PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Chapter 1 MEANING AND SCOPE OF ACCOUNTING

TRANSACTIONS AND EVENTS

 Transaction is used to mean ‘a business, performance of an act, an agreement’
 Event is used to mean ‘a happening, as a consequence of transaction(s), a result

MEANING OF ACCOUNTING-
Accounting may be defined as the process of recording, classifying, summarising, analysing and interpreting
the financial transactions and communicating the results thereof to the persons interested in such
information.

Recording – This is the basic function of accounting. All business transactions of a Financial character,
as evidenced by some documents such as sales bill, pass book, salary slip etc. are recorded in the books
of account. Recording is done in a book called “Journal

Classifying – Classification is concerned with the systematic analysis of the recorded data, with a
view to group transactions or entries of one nature at one place so as to put information in compact and
usable form. The book containing classified information is called “Ledger

Summarising – It is concerned with the preparation and presentation of the classified data in a manner
useful to the internal as well as the external users of Financial statements

Analysing – The term ‘Analysis’ means methodical classification of the data given in the financial
statements.

Interpreting – This is the Final function of accounting. It is concerned with explaining the meaning and
significance of the relationship as established by the analysis of accounting data.

Communicating – It is concerned with the transmission of summarised, analysed and interpreted

information to the end-users to enable them to make rational decisions

ACCOUNTING AS A SOCIAL SCIENCE-

 Stewardship Accounting’ was the root of Financial accounting system
 Social Science study man as a member of society; they concern about social processes and the
results and consequences of social relationships. The usefulness of accounting to society as a whole
is the fundamental criterion to treat it as a social science. Although individuals may benefit from the
availability of accounting information, the accounting system generates information for social good.
It serves social purposes, it contributes for social progress; also it is being adapted to keep pace with
social progress. So, accounting is treated as a social science

CA SANDESH .C H Page 1.1

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

OBJECTIVES OF ACCOUNTING-
 Systematic recording of transactions – Basic objective of accounting is to systematically record the
Financial aspects of business transactions i.e. book-keeping.
 Ascertainment of results of above recorded transactions – Accountant prepares profit and loss
account to know the results of business operations for a particular period of time.
 Ascertainment of the financial position of the business- To know this, accountant prepares a
Financial position statement popularly known as Balance Sheet. The balance sheet is a statement of
assets and liabilities of the business at a particular point of time and helps in ascertaining the
Financial health of the business.
 Providing information to the users for rational decision-making
 To know the solvency position – By preparing the balance sheet, management not only reveals
what is owned and owed by the enterprise, but also it gives the information regarding concern’s
ability to meet its liabilities in the short run (liquidity position) and also in the long-run (solvency
position) as and when they fall due.

DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING-

Book-keeping Accounting
It is a process concerned with recording of It is a process concerned with summarising of
Transactions the recorded transactions
Financial statements do not form part of this Financial statements are prepared in this process
process. on the basis of book-keeping records.
Managerial decisions cannot be taken with the Management takes decisions on the basis of
help of these records these records.
There is no subfield of book-keeping. It has several subfields like Financial accounting,
management accounting etc.
Financial position of the business cannot be Financial position of the business is ascertained
ascertained through book-keeping records. on the basis of the accounting reports

SUB-FIELDS OF ACCOUNTING-
 Financial Accounting – It covers the preparation and interpretation of Financial statements and
communication to the users of accounts.
 Management Accounting – It is concerned with internal reporting to the managers of a business
unit.
 Cost Accounting- Ascertaining Cost of the product
 Social Responsibility Accounting – is concerned with accounting for social costs incurred by the
enterprise and social benefits created.
 Human Resource Accounting – Human resource accounting is an attempt to identify, quantify and
report investments made in human resources of an organisation that are not presently accounted
for under conventional accounting practice

USERS OF ACCOUNTING INFORMATION-

 Investors: They provide risk capital to the business
 Employees: Growth of the employees is directly related to the growth of the organisation and
therefore, they are interested to know the stability, continuity and growth of the enterprise and its
ability to provide remuneration, retirement and other benefits and to enhance employment
opportunities

CA SANDESH .C H Page 1.2

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

 Lenders: They are interested to know whether their loan-principal and interest will be paid back
when due.
 Suppliers and Creditors: They are also interested to know the ability of the enterprise to pay their
dues, that helps them to decide the credit policy for the relevant concern
 Customers: Customers are also concerned with the stability and profitability of the enterprise
because their functioning is more or less dependent on the supply of goods
 Government and their agencies: They regulate the functioning of business enterprises for public
good, allocate scarce resources among competing enterprises, control prices, charge excise duties
and taxes
 Management : Management as whole is also interested in the accounts for various managerial
decisions.

