Bca Unit Ii
Bca Unit Ii
Bca Unit Ii
UNIT II
Accounting Cycle
The accounting cycle is a collective process of identifying, analyzing, and recording the accounting
events of a company. It is a standard 8-step process that begins when a transaction occurs and ends
with its inclusion in the financial statements.
The key steps in the eight-step accounting cycle include recording journal entries, posting to the
general ledger, calculating trial balances, making adjusting entries, and creating financial statements.
1. Identify Transactions: An organization begins its accounting cycle with the identification of
those transactions that comprise a bookkeeping event. This could be a sale, refund, payment
to a vendor, and so on.
2. Record Transactions in a Journal: Next come recording of transactions using journal
entries. The entries are based on the receipt of an invoice, recognition of a sale, or completion
of other economic events.
3. Posting: Once a transaction is recorded as a journal entry, it should post to an account in
the general ledger. The general ledger provides a breakdown of all accounting activities by
account.
4. Unadjusted Trial Balance: After the company posts journal entries to individual general
ledger accounts, an unadjusted trial balance is prepared. The trial balance ensures that total
debits equal the total credits in the financial records.
5. Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth step in
the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there
are discrepancies then adjustments will need to be made.
6. Adjusting Journal Entries: At the end of the period, adjusting entries are made. These are
the result of corrections made on the worksheet and the results from the passage of time. For
example, an adjusting entry may accrue interest revenue that has been earned based on the
passage of time.
7. Financial Statements: Upon the posting of adjusting entries, a company prepares an adjusted
trial balance followed by the actual formalized financial statements.
8. Closing the Books: An entity finalizes temporary accounts, revenues, and expenses, at the
end of the period using closing entries. These closing entries include transfering net income
into retained earnings. Finally, a company prepares the post-closing trial balance to ensure
debits and credits match and the cycle can begin anew.
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Journal
In accounting and bookkeeping, a journal is a record of financial transactions in order by date.
Traditionally, a journal has been defined as the book of original entry. A journal is a detailed account
that records all the financial transactions of a business, to be used for the future reconciling of
accounts and the transfer of information to other official accounting records, such as the general
ledger. A journal states the date of a transaction, which accounts were affected, and the amounts,
usually in a double-entry bookkeeping method.
As the recording of transactions is done first in the journal, it is also called book of original entry or
prime entry. Journalizing is defined as the process of recording transactions in the journal.
Format of Journal
Journal
Debit Credit
Date Particulars L.F
Rs. Rs.
Steps in Journal
(i) Date:
The ‘Date’ column shows the date of transaction. It should be noted that all the transactions are to be
recorded in the journal in the chronological order.
(ii) Particulars:
In ‘Particulars’ column, the accounts which are to be debited and credited are written. The account(s)
to be debited is written in the first row following the word ‘Dr’ towards the end of the row. Leaving
sufficient margin on the left side in the next row, the account(s) to be credited is written and prefixed
with the word ‘To’. A brief description of the transaction is written below the credited account. This
description prefixed with ‘Being’ or ‘For’, is known as narration and is given in the brackets after
writing these two types of accounts.
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Problem no. 1
Solution
Journal
3 Purchases Dr.
4 Cash Dr.
15,000
To Sales Cr. 15,000
(Being the sold goods for cash)
5 Mohan Dr.
16
To Sales Cr.
6 Salary Dr.
To Cash Cr.
To Interest Cr.
Problem no. 2
Journal
8
John a/c Dr. 15,000
To Sales a/c
15,000
9
Drawings a/c Dr.
1,000
To Cash a/c 1,000
18
10
Cash a/c Dr.
To John a/c
Practical Problem
A compound journal entry is the journal entries in the accounting system where more than one
account is debited or more than one account is credited i.e. when a transaction has to effect on more
than the three accounting heads. Compound Journal Entry means a combination of two or more
debits and credits in a single accounting entry. It means it is a journal entry with the following
combinations:
Example
Mr. Ram commenced business with cash Rs. 25,000, Machinery Rs. 30,000, and Building Rs.
