
onMarch31,
2003

Subscriptionpaidaspersta
instruction

Balanceaspercashbook(Fa

When an extract of
cash book (bank
Overdraftbalanceasperpassbook column) and pass
bookisgiven.
Add: Chequesissuedbutnotpresented
Particulars

Illustration5: Given
belowaretheentries
inthebankcolumnof
Less Chequespaidintobankbutnot
thecashbookandthe
collected(Rs.15000Rs.4500)
passbook.Preparea
WrongdebitinpassbookinaccountBank Reconciliation
No.1insteadofaccountNo.2
Statement

of
Mr.Sekar as on
Interestandbankchargesnotentered
August31,2003.
inthecashbook(Rs.150+Rs.30)
210
211

Cas
h
Boo
k
(BankColumns)
Amount
Particulars
Rs.

Dr.
Date
2003

Aug1 ToBalanceb/d
18 ToShankerA/c
19 ToSalesA/c
(Rajan)
20 ToCommission
A/c(Babu)
20 ToNirmalaA/c

20,525
6,943
450

200
7,810
35,928

Sept1 ToBalanceb/d

1,688

Pas
s
Boo
k
Date

Particulars

Dr.
Withdrawals
Rs.

1.8.03 Bybalanceb/d
9.8.03 ToKokila

12,000

19.8.03 ByShankar
25.8.03 ByRajan
26.8.03 ToGeetha

9,740

27.8.03 ByBabu
28.8.03 ToAmala

720

Solution:
In the above
problem, an extract of
the cash book (bank
column) and the pass
book of Mr.Sekar is
given.Theitemsgiven
onthedebitsideofthe
cashbookshouldmatch
withtheitemsgivenon
thecreditcolumnofthe
pass book and vice
versa.Theitems,which
donotmatch,causethe
differencebetweenboth
thebalances.

30.8.03 ByB/R
ByInterest
ByIntereston
Investment
31.8.03 ToB/P

4,000

Bank
Reconciliation
Statementas
onAugust31,
2003

Amount
Rs.

Particulars
Balanceaspercashbook

Amount
Rs.
1,688

Add:Billsreceivablecollected,notentered
incashbook

20,000

Interestcollected,notenteredin
cashbook

25

Interestoninvestmentcollected,not
enteredincashbook

1,820

ChequesissuedbutnotcollectedLatha

11,780
33,625
35,313

Less:Chequespaidintobank,bunotcollected
Nirmala

7,810

Billspayablepaid,notenteredin
cashbook

4,000
11,810

Balanceasperpassbook
212
213

Q
U
E
S
T
I
O

23,503

N
S
I. Objective type:
a)Fillintheblanks:

1. The

bank
statementissent
by __________

tothecustomer.
2. Overdraft means
creditbalanceas
per ________
book.
3. When cash is
withdrawn from
the bank, the
bank ________
the customers
account.
4. ________
balance in pass
book shows
bankoverdraft.
5. Forthepurposes
of reconciliation
only

the
________
column of the
cashbookareto
beconsidered.
6. Abankreconciliation
statementisprepared
bythe________.
[Answers:1.bank,2.
cash,3.debits,4.debit,
5.bank,6.customers]

b)Choosethecorrect
answer:

1. Bank
Reconciliation
statement is
preparedbythe
a)bank
b)creditorofa
business
c) customerofa
bank
2. Debitbalancein
the Cash Book
means
a) overdraft as
perPassBook
b) creditbalance
as per Pass
Book
c) overdraft as
per Cash
Book
3. When balance as
perCashBookis
thestartingpoint,
to ascertain
balance as per
passbookinterest
allowed by Bank
is

a)subtractedb)
added
c)notadjusted

5. When the balance

4. When balance as
per Cash Book is
the starting point,
to ascertain the
balance as per
passbookinterest
charged by Bank
is:

toascertainbalance

a)added
b)subtracted
c)notadjusted

as per Cash Book

isthestartingpoint
as per pass book,
direct deposits by
customersare:

a)added
b)subtracted
c)notadjusted
6. Whenthe balance
asperCashBook
is the starting
point to ascertain
balance as per
pass book, direct
payment by bank
are:

a)added
b)subtracted
c)notadjusted

7. A bank pass
bookisacopyof
a) the cash
column of a
customers
cashbook.

b) the bank
column of a
customers
cashbook.
c) the
customers
accountinthe
banksledger.
8. The

bank
statement shows
an overdrawn
balance of
Rs.2,000. A
cheque for
Rs.500drawnin
favour of a
creditor has not
yet

been
presented for
payment. When
the creditor
presents the
cheque for
payment, the
bank balance
willbe
a)Rs.1,500
b)Rs.2,500
(overdrawn)
214
215

7. List the five

c)Rs.2,500
[Answers:1.(c),2.
(b),3.(b),4.(b),5.
(a),6.(b),7.(c),8.
(b)]
II. Other Questions :

1. What is a Bank
PassBook?
2. What is a Bank
Reconciliation
Statement?
3. Whencanabank
reconciliation be
prepared?
4. Who prepares a
bankstatement?
5. Why is the
preparation of
Bank
Reconciliation
Statement
necessary?
6. List the five
itemshavingthe
effect of higher
balance in the
CashBook.

itemshavingthe

effect of lower
balance in the
PassBook.
8. State any two
causes

of
disagreeent
between the
balances shown
by the Cash
Book and Pass
Book.
III. Problems:

1. Make a bank
reconciliation
statement of
Mr.Udayakumar
from

the
following
particulars.
a) Balance as
per cash
book
Rs.1,500.
b) Cheques
deposited
but not
cleared
Rs.100.
c) Cheques
issued but
not
presented

forpayment
Rs.150.
d) Interest
allowed by
bankRs.20.
[Answer:Balanceas
perpassbook
Rs.1,570]
2. Prepare a bank
reconcilition
statement of
Mr.Goutham
from

the
followingdataas
on31.12.2003.

a) Balanceaspercashbook
b) Chequesissuedbutnotpr
c) Chequesdepositedinba
d)Bankpaidinsuranceprem
e) Directdepositbyacusto
f) Interestoninvestmentco
g) Bankcharges
[A
ns
we
r:
Ba
lan
ce
as
per

pas
s
bo
ok
Rs.
12,
60
0]

3. From

the
following
particulars,
ascertain the
bank balance as
percashbookof
Mr.Muthu as at
31st March
2003.
Rs.
a) Credit balance
as per pass
book as on
31.3.2003 Rs.
2,500.
b) Bank charges
of Rs.60 had
not been
entered in the
cashbook.

c) Out of the
cheques of
Rs.3,500
paid into the
bank, a
cheque of
Rs.1,000was
not yet
credited by
thebanker.
d) Out of the
cheques
issued for
Rs.4,500,
cheques of
Rs.3,800
only were
presented for
payment.
e) A divident of
Rs.400 was
collected by
the banker
directly but
not entered
in the cash
book.
f) A cheque of
Rs.600 had
been
dishonoured
prior to
31.3.2003,

but no entry
was made in
the cash
book.
[
A
ns
w
er
:
B
al
a
n
ce
as
p
er
ca
sh
b
o
o
k
R
s.
3,
0
6
0]
4. On 31st March
2004 the cash
book of Fashion
World showed a

balance

of
Rs.1,500 as cash
at bank, but the
bankpassbookas
on that date
showed that
cheques for
Rs.185, Rs.175
and Rs.100 had
not

been
presented for
payment. Also
cheques to the
amountofRs.410
paidintothebank
had not been
cleared. Find out
thebalanceasper
pass book as on
thatdate.
[
A
n
s
w
e
r
:
B
a
l
a
n

c
e
a
s
p
e
r
p
a
s
s
b
o
o
k
R
s.
1
,
5
5
0
]

5. On

31st
December 2003
thepassbookof
Ms.Rosy shows
a credit balance
ofRs.3,357.
Thechequessent
to the bank but
notcollectedand
credited

amounted to
Rs.790andthree
cheques drawn
for Rs.300,
Rs.150 and
Rs.200
respectively
were

not
presented for
paymenttill31st
January2004.
Bank has paid a
bill payable
amounting to
Rs.1,000 but it
has not been
entered in the
CashBookanda
billreceivableof
Rs.500 which
was discounted
with the bank
was dishonoured
bythedraweeon
duedate.
The bank has
chargedRs.12as
its commission
for collecting
outstation
cheques and has
allowed interest

216
217

Rs.10 on the

tradersbalance.

PrepareaBank
Reconciliation
Statementand
showthebalance
aspercashbook.

o
k
R
s
.
4
,
9
9
9
]

[
A
n
s
w
e
r
:
B
a
l
a
n
c
e
a
s
p
e
r
c
a
s
h
b
o

6. From

the
following
particulars of
Mr.Manikandan,
prepare a Bank
Reconciliation
Statement as on
March31,2003:
a) The
following
cheques
were paid
into the
firms
current A/c
inMarchbut
were
credited by

the bank in
April: Anbu
Rs. 250,
Balu Rs.350
andChandru
Rs.190.

b) The
following
cheques
were issued
by the firm
in March
and were
cashed in
April:
Prince Rs.
250, Queen
Rs.450and
Raja
Rs.400.
c) Achequefor
Rs.100
which was
received
from a
customer
was entered
in the bank
column of
the cash
book in
March but
the same

was paid
intothebank
inApril.

d) The pass
book shows
a credit of
Rs. 250 for
interest and
a debit of
Rs. 100 for
bank
charges.
e) Thebalance
asperCash
Book was
Rs. 18,000
as on
31.3.2003.
[A
ns
we
r:
Ba
lan
ce
as
per
pas
s
bo
ok
Rs.
18,

36
0]

7. From

the
following
particulars,
ascertain the
balance that
would appear in
the Bank Pass
Book of Cotton
World Ltd. at
31st December,
2003.
a) The bank
overdraft as
per Cash
Book on
31st
December,
Rs.
1,26,800.
b) Interest on
overdraft
for

6
months
ending 31st
December,
Rs.3,200 is
entered in
the Pass
Book.
c) Bank

charges of
Rs.600 for
the above
period are
debited in
the Pass
Book.
d) Cheques
issued but
not cashed
priorto31st
December,
amountedto
Rs.23,360.

e) Cheques
paid into
bank but
not cleared
before 31st
December,
wereforRs.
43,400.

2003.

On
verification of
the Cash Book
and the Bank
Pass Book the
following points
werenoticed:

f)Interest on
investments
collectedby
the bank
andcredited
in the Pass
Book, Rs.
24,000.

a) Cheques
worth
Rs.1,400
paidintothe
Bank had
not been
collectedtill
31st
October.

[Answ
er:
Overdr
aftas
per
pass
book
Rs.
1,26,6
40]

b) Cheques
worth Rs.
720 issued
before 31st
Octoberhad
not been
presented
for
payment.

8. The Cash Book

ofMr.Elavarasan
showed that he
hadanOverdraft
of Rs.8,000 on
31st October,

c) Interest on
Overdraft
Rs. 110
charged by
the Bank
was not
entered in
the Cash

Book.
d) A Bill
Receivable
worth Rs.
800
discounted
on 1st
September
was
dishonoured
.
e) A customer
had paid
into the
Bank
directly Rs.
450andthis
was not
entered in
the Cash
Book.
Prepare a
Bank
Reconciliati
onStatement
as

on
31.10.73.
[Answer:
Overdraft
balanceas
percash
bookRs.
9,140]

9. The Cash book

of Dhandapani
showed an
Overdraft of
Rs.15,000. The
Cash Book
entries were
checkedwiththe
entries in the
Pass Book. The
following details
were disclosed.
Prepare a Bank
Reconciliation
Statement to
show the Bank
Balances as per
PassBookason
30thJune,2003.
a) Out of the
four
cheques
issued on
27th June,
2003 for
Rs.21,000,
twocheques
for 12,000
alone were
presented
forpayment
on 29th

June,2003.
218
219

b) Cheques
paidintothe
Bank
amountedto
Rs.17,800.
But the
Bank had
not cashed
andcredited
in the Pass
Bookbefore
thatdate.
c) There was
an entry on
the debit
side of the
Pass Book
for Bank
Charges,
Rs.150.
d) The Bank
had also
debited the
account for
Interest on
O/D for
Rs.280.
e) It was also
noticed that

the Bank
had paid
Rs.2,750 as
Insurance
premium as
perstanding
instructions
on 29th
June,2003.
[Answer:
Overdraft
balanceas
perpass
bookRs.
26,980]

10. From

the
following
particulars of
Mr.Jacob,
ascertain the
BankBalanceas
per Pass Book
onDecember31,
2003.
a) The Bank
balance as
per Cash
Book was
Rs.11,500

on
December
31,2003.
b) Cheques
issued but
not cashed
before that
date
amounted
toRs.1,750.
c) Cheques
paid into
Bank, but
not cleared
before
December
31, 2003
amountedto
Rs.2,150.
d) Interest on
Investments
collectedby
the Bank
but not
entered in
the Cash
Book
amountedto
Rs.275.
e) Local
cheque paid
in but not

entered in
the Cash
Book
Rs.250.
f) Bank
Charges
debited in
the Pass
BookRs.95.
[A
ns
we
r:
Ba
lan
ce
as
per
pas
s
bo
ok
Rs.
11,
53
0]

220

11.PrepareaBank
Reconciliation
Statementof
Mr.Srinivasan.

Date

CashBook
Dr.
2003
Feb 1
18
19
28
28

ToBal.b/d
ToKumar
ToSalesRaman
ToBalu
ToCommission
Babu
28 ToVenkatesh

2003
22,148 Feb3
12,000
200
8,345
810
3,412
46,915

Mar1

ToBal.b/d

1
4
16
19
20
20
20
26
28

C
H
A
PT
E
R10

ByBalanceb/d
ToMani
ToGiri
ByKumar
ByRaman
ToChidambaram
ToPadma
ToSomu
ToInsurancePremium
ToB/PA/c
ByBabu
ByMuthu
ByInterest
ByInterestoninvestment
ByB/RA/c.

