THE ACCOUNTING STORY

FINANCIAL ACCOUNTING FUNDAMENTALS

VIJAY KORKE

An explanation of Accounting Fundamentals in a simple and friendly way such that the Reader understands the logic and whys of the subject. (Based on the 11th Standard Syllabus of the Commerce Course of Indian Universities) Supported by vikrofinacs.com-the web site of Vikronet Finacs in which problems on the above topics are set and automatically immediately evaluated as also reasons and justifications given for each answer-all for the benefit of the User Student

THE ACCOUNTING STORY CHAPTERS

CHAPTERS 1 2 3 4 5 6 7

TOPICS ACCOUNTING CONCEPTS THE JOURNAL BOOK OTHER SUBSIDIARY BOOKS THE LEDGER THE TRIAL BALANCE THE BANK RECONCILIATION STATEMENT THE FINAL ACCOUNTS

PAGE NOS 3-43 44-55 56-

CHAPTER ONE ACCOUNTING CONCEPTS CONTENTS

Sr No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Particulars THE ACCOUNTING STORY LESSON NO 1-WHAT IS A BUSINESS TRANSACTION THE ACCOUNTING STORY- continued LESSON NO 2-THE ACCOUNTING EQUATION THE ACCOUNTING STORY- continued LESSON NO 3-BOOKS OF ACCOUNTS THE ACCOUNTING STORY- continued LESSON NO 4-DEFINITION OF ACCOUNTANCY THE ACCOUNTING STORY- continued LESSON NO 5-EFFECTS OF BUSINESS TRANSACTIONS THE ACCOUNTING STORY- continued LESSON NO 6-CLASSIFICATION OF BUSINESS TRANSACTIONS THE ACCOUNTING STORY.. continued LESSON NO 7-PRINCIPLES AND RULES OF ACCOUNTANCY THE ACCOUNTING STORY- continued LESSON NO 8-SOME ACCOUNTING TERMINOLOGIES ILLUSTRATIONS Page No 4 8 9 12 15 17 20 21 22 23 25 26 27 28 32 33 35

THE ACCOUNTING STORY

Ram had turned 24 today. He had just majored in Marketing from one of Punes numerous management institutes. His father, Hari Kale, had promised him an unique present for this birthday. Hari was pretty well off, being the General Manager of Marketing in a multinational company in India. Ram planned to start a business enterprise- initially trading, then eventually a manufacturing one. But today was for enjoying the party organized by his family. The party went on well past midnight. Ram had forgotten all about his fathers birthday present. After the festivities were over Hari and he were relaxing alone in their drawing room when he remembered his fathers promise. Dad, when are you giving me your unique present? Ah, Ram. I was just wondering when you would ask. I have been able to save a considerable amount of money up to now, part of which I can give you-maybe up to Rs 1 crore, that will be my birthday present but there are some conditions which you will have to agree to. Ram was totally flabbergasted ! One Crore!! He had not expected this! Conditions-anything what you say, Dad, just name them. I am a MBA, it should be easy for me to fulfill all your conditions. Hari could not help smiling.

Hey hold on, buddy, you are excited because I have promised you a crore but first listen to my conditions. OK, Dad, spell them out. I know you want to start a business but I am not sure whether you are capable of making a success of it. I know you are good at marketing and I know that you have worked hard at it, but to run a business, just having knowledge of marketing is not enough. Then what, Dad? How much do you know of Accounting and Finance? Why? Whats this got to do with your conditions? Ram, just answer my question. Dad, I think that I have a fairly good knowledge of Finance but I am not very sure about Accounting. You mean to tell me that without knowledge of Accounting, you have a good knowledge of Finance? Why? Why do you require knowledge of Accounting to understand Finance? Dad, you very well know that I did my MBA after my engineering degree. I was never good at accounting but because today Financial Theories are more dominated by economists than accountants, it is more statistically and mathematically oriented than accounting wise. Therefore I had lesser difficulty there. Ram, I dont agree with you. You know I met a guy some 10 years back and we got to talking about finance because he was a finance guy and I was having some problems in understanding some finance reports. He is a Chartered Accountant but he also teaches Accounts and Finance. Name Vijay Korke-Professor Vijay Korke.

He said that you just cannot understand finance without having a basic knowledge of accounting and he proved it to me subsequently. He said that all financial theories-statistical, economic, mathematical or otherwise were based on financial information. This financial information is recorded and structured in the required formats by accounting methods and techniques. Therefore, unless one has a good knowledge of the basics of Accounting, it can lead to wrong financial decisions. He taught me some basics, enough for my job of marketing-but you want to run a business which involves everything, money, purchases, manufacturing, marketing, people-if you do not know basic accounting, where will you be? So, condition number one, first you go to him and persuade him to teach you the basics of accounting and finance, I give you a max of three months for accounting and three for finance. Call it revision but you will have to get his certificate, for me to consider loosening my purse strings!!. So, agreed to condition one? Ram thought for some time. OK Dad, so what are the other conditions? Other conditions baad me bataunga !!! Pehle yeh to kar lo! Here is his cell number. Phone him and take his appointment. Next day, Ram met Prof Vijay at his house at Baner in Pune city. Hi, so you are Ram. Haris son eh! Yes sir. You are a MBA and still you want to learn the basics of accounts from me? Well, sir, dad says that you will be able to make me appreciate the importance of accounting in finance and marketing.

And you obviously do not share his opinion!! No I am not sure but I sure do require to revise my concepts of accounting. OK we will find out soon enough what you know about it. Tell me Ram, you want to start a business, right? Yes sir. Why? Why? Because I think it will help me to increase my wealth. Wow-spoken just like a MBA!! So what do you mean by your wealth? Hmmm. I suppose it means what I own-my properties. And how would you increase your properties? By doing business, obviously! Oh, we have a wise guy here! OK, Ill play along. Tell me, Ram, what is the definition of business? Tell me in your own words. Well, business involves buying or selling goods or services in order to increase your wealth. Not bad! However let me give you my definition of business, OK? A business is a series of relationships entered into for the prime purpose of increasing the monetary worth of each party to the relationship, by conducting business transactions. Therefore, Ram, in Lesson no 1, let us define a Business Transaction.

LESSON NO 1 WHAT IS A BUSINESS TRANSACTION

An act of exchangea. of things or services b. between two or more parties is called a transaction. Transactions may be monetary or non-monetary i.e., they may involve money or no money respectively. Transactions which do not involve an exchange of money or money's worth directly or indirectly or in more simple terms, which do not result -immediately or in the future -into either an inflow or outflow of cash, are called Non-Monetary, Non-Business Transactions Transactions involving money or money's worth which result into either an inflow or outflow of cashimmediately or in the futureand which are not personal in nature, are called Business Transactions Examples of Business Transactions: payment of money to buy goods which are intended to be resold for a profit, a sale of the same goods without receiving any money immediately but would receive money at a later date, receipt of moneys on sale of these goods, In the above context, the word personal concerns any inflows and outflows of cash which result into a personal benefit e.g., a money gift received during marriage or paying money for buying articles for personal consumption or spending money to buy a train ticket for personal travel----all these type of transactions are personal in nature and are not concerned with the business!

THE ACCOUNTING STORY-continued So Ram, are you now clear about Business Transactions! This is the first step to become a Bean Counter which you MBA guys call us accountants. Sir, I dont want to become a Bean Counter, but I would certainly like to get a feel of accounts not because I want to make it my career, but to help me run my business efficiently. Right, it is presumed that you are interested in learning all about Accountancy for this reason so as to understand and record business transactions-and not personal ones. Ram, you mentioned sometime earlier that you want to do business for increasing your wealth, i.e., increasing the worth of your properties. Correct? Yes, sir. That means these business properties are your Assets because they are worth something to you in monetary terms? Yes, sir. That means that you own these business properties, correct? Of course, Sir. Do you agree that you as the proprietor of your business and your business are two different persons? Yes, Sir Why? Because the proprietor invests his money into the business as opposed to his own personal investment-and he expects the business to use this money for making profit which ultimately belongs to the proprietor. Therefore the proprietor and his business are two different persons.