RELATIONSHIP OF ACCOUNTING WITH OTHER DISCIPLINES-

 Accounting and Economics: Economics is viewed as a science of rational decision-making about the
use of scarce resources. Accounting is viewed as a system, which provides data to the users to
permit informed judgement and decisions. Economic theories influenced the development of the
decision-making tools used in accounting

 Accounting and Statistics: Accounting information is very precise; it is exact to the last paisa. But,
for decision-making purposes such precision is not necessary and hence, the statistical
approximations are sought.

 Accounting and Mathematics: Double Entry book-keeping can be converted in algebraic form; in
fact the first known book on this subject was part of a treatise on algebra.

 Accounting and Law: Every country has a set of economic, Fiscal and labour laws. Transactions and
events are always guided by laws of the land. Very often the accounting system to be followed has
been prescribed by the law. For example, the Companies Act has prescribed the format of Financial
statements for companies

 Accounting and Management: Management is a broad occupational field, which comprises many
functions and encompasses application of many disciplines including those mentioned above.
Accountants are well placed in the management and play a key role in the management team. A
large portion of accounting information is prepared for management decision-making. Although
management relies on other data sources, accounting data are used as basic source documents. In
the management team, an accountant is in a better position to understand and use such data

LIMITATIONS OF ACCOUNTING-
 The factors which may be relevant in assessing the worth of the enterprise don’t _nd place in the
accounts as they cannot be measured in terms of money. The Balance sheet cannot re_ect the value
of certain factors like loyalty and skill of the personnel which may be the most valuable asset of an
enterprise these days.
 Balance Sheet shows the position of the business on the day of its preparation and not on the future
date while the users of the accounts are interested in knowing the position of the business in the
near future and also in long run and not for the past date.
 Accounting ignores changes in some money factors like inflation etc.
 There are occasions when accounting principles conflict with each other.
 Certain accounting estimates depend on the sheer personal judgement of the accountant, e.g.,
provision for doubtful debts, method of depreciation adopted, recording certain expenditure as
CA SANDESH .C H Page 1.3
PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Chapter 2 ACCOUNTING CONCEPTS, PRINCIPLES AND CONVENTIONS

ACCOUNTING CONCEPTS-
Accounting concepts define the assumptions on the basis of which Financial statements of a business
entity are prepared.

Entity concept: Entity concept states that business enterprise is a separate identity apart from its owner.

Money measurement concept: As per this concept, only those transactions, which can be measured in
terms of money are recorded

Periodicity concept: According to this concept accounts should be prepared after every period & not at the
end of the life of the entity. Usually this period is one calendar year. We generally follow from 1st April of a
year to 31st March of the immediately following year.

Accrual concept: Under accrual concept, the effects of transactions and other events are recognised
on mercantile basis i.e., when they occur (and not as cash or a cash equivalent is received or paid) and
they are recorded in the accounting records and reported in the Financial statements of the periods to
which they relate.

i) when cash received before revenue is booked - a liability is created when cash is received in advance
ii) when cash received after revenue is booked - an asset called Trade receivables is created
iii) when cash paid before expense is booked - creates an asset called Trade Advance when cash is paid in
advance
iv)when cash paid after expense is booked - creates a liability called payables or Trade payables or
outstanding liabilities

Matching concept: In the Financial statements of the organization if any revenue is recognized
then expenses related to earn that revenue should also be recognized.

Going Concern concept: The Financial statements are normally prepared on the assumption that an
enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is
assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially
the scale of its operations.

Cost concept: By this concept, the value of an asset is to be determined on the basis of historical cost, in
other words, acquisition cost.

Realisation concept: It closely follows the cost concept. Any change in value of an asset is to be
recorded only when the business realises it. When an asset is recorded at its historical cost of Rs 5,00,000
and even if its current cost is Rs 15,00,000 such change is not counted unless there is certainty that such
change will materialize.

