Financial Accounting Updated

FINANCIAL ACCOUNTING
Unit-1
Accounting Fundamentals
Definition of Accounting
The American Institute of Certified Public Accountants has defined the Financial Accounting as "the art of
recording, classifying and summarising in a significant manner in terms of money transactions and events
which in part, at least of a financial character and interpreting the results thereof." American Accounting
Association defines accounting as "the process of identifying, measuring, and communicating economic
information to permit informed judgements and decisions by users of the information". From the above the
following attributes of accounting emerge:
 It is the art of recording business transactions. First, all financial transactions should be recorded in
the journal or in the books of original entry known as subsidiary books as and when they take place
so that a complete record of financial transactions is available.
 It is the art of classifying business transactions. All entries in the journal or subsidiary books should
be classified by posting them to the appropriate ledger accounts to find out at a glance the total effect
of all such transactions in a particular account. For example, all transactions relating to Shyam
Sunder in the journal or various subsidiary books will be posted to Shyam Sunder's Account. It may
be noted that business transactions are recorded and classified in such a way that it may be possible
to determine date.
 The transactions or events of a business must be recorded in monetary terms. If recorded in financial
accounting. For example, a quarrel between production managers a financial manager may be
affecting the business but it cannot be measured in terms of money and thus will not be recorded in
the books of accounts.
 It is the art of summarising financial transactions. After recording and classifying financial
transactions next stage is to prepare the trial balance and final accounts with a view to ascertaining
the profit or loss made during a trading period and the financial position of the business on a
particular date.
It is an art of analysis and interpretation of these transactions. The accounting information must be analysed
and interpreted by calculating various ratios and percentages other relationship in order to evaluate the past
performance of the business and to make found plans for the future.
 The results of such analysis must be communicated to the persons who are to take decisions or form
judgements. All information must be provided in time and -sensed to the different categories of the
persons so that appropriate decisions may be at the right time.
Objects of Accounting
The main objects of accounting are
 To ascertain whether the business operations have been profitable or not.
Accounting helps us to know whether a business has earned profit or suffered loss during the
accounting period. It will give us an idea of efficiency of the business. To determine profit or loss of the
accounting period, a Trading and Profit and Loss Account or an Income Statement is prepared by matching
revenues and expired costs (i, e ... revenue expenditures) incurred for earning the revenues. In the process of
determination of profit or loss, it is expense or cost that is matched with revenue and not vice versa. Thus,
first of all revenue is determined and then expenses incurred for earning the revenue are matched with the
revenue for calculating the difference known as net profit or net loss.
 To ascertain the financial position of the business.
Balance Sheet or Position Statement is prepared to give an idea of the financial position of the business
on a particular date. The financial position of an enterprise is indicated by its assets on a given date and its
liabilities on that date. Excess of assets over liabilities represent the capital and is indicative of the financial
soundness of an enterprise. A properly drawn up balance sheet gives information relating to
 the nature and value of assets,

 the nature and extent of liabilities,
 whether the enterprise is solvent,
 Whether the business concern is over trading.
 To generate such information from accounting records which may be helpful to various persons in
planning, control, evaluation of performance and decision-making.
Functions of Accounting
The main functions of accounting are:
1. Systematic record of business transactions.
To keep systematic record of business transactions, post them to the ledger and ultimately to prepare
the final accounts is the first main function of accounting.
2. Protecting the property of the business.

For performing this function the accountant is required to devise such a system of recording
information so that assets of the business are not put to wrong use and a complete record of the assets of the
concern is available without any difficulty.
3. Communicating results to interested parties.
This function requires to supply the meaningful information about the financial activities of the
business to the various parties i.e. owners, creditors, investors, employees, government, public, research
scholars and the managers at the right time.
4. Compliance with legal requirements.
The accounting system must be such which may be able to comply with the legal requirements.
Under various enactments a businessman is required to file various statements e.g. income tax return, return
for sale tax purposes etc.
Importance of Accounting
The importance of accounting is to provide meaningful information about a business enterprise to
those persons who are directly or indirectly interested in the performance and financial position of a
business enterprise. Such persons may include owners, creditors, investors, employees, government, public,
research scholars and the managers.
1. Owners.
The owners of a business furnish capital to be used for the purpose of business. They are interested
to know whether the business has earned a profit or loss during a particular period and also its financial
position on a particular date. They want accounting reports in order to have an appraisal of past performance
and also for an assessment of future prospects.
2. Creditors
The creditors include supplier of goods and supplies, bankers and other lenders of money. They are
interested in the financial stability of the concern before making loans or granting credit. They look to the
ability of the business to pay interest and amount as and when it becomes due for payment. They also look
to the trends of earnings as it ultimately affects the solvency of a concern
3. Investors.
Investors look not only the earning capacity of business but also its financial strength and solvency
before deciding whether to subscribe or not for the shares in a Company. They are interested in steady and
good return on their capital, the safety of their capital and appreciation in the value of the shares. 4.
Employees. Employees are interested in caring capacity of a concern as their salaries, bonus and pension
schemes are dependent on this factor. They have a permanent stake in the business and in order to have an
assurance of steady employment they are very much interested in the stability of the organisation. 5.
Government. Government is interested in accounting statements and reports in order to see the performance
of a particular unit, its cost structure and income in order to impose tax and excise duty.
6. Public.
The public as consumers is interested in accounting statements in order to know whether control is
exercised on production, selling and distribution expenses in order to reduce the prices of goods they buy.
They can also judge whether the economic resources of the concern are being utilised for the benefit of the
common man or not.
7. Research Scholar.
Such persons are interested in accounting statements and reports in order to get data for proving
their thesis on which they are working and hence to complete their research projects.
8. Managers.
The managers of an enterprise need accounting information of planning, control, evaluation of

performance and decision-making. Their main responsibility is to operate the business so as to obtain
maximum return on capital employed without causing any harm to the interest of the shareholders. The
manager would like to have data relating to sales, output and expenses etc. relating to next year and also the
flow of cash for the purpose of planning the activities of a business. He is also faced with such a situation
where various alternatives are available and he is to decide as to what alternative is the best. He is also
required to plan and see that the cost incurred is reasonable. All these requires relevant accounting
information.
Branches of Accounting
The following are the main branches of accounting:
1. Financial Accounting
The main purpose of this branch of accounting is to ascertain profit or loss during a specific period,
to show financial condition of the business on a particular date and to have control over the firm's property.
Such accounting records are used to impart useful information to outsiders and to meet the legal
2. Cost Accounting.
It main aim is to ascertain cost relating to the various activities of the business and to have cost
control. The cost accountant is required to assemble and requirements. interpret cost data for the use of
management in controlling current operations and in planning for the future.
3. Management Accounting.
It supplies the management significant information in order to assist the management to discharge
its various functions such as planning. control, evaluation of performance and decision making etc.
Advantages of Accounting
The following are main advantages of accounting:
 Replacement of memory.
In a large business it is very difficult for a business-man to remember all the transactions.
Information as and when desired and thus it replaces human memory. Accounting provides records which
will furnish den Evidence in court. Properly maintained accounts are often treated as a good evidence in the
 Settlement of taxation liability.
If accounts are properly maintained, it will be of court to settle a dispute. otherwise tax authorities
may impose any amount of tax which the businessman will have to pay.
 Comparative study.
It provides the facility of comparative study of the various Aspects of the business such as profits,
sales, expenses etc. with that of previous year and helps the businessman to locate significant factor leading
to the change, if any. 5. Sale of business. If accounts are properly maintained, it helps to ascertain the proper
purchase price in case the businessman is interested to sell his business. 6. Assistance to the insolvent
person. If a person is maintaining proper accounts and unfortunately he becomes insolvent (ie. when he is
unable to pay to his creditors), he can explain many things about the past with the help of accounts and can
start a fresh life.
 Assistance to various parties.
It provides information to various parties, i.e. Owners, creditors, investors, government, managers,
research scholars, public and employees and financial position of a business enterprise from their own view
point.
Limitations of Accounting
The following are the main limitations of accounting:
1. Records only monetary transactions.
Accounting records only those transactions which can be measured in monetary terms. Those
transactions which cannot be measured in monetary terms as conflict between production manager and
marketing manager, efficient management etc., may be very important for a concern but not recorded in the
business books.
2. Effect of price level changes not considered.

Accounting transactions are recorded at cost in the books. The effect of price level changes is not
brought into the books with the result that comparison of the various years becomes difficult. For example,
the sales to total assets in 1995 would be much higher than in 1980 due to rising prices, fixed assets being
shown at cost and not at market price.
3. No realistic information.
Accounting information may not be realistic as accounting statements are prepared by following
basic concepts and conventions. For example, going concern concept gives us an idea that the business will
continue and assets are to be recorded at cost but the book value which the asset is showing may not be
actually realisable. Similarly, by following the principle of conservatism the financial statements will not
reflect the true position of the business,
4. Personal bias of Accountant affects the accounting statements.
Accounting statements are influenced by the personal judgement of the accountant. He may select
any method of depreciation, valuation of stock, amortisation of fixed assets, and treatment of deferred
revenue expenditure. Such judgement based on integrity and competency of the accountant will definitely
affect the preparation of accounting statements.
5. Permits alternative treatments:
Accounting permits alternative treatments within generally accepted accounting concepts and
conventions. For example, method of charging depreciation may be straight line method or diminishing
balance method or some other method. Similarly, closing stock may be valued by FIFO (First-in-First-Out)
or LIFO (Last-in-First-out) or average price method. Application of different methods may give different
results and results may not be comparable.
6. No real test of managerial performance.
Profit earned during an accounting period is the test of managerial performance. Profit may be
shown in excess by manipulation of accounts by supressing such costs as depreciation, advertisement and
research and development or taking excess value of closing stock. Consequently real idea of managerial
performance may not be available by manipulated profit.
7. Historical in nature.
Usually accounting supplies information in the form of Profit and Loss Account and Balance Sheet
at the end of the year. So, the information provided is of historical interest and only gives post-mortem
analysis of the past accounting information. For control and planning purposes management is interested in
quick and timely information which is not provided by financial accounting.
ACCOUNTING TERMS:
Business Transactions.
Any exchange of money or money's worth as goods and services between two parties is called a
business transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering
of service by one party to another. In accounting, only business transactions are recorded. A business
transaction is an event which can be expressed in terms of money. An event which cannot be expressed in
terms of money and does not affect the financial position of a business enterprise will not be recorded in
accounting. Therefore, all business transactions are events but all events are not business transactions.
When payment for a business activity is made immediately, it is called a cash transaction but when
the payment is postponed to a future date, it is called a credi transaction.
 Debtor.
A debtor is a person who owes money. The amount due from him is called debt. The amount
due from a person as per the books of account is called a book debt.
 Creditor.
A person to whom money is owing or payable is called a creditor.
 Capital.
This is the owner's financial interest or holding in the business and i represented by the value
of net assets (i.e. total assets less liabilities).
 Goods.
This includes all articles, commodities or merchandise in which the business deals. Thus,
cloth would be goods for a dealer in cloth; furniture would be goods for a dealer in furniture and so
on
 Arens.
Any physical thing or right owned that has a money value is an asset. In other words, an asset is that
expenditure which results in acquiring of some property or benefit of a lasting nature.
 Equity.
A claim which can be enforces against the assets of the firm is called equity. In other words, the
rights to properties are called equities. Equities are of two types the right of creditors and the right of
owners. The equities of creditors represent debts of the business and are called liabilities. The equity of the
owners is called capital,
Assets=Liabilities + Capital.
Proprietorship or owner's equity. Thus,

 Income.
It is the favourable change in owner's equity which results from business operations. In other words,
income is an inflow of assets which results in an increase in the owner's equity.
 Expenditure.
An expenditure takes place when an asset or service is acquired Expenditure will include both
payment of a sum immediately and a promise to pay it at a future date
 Expense.
It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc.
The purchase of goods is an expenditure whereas cost of goods sold is an expense similarly, if an asset is
acquired during the year, it is an expenditure, if it is consumed during the same year, it is also an expense of
the year.
 Drawings.
Any amount or goods withdrawn by the owner of a business for personal use is called drawings.
 Loss.
A loss is expenditure without any benefit to the concern. On the other hand, expense is incurred to
result in some benefit. Thus, amount spent on lighting is an expense but loss due to fire is loss.
 Voucher.
Any written document in support of a business transaction is called a voucher. It is objective

evidence in support of a transaction.
 Turnover.
It means total trading income from cash sales and credit sales.
 Net worth.
It means assets minus outside liabilities. Profits of a business increase net worth whereas losses
reduce the net worth of a business.
ACCOUNTING EQUATION
The whole of financial accounting is based on the accounting equation. This can be stated to be that
for a firm to operate resources are required and that these resources are to be supplied to the firm by
someone. The resources possessed by the firm are known as assets and obviously some of the resources will
have to be supplied to the firm by the owner of the business. The total amount supplied by him is known as
his capital. If he was the only one who had supplied the assets then capital must be equal to assets. On the
other hand, some of the assets will normally have been provided by someone other than the owner. The
ineptness of the firm for these resources is known as liabilities.
The capital must be equal to assets minus liabilities. The two sides of equation are, therefore, equal.
On the one side are the resources possessed and on the other side are the sources from which these resources
were obtained. The equity of the two sides will always be true, no matter how many transactions are entered
into. The actual assets, capital and liabilities may change but the equality of the assets with that of the total
of capital and liabilities will always hold true. Capital is often called the owner's equity or net worth
American accountants have derived the rules of debit and credit through accounting equation which
is given below:
The equation is based on the principle that accounting deals with property and rights Assets Equities to
property and the sum of the properties owned is equal to the sum of the rights to the properties. The
properties owned by a business are called assets and the rights to properties are known as liabilities or
equities of the business. Equities may be divided into equities of creditors representing debts of the business
known as liabilities and equity of the owner known as capital. Keeping in view the two types of equities the
equation given above can be stated as below:
Assets=Liabilities + Capital Assets Liabilities
Or
Liabilities = Assets - Capital
Rules of Accounting Equation
 Regarding assets Increases in assets are debits and decreases in assets are credits.
 Regarding Liabilities Increases in liabilities are credits and decreases in liabilities are debits.
 Regarding Capital Increases in capital are credits and decreases in capital are debits.
 Regarding Expenses Increases in expenses are e debits and decreases in expenses are credits.
Regarding Incomes or Profits.
 Increases in Incomes or profits are credits and decreases in incomes or profits are debits.
Accounts and Nominal or Fictitious Accounts the financial transactions of the business,
Classification of Accounts
 Personal Accounts
 Natural Persons Accounts
 Artificial Persons Accounts
 Impersonal Accounts
 Real Accounts
 Nominal Accounts
 Representative Persons' Accounts
 Tangible Real Accounts
 Intangible Real Accounts
Natural Person's Personal Account.
An account recording transactions with an individual human being is known as a natural person's
Personal Account, e.g., Vinod's Account.
Artificial Person's Personal Account.
An account recording financial transactions with an artificial person created by law or otherwise is
called an artificial person's personal account, e.g., Arian Industries Ltd., Bank Account, Ramesh & Bros.
Co. etc.
Representative Personal Account.
An account indirectly representing a person or persons is known as a representative personal