31,758

PassBook

TRI

2004
Feb

Particulars

221

AL
BA
LA
NC
E
AN
D
RECTI
FICATI
ON OF

ERRO
RS
Learning
Objectives
Afterlearning
thisChapter,
youwillbeable
to:
know the
Meaning,
Objectives
and
Preparatio
n of Trial
Balance.
identify the
Kinds of
Errors.
understand
the
Procedure
for
Rectificatio
nofErrors.

In the previous

chapters, you have

learnt how to record
and classify the
transactions in the
various accounts along
with balancing thereof.
The next step in the
accountingprocessisto
prepare a statement to
check the arithmetical
accuracy of the
transactionsrecordedso
for. This statement is
calledTrialBalance.
Trial balance is a

statement which shows

debitbalancesandcredit
balances of all accounts
in the ledger. Since,
every debit should have
acorrespondingcreditas
per the rules of double
entrysystem,thetotalof
the debit balances and
credit balances should
tally (agree). In case,
thereisadifference,one
has to check the
correctness of the
balances

broughtforwardfrom
therespective
accounts.Trial
balancecanbe
preparedinanydate
providedaccountsare
balanced.
10.1 Definition
Trial balance
is a statement,
prepared with the
debit and credit
balances of ledger
accounts to test the
arithmetical accuracy
of the books J.R.
Batliboi.
10.2 Objectives
Theobjectivesof
preparingatrial
balanceare:
i.

To check
the
arithmetical
accuracy of
the ledger
accounts.

ii. To locate
theerrors.

iii. To
facilitate
the
preparation
of final
accounts.
10.3 Advantages
Theadvantages
ofthetrial
balanceare
i. It helps to
ascertain
the
arithmetica
l accuracy
of the
book
keeping
work done
during the
period.
ii. It supplies
in one
placeready
reference
of all the
balancesof
the ledger
accounts.
iii. Ifanyerror
is found

out by
preparing a
trial
balance,
the same
can be
rectified
before
preparing
final
accounts.

iv. It is the
basis on
whichfinal
accounts
are
prepared.
10.4 Methods
Atrialbalance
222
223

ii. The
Balance
Method:In
thismethod,
only the
balances of
an account
either debit
orcredit,as
the case

canbeprepared
inthefollowing
methods.
i.

The Total
Method :

According to
this method,
the total
amount of
thedebitside
of the ledger
accounts and
the total
amount of
the credit
side of the
ledger
accounts are
recorded.

maybe,are
recorded
againsttheir
respective
accounts.

Thebalance
methodismore
widelyused,asit
suppliesready

figuresforpreparing
thefinalaccounts.
10.5 Format
T
ri
al
B
al
a
n
c
e
of
A
B
C
L
td
.
as
o
n
...
...
...
...
...
...
Sl.No

NameofAccount

Pointstobenoted:
i. Date on
whichtrial
balance is
prepared
should be
mentioned
atthetop.
ii. Name of
Account
column
contains
the list of
all ledger
accounts.
iii. Ledger
folio of
the
respective
account is
entered in
the next
column.
iv. In the
debit

column,
debit
balanceof
the
respective
account is
entered.
v. Credit
balanceof
the
respective
account is
written in
the credit
column.
vi. The last
two
columns
are
totalled at
theend.

10.6 Sundry
Debtors and
Sundry Creditors
In the ledger
there are many
personal accounts,
some of them may
show debit balances,
some others may
showcreditbalances.
Ifallthenamesareto
bewritteninthetrial
balance it will be
unduly

long.
Therefore, a list of
names withthedebit
balances is prepared.
Thislistisknownas
Sundry Debtors
(Sundry means
many). Similarly, a
listofnameswiththe
credit balances is
prepared. This list is
known as Sundry
Creditors.
Illustration1
The following
balances

were

extracted from the

ledger of Rahul on
31st March, 2003.
You are requested to
prepareatrialbalance
asonthatdateinthe
properform.

Rs.
Salaries

36,320 Purchases

Sales

1,73,500 SundryDebtors

Plant&Machinery

34,300 TravellingExpenses

Rs.
1,44,670
1,430
2,630

CommissionPaid

1,880 CarriageInward

Stockon1.4.2002

11,100 SundryCreditors

14,260

1670 Capital,1.4.2002

62,500

Repairs
SundryExpenses

460 Drawings

ReturnsInward

1,000 CashatBank

DiscountAllowed

1,150 ReturnsOutward

RentandRates

3,220 Investments

224
225

Solution:
T
r
i
a
l

B
a
l
a
n
c
e

240

3,500
1,090
400
6,000

o
f

R
a
h
u
l

a
s

3
1
s
t

M
a
r
c
h
,

2
0
0
3
S.
NameoftheAccount
No.
1.

Salaries

2.

Sales

3.

PlantandMachinery

4.

CommissionPaid

5.

Stockon1.4.2002

6.

Repairs

7.

SundryExpenses

8.

ReturnsInward

9.

DiscountAllowed

10.

Rent&Rates

11.

Purchases

12.

SundryDebtors

13.

TravellingExpenses

14.

CarriageInward

15.

SundryCreditors

16.

Capital1.4.2002

17.

Drawings

18.

CashatBank

19.

ReturnsOutward

20.

Investments
TOTAL

L.
F.
36,320
34,300
11,100

1,44

2,50

Note:Thelastcolumn
giveninthesolution
doesnotappearin
practice.Itisincluded
heretoillustratethe
followinggeneralised
rules,that

i)

debit
balance is either an
asset or loss or
expense;and

ii)

a credit
balance is either a
liabilityorincomeor
gain.
10.7 Limitations
Though the trial
balancehelpstoensure
the

arithmetical
accuracy of the books
of accounts, it is
possibleonlywhenthe
accountant has not
committed any error.
As all the errors made
arenotdisclosedbythe
trial balance, it would
not be regarded as a
conclusive proof of
correctness of the

books of accounts
maintained.

10.8 Errors in
Accounting
The fundamental
principle of the
doubleentrysystemis
thateverydebithasa
corresponding credit
of equal amount and
viceversa. Therefore,
the total of all debit
balances in different
accounts must be
equaltothetotalofall
credit balances in
differentaccounts,i.e.,
the total of the two
columns should tally
(agree).
Thetallyingofthe
two totals (debit
balances and credit
balances) of the trial
balance ensures only
arithmetic accuracy but
notaccountingaccuracy.
If however, the two
totals do not tally, it
impliesthatsomeerrors
have been committed

while recording the

transactionsinthebooks
of accounts. The
followingarethevarious
kindsoferrors..

10.8.1. Kinds of
Errors

i. Errors of
Principleand

Keepinginview
226
227

the nature of errors,

all the errors
committed in the
accounting process
canbeclassifiedinto
two.

Ki
n
d
s
of
Er
ro
rs
Errors

ErrorsofPrinciple

Errorsof
Omission
i.Partialomission
ii.Completeomission

ii. ClericalErrors

I. Errors of Principle
Transactions are
recorded as per
generally accepted
accounting principles.
If any of these
principlesisviolatedor
ignored,errorsresulting
fromsuchviolationare
known as errors of
principle. For example,
Purchase of assets
recorded in the
purchasesbook.Itisan
error of principle,
because the purchases
book is meant for
recording

credit

purchases of goods
meantforresaleandnot
fixed assets. A trial
balance will not
disclose errors of
principle.
II. Clerical Errors

These errors
arise because of
mistakes committed
intheordinarycourse
of accounting work.
These can be further
classified into three
typesasfollows.
a)Errorsof
Omission
This error arises
whenatransactionis
completely

or
partiallyomittedtobe
recordedinthebooks
ofaccounts.Errorsof
omission may be
classifiedasbelow.

i.

Error of Complete
Omission: This error
arises when a
transaction is totally
omittedtoberecorded
in the books of
accounts.

For
example, Goods
purchased from Ram
completelyomittedto
berecorded.Thiserror
does not affect the
trialbalance.

ii. Error of Partial

Omission: This error
arises when only one
aspectofthetransaction
either debit or credit is
recorded.Forexample,a
credit sale of goods to
Siva recorded in sales
book but omitted to be
postedinSivasaccount.
This error affects the
trialbalance.

b)Errorsof
Commission
This error arises
due to wrong
recording, wrong
posting, wrong

casting, wrong
balancing, wrong
carrying forward etc.
Errorsofcommission
may be classified as
follows:
i.

Error of Recording:
Thiserrorariseswhen
a transaction is
wrongly recorded in
the books of original
entry. For example,
Goods of Rs.5,000,
purchased on credit
fromViji,isrecorded
in the book for
Rs.5,500. This error
doesnotaffectthetrial
balance.

ii. Error of Posting:

This error arises
when information
recordedinthebooks
of original entry are
wrongly entered in
the ledger. Error of
postingmaybe
i. Right
amount
in the
rightside
of wrong

ii.

iii.

iv.

v.

vi.

account.
Right
amount
in the
wrong
side of
correct
account
Wrong
amount
in the
rightside
ofcorrect
account
Wrong
amount
in the
wrong
side of
correct
account
Wrong
amount
in the
wrong
side of
wrong
account
Wrong
amountin
the right
side of
wrong
account,

etc.

Thiserrormay
ormaynotaffect
thetrialbalance.
iii. Error of
Casting(Totalling):
This error arises
when a mistake is
committed while
228
229

iv. Error of
Carrying Forward :
This error arises
when a mistake is
committed

in
carrying forward a
total of one page to
the next page. For
example, Total of
purchase book in
page 282 of the
ledger Rs.10,686,
while

carrying
forward the balance
to the next page it
was recorded as
Rs.10,866.
c)Compensating
Errors
The errors arising

totalling

the
subsidiary book. For
example, instead of
Rs.12,000 it may be
wrongly totalled as
Rs.13,000. This is
called overcasting. If
itiswronglytotalled
as Rs.11,000, it is
calledundercasting.

from excess debits or

underdebitsofaccounts
beingneutralisedbythe
excess credits or under
credits to the same
extent of some other
accountiscompensating
error.Sincetheerrorsin
one direction are
compensatedbyerrorsin
another

direction,
arithmetical accuracy of
thetrialbalanceisnotat
all affected inspite of
such errors. For
example, If the
purchasesbookandsales
book are both overcast
(excess totalling) by
Rs.10,000, the errors
mutually compensate

each other. This error

will not affect the
agreement of trial
balance.

10.8.2 Errors
disclosed and not
disclosed by trial
balance

If the impact of
the errors on trial
balanceisconsidered,
errors may be
classified into two
categories Errors
disclosed by trial
balance, and Errors
notdisclosedbytrial
balance.
ERRO
RS

Illustration2
Statethetypeof
errorinvolvedinthe
followingtransactions
andsaywhetheritwill
affecttheagreementof
thetrialbalanceornot.

1.

ThesalesbookisundercastbyRs.2,000.

2.

ThepurchasesbookisovercastbyRs.1,500.

3.

ThepurchasesreturnbookisovercastbyRs.5,000.

4.

ThesalesreturnbookisovercastbyRs.1,000.

5.

GoodsreturnedbyVaniworthRs.1,500werenotentered.

6.

GoodsreturnedbyVenu&Co.Rs.4,000werenotposted.

7.

GoodssoldtoRobinforRs.2,600hasbeendebitedto
RobertsA/c.

8.

AcreditsaletoBashaforRs.3,500wasenteredasRs.5300.

9.

ApurchaseofMachineryforRs.50,000hasbeenenteredin
thepurchasesbook.

10. AcreditpurchasefromSenthilforRs.6,250wasdebitedto
SanthoshsA/c.frompurchasesbook.
11. CashreceivedforcommissionRs.2,735waspostedtothe
commissionaccountasRs.2,375.
12. Themonthlytotalofdiscountcolumnonthedebitsideofthe
Er
ror
1.
s
dis
clo
sed
by
T
r
i
a
l

B
a
l 2.
a
n
c
e

sting

Er
ro
rs
of
pa
rti
al
o
m
is
si
on
Er
ro
rs
of
ca

3.

Errors

carrying
forward

of

4.

Errorsofposting
inthewrongside
of the correct
account

Errors
not
disclosed
by
Trial
Bala
nce
1.

Errors
of
complet
e
omissio
n

2.

Errors
of
recordin
g

3.

Errors
of
principl
e

4.

Errors
of
posting
to
wrong
account
inthe
right
side
withthe
correct
amount

cashbookRs.1,350wascreditedtodiscountallowed
account.
13. CashpaidforinsuranceRs.6,310waspostedtotheinsurance
A/c.asRs.6,130.
14. Themonthlytotalofdiscountcolumnonthecreditsideofthe
cashbookRs.22,500wasdebitedtodiscountreceived
account.
5.
6.

Errorsofpostingtocorrect
accountwithwrongamount
Double
posting in
the same
account
230

Solution:
1. This is an
error of
casting and
it affect
sales
account
only. The
trialbalance
will not
tally.
2. This is an
error of
casting and
it affect
purchases
account
only. The
trialbalance

15.Asaleto
KaveriRs.6,900
hasbeenentered
inthepurchases

book.
231

will not
agree.

3. This is an
error of
casting and
it affect
purchases
return
account
only. The
trialbalance
will not
agree.
4. This is an
error of
casting and
it affect
sales return
account

only. The
trialbalance
will not
agree.
5. This is an
error of
complete
omission.
Since both
the aspects
have been
omitted,this
error will
not affect
the
agreement
of the trial
balance.
6. This is an
error of
partial
omission.
Since the
principlesof
doubleentry
is not
completed,
this error
will affect
the
agreement
of the trial
balance.

7. This is an
error of
posting i.e.,
right
amount in
the right
side of the
wrong
account.
This error
will not
affect the
agreement
of the trial
balance.
8. This is an
error of
recording
i.e., wrong
entry in the
subsidiary
book. Since
the mistake
is found in
both debit
and credit
aspects to
the same
extent. The
agreement
of the trial
balancewill
not be

affected.
9. This is an
error of
principle.
This error
will not
affect the
agreement
of the trial
balance.
10. This is an
error of
recording
i.e., wrong
entry in the
subsidiary
book.Since,
the mistake
is found in
both debit
and credit
aspects to
the same
extent. The
agreement
of the trial
balancewill
notaffected.
11. This is an
error of
posting
involving

posting of
wrong
amount.
Since the
commission
account has
an excess
credit of
Rs.360, the
trialbalance
will be
affected.

