Teaching Manual, Accountancy,, Grade XI

Teaching Manual
Subject Class : Accountancy I : XI
Full Marks: 100 Teaching Hours: 100

I. Introduction Accounting is a process designed to identify, measure and communicate financial information about an organization or other entity. It is both an art and a science of keeping record of financial transactions, presenting and analyzing financial information of government and non-government enterprises. It is an essential component of commerce education. II. General Objectives General Objectives of this course are to: a. Introduce to the students the basic principles of book-keeping and accounting, accounting of non-profit organization, and governmental accounting. b. Provide them with fundamental knowledge of book-keeping and accounting required while pursuing higher education in commerce and management field. III. Specific Objectives On completion of this course, the student will be able to; a. develop strong foundation of knowledge and understanding required for advanced level education in management and accounting. b. Learn basic concepts and procedures to prepare financial statements. c. Understand the procedures of accounting for government, non-government and non-profit organizations. d. Ascertain profit or loss from incomplete accounting records.

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Teaching Manual, Accountancy,, Grade XI IV. Unit-wise Teaching Hours Units Chapters 1 Book-keepting and accounting concept 2 Recording of transactions 3 Cash and Banking transactions 4 Trial Balance and Accounting Errors 5 Final Account 6 Depreciation 7 Reserve and Provision 8 Accounting for non-profit organization 9 Accounting for Incomplete Records 10 Government Accounting Total V. Course Content Unit 1 Book Keeping and Accounting Concept A. Introduction Accounting is the language of business. It is necessary for business activities as well as for all types of economics activities. On one hand it maintains the records of business and on the other it supplies the required information to managers and other interested parties in order to make better business decisions. For this reason, the business (Management students, business executives and other must be familiar with accounting discipline. This unit is related with the conceptual meaning of book-keeping and accounting with their objectives, functions and scopes. It also includes basic accounting concept, Double entry book-keeping, Accounting cycle and accounting equation.

Teaching Hours 8 18 15 10 36 8 4 15 6 30 150

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Teaching Manual, Accountancy,, Grade XI B. Objectives The main objectives of this unit is to help the students to acquire knowledge of book keeping and accounting. After studying this unit the students would be able to: (i) Define book-keeping and accounting. (ii) Know the functions, objectives and scopes of book keeping and accounting. (iii) Explain about origin and evolution of book-keeping. (iv) Understand the meaning, features and advantages of double entry system. (v) List the steps in accounting cycle. (vi) Know the procedure for developing an accounting equation. C. Specification of Content Area of the Unit The sub-unit and teaching hours allotted for the sub-units are given below. However, the teacher being the ultimate guide of the class, may arrange the teaching hour as per convenient: Teaching Serial Number Areas of Units Hours 1.1 Introduction to book keeping and 2 accounting 1.2 Basic accounting concepts 2 1.3 Double entry book keeping 4 Total 8 D. Description of Content Areas of the Unit 1.1. Introduction to Book Keeping and Accounting 1.1.1. Concept and meaning of Book Keeping. The meaning of book-keeping should include the following points: - The act of keeping the accounts of a business concern and other organizations. - The science and art of recording of business transactions in a systemic manner.

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Teaching Manual, Accountancy,, Grade XI It is a process of identifying, measuring and communicating economic information to permit informed judgment and decisions by users of information. 1.1.2. Concept and meaning of Accounting. Further to other points the meaning to accounting should includes the following points: - It is the language of business - It is an analysis and interpretation of book keeping records. - It includes maintenance of accounting records as well as preparation of financial and economic information, which involves the measurement of transactions and other events pertaining to a business. - It is an art of measuring, recording and communicating of financial information. 1.1.3. Origin and Evolution of Book-Keeping The origin of book-keeping can not be exactly traced out. It has been practiced from ancient time. The system of book-keeping was first conceived by Luca Pacioli, in his book "De compectic at scriptures" (Italian). This work was translated and published in english by Hugh Old Castle in 1543. Later on James Paula improved the method of book-keeping with his view and concepts about keeping the complete records of debtors and creditors. In 1795 AD, Edward Jones published a subject matter about the bookkeeping, in which he advocates for two columns in Journal. The art of accounting has been practiced for centuries but only since the late thirties, has been it seriously take-up. 1.1.4. Functions of Accounting The main functions of Accounting are as under: (i) To keep complete and systematic records of business transactions according to specified rules. -

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Teaching Manual, Accountancy,, Grade XI To ascertain the net profit earned or loss suffered during the particular period. (iii) To ascertain the financial position of the business at a certain period. (iv) To summaries, analyze and interpret the data. (v) To communicate accounting information to the management, creditors, employees and the government to serve the interest of a business as a whole. 1.1.5. Objectives of Accounting The primary objectives of accounting are giver below: (i) To maintain proper record of business transactions. (ii) To ascertain profit or loss made by an enterprise. (iii) To present financial position of a business concern. (iv) To communicate the accounting information to different users. (v) To help in determining the tax amount. 1.1.6. Scopes of Accounting Accounting is useful to trading concern as well as non-trading concern. So, its scope is unlimited. The scope of accounting can be highlighted as under: (i) Accounting helps to trading concern by recording entire transactions and preparing financial statements. (ii) It also helps to non-trading organizations by preparing Receipt and Payment Account, Income and Expenditure Account and Balance Sheet. (iii) Accounting can also be great helpful to the government of every country. (iv) Accounting helps to professional and individuals. 1.2. Basic Accounting Concepts The rules that have been commonly accepted by the professional accounting would as general guideline for preparing account may be referred ad Generally Accepted Accounting Principles (GAAP). Those principles are also //5// (ii)

Teaching Manual, Accountancy,, Grade XI known as Basic Accounting Concepts or Assumptions. Some accounting concepts are as under; 1. Business Entity Concept: For accounting purpose, a business is treated as a repartee entity. It is distinct from its owners and all other economic activities. 2. Money Measurement Concept: All business transactions will be recorded in monetary terms. Those transactions which cannot be in terms of money cannot be recorded, therefore, should be ignored. 3. Going Concern Concept: A business will have indefinite life unless it is likely to be sold or wound up in the near future. 4. Accounting Period Concept: The economic life of an entity to be divided into arbitrary periods, usually 12 months period to report on the performance and financial position of a concern to its users. 5. Revenue Realization Concept: Revenue should be considered as earned on the date when it is realized. The revenue is realized by the amount changed for goods sold or service rendered to the customers. 6. Cost Concept: The transactions and events of the business are to be recorded at the amount actually received or spent. 7. Matching Concept: The expenses for an accounting period should be compared or matched with the revenue of that period in order to finding out the net profit or loss. The expenditure incurred for generating revenue in the future should not be taken as expenses for current period. 1.3. Double Entry Book Keeping. 1.3.1. Meaning and Concept Further to other points, the meaning of double entry book keeping should enclose the following points: - Every transaction has two fold effects debit and credit, and the set of record based on two duality is called double entry system of book keeping. - The system under which under which both receiving and giving (debit and credit) aspects are recorded. - It is the most modern, progressive, scientific and best system of recording the financial transactions of a business.

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Teaching Manual, Accountancy,, Grade XI 1.3.2. Features of Double Entry System The features of double entry system are as follows: (i) Both the aspects of transaction which are described as debit and credit are recorded under double entry system. (ii) Two fold effects of the transactions are shown with equal effect debit to credit in monetary terms. (iii) Recording is made on the basis of certain prescribed rules. (iv) The arithmetical accuracy of recording can be checked by preparing a trial balance. 1.3.3. Advantages of Double Entry System The advantages of double entry system can be mentioned in the following ways: (i) All the transactions are recorded so that if the need arises, full details of each and every transaction can be obtained. (ii) Arithmetical accuracy of the accounts can be tasted by preparing a list of balances (Trial Balance). (iii) `Profit or loss made by a business, during an accounting period, can be ascertained by preparing Trading and Profit and Loss Account. (iv) The exact financial position of a business at a particular date can be noticed by preparing Balance Sheet. (v) It helps the owner to judge the progress of the business by comparing current year activities and results with previous. (vi) It also helps to defect frauds and errors. (vii) It covers all types of accounts including Nominal, Personal & Nominal Account. (viii) It is a scientific system and transactions are recorded according to certain specified rules. (ix) It is accepted as a necessary document for court of law and income tax authorities which rely on the books prepared under this system. 1.3.4. Accounting Process or Cycle A complete sequence of accounting procedures is known as Accounting Process or Cycle. It includes recording, classifying, summarizing and //7//

Teaching Manual, Accountancy,, Grade XI interpreting. An accounting cycle begins with the recording of transactions and ending with the preparation and interpretation of the final account. Accounting process is of cyclic and sequential order which is portrayed in the following diagrams: Documenting the transactions

Classifying and recording the transactions

Positing the transactions

Balancing the ledgers

Preparing a trial balance Trading Account

Preparing the financial statements

Profit and Loss Accounting

Balance Sheet Interpreting the transactions The Accounting Process Chart //8//

Teaching Manual, Accountancy,, Grade XI 1.3.5. Accounting Equation The value of resources and sources must be equal. The expression of this equality in the terms of equation is known as accounting equation. An accounting equation. An accounting equation is expressed as under Resources = Sources of Finance Resource denotes assets. Capital and liabilities are included in source of finance. So the above equation can be expressed in the following ways also: Assets = Capital + Liabilities Capital = Assets Liabilities Liabilities = Assets Capital Assets, capital and liabilities are three basic elements of every business bans action. The relationship between these three elements remains unaltered. Change in one element results in corresponding change in the same item or in other element. Such change can be summed up as follows: (i) An increase in assets side with corresponding increase in capital. (ii) An increase in assets with corresponding increase in liabilities. (iii) An increase and decrease in assets. (iv) A decrease in assets with corresponding decrease in capital. (v) An increase and decrease in liabilities. (vi) An increase and decrease in capital. (vii) An increase in capital and decries in liabilities. (viii) An increase in liabilities and decrease in capital. (ix) A decrease in assets with corresponding decrease in liabilities. Procedure for Developing and Accounting Equation The steps required for developing as accounting equation are as under: Step 1: To find out the variables affected by a transaction (i.e. Capital Assets or Liabilities).

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Teaching Manual, Accountancy,, Grade XI Step 2: To find out the effects on variables (in terms of increase or decrease) Step 3: To show the effect on the appropriate side of an equation. Illustration Binayak had the following transactions: (i) Commenced business with cash Rs. 1,00,000 (ii) Purchased goods for cash Rs. 50,000 and credit Rs. 30,000 (iii) Paid rent in advance Rs. 1,000 (iv) Sold goods for cash Rs. 40,000 costing Rs. 30,000 (v) Paid salary Rs. 1,000 and salary outstanding Rs. 100 Required: Accounting equation for the above transactions. Solution: Transactions Assets (=) Liabilities + Capital
(i) Commenced business with cash Rs. 1,00,000 (ii) Purchased goods for cash Rs. 50,000 and credit Rs. 30,000 (iii) Paid rent in advance Rs. 1,000 Cash 1,00,000 1,00,000 Liabilities 0 + Capital 1,00,000 1,00,000 Liabilities 30,000 + Capital 1,00,000 1,30,000 Liabilities 30,000 + Capital 1,00,000 1,30,000 Liabilities 30000 + Capital 1,00,000 + Profit 10,000 1,40,000 Liabilities 30,000 + Outstanding and Salaries 100 + Capital 1,000 + Profit 8,900 1,39,000

(iv) Sold goods for cash Rs. 40,000 costing Rs. 30,000

(v) Paid salary Rs. 1,000 and salary outstanding Rs. 100

Cash 50,000 +Stock 80,000 1,30,000 Cash 49,000 + Prepaid rent 1,000 + Stock 80,000 1,30,000 Cash 89,000 + Prepaid rent 1,000 + Stock 50,000 1,40,000 Cash 88,000 + Prepaid rent 1,000 + Stock 50,000 1,39,000

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Teaching Manual, Accountancy,, Grade XI F. Evaluation Scheme

This unit has been designed for short answer theoretical and practical questions carrying 2 to 3 marks and the students requiring to give answer in 3 to 5 effective sentences. The number of questions and marks allocated for this unit are as under: Types of Question No. of Questions Marks Theoretical 2 3+3=6 2 Practical 1 Total 3 8 F. Some Model Question: 1. What do you understand by Book-keeping ? Mention any two objectives of Book-keeping [2+1] 2. Write the meaning of Accounting with its two objectives. [2+1] 3. Write in brief about the historical background of book-keeping. [3] 4. State any three objectives of Accounting. [3] 5. Write in brief any three accounting concept. [3] 6. Briefly write the functions of Accounting. [3] 7. Briefly explain any three advantages of double entry system. [3] 8. What is meant by the basic principle of accounting? Enumerate any two basic principles of accounting. [1+2] 9. What do you meant by Double Entry System of book-keeping ? Give any two advantages of double entry system. [1.5+1.5] 10. Write the meaning of following accounting concepts: (i) Business entity concept (ii) Money measurement concept (iii) Going concern concept 11. What do you understand by Accounting Cycle? Give the diagram of Accounting cycle. [1.5+1.5] 12. You are given the following transactions: (a) Commencement of business with Rs. 2,00,000 //11//

Teaching Manual, Accountancy,, Grade XI (b) Purchased goods for cash Rs. 50,000 and credit Rs. 20,000 (c) paid Salary Rs. 10,000 Required: Acclunting Equation 13. The following transactions relate to Mr. Ganesh, a sole proprietor: (i) Started a business with Rs. 1,00,000 (ii) Purchased goods for a cash amounting Rs. 40,000 (iii) Purchased goods on credit from Mr. Narayan Rs. 30,000 (iv) Sold goods worth Rs. 50,000 for a cash amount of Rs. 60,000 Required: Accounting Equation Key-terms introduced in the unit: Book keeping, Account, Basic accounting concept, Business entity concept, Money measurement concept, Going concern concept, Accounting period concept, Revenue realization concept, Accounting period concept, Matching concept, Cost concept, Accounting process of cycle, Double entry book keeping, Assets, Accounting equation, Capital, Liabilities.

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Unit 2 Recording of Transactions

A. Introduction Accounting records are made for transactions only. This unit is related with recording of those business transactions. It includes the preparation of Journal, ledger and sub-division of journal. This unit also gives the knowledge of the different basic accounting terminologies. B. Objectives The objective of the unit is to help the student to understand the ways of recording and posting the transactions. After studying this unit, the students would be able to: //12//

Teaching Manual, Accountancy,, Grade XI (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Define the different accounting terminologies. Know various rules for debit and credit. Make entries in the journal. Understand the meaning, importance's and objectives of ledger. Learn posting technique in ledger. Illustrate and balancing ledger. Describe the concept of different subsidiary books. Prepare various subsidiary books and posting them into ledgers.

C. Specification of Conduct Area of the Unit. The total teaching hours allocated for this unit as per syllabus is 18 hours. The total hours can be sub-divided in the following way. However, the teacher can arrange the sub-division of hours as per his/her convenient. Serial Areas of Units Teaching Hours No. 2.1 Basic terminologies 1 2.2 Rules of debit and credit 2 2.3 Books of original entry 6 2.4 Ledger account 6 2.5 Subsidiary books and its types 3 Total 18 D. Description of Content Areas of the Unit 2.1. Basic Terminologies (a) Capital: The excess of assets over liabilities is capital. It is the amount invested in an enterprise by the proprietor. It is also known as net worth. (b) Liabilities: The financial obligation of an enterprise other than owner's fund is known as liabilities. (c) Long term liabilities: Those liabilities which are payable after a long period. (d) Short term liabilities: Those liabilities which fall due for payment within a span of one year. //13//

Teaching Manual, Accountancy,, Grade XI (e) Assets: The valuable resources owned by a business and acquired at a measurable money cost are known as assets. It is the property of all sorts of business. It is the economic resources of an enterprise that can be expressed in monetary terms. (f) Fixed assets: The assets which are acquired for use in long run is known as fixed assets. These assets are not acquired for resale purpose. (g) Current assets: The assets which can be converted into cash as soon as possible or within one year. (h) Investment: It represents an expenditure on assets invested outside the business to earn interest, dividend or other benefits. (i) Tangible assets: It refers to assets that can be existed in physical forms. (j) Intangible assets: It refers to assets that has no physical properties. (k) Inventory: The tangible property held for sale in the ordinary course of business. (l) Revenue: The amount charged for goods sold or service rendered is known as revenue. It refers to the monetary expression of the aggregate of products or services transferred by an enterprise to its customers during a period of time. (m) Expenses: The amount incurred in the process of earning revenue. 2.2. Rules of Debit and Credit Every business transaction has dual effects. One side of the transaction is debit and next credit. The account receives the benefit is termed as 'debit' and the accounts that gives the benefit is credit. The rules of debit and credit can be identified in two ways, which are as under: (i) On the basis of types of accounts (ii) On the basis of increase or decrease in assets, capital and liabilities. (i) On the basis of types of accounts There are three types of accounts: (a) Personal account: It relates to individual, firms, companies or institution.

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Teaching Manual, Accountancy,, Grade XI (b) Real account: It relates to all those things which exist and whose value can be measured in the terms of money. (c) Nominal account: It relates to expenses, losses, profit and gains. Rules for Debit and Credit: On the basis of types of accounts. Types of Accounts Debit Credit For personal account Receiver Giver For real account What comes in What goes out For nominal account All expenses & losses Al income and gain The following three steps can be applied for the rules of debit and credit on the basis of types of accounts: Step 1: Identify the accounts involved in the transaction. Step 2: Classify the accounts involved in the transaction. Step 3: Apply the rules of debit and credit according to the nature of accounts. Illustration 1. The following transactions are given: (a) Mr. X commenced business with a capital of Rs. 1,00,000 (b) Purchased goods for cash (c) Purchased furniture on credit from furniture company (d) Goods sold for cash (e) Goods sold on credit to Mr. Y. (f) Paid wages (g) Paid to furniture company for credit purchase Borrowed from Bank (h) Interest paid on bank loan (i) Cash collected from Mr. Y. Required: Analyse the above transactions and find out debit and credit according to the traditional approach.

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Teaching Manual, Accountancy,, Grade XI Solution: Transactions (a) Mr. X commenced business with a capital of Rs. 1,00,000 (b) Purchased Goods for Cash (c) Purchased Furniture on credit form Furniture co. (d) Goods Sold for cash (e) Goods sold on credit to Mr. Y. (f) Paid wages (g) Paid to furniture Co. for credit purchase (h) Borrowed from bank (i) Interest paid on bank loan (j) Cash collected from Mr. Y

Accounts Cash Capital

Classification Real Personal

Effects Comes in Giver

Debit/ Credit Debit Credit

Purchase Cash Furniture Furniture Co. Cash Sales Sales Y Sales Wages Sales Furniture Cash Cash Bank Loan Interest Cash Cash Y Y

Nominal Real Real Personal Real Nominal Personal Nominal Nominal Real Personal Real Real Personal Nominal Real Real Personal

Expenses Goes out Comes in Giver Comes in Income Receiver Income Expenses Goes out Receiver Goes out Comes in Giver Expenses Goes out Comes in Giver

Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

(ii) On the basis of increase or decrease in assets, capital and liabilities. For knowing the rules for debit and credit on the basis of accounting equation, the accounts are classified into following categories: (a) Assets account (b) Liabilities account

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Teaching Manual, Accountancy,, Grade XI (c) Capital account (d) Revenue account (e) Expenses account The steps which can be followed for applying the rules of debit and credit on the basis of equation approach are: Step 1: Identify the elements (accounts) involved in the transaction. Step 2: Analyse the type of change in elements increase or decrease in amounts Step 3: Apply the following rules of debit and credit: - Increase in assets is debited and decrease in assets in credited. - Decrease in liability is debited and increase in liability is created. - Decrease in capital is debited and increase in capital is credited. - Increase in expenses and losses is debited and decrease in expenses and losses is credited. - Decrease in revenue and profit is debited and increase in revenue and profit is credited. Some examples for understanding the rules of debit and credit on the basis of increase or decrease in assets, capital & liabilities are given below: 1. Transaction : Goods purchased for cash Debit : Goods or purchase account asset Credit : Cash account asset Reason : Increase in asset is debited and decrease in assets credited. 2. Transaction : Goods purchased on credit from Ram Credit : Ram account liability Debit : Goods or purchase account asset Reason : Increase in asset is debited and increase in liability is credited. 3. Transaction : Started business with a capital of Rs. 5,00,000 Debit : Cash account asset Credit : Capital account capital Reason : Increase in assets and liability are debited and credited 4. Transaction : Borrowed from bank //17//

Teaching Manual, Accountancy,, Grade XI Debit : Cash account - asset Credit : Bank loan account - liability Reason : Assets increased debited and liability increased credited 5. Transaction : Payment made to Ram for credit purchase Debit : Ram A/C liability Credit : Cash A/C assets Reason : Decrease in liability and assets are debited and credited 6. Transaction : Withdrawn from the business for personal use Debit : Capital A/C liability Credit : Cash A/C asset Reason :Decrease in liability is debited and assets credited 7. Goods returned to Ram Debit : Ram A/C - Liability Credit : Purchase A/C - Asset Reason : Decrease in liability is debited and assets credited 8. Rent paid Debit : Rent A/C - Expenses Credit : Cash A/C Asset Reason : Expenses incurred is debited and decrease in cash is credited 9. Commission received Debit : Cash A/C Asset Credit : Commission A/C Income Reason :Income is credited and increase in assets is debited 10. Purchased furniture on credit from Hari Debit : Furniture A/C Asset Credit : Hari A/C Liability Reason : Increase in assets is debited and liability is credited 11. Received advance from customers Debit : Cash/ A/C - Asset Credit : Advance from customers Liability Reason :Increase in assets is debited and liability is credited. //18//

Teaching Manual, Accountancy,, Grade XI 2.3. Books of Original Entry 2.3.1. Meaning of Journal The book is which all transactions are recorded in the order in which they are occurred is known as Journal. A transaction is recorded for the first time in this book and hence, it is also known as "Books of Original Entry". 2.3.2. Meaning and Steps in Journalising Journalising is a process of recording of transactions in Journal. The various steps in Journalising are given below: Step 1: Ascertain what accounts are involved in a transaction. Step 2: Identifying what types of accounts are involved. Step 3: Think about the rule of debit and credit applicable for each of the accounts involved and ascertain which account is to be debited and which is to be credited. Step 4: Record the date of transaction in the 'date' column and write the name of account to be debited and credited in the particular column along with their related amounts. Step 5: Write brief description of transaction within bracket in the next line in the particular column 2.3.3. Format of Journal Generally, the Journal includes five columns. The format of Journal is as under: Journal Date Particulars L.F. Dr. Amount Cr. Amount

Column 1: Date

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Teaching Manual, Accountancy,, Grade XI The date on which the transaction has occurred is recorded under this column. In the opening entry of every page, the year is written. After that, month and date are noted down respectively. Column 2: Particulars The name of accounts to be debited and credited is shown in this column. The name of the account to be debited is written on the first line. Leaving a space below on the second line the name of account to be credited is written beginning with 'To'. For instance, the entry for the transaction wage paid is written in particulars column as under: Wage A/C To Cash A/C Dr.

The narration is also entered in this column. A brief explanation of the transaction is known as narration. The reason for debited and credited is written under narration. Column 3: Ledger Folio (L.F.) In this column, the page number of ledger at the time of posting is recorded. It is not recorded at the time of Journalising. It is recorded at the time of posting only. Column 4: Debit Amount (Dr.) In this column, the debit amount of transaction is entered. Column 5: Credit Amount (Dr.) The credit amount of the transaction is entered under this column. According to curriculum, the following transactions and their recording should be taught: (a) Capital (b) Liabilities (c) Assets (d) Purchase (e) Sales (f) Credit Purchase (g) Credit Sale (h) Loss and Gain (i) Revenue (j) Expenses (k) Return Outward (l) Return Inward (m) Compound Transactions (n) Bills of exchange: Accepting, Discorenting and Dishonour.

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Teaching Manual, Accountancy,, Grade XI Illustration 2 Journalise the following transactions: Sharawan: 1. Ganesh started business with cash 2. Deposited cash into Bank 3. Purchased goods for cash 4. Sold goods for cash 5. Purchased furnitures and paid by cheque 6. Purchase dgoods from Binayak 7. Returned goods to Binayak 8. Cash paid to Binayak in full settlement 9. Sold goods to Kumar 10. Withdrew goods for personal use 11. Received from Kumar in full settlement 12. Paid telephone charge 13. Paid for stationery 14. Cash withdrew form Bank for personal use 15. Paid salaries by cheque 16. Purchased goods and paid by cheque Solution: In the Books of Ganesh Journal Particulars L.F.

Rs. 5,00,000 Rs. 3,00,000 Rs. 1,00,000 Rs. 80,000 Rs. 60,000 Rs. 80,000 Rs. 10,000 Rs. 69,000 Rs. 60,000 Rs. 5,000 Rs. 59,000 Rs. 3,000 Rs. 500 Rs. 10,000 Rs. 20,000 Rs. 25,000

Date Sharawan 1 Cash A/C Dr. To Capital A/C (For cash brought for capital) 2 Bank A/C Dr. To Cash A/C

Dr.(Rs.) 5,00,000

Cr. (Rs.)