account. When accounts are of a similar nature and their number is large, it is better to group them under
one head and open a representative personal account. Examples of such types of accounts can be: Salaries
Outstanding Account, Interest Outstanding Account, Prepaid Insurance Account etc. Salaries Outstanding
Account is a personal account representing salaries payable to the staff.
Tangible Real Account.
Such type of account relates to an asset which can be touched, felt, seen and measured e.g..
Machinery Account, Cash Account, Furniture Account, Stock Account etc.
Intangible Real Account.
Such type of account relates to an asset which cannot be touched physically but can be measured in
value. For example, Goodwill Account, Patents Account, Trade Marks Account, Copy Rights Account etc.
Generally Accepted Accounting Principles (Concepts, Conventions and Policies)
Accounting is the language of business. To make the language convey the same meaning to all
people, accountants all over the world have developed certain rules, procedures and conventions, which
represent a consensus view by the profession of good accounting practices and procedures and are generally
referred to as Generally Accepted Accounting Principles (GAAP), Accounting statements are prepared in
conformity with these principles in order to place more reliance on them. The need for the common
accounting principles becomes more apparent when we contemplate the chaotic conditions that would
prevail if every accountant could follow his own principles about the measurement of revenue and expenses
Meaning of Accounting Principles
The term "Principle" refers to fundamental belief or a general truth which once established does not
change. It is incorrect to apply the term with respect to accounting which is merely an art of involving
adoption for the attainment of some useful results by its application. Application implies changing nature
and hence is contradictory to the meaning of fundamental truth implied by the term 'principles. To others,
the term 'Principles' means rule of action or conducted and hence can be aptly applied to rules in accounting,
AICPA defined the term 'Principles' "as a guide to action, a settled ground as basis of conduct or practice."
Some Accountants prefer to use the term 'Standards' instead of using the word "Principles."
Characteristic of Accounting Principles
The following are the main characteristics of accounting principles:
 Accounting principles are manmade so they do not have the authoritativeness as universal principles
like the principles of physics, chemistry and other natural sciences. They represent the best possible
guidelines based on reasons and observations and have been developed by accountants to enhance the
usefulness of accounting data in an ever changing society.
 The science of accounting is not in a finished from, it is in the process of evolution. Consequently,
accounting principles are fast developing. These are influenced by business practices and customs,
government agencies and other business groups.
 The general acceptance of an accounting principle usually depends on how well it meets three criteria
relevance, objectivity and feasibility. A principle is relevant to the extent that it results in information
that is useful to those who want to know something about a certain business. A principle is objective
to the extent that the accounting information is not influenced by the personal bias of those who
furnish the information The accounting information given in the financial statements should be free
from the personal bias of the persons who have taken part in the preparation of such statements. A
principle is feasible to the extent that it can be applied without undue complexity or cost
Accounting principles can be classified into two categories:
Accounting Concepts
Accounting concepts may be considered as postulates i.e., basic assumptions or conditions upon which
the science of accounting is based. There is no authoritative list of these concepts but most of the following
concepts have fairly general support
Accounting Conventions
The term 'convention' denotes circumstances or traditions which guide the accountants while
preparing the accounting statements. Accounting concepts and conventions are significant to the
development of accounting theory in two ways. First, they are themselves part of an empirical process for
developing principles of accounting. In this respect, they may be taken as belonging to the corpus of
accounting theory. Second, they reflect the influence of the social, economic, historical and legal forces
which shape the philosophy of accounting in a given environment. Their origin lies in a historical process of
development of viable theories of accounting.
The concepts and conventions can be put in the form of a chart as given below:
Accounting Principles
Accounting Concepts
 Business Entity
 Money Measurement
 Going Concern
 Cost
 Dual Aspect
 Accounting Period
 Matching
 Realisation
 Objective Evidence
 Accounting Conventions
 Consistency
 Full Disclosure
 Conservatism
 Materiality
 Accrual
Important Questions:
1. Define accounting. State the objectives and scope of accounting.
2. Discuss the uses and limitations of accounting.
3. What is accounting equation ? Explain with suitable examples.
4. What is accounting cycle? Give the coverage of the accounting cycle .
5. Why are accounting concepts and conventions required? How do you distinguish between
accounting concepts and conventions?
UNIT-II
Preparation of Journal, Ledger and Trial Balance & Accounting Errors
Journal, Ledger and Trial Balance

Business transactions are recorded either is the journal or subsidiary books
JOURNAL
Journal is derived from the French word 'Jour which means a day. Journal, succour, means a daily
record of business transactions. Journal is a book of original cart because transaction is first written in the
Journal from which it is posted to the scooper any convenient time. The ruling of the journal is as follows:
Column I (Date).
The date of the transaction on which it takes place is writes in this column. The year is written only
in the first entry appearing on cash page. This column is divided into two parts: the first part is used for
writing the month and the second part is used for writing the date.
Column 2 - (Particulars)
In this column, the name of the account to be debited is written first and is written close to the line
marked (A). The word Dr. is written near the line marked (B). In the next line, the account to be credited is
written proceeded by the word "To" leaving a few spaces away from the line (A). An explanation of the
entry knows as "narration" is also recorded in this column below the line giving credit to the account
Column 3-(LF.)
L.F. stands for ledger folio which means page of the lodger, in this column are entered the page
numbers on which the various accounts appear in the ledger.
Column 4-(Dr. Amount).
In this column, the amount to be debited against the ` D T. Account is written along with the nature
of currency.
Column 5-(Cr, Amount).
In this column the amount to be credited against the 'Cr. Account is written along with the nature of
currency.
Explanation of Journal
(i) Date Column: This column contains the date of the transaction.
(ii) Particulars: This column contains which account is to be debited and which account is to be credited. It
is also supported by an explanation called narration.
(iii) Voucher Number: This Column contains the number written on the voucher of the respective transaction.
(iv) Ledger Folio (L.F.): This column contains the folio (i.e. page no.) of the ledger, where the transaction is
posted.
(v) Dr. Amount and Cr. Amount: This column shows the financial value of each transaction. The amount
is recorded in both the columns, since for every debit there is a corresponding and equal credit.
All the columns are filled in at the time of entering the transaction except for the column of ledger folio.
This is filled at the time of posting of the transaction to ‘ledger’.
Example: As per voucher no. 31 of Roy Brothers, on 10.05.2014 goods of ` 50,000 were purchased. Cash
was paid immediately. Ledger Folios of the Purchase A/c and Cash A/c are 5 and 17 respectively. Journal
entry of the above
transaction is given bellow:
In the books of Roy Brothers

Journal Entries
Dr. Cr.
Date Particulars Voucher Ledger Foli Amount Amount

No. o (`) (`)
10.05.2014 Purchase A/c Dr. 31 5 50,000
To, Cash A/c
(Being goods purchased for Cash) 17 50,000
Illustration 4
Let us illustrate the journal entries for the following transactions:
2015 April
1. Mr. Vikas and Mrs. Vaibhavi who are husband and wife start consulting business by bringing in their
personal
cash of ` 5,00,000 and ` 2,50,000 respectively.
10 Bought office furniture of ` 25,000 for cash. Bill No. - 2015/F/3
11 Opened a current account with PP National Bank by depositing ` 1,00,000
15 Paid office rent of ` 15,000 for the month by cheque to M/s Realtors Properties. Voucher No. 3
20 Bought a motor car worth ` 4,50,000 from Millennium Motors by making a down payment of `
50,000 by cheque and the balance by taking a loan from HH Bank. Voucher No. M/15/7
25 Vikas and Vaibhavi carried out a consulting assignment for AA Pharmaceuticals and raised a bill for `
10,00,000 as consultancy fees. Bill No. B15/4/1 raised. Avon Pharmaceuticals have immediately
settled ` 2,50,000 by way of cheque and the balance will be paid after 30 days. The cheque
received is deposited into Bank.
30 Salary of one receptionist @ ` 5,000 per month and one officer @ ` 10,000 per month. The salary for the
current month is payable to them.
Solution:
The entries for these transactions in a journal will look like:
In the Books of Vikash &

Vaibhavi Journal Entries
Journal Folio-1
Date Particulars Vouche L. Amount (`) Amount (`)

r F
numbe
r
01-04-15 Cash A/c Dr. 1 7,50,000
To Vikas’s Capital A/c 2 5,00,000
To Vaibhavi’s capital A/c 3 2,50,000
(Being capital brought in by the partners)
10-04-15 Furniture A/c Dr. 2015/F/3 4 25,000
To Cash A/c 1 25,000
(Being furniture purchased in cash)
11-04-15 PP National Bank A/c Dr. 5 1,00,000
To Cash A/c 1
(Being current account opened with PP 1,00,000
National
Bank by depositing cash)
15-04-15 Rent A/c Dr. 3 6 15,000
To PP National Bank A/c 5
(being rent paid to Realtors Properties for 15,000
the
month)
20-04-15 Motor Car A/c Dr. M/15/7 7 4,50,000
To PP National Bank 5 50,000
A/c To Loan from HH 8 4,00,000
Bank A/c
(Being car purchased from Millennium
Motors by
paying down payment and loan
arrangement)
25-04-15 PP National Bank A/c Dr. B15/4/1 5 2,50,000
AA Pharma A/c Dr. 9 7,50,000
To Consultancy Fees A/c 10 10,00,000
(Being amount received and revenue
recognized for fees charged)
30-04-15 Salary A/c Dr. 11 15,000
To Salary payable A/c 12
(Being the entry to record salary obligation 15,000
for
the month)
Illustration 5
Journalise the following transactions in the books of Mr. Roy
2015
April
1 He started business with a capital of – Plant ` 10,000, Bank ` 8,000, Stock ` 12,000
2 Bought furniture for resale ` 5,000
Bought furniture for Office decoration ` 3,000
3 Paid rent out of personal cash for ` 2,000
8 Sold furniture out of those for resale ` 6,000
12 Paid Salary to Mr. X for ` 1,200
15 Purchased goods from Mr. Mukherjee for cash ` 3,000
18 Sold goods to Mr. Sen on credit for ` 8,000
20 Mr. Sen returned goods valued ` 1,000
22 Received cash from Mr. Sen of ` 6,500 in full settlement
28 Bought goods from Mr. Bose on credit for ` 5,000
30 Returned goods to Mr. Bose of ` 500 and paid to Mr. Bose ` 4,000 in full settlement.
Solution:
In the Books of Mr. Roy

Journal Entries
Date Particulars L. Debit (`) Credit (`)

F.
2015 Plant A/c Dr. 10,000
Aprl. Bank A/c Dr. 8,000
1
Stock A/c Dr. 12,000 30,000
To, Capital A/c
[Being Plant, Bank, Stock introduced to the business]
2 Purchase A/c Dr. 5,000
To, Bank A/c 5,000
[Being furniture purchased for resale]
Furniture A/c Dr. 3,000
To, Bank A/c 3,000
[Being furniture purchased for office decoration]
3 Rent A/c Dr. 2,000
To, Capital A/c 2,000
[Being rent paid out of personal cash]
8 Cash A/c Dr. 6,000
To, Sales A/c 6,000
[Being furniture out of those meant for resale are sold]
12 Salary A/c Dr. 1,200

To, Bank A/c 1,200
[Being salary paid to Mr. X]
To, Cash A/c 3,000
[Being goods purchased]
18 Mr. Sen A/c Dr. 8,000
To, Sales A/c 8,000
[Being goods sold on credit to Mr. Sen]
20 Returns Inward A/c Dr. 1,000
To, Mr. Sen A/c 1,000
[Being goods returned from Mr. Sen]
22 Cash A/c Dr. 6,500
Discount Allowed A/c Dr. 500
To, Mr. Sen A/c
[Being cash received from Mr. Sen in full settlement] 7,000

To, Mr. Bose A/c
[Being goods purchased from Mr. Bose on credit]
5,000
30 Mr. Bose A/c Dr. 5,000
To, Cash A/c 4,000
To, Returns Outward A/c 500
To, Discount Received A/c 500
[Being goods returned to Mr. Bose and paid cash in full settlement]
Please observe the convention of entry. Accounts to be debited are written first with ‘Dr’ as a suffix, and
accounts to be credited are written subsequently with a prefix ‘To’.
Sub-division of Journals
Journal is divided into two types -(i) General Journal and (ii) Special Journal.
(i) General Journal

◆ This is a book of chronological record of transactions.
◆ This book records those transactions which occur so infrequently that they do not warrant the setting
up of special journals.
Examples of such entries: (i) opening entries (ii) closing entries (iii) rectification of
errors. The form of this general journal, is as under:
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount
Recording of transactions in this book is called journalising and the record of transactions is known as journal
entry.
(ii) Special Journal
It is subdivided into Cash Book, Purchase Day Book, Sales Day Book, Returns Inward Book, Returns
Outward Book, Bills Receivable Book and Bills Payable Book. These books are called subsidiary books.
Importance of Sub-division of journals
When the number of transactions is large, it is practically not possible to record all the transactions
through one journal because of the following limitations of Journal:
(i) The system of recording all transactions in a journal requires (a) writing down the name of the
account involved as many times as the transaction occurs; and (b) an individual posting of each
account debited and credited and hence, involves the repetitive journalizing and posting labour.
(ii) Such a system cannot provide the information on a prompt basis.
(iii) Such a system does not facilitate the installation of an internal check system because the journal
can be handled by only one person.
(iv) The journal becomes huge and voluminous.
(v) To overcome the shortcomings of the use of the journal only as a book of original entry, the journal is
sub- divided into special journal.
The journal is sub-divided in such a way that a separate book is used for each category of transactions which
are repetitive in nature and are sufficiently large in number.
Compound Journal
If for a single transaction, only one account is debited and one account is credited, it is known as simple
journal.
If the transaction requires more than one account which is to be debited or more than one account is to
be credited, it is known as Compound Journal.
The following illustration will make it clear:
Illustration 6
(i) Started business with Cash `50,000; Plant `24,000; Stock `4,000
(ii) Sold Goods for Cash `8,000 and to Ms. Agarwal for `10,000
(iii) Ms. Agarwal settled her account less discount ` 600
Solution:
In the Books of
……… Journal
Date Particulars L.F. Debit` Credit`
(i) Cash A/c Dr. 50,000
Plant A/c Dr. 24,000
Stock A/c Dr. 4,000
To Capital A/c 78,000
(Being business started with cash, plant and stock as capital)
(ii) Cash A/c Dr. 8,000
Ms. Agarwal’s A/c Dr. 10,000
To Sales A/c 18,000
(Being goods sold for cash ` 8,000 and on credit ` 10,000)
(iii) Cash A/c Dr. 9,400
Discount Allowed A/c Dr. 600
To Ms. Agarwal’s A/c 10,000
(Being cash received as final settlement and discount allowed)
RECORDING OF CASH AND BANK TRANSACTIONS
Cash Book
A Cash Book is a special journal which is used for recording all cash receipts and all cash payments. Cash
Book is a book of original entry since transactions are recorded for the first time from the source documents.
The Cash Book is larger in the sense that it is designed in the form of a Cash Account and records cash
receipts on the debit side and cash payments on the credit side. Thus, the Cash Book is both a journal and a
ledger.
Illustration 7:
Write up a single column Cash Book of Mr. Y for the month of April 2015, April 2015
1. Balance in hand ` 5,000
4. Sold goods to Mr. Z on credit ` 3,000
6. Sold goods for Cash ` 1,000
8. Purchased goods on credit from Mr. P for ` 3,000
12. Paid to Mr. P for ` 2,000 and Received Discount ` 200
15. Returned goods to Mr. P for ` 800
20. Goods Returned by Mr. Z for ` 300
25. Z settled his account for ` 2,500
26. Paid salary by cheque for ` 1,000
30. Received interest for ` 1,000
Solution:
In the books of Mr. Y

Cash Book (as the only Book of Single Entry)
Date Particulars L/F Amount ` Date Particulars L/F Amount `

2015 2015 To, Mr. P A/c
Apr.1 To Balance b/d 5,000 12 2.000
(paid to Mr. P)
6 Sales A/c 1,000 30 By, Balance c/d 7.500
(Goods sold for cash)
25 To, Z’s A/c 2.500
(Z settled his account)
30 To, Interest A/c 1.000
(Received interest)
9,500 9,500
May 1 To, Balance b/d 7,500

Types of Cash Book
There are different types of Cash Book as follows:
(i) Single Column Cash Book- Single Column Cash book has one amount column on each side. All cash
receipts are recorded on the debit side and all cash payments on the payment side, this book is
nothing but a Cash Account and there is no need to open separate cash account in the ledger.
(i) Double Column Cash Book- The Double Column Cash Book having two amounts. Columns on
each side as under:
(a) Cash and discount columns
(b) Cash and bank columns
(c) Bank and discount columns
(iii) Triple Column Cash Book- Triple Column Cash Book has three amount columns, one for cash, one for
Bank and one for discount , on each side. All cash receipts, deposits into book and discount allowed
are recorded on debit side and all cash payments, withdrawals from bank and discount received
are recorded on the credit side. In fact, a triple-column cash book serves the purpose of Cash Account
and Bank Account both. Thus, there is no need to create these two accounts in the ledger.
(iv) The multi-column cash book having multiple columns on both the sides of the cash book.
(v) The petty Cash Book.
Dr. Specimen of Single Column Cash Book Cr.

