Accounting Process by Navkar
Accounting Process by Navkar
Accounting Process by Navkar
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Principles
& Practice
of Accounting
Accounting Process
CE 1997
SIN
CHAPTER-2
ACCOUNTING PROCESS
UNIT : 1
BASIC ACCOUNTING PROCEDURES - JOURNAL ENTRIES
INTRODUCTION
Double entry system of accounting is more than 500 years old. “Luca Pacioli” an Italian friar & mathematician
published Summa de Arithmetic, Geometria, Proportioni, et Proportionalita (“Everything about Arithemetic
Geometry and proportions”). The first book that described a double entry accounting system. Double entry
system of bookkeeping has emerged in the process of evolution of various accounting techniques. It is the
only scientific system of accounting. According to it, every transaction has two-fold aspects–debit and credit
and both the aspects are to be recorded in the books of accounts. Therefore, in every transaction at least two
accounts are effected.
For example, on purchase of furniture either the cash balance will be reduced or a liability to the supplier will
arise. and new asset furniture is acquired . This has been made clear already, the Double Entry System
records both the aspects. It may be defined as the system which recognizes and records both the aspects of
transactions. This system has proved to be systematic and has been found of great use for recording the
financial affairs for all institutions requiring use of money.
1. Account - Meaning
1. Meaning: Under the Double Entry System, the Dual Aspects (Debit and Credit) relating to each
transaction under each of Assets / Liabilities / Incomes / Expenses are presented in a “T” Form. This is
called as an Account.
2. An “Account” represents a detailed record of transactions and changes that have occurred in a particular
Asset, Liability, Expense, Loss, Gain or Capital during an accounting period.
3. The Left Hand Side of the “T” Form Account is called Debit side (in short Dr.), and the Right Hand Side of
the “T” Form Account is called as Credit Side (in short Cr.).
4. The terms Debit (Dr.) and Credit (Cr.) only describe the two sides of the Account. (Note: Debit and
Credit does not -mean unfavourable and favourable respectively.)
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8. Type of Account
Personal Accounts
(a) Natural Personal Accounts
* All Accounts which record transactions of Natural human beings, i.e. Ram, Lakshman, Krishna,
Joseph, Kabir, Debtors, Creditors etc.
(b) Artificial (Legal) Personal Accounts
* All Accounts which record the transactions with other business entities having separate legal
status for accounting purposes, i.e. Ram Industries Limited (Company), Aditya & Co, (Partnership
Firm), Krishna & Co. (say Proprietary Firm), Cooperative Societies, Clubs, Government, Banks,
Debtors, Creditors etc.
(c) Representative Personal Accounts
* All Accounts which indirectly represent the persons. For Example -
Name of the Account Indirectly represents
Capital Account Owner
Outstanding Expenses Account Service Provider / Supplier(For Eg - O/s Rent
represents landlord)
Prepaid Expenses/Expenses paid
in advance A/c Service Provider / Supplier
Accrued Incomes Customers
Incomes received in advance Customer.
Note: All Liabilities will fall under “Personal Accounts”
* Impersonal Accounts
(a) Real Accounts
All Accounts which record transactions relating to Assets of the Firm (but not except those covered
under Personal A/c above - i.e. Debtors, Prepaid expenses etc. For Example: Building, Machinery,
Other Fixed Assets, Investments, Cash, Bank, etc.
(b) Nominal Accounts
All Accounts which record transactions relating to -
• Incomes / Gains, e.g. Sales, Rent / Interest / Dividend / Commission Receive/ Profit on Sale of
Fixed Assets / Investments, etc.
• Expenses / Losses, e.g. Salary, Wages, Rent Paid, Insurance, Bad Debts / Depreciation, Discounts
allowed, etc.
Note: For the sake of convenience in accounting, the above type of accounts are summarized as -
(a) Personal Accounts, (b) Real Accounts, and (c) Nominal Accounts.
9. Determination of Profits and Losses - 2 Approaches
Meaning of Profits / Losses and Financial Position
Profit / Losses: The Main Purpose of a business is to achieve profits. “Profits” means Excess of Incomes
over expenses. “Losses” refers to excess of Expenses over Incomes. Hence, Profits / Losses are concerned
with Incomes / Gains and Expenses / Losses of the business. (Otherwise called as Operating Results)
Financial Position: It refers the wealth of the business. A business is wealthier when it has more assets
and less outside liabilities. Hence, Financial Position is concerned with the assets and Liabilities of the
business.
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Balance Column. Hence, Trial Balance is a consolidation of all ledger account balances.
4. Preparation of Financial Statements: For Determination of Operating Results and the Financial Position
of the business, the following accounts or statements are prepared -
(a) Performance Statement i.e. Trading Account and Profit & Loss Account : To find out the profit
made or loss sustained in a particular accounting period through transactions and events,
(b) Position Statement, i.e. the Balance Sheet : To explain the financial position of the reporting
entity at the end of the accounting period, and
(c) Cash Flow Statement : To analyse the pattern of movement in cash and Bank
12. Meaning of journal
1. Meaning:
(a) Journal is the Book of Primary Entry / Book of Original Entry.