Dual aspect concept: This concept is the core of double entry book-keeping. Every transaction or event
has two aspects:
(1) It increases one Asset and decreases other Asset;
(2) It increases an Asset and simultaneously increases Liability;
(3) It decreases one Asset, increases another Asset;
(4) It decreases one Asset, decreases a Liability.
CA SANDESH .C H Page 2.1
PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Conservatism: Conservatism states that the accountant should not anticipate any future income
however they should provide for all possible losses.

Consistency: In order to achieve comparability of the Financial statements of an enterprise through

time, the accounting policies are followed consistently from one period to another; a change in an
accounting policy is made only in certain exceptional circumstances.

Materiality: According to materiality principle, all the items having significant economic effect on the
business of the enterprise should be disclosed in the Financial statements and any insignificant item which
will only increase the work of the accountant but will not be relevant to the users’ need should not be
disclosed in the Financial statements.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS

There are three fundamental accounting assumptions :
(i) Going Concern
(ii) Consistency
(iii) Accrual

If nothing has been written about the fundamental accounting assumption in the Financial statements then
it is assumed that they have already been followed in their preparation of Financial statements. However, if
any of the above mentioned fundamental accounting assumption is not followed then this fact should be
specifically disclosed

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS-

 Understandability: An essential quality of the information provided in financial statements is that it
must be readily understandable by users.
 Relevance: To be useful, information must be relevant to the decision-making needs of users.
 Reliability: To be useful, information must also be reliable, Information has the quality of reliability
when it is free from material error and bias
 Comparability: Users must be able to compare the financial statements of an enterprise through
time in order to identify trends in its financial position, performance and cash flows. Users must also
be able to compare the Financial statements of different enterprises in order to evaluate their
relative financial position, performance and cash Flows.

1. (i) All the following items are classified as fundamental accounting assumptions except
(a) Consistency (b) Business entity
(c) Going concern.

(ii) Two primary qualitative characteristics of Financial statements are

(a) Understandability and materiality (b) Relevance and reliability
(c) Neutrality and understandability

(iii) Kanika Enterprises follows the written down value method of depreciating machinery year after
year due to
(a) Comparability (b) Convenience.
(c) Consistency.

CA SANDESH .C H Page 2.2

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

(iv) A purchased a car for Rs 5,00,000, making a down payment of Rs 1,00,000 and signing a Rs 4,00,000 bill
payable due in 60 days. As a result of this transaction
(a) Total assets increased by Rs 5,00,000.
(b) Total liabilities increased by Rs 4,00,000.
(c) Total assets increased by Rs 4,00,000 with corresponding increase in liabilities by Rs 4,00,000.

(v) Mohan purchased goods for Rs15,00,000 and sold 4/5th of the goods amounting Rs18,00,000 and
met expenses amounting Rs 2,50,000 during the year, 2020. He counted net profit as Rs 3,50,000.
Which of the accounting concept was followed by him?
(a) Entity (b) Periodicity.
(c) Matching.

(vi) A businessman purchased goods for Rs 25,00,000 and sold 80% of such goods during the accounting
year ended 31st March, 2020. The market value of the remaining goods was Rs 4,00,000. He valued
the closing Inventory at cost. He violated the concept of
(a) Money measurement. (b) Conservatism
(c) Cost.

(vii) Capital brought in by the proprietor is an example of

(a) Increase in asset and increase in liability.
(b) Increase in liability and decrease in asset.
(c) Increase in asset and decrease in liability.

2. (i) Assets are held in the business for the purpose of

(a) Resale. (b) Conversion into cash.
(c) Earning revenue.

(ii) Revenue from sale of products, is generally, realized in the period in which
(a) Cash is collected. (b) Sale is made.
(c) Products are manufactured.

(iii) The concept of conservatism when applied to the balance sheet results in
(a) Understatement of assets. (b) Overstatement of assets. (c) Overstatement of capital.

(iv) Decrease in the amount of trade payables results in

(a) Increase in cash. (b) Decrease in bank over draft account.
(c) Decrease in assets.

(v) The determination of expenses for an accounting period is based on the principle of
(a) Objectivity (b) Materiality.
(c) Matching.

(vi) Economic life of an enterprise is split into the periodic interval to measure its performance is as per
(a) Entity (b) Matching.
(c) Periodicity.

3. (i) If an individual asset is increased, there will be a corresponding

(a) Increase of another asset or increase of capital.
(b) Decrease of another asset or increase of liability.
(c) Decrease of specific liability or decrease of capital.