Then all these properties of the business are owned by whom - by the proprietor or the business? Ram thought for sometime. I guess, the business. Therefore the business which is at present holding these properties as its assets, is it liable to the proprietor for the same? Yes, it is I know this! The proprietor has invested his money in the business and therefore once the business is closed, if at all, then it will have to return the money back to the proprietor. What it purchases from these moneys ultimately belongs to the proprietor. But since it is holding these assets in its name, it becomes liable to return them to the proprietor either in the same form or by converting into their monetary value, as and when the proprietor wants his money back. Wow!! Ram, tumne toh sixer mara! OK, what this means is that the business is liable to the proprietor because he has provided the money for these assets, right? Yes, sir. It also means that the business has assets and also has an equal liabilitytowards the proprietor, isnt it? It also means that the proprietor has what can be termed as Property Rights over the assets of the business? Sir, as you so easily put it, now I am beginning to understand the meaning of the Accounting Equation!! So you are aware of the Accounting Equation-OK, so let us discuss this in detail in our lesson no 2 tomorrow at 10a.m sharp. Next day, Vijay had just finished his bath when the doorbell rang. It was Ram. Arre, you are very early today? Its just 8.30 am! Sir, I could not sleep last night-some questions were going round in my mind and I wanted the answers immediately so I came early. I hope you dont mind, do you Sir? No-no, come on in-said Vijay. Whats the problem? he asked.

Sir, you mentioned yesterday that all business transactions result immediately or in the future, either into an inflow or outflow of cash. But suppose A owes me Rs 1000/- and he does not pay me anything-it does not result into a cash outflow or inflow-then is it a business transaction? When A took the money, he had promised to pay you back-it is assumed that he had borrowed this money for a business purpose. Therefore according to my definition it was a business transaction, because it had resulted into a cash outflow . That is one business transaction. Now I presume that your question is about the fact that A is not going to pay you back and therefore, is it a business transaction? If A does not pay you the Rs 1000/- then it is lost for you which we term in Accounting terms as a loss. Therefore this is a business transaction, because it has resulted into a reduction or loss of an inflow of cash due from A and you have lost Rs 1000!!!. If A had paid you as promised, it would have resulted into an inflow of cash, wouldnt it? But my dear chap-you have leapt forward-these types of business transactions we will deal with later-not now. Let us go forward in a more structured way and start with Lesson No 2 on The Accounting Equation.

LESSON NO 2 THE ACCOUNTING EQUATION

All businesses necessarily start with Property and Property Rights. What then is this Property? Property can be Tangible or Intangible. Tangible Property can be felt and seen, and which has monetary value to the owner of that Property like Buildings, Shares in Companies, Furniture, Machinery, Cash, Inventory, etc . Intangibles also have monetary value but cannot be felt or seen like patent rights, business goodwill, software programs, customer debts etc. This Property is created by providing resources or money to the business. These resources can be provided by the owners contribution and/or by borrowing these resources from someone who is willing to lend the same. Therefore at any given time the business properties are equal to the total amount of moneys brought into the business by the owners and by the lenders, who obtain the Rights in the Property. BUSINESS PROPERTY = RIGHTS IN THE BUSINESS PROPERTY. This is called the Accounting Equation Whenever there is an increase in Business Property, there would be an increase in the Property Rights and vice versa. These Property Rights belong jointly to the owners of the business and the lenders to the business in the proportion of the resources provided by each, and as the value of property increases or decreases these rights also automatically increase or decrease in value but not necessarily in the same proportion for each resource provider-we will detail this out a little later.

Therefore Business Property = Owners Funds + Lenders Funds Therefore Owners Funds = Business Property Lenders Funds Therefore Lenders Funds = Business Property - Owners Funds In the Business environment, Owners Funds is called Capital, Business Property is called Assets, and Lenders Funds is called Liabilities. Therefore Assets = Capital + Liabilities Capital = Assets Liabilities Liabilities = Assets Capital Business Transactions therefore result into either a change in the values of Capital, Assets or Liabilities. Let us look at a few Business Transactions and see how they affect the above Accounting equations:

Sr No

ParticularsEffects

Total Assets Rs

Total Capital Rs

Total Liabilities Rs

Total Capital + Liabilities Rs

If Assets Rs 500000

are

= + Rs Rs

500000

300000

200000

500000

Then Capital Liabilities = 500000. 2 If Capital = 300000 then Liabilities = Rs 500000 Rs 300000 200000

500000

300000

200000

500000

minus = Rs

Sr No

ParticularsEffects

Total Assets Rs

Total Capital Rs

Total Liabilities Rs

Total Capital + Liabilities Rs

Suppose some assets valued at Rs 150000 in the Total Assets of Rs 500000 given above, are sold for Rs 200000 which is received in cash, then

500000 -150000 (assets sold) +200000 (cash received) =550000

300000 +50000 (Profit on Sale of Assetbelongs to Owner) =350000

200000

550000

Suppose further Plant & Machinery is purchased for Rs 150000 by making payment in Cash, then

550000 +150000 (Machiner y) 150000 (Cash) =550000

350000

200000

550000

Suppose instead of payment in cash , the payment is to be made at a later date to the Supplier of the Machinery - M/s A, then

550000 + 150000 (Machiner y) =700000

350000

200000 150000 (M/s A) =350000

700000

THE ACCOUNTING STORY-continued Book-Keeping and Accountancy is the technique of recording these changes in such a manner that the businessman is made aware of the results of his business transactions in the following way: Whether they have resulted into an increase or decrease in his Capital, i.e., whether he has made a profit or loss, and What is his financial worth-i.e., what is the amount of Capital, Assets and Liabilities of his business. Such recordings of the business transactions are done in the Books of Accounts maintained by him. Therefore we now come to the Books of Accounts. Vijay Sir, I think I am now beginning to understand the importance of Accounting. But Sir, lets continue tomorrow-I want to do a little more practice on my own to cement this understanding of the Accounting Equation. Yes, Ram, do that- meet me again at 4 p.m. tomorrow. OK, Sir, no problem!! Next day, at 4 p.m. sharp Ram turned up. So Ram, any problems now with the Accounting Equation? No sir, none at all. Good, then we can proceed with the Books of Accounts. But sir, why do we have to learn about this- With the extent of computerization we have today, does anybody have to know how to write or maintain books of accounts? No doubt Ram that there are numerous software programs available today which automatically record all the business transactions in the required Books of Accounts. Therefore the topics relating to the maintenance of the books of accounts would be purely academic as they are automatically formatted by the software.

However knowledge of the same may be necessary for a proper understanding of the Accounting Technique because the same technique and method of maintaining the books of accounts is followed in the computerized accounting packages. Moreover the entries to record the actual debits and credits to the required accounts are still to be entered manually into the package by the User and therefore he has to have knowledge of accounting. What is debit and credit we shall go into later. It is also compulsory as per the various laws of our country for certain business enterprises to maintain them but-but-but, absolutely necessary for all businessmen to maintain them. Books of Accounts can be maintained manually or in a computer but the formats are similar. So on to Lesson no 3- Books of Accounts.

LESSON NO 3 BOOKS OF ACCOUNTS

Recording of business transactions is called 'Book-Keeping' and the way or technique or say rules for recording them is called 'Accountancy'. Therefore in Book-Keeping and Accountancy, we are only concerned with monetary business transactions. If a transaction has no financial character it will not be recorded in the Books of Accounts. From time immemorial human beings have kept some sort of a record of things done or to be done, in some form or the other. Some have kept it in their minds, some have written it down in their personal diaries or a notebook or on scraps of paper and so on and so forth. Some have been very organized and have kept proper accessible records and some have not bothered to keep any track at all! It was this need which gave rise to recording of dealings concerning money in a more organized manner, and the records in which such dealings were written down were called the 'Books of Accounts'. The method of writing and recording these business transactions in these books is the subject of 'Book-Keeping and Accountancy'. The human mind is a great storehouse of data. But it suffers from a major shortcoming- of easy, immediate and at will recall and retrieval of the information stored in it!! Therefore it becomes necessary to record the required data in a proper and accessible manner. It becomes more important when any business dealing is to be recorded because neglect in this case could result into a monetary loss. Therefore Book Keeping & Accountancy is mainly concerned with the recording of business dealings or what accountants call as 'business transactions'.