5,00,000

3,00,000 3,00,000

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Teaching Manual, Accountancy,, Grade XI (For cash deposited into Bank) Purchase A/C Dr. To Cash A/C (For goods purchased) Cash A/C Dr. To Sales A/C (For cash sale of goods) Furniture A/C Dr. To Bank A/C (For furniture purchased and payment made by cheque) Purchase A/C Dr. To Binayak's A/C (For credit purchase of goods) Binayaks' A/C Dr. To Purchase Return A/C (For goods returned to Binayak) Cash A/C Dr. Discount A/C Dr. To Binayak A/C (For cash received from Binayak and discount allowed)

1,00,000 1,00,000 80,000 80,000 60,000 60,000

80,000 80,000

10,000 10,000

69,000 1,000 70,000

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Teaching Manual, Accountancy,, Grade XI 9 Kumar A/C Dr. To Sales A/C (For goods sold to Kumar Drawing A/C Dr. To Purchase A/C (For goods withdrawn by proprietor) Cash A/C Dr. Discount A/C Dr. To Kumar's A/C (For cash received from Kumar in full settlement of Rs. 60,000 and allowed him Rs. 1,000 discount) Telephone charge A/C Dr. To Bank A/C (For payment of telephone charge) Stationery A/C Dr. To Cash A/C (For stationery purchased) Drawing A/C Dr. To Bank A/C (For withdrawn from bank for personal use) Salaries A/C Dr. To Bank A/C (For payment of salaries by cheque) Purchase A/C To Bank A/C 60,000 60,000 5,000 5,000

10

11

59,000 1,000 60,000

12

3,000 3,000

13

500 500 10,000 10,000

14

15

20,000 20,000

16

25,000 25,000

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Teaching Manual, Accountancy,, Grade XI Illustration 3 Following transactions are given: 1. Binayak started business with cash Rs. 5,00,000, furniture Rs. 50,000, and stock Rs. 20,000. 2. Purchased goods from ganesh Rs. 40,000, Kumar Rs. 30,000 and Mahesh Rs. 20,000. 3. Sold goods to Krishna Rs. 20,000 received cash Rs. 15,000. 4. Received cash from Krishna Rs. 4,900 in full settlement of his account Rs. 5,000. 5. Paid to Ganesh Rs. 39,500 in full settlement of Rs. 40,000. 6. Salaries Rs. 50,000, Advertising Rs. 10,000, Sales commission Rs. 1,000, Rent Rs. 10,000 and carriage Rs. 100 were paid on 31st March. 7. A running business purchased with following assets and liabilities for Rs. 2,50,000; Land and Building Rs. 2,50,000 Furniture Rs. 15,000 Stock-in-trade Rs. 30,000 Creditors Rs. 40,000 Bank overdraft Rs. 5,000 Required: Journal Entries. Solution: Journal Date Particulars L.F. Dr.(Rs.) Cr. (Rs.) 1 Cash A/C Dr. 5,00,000 Furniture A/C Dr. 50,000 Stock A/C Dr. 20,000 To Capital A/C 5,70,000 (For business started with cash, furniture and stock) ) 2 Purchase A/C Dr. 90,000 To Ganesh A/C 40,000 To Kumar's A/C 30,000

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Teaching Manual, Accountancy,, Grade XI To Mahesh's A/C (For goods purchased A/C/) Cash A/C Dr. Krishna's A/C Dr. To Sales A/C (For goods sold to Krishna for cash and on credit) Cash A/C Dr. Discount A/C Dr. To Krishna's A/C (For amount received from Krishba and discount allowed) Ganesh A/C Dr. To Cash A/C To Bank A/C (For amount paid to Ganesh and discount received) Salaries A/C Dr. Advertising A/C Dr. Sales Commission A/C Dr. Rent A/C Dr. Carriage A/C Dr. To Cash A/C (Being payment of different expenses) Land & Building A/C Dr. Furniture A/C Dr. Stock-in-trade A/C Dr. To Creditors A/C To Bank Overdraft A/C To Cash A/C (For business purchased) 20,000 15,000 5,000 20,000

4,900 100 5,000

40,000

39,500 500

50,000 10,000 1,000 10,000 100 71.100

2,50,000 15,000 30,000 40,000 5,000 2,50,000

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Teaching Manual, Accountancy,, Grade XI 3.2.4. Journal Entries for Bills of Exchange A bill of exchange has been defined as an "instrument in writing containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument". Parties to the bill of exchange: (i) Drawer: The person who draws or makes bill. (ii) Drawer: Also known as 'accepter', to whom the order is made. (iii) Payee: The person who receives the payment. Maturity of a bill of exchange: The date on which the bills falls due for payment and 3 days grace must be allowed or finding the due date. Accounting Treatment of Bills of Exchange (a) When a bill is drawn and accepted: In the books of the drawer Bills Receivable A/C Dr. To Drawer's A/C (b) When a bill is discharged: In the books of the drawer Cash A/C Dr. To bills receivable A/C (c) When a bill is dishonored: In the books of the drawer Drawer's A/C Dr. To bills receivable (d) When a bill is discounted: In the books of the drawer Bank A/C Dr. Discount A/C Dr. To bills receivable A/C

In the books of the drawer Drawer's A/C Dr. To Bills payable In the books of the drawer Bills payable A/C Dr. To Cash A/C In the books of the drawer Bills payable A/C Dr. To drawer's A/C In the books of the drawer No entry

//26//

Teaching Manual, Accountancy,, Grade XI (e) When a discounted bill is discharged: In the books of the drawer No entry

In the books of the drawer Bills payable A/C Dr. To bank A/C

(f) When a discounted bill is dishonored: In the books of the drawer In the books of the drawer Drawer's A/C Dr. Bills payable A/C Dr. To bank A/C To drawer's A/C 2.4. Ledger Account 2.4.1. Meaning and Concept - A principle book which contains all accounts to which the transactions recorded in the books of original entry are transferred. - A summarized form of all the transactions that have taken place with the particular person or things specified. 2.4.2. Objectives of Ledger Accounts (i) To present the financial position of the business. (ii) To provide information about income and expenses. (iii)To find out the position of purchase and sale of goods. (iv) To ascertain the creditors and debtors. (v) To supply financial information to the concerned parties. (vi) To ascertain the cash and other assets position of the business. 2.4.3. Importance and Utility fo Ledger Accounts (a) The debtors and to be collected from them can be ascertained through the help of ledgers. Likewise, creditors and amount to be paid to them also can be found out. (b) It helps in ascertaining the existing assets in business and their value recorded in books. (c) it is useful to provide the information about nominal accounts: expenses, loss, income as well as profit. (d) Immediate checking of the book-keeping is possible. The correctiveness of recording can be easily found out by preparing a Trial Balance. //27//

Teaching Manual, Accountancy,, Grade XI (e) The financial position of the business can be easily found out. (f) It facilitates the preparation of final account. 2.4.4. Format of Ledger Accounts There are two types of forms of ledger accounts. They are 'T' and continuous balance form. (i) Standard form of ledger account The simplified representation of ledger account is "T" Account which is profusely brought to use in business firms. It is divided into two parts: Debit on the left and credit on the right. At the left corner "Dr." and at the right corner "Cr." Are inscribed. Each side of the ledger has following four columns: First column: date The date of transaction is entered in this column. Second column: Particular The name of the account for which accounts debited and credited given is entered in this column. The name of the account is written with "To" and "By" in debit and credit side respectively. Third column: folio The page number of journal, from where the transaction is posted into ledger is recorded in this column. Fourth column: Amount The relevant amount of transaction is entered on amount column. The format of ledger in "T" form is given below: . Account
Date Particulars Folio Amount Date Particulars Folio Amount

//28//

Teaching Manual, Accountancy,, Grade XI (ii) Running balance form of ledger account An alternative form of ledger account is running balance form, that is often adopted by commercial banks and other business firms. Accouding to this rule, this account is divided into six columns: Date, Particulars, Folio, Debit Amount, Credit Amount and Balance. The specimen of Running Balance form is as follows:
Date Particulars Folio Amount Date Particulars Folio Amount

2.4.5. Posting The process of transferring entries form journal to the respective account in the ledger is known as posting. The following rules should be followed while posting the entries into the ledger: (i) A separate account with respective heading should be opened for each item appearing in the journal. (ii) The date of transaction should be entered in the date column. (iii) The relevant account debited in the journal should be debited in the ledger and the name of the credit account of the same entry in the journal should be written in the particular in the debit column with a word 'To'. (iv) Likewise, the relevant account credited in the journal should be credited in the ledger and the name of the debit account in the journal should be written in the particular column in the credit side with a word 'By'. (v) The page number of the journal, from where the transaction has been posted, should be entered in the 'Folio' column.

//29//

Teaching Manual, Accountancy,, Grade XI (vi) The corresponding amount of transaction should be entered in the amount column. 2.4.6. Balancing and Closing of Ledger Accounts The process of equalizing the two sides of an account is known as balancing. Balancing of an account is completed by totaling the debit and credit side of the account and noting the difference. The difference between the total of debit and credit of an account is known as balance. The procedure for balancing a ledger is given below: Step 1: To find out the total amount separately of both debit and credit amount column on a rough sheet. Step 2: If the debit side exceeds the credit side, that is known as debit balance. Put the difference amount on credit side in credit amount column by writing the date of which balancing is being done and the words "By Balance c/d" In particular column. Similarly, if credit side total exceeds that is known as credit balance and put such difference in debit column by including closing date on date column and "To Balance c/d" in particular column. Step 3: Sum both the debit and credit amount column and put the total on both sides and draw double line immediately beneath the totals. Step 4: Enter the date of the beginning of next period in 'Date' column and bring down the debit balance or credit balance. The balancing of different accounts shows the following result: Types of Accounts Balance Result 1. Personal Account Debit Balance The person is debtor for Credit Balance
the firm The person is debtor for the firm

//30//

Teaching Manual, Accountancy,, Grade XI 2. Real Account (other than Goods Account) 3. Nominal Account Debit Balance Credit Balance Debit Balance Credit Balance
The assets owned by the firm Deficit Debited to Trading or P/LA/C Credited to Trading or P/LA/C

Illustration The following transactions are given: 1. Goods purchased for cash Rs. 25,000 2. Goods purchased from Ganesh Rs. 15,000 3. Goods sold for cash Rs. 30,000 4. Goods returned by Kumar Rs. 2,000 5. Cash received from Kumar Rs. 3,000 6. Cash paid to Ganesh Rs. 4,000 7. Goods returned to Ganesh Rs. 2,000 Required: (i) Journal entries (ii) Cash Account, Purchase Account, Sales Account and Ganesh Account. Solution: Journal Date Particulars L.F. Dr. (Rs.) Cr. (Rs.) 1 Purchase A/C Dr. 25,000 To Cash A/C 25,000 (For goods purchased) 2. Purchase A/C Dr. 15,000 To Ganesh A/C 15,000 (For credit purchase of goods) 3. Cash A/C Dr. 30,000 30,000 To Sales A/C //31//

Teaching Manual, Accountancy,, Grade XI (for goods sold) Kumar A/C Dr. To Sales A/C (For credit sale of goods) Sales Return A/C Dr. To Kumar's A/C (for goods returned by Kumar) Cash A/C Dr. To Kumar's A/C (For cash received from Kumar) Ganesh A/C Dr. To cash A/C (For cash paid to Ganesh) Ganesh A/C Dr. To purchase return A/C (For goods returned) Cash Account
Particulars To Sales A/C To Kumar's A/C F. Amount 30,000 3,000 33,000 4,000 Date 1 7

4.

10,000 10,000 2,000 2,000

5.

6.

3,000 3,000

7.

4,000 4,000 2,000 2,000 Cr.

F. Amount 25,000 4,000 4,000 33,000

8.

Dr.
Date 3 6

Particulars By Purchase A/C By Ganesh A/C By Balance c/d

Balance b/d

Dr.
Date 1 2 Particulars To Cash A/C To Ganesh A/C F.

Purchase Account
Amount 25,000 15,000 40,000 40,000 Date Particulars By Balance c/d F.

Cr.
Amount 40,000

40,000 To Balance b/d

//32//

Teaching Manual, Accountancy,, Grade XI Dr.

Date Particulars To Balance b/d F.

Sales Account
Amount 40,000 40,000 By balance c/d Date Particulars By Cash A/C By Kumar's A/C F.

Cr.
Amount 30,000 10,000 40,000 40,000

Dr. Ganesh Account

Date 7 8 Particulars To Cash A/C Return A/C To Balance c/d F. Amount 4,000 2,000 9,000 15,000

Cr.
Date 2 Particulars By Purchase A/C F. Amount 15,000

By Balance b/d

15,000 15,000

Illustration 2 Post the following transactions post them into Ledger Accounts and balance the necessary accounts on 30th Jestha, 2059: 1. Started business with cash 2. Goods purchased for cash 3. Furniture purchased 4. Goods purchased from Ram 5. Goods sold for cash 6. Goods sold to Hari 7. Cash paid to Ram 8. Cash received from Hari 9. Goods returned by Hari 10. Rent paid 11. Goods sold for cash 12. Salary paid Rs. 50,000 Rs. 20,000 Rs. 10,000 Rs. 10,000 Rs. 20,000 Rs. 10,000 Rs. 3,000 Rs. 8,000 Rs. 2,000 Rs. 5,000 Rs. 10,000 Rs. 5,000

//33//

Teaching Manual, Accountancy,, Grade XI Solution: Dr.

Date
059-2-1 8 14 25

Cash Account
Particulars
To Capital A/C To Sales A/C To Hari A/C To Sales A/C

Cr.
Particulars
By Purchase A/C By Furniture A/C By Ram A/C By Rent A/C By Salary A/C By Balance d/c

F.

Amount
50,000 20,000 8,000 10,000

Date
059-2-1 3 13 17 30

F.

Amount
20,000 10,000 3,000 5,000 5,000 45,000 88,000

058-3-1

To Balance b/d

88,000 45,000

Dr.
Date
059-2-30

Capital Account
Particulars
To Balance c/d

Cr.
Particulars
By Cash A/C

Amount
5,00,000

Date
059-2-1 059-3-1

F.

Amount
50,000 50,000

Dr.
Date
059-2-2 059-2-5

Purchase Account
Particulars
To Cash A/C To Ram A/C

Cr.
Particulars
By Balance c/d

Amount
20,000 10,000 30,000 30,000

Date
059-2-30

F.

Amount
30,000 30,000

059-3-1

To Balance b/d

Dr.
Date
059-2-3 059-3-1

Furniture Account
Particulars
To Cash A/C To Balance C/D

Cr.
Particulars
By Balance c/d

Amount
10,000 10,000

Date
059-2-30

F.

Amount
10,000

Dr.
Date
059-2-12 059-2-13 059-2-30

Ram's Account
Particulars
To Purchase Return A/C To Cash A/C To Balance c/d

Cr.
Particulars
By Purchase A/C

Amount
1,000 3,000 6,000 10,000

Date
059-2-5

F.

Amount
10,000

059-3-1

By Balance c/d

10,000 6,000

//34//

Teaching Manual, Accountancy,, Grade XI Dr.

Date
059-2-30

Sales Account
Particulars
To Balance c/d

Cr.
Particulars
By Cash A/C By Hari's A/C By Cash A/C

Amount
40,000

Date
059-2-8 059-2-10 059-2-25

F.

Amount
20,000 10,000 10,000 40,000 40,000

40,000 059-3-1 By b/d Balance

Dr.
Date
059-2-17 059-3-1

Rent Account
Particulars
To Cash A/C To Balance b/d

Cr.
Particulars
By Balance c/d

Amount
5,000 5,000

Date
059-2-30

F.

Amount
5,000

Dr.
Date
059-2-30 059-3-1

Salary Account
Particulars
To Cash A/C To Balance b/d

Cr.
Particulars
By Balance c/d

Amount
5,000 5,000

Date
059-2-30

F.

Amount
5,000

Dr.
Date
059-2-10

Hari's Account
Particulars
To Sales A/C

Cr.
Particulars
By Cash A/C By Sales Return A/C

Amount
10,000

Date
059-2-14 059-2-15

F.

Amount
8,000 2,000 10,000

10,000

Dr.
Date
059-2-30

Purchase Return Account

Particulars
To Balance c/d

Cr.
Particulars
By Ram's A/C By Balance b/d

Amount
1,000

Date
059-2-12 059-3-1

F.

Amount
1,000 1,000

Dr.
Date
059-2-15 059-3-1

Sales Return Account

Particulars
To Hari's A/C To Balance b/d

Cr.
Particulars
By Balance c/d

Amount
2,000 2,000

Date
059-2-30

F.

Amount
2,000

2.5. Subsidiary Books and its types Some items of transactions are repeated many times in a day. Recording of these in a Journal will involve money and efforts. Therefore, transactions are recorded in a separate book. //35//

Teaching Manual, Accountancy,, Grade XI 2.5.1. Purchase Book Concept: All credit purchase of merchandise are recorded in this book. Cash purchases and assets purchases are not recorded in this book. It is also known as 'Invoice Book'. Purchase Book is maintained on the basis of invoice received from the supplier, from whom the goods are purchased on credit. It shows the details of quantities and price of material purchased. Invoice: It details the quantity and price of each item sold on credit by a trader to its customer. It also states discount allowance on the basis of invoice, both parties, seller and buyer make entries in their book. The some invoice would be sales invoice to the seller and purchase invoice to the buyer. The specimen of the invoice is as follows: Invoice (Firm's Name & Address) Telephone: Invoice No: Fax: Date: .. To: .. . . Qty. Description Rate Amount Remarks (Rs.)

It is clear from the specimen that an invoice contains the following details: (i) Names and address of both parties-seller and buyer. //36//

Teaching Manual, Accountancy,, Grade XI (ii) An exact description of the goods, including the quantity rate and total value of goods. (iii) The terms and conditions of sale (on the overleaf Specimen of purchase book: The standard form of purchase book is as under:
Date Invoice No. Particulars L.F. Details (Rs.) Amount (Rs.)

Explanation: First column 'Date': It shows the dates of transaction in serial order. Second column 'Invoice No.': It reveals the invoice number is serial order. Third column 'Particulars': It records the name of supplier and particulars of goods purchased. Fourth column 'L.F.': It mentions the page number of book posted. Fifth column 'Details': It represents the amounts of different goods purchased and the amount of trade discount, if any. Sixth column 'Amount': This column shows net amount payment of each purchase. Trade Discount and Cash Discount Trade Discount: It is a deduction from the catalogue, list or published price. It is an allowance made by the supplier to the buyer.

//37//

Teaching Manual, Accountancy,, Grade XI Cash Discount: Allowance made by the supplier to the buyer for the payment made within a certain period. Posting from Purchase Book The following rules are applicable for posting from purchase book: (i) Posting to Personal Account: Individual amounts are daily posted to the credit side of supplier's account by writing 'By Purchase A/C' (ii) Posting to Purchase Account: Periodic total is posted to the debit of purchase account by writing "To sundries as per Purchase Book". Illustration 1 From the following transaction prepare the purchase book of A & Co., a readymade garment dealer and post the transactions recorded in the purchase book to ledger: Ashadh 1 Purchased from P on credit 10 Shirts @ Rs. 400 each 15 Trousers @ Rs. 600 each Ashadh 5 Purchased from Q on credit 20 Hats @ Rs. 120 each 20 Coats @ Rs. 1,200 each Trade discount @ 10% is made both on coats and hats purchases. Ashadh 11 Purchased for cash from R 10 Shirts @ Rs. 350 each Ashadh 15 Purchased from S on credit 15 Shirts @ Rs. 400 each 20 Trousers @ Rs. 500 each //38//

Teaching Manual, Accountancy,, Grade XI Solution: Date Ashadh 1 Invoice No. Purchase Book Particulars P: 10 Shirts @ Rs. 300 each 15 Trousers @ Rs. 600 each Q: 20 Hats @ Rs. 120 each 20 Coats @ Rs. 1,200 each Less: 10% Trade Discount S: 15 Shirts @ Rs. 400 each
20 Trousers @ Rs. 500 each

L.F.

Details (Rs.) 3,000 9,000 2,400 24,000 26,000 2,640

Amount (Rs.)

12000

15

23,700 6,000 10,000 16,000 51,760 Cr.

F. Rs.
12,000

Total:Ledger Dr.
Date Particulars F. Rs. Date
3.1

P's Account
Particulars
By Purchase A/C

Dr.
Date Particulars F. Rs. Date
3.5

Q's Account
Particulars
By Purchase A/C

Cr.
F. Rs.
23,760

Dr.
Date Particulars F. Rs. Date
3.5

S's Account
Particulars
By Purchase A/C

Cr.
F. Rs.
16,000

Dr.
Date
3.1 3.15

Purchase Account
Particulars
To Cash A/C To Sundries

Cr.
F. Rs.

F.

Rs.
3,500 51,760

Date

Particulars

//39//

Teaching Manual, Accountancy,, Grade XI 2.5.2. Sales Book Concept: All credit sales of merchandises are recorded in the Sales Book. The cash sale of merchandise and sale of other assets are not recorded in this book. Specimen of sales book: The simplest format of sales book is shown below: Sales Book Date Invoice No. Particulars L.F. Details Amount (Rs.) (Rs.)

Explanation: First column 'Date': It states the date of transaction in serial order. Second column 'Invoice No.': It reveals the serial number of the outward invoices. Third column 'Particulars': It includes the name of the customers and particulars of goods sold. Fourth column 'L.F.': It mentions the page number of book posted. Fifth column 'Details': It represents the amount of goods sold and the amount of trade discount if allowed. Sixth column 'amount': This column shows net amount recoverable from the customers. Posting from sales book: The following rules are applicable for posting from sales book: (i) Posting of individual customers are debited with the amount and "To Sales Account" is mentioned in the particular column. (ii) Posting of periodic total to credit side of sales account by mentioning "By Sundries Account" in the particular column.

//40//

Teaching Manual, Accountancy,, Grade XI Illustration 2 Enter the following transactions in the sales Book of Bishal and Co, Ltd. And post them into ledgers: Jestha, Sold to Brihat on credit 1 10 Shirts @ Rs. 500 per shirt 10 Trousers @ Rs. 600 per trousers 4 Sold for cash to Bijaya 10 Coats @ Rs. 1,300 each 5 Trousers @ Rs. 600 each 6 Sold on credit to Biraj 5 Coats @ Rs 1,400 each 5 Shirts @ Rs. 500 each Trade discount @ 10% 7 Sold on credit to Bilash 20 Trousers @ Rs. 700 each Solution: In the Books of Bishal & Co. Sales Book Date Invoice Particulars L.F. Details Amount (Rs.) (Rs.) No. Jestha 1 Brihat 10 Shirts @ Rs. 500 each 5,000 10 Trousers @ Rs. 600 each 6,000 Biraj: 11,000 6 5 Coats @ Rs. 1,400 each 7,000 5 Shirts @ Rs. 500 each 2,500 9,500 Less: 10% Trade Discount 950 Bilash: 8,550 20 Trousers @ Rs. 700 each 7 14,000 Total:33,550

//41//

Teaching Manual, Accountancy,, Grade XI Ledger's Brihat's Account

Particulars
To Sales A/C

Dr.
Date
2.1

Cr.
F. Rs.

F.

Rs.
18,000

Date

Particulars

Dr.
Date
2.6

Biraj's Account
Particulars
To Sales A/C

Cr.
Particulars F. Rs.

F.

Rs.
8,550

Date

Dr.
Date
2.7

Bilash's Account
Particulars
To Sales A/C

Cr.
Particulars F. Rs.

F.

Rs.
14,000

Date

Dr.
Date Particulars F.

Sales's Account
Rs. Date
2.4 2.7

Cr.
Particulars F. Rs.
16,000 33,550

By Cash A/C By Sundries A/C

2.5.3. Purchase Return Book Concept: It is used for the purpose of recording the return of merchandise purchased on credit. Concept of Debit note: It is prepared by the buyer when the goods are returned to supplier. It is sent along with goods. It contains the date of return, name of the supplier to whom the goods have been returned details of the goods returned and reasons for returning the goods. The specimen of Debit Note is given below: Debit Note (Firm's Name & Address) Telephone: Debit Note No: Date: . To: .. . Dear Sir, We have debited your account for the goods returned by us as under:

//42//

Teaching Manual, Accountancy,, Grade XI Date Description Rate Amount (Rs.) Remarks

For: Specimen of purchase return book:: The format of purchase return book is given below:
Date Debit Note No. Particulars L.F. Details (Rs.) Amount (Rs.)

Posting from purchase return book: Posting into ledger from purchase return book involves the following steps: Step 1: Posting of individual amount The account of the supplier to whom debit note is sent is debited individually with their respective amounts. Step 2: Posting of periodic total The total of the amount column of the purchase return book is credited to purchase return account. Illustration 3 From the following particulars, prepare a purchase return book of a firm and post them into respective ledgers: Ashad 3 Returned to P 5 cricket balls @ Rs. 100 each 10 table tennis rackets @ Rs. 300 each //43//

Teaching Manual, Accountancy,, Grade XI Ashad 6 Returned to R 5 footballs @ Rs. 500 each 5 table tennis rackets @ Rs. 400 each Trade discount 10% Purchase Return Book Particulars L.F. P:
5 Cricket Balls @ Rs. 100 each 10 Table Tennis Rackets @ Rs. 300 each

Solution: Date Ashadh 3 Invoice No. Details (Rs.) 500 3,000 3,500 6 R: 5 Footballs @ Rs. 500 each 5 Table Tennis Rackets @ 400 each Less: 10% Trade Discount Total:Ledger P's Account
Particulars
To Purchase Return A/C

Amoun t (Rs.)

2,500 2,000 450 4,050 7,050

Dr.
Date
3

Cr.
Particulars F. Rs.

F.

Rs.
3,500

Date

Dr.
Date
6

R's Account
Particulars
To purchase Return A/C

Cr.
Particulars F. Rs.

F.

Rs.
4,050

Date

//44//

Teaching Manual, Accountancy,, Grade XI Dr.

Date Particulars F.

Purchase Return Account

Rs. Date 6 Particulars By Sundries F.

Cr.
Rs. 7,550

2.5.4. Sales Return Book Concept: It is used for the recording of the return of merchandise sold on credit. Credit Note: It is acknowledgement of return intimating the customer that his account has been credited for the goods returned by him. Credit Note (Firm's Name & Address) Telephone: Credit Note No: Date: . To: .. . We have debited your account in respect of the following goods returned by you: Date Description Rate Amount Remarks (Rs.)

For: Specimen of sales return book The outline of a sales return book is presented below: Return Inward or Sales Return Book //45//

Teaching Manual, Accountancy,, Grade XI Date Credit Note No. Particulars L.F. Details (Rs.) Amount (Rs.)

Posting from sales return book When the sales return book is properly recorded, they should be posted to the respective ledgers in the following steps: Step 1: Posting of individual accounts Every day the posting is made from this book to the account of the particular column Step 2: Posting of periodic total At the last date of the specific period, the grand total amount of the sales return book is to be posted on the debit side of the sales return account with to Sundries' mentioned. Illustration 4 The following transactions are summarized: Ashadh 2 Sent a credit Note No. c/002 to P for the returned 2 Shirts @ Rs. 300 each and Trousers 5 pieces @ Rs. 400 each. Ashadh 5 Sent a credit Note No. c/003 to Q and received a debit note from him as he returned 5 coats @ Rs. 1,500 each and 5 shirts @ Rs. 400 each. In the outward invoice he was allowed a trade discount of 10% Required: (i) Draw the ruling of a suitable sales return book and enter therein the above transactions. (ii) Open the relevant ledgers.

//46//

Teaching Manual, Accountancy,, Grade XI Solution: Date Ashadh 2 Credit Note No. C/002 Sales Return Book Particulars L.F. P: 2 shirts @ Rs. 300 each 5 Trousers @ 400 each Q: 5 Coats @ Rs. 1,500 each 5 Shirts @ Rs. 400 each Details (Rs.) 600 2,000 2,600 5 C/003 7,500 2,000 9,500 950 8,550 11,150 Cr.
Particulars
By Sales Return A/C

Amount (Rs.)

Less: 10% Trade Discount Total Ledger Dr.

Date Particulars F.

P's Account
Rs. Date
3.2

F.

Rs.
2,600

Dr.
Date Particulars F.

R's Account
Rs. Date
3.5

Cr.
Particulars
By Sales Return A/C

F.

Rs.
8,550

Dr.
Date 3.5 Particulars To Sundries

Purchase Return Account

F. Rs. 11,150 Date Particulars F.

Cr.
Rs.

//47//

Teaching Manual, Accountancy,, Grade XI E. Evaluation Scheme

The competency achieved by a student in this unit will be evaluated on the following basis: Types of Questions No. of Questions Marks Practical 2 3+3=6 F. 1. Some Model Questions Following transactions are given: a. Started business with Rs. 40,000 b. Purchased goods for Rs. 10,000 from Ram and made partial payment of Rs. 8,000 c. Equipment costing Rs. 5,000 were sold for Rs. 5,500 d. Paid Rs. 1,950 to Ram in full settlement of his account. Required: (i) Journalise the transactions (ii) Ram's account 2+1 Journalise the following transactions: a. Goods purchased for cash Rs.1,00,000 b. Goods purchased from Hari Rs. 40,000 c. Goods sold for cash Rs. 60,000 d. Goods sold to Bishnu Rs. 30,000 e. Goods taken by the proprietor for domestic use Rs. 5,000 f. Goods distributed as free sample Rs. 100 g. Goods destroyed by fire Rs. 5,000, claims admitted only for Rs. 4,000. Prepare (a) Bank A/C (b) Mrs. Radha A/C (c) Hira & Co. A/C from the following transactions: a. Open a bank account by depositing Rs. 20,000 b. Purchased goods for Rs. 5,500 from Hira & Co. and issued a cheque of Rs. 3,500 c. Received Rs. 10,000 from Mrs. Radha as a loan. d. Paid Rs. 6,000 in cash to Mrs. Radha as repayment of her loan. 3 Following purchase transaction of business selling Jute goods were given to you: a. Bought following items from Gupts Store of Jhapa //48//

2.

3.

4.

Teaching Manual, Accountancy,, Grade XI (i) 1,000 pieces of Jute bag @ Rs. 12 per bag. (ii) 500 plastic coated Jute bag @ Rs. 15 per bag. b. Bought from Goyal store of Dharan 500 metres of Jute carpet @ Rs. 80 per metre. c. Bought furniture valued Rs. 50,000 from classic furniture shop of Biratnagar for cash. Required: (a) Purchase Book (b) Purchase Account 3+1 Following are the transactions relating to credit sales: a. Sold to Rai and Sons Udayapur: 110 fan heaters @ Rs. 400 per heater b. Sold to Kumar Stores of Bhojpur: 55 Table fans @ Rs. 600 per fan c. Sold to Rampur stores of Rampur: 40 Electric Heater @ Rs. 300 per heater Required: Sales Book G. Key - terms introduced in the unit: 1. Capital 4. Short terms liabilities 7. Current assets 10. Intangible assets 13. Expenses 16. Personal account 19. Journal 22. Drawee 25. Ledger account 28. Balancing 31. Purchase book 34. Cash discount 37. Debit note 2. Liabilities 5. Assets 8. Investment 11. Inventory 14. Debit 17. Real account 20. Bills of exchange 23. Bills Receivable 26. Maturity of bills 29. Closing 32. Invoice 35. Sales book 38. Sales return book -3. Long term liabilities 6. Fixed assets 9. Tangible assets 12. Revenue 15. Credit 18. Nominal account 21. Drawer 24. Bills payable 27. Posting 30. Subsidiary books 33. Trade discount 36. Purchase return book 39. Credit note 5.

2+1

//49//

Teaching Manual, Accountancy,, Grade XI

Unit 3 Cash and Banking Transactions

A. Introduction Cash Book is a sub-division of a Journal, like in other subsidiary books, all transactions relating to cash receipt and cash payment are recorded in the cash book. There are different types of cash books such as simple cash book, double column cash book, triple column cash book and petty cash book. This unit includes all these types of cash book. It also includes accounting treatment of different transactions between a business enterprise and the bank. Generally the bank balance shown by the cash book & pass book must be tally. But sometimes the bank balance shown by the cash book does not tally with the balance reported by the bank. To reconcile these balance, the bank reconciliation statement is prepared. This unit gives the technical know how far the preparation of such a statement. B. Objectives The main objective of this unit is to help the students to understand the meaning of cash and banking transactions and their accounting treatment. After studying this unit, the student would be able to: (a) Understand the meaning and different types of cheques. (b) Prepare different types of cash book with single, double and triple column cash book. (c) Prepare petty cash book (d) State the meaning of and to prepare bank reconciliation statement. (e) Describe the reasons for difference in balance of bank pass book and cash book.