12. This is an
error of
posting
involving
postingonthe
wrongsideof
an account.
The amount
must have
been debited
to discount
allowed
account. The
trial balance
willnotagree
to the extent
of Rs.2,700
i.e., twice the
amountofthe
transaction.

13. This is an
error of
posting
involving
posting of
wrong
amount.
Since the
insurance
account has
ashortdebit
of Rs.180,

the trial
balancewill
beaffected.
14. This is an
error of
posting
involving
posting on
the wrong
side of an
account.
Theamount
must have
been
credited to
discount
received
account.
The trial
balancewill
notagreeto
the extent
of
Rs.45,000,
ie., twice
the amount
of the
transaction.
15. This is an
error of
recording.In
this

transaction,
error is
made in the
book of
original
entry, the
trial balance
will not be
affected. An
entry has
been made
wrongly in
the
purchases
bookinstead
of the sales
book. To
rectify this,
Kaveri A/c
is to be
debited with
Rs.13,800
and
Purchases
A/c. and
Sales A/c.
are to be
creditedwith
Rs.6,900
each.

10.9 Steps

to

Locate
Errors:

the

If the trial
balance does not
tally, it means there
aresomeerrorsinthe
books of accounts.
The various steps
which may be taken
to locate the errors
include

the
following:
Step 1 Check the
total of
the trial
balance
and
ascertain
the exact
amountof
difference
inthetrial
balance.
Step 2

The
difference
is halved
to find
out
whether
there is
any

balance
of the
same
amountin
the trial
balance.
It is
because,
such a
balance
might
havebeen

recorded
on the
wrong
side of
the trial
balance
and
hence,the
difference
is double
the
amount.

Step3Ifthesecond
step fails
to locate
the error,
the
difference
inthetrial
balanceis
divided
by9.Ifit
is
divisible
by 9
without
any
remainder
,theerror
is due to
transposit

ion of
figures.
For
example,
transposit
ion of
figures
represents
writingof
Rs.780
for
Rs.870.

232
233

Step 4 See whether

the
balance of
all ledger
accounts
including

cash and
bank
balances
are
included
inthetrial
balance.

Step 5 Ensure that

all the
opening
balances
havebeen
correctly
brought
forwardin
the
current
years
books.

Step 6 If the
difference
inthetrial
balanceis
of large
amount,
the trial
balance
of the
current
year is
compared

with that
of the
previous
year and
an
account
showinga
large
difference
over the
figure in
the
previous
years
trial
balance
should be
rechecked
.
Step7 Iftheerror
is not
detected
by the
above
steps,
care
should be
taken to
scrutinise
the
i. totals
of all

the
subsidi
ary
books.
ii. postin
g
made
from
the
journal
and
the
subsidi
ary
books
to the
releva
nt
ledger
accoun
ts.
iii. balance
s
extract
ed
from
the
various
ledger
accoun
ts.
iv. totallin
g of
the

ledger
balanc
es.
Even after
following the above
steps, if the error
couldnotbelocated,
the whole of the
prime entry must
once again be
checked and in case
of need, the posting
to the ledger should
be

rechecked
thoroughly.
10.10 Suspense
Account
Whenitisdifficult
to locate the mistakes
before preparing the
final accounts, the
difference in the trial
balanceistransferredto
newlyopenedimaginary
and temporary account
called

Suspense
Account. Suspense
account is prepared to
avoid the delay in the
preparationoffinal

accounts. If the total

debit balances of the
trial balance exceeds
the total credit
balances,

the
difference

is
transferred to the
credit side of the
suspense account. On
the other hand, if the
totalcreditbalancesof
the trial balance
exceedsthetotaldebit
balancesthedifference
is transferred to the
debit side of the
suspenseaccount.
When the errors
affecting the suspense
account are located,
they are rectified with
suspense account.
Suspense account is
continued in the books
until the errors are
located and rectified.
Such balance will be
shown in the balance
sheet. Debit balance
will be shown on the
assetsideandthecredit
balance will be shown

on the liability side.

When all the errors
affecting the trial
balancearelocatedand
rectified, the suspense
account automatically
getsclosed.

The following
illustration will help
to understand the
suspenseaccount:
Illustration3
The following
balances

were
extracted from the
ledger

of
Mr.Ramakrishna as
on 31st March 2003.
You are required to
prepareatrialbalance
asonthatdate.

Drawings
Capital
Sundrycreditors
Billspayable
Sundrydebtors
Billsreceivable
Plant&Machinery
Openingstock
Cashinhand
Cashatbank
234
235

Solution:
I
n

t
h
e

b
o
o
k
s

o
f

M
r

Rs.
60,000
2,40,000
4,30,000
40,000
5,00,000
52,000
45,000
3,70,000
9,000
25,000

Rs.
Salaries
95,000
Salesreturn
10,000
Purchasesreturn
11,000
Commissionpaid
1,000
Tradingexpenses
25,000
Discountearned
5,000
Rent
20,000
Bankoverdraft
60,000
Purchases
7,08,000
Sales
11,80,000
.
R
a
m
a
k
r
i
s
h
n
a

T
r
i
a
l

B
a
l
a
n
c
e

a
s

o
n

3
1
s
t

M
a
r
c
h

2
0
0
3
S.
Nameoftheaccount
No.
1.
Capital

2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.

Drawings
Sundrycreditors
Billspayable
Sundrydebtors
Billsreceivable
Plant&machinery
Openingstock
Cashinhand
CashatBank
Sales
Salaries
Salesreturn
Purchasesreturn
Commissionpaid
Tradingexpenses
Discountearned
Rent
Purchases
Bankoverdraft
SuspenseA/c.
TOTAL

Note : The difference

intheTrialBalanceis
transferred to suspense
accounttoavoiddelay
in the preparation of
finalaccounts.

10.11 Rectification
of Errors
Correctionoferrors
inthebooksofaccounts
is not done by erasing,

rewriting or striking the

figures which are
incorrect.Correcting

the errors that has

occured is called
Rectification.
Appropriate entry is
passed or suitable
explanatory note is
written in the
respective account or
accounts to neutralise
the effect of errors.
From the point of
rectification, errors
may be classified as
follows:

i. Single sided
errors
are
errors which
affect one
side of an
account.
ii. Double sided
errors
are
errors which
affect both
the accounts
in

a
transaction.
BasicPrinciplesfor
Rectificationof
Errors
Allerrors,

whatevermaybe
theirkindornature,
resultinoneofthe
followingfour
positionsinoneor
moreaccounts.
i. Excess debit
in one or
more
accounts:
Thismustbe
rectified by
crediting
the excess
amount to
the
respective
account or
accounts.
ii. Shortdebitin
oneormore
accounts:
Thismustbe
rectifiedbya

further
debit to the
respective
account or
accounts
involved.
iii.Excess credit

in one or
more
accounts:
This can be
rectified by
debitingthe
respective
account with
the excess
amount
involved.
iv. Short credit
in one or
more
accounts:
This can be
rectified bya

further
credit to the
respective
account or
accounts
involved.
Thefollowing
threestepsmaybe
adoptedwhile
attemptingtorectify
anerror:
i. Ascertain what
has actually
beendone,i.e.
what is the

error?.

ii. Make sure

what ought
to havebeen
done,i.e.,the
correct
record.

iii. Decidewhatis
236
237

Stagesof
Rectification
The stage in
whichrectificationis
done depends on
identification or
locating the error.
Rectification of
errors may be
explained in two
stages.
i. Rectification
before the
preparation
of trial
balance : In
this stage
errors are
located
before
transferring

to bedonein
view of what
hasbeendone
and what
oughttohave
been done.
i.e.,
rectification.

the
difference in
the trial
balance to
Suspense
Account.
ii. Rectification
after the
preparation
of

trial
balance: In
this stage the
difference in
the trial
balancewould
have been
transferred to
Suspense
Account. So
wherever
applicable

suspense
account is
used while
passing
rectification
entries.

Stageatwhichthe
errorsarerectified
i.Whentheerrorsarerectified
beforetransferringthedifference
inthetrialbalancetothe
suspenseaccount
ii.Whentheerrorsarerectified
aftertransferringthedifferencein
thetrialbalancetothesuspense
account
Illustration4
Rectifythefollowing
errors:
i. Purchases
bookovercast
byRs.1,300
ii. Sales book
undercast by
Rs.2,500.
iii.Purchases
return book
overcast by

Rs.750.
iv. Sales return
book
undercast by
Rs.600.

Rs.850less.

Solution:
S.No.

Natureofmistake

Effectofmistake

1.

Overcastingof
purchasesbook

Excessdebit
inPurchasesA/c

2.

Undercastingof
salesbook

Shortcredit
inSalesA/c

3.

Overcastingof
purchasesreturnbook

Excesscredit
inPurchases
ReturnA/c

4.

Undercastingof
salesreturnbook

Torectifytheerrors:

Shortdebitin
SalesReturnA/c

ii. Sales book

total is
carried
forward
Rs.2,500
more.
iii.A total of
Rs.7,580 in
thepurchases
book has
been carried
forward as
Rs.8,570.

iv. The total of

Credit
the sales
Purchases A/c with
book
Rs.1,300.
Rs.7,550 on
ii.
CreditSales
page 20 was
A/cwithRs.2,500.
carried
iii.Debit PurchasesreturnA/cwithRs.750. forward to
page 21 as
iv.Debit SalesreturnA/cwithRs.600.
Rs.5,570.
Illustration5
v. Purchases
return book
Rectifythefollowing
was carried
errors:
forward as
i. Purchases
Rs.1,520
book is
instead of
carried
Rs.5,120.
forward
i.

238

239

errors:

Solution:
S.No.

Natureofmistake

Effectofmistake

1.

Carryingforwardlower
amountinpurchases
book

Shortdebitin
PurchasesA/c

2.

Carryingforwardhigher Excesscredit
amountinsalesbook
inSalesA/c.

3.

Carryingforwardhigher Excessdebit
amountinpurchases
inPurchasesA/c
book

4.

Carryingforwardlower
amountinsalesbook

Shortcredit
inSalesA/c.

5.

Carryingforwardlower
amountinpurchases
returnbook

Shortcredit
inPurchases
returnA/c

Rectification:
i. Debit PurchasesA/cwithRs.850.
ii. Debit SalesA/cwithRs.2,500.
iii.
Credit
Purchases A/c with
Rs.990.
iv.
CreditSales
A/cwithRs.1,980.
v.Credit
Purchasesreturn
A/cwith
Rs.3,600.
Illustration6:
Rectifythefollowing

i. Purchases
from
Bagavathifor
Rs.4,500 has
been posted
to the debit
side of her
account.
ii. SalestoVijay
for Rs.1,520
has been
posted to his
credit as
Rs.1,250.
iii.Purchases
from Shakila
for Rs.750
has been
omittedtobe
postedtothe
personalA/c.

iv. Sales to
Khader for
Rs.780 has
been posted
to

his
account as
Rs.870.
Solution:
i. Purchasesfrom
Bagavathi
should have
beenpostedto
the credit of
Bagavathis
A/c.,butithas
been debited.
Hence, Credit
Bagavathis
A/c with
double the
amount i.e,
Rs.9,000.

ii. SalestoVijay
has to be
debited in
Vijays
account but
hisaccountis
credited with
Rs.1,250.
Hence, Debit
Vijays A/c

with
Rs.1,250 +
Rs.1,520 i.e,
Rs.2,770.
iii.This is an
error of
omission.
Posting must
be to the
credit of
Shakilas
A/c. Hence,
post Rs.750
to the credit
of Shakilas
A/c.
iv. Here
KhadersA/c
has been
debited with
a wrong
amount i.e.,
with excess
amount. To
rectify this
error, the
excess
amount must
becreditedto
his account.
Hence,credit
KhadersA/c
withRs.90.

Illustration7
Thefollowing
errorswerefoundin
thebooksofPrabhu.
Givethenecessary
entriestocorrect
them:
i)Salary of
Rs.10,000
paid to
Murali has
beendebited
to his
personal
account.
ii) Rs.3,500
paid for a
typewriter
wascharged
to office
expenses
account.
iii) Rs.8,000
paid for
furniture
purchased
has been
charged to
240
241

Solution:

purchases
account.
iv) Repairsmade
were debited
to building
account for
Rs.500.
v) An amount
of Rs.5,000
withdrawn
by

the
proprietorfor
his personal
use has been
debited to
trade
expenses
account.

vi) Rs.2,000
received
from
Shanthi &
Co. has
been
wrongly
entered as
from
Shakila &
Co.

I
n


t
h
e

B
o
o
k
s

o
f
P
r
a
b
h
u
R
e
c
t
i
f
y
i
n
g
J
o
u
r
n

a
l
E
n
t
r
i
e
s
Errors

Particulars

i.

SalariesA/c
ToMuraliA/c.
[Correctionofwrongdebitto
MuralispersonalA/cforsalari

ii.

TypewriterA/c
ToOfficeexpensesA/c
[Correctionofwrongdebittoo
expensesA/cforpurchaseofty

iii.

FurnitureA/c
ToPurchasesA/c
[Correctionofwrongdebittop
accountforfurniturepurchased

iv.

RepairsA/c
ToBuildingA/c
[Correctionofwrongdebittob
Accountforrepairsmade]

v.

DrawingsA/c
ToTradeexpensesA/c
[CorrectionofwrongdebittoT
ExpensesA/c.forcashwithdra
bytheproprietorforhisperson

vi.

Shakila&Co.A/c.
ToShanthy&Co.A/c
[Correctionofwrongcreditto
Shakila&Co.insteadof
Shanthi&Co.]