50,000
Trade Discount
Trade discount is referred to as the discount that is offered by a seller to the buyer of the product in
the form of reduction in the price of the item. Trade discounts are offered to increase the sales of the
product and make the customers feel that they are getting the best offer. No accounts are maintained
for keeping track of the discounts that are offered.
Cash Discount
Cash discount is referred to as the discount that is offered by the seller of a product to the buyer at
the time of payment for the purchase. This reduction is provided at the value of the invoice. Cash
discount is offered to make the customer or the buyer pay for the product promptly, it helps the
business in reducing or avoiding the credit risk completely. Such discounts are mostly used in
business transactions, where a creditor will be reducing the amount to be paid by the debtor, if the
payment is processed within the time limit. Proper records are maintained for all such discount
transactions both by the buyer and seller.
Meaning It is the type of discount that is This discount is offered by the seller
offered by the seller to the buyer as a to the buyer on the invoice amount at
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reduction in the price of the product the time of making payment within
the stipulated time
Purpose of To ensure bulk sales of the product To ensure prompt payment for the
offering items purchased
discount
When discount At the time the purchase is made It is allowed at the time of payment
is allowed
Allowed on Both cash and credit transactions Only transactions involving cash
transactions payment are allowed.
Suppose James purchased goods from Ali of the list price of Rs. 5000, on April 1, 2016. Ali allowed
10% discount to James on the list price, for purchasing goods in bulk quantity. Further, a discount of
Rs. 200 was allowed to him, for making immediate payment.
Answer:
Trade Discount
The discount allowed on the list price of the goods, i.e. 10% of Rs. 5000 = Rs. 500, is a trade
discount, which is not going to be recorded in the books of accounts.
Cash Discount
The discount received by James of Rs. 200 for making quick payment is a cash discount, as it is
allowed on the invoice price of the goods. Cash discount is entered in the books of accounts.
Therefore the journal entry in the books of James is:
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Purchase Returns
Purchases returns, or returns outwards, are a normal part of business. Goods may be returned to
supplier if they carry defects or if they are not according to the specifications of the buyer.
Particulars Dr Cr
Cash A/C …..Dr XXX
To Purchase Return A/C XXX
Particulars Dr Cr
Accounts Payable A/C …..Dr XXX
To Purchase Return A/C XXX
Sales Returns
Customers are normally entitled to return the products they purchase from a company when they are
not satisfied, usually within a specified duration after the sale. When a sales return occurs, the
customer physically returns the product and receives his cash back.
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Particulars Dr Cr
Sales Return A/C …..Dr XXX
To Cash A/C XXX
Particulars Dr Cr
Sales Return A/C …..Dr XXX
To Accounts Receivable A/C
XXX
Ledger
It is also known as the principal book of accounts as well as the book of final entry. It is a book in
which all ledger accounts and related monetary transactions are maintained in a summarized and
classified form. All accounts combined together make a ledger and form a permanent record of all
transactions. It is the most important book of accounting as it helps in the creation of trial
balance which then acts as a base for the preparation of financial statements.
Format of Ledger
A ledger account is T-shaped, having two sides, wherein the left part of the account represents the
debit side, whereas the right part of the account, is the credit one, both the sides consist of four
columns
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Ledger Posting
When the debit and credit items are transferred from journal to the specific ledger accounts, the
process is called as Posting.
The rules with respect to the ledger posting are discussed as under:
Individual accounts are to be opened in ledger book for each group, i.e. purchases, sales, cash etc.
and the entries from the journal are posted to their account.
It should be kept in mind that the account name used in ledger should be the same used in the
journal.
In the date column, we enter the date of the transaction.
While posting the entries in the debit side, we add the prefix ‘To’ with the concerned accounts
posted in the particulars column and the prefix ‘by’ is used with the accounts entered in the
particulars column of the credit part.