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Teaching Manual, Accountancy,, Grade XI C. Specification of Content Area of the Unit The following are the content areas of the unit and their suggested teaching hours. The teaching hours allocated could very depending upon a teacher's style of teaching. Hence, they could be suitable modified but limiting the total hours to 15 hours: S.N. Content Areas of the Unit Teaching hours 3.1 Banking concepts 2 3.2 Cash book 7 3.3 Bank reconciliation statement 6 Total:15 D. Description of Content Areas of the Unit 3.1. Banking Concepts 3.1.1. Cheque meaning, types and parties to cheque. Cheque is a written order given to the bank by a person or institution for the payment of a certain amount out of deposit to the self or others. In short, a cheque is an order on a banker to pay the money. In the cheque, the amount to be withdrawn should be written in figures as well as in words. The person who issues the cheque has to put the signature on the cheque and also he should mention the date. Generally, there are three parties connected with the cheque. Those are: (a) Drawer (b) Drawee (c) Payee (a) Drawer: The depositer who writes and issues the cheque is known as drawer. Only the holder of bank account can issue the cheque and he is described as a drawer. (b) Drawee: the cheque is drawn on bank and bank is known as drawee. (c) Payee: The person or the firm in whose favour the cheque is issued is known as payee. However, it the depositor writes the cheque for himself //51//

Teaching Manual, Accountancy,, Grade XI to be paid in the bank, in that case drawer and payee happen to be one and same. Types of Cheque: Mainly there are three types of cheques, in practice. They are: (a) Bearer cheque (b) Order cheque (c) Crossed cheque (a) Bearer cheque: This type of cheque is liable for payment to the person who present it to the bank for encashment. (b) Order cheque: That type of cheque which is payable to the person, of whose name is written on the cheque or to his order after proper identification. (c) Crossed cheque: The cheque that has two slanted lines drawn on the front position is called the crossed cheaue. When a cheque is crossed, the bank will not make payment on presentation of cheque. It will be credited in the account of customer. The words '& Co." are inscribed between the slanted line. There are three types of crossed cheque. They are: (i) Ordinary Crossed Cheque (ii) Special Crossed Chequee (iii) Account Payee Cheque 3.1.2. Endorsement of Cheque: The task of putting a signature on the cheque with an intention of handing over the ownership of the cheque to any one is described as the endorsement of cheque. If the payee of the cheque authorizes someone to receive the amount mentioned in the cheque, the cheque is endorsed. The person referred puts a signature on the back of the cheque and hands it over to the other party. The former is called the "Endorser" and the latter receive of the cheque- is said to be the "Endorsee". The endorsement of cheque can be as follows:

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Teaching Manual, Accountancy,, Grade XI (i) Blank or general endorsement: If the signature is put on the back of the cheque only by the endorser, it is called blank or general endorsement. (ii) Special endorsement: In this kind of endorsement, the endorser, in addition to putting the signature on the back of the cheque, mentions the name of the endorser. (iii) Restrictive endorsement: The endorser puts the signature on the back of the cheque while stating that the payment should be made only to the person referred. As the payment of the cheque is made to the person mentioned and, thereby, the power of handing over the cheque is restricted, it is described as the restrictive endorsement. (iv) Partial endorsement: The cheque endorsed with a provision of giving a partial amount of the cheque is called partial endorsement. This kind of endorsement is seldom found in practice. 3.1.3. Dishonour of Cheque When the Bank refuses for the payment of cheque the cheque is said to have been dishonoured. The reasons for dishonour of cheque are as under: (i) In case of the death of the customer and its notification to the bank. (ii) In case of the customer being bankrupt of insolvent. (iii) If the Bank receives the prohibition order from the court about the payment. (iv) In case the Bank is informed that the customer writing the cheque has been deranged and insane. (v) If there is no sufficient amount in the account of the customer for the payment and also if there is no provision of overdraft. (vi) In case the figure and words within about the amount, signature of the drawer, date, account number etc. are inappropriate and out of order. (vii) If the time or duration of the cheque is expired. (viii) If the concerning parties notifies the Bank to stop the payment. (ix) If the cheque is not handed over according to rules and regulations.

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Teaching Manual, Accountancy,, Grade XI 3.2. Cash Book: 3.2.1. Meaning and Concept: The book which keeps records of all cash transactions is called a Cash book. It records both cash receipt and payment. The cash book is a sub division of the books of original entry. All cash transactions are recorded first in it, and, thereafter posted from cash book into ledger. So it can be called the book of original entry. Cash Book being a sub-division of Journal, all entries in it should be supported by narration like in case of making of a Journal entry. However, if a cash book is maintained as a part of ledger account, narration is not necessary. 3.2.2. Features of Cash Book The main features of Cash Book are as follows: (i) Only cash transactions are recorder in Cash Book (ii) Cash Book is both a principal book and subsidiary book. (iii) All the amounts received are recorded on the debit side and paid on the credit side. (iv) The dates of all transactions are recorded chronologically. (v) As only the cash transactions are recorded in the Cash Book, it does not show the credit balance at all. (vi) The Cash Book presents the true position of cash transactions. (vii) It serves as a documentary evidence for the available cash balance. 3.2.3. Types of Cash Book The various types of Cash Books are as follows: A. Single column Cash Book: (i) Simple Cash Book For recording cash transactions (ii) simple Bank Book For recording banking transactions B. Double column Cash Book:

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Teaching Manual, Accountancy,, Grade XI (i) Cash Book with cash and -For recording cash receipt and discount column payment with discount allowed and (ii) Cash Book with bank and received. discount columns -For recording banking transactions (iii) Cash Book with cash and with discount Bank columns -For recording cash and banking transactions without discount column C. Triple column Cash Book Cash Book with Cash, Bank For recording cash and banking and Discount columns transactions with discount column. D. Petty Cash Book For recording petty expenditure and (i) Ordinary petty Cash Book receipt (ii) Imprest petty cash system

a. Single Column Cash Book (i) Simple cash book: It records only the receipt and payment of cash. Receipt of cash is recorded on debit side and payment on credit side. There is only one column for the amount on each side of the simple cash book. The issue of cheque is not required to enter in cash book containing cash column only. However, the cheque received by the firm should be treated as cash, unless it is specified that cheque has been received and deposited into the bank the same day. The format of simple cash book is given below: Dr. Simple Cash Book Cr. Date Particulars L.F. Amount Date Particulars L.F. Amount

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Teaching Manual, Accountancy,, Grade XI (ii) Simple bank book: Simple bank book is similar to simple cash book. It records only the receipt and payment of cheque. The transactions made through bank are recorded in this book. It is suitable for those organizations, where both payments and receipts are made through organizations, where both payments and receipts are made through bank (chequer). The format of simple bank book is given below: Dr. Simple Bank Book Cr. Date Particulars L.F. Amount Date Particulars L.F. Amount

b. Double Column Cash Book (i) Cash book with cash and discount columns: When there is discount, the cash book is maintained by adding one more amount column. "Discount" on each side. All cash receipts and discount allowed are recorded on the debit side. Similarly, all cash payment and discount received are recorded on the credit side. Discount allowed is an expense. So, it is recorded on debit side. In the same way, discount received is an income and hence. It is recorded on the credit side of cash book with cash and discount columns. Dr. Cash Book with Cash and Discount Column Cr. Date Particulars L.F. Disc. Cash Date Particulars L.F. Disc Rs.

(ii) Cash book with bank and discount column: This book is similar to a cash book with cash and discount column. Instead of cash column, there will be bank column on each side. It is maintained by those persons or //56//

Teaching Manual, Accountancy,, Grade XI firms which carry out their business exclusively through the bank. Receipt of cheques and discount allowed out are recorded on the debit side. Similarly, all payments by cheques and discount received are recorded on the credit side. (iii) Cash book with cash and bank column: This type of cash book is the combination of simple cash book and bank book. It will have two amount columns on each side. One for cash column and next for book column, The first column is meant for cash receipt on debit side and payment on credit side. In the same way, the second column is meant for cash deposit on debit and withdrawal from bank on credit. Contra entry: The cash book with cash and bank columns represents both cash and banking transactions. So, some of the transactions have to be recorded in the both sides of the same book. Such a transaction increases cash in hand on one side and decreases cash at bank on another side or vice-versa. Those entries which affect both sides of the cash book are known as contra entries. Some of the contra entries are as under: (i) Opening account with bank (ii) Depositing money into bank (iii) Depositing cheque into bank (iv) Withdrawing money for office use from bank. Illustration Prepare cash book with cash and bank columns from the following transactions: (a) Opening cash balance Rs. 25,000 (b) Open a bank account with Rs. 10,000 (c) Issued a cheque of Rs. 1,500 to Mr. Ram Pradhan (d) Paid into bank Rs. 1,500 (e) Paid to Hada & Sons by cheque Rs. 1,500 and cash Rs. 700.

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Teaching Manual, Accountancy,, Grade XI Solution: Dr.

Date (a) (b) (c) Particulars To Balance b/d To Cash A/C To Cash A/C L.F. (c) (c) Cash 25,000

Cash Book with Cash & Bank Column Cr.

Bank 10,000 4,500 Date (b) (c) (d) (e) Particular By Bank A/C By Ram Pradhan A/C By Bank A/C By Hada & Sons A/C By Balance c/d L.F. (c) (c) Cash 10,000 4,500 700 9,800 25,000 Bank 1,500 1,500 11,500 14,500

25,000 To Balance b/d 9,800

14,500 11,500

Illustration: Following cash and banking transactions were given to you: Chaitra 1, Balance of cash in hand Rs. 7,200 and at Bank Rs. 21,500 8, Received cheque of Rs. 4,000 from Puja Karki 16, Bought goods for Rs. 8,000 and paid cash Rs. 3,000 and balance by cheque. 21, Drawn for office use Rs. 7,000 30, paid salary of Rs. 1,200 by cheque and rent of Rs. 500 in cash. Required: Cash Book with cash and bank column. Solution: Dr.
Date Chaitra 1 8 21 Particulars To Balance b/d
To Puja Karki A/C

Cash Book with Cash & Bank Column

L.F

Cr.
Particular
L.F

Cash 7,200

Bank 21,500 4,000

To Bank A/C

(c)

7,000

Date Chaitra 16 21 30 30

Cash 3,000

Bank 5,000 7,000 1,200

12,300 25,500

By Purchases A/C

By Cash A/C By Salary A/C By Rent A/C By Balance c/d

(c) 500
10,700 14,200

14,200 Baisakh 1 To Balance b/d 10,700

25,500 12,300

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Teaching Manual, Accountancy,, Grade XI c. Triple Column Cash Book This type of cash book has three amount columns on each side. They are: one for cash, another for bank and third one for discount. This book serves the purpose of cash account and bank account. All cash receipts, deposited into bank and discount allowed are recorded on the debit side. All cash payments, withdrawals from bank and discount received are recorded on credit side. Illustration Following cash and banking transactions are given: 2059 Magh 1: Cash in hand Rs. 475, bank Rs. 4,965 " Magh 5: Bought goods & paid by cash Rs. 400 by cheque Rs. 650 " Magh 10: Paid Archana's account of Rs. 600 discount at 2% " Magh 15: Cash sales Rs. 750 " Magh 20: Deposited into the bank Rs. 375 " Magh 25: Received cash Rs. 1,900 from Nanu after deducting discount Rs. 100 Solution: Dr.
Date Magh 1 " 15 " 20 " 25 Falgun 1 To Bal. b/d Particulars To Bal. b/d To Sales A/C To Cash A/C To Nanu's A/C L.F Dic. Cash 475 750 1,900 3,125 1,762 Bank 4,965 375 100 100 5,340 4,690 Date Magh " 5 " 10 " 20 " 30

Triple Column Cash Book Cr.

Particular By Purchase A/C By Archana A/C By Bank A/C By Balance c/d L.F Dic. 12 (c) 1 2 Cash 400 588 375 1,762 3,125 Bank 650

(c)

4,690 5,340

d. Petty Cash Book All the business firms usually spend a small amount of money for postage, magazines, refreshment stationery, bus fare, carriage, cleaning etc. There are //59//

Teaching Manual, Accountancy,, Grade XI regular expenses and need immediate payments. It is impracticable to pay these expenses through cheque. These expenses are to be paid in cash. If all these expenses are recorded in the cash book, it will unnecessarily be overburdened. To avoid such difficulties, a petty cashier is appointed for making and recording these expenses. Petty cash means a small amount of cash. The cash book for recording small payment is known as petty cash book. The cashier who handles the petty expenses and petty cash book is known as petty cashier. Types of petty cash book: There are two types of petty cash book. They are: (i) Simple Petty Cash Book (ii) Analytical Petty Cash Book (i) Simple Petty Cash Book: It is similar to simple cash book. Receipt of cash received by petty cashier is recorded on debit side and petty cash payment on credit side. The date and particulars of every transaction will be written in the same date and particular column. The ruling of a simple petty cash book is given below: Dr. Simple Cash Book Cr. Rs. Date Particulars L.F. Rs. Date Particulars L.F.

(ii) Analytical Petty Cash Book: Under this system, an analytical or columnar form for various expenses are maintained. The credit side of analytical petty cash book contains number of columns for different heads of expenditures including column for total. The debit side of cash book contains only one column for the cash received from the cashier.

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Teaching Manual, Accountancy,, Grade XI The ruling of analytical petty cash book is given below:
Cash received Date L.F. Particulars V. No. Total Payment Postage Carriage Stationery Advertisement Sundry Expenses

Illustration: Enter the undermentioned transactions in a petty cash book with suitable columnar heads: Baisakh 1, Petty cashier starts with opening balance of Rs. 200 " 2, Purchased postage stamps Rs. 10 " 2, Purchase stationery Rs. 40 " 3, Paid taxi hire Rs. 50 " 4, Paid for postage and telegrams Rs. 40 " 7, Paid Ganesh, a creditiors in full settlement of his bill Rs. 30 Bring down the balance as on 7th Baisakh and show how he start again on 8th Baisakh with his original sum of Rs. 200. Solution: Analytical Petty Cash Book
Receipt 200 Date 1-1 1-2 1-2 1-3 1-4 1-7 By Balance c/d 1-7 200 30 170 1-8 To Balance b/d To Cash A/C 30 200 L.F Particulars To Cash A/C By Postage A/C By Stationery By Tax Hire A/C By Postage & Telegram By Ganesh A/C V. No. Total Payment 10 40 50 40 30 170 40 Station ery Postage Telegram 10 40 50 40 30 50 50 30 Convey ance Ledger Accounts

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Teaching Manual, Accountancy,, Grade XI 3.3. Bank Reconciliation Statement: 3.3.1. Meaning and Concept When a firm or person deposits money into the bank, it enters the transaction in the debit side of the bank column of the cash book. Similarly for withdrawn of money from a bank, it enters the transaction in the credit side of the bank column of the cash book. In the same way the bank also maintains ledger account in the name of its customers. Such a ledger records payments as well as deposits and other charges for the period. The bank also provides a copy of the customer account in deposits and other charges for the period. The bank also provides a copy of the customer account in the bank ledger to its customers, which is known as Bank Statement of Pass Book. The bank statement may be provided at regular intervals or demand. As the same transaction is entered in both pass book and bank column of the cash book. The balances shown by both books should be equal on a stated date. But usually these two balances do not agree due to various reasons. For the purpose of adjusting and testing the accuracy of those balances do not agree due to various reasons. For the purpose of adjusting and testing the accuracy of those balances a statement should be prepared which is called bank reconciliation statement. 3.3.2. Causes for the Difference in Balance of Bank Dash Book and Pass book. The main reason for difference in the balance are: (i) Cheques issued but not presented for payment. (ii) Cheques deposited but not collected. (iii) Bank charges not entered in the cash book. (iv) Interest on overdraft not recorded in the cash book. (v) Interest credited by bank but not entered in the cash book. (vi) Amount directly deposited into bank by debtors. //62//

Teaching Manual, Accountancy,, Grade XI (vii) Dividend collected by bank but not recorded in the cash book. (viii) Insurance premium paid by bank but not recorded in the cash book. 3.3.3. Specimen of Bank Reconciliation Statement. On the basis of the bank balance of cash book. Bank reconciliation statement is formulated through the following method: Bank Reconciliation Statement As at Particulars Rs. Rs. Bank Balance as per Cash Book xxx Add : [Transaction having the effect of higher balance in the Pass Book] xxx Cheque deposited into the bank, but not recorded in Cash Book xxx Cheque issued but not yet presented interest for xxx deposit allowed in pass book only Bills receivable directly collected by Bank xxx Direct payment made by a customer into bank xxx but not recorded in cash book xxx Cheque issued and returned on technical ground A wrong credit given by Bank in pass book Rectification of errors in cash book: xxx xxx Under casting, carry forward of shorter balance, xxx short debit, excess credit etc. xxx Less: [Transaction having the effect of lower balance xxx in Pass Book] xxx Cheque received and recorded but not sent to bank xxx Cheque deposited but not yet collected xxx

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Teaching Manual, Accountancy,, Grade XI Bank charges debited in pass book xxx Cheque deposited for collection, returned, xxx dishonoured and recorded in pass book only xxx Discounted bill dishonoured and recorded in xxx xxx cash book Direct payment made by bank A wrong debit given by bank in pass book Rectification of errors in Cash Book: Overcasting, carry forward of excess balance, excess debit, short credit etc. Balance as per pass book In case of the statement prepared from the balance of pass book, all the added items above should be subtracted and vice versa. In such a case, the statement ascertains the bank balance of cash book. Overdraft: The bank balances shown by cash book may be debit or credit balance. The debit bank balance denotes that there is some cash in the customer's account in the bank. But if it is credit balance, it shows that the customer is drawing more than deposited amount which can be described as overdraft. Such a facility is not provided by bank to all its customers and if provided that also to certain limit only which has been already fixed by the bank. Thus the facility provided by a bank to its customers to draw from his account over and above its balance, up to a limit as agreed upon is known as overdraft. Bank pass book will then show a credit balance and cash book will show a credit balance in case of an overdraft. On the basis of the credit balance of cash book or overdraft, the bank reconciliation statement is formulated in the following method: Bank Reconciliation Statement As at

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Teaching Manual, Accountancy,, Grade XI Particulars Overdraft as per cash book Add : Cheque deposited but not credited Cheque entered into cash book but not sent to bank Interest, bank charges and commission etc. charged by bank Direct payments of insurance premium, subscriptions, bills payable etc. made by bank Cheque issued and presented but not entered in the cash book Rectification of error in cash book: Overcastting, carry forward of excess balance, excess debit, short credit etc. A wrong debit given by bank in pass book Less: Cheque issued but not presented Direct deposited by a customer into bank Interest on deposit credited by bank Interest, dividend, bills receivable etc. Collected by bank Cheque issued and returned on technical ground A wrong credit given by bank in pass book Rectification of error in cash book: Undercasting, carry forward of short balance, short debit, excess credit etc. Balance as per pass book In case of preparing a statement from the overdraft of pass book, the transaction added in the above statement needs to be subtracted and those which are subtracted should be added in such a case, the balance of cash book is ascertained with the help of bank reconciliation statement. //65// Rs. Rs.

Teaching Manual, Accountancy,, Grade XI Illustration Following information are given to you: Bank balance on Ashadh 31, as per cash book Rs. 2,500 Cheque issued but not yet presented for payment Rs. 2,000 Payment made by the bank as per standing instruction: Life insurance premium Rs. 2,100 Electricity charge Rs. 290 Cheque paid into the bank but not yet cleared and credited Rs. 5,000 Interest on investment collected and credited by the bank but not shown in cash book Rs. 500 Required: Bank Reconciliation Statement showing balance as per Pass Book. Solution: Bank Reconciliation Statement As at 31st Ashadh Particulars Bank Balance as per Cash Book Add : Cheque issued but not presented Interest on investment collected and credited by bank

Rs.

Rs. 2,500

2,000 500

2,500 5,000

Less: Payment made by bank: Life insurance Electricity charges Cheque paid into bank but not credited Bank overdraft as per pass book

2,100 290 5,000 7,390

2,390

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Teaching Manual, Accountancy,, Grade XI Illustration The following particulars are given: (i) Bank overdraft as per as book Rs. 20,000 (ii) A Cheque deposited per bank statement but not recorded in the cash book Rs. 1,000 (iii) Debit side of the bank column short Rs. 100 (iv) Cheques for Rs. 5,000 deposited but collected as per bank statement Rs. 4,000 (v) A party's cheque returned dishonoured as per the bank statement Rs. 500 but not recorded in cash book. (vi) Bills collected directly by bank Rs. 3,000 (vii) Bank charges recorded twice in the cash book Rs. 25 (viii) Cheque deposited but not yet collected by bank Rs. 2,000 (ix) Cheque issued but not yet presented Rs. 1,275 Solution: Bank Reconciliation Statement as on Particulars Rs. Rs. 20,000 Bank Overdraft as per pass book Add : Cheque deposited but not recorded in cash book 1,000 Undercast of debit side on cash book 100 Bills collected by bank 3,000 Bank charged recorded twice in cash book 25 Cheque issued but not presented 1,275 5,400 25,400 Less: Cheques for Rs. 5,000 deposited but collected as per bank statement Rs. 4,000 Cheque dishonoured & recorded in pass book Cheque deposited but not collected Bank overdraft as per cash book 1,000 500 2,000

3,500 21,900

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Teaching Manual, Accountancy,, Grade XI E. Evaluation Scheme No. of Question 1 2 2 Questions F. Some Model Questions: Type of Question Problem solving type of question based on preparation of cash book Problem solving type of question based on preparation of bank reconciliation statement Marks

6 6 12 Marks

Problem 1: Record the following transactions in cash book with cash and bank column: 20XX. Baisakh 1. Opening balance of cash Rs. 50,000 2. Opened bank account with Rs. 25,000 3. Cash with drawn from bank for personal use Rs. 5,000 4. Cash withdrawn from bank for office use Rs. 4,000 5. Rent paid by cheque Rs. 3,000 6. Cheque received from Koirala Rs. 5,000 and deposited into bank 7. Cheque received from Acharya Rs. 3,000 8. Cheque received from Acharya deposited into bank Rs. 3,000 9. Purchased goods Rs. 10,000, Rs. 6,000 paid by cheque and balance in cash 10. Cash deposited into bank Rs. 3,000 Problem 2: Following cash and bank transactions of a firm are given: Magh 1. Cash in hand Rs. 20,000, Bank overdraft Rs. 5,000 2. Sold goods for cash Rs. 15,000 //68//

Teaching Manual, Accountancy,, Grade XI Cash deposited into bank Rs. 10,000 Goods purchased and paid by cheque Rs. 5,000 Crossed cheque received from Mr. A, Rs. 10,000 and discount allowed him Rs. 200 6. Cash paid to Mr. B Rs. 5,000 and discount allowed by him Rs. 100 7. Made a cash purchase of Rs. 2,000 after receiving a discount of Rs. 100 8. Drew Rs. 2,000 for office use and Rs. 1,000 for personal use 9. Mr. C paid Rs. 10,000 in full settlement of Rs. 10,500 10. Received a cheque from Mr. D and deposited same into bank Rs. 15,000 11. Rent paid by cheque Rs. 5,000 12. Salary paid by cheque Rs. 10,000 Required: Triple column cash book for the month Magh. Problem 3: Prepare a petty cash book in analytical form from the following information on the imprest system: Baisakh 1. Received Rs. 1,000 for petty cash 2. Purchased postage stamps Rs. 80 Purchase ink, pen & paper Rs. 120 Paid taxi fare Rs. 80 3. Repairs charge paid Rs. 150 Paid for postage & telegram Rs. 80 4. Paid for refreshment Rs. 120 5. Paid Mr. A, a creditor Rs. 40 Purchased stationery Rs. 40 Paid carriage Rs. 30 6. Paid for postage Rs. 20 Lunch Rs. 80 7. Paid for taxi fare Rs. 70 //69// 3. 4. 5.

Teaching Manual, Accountancy,, Grade XI Problem 4: From the following particulars ascertain the bank balance as would appear in the pass book as on 31st, December, 2001: (i) The bank balance (debit) as per cash book on the date was Rs. 12,000 (ii) Cheque issued but not presented for payment before 31st, Dec. amounted to Rs. 3,000 (iii) Cheque paid into the bank, but not cleared and credited before 31st, December, 2001 were Rs. 5,000 (iv) Bank charges for the above period also debited in the pass book which amounted Rs. 100 (v) Interest on government securities collected by the bank and credited in the pass book amounted to Rs. 4,000 (vi) Interest Rs. 200 credited by the bank but not entered in the cash book (vii) Cheque issued and presented for payment but not recorded in cash book Rs. 5,000 (viii) There is a wrong entry made in the debit column of pass book Rs. 1,000 (ix) Cheque of a customer collected by bank but omitted to be recorded in cash book Rs. 1,800. Problem 5: On checking trader's cash book with the bank statement for the month April, you find the following: (i) On 30th April, pass book disclosed a credit balance of Rs. 15,000 but cash book disclosed a debit balance of Rs. 16,800. (ii) Cheque amounting Rs. 1,800 were deposited on 28th April but they had not been collected. (iii) A cheque of Rs. 1,500 issued on 25th April was paid by the bank on 5th May. (iv) Bank paid life insurance premium of Rs. 450 but it was not entered in the cash book.

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Teaching Manual, Accountancy,, Grade XI A customer deposited Rs. 450 direct into bank account, but this was not entered in the cash book. (vi) The banker credited the account with interest Rs. 450 but no entry was made in the cash book. (vii) The credit side of bank column of the cash book was overcast by Rs. 300. (viii) A party's cheque returned and dishonoured as per the bank statement only Rs. 2,250. Required: Bank reconciliation statement as on 30th April. Key Terms Used in the Unit: Bank book, Cash book, Endorsement of cheque, Dishonour of cheque, Cash transactions, Bank transactions contra entry, Discount allowed, Discount received, General crossing, Special crossing, Imprest system, Bank reconciliation statement, Bank overdraft. --G. (v)

Unit 4 Trial Balance and Accounting Errors

Introduction: This unit deals with the preparation of an unadjusted Trial Balance and various issues relating to accounting errors and their rectification. The basis of double entry bookkeeping is that each debit entry must be followed by a credit entry and vice-versa. It means that if individual debit entry must be equal to individual credit entry, then the total debit entries must be equal to total of credit entries. We need to check whether it is the case or not. Hence, to see whether all debit entries have the equal corresponding entries, a statement is generated which is known as a Trial balance. The accounting system contains a built-in warning technique which indicates that certain types of errors have been made. That warning is the disagreement between the debit totals and the credit totals of trial balance. If the trial balance does not have equal debit and credit

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Teaching Manual, Accountancy,, Grade XI

totals, there is an error somewhere in the records. Errors are those mistakes that are normally committed unknowingly either due to lack of accounting principle or owing to oversight. Mistakes made out of lack of knowledge or carelessness affecting books of accounts are known as accounting errors. But mistakes made intentionally are called frauds. The unit is important as the agreement of a trial balance is an indicator the records are error free and the trial balance is taken as the starting point for preparation of final accounts. At the same errors are bound to happen and it is critical that they are rectified. Therefore, study of errors and the ability to rectify them is one the most important competencies required of accounting students. However, students need to be cautioned that agreement of a trial balance is not a conclusive proof that all records are correct. Some errors could compensate each other and yet tally the Trial Balance.

Prerequisite:
The knowledge of accounting concepts, conventions, principles affecting the accounting records and competence in passing journals and preparing ledgers are essential to fully understand the unit.

Objectives:
The following are the learning objectives of the Unit: 1. Be able to discuss the meaning and definition of Trial Balance. 2. Be able to state the objectives and importance of Trial Balance. 3. Be able to prepare Trial Balance from the given ledger account balances. 4. Be able to explain the meaning and types of accounting errors. 5. Be able to identify the errors not revealed by the trial balance and errors revealed by the trial balance. 6. Be able to pass the correction entries before and after preparing trial balance for both one sided and two sided errors. 7. Be able to explain the meaning and utility of Suspense Account. 8. Be able to prepare and dispose the Suspense Account.

Content Areas of the Unit

The following are the content areas of the Unit and their suggested teaching hours. The teaching hours allocated could vary depending upon a teachers style of teaching. Hence, they could be suitable modified but limiting the total hours to 10 hours:

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Teaching Manual, Accountancy,, Grade XI

Teaching SN 1. 2. Content Areas of the Unit Hours The concept, objectives and preparation of unadjusted trial balance The meaning and types of accounting errors, errors disclosed and not disclosed by trial balance, rectification of errors before and after preparation of trial balance. The suspense account, its meaning, utility, and preparation of suspense account. 2 6

3.

2 10 Hours

Description of the content: Meaning and Definition of Trial Balance

Trial balance is a statement prepared to check the arithmetical accuracy of the accounting entries made to record the transactions and events. According to R. N. Carter trial balance is the list of debit and credit balances, taken out from ledger; it also includes the balances of cash and bank taken from cash book. Objectives and importance of Trial Balance There are mainly three objectives of preparing a trial balance which are: 1. Prove the arithmetical accuracy of Ledger Accounts 2. Assists in location of errors 3. Helps the preparation of the Final Accounts It is important to prepare the trial balance for the following reasons: 1. In order to ensure that the accounting entries have been posted correctly and the accounts balances have been arrived at accurately preparation of Trial Balance is necessary.

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Teaching Manual, Accountancy,, Grade XI

2. Trial Balance provides an overall picture of all the ledger accounts as it is a summary of all ledger accounts. 3. The Trial Balance is the starting point for preparing the financial statements of an organization. 4. It helps to identify income, expense, assets and liabilities easily since debit and credit balances are arranged separately. Preparation of Trial Balance Trial Balances are internal documents generated to help check completeness and accuracy of ledger accounts. It is usually prepared by listing the ledger balances arranging the debit and credit balances. All assets, expenses, losses & drawings accounts will fundamentally have debit balances and they should be entered in the Debit column of the Trial Balance. All liabilities, capital, revenue & gain accounts will essentially have credit balances and they should be entered in the credit column of the Trial Balance.