Illustration8
Givejournalentries
torectifythe
followingerrors:
i. Purchase of
goods from
Devi
amounting to
Rs.25,000
has been
wrongly
passed
through the
salesbook.
ii. Credit saleof
goods
Rs.30,000 to
Rajan has
been
wrongly
passed
through the
purchases
book.
iii. Sold

old
furniture for
Rs.3,500
passedthrough
thesalesbook.

iv. Paid wages

for the
construction

of Building
debited to
wages
account Rs.
1,00,000.
v. Paid
Rs.10,000for
the
installationof
Machinery
debited to
wages
account.
vi. On 31st Dec.
2003 goods
worth
Rs.5,000
werereturned
by Manjula
and were
taken into
stock on the
same date,
but no entry
waspassedin
thebooks.
Solution:
Re
cti
fyi
ng
Jo

ur
na
l
En
tri
es

Errors
i.

ii.

Particulars

L.F

Debit

Credit

Rs.

Rs.

PurchasesA/c
Dr.
SalesA/c
Dr.
ToDeviA/c
[Correctionofwrongentryinsales
bookforacreditpurchasefromDevi]

25,000
25,000

RajanA/c

60,000

ToPurchasesA/c
ToSalesA/c
[Correctionofwrongentryinpurchases
bookforcreditsaletoRajan]

Dr.

50,000

30,000
30,000

242
243
iii.

SalesA/c
ToFurnitureA/c
[Correctionofwrongcredittosales
accountforsaleofoldfurniture]

iv.

BuildingA/c
ToWagesA/c
[Correctionofwrongdebittowages
accountforwagespaidfor
constructionofbuilding]

v.

MachineryA/c
ToWagesA/c
[Correctionofwrongdebittowages
accountforwagespaidforinstallation
ofmachinery]

vi.

SalesReturnA/c
ToManjulaA/c
[Entryforgoodsreturnedandtaken
intostock]

Illustration9

An accountant
couldnottallytheTrial
balance.Thedifference
of Rs.5,180 was
temporarily placed to
the credit of suspense
account for preparing
the final accounts. The
following errors were
laterlocated.

i. Commission
of Rs.500
paid, was
posted twice,
once to
discount
allowed

account and
once to
commission
account.

ii. The sales

book was
undercast by
Rs.1,000.
iii. Acreditsaleof
Rs.2,780 to
Roja though
correctly
entered in
sales book,
was posted
wronglytoher
account as
Rs.3,860.

iv. A credit
purchase
from Nataraj
of Rs.1,500,
though
correctly
entered in
purchases
book, was
wrongly
debitedtohis
personal
account.

v. Discount
column of
the payments
side of the
cash book
was wrongly
added as
Rs.2,800
instead of
Rs.2,400.
Youarerequiredto:
i. Pass the
necessar
y
rectifyin
g
entries.
ii. Prepare
Suspens
e
Account
Solution:
Re
cti
fyi
ng
Jo
ur
na
l
En

tri
es

Errors

i.

ii.

iii.

iv.

v.

Particulars

L.F

SuspenseA/c
Dr.
ToDiscountallowedA/c
[Amountwronglydebitedto
discountaccount,nowrectified]
SuspenseA/c
Dr.
ToSalesA/c
[Salesbookundercastby
Rs.100,nowrectified]
SuspenseA/c
Dr.
ToRojaA/c
[Wrongpostingofsaleof
Rs.2,780toRojaasRs.3,860,now
rectified]
SuspenseA/c
Dr.
ToNatarajA/c
[CreditpurchaseofRs.1,500from
Natarajwronglydebitedtohis
personalaccountnowrectified]
DiscountreceivedA/c
Dr.
ToSuspenseA/c
[Excesscreditindiscountaccount,
nowrectified]

244
245

Debit

Credit

Rs.

Rs.

500

1,000

1,080

3,000

400

1,000

1,080

3,000

400

SuspenseAccount

Dr.
Date

500

Cr.
Particulars
ToDiscount
allowedA/c
ToSalesA/c
ToRojaA/c

L.F

Rs. Date

500
1,000
1,080

Particulurs
ByBalanceb/d
ByDiscount
receivedA/c

L.F

Rs.
5,180
400

ToNatarajA/c

3,000
5,580

5,580

QUESTIONS
I. Objective Type:

a)Fillintheblanks:
1. TrialBalanceshouldbetalliedbyfollowingtherulesof_______.

2. Ifthetotaldebitsexceedsthetotalcreditsoftrialbalance,
suspenseaccountwillshow_______balance.
3. Suspenseaccounthavingdebitbalancewillbeshownonthe
_______sideofbalancesheet.

4. Ifthetotaldebitbalancesofthetrialbalanceexceedsthe
total credit balances, the difference is transferred to the
_______sideofthesuspenseaccount.
5. Suspenseaccounthavingcreditbalancewillbeshownonthe
_______sideofthebalancesheet.

6. Shortcreditofanaccountdecreasesthe_______columnof
thetrialbalance.
7. When errors are located and rectified, _______
automaticallygetsclosed.
8. Journalentriespassedtocorrecttheerrorsarecalled_______.

9. Excessdebitofanaccountcanberectifiedby_______the
sameaccount.
10. Shortdebitofanaccountcanberectifiedby_______ofthe

sameaccount.
[Answers:1.doubleentrysystem,2.credit,3.assets,4.credit,
5. liabilities, 6. credit, 7. suspense account, 8.
rectifyingentries,9.credit(theexcessamountin),
10.furtherdebit(theshortamount)]
b)Choosethecorrectanswer:
1. Trialbalanceispreparedtofindoutthe
a)profitorloss
b)financialposition
c)arithmeticalaccuracyoftheaccounts
2. Suspenseaccountinthetrialbalanceisenteredinthe
a)TradingA/c
b)ProfitandlossA/c
c) Balancesheet
3. Suspenseaccounthavingcreditbalancewillbeshownonthe

a) CreditsideoftheprofitandlossA/c
b) Liabilitiessideofthebalancesheet
c) Assetssideofthebalancesheet
4. Statewhichofthefollowingerrorswillnotberevealedby
theTrialBalance.
a) Errorsofcompleteomission.
b) Errorofcarryingforward.
c) Wrongtotallingofthepurchasesbook.
246
247

5. Errors which
affectonesideof
an account are
called
a)Singlesided

errors

b)Doublesided
errors

c) None of the
above.

6. Amountspenton
servicing office
Typewriter
should

be
debitedto:
a) Miscellaneo
us Expenses
Account.
b) Typewriter
Account.
c) Repairs
Account.
7. Wages paid to
workers for the
installation of a
new Machinery
should

be
debitedto:
a) Wages
Account
b) Machinery
Account
c) Factory
Expenses
Account
8. Salary paid to
Managermustbe
debitedto
a) Managers
Account
b) Office

Expenses
Account
c) Salary
Account.
9. Goods taken by
theproprietorfor
domestic use
should

be
creditedto
a) Proprietors
Drawings
Account.
b) Sales
Account.
c) Purchases
Account.
10. Cash received
from Mani
whose account
was previously
written off as a
BadDebtshould
becreditedto:
a) Manis
Account.
b) Miscellaneo
us Income
Account.
c) Bad Debts
Recovered
Account.
[Answers: 1.(c),2.

(c),3.(b),
4.(a),5.
(a),6.(c),
7.(b),8.
(c),9.(c),
10.(c)]

II. Other Questions :

1. What is a Trial
Balance?
2. What are the
objectives of
preparingaTrial
Balance?
3. What are the
advantages of a
TrialBalance?
4. Why is it said
that the trial
balance is not a
conclusiveproof
of the accuracy
of the account
books?
5. Explain the
principle on
which

the
agreement of
trial balance is
based.
6. Name

the
differentkindsof
errors?
7. Explain the
differentkindsof
errors.
8. Writeshortnotes

on
i. ErrorofPrinciple
iii. Errorofcasting.
9. What are the
errors disclosed
by the Trial
Balance?
10. What are the
errors

not
disclosed by the
TrialBalance?
11. What is a
Suspense
Account? When
isitopened?
12. What do you
mean

by
Rectification of
Errors?
13. In what ways
may the errors
berectified?
III. Problems

1. Prepare Trial
Balance as on
31.12.2000 from
thefollowing
balancesof
Mr.Balan.

ii.
iv.

Capital
Creditors
Drawings
Salaries

Rs.
3,40,000
13,000
4,000
38,200

Purchases
SalesReturns
PurchasesReturn
Carriageinwards

Rs.
94,000
3,400
2,400
1,400

BaddebtsSales
248
Commission
249
Billspayable
Bankoverdraft
Discount

5,800 Printing&Stationery

5,000

[Answer:Rs.7,11,020]
BillReceivable
BillsPayable
7,000 Stock
29,900
4.
PrepareTrialBalanceason31.12.2002fromthefollowing
Debtors
16,000 Machinery
50,000
balancesofMs.Fathima.
Sales
1,44,000
Wages
5,000
Rs.
Rs.
Insurance
2,200
Rent
1,600
Drawings
74,800
2,95,700
Purchases
Land
2,50,000
Interestreceived
1,700
30,000
1,000
Discountreceived
Stock(1.1.2000)
Commissionreceived 2,50,000800 Discountallowed
Electricitycharges
2,400
Capital
950
[Answer:Rs.5,08,900]
Sales
33,000
3,35,350
FurnitureSundry
75,000
72,500
creditorsPrinting
2. The following balances
are Rent
extracted from the books
of
chargesBank
1,500
21,000
Sundryexpenses
Mr.Senthil.PrepareTrialBalanceason30.6.2004.
loanFreight
1,20,000
52,500
Billsreceivable
Carriageoutwards
3,500
1,500
Insurance
9,500
1,200
Incometax
Machinery
2,15,400
Billspayable
31,700

Capital
Cashinhand

Drawings
Capital
Sundrycreditors
BillsPayable
SundryDebtors
BillsReceivable

Rs.
Rs.
[Answer:Rs.8,13,050]
4,70,200 Machinery
1,58,800
6,000 SundryDebtors
48,000

Building
Stock
Sundrycreditors
Commissionpaid
Rent&Taxes
Purchases
Salaries
Discountallowed
Drawings
Baddebts

3,20,000
33,000
26,000
750
6,300
1,65,000
70,600
650
5,000
1,350

Repairs
5,400
Insurancepremium
3,300
Sales
2,90,000
Telephonecharges
6,450
Furniture
11,000
Discountearned
1,100
LoanfromMohammed51,000
Reservefund
5,900
Billsreceivable
8,600
Billspayable
6,000
[Answer:Rs.8,50,200]

3. PrepareTrialBalanceason31.3.2004fromthebooksof
Mrs.Chitra.
Rs.
Rs.
Capital
2,49,000 Drawings
24,000
Generalexpenses
97,000 Building
78,000
Machinery
1,18,680 Stock
1,32,400
Wages
14,400 Insurance
2,610
1,100 Creditors
5,000
3,30,720 Loan(Cr.)
75,000
5,500 Purchases
2,10,800
7,700 ReserveFund
15,000
28,600 Cashinhand
25,320
1,210
5. Preparetrialbalanceas on31.3.2003fromthefollowing
balancesofMrs.Sujatha.
Rs.
Rs.
43,000 Purchases
2,98,000
2,12,000 Sales
3,64,000
61,500 Salaries
44,950
22,000 Salesreturn
500
55,000 Purchasesreturn
2,550

72,600 Travellingexpenses
250
251

LoanfromShameem
Furniture&Fittings
Openingstock
Cashatbank

12,300

2,50,000 Commissionpaid
250
12,250 Discountearned
2,000
2,23,500 Cashinhand
65,450
86,250
[Answer:Rs.9,14,050]

6. Prepare Trial Balance from the following balances of

Mrs.Dilshadason31.12.2002.
Rs.

Rs.

Capital
4,20,000 Cashinhand
25,000
Building
1,15,000 Cashatbank
84,700
Machinery
60,000 Salaries
94,000
Furniture
11,000 Rent
48,000
Car
68,000 Commission
1,400
Openingstock
86,000 RatesandTaxes
2,600
Purchases
94,000 Baddebts
3,200
Sales
1,96,000 Insurance
2,400
Sundrydebtors
16,200 GeneralExpenses
800
Reservefordoubtfuldebts7,300 SundryCreditors
68,000
[Answer:Suspenseaccount(credit)Rs.21,000]
7. Rectifythefollowingjournalentries.
i. PurchasesA/c
ToCashA/c
(Purchaseoffurniture)

Dr.

Rs.
6,000

ii. ArulA/c

Dr.

Rs.
10,000

Rs.
6,000
Rs.

ToCashA/c
(SalarypaidtoArul)
iii. RaviA/c
ToCashA/c
(Rentpaid)

10,000
Dr.

Rs.
1,500

Rs.
1,500

iv.SalesA/c
ToCashA/c
(CreditsaletoNavin)

Dr.

Rs.
12,000

v. CashA/c
ToBabuA/c
(Cashsales)

Dr.

Rs.
8,000

Rs.
12,000
Rs.
8,000

8. Rectifythefollowingerrorswhicharelocatedinthebooks
ofMr.Ganesh.
i. ThepurchasesreturnbookovercastbyRs.1,500.
ii. ReceivedRs.2,000fromShankardebitedtohisaccount.

iii. ThesalesbookundercastbyRs.1,500.
iv. Rs.1,500 received from Geetha was entered on the
debitsideofthecashbook.Nopostingwasdoneto
GeethasA/c.
v. SaleofoldfurnitureforRs.2,000treatedassaleofgoods.

9. Rectifythefollowingerrors:
i. Rs.12,000 paid of salary to cashier Govind, stands
debitedtohispersonalaccount.
ii. AnamountofRs.5,000withdrawnbytheproprietorfor
hispersonalusehasbeendebitedtotradeexpensesA/c.

iii CashreceivedfromBalaRs.300wascreditedtoBalu.
252
253

iv. A credit
sale of
Rs.2,000 to
Janakiram
has been
wrongly
passed
through the
purchases
book.