Receipts Payment
s
Date Particulars L.F. Cash Date Particulars L.F. Cash
Dr. Specimen of Double Column Cash Book Cr.

Receipt Payment
s s
Date Particulars L.F. Cash Disc. Allowed Date Particulars L.F. Cash Disc.
Received
Dr. Specimen of Triple Column Cash Book Cr.

Receipt Payment
s s
Date Particular L.F. Cash Bank Discount Date Particulars L.F. Cash Bank Discoun
s Allowed t Received
Is the Cash Book Journal or Ledger?

◆ Cash Book is a book of original entry since transactions are recorded for the first time from the
source
documents.
◆ The cash book is ledger in the sense that it is designed in the form of a Cash Account and records
cash receipts on the debit side and cash payments on the credit side.
Thus the cash Book is both a journal and a ledger.

1. Contra Transactions
Transactions which relates to allowing discount or receiving discount in cash after the settlement of the dues
are known as Contra Transactions.
Example:
1. Cash
deposited
in to Bank
Bank A/c
Dr.
To, Cash
2. Cash withdrawn from
Bank Cash A/c Dr.
To, Bank A/c
B. Cheque Transactions
When a cheque is received and no any other information at a later date about the same is given, it will be
assumed that the said cheque has already been deposited into bank on the same day when it was received.
Then the entry should be as under:
Bank A/c Dr.
To Debtors/Party A/c
But if it is found that the said cheque has been deposited into the bank at a later date, then the entry will be:
(i) When the cheque is
received Cash A/c Dr.
To Debtors/Party A/c
(ii) When the same was deposited into bank at a later
date Bank A/c Dr.
To Cash A/c
(iii) When the said cheque is dishonoured by the
bank Debtors/Party A/cDr.
To Bank A/c
Illustration 8.
Let us see an illustration for the following cash and bank transactions in the books of Mr.
Abhishek January 1 Opening cash balance was ` 3,800 and bank balance was ` 27,500
January 4 Wages paid in cash ` 1,500
January 5 received cheque of ` 19,800 from KBK enterprises after allowing discount of ` 200
January 7 Paid to consultancy charges by cheque for `
7,500 January 10 Cash of ` 2,500 withdrawn from bank
January 12 Received a cheque for ` 4,500 in full settlement of the account of Mr. X at a discount of 10%
and
deposited the same into the Bank.
January 15 X’s cheque returned dishonoured by the Bank
Solution:
In the Books of Mr. Abhishek
Dr. Cash Book Cr.
Receip Paymen
ts ts
Date Particulars L. Cas Ban Dis Date Particulars L. Cas Ban Dis
F h k Allow F h k receive
(`) (`) ed (`) (`) (`) d (`)
1- Opening 3,800 27,500 4- Wages paid 1,500
Ja Balance Jan
n
5- Recd from 19,800 200 7- Consultancy 7,500
Ja KBK Jan fees
n
10- Cash 2,500 10- Cash 2,500
Jan Jan
withdrawn withdrawn
12- Mr. X 4,500 500 15- Mr. X 4,500 500
Jan Jan
Closing 4,800 37,300
balance
6,300 51,800 700 6,300 51,800 500
Please note that the balance of discount columns is not taken and these are posted directly to the
respective ledger account separately. The balance of cash and bank columns are posted into cash and
bank accounts periodically. The posting into ledger is explained later in this chapter.
PURCHASE DAY BOOK

The purchase day book records the transactions related to credit purchase of goods only. It follows that any
cash purchase or purchase of things other than goods is not recorded in the purchase day book. Periodically,
the totals of Purchase day book are posted to Purchase account in the ledger. The specimen Purchase
day book is given below:
In the Books of .........

Purchase Day Book
Date Name of the Suppliers and details of Goods Invoice reference L. F. Amount (`) Remark
Purchased s
The format for Purchase Return is exactly the same; hence separate illustration is not
given. Let us see an illustration for following transactions for a furniture shop:
Illustration 9
1. Bought 20 tables @ ` 500 per table from M.M Appliances on credit @ 12% trade discount as per
invoice number 22,334 on 2nd March.
2. Purchased three dozen chairs @ ` 250 each from Metro chairs as per invoice number 1112 on 4th March.
3. Second hand furniture bought from Golden Furnitures on credit as per invoice number 375 for ` 1200
on 7th March.
4. Purchased seven book racks from Mayur Furnitures for ` 4,900 paid for in cash on 6th March.
5. Purchased Machinery for ` 30,000 from Kirloskar Ltd on 9th March as per invoice number 37.
Solution
In the Books of Furniture Shop
:
Purchase Day Book
Date Name of the Suppliers and Details of goods purchased Invoice L. Amoun
reference F. t (`)
M.M Appliances
2nd 20 tables@ 500 and 12% trade discount (20 * 500) = 10000 less 12%
22334 8,800
Mar. discount
4th Metro Chairs (3 dozen chairs @ 250 per chair) 1112 9,000
Mar.
7th Golden Furniture 375 1,200
Mar.
Total 19,000
Please note that the transaction for purchase of book rack will not be entered in the purchase book as it
is not purchased on credit. (Where will it go then? it will go to the cash book!). Similarly purchase of
machinery will not form part of purchase book. It will be entered in Journal Proper.
SALES DAY BOOK

The sales day book records transaction of credit sale of goods to customers. Sale of other things, even on
credit, will not be entered in the sales day book but will be entered in Journal Proper. If goods are sold for
cash, it will be entered in cash book. Total of sales day book is periodically posted to sales account in
the ledger. The specimen of a sales day book is given below.
In the books of ...........
Sales Day Book
Date Particulars Invoice reference L. F. Amount Remarks
The format of sales return book is exactly the same; hence a separate illustration is not
given. Let us see how will be the following transaction recorded in the books of a Cloth
Merchant.
Illustration 10.
1st July Sold Tip Top clothing 50 suits of ` 2,200 each on two months credit on invoice
number -2 11th July Sold to New India Woolen 100 sweaters @ ` 250 each on invoice number 55
13th July Received an order from Modern clothing for 100 trousers @ ` 500 at trade discount
of 10% 17th July Sold 50 sarees to Lunkad brothers @ ` 750 each
25th July Sold T-shirts at exhibition hall for cash for ` 7,500
Solution
In the books of Cloth Marchant
:
Sales Day Book
Date Particulars Invoice L. F. Amount
reference
1st July Tip Top Clothing (50 suits @ ` 2,200) 2 1,10,000
11th July New India Woolen (100 sweaters @ ` 250) 55 25,000
17th July Lunkad brother 50 sarees @ ` 750 37,500
Total 1,72,500
Here again, cash sales at exhibition hall are not recorded. Also, merely getting an order for goods is not a
transaction to be entered in sales book.
OTHER SUBSIDIARY BOOKS – RETURNS INWARD, RETURN OUTWARD, BILLS RECEIVABLE, BILLS
PAYABLE
(i) ReturnInward Book- The transactions relating to goods which are returned by the customers for various
reasons, such as not according to sample, or not up to the mark etc. contain in this book. It is also known as
Sales Return Book.
Generally when a customer returns good to suppliers he issues a Debit Note for the value of the goods
returned by him. Similarly the supplier who receives those goods issues a Credit Note.
Returns Inward Day Book

Date Particulars Outward Invoice L.F. Details Totals Remarks
(ii) ReturnOutward Book- This book contains the transactions relating to goods that are returned by us
to our creditors e.g. goods broken in transit, not according to the sample etc. It’s also known as Purchase
Return Book.
Return Outward Day Book

Date Particulars Debit Note L. Details Totals Remarks
F
(iii)Bills Receivable Book- It is such a book where all bills received are recorded and there from posted
directly to the credit of the respective customer’s account. The total amounts of the bills so received during
the period (either at the end of the week or month) is to be posted in one sum to the debit of Bills Receivable
A/c.
Bills Receivable Day Book
No Date Fro Nam Name Name of Date Du Amoun How
. of of e of of L.F. dispose
m Acceptor of e t of
Bill Receip who the Drawe Bill Dat Bill d off
s t of m Receive r
r e
Bill
(iv) Bills Payable Book- Here all the particulars relating to bills accepted are recorded and there from
posted directly to the debit of the respective creditor’s account. The total amounts of the bills so
accepted during the period (either at the end of the week or month) is to be posted in one sum to the credit
of Bills Payable Account.
Bills Payable Day Book

No Date of To Name Nam Where Date Du Amount of
. who of e of Term L.F Bill How
Acceptance Payabl of e
of m Drawe the . disposed off
e Bill Dat
Bill given r Paye e
s e
JOURNAL PROPER
Credit transactions that cannot be entered in any other subsidiary book are entered in journal proper.
It will cover purchase or sale of assets, expense accruals, rectification entries, adjusting entries, opening
entries and closing entries. The format of journal proper is exactly the same as Journal.
LEDGER ACCOUNTS
The book which contains accounts is known as the ledger. Since finding information pertaining to the
financial position of a business emerges only from the accounts, the ledger is also called the Principal Book.
As a result, all the necessary information relating to any account is available from the ledger. This is the
most important book of the business and hence is rightly called the “King of All Books”. Also Known as
Book of Final Entry.
The specimen of a typical ledger account is given below:
Dr Ledger-Account Cr
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
Ledger Posting
As and when the transaction takes place, it is recorded in the journal in the form of journal entry. This entry
is posted again in the respective ledger accounts under double entry principle from the journal. This is called
ledger posting.
The rules for writing up accounts of various types are as follows:

Assets: Increases on the left hand side or the debit side and decreases on the credit side or the
right hand side.
Liabilities: Increases on the credit side and decreases on the debit
side. Capitals: The same as liabilities.
Expenses: Increases on the debit side and decreases on the credit
side. Incomes or gain: Increases on the credit side and decrease on the debit
side.
Dr. Assets Cr. Dr. Liabilities & Capital Cr.
Increase | Decrease Decrease | Increase
Dr. Expenses or Loses Cr. Dr. Income or Gains Cr.

Increase | Decrease Decrease | Increase
To summarise
The student should clearly understand the nature of debit and
credit. A debit denotes:
(a) In the case of a person that he has received some benefit against which he has already rendered
some
service or will render service in future. When a person becomes liable to do something in favour of the
firm, the fact is recorded by debiting that person’s account : (relating to Personal Account)
(b) In case of goods or properties, that the value and the stock of such goods or properties has
increased, (relating to Real Accounts)
(c) In case of other accounts like losses or expenses, that the firm has incurred certain expenses or has lost
money. (relating to Nominal Account)
A credit denotes:
(a) In case of a person, that some benefit has been received from him, entitling him to claim from
the firm a return benefit in the form of cash or goods or service. When a person becomes entitled to
money or money’s worth for any reason. The fact is recorded by crediting him (relating to Personal
Account)
(b) In the case of goods or properties, that the stock and value of such goods or properties has
decreased. (relating to Real Accounts)
(c) In case of other accounts like interest or dividend or commission received, or discount received, that
the firm has made a gain (relating to Nominal Account)
At a glance:
Dr. (Debit side) Cr. (Credit
side)
DESTINATION Where the economic benefit SOURCE of each economic benefits
reaches / is
received.
Receiver Given
What comes in What goes out
All expense and losses All income and gains
Let us now understand the mechanism of posting transaction into the ledger account. Consider the
transaction: Rent paid in cash for ` 10000. The journal entry for this transaction would be:
Jan 15 Rent A/c Dr 10,000
To Cash A/c 10,000
We will open two ledger accounts namely Rent A/c and Cash A/c. Let us see how the posting is made
Dr. Rent Account Cr.
Date Particulars J. F. Amount (`) Date J. F. Amount (`)

Particulars
Jan15 To Cash A/c 10,000
Dr. Cash Account Cr.

Jan 15 By Rent 10,000
A/c
Please observe the following conventions while posting a transaction into ledger accounts. Note that
both the effects of an entry must be recorded in the ledger accounts simultaneously.
1) The posting in the account which is debited, is done on the debit side by writing the name of the
account or accounts that are credited with the prefix ‘To’.
2) The posting in the account which is credited, is done on the credit side by writing the name of the
account or accounts that are debited with the prefix ‘By’.
Illustration 11.
Let us now see how we can create ledger account for the seven journal entries that we passed for Illustration 4.
Folio No. 1
1.4.2015 To Vikas’s capital 1 500,000 10.4.2015 By Furniture 1 25,000

1.4.2015 To Vaibhavi’s 1 250,000 11.4.2015 By Punjab National 1 1,00,000
capital Bank
30.4.2015 By Balance c/d 6,25,000
750,000 7,50,000
1.5.2015 To Balance b/d 625,000
Folio No. 2
Dr. Mr. Vikas’s Capital Account Cr.
30.4.2015 To Balance 5,00,000 1.4.2015 By Cash 1 5,00,000
c/d
5,00,000 5,00,000
1.5.2015 By Balance b/d 5,00,000
Folio No. 3
Dr. Mrs. Vaibhavi’s Capital Account Cr.
30.4.2015 To Balance c/d 2,50,000 1.4.2015 By Cash 1 2,50,000
2,50,000 2,50,000
1.5.2015 By Balance b/d 2,50,000
Folio No. 4
Dr. Furniture Account Cr.
10.04.2015 To Cash 25,000 30.4.2015 By Balance 25,000
c/d
25,000 25,000
1.05.2015 To Balance b/d 25,000
Folio No. 5
Dr. Punjab National Bank Account Cr.
11.4.2015 To Cash 1 1,00,000 15.4.2015 By Rent 1 15,000
25.4.2015 To Consultancy 1 2,50,000 20.4.2015 By Motor Car 1 50,000
Fees
By Balance c/d 2,85,000
3,50,000 3,50,000
1.05.2015 To Balance b/d 2,85,000
Folio No. 6
Dr. Rent Account Cr.
15.4.2015 To Punjab National Bank 1 15,000
Folio No. 7
Dr. Motor Car Account Cr.
20.4.2015 To Punjab National 1 50,000
Bank
“ To Loan from HDFC 1 4,00,000
Bank
Folio No. 8
Dr. Loan from HDFC Bank Account Cr.
Date Particulars J. F. Amount Date Particulars J. F. Amount (`)
(`)
20.4.2015 By Motor 1 4,00,000
Car
Folio No. 9
Dr. Avon Pharmaceuticals Account Cr.
(`)
25.4.2015 To Consultancy 1 7,50,000
Fees
Folio No. 10
Dr. Consultancy Fees Account Cr.
(`)
25.4.2015 By Punjab National 1 2,50,000
Bank
25.4.2015 By Avon Pharma 1 7,50,000
Folio No. 11
Dr. Salary Account Cr.
(`)
30.4.2015 To Salary 1 15,000
payable
Folio No. 12
Dr. Salary Payable Account Cr.
30.4.2015 By Salary 1 15,000
Please carefully observe the posting of journal entries into various ledger accounts. Do you see some
further calculation in the Cash A/c and Mr. Vikas’s Capital A/c? What is done is that after posting all
transactions to these accounts, the difference between the debit and credit sides is calculated. This
difference is put on the side with smaller amount in order to tally grand totals of both sides. The
convention is to write “To Balance c/d” or “By balance c/d” as the case may be. This procedure is normally
done at the end of an accounting period. This process is called as “balancing of ledger accounts’.
Once the ledgers are balanced for one accounting period, the balance needs to be carried forward to the
next accounting period as a running balance. This is done by writing “To Balance b/d” or “By balance
b/d” as the case may be after the grand totals. This is also shown in the Cash A/c and Mr.Vikas’s Capital
Account.
Could you now attempt to balance the other ledger accounts and carry the balances to the next
accounting period?
Important note: Please remember the balances of personal and real accounts only are carried down to
the next accounting period as they represent resources and obligations of the business which will continue
to be used and settled respectively in future. Balances of nominal accounts (which represent incomes or
gains and expenses or losses) are not carried down to the next period. These balances are taken to the Profit
and Loss account (or Income statement) prepared for the period. The net result of the P & L Account will
show either net income or net loss which will increase or decrease the owner’s equity.
In the above example, please note that the balances of Rent Account, Consultancy Fees Account and
Salary Account will not be carried down to the next period, but to the P & L Account of that period. As
illustration, we have shown it for Rent Account.
Posting to Ledger Accounts from Subsidiary books
In the above section, we explained posting to ledger accounts directly on the basis of journal entries.
In practice, however, we know that use of subsidiary books is in vogue. Let us see how the posting to
ledger accounts is done based on these records.
For each of the subsidiary books, there is a ledger account e.g. for purchase book, there is Purchase Account,
for sales book there’s Sales A/c, for cash book there will be Cash A/c as well as Bank A/c and so on.
Illustration 12.
Let us continue with illustration seen in the section Illustrations 8 9 and 10 above and post the totals into
respective ledger accounts.
Solution:
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount(`)
1st Jan To Balance b/d 3,800 By Sundries as per cash 1,500
book
To Miscellaneous 2,500 By Balance c/d 4,800
Receipts
6,300 6,300
Dr. Purchases Account Cr.