When it comes to posting the entries, the accounts debited in the journal are to be debited in the
ledger, however, reference is given to the concerned credit account.
The accounts are balanced at the end of each month or financial year. And to do so both the sides are
totaled first and then the difference between the two sides is ascertained. This difference is called the
balance, which is added to the side which falls short. When the credit side is greater than the debit
side, it is called a credit balance which is indicated as ‘To balance c/d’. On the other hand, when the
debit side is in excess of the credit side it is termed as debit balance, which is indicated as ‘By
balance c/d’. Here, the word c/d refers to carried down. Similarly while opening the account for the
next month or period. The balance on the debit balance is taken to the debit side as ‘To Balance b/d’
and vice versa. The word ‘b/d’ expands to brought down.
In the folio column, we will enter the page number of the journal from which entry is posted to the
ledger.
The amount column is filled with the respective amount against the entry.
Problem no.3
Mr. Ramu has the following transactions in the month of July. Record them into the journal and
show postings in the ledger and balance the accounts.
Journal
Amount Amount
Date L/F
(Dr) (Cr)
July 1st Cash a/c Dr – 75,000
To Capital a/c – 75,000
Amount Amount
Date L/F
(Dr) (Cr)
July 5th Manu a/c Dr – 2,000
To Purchase returns a/c – 2,000
Cash a/c
Dr Cr
1st July To Capital a/c – 75,000 6th July By Furniture a/c – 15,000
4th July To Sales a/c – 16,000 8th July By Manu a/c – 10,000
17th July By Drawings a/c 15,000
30th July By Balance c/d – 51,000
91,000 91,000
To Balance b/d 51,000
Capital Account
Dr Cr
30th July To Balance c/d – 75,000 1st July By Cash a/c – 75,000
75000 75000
By Balance b/d 75,000
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Purchase Account
Dr Cr
40000 40000
37,000
To Balance c/d
Balancing of Accounts
It represents the amount that is the same in both columns of an account. In case amounts do
not match, you should put the difference in the column with a lesser amount. If the debit
consists of the larger figure, the balance is called a debit balance. Similarly, if the credit has a
higher amount, it means the account has a credit balance.
No Journal Ledger
Journal is a subsidiary book of account. It Ledger is the permanent and final book of
1. is the storehouse for recording accounts. It is termed as the means of
transactions. classified transactions.
Preparation of trial balance is not possible The trial balance is prepared from the
5.
from the journal. ledger.
1. Special journal
2. General journal
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Special Journal:
By special journal we mean, a journal in which transactions relating to a certain special group or
recorded. Special journal is again subdivided into eight groups:
General Journal:
The transactions which do not fall with in the scope of above mentioned books, are recorded in this
journal e.g. purchase of an asset on credit, depreciation on assets, expenses payable, bad debts etc. It
is also known as journal proper, Modern journal or principle journal. Some authors call it only
"journal".
The main function of the above books is to supply necessary information to the ledger. All the
transactions are posted in the ledger on the basis of information available from these books, so these
books are called subsidiary books
1. Because of subdivision the books cannot be bulky and hence there will be no difficulty in
handling them.
2. Accounting work is divided amongst a large number of employees. So work is done nicely
and promptly and no work is left in arrears.
3. Each employee can be held responsible for mistakes committed by him. This serves as
caution and care to the employees.
5. By keeping the book under the custody of different employees the chances of fraud and
defalcation are minimized.
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Cash book
The cash book is used to record receipts and payments of cash. It works as a book of original entry
as well as a ledger account. The entries related to receipt and payment of cash are first recorded in
the cash book and then posted to the relevant ledger accounts. Moreover, a cash book is a substitute
for cash account in the ledger. A company that properly maintains a cash book does not need to open
a cash account in its ledger. Receipts are recorded on the debit – the left hand side, and payments are
recorded on the credit – right hand side.