10. Rectify
following
errors:
i.

the

Repairs
made were
debited to
building
account
Rs.5,000.

ii. Mahesh
returned
goodsworth
Rs.2,000.
No entry
was passed
inthebooks
to this
effect.

iii. Purchase of
goods from
Antony
amounting
to Rs.1,500
has been
debited to
hisaccount.
iv. Rs.5,200
paid for the
purchase of
typewriter
wascharged
to office
expenses
account.
11. Rectify the
followingerrors:
i. Credit
purchase of
goods from
Madhan of
Rs.300 has
been
wrongly
entered in
the sales
book.

ii. Rs.500
received
from
Selvam has
been
credited to
Selvis
account.
iii. Rs.1,000
received as
interest was
credited to
commission
account.
iv. Sales book
total Rs.878
waswrongly
totalled as
Rs.788.
v. Thetotalof
thediscount
column, on
the debit
side of the
cash book
has been
added short
byRs.400.
12. Rectify the
following errors
without using a
suspenseaccount:

i. Purchases
Rs.5,000
from Sheela
wrongly
entered in
the sales
book.
ii. Goods
takenbythe
proprietor
Rs.1,000
not
recorded in
thebooksat
all.
iii. Discount
Rs.50
allowed to
Mala has
been
credited to
discount
account.

iv. Credit sales

to Leela
Rs.1,500
wrongly
posted to
thecreditof
heraccount.
13. A bookkeeper
found his Trial
Balance not
balanced, placed
the difference
amount in the
Suspense
Account and
subsequently
found

the
followingerrors:
a) Sales Book
was
overcast by
Rs.1,500.
b) Rs.2900
received
from Vani
in full
settlement
of his
account of
Rs.3,000
was posted
in cash

book but
omitted to
be entered
in her
account.
c) Thetotalof
the sales
book
Rs.12,000
was debited
to sales
returns
account.
d) Rs.1,000
received as
interest was
credited to
interest
account as
Rs.100.
Giverectifying
entriesandshow
theSuspense
Account.
14. An Accountant
couldnottallythe
trialbalance.The
difference of
Rs.520 was
temporarily
placed to the
creditofsuspense

account and
subsequently
found

the
followingerrors.

a) Thetotalof
the
Discount
column on
the credit
side of the
Cash Book
Rs.230 was
not posted
in the
ledger.
b) The total of
the Discount
Column on
thedebitside
of the Cash
BookRs.150
was omitted
to be posted
intheledger.

c) Thetotalof

the
purchases
book was
short by
Rs.600.
d) A sale of
Rs.675 to
Kalpana
was entered
in the Sales
book as
Rs.975.
e) A sale of
Rs.500 to
Vimala has
been
entered in
the
Purchase
Book.
Rectifythe
aboveerrorsthrough
SuspenseAccount.
Alsogivejournal
entriesfor
rectification.

254
255

C
H
AP

TE
R11

CAPITAL
AND
REVENUE
TRANSACTIO
NS

Learning
Objectives
Afterstudying
thisChapter,
youwillbeable
to:
identify
Capital,
Revenue
and
Deferred
Revenue
Expenditure
s.
understand
Capital and
Revenue
receipts.

Once the trial

balance is prepared the
next step is to find out
the net result (profit or
loss account) and
financial

position
(balance sheet) of the
business concern. The
business concerns
financial position is
boundtobeaffectedby
the result of its
operations. Matching
Principle governs the
preparationofthesetwo
statements.According to
this principle the
revenues and relevant
expenditures incurred
during a particular
period should be
matched. Thus a proper
distinction must be
accounted for between
capital and revenue
transactions. Business
transactions can be
capital transactions or
revenuetransactions.

11.1 Capital

Transactions
The business
transactions, which
provide benefits or
supplyservicestothe
business concern for
morethanoneyearor
oneoperatingcycleof
the business, are
known as capital
transactions.

The transactions
which relate to
capitalareagainsub
divided into capital
expenditure and
capitalreceipt.
11.1.1 Capital
Expenditure

Capital
expenditure consist
ofthoseexpenditures,
the benefit of which
is carried over to
several accounting
periods. In other
words the benefit of
which is not
consumedwithinone
accounting period. It
is nonrecurring in
nature.
Characteristics

Inotherwords,it
referstothe
expenditure,
whichmaybe
i. purchase of a
fixedasset.
ii. notacquired

forsale.
iii. it is non
recurring in
nature.
iv. incurred to
increase the
operational
efficiency
of the
business
concern.
Examples

i. Expenses
incurred in
the
acquisition
of Land,
Building,
Machinery,
Furniture,
Car,
Goodwill,
Copyright,
TradeMark,
Patent
Right,etc.
256
257

11.1.2. Capital
Receipt

ii. Expenses
incurred for
increasing
the seating
accommoda
tion in a
cinemahall.
iii. Expenses
incurredfor
installation
of fixed
assets like
wages paid
for
installing a
plant.
iv. Expenses
incurred for
remodelling
and
reconditioni
ng an
existing
asset like
remodeling
abuilding.

Capital receipt is
onewhichisinvestedin
the business for a long

period. It includes long

termloansobtainedfrom
others and any amount
realisedonsaleoffixed
assets. It is generally
nonrecurringinnature.
Characteristics

i. Amount is not
received in
the normal
course of
business.

ii. It is non
recurring in
nature.
Examples

i. Capital
introduced
by the
owner
ii. Borrowed
loans
iii. Sale of
fixedasset
11.2 Revenue
Transactions
The business

transactions, which
provide benefits or
suppliesservicestoa
business concern for
anaccountingperiod
only, are known as
revenue transactions.
Revenue transactions
can be Revenue
Expenditure or
RevenueReceipt.
11.2.1 Revenue
Expenditure
Revenue
expenditures consist of
those expenditures,
which are incurred in
the normal course of
business. They are
incurred in order to
maintain the existing
earningcapacityofthe
business.Ithelpsinthe
upkeepoffixedassets.
Generallyitisrecurring
innature.
Characteristics

i. It helps in
maintaining
the earning

capacity of
thebusiness
concern.
ii. It

is
recurring in
nature.

Examples

i. Cost of
goods
purchased
forresale.
ii. Office and
administrati
ve
expenses.
iii. Selling and
distribution
expenses.
iv. Depreciation
of fixed
assets,
interest on
borrowings
etc.

v. Repairs,
renewals,
etc.
11.2.2
Reven
ue Receipt

Revenuereceipt
isthereceiptof
incomewhichis
earnedduringthe
normalcourseof
business.Itis
recurringinnature.

Revenue
Expenditure

Characteristics

i. It is received
in the
normal
course of
business.

A heavy revenue
expenditure, the
benefit of which may
be extended over a
number of years, and
notforthecurrentyear
alone is called
deferred revenue
expenditure. For
example, a new firm
may advertise very
heavily in the
beginningtocapturea
positioninthemarket.
The benefit of this
advertisement
campaignwilllastfor
quite a few years. It
willbebettertowrite
off the expenditure in
threeorfouryearsand
not only in the first
year.

ii. It

is
recurring in
nature.
Examples

i. Sale of goods
orservices.
ii. Commissio
n and
Discount
received.
iii. Dividend
and interest
received on
investments
etc.
11.3 Deferred
258
259

Characteristics

i.

Benefit is
enjoyedformorethan
oneyear

ii.

It is non
recurringinnature
Examples

i. Expenses
incurred on
researchand
developmen
t
ii. Abnormal
loss arising
out of fire
or lightning
(in casethe
asset has
not been
insured).
iii. Huge
amount
spent on
advertiseme
nt.
11.4 Revenue
expenditure,
Capital
Expenditure
and Deferred
revenue
expenditure
Distinction
Basisof
S.No. Distinction
1.

Periodofbenefit

Capital
Expenditure
Benefitisenjoyed
beyondthe
accountingyear,

2.

Purpose

lastsforalongtime
Relatestothe
acquisitionoffixed
assets.

3.

Natureof
occurance

Nonrecurring
innature.

4.

Aim

Helpstoincrease
theearningcapacity
ofthebusiness.

5.

Convertibility

Convertedinto
cash.

11.5 Capital profit

and Revenue
profit
In order to find
out the correct profit
andthetruefinancial
position, there must
beacleardistinction
betweencapitalprofit
andrevenueprofit.

11.5.1 Capital
profits

Capital profit is
the profit which
arises not from the
normal course of the
business. Profit on
sale of fixed asset is
an example for
capitalprofit.

11.6.1 Capital
Losses
Capital losses are
the losses which arise
not from the normal
courseofbusiness.Loss
onsaleoffixedassetis
an example for capital
loss.

11.5.2 Revenue
profits

11.6.2 Revenue
Losses

Revenueprofitis
the profit which
arises from the
normal course of the
business. i.e, Net
Profittheexcessof
revenuereceiptsover
revenueexpenditures.

Revenuelosses
arethelossesthat
arisefromthenormal
courseofthe
business.Inother
words,netloss
i.e.,excessofrevenue
expendituresover
revenuereceipts.

11.6 Capital loss

and Revenue loss
In order to
ascertain the loss
incurredbyafirmitis
important

to
distinguish between
capital losses and
revenuelosses.

Illuatration1:
Shyam&Co.,
incurredthe
followingexpenses
duringtheyear
2003.Classifythe
followingitems
undercapitalor

revenue
i. Purchase of
furniture
Rs.1,000.
ii. Purchase of
secondhand
260
261

iv. Rs.175paid
for repairs
on second
hand
machinery
assoonasit
was
purchased.
v. Rs.600
wages paid
for
installation
ofplant.
Solution
i. Capital
expenditure
as it
results in
the
acquisition
of fixed
asset.
ii. Capital

machinery
Rs.4,000.
iii. Rs.50 paid
for carriage
on goods
purchased.

expenditure
as it
results in
the
acquisition
of fixed
asset.
iii. Revenue
expenditur
e

expenses
incurredon
purchases
of goods
forsale.
iv. Capital
expenditure
as it is
spent for
bringing
the asset
into
working
condition.

v. Capital
expenditure
as it is
spent for
bringing
the asset
into
working
condition.
Illustration2
PrasadPictures
Ltd.constructeda
cinemahouseand
incurredthefollowing
expendituresduring
theyearended
31.12.2003.

i. Second hand
furniture
purchased
worth
Rs.3,00,000
.
ii. Expenses in
connection
with
obtaining a
licensewere
Rs.30,000.
iii. Fire
insurance,

Rs.2500
waspaidon
1st January
2003 for
oneyear.
iv. During the
first week
after the
release of
the cinema,
free tickets
worth
Rs.30,000
were
distributed
to increase
thepublicity
of the
cinema
house.
v. The
managers
salary for
theyearwas
Rs.60,000.
Classifythe
abovetransactions
intocapital,revenue
anddeferredrevenue
expenditures.

Solution
i. Capital
expenditur
e as the
amount
spent
results in
acquisition
of fixed
assets.
ii. Capital
expenditur
e as the
amount
was spent
on
acquiring a
right to
carry on
business.
iii. Revenue
expenditure
amount spent
relatestoonly
oneyear.

iv. Deferred
revenue
expenditure
it is a
heavy
advertising
expenditure
as the

benefit will
last more
than one
year.
v.Revenue
expenditure
incurred for
the
functioningof
business.

Illustration3
Hari&Co.
incurredthe
followingexpenses
duringtheyear2003
Classifytheexpenses
ascapitaland
revenue.
i. Rs.750 spent
towards
replacement
of a worn
outpartina
machinery.
ii. Rs.1,500
spent for
legal
expenses in
relation to
raising of a
loanforthe

business.
iii. Rs.300
spent for
ordinary
repairs of
plant.
iv. Rs.6,000
spent on
replacing a
petrol
driven
enginebya
diesel
driven
engine.
v. Electricity
charges
Rs.1,200
permonth.
Solution
i. Capital
262
263

iv. Capital
expenditure
as it helps to
reducecostof
production.

v. Revenue
expenditur
e

expenditure
asithelps
to increase
the
working
condition
of the
machinery.
ii. Capital
expenditur
easitis
spent as it
helpstoget
a capital
receipt.
iii. Revenue
expenditur
easitis
spent for
the
maintenanc
e of the
asset.
expenditur
e incurred
in the
normal
course of
the
business.

cotton T
shirts(cost
Rs. 1,200 )
for
Rs.1,500.

Illustration4
Fashion Textiles
gives the following
transactions of their
firm during the year
2003, you are
required to classify
the transactions into
capitalorrevenue.
i. Rs.2,500
spent on
purchasing
a tyre for
theirlorry.
ii. They had
old
machinery
of value
Rs.10,000
wassoldfor
Rs.9,500.
iii. They
received
Rs.5000
towards
dividend
form their
investments
inshares.
iv. They were
able to sell

v. Rs.600 was
spent on
alterationof
amachinery
in order to
reduce
power
consumptio
n.
Solution
i. Revenue
expenditure
asitspent
toreplacea
part of the
lorry.
ii. Capital loss
Rs.500as
they have
incurred a
loss on sale
of fixed
asset and
Rs.9,500
will be a
capital

receipt as it
is a sale of
fixedasset.
iii. Revenue
receipt
earnedinthe
ordinary
course of
business.

iv. Revenue
receipt
Rs.300 is
received in
the
ordinary
course of
business.
v. Capital
expenditure
as it
reducescost
of
production.