(b) It is the Initial Accounts Book in which the transactions are RECORDED on their occurrence.
(c) Entry is made in this book to show which Account should be debited and which Account should be
credited.
2. Features of Journal:
(a) Once a transaction happens, it is analysed to determine the Debit aspect and Credit aspect and
entered in Journal.
(b) All transactions are first recorded in the Journal Book as and when they occur. Hence, the Journal
is maintained in chronological, i.e. Date-wise order.
(c) The Journal is referred to as Subsidiary Book (as entries are posted from this book into Ledger
subsequently.)
3. Purposes of Journal: Based on Dual Aspect Concept, every transaction has two equal aspects - Debit
and Credit.
Hence, it is essential to identify the accounts which are involved and to decide the accounts to be
debited / credited.
4. Journalising: Recording entries in Journal is called “Journalising the Entries”. Each entry is called as
“Journal Entry”.
5. Source for recording: The sources available for recording in the Journal are (a) Vouchers (b) Documents
(c) Invoices.
6. The format of Journal is as under -
Column Explanation
(1) Date on which the particular transaction happens
(2) Debit of which account is to be debited and credited is give here.
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CLASS WORK
THEORETICAL QUESTIONS
1. Write short note on classification of accounts.
2. Distinguish between Real account and nominal account.
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HOME WORK
1. Show the classification of the following Accounts under traditional and accounting equation approach:
a Rent outstanding g Capital
b Closing Inventory h Sales Tax Payable
c Sales i Trade receivables
d Bank Fixed Deposit j Depreciation
e Cash k Drawings
f Bad Debts
2. Pass Journal Entries for the following transactions in the books of Gamma Bros.
(i) Employees had taken inventory worth ` 1,00,000 (Cost price ` 75,000) on the eve of Deepawali
and the same was deducted from their salaries in the subsequent month.
(ii) Wages paid for erection of Machinery ` 18,000.
(iii) Income tax liability of proprietor ` 1,17000 was paid out of petty cash.
(iv) Purchase of goods from Naveen of the list price of ` 2,00,000. He allowed 10% trade discount, `
5,000 cash discount was also allowed for quick payment.
3. Calculate the missing amount for the following
Assets Liabilities Capital
(a) 15,00,000 2,50,000 ?
(b) ? 1,50,000 75,000
(c) 14,50,000 ? 13,75,000
(d) 57,00,000 - 2,80,000 ?
4. Show the effect of increase = (+), decrease = (-) and no change=(0) on the assets of the following
transactions:
a. Purchased office furniture, payment to be made next month.
b. Collected cash for repair services
c. Goods sold on credit.
d. Withdrawal of cash by the owner for personal use.
e. Hired an employee as sales manager of the north wing.
f. Returned goods worth ` 50,000.
g. One of our debtor agreed to pay his dues to Mr. C who is a creditor of the company with the same
amount being due to him.
h. Entered into an agreement with Mehta & Co. to purchase all raw materials from their company
from next year.
Also give reasons for your answers.
5. Following is the information provided by Mr. Gopi pertaining to year ended 31st March 2017. Find the
unknowns, showing computation to support your answer:
Particulars ` Particulars `
Machinery 12,00,000 Trade Receivables B
Accounts Payable 1,00,000 Loans C
Inventory 60,000 Closing Capital D
Total Liabilities including capital 14,15,000 Opening Capital 10,00,000
Cash A Loss incurred during the year 35,000
Bank 80,000 Capital Introduced during the year 1,00,000
Additional Information: During the year sales of ` 15,55,000 was made of which ` 15,00,000 have been
received.
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UNIT : 2
LEDGER
INTRODUCTION
After recording the transactions in the journal, recorded entries are classified and grouped into by preparation
of accounts. The book which contains all set of accounts (viz. personal, real and nominal accounts), is known
as Ledger. It is known as principal books of account in which account-wise balance of each account is
determined.
1. Meaning and Significance of Ledger
(1) Meaning: Ledger is an Accounts Book which contains all Account Heads, which are opened in Journal /
Subsidiary Books,
(2) Significance:
(a) Ledger helps to identify the list of transactions under a particular Account Head and also show the
balances in each of the ledger accounts. This helps in ascertaining the status of that account.
(b) For Example, Cash Account contains all transactions involving cash. Hence, by looking at the cash
account, the can find out the sources from which cash is received and also the reasons for use of
such cash. It also shows the cash balance in the business on a specified date.
(3) Other Names for Ledger :
Principal Book : Debit and Credit aspect of each transaction is recorded here, and constitutes the basis
for preparation of Trial Balance and Final Accounts.
Secondary Book of Entry : It is the second stage in the Accounting Process.