CA SANDESH .C H Page 2.3

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Chapter 10 BASIC ACCOUNTING PROCEDURES - JOURNAL ENTRIES

DOUBLE ENTRY SYSTEM-

 Double entry system of accounting is more than 500 years old. “Luca Pacioli” an Italian friar &
mathematician published Summa de Arithmetica, Geometria, Proportioni, et Proportionalita
(“Everything about Arithemetic Geometry and proportions”). The First book that described a double
entry accounting system.
 It is the only scientific system of accounting. According to it, every transaction has two-fold aspects–
debit and credit and both the aspects are to be recorded in the books of accounts. Therefore, in
every transaction at least two accounts are effected

ADVANTAGES OF DOUBLE ENTRY SYSTEM

(i) By the use of this system the accuracy of the accounting work can be established, through the device of
the trial balance.
(ii) The profit earned or loss suffered during a period can be ascertained together with details.
(iii) The financial position of the firm or the institution concerned can be ascertained at the end of each
period, through preparation of the balance sheet.
(iv) The system permits accounts to be kept in as much details as necessary and, therefore affords
significant information for the purposes of control etc.
(v) Result of one year may be compared with those of previous years and reasons for the change may be
ascertained.

ACCOUNTING EQUATION APPROACH

 The relationship of assets with that of liabilities and owners’ equity in the equation form is known as
‘Accounting Equation.
 Equity + Liabilities = Assets

1. Develop the accounting equation from following information available at the beginning of
accounting period:
Particulars (in 000)
Capital 51,000
Loan 11,500
Trade payables 5,700
Fixed Assets 12,800
Inventory 22,600
Trade receivables 17,500
Cash and Bank 15,300

At the end of the accounting period the balances appear as follows:

Capital ?
Loan 11,500
Trade payables 5,800
Fixed Assets 12,720
Inventory 22,900

CA SANDESH .C H Page 10.1

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Trade receivables 17,500

Cash at Bank 15,600
(a) Reset the equation and find out profit.
(b) Prepare Balance Sheet at the end of the accounting period.

SOLUTION
(All the figures in solution are in ‘000)
(a) Accounting equation is given by
Equity + Liabilities = Assets
Let us use E0, L0 and A0 to mean equity, liabilities and assets respectively at the beginning of the
accounting
period.
E0 = Rs 51,000
L0 = Loan + Trade payables
= Rs 11,500 + Rs 5,700
= Rs 17,200

A0 = Fixed Assets + Inventories + Trade receivables + Cash at Bank

= Rs 12,800 + Rs 22,600 + Rs 17,500 + Rs 15,300
= Rs 68,200

So, at the beginning of accounting period

E0 + L0 = A0
i.e., Rs 51,000 + Rs 17,200 = Rs 68,200

Let us use E1, L1, A1 to mean equity, liabilities and assets respectively at the end of the accounting period.
L1 = Loan + Trade payables
= Rs 11,500 + Rs 5,800
= Rs 17,300

A1 = Fixed Assets + Inventories + Trade receivables + Cash at Bank

= Rs 12,720 + Rs 22,900 + Rs 17,500 + Rs 15,600
= Rs 68,720
E1 = A1 - L1 = Rs 68,720 - Rs 17,300 = Rs 51,420
Profit = E1 - E0 = Rs 51,420 - Rs 51,000 = Rs 420

(b) Balance Sheet

Liabilities Assets
Capital Fixed Assets 12,720
Balance 51,000 Inventories 22,900
Add: Profit 420 51,420 Trade receivables 17,500
Loan 11,500 Cash at Bank 15,600
Trade payables 5,800
68,720 68,720

CA SANDESH .C H Page 10.2

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

2. Mr. Dravid. has provided following details related to his financials. Find out the missing figures:
Particulars (in’000)
Profits carved during the year 5,000
Assets at the beginning of year A
Liabilities at the beginning of year 12,000
Assets at the end of the year B
Liabilities at the end of the year C
Closing capital 35,000
Total liabilities including capital at the end of the year 50,000

SOLUTION
Computing opening capital: (All figure in ‘ 000 )
Closing capital - profits earned during the year
= 35,000 - 5,000
= 30,000

We also know:
Assets = liabilities + capital
Therefore, opening assets (A) = 12,000 + 30,000
= 42,000