Illustration5
Bharatcompany
hasincurredthe
followingexpenditure
youarerequiredto
identifythecapital,
revenueanddeferred
revenueexpenses.

i. Rs.60,000
travelling
expenses of
their sales
manager
who
travelled to
Japan to
attend a
meeting in
order to
increase
sales trip
was quite
successful.
ii. Rs.500
spent for
installing
machinery.
iii. Rs.6,00,000
spent on
researchand
developmen

t.
iv. Rs.500 paid
forfuel.

the normal
functioning
ofthefirm

Solution

Q
U
E
S
T
I
O
N
S

i. Deferred
revenue
expenditur
e benefit
likelytobe
enjoyedfor
more than
oneyear
ii. Capital
expenditure
amount is
spent to
bring the
asset into
use.
iii. Deferred
revenue
expenditur
e the
benefit can
be spread
for more
than one
year
iv. Revenue
expenditure
spent for

I. Objective Type

a)Fillintheblanks:
1. Amountspenton
acquiringacopy
right is an
examplefor
_________.
2. Capital
expenditure is
_________ in
nature.
3. Revenue
transactions can

be_________or

_________.

264
265

4. Depreciation on
fixed asset is a
_________
expenditure.
5. Expenses on
research and
development will
beclassifiedunder

_________.
[Answers:1.capital
expenditu
re,2.non
recurring,
3.
revenue
expenditu
re,
revenue
receipt,4.
revenue
expenditu
re,
5.deferred
revenue
expenditu
re.
b)Choosethe
correctanswer:

1. Transaction
which provide
benefit to the
business for
more than one
yeariscalledas
a)capital
transaction
b)revenue
transaction

c) neitherofthe
two.
2. Amountspenton
remodelling an
old car is
exampleof
a)deferred
revenue
expenditureb)
revenue
expenditure
c) capital
expenditure
3. Shankar
introduces
Rs.50,000 as
additional
capital in the

business. This
amount will be
considered as
__________.
a)capitalreceipt
b)revenue
receipt
c) both
4. Revenuereceipts
are
___________ in
thebusiness.
a)nonrecurring
b)recurring

c) neitherofthe
above.
5. Venkatesh
purchases goods
worth Rs.80,000
for the purpose
of selling. This
amount will be
treatedas
a)capital
expenditure
b)revenue
expenditure

c)deferred
revenue
expenditure

6. Expenses on
advertisement
willbeclassified
under
a)capital
expenditure
b)revenue
expenditure

c) deferred
revenue
expenditure
7. An plant worth
Rs.8,000 is sold
for 8,500 the
capital receipt
amountsto
a)Rs.8,000
b)Rs.8,500
c) Rs.500
8. Revenue
expenditure is
intended to
benefit.
a)subsequent
year
b)previousyear
c) currentyear
9. An asset worth
Rs.1,00,000 is
sold

for

Rs.85,000 the
capital loss
amountsto
a)Rs.85,000
b)Rs.1,00,000
c) Rs.15,000
10. The net loss
whicharisesina
business is an
exampleof
a) revenueloss
c) neitherofthetwo
[Answers:1.(a),2.
(c),3.(a),4.(b),5.
(b),6.(c),7.(b),8.
(c),
9. (c), 10.
(a)]
AI. Other Questions:
266
267

III. Problems:

1. Classify the
following into
capital and
revenue
i.

Rs.560spent
on
replacement

1. Write the
characteristic
s of Capital
Expenditure.
2. What is a
revenue
expenditure?
3. Write a note
on deferred
revenue
expenditure.
4. Differenciate
Capital,
Revenue &
Deferred
revnue
expenditure.

5. What are
Capital
profits?
6. What is
revenueloss?

of a worn
ourpartofa
plant

ii. Rs.1,500
spent on
complete
overhauling
of a second
hand

machinery
justbought.
iii. Carriage
expenses
Rs.230
iv. Profit on
saleofasset
Rs.700
v. Rs.250 loss
on sale of
furniture
[Answers:Capital
expendit
ure(i),
(ii);
Revenue
expendit
ure
(iii);
Capital
profit
(iv);
Capital
loss
(v)]
2. Raju gives you
the following
expenses which
wereincurredin
his business
during the year

2003, classify
them

into
capital,revenue
or deferred
revenue
i. Rs.12,000
spent on
purchasing
a patent
right
ii. Freight
chargespaid
on new
plant
amounts to
Rs.700
iii. Repairs of
Rs.575 for
furniture
iv. Rs.5,000
spent
towards
expenses
connected
with rain
water
harvesting
as per
Government
orders
v. Rs.7,500
spent

towadrs
initial
advertsing
expenses
[Answers:Capital
expendit
ure(i),
(ii),(iv);
Revenue
expendit
ure(iii);
Deferred
revenue
expendit
ure(v)]

3. Vasudevangives
you

the
following
transactions in
his business,
classify into
capital

or
revenue
i.

Purchases of
goods worth
Rs.7,000 for
thepurposeof
selling.

ii. Rs.1200fire
insurance
for the

building for
business.
iii. Renewal of
magazine
subscription
feeRs.75.

iv. Cost of
Rs.1,00,000
on building
agodown.
v. Purchased
land for
Rs.1,00,000
.
[Answers:
C
a
p
it
a
l
e
x
p
e
n
d
it
u
r
e

(
i
v
),

(
v
)
;
R
e
v
e
n
u
e
e
x
p
e
n
d
it
u
r
e

(
i
),
(
ii
),
(
ii

i
)
]

4. Classify the
following
expenses into
Capital and
revenue.
i. registration
expenses
incurred for
thepurchase
ofland.
ii. repairing
chargespaid
for
remodelling
the
purchased
old
building.
iii. profit
earned on
the sale of
old
furniture.
[Answers:Capital
expenditure(i),(ii);
Capitalprofit(iii)]
5. Statewhetherthe
following are
capital

or

revenue
i. repairs
made on
secondhand
plant
purchased
ii. wages paid
to workmen
for setting
up a new
plant
iii. replacement
of old
furniture
iv. salary paid
tostaff
v. amount
received as
rent during
the year for
lettingouta
portion on
subrent
[Answers:Capital
expendit
ure(i),
(ii),(iii);
Revenue
receipts
(v);
Revenue
expendit

ure
(iv)]
6. Classify as
capital and
revenue
i. carriage
paid on
goods
purchased
ii. legal
expenses
paid for
raising of
loans
iii. cost of
maintenanc
e

of
building
iv. investments
costing Rs
40,000were

purchased a
few years
back, were
sold for Rs
50,000
v. annual
white
washing
charges
amountedto
Rs1,000
[Answers:Capital
expendit
ure
(ii);
Revenue
expendit
ure(i),
(iii),(v);
Capital
profit
(iv)]

268
269

TE
R12
C
H
AP

F
I
N

A
L
A
C
C
O
U
N
T
S

Learning
Objectives
Afterlearning
thisChapter,
youwillbeable
to:
know the
Meaning,
Purpose,
Content
and
Formatof
Trading,
Profit
and Loss
Account

and
Balance
Sheet.

under
stand
the
Differ
ences
betwe
en
Trial
Balan
ce
and
Balan
ce
Sheet.
prepare
the Final
Accounts.

Trial balance
proves the arithmetical
accuracy of the
business transactions,
but it is not the end.
The businessman is
interested in knowing
whether the business

hasresultedinprofitor
loss and what the
financial position of
the business is at a
given period. In short,
he wants to know the
profitability and the
financial soundness of
thebusiness.Thetrader
can ascertain these by
preparing the final
accounts. The final
accounts are prepared
at the end of the year
from the trial balance.
Hencethetrialbalance
is said to be the
connecting

link
between the ledger
accounts and the final
accounts.

Fin
al
Ac
cou
nts

Tradingand
Balance
Sheet

ProfitandLoss
Account

12.1 Parts of Final

Accounts
The

final
accounts of business
concern generally
includes two parts.
The first part is
Trading and Profit
and Loss Account.
This is prepared to
findoutthenetresult
of the business. The
second part is
BalanceSheetwhich
is prepared to know
thefinancialposition

of the business.
However
manufacturing
concerns,

will
prepare

a
Manufacturing
Account prior to the
preparationoftrading
account, to find out
costofproduction.

Attheendofeach
year,itisnecessaryto
ascertainthe net profit
or net loss. For this
purpose, it is first
necessary to know the
gross profit or gross
loss. The trading
account is prepared to
ascertain this. The
difference between the
selling price and the
costpriceofthegoods
isthegrossearningof
the business concern.
Such gross earning is
called as gross profit.
However, when the
sellingpriceislessthan
the cost of goods
purchased,theresultis
grossloss.

12.2 Trading
Account
Trading means
buying and selling.
The trading account
shows the result of
buyingandsellingof
goods.
12.2.1 Need
270
271

12.2.2 Format
T
r
a
d
i

n
g
A
c
c

o
u
n
t

xxx
Items appearing in the
debit side

for the
year
ending
31st
March
2003

1. Opening

Dr.
Particulars

Rs.

ToOpeningStock
ToPurchases

Rs.
xxx

xxx

Less:Returns
outward

xxx

xxx

ToWages

xxx

ToFreight

xxx

ToCarriage
Inwards

xxx

ToClearing
charges

xxx

ToPackingcharges

xxx

ToDockdues

xxx

ToPower(factory)

xxx

ToOctroiDuty

xxx

ToGrossProfitc/d

xxx

(transferredto
P&LA/c)

stock: Stock
on hand at
the begining
oftheyearis
termed as
opening
stock. The
closing stock
of

the
previous
accounting
year is
brought
forward as
opening
stcokofthe

current
accounting
year.Inthe
caseofnew
business,
therewill
notbeany
opening
stock.
2.Purchases:

Purchases
made during
the year,
includesboth
cash and
credit
purchases of
goods.
Purchase
returns must
be deducted
fromthetotal
purchases to
get net
purchases.
3. Direct
Expenses:

Expenses
which are
incurred
from the

stage of
purchase to
thestageof
making the
goods in
saleable
condition
are termed
as direct
expenses.
Someofthe
direct
expenses
are:
i. Wages:
It means
remuner
ation
paid to
workers.
ii. Carriage
or
carriage
inwards:

It means
the
transport
ation
charges
paid to
bringthe
goods

from the
place of
purchase
to the
place of
business
.
iii. Octroi
Duty:

Amount
paid to
bring
the
goods
within
the
municip
allimits.
iv. Customs
duty,
dock
dues,
clearing
charges,
import
duty
etc.:

These
expenses
are paid
to the
Govern

ment on
the
goods
imported
.
v. Other
expenses:

Fuel,
power,
lighting
charges,
oil,
grease,wa
ste
related to
productio
n and
packing
expenses.
Items appearing in the
credit side

i. Sales:
This
includes
both cash
and credit
sale made
during the
year. Net
sales is
derived by

deducting
sales return
from the
totalsales.
ii. Closing
stock:

Closing
stock is the
value of
goodswhich
272
273

trialbalance.
(As it
appears
outside the
trialbalance,
first it will
be recorded
in the credit
side of the
trading
account and
then shown
in the assets
side of the
balance
sheet).

Illustration1
Preparea

remain in
thehandsof
the traderat
the end of
the year. It
does not
appearinthe
trialbalance.
It appears
outsidethe

TradingAccount
fromthefollowing
informationofa
trader.
Totalpurchases
madeduringthe
year2003
Rs.2,00,000.
Totalsalesmade
duringtheyear
2003
Rs.2,50,000
Solution:
Trading
Accountfor
theyear
ending31st
March2003

Solution:

(transferredtoP&LA/c)

Trading
Accountfor
theyear
ending
31.12.2003
Particulars
ToOpeningstock
ToPurchases
ToGrossprofitc/d

44,100

Illustration3

Rs.
15,000
16,500
12,600

Dr.
Particulars
ToPurchases
ToGrossprofitc/d

Rs.
2,00,000
50,000

Prepare Trading
Accountfortheyear
ending 31st March
2002 from the
following
information.
O
Sales
pe
return
ni
Rs.
ng
20,000
st
Carriage
oc
inward
k
Rs.
Rs
20,000
.
1,
70
,0
00
Sa
les
Rs
.2,
50
,0
00

PurchasesreturnRs.
10,000WagesRs.
50,000PurchasesRs.
1,00,000Closing

st
oc
k
Rs

(transferredtoP&LA/c)

2,50,000

Illustration2
Fromthe
following
information,prepare
aTradingAccount
fortheyearended
31.12.2003.
2003Jan1
Openingstock
Rs.15,000

2003Dec31
Purchases
Rs.16,500
S
a
l
e
s
R
s
.
3

.1,60,000

0
,
6
0
0
C
l
o
s
i
n
g
s
t
o
c
k
R
s
.
1
3
,
5
0
0

Solution:
Trading
Accountfor
theyear
ending31st
March2002

Dr.

Cr.
Particulars

Rs.

ToOpeningstock
ToPurchases
LessPurchasesreturn

Rs.

Particulars

1,70,000 BySales
1,00,000
10,000

Rs.
2,50,000

LessSalesreturn

20,000

50,000 Byclosingstock

ToCarriageinwards

20,000

ToGrossprofitc/d
(transferredtoP&LA/c)

60,000

1,60,000

3,90,000

12.2.3 Balancing
The difference
betweenthetwosidesof
the Trading Account,
indicates either Gross
Profit or Gross Loss. If
the credit side total is
more, the difference
represents Gross Profit.
Ontheotherhand,ifthe
totalofthedebitsideis
more, the difference
represents Gross Loss.
The Gross Profit or
GrossLossistransferred
to Profit & Loss
Account.

2,30,000

90,000

ToWages

274
275

Rs.

3,90,000

12.2.4 Closing
Entries
Like

ledger
accounts, trading
account will be closed
by transferring the
gross profit or gross
loss to the profit and
lossaccount.

i.

Ifgrossprofit
Trading
A/c.............
Dr
xxx

To
profit
and

loss
accoun
t
xxx

(Gross
Profit
transferred
to
Profitand
lossA/c)
ii.

Ifgrossloss.
Profitand
loss
A/c.........Dr
xxx

To
Tradin
gA/c
xxx

(GrossLoss
transferred
to
Profitand
lossA/c)
12.3 Profit and
Loss Account
After calculating
the gross profit or
grosslossthenextstep
istopreparetheprofit

and loss account. To

earnnetprofitatrader
has to incur many
expenses apart from
those spent for
purchases

and
manufacturing of
goods. If such
expensesarelessthan
grossprofit,theresult
will be net profit.
Whentotalofallthese
expenses are more
than gross profit the
resultwillbenetloss.

12.3.1 Need:

Theaimofprofit
andlossaccountisto
ascertainthenet
profitearnedornet
losssufferedduringa
particularperiod.
12.3.2 Format

P
r
o
f
i
t
a
n
d

L
o
s
s
A
c
c
o
u
n
t
for
the
year

ende
d.....
........
........
.