Book of Final Entry : The Ledger is the Final Destination of all transactions.
(4) Sources of Ledger :
(a) The Entiries in the Journal / Subsidiary Books form the basis for preparation of Ledger.
(b) without Passing an Entry in the Journal / Subsidiary Books, an entry cannot appear in the ledger.
(c) Transactions in the ledger are recorded in an analytical order.
2. Format of Ledger Accounts
1. Basic Process:
(a) Posting: After recording the transactions in the Journal, the debit and credit aspects of each of the
journal entries are then transferred to the appropriate Account Head in the Ledger. (This process
is known as “Ledger Posting”, or simply “Posting”)
(b) The Journal Entries are classified and grouped appropriately, by preparation of Accounts, in the
Ledger.
2. The format of the Ledger Account Book is as under - (Note: Ledger Accounts Books contains all the
Ledger Accounts).
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CLASS WORK
1. The process of transferring the debit and credit items from a Journal to their respective accounts in the
ledger is termed as
(a) Posting (b) Purchase
(c) Balancing of an account
2. The technique of nding the net balance of an account after considering the totals of both debits and
credits appearing in the account is known as
(a) Posting (b) Purchase
(c) Balancing of an account
3. Journal and ledger records transactions in
(a) A chronological order and analytical order respectively.
(b) An analytical order and chronological order respectively.
(c) A chronological order only
THEORETICAL QUESTIONS
HOME WORK
1. Journalize the following transactions, post them in the Ledger and balance the accounts on 31st
December.
1. X started business with a capital of ` 20,000
2. He purchased goods from Y on credit ` 4,000
3. He paid cash to Y ` 2,000
4. He sold goods to Z ` 4,000
5. He received cash from Z ` 6,000
6. He further purchased goods from Y ` 4,000
7. He paid cash to Y ` 2,000
8. He further sold goods to Z ` 4,000
9 He received cash form Z ` 2,000
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UNIT : 3
TRIAL BALANCE
INTRODUCTION
Preparation of trial balance is the third phase in the accounting process. After posting the accounts in the
ledger, a statement is prepared to show separately the debit and credit balances. Such a statement is known
as the trial balance. It may also be prepared by listing each and every account and entering in separate
columns the totals of the debit and credit sides. Whichever way it is prepared, the totals of the two columns
should agree. An agreement indicates reasonable accuracy of the accounting work; if the two sides do not
agree, then there is simply an arithmetic error(s).
1. Meaning and Purpose of Trial Balance
1. Meaning: Trial Balance is a statement which lists down the debit and credit balances of all accounts, as
at a particular date (i.e. end of the period) under two separate columns.
2. Features:
(a) Trial Balance is a statement and not an Account.
(b) The Totals of all Debit Balances and Credit Balances will be equal. (Explained in the next page)
(c) It has two columns - Debit Column and Credit Column.
(d) It is the third stage in the Accounting Process
(e) Trial Balance can be prepared on any day of the accounting period. It shows the balances on that
date.
3. Objectives / Advantages: The 3rd phase in the accounting process, i.e. preparation of Trial Balance
(a) It summarises the Ledger balances in four columns.
(b) The Ledger itself may be referred to only when further details are required in respect of that
Account.
(c) Serves as a check on Arithmetical Accuracy of books, since Debit and Credit Totals must agree.
(d) Provides the basis of preparation of Final Accounts, i.e. Financial Statements - P&L A/c & B/Sheet.
4. Source for Trial Balance: Ledger Accounts
5 Limitations: Mere tallying / agreement of Trial Balance is not a conclusive proof of arithmetical accuracy.
The Trial Balance may still tally with the following errors -
(a) Complete omission of a transaction, either in journalizing or in ledger posting therefrom,
(b) Recording of a transaction at a wrong amount,
(c) Debiting or Crediting correctly in the Ledger, but in the wrong account head,
(d) Compensating Errors, i.e. errors whose effects nullify each other.
2. Format of Trial Balance
1. Methods of preparation of Trial Balance: Trial Balance may be prepared as under -
Methods
(a) Total Method:
What is written in Trial Balance ?
The Total of Debit and Credit Side of each Ledger Account is recorded in the Trial Balance, in the
respective columns.
Remarks :
Merit: Time taken to balance each Ledger A/c is saved.
Demerit: Not useful for preparation of Final Accounts.
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CLASS WORK
THEORETICAL QUESTIONS
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HOME WORK
1. An inexperienced bookkeeper has drawn up a Trial Balance for the year ended 30th June, 2017.
Debit (`) Credit (`)
Provision For Doubtful Debts 200 –
Bank Overdraft 1,654 –
Capital – 4,591
Trade payables – 1,637
Trade receivables 2,983 –
Discount Received 252 –
Discount Allowed – 733
Drawings 1,200 –
Office Furniture 2,155 –
General Expenses – 829
Purchases 10,923 –
Returns Inward – 330
Rent & Rates 314 –
Salaries 2,520 –
Sales – 16,882
Inventory 2,418 –
Provision for Depreciation on Furniture 364 –
Total 24,983 25,002
Required:
Draw up a ‘Corrected’ Trial Balance, debiting or crediting any residual errors to a Suspense Account.