Objectives and importance of maintaining Books of Accounts

Objectives: It is not possible for any businessman to remember all his business transactions. Books of Accounts serve as a permanent record of the business dealings and they can be produced as evidence of a business transaction whenever and where-ever required. A businessman can know what he owes to others and what others owe to him. Maintenance of Books of Accounts enables him to ascertain his trading results, i.e., profits earned or losses sustained by his business, and to also know the financial position of his business on a particular day. It also assists him to meet the requirements of certain laws. Importance And Utility Of Book-Keeping: In the absence of book keeping it would be difficult to conduct business successfully. Whether the business is profitable or not would be difficult to ascertain. A businessman would not be able to ascertain the total amount of his capital, i.e., how much of his money has been invested into his business. The businessman can arrive at certain conclusions by scrutinizing or checking the accounts of the business and thereby be able to take decisions to control the activities of the business i.e., it is the source of the Management Information Systems of a business concern. Required for the correct assessment of Income-tax, Sales-tax, Customs Duty, etc,. If a legal action is required to be taken against any customer for recovery of debt due from him, the books of accounts or its extracts are required to be produced in the Courts as evidence. In cases of Insolvency or Bankruptcy, the Courts may refuse or suspend the discharge of an insolvent who cannot produce his books of accounts.

For ascertaining the value of business in the case of admission of a partner or amalgamation or sale of business. Maintenance of books of accounts has been made compulsory in respect of companies by the Indian Companies Act, 1956 and by various Laws of all the countries in the World.

THE ACCOUNTING STORY-continued

Ram, I am sure you now understand that the Books of Accounts have to maintained not only to record the business transactions but also for various other reasons which were detailed out in our Lesson no 3. Do you have any problems? No Sir, I do not have any problems. Good, now if you remember in the beginning of Lesson no 3, I had differentiated between Book-Keeping and Accountancy as follows. Recording of business transactions is called 'Book-Keeping' and the way or technique or say rules for recording them is called 'Accountancy. Therefore the maintenance of the various Books of Accounts falls under Book-Keeping. So now to Lesson No 4 Definition of Accountancy-a small but interesting lesson.

LESSON NO 4 DEFINITION OF ACCOUNTANCY

The term Accountancy relates to the formulation of the principles or rules to be followed in the recording of business transactions. Is Accountancy a Science or an Art ??? Neither !! Though Accountancy follows rules based on common sense and logic, the results of applying these Rules could lead to disparate and different results, all termed as correct eg., depending on the method used for valuing the cost of the products dealt in by the business, the profit of the business can be varied and all such profit figures could be taken as correct!!! However scientific results are unique for a given set of circumstances, hence Accountancy cannot be called a Science. At the same time it is not abstract and is based on logical and objective principles rather than subjective ones i.e.,. results cannot be based on the whims, fancies and talents of a particular person, and therefore it cannot be called an Art. Therefore it is something unique and should be viewed as such by the student.

THE ACCOUNTING STORY-continued Now that you are aware about the meaning of Accountancy and the fact that it is based on the logic of business transactions, Ram, let us consider the effects of business transactions. What do you mean by this , Sir?-Ram was a little puzzled by this. Ha! You will see the logic of it when we go to the next lesson-Lesson No 5.

LESSON NO 5 EFFECTS OF BUSINESS TRANSACTIONS

To understand how the Principles and Rules of Accountancy were formulated we have to first evaluate the effects of Business Transactions. Every businessman enters into a business transaction with a profit motive. This means that his objective in starting and continuing his business is to have more money than what he first had when he started his business. It is possible that he may end up with less and that would mean that he has made a loss, but that would definitely not be his intention or objective! All business transactions have some effect on the cash flow of the business. That would mean that cash will be either added or reduced, either immediately or in the future, because of the business transaction. What I mean by cash here, is the cash lying physically in the business. Cash held by its bankers in its bank account or invested in such a way that it can be encashed ( converted into cash) immediately whenever it wants it, are termed as Investments. These are also called cash equivalents. These cash inflows and outflows are of two types---Temporary and Permanent. A temporary cash inflow would mean that cash has been received today which will have to be returned in the future while a permanent inflow would imply that the cash which has been received , permanently belongs to the business and does not have to be returned. Similarly with cash outflows-a temporary cash outflow would imply that though cash is going out now it will come back into the business at a later date. However with a permanent cash outflow we do not expect it to come back. What does this mean for the business?? Whenever a business transaction results into a temporary inflow of cash, a Liability gets created. Since the business has to return it in the future what has been temporarily received today, it would mean that it owes this money to the person who has

given it. A simple definition of liability is the amount owed by the business to others. Conversely when we pay back what we owe, which will result into a permanent cash outflow, the liability which was created by the temporary cash inflow will get extinguished. When there is a permanent inflow it means that the business has received Revenues or Income. This means the cash received is not to be given back and therefore it belongs permanently to the business. This money adds to the Owners Capital which the business had originally received from the owner, and therefore adds to the profit which it is making. Whenever a business transaction results into a temporary outflow of cash it results into the creation of an Asset. A simple example is that of furniture purchased by paying cash. Here there is an outflow of cash but furniture has been received in its stead. It is possible to sell that piece of furniture in the future and recover the cash gone out (assuming for the moment that the same amount can be recovered). That means that this type of cash outflow has resulted into a receipt of some article having the same cash (or monetary) value! Assets are articles which have a value which can be converted to cash. Conversely when the asset is sold, which will result into a permanent cash inflow, the asset which was created by the temporary cash outflow will get liquidated. Whenever a business transaction results into a permanent outflow of cash, it results into an Expense or Loss. This means that this cash outflow will not be received back and therefore it has gone out permanently from the business. This money reduces the Owners Capital which was originally received from the owner, and therefore reduces the profit of the business. Based on the above we have now grouped our basic cash business transactions into liabilities, incomes, assets, expenses, sale/liquidation of an asset and repayment of a liability.

A Chart is given below to illustrate the above: Serial No 1 Type of Cash Flow Temporary Inflow Meaning Cash comes into the business which it will have to give back in the future Effect Creates a Liability (Does not affect Owners Capital unless it has been received from the Owner) Cash goes out of the Creates an Asset business which can be (Does not affect received back in the Owners Capital) future Cash comes into the Creates Income business which it does (Adds to the Owners not have to give back Capital) in the future Cash comes into the business as a result of sale or liquidation of an Asset Asset gets liquidatedgoes out of the business (Does not affect Owners Capital unless more or less cash is received than what was originally paid for the Asset) Cash goes out of the Incurs Expenses business which will (Reduces from not be received back Owners Capital) in the future Cash goes out for Liability is repayment of Liability extinguished (Does not affect Owners Capital unless paid to the Owner)

Temporary Outflow

Permanent Inflow

Permanent Inflow

Permanent Outflow

Permanent Outflow

However there are also other business transactions which do not immediately result into either a cash inflow or outflow but would result into such, in the future. How then will we determine their effects? This requires a little more application of business logic. Suppose we buy Furniture from M/s A & Co for Rs 25000 but we decide to pay A & Co after 15 days. Now in this case there is neither an inflow nor outflow of cash. But let us first suppose that we paid A & Co the money which then would be considered a temporary outflow of cash. This would result into the creation of an asset for us called Furniture. However it is assumed that this cash is then returned by A & Co to us with a condition that it should be paid back within 15 days. This results into a Liability as this would be a temporary inflow of cash. This means that this business transaction is an example of a simultaneous temporary outflow and temporary inflow of cash which has resulted into both an Asset and a Liability. All business transactions in which the cash flow does not take place immediately result either into an Asset and a Liability as above or an Expense and a Liability or an Asset and an Income. We will now make use of these basic groups of Assets, Liabilities, Incomes and Expenses to decide the rules for entering the business transactions into the Books of Accounts. What we have now discussed, is the first rule of evaluating a business transaction i.e., How to determine the Type of a Business Transaction!!!