Date Particulars J. F. Amount Date Particulars J. F. Amount
(`) (`)
To Sundries as per 19,000 By Transfer to P & L 19,000
purchase book A/c
Dr. Sales Account Cr.
(`)
To Transfer to 1,72,500 By Sundries as per 1,72,500
P&L A/c sales book
Typical Ledger Account Balances
We have seen how to balance various ledger accounts. It can be seen that while some accounts will
show debit balance, while the other will show credit balance. Is there any relationship between the type of
account (whether it is the account of asset, liability, capital, owner’s equity, incomes or gain, expenses
or losses) and the kind of balance (debit or credit) it should show?
The answer is generally ‘Yes’. You may test to find the following are typical relationships.
Type of Account Type of balance

All asset accounts Debit balance
All liability accounts Credit balance
Capital & Owner’s equity Credit balance
account
Expenses or loss accounts Debit balance
Incomes or gain accounts Credit balance
Let us test these possibilities for confirmation. How does one go about testing this? Consider ‘Cash A/c’.
Whenever business receives cash we debit it, and whenever it is paid we credit it. Is it possible to see a
situation that credits to cash are more than debits? In other words could we have negative cash in hand? No.
Cash account will therefore always show a debit balance. So is true for all real asset accounts.
After solving problems, if the contrary is observed, there is every chance that an error has been made while
passing
the accounting entries.
Closing Balance and Opening Balance
The debit or credit balance of an account what we get at the end of the accounting period is known as
closing balance of that account.
The “balance of the nominal accounts” is closed by transferring to trading account and the profit and loss
account which shows the net operating results – net profit or net loss.
The “balance of the personal accounts and real accounts” representing assets, liabilities, owner’s equity
are reflected in the Balance sheet, which shows the financial position of a business on a particular date.
These balances are transported as opening balance in the succeeding accounting period.
Some terms used:

Casting — totaling
Balancing — to find the difference between debit side total and credit side total of an account.
C/d -Carried down B/d -Brought down

C/o - Carried over B/o - Brought over
C/f - Carried forward B/f - Brought
forward
Subdivisions of Ledger
Practically, the Ledger may be divided into two groups -
(a)Personal Ledger &
(b) Impersonal Ledger. They are again sub-divided as :
Personal Ledger: The ledger where the details of all transactions about the persons who are related to the
accounting unit, are recorded, is called the Personal Ledger.
Impersonal Ledger: The Ledger where details of all transactions about assets, incomes & expenses etc. are
recorded, is called Impersonal Ledger.
Again, Personal Ledger may be divided into two groups:

Viz. (a) Debtors’ Ledger, & (b) Creditors’ Ledger.
(a) Debtors’ Ledger: The ledger where the details of transactions about the persons to whom goods
are sold, cash is received, etc. are recorded, is called Debtors’ Ledger.
(b) Creditors’ Ledger: The ledger where the details of transactions about the persons from whom are
purchase goods on credit, pay to them etc. are recorded, is called Creditors’ Ledger.
Impersonal Ledger may, again be divided into two group, viz, (a) Cash Book; and (b) General Ledger.
(a) Cash Book: The Book where all cash & bank transactions are recorded, is called Cash Book.
(b) General Ledger: The ledger where all transactions relating to real accounts, nominal accounts,
details of Debtors’ Ledger and Creditors’ Ledger are recorded, is called General Ledger.
General Ledger may, again, be divided into two groups. viz, Nominal Ledger; & Private Ledger.
(a) Nominal Ledger: The ledger where all transactions relating to incomes and expenses are recorded is
called Nominal Ledger.
(b) Private Ledger: The Ledger where all transactions relating to assets and liabilities are recorded is
called Private Ledger.
Advantages of sub-division of Ledger:
The advantages of sub-division of ledger are:
(a) Easy to Divide work : As a result of sub-division, the division of work is possible and records can be
maintained efficiently by the concerned employee.
(b) Easy to handle : As a result of sub-division, the size and volume of ledger is reduced.
(c) Easy to collect information: From the different classes of Ledger a particular type of transactions can
easily be
found out.
(d) Minimizations of mistakes: As a result of sub-division chances of mistakes are minimized.
(e) Easy to compute : As a result of sub-division, the accounting work may be computed quickly
which is very helpful to the management.
(f) Fixation of responsibility: Due to sub-division, allotment of different types of work to different
employees is done for which concerned employee will be responsible.
TRIAL BALANCE
Trial balance may be defined as a statement or a list of all ledger account balances taken from various
ledger books on a particular date to check the arithmetical accuracy. According to the Dictionary for
Accountants by Eric. L. Kohler, Trial Balance is defined as “a list or abstract of the balances or of total
debits and total credits of the accounts in a ledger, the purpose being to determine the equality of posted
debits and credits and to establish a basic summary for financial statements”. According to Rolland, Trial
Balance is defined as “The final list of balances, totaled and combined, is called Trial Balance”.
As this is merely a listing of balances, this will always be as on a particular date. Further it must be
understood that Trial Balance does not form part of books of account, but it is a report prepared by
extracting balances of accounts maintained in the books of accounts.
When this list with tallied debit and credit balances is drawn up, the arithmetical accuracy of basic entries,
ledger posting and balancing is ensured. However, it does not guarantee that the entries are correct in all
respect. This will be explained later in this chapter.
Although it is supposed to be prepared at the end of accounting period, computerized accounting

packages are capable of providing instant Trial Balance reports even on daily basis, as the transactions are
recorded almost on line.
Let us prepare the trial balance for the ledger accounts from the illustration 4.
Trial Balance as on...

Account name Debit (`) Credit (`)
Cash A/c 6,25,000
Vikas’s capital A/c 5,00,000
Vaibhavi’s capital A/c 2,50,000
Furniture A/c 25,000
PP National Bank A/c 2,85,000
Rent A/c 15,000
Motor Car 4,50,000
Loan from HH A/c 4,00,000
AA Pharmaceuticals 7,50,000
Consultancy fees A/c 10,00,000
Salary A/c 15,000
Salary payable A/c 15,000
Total 21,65,000 21,65,000
It can be seen that the totals of debit and credit balances is exactly matching. This is the result of
double entry book-keeping wherein every debit has equal corresponding credit.
Feature’s of a Trial Balance

1. It is a list of debit and credit balances which are extracted from various ledger accounts.
2. It is a statement of debit and credit balances.
3. The purpose is to establish arithmetical accuracy of the transactions recorded in the Books of Accounts.
4. It does not prove arithmetical accuracy which can be determined by audit.
5. It is not an account. It is only a statement of account.
6. It is not a part of the final statements.
7. It is usually prepared at the end of the accounting year but it can also be prepared anytime as and
when required like weekly, monthly, quarterly or half-yearly.
8. It is a link between books of accounts and the Profit and Loss Account and Balance sheet.
Preparation of Trial Balance:

1. It may be prepared on a loose sheet of paper.
2. The ledger accounts are balanced at first. They will have either “debit-balance” or “credit
balance” or “nil- balance”.
3. The accounts having debit-balance is written on the debit column and those having credit-
balance are written on the credit column.
The sum total of both the balances must be equal, for “Every debit has its corresponding and equal credit”.
Purpose of a Trial Balance
It serves the following purposes:

1. To check the arithmetical accuracy of the recorded transactions.
2. To ascertain the balance of any ledger Account.
3. To serve as an evidence of fact that the double entry has been completed in respect of every transaction.
4. To facilitate the preparation of final accounts promptly.
Is Trial Balance indispensable?
It is a mere statement prepared by the accountants for his own convenience and if it agrees, it is assumed that at
least arithmetical accuracy has been done although there may be a lot of errors.
Trial Balance is not a process of accounts, but its preparation helps us to finalise the accounts. Since it is
prepared on a particular date, as at ........ / as on is stated.
Forms of a Trial Balance
A trial balance may be prepared in two forms, they are –

1. Journal Form
2. Ledger Form
The trial balance must tally irrespective of the form of a trial balance.
1. Journal Form: This form of a Trial balance will have a format of Journal Folio. It will have a column
for serial number, name of the account, ledger folio, debit amount and credit amount columns in this
journal form.
The ledger folio will show the page number on which such account appears in the ledger.
Specimen of Journal Form of Trial Balance:
Trial Balance as on …………
Sl. No. Name of the Account L.F Debit Balance ` Credit Balance `
.
2. Ledger Form: This form of a trial balance have two sides i.e. debit side and credit side. In fact, the
ledger form of a trial balance is prepared in the form of an account. Each side of the trial balance
will have particulars (name of the account) column, folio column and the amount column.
Specimen of ledger form of Trial Balance
Dr. Trial Balance as on …… Cr.

Date Name of the Account L.F. Amount ` Date Name of the L.F. Amount `
Account
Method of Preparation
1. Total Method or Gross Trial Balance.

2. Balance Method or Net Trial Balance.
3. Compound Method.
These are explained as under :-
1. Total Method or Gross Trial Balance : Under this method, two sides of the accounts are totaled. The
total of the debit side is called the “debit total” and the total of the credit side is called the “credit
total”. Debit totals are entered on the debit side of the Trial Balance while the credit total is entered on
the credit side of the Trial Balance.
If a particular account has total in one side, it will be entered either in the debit column or the credit column as
the case may be.
Advantages:
(a) It facilitates arithmetical accuracy of the accounts.
(b) Extraction of ledger balances is not required at the time of preparation of Trial Balance.
Disadvantages: Preparation of final accounts is not possible.
2. Balance Method or Net Trial Balance: Under this method, all the ledger accounts are balanced. The
balances may be either “debit-balance” or “credit balance”.
Advantages:
(a) It helps in the easy preparation of final accounts.
(b) It saves time and labour in constructing a Trial Balance.
Disadvantages: Errors may remain undisclosed irrespective of the agreement of Trial Balance.
3. Compound Method: Under this method, totals of both the sides of the accounts are written in the
separate columns. Along with this, the balances are also written in the separate columns. Debit
balances are written in the debit column and credit balances are written in the credit column of the
Trial Balance.
Advantages: It offers the advantage of both the methods.

Disadvantages: Lengthy process and more time consumed in the preparation of a Trial Balance.
Summary of Rules
Debit Balance — All Assets, Drawings, Debtors, Expenses and losses.
Credit Balance — All liabilities, Capital, Creditors, Gains and
Incomes.
Trial Balance – Utility and Interpretation
The utility of Trial balance could be found in the following:
(1) It forms the basis for preparation of Financial statements i.e. Profit and Loss Account and Balance sheet.
(2) A tallied trial balance ensures the arithmetical accuracy of the entries made. If the trial balance
does not tally, the errors can be found out, rectified and then financial statements can be prepared.
(3) It acts as a quick reference. One can easily find out the balance in any ledger account without
actually
referring to the ledger.
(4) If the listing of ledger accounts is systematically done in the trial balance, one can do quick time
analysis. Hence, listing is usually done in the sequence of Asset accounts, Liability accounts, Capital
accounts, Owner’s equity accounts, Income or gain accounts and Expenses or losses accounts in that
order.
One can draw some quick inferences from trial balance by interpreting the same. If one plots monthly trial
balances side by side, one can analyse the movement of balances in various accounts e.g. one can see
how expenses are increasing or decreasing or showing a trend of movements. By comparing the owner’s
equity balances as on two dates, one can interpret the business result e.g. if the equity has gone up, one can
interpret that business has earned net profit and vice versa.
Trial Balance
as at / as on
…..
Heads of Accounts Side of Trial Balance Reasons
Cash in hand Debit Assets
Cash at Bank Debit Assets
Cash at Bank (overdrawn) Credit Liability
Bank Overdraft Credit Liability
Capital Credit Liability
Opening stock Debit Assets
Wages Debit Expenses
Purchase Debit Expense/Increase in stock
Carriage Inwards Debit Expenses
Freight Debit Expenses
Royalty on production Debit Expenses
Gas, Water, Fuel Debit Expenses
Motive Power Debit Expenses
Import Duty Debit Expenses
Sales Credit Income/Decrease in stock
Discount Allowed Debit Losses
Discount Received Credit Gains
Bad Debts Debit Losses
Reserve /Provision for Bad & Doubtful Debt (Opening) Credit Gains
Commission Received Credit Incomes
Salaries Debit Expenses
Commission paid Debit Expenses
Rent, rates, and taxes Debit Expenses
Repairs and maintenance Debit Expenses
Insurance Debit Expenses
Carriage outward Debit Expenses
Trade charges Debit Expenses
Royalty on sales Debit Expenses
Interest paid Debit Expenses
Interest received Credit Income
Advertisement Debit Expenses
Sundry expenses Debit Expenses
Miscellaneous expenses Debit Expenses
Miscellaneous receipts Credit Incomes
Income tax Debit Drawings/Assets
L.I.C. Premium Debit Drawings/Assets
Office expenses Debit Expenses
Export duty Debit Expenses
Allowances Debit Losses
Rebates Debit Losses
Sales tax Debit Expenses
Horses and Carts Debit Assets
Watch Dag Squad Debit Assets
Loan Secured Credit Liability
Loans Advanced Debit Assets
Reserve Funds Credit Liability
Sinking Fund Credit Liability
Sinking Fund Investments Debit Assets
Ecology Fund Credit Liability
Ecology Fund Investments Debit Assets
Building Fund Credit Liability
Building Debit Assets
Land Debit Assets
Plant Debit Assets
Machinery Debit Assets
Furniture & fittings Debit Assets
Motor vehicles Debit Assets
Computer Debit Assets
Office equipments Debit Assets
Goodwill Debit Assets
Patent rights Debit Assets
Copyrights Debit Assets
Trade marks Debit Assets
Investments Debit Assets
Shares & Securities Debit Assets
G. P. Notes Debit Assets
Sundry debtors Debit Assets
Sundry creditors Credit Liability
General Reserve Credit Liability
Bill Receivable Debit Assets
Bills Payable Credit Liability
Provision for Discount on Debtors Credit Liability
Provision for Discount on Creditors Debit Assets
Lighting and Heating Debit Expense
Drawings Debit Assets
Contribution to Provident Fund Debit Assets
Prize Fund Credit Liability
Depreciation Debit Losses
Provision for Depreciation Credit Liability
Returns Inwards Debit Losses
Returns Outwards Credit Gains
Freehold Property Debit Assets
Premises Debit Assets
Leasehold Property Debit Assets
Loose Tools Debit Assets
Petty Cash Debit Assets
Provident Fund Credit Liability
Debentures Purchased Debit Assets
Debentures (from Public) Credit Liability
Loan on Mortgage Credit Liability
Prepaid Expenses Debit Assets
Outstanding Expenses Credit Liability
Bad Debts Recovered Credit Gains
Accrued Incomes Debit Assets
Apprenticeship Premium received Credit Income
Books Debit Assets
Newspaper and Magazine Debit Expenses
Profit and Loss A/c (Dr.) Debit Losses
Profit and Loss A/c (Cr.) Credit Gains
Accumulated Depreciation Credit Liability
Postage and Telegram Debit Expense
Travelling & Conveyance Debit Expenses
Illustration 13.
From the following ledger account balances, prepare a Trial Balance of Mr. Sen for the year ended
31st March, 2015. Capital ` 80,000; Sales `10,00,000; Adjusted Purchase ` 8,00,000; Current A/c(cr) ` 10,000;
Petty Cash ` 10,000; Sales Ledger Balance ` 1,20,000; Purchase Ledger Balance ` 60,000; Salaries `24,000;
Carriage Inwards ` 4,000;
Carriage Outward ` 6,000; Discount Allowed ` 10,000; Building ` 80,000; Outstanding Expenses ` 10,000;
Prepaid Insurance ` 2,000; Depreciation ` 4,000; Cash at Bank ` 80,000; Loan A/c (cr) ` 66,000; Profit & Loss
A/c(cr) ` 20,000; Bad Debts Recovered ` 2,000; Stock at 31.03.2015 ` 1,20,000; Interest Received ` 10,000;
Accrued Interest ` 4,000; Investment ` 20,000; Provision for Bad Debts (01.04.2014) ` 6,000; General Reserve `
20,000.
Solution.
Trial Balance of Mr. Sen
Dr. as on 31st March, 2015 Cr.
Heads of Accounts Amount (`) Heads of Accounts Amount (`)
Adjusted Purchase 8,00,000 Capital 80,000
Petty Cash 10,000 Sales 10,00,000
Sales Ledger Balance 1,20,000 Current A/c 10,000
Salaries 24,000 Purchase Ledger 60,000
Balance
Carriage Inward 4,000 Outstanding Expenses 10,000
Discount Allowed 10,000 Loan A/c 66,000
Building 80,000 Profit & Loss A/c(cr) 20,000