Illustration 1
The following balances are extracted from the books of Chandralal & Co., as on 30 Chaitra 2063. Capital Drawings Plant and Equipments Salaries and Wages Investments Loan (Cr.) Bank Loan Commission Sales Revenue Required: An unadjusted Trial Balance 450,000 Accounts Receivables 45,000 Accounts Payables 585,000 Notes Payable 36,000 Rent 225,000 Interest Received 337,500 Cash in Hand 6,000 Office Furniture 9,000 Purchases 666,000 360,000 270,000 45,000 9,000 13,500 24,000 90,000 405,000

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Teaching Manual, Accountancy,, Grade XI

Solution: S/N 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Account Head Drawings Plant and Equipments Salaries and Wages Investments Loan (Cr.) Commission Accounts Receivables Rent Cash in Hand Office Furniture Purchases Capital Bank Loan Sales Revenue Accounts Payables Notes Payable Interest Received 1,788,000 Meaning and Types of Accounting Errors Accounting Errors are those mistakes that are normally committed unknowingly either due to lack of accounting principle or owing to oversight affecting the books of accounts. Trial Balance is a built-in warning system. On its disagreement it is considered that certain types of errors have been made. However, a tallied trial balance does not necessarily mean that there are no accounting errors. There may be several accounting errors in spite of a tallied trial balance. There are mainly two types of errors: the errors of principle and clerical error. Errors of principle are those errors that occur due to the violation of fundamental principle of accounting. 9,000 360,000 9,000 24,000 90,000 405,000 450,000 6,000 666,000 270,000 45,000 13,500 1,788,000 Ref. Debit 45,000 585,000 36,000 225,000 337,500 Credit

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Teaching Manual, Accountancy,, Grade XI

Clerical Errors: There are different stages to be followed while recording the financial transactions in the books of account. The errors of numbers which are also termed as clerical errors are the mistakes occurring at different stages of record keeping. The different types of clerical errors are discussed below: Errors of Omission: These are the errors which arise when any transaction is completely or partly omitted to be recorded in the books. The whole entry can be omitted due to oversight, loss of vouchers or invoices etc. Error of Commission: This type of error can be committed throughout the whole entry, involving both aspects, or in part, any one aspect. The error of commission include wrong entries, wrong posting of numerical figures, posting on wrong side, wrong totalling, wrong carry forward, entering the same transaction twice etc. Compensating Errors: These are errors arising from excess debits or under debits of accounts being neutralized by the excess credits or under credits to the same extent of some other account. In other words the net effect of these types of errors will be zero. Since the errors in one direction are compensated by errors in another direction, arithmetical accuracy of the trial balance is not at all affected regardless of such errors. Transposition Errors: The transposition errors arise due to reversal of digits while posting or copying the ledger account balances in the trial balance. Recording Rs. 38 for 83, or recording Rs. 223 for Rs. 232 are the examples of transposition errors. Sliding Errors: if the error arises due to incorrect placement of decimal point, it is called sliding error. In other words, a slide is the entry of a number with an incorrectly placed decimal point, such as recording Rs.3.17 for Rs. 317 or Rs. 5,500 for 550. Errors revealed by the Trial Balance and errors not revealed by the Trial Balance: Errors disclosed by disagreement of Trial Balance 1. 2. 3. 4. 5. Omission of Posting Omission of an account while preparing a Trial Balance Omission of casting Omission of carry forward Wrong Posting

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Teaching Manual, Accountancy,, Grade XI

6. 7. 8. 9. 10. Bringing the balance of an account to the wrong side of the Trial Balance Wrong Totalling Wrong carry forward Wrong balancing Double posting to one account

Errors not disclosed by disagreement of Trial Balance 1. Errors of Principle 2. Errors of complete Omission, i.e., omission of entry altogether from subsidiary books 3. Writing wrong amount in subsidiary books 4. Compensating errors 5. Entering a transaction in two subsidiary books 6. Posting an amount to the correct side but with wrong amount

Rectification of errors:
Most of the correction entries are recorded in the journal proper as they cannot be recorded in the respective books either because they have been closed already or they do not qualify for such recording. Before starting to rectify the errors, it is important to know whether the errors given, are located before or after preparing a Trial Balance. The errors located before preparing the Trial Balance will have to be rectified without using a Suspense Account. But, for rectifying the errors located after preparing a Trial Balance, Suspense Account has to be used. This is under the presumption that the Trial Balance prepared with errors would not tally and a Suspense Account would have been opened to transfer the difference. When the question is not clear about the timing of location of errors, it is to be assumed that the errors have been disclosed after preparing the trial balance. ILLUSTRATION 2: (ONE SIDED ERROR BEFORE PREPARING A TRIAL BALANCE) The following errors were located before preparing a Trial Balance:

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Teaching Manual, Accountancy,, Grade XI

a. The Purchase Book was under cast by Rs. 142. b. The debit side of Naresh, a debtor, is overcast by Rs. 14,000. c. The total of Sales Book carried forward Rs. 20,000 less. Required: Journal Entries to rectify the errors

Solution:
a. Debit Purchase Account with Rs. 142 as "To Under casting of Purchase Book for the month ......" b. Credit Naresh Account with Rs. 14,000 as " By Over casting on ........(date)" c. Credit Sales Account with Rs. 20,000 as "By wrong carry forward of Sales Book on ......(date).

Illustration 3: (TWO sided error before preparing a Trial Balance)

The following errors were discovered in the books of Mr. Tamang before preparing a Trial Balance: a. Rs. 4,500 was debited to Printing & Stationery when it was the sum actually paid on purchase of a Filing Cabinet. b. A credit sale of Rs. 10,000 to Mr. Strong was not recorded at all. c. Rent Rs. 2,500 for Mr. Tamang's residence was debited to the Rent account. Required: Journal Entries to rectify the errors

Solution:
a. Office Equipment A/C....Dr To Printing & Stationery A/C (Being rectification of the wrong debit to Printing & Stationery Account instead of Office Equipment) b. Strong's A/C ..... Dr 10,000 4,500 4,500

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Teaching Manual, Accountancy,, Grade XI

To Sales A/C (Being Sales vide Bill No.... previously unrecorded now brought into record) c. Drawings A/C .... Dr To Rent A/C (Being cancellation of wrong debit given to Rent A/C and correctly debiting Drawings A/C) 2,500 2,500 10,000

Meaning and Utility of Suspense Account This is a dummy account opened by an accountant to transfer the difference in trial balance when he is in a hurry to close the books of accounts. Suspense account is called as a dummy account because it is opened not because of any transaction but for convenience. Apart from using the Suspense Account as a dummy account to tally the Trial Balance, this account is also used to treat some uncertain and incomplete transactions till there is certainty about their treatment. Preparation and Disposal of Suspense Account Suspense Account would start with a debit balance, if the Trial Balance was short on the debit side and vice-versa. A suspense account is opened with the difference in trial balance and it will be used to complete the double entry. The amount standing to the debit or credit of the Suspense Account represents the net effect of the one-sided errors. Therefore, when such errors are corrected, there should be no balance left in the Suspense Account and this account stands closed. But if the suspense account cannot be closed, the balance is taken to the Balance Sheet on the asset side if there is a debit balance or on the liability side if there is a credit balance.

Illustration 4: Rectification of errors after preparing a trial balance and Suspense Account
The following errors were identified after preparing the trial balance and the excess of debit of Rs 570 was placed in a Suspense account: a. Purchase Book was under cast by Rs. 250. b. Rs. 500 received from Kapil was debited to his account

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Teaching Manual, Accountancy,, Grade XI

c. An amount of Rs. 750 for a credit sale to Gopal correctly entered in the Sale Book but has been debited to his account as Rs. 570. Required: Journal entries to rectify the errors Suspense account

Solution:
Errors a Particulars Purchase A/c ... Dr To Suspense A/c (Being under cast of Purchase Book now rectified) b Suspense A/c ... Dr To Kapil A/c (Being rectification of the wrong debit instead of crediting Kapil's A/c) c Gopal's A/c ... Dr To Suspense A/c (Being Gopal's account debited less by 180 [750570] now rectified) Suspense Account Date Particulars To Kapil A/c Amount 1,000 Date Particulars By Difference in Trial Balance By Purchase By Gopals A/c 1,000 570 250 180 1,000 Amount 180 180 1,000 1,000 LF Debit 250 250 Credit

Evaluation Scheme:
The competency achieved by a student in this Unit will be evaluated on the following basis:

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Teaching Manual, Accountancy,, Grade XI

No. of Questions 1 2 Type of Question Theory Question with exact requirement or an answer consisting of 3 to 5 effective sentences Problem Solving type of questions based on preparation of Trial Balance, Rectification of errors with or without preparing a Suspense Account Marks 2 Marks 4 Marks

2 Questions

6 Marks

Key Terms used in the unit:

Adjusted Trial Balance, Adjustments, Clerical Errors, Compensating Errors, Trial Balance, Correction Entries, Unadjusted Trial Balance, Suspense Account, Errors of Omission, Errors of Principle, Compensating Errors, Errors of Commission, Post Closing Trial Balance, Accounting Errors, Final Accounts, Balance, Clerical Errors, Transposition Error, Slide Error, Rectification of Errors.

Unit 5 Final Accounts

Introduction:
This unit covers the concept of capital and revenue items, passing of the adjusting entries, the preparation of an adjusted Trial Balance, and the preparation of final accounts. An expenditure of which the benefit is enjoyed for many years to come is a capital expenditure. Revenue expenditures are those expenses whose benefits expire within a year or so and those expenses, which are recurring in nature. Deferred Revenue Expenditure or losses are those, which are in the nature of revenue but have a bearing on the profit of a business for several years. Journal Proper records all those transactions and events outside the realm of the special journals prepared by a business. The original balances in the Unadjusted Trial Balance are

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adjusted for the debit and credit amounts in the adjusting entries. The Adjusted Trial Balance is totaled to check its agreement. Trading account is prepared to show the profit made on selling the goods, which were purchased earlier for re-sale purposes. The profit so calculated is known as gross profit.

Profit and Loss Account is the second part of the Income Statement. It is prepared to list the various expenses, losses, gains, and income so that the Net Profit is arrived at.
Balance sheet is a statement prepared to show the financial position of a business. Essentially, it shows the measurement of assets, liabilities, and equity of a business entity on a given date which means that the reported assets are owned or are in control of the entity on that particular date and the same case also is applicable with reported claims against those assets, i.e. all liabilities and equity are effective on that only.

Prerequisite:
The knowledge of all accounting concepts, conventions, principles affecting the accounting records and competence in passing journals, preparing ledgers and the ability of preparation of Trial Balance are essential to fully understand the unit.

Objectives:
The following are the learning objectives of the Unit: 1. Be able to explain the concepts of capital and revenue items (expense, revenue, profit, loss, and reserve) and differentiate between them 2. Be able to discuss the concept of journal proper, its format, and its uses. 3. Be able to pass opening entry for both new business and existing business, and closing entries 4. Be able to pass entries for the purchase or sale of fixed assets on credit, prepaid expenses, accrued expenses, unearned revenue, and accrued revenues, drawings made in other forms than cash, for goods distributed as free samples, for bad debt, for depreciation.

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5. Be able to prepare a simple worksheet till an adjusted trial balance.
6.

Be able to prepare the Trading, Profit and Loss Account, and a Balance Sheet from a given Trial Balance with adjustments.

Content Areas of the Unit

The following are the content areas of the Unit and their suggested teaching hours. The teaching hours allocated could vary depending upon a teachers style of teaching. Hence, they could be suitable modified but limiting the total hours to 36 hours: Teaching SN 1. Content Areas of the Unit Hours The meaning and concept, types and difference between capital and revenue: receipts, expenditure, losses, profit, and reserves. The concept, importance, advantages and preparation of Trading Account including the closing entries. The concept, advantages and preparation of Profit and Loss Account including the closing entries clearly making a difference between gross profit and net profit. The concept, importance, objectives, and preparation of a Balance sheet showing the assets, liabilities and owners equity with an ability to marshal the assets and liabilities. The concept, importance, and passing of adjusting entries and the preparation of an Adjusted Trial Balance. The preparation of final accounts with or without following adjustments: outstanding expenses, prepaid expenses, advance income, accrued income, depreciation, appreciation, closing stock, bad debts, loss of goods, provision for bad debt, provision for discount on debtors, drawings in cash and in kinds, interest on loans, and investments. 4

2. 3.

2 2

4.

5. 6.

6 20

36 Hours

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Teaching Manual, Accountancy,, Grade XI Description of the content:

Concepts of capital and revenue items (expense, revenue, profit, loss, and reserve) and difference between them Capital expenditures are those, which provide a long-term benefit because the expenditures result into purchase of a fixed asset, increase the earning capacity or reduce the need for expenses in the future. Revenue expenses are those recurring expenses which are incurred to maintain and up-keep the long-term assets, and are incurred for managing the day-to-day affairs of a business. Deferred Revenue Expenditures are those which are in nature of revenue but are applicable either wholly or in part to the future years. Since the revenue expenses are spread (deferred) over a number of years in the future, they are known as deferred revenue expenditures. The need to defer may arise for maintaining some parity of cost and benefit or simply not to overburden a single years profit and loss account. Capital Receipts are amounts of money received by sale of fixed assets or investments or obtained by way of loans. In other words, a capital receipt is a financing activity, which results into investment in the business either by the owner or by way of loans or simply by way of disposal of an item of capital in nature. On the other hand, revenue receipt or income is money received from the normal profit-making activities of a business. For a business that sells goods, the value of the sales will be the major item of revenue. For other service providing business, the fees for their services rendered are their revenue receipts. Capital profits are earned on transactions involving the items of capital in nature. The profits made by sale of fixed assets or premium earned while issuing shares and debentures are the examples of capital profits. Any residual profit made on forfeiture of shares is also considered as capital profit. Revenue profits are all those gains and profits made in the ordinary course of business operations. Capital loss arises when fixed assets are sold at a value less than the book value or are destroyed by fire or accident or earthquake. These also arise when the shares and debentures are issued at a discount. On the other hand, revenue loss is the loss of revenue receipt or a loss of inventory or any loss incurred in the normal course of running the business or incidental to running of the business. Capital reserve arises out of transactions other than the regular business. They are of capital in nature. These reserves come into existence by transfer of capital profits like gain on sale

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of fixed assets, premium on issue of shares, and gain on forfeiture of shares remaining after adjusting the loss on re-issue of such shares. Revenue reserves are those created by transfer of profits out of divisible profits. The examples of revenue reserves are General Reserve, Reserves for Redemption, Investment Fluctuation Reserve, and Dividend Equalization Reserve. Meaning of journal proper, passing of adjusting entries and preparation of adjusted Trial Balance

Apart from the regular and recurring transactions, there are events and transactions like credit transaction of assets, drawings in goods, adjustments to accounts, opening the books of accounts, closing of the books of accounts especially the temporary accounts of revenues and expenses and rectifications in the vent of errors. The place where such transactions are recorded is known as General Journal the Journal Proper. The ruling of the journal proper is the same as a journal. The reasons for using the journal proper are: To provide primary accounting record for non-regular transactions To keep track of the non-regular transactions To reduce the risk of fraud by ensuring that only authorised transactions enter the accounting system To reduce the risk of errors while posting non-regular transactions To ensure that the entries have been captured, even if it happens to be very rare.

The opening entries are passed by a new business or used by an old business to open its books of accounts in the new accounting year; thus the name, opening entries. Purchase and sale of goods in trade in cash are recorded in the Cash Book and if they are purchased or sold on credit, record is made in the purchase book and sales book. However, the purchases or sales of assets on credit are not eligible to be recorded in the Purchase Book or Sales Book, the books are used for goods-in-trade only. For such transactions, journal entries need to be passed in the journal proper. Accountants often use the terms deferrals and accruals to describe the adjusting process. A deferral is the postponement of the recognition of an expense already paid //85//

Teaching Manual, Accountancy,, Grade XI or revenue received in advance. Prepaid expense and unearned revenues are examples of deferrals. An accrual is the recognition of a revenue or expense that has arisen but not recorded. As their names imply, accrued expenses and accrued revenues are examples of accruals. At times, the owner can make drawings of items other than cash or use the services of the business for personal use. These types of drawings are to be transferred to Drawings Account and credit given to respective accounts involved. Goods can be distributed as free samples with a view to advertise the product and goods can also be sent to customers under "sale or return basis" subject to the satisfaction of the customer. Such events need to be accounted for but they do not qualify to be recorded in any other books of accounts; therefore, they are entered in the journal proper. Selling goods on credit has become almost unavoidable in the history of modern marketing. It is quite common to find traders in a tricky situation of losing customers if denied credit and of losing money because of not receiving the dues from the debtors. Moreover, there is no point in keeping alive the ledger accounts of those customers who have not paid their dues. It is important that the organisation keeps track of aging debtors and periodically writes off those accounts as unrecoverable or forces the debtors to pay. The debts, which are considered irrecoverable, are said to be the bad debts. The debt, which has been considered as bad debt, is no longer a receivable amount; it is written off by way of a journal entry in the Journal Proper. Most assets provide the benefit for a limited time frame and hence after a certain period, depending upon the nature of the asset, are reduced to scrap. Every year passing by, reduces the intrinsic value of the asset. This reduction in the value of the asset each year is a loss of an inherent expense due to having the asset and must be accounted for in the firms books. This loss/expense is literally termed as depreciation. Closing Entries are used to transfer the end-of-period balances in the revenue, expense, and withdrawals accounts to the owner's capital account thereby establishing correct end-of-period balance in the owner's equity account. However, //86//

Teaching Manual, Accountancy,, Grade XI not to overload the equity account with so many entries, a temporary account known as Income Summary is opened. The closing entries also cause the Revenue, Expense, and Withdrawals accounts to begin each new accounting period with zero balances.
Accountants need to make adjustments to the various accounts appearing in the Trial Balance or bring into books of accounts some information, which is not yet recorded, in the books. There are a number of adjustments to be made while finalising the financial statements but our discussion will be limited to the following adjustments (limited by the Curriculum): 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Prepaid expenses Accrued expenses Unearned revenue Accrued revenue Drawings in cash and in kind Bad debts and its provision Depreciation and Appreciation Closing stock Abnormal loss of goods Provision for discount on debtors Provision for discount on creditors Interest on capital Interest on loans Interest on investments

Taking the unadjusted trial balance and putting in all the adjustments as additional columns can prepare the adjusted trial balance. The preparation involves a worksheet, which devotes two columns for the unadjusted ledger balances, another two for the adjustments, and last two for the adjusted trial balance. In all, a worksheet can have 6 columns enabling us to prepare an adjusted trial balance.
Meaning of Adjusted Trial Balance (ATB) Adjusted Trial Balance is the extension of the traditional trial balance to incorporate the adjustments required in the final accounts to get a preview of the Financial Statements. Adjusted Trial Balance is a schedule of data showing the relationship among (1) unadjusted trial balance and (2) adjusting entries. It allows the accountants to assemble all the ledger

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account balances and adjustment information, all in one place. Format of an Adjusted Trial Balance The following is the format:
Part 1 Trial Balance Dr Cr Dr Part 2 Adjustments Cr Dr Part 3 Adjusted Trial Balance Cr

Part 1: It is the unadjusted Trial Balance part. Part 2: It is the adjusting entries part. Two extra columns are provided to write the reference numbers. Part 3: It is the adjusted Trial Balance part. The adjusted Trial Balance can be extended to incorporate the financial statements, which will be known as a Work Sheet. The preparation of an adjusted Trial Balance involves three basic steps, which are as follows:

Step 1:Enter the ledger account balances in the Unadjusted Trial Balance
Enter all the ledger balances classified as Balance Sheet Items and Income Statement Items leaving a few lines blank immediately below the last Balance Sheet items, which are used to add more accounts created during the adjusting process.

Step 2:Enter the adjustments in the Adjustment Columns

The next step is to enter the adjustments in the Adjustment columns numbering each adjustment. Use the space on the left to add new accounts created by the adjusting process (Use different ink colour to differentiate the account heads in the Unadjusted Trial Balance and new accounts created).

Step 3:Prepare the Adjusted Trial Balance

The original balances in the Unadjusted Trial Balance are adjusted for the debit and credit amounts in the adjustment column. The Adjusted Trial Balance is totalled to check its agreement.

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Teaching Manual, Accountancy,, Grade XI Illustration 1

The following unadjusted trial balance is provided to you: Account Heads Cash Accounts Receivable Supplies Prepaid Insurance Land Building Accumulated Depreciation Plant Accumulated Depreciation Notes Payable Accounts Payable Unearned Rent Capital Reserves Drawings Consulting Revenue Advertising Wages Supplies Expenses Depreciation Expenses (Building) Depreciation Expenses (Plant) Utility Expenses Insurance Expenses Interest Expenses Dr 50,000 14,000 4,000 6,000 103,000 80,000 4,000 80,000 2,000 60,000 8,000 12,000 120,000 40,000 30,000 320,000 8,000 100,000 12,000 3,000 4,000 36,000 30,000 6,000 566,000 Cr

566,000

Adjustments: a. Consulting Revenue earned but not yet billed Rs 2,000 b. Supplies consumed during the year Rs 1,000 c. 50% of the un-earned rent is earned during the year d. One-third of un-expired Insurance has expired during the period e. Unpaid wages during the period is Rs 4,000 f. Interest due is Rs 1,000 Required: A six (6) Column Work Sheet

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Teaching Manual, Accountancy,, Grade XI Solution:

PART 1 Trial Balance Cash Accounts Receivable Supplies Prepaid Insurance Land Building Accumulated Depr.Bldg Plant Accumulated Depr.- Plant Notes Payable Acc Payable Unearned Rent Capital Reserves Drawings Wages Payable Interest Payable Consulting Revenue Advertising Wages Supplies Expenses Depr. Expenses (Blg) Depr. Expenses (Plant) Utility Expenses Insurance Expenses Interest Expenses Rent Revenue Totals 566,000 566,000 16,000 8,000 100,000 12,000 3,000 4,000 36,000 30,000 6,000 d f 2,000 1,000 c 6,000 16,000 e b 4,000 1,000 320,000 30,000 e f a 4,000 1,000 2,000 8,000 104,000 13,000 3,000 4,000 36,000 32,000 7,000 6,000 573,000 80,000 2,000 60,000 8,000 12,000 120,000 40,000 30,000 4,000 1,000 322,000 c 6,000 Dr 50,000 14,000 4,000 6,000 103,000 80,000 4,000 80,000 2,000 60,000 8,000 6,000 120,000 40,000 Cr a Dr 2,000 b d 1,000 2,000 Part 2 Adjustments Cr Part 3 Adjusted Trial Balance Dr Cr 50,000 16,000 3,000 4,000 103,000 80,000 4,000

573,000

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Teaching Manual, Accountancy,, Grade XI Illustration 2 (Adjusting Entries using an ATB) The following work sheet is prepared by Mahajan and Seth Pvt. Ltd: Work Sheet
PART 1 Trial Balance Dr Cash Accounts Receivable Office Supplies Prepaid Insurance Land Building Accumulated Depreciation Plant Accumulated Depreciation Notes Payable Accounts Payable Unearned Rent Capital Reserves Drawings Wages Payable Interest Payable Service Revenue Advertising Wages Supplies Exp Depreciation Exp (Blg) Depreciation Exp (Plant) Utility Expenses Insurance Exp Interest Exp Rent Revenue Totals 680,000 680,000 28,000 4,000 50,000 6,000 1,500 2,000 18,000 15,000 3,000 d f 2,500 2,500 c 15,000 28,000 689,500 e b 5,000 1,000 255,000 15,000 e f a 5,000 2,500 2,000 4,000 55,000 7,000 1,500 2,000 18,000 17,500 5,500 15,000 689,500 240,000 32,000 80,000 45,000 26,000 c 160,000 20,000 15,000 5,000 2,500 257,000 15,000 8,100 17,400 2,000 3,000 150,000 145,000 62,000 240,000 32,000 80,000 45,000 11,000 160,000 20,000 a 2,000 b d 1,000 2,500 Cr Dr Part 2 Adjustments Cr Dr 8,100 19,400 1,000 500 150,000 145,000 62,000 Part 3 Adjusted Trial Balance Cr

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Teaching Manual, Accountancy,, Grade XI Required Pass the necessary Adjusting Entries Solution: General Journal
S/N Description a Accounts Receivable Service Revenue Accrued service revenue b Supply Expenses Office Supplies Expired office supplies expenses c Unearned Rent Rent Revenue Earned part of the unearned rent d Insurance Expenses Prepaid Insurance Expired part of the prepaid insurance e Wages Wages Payable Accrued wages payable f Interest Expenses Interest Payable Interest accrued and payable ...Dr Account Code LF No. 10 20 30 11 JF 00245 Debit Credit Amount Amount 2,000 2,000 1,000 1,000

...Dr

...Dr

21 40

15,000 15,000

...Dr

31 12

2,500 2,500

...Dr

32 22 33 23

5,000 5,000 2,500 2,500

...Dr

Illustration 3 The following un-adjusted Trial Balance is extracted on 31st March 2005 from the books of Birat Traders: Opening Inventory (1.4.2004) Purchases & Sales Debit (Rs.) Credit (Rs.) 186,000 718,000 1,170,000

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Teaching Manual, Accountancy,, Grade XI

Returns Reserves (1.4.2004) Carriage Inwards 18 % Bank Loan (Secured) Interest on Bank Loan Office Salaries and Expenses Sales Managers Commission Bad Debts Drawings Furniture Land and Building Plant and Machinery Receivables and Payables for goods Cash at Bank Capital 13,000 24,000 50,000 9,000 38,000 4,000 6,000 50,000 89,000 224,000 140,000 105,000 116,000 1,722,000 10,000 60,000

62,000 370,000 1,722,000

Closing Stock was valued Rs. 124,000. Depreciation is 15% on Plant and Machinery.

Required
1. Adjusted Trial Balance Solution: The Adjusted Trial Balance for a trader will pose a problem with regards to adjustments of purchases, returns, and inventory. One method is to include all intermediate calculations in the Work Sheet. The other method is to calculate cost of goods available for sale as a note and show the adjustments in the work sheet. Both methods are shown below.

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Solution (1st Alternative) Adjusted Trial Balance
PART 1 Trial Balance Dr Inventory (Beginning) Purchases & Sales Returns Carriage Inwards Cost of Goods Sold Inventory at End Reserves 18 % Bank Loan Interest on Loan Office Salaries etc Managers Com. Bad Debts Drawings Furniture Land and Building Plant and Machinery Receivables & Payables Cash at Bank Depreciation Exp Accumulated Dep Capital 1,722,000 370,000 1,722,000 1,073,000 1,073,000 9,000 38,000 4,000 6,000 50,000 89,000 224,000 140,000 105,000 116,000 b 21,000 b 21,000 62,000 60,000 60,000 50,000 50,000 9,000 38,000 4,000 6,000 50,000 89,000 224,000 140,000 105,000 116,000 21,000 21,000 370,000 1,733,000 1,733,000 62,000 186,000 718,000 13,000 24,000 c a 918,000 124,000 1,170,000 c 10,000 c 10,000 c a 24,000 124,000 794,000 124,000 718,000 13,000 1,170,000 Cr Part 2 Adjustments Dr c Cr 186,000 Part 3 Adjusted Trial Balance Dr Cr

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Notes: The new accounts created by the adjustments are shown in bold letters. Cost of goods sold is created by debiting it and crediting Opening stock, Purchases, Carriage Inwards, and debiting purchase returns.
Solution (2nd Alternative) Adjusted Trial Balance PART 1 Trial Balance Dr Sales Sales Returns Cost of Goods Sold Inventory at End Reserves 18 % Bank Loan Interest on Loan Office Salaries etc Managers Com. Bad Debts Drawings Furniture Land and Building Plant and Machinery Receivables & Payables Cash at Bank Depreciation Exp Accumulated Dep b Capital
1,712,000

Part 2 Adjustments Dr 13,000 c a 124,000 13,000 a 124,000 Cr Dr

Part 3 Adjusted Trial Balance Cr 1,157,000 794,000 124,000 60,000 50,000 9,000 38,000 4,000 6,000 50,000 89,000 224,000 140,000

Cr 1,170,000 c

13,000 918,000 60,000 50,000 9,000 38,000 4,000 6,000 50,000 89,000 224,000 140,000 105,000 116,000 b 21,000 62,000

105,000 116,000 21,000 21,000

158,000 1,720,000

62,000

21,000 370,000
1,7203,000

370,000
1,712,000 158,000

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Teaching Manual, Accountancy,, Grade XI

Notes: Cost of goods available for Sale: Inventory (Beginning) Purchases Less: Returns Carriage Inwards 186,000 718,000 10,000 708,000 24,000 918,000

Preparation of the Trading, Profit and Loss Account, and a Balance Sheet from a given Trial Balance with adjustments Financial Statements are end-of-the-period accounts prepared to show the profits or loss situation of a business for a period of time (usually one year) and to assess the financial position and cash flow situation as on a particular date, usually the last date of operation. Trading account is prepared to show the profit made on selling the goods which were purchased earlier for re-sale purposes. The profit so calculated is known as gross profit. The word gross is used because the other incomes and expenses not directly related to the purchase of goods and bringing them into our premises are not taken into account. In effect, the typical items associated with Trading Account are Sales, Sales Returns and allowances, Cost of goods sold and any abnormal loss of inventory. The trader will not be satisfied with the calculation of gross profit earned during the accounting period. He needs to know the final profit or loss of the business. With this objective in view, a Profit and Loss A/c is prepared. The profit or loss so calculated is the amount the business has earned after taking into consideration all the running expenses and any other items of income. This is known as the Net Profit. The typical items taken to Profit and Loss A/c are items of losses and operating expenses incurred in carrying on the business and in selling and distributing the goods for the particular accounting period. Preparation of a combined Trading and Profit and Loss Account involves simple listing of items attributable to these statements when they are prepared separately. Such preparation can be very simple for entities with fewer items but can be very complicated for entities with a large undertaking and other complexities associated with the undertaking. The balance sheet is a representation of the financial position at a specified date; that is why it is also called a Statement of Financial Position. It provides information about entitys

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Teaching Manual, Accountancy,, Grade XI

economic resources and the claims against those resources by the creditors and owner(s). The economic resources reported on the balance sheet are called assets, and they include such items as cash, inventory of goods, land, buildings, and equipments. The claims against the assets are known as liabilities or equity depending upon who has provided the resources. When the outsiders provide the resources, it is known as liabilities and if the owners provide the resources, it is known as equity. Marshalling of assets and liabilities involves arranging the assets and liabilities using some basis for such arrangement. It can be arranged using the liquidity basis or permanence basis. Using the liquidity basis, the items are arranged by showing the most liquid asset first and then building up to the most permanent (or least liquid) asset. It is the reverse order in case the permanency is the basis for the arrangement of items in the Balance Sheet. All business entities are guided by the profit motive and the calculation of profit is invariably the most important objective of accounting function. In addition, it is equally important to establish the financial position of the business entity to ensure a long-term existence and profitability. For these reasons, an Income Statement (combined Trading and Profit and Loss Account) and Balance Sheet can be drawn-up from the un-adjusted trial balance and the adjustments required making changes to the ledger accounts.