THE ACCOUNTING STORY-continued Ram was surprised. Sir, do you mean that it is the cash inflow or outflow which determines the type of business transaction? Why, dont you agree? As mentioned earlier, every business transaction results into a cash inflow or outflow, so we make use of these cash flows to determine a very important rule-the type of the business transaction. Do you not agree that there is logic in the way we have formulated this rule? Of course, Sir, it definitely has perfect logic, but all my friends who were Commerce graduates have never explained this logic to me whenever I had difficulties in understanding Accountancy during my MBA days! Forget about them-do you agree with me on this? Yes, Sir, perfectly as far as the basic cash inflows and outflows are concerned but I am still a bit hazy on the non-cash flow transactions. Could you please clarify? Yes, that logic takes a little more time to understand. But once you have properly understood it, you will have less difficulty in understanding what follows. So let me illustrate this logic a little further for you. Suppose you are a trader in pens. A customer comes to you to buy 1000 pens from you and you offer to sell him the same @ Rs 10/- per pen i.e., a total of Rs 10,000/-. Now he pays you in cash. Therefore for you it is a cash inflow and because you have given him 1000 pens in return, you will not have to return this money to him, therefore for you it is a permanent cash inflow which has generated income or revenue for you of Rs 10,000. But then the customer makes a request to you to give back the money to him and promises to pay back after 15 days and you accept for whatever reasons he gives you for this request in the interest of your business because he is a regular customer and you trust his promise, and you give back the Rs 10,000, then this will be a cash outflow for you which will be a temporary one since you are going to receive it back after 15 days. This temporary cash outflow will create an Asset for you in the form of owing by your customer. Therefore in this transaction, there is zero net cash flow but both an income has been generated and an asset has been created, isnt it? You agree that this is a business transaction because as per the definition of such given

earlier there is an exchange of pens and promise to pay for the same and money will flow in the future? Yes, I suppose so. Why do you suppose-are you not sure? No, no what you say is very logical but it takes some getting used to!! That is what you should understand-the logic behind a business transaction which determines the nature of the business transaction and recognizes its type so as to determine which of the groups it relates to i.e., whether it creates an Asset or Liability or an Expense or Income or a combination of these. Unless you can recognize this, it would be difficult for you to properly account for the transaction in your Books of Accounts however expert you may be in understanding the other rules of Accountancy which follow. Most of my management students who have graduated in Commerce have not understood this very vital and important fact and therefore have problems in accounting. I will give you another example below: A, a businessman, contracts with a cleaning service, B & Co to clean his business offices for a sum of Rs 5000/- and after it has done the same to As satisfaction, to pay the contracted amount after 15 days of submission of B & Cos Bill. Which type of transaction is this for A and which groups has it generated? The answer would be that this a zero cash flow type of business transaction and that it generates an Expense and a Liability. How, Ram? Well Sir, no cash has passed so it is a zero cash flow transaction. However if A had paid B & Co immediately after receiving the Bill, it would have been a Permanent Cash Outflow resulting into an Expense for him. But if B& Co returns this money back in return of a promise from A to pay it back after 15 days then it will be a Temporary Cash Inflow creating a liability. This will therefore cancel out both the outflow and inflow of cash since they are of equal amounts making it a net zero cash flow and what will remain is the Expense and Liability for A. Wow!! Ram, you have passed the logic test. I am sure you will think of more such types of business transactions and arrive correctly at the groups generated by it.

I have given above and in the Lesson no 5 above three examples to determine the groups of non-cash flow transactions. This topic is very very important, Ram, for the proper understanding of how to account for business transactions in the Books of Accounts. Because if you do not know how, though you may apply all the other rules of Accountancy correctly, you may account for the transaction incorrectly. Now let us proceed ahead- these groups which we have identified will now have to be classified further. Why? That will be explained in our next lesson no 6-Classification of Business Transactions.

LESSON NO 6 CLASSIFICATION OF BUSINESS TRANSACTIONS

This is the second rule to evaluate a business transaction-How to determine in which classification a business transaction falls, based on its Type and Groups. Basically therefore all initial business transactions result into liabilities, assets, incomes and expenses and all other transactions flowing from these initial business transactions are either a sale or liquidation of an asset or repayment of a liability as also a combination of the four groups as explained earlier. Liabilities are basically classified further as Personal transactions because moneys are owed to persons maybe individuals or another business firm or to the Government or to any other Statutory Authority etc.. Assets can either be articles and things of monetary value or persons who owe the business some moneys. Therefore Assets are further classified as either Real or Personal. Real is an accounting term depicting something real belonging to the business, having monetary value. Cash is the basic Real Asset and is always classified as such. Incomes and Expenses are classified further into what is called Nominal transactions i.e., they have value which adds or reduces the Owners Capital. Therefore Business Transactions for the purpose of accounting ( this is now hereafter the word which we will use to substitute recording) the same in the Books of Accounts can be a mixture of the following classifications. Personal: Relating to personal dealings i.e., transactions involving monetary dealings with various persons like individuals, other business concerns, financial institutions, banks etc. Therefore all such persons to whom moneys are owed or those from whom money is owed , are classified as Personal-i.e., all liabilities and some types of assets. Real: Relating to buying and selling or transfer of an asset, not personal in nature. Nominal: Relating to the payment of an expense or receipt of an income.

THE ACCOUNTING STORY-continued Ram, these two Rules-one for determining the Type and Groups, and the other for determining the Classification, form the basis for the third Rule which determines the Accounting Entry in the Books of Accounts-which is explained in the next Lesson No 7- Principles and Rules of Accountancy.

LESSON NO 7 PRINCIPLES AND RULES OF ACCOUNTANCY

Every business transaction results into an exchange of money or money's worth. Exchange means the act of giving or taking one thing in return for another. Thus every such transaction results into two equivalent opposite effects like the famous Newtons Law of Physics viz., 'every action has an equal and opposite reaction'. These two equivalent and opposite effects are recorded in the Books of Accounts. From the above it is quite clear that every business transaction is concerned with at least two accounts. Hence if any transaction is to be recorded completely, it has to be recorded in such a manner that both the opposite sides or effects are equalized. Thus the Double Entry Book Keeping System of Accounting is based on the "Dual Aspect" of each transaction. Every transaction has a double or two fold effect, which is termed as 'debit' and 'credit'. The recording of a transaction involves debiting one or more accounts affected and crediting one or more different accounts with an equivalent amount. It is therefore very clear that "every debit has a corresponding credit and vice-versa", and therefore the system is known as the Double Entry System of Book-Keeping. Based on the classifications arrived at earlier: a. Business transactions are analyzed to find out which classifications are being affected and b. Then after applying the Rules for passing Accounting Entries (i.e., what to debit and what to credit) for each such classification, c. to determine which account or accounts are to be debited and which are to be credited.

But what is an Account ? :- An account (short form is a/c) is a summarized record or a statement of all the business transactions (during a particular period, generally a year) relating to a particular person or institute, or to a particular property or things, or to a particular item of an expenditure or income. In order to keep a full record of all the transactions the business has to keep: a. An account of each person, firm, institute with whom it deals. b. An account of each property or an article. c. An account of each type (head) of expense or income. The Rules for each Class of Accounts are as follows: For Personal Accounts :DEBIT THE RECEIVER, AND CREDIT THE GIVER. Whenever any person receives any Property from the business, he becomes a Debtor of the business and his account is therefore debited. Whenever the business receives any Property from another person, that person becomes a Creditor of the business, i.e., he has given to the business and therefore his account is credited. This is related to the temporary cash outflows and inflows. Whenever the Debtors pays the money due, he is the giver and therefore his Account will be credited. This is related to the permanent cash flow received due to the liquidation of a personal asset. For Real Accounts :DEBIT WHAT COMES IN, AND CREDIT WHAT GOES OUT. Whenever Cash or any Property is bought, it comes into the business it increases the value of the total Properties held, and its account is therefore debited. This is related to the temporary cash outflows. Whenever a Property goes out of the business because of it being sold/transferred/exchanged, it reduces the value of the total Properties held and its account is therefore credited. This is related to the permanent cash inflow received due to sale of the asset. For Nominal Accounts :DEBIT EXPENSES AND LOSSES, CREDIT INCOMES AND PROFITS Whenever a business makes an expense or a loss, it results into a reduction of the Capital Fund of the business and therefore that expense or loss account is

debited. If an income or gains result because of a business transaction, it results into an increase in the Capital Fund of the business and therefore the income or gain account is credited. This is related to the permanent cash outflows and inflows. Now applying the stated rules, how do we pass an Accounting Entry ? Let us take an exampleOn 1st January 2007, A brings in Rs 35000 in cash as his Capital in the business called A & Co. Pass an entry in the books of A & Co. The two equal and opposite sides of this transaction are -----Cash and As Capital In this business, cash of Rs 35000 has come in. Cash is an Asset having money value and it has come into the business. This is an a/c having the Real classification and the rule for that classification is-Debit what comes in, Credit what goes out. Since in this case, Cash has come in, Cash a/c is debited. Capital means moneys received from the owner/s for conducting the business operations. This money would have to be returned back to the owners as and when he requires or when the business closes down. Therefore the receipt from A is a temporary inflow and is therefore a liability. It is also an a/c having Personal classification -the rule for this classification is Debit the Receiver and Credit the Giver. Therefore since A is the giver, his a/c will be credited. Instead of his individual a/c , his Capital a/c is credited because he is the Owner. So the Journal Entry is as follows:

Date

Particulars

LF

Debit Amount Rs

Credit in Amount Rs

in

01-01-07

Cash a/c

Dr

35000.00

To As Capital a/c

35000.00

Therefore each side of the business transaction has to be analyzed to determine its classification and then using the rules for each such classification, decide which a/c to debit and which to credit. Therefore it can be seen that the basic knowledge required for accounting a business transaction is as follows: a. Understanding and recognizing the dual i.e., the two fold effect of the business transaction by the Cash Flow and Non-Cash Flow Evaluation Methods, b. Determining the Accounts affected by the business transaction, c. Finding out the Classifications of the accounts involved in the business transaction, d. Applying the rules of Debit and Credit to the Accounts based on their classification, e. Passing the Accounting Entry. Everything else in this subject of Accountancy follows this knowledge and therefore it should be properly understood,++++++++ before we go on to : a. Where and How to make the Accounting Entries, in such a way that we are absolutely sure that we have entered all the effects of our business transactions in the proper and required manner. b. How to present the information available in the Books of Accounts for the proper evaluation and understanding of the results of the business-whether the business has made a profit or loss- how much cash we have-how much Assets we have-how much money we owe to others how much money is owed by others to us and so on and so forth.

THE ACCOUNTING STORY-continued So now, Ram, we have, on the basis of the Type, Classification and the dual aspect of a Business Transaction, formulated the most important and basically the main Rule or say, the basic theory of Accountancy, and that is, What to Debit and What to Credit??? This is the only Rule which you have to memorize or mug up. Everything which you will learn further in Accountancy is based on the logical use and extension of these Rules. Therefore before you proceed further, check the two Illustrations at the end of Lesson No 8 and then go to vikrofinacs.com on your internet , log in and solve at least two different Problems concerning the Concepts of Accounts, in the System, within the hours allotted to you . Then come back to me, Ram, after three days and if you have any further questions, then we will discuss further otherwise we will proceed to the next Chapter. Also in the meanwhile, go through the next Lesson No 8- Some Accounting Terminologies- so that you become familiar with Accounting Terms.

LESSON NO 8 SOME ACCOUNTING TERMINOLOGIES

Cash Transaction:-A business transaction in which cash is paid or received immediately. Credit Transaction:- A business transaction in which cash is not paid or received immediately at the time of a transaction but it is paid or received at a later date. Goods:- The term goods refers to merchandise, commodities, articles or things which a business deals with i.e., either trades or manufactures. Purchases & Sales:- Purchases and Sales are synonymous with Goods and are used to indicate purchases and sales of goods. When goods come in due to purchases for business purposes, the correct account affected is the Purchases Account and not the Goods account. Similarly when goods go out due to a sale, the account affected is the Sales Account. Stock:- It means goods which had been purchased earlier and lying unsold in the business on any given date. Stock at the beginning of the trading year is termed as Opening Stock. Stock at the end of the trading year is termed as Closing Stock. Debtor:- A person who owes money to the business becomes a debtor of the business. e.g., A Customer who bought goods from the business and still owes money on that account. Creditor:- A person to whom a business owes money is a creditor of the business. A creditor could be a Supplier from whom goods are purchased and not yet paid for. Debt:- The money due from a debtor. Bad Debts:- The debts which cannot be recovered in money or moneys worth are termed as bad debts. Assets:- Total possessions of and debts due to the business such as building, furniture,stocks, sundry debtors etc.

Fixed Assets:- Assets purchased by the business for its own use and for producing goods and not for resale, such as Buildings, Machinery, Motor car etc. Liabilities:- Amounts payable by the business to its proprietors & other persons, like creditors, banks, financiers etc. Capital:- Whatever money or money's worth the proprietor brings into his business from his private or personal estate, is his capital in the business. Drawings:- Money or goods or other items of the business either withdrawn or used by the proprietor for his private and personal purpose, is the drawings of the proprietor. Discount:- Discount means an allowance in the purchase price, given by the seller to the purchaser. There are two types of discount viz., Trade Discount and Cash Discount. A Trade Discount is is an allowance given on the catalogue or stated price of goods. This discount is allowed at the time of purchase/sale of goods. Trade Discount does not appear in the Books of Accounts separately." A Cash Discount is allowed to trade debtors to induce them to pay their dues within or before the time limit given. If payment is not so made the debtors do not get this discount. As this discount is dependant upon the payment of cash in time, it is required to be recorded separately in the books of accounts. Books of Accounts:- It means suitably ruled account books in which business transactions are recorded. Main books of accounts are Journal and Ledger. An Accounting Entry:- An Accounting Entry means recording a transaction in the Journal or Ledger. Thus this term may mean journal entry or ledger entry. Turnover:- Turnover means the total sales (cash and credit) of the business during a given business accounting period. Voucher:- Any document which is a written evidence in support of a business transaction is called a voucher. Cheque:- A Cheque is an unconditional order in writing, drawn on a specified banker ,signed by the drawer directing the banker to pay on demand, a certain sum of money to or to the order of a person named therein or to the bearer and which does not order any act to be done in addition to payment of money. Bank Current Account:- It is a running account of a customer of the bank and he is at liberty to pay into or withdraw from this account the amount required by him from time to time.

ILLUSTRATIONS
Illustration 1. Enter Account Type, Classification, Applicable Rule and Side for the transactions of A & Co, given below: :1. 2. 3. 4. 5. A & Co receives cash from A, the proprietor. It receives goods from B on credit terms. A deposits a cheque of his personal bank a/c into A & Cos bank account. Sold goods on cash to C allowing trade discount Withdraws cash from the bank.

Answer: Tran No 1 1 2 2 3 3 4 4 5 5 Account Head Cash As Capital Purchases B Bank As Capital Cash Sales Cash Bank Account Group Asset Liability Expense Liability Asset Liability Asset Income Asset Asset Classifica tion Real Personal Nominal Personal Personal Personal Real Nominal Real Personal Applicable Rule Debit What Comes In Credit The Giver Debit Expenses/Losses Credit The Giver Debit The Receiver Credit The Giver Debit What Comes In Credit Incomes/Gains Debit What Comes In Credit The Giver Side Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Justifications for the above Answers are given below: Transaction 1 1. This is a temporary inflow as cash is brought in by A as his Capital which would have to be returned whenever he requires or when the business closes down or winds up. This therefore creates a liability of A & Co towards A. 2. 2 accounts are therefore affected-Cash & A Capital. 3. Since A brings in cash into the business, cash a/c which is an asset and is classified as real, is debited as the applicable rule is - debit what comes in. 4. Since A has given the cash, As Capital a/c (Capital- because A is the owner) which is a liability of the business, is credited since its classification is personal and the applicable rule is - credit the giver-. Transaction 2 1. This is a case of both inflow and outflow or non-cash flow. This creates both an assumed permanent cash outflow incurring an expense (for goods purchased) and an assumed temporary cash inflow (from B) creating a liability. 2. Therefore 2 accounts-Purchases and B are created. 3. Normally when goods are purchased for trading or manufacturing purposes, it creates a revenue asset since it should have been considered a temporary cash outflow which will be received back when they are sold. However it becomes difficult to keep an exact track of how much and which of the goods purchased were sold during an accounting period. Therefore when goods intended for trading or manufacturing are purchased, it is considered as a permanent cash outflow and an Account Head named as 'Purchases' is debited, having nominal classification and the applicable rule is 'debit expenses'. 4. Purchases of goods in such cases are therefore considered as expenses and at the end of the accounting period they are matched with the sales made from the goods purchased to arrive at the profitability of the business by deducting the expense (Purchases) from the income (Sales). 5. The profit made on the sale of the same i.e., the amount received over and above the amount paid for the purchase of the goods will be a permanent inflow and which will be accounted for as the profit of the business. 6. The goods are given on credit by B.