There are four major types of cash book that companies usually maintain to account for their cash
flows. These are given below:
It records only cash receipts and payments. This form of cash book has only one amount column on
each of the debit and credit sides of the cash book. All the cash receipts are entered on the debit side
and cash payments are entered on the credit side
Date Particulars R.N L/F Amount Date Particulars V.N L/F Amount
Problem No. 4
Record the following transactions in a single column cash book and post into ledger:
L/
Date Particulars R.N L/F Amount Date Particulars V.N Amount
F
6037 6037
The double column cash book (also known as two column cash book) has two amount columns on
both debit and credit sides – one to record cash transactions and one to record bank transactions. The
cash column is used to record all cash transactions and works as a cash account whereas bank
column is used to record all receipts and payments made by cheques and works as a bank account.
Both the columns are totaled and balanced like a traditional T-account at the end of an appropriate
period which is usually one month. Since a double column cash book provides cash as well as bank
balance at the end of a period
Double Column cash book columns have the following advantages in addition to those of single cash
column book
1. It is more convenient as cash and bank accounts are kept side by side at one place.
2. It is cost and time effective as no separate bank account is required to be maintained.
Problem no 5
Record the following transactions in a double column cash book for December 2016:
01 Started business with cash 80,000
c/d
Contra entry
It is a transaction which involves both cash and bank. Both debit aspect and credit aspect of a
transaction get reflected in the cash book.
For example:
To Cash a/c
To Bank a/c
The three column cash book (also known as triple column cash book) has three money columns
on both debit and credit side – one on each side for recording discount, cash and bank amounts. This
cash book is prepared in the same way as simple and double column cash books are prepared. If
there is any discount allowed it is entered in the discount column on the debit side against the
particular account. Similarly, if there is any discount received, it is entered in the discount column on
the credit side. The discount columns are just totaled and not balanced.
Problem no 6
Record the following transactions in a double column cash book for December 2016:
01 Cash in hand Rs.90,000, Cash at bank Rs.80,000
Dat
Particulars R.N L/F Disc. Cash Bank Date Particulars V.N L/F Disc. Cash Bank
e
By Balance 1,12,000
c/d 44,00
0
Petty Cash Book is maintained to record small expenses such as postage, stationery, telegram. A
separate column is allotted for each type of expenditure. The difference between the total of the debit
items and that of the ‘total column’ on the credit represents the balance of the petty cash in hand.
The person responsible for spending petty cash and recording it in a petty cash book is known
as petty cashier.
1. Ordinary system
Under ordinary system, a lump sum amount of cash is given to the petty cashier. When the whole
amount is spent, the petty cashier submits the details of petty expenditures recorded in the petty cash
book to the head or chief cashier for review.
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2. Imprest system
Under imprest system, a fixed amount of money known as float is given to the petty cashier to meet
petty expenditures for an agreed period which usually consists of a week or month. At the end of
agreed period, the petty cashier submits the details of all expenditures incurred by him to the chief
cashier. The total cash spent by the petty cashier during the period is reimbursed to him and the total
cash available to spend at the start of the next period becomes equal to the original sum (i.e., float).
1. It saves the time of the chief cashier who is very busy with the main cash book.
2. It reduces the chances of misuse of cash because petty cashier is not allowed to keep idle cash
with him.
3. It reduces the chances of misappropriation as the imprest cash is a very small amount.
4. Errors are rectified very soon as the record of petty cash is checked by the cashier
periodically.
Types of Petty Cash Book
Simple Petty Cash Book is just like the main cash book. Cash received by the petty cashier is
recorded on debit side and all payments for petty expenses are recorded on credit side in one column.
It is the most advantageous method of recording petty cash payments. In this type, a separate column
for each petty expense is provided on credit side. When petty expense is recorded in total payment
column, the same amount is recorded in the relevant petty expense column.
Received Payments y
Problem 7
The petty cashier of John and James Company paid cash for the following expenditures during
March 2021.
Record the above transactions in a petty cash book assuming a petty cash imprest system is used by
the John and James company.