Dr.
Particulars
ToTradingA/c
(GrossLoss)
ToSalaries
ToRent&rates
ToStationeries
ToPostageexpenses
ToInsurance
ToRepairs
ToTradingexpenses
ToOfficeexpenses
ToInterestpaid
ToBankcharges
ToSundryexpenses
ToCommissionpaid
ToDiscountallowed
ToAdvertisement
ToCarriageoutwards
ToTravellingexpenses
ToDistributionexpenses
ToRepackingcharges
ToBaddebts
ToDepreciation
ToNetProfit(transferred
toCapitalA/c)
276
277
Items appearing in the
debit side

Those expenses
whicharechargeable
to the normal

Cr.
Rs.
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

Particulars
ByTradingA/c
(Grossprofit)
ByCommissionearned
ByRentreceived
ByInterestreceived
ByDiscountreceived
ByNetLoss
(Transferredto
CapitalA/c)

Rs.
xxx
xxx
xxx
xxx
xxx
xxx

xxx

activities of the
businessarerecorded
in the debit side of
profit and loss
account. They are
termed as indirect

expenses.

i. Office

and
Administrative
Expenses :

Expenses
incurred for
the
functioning of
an office are
office and
administrative
expenses
office salaries,
office rent,
officelighting,
printing and
stationery,
postages,
telephone
chargesetc.

ii. Repairs and

Maintenance
Expenses :

These
expenses
relates to the
maintenance
of assets
repairs and
renewals,
depreciation
etc.

iii. Financial
Expenses :

Expenses
incurred on
borrowings
Interest paid
onloan.
iv. Selling and
Distribution
Expenses:All

expenses
relating to
sales and
distributionof
goods
advertising,
travelling
expenses,
salesmen
salary,
commission
paid

to
salesmen,
discount
allowed,
repacking
chargesetc.
Items appearing in the
credit side

Besides

the

gross profit, other

gainsandincomesof
the business are
shown on the credit
side. The following
are some of the
incomesandgains.
i. Interest
received on
investment

Illustration4
PrepareProfit
andLossAccount,
fromthefollowing
balancesof
Mr.Kandanforthe
yearending
31.12.2003.
Rs.

30,000

ii. Interest
received on
fixed
deposits.

PrintingexpensesRs.

2,000

Tax,Insurance Rs.

4,000

iii. Discount
earned.

GrossProfit

iv. Commissio
nearned.
v. Rent
Received

Officerent

Advertisement Rs. 36,000

Solution:
Pr
o
f
i
t

a
n
d

L
o
s
s

Rs.2,50,000


A
c
c
o
u
n
t

o
f

M
r
.

K
a
n
d
a
n

f
o
r

h
e

y
e
a
r

e
n
d
i
n
g

3
1
s
t

D
e
c

2
0
0
3

Dr.

Cr.
Particulars

Rs.

Particulars

ToSalaries

80,000 ByGrossprofit

ToOfficerent

30,000 (transferredfromthe

ToStationaries

3,000 TradingA/c)

Rs.
2,50,000

ToPrintingexpenses

2,000 ByDiscountreceived

ToTax,insurance

4,000

ToDiscountallowed

6,000

ToTravellingexpenses

26,000

ToAdvertisement

36,000

ToNetprofit(transferred
tocapitalA/c)

67,000
2,54,000

278
279

Illustration5
PrepareTrading
andProfitLoss
Accountfortheyear
ending31stMarch
2002fromthebooks
ofMr.Siva
Subramanian.
Stock(31.3.2001)
Purchases
Purchasesreturn
Postage
Discountreceived
Baddebts
Sales
Stock(31.3.2002)
Solution:
Trading
a

Rs.
15,000
1,65,000
10,000
3,000
5,000
1,000
3,00,000
80,000

4,000

2,54,000

n
d

P
r
o
f
i
t

&

L
o
s
s

A
/
c

o
f

M
r
.

S
i
v
a

S
u
b
r
a
m
a
n
i
a
n

f
o
r

t
h
e

e
a
r

e
n
d
e
d

3
1
s
t

M
a
r
c
h

2
0
0
2
Dr.
Particulars
ToOpeningstock
ToPurchases
LessReturns
ToWages
ToGrossprofit
(transferredto
P&LA/c)

Rs.

Rs.
15,000

1,65,000
10,000

1,55,000
30,000
1,75,000

3,75,000
ToSalaries
ToPostage
ToBaddebts
ToCarriageoutwards
ToStationeries
ToInterest
ToInsurance
ToNetprofit

20,000
3,000
1,000
4,000
2,000
8,000
4,000
1,38,000

(transferredCapitalA/c)

1,80,000

Illustration6
Fromthe
followingtrialbalance
ofMr.John,prepare
Trading,Profitand
LossAccountforthe
yearending
31.12.2002.

Particulars

Debit
Rs.

Purchases

5,40,000

Salaries&wages

3,50,000

Officeexpenses

4,000

Tradingexpenses

8,000

Factoryexpenses

11,000

Carriageinwards

8,000

Returnsinward

12,000

Discountallowed

4,000

Commission

2,000

Stock

60,000

Incometax

40,000

Cashinhand

2,00,000

12,39,000

280
281

Solution:
Tradi
n
g
,

P
r
o
f
i
t

&

L
o
s
s

A
c
c
o
u
n
t

Closingstockis
valuedatRs.
1,35,000.

o
f

M
r
.

J
o
h
n

f
o
r

t
h
e

y
e
a
r

e
n

d
i
n
g

3
1
.
1
2
.
2
0
0
2

ToNetprofit
(transferredto
capitalA/c)

5,57,000

Note:

Dr.
Particulars

Rs.

Rs.

ToStock
60,000
ToPurchases
5,40,000
LessPurchases
return
12,000 5,28,000
ToTradingexpenses
8,000
ToFactoryexpenses
11,000
ToCarriageinwards
8,000
ToGrossprofit
5,48,000
(transferredto
P&LA/c)
11,63,000
ToSalaries&wages
ToOfficeexpenses
ToDiscountallowed
ToCommission

1,97,000

3,50,000
4,000
4,000
2,000

i. Iftrialbalance
shows both
trading
expenses as
well as
office
expenses,
the trading
expenses
should be
shown in
the trading
account and
office
expenses
should be
shown in
profit &
loss
account. On
the other
hand, if the
trialbalance
shows only
trading
expenses, it
should be

shown in
theprofit&
loss
account.

ii. Ifinthetrial
balance,
wages are
clubbed with
salaries and
shown as
wages and
salaries.
This item is
shown in
trading
account. On
the other
hand, if it
appears as
salaries and
wages, this

item is
recorded in
the profit &
lossaccount.

iii. Income tax

paid by a
proprietor is
considered
as personal
expenses.So
it should be
deducted
from the
capital.

Profitand
Loss
A/c.............
Dr

12.3.3 Balancing

The difference
betweenthetwosides
of profit and loss
account indicates
eithernetprofitornet
loss.Ifthetotalonthe
creditsideismorethe
differenceiscallednet
profit. On the other
hand if the total of
debitsideismorethe
difference represents
netloss.Thenetprofit
or net loss is
transferred to capital
account.

xxx

To
Capital
A/c
xxx

(Netprofit
transferred
to
capitalA/c)
ii.

Ifnetloss
Capital
A/c..............
......Dr.

12.3.4 Closing
Entries

xxx

To
Profit
and
loss
A/c

Profitandloss
accountshouldbe
closedby
transferringthe
net
profitornetlossto
capitalaccount.

i.
282
283

xxx

(Netloss
transferred
to
capitalA/c)

Ifnetprofit

12.4 Balance

Sheet:

This forms the

secondpartofthefinal
accounts. It is a
statementshowingthe
financialpositionofa
business. 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
righthandside,allthe
assets are shown.
Balancesheetisnotan
account but it is a
statement prepared
from the ledger
balances. So we
should not prefix the
accounts with the
wordsToandBy.
Balance sheet is

defined as a
statement which sets

out the assets and

liabilities of a
business firm and
which serves to
ascertainthefinancial
position of the same
on any particular
date.
12.4.1 Need:

Theneedfor
preparinga
Balancesheetis
asfollows:
i.

Toknow
the
nature
and
value of
assets of
the
business

ii. To
ascertai
n the
total
liabilitie
s of the
business
.
iii. To

know
the
position
of
owners
equity.
12.4.2 Format

TheBalance
sheetofabusiness
concerncanbe
presentedinthe
followingtwoforms
i. Horizon
tal form
or the
Account
form
ii. Vertical
form or
Report
form

i) Horizontalform
of Balance
Sheet:
The right hand
side of the balance
sheetisassetsideand
the left hand side is
liabilities side. All
accountshavingdebit
balancewillappearin
theassetsideandall
those having credit
balancewillappearin
theliabilityside.
B
a
l
a
n
c
e

S
h
e
e
t
o
f

.
.
.
.
.

.
.
.
.
.
.
.
.
.
.
.
as
on..
.......
.......
..

Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Sundrycreditors

xxx Cashinhand

xxx

Billspayable

xxx Cashatbank

xxx

Bankoverdraft

xxx Billsreceivable

xxx

Outstandingexpenses

xxx Sundrydebtors

xxx

Mortgageloans

xxx Investments

xxx

Reservefund

xxx Closingstock

xxx

Capital

xxx

Prepaidexpenses

xxx

Furniture&fittings

xxx

xxx

Plant&machinery

xxx

xxx

Land&buildings

xxx

xxx

Businesspremises

xxx

xxx

Patents&trademarks

xxx

Goodwill

xxx

Add:Netprofit(or)
Less:Netloss

Less:Drawings

Less:Incometax

xxx

xxx
xxx

284
285

ii) Verticalformof
BalanceSheet
Inthis,Balance
Sheetis
presentedina
statementform.
Balan
ce

xxx

Sheet
as
on.....
..........
..........
.....
Particulars
CurrentAssets:
StockinTrade
SundryDebtors

PrepaidExpenses
AccruedIncome
BillsReceivable
CashatBank
CashinHand
TotalCurrentAssets
Less:CurrentLiabilities:
SundryCreditors
BillsPayable
BankOverdraft
OutstandingExpenses
TotalCurrentLiabilities
NetWorkingCapital:
Add:FixedAssets:
Goodwill
LandandBuilding
PlantandMachinery
Furniture
Investment
TotalFixedAssets
CapitalEmployed
(Bothownersandoutsiders)
Less:LongTermLiabilities
Debentures
Loans
TotalLongTermLiabilities
NetAssets
Representedby:
OwnersCapital
Reservesandsurplus
ShareholdersFunds

12.4.3
Classification of
Assets and
Liabilities
Assets

Assetsrepresents
everything which a
business owns and
has money value. In
other words, asset
includes possessions
and properties of the
business. Asset are
classifiedasfollows:
Assets
Tangibl
e
Intangi
ble
Fictitious

Fixed
Current

a) Tangible Assets:

Assets which
have some physical
existence are known
as tangible assets.
They can be seen,
touchedandfelt,e.g.
Plant and Machinery
Tangible assets are
classifiedinto
i.Fixedassets:

Assetswhichare
permanent in nature
havinglongperiodof
life and cannot be
286
287
b) Intangible Assets

Theassetswhich
have no physical
existence and cannot
beseenorfelt.They
help to generate
revenueinfuture,e.g.
goodwill, patents,
trademarksetc.
c) Fictitious Assets

These assets are

nothing but the

convertedintocashin
a short period are
termedasfixedassets.
ii.Currentassets:

Assetswhichcan
be converted into
cash in the ordinary
course of business
and are held for a
shortperiodisknown
ascurrentassets.This
is also termed as
floating assets. For
example, cash in
hand, cash at bank,
sundrydebtorsetc.
unwritten off losses
or nonrecoupable
expenses. They are
really not assets but
are worthless items.
For

example,
Preliminaryexpenses.
Liabilities

The amount
which a business
owes to others is
liabilities. Credit

balance of personal
and real accounts
together with the
capital account are
liabilities.
Liabil
ities
LongTerm
Current
Contigent
a) Long Term
Liabilities

Liabilities which
are repayable after a
long period of time are
known as Long Term
Liabilities. For example,

capital, long term loans

etc.
b) Current Liabilities

Currentliabilities
are those which are
repayable within a
year. For example,
creditors for goods

purchased, short term

loansetc.
c) Contingent
liabilities

Itisananticipated
liability which may or
maynotariseinfuture.
For example, liability
arising for bills
discounted. Contigent
liabilities will not
appear in the balance
sheet. But shown as
footnote.

12.4.4 Marshalling
of Assets and
Liabilities

sheet.

The

term
Marshalling refers
totheorderinwhich
thevariousassetsand
liabilities are shown
in the balance sheet.
The assets and
liabilities can be
shown either in the
order of liquidity or
in the order of
permanence.

This order is
exactly the reverse of
the above. Assets and
liabilities are recorded
intheorderoftheirlife
inthebusinessconcern.

a) In order of liquidity

Liquidity means
convertability into
cash. Assets will be
saidtobeliquidifit
canbeconvertedinto
cash easily, they are
placed at the top of
the balance sheet.
Liabilities

are
arrangedintheorder
of their urgency of
payment. The most
urgentpaymenttobe
made is listed at the
top of the balance

b) In order of
permanence

12.4.5 Balance
Sheet Equation
An important
thingtonoteaboutthe
Balance Sheet is that,
the total value of the
assets is always equal
tothetotalvalueofthe
liabilities. This is
because the liability to
the owner capital, is
alwaysmadeupofthe
difference between
assets and liabilities.
Thus,

Assets

= Liabilities+Capita
or
Capital = AssetsLiabilitie
While preparing
thetrialbalanceincase

it does not tally the

differenceistransferred
toanimaginaryaccount
called as suspense
account. In case the
suspenseaccountisnot
closed before the
preparationofthefinal
accounts then it has to
beplacedinthebalance

sheet,sothatitcanbe
rectified later. If
suspenseaccounthasa
debit balance it will
appear as the last item
intheassetside.Incase
it shows a credit
balanceitwillappearas
the last item in the
liabilityside.