7. B is a liability a/c having personal classification and the applicable rule is ' Credit the Giver' and therefore B a/c is credited with the total amount of the goods purchased. Transaction 3 1. This is also a case of both inflow and outflow or non-cash flow since this is a cheque receipt and therefore requires the services of a third party (bank) to collect the money on A & Cos behalf. This creates both an assumed temporary cash inflow from A creating a liability (As Capital) and an assumed temporary outflow to the Bank creating a personal asset since the money on the cheque is collected/received by the Bank directly on A & Cos behalf. The Bank has to return this money to A & Co when it requires or to pay someone on As behalf and on its instructions, out of the amount A has given it from time to time. Therefore the amount of such money lying with its Bank will be A & Cos Personal Asset. 2. Therefore two accounts-Bank and As Capital are affected. 3. Bank is a Personal a/c and since it receives the money on A & Cos behalf, the applicable rule is-Debit the Receiver. Therefore the Bank a/c will be debited. 4. A is the giver and there his Capital a/c (since he is the owner) will be credited as per the applicable rule-Credit the Giver. Transaction 4 1. This is a permanent cash inflow creating an income. Cash has been received from C for goods sold to him by A & Co which will not be returned to C because he has received equivalent goods in return from A & Co. 2. Therefore Cash and Sales (Income Head) are affected. 3. Since Cash is received, it means it has come into the business and since it has a Real classification, the applicable rule is-debit what comes in and therefore Cash a/c is debited. 4. The trade discount allowed to C, reduces the Sales amount and amount due from C and therefore the profit made on selling the same. Therefore it is not necessary to account for it separately. 5. Normally when goods are sold,it results into a liquidation of a revenue asset and it should have been considered as a repayment of a temporary cash outflow made earlier and therefore goods a/c should have been credited as the goods are going out.

6. However it becomes difficult to keep an exact track of how much and which of the goods purchased were sold during an accounting period. Therefore when goods intended for trading are sold, it is considered as a permanent cash inflow which is considered as an income and an Account Head named as 'Sales' is credited, having nominal classification and the applicable rule is 'credit income'. Transaction 5 1. This is a case of liquidation of a personal asset i.e., return by the Bank as required by A & Co, of a past temporary cash outflow. 2. Therefore Cash and Bank a/cs are affected. 3. When cash is withdrawn the bank, cash comes in and then applying the relevant rule for its Real classification-Debit what comes in, Cash a/c is debited. 4. Bank is the giver of the cash withdrawn, and having a personal classification, it is therefore credited, the applicable rule being credit the receiver. It is a personal asset of the business to the extent of the balance in it of the money deposited into it by the business.

Illustration 2. Abhijit starts a retail business in Pune called as Baner Consumer Electronica (BCE) for trading in electronic items like TVs, Refrigerators and Washing Machines. From the transactions given below enter Account Heads, Group, Classification, Applicable Rule & Side:1. Abhijit opens a bank account in the name of his business- -with the Canara Bank, Baner Road Branch with his personal cash. 2. He also deposits his personal cheque into the bank . 3. BCE pays Rent Deposit to Mr. Shrivastava, the landlord of the shop leased out to it for its retail business,. It also pays the advance rent for the first month. Both payments were made by two cheques drawn on BCEs bank. 4. BCE also pays to Pune Office Equipments Co a cheques of different amounts for purchase of various furniture & fittings and Office Equipments. 5. It withdraws cash from its bank a/c. 6. It pays in cash to a carpenter for some customized furniture fittings. 7. It purchases the first lot of its electronic goods from its Principals-M/s Whirlpool India, by issuing a cheque on its bank. It also obtains TVs on credit for 30 days from M/s Vijay Traders. 8. It incurs expenses in cash for stationery and other office expenses. 9. It sells Washing Machines and TVs and receives payment partly by cheques and partly in cash.

Answer: Tran No
1 1 2 2 3 3 4 4 5 5 5 6 6 7 7 7 7 8 8 8 9 9 9

Account Head
Canara Bank Abhijit Capital Canara Bank Abhijit Capital Rent Deposit Canara Bank Rent Canara Bank Furniture Fittings &

Account Group
Asset Liability Asset Liability Asset Asset Expense Asset Asset Asset Asset Asset Asset Expense Asset Expense Liability Expense Expense Asset Asset Asset Income

Classifica tion
Personal Personal Personal Personal Personal Personal Nominal Personal Real Real Personal Real Personal Nominal Personal Nominal Personal Nominal Nominal Real Real Personal Personal

Applicable Rule
Debit the Receiver Credit the Giver Debit the Receiver Credit the Giver Debit the Receiver Credit the Giver Debit Expenses/Losses Credit the Giver Debit what comes in Debit what comes in Credit the Giver Debit what comes in Credit the Giver Debit Expenses/Losses Credit the Giver Debit Expenses/Losses Credit the Giver Debit Expenses/Losses Debit Expenses/Losses Credit what goes out Debit what comes in Debit the Receiver Credit the Giver

Side
Dr Cr Dr Cr Dr Cr Dr Cr Dr Dr Cr Dr Cr Dr Cr Dr Cr Dr Dr Cr Dr Dr Cr

Office Equipments Canara Bank Cash Canara Bank Purchases Canara Bank Purchases Vijay Traders Stationery Expenses Office Expenses Cash Cash Canara Bank Sales

Work out the justifications yourselves. You can check them in vikrofinacs.com if you so wish-under Accounts Concepts Chapter Problem No 5.

CHAPTER TWO THE JOURNAL CONTENTS

Sr No 1 2 3 4 Particulars THE ACCOUNTING STORY LESSON NO 1- THE JOURNAL BOOK THE ACCOUNTING STORY- continued ILLUSTRATION Page No 4 8 9 12

THE ACCOUNTING STORY

Ram came back 3 days after attending the Lesson on Principles of Accountancy. Sir, I have solved all the problems on Accounting Concepts and now I am ready for the next Chapter. You are sure you have understood it in its entirety? Yes, the justifications for every transaction in the Problems were very clear and I had no difficulty in understanding them. I did have to attempt each problem at least twice-in one problem, thrice-before I got them all right. You have done well now we can without any delay get on with the next Chapter. It deals with the Journal which is called the Prime Book of Entry. It was so called because the accounting entries of all business transactions of the business were first entered into this Account Book. Nowadays this book has been divided into different Books of Accounts. We shall have a look at them later. But for now we will assume that there is only one Book of Prime Entry (it means First Entry ) and that all Business Transactions have to be first accounted for in this Book. Accounting for a transaction means evaluating a Business for its Dual Aspects, for Group, for Classification and then deciding which account or accounts to debit and credit such that the total of the accounts debited will be equal to the total of the accounts credited. Sir. Sir, you are going too fast for me!! Prof Vijay laughed loudly and said-Isnt this what you did when you solved the Accounting Concepts Problems? Yes , and so I did. Then why the confusion-I just said you have to do that and then enter in the Journal. OK, we will go straight away to the Topic and then you will understand-So Lesson No 1-The Journal.

LESSON NO 1 THE JOURNAL BOOK

In order to avoid omission of any transaction or to avoid any error in the entry recording that transaction, it is necessary to immediately record it in the Books of Accounts. One of the books of accounts in which an entry is first made is known as the Journal Book. Journal means a Day Book or a daily record. The Journal is a subsidiary book in which all day to day transactions of a business are recorded as and when they take place in a chronological order, in a debit and credit form and in a systematic manner. The act of recording a transaction in the Journal in the form required, is called Journalizing.