Computation of liabilities at the end of the year:

Total liabilities including capital = 50,000
Less: closing capital = (35,000)
Liabilities at the end of the year (C) = 15,000
Also assets at the end of the year (B) = closing capital + liabilities at the end of the year
= 35,000 + 15,000
= 50,000

TRADITIONAL APPROACH-
Classification of Accounts
(i) Personal Accounts: Personal accounts relate to persons, trade receivables or trade payables. Example
would be the account of Ram & Co., a credit customer or the account of Jhaveri & Co., a supplier of goods.
The capital account is the account of the proprietor and, therefore, it is also personal but adjustment on
account of profits and losses are made in it. This account is further classified into three categories:
(a) Natural personal accounts: It relates to transactions of human beings like Ram, Rita, etc.
(b) Artificial (legal) personal accounts: For business purpose, business entities are treated to have
separate entity. They are recognised as persons in the eye of law for dealing with other persons. For
example: Government, Companies (private or limited), Clubs, Co-operative societies etc.
(c) Representative personal accounts: These are not in the name of any person or organisation but
are represented as personal accounts. For example: outstanding liability account or prepaid
account, capital account, drawings account.

(ii) Impersonal Accounts: Accounts which are not personal such as machinery account, cash account, rent
account etc. These can be further sub-divided as follows:
(a) Real Accounts: Accounts which relate to assets of the firm but not debt. For example, accounts
regarding land, building, investment, fixed deposits etc., are real accounts. Cash in hand and Cash at the
bank accounts are also real.

CA SANDESH .C H Page 10.3

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Chapter 11 LEDGERS

MEANING-
The book which contains all set of accounts (viz. personal, real and nominal accounts), is known
as Ledger. It is known as principal books of account in which account-wise balance of each account is
determined.

SPECIMEN OF LEDGER ACCOUNTS

Date Particulars J.F. Amount Date Particulars J.F. Amount

POSTING-
The process of transferring the debit and credit items from journal to classified accounts in the ledger is
known as posting.

RULES REGARDING POSTING OF ENTRIES IN THE LEDGER-

 Separate account is opened in ledger book for each account and entries from ledger posted to
respective account accordingly.
 It is a practice to use words ‘To’ and ‘By’ while posting transactions in the ledger. The word ‘To’ is
used in the particular column with the accounts written on the debit side while ‘By’ is used with the
accounts written in the particular column of the credit side.

BALANCING AN ACCOUNT-
 At the end of the each month or year or any particular day it may be necessary to ascertain the
balance in an account. This is not a too difficult thing to do; suppose a person has bought goods
worth Rs1,000 and has paid only Rs 850; he owes Rs150 and that is balance in his account.
 If the credit side is bigger than the debit side, it is a credit balance. In the other case it is a debit
balance. The credit balance is written on the debit side as, “To Balance c/d”; c/d means “carried
down”. By doing this, two sides will be equal.
 Then the credit balance is written on the credit side as “By balance b/d (i.e., brought down)”. This is
the opening balance for the new period. The debit balance similarly is written on the credit side as
“By Balance c/d”, the totals then are written on the two sides as shown above as then the debit
balance written on the debit side as, “To Balance b/d”, as the opening balance of the new period
 It should be noted that nominal accounts are not balanced; the balance in the end are transferred to
the profit and loss account. Only personal and real accounts ultimately show balances

CA SANDESH .C H Page 11.1

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

ILLUSTRATION 1
Prepare the Stationery Account of a firm for the year ended 31.12.2020 duly balanced off, from the
following details:
2020
Jan. 1 Inventory of stationery 480
April 5 Purchase of stationery by cheque 800
Nov. 15 Purchase of stationery on credit from Five Star Stationery Mart 1,280

SOLUTION

Stationery Account
Dr Cr
Date Particulars Date Particulars
1.1.2020 To Balance b/d 480 31.12.2020 By Balance c/d 2,560
5.4.2020 To Bank A/c 800
15.11.2020 To Five Star 1,280
Stationery Mart
A/c
2,560 2,560
1.1.2021 To Balance b/d 2,560

ILLUSTRATION 2
Prepare the ledger accounts on the basis of following transactions in the books of a trader.

Debit Balances on January 1, 2020:

Cash in Hand Rs 8,000, Cash at Bank Rs 25,000, inventory of Goods Rs 20,000, Building Rs 10,000. Trade receivables:
Vijay Rs 2,000 and Madhu Rs 2,000.