Prepaid Insurance 2,000 Bad Debts Recovered 2,000
Depreciation 4,000 Interest Received 10,000
Cash at Bank 80,000 Provision for Bad debts 6,000
Stock (31.03.2015) 1,20,000 General Reserve 20,000
Accrued Interest 4,000
Investment 20,000
Carriage outward 6,000
Total 12,84,000 Total 12,84,000
Note: Closing Stock will appear in Trial Balance since there is adjusted purchase.
Adjusted purchase = Opening Stock + Purchase - Closing Stock.
It may be noted that if only adjusted purchase is considered then the matching concept is affected. Hence,
to satisfy the matching concept, closing stock is also considered in Trial Balance.
1.5 RECTIFICATION OF ERRORS
Every concern is interested in ascertaining its true profit and financial position at the close of the trading
year. But inspite of the best efforts of the book-keeper and the accountant certain errors are committed in the
recording of the transactions which affect the final accounts of the concern. It, therefore, becomes
utmost important for the book-keeper and the accountant to locate such errors and rectify them so that
correct profit and financial position of the concern may be ascertained. So whenever errors in accounting
records come to notice, they should be rectified without waiting till the end of the accounting year when
Trial Balance is to be prepared.
Stages of Errors:
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,
ii) 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 totaling 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,
4. Compensating Errors.
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 wring account. Suppose
on the purchase of a typewriter, the office expenses account is debited; the trial balance will still
agree.
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 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 buy the increased credit to the Sales Account.
From another point of view, error may be divided into two categories:
a) Those that affect the trial balance –because of the errors that trial balance does not agree; and
(i) Wrong casting of the subsidiary books
(ii) Wrong balancing of an account

(iii) Posting an amount on the wrong side
(iv)Wrong posting, i.e., writing the wring amount
(v) Omitting to post an amount from a subsidiary book
(vi)Omitting to post the totals of subsidiary book
(vii) Omitting to write the cash book balances in the trial balance
(viii) Omitting to write the balance of an account in the trial
balance. (ix)Writing a balance in wrong column of the trial
balance
(x) Totaling the trial balance wrongly.
b) The errors that do not affect the trial balancing are the following:
i) Omittingan entry altogether from the subsidiary book
ii) Making an entry in the wrong subsidiary book
iii) Posting
an amount in a wrong account but on the correct side, e.g., an amount to be debited to
A is debited to B, the trial balance will still agree.
A chart of the types of errors is given below:
ERRORS
Errors of Principle (treating a revenue expense as capital Clerical Errors

expenditure or vice versa or the sale of a fixed asset as
ordinary sale). Trial Balance will agree
Errors of omission Errors of Commission Compensating Errors

Trial Balance will
Omitting an entry Omitting to post the ledger

completely from the account from the subsidiary
subsidiary books. Trial books. Trial Balance will not
Balance will agree
Writing the wrong Wrong casting Posting the wrong Posting an Wrong
amount in the subsidiary of subsidiary amount in the amount on the balancing of an
books. Trial Balance will books ledger wrong side. account
Trial Balance will not agree
Steps to Locate Errors:

Even if there is only a very small difference in the trial balance, the errors leading to it must be located and
rectified. A small difference may be the result of a number of errors. The following steps will be useful in
locating errors:
i) The two columns of the trial balance should be totaled again. If in place of a number of accounts,
only one amount has been written in the trial balance the list of such accounts should be checked
and totaled again. List of Trade receivables is the example from which Trade receivable balance is
derived.
ii) It should be seen that the cash and bank balances have been written in the trial balance.
iii) The exact difference in the trial balance should be established. The ledger should be gone through
it is possible that a balance equal to the difference has been omitted from the trial balance. The
difference should also be halved; it is possible that balance equal to half the difference has been
written in the wrong column.
iv) The ledger accounts should be balanced again.
v) The casting of subsidiary books should be checked again, especially if the difference is `1, `100 etc.
vi) If the difference is very big, the balance in various accounts should be compared with the
corresponding accounts in the previous period. If the figures differ materially the cases should be
seen; it is possible that an error has been committed. Suppose the sales account for the current year
shows a balance of `32,53,000
whereas it was `36,45,000 last year; it is possible that there is an error in the Swales Account.
vii) Postings of the amounts equal to the difference or half the difference should be checked. It is possible
that
an amount has been omitted to be posited or has been posted on the wrong side.
viii) If there is still a difference in the trial balance, a complete checking will be necessary. The posting of
all the entries including the opening entry should be check. It may be better to begin with the nominal
accounts.
Rectification of Errors:
Errors should never be corrected by overwriting. If immediately after making an entry it is clear that an error
has been committed, it may be corrected by neatly crossing out the wrong entry and making the correct
entry. If however the errors are located after some time, the correction should be made by making another
suitable entry,
called rectification entry. In fact the rectification of an error depends on at which stage it is detected. 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 account are drawn.
c) After final accounts, i.e., in the next accounting period.
Before Preparation of Trial Balance:

(i) The sales book for November is undercast by `200. The effect of this error is that the Sales Account
has been credited short by `200. Since the account is posted by the total of the sales book, there is
no error in the accounts of the customers since they are posted with amounts of individual sales.
Hence only the Sales Accounts is to be corrected. This will be done by making an entry for `200 on
the credit side: “By Undercasting of Sales Book for November `200”.
(ii) While posting the discount column on the debit side of the cash book the discount of `10 allowed to
Ramesh has not been posted. There is no error in the cash book, the total of discount column
presumably has been posted to the discount account on the debit side. The error is in not crediting
Ramesh by `10. This should now be done by the entry “By omission of posting of discount on `10”.
(iil) `50 was received from Mahesh and entered on the debit side of the cash book but was not posted
to his account. By the error, which affects only the account of Mahesh, `50 has been omitted from the
credit side of his account. The rectification will be by the entry. “By Omission of posting on the `50.”
(iv) Goods purchased from Vinod for `1,000 was wrongly credited to Vimal account by `100. Again we
cannot pass a complete journal entry for rectifications even through two accounts are involved. The
rectification will be done by the entry “To wrong posting on `100” in the debit of Vimal account and
“By omission of posting on `1,000” in the credit of Vinod account.
After Trial Balance but before Final Accounts

The method of correction of error indicated so far is appropriate when the errors have been located
before the end of the accounting period. After the corrections the trial balance will agree. Sometimes
the trial balance is artificially made to agree inspite of errors by opening suspense account and putting
the difference in the trial balance to the account – the suspense account will be debited if the total of
the credit column in the trial balance exceeds the total of the debit column; it will be credited in the
other case.
One must note that such agreement of the trial balance will not be real. Effort must be made to locate the errors.
The rule of rectifying errors detected at this stage is simple. Those errors for which complete journal entries
were not possible in the earlier stage of rectification (i.e., before trial balance) can now be rectified by
way of journal entry(s) with the help of suspense account, for it these errors which gave rise to the suspense
account in the trial balance. The rectification entry for other type of error i.e., error affecting more than
one account in such a way that a complete journal entry is possible for its rectification, can be rectified in
the same way as in the earlier stage (i.e., before trial balance).
In a nutshell, it can be said that each and every error detected at this stage can only be corrected by a
complete journal entry. Those errors for which journal entries were not possible at the earlier stage will now
be rectified by a journal entry(s), the difference or the unknown side is being taken care of by suspense
account. Those errors for which entries were possible even at the first stage will now be rectified in the same
way.
Suppose, the sales book for November, 2010 is cast `100short; as a consequence the trial balance will not
agree. The credit column of the trial balance will be `100 short and Suppose Account will be credited by
`100. To rectify the error the Sales Account will be credited (to increase the credit to the right figure. Since
now one error remains,
the suspense Account must be closed – it will be debiting the Suspense Account. The entry will be:
Suspense Account Dr. `100
To Sales Account `100
(Correction of error of Undercasting the sales Book for Nov. 2010)
Illustration: 1
Correct the following errors without opening a Suspense Account
a) The Sales Book has been totaled `100 short.
b) Goods worth `150 returned by Green & Co. have not been recorded anywhere.
c) Furniture purchased from Gulab & Bros., `1,000 has been entered in Purchases Day Book.
d) 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.
Solution:
If a Suspense Account is not opened:

a) Since sales book has been cast `100 short, the Sales Account has been similarly credited `100 short.
The
correcting entry is to credit the Sales Account by `100 as “By wrong totaling of the Sales Book `100”.
b) To rectify omission, the Return Inwards Account has to be debited and the Account of Green & Co.
credited. The entry:
Returns Inward Account Dr. `150
To Green & Co. `150
(Goods returned by the firm, previously omitted from the Returns Inward Book)
c) By this error Purchases Account has to be debited by `1,000 whereas the debit should have been
to the Furniture Account. The correcting entry will be:
Furniture Account Dr. `1,000
To Purchase Account `1,000
(Correction of the mistake by which purchases Account was debited instead of the Furniture Account)
d) In this case the account of the customer has been correctly posted; the discount account has been
debited
`18 short since it has been omitted from the discount column on the debit side of the cash book. The
discount account should now be debited by the entry. “To Omission of entry in the Cash Book `18”.
Correction in the Next Accounting Period

Rectification of errors discussed so far assumes that it was carried out before the books were closed for
the concerned year. However, sometimes, the rectification is carried out in the next year, carrying forward
the balance in the Suspense Account or even transferring it to the Capital Account. Suppose, the Purchase
Book was cast short
by `1,000 in December, 2014 and Suspense Account was opened with the difference in the trial
balance. If the error is rectified next year and more than the amount relating to year 2014 and thus the
profit that year 2014 will be
less than the actual for that year. Thus, correction of errors in this manner will ‘falsify’ the Profit and Loss
Account.
To avoid this, correction of all amounts concerning nominal account, i.e., expenses and incomes should be
through a special account styled as “Prior Period Items” or “Profits and Loss Adjustment Account”.
The balance in the account should be transferred to the Profits and Loss Account. However, these Prior
Period Items should be charged after deriving net profit of the current year. ‘Prior Period items’ are material
income or expenses which rise in the current period as a result of errors or omissions in the preparation of
the financial statements of one or more periods. Prior Period Items should be separately disclosed in the
current statement of profit and loss together with their nature and amount in a manner that their impact on
current profit or loss can be perceived.
Illustration: 2
Mr. A 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 Mr. 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 Purchase 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 was not entered in the books at all. The book
value of machine was `7,500. The firm has the practice of writing off depreciation @10% on the
balance at the end of the year.
Pass journal entries to rectify the errors. Have you any comments to make?
Solution:
Journal of Mr.
A
Date Particular L.F. Dr.(`) Cr.(`)
s
2011 Mr. Mala A/c Dr. 2,300
(i)
Mr. Lala A/c Dr. 2,300
To Suspense A/c 4,600
(Correction of error by which a sale of `2,300 to Mr. Lala was posted
to the Credit of Mrs. Mala)
(ii) Profit and Loss Adjustment A/c Dr. 1,240
To Suspense A/c 1,240
(Rectification of omission to post the total of Returns Inward Book for July,
2014)
iii) a) Machinery A/c Dr. 5,600
Suspense A/c Dr. 900
To Profit & Loss Adjustment A/c 6,500
(Correction of error by which freight paid for a machine `5,600 was
posted to
Freight Account at `6,500 instead of capitalizing it)
b) Profit & Loss Adjustment A/c Dr. 560
To Plant and Machinery A/c 560
(Depreciation @ 10% charged on freight paid on a machine capitalized)
iv) Suspense A/c Dr. 8,640
(Correction of wrong carry forward of total in the purchase Account to the
next
page `65,590 instead of `56,950)
v) Mr. Mehta Dr. 9,000
To Plant & Machinery A/c 6,750
(Correction of omission of sale of machine on credit to Mr. Mehta for
`9,000 with a book value of `7,500 on which depreciation @10% has
been charged in 2010)
Comments:
The Suspense Account will not appear as shown below:
Suspense Account
Dr. Cr.
Date Particulars Amoun Date Particular Amoun
t t
` s `
2015 To Profit and Loss Adjustment 900 2014 By Balance b/d 830
A/c
To Profit and Loss Adjustment 8,640 By Sundries: 2,300
A/c Mr. Mala
Mr. Lala 2,300
By Profit and Loss Adjustment A/c 1,240
By balance c/d 2,870
9,540 9,540
Since the suspense Account still shows a balance, it is obvious that there are still some errors left in the books.
Profit & Loss Adjustment Account

(For Prior Period Items)
Dr. Cr.
Date Particulars Amount ` Date Particulars Amount `
2015 To Suspect A/c 1,240 2015 By Machinery A/c 5,600
To Plant & Machinery A/c 560 By Suspense A/c 900
To Balance c/d 15,590 By Suspense A/c 8,640
By Mr. Mehta 2,250
17,390 17,390
ERRORS DISCLOSED BY TRIAL BALANCE:
The following errors are disclosed by Trial balance.
a) Posting of transaction in wrong side of the account.
b) Posting of transaction on correct side with wrong amount.
c) Errors in totaling.
d) Error is made in carrying forward.
e) Wrong balancing in the ledger account.
f) Posting of one aspect of Journal entry in Ledger account.
g) Recording of one aspect of entry twice.
Recording in subsidiary book and not posted to concerned amount.
Illustration: 3
Rectify the following errors assuming that the errors were detected
(a) Before the Preparation of Trial Balance;
(b) After the preparation of Trial Balance and
(c) After the preparation of Final Accounts.
(i) Purchase Plant for ` 10,000 wrongly passed through Purchase Account.
(ii) Sales Day Book was cast short by ` 1,000.
(iii) Cash paid to Mr. X for ` 1,000 was posted to his account as ` 100.
(iv) Purchase goods from Mr. T for ` 3,500 was entered in the Purchase Day Book as ` 500.
(v) Paid salary for ` 3,000 wrongly passed through wages account.
Solution:
In the Books of …………………….