FORMAT OF THE JOURNAL

Date

Particulars

LF

Debit Amount Rs

Credit in Amount Rs

in

01-01-07

Cash a/c To As Capital a/c

Dr

35000.00 35000.00

(Being the amount received from A as his Capital)

The Method: Find out the accounts involved in a transaction. There will be at least two accounts concerned. Ascertain the class of each of the accounts concerned and then apply the rules of debit and credit to the class identified. On the basis of the relevant rule, debit or credit the said account. The name of the account/s to be debited is written first under the 'Particulars' column, and the name of the account/s to be credited is to be written on the second line. The word "Dr" is written after the name of the account to be debited whereas the name of the account to be credited is to be preceded by the word "To". The amount involved in the transaction is written under the 'Dr' and 'Cr' columns against the names of debit and credit accounts respectively. A brief explanation of the entry is given in brackets just below the entry. It is called the 'Narration'. LF in the Journal is the reference to the page number of the concerned Account in the ledger. It facilitates easy reference. The date of the transaction is written in the column 'Date'. In simple entries there is only one debit and one credit for every transaction. But there may be certain transactions in which there may be more than one debit entry or more than one credit entry. However the total of debit amounts should equalize the total of credit amounts. The Journal is necessary for the following reasons: a. A complete record of each transaction is available at one place. b. As the transactions are recorded date-wise it facilitates quick and easy reference to any transaction, whenever necessary. c. Narration of the entry helps to understand the transaction recorded. d. Cross Checking between journal and ledger is facilitated. e. Courts of Law consider journal entries as a proof of a transaction. Some Useful Tips for passing (recording) Journal Entries a. Any amount withdrawn by the proprietor for personal use or for payment of his private expenses or any business asset used by the proprietor for his private purposes is called as Drawings of the Proprietor.

b. When it is not mentioned specifically whether purchase or sale is on cash or credit and party's name is mentioned it is presumed to be a credit transaction. If partys name is not mentioned then it is presumed to be a cash transaction (not cheque). c. Trade discount does not appear in the books of accounts. The purchases or sales are reduced by the amount of Trade Discount and only the net amount is recorded. d. Goods distributed as free samples are treated as Advertisement Expenses. e. In the Business Entitys Books of Accounts, there will never be its own account, since obviously the Business Entity cannot enter into a business transaction with itself, because for a transaction to be recognized as a business transaction, there has to be more than one person different from each other as parties to the transaction. However in my experience as an examiner, many students show the business entitys account in its own books!! ILLUSTRATION: Journalize the following business transactions in the Journal of Hasmukhlal Salunkhe & Bros: Sr No 1 2 Date 1-1-12 1-1-12 Particulars Withdrew cash Rs 75,000 from the bank, out of the Rs 6,79,435 available in it. Paid Rs 19,250 as salary by cheque to Hari Ram, Head Supervisor of the business, after deducting Rs 750 as income tax on the same. Paid Rs 46,730 as salary to subordinate staff members in cash Received a cheque from Gandhi Mfg Co of Rs 1,56,395 for credit sales made to it earlier Sold goods to Fergusson Wholesalers Ltd of Rs 6,57,980 and received payment immediately by cheque Purchased goods from Wankhede 8,34,650 payable after 30 days Distributors of Rs

3 4 5 6 7

1-1-12 2-1-12 2-1-12 3-1-12 3-1-12

Paid Rs 2,361 in cash as tempo charges for bringing the above goods to Hasmukhlals godown.

8 9 10 11

3-1-12 4-1-12 4-1-12 5-1-12

Paid in cash Rs 835 as unloading charges of the above goods Paid by cheque to the Income-Tax Dept the amount of Rs 750 earlier deducted from the Head Supervisors salary Paid to Chagan Chaiwala in cash Rs 1925 being the tea charges for Dec 11 Incurred xerox charges of Rs 249 from Satpute Copiers. All amounts of xeroxing work done by Satpute in every month are payable by the 7th of next month and are accounted as expenses when actually paid. Paid Rs 7451 by cheque to Satpute Copiers being the amount of xerox charges for the month of Dec 11 Paid cash of Rs 1835 for purchase of office stationery Paid Rs 10,000 to the Proprietor Hasmukh in cash for personal purposes Sold goods to an employee for Rs 1545 to be accounted for as a Salary Advance for the month.

12 13 14 15

7-1-12 8-1-12 9-1-12 10-1-12

Answer: the Journal of Hasmukhlal Salunkhe & Bros Date Particulars L Debit Credit F Amount in Amount in Rs Rs Dr withdrawn 20,000.00 750.00 19,250.00 75,000.00 75,000.00

1-1-12

Cash a/c To Bank a/c (Being the cash from the Bank)

1-1-12

1-1-12

Salary a/c Dr To I-Tax on Salaries a/c To Bank a/c (Being the amount of salary paid to Supervisor for Dec 11, by cheque after deduction of ITax) Salary a/c Dr To Cash a/c (Being the salaries paid in cash to subordinate staff for Dec 11) Bank a/c Dr To Gandhi Mfg Co (Being the cheque received from the latter for payment of its dues) Bank a/c Dr To Sales a/c (Being the sales to Fergusson Wholesalers and received immediate payment by cheque)

46730.00 46,730.00

2-1-12

1,56,395.00 1,56,395.00

2-1-12

6,57,980.00 6,57,980.00

3-1-12

Purchases a/c Dr To Wankhede Distributors a/c (Being the credit purchases from the latter)

8,34,650.00 8,34,650.00

3-1-12

Carriage Inward a/c Dr To Cash a/c (Being the cash paid for tempo charges for inward goods) Hamali charges a/c Dr To Cash a/c (Being the unloading charges for goods received) I-Tax on Salaries a/c Dr To Bank a/c (Being the cheque paid to the I-Tax Dept on a/c of tax deducted from salary) Miscellaneous Exps a/c Dr To Cash a/c (Being the cash paid to Chagan Chaiwalla for tea charges for Dec 11) --No entry to be done--

2,361.00 2,361.00

3-1-12

835.00 835.00

4-1-12

750.00 750.00

4-1-12

1925.00 1925.00

5-1-12

7-1-12

Xerox Charges a/c Dr To Bank a/c (Being the cheque paid to Satpute Copiers for Xerox chgs for Dec 11)

7451.00 7451.00

8-1-12

Stationery Expenses a/c Dr To Cash a/c (Being the cash paid for office stationery) Hasmukh Drawings a/c Dr To Cash a/c (Being the cash withdrawn by Hasmukh for his personal purposes) Salary Advance a/c Dr To Sales ( Being the goods sold to an employee to be treated as a Salary Advance)

1835.00 1835.00

9-1-12

10,000.00 10,000.00

10-1-12

1545.00 1545.00

Justifications for all the entries above are available in Problem No 5 of Journal in vikrofinacs.com

THE ACCOUNTING STORY- continued

Now do you understand, dear Ram, what this Journal is all about? Yes, but I think I require to solve the Problems in vikrofinacs.com to understand completely. In this subject, where the Theory is not much, you have to solve the maximum problems-at least four in each topic covering different business transactions. So go ahead and solve them and come back after two days. OK, Sir, no problem.

CHAPTER THREE THE LEDGER CONTENTS

Sr No 1 2 3 4 5 Particulars THE ACCOUNTING STORY LESSON NO 1- THE LEDGER ACCOUNT THE ACCOUNTING STORY- continued LESSON NO 2- POSTING INTO THE LEDGER LESSON NO 3- BALANCING OF A LEDGER ACCOUNT 12 Page No 4 8 9

THE ACCOUNTING STORY

Now we come to the Main Book of Account-The Ledger. The Journal is the Prime Book and the Ledger is the Main Book. This prime book, the Journal is divided further depending on the transactions involving some Accounts regularly, like Cash (Cash Book), Bank (Bank Book), Sales (Sales Book), Purchases (Purchase Book) etc., This we shall see in details in the next Chapter. These Subsidiary Books are part of the Journal, but we find that they have characteristics of the Ledger also. Therefore we will first familiar ourselves with the Ledger and then understand that further. OK, Ram? Yes, Sir. Now we will try to understand the ledger by first finding out in the 1st Lesson-all about the Ledger Account.