288
289

12.5 Difference
between Trial
Balance and
Balance Sheet
S.No.

Basis
Distinction

Trialbalance

1.

Objective

Toknowthearithmetical
accuracyoftheaccounting
work.

2.

Format

3.

Content

4.

Stage

Itisthemiddlestageinthe
preparationofaccounts.

5.

Period

Itcanbepreparedperiodically,
sayattheendofthemonth,
quarterlyorhalfyearly,etc.

6.

Preparation Itispreparedbefo
preparationoftradin
andlossaccount.

7.

Stock

Itshowsopeningsto

8.

Order

Balancesshownint
balancearenotinor

9.

Evidence

Itcannotbeproduce
documentaryeviden
court.
Thecolumnsaredebitbalances
10. Compulsion Preparationoftrialb
andcreditbalances.
notcompulsary.
Itisasummaryofalltheledger
balancespersonal,realand
nominalaccounts.

Illustration7
From

the
following Trial
BalanceofM/s.Ram
& Sons, prepare
tradingandprofitand
loss account for the
year ending on 31st
March 2002 and the
balance sheet as on
thedate:
Trial
Balanc
eason
31st
March
2002

Purchases
Discountallowed
Wages
Sales
Salaries
Travellingexpenses
Commission
Carriageinward
Administrationexpenses
Tradeexpenses
Interest
Building
Furniture
Debtors
Creditors
Capital
Cash

Particulars
OpeningStock(1.4.2001)

Stockon31stMarch
2002wasRs.6,000.

290
291

o
ns

Solution:
M
/s.
R
a
m
&
S

T
r
a
d
i

n
g

a
n
d

P
r
o
f
i
t

a
n
d

L
o
s
s

A
c
c
o
u
n
t

o
r

t
h
e

y
e
a
r

e
n
d
i
n
g

3
1
s
t

M
a
r
c
h

2
0

0
2

17,495

Dr.
Particulars

Rs.

ToOpeningstock
ToPurchases
ToWages
ToCarriageinward
ToGrossprofitc/d

(transferredtoP&LA/c)

5,000
16,750
6,500
275
7,475
36,000

ToDiscount
ToSalaries
ToTravellingexpenses
ToCommission
ToAdministrationexpenses
ToTradeexpenses
ToInterest
ToNetprofit(transferred

1,300
2,000
400
425
105
600
250
2,395

tocapitalA/c)

7,475

Balanc
eSheet
ason
31st
March
2002
Liabilities
Creditors
Capital
AddNetprofit

Rs.

Rs.
2,100

13,000
2,395
15,395

Q
U
E
S
T
I
O
N
S
I.Objective type :
a) Fillintheblanks:
1. _________
___account
enables the
trader to
findout
gross profit
orloss.
2. By
preparing
profit and
lossaccount
_________
can be find
out.
3. Closing
stock is
_______ in

the trading
account.
4. Direct
expenses
appearsinthe
debit side of
the
___________

account.
5. Indirect
expenses
appears in
the
__________
side of the
profit and
loss
account.
6. Allincomes
are
__________
___ in the
profit and
loss
account.
7. Bad debt is
a
__________
expense.
8. Salaries
and wages
appear on

the
__________
_____
account.
9. Balance
sheet shows
the
________
of

a
business
[Answers:1.Trading,
2.net
profitor
loss,3.
credited,4.
Trading,5.
debit,6.
credited,7.
selling,8.
profitand
292
293

2.Wages is an
exampleof
a)capital
expenses
b)indirect
expenses

c) direct
expenses
3.Opening
stockis

loss
account,

9. financi
al
positio
n]
b) Choose the
correctanswer:
1. Trading
account is
prepared to
findout
a)gross
profitor
loss

b)netprofit
orloss

c)financial
position

a)debitedin
trading
accountb)
creditedin
trading
account

c) credit in
profit and
lossaccount
4.Balance sheet

isa
a)statement
b)account
c)ledger

5.Fixed assets
have
a)shortlife
b)longlife
c)nolife

6.Cash in hand
is

an
exampleof
a)current
assets
b)fixed
assets
c)current
liability

7.Capitalisa
a)income
b)assets
c)liability

8.Drawingmust
be deducted
from

a)netprofit
b)capital
c)gross
profit

9.Current
liabilities
arerecorded
in the
balance
sheeton
a)notrecorded

b)lia

10.Netprofitisaddedto
a)grossprofit
b)dr
[Answers:1.(a),2.
(c),3.(a),
4.(a),5.
(b),6.(a),
7.(c),8.
(b),9.(b),
10.(c)]
AI. Other Questions:

1. Explain the
need of
trading
account.
2. What is
trading
account?
Whatareits

uses?
3. What are
the items
appearingin
the debit
and credit
side of
trading
account?

4. What are
the merits
of profit
and loss
account?
5. What are
direct and
indirect
expenses?
6.Write the
difference
between trial
balance and
balancesheet.

7. What do
you mean
by current
assets.
8. Explain the
term
liabilities.
9. Draw the
format of
vertical
balance
sheet.
10. What do
you mean
by Assets?
Classifythe
assets with
suitable

examples.
III. Problems:
1. Prepare a trading
account

of
Mr.Vasufromthe
followingfigures.

Openingstock
Purchases
Sales
Closingstock
[Answer:Gross
profitRs.900]
2. Prepareatrading
account of
Mr.Devan for
294
295

3. The following
are some of the
balances
extracted from
the ledger of
Mr.Sundaram as
on

31st
December 2000.
Prepareatrading
account.

Particulars

the year ended

31st December
2002.
Openingstock
Purchases
Purchasesreturns
Sales
Salesreturns
Closing
stockwas
valuedat
Rs.8,600.
[Answer
:Gross
profit
Rs.
1,07,20
0]

5. The following
balances are
taken from the
books of M/s.
RSPLtd.Prepare
profit and loss
account for the
year ended 31st
March2002.
Stock1.1.2000

Purchases
Sales
Returnsoutwards
Returnsinwards
Salaries

1,00,000

10,000

Grossprofit
Rent
Interestonloan
Distributioncharges
Baddebts
Commissionreceived
Interestreceived
Taxesandinsurance

Rs.
Salaries&wages
1,00,000
Depreciation
5,000
Officeexpenses
1,500
Salesmansalary
8,000
Stationeryandprinting
500
Discountreceived
2,000
Advertising
9,000
Wages
Rent
Carriageinwards
Carriageoutwards
Power,coal,gas

Rent
5,000 Inte
Carriageoutwards
1,000 inte
Sellingexpenses
500 Co
Incomefrominvestment1,500

Stockon
31.12.2000was
valuedat
Rs.14,000.
[Answer:
Gross
profitRs.
35,500]

4. Prepare profit
andlossaccount
ofMrs.Nalinifor
the year ended
31st Dec. 2001
from

the
following.
Rs.
Grossprofit
Salaries

1,25,000 Discountpaid
15,000 Discountreceived

[A

[Answer:
Netprofit
Rs.
3,89,300]

6. From

the
following
particulars,
prepare

a
balance sheet of
Mr.Venugopal
as on 31st
December2003.
Capital
Debtors
Cashinhand
Furniture
Netprofit
Closingstock
[Answer:Balance
sheetRs.42,460]
7. From

the
following
information
prepare balance
sheet

of
Mrs.Nasreen
Khan as at 31st
Dec.2003.

40,000
6,400
360
3,700
1,660
14,800

Drawings
Creditors
Cashatbank
Plant
Generalreserve

Goodwill
Capital
Cashinhand
Investment
Netprofit
296
297

Billsreceivable
Billspayable
Furniture

Rs.
10,000
90,000
10,000
500
46,900

Sundrydebtors
Drawings
Land&Buildings
Bank
Creditors

6,500 Plant&machinery
5,350 Closingstock
6,750

Rs.
25,000
15,000
30,000
10,000
31,500

20,000
40,000

[Answer:BalanceSheetRs.1,58,750]

8. Given below is the trial balance of Shri.Hari Prakash.

Prepare trading and profit and loss account for the year
ended31stMarch2002.
Particulars
Stockason1.4.2001
Sales
Salesreturns
Purchases
Purchasereturns
Carriageinwards
Carriageoutwards
Wages
Salaries
Printingandstationary
Discountallowed
Discountreceived
Depreciation
Buildings

Dr.
Rs.
50,000

Cr.
Rs.
2,90,000

10,000
2,45,000
4,000
6,000
12,000
18,000
900
900
3,000
2,08,100

5,000

600

TradeExpenses
Capital
Billsreceivables
BillsPayable

5,600
20,000

2,72,900
15,000

5,83,500

5,83,500

Closingstockon31.3.2002Rs.65,000.
[Answer:GrossprofitRs.39,000,NetprofitRs.5,200]
9. Thefollowinginformationwasextractedfromthebooksof
M/s.SudhaLtd.Preparefinalaccountson31.3.2002.

Particulars

Debit

Particulars

Rs.
Openingstock

Rs.

12,500 Sales

Depreciation

7,000 Commission

Carriageinwards

700

Furniture

8,000 Creditors

Carriageoutwards

Capital

500 Billspayable

Plant&machinery 2,00,000 Returnoutwards

Cash

8,900

Salaries

7,500

Debtors

19,000

Discount

1,500

Billsreceivable

17,000

Wages

16,000

Salesreturns

14,000

Purchase

86,000

Credit
1,89,000
2,000
1,71,300
17,500
5,000
13,800

3,98,600

3,98,600

Closingstockon31.12.2002Rs.45,000.
[Answer:GrossprofitRs.1,18,600,NetprofitRs.1,04,100,
BalancesheetRs.2,97,900]
298
299

10. The

trial
balances of
Mr.Uma
Shankar shows
the following
balanceson31st
March 2000.
Prepare final
accounts.
DebitBalance

Purchases
Salesreturns
Openingstock
Discountallowed
Bankcharges

Advertising

6,000

Cashinhand

1,000

Plantandmachinery

50,000

Sundrydebtors

60,000

Cashatbank

7,000
2,41,000

Rs.
70,000
5,000

Closingstockon31st
March2000wasRs.
30,000.

[Answer:GrossprofitRs.80,000,Net
20,000

2,000
500

Salaries

4,500

Wages

5,000

Freightinwards

4,000

Freightoutwards

1,000

Rent,ratesandtaxes

5,000

profit
Rs.62,000
,Balance
sheetRs.
1,48,000]

11. The following

trial balance
extracted from
the books of
Murugan,
prepare trading,
profit and loss
a/c for the year
ended 31st Dec.
2001

and
balance sheet as
onthatdate.

Cashinhand
Cashatbank
Salaries
Stock
Rent
Manufacturingexpenses
Billsreceivable
Billspayable
Baddebts
Carriageinwards
Furniture

Particulars
Drawings
Capital
Plant&machinery
Sundrydebtors
Sundrycreditors
Purchases
Sales
Salesreturns
Wages

Closingstockas
on31.12.2001
Rs.50,000.
[Answer:GrossprofitRs.56,000,Net
profitRs.
3,000,
Balance
sheet
Rs.2,42,00
0]

300
301

12. The following

balances were
extracted from
the books of
Mr.Chandran on
31.3.2001.

Particulars
Capital
Buildings
Machinery
Furniture

Stock
Power
Wages
Carriage
Rentandrates
Salaries
BankCharges
Incometax
Baddebts
Commissionreceived
Purchases
Sales
Billsreceivable
Bankoverdraft
Cashinhand
Purchasereturns
Salesreturns

Theclosingstock
was valued at
Rs.60,000. You are
required to prepare
final accounts for the
yearended31stMarch
2001.
[Answer:GrossprofitRs.1,07,000,Net
profit
Rs.58,000,
Balance
sheet
Rs.2,47,000]

13. The following

balances are
extracted from
the books of
Mr.Ramasamy
on 31.12.2001.
Prepare final
accounts
Particulars
Stockon1.1.2001
Manufacturingwages
Factoryrent
Factorylighting
Purchase
Carriage
Salary
Officerent
Printing&stationery
Baddebts
Land
Buildings
Plant&machinery
Furniture
Depreciation
Debtors
Cashinhand

Debit
Rs.

17,000
10,000
2,000
3,000
30,000
3,000
2,000
2,000
1,000
1,000
10,000
20,000
15,000
5,000
2,000
5,000
5,000

1,33,000

Closingstockwas
valuedatRs.19,000.
[Answer:GrossprofitRs.14,000,Net
profit

Rs.6,000,
Balance
sheet
Rs.79,000
]

302
303

14. Prepare Trading

and Profit and
Loss Account
and Balance
Sheet

of
Mr.Venkatason
31st March
2000.
Particulars

Commission
Discount
Stationeryandprinting
Tradingexpenses
Cashinhand
SuspenseA/c

Closingstockwas
valuedatRs.70,000.

VenkatCapital
[Answer:GrossprofitRs.93,000,Net
Freeholdpremises
profit
Goodwill
Rs.68,700,
Machineryandplant
Balance
Openingstock
sheet
Billsreceivableandpayable
Rs.1,72,70
Sundrydebtorsandcreditors
0]
Purchasesandsales
Returns
Carriageoutwards
Freight,dutyetc
Manufacturingwages
Factoryexpenses
Salaries

15. From

the
following
balances
extracted from
the books of
Mrs.Mala,
prepare final
accounts for the
year ending 31st
March 2003.
Closing stock as
on 31.03.2003
wasRs.72,500.

Particulars
Mrs.MalasCapital
Plant&Machinery
RepairstoMachinery
Wages
Salaries
Incometax
Cashandbankbalances
Landandbuilding
Purchases
304
305

PurchaseReturns
Sales
Interest
Billsreceivable
Billspayable
Commission(Cr)
Debtors
Creditors
OpeningStockason1.4.2003
Drawings
Suspenseaccount

[Answers : Gross
profit
Rs.1,73,0
00; Net
profit
Rs.1,61,6
00;
Balance
sheet
Total Rs.
2,91,750]