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UNIT : 4
SUBSIDIARY BOOKS
INTRODUCTION
In a business, most of the transactions generally relate to receipts and payments of cash, sale of goods and
their purchase. It is convenient to keep a separate register for each such class of transactions one for receipts
and payments of cash, one for purchase of goods and one for sale of goods. A register of this type is called a
book of original entry or of prime entry. For transactions recorded in such books there will be no journal
entry. The system by which transactions of a class are first recorded in the book, specially meant for it and on
the basis of which ledger accounts are then prepared is known as the Practical System of Book keeping or
even the English System. It should be noted that in this system, there is no departure from the rules of the
double entry system.
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Sales Books : Individual items of Credit Sales are posted: this book along with the date and a~ Trade
Discount if any, is reduced, a the net amount is recorded in the Sales Book.
4. Source
Purchase Books : Purchase Invoice is the base document.
Sales Books : Sales Invoice is the base document.
5. Posting in Parties Ledger A/c
Purchase Books : Suppliers’ / Creditors’ Account will be credited for the amount of credit purchases as
“By Purchases Account”. This posting is on individual basis.
Sales Books : Customers’ / Debtors/s A/c will be debited for the amount of credit sales as “To Sales
Account”. This posting is on individual basis.
6. Posting in Nominal A/c
Purchase Books : Total of Purchases Book is posted to the debit side of Purchases A/c as “To Sundries as
per Purchases Book”.
Sales Book : Total of Sales Book is posted to credit side of Sales A/c as “By Sundries as per Sales Book”.
Note: Refer the method of posting from Subsidiary Books to Ledger Accounts at the end of this Chapter.
4. Purchase Returns and Sales Returns Books - Features
1. Purpose/ Inclusions
Purchase Returns Book (also called Returns Outward Book ) : When goods / materials earlier purchased
on credit are returned by the Firm to the Supplier, they are recorded in Purchase Returns book.
Sales Returns Book (also called returns Inward Book) : When goods / materials earlier sold on credit are
returned to the Firm by the Customer, they are recorded in Sales Returns book.
2. Entry in Subsidiary Book
Purchase Returns Book : Individual items of Purchases Returns are posted in this book along with the
date and amount.
Sales Returns Book : Individual items of Sales Returns are posted in this book along with the date and
amount.
3. Omission/ Exclusions
Purchase Returns Book :
(a) Goods returned to supplier & cash received
(b) Fixed Assets returned to the supplier
(c) Goods earlier purchased for Cash
Sales Returns Book :
1. Goods received from the buyer & cash paid
2. Fixed Assets received from back from buyer
3. Goods earlier sold for cash
4. Source
Purchase Returns Book : Debit Note
Sales Returns Book : Credit Note
5. Positing in Parties Ledger A/c
Purchase Returns Book : Suppliers’ / Creditors’ A/c will be debited for the amount of purchase returns
as “To Purchases Returns A/c”. This posting is on individual basis.
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CLASS WORK
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THEORETICAL QUESTIONS
HOME WORK
1. Enter the following transactions in Sales Book of M/s. Pranat Engineers Ltd., Delhi.
2016
Jan. 2. Sold to M/s. Ajanta Electrical, Delhi 5 pieces of Ovens @ `6,000/- each less Trade
discount @ 10%.
8 Sold to M/s. Ajanta Electricals Plaza, 10 pieces of Tablets @ ` 8,000/- each less
trade discount 5%.
15 Sold to M/s. Haryana Traders, 5 pieces of Juicers @ `3,500/- each less trade discount
@ 10%.
2. Post into the ledger the entries of Sales Book prepared in above Question.
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UNIT : 5
CASH BOOK
INTRODUCTION
Cash transactions are straightaway recorded in the Cash Book and on the basis of such a record, ledger
accounts are prepared. Therefore, the Cash Book is a subsidiary book. But the Cash Book itself serves as the
cash account and the bank account; the balances are entered in the trial balance directly. The Cash Book,
therefore, is part of the ledger also. Hence, it has also to be treated as the principal book. The Cash Book is
thus both a subsidiary book and a principal book.
1. Cash Book - Meaning and Features
1. Meaning of Cash Book: Cash Book is one of the Subsidiary Books which directly records transactions
involving cash. Hence, it groups together all cash related transactions.
2. Features:
(a) Subsidiary Book: On the occurrence of cash transactions, they are recorded in Cash Book directly.
—Hence no Journal Entry is passed. From cash book, the other aspect of the same transaction is
posted to Ledger Accout
(b) Principal Book: The Cash Book itself serves as an Account since the balances are entered in the
Trial Balance directly. Hence, the Cash Book is part of the Ledger also and should also be regarded
as a Principal Book, format of cash book is also in the form of a ledger account.