Credit Balances on January 1, 2020:

Trade payables: Anand Rs 5,000, Capital Rs 55,000

Following were further transactions in the month of January, 2020:

Jan. 1 Purchased goods worth Rs 5,000 (payable at later date) for cash less 20% trade discount and 5% cash
discount.
Jan. 4 Received Rs 1,980 from Vijay and allowed him Rs 20 as discount.
Jan. 8 Purchased plant from Mukesh for Rs5,000 and paid Rs100 as cartage for bringing the plant to the factory
and another Rs200 as installation charges.
Jan. 12 Sold goods to Rahim on credit Rs600.
Jan. 15 Rahim became insolvent and could pay only 50 paise in a rupee.
Jan. 18 Sold goods to Ram for cash Rs1,000.

SOLUTION
Cash Account
Date Particulars J.F. Date Particulars J.F.
2020 2020
Jan. 1 To Balance b/d 8,000 Jan. 1 By Purchases A/c 3,800
Jan. 4 To Vijay 1,980 Jan. 8 By Plant A/c 300
Jan. 15 To Rahim 300 Jan. 31 By Balance c/d 7,180
Jan. 18 To Sales A/c 1,000
11,280 11,280
Feb. 1 To Balance b/d 7,180
CA SANDESH .C H Page 11.2
PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Bank Account
Date Particulars J.F. Date Particulars J.F.
Jan. 1 To Balance c/d 25,000 Jan. 31 By Balance c/d 25,000
25,000 25,000
Feb. 1 To Balance b/d 25,000

Inventory Account
Date Particulars J.F. ` Date Particulars J.F. `
Jan. 1 To Balance b/d 20,000 Jan. 31 By Balance c/d 20,000
20,000 20,000
Feb. 1 To Balance b/d 20,000

Building Account
Date Particulars J.F. ` Date Particulars J.F. `
Jan. 1 To Balance b/d 10,000 Jan. 31 By Balance c/d 10,000
10,000 10,000
Feb. 1 To Balance b/d 10,000

Vijay A/c
Date Particulars J.F. ` Date Particulars J.F. `
Jan. 1 To Balance b/d 2,000 Jan. 4 By Cash A/c 1,980
By Discount A/c 20
2,000 2,000

Madhu A/c
Date Particulars J.F. ` Date Particulars J.F. `
Jan. 1 To Balance b/d 2,000 Jan. 31 By Balance c/d 2,000
2,000 2,000
Feb. 1 To Balance b/d 2,000

Capital Account
Date Particulars J.F. ` Date Particulars J.F. `
Jan. 31 To Balance c/d 55,000 Jan. 1 By Balance b/d 55,000
55,000 55,000
Feb. 1 By Balance b/d 55,000

Purchases Account
Date Particulars J.F. ` Date Particulars J.F. `
Jan. 1 To Cash 3,800
Jan. 1 To Cash Discount 200 Jan. 31 By Balance c/d 4,000
4,000 4,000
Feb. 1 To Balance b/d 4,000

CA SANDESH .C H Page 11.3

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Chapter 21 CONSIGNMENT

MEANING OF CONSIGNMENT-
To consign means to send. In Accounting, the term “consignment account” relates to accounts dealing with
a situation where one person (or firm) sends goods to another person (or firm) on the basis that the goods
will be sold on behalf of and at the risk of the former. The following should be noted carefully:
(i) The party which sends the goods (consignor) is called principal.
(ii) The party to whom goods are sent (consignee) is called agent.
(iii) The ownership of the goods, i.e., the property in the goods, remains with the consignor or the principal
– the agent or the consignee does not become their owner even though goods are in his possession.
On sale, of course, the buyer will become the owner.
(iv) The consignor does not send an invoice to the consignee. He sends only a proforma invoice, a
statement that looks like an invoice but is really not one. The object of the proforma invoice is only to
convey information to the consignee regarding particulars of the goods sent.
(v) Usually, the consignee recovers from the consignor all expenses incurred by him on the consignment.
This however can be changed by agreement between the two parties.
(vi) Periodically, the consignees ends to the consignor a statement called Account Sales

DISTINCTIONS BETWEEN CONSIGNMENT AND SALE

S.No. Consignment Sale
1. Ownership of the goods rests with the consignor The ownership of the goods transfers with the
till the time they are sold by the consignee, transfer of goods from the seller to the buyer.
no matter the goods are transferred to the
consignee.
2. The consignee can return the unsold goods to Goods sold are the property of the buyer and
the consignor. can be returned only if the seller agrees.
3. Consignor bears the loss of goods held with the It is the buyer who will bear the loss if any, after
consignee. the transfer of goods.
4. The relationship between the consignor and The relationship between the seller and the
the consignee is that of a principal and agent. buyer is that of a creditor and a debtor.