2,000 To Cash
March 3 By Postage 50 50
50 50
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1280
April 1 To Balance b/d
Purchase Book
Purchase book is a type of special purpose subsidiary book which is used for recording only credit
purchases of goods. Cash purchases of goods are recorded in the cash book. Purchase book is also
called a book of original entry. Purchase book does not record purchases of other assets. Those
entries are recorded in the journal proper. Entries for credit purchases of goods are recorded from the
source documents directly to the purchase book. The source documents are the invoices or bills that
are received from the supplier of goods. The main purpose of preparing a purchase book is to know
the amount of credit purchase taking place in a business at a particular point of time.
Example
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1 Aug Purchased from ABC Ltd. (Invoice No. 524): 2000 balls @ ₹ 5 per piece.
15 Purchased from XYZ Ltd. (Invoice No. 611): 100 bats @ ₹ 250 per piece.
Aug Trade discount 20%
29 Purchased from Con Ltd. (Invoice No. 444): 200 skates for ₹100000. Trade
Aug discount 10%
29 Purchased from ABC Ltd. (Invoice No. 741): 200 Chess for ₹2000. Trade
Aug discount 15%
30 Purchased from Con Ltd. (Invoice No. 521): 100 skates for ₹40000. Trade
Aug discount 8%
Ans:
Purchase Book
ABC Ltd.
1 Aug 524 10000
2000 balls@ ₹ 5 per piece.
XYZ Ltd.
Con Ltd.
ABC Ltd.
29 Aug 741 200 Chess @ ₹ 100 per piece = 2000 1700
Con Ltd.
When the goods purchased on credit are returned to the supplier, these are recorded in the Purchase
return book. Sometimes, goods purchased can be defective or low quality, etc. and hence, need to be
returned. A separate book is maintained for the purchase return and these are not deducted from the
purchases in the Purchase book. Also, Purchase return is recorded at the net amount on the invoice.
Debit note is prepared for every return of goods. It is prepared in duplicate. The original one is sent to
the supplier while the duplicate copy is kept for our own records. The Debit note contains the name of
the supplier, details of goods returned and the reason thereof. Each debit note is dated and serially
numbered.
Date Debit Note No. Name of the Supplier L.F. Amount (₹)
Example
Record the following transactions in the books of Zen and Co. and also show the ledger accounts
3 Aug Returned goods purchased from MNC Ltd. (Debit Note No. 24): 2 T.V. @ ₹ 50000
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per piece.
Goods returned purchased from Daya Ltd. (Debit Note No. 26): 10 DVD Players @ ₹
17 Aug
2500 per piece. Trade discount 20%
Returned goods purchased from X Ltd. (Debit Note No. 28): 5 refrigerators for
30 Aug
₹60000. Trade discount 10%
Debit Amount
Date Name of the Supplier L.F.
Note No. (₹)
MNC Ltd.
3 Aug 24 100000
2 T.V. @ ₹ 50000 per piece
Daya Ltd.
X Ltd.
Total 174000
Sales book
Sales book is a subsidiary book maintained to record credit sale of goods. Cash sale of goods and
sale of property and assets whether for cash or on credit are not recorded in the sales book. This
book is also named as sales day book, sold day book, sales journal or sale register.
The preparation of the sales book is similar to that of purchases book. The entries are made in the
sales book on the basis of copies of the invoice sent to the buyer.
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Illustration 5
From the transactions given below, prepare the sales book of Kumar Stationery for July 2017.
July 5
July 8
July 20
July 23
July 28
Sold to Kumaran for cash 15 packets of marker pens @ Rs. 250 per packet
Solution
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Sometimes, goods sold can be defective or of low quality, etc. and hence, the customer may return
them. Thus, goods sold that are returned by the customer or buyer, are recorded in the Sales Return
Book. It is noteworthy that the return of only those goods is entered in these books that were earlier
sold on credit.