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Teaching Manual, Accountancy,, Grade XI

Illustration 4 Following Trial Balance of a trading concern for the year ending December 31, 2005 is given.
Debit Items Land and Building Goodwill Drawing Freight on sales Closing stock Discount allowed Cash at bank Bad debts Plant and machinery Rent, rates and insurance Debtors Salaries Wages Sales return Purchases Opening stock Rs 15,000 10,000 5,000 500 7,000 500 2,200 500 42,000 900 10,000 7,400 3,000 500 48,000 12,000 1,64,500 1,64,500 Credit Items Unearned commission Overdraft Reserve of doubtful debts Creditors Purchase return Sales Capital Rs 2,000 12,000 1,000 13,000 1,500 90,000 45,000

Additional information: a. b. c. d. Depreciate plant and machinery by 10% Reserve for doubtful debts is to be maintained at 5% Unearned commission is earned to the extent of Rs.1,500. Prepaid salary amounted to Rs.400

Required: Trading Account Profit and loss account Balance sheet at December 31, 2005 HSEB Adapted, 2001

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Teaching Manual, Accountancy,, Grade XI

Solution : Trading & Profit and Loss Account for the year ending December 31, 2005
Particulars To Opening Stock To Purchases Less: Returns To Wages To Gross Profit c/d To Office Salaries Less: Prepaid To Freight on Sales To Discount Allowed To Rent, Rates & Ins. To Depreciation: Plant and Machinery To Net Profit 4,200 16,400 30,500 30,500 7,400 400 48,000 1,500 46,500 3,000 28,000 89,500 By Gross Profit b/d 7,000 By Commission 500 Less: Un-expired 500 900 2,000 500 1,500 89,500 28,000 Amount Particulars Less: Returns Amount 90,000 500 89,500 12,000 By Sales

Bad debts expenses = Bad debts written off + New Provision - Old Provision = 500 + 500 1,000 = Nil Balance Sheet as on 31 December 2005
Liabilities Owners Fund Capital Add: Net Profit Less: Drawings Reserves 45,000 16,400 61,400 5,000 56,400 Plant & Machinery Less: Depreciation Current Assets, 42,000 4,200 37,800 Amount Assets Fixed Assets Goodwill Land & Building 10,000 15,000 Amount

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Teaching Manual, Accountancy,, Grade XI

Secured Loan Overdraft Current Liabilities & Provisions Creditors Un-earned Commission 12,000 Stock Prepaid Salaries 13,000 Debtors 500 Less: Reserve for D/D Cash 81,900 10,000 500 9,500 2,200 81,900 7,000 400 Loans & Advances

Illustration 5 The trial balance of Mr. Maskey, a trader, at the end of December 2005 is as under:
Opening Stock Plant and Machinery Furniture Sundry Debtors Cash at Bank Purchases Wages & other Direct Expenses Carriage Inwards Office Salaries Bad Debts General Expenses Insurance Premium Office Rent Maskey's Drawings Maskey's Capital Bank Loan Sundry Creditors Sales Purchase Returned Reserve for Bad debts Discount & Commission Total 555,000 30,000 80,000 40,000 80,000 26,000 200,000 30,000 5,000 25,000 500 1,500 2,000 20,000 15,000 150,000 50,000 40,000 300,000 10,000 2,000 3,000 555,000

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Teaching Manual, Accountancy,, Grade XI

Additional Information: a) b) c) d) Plant and Machinery and furniture are to be depreciated by 10% each Reserve for doubtful debts is to be maintained at 5% Office salary to be paid Rs 5,000 Closing Stock was valued at Rs 40,000

Required a) Trading Account b) Profit and Loss Account c) Balance Sheet at December end HSEB Adapted, 2000 Ans: Trading & Profit and Loss Account for the year ending 31 December 2005
Particulars To Opening Stock To Purchases Less: Returns To Wages & Expenses To Carriage Inward To Gross Profit c/d To Bad Debts Expense To Office Salaries Add: Outstanding To Office Rent To Insurance Premium To General Expenses To Depreciation: Plant & Machinery Furniture To Net Profit 8,000 4,000 12,000 20,000 88,000 88,000 25,000 5,000 30,000 20,000 2,000 1,500 200,000 10,000 190,000 30,000 5,000 85,000 340,000 2,500 By Gross Profit b/d By Discount & Commission 340,000 85,000 3,000 Amount 30,000 By Sales By Closing Stock Particulars Amount 300,000 40,000

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Teaching Manual, Accountancy,, Grade XI

Bad debts expenses = Bad debts written off + New Provision - Old Provision = 500 + 4,000 2,000 = 2,500 Balance Sheet as on 31 December 2005
Liabilities Owners Fund Capital Add: Net Profit Less: Drawings Reserves Secured Loan Bank Loan Current Liabilities & Provisions Creditors Salaries outstanding 5,000 250,000 250,000 150,000 20,000 170,000 15,000 Amount Assets Fixed Assets Plant & Machinery Less: Depreciation Furniture 155,000 Less: Depreciation Current Assets, Loans and Advances Stock 50,000 Prepaid Insurance Debtors Less: Reserve for D/D 40,000 Cash 80,000 4,000 76,000 26,000 40,000 80,000 8,000 40,000 4,000 36,000 72,000 Amount

Evaluation Scheme:
The competency achieved by a student in this Unit will be evaluated on the following basis: No. of Questions 1 Type of Question Theory Question with exact requirement or an answer consisting of 3 to 5 effective sentences based on capital and revenue concepts Problem Solving type of questions based on preparation of Adjusted Trial Balance and adjusting entries. Problem on Final Accounts. 20 Marks Marks 2 Marks

2 3 3 Questions

18 Marks

Note: The second and third question could be broken into two questions either 12+6 or 15+3 or 10+8.

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Teaching Manual, Accountancy,, Grade XI Key Terms Introduced in the chapter: Accrued Expenses, Accrued Revenues, Accumulated Depreciation, Adjusted Trial Balance, Adjustment Entries, Adjustments, Administrative Expenses, Appreciation, Bad Debt, Bad Debts, Expense Account, Bad Debts Recovered, Balance Sheet, Capital Expenditure, Capital Loss, Capital, Profits, Capital Receipt, Capital Reserve, Closing Entries, Closing Stock, Cost of Goods Sold, Deferred Revenue Expenditures, Depreciation, Drawings, Expense, Extended Trial Balance, Financial Expenses, Financial Position, Financial Statements, Gross Profit, Horizontal Format, Income from Operations, Income Statement, Indirect Expenses, Interest on Capital, Interest on Investments, Interest on Loan, Interest Revenue, Inventory, Liquidity of A Business, Marshalling of Assets and Liabilities, Net Income (Loss), Opening Entries, Operating Expenses, Prepaid Expenses, Profit and Loss Account, Provision (Allowance) for Bad Debts, Provision (Allowance) for Discount on Debtors, Revenue, Revenue Expenditure, Revenue Loss, Revenue Profits, Revenue Receipt, Revenue Reserve, Sales Revenue, Sample Goods, Selling & Distribution Expenses, Service Revenue. Solvency of a Business, Trading Account, Unadjusted Trial Balance, Un-Amortised Expenses, Unearned Revenues, Unearned Revenues, Vertical Format, Work Sheet.

UNIT 6 Depreciation
Introduction:
This unit deals with the concept and causes of depreciation, advantages of accounting for depreciation and factors affecting the amount of depreciation. Only two methods: fixed instalment and reducing balance method are to be discussed and studied. Apart from the accounting treatment for purchase of assets, disposal of assets, and charging of depreciation the relative advantages and disadvantages of the two methods are to be dealt with. Change of method is beyond the purview of the current syllabus.

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Teaching Manual, Accountancy,, Grade XI

Depreciation is one of the largest elements of expense in most Balance Sheets of companies and it is one of the areas having large tax implication. It is also an item of expenditure which is widely regulated by governments. Hence, its study and appreciation is very important for accounting students.

Prerequisite:
The knowledge of accounting principles especially of matching principle and competence in passing journals and preparing ledgers are essential to fully grasp the unit.

Objectives:
The following are the learning objectives of the Unit: Be able to explain the meaning and concept of depreciation Be able to describe the causes of depreciation Be able to write the objectives of providing depreciation Be able to discuss the factors affecting the amount of depreciation. Be able to compute the amount of depreciation under Fixed Installment and Reducing Balance method of depreciation. Be able to write the meaning and list the advantages and disadvantages of the two methods. Be able to account for depreciation, journalizing and preparing ledgers.

Content Areas of the Unit

The following are the content areas of the Unit and their suggested teaching hours. The teaching hours allocated could vary depending upon a teachers style of teaching. Hence, they could be suitable modified but limiting the total hours to 8 hours: Teaching SN Content Areas of the Unit Hours 4. The concept and causes of depreciation, advantages of providing depreciation, and the factors affecting the amount of depreciation. The fixed instalment method, its meaning, advantages and 2

5.

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Teaching Manual, Accountancy,, Grade XI

disadvantages. The preparation of journals and ledgers for: purchase of assets, charging the yearly depreciation, addition, and disposal of depreciable assets. The reducing balance method, its meaning, advantages and disadvantages. The preparation of journals and ledgers for: purchase of assets, addition and disposal of depreciable assets.

6.

8 Hours

Description of Content Areas

Concept and causes of Depreciation Depreciation is a permanent decrease in value of fixed assets due to various reasons. Some of the popular definitions of depreciation are as follows: According to R. N. Carter, Depreciation is gradual and permanent decrease in the value of an asset from any cause. The Institute of Charted Accountants of England and Wales defines depreciation as a part of the cost of a fixed asset to its owner, which is not recoverable when the asset is finally put out of use by him. Provision against this lost capital is an integral cost of conducting the business during the effective commercial life of the asset and is not dependent upon the amount of profit earned. Hence, depreciation is merely a bookkeeping entry without having to pay any cash for it depicting the amount of the cost of plant asset allocated to each accounting period benefiting from the fixed assets use. It is an allocation process, not a valuation process. Another aspect about it is a permanent decrease in value of the asset based on the historical cost of the asset and the amount depreciation is recorded even if the market value of assets has temporarily appreciated. The major causes of depreciation are as follows. 1. Wear and tear because of the assets continuous use in the business. 2. Expiration of time causes decrease in the value of some assets, like lease, patents, copy rights, and trade marks. Commonly, it is known as amortization.

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3. Depletion leads to decreases in value of natural resources like mines, quarries, oil fields etc. due to continuous extraction of minerals and oil. 4. Obsolescence of an asset is the decline in value of assets owing to technological advancements and inventions. Obsolete assets may have to be scraped off even though they are capable of providing economic benefits to keep pace with the changes. 5. Accidents and permanent fall in the market price are some other causes of depreciation. Need for Providing Depreciation Unless the depreciation is charged against income, the result of operation will be overstated. Hence, depreciation is charged to calculate the correct amount of net profit. Depreciation is to be provided to compute the actual cost of production. According to Company Act 2053, it is necessary to write off depreciation on fixed assets used in business for generating revenue. Thus, depreciation is charged to fulfill legal requirements. Depreciation is an expense not requiring a current cash outlay. Hence, the amount of depreciation is retained in the business and is used to meet the need for the replacement of fixed asset at the end of its useful life. Factors affecting the Amount of Depreciation Depreciation is the amount of plant asset cost allocated to each period benefited by the assets use. To compute depreciation expense, accountants consider four major factors: cost of the asset, estimated salvage value of the asset, estimated useful life of the asset, and the depreciation method used. Plant assets are initially recorded at cost, which is defined as all typical, reasonable, and necessary outlays made to acquire the asset and place it in a condition and location for its

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intended use. Cost does not include expenditures for inefficiencies, waste, repair of damages in transit or handling, fines, and repairs due to vandalism. However, cost does include the cost of repairs on an asset purchased in damaged condition. What is included in the cost of a plant asset will vary according to the type of asset acquired and the manner of its acquisition. Cost is measured by the cash and/or cash equivalents given up to acquire the asset. This valuation rule generally bars the inclusion of interest on money borrowed to purchase a plant asset. However, interest on money borrowed to finance the construction of a major asset, such as a building, should be capitalized, that is, added to plant assets. Land improvements must be distinguished from land because the improvements are depreciable, while the land is not. Plant assets acquired in an exchange for non-cash assets are recorded at fair market value of what was given up or what was received, whichever amount is more clearly evident. Plant assets acquired as gifts are recorded at their fair market value. Accounting is concerned with all assets, not just those assets that have a cost.

Accounting treatment for purchase of assets, charging yearly depreciation, addition and disposal of assets Accounting treatment for depreciation and the depreciable assets involves two relevant handling. The first being the journal entries and the second being the ledger for the depreciable assets, depreciation account/ accumulated depreciation account, and extracts of Income Statement and Balance Sheet showing the effect on them. The journal entries depend upon the use of accumulated depreciation account or simply using the depreciation account. Although the trend to use the accumulated depreciation account has become the most widely method of accounting for depreciation, the spirit of syllabus for Class XI is to use the depreciation account rather than accumulated depreciation account. The various entries involved as follows:

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Teaching Manual, Accountancy,, Grade XI

General Journal
Date Account Heads Code Folio Debit Rs
Purchase Price

Credit Rs

For Assets Purchase Asset A/c .Dr To Bank A/c For charging Depreciation Depreciation Expense A/c Dr To Assets A/c For Sale of Asset at Book Value Bank A/c .Dr To Asset A/c For Sale of Asset at a price more than Book Value Bank A/c .Dr Loss on Sale of Assets A/c Dr To Asset A/c For Sale of Asset at a price less than Book Value Bank A/c .Dr To Asset A/c To Profit on Sale of Assets A/c Year-end Journal Profit & Loss A/c To Depreciation Expense A/c

Yearly Depreciation

Sale Price Book Value

Sale Price Loss Amount Book Value

Sale Price Book Value Profit Amount

Yearly Dep Yearly Dep

The ledgers and the extract of Income Statement and Balance Sheet will be shown in the illustrations in the following section. //108//

Teaching Manual, Accountancy,, Grade XI

METHODS OF CALCULATING DEPRECIATION AMOUNT There are various methods of calculating the depreciation amount to be charged to the yearend income statement but the syllabus for Class XI is limited to the two methods of calculating and accounting for depreciation which are: Fixed Installment Method and Reducing Balance Method. Fixed Installment Method of charging Depreciation As the name suggests, under this method a fixed percentage of original cost is charged as depreciation every year. It is also known as straight line method or original cost method. The amount of depreciation is calculated as under: Annual Depreciation = Rate of Depreciation (in %) x Original Cost of the Depreciable Asset. Where a percentage is not specified, the annual depreciation is calculated using the following equation:
Annual depreciation = Purchase price + Transportation charge + installation - salvage value Expected life in years

Illustration 1
On Baishak 1, 2055 Kunal Company purchased Machinery for Rs 180,000, and Rs 20,000 was paid for transportation. Another Rs. 15,000 was spent on installation. The Machinery is expected to have useful life of 10 years with an estimated salvage value of Rs 15,000. The company uses the fixed instalment depreciation method. Required: Amount of annual depreciation Solution: Purchase price .................................. Rs 180,000 Transportation ................................... Rs. 20,000 Installation charge ............................. Rs. 15,000 Useful life .............................................. 10 years Estimated salvage value ...................... Rs 15,000

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Teaching Manual, Accountancy,, Grade XI

Annualdepreciati on = PurchasePrice + Transporta + Installati Charges- SalvageLife tion on UsefulLife

180,000 + 20,000 + 15,000 15,000 200,000 = = Rs. 20,000 10 10

Advantages of Fixed Installment Method: 1. It is simple to understand 2. It is easy to calculate 3. At the end of the useful life, the value of the asset is reduced to the residual value. Disadvantages of Fixed Installment Method: 1. The depreciation amount is unrealistic as it charges the same amount when the asset is new and old. 2. The total charge to profit every year increases as the assets become older. The total charge is the sum of annual depreciation and the repairs and renewals. 3. It ignores the interest on the money blocked with the asset.

Illustrative Problem 2:
A plant was purchased for Rs. 60,000 on Baisakh 1, 2052. The scrap value was estimated to be Rs. 6,000 at the end of plants life of nine years. Straight-line method of depreciation was used for providing depreciation. The accounting year ends on Chaitra-end each year. The plant was sold out on Chaitra end 2054 for Rs. 39,000 and bought another machine on same day for Rs. 35,000. The new machine has a useful life of seven years with no salvage value. Required: 1. Plant & machinery account for Baisakh 1, 2052 to Chaitra end 2054 2. Depreciation Account for Baisakh 1, 2052 to Chaitra end 2054 3. Extract of Profit and Loss Account for Chaitra 2052, 2053, and 2054 4. Extract of Balance Sheet for Chaitra 2052, 2053, and 2054 5. Working Note showing the amount of profit & loss on sale of machine

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Teaching Manual, Accountancy,, Grade XI

Solution: 1.

D R
Date Description Folio

P t an M in A c lan d ach ery /

Amount Rs 60,000 60,000 Date Description Folio

Cr Amount Rs 6,000 54,000 60,000 6,000 48,000 54,000 6,000 39,000 3,000 35,000 83,000

52/1/1 To Bank A/c

52/12/31 By Depreciation By Balance c/d 53/12/31 By Depreciation By Balance c/d 54/12/31 By By By By Depreciation Bank Loss on Sale Balance c/d

53/1/1 To Balance b/d

54,000 54,000

54/1/1 To Balance b/d 54/12/30 To Bank

48,000 35,000

83,000

2.

Dr
Date Particulars Ref.
2052/12/30 To Plant and Machinery

Depreciation A/c
Amount Date Particulars Ref. 6,000 2052/12/30 By Income Summary A/c 6,000 6,000 2053/12/30 By Income Summary A/c 6,000

Cr
Amount 6,000 6,000 6,000 6,000 6,000 6,000

2053/12/30 To Plant and Machinery

2054/12/31 To Plant and Machinery

6,000 2054/12/31 By Income Summary A/c 6,000

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Teaching Manual, Accountancy,, Grade XI

3.

Dr
Date Particulars To Depreciation A/c

Profit and Loss Account for the year ended Chaitra 30, 2052
Ref. Amount 6,000 Date Particulars Ref.

Cr
Amount

Dr
Date Particulars To Depreciation A/c

Profit and Loss Account for the year ended Chaitra 30, 2053
Ref. Amount 6,000 Date Particulars Ref.

Cr
Amount

Dr
Date Particulars To Depreciation A/c Loss on Sale

Profit and Loss Account for the year ended Chaitra 31, 2054
Ref. Amount 6,000 3,000 Date Particulars Ref.

Cr
Amount

4.

Balance Sheet
as at Chaitra 30, 2052 Rs Assets Plant and Machinery Rs Rs 54,000

Balance Sheet
as at Chaitra 30, 2053 Rs Assets Plant and Machinery Rs Rs 48,000

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Teaching Manual, Accountancy,, Grade XI

Balance Sheet
as at Chaitra 31, 2054 Rs Assets Plant and Machinery Rs Rs 35,000

5. Working Note: Book value of the Plant on the date of sale Less: Sale value of the Plant on the same date Loss on Sale

: : :

Rs 42,000 Rs 39,000 Rs. 3,000

Reducing Balance Method of charging Depreciation As the name suggests, under this method the annual depreciation is calculated on the reduced balance rather than the original cost of the asset. The amount of depreciation is calculated using a given percentage or the rate calculated as under:

Rate of Depreciation =1 n

Residual Value of Asset Cost of the Asset

Advantages of Reducing Balance Method: 1. It is simple to understand 2. The total charge in respect of depreciation and repairs/ renewals put together remains almost equal from year to year. 3. This method is logical as the asset grows older the amount of depreciation also decreases. 4. This method is the most favoured one by tax authorities. Disadvantages of Reducing Balance Method: 1. It is difficult to calculate the rate of depreciation. 2. It ignores the interest on the money blocked with the asset.

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Teaching Manual, Accountancy,, Grade XI

3. It is suitable only for assets with shorter useful life. 4. Value of asset cannot be reduced to zero even if actual value of the assets decreases to zero.

Illustration 3:
A transport company purchased a truck at Rs. 70,000 on January 1, 1988. In the last week of December, 1989, the truck was completely destroyed in an accident. Rs. 46,200 was received from the Insurance Company in full settlement. On January 1, 1990 the Company purchased another truck for Rs. 90,000. The company writes off 20 % per annum on the Diminishing Balance Method. The company closes its books of accounts on December 31st each year. Required: Show the Truck Account for three years ending December 31, 1990.

Solution
Dr.
DATE 1.1.88

Truck Account
Particulars To Bank Amount Date Particulars

Cr.
Amount 14,000 56,000 70,000 11,200 44,800 56,000 18,000 72,000 90,000

70,000 31.12.88 By Depreciation ,, 70,000 By Balance c/d

1.1.89

To Balance b/d

56,000 31.12.89 By Deprecation ,, 56,000 By Bank (Claim)

1.1.90

To Bank

90,000 31.12.90 By Depreciation ,, 90,000 By Balance c/d

1.1.91

To Balance b/d

72,000

Book value is Rs. 44,800 (56,000 - 11,200) and claim received being Rs. 46,200, the difference being profit i.e. Rs. 1,400.

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Teaching Manual, Accountancy,, Grade XI

Evaluation Scheme:
The competency achieved by a student in this Unit will be evaluated on the following basis: No. of Questions 1 Type of Question Problem Solving type of question based on accounting treatment for depreciation including journals, ledgers, and disclosure in final accounts. Marks 8 Marks

1 Question

8 Marks

Key terms Used in the unit:

Book Value: Depletion:

Depreciation, Reducing Balance Method, Efflux of Time, Expected Useful Life,

Obsolescence, Original Cost, Salvage Value, Straight-Line Method, Wear And Tear

Unit 7 Reserves and Provisions

Introduction:
The amount of profit made by a business rightfully belongs to the owner(s). But a sensible owner leaves behind a portion of profit in the business. This portion of profit left behind is known as reserve. The different types of reserves are: disclosed or undisclosed reserves, revenue or capital reserves, general or specific reserves. The accounts of customers who do not pay are a bad debt. It is an expense of selling on credit. There are two methods of handling the bad debts in accounts.

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Teaching Manual, Accountancy,, Grade XI Terms reserves and provisions have been loosely used to denote one and the same thing but conceptually, there is a difference between them. The main difference is that reserves are appropriations of profit and provisions are charges against profit. Reserves can be created only when there is profit available but provisions can be created even in absence of profit.

Prerequisite:
The knowledge of accounting concepts, conventions, principles affecting the accounting records and competence in passing journals and preparing ledgers are essential to fully understand the unit.

Objectives:
1. Be able to explain the concept of reserves and provisions, and their types 2. Be able to describe the concept of General Reserve and secret reserve, their accounting treatment and outline the objectives of maintaining such reserves 3. Be able to explain the concept of sinking fund and research and development fund, and their types. 4. Be able to explain the concept of provisions, its objective and types. 5. Be able to explain the concept of bad debt and account for the provisions for bad debts 6. Be able to explain the concept of discount and account for the provisions for discount on debtors. 7. Be able to differentiate between the reserves and provisions

Content Areas of the Unit

The following are the content areas of the Unit and their suggested teaching hours. The teaching hours allocated could vary depending upon a teachers style of teaching. Hence, they could be suitable modified but limiting the total hours to 4 hours:

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Teaching Manual, Accountancy,, Grade XI

Teaching SN 7. Content Areas of the Unit Hours

The concept and the objectives of maintaining the following reserves: General reserve and secret reserve, Specific reserves: Sinking fund, Research and development fund, Reserve for redemption of liabilities The Accounting treatment for: Provision for bad debt, Provision for discount on debtors, General reserve and Research and Development fund.

8.

4 Hours

Description of the content:

Concept of Reserves

Reserves are amounts set aside out of profits and other surpluses, which are not intended to meet any particular liability, contingency, commitment or diminution in value of assets known to exist at the date of balance sheet but to simply strengthen the financial position of a business.
Objectives of Maintaining Reserves

The objectives of maintaining reserves are as follows: 1. To cover any anticipate or unanticipated liabilities or loss. 2. Achieving some specific purpose like reserve for research and development. 3. Repayment of a liability like reserve for repayment of loan. 4. Replacement of wasting assets fund for replacement of machine. 5. Strengthening the financial position of the concern by creating General Reserve.
Classification of Reserves

The reserves are classified as follows: //117//

Teaching Manual, Accountancy,, Grade XI

Reserve and Funds

Disclosed

Undisclosed

Secret Reserves Reserves Funds

Revenue Reserve

Capital Reserve

Specific Reserve

General Reserve

Concept and Objectives of Maintaining General Reserves

General Reserve is the retention of a portion of divisible profit without any specific purpose in mind rather for the improvement of the overall financial strength of an organisation.

The objectives of creating the general reserve are as follows: 1. To strengthen the financial health of a business 2. To provide resources for further expansion of operations 3. To provide stability in profits as this reserve can be used for any purpose deemed fit by a sole proprietor or partners during periods of inadequate profits.

Concept and Objectives of Maintaining Secret Reserves

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Teaching Manual, Accountancy,, Grade XI Secret Reserves are those reserves, which are not disclosed in the books of accounts. These are not specifically created but represent a surplus not disclosed in the Balance Sheet. These reserves are created in the following manner: 1 2 3 4 5 6 7 8 By providing excessive depreciation of assets. By eliminating the assets altogether By undervaluing the assets By charging capital expenditure to revenue By overvaluing liabilities By showing a contingent liability as an actual liability By making excessive provisions for losses By including a fictitious liability etc.

The objectives of Secret Reserve are as follows: 1. 2. 3. 4. 5. Strengthen the financial position of a business Enable the business to meet unforeseen emergencies To curtail competition To avoid demands for capitalization of reserves To limit the distribution of reserves as dividends

Concept and Objectives of Sinking Fund

Sinking fund is a fund built by annual contributions using a Sinking Fund table to be ultimately used for replacement of assets or repayment of liabilities. The objectives of sinking fund are as follows: 1. To provide funds for replacement of assets 2. To provide funds for repayment of liabilities.

Research and Development Fund

Fund created to cover Research and Development expenses is known Research and Development Fund. Research and Development expenses are those spent on //119//

Teaching Manual, Accountancy,, Grade XI researching into and developing better ways of achieving their objectives which may be discovering techniques for the production of new item either to replace or to compete with products already marketed by others, or new methods of producing old lines.

Illustration 1
Following is an extract of a Trial Balance of Amit Company:

Particulars
Research and Development Fund Research and Development Expenditure

Dr.
12,500

Cr.
50,000

During the year a transfer of Rs 22,500 was made to Research and Development Fund.

Required:
Journal entries and show the relevant accounts in the Balance Sheet. Solution: General Journal
Date Description Profit and Loss Appropriation A/c ... Dr To Research and Development Fund A/c (Being transfer of Rs 22,500 to research and development fund account) Research and Development Fund A/c Dr To Research and Development Expenditure A/c (Being adjustment of Research and Development Expenditure against the Research and Development Fund A/c) 12,500 12,500 LF Debit Amount 22,500 22,500 Credit Amount

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Balance Sheet as on ---------Liabilities and Equity Reserve and Surplus

Research and Development Addition during the year Used-up during the year 50,000 22,500 72,500 12,500 60,000 Amount (Rs)

Assets

Amount

Provisions
Provisions are amounts written off or retained by way of providing for depreciation, renewals, or diminution in value of assets, or retained by way of providing for any known liability is known as provisions. Provision amounts cannot be determined with accuracy. Hence they are estimated using reasonable basis.

Provision for Bad debts (Allowance Method)

The allowance method is a procedure that estimates and matches bad debts expense with its sales for the period and also reports accounts receivables at their realizable value.