DISTINCTION BETWEEN COMMISSION AND DISCOUNT

Commission Discount
Commission may be defined as remuneration The term discount refers to any reduction or
of an employee or agent relating to services rebate allowed and is used to express one of the
performed in connection with sales, following situations:
purchases, collections or other types of
An allowance given for the settlement of a debt
business transactions and is usually based on a
before it is due i.e. cash discount.
percentage of the amounts involved.

CA SANDESH .C H Page 21.1

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Commission earned is accounted for as An allowance given to the whole sellers or bulk
an income in the books of accounts, and buyers on the list price or retail price, known as
commission allowed or paid is accounted for as trade discount. A trade discount is not shown in
an expense in the books of the party availing the books of account separately and it is shown
such facility or service. by way of deduction from cost of purchases.

ACCOUNTING FOR CONSIGNMENT TRANSACTIONS IN THE BOOKS OF THE CONSIGNOR-

1. When goods are consigned or dispatched:

Consignment (say to Star trading) Account Dr.
To Goods Sent on Consignment Account

2. Expenses incurred by consignor:

Consignment (say to Star trading) Account Dr.
To Supplier Account/Bank/Cash

3. When advance is received from the consignee:

Bank/Cash Account Dr.
To Consignee’s Personal Account

4. For sales proceeds-

Consignee’s Personal Account Dr.
To Consignment Account

5. For expenses incurred by consignee

Consignment Account Dr.
To Consignee’s Personal Account

6. Cash or cheque or bank draft or bill of exchange/promissory note received from the consignee as
settlement:
Cash/Bank/Bills Receivable Account Dr.
To Consignee’s Personal Account

7. For bad debts:

i. When del-credere commission is not paid to the consignee
Consignment Account Dr.
To Consignee’s Personal Account

ii. When del-credere commission is paid to the consignee

No entry is recorded as bad debts is to be borne by consignee.

8. For the goods taken over by the consignee

Consignee’s Personal Account Dr.
To Consignment Account

9. For unsold consignment stock:

Consignment Stock Account Dr.
To Consignment Account

CA SANDESH .C H Page 21.2

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

10. For commission payable to consignee

Consignment Account Dr.
To Consignee’s Personal Account

1. Exe sent on 1st July, 2019 to Wye goods costing Rs 50,000 and spent Rs 1,000 on packing etc. On 3rd
July, 2019, Wye received the goods and sent his acceptance to Exe for Rs 30,000 payable at 3
months. Wye spent Rs 2,000 on freight and cartage, Rs 500 on godown rent and Rs 300 on
insurance. On 31st December, 2019 he sent his Account Sales (along with the amount due to Exe)
showing that 4/5 of the goods had been sold for Rs 55,000. Wye is entitled to a commission of 10%.
One of the customers turned insolvent and could not pay Rs 600 due from him. Show the necessary
journal entries in the books of consignor. Also prepare ledger accounts.

SOLUTION
Journal Entries in the books of Consignor

1 Open Consignment Account and debit it with the cost of goods and
credit it with “Goods sent on Consignment Account”.
1/7/2019 Consignment to Wye A/c Dr. 50,000
To Goods Sent on Consignment A/c 50,000

2 For the expenses incurred by the consignor,debit Consignment

Account and credit cash or Bank, as the case may be.
1/7/2019 Consignment to Wye A/c Dr. 1,000
To Bank A/c 1,000
3 If the consignee sends an advance, debit Cash(or Bank) or Bills
Receivable and credit the consignee’s personal account
3/7/2019 Bills Receivable A/c Dr. 30,000
30,000
To Wye
(Note: Wye’s account has appeared only now, in the previous
two entries his account did not figure since he is not personally
involved)
4 Wye’s acceptance will mature on 6/10/2019
Assuming it was met, the entry will be:
6/10/2019 Bank A/c Dr. 30,000
30,000
To Bills Receivable A/c
(Note: If such bill is discounted by consignor with the bank before
maturity, pass usual entry for discounting a bill. The discount on bills
may either be treated as consignment expenses and charged to
Consignment A/c or it may be treated as general financial charges
and charged to Profit & Loss Account)