Journal (without narration)
Date Before preparation of Trial After preparation of Trial After preparation of Final
Balance Balance Accounts
Dr. Cr. Dr. Cr. Dr. Cr.
(i) Plant A/c 10,000 Plant A/c 10,000 Plant A/c 10,000
To Purchase A/c. 10,000 To Purchase A/c. 10,000 To P&L Adjustment A/c 10,000
(ii) Sales account will be credited Suspense A/c Dr. 1,000 Suspense A/c Dr. 1,000
with ` 1,000 To Sales A/c. 1,000 To P&L Adjustment A/c 1,000
(iii) X Account will be debited X A/c Dr. 900 X A/c Dr. 900
when
` 900 To Suspense A/c. 900 To Suspense A/c 900
(iv) Purchase A/c Dr. 3,000 Purchase A/c Dr. 3,000 P&L Adjustment A/c Dr. 3,000
To T A/c 3,000 To T A/c 3,000 To T’s A/c. 3,000
(v) Salary A/c Dr. 3,000 Salary A/c Dr. 3,000 P&L Adjustment A/c. Dr. 3,000
To Wages A/c 3,000 To wages A/c. 3,000 To P&L Adjustment A/c 3,000
UNIT-3
Methods of Depreciation
Depreciation is derived from the Latin word “Depretium”, where “De” – decline “Pretium” – Price.
This decline in price is due to constant use, wear and tear. “Depreciation is the gradual and permanent
decrease in the value of an asset from any cause.
Accounting Standard (AS 10) states that “Depreciation is allocated so as to charge a fair proportion of
the depreciable amount in each accounting period during the expected useful life of the asset.”
Amortization
◆ Intangible assets such as goodwill, trademarks and patents are written off over a number of
accounting periods covering their estimated useful lives.
◆ This periodic write off is known as Amortization and that is quite similar to depreciation of tangible
assets.
◆ The term amortization is also used for writing off leasehold premises.
◆ Amortization is normally recorded as a credit to the asset account directly or to a distinct provision
for
depreciation account.
◆ Though the write off of intangibles that have no limited life is not approved by some Accountants.
◆ Some concerns do amortize such assets on the ground of conservatism.
Depletion
◆ This method is specially suited to mines, oil wells, quarries, sandpits and similar assets of a wasting
character.
◆ In this method, the cost of the asset is divided by the total workable deposits of the mine etc. And by
following the above manner rate of depreciation can be ascertained.
◆ Depletion can be distinguishable from depreciation in physical shrinkage or lessening of an
estimated available quantity and the latter implying a reduction in the service capacity of an asset.
Obsolescence
◆ The term ‘Obsolescence’ refers to loss of usefulness arising from such factors as technological
changes, improvement in production methods, change in market demand for the product output of
the asset or service or legal or medical or other restrictions.
◆ It is different from depreciation or exhaustion, wear and tear and deterioration in that these terms refer
to functional loss arising out of a change in physical condition.
Dilapidation
In one sentence Dilapidation means a state of deterioration due to old age or long use. This term
refers to damage done to a building or other property during tenancy.
Causes of Depreciation
Internal Causes External Causes Time Element Abnormal Occurrence
Wear and Tear Depletion Obsolesce Inadequacy
A. Internal Causes
(i) Wear and tear: Plant & machinery, furniture, motor vehicles etc suffer from loss of utility due to
vibration, chemical reaction, negligent handling, rusting etc.
(ii) Depletion (or exhaustion): The utility or resources of wasting assets (like mines etc.) decreases
with regular extractions.
B. External or Economic Causes
(i) Obsolescence: Innovation of better substitutes, change in market demand, imposition of legal
restrictions may result into discarding an asset.
(ii) Inadequacy: Changes in the scale of production or volume of activities may lead to discarding an
asset.
C. Time element: With the passage of time some intangible fixed assets like lease, patents. Copy- rights
etc., lose their value or effectiveness, whether used or not. The word “amortization” is a better term to
speak for the gradual fall in their values.
D. Abnormal occurrences: An accident, fire or natural calamity can damage the service potential of
an asset partly or fully. As a result the effectiveness of the asset is affected and reduced.
Fixed/Equal Installment OR Straight Line Method
Features:
(i) A fixed portion of the cost of a fixed asset is allocated and charged as periodic depreciation.
(ii) Such depreciation becomes an equal amount in each period.
(iii) The formula for calculation of depreciation
is : Depreciation = (V-S)/n
Where, V = Cost of the Asset
S = Residual value or the expected scrap
value n = estimated life of the asset
Formula for calculation of rate of depreciation under Written Down Value Method:
Residual Value
1n
Costofof the Asset
Example:
If a plant costs ` 16,000 with an estimated salvage value of ` 2,000 at the end of third year of its useful life,
compute
the rate of depreciation.
100 1-2,000
3 
 50%
1616,000
 
Reducing / Diminishing Balance Method OR Written Down Value
Method Features
Depreciation is calculated at a fixed percentage on the original cost in the first year. But in subsequent years
it is calculated at the same percentage on the written down values gradually reducing during the
expected working life of the asset.
The rate of allocation is constant (usually a fixed percentage) but the amount allocated for every year
gradually
decreases.
Methods of Recording Depreciation:
Depreciation can be recorded in the books of account by two different methods. They are discussed below:
1. When a provision for Depreciation Account is maintained:
In case of this method, the amount of depreciation to be charged in a particular year in debited to
Depreciation A/c and credited to Provision for Depreciation Account. The Asset Account appears in the
books at original cost. In case the asset is sold, the provision for Depreciation Account is transferred to the
Asset Account. Any amount released on account of sale of asset is also credited to Asset Account. The
balance, if any, in the Asset Account is transferred to the Profit and Loss Account.
2. When a provision for Depreciation Account is not maintained:
In case a Provision for Depreciation Account is not maintained, the amount of depreciation is debited
to the Depreciation Account and credited to the Asset Account. The Asset Account thus appears in the
books at written down value. The Depreciation Account is transferred to the Profit and Loss account like
any other item of expense.
Accounting Treatment under different methods:
Sl. Transaction If Provision for If Provision for Depreciation A/c is maintained

No. Depreciation If Asset Disposal A/c is If Asset Disposal A/c
A/c is NOT NOT opened is opened
maintained
(ordinary
method)
1. For the Asset A/c Asset A/c Asset A/c
purchase of an
asset (including Dr. To Dr. To Cash/Bank Dr. To Cash/Bank
exp. Incurred till Cash/Bank A/c A/c A/c
it is brought into
use)
2. For the Depreciation A/c Dr. Depreciation A/c Depreciation A/c

depreciation To Asset A/c
on the asset. Dr. To Prov. for Dr. To Prov. for
Dep. A/c Dep. A/c
3. For the transfer Profit & Loss A/c Profit & Loss A/c Profit & Loss A/c
of depreciation
to P & L a/c Dr. To Dr. To Dr. To
Depreciation A/c Depreciation A/c Depreciation A/c
4. When the asset is No Entry No Entry Asset Disposal A/c Dr.
to be sold To Asset A/c
a. For the
transfer of
original cost of
the asset to Asset
Disposal A/c
b. For the No Entry Prov. for Dep A/c Dr. Prov. for Dep A/c
transfer of To Asset A/c
provision for Dr. To Asset
Depreciation Disposal A/c
A/c
c. For the sale of Cash / Bank A/c Dr. Cash / Bank A/c Dr. Cash / Bank A/c
asset To Asset A/c To Asset A/c
Dr. To Asset
Disposal A/c
d. For the profit Asset A/c Asset A/c Asset Disposal a/c
on the sale of
asset. Dr. To Profit & Loss Dr. To Profit & Loss Dr. To Profit & Loss
A/c A/c A/c
e. For the loss Profit & Loss A/c Dr. Profit & Loss A/c Dr. Profit & Loss A/c
on the sale of To Asset A/c To Asset A/c
asset Dr. To Asset
Disposal a/c
Illustration 1
Purchase price of a machine `1,80,000; Freight charges `30,000; installation charges `10,000; residual vale
`16,000 and useful life 5 years. Calculate the depreciation for third year under the straight line method.
Under straight line
method, the depreciation for each year
Solution:
Depreciation = Cost of Machine + Repair + Installation - Residual Value

Useful Life
Hence, the depreciation for the third year = 1,80,000 + 30,000 +10,000 -
16,000 = ` 40,800
5
Illustration 2
Calculate the Rate of Depreciation under Straight Line Method (SLM) in each of the following:-
Machine Cost of Machine Expenses incurred at Estimated Expected Useful
No. the time of purchase Residual Life
(`) Value (`) in years
to be
capitalized (`)
1 90,000 10,000 20,000 8
2 24,000 7,000 3,100 6
3 1,05,000 20,000 12,500 5
4 2,50,000 30,000 56,000 10
Solution:
Ma- Cost of Expenses Depreciation Total Estimate Expecte Rate of

chin Machin incurred at the = (d-e)/f (`) Cost of d d Useful Depreciatio
e No e (`) time of Asset = Residua Life in n under
purchase to be (b+c) (`) l years SLM =
Value(`
capitalized (`) ) (g/d)×100
a b c g d e f h
1 90,000 10,000 10,000 1,00,000 20,000 8 10%
2 24,000 7,000 4,650 31,000 3,100 6 15%
3 1,05,000 20,000 22,500 1,25,000 12,500 5 18%
4 2,50,000 30,000 22,400 2,80,000 56,000 10 8%
Illustration 3
A machine is purchased for ` 7,00,000. Expenses incurred on its cartage and installation ` 3,00,000. Calculate
the amount of depreciation @ 20% p.a. according to Straight Line Method for the first year ending on 31st
March, 2015,
if this machine is purchased on:
(a) 1st April, 2014 (b) 1st July, 2014 (c) 1st October, 2014 (d) 1st January, 2015
Solution:
Here, Total Cost of Asset = Purchased Price + Cost of Cartage and Installation
= ` 7,00,000 + ` 3,00,000 = ` 10,00,000
= Total Cost of Asset × Rate of Depreciation × Period from the date of purchase of date od closing accounts
12
(a) The machine was purchased on 1st April,
2012:
= ` 2,00,000
Amount of Depreciation = ` 10,00,000 × 20% ×
12
12
(b) 1st July, 2012 9

Amount of Depreciation = ` 10,00,000 × 20% ×
12
= ` 1,50,000
(c) 1st October, 2012

Amount of Depreciation = ` 10,00,000 × 20% × = ` 1,00,000
12
6
(d) 1st January, 2013

Amount of Depreciation = ` 10,00,000 × 20% × = ` 50,000
12
3
Illustration 4
A company whose accounting year is the calendar year, purchased on 1st April, 2013 Machinery costing `
30,000. It purchased further machinery on 1st October, 2013 costing ` 20,000 and on 1st July, 2014 costing `
10,000. On 1st January, 2015 on third of the Machinery installed on 1st April, 2013 became obsolete and
was sold for ` 3,000. Show how machinery account would appear in the books of the company, it being
given that machinery was
depreciated by fixed installment method at 10 p.c. per annum.
Solution:
Dr. Machinery Account Cr.
2013 Particulars ` 2013 Particulars `
Apr. To Bank A/c 30,000 Dec.3 By Depreciation A/c (on ` 30,000 for nine months and 2,750
1 1 on
` 20,000 for 3 months)
To Bank A/c 20,000 Dec.3 By Balance c/d 47,250
1
50,000 50,000
2014
Jan.1 To 47,250 2014
Balance
b/d
July1 To Bank A/c 10,000 Dec.31 By Depreciation A/c (on ` 50,000 for one year and on ` 5,500
10,000 for 6 months)
2005
Dec.31 By Balance c/d 51,750
57,250 57,250
2015 2015
Jan.1 ToBalance 51,750 Jan. 1 By Bank a/c 3,000
b/d
Jan.1 By Profit and Loss A/c (loss on sale) (1) 5,250
Dec.31 By Depreciation (on `50,000 for one year) A/c 5,000
Dec.31 By Balance c/d 38,500
51,750 51,750
2016
Jan.1 To Balance 38,500
b/d
Working Note:
(1) Calculation of Loss on sale of 1/3 of the Machinery
` `
Value of Machinery 10,000
Less: Depreciation for 2013 for 9 months 750
Depreciation for 2014 1,000
1,750
Written down value of Machinery 1-1- 8,250
2015
Less: Amount realized 3,000
Loss transferred to profit and loss A/c 5,250
Illustration 5
On July 1, 2012 Granites Ltd. purchased second hand machine for `40,000 and reconditioned the same by
spending
`6,000. On January 1, 2013 a new machine was purchased for `24,000. On June 30, 2014 the machine
purchased on January 1, 2013 was sold for `16,000 and another machine was installed at a cost of `30,000.
The company writes of 10% on original cost every year on March 31. Show the Machinery account update.
Solution:
Date Particulars ` Date Particular `
s
1-7-12 To Bank (`40,000 46,000 31-3-13 By depreciation A/c
9 10
+ `6,000) ` 46,000 × × = 3,450
12 100
3 10
1-1-13 To Bank 24,000 ` 24,000 × × = 600 4,050
12 100
31-3-13 By balance c/d 65,950
70,000 70,000
1-4-13 To Balance b/d 65,950 31-3-14 By depreciation A/c (on ` 70,000 at 10%) 7,000
31-3-12 By balance c/d 58,950
65,950 65,950
1-4-14 To balance b/d 58,950 30-6-14 By Bank (Sale of Machinery) 16,000
30-6- To Bank 30,000 30-3-15 By P & L A/c (1) 4,400
14
31-3-15 By Depreciation (2) 7,450
By balance c/d 61,100
88,950 88,950
1-4-15 To balance b/d 61,100
Working Notes:
1. Calculation of Loss on sale of machinery:
Cost of Machinery on 1-1-2013 24,000
3 10 600
Less: Depreciation upto 31-3-2013 (` 24,000 ×12 ×100 )
23,400
Less: Depreciation upto 31-3-2014 (on ` 24,000 at 10%) 2,400
21,000
3 10 600
Less: Depreciation till the date of sale of machinery i.e. (30-6-2014) (` 24,000 × ×
) 20,400
12 100
Less: Amount realized on sale of machinery 16,000
4,400
Loss on sale of machinery 4,400
2. Calculation of depreciation on the balance of machinery form 1-4-2014 to 31-3-2015:
Depreciation on the machinery sold for 3 months form 1-4-2014 to 30-6-2014 (date of sale) (` 600
24,000
3 10
×12 ×100 )
On ` 46,000 at 10% 4,600
On ` 30,000 at 10% for 9 months (` 30,000 × 9 × 10 ) 2,250
12 100
7,450
Illustration 6
A company purchased some machineries for `1,00,000 on 1st April, 2011. It charges depreciation @ 10% p.a.
on reducing balance method every year. On 30th September, 2015 a part of machinery was sold for
`14,000, the original cost of the machine was `20,000. Calculate the profit or loss on sale of machinery.
Solution:
Particulars Amt. (`) Amt. (`)
Original cost of the machines as on 20,000
1.4.2011
(-) Depreciation for the year 2011-12 2000
2012-13 1800
2013-14 1620
2014-15 1458
2015-16 656 (7534)
Written down value as on 30-9-2015 12466
Sales price 14000
Profit on sale of machinery 1534
On 1.1.2013 a machine was purchased for `1,00,000 and `50,000 was paid for installation. Assuming that the
rate of depreciation was 10% on Reducing Balance Method, calculate amount of depreciation upto
31.12.2015.
Solution:
Year Opening Book Value (`) Rate Depreciation (`) Closing Book Value (`)
2013 1,50,000 10% 15,000 1,35,000
2014 1,35,000 10% 13,500 1,21,500
2015 1,21,500 10% 12,150 1,09,350
Note: Cost of the machine (i.e. Opening Book Value for the year 2013)
= Cost of Purchase + Cost of Installation
= ` 1,00,000 + ` 50,000 = ` 1,50,000
Illustration 8
A Manufacturing concern whose books are closed on 31st March, Purchased Machinery for `1,50,000 on 1st
April 2011. Additional machinery was acquired for ` 40,000 on 30th September, 2012 and for ` 25,000 on 1st
April, 2014. Certain machinery, which was purchased for ` 40,000 on 30th September, 2012, was sold
for ` 34,000 on 30th September, 2014.
Give the Machinery Account for the year ending 31st March, 2015 taking into account depreciation at
10% per annum on the written-down value.
Solution:
Date Particulars ` Date Particulars `
2011 April To Bank 1,50,000 Mar. 31 By Depreciation 15,000
By Bal. c/d 1,35,00
0
1,50,000 1,50,00
0
2012 April To Bal. b/d 1,35,000 2013 Mar. By depreciation (13,500+2,000) 15,500
1 31
Sept. 30 To Bank 40,000 By Bal. c/d 1,59,50
0
1,75,000 1,75,00
0
2013 Apr.1 To Bal B/d 1,59,500 Mar. 31 By Depreciation (12,150+3,800) 15,950
By Bal. c/d 1,43,55
0
1,59,500 1,59,50
0
2014 April To balance b/d 1,43,550 2014 Sept. By Depreciation A/c 1,710
1 30
To Bank (additions) 25,000 By Bank A/c 34,000
2014 To P & L A/c (profit on sale 1,510 2015 Mar. By depreciation (10,935+ 2,500) 13,435
Sept. of machinery) (` 34,000 – ` 31
30 32,490)
By Balance c/d 1,20,91
5
1,70,060 1,70,06
0
2015Apri To Bal. b/d 1,20,915
l1
Calculation of profit on sale of machinery:

Cost of machinery on 30-9-2012 40,000
Less: Depreciation for 2012-2013 (i/1 year) 2,000
2013-14 3,800
2014-15 (1/2 year) 1,710
7,510
32,490
Less: Amount realized on sale of 34,000
machinery
Profit on sale of Machinery 1,510
Illustration 9
One lathe machine whose original value was `1,20,000 on 1.4.2013, being the date of installation was
sold on 30.9.2015 for `1,00,000. Depreciation is charged at the rate of 10% on reducing balance. Show
machinery account and assets disposable account.
Solution:
Machinery Account
Dr. Cr.
Date Particulars Amt. (`) Date Particula Amt.(`)
1,20,000 r 12,000
2013 Apr. To Balance b/d 2014 Mar
1 31 By Depreciation A/c (1,20,000*10%)
Mar 31 By Balance c/d 1,08,000
1,20,000 1,20,000
2014 Apr.1 To Balance b/d 1,08,000 2015 Mar By Depreciation A/c (1,08,000*10%) 10,800
31
Mar 31 By Balance c/d 97,200
1,08,000 1,08,000
2015 Apr.1 To Balance b/d 97,200 Sep 30 By Machinery disposal A/c 97,200
97,200 97,200
Machinery Disposal Account

Dr. Cr.
Particular Amt. (`) Particular Amt. (`)
To Machinery A/c 97,200 By Bank A/c 1,00,000
To Profit and Loss A/c (profit on sale of 7,660 By depreciation A/c (1.4.08-30.9.15) 4,860
Machinery)
1,04,860 1,04,860
Meaning of Provision:
The term ‘provision’ means any amount written off or retained by way of providing depreciation,
renewals or diminution in the value of assets or retained by way of providing for any known liability the
amount of which may not be determined with substantial accuracy. If the amount of such liability can be
ascertained it will be a liability and not a provision. Provisions for depreciation, provision for bad and
doubtful debts, provisions for taxation, provision for repairs and renewal and provision for contingencies are
some examples of provisions. It is a charge to profit and loss account.
The main purpose of provision for repairs and renewals is to give a uniform charge to profit and loss
account in respect of machinery. This is all the more necessary as the usefulness of the machinery is also
uniform form year to year. Under this method the total repairs over the life of the asset are estimated and
then average is found. This amount is debited to the profit and loss account of every year and credited to
the provisions of repairs and renewals account. The actual amount of repairs and renewals is debited to the
provision for repairs and renewals account, the balance of the account appears on the liabilities side in the
balance sheet. As soon as the life of the asset is over, the account is automatically closed.
A firm desires to debt its profit and loss account with a uniform figure every year in respect of repairs and
renewals. It expects that considering the life of the asset in question ` 10,000 will be the average amount to be
spent per year. Actual repairs are ` 1,000 in the first year, ` 2,300 in the second year and ` 3,700 in the third year.
Show the provision for repairs and renewals account.
Solution:
Provision for Repairs and Renewals Account
Dr. Cr.
Year 1 To Bank (repairs) 1,000 Year – 1 By P & L A/c 10,000
To Balance c/d 9,000
10,000 10,000
Year II To Bank (repairs) 2,300 Year – II By Balance b/d 9,000
To Balance c/d 16,700 By P. & L. A/c 10,000
19,000 19,000
Year III To Bank (repairs) 3,700 Year III By Balance b/d 16,700
To Balance c/d 23,000 By P & L A/c 10,000
26,700 26,700
Meaning of Reserve
Any sum which is appropriated out of profit and loss appropriation account is not meant to cover up
liability, contingency, commitment. Or reduction in the value of an asset is a reserve. It is provided for
meeting prospective losses or liabilities, creation of reserves to increase the working capital in the business,
strengthen its financial position to equalize the dividend during the period of inadequate profit and to comply
with legal requirements. Sometimes the amount is not kept in the business as additional working capital
but is invested in the purchase of outside securities, then it is called reserve fund and not a reserve. Reserve
may be (i) capital reserve and (ii) revenue serve.
EXERCISE:
1. M/s Suba Pharmaceuticals has imported a machinery on 1st July, 2012 for `1,60,000 paid custom
duty and freight `80,000 and incurred erection charges ` 60,000. Another local machinery costing `1,00,000
was purchased on January 1 , 2013. On 1st July, 2014 a portion of the imported machinery (value one third)
got out of order and was sold for `34,800. Another machinery was purchased to replace the same for
`50,000. Depreciation is to be
calculated at 20% p.a. on straight line method. Show the machinery account for 2012, 2013 and 2014.
Ans: Balance in Machinery Account `2,05,000; Loss on sale `25,200

2. A manufacturing concern, whose books are closed on 31st March, purchased machinery for ` 1,50,000
on 1st April 2010. Additional machinery was acquired for ` 40,000 on 30th September 2011 and for ` 25,000
on 1st April, 2013. Certain machinery, which was purchased for ` 40,000 on 30th September, 2011 was
sold for ` 34,000 on 30th September, 2013. Give the machinery account for the year ending 31st March,
2014 taking into account
depreciation at 10% per annum on the written – down value.
Ans: Balance in Machinery Account `1,20,915; Profit on sale of Machinery = `1,510

3. A Transport company purchased 5 trucks at `2,00,000 each on April 1. 2012. The company observes
calendar
year as its accounting year.
On October 1, 2014 one of the trucks is involved in an accident and is completely destroyed. Insurance
company pays `90,000 in full settlement of the claim. On the same day the company purchases an used truck
for `1,00,000 and spends `20,000 on its overhauling.
7 BANK RECO
BANK RECONCILIATION STATEMENTS
1.4 DEPRECIATION - METHODS1.4 DEPRECIATION - METHODS
When an individual or a firm deposits any money into a bank or withdraw money by issuing a cheque from a
bank, he/it records the transaction in the debit-side of the bank columns of the Cash Book for such deposits
and credit side of the bank column of the Cash book for such withdrawals.
On the other hand, bank also records such transactions in its book i.e. credit such account for deposits and
debit such account for any withdrawals. The Bank issues a book to the account holder after recording such
transactions. The book which is prepared by the bank for accountholder is known as Pass Book. In case of
Current Account, the bank issues Statements and not a Pass Book.
The statement is known as Bank Statement.
A Specimen of a Pass Book is presented below:
Date Particulars Cheque Withdrawals (`) Deposits (`) Balance (`) Initials
No.
20.03.15 Balance b/f - - 14,078.00 -
22.03.15 To CLG 210850 2,000.00 12,078.00
23.03.15 To Self 210853 11,500.00 578.00
24.03.15 By CLG 1,000.00 1,578.00
28.03.15 To CLG 210854 700.00 878.00
29.03.15 By Cash 1,000.00 1,878.00
30.03.15 To CLG 210855 600.00 1,278.00
Definition
A statement which is prepared to reconcile the causes of difference between Bank Balance as per Cash
Book and Bank Balance as per Pass Book/ Bank Statement is known as a Bank Reconciliation Statement.
Features of a Bank Reconciliation statement

1. It is a statement.
2. It is not a part of the process of Accounts
3. It is prepared to reconcile the causes of difference between the Bank balance as per Cash Book and
the4. Bank balance as per Pass Book
4. It can be prepared at any time during the financial year, as and when it is required.
5. Since it is prepared on a particular date, it is written as Bank Reconciliation statement as at/as
on……………………
It is necessary for a beginner to understand the mechanism of how to prepare the Bank Reconciliation
statement. The first milestone on this journey is to understand the various reasons for differences between the
two records.
Reasons for Differences between Cash Book and Pass Book
The differences are basically of two types:

A. Items appear in Cash Book but not appearing in Pass Book and
B. Items appear in Pass Book but not appearing in the Cash Book
Let us understand these reasons:

(A) Items not appearing in Bank Pass Book
(1)Cheques issued by business entity not debited by the Bank –

This may be because they might not have been Banked by the payee or it may still be under clearance. The
entry in Cash Book will be made immediately when the cheque is issued thereby reducing the Bank balance
in the books of entity’s books of A/cs. Here, Bank balance as per Cash Book will be less, but as per Bank
Pass Book it will be more. This is also termed as unpresented cheques.
(2)Cheques deposited but not credited by the Bank –

The business entity may receive cheques or draft which is deposited into the Bank for collecting the payment.
Again entry in Cash Book will be instant thereby increasing the balance. Here, Bank balance as per Cash
Book will be more than the balance as per Bank passbook. This is also called as outstanding cheques.
(3)Errors –
The Bank may by mistake miss out entering the debit or credit which results in the difference.
(4)Standing Instructions –
The entity may give standing instruction to the Bank for certain regular payments like loan repayment
installment, transfer of funds etc. This may get entered in the Cash Book immediately, but Pass Book entry
may be delayed.
(B) Items not appearing in the Cash Book

(1) Bank interest, Bank charges etc. –
The Bank will charge interest on overdraft or also charges for services, issue of demand draft, pay orders etc.
Here, being the source of transaction, the Bank will record in the Pass Book immediately and send the debit
advice slips to the business entity. The entry in the Cash Book may be delayed. Similarly the Bank could
credit interest on fixed deposits, which may get entered in business books at a later date.
2) Direct deposits in Bank account –

Sometimes customers or others may directly deposit an amount in the Bank for goods or services rendered.
The Bank will enter it immediately, but entry in Cash Book will appear later.
(3)Bills for collection –

The Business Entity may send bills of exchange for collection. The Bank will collect the payment and credit
the same in the passbook. The entry in Cash Book will be made only after receipt of information from the
Bank.
(4)Errors – The records may be missed out by the book-keeper of the Business Entity.
Illustration 1.
On 31.12.14, P. Roy’s Bank Balance as shown by the Cash Book was ` 75,000. On receipt of Bank Statement it
was found that:
(i) Three cheques of `3,000, `4,000 and `1,500 drawn in favour of suppliers respectively on 28th, 29th and
30th December, 2014 had been debited in the Bank Statement on 2nd January 2015.
(ii) The Bank had credited `8,000 on 30th December, 2014, in respect of collection made by Bank directly
from a customer, the intimation not having yet been received.
(iii) Two cheques of `5,000 and `6,000 were deposited into Bank on 30th December, 2014 had been
credited in the Bank statement on 4th January, 2015.
(iv) The Bank had debited `30 as incidental charges on 30th December, 2014 but not entered in the Cash
Book. Show the reconciliation of the Bank Balance as per Cash Book with the Bank Balance as per Bank
Statement as on 31st December, 2014.
Solution:
Bank Reconciliation Statement of Mr. P. Roy as on 31st December, 2014.

Particular Amount Amount
s (`) (`)
Bank Balance as per Cash Book (Dr.) 75,000
Add:
(i) Cheques issued but not presented for payment `3,000, `4,000 & `1500 respectively. 8,500
(ii) Collection by Bank from a Customer not recorded in the Cash Book 8,000 16,500
91,500
Less:
(i) Cheques deposited but not credited in the Pass Book on 31.12.14 `5,000 + `6,000 11,000
respectively.
(ii) Bank charges not recorded in the C.B. 30 11,030
Balance as per Pass Book (Cr.) 80,470
1. Preparation of journal entries.
2. Discuss the rules , advantages and disadvantages of double entry system.
3. Preparation of single column, Double column and Three column cash book.
4. Preparation of Trial balance and Rectification of Errors.
5. Discuss the different types of Errors.
CILIATION STATEMENTS BANK RECONCILIATION STATEMENTS
UNIT-IV
FINAL ACCOUNTS
TRADING AND PROFIT AND LOSS ACCPUNT:

The most important function of an accounting system is to provide information about the profitability of
the business. A sole trader furnishes a Trading and Profit and Loss Account which depicts the result of the
business transactions of the sole trader. Along with the Trading and Profit and Loss Account he also prepares
a Balance Sheet which shows the financial position of the business.
Steps in the Process of Finalization of Accounts
A. For Trading Concerns:

1. Trading Account.
2. Profit and Loss Account.
3. Balance Sheet.
B. For Manufacturing and Trading Concerns:

1. Manufacturing Account.
2. Trading Account.
3. Profit and Loss Account.
4. Balance Sheet.
Profitability Statement –
This statement is related to a complete accounting period. It shows the outcome of business activities during
that period in a summarized form. The activities of any business will include purchase, manufacture, and sell.
Balance Sheet –
Business needs some resources which have longer life (say more than a year). Such resources are, therefore,
not related to any particular accounting period, but are to be used over the useful life thereof. The
resources do not come free. One requires finance to acquire them. This funding is provided by owners
through their investment, bank & other through loans, suppliers by way of credit terms. The Balance Sheet
shows the list of resources and the funding of the resources i.e. assets and liabilities (towards owners and
outsiders). It is also referred as sources of funds (i.e. liabilities & capital) and application of funds (i.e. assets).
Let us discuss these statements in depth.
Trading Account:
It is an account which is prepared by a merchandising concern which purchases goods and sells the same
during a particular period. The purpose of it to find out the gross profit or gross loss which is an important
indicator of business efficiency.
The following items will appear in the debit side of the Trading Account:
ROFIT MAKING CONCERN (FOR SOLE PROPRIETORSHIP CONCERN)
1. What is Trading account? Give the specimen of Trading account.
2. What is Profit & Loss account? Give the specimen of is Profit & Loss account.
3. Preparation of Trading account.
4. Preparation of Profit & Loss account.
5. Preparation of Final accounts with adjustment.
UNIT-V
Preparation of Final accounts of Joint Stock Companies (As per the format of the Indian Companies
Act)
Problems on Profit & Loss A/c of a Company as per Revised Schedule III of the Companies Act 2013
FORMAT OF P & L Account
P & L Account of ………….Company Limited for the year ended 31st