Accounting Treatment The accounting treatment for bad debts using the allowance method revolves around two entries made: 1) adjusting entry and 2) write off entry. Step1: the end-of-the-period adjusting entry to record bad debt expense estimates, Step 2: writing off the specific accounts determined to be uncollectible during the period. Illustration

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Teaching Manual, Accountancy,, Grade XI The following extracts and the additional information are provided from the books of Ms. Roshani as on 31 December 2004:

Trial Balance as on 31st December 2004 Particulars

Accounts Receivables Net Sales (all credit) Allowance for doubtful debts

Debit Balance
503,000

Credit Balance

1,000,000 15,000

Additional Information:
There were further bad debts of Rs 3,000 not yet written off from the accounts of Mr. Ram Kumar. The industry average of bad debt expenses has been estimated as 2.5% of Accounts receivables.

Required:
Write off journal and adjusting entry Show the relevant ledger of allowance for bad debts

Solution December 31, 2004

Allowance for doubtful debts A/c ... ...........Dr To Accounts Receivable A/c - Ram Kumar.... (Being write off of additional bad debts not accounted as yet) December 31, 2004 Bad debt Expenses A/c ... ...........................Dr To Allowance for doubtful debts A/c ........... (Being bad debt expense account estimated and accounted for) 500 500 3,000 3,000

Computation:
Estimated balance (2.5% of Accounts Receivables of Rs 500,000)................... 12,500

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Teaching Manual, Accountancy,, Grade XI Less: ............Current balance in the allowance for doubtful debts before adjustment (15,000 - 3,000)........................................................... 12,000 ............................................................................................................ Bad debt expense adjustment amount................................................................... 500

Allowance for doubtful debts A/c

Date To Description Account Receivables - Ram Kumar To Balance c/d 12,500 15,500 By Bad debt Expense A/c 500 15,500 Ref. Amount 3,000 Date By Description Balance b/d Ref. Amount 15,000

Extract of Balance Sheet

Accounts Receivables .......................................................... 503,000 Less: Additional Bad debts .................................................. (3,000) 500,000 Less: Allowance for doubtful debts...................................... (12,500)

Net Accounts Receivables .................................................. 487,500 Provision for Discount on Accounts Receivables
Sales are made on credit with the expectation that cash will ultimately be collected and to encourage prompt payment, many firms permit their customers to deduct some amount as discount. Discounts are given to encourage prompt payments. Discounts on credit sales must be provided in the year when the sales were affected. Because expenses of discount can not be shown as expenses when they occur, they need to be anticipated and accounted for in the year sales are affected.

Accounting Treatment

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Teaching Manual, Accountancy,, Grade XI The accounting treatment for discounts using the allowance method revolves around two entries made: 1) adjusting entry and 2) write off entry. Step1: the end-of-the-period adjusting entry to record discount allowed estimates, Step 2: writing off the specific accounts determined to be receiving discounts during the period.

Illustration
The following extracts and the additional information are provided from the books of Mr. Jiwa Nath as on 31 December 2004:

Trial Balance as on 31st December 2004 Particulars

Accounts Receivables Net Sales (all credit) Allowance for Doubtful Debts Allowance for Discounts

Debit Balance
150,000

Credit Balance
500,000 12,000 5,000

Additional Information:
Create 10 % provision for doubtful debts and 5% provision for discount on receivables. The industry average suggests that 2% of credit sales go bad and 1% of sales claim discount on the amounts due.

Required:
Pass the necessary journal entries to account for the bad debts and discount. Also prepare allowance accounts for bad debts and discounts.

Solution December 31, 2004 Bad Debt Expense A/c ... Dr........................3,000 To Allowance for doubtful Accounts ............. 3,000 (Being bad debt expense account estimated and accounted for)
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Teaching Manual, Accountancy,, Grade XI Computation Estimated balance (10% of 150,000) ................................................................ 15,000 Less: ............Current balance in the allowance for doubtful debts before adjustment ..................................................................................... 12,000 .............................................................................................................________ Bad debt expense adjustment amount................................................................ 3,000 Allowance for doubtful debts A/c
Date To Description Balance c/d Ref. Amount 15,000 Date By By 15,000 Description Balance b/d Bad debt Expense A/c Ref. Amount 12,000 3,000 15,000

December 31, 2004 Discount Expense A/c ... Dr ................................................. 1,750 To Allowance for discounts ........................................................1,750 (Being discount expense account estimated and accounted for)

Computation
Estimated balance (5% on good accounts receivables, 135,000 ) ........................6,750 Less: ............Current balance in the allowance for doubtful debts before adjustment .......................................................................................5,000 Discount expense adjustment amount................................................................ 1,750 Allowance for discounts A/c
Date Description To Balance c/d Ref. Amount 6,750 Date By By 6,750 Description Balance b/d Discount Expense A/c Ref. Amount 5,000 1,750 6,750

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Teaching Manual, Accountancy,, Grade XI

Difference between Reserves and Provisions

The following are the main differences between reserves and provisions:
a. b. c. Basis Effect Need Basis Reserves It is an appropriation of profit. It is created for unknown liabilities Reserve is created based on a financial policy. a. Provisions It is a charge against profit.

d. e.

f.

g.

Creation of reserve is discretionary. Availability Reserves represent undivided profit and are available for distribution, if need be. Possibility Reserves are created only f. in the event of profit available for such creation. Purpose Reserves are created to g. strengthen the financial position of a business and can be utilised for any purpose deemed fit.

Legality

b. It is created for meeting a definite liability. c. It is based on the principle of conservatism, which suggests that all future losses are to be anticipated and provided for. d. Creation of a provision is usually mandatory. e. Provisions are not available for distribution as undivided profits.

Provisions can be created even in absence of profit.

Provisions are created keeping in consideration a specific liability or loss and can be utilised for the earmarked purpose only.

Evaluation Scheme:
The competency achieved by a student in this Unit will be evaluated on the following basis: No. of Questions Type of Question Marks

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Teaching Manual, Accountancy,, Grade XI

1 2 Theory Question with exact requirement or an answer consisting of 3 to 5 effective sentences Problem Solving type of questions based on preparation of ledger for Provision for Doubtful debts and journal entries for management of reserves and provisions 2 Marks 2 Marks

2 Questions

4 Marks

Key Terms used in the unit:

Aging Schedule, Allowance method, Appropriation of Profit, Bad debts, Bad debts expense account, Capital Reserve, Charge to Profit, Direct-write off method, Disclosed Reserves, Funds, General Reserve, Known Liability, Net Realisable Value, Plough back of Profit, Provision (allowance) for Bad debts, Provisions, Research and Development Fund, Reserves, Revenue Reserve, Secret Reserves, Sinking Fund for Asset Replacement, Sinking Fund for Repayment of Loan, Specific Reserve, Write off.

Unit 8 Accounting for Non-Trading

I. Introduction
There are certain institution or organizations which are established only for the purpose of rendering service. The aim of such organization is not earn profit but to provide recreational facilities to its members or beneficiaries. The examples of such organization include clubs, educational institutions, charitable hospital, libraies etc. This unit includes Receipts and Payments Account, Income and Expenditure Account and Balance Sheet.

II. Objectives

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Teaching Manual, Accountancy,, Grade XI The main objective of the unit is to help students to acquire the knowledge of accounting for non-trading organizations. After studying this unit, the students will be able to: (i) Explain the meaning and features of non-trading organization. (ii) Know the different terminologies used by non-trading organizations. (iii) Prepare Receipts and Payments Account, Income and Expenditure Account and Balance Sheet. (iv) Make entries for different adjustment relating to non-trading organizations.

III. Content arrears of the Unit

S.No. 1 2 3 4 5 Areas' of Unit Concept and terminologies of non-profit organizations Receipts and payment account Income and expenditure account Balance sheet Final account for non-profit organizations T.H. 2 hrs. 2 hrs 3 hrs. 3 hrs. 5 hrs.

8.1. Concept of non-profit organizations:

There are certain institutions or organizations which are established only for the purpose of rendering service. The aim of such organization is not to earn profit but to provide recreational facilities to its members or beneficiaries. The main idea is to spend the funds of the organization in such a way that provides maximum benefit to its members. The examples of such organization include clubs, educational institutions, charitable hospital, libraries, religious institutions etc.

8.2. Features of a non-trading organization

Following are some features of non-trading organization:

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Teaching Manual, Accountancy,, Grade XI (a) (b) (c) (d) (e) The main objective of such organization is not to earn profit but render services to the public or its member. A non-trading organization is governed by the elected members. These organizations, generally, depend on donations. A non-trading organization generally employs the accrual basis of accounting. They do not prepare trading and profit and loss account.

8.3. Terminology used in account on non-trading organizations Subscription: The fee received from the members regularly for their membership to the organization is known as subscription. Subscription is the main source of a nontrading organization. It is a revenue receipt, and is usually paid annually by the members. However, it is also paid monthly, or half yearly.
For the preparation of income and expenditure account subscription can be calculated as follows: Total subscription received during the year xxx Add: Outstanding subscription for current year xxx Add: Advance subs-received in previous year xxx xxxx Less: Outstanding subscription of previous year received in xxx current year Less: Advance subscription received in current year for xxx coming year Net subscription for current year xxxx

Donations: It is the amount received from some person firm, organization or any other body as a gift. It appears on the receipt side of receipts and payments account. Donation may be: (i) A specific donation or (ii) A general donation

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Teaching Manual, Accountancy,, Grade XI

(i) Specific donation: Such donation is received for specific purpose. Donation for building, Pavilion, Furniture, Medical equipment, Educational equipment and laboratory etc. are some example of specific donation. Specific donation should be treated as capital income and shown in the liability side of balance sheet. (ii) General donation: This is such donation, which is received for general purpose. It can be used for any purpose. General donation is treated as revenue receipts and credited to the income and expenditure account. Entrance/Admission fees: The fees received from the new members at the time of their admission is known as entrance/admission fees. The entrance fees are treated as revenue receipts and shown on the credit side of income and expenditure account. Grants: The amount received for financial assistance from public, government, local bodies and foreign donor is termed as grant. It may be received from general or specific purposes. Therefore, general grants are treated as revenue receipts and specific grants must be treated as capital receipts. Honorarium: It is the amount paid to the person who is not the employee of the organization. It is a payment to a person for specific services rendered by him. It is accounted as revenue expenditure. So it is taken to the debit side of income and expenditure account. Life membership fees: Generally, the members are paid subscription periodically. Instead of paying periodically, some members may pay lump-sum amount and they become a member for whole life. The amount paid in a lump-sum for this purpose is known as life membership fees. Such amount should be credited to capital fund. Endowment fund: It arises from a gift. It represents relatively a large amount of money. The endowment fund is usually placed in fixed deposits or invested in government securities. It is a capital receipt and shown on the liability side of balance sheet.
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Teaching Manual, Accountancy,, Grade XI

Sales of old assets: Amount received from sales of old assets is a capital receipt. The book value of the assets sold is deducted from the relevant assets in the balance sheet. Only profit on sales and loss on sales is recorded in the income and expenditure account. Sales of newspapers and magazines: The amount received from sales of old newspaper is treated as revenue income and credited to income and expenditure account. Sales of sport materials: It is also treated as a revenue income and credited to income and expenditure account. Special fund: If any amount is received by an organization for specific purpose, that is known as special fund. Tournament fund, Development fund and Prize fund etc. are some of the examples of special fund. The special fund is capital receipt and shown on the liability side of the balance sheet. 8.4. Receipts and Payments Account 8.4.1. Concept:
A receipt and payment account is a summary of cash transactions. It is prepared on the basis of cash book. It starts with opening balance of cash and bank on the debit side and ends with closing balance of cash and bank on credit side. All receipts or incomes are shown on the debit side where as payment of expenses are shown on credit side. Generally, the closing balance of cash and bank is ascertained by comparing its debit and credit total.

8.4.2. Features of receipts and payments account:

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Teaching Manual, Accountancy,, Grade XI (a) It is just like a summary of cash book. As in the cash book, all receipts are recorded on the debit side and all payments are recorded on the credit side. (b) It includes all cash and bank receipts and payments, whether they are related to current, past or future accounting period. (c) It includes all capital and revenue nature receipts and payments. (d) It is a real account. (e) The non-cash items are not recorded by this account. (f) It is not based on accrual basis of accounting.

8.4.3. Limitations of receipts and payments account

(a) (b) (c) (d) (e) It does not find out surplus or deficit of the organization. It does not disclose the income and expenditure of the current year. Financial position of the organization is not shown by this account. It does not record some relevant items like depreciation, write off losses, outstanding expenses and accrued income etc. It fails to distinguish between capital and revenue incomes and expenses.

8.4.4. Format of receipts and payments account Receipts and Payments Account Dr. As on . . . . . . . . Receipts Rs. Payments To balance b/d By purchase of fixed XXX Cash in hand assets XXX Cash at bank By investment To subscriptions: By sports equipment XXX Previous year By purchase of books XXX Current year By loans to members XXX Coming year By salaries and wages XXX To entrance fees By printing & XXX To interest received stationery XXX
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Cr. Rs. XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

Teaching Manual, Accountancy,, Grade XI To sales of news paper To sales of tickets To sales of scrap To rent received To receipts from bar To donations To life membership fees To legacies To sales of fixed assets To sales of investments To loans To municipal grants
XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

By rent By postage & telephone By electricity By insurance By general expenses By audit and legal fees By paid to creditors By interest paid By honorarium By refreshment By tournament expenses By closing balance: Cash in hand Cash at bank

XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

Illustration
From the information given below, prepare receipts and payments account on 31st Chaitra, 2059. Rs. Rs. Cash on 1-1-2059 5,000 Donation 7,500 Entrance fees 4,000 Subscription 40,000 Rent from hall 5,400 Telephone 3,500 Salaries 15,000 Wages 5,000 Honorarium 3,000 Interest on investment 3,000 Printing 400 Sundry expenses 1,000

Solution:
Receipts and Payments Account //133//

Teaching Manual, Accountancy,, Grade XI Dr. For the Year Ended 31st Chaitra, 2059 Receipts Rs. Payments To balance b/d 5,000 By telephone To donation 7,500 By salaries To entrance fees 4,000 By wages To subscription 40,000 By honorarium To rent 4,500 By pringing To interest on 3,000 By sundry expenses investment By balance c/d 64,000 Cr. Rs. 3,500 15,000 5,000 3,000 400 1,000 36,100 64,000

8.5. Income and Expenditure Account: 8.5.1. Meaning

The income and expenditure account is similar to a profit and loss account of a business organization. It is prepared to determine the amount of 'surplus' or 'deficit' made during an accounting period by non-trading organization. It shows the classified summary of incomes and expenditure which are of revenue nature and which are related to the current year. In this account, all incomes or receipts are credited and all expenses or payments are debited. If the total of credit side exceeds the total of debit side, the balance is known as surplus. It is the case of excess income over expenditure. But when debit total is higher than credit total, there is deficit. And it is the case of expenditure over income. In the words of F.G. Willam "An income and expenditure account is prepared to show all the revenue incomes for the period whether actually received or accrued and all the revenue expenditures for the period whether actually paid or accrued and not yet paid." //134//

Teaching Manual, Accountancy,, Grade XI

8.5.2. Features of income and expenditure account

(a) It records only those incomes and expenses which are of revenue nature. All capital incomes and expenses are excluded. (b) It records all the expenses and losses on the debit side and all the incomes on the credit side. (c) It does not record opening and closing balance of cash and bank. (d) It is a nominal account. (e) It is prepared on the basis of accrual concept. (f) It only records those incomes and expenses which are related to current year.

8.5.3. Difference between receipts and payments account and income and expenditure account.
S.N. 1. 2. 3. 4. 5. Receipts and Payments Account It is a real account It is the summary of the cash transactions It starts with opening balance of cash/bank Non-cash items are not included in this account It includes incomes and expenses for current year, past year & future year Balance at the end represents cash balance Debit side shows cash receipts Credit side shows payment It includes both capital and revenue incomes and expenditures S.N. 1. 2. 3. 4. 5. Income and Expenditure Account It is a nominal account It is like a profit and loss account It does not start with any opening balance Both cash and non-cash items are included in this account It includes incomes and expenses for the current year only Balance represents surplus or deficit Debit side shows expenses Credit side shows in comes It includes only revenue incomes and expenditures

6. 7. 8. 9.

6. 7. 8. 9.

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Teaching Manual, Accountancy,, Grade XI

8.5.4. Format of income and expenditure account

Income and Expenditure Account For the Year Ended Cr.
Expenditures Rs. Incomes Rs.

Dr.

To salaries and wages To printing & stationery To repairs To rent To office expenses To depreciation To insurance To audit fees To postage To telephone To bar expenses To honorarium To sundry expenses To loss on sales of assets To surplus (Bal. fig.)

XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XXX

By subscription By admission fees By donation (Revenue) By interest on investment By profit on sales of assets By rent received By sales of ticket By sales of newspaper By sundry incomes By deficit (bal. fig.)

XX XX XX XX XX XX XX XX XX XX

XXX

Illustration
The following receipts and payments account and additional information's are given to you: Receipts and Payments Account As on 31st Chaitra, 2059 Receipts Rs. Payments //136//

Dr.

Cr. Rs.

Teaching Manual, Accountancy,, Grade XI To balance b/d To subscription To entrance fees To donations (50% to be capitalized) To sales of refreshments 10,000 30,000 5,000 20,000 By salaries By equipment By sundry expenses By printing By refreshment 12,000 expenses By furniture 77,000 By balance c/d 18,000 20,000 5,000 2,000 9,000 6,000 17,000 77,000

Additional information: (1) Subscription due for 2059 Rs. 1,500 Subscription includes Rs. 500 received for next year (2) Outstanding salaries Rs. 1,000 (3) (4) Depreciation on furniture Rs. 500 Required: Income and expenditure account. Solution
Income a Expenditure Account Dr. As on 31 Chaitra, 2059 Expenditure Rs. Income To salary 18,000 By subscription 30,000 Add: Outstanding 1,000 19,000 Add: Outstanding 1,000 To sundry expenses 5,000 Less: Advance 500 To printing 2,000 By entrance fees To refreshment expenses 9,000 By donation (50% of To depreciation on 500 20,000) furniture 22,500 By sales of refreshment To surplus 58,000

Cr. Rs.

31,000 5,000 10,000 12,000 58,000

8.6.

Balance sheet:

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Teaching Manual, Accountancy,, Grade XI Balance sheet of a non-trading concern is prepared in the same man as the balance sheet of a business organization. It records all assets or right hand side and all liabilities on left hand side. The balance sheet is prepared on the basis of the last year's balance sheet, receipts and payment account, stock register kept for assets and the income and expenditure account. The following points should be noted for preparation of balance sheet: (a) Capital fund: Capital fund is ascertained by preparing opening balance sheet at the beginning of the year. The excess of assets over the liabilities will indicate the capital fund. (b) Surplus or deficit: The surplus is added to the capital fund while preparing balance sheet, and deficit is deducted from the capital fund. (c) Cash balance: The closing balance of cash is taken from receipts and payments account and is recorded in assets side. However, opening balance is ignored. (d) Assets: Assets of opening balance sheet are shown in closing balance sheet. If there is purchase of new assets in current year, it must be added and in case of sales, it is deducted. (e) Liabilities: Advance incomes and outstanding expenses etc. are shown on the liabilities side of balance sheet. (f) Special receipts: Special receipts given in the receipts and payments account are shown in balance sheet after making necessary adjustments.

Illustration
The following is the balance sheet of a club as on Baishak 1, 2059 Liabilities Rs. Assets Capital fund 25,000 Building Salaries due 200 Furniture

Rs. 20,000 3,000

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Teaching Manual, Accountancy,, Grade XI Advance subscription 400 Books Subscriptions receivable Cash 25,600 1,000 500 1,100 25,600

The following is the receipts and payments account for the year ended 30-12-2059 Receipts Rs. Payments Rs. To subscription By salaries 1,400 600 For 2058 500 By general expenses 2,000 For 2059 3,000 By books 3,900 By furniture (1-7-2059) 1,000 For 2060 400 To rent of hall 2,000 By electric charge 100 To sales of old newspapers 500 By telephone 400 To entrance fees 1,000 By balance c/d 3,900 To donations 2,000 9,400 9,400 Additional information: 1. The club has 72 members each paying and annual subscriptions of Rs. 50 2. Salaries for the year still payable Rs. 300 3. Depreciation of the furniture @ 10% p.a. 4. Donation is treated as capital receipts.

Required: (a) Income and expenditure (b) Balance sheet as on 30 Chaitra, 2059. Solution:
Dr. Income and Expenditure Account For the year ended 30 Chaitra, 2059
Rs. Incomes By: subscription 3,000

Cr.
Rs.

Expenditures To salaries 1,400 Less: Outstanding (2058) 200

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Teaching Manual, Accountancy,, Grade XI

Add: Outstanding (2059) 300 To teneral expenses To telephone To electric charge To depreciation of furniture To surplus 1,500 600 400 100 350 4,150 7,100 Add: Advance (2058) 400 Add: Outstanding (2059) 200 By rent of hall By sales of newspaper By entrance fees

3,600 2,000 500 1,000 7,100

Balance Sheet as on 30-12-2059

Liabilities Capital fund 25,000 Add: surplus 4,150 Advance subscription Donations Outstanding salaries Rs. Assets Building 3,000 29,150 Furniture 1,000 400 Add: Purchases 2,000 4,000 300 Less: Depreciation 350 Books 1,000 Add: Purchases 2,000 Outstanding subscription Old cash balance Closing balance 31,850 Rs. 20,000

3,650 3,000 200 1,100 3,900 31,1850

* Depreciation on furniture Depreciation of old furniture = 3,000 x 10% = 300 Dep. On new furniture = 1,000 x 10% = 100 x/12 = 50 (for 6 months) Total Depreciation = Rs. 350

E.

Model Questions:

Problem
From the following receipts and payments account and balance sheet, prepare an Income & Expenditure Account & Balance Sheet for the year ended 31 Chaitra 2060.

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Teaching Manual, Accountancy,, Grade XI Balance Sheet As on Baishak 1, 2060 Rs. Assets 50,000 Land & building 20,000 Subscription due 2,000 Prepaid insurance (Aswin end) 3,000 Cash balance 75,000

Liabilities Capital fund 10% loan Advance subscription Outstanding salaries

Rs. 60,000 2,500 4,000 8,500 75,000

Receipts & Payments Account Dr. For the year ended 31 Chaitra Cr. Receipts Rs. Payments Rs. To balance b/d 8,500 By grounds men's fees 4,500 To entrance fees 10,000 By tournament expenses 15,000 To subscriptions: By upkeep of grounds 2,000 For 2059: 2,000 By interest on loan 1,000 For 2062: 40,000 By books 5,000 For 2061: 1,000 43,000 By publicity 2,000 20,000 By salaries: To tournament fund To rent of the auditorium 5,000 For 2059: 2,500 To donation for pavilion 30,000 For 2060: 10,000 12,500 By insurance for 2061 Aswin end 8,000 By equipment 40,000 26,500 By balance c/d 1,16,500 1,16,500 Adjustments: 1. Capitalize 50% entrance fees. 2. Subscription due for 2060 Rs. 3,000 3. Depreciate land & building by 5%

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Teaching Manual, Accountancy,, Grade XI

Problem
The following is a summary of the receipts and payments account for the year ended 31 December 2003, of a club. Dr. Cr.
Receipts To balance b/d To subscriptions (Rs.500 including for 2004) To interest on investment To dance receipts To donation (50% capitalized) To sales of old furniture (Book value Rs. 5,000) Rs. Payments 10,000 By rent 20,500 By salaries By dance expenses 400 By help to needy 6,000 By equipment (July 1) 10,000 By insurance premium for 2004 March end 4,500 By fuel for vehicles By balance c/d 51,400 Rs. 4,000 5,000 2,000 3,000 15,000 6,000 500 15,900 51,400

Additional information: 1. Subscription include Rs. 500 for previous year. 2. Rent includes Rs. 100 paid for last year. 3. The cost of investment (acquired on 2001) was Rs. 10,000. 4. Depreciation of equipment @10% p.a. 5. Furniture on the last balance sheet stood at Rs. 10,000. Required: (a) Income & expenditure account (b) Balance sheet for the year ended 2003 F. Evaluation Scheme
The competency achieved by a student is this unit will be evaluated on the following basis: Type of question No. of Question Marks //142//

Teaching Manual, Accountancy,, Grade XI Practical 1 10

G.

Key-terms Introduced in the Unit

Non-trading concern, Profit motive, Service motive, Receipts and payment account, Income and expenditure account, Capital expenditure, Revenue expenditure, Capital receipts, Revenue receipts, Subscription, Entrance/admission fees, Donation, Grants, Legacies, Life membership fees, Endowment fund, Capital fund, Special fund, Surplus, Deficit etc. ---

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Teaching Manual, Accountancy,, Grade XI

Unit 9 Accounting for Incomplete Records

A. Introduction
There are many small scale business which do not follow double entry system. They believe that double entry system is not economical. They follow the single entry system. This unit includes preparation of statement of affairs and statement of profit and loss account.

B. Objectives
The main objectives of the unit is to help students for developing the ability to prepare statement of profit and loss account. After studying this unit, the student would be able to: (i) Know the meaning and features of single entry system. (ii) Differentiate between double entry and single entry system. (iii) Ascertain profit or loss from in complete records. (iv) Prepare opening and closing statement of affairs.

C. Content Arrears of the Unit S.N.

1 2

Arrears' of Unit Concept, features, advantage, disadvantage and difference between single and double entry system. Preparation of statement of affairs and ascertainment of profit or loss

T.H. 2 hrs.
4 hrs.

D. Description of Content area of Unit 9.1. Concept:

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Teaching Manual, Accountancy,, Grade XI

Under the double entry system, both aspects of every transaction are recorded one on the debit side and the other on the credit side. But under the single entry system, the record of both aspects of every transaction is not kept. Usually, in single entry system, the cash book and personal ledgers are kept, but real and nominal accounts are not maintained. Single entry system may be defined as a system in which accounting records are not kept according to double entry system of book-keeping. It is also known as incomplete record system. In fact, single entry is quite unsystematic, as it does not follow any rule and principles. According to kohlar "Single entry system is a system of book-keeping in which only records of cash and of personal accounts are maintained, it is always incomplete double entry system, varying with circumstances."

9.2. Features of Single Entry System

Following are the features of single entry system: (a) Single entry system is suitable only for small-scale business. (b) Generally, cash and personal accounts are maintained. Nominal and real accounts are not considered. (c) Cash book is maintained to record cash transactions. (d) Trial balance cannot be prepared under single entry system. (e) Profit or loss can be fund out with the help of single entry system but the details of income and expenses are not available.

9.3. Advantages of Single Entry System

The advantages of single entry system are as follows: (a) This method is suitable for small business concern. //145//

Teaching Manual, Accountancy,, Grade XI (b) (c) (d) Profit & loss can be ascertained easily is this system. It is such a simple method even a layman can keep account under this system. This system is economical as compared to double entry system.

9.4. Disadvantages of Single Entry System

(a) (b) (c) (d) (e) It is not a scientific method of accounting because it does not record the dual aspect of each transaction. The personal transactions of the proprietor get mixed up with business transactions. The arithmetical accuracy of the account cannot be checked since trial balance cannot be prepared. There is no clear records of purchases, sales and returns. The tax authorities do not recognize such records.

9.5. Difference between Single and Double Entry System

1. This method is suitable for small scale business 2. It is an incomplete method of recording transactions 3. Arithmetical accuracy can not be checked because no trial balance can be prepared 4. Only cash & personal accounts are maintained 5. Trading, profit & loss account & balance sheet cannot be prepared 1. This method is suitable for largescale business 2. It is a complete method of recording transactions 3. Arithmetical accuracy can be checked by preparing trial balance 4. All accounts like personal, real and nominal account are maintained 5. Trading, profit & loss account & balance sheet can be prepared

9.6. Statement of Affairs or Net Worth Method

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Teaching Manual, Accountancy,, Grade XI Under this method, profit is calculated by comparing closing capital and opening capital. If the closing capital is more than the opening capital, the difference is profit. If the closing capital is less than the opening capital, the difference is loss. If there is drawing, it should be added to the closing capital. Similarly, if any new capital (additional capital) has been introduced during the year, it is deducted. The opening capital is also deducted. The following is the procedure to calculate profit or loss under net worth method: (a) Calculate the amount opening capital and closing capital by preparing statement of affairs. (b) Ascertainment of drawing during the period. (c) Ascertainment of additional capital. (d) Preparation of statement of profit and loss.

9.7. Format of Statement of Profit and Loss

Statement of Profit & Loss For the Year Ended .. .. .. .. .. Particulars Closing capital (before adjustment) Add: Drawing Less: Opening capital xxxx Less: Additional capital xxxx Net profit (net loss) It there are adjustments to be made Statement of Profit & Loss Account For the Year Ended Particulars Closing capital (before adjustment)

Amount xxxx xxxx xxxx xxxx xxxx

Amount xxxx

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Teaching Manual, Accountancy,, Grade XI Add: Drawing Less: Opening capital Less: Additional capital Less: Interest on capital Net profit before adjustment Less: Adjustment: Baddebts Provision for baddebts Depreciation Net profit (Net loss) xxxx xxxx xxxx xxxx xxxx

xxxx xxxx

xxxx xxxx xxxx

xxxx xxxx

Illustration 1:
Find out the profit or loss of a concern during the year 2060. Capital on Baishak 1, 2060 Rs. 2,50,000 Drawing per month Rs. 1,500 from Ashad 2060 Interest on capital Rs. 10,000 Capital added by the proprietor during the year SR.s 25,000 Capital on Chaitra 2060 Rs. 3,00,000 He decide to write off Rs. 500 as baddebts and provide for baddebts Rs. 1,000. Write off depreciation on furniture Rs. 2,000.