A Credit Note is prepared for every return of goods. It is prepared in duplicate. The Credit Note
contains the name of the customer, details of goods returned and reason thereof. Each Credit Note is
dated and serially numbered. The Credit Note serves as the source document for entries in the Sales
Return Book.
Journal proper
Journal proper is book of original entry (simple journal) in which miscellaneous credit transactions
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which do not fit in any other books are recorded. It is also called miscellaneous journal. The form and
procedure for maintaining this journal is the same that of simple journal.
1. Opening entries
2. Closing entries
3. Transfer entries
4. Adjustment entries
5. Rectification entries
6. Entries for which there is no special journal
7. Entries for rare transactions
Trial Balance:
The statement which is prepared at a particular date with the ledger account balances to test the
arithmetical accuracy of the ledger accounts and also to facilitate preparation of financial
statements is called a trial balance.
The main object of the trial balance is to proof the arithmetical accuracy of accounts.
It is prepared to check whether the debit and credit accounts of each transaction have been
recorded properly.
For the convenient preparation of financial statements, the trial balance is prepared to bring
debit and credit ledger balances together.
To detect mistakes in the process of accounts, if any.
To provide information to the proper authority in time.
To compare the balances of various ledger accounts of the current year with those of previous
year.
Trial Balance is not an account. It is only a list or schedule of balances of ledger accounts including
cash and bank balances. It is prepared on a particular date. The accounts having a debit balance are
entered in the debit amount column and credit balance accounts are entered in the credit amount
column. The totals of the two sides of the accounts may also be used to prepare trial balance. The
sum of each column should be equal. The standard format of a trial balance is given below :
(A)Total Method :
In this method the total of both sides of every account in the ledger is written against the name of
the respective account without balancing them in the form of debit and credit balances respectively.
In Balance method, the balance of each account (which may be debit balance or credit balance) is
extracted and written against each account; we write debit balance in the debit column and credit
balance in the credit column
Goods/Stock a/c —
Trading Account
Profit and Loss Account
Balance Sheet
Trading Account
A trading account helps in determining the gross profit or gross loss of a business concern, made
strictly out of trading activities. Trading involves buying and selling of goods and services. In the
trading account, the cost of goods sold is subtracted from net sales for the period to calculate gross
profit. Only direct revenue and direct expenses are considered in it. Trading account is prepared mainly
to know the profitability of the goods bought by the businessman.
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Trading account is a nominal account in nature. Activities which generate revenue for the business
such as Sales of Services or Goods, Closing Stock are shown on the credit side (Right) whereas
activities which are a part of the Cost of Goods Sold such as the purchase of raw material, opening
stock, direct expenses, etc. are shown on the debit side (Left).
XXXX XXXX
Illustration 2
The following information relates to a business for the year 2020. Opening stock Rs.16, 000,
Purchases Rs. 40,000, Purchase returns 1,500, direct expenses 3,000, Sales 78,000, Sales returns
2,400, Closing stock 13,000.
Illustration 3
The following information relates to a business for the year 2020.
Rs.
Opening stock 1,00, 000
Purchases 6,10,000
Return outwards 10,000
Carriage on purchase 3,000
Fuel, Water 2,000
Wages 5,000
Octroi 1,000
Royalty 5,000
Sales 7,08,000
Return Inwards 8,000
Closing stock 3,30,000
Solution
Trading Account for the year ended 31-12-2020
Particulars Amount Particulars Amount
Rs. Rs.
Opening stock 1,00,000 Sales 7,08,000
Purchases 6,10,000 Less: Sales returns 8,000 7,00,000
Less: returns 10,000 6,00,000
3,000 3,30,000
Carriage on purchase Closing stock
Fuel, Water 2,000
Wages 5,000
54
Octroi 1,000
Royalty 5,000
Gross profit c/d 3,14,000 10,30,000
10,30,000
Meaning Trading account used to find the gross Profit and loss account or Income
profit/loss of the business for an statement is used to find the net
accounting period profit/loss of the business for an
accounting period
Timing Trading Account is prepared first and Profit/Loss Account is prepared after
then profit and loss account is prepared. the trading account is prepared.