March……….
Particulars Note Amount

No
I. Revenue from Operations ****
(II)Other Income ****
(III)Total revenue *****
(IV) Expenses:
(a)Material Consumed ****
(b)Purchases ****
(c)Changes in Inventories(Finished goods, ****
work-in-progress & stock-in-trade)
(d)Employees benefit expenses ****

(e)Finance Cost ****
[f] Depreciation and Amortization Exp ****
(g)Other Expenses ****
Total Expenses *****
(V)Profit & Loss before Tax (III-IV) *****
(VI)Provision for Tax ****
(VII)Profit Loss after Tax (V-VI) *****
EXPLAINATION
I Revenue from operations (Cash sales + Credit sales Less Sales returns Less Excise Duty)
II Other Income (All incomes other than sales)
III Total Revenue (I + II)
IV Expenses
a) Cost of materials consumed (it given specifically; No need to calculate if not given)
b) Purchases of stock-in-trade (purchases)

c) Changes in inventories of finished goods, work-in-progress &
stock-in-trade. (Opening stock less closing stock)
d) Employees Benefits Expenses (salaries, wages, canteen expenses, all
their employee welfare expenses, PF contribution of the employer)
e) Finance cost (Interest on borrowings)
f) Depreciation& Amortisation expenses (Dep. On fixed tangible assets &
amortisation of intangible asset)
g) Other expenses (All other revenue expenses & losses + loss by theft/fire etc.
Problem No.1
You are given the following information from the books of Siraj Co. Ltd., as on 31st March 2015.
Siraj Co. Ltd

Trial Balance as on 31st March,2015
Particulars Amount Particulars Amount
Depreciation on premises 8,000 Sales 12,40,000
Materials Consumed 8,00,000 Equity Share Capital 8,00,000
Opening Stock 40,000 Outstanding wages 6,000
Salaries 1,14,000
Bad debts 3,800
Bonus to employees 20,000
Interest on Loan 16,000
Depreciation on machinery 18,000
Conveyance 4,000
Insurance 16,200
Sales Returns 40,000
Provision for Tax 60,000
Machinery 6,00,000
P. F. Contribution 86,000
Premises 1,60,000
Computer 40,000
20,46,000 20,46,000
Additional information:
Closing stock was valued at Rs.1, 20,000.
Solution
1. Siraj Co. Ltd
Statement of Profit and Loss as on 31st March,2015
Note No Amount
I. Revenue from Operations 1 12,00,000
(II)Other Income -
(III)Total revenue 12,00,000
(IV) Expenses:
(a)Material Consumed 8,00,000
(b)Purchases 0
(c)Changes in Inventories 2 (80,000)
(d)Employees benefit expenses 3 2,20,000
(e)Finance Cost 16,000
(f)Depreciation and Amortization Exp 4 26,000
(g)other Expenses 5 44,000
Total Expenses 10,26,000
(V)Profit & Loss before Tax (III-IV) 1,74,000
(VI)Provision for Tax (60,000)
(VII)Profit Loss after Tax (V-VI) 1,14,000
Notes
1 Revenue from Operations

Sales 12,40,000
Less Sales Returns 40,000
12,00,000
2 Changes in Inventories
Opening Stock 40,000
Less Closing Stock (1,20,000)
(80,000)
3 Employees benefit expenses
Salaries 1,14,000
PF Contribution 86,000
Bonus to
employees 20,000
2,20,000
4 Depreciation & Amortisation
Depreciation on premises 8,000
Depreciation on machinery 18,000
26,000
5 Other Expenses
Bad debts 3,800
Conveyance 4,000
Insurance 16,200
44,000
************************************
Problem No.2
From the following Trial balance of Glory Co. Ltd., as on 31st
March 2015 Prepare a statement of P & L Account as per schedule
III of the companies Act. Glory Co. Ltd.
Trial Balance as on 31st March,2015
Particulars Amount Particulars Amount
Interest on
Debentures 32,400 Share Transfer Fees 15,000
Travelling Expenses 10,200 12% Debentures 2,70,000
Delivery van expenses 5,100 Commission received 7,400
Bad Debts 6,500 Sales 6,45,500
Discount 7,000 Share Capital 5,00,000
Purchases 3,15,800
Opening Stock 72000
Freight outward 8,400
Free samples 5,000
Depreciation 38,900
Showroom expenses 11,400
Bank balance 1,58,600
Wages 93,000
Land & Building 4,00,000
Office Equipment 1,45,000
Insurance 6,000
Furniture 1,22,600
Total 14,37,900 Total 14,37,900
Additional information:
Closing stock was valued at Rs.85,500
Solution 2
Glory Co. Ltd.
Particulars Note No Amount
I. Revenue from Operations 6,45,500
(II)Other Income 1 22,400
(IV) Expenses:
(a)Material Consumed 0
(b)Purchases 3,15,800
(d)Employees benefit expenses 93,000
[f] Depreciation and Amortization Exp 38,900
(g)Other Expenses 3 59,600
(VI)Provision for Tax 0
Notes
1 Other Income
Share Transfer Fees 15,000
Commission Received 7,400
22,400
Less Closing Stock (85,500)
(13,500)
3 Other Expenses
Travelling Expenses 10,200
Delivery van Expenses 5,100
Bad Debts 6,500
Discount 7,000
Freight Outward 8,400
Free samples 5,000
Showroom expenses 11,400
Insurance 6,000
59,600
************************************
Problem No.3
You are given the following extracts of ledger balances taken from
Vihar Co. Ltd., for the year ending 31st March 2015.
Prepare a statement of P & L A/C as per revised schedule III
Particulars Rs
Excise Duty 8,000
Provision for tax 10,000
Depreciation on Machinery 3,300
Sundry expenses 7,000
Rent 4,000
Salaries 7,500
Materials consumed 90,000
Machinery 25,000
Directors remuneration 20,000
Factory expenses 2,500
Sales 4,55,000
Returns inward 5,000
Purchases 2,35,000
Closing stock 75,000
opening stock 82,000
Wages 30,000
Bank loan 40,000
Interest on Bank loan 4,000
Interest on Investment 5,000
Rent received 3,000
Motive power 12,000
Transport Charges 1,000
Solution
3 Vihar Co. Ltd.
Particulars Note No Amount

(I) Revenue from Operations 1 4,42,000
(IV) Expenses:
(a)Material Consumed 90,000
(b)Purchases 2,35,000
(c)Changes in Inventories 3 7,000
(d)Employees benefit expenses 4 37,500
[f] Depreciation and Amortization Exp 3,300
(g)Other Expenses 5 46,500
(V)Profit & Loss before Tax (III-IV) 26,700
(VII)Profit Loss after Tax (V-VI) 16,700
Notes

Sales 4,55,000
Less Sales Returns 5,000
Less Excise Duty 8,000
4,42,000
2 Other Income
Interest on investment 5,000
Rent received 3,000
8,000
Less Closing Stock (75,000)
7,000
Salaries 7,500
Wages 30,000
37,500
5 Other Expenses
Sundry expenses 7,000
Rent 4,000
Directors remuneration 20,000
Motive power 12,000
Transport
charges 1,000
46,500
*************************
Problem No.4
You are given the following extracts of ledger balances taken

from Chanakya co. ltd. For the year ending 31st March 2015.
Prepare a statement of P & L A/C as per revised schedule III

Particulars Rs.
opening stock of finished goods 1,90,500
Cost of material consumed 2,92,000
Salaries to office staff 68,000
Closing stock of finished goods 2,03,000
Interest on debentures paid 16,250
General expenses 8,250
Discount earned 4,900
Cash sales 2,66,000
Credit sales 3,87,500
Income tax refund 11,500
Provision for taxation 30,000
Goodwill written off 18,000
Sales returns 17,000
Provision for bad debts 8,200
Delivery Expenses 7,200
Printing & stationery 22,600
Depreciation on Plant & machinery 50,000
Solution 4
Chanakya Ltd.,

No
I. Revenue from Operations 1 6,36,500
(IV) Expenses:
(b)Purchases 0
(d)Employees benefit expenses 4 1,00,000
[f] Depreciation and Amortization Exp 5 68,000
(g)Other Expenses 6 1,28,250
(V)Profit & Loss before Tax (III-IV) 60,900
(VII)Profit Loss after Tax (V-VI) 30,900
Notes

Cash sales 2,66,000
Credit sales 3,87,500
Less: sales returns (17,000)
6,36,000
2 Other Income
Discount earned 4,900
Income tax refund 11,500
16,400
Opening Stock 1,90,500
Less Closing Stock (2,03,000)
(12,500)
Salaries to office staff 68,000
1,00,000
Goodwill written off 18,000
Dep. on Plant & machinery 50,000
68,000
6 Other Expenses
General expenses 8,250
Provision for Bad debts 8,200
Freight on purchases 7,200
1,28,250
************************************
Problem No.5
Following ledger balances are taken from Virupaksh Ltd., for the year
ending 31/3/2015. Prepare P & L Account in vertical form with major
heads.
Particulars Rs
Stock of finished goods as on 01-04-2014 2,90,000
Stock of work-in-progress as on 01-04-2014 3,93,00
0
Stock of finished goods as on 31-03-2015 1,84,000
Stock of work-in-progress as on 31-03-2015 2,60,000
Material consumed 3,15,000
Wages 74,000
Coal & Coke 87,500
Live stock 1,00,600
Patents written off 25,200
Directors fees 57,000
Sales 10,95,000
Depreciation on plant 38,000
Bad debts 16,570
Provision for taxation 18,000
Royalty received 18,300
Bank loan 4,00,000
Administrative expenses 37,400
Interest on loan 60,000
Solution 5.
Virupaksh Co. Ltd.

No
(I) Revenue from Operations 10,95,000
(II)Other Income 18,300
(IV) Expenses:
(b)Purchases 0
(c)Changes in Inventories 1 2,39,000
(d)Employees benefit expenses 74,000
[f] Depreciation and Amortization Exp 2 63,200
(g)Other Expenses 3 1,98,470
Notes
Opening Stock
Work-in-progress 3,93,000
Finished Goods 2,90,000
6,83,000
LESS Closing Stock
Work-in-progress 2,60,000
Finished Goods 1,84,000
4,44,000 2,39,000
Depreciation on plant 38,000
Patents written off 25,200
63,200
3 Other Expenses
Coal & coke 87,500

Bad debts 16,570
Administrative expenses 37,400
1,98,470
********************************
PROBLEMS FOR PRACTICE:
Problem No.1
from Abhinav Co. Ltd., for the year ending 31 March, 2015.
Prepare P & L A/c as per schedule III of the companies Act.
Particulars Rs.
Salary 40,000
Selling expenses 18,750
Interest on loan (Debit) 17,500
Closing stock 7,75,00
0
Purchases 2,42,50
0
Wages 51,000
Manufacturing expenses 18,000
Sales 5,25,50
0
Sales returns 7,500
Opening stock 2,75,00
0
Audit fees 20,000
Interest on debentures 12,000
Depreciation on Plant & machinery 27,000
Depreciation on furniture 13,000
Interest on investment 16,750
Machinery 2,00,00
0
Furniture 1,00,00
0
Discount on issue of shares written off 2,000
Problem No.2
from Ashirvad Co. Ltd.,for the year ending 31 March, 2015.
Prepare P & L A/c as per revised schedule III of the companies Act.
Particulars Rs.
Closing stock 50,000
Sales 4,25,000
Purchases 3,00,000
Bonus to workers 27,500
Discount received 3,150
Opening stock 91,500
Discount allowed 4,200
Insurance 3,040
consumables 2,600
Trade marks 8,000
Repairs 6,950
Interest on debenture 8,500
Depreciation machinery 7,200
Machinery 80,000
Rent from sub-let 36,000
Loss by fire 4,700
Wages 65,000
**********************************
Problem no. 3
Following ledger balances are taken from the books of Navbharat
Trading Co. for the year ending 31/3/2013
Prepare P & L A/c as per revised schedule III
Particulars Rs.
Profit on sale of furniture 58,780
Cash purchases 2,58,120
Credit purchases 1,02,560
Sales 5,36,000
Returns outward 15,050
Royalty paid 36,000
Salesman's commission 24,000
Bad debts 2,540
Depreciation on furniture 9,800
Opening stock of finished 1,03,000
Opening stock of work-in-process 2,58,000
Rentals 26,000
Closing stock of work-in-process 32,500
Closing stock of finished goods 1,89,500
Interest on Bank overdraft 14,580
Freight Outward 5,790
Share transfer fees 11,200
******************
1. Preparation of final accounts is the culmination of the accounting process.” Explain.
2. What are the Components of Final accounts of a Joint Stock Companies ?
3. Preparation of statement of profit and loss.
4. Preparation of Balance sheet.
5. Explain the following i) Provision ii) Reserves iii) Reserve fund .
98

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FINANCIAL ACCOUNTING

 To ascertain whether the business operations have been profitable or not.

 To ascertain the financial position of the business.

 the nature and value of assets,

The main functions of accounting are:

1. Systematic record of business transactions.

2. Protecting the property of the business.

3. Communicating results to interested parties.

4. Compliance with legal requirements.

The managers of an enterprise need accounting information of planning, control, evaluation of

The following are main advantages of accounting:

 Settlement of taxation liability.

 Assistance to various parties.

The following are the main limitations of accounting:

1. Records only monetary transactions.

2. Effect of price level changes not considered.

4. Personal bias of Accountant affects the accounting statements.

5. Permits alternative treatments:

6. No real test of managerial performance.

A person to whom money is owing or payable is called a creditor.

Proprietorship or owner's equity. Thus,

Any written document in support of a business transaction is called a voucher. It is objective

Assets=Liabilities + Capital Assets Liabilities

Liabilities = Assets - Capital

Rules of Accounting Equation

Natural Person's Personal Account.

Artificial Person's Personal Account.

Representative Personal Account.

An account indirectly representing a person or persons is known as a representative personal

Tangible Real Account.

Intangible Real Account.

Generally Accepted Accounting Principles (Concepts, Conventions and Policies)

Meaning of Accounting Principles

Characteristic of Accounting Principles

The following are the main characteristics of accounting principles:

Accounting principles can be classified into two categories:

Journal, Ledger and Trial Balance

Column 4-(Dr. Amount).

Column 5-(Cr, Amount).

In the books of Roy Brothers

Date Particulars Voucher Ledger Foli Amount Amount

The entries for these transactions in a journal will look like:

In the Books of Vikash &

Date Particulars Vouche L. Amount (`) Amount (`)

In the Books of Mr. Roy

Date Particulars L. Debit (`) Credit (`)

12 Salary A/c Dr. 1,200

28 Purchase A/c Dr. 5,000

(i) General Journal

In the books of Mr. Y

Date Particulars L/F Amount ` Date Particulars L/F Amount `

May 1 To, Balance b/d 7,500

There are different types of Cash Book as follows:

Dr. Specimen of Single Column Cash Book Cr.

Dr. Specimen of Double Column Cash Book Cr.

Dr. Specimen of Triple Column Cash Book Cr.

Is the Cash Book Journal or Ledger?

Thus the cash Book is both a journal and a ledger.

PURCHASE DAY BOOK