(c) The Cash Book is thus both a Subsidiary Book and a Principal Book
3. Various types of Cash Book: The main Cash Book may be of three types -
(a) Single Cash Book - Having Cash Column only on both sides.
(b) Two-Column Cash Book - Having Cash and Discount columns / Cash and Bank Columns on both
sides
(c) Three-Column Cash Book - Having Cash, Bank and Discount columns on both sides.
4. Debit and Credit Aspects:
(a) Debit Side of Cash Book is for recording Receipts of Cash / Cheques (by way of Capital introduced,
Loans taken. Cash Sales, Collection from Debtors, Income by way of Interest / Rent etc. received,
Bad Debts recovered, Sale of Fixed Assets or Investments, etc.)
(b) Credit Side of Cash Book is for recording Payments of Cash / Cheques (by way of Drawings, Loans
repaid: : Purchases, Payment to Creditors, Expenses like Salary, Rent, Advertisement paid, Purchase
of Fixed Assets or Investments, etc.)
2. Simple Cash Book
1. Meaning: Simple Cash Book is also called as Single Column Cash Book. It appears like an ordinary
Ledger Account one amount column on each side.
2. Contents: Dr. Side is for recording all Cash Receipts while Cr. Side is for recording all Cash Payments.
3. The difference between Debit and Credit side (i.e. Closing Balance) is written as “By balance c/d” on
the credit side -the Cash Book. [Note: Cash balance cannot be negative, i.e. Cash Payments cannot
exceed Cash Receipts;
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Closing Balance :
• Discount Columns are not balanced. They are totaled and entered in the Discount Account in the
Ledger.
• Total of Discount Column on the Receipts Side (i.e. Dr. Side) shows total Discount Allowed to
Customers.
• Total of Discount Column on Payments Side (i.e. Cr. Side) shows total Discount Received from
Suppliers.
Students ‘Notes:
1. Cash / Bank is an account, since they have debit and credit columns on both sides of cash book
2. However, discount allowed and discount received are not accounts as they do not have columns on
both sides. For discount allowed, one column exists on debit side and for discount received one
column exists on credit side. Hence, a separate ledger account is to be opened for Discount Received/
Discount allowed in the ledger.
4. Format of Two-Column Cash Book:
(a) Cash and Discount Columns
Date Receipts L.F. Discount Cash Date Payments L.F. DiscountCash
allowed Received
To Balance b/d N.A. xxx By Payments xx xxxx
To Receipts xx xxxx By Creditors xx xxxx
To Debtors xx xxxx By Balance c/d xxxx
Total xx xxxx Total xx xxxx
(b) Cash and Bank Columns
Date Receipts L.F. Bank Cash Date Payments L.F. Bank Cash
Note To Balance b/d xxx xxx Note By Balance b/d xxx N.A.
To Receipts xxxx xxxx By Payments xxxx xxxx
To Debtors xxxx By Creditors xxxx xxxx
Note To Balance c/d xxx xxxx Total xxxx xxxx
Note: Closing Balances of bank may be debit or credit balance. Both debit and credit balance cannot exist at
7.5 However, for cash, its always debit balance only.
4. Triple Column Cash Book
1. Meaning: Three Column Cash Book has three amount columns on both sides i.e. Cash, Bank and Discount
amount
[Note: The principles for recording are the same as for Two Column Cash Book as described in the
previous question.]
2. Format:
Date Receipts L.F. Discount Cash Bank Date Payments L.F. Discount Cash Bank
allowed Received
3. Advantages:
(a) Cash and Bank Accounts are prepared simultaneously, so there is saving in time.
(b) Information regarding Cash in Hand and Bank Balances can be obtained simultaneously.
(c) If there are two or more Bank Accounts, the Firm can introduce multi-column Cash Book, one each
for the various Bank Accounts.
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1. Card Contents: Credit Card / Debit Card issued by a Bank is a small plastic card containing - (a) Name of
the Cardholder, (b) Card Number (16 digit Number), (c) Date of Issue, (d) Date of Expiry, and (e) Magnetic
Strip at the back.
2. Debit vs Credit Card: In a Credit Card, the Cardholder can buy now and pay later, whereas in a Debit
Card, the Cardholder has to pay earlier (i.e. have a minimum balance in his account) in order to buy
now. Nowadays, ATM Cards issued by a Bank can also be used as Debit Card.