Solution:
Statement of Profit & Loss For the Year Ended 31 Chaitra 2060 Particulars Closing capital Add: Drawing (1,500 x10)

Rs. 3,00,000 15,000 3,15,000

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Teaching Manual, Accountancy,, Grade XI Less: Opening capital 2,50,000 Less: Additional capital 25,000 Less: Interest on capital 10,000 Net profit before adjustment Less: Baddebts 500 Less: Provision for baddebts 1,000 Less: Depreciation on furniture 2,000 Net profit (Net loss)

2,85,000 30,000

3,500 26,500

9.8. Preparation of statement of affairs: This statement is prepared with a view to find out the capital of the business. Opening statement of affairs is prepared to find out the opening capital. Similarly, closing statement of affairs is prepared to find out closing capital. It follows the principle of accounting equation: Assets Liabilities = Capital The statement of affairs is just like a balance sheet. All the assets are shown on the right hand side and all the liabilities are shown on the left hand side of the statement of affairs. The difference between the assets and liabilities represents 'Capital'. Illustration 2
Kalu started business with Rs. 1,05,200 on Jan. 1, 2004. His position on 31 December, 2004 is as follows: Plant & machinery Rs. 25,000 Land & building Rs. 60,000 Debtors Rs. 15,000 Bills receivable Rs. 5,000 Bills payble Rs. 12,000 Creditors Rs. 10,000 Furniture Rs. 20,000 Bank balance Rs. 22,000 His drawing during the year were Rs. 600 per month. Depreciate furniture by 10%. Write off baddebts Rs. 1,000 and provision for bad & debtful debts @ 10%.

Solution:

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Teaching Manual, Accountancy,, Grade XI If adjustments are considered in statement of profit & loss: Statement of Affairs As on 31 December 2004 Liabilities Rs. Assets Bills payable 12,000 Plant & machinery Creditors 10,000 Land & building Closing capital (Bal. 1,25,000 Debtors figure) Bills receivable Furniture Bank balance 1,47,000 Statement of Profit & Loss For the year ended 31 December 2004 Particulars Closing capital Add: Drawing (600 x12) Less: Opening capital Net profit before adjustment Less: Depreciation on furniture Less: Baddebts Less: Provision for doubtful debts Net Profit

Rs. 25,000 60000 15,000 5,000 20,000 22,000 1,47,000

Rs. 1,25,000 7,200 1,32,200 1,05,200 27,000

2,000 1,000 1,400

4,400 22,600

E. Model Questions: Problem

Mr. Karki started business with Rs. 55,000 on Jan. 1, 2001. His position at the end tof the year was: Furniture Rs. 25,000 //150//

Teaching Manual, Accountancy,, Grade XI Stock Rs. 30,000 Creditors Rs. 22,000 Debtors Rs. 28,000 Unearned rent income Rs. 4,000 Bank overdraft Rs. 5,000 Prepaid insurance Rs. 6,000 Cash in hand Rs. 25,000 The prepaid insurance expired to the extent of Rs. 4,000 and unearned rent were earned end of the year was Rs. 1,000. Write off Rs. 1,000 as baddebts. Depreciate furniture by 2%

Required: (a) Closing statement of affairs (b) Statement of profit and loss Problem
'A' started business with Rs. 80,000 on Jan. 1, 2003. On July 1st 2003 he bought a machinery of Rs. 40,000. His drawing during the year Rs. 24,000 and further capital of Rs. 30,000. His position at the end of the year was as follows: Sundry debtors Rs. 50,000 Stock Rs. 40,000 Creditors Rs. 30,000 Cash at bank Rs. 25,000 Bills receivable Rs. 5,000 Loan Rs. 30,000 Outstanding wages Rs. 500 Bank overdraft Rs. 3,500 Additional Information: (a) Depreciate machinery 10% (b) Write off baddebts Rs. 1,000 (c) Create reserve for baddebts @ 5% Required: (a) Closing statement of affairs to find out closing capital //151//

Teaching Manual, Accountancy,, Grade XI (b) Statement of profit and loss

F. Evaluation Scheme
This unit has been designed for short answer practical question. The number of question and marks allocated for this unit are as under: Types of Question No. of Question Marks Practical 1 4

G. Key-terms Introduced in the Unit: Single entry system, Statement of affairs, Statemetn of profit and loss, Net worth, Adjusted capital, Profit before adjustment.

Unit 10 Government Accounting

A. Introduction
This unit gives an overview of government accounting. Government accounting is the process of recording, classifying, summarizing and interpreting government incomes and expenditures. The main objective of this unit is to give knowledge about government accounting. After studying this unit, students will be able to keep the records of government transactions and prepare reports of them. It also help to produce lower level manpower's for keeping financial transactions in government offices. It includes Journal voucher, Bank cash book, Petty cash book, Budget sheet, Ledger accounts and statement of expenditure reports.

B. Objectives:
The main objective of this unit is to help students to acquire the knowledge of government accounting. After studying this unit, the students will be able to:

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Teaching Manual, Accountancy,, Grade XI (a) (b) (c) (d) (e) (f) Know the meaning, objectives and features of government account. Distinguish between government and commercial accounting. Trace the evolution of accounting system of government of Nepal. Explain the objectives, features and importance of accounting system of government of Nepal. Make journal voucher. Prepare Bank cash book, Petty cash book, Budget sheet, Ledger account, Statement of expenditure report and advance expenditure report.

C. Content Arrears of the Unit

The teaching hours allocated for the unit is 30 hours, The teaching hours may be subdivided as below. However the teacher can arrange these lecture hours as per his convenient. S.N. Areas of Units Teaching hours 1 Concept, objectives and features of government 2 hrs. accounting and difference between government and commercial accounting 2 Historical background, objectives, importance, 3 hrs. features, heads of expenditure and form used in accounting system of government of Nepal. 3 Meaning and preparation of journal voucher 8 hrs. 4 Concept and preparation of bank cash book and 6 hrs. petty cash book 5 Meaning and preparation of budget sheet and 6 hrs. ledger account 6 Concept and preparation of statement of 5 hrs. expenditure report and advance expenditure report.

D. Description of Content Areas

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Teaching Manual, Accountancy,, Grade XI

10.1.1. Introduction of Government accounting

Accounting system implemented and followed by the government offices to record the financial transactions of the government is called government accounting. It is concerned with keeping records of government revenue, expenditure, penalties, subsidies, grants, loans etc. It is the process of recording, classifying summarizing and interpreting the financial transactions of the government. According to Oshisami and Dean "Government accounting is the process of recording, summarizing, communicating and interpreting financial information about government in aggregate and in detail, reflecting all transactions involving the receipt, transfer and disposition of government funds and property".

10.1.2. Objectives of government Accounting:

a. b. c. d. e. f. g. To record the financial transactions of government which includes revenue and expenses. To get control over the expenditure within the ceiling of the budget. To provide information about allocated expenses and their utilization. To provide financial information and data for budget preparation. To safeguard the government property. To make auditing simple and economical. To provide information needed for financial reports.

10.1.3. Features of Government Accounting: a. History of financial transaction b. Bases on double entry system. c. Based on budget and control mechanism. d. Based on financial acts and rules. e. Provision of auditing. f. No concern with profit or loss. g. Decentralization.
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Teaching Manual, Accountancy,, Grade XI

10.1.4. Difference between Government and Commercial Accounting:

Government Accounting (1) Government accounting is used to record transactions that takes place in government office. (2) Government accounting is normally maintained is cash basis. (3) Government accounting is no way is related to show profit or loss. (4) Government accounting is based on budgeting principle. Thus it is controlled by budget. (5) Government accounting is strictly maintained following government rules and acts. Commercial Accounting (1) Commercial accounting is used to record transactions in commercial organizations. (2) Commercial accounting is maintained in accrual basis. (3) Commercial accounting is concerned with profit or loss. (4) commercial account is not rigidly guided and controlled by budget. (5) Commercial accounting is maintained with out following specific rules and acts except some government rules and regulations.

10.2. Accounting System of Government of Nepal 10.2.1. A Short History of Government of Nepal Accounting System The main accounting system followed by government of Nepal before the introduction of present new accounting system were as follows: a. Syaha Sresta Pranali b. Wasil Waki Sresta Pranali c. Form Sresta Pranali d. Bhuktani Sresta Pranali (Payment Accounting System)

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Teaching Manual, Accountancy,, Grade XI

(a) Syaha Sresta Pranali It was introduced by Khardar Gunbat. It has adopted following three main types of account: (i) Syaha (ii) Awarje (iii) Dhapot (i) Syaha is used to record the original record of the transactions. It is also called as sixteen column syaha. Left side of the book is used for recording revenue and right side for expenditure. It is closed at the end of the month, at the end of the year and at the completion of job. Cash Syaha, Property Syaha and Dharouty Syaha comes under Syaha Sresta Pranali. (ii) Awarje is used to post the transactions for classified information of the financial transactions. It is the book of final entry under Syaha Sresta Pranali. The total income and expenditure on any head can be easily. (iii) Dhapot is used as a reporting statement under Syaha Sresta Pranali. The accountant has to report for checking and suppression of the financial transactions to Kumarichok. Dhapot are of following types: (a) Month end Dhapot (b) Year end Dhapot (c) Job completion/end Dhapot. (b) Wasil Waki Sresta Pranali It is a simple book of account for recording the income and expenditure. The income and expenditure are recorded in a single book. It is used for the recording the financial transactions of minor non-recurring project work or temporary office units. Year-end Wasil Waki Sresta and job-end Wasil Waki Sresta all of two types under Wasil Waki Sresta Pranali. (c) Form Sresta Pranali

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Teaching Manual, Accountancy,, Grade XI During B.S. 1968 Form Sresta Pranali was developed for revenue accounting. Altogether 50 different forms have been developed under then Sresta Pranali.

(d) Bhuktani Sresta Pranali (Payment Accounting System) This system is based on financial procedural rules of B.S. 2016. The financial procedural rules 2016 define the duties and responsibilities of the following governmental bodies: (i) Function of ministry of finance regarding the budget release. (ii) Responsibility and duties toward the financial administration of different ministries. (iii) Financial procedures to be followed by operating level offices. (iv) Duties and responsibilities regarding financial administration of controller general. (v) Rights and duties of auditor general regarding the audit of government financial transactions. 10.2.2. New Accounting System of Government of Nepal Under article 100 (4) of the constitution of kingdom of Nepal, 2047 and other legal provision, all governmental offices are required to maintain accounts on forms prescribed by the auditor general, in accordance with rules and procedures of government of Nepal. At present following accounting system are used in government offices: 1. New accounting system 2. Public work accounting system 3. Revenue accounting system 4. Property accounting system
An account committee was formed for the preparation of appropriate and scientific accounting systems. The committee was comprised of accounting general of G. of Nepal advisor from U.S. Aid & accounting specialist of the U.N. After a detailed study of 288 days, the committee prepared and //157//

Teaching Manual, Accountancy,, Grade XI presented a draft of Kartik 18, 2018 B.S. for approval by the G. of Nepal. The account general of G. of Nepal approved this Magh 20th and was finally approved by the G. of Nepal on 2nd. Chaitra, 2018. This system was implemented in the different offices of G. of Nepal. The accounting system is known as "New Accounting System of G. of Nepal" This system became fully operational throughout the kingdom of Nepal from Shrawan 1st 2025. The new accounting system is based on double entry system. It is also based on government fund expenditure rule of 2016 B.S. In this system, separate provisions are made for cash transactions and liabilities.

10.2.3. Objectives of New Accounting System of Nepal Government (a) To provide basic financial statistic and necessary data required to prepare financial reports. (b) To keep control over the available funds and other resources as well as their expenditures. (c) To summarise the accounting data necessary prepare government budget. (d) To collect the historical data of budget heads. (e) To facilitate auditing and make it simple and economical. 10.2.4. Importance of Present (New) Accounting System of G. of Nepal 1. G. of Nepal Accounting System provides details of financial information of government offices. 2. It also provides information or datas required for the preparation of plans and formulating the government policies. 3. It furnishes the report of revenue and expenses of government of the public. 4. It assists budget preparation by providing all kinds of information. 5. G. of Nepal Accounting System is helpful for auditing also. 6. It controls the financial activities of government offices. 7. It informs in detail about the fund to the donor contries.

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Teaching Manual, Accountancy,, Grade XI 8. It provides necessary information required for the preparation of financial statement.

10.2.5. Features of Present (New) Accounting System of G. of Nepal 1. The G. of Nepal accounting is based on the principles of double entry system. 2. Advances are treated as budgetary expenditure to the tune of payment for effective budgetary control. 3. It emphasizes banking transactions. 4. It is prepared on cash basis and all financial transactions are recorded as and when they occur. 5. It keeps accounts under different budget heads which helps in monitoring whether the actual revenues and expenses are budgeted or not. 6. G. of Nepal accounting system divides the government offices into two levels: Control level and operating level. These is follows the principle of decentralization. 7. Different types of forms are used for different nature of transactions, from which control on the forms become easy and uniformity in account maintaining is possible. 8. Separate report forms have been developed for the different types of activities by which any report can be found out easily. 10.2.6. forms used in New Accounting System of Government of Nepal The different forms used in G. of Nepal accounting system are as follows:
AGF No. 1. Bank Cash Book (Bank Nagadi Kitab) 2. Cash Payment Slip (Nagad Bhuktani Parcha) 3. Requisition for the reimbursement of Cash Payment (Negad Bhuktani Sodhbharna Faram) 4. Cash Payment Slip and Controlling of Cash Receipt Slip (Nagad Bhuktani Parcha Ra Nagadi Rasidko Niyantran) //159//

5 6 6(A) 7

Teaching Manual, Accountancy,, Grade XI 5. Budget Sheet (Budget Hisab) 8 6. Monthly report regarding revenue (Rajaswq Sambhandi Report) 9 7. Journal Voucher (Goswara Voucher) 10 8. Cash Receipt (Nagadi Rashid) 11 9. Inquiry Sheet (Sodhani Patra) 12 10. Statement of Expenditure (Kharcha Ko Phantwari) 13 11. Monthly Report of uncleared advance (Farchout Garna Banki Peskiko Maskewari) 14 12. Statement of Bank Account (Bank Hisabko Bibaran) 15 13. Summary of the Condition of Fund (Koshko Abastha Terij) 16 14. Statement of Budet Sheet (Budget Hisabko Bibaran) 17 15. Statement of Outstanding Payment (Bhuktani Dina Bankiko Kacchabari) 18 16. Monthly Report of Deposits (Dharautiko Maskebari) 19 17. Statement of Annual Programme (Barshik Karyakram) 20 18. Requisition from for Four Monthly Budget Release (Chaumashik Maag Faram) 21 19. Accounts (Khata) 22 20. Cash Receipt Book (Nagad Amdani Kitab) 23 21. Budget Summary and Expenditure Control Account (Budget Saransha Kharcha Niyantran Khata) 24 22. Statement of Monthly Report (Maskebari Hishabko Bibaran) 25

10.2.7. Classification of Heads of Expenditure 1. Consumable Expenses: 1.1. Salaries 1.2. Allowance 1.3. TADA on transfer of employees 1.4. Dress 1.5. Food and feeding materials 1.6. medical treatment 1.7. Retirement facilities 1.8. Expenses on training programme
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Teaching Manual, Accountancy,, Grade XI

2. Office Operation and Service Expenses 2.1. Water and electricity charges 2.2. Communication charges 2.3. Office related expenses 2.4. Rent 2.5. Repairs and maintenance 2.6. fuel and fuel for other purpose 2.7. Consultancy and other service charges 2.8. Miscellaneous expenses 3. Grants/Subsidy 3.1. Grant to public enterprises 3.2. Grant to local bodies 3.3. Grant to public utilities 3.4. Grant on public securities 4. Services Expenses 4.1. Production materials and service cost 4.2. Medicine 4.3. Book and other materials 4.4. Programme execution expenses 4.5. TADA on conducting programme 4.6. Maintenance and repair of public property 5. Capital Transfer Expenses 5.1. Purchase of land 5.2. Purchase of building 6. Capital Formation 6.1. Furniture 6.2. Means of transport
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Teaching Manual, Accountancy,, Grade XI 6.3. Machinery and equipment 6.4. Building 6.5. Construction of public properties 6.6. Capital assets improvement expenses 6.7. Capital expenditure for technical advisory service cost

7. Investments 7.1. Investment in shares 7.2. Investment in loans 8. Capital Subsidy 8.1. Subsidy to public enterprises 8.2. Subsidy to local bodies 8.3. Subsidy to service oriented organizations. 9. Contingencies 10. Payments of principal 10.1. Payment of principal of internal loan 10.2. Payment of principal of external loan. 11. Payment of Interest 11.1. Payment of interest of internal loan 11.2. Payment of interest of external loan. 12. Return Expenses 12.1. Return on expenses 12.2. Capital expenditure E. Key-terms used in the Chapter

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Teaching Manual, Accountancy,, Grade XI Government accounting, Commercial accounting, Central levels, Operating levels, Budget expenditure, budget heads, Budget limit, Auditing, Annual report, syaha, Awarje, Dhapot, Cash basis, Accrual basis, Regular expenditure, Capital expenditure etc.

10.3. Journal Voucher 10.3.1. Meaning Journal Voucher also called Goshwara Voucher is the prime part of new accounting system of Nepal Governement. Journal Voucher is the first document used for recording the financial transactions that took place in government offices. The Journal Voucher is based on the principles of double entry system. It is used by both central and operating level offices. The Journal Voucher is divided into four parts. They are:
First Part: The following facts are mentioned in the part: 1. Name of the office, department or ministry 2. The serial number of Journal Voucher 3. Date of recording the transaction. Second Part: In this part, the following facts are included: 4. Code no. 5. The account to be debited and credited with a brief explanation about the transaction. 6. The page no. of ledger in which the transaction is posted. 7. Budget head number 8. Debit amount of the transaction 9. Credit amount of the transaction Third Part: 10. The receipt number of the amount received and amount received in words in written here, if Voucher is prepared for an income. //163//

Teaching Manual, Accountancy,, Grade XI 11. Number and amount of cheque is mentioned for payment. Fourth Part: 12. Signature, Date and position of the executive giving approval to the statement in mentioned. The format of the Voucher. Which is based on the design of form AGF No. 10. is given below: Government of Nepal AGF No. 10 Office/Department/Ministry J.V. No. . Date ... Journal Voucher
Code no. Particulars L.F. Budget Head Debit Amount Credit Amount

Receipt No . .. Received Amount Cheque Submitted by .. Date Position .. ..

Cheque No. Amount of Approved by Date Position

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Teaching Manual, Accountancy,, Grade XI

10.3.2. Rules for Debit and Credit used in New Accounting System of Nepal Government
One of the features of new accounting system is that this account is based on the principle of double entry system of book keeping, where every debit entry has a corresponding credit entry with equal amount. The rule for debiting and crediting may be done in two wags. (1) Nature of Account: As has been discussed in unit 2 accounts are classified into 3 types and rules for debit and credit are as follows: For Personal Account: Receiver Debit Giver Credit For Real Account: What Comes in Debit What goes out credit For Nominal Account Expenses or losses Debit Income or gains Credit (2) Nature of Transaction for Assets increases for Liabilities decreases for Revenue decreases for Expenses decreases for Assets decreases for Liabilities increases for Revenue increases for Expenses decreases

Debit

Credit

10.3.3. Types of Journal Voucher: The vouchers are classified into following three categories: (a) Expenditure journal voucher

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Teaching Manual, Accountancy,, Grade XI (b) Advance expenditure journal voucher (c) Miscellaneous journal voucher

(a) Expenditure journal voucher: Vouchers prepared only for budgeted expenditure transactions are called expenditure journal voucher. When items are purchased or any service is rendered journal voucher is prepared at the time of their payments.
At the time of preparing journal voucher, the word BE is prefixed on the concerned head of expenditure, which means expenditure is made from this head. When payment is made, the credit is given to concerned bank where the government office has opened their account, otherwise credit will be given to Nepal Rastra Bank.

Illustration I: District Irrigation Office Chitwan, purchased computer paper, envelope, marker pen, ball pen, paper file, etc. from a local stationery shop and paid Rs. 4,000 as per the bill on 4.4.2059 through cheque no. 004. Solution:
AGF No. 10 Government of Nepal District Irrigation Office/Dept./Ministry Chitwan Journal Voucher 1.
Code No. 4.4.059 Particulars Dr. B.E. Office Materials Cr. Nepal Rastra Bank (Being payment made to for L.F. BH 2.03 Debit Amount Rs. 4,000

J.V. No. 001 Date 4.4.2059

Credit Amount Rs. 4,000

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Teaching Manual, Accountancy,, Grade XI

purchase of stationeries and paid through cheque no. 004) Receipt No. .. Amount Received . Thousand Submitted by Mr. A Position Account Date 4.4.059

Cheque No. 00002 Amount of Cheque Ten Approved by Mr. X Position Officer Date 4.4.059

(b) Advance expenditure journal voucher: In principle, government offices should not make any payment neither before receiving the goods supplied by the supplier nor such payments are made before completing the job or services. However under certain circumstances, they are completed to make payment even before delivering the goods or rendering the services. This amount which is paid before receiving goods or rendering services is called advance expenditure.
Actually advance is not an expenditure but it is treated as expenditure, for the time being, in new accounting system. Therefore the word BE would not be prefixed when advance is made. This advance amount must be cleared later on by submitting the purchase bills. Advance amounts are recorded twice-first when the advance is given and next when the advance is cleared.

(i) Journal Voucher when Advance is Given: When advance is given it should be debited in the name of the person to whom advance is given along with his position, giving reason for which advance is given and name of bank against which the cheque is drawn or credited. Illustration 2: Issued cheque no. 00115 to Mr. Milan Shah, Sr. Accountant, of 4,000 as advance for an official tour within the district on 1.12.059. Solution
AGF No. 10

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Teaching Manual, Accountancy,, Grade XI Government of Nepal District Education Office Kathmandu Journal Voucher 1.
Code No. 001 Particulars L.F. BH Debit Amount Rs. 4,000 4,000

J.V. No. 00101 Date 1.12.2059

Credit Amount Rs.

Dr. Mr. Milan Shah Sr. Accountant TADA Advance Cr. N.R. Bank (Being advance given to Sr. Accountant Mr. Milan Shah for district official tour through cheque no. 00115) Receipt No. .. Amount Received: Four Thousand Cheque: Four Thousand Submitted by: Position: Position: Date : 1.12.059

4.05

Cheque No. 00115 Amount of Approved by: Date 1.1.059

(ii) Journal Voucher While Clearing the Advance: The following are the five possible cases and entries relating to the clearance of advance: Case 1: By returning whole advance amount without any expenditure. Dr. Nepal Rastra Bank Cr. Name of the organization or persons Case 2: More expended than the advance taken: Dr. B.E. The relevant budget heads Cr. N.R. Bank Cr. Name of the person clearing advance Case 3: Less expended than the advance taken Dr. B.E. The relevant budget head &
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Teaching Manual, Accountancy,, Grade XI Dr. N.R. Bank Cr. Name of the person clearing advance Case 4: Expenditure equal to advance taken Dr. B.E. The relevant budget heads Cr. Name of the person clearing advance Case 5: Partial clearing: Dr. B.E. The relevant budget head Cr. Partial clearing of advance amount.

Illustration 3: Mr Ramesh Sharma, CDO of Lalitpur District, Patan had received TADA advance of Rs. 3,000 for district tour. He submitted the statement of actual expenditure of Rs. 3,000 on 2.5.059 and cleared his advance. Solution: a.
Code Particulars Dr. B.E. Travelling & Daily Allowance (TADA) Cr. Mr. Ramesh Sharma, CDO, TADA Advance Clearance (Being TADA advance taken by CDO, Ramesh Sharma submitted the actual bill of expenses and cleared the advance) L.F. BH 4.05 Debit Rs. 3,000

Date
Credit Rs.

3,000

(c)

Miscellaneous journal voucher:

Those transactions which are not under the budget expenditure head and advance are comes in miscellaneous transactions. These transactions are recorded in miscellaneous vouchers. The miscellaneous transactions are as follows: (i) Revolving fund

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Teaching Manual, Accountancy,, Grade XI (ii) Budget releases or disbursement (iii) Petty cash fund (iv) Loan to employees (v) Transfer of budget (vi) Income tax (vii) Tejarath Sapati loan (viii) Employees providend fund (ix) Security deposit (x) Annual closing (xi) Rectification of errors

Illustration 4: (a) Received ban order letter of Rs. 1,50,000 and budget release order for Rs. 1,65,000 for the actual expenditure of the last month. (b) Issued a cheque of Rs. 9,000 for office rent for the month of Chaitra and Baishakh. The monthly rent is Rs. 4,500. (c) Salary of the month Rs. 21,000 has been distributed after deduction for Rs. 5,000 for p.f. and Rs. 1,500 for p.f. loan. Required: Journal voucher Solution:
C.N. (a) Particulars Dr. N.R. Bank Dr. Revolving Fund Cr. Budget Release (Being received of budget release order) Dr. B.E. Rent Dr. Advance Rent Cr. Nepal Rastra Bank (Being house rent paid for Chaitra & L.F. BH No. Debit Rs. 1,50,000 15,000 1,65,000 2.04 2.04 4,500 4,500 9,000 1.01 25,000 Credit Rs.

(b)

(c)

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Teaching Manual, Accountancy,, Grade XI

Baishakh) Dr. B.E. Salary Cr. P.F. Cr. P.F. Loan Cr. Nepal Rastra Bank (Being distribution of salary after deduction of p.f. & p.f. loan) 5,000 1,500 21,000

10.4. Bank Cash Book 10.4.1. Meaning

Bank cash book is a book of account maintained by operating level offices in government office to record their cash and banking transactions. It is one of the important means of controlling government budget introduced by the government. Bank cash book, as a means of control, maintains all kinds of records pertaining to budget release, cash and bank account, statement of cash deposit and statement of advance etc. Form designed and used to maintain the above records is AFT No. 5. This form serves as a general ledger to record all the above transactions. Transactions in bank cash book are recorded on the basis of journal voucher. Therefore, preparation of journal voucher is necessary before posting transactions into bank cash book. Records are maintained by following the principles of double entry system. Bank cash book comprises five ledger heads. They are: cash, bank, budget expenditures, advance expenditures, and miscellaneous. While posting the transactions from journal voucher into back cash book the amount debited in the vouchers are posted in the debit column and amount credited in the vouchers are posted in the credit column of the bank cash book. Bank cash book is closed at the end of each month to depict the real position of receipts, payments and balance of cash. There are all together 17 columns in a bank cash book. The following is the prescribed format of bank cash book. //171//

Teaching Manual, Accountancy,, Grade XI

A.G. No. 5 Government of Nepal .. Office/Department/Ministry . Year Month
Cash Bank Balance Balance Date CodeParticulars Dr. Cr. Dr. Cr. Cheque Bal. No. No. Budget Expenditure B.E. Am No. t. Advance Account Given Clearan ce Miscellaneous B.E . No. Dr. Cr. Remar ks

10

11

12

13

14

15

16

17

The above book contains 5 accounts and 17 columns. The details about each account and column is mentioned below: (1) Date: The date of financial transaction is recorded in this column. (2) Code No.: The Journal Voucher number is recorded in this column. (3) Particulars: The transaction in brief manner is mentioned in this column. (4) Cash Balance - Dr. In this column the cash or cheque received amount is recorded. Cash Balance - Cr.: In this column cash payment and cash deposit is (5) recorded. (6) Bank Account - Dr: It is used to record the amount deposited into Bank. (7) Bank Account Cr: It is used to record payment made by cheque. (8) Bank Account Cheque No.: the cheque number of amount drawn is shown in this column. (9) Bank Account Balance: In this column, the balance amount after depositing or withdrawing from bank is shown. //172//

Teaching Manual, Accountancy,, Grade XI (10) (11) Monthly Budget Expenditure B.E. No.: Budget head number is recorded in this column. M.B.E. Amount: The expenditure amount is recorded in this column payment for other than budget expenses were not included in the column. Advance Given: Advance given amount for any purpose is recorded in this column. Advance Clearance: This column is used for advance clearance amount. Miscellaneous Account B.E. No.: It is used to record miscellaneous account number. & (16) Miscellaneous Account Dr. and Credit: The columns are used for recording those transactions which are not recorded in cash, bank, budget expenditure and advance account. The expenditure amount is recorded in debit column (15) and income in credit column (16). Remarks: For additional information and signature, this column is used.