Purpose For knowing the gross profit or gross For knowing the net profit or net loss
loss of a business of a business
Stage It is the first stage in the creation of the It is the second stage in the creation
final account. of the final account.
Transfer The balance in the form of Gross loss or The balance in the form of Net loss or
of Balance Gross Profit of the trading account will Net Profit of the profit and loss
be transferred to the Profit and Loss account will be transferred to the
Account Balance Sheet
Illustration 4
From the following information prepare a Profit and Loss Account of Rajan and Bros., for the year
ending 31st December 2020.
Gross profit 12,000 Salaries 4,500
Stationary 250 Insurance 200
Carriage on sales 450 Advertising 850
Commission paid 800 Discount allowed 500
Discount received 700 Bad debts 200
Interest received 1,000
Illustration 5
From the following information prepare a Trading and Profit & Loss Account of Raman, for the year
ending 31st December 2020.
Opening stock 1,20,000
Purchase 1,51,000
Return Outwards 1,000
Wages 2,000
Salaries 10,000
Insurance 2,000
Octroi 1,500
Power 3,000
Factory Rent 1,000
Carriage inwards 4,000
Advertising 1,500
Commission paid 800
Discount allowed 500
Discount received 700
Bad debts 200
Interest received 1,000
Rent received 2,000
Sales 2,52,000
Return Inwards 2,000
Closing stock 1,30,000
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Solution
Trading and Profit & Loss Account for the year ended 31-12-2020
Particulars Amount Particulars Amount
Rs. Rs.
Opening stock 1,20,000 Sales 2,52,000
Purchases 1,51,000 Less: Sales returns 2,000 2,50,000
Less: Return Outwards 1,000 1,50,000
2,000 Closing stock 1,30,000
Wages
Power 3,000
Octroi 1,500
Factory Rent 1,000
Carriage inwards 4,000
Gross profit c/d 98,500 3,80,000
3,80,000
Gross profit b/d 98,500
Salaries 10,000 Discount received 7,00
Insurance 2,000 Interest received 1,000
Advertising 1,500 Rent received 2,000
Commission paid 8,00
Discount allowed 5,00
Bad debts 2,00
1,02.200 1,02.200
Balance Sheet
A balance sheet is a financial statement which summarizes the assets, liabilities, and shareholders’
equity of a business organization at a given date. It provides a base on which rate of return can be
computed and its capital structure can be evaluated. It is also known as the statement of financial
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position. A balance sheet can only represent the financial position of a business at a given date. It is
prepared after the preparation of trading and profit and loss account.
XXXX
XXXX ============
==========
=
a. Assets
Assets are the things of value which are owned by the business organization. They are listed in
accounts in descending order of their liquidity. There are two types of assets – current assets (can
be converted to cash in a year or less) and non-current or long-term assets or fixed assets (can be
converted to cash in more than a year).
Current Assets:
Cash and its equivalents
Marketable securities
Accounts receivable
Inventory
Prepaid expenses
Fixed Assets:
Fixed assets such as land, machinery, buildings, etc.
Intangible assets such as intellectual property, goodwill, etc.
b. Liabilities
Liabilities are the things which the business owes to other parties. They include bills payable,
interests, debts, outstanding rent, outstanding salaries, etc.. There are two types of liabilities –
current liabilities (which are due within a year or less) and non-current or long-term liabilities
(which are due in more than a year).
Current Liabilities:
Short-term debt or current payable amount of long-term debt
Bank loans
Payable interest
Expenses on utilities, taxes, rents, etc.
Salaries payable
Customer prepayments
Payable dividends
Non-Current Liabilities:
Long-term debt and its interest
Liability of pension funds for employee retirement accounts
c. Shareholders’ Equity
Shareholders’ equity is the amount of money which belongs to the shareholders or owners of the
business.