3. Parties involved:
(a) Cardholder (Who buys goods using a Credit / Debit Card)
(b) Merchant (Who sells goods to a customer using a Credit / Debit Card)
(c) Issuing Bank (A bank who has issued a card to the Cardholder Eg. Standard Chartered Bank)
(d) Acquiring Bank (A bank with whom the merchant has an account Eg. HSBC Bank)
(e) Member Service Provider (Visa / Master)
4. Process Flow of Card Transactions:
Purchase by Card swiped in “point Charge Slip generated Customer signs 3
Cardholder of sale” machine in 3 copies charge slips & gives
back 2 to merchant
Recovery: Debit Card Issuing bank pays money Acquiring Bank forwards Merchant forwards 1
- immediately to acquiring bank & slip to Issuing bank through slip to acquiring bank
Credit Card - after recovers from customer member service provider & receives money
specified period
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CLASS WORK
1. The total of discounts column on the debit side of the cash book, recording cash discount deducted by
customers when paying their accounts, is posted to the __________________________
(a) Credit of the discount allowed account.
(b) Debit of the discount allowed account
(c) Credit of the discount received account.
2. Cash book is a type of __________ but treated as a ____________ of accounts.
(a) Subsidiary book, principal book (b) Principal book, subsidiary book
(c) Subsidiary book, subsidiary book
3. Which of the following is not a column of a three-column cash book?
(a) Cash column (b) Bank column
(c) Petty cash column
4. Contra entries are passed only when __________________________
(a) Double-column cash book is prepared
(b) Three-column cash book is prepared
(c) Simple cash book is prepared
5. The Cash Book records __________________________
(a) All cash receipts
(b) All cash payments
(c) All cash receipts and payments
THEORETICAL QUESTIONS
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HOME WORK
1. Shri Ramaswamy maintains a Columnar Petty Cash Book on the Imprest System. The imprest amount is
` 500. From the following information, show how his Petty Cash Book would appear for the week
ended 12th September, 2015:
`
7-9-2015 Balance in hand 134.90
Received Cash reimbursement to make up the imprest 365.10
Stationery 49.80
8-9-2015 Miscellaneous Expenses 20.90
9-9-2015 Repairs 156.70
10-9-2015 Travelling 68.50
11-9-2015 Stationery 71.40
12-9-2015 Miscellaneous Expenses 6.30
Repairs 48.30
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UNIT : 6
RETIFICATION OF ERRORS
INTRODUCATION
Unintentional omission or commission of amounts and accounts in the process of recording the transactions
are commonly known as errors. Also errors may occur as a result of mathematical mistakes, mistakes in
applying accounting policies, misinterpretation of facts, or oversight. To check the arithmetic accuracy of the
journal and ledger accounts, trial balance is prepared. If the trial balance does not tally, then it can be said
that there are errors in the accounts which require rectification thereof.
Errors may occur at any of the following stages of the accounting process:
AT THE STAGE OF RECORDING THE TRANSACTIONS IN JOURNAL
Following types of errors may happen at this stage:
(i) Errors of principle,
(ii) Errors of omission,
(iii) Errors of commission.
AT THE STAGE OF POSTING THE ENTRIES IN LEDGER
(i) Errors of omission:
(a) Partial omission,
(b) Complete omission.
(ii) Errors of commission:
(a) Posting to wrong account,
(b) Posting on the wrong side,
(c) Posting of wrong amount.
AT THE STAGE OF BALANCING THE LEDGER ACCOUNTS
(a) Wrong Totalling of accounts,
(b) Wrong Balancing of accounts.
AT THE STAGE OF PREPARING THE TRIAL BALANCE
(a) Errors of omission,
(b) Errors of commission:
1. Taking wrong account,
2. Taking wrong amount,
3. Taking to the wrong side.
On the above basis, we can classify the errors in four broad categories:
1. Errors of Principle,
2. Errors of Omission,
3. Errors of Commission,
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4. Compensating Errors.
3 Types of Errors
Basically errors are of two types:
(a) Errors of principle: When a transaction is recorded in contravention of accounting principles, like treating
the purchase of an asset as an expense, it is an error of principle. In this case there is no effect on the
trial balance since the amounts are placed on the correct side, though in a wrong account. Suppose on
the purchase of a computer, the office expenses account is debited; the trial balance will still agree.
(b) Clerical errors: These errors arise because of mistake committed in the ordinary course of the accounting
work. These are of three types:
(i) Errors of Omission: If a transaction is completely or partially omitted from the books of account, it
will be a case of omission. Examples would be: not recording a credit purchase of furniture or not
posting an entry into the ledger.
(ii) Errors of Commission: If an amount is posted in the wrong account or it is written on the wrong
side or the totals are wrong or a wrong balance is struck, it will be a case of “errors of commission.”
(iii) Compensating Errors: If the effect of errors committed cancel out, the errors will be called
compensating errors. The trial balance will agree. Suppose an amount of `10 received from A is
not credited to his account and the total of the sales book is `10 in excess. The omission of credit
to A’s account will be made up by the increased credit to the Sales Account.
5 Rectification of Errors
An error can be detected at any one of the following stages:
(a) Before preparation of Trial Balance.
(b) After Trial Balance but before the final accounts are drawn.
(c) After final accounts, i.e., in the next accounting period.
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CLASS WORK
Q-1 How would you rectify the following errors in the book of Bablu & Co., if the errors were detected
before preparation of trial balance?