(12) (13) (14) (15)

(17)

Illustration 1:
You are given the following transactions: Magh 1 Balance at bank Rs. 50,000 3 Received budget release and bank order of Rs. 90,000 10 Purchased office supplies and paid by cheque Rs. 7,200 10 Mr. Thapa submitted the bill of Rs. 25,000 for purchase of furniture against the advance taken of Rs. 20,000 for the same. His advance is cleared accordingly on the same day. 20 Issued a cheque of Rs. 5,000 for purchase of office supplies. 28 Issued a cheque of Rs. 18,000 for distribution of salary for the month after deducting Rs. 4,000 for P.F. contribution. The deduction is deposited into the concern office on the very day. //173//

Teaching Manual, Accountancy,, Grade XI

Required: (i) Journal voucher (ii) Posting into bank cash book. (Sketch a specimen of a journal voucher of your own or use printed forms) Solution:
Code Magh 3 Particulars Dr. Nepal Rastra Bank Cr. Budget Release A/C (Being receipt of budget release for the actual expenditure of Paush) Dr. BE Office Supplies Cr. Nepal Rastra Bank (Being purchase of office supplies) Dr. BE Furniture Cr. Mr. Thapa, Advance Clearance Cr. Nepal Rastra Bank (Being advanced of Mr. Thapa for furniture purchase is cleared) Dr. BE Office Supplies Cr. Nepal Rastra Bank (Being purchase of office supplies) Dr. BE Salaries Cr. PF Contribution Cr. Nepal Rastra Bank (Being PF deduction deposited to concern office) Dr. PF Contribution Cr. Nepal Rasta Bank (Being PF deduction deposited into concern bank account) 2.03 L. F. BH No. Debit Rs. Credit Rs. 90,000 90,000

Magh 10

7,200 7,200

Magh 10

6.01

25,000 20,000 5,000

Magh 20

2.03

5,000 5,000

Magh 28

1.01

22,000 4,000 18,000

Magh 28

4,000 4,000

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Teaching Manual, Accountancy,, Grade XI

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Teaching Manual, Accountancy,, Grade XI AGF No. 5

Government of Nepal Office/Department/Ministry Bank Cash Book of . Magh .. Month .. Year

Date Ref. Particulars Cash Hand Dr. in Cr. Dr. Bank Balance Cr. Ch. No. Balance 50,000 140,000 Budget Expenditure B.H.No. Amount Advance Paid Cleared Miscellaneous A/C No. Dr. Cr. Remarks

1.10 3.10

10.10 10.10

20.10 28.10 28.10

Balance b/d Receipt of bank order and budget release Payments for office supplies Clearance of furniture purchase advance of Mr. Thapa Payments of office supplies Payments of staff salaries Deposit of PF to concern office End of Magh

90,000

90,000

7,200 5,000

132,800 127,800

2.03 6.01

7,200 25,000(20,000) 20,000

5,000 18,000 4,000 90,000 39,200

122,800 104,800 100,800

2.03 1.01

5,000 22,000 4,000 39,200 20,000 4,000 94,000 4,000

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Teaching Manual, Accountancy,, Grade XI

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Teaching Manual, Accountancy,, Grade XI 10.4.2. Petty Cash Book: Banking transactions have been emphasized in the Accounting System of Government of Nepal. Practically it may not be convenient to issue cheque for small payments. These small payments are known as petty expenses. To overcome this practical difficulty, the accounting system has a provision to create a separate fund to meet day to day small expenses, which is known as petty cash fund. The petty cashier is appointed for making small payments and recording those payments. He is given a certain sum of money and small payments are made by him. The amount is fixed on the basis of past experience or transactions. It may be from Rs. 200 to Rs. 500. At a regular interval, the petty cashier produces the vouchers to the main cashier. The main cashier checks the vouchers and hands over the necessary cash to petty cashier again. Thus all the expenses incurred so far will be reimbursed to the petty cashier, thus, the petty cash in hand will stand at the original figure by which it was established. 10.4.3. Guidelines for Operating the Petty Cash Fund Only the petty (small) expenses are paid from this fund. Advance payments should not be made out of this fund. Journal vouchers are not prepared for petty expenses. Instead of it a cash payment slip is prepared for payments. The office in-charge should inspect the status and the operation of the fund from time to time to ensure proper utilization of the fund. Any amount received from staff or other persons while clearing the advance taken or cash received from any source of revenue should not be mixed up with this fund. Rs. 20 can be paid at a time except for wages to casual labour. Accounting of petty cash it to be maintained using the A.G.F. No. 22 format. The demand for reimbursement of petty cash fund expenditure should be made in the A.G.F. No. 6(A) form, providing the necessary details of expenses incurred. The expenditures made out-up petty cash fund are not recorded in the cash book until the reimbursements for expenses are made. 10.4.4. Account Keeping for Petty Cash Expenses: 1. Cash payment slip 2. Cash Reimbursement demand form 3. Cash payment slip & cash receipt control form 4. Petty cash fund account

AGF No. 6 AGF No. 6(A) AGF No. 7 AGF No. 22

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Teaching Manual, Accountancy,, Grade XI 1. Cash Payment slip: This form is used for the payment of cash through petty cash fund. The format of the slip is given below:
AGF No. 6

Government of Nepal Office/Department/Ministry Name of the person receiving the payment .. Place: Particulars Amount Rs. P.

Total payment (in words) Signature of the office giving approval .. Signature of the office giving payment . Signature of the person receiving payment

2. Cash Reimbursement Demand Form: The petty cashier submits a statement of expenditure of the petty payment made by him. Along with the statement also prepares a cash reimbursement demand form. Reimbursement for petty cash fund expenses is made only after receiving of cash reimbursement demand form.
Government of Nepal .. Office/Department/Ministry REQUEST OF REMBURSEMENT OF CASH PAYMENT Balance on . As per previous reimbursement request Rs. . Reimbursement received on .. as per reimbursement request Rs. .. Total: Rs Slip No. Particulars Name of the person receiving B.E. Amount Remarks payment Rs. P.

Balance Amount Rs. . In word .. Approved by: Balance verified by For reimbursement, Request. I have submitted the statement of expenditures incurred out of the received amount. Now, I am requesting for reimbursement of the above expenditures amounting to Rs ..

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Teaching Manual, Accountancy,, Grade XI

Submitted by . .. Date: Approved for reimbursement by .. Date: Received cheque/cash of Rs as reimbursement of above expenditure. Signature . Date: ..

3. Cash Payment Slip Control: This form is used for controlling the cash payment slips. These slips are renumbered and are issued to the person responsible for handling the fund. Payment slip control records all petty payment slip. Issued to petty cashier the format of the slip is given below:
AGF No. 7 Government of Nepal .. Office/Department/Ministry CASH PAYMENT SLIP AND CASH CONTROL FORM Starting and ending number of Name and position of person Signature payment slip issued receiving the payment slip

Date

4. Petty Cash Fund Account: Petty cash fund received by the petty cashier and payment made by him are recorded in this book. The format of petty cash fund account is given below:
AGF No. 22 Government of Nepal . Office/Department/Ministry PETTY CASH FUND ACCOUNT Particular J.V. No. Debit Credit Dr/Cr Rs. P. Rs. P.

. Year Month Day

Balance Rs. P.

Illustration 1: Following information are given to you. Magh 1 Balance as shown by petty cash fund Rs. 175

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Magh 3 Falgun 1 Date Magh 5 Magh 12 Magh 20 Magh 30 Solution:

Teaching Manual, Accountancy,, Grade XI Received a cheque of Rs. 325 for reimbursement of petty cash fund as per the statement of the Paush month. The petty cashier submitted the following statement of expenditure for reimbursement of fund for the moth of Magh. Cash Payment Voucher Payment for Rs. No. 111 Purchase of record file 120 No. 112 Purchase of pen 15 No. 113 Electricity charges 75 No. 114 Wages to gardner 100

(a) Date Magh 1 3 5 12 20 30

Government of Nepal Office/Dept/ Ministry Petty Cash Book AGF NO. 22 Particulars Jv. No. Dr. Rs. Cr. Rs. Dr./Cr. Balance Balance b/d Dr. 175.00 500.00 Cheque/cash received 325.00 Dr. 380.00 Purchase of record file 111 120.000 Dr. 15.00 365.00 Purchase of ball pen 112 Dr. Payment of electricity charges 113 75.00 Dr. 290.000 Payment of wages 114 100.00 Dr. 190.00

AGF No. 6(A) Government of Nepal Office/Dept/ Ministry Request for Reimbursement of Cash Payment
Balance on 1/10 (date of previous request as per reimbursement request from Rs. 175.00 Reimbursement received no 3/10 (previous date) as per reimbursement request Rs. 325.00 Expenditure report out of the total fund Total : 500.00 CPV Particulars Payee B.H.No. Amount Remarks No. Rs. P. 111 Purchase of record file Asan stationery 2.03 120 00 " 2.03 15 112 Purchase of ball pen 00 113 Payment of electricity charges NEC 2.01 75 00 114 Payment of wages Thapa Singh 2.07 100 00 Total: 310 00 Balance: Rs. 190.00 Approved by: Sd In words: One hundred ninety only

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Teaching Manual, Accountancy,, Grade XI

Balance verified: Sd For Reimbursement Request Above expenditure is reported out of the total fund available. It is requested for reimbursement of expenditure of Rs. 310.00 Presented by: Sd Date: 2/11 Reimbursement approved by: Sd Date: 2/11 Received cash/cheque Rs. 310.00 for reimbursement for the above mentioned expenditure. Signature: Sd Date: 2/11

10.5. Budget Sheet 10.5.1. Introduction: Budget sheet is one of the various statements maintained by offices of Government of Nepal. It is also known as budget ledger. Budgetary control is concerned with the making of expenditures within the budget limit. Budget account ensures appropriate utilization of fund and reduces the chance of misuse. Budget sheet is the statement of annual appropriation, budget release and budget expenditures. A budget sheet provides information of budget release, amount spent under each head of expenditure and the balance at bank. It provides not only information about the budget but also supports the financial administration. The government of budget sheet is mentioned in auditor general from number 8. The following information can be obtained from a budget sheet. (i) Annual Budget Section (ii) Budget Release Section (iii) Budget Expenditure Section (i) Annual Budget Section: The annual budget amount approved for different heads of expenditure, the supplementary budget release and alteration of amount under different budget heads with the necessary amendment of rules are shown in this section. This section provides information on the allocation of budget under each head of expenditure for a fiscal year. (ii) Budget Release Section: The budget releases are shown in this section. When budget releases are received, it is recorded in the corresponding columns approved for each budget head. (iii) Budget Expenditure Section: All budgeted expenditures are recorded in this section. Expenditure done through petty cash fund are also recorded in this section. On the basis of journal vouchers budgeted expenditures are recorded under corresponding budget heads. At the end of each month, total of each expenditure headings are calculated. Aggregate total up to the previous months are added with the current month's total to calculate the cumulative total of each head of budgeted expenditures. //5//

Teaching Manual, Accountancy,, Grade XI 10.5.2. ??? format /fVg' kg]{ 10.5.3. Preparation of Budget sheet: On the basis of journal voucher the transactions are posted in the budget sheet. For the annual appropriation of budget journal voucher is not prepared. But for budget released amount and budget expenditures the journal vouchers are prepared. All the budget releases received an expenditures are recorded in budget sheet. Expenditure done through petty cash fund are also recorded. It also records advance transactions. Advances given are treated in a similar manner as the budget expenses. When the advance is cleared the postings are made both within and outside the bracket. The actual expenditure is posted, outside the bracket and advance is posted inside the bracket. This method will cancel the earlier advance payments and its place will be taken by the actual expenses. Illustration The following transactions are related to G. of Nepal operating level office.
Budget Heads Salary Allowance Rent Office materials Miscellaneous Expenses fuel for other Furniture Machinery Annual Budget (Rs.) 125,000 5,000 15,000 18,000 30,000 6,000 9,000 30,000 Expenses of Marga (Rs.) 10,500 350 1,000 2,000 4,000 500 5,650 Expenses up to Kartik (Rs.) 45,000 1,200 5,000 4,000 15,000 2,000 4,000 -

Received budget release order for the actual expenditure of Marga and bank order letter for the same. Paush 10: Miscellaneous advance of Rs. 4,800 of section officer. Mr. Dahal has been cleared after receiving bills for the same of Rs. 5,000. Paush 18: Additional revolving fund of Rs. 22,000 for purchase of machinery has been received. Paush 25: Paid office rent by cheque for the month of Paush and Magh @ Rs. 1,500 p.m. Required: Post into budget sheet. (Draw necessary columns or use printed form)

Paush 3:

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Teaching Manual, Accountancy,, Grade XI

Solution:

A.G.F. No. 8 Government of Nepal Office/Department/Ministry Budget Sheet

Budget Expenditures Heads and Subheads Salary Allowance Office Operating Expenses 2.03 18,000 Rent Fuel for other 2.06 6,000 Miscellaneous Exp. 2.08 30,000 Furniture Machinery

Budget Head Numbers Appropriation for the current fiscal year Budget Transfer Date
Release

1.01 1,25,000 Total 45,000 10,500 55,500 (4,800) 5,000 3,000 3,200

1.02 5,000

2.04 15,000

6.01 9,000

6.03 30,000

Ref.No.

Paush 3 18 Paush 10

Particular Budget release upto Kartik Budget release for the month Marga Additional budget release Mr. Dahal Advance Clearance Rend Paid Expenses for the month of Paush Expenses upto the month Push

1,200 350 1,550

4,000 2,000 6,000

5,000 1,000 6,000

2,000 500 2,500

Expenditure

15,000 4,000 19,000 (4,800) 5,000 200 19,200

4,000 4,000

5,650 22,000 27,650

25

55,500

1,550

6,000

3,000 3,000 9,000

2,500

4,000

5,650

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Training Manual, Accountancy, Grade XII

10.5.4. Ledger Accounts

Besides the ledger accounts covered by bank cash book (AGF No. 5) and budget sheet (AGF No. 8). There are several other ledger accounts that an operating level office has to maintain to record the accounting transactions. These accounts are called subsidiary ledger accounts and records are maintained under AGF No. 22. These ledgers are: (i) Advance account (ii) Revolving fund A/C and budget release account (iii) Provident fund, income tax, tejarath or staff loan account. (iv) Loan account (v) Petty cash account (vi) Outstanding expenditure account Given below is the specimen of the AGF No. 22. This ledger is maintained in a running balance system. It means when advance is given in the name of a particular party, instead of opening a separate ledger account each time, the transactions are posted several times in the ledger account opened in his name. Ledger accounts are closed at the end of each fiscal year.
A.G.F. No. 22

Government of Nepal Office/Department/Ministry

Date Particulars JV No. Dr. Cr. Dr./Cr. Balance

10.6. Expenditure Report 10.6.1. Meaning

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Training Manual, Accountancy, Grade XII

Maintaining of the books of account is not only the function of operating level office, but it also should prepare a report, which submitted to its corresponding central level office at the end of every month. The ready made forms are available for standard report in accounting system of G. of Nepal among those, expenditure report is one of the main reports. Expenditure report is prepared to state the actual expenditures of every operating level office under all the budgeted expenditures heads. It shows the budget expenditure and their appropriations. It also shows budget release to a certain date and balance of budget yet to be released from the central office.

10.6.2. The Format of Monthly Expenditure Report is as Follows:

Expenditure in the months of . Rs. (1) Allotment till the months of .. Rs. (2) B.N. Ho Budget Heads/Subheads Annual Appropriation Expenditure upto the Month of Rs. (6) Balance of Budget Rs. (7)

(3)

(4)

Rs. (5)

Fund Position

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Training Manual, Accountancy, Grade XII

(1) Total amount received upto Rs. .. (6) Cash in hand Rs. (2) Total expenditure upto . Rs. . (7) Total Rs. . (3) Outstanding (uncleared) advances Rs. (8) Loan payable Rs. (4) Total expenditure (less uncleared advance) Rs. (9) Loan receivable Rs. (5) Bank balance Rs. . Submitted by .. Designation Date .. Approved by ...... .. Designation Date

10.6.3. The Format of Monthly Expenditure Report is as Follows:

After receiving the current fund, every month the central office has to submit the report to central office. Those reports are as follows: 1. Monthly Expenditure Report A.G.F. No. 13 2. Monthly Advance Expenditure Report A.G.F. No. 14

1. Monthly Expenditure Report: The monthly expenditure report consist of two parts: (a) Section depicting the status of the budget. (b) Section depicting the status of the fund. (a) Section depicting the status of the budget. There are seven columns in this part. These columns represent and records the following facts: Column 1: The expenditures incurred under various heads of expenditure for the current month.

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Training Manual, Accountancy, Grade XII

Column 2:

Column 3: Column 4: Column 5: Column 6: Column 7:

The cumulative total of the budget received under the heading and sub-heading up to the end of the current month. Budget head numbers of related accounts. Budget heading and sub-headings. Amount of annual appropriation of the budget for the particular office on a specific heading or sub-heading. Cumulative total expenditures up to the end of the current month (1+2=6) The balance of allocated budget for the office yet to be received from the central level office (5-6=7)

(b) Section depicting the status of the fund. The second part shows the cash and bank balance amount of total budget release and total expenditures till the end of current month, advance given but not yet cleared and amount of loan payable or receivable. Illustration The following particulars were extracted from the record of a government office.
Budget Heads/ Sub-Heads Salary Allowance TADA for transfer Office operation materials Furniture's Machinery Annual Budget Appropriation (Rs.) 2,00,000 4,000 20,000 18,000 40,000 1,00,000 Expenditure upto Kartik (Rs.) 45,000 900 4,000 4,500 9,500 30,000 Expenses of marga (Rs.) 30,000 300 2,000 2,000 2,000 3,700

Additional information: (i) Received on revolving fund (ii) Petty cash balance at the end of Kartik (iii) Uncleared advance of TADA //4//

Rs. 2,12,000 Rs. 500 Rs. 1,300

Training Manual, Accountancy, Grade XII

Required: Monthly expenditure report for the month of Marga showing: (i) Total budget release up to Marga with revolving fund balance (ii) Bank balance at the end of Marga (iii) Unspent budget balance (iv) Net expenditure up to Marga.

Solution:
Expenditure for the month of Marga (Rs.) 30,000 300 2,000 2,000 3,700 12,000 50,000 50,000 Budget Budget Budget release Head Heads/ upto No. Sub-heads Marga (Rs.) 45,000 1.01 Salary 900 1.02 Allowance 4,000 1.03 TADA for transfer 4,500 2.03 Office operating 9,500 6.01 Materials furniture 30,000 6.03 Machinery 93,900 18,100 2,12,000 Annual Budget Appropriation (Rs.) 200,000 4,000 20,000 18,000 40,000 1,00,000 3,82,000 3,82,000 Expenditure up to Marga (Rs.) 75,000 1,200 6,000 6,500 13,200 42,000 1,43,900 1,43,900 Budget Balance (Rs.)

125,000 2,800 14,000 11,500 26,800 58,000 2,38,100 2,38,100

Position of fund Total amount received upto marga Rs. 212,000 Bank balance Rs. 67,600 Total expenditure up to Marga Rs. 143,900 Petty cash bal Rs. 500 Uncleared advance Rs. 1,300 Net expenditure Rs. 142,600 Bank balance is determined as fallows: Bank balance = Total budget released Petty cash balance Total expenditure + Loan provided + Deposit received + Loan received. = 2,12,0005001,43,9000+0+0 = 67,600.

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Training Manual, Accountancy, Grade XII

10.6.4. Monthly Advance Expenditure Report

A monthly report regarding advances which have not yet been cleared is prepare by an operating level office and submitted to the central level office. The specimen of the form is as follows:
AGF No. 14 Government of Nepal Office/Department/Ministry Monthly Advance Expenditure Report Date given advance Name of the receiver Adv. Amount Rs. P.

Reasons for not clearance

Total: Submitted by .. . Approved by .. .

Position Position .

Date Date

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Training Manual, Accountancy, Grade XII

E. Evaluation Scheme
This units has been designed for short theoretical and practical questions. The number of questions and marks allocated for this unit are as under: Types of Questions No. of Questions Marks Theoretical 2 3+3 =6 Practical 3 5+5+6=6 5 22

F. Some Model Questions:

1. 2. 3. 4. 5. 6. 7. What do you mean by government accounting? Write in brief any three objectives of government accounting. Differentiate between government accounting and commercial accounting. Briefly trace the origin and growth of new accounting system of government of Nepal. Mention any four features of new accounting system of government of Nepal. Give any three objectives of new accounting system of government of Nepal. Mention the importance of present accounting system of government of Nepal.

Problem 1: Following transaction are given: (a) Received bank order Rs. 1,50,000 and budget release order Rs. 2,00,000 for actual expenditure of last month. (b) Out of total salary Rs. 60,000 and allowance Rs. 4,000 were distributed to the staff after deducting P.F. Rs. 8,000, P.F. loan Rs. 2,000 and income tax Rs. 1,000. The deducted amounts were deposited to the concerned offices.

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Training Manual, Accountancy, Grade XII

(c) District post office of Dolakha received loan of Rs. 50,000 from district education office by bank. (d) Issued a cheque for Rs. 15,000 to Nepal television for advertisement. ] (e) Issued a cheque for Rs. 10,000 as advance in favour of Mr. Surendra for office supplies. (f) Advance taken by Ramesh for the purchase of medicine Rs. 60,000 was cleared as he submitted statement of expenses for Rs. 55,000 and pay-in-slip voucher for Rs. 5,000. Required: Journal Voucher.

Problem 2: Journalise the following transactions; (a) Received bank order Rs. 2,00,000 and budget release order Rs. 1,80,000 actual expenditure of last month. (b) Purchased furniture for Rs. 35,000 and paid by cheque. (c) Computer purchase advance of Mr. Thapa Rs. 40,000 was cleared against the bill for purchase of Rs. 38,000 and the TADA bill of Rs. 2,000. (d) Salary for the month Rs. 1,20,000 (excluding HMG contribution for P.F.) and allowance Rs. 5,000, deduction for P.F. as per rule, Rs. 3,000 for P.F. loan and Rs. 6,000 for income tax and balance has been distributed to the staff. (e) The petty cash fund established by Rs. 500 has following position on closing date. Expenditure: (i) Wages Rs. 75 (ii) Ink, pencil & paper Rs. 110 (iii) Postage stamps Rs. 35 Required: Journal Voucher. Problem 3: Post the following transaction into Bank Cash Book (A.G.F. No. 5) (a) Balance at the beginning of the month Rs. 6,50,000. (b) Issued a cheque for the purchase of ration for Rs. 4,00,000. (c) Issued cheque for Rs. 9,000 to pay electricity charges.

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Training Manual, Accountancy, Grade XII

(d) Ram submitted statement of expenses for Rs. 60,000 after making purchase of furniture against the advance taken for same amount to clear his advance. (e) Miss Rama, section officer submitted statement of expenses for Rs. 25,000 after returning from tour against the amount of advance taken for Rs. 26,000. (f) Issued a cheque of Rs. 60,000 to pay rent advance for next two months.

Problem 4: Following information are given: Magh 1: Bank balance Rs. 1,00,000. 2: Received bank order Rs. 1,00,000 and budget release order Rs. 2,00,000. 5: Issued a cheque for Rs. 20,000 for purchase of furniture. 10: Issued a cheque of Rs. 5,000 as advance for the purchase of office supplies to Adesh. 25: Issued a cheque of Rs. 45,000 for salary & Rs. 6,000 for allowance after deducting Rs. 10,000 for provident fund. 27: Mr. Adesh submitted the bill for purchase of office supplies Rs. 5,500 against the advance Rs. 5,000. Required: Bank Cash Book. Problem 5: Post the following transaction into Bank Cash Book: Chaitra 1: Bank balance Rs. 20,000. 2: Received bank order Rs. 1,80,000 and budget release order Rs. 1,50,000. 4: paid rent for the month of Chaitra & Baishak @ Rs. 4,000 per month. 10: Purchase a fan for Rs. 4,000. 15: paid Rs. 2,500 for advertisement through cheque. 25: Total salary of Rs. 55,000 (including HMG contribution) was distributed after deducting Rs. 10,000 for P.F., Rs. 1,000 for income tax. The deduction were paid into the concern office on the same day. Problem 6:
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Training Manual, Accountancy, Grade XII

The following transactions are given: Magh 1: Balance at petty cash fund Rs. 200 2: Received reimbursement of last month's petty expenses Rs. 300 5: Water supply charge Rs. 120 12: Paid for postal stamp Rs. 50 18: Trunk charge Rs. 45 20: Stationery Rs. 65 25: Registration of letter Rs. 35 30: Above expenses were reimbursed. Required: (a) Petty Cash Account (b) Request for Reimbursement of Cash Payment. (AGF 6'A')

Problem 7: Your are given following information to prepare: (a) Petty cash Account (AGF No. 22) (b) Reimbursement of cash payment (AGF6 'A') Magh 1: Balance at petty cash fund Rs. 75 2: Received reimbursement of petty expenses 425 7: P.V No. 425: Taxi fare Rs. 105 10: P.V No. 426: Postal stamp Rs. 45 15: P.V No. 427: Water supply Rs. 125 25: P.V No. 428: Trunk charge Rs. 55 29: P.V No. 429: Wages Rs. 70 30: Above expenses were reimbursed. Problem 8: Your are given following information:
B.H. No. 1.01 1.03 2.03 2.04 2.06 Budget Subheads Salary TADA for office transfer Office supplies Rent Fuel expenses Annual Budget 1,69,000 36,000 24,000 60,000 20,000

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Training Manual, Accountancy, Grade XII

2.07 4.05

Miscellaneous expenses TADA for program visit

16,000 25,000 3,50,000

In addition to above, District Agriculture Office Dolakha incurred the following expenses: (a) On 5th Shrawan, issued a for Rs. 6,000 as advance Raman for TADA as he was transferred to Ramechhap. (b) On 6 Shrawan, paid to Gauri Shanker Petrol Pump Rs. 5,000 through cheque. (c) Paid rent Rs. 5,000 through cheque on 15th Shrawan. (d) On 18, Shrawan Paid to Dawa Stationers for the supply of necessary office supplies Rs. 3,000 through cheque. (e) Issued a cheque for Rs. 1,000 for refreshment on 20th Shrawan. Require: Posting into Budget Sheet.

Problem 9: You are provided the following information related to District Hospital, Rasuwa.
B.H. No. 1.01 1.02 1.04 2.01 2.02 2.05 4.06 6.01 6.02 Budget Sub-Heads Salary Allowance Dress Water & Electricity Telephone & Truck Repair & Maintenance Medicine Purchase Furniture Means of Transport Annual Budget 2,14,500 24,000 10,000 18,000 22,000 14,000 30,000 80,000 1,00,000 5,12,500 Expenses of Shrawan 16,500 2,000 6,000 2,000 2,000 1,500 2,500 20,000 50,000 1,02,500

Additional Information: (a) On 5th Bhadra, issued cheque to Suraj Vastralaya Rs. 3,000 for dress purchase. (b) On 6th Bhadra, issued a cheque in favour of Nepal Electricity Authority Rs. 1,500. (c) On 8th Bhadra, Paid to Nepal Telecommunication Corporation Rs. 1,200 through cheque. (d) On 9th Bhadra, Paid by cheque Rs. 1,200 through cheque. //11//

Training Manual, Accountancy, Grade XII

(e) On 29th Bhadra, paid by cheque Rs. 2,000 to Rasuwa Engineering Works for repair of machine. (f) On 29th Bhadra, opened L/C in favour of KIA motor company Korea to import a vehicles for Rs. 40,000. Required: Posting of the Transactions in Budget Sheet.

Problem 10: Your are given the following information:

B.H. No. 1.01 2.02 2.04 2.06 4.03 6.02 9.01 Budget Subheads Salary Telephone & trunk Rent Fuel Books & materials Vehicles Contingency Annual Budget 2,21,000 36,000 72,000 24,000 35,000 80,000 9,000 4,77,000 Expenses of Chaitra 17,000 6,000 6,000 4,000 5,000 80,000 500 1,18,500 Expenses upto Chaitra 1,70,000 30,000 54,000 20,000 30,000 80,000 3,84,000

Additional Information: (a) Total release upto Chaitra 4,10,000 (b) Cash balance Rs. 500 (c) Security deposit refunded Rs. 15,000 out of 25,000 received. (d) Loan given to nearby office Rs. 15,000 Required: Statement of expenditure for the month of Chaitra determining bank balance & imprest fund balance.

Problem 11: Your are given the following information:

B.H. No. 1.01 1.02 2.03 2.04 Budget Subheads Salary Allowance Office supplies Rent Annual Budget 1,82,000 30,000 40,000 48,000 Expenses of Chaitra 14,000 2,500 3,000 4,000 Expenses upto Chaitra 1,40,000 20,000 27,000 36,000

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Training Manual, Accountancy, Grade XII

6.01 6.02 6.03

Furniture Vehicles Machinery & equipment

60,000 1,00,000 80,000 5,40,000

1,00,000 80,000 2,03,500

60,000 1,80,000 80,000 4,63,000

Additional Information: (a) Total imprest fund received upto Chaitra Rs. 4,78,000. (b) Loan taken Rs. 40,000 and loan given Rs. 25,000 to another office. (c) Cash balance Rs. 350. Required: Statement of expenditure showing: (i) Bank balance and (ii) Imprest fund balance. G. Key-terms Used in the Unit:
Journal (Goswara) Voucher, Expenditure Journal Voucher, Advance Expenditure Journal Voucher, Miscellaneous Journal Voucher, Revolving Fund, Budget Release, Provident Fund, Provident Fund Loan, Budget Freeze, Bank Cash Book, Cash Account, Bank Account, Imprest Fund, Budget Sheet, Annual Appropriation, Allocation of Budget, Brackets, Petty Cash, Petty Cash Fund, Patty Cashier, Reimbursement, Cash Payment Slip, Expenditure Report, Status of Budget, Status of Fund, Imprest Fund Balance.

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