Illustration 6
1,2
Bills payable 13,300 Cash in hand 50
Sundry creditors 14,000 Cash at Bank 2,450
Capital 60,000 Bills receivable 3,500
Add Net profit 39,900 Sundry debtors 11,000
------------- Closing stock 27,000
9 9,900 Loan to Kumar 15,000
Less Drawings 3,000 96,900 Investment 13,000
------------- Machinery 3,500
Furniture 7,500
Premises 40,000
1,24,200
======== 1,24,200
=========
Illustration 7
The following trial balance have been taken out from the books of XYZ as on 31st December, 2020.
Dr. Cr.
Rs. Rs.
Plant and Machinery 1,00,000
Opening stock 60,000
Purchases 1,60,000
Return Outwards 2000
Building 1,70,000
Carriage inward 3,400
Carriage outward 5,000
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Wages 32,000
Sundry debtors 100,000
Salaries 24,000
Furniture 36,000
Trade expense 12,000
Advertisement 5,000
Bad debts 1,800
Drawings 10,000
Bills receivable 50,000
Insurance 4,400
Bank balances 20,000
Sales 480,000
Return Inwards 1900
Interest received 2,000
Sundry creditors 40,000
Bank loan 100,000
Capital 171,500
Total 795,500 795,500
Prepare the trading and profit and loss account of the business for the year ended 31.12.2005 and a
balance sheet as at that date. Value of Closing stock Rs.90,000
Solution
3,16,700 3,16,700
5,66,000 5,66,000
Illustration 8
From the following information, prepare trading and profit and loss account of Abdul Rahuman for
the year ending 31st December, 2016 and balance sheet as on that date. The closing stock on 31st
December, 2016 was valued at Rs. 2,000.
63
Solution
Illustration 9
From the following trial balance of Sharan, prepare trading and profit and loss account for the year
ending 31st December, 2017 and balance sheet as on that date. The closing stock on 31st December,
2017 was valued at Rs. 2,50,000.
64
Solution
65
Illustration 10
66
4,950
==========
Closing Entries:
Journal entries which are passed to close nominal accounts for the purpose of transferring them to
trading account are called closing entries.
3. The gross profit or gross loss is transferred to Profit and loss account.
ACCOUNTING CONCEPTS
Accounting concept refers to the basic assumptions and rules and principles which work as the basis
of recording of business transactions and preparing accounts. Following are the various accounting
concepts
ACCOUNTING CONVENTIONS
Conventions in accounting have been developed to bring about uniformity in the maintenance of
accounts. Conventions denote customs or traditions or usages which are in use since long. To be
clear, these are nothing but unwritten laws. The accountants have to adopt the usage or customs,
which are used as a guide in the preparation of accounting reports and statements. These
conventions are also known as doctrine. Following are the important accounting conventions in
use.
69
1. Convention of Disclosure:
This convention requires that accounting statements should be honestly prepared and all
significant information should be disclosed therein. That is, while making accountancy records,
care should be taken to disclose all material information. Here the emphasis is only on material
information and not on immaterial information.
2. Convention of Consistency:
Rules and practices of accounting should be continuously observed and applied. In order to
enable the management to draw conclusions about the operation of a company over a number of
years, it is essential that the practices and methods of accounting remain unchanged from one
period to another. Comparisons are possible only if a consistent policy of accounting is followed.
3. Convention of Conservatism:
“Anticipate no profit and provide for all possible losses” is the essence of this convention. Future
is uncertain. Fluctuations and uncertainties are not uncommon. Conservatism refers to the policy
of choosing the procedure that leads to understatement as against overstatement of resources and
income.
4. Convention of Materiality:
American Accounting Association defines the term materiality as “An item should be regarded as
material if there is reason to believe that knowledge of it would influence the decision of
informed investor.” It refers to the relative importance of an item or event. Materiality of an item
depends on its amount and its nature.