1. The total to the Purchases Book has been undercast by `100.
2. The Returns Inward Book has been undercast by ` 50.
3. A sum of ` 250 written off as depreciation on Machinery has not been debited to Depreciation
account.
4. A payment of ` 75 for salaries (to Lallu) has been posted twice to Salaries Account.
5. The total of Bills Receivable Book ` 1,500 has been posted to the credit of Bills Receivable Account.
6. An amount of `151 for a credit sale to Hari, although correctly entered in the Sales Book, has been
posted as ` 115.
7. Discount allowed to Satish ` 25 has not been entered in the Discount Column of the Cash Book.
the amount has been posted correctly to the credit of his personal account.
Q-2 The following errors were found in the book of Abba. Give the necessary entries to correct them.
(1) ` 500 paid for furniture purchased has been charged to ordinary Purchases Account.
(2) Repairs made were debited to Building Account for ` 50.
(3) An amount of `100 withdrawn by the proprietor for his personal use has been debited to Trade
Expenses Account.
(4) `100 paid for rent debited to Landlord’s Account.
(5) Salary `125 paid to a clerk due to him has been debited to his personal account.
(6) `100 received from Shah & Co. has been wrongly entered as from Shaw & Co.
(7) ` 700 paid in cash for a typewriter was charged to Office Expenses Account.
RECTIFICATION ENTRIES IF ERRORS ARE DETECTED AFTER PREPARATION OF TRIAL BALANCE BUT BEFORE
PREPARATION OF FINAL ACCOUNTS :
Q-3 The trial balance of Mr. Lallu failed to agree and the difference `20,570 was put into suspense
pending investigation which disclosed that:
(i) Purchase returns day book had been correctly entered and totalled at `6,160, but had been posted
to the ledger.
(ii) Discounts received `1,320 had been debited to discounts allowed.
(iii)The Sales account had been under added by `10,000.
(iv) A credit sale of `1,470 had been debited to a customer account at `1,740.
(v) A vehicle bought originally for `7,000 four years ago and depreciated to `1,200 had not been sold
for `1,500 in the beginning of the year but no entries, other than in the bank account had been
passed through the books.
(vi) An accrual of `560 for telephone charges had been completely omitted.
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(vii) A bad debt of `1,560 had not been written off and provision for doubtful debts should have been
maintained at 10% of Trade receivables which are shown in the trial balance at `23,390 with a
credit provision for bad debts at `2,320.
(viii) Tools bought for `1,200 had been inadvertently debited to purchases.
(ix) The proprietor had withdrawn, for personal use, goods worth `1,960. No entries had been made
in the books.
Required:
(i) Pass rectification entries without narration to correct the above errors before preparing annual accounts.
(ii) Prepare a statement showing effect of rectification on the reported net profit before correction of
these errors.
Q-4 On going through the Trial balance of Zandu Ltd., it were found that the debit is in excess by `150.
This was credited to “Suspense Account”. On a close scrutiny of the books the following mistakes
were noticed:
(1) The totals of debit side of “Expenses Account” have been cast in excess by ` 50.
(2) The “Sales Account” has been totalled in short by `100.
(3) One item of purchase of `25 has been posted from the day book to ledger as `250.
(4) The sale return of `100 from a party has not been posted to that account though the Party’s
account has been credited.
(5) A cheque of `500 issued to the Suppliers’ account (shown under Trade payables) towards his dues
has been wrongly debited to the purchases.
(6) A credit sale of `50 has been credited to the Sales and also to the Trade receivables Account.
You are required to :
(i) Pass necessary journal entries for correcting the above;
(ii) Show how they affect the Profits; and
(iii) Prepare the “Suspense Account” as it would appear in the ledger.
Q-5 On 31st March 2001, a book-keeper finds the difference in the Trial Balance and he puts it in the
Suspense Account later on he detects the following errors:
(i) Rs. 50,000 received from A was posted to the debit of his account.
(ii) Rs. 20,000 being purchase returns were posted to the debit of Purchases Account.
(iii) Discount of Rs. 8,000 received were posted to the debit of discount Account.
(iv) Rs. 9,060 paid for repairs of Motor Car was debited to Motor Car Account as Rs. 7,060.
(v) Rs. 40,000 paid to B was debited to A’s Account.
Give journal Entries to rectify the above errors and ascertain the amount transferred to Suspense Account
on 31st March, 2001 by showing the Suspense Account assuming that the Suspense Account is balance
after the above corrections.
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1. Goods purchased from A for `10,000 passed through the sales book. The error will result in
(a) Increase in gross profit. (b) Decrease in gross profit.
(c) No eff ect on gross profit.
2. If a purchase return of ` 1,000 has been wrongly posted to the debit of the sales returns account, but
has been correctly entered in the suppliers’ account, the total of the
(a) Trial balance would show the debit side to be ` 1,000 more than the credit.