5 On receipt of Account sale

31/12/2019 (a) For sales made by the consignee, debit his personal account and
credit Consignment Account
Dr. 55,000

CA SANDESH .C H Page 21.3

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

Wye 55,000
To Consignment to Wye A/c
(b) For expenses incurred by the consignee as well as bad debts
suffered by him on behalf of the consignor, debit Consignment
Account and credit Consignee Account
31/12/2019 Consignment to Wye A/c Dr. 3,400
(2,000+500+300+600)To Wye 3,400
(c) For commission due to the consignee, debit Consignment
Account and credit the consignee.
31/12/2019 Consignment to Wye A/c(10% on ` 55,000) 5,500
To Wye 5,500
(d) For the remittance that may accompany the Account Sales, debit
Bank and credit the consignee.
Bank A/c Dr. 16,100

To Wye 16,100

6 For the goods that may remain unsold debit the Consignment Stock
Account and credit Consignment Account.
31/12/2019 Inventories on Consignment A/c Dr. 10,600
10,600
To Consignment to Wye A/c
Note: (i) Cost of Inventories
1/5 of Cost to consignor 10,000
1/5 of expense incurred by the consignor 200
1/5 of freight (direct exp. Of consignee) 400
10,600
(ii) Inventories on Consignment Account is an asset; it will be
shown in the balance sheet of the consignor and next year it
will be transferred to the debit of the Consignment Account.
7 At this stage the Consignment Account will reveal profit or loss (see the
account given below). The profit or loss will be transferred to the Profit
and Loss Account of the consignor by debit to the ConsignmentAccount.
Consignment to Wye A/c
31/12/2019 Dr. 5,700
To Profit and Loss A/c
5,700
8 The Goods sent on Consignment Account should be closed by transferto
the Trading Account debit the former and credit the latter:
31/12/2019 Goods sent on Consignment Account Dr. 50,000
To Trading Account 50,000

Consignment to Wye Account

2019 Particulars 2019 Particulars
1-Jul To Goods sent on Dec. 31 By Wye-sale
Consignment A/c 50,000 Proceeds 55,000
1-Jul To Bank(expenses) 1,000 Dec. 31 By Inventories on
Dec. 31 10,600

CA SANDESH .C H Page 21.4

PRINCIPLES & PRACTICE OF ACCOUNTING ARIVUPRO ACADEMY

To Wye-expenses 3,400 Consignment

Dec. 31 & bad debt 5,500 Account
Dec. 31 To Wye-commission 5,700
To P&L Account-transfer of profit 65,600 65,600

Goods sent on consignment account

2019 Particulars ` 2019 Particulars `
Dec. 31 To Trading A/c 50,000 July 1 By Consignment to 50,000
Wye A/c

Inventories on Consignment account

2019 Particulars ` 2019 Particulars `
Dec. 31 To Consignment to 10,600 Dec. 31 By Balance c/d 10,600
WyeA/c
2020
Jan. 1 To Balance b/d 10,600

Wye’s account
2019 2019
Dec. 31 To Consignment 3-Jul By Bills Receivable
Wye A/c 55,000 Account 30,000
By Consignment to
Wye A/c –
Expenses & bad debt 3,400
Commission 5,500
By Bank
(balance received) 16,100
55,000 55,000

VALUATION OF INVENTORIES-
 In the case of consignment, cost means not only the cost of the goods as such to the consignor but
also all expenses incurred till the goods reach the premises of the consignee. Such expenses include
packaging, freight, cartage, insurance in transit, octroi, import duty etc.
 But expenses incurred after the goods have reached the consignee’s godown (such as godown rent,
insurance of godown, delivery charges,salesman salaries) are not treated as part of the cost of
purchase for valuing inventories on hand.
 Sometimes an examination problem states only that the consignor’s expenses amounted to such
amount and that consignee spent so much. If details are not available, then for valuing inventories
the expenses incurred by the consignor should be treated as part of cost while those incurred by the
consignee should be ignored

CA SANDESH .C H Page 21.5