(b) Trial balance would show the credit side to be ` 1,000 more than the debit.
(c) The debit side of the trial balance will be ` 2,000 more than the credit side.
3. If the amount is posted in the wrong account or it is written on the wrong side of the account, it is called
(a) Error of omission. (b) Error of commission.
(c) Error of principle.
4. ` 200 paid as wages for erecting a machine should be debited to
(a) Repair account. (b) Machine account.
(c) Capital account.
5. On purchase of old furniture, the amount of ` 1,000 spent on its repair should be debited to
(a) Repair account. (b) Furniture account.
(c) Cash account.
6. Goods worth ` 50 given as charity should be credited to
(a) Charity account. (b) Sales account.
(c) Purchase account.
7. Goods worth ` 100 taken by proprietor for domestic use should be credited to
(a) Sales account. (b) Proprietor’s personal expenses.
(c) Purchases account.
8. Sales of offi ce furniture should be credited to
(a) Sales Account. (b) Furniture Account.
(c) Purchase Account.
9. The preparation of a trial balance is for:
(a) Locating errors of commission. (b) Locating errors of principle.
(c) Locating clerical errors.
10. ` 200 received from Smith whose account, was wri en off as a bad debt should be credited to:
(a) Bad Debts Recovered account. (b) Smith’s account.
(c) Cash account.
11. Purchase of office furniture ` 1,200 has been debited to General Expense Account. It is:
(a) A clerical error. (b) An error of principle.
(c) An error of omission.
THEORETICAL QUESTIONS
1. How does errors of omission di ffer from errors of commission?
2. What is error of principle and how does it a ffect Trial Balance?
3. When and how is Suspense account used to rectify errors?
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HOME WORK
RECTIFICATION ENTRIES IF ERRORS ARE DETECTED BEFORE PREPARATION TRIAL BALANCE :
RECTIFICATION ENTRIES IF ERRORS ARE DETECTED AFTER PREPARATION OF TRIAL BALANCE BUT
BEFORE PREPARATION OF FINAL ACCOUNTS
Q-2 Correct the following errors.
(a) The Sales Book has been totalled `100 short.
(b) Goods worth `150 returned by Green & Co. have not been recorded anywhere.
(c) Goods purchased `250 have been posted to the debit of the supplier Gupta & Co.
(d) Furniture purchased from Gulab & Bros, `1,000 has been entered in Purchases Day Book.
(e) Discount received from Red & Black `15 has not been entered in the Discount Column of the Cash Book.
(f) Discount allowed to G. Mohan & Co. `18 has not been entered in the Discount Column of the Cash
Book. The account of G. Mohan & Co. has, however, been correctly posted.
Ans.
(a) under- casting of Sales Day Book
(b) recording of unrecorded returns)
(c) Gupta & Co. was debited instead of being credited by ` 250).
(d) recording purchase of furniture as ordinary purchases)
(e) discount omitted to be recorded
(f) omission of the discount allowed from Cash Book customer’s account already posted correctly
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Suspense Account
Dr. Particulars Amount Date Particulars Cr.
Date ` Amount
`
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Ans.
(1) Purchase of scooter wrongly debited to conveyance account
(2) Purchase Account overcast in the previous year;
(3) Credit purchase from P ` 2,000, entered as sales last year
(4) Amount received from A wrongly posted to the account of B
(5) ` 500 received from C wrongly debited to his account;
(6) ` 500 due by Q not taken into trial balance;
(7) Sales to R omitted last year
(8) Excess posting to purchase account last year, ` 2,593, instead of ` 2,395, now adjusted)
(9) Profit & Loss Adjustment A/c Dr. 10,898
To Roy’s Capital Account 10,898
(Balance of Profit & Loss Adjustment A/c transferred to
Capital Account)
Q-6 Mr. Bablu closed his books of account on September 30, 2014 in spite of a difference in the trial balance.
The difference was ` 830 the credits being short; it was carried forward in a Suspense Account. In 2015
following errors were located:
(i) A sale of ` 2,300 to Mr. Lala was posted to the credit of Mrs. Mala.
(ii) The total of the Returns Inward Book for July, 2014 ` 1,240 was not posted in the ledger.
(iii) Freight paid on a machine `5,600 was posted to the Freight Account as ` 6,500.
(iv) White carrying forward the total in the Purchases Account to the next page, ` 65,590 was written
instead of ` 56,950.
(v) A sale of machine on credit to Mr. Mehta for ` 9,000 on 30th sept. 2014 was not entered in the
books at all. The book value of the machine was ` 6,750.
Pass journal entries to rectify the errors. Mr. Bablu charged 10% Depreciation on machine.
Ans.
1. freight paid for a machine ` 5,600 was posted to Freight Account at ` 6,500 instead of capitalising it
2. wrong carry forward of total in the purchase Account to the next page ` 65,590 instead of ` 56,950
3. omission of a sale of machine on credit to Mr. Mehta for ` 9,000
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