LESSON NO 1 THE LEDGER ACCOUNT

The Ledger is the Principal Book of Account and it contains all the accounts of a business. An account is a record of all dealings and transactions in respect of any particular person, a particular thing or a particular item of expenditure or income. All the transactions are recorded first in the Journal and if necessary in the other subsidiary books and then from there they are transferred to the respective accounts in the ledger. This is called posting to the Ledger. The Ledger is the book wherein all transactions ultimately find their place under the respective accounts. Therefore it is the book of final entry. Every Account normally is opened on a new page in the Ledger. The accounting term for a page is 'Folio'. As soon as it is opened it is entered in the alphabetical index of the Ledger along with reference to the folio number on which it is located. The name of the account is written in bold letters at the top center of the folio. The folios of the Ledger as well as the Subsidiary Books should be numbered consecutively to facilitate reference. The left hand side of the 'T' in the account is its debit side and the right hand side is its credit side.

THE LEDGER THE T FORMAT

NAME OF THE ACCOUNT --------Debit
Date

Side---------------SBF Amt in Rs

-----------Credit Side-------------Date Particulars SBF Amt in Rs

Particulars

This is the T format of the Ledger-the vertical line of the T dividing the Debit and the Credit side

THE LEDGER THE COLUMNAR FORMAT

NAME OF THE ACCOUNT Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Dr/Cr Balance Amt in Rs

THE ACCOUNTING STORY continued

We must understand how to enter the accounting entries made into the Journal into the Ledger, in both the horizontal and vertical formats and then how to summarize them in each Account. Why? asked Ram. Because we would want to know where our money has gone or from where it has come in. We would like to know who owes us and to whom we owe. We would like to know what our expenses are and what our incomes are during a particular period . And this we can find out from the Ledger? You bet, and that is why it is called the Main Book of Account. So now lets learn how to transfer the entries from the Journal into the Ledger. This process is known in Book-Keeping as Posting into the Ledger-and that is our next Lesson Two.

LESSON NO 2 POSTING INTO THE LEDGER

Transferring of entries from the journal to the respective accounts in the ledger is called Posting. Posting is to be made to the debit side of the account/s which is/are to be debited and to the credit side of the account/s which is/are to be credited as entered in the Journal. While making an entry to the debit side of an account, the name of the corresponding credit account is to be written under the column of "Particulars" and it is to be preceded with the word "To". Whilst making an entry on the credit side of an account the name of the corresponding account debited is written and it is preceded by the word "By". The date of the transaction is written under the column "date" and the amount is written under the column "Amount". The folio No. on which the entry is made in the Journal is to be inserted under the SBF Folio No column. Thus for the purpose of cross references the corresponding Ledger Folio is written in the Subsidiary Book and the Subsidiary Book folio in the Ledger. This procedure is the same for both the T and Columnar types of Ledger Account

THE ACCOUNTING STORY continued

After the entries have been posted into the Ledger then we have to find out what are the balances of each of the Accounts in the Ledger. By balancing , we summarize the effect of all the debits and credits to each account to determine what the amount of each account is. And how do we do that? That is what we will now learn in Lesson No 3- Balancing of an Account. You know Ram, I have found that the student finds this topic difficult to understand and 70% always make mistakes in balancing accounts. They try to understand it mechanically without making a proper attempt to understand its logic. Therefore I personally feel that it requires an elementary knowledge of Arithmetic and a little bit of Logic. So, understand this properly otherwise you will have a lot of problems in future.

LESSON NO 3 BALANCING OF A LEDGER ACCOUNT

In the T format, each account in the ledger may have some entries on the debit side and some on the credit side. Balancing the account means finding out the difference between the two. The procedure is to separately total the amounts on each side, write the greater total as the total of both the sides and then subtract the smaller total from the larger one. The difference between the two is called the Balance. This balance is then inserted at the end of all the entries, on that side of the account which has the lesser amount, writing before it as follows: "By Balance c/d" -when inserting the difference on the credit side i.e., when the total debit side amount is greater than the total credit side amount. To Balance c/d" -when inserting the difference on the debit side i.e., when the total credit side is greater than the total debit side. Therefore by writing this balance on the side having the lesser total, it would mean equalizing the total of the lesser side to the greater one. This process of extracting the balance and inserting it on the lesser side of an account is called balancing or closing of an account. Debit Balance:It is therefore obvious from the above that if the balance is written on the credit side it would mean that the debit side is greater than the credit side of the account. Therefore this balance is called a Debit Balance even though it appears on the credit side of the account. Credit Balance:Similarly if the balance appears on the credit side of an account it means that the credit side is greater than its debit side and therefore it is called a Credit Balance. This method of balancing applies to the T format. However in the Columnar format, balancing is done every time a debit entry or credit entry is posted in the a/c, one below the other, i.e., the difference between the debit and credit side amounts. To the balance of the earlier date, the new entry is either added or subtracted depending on the type of the earlier balance, i.e., Debit or Credit.

Examples of balancing in the T and columnar formats are given below. Balancing of Ledger- T Format Given below is an example of a debit balance-i.e., where the debit total is more than the credit total. This represents a Debtors a/c to whom sales have been made and moneys received there from. The information given by the a/c is the amount of sales made to him for the period from 12-10-06 to 30-03-07 and the moneys received from him during that period. The balance amount which is a debit balance informs that Rs 146840.00 is due from him and that he is a debtor to that extent as on 30-03-07, as a result of all the business transactions concerning him during that period. A & Cos Account (Debtors Account) |-------------Debit Side------------------|-|-------------Credit Side---------------|
Date Particulars SBF Amt in Rs Date Particulars SBF Amt in Rs

12-10-06

To Sales

500000

12-11-06

By Bank

18

490000

5-11-06

To Sales

258978

15-11-06

By Discount

10000

12-12-06

To Sales

65890

14-01-07

By Bank

18

258978

2-2-07

To Sales

74250

15-02-07

By Bank

18

65890

30-3-07

To Sales

72590

30-03-07

By Bal c/d

146840

Total

971708

Total

971708

30-03-07

To Bal b/d

146840

Given below is an example of a credit balance-i.e., where the credit total is more than the debit total. Also this represents a Creditors a/c from whom purchases have been made and moneys paid thereto. The information given by the a/c is the amount of purchases made from him for the period from 12-10-06 to 30-03-07 and the moneys paid to him during that period. The balance amount which is a credit balance informs that Rs 146840.00 is due to him and that he is a creditor to that extent as on 30-03-07, as a result of all the business transactions concerning him during that period. A & Cos Account (Creditors Account) |------------Debit Side---------------|-|--------------Credit Side----------------|
Date Particulars SBF Amt in Rs Date Particulars SBF Amt in Rs

12-11-06

To Bank

18

490000

12-10-06

By Purchases

500000

15-11-06

To Discount

10000

5-11-06

By Purchases

258978

14-01-07

To Bank

18

258978

12-12-06

By Purchases

65890

15-02-07

To Bank

18

65890

2-02-07

By Purchases

74250

30-03-07

To Bal c/d

146840

30-03-07

By Purchase

72590

Total

971708

Total

971708

30-03-07

By Bal b/d

146840

 Following are the same accounts-both the Debtors and Creditors accounts with the same data in the columnar format of the Ledger which is now presently utilized because it is more convenient to program in the computerized accounting packages presently being used. A & Cos Account (Debtors Account) (Columnar Format)
Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

12-10-06

To Sales

500000

Dr

500000

5-11-06

To Sales

258978

Dr

758978

15-11-06

By Bank

18

490000

Dr

268978

15-11-06

By Discount

10000

Dr

258978

12-12-06

To Sales

65890

Dr

324868

14-01-07

By Bank

18

258978

Dr

65890

2-02-07

To Sales

74250

Dr

140140

15-02-07

By Bank

18

65890

Dr

74250

30-03-07

To Sales

72590

Dr

146840

A & Cos Account (Creditors Account) (Columnar Format)

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

12-10-06

By Purchases

500000

Cr

500000

5-11-06

By Purchases

258978

Cr

758978

15-11-06

To Bank

18

490000

Cr

268978

15-11-06

To Discount

10000

Cr

258978

12-12-06

By Purchases

65890

Cr

324868

14-01-07

To Bank

18

258978

Cr

65890

2-02-07

By Purchases

74250

Cr

140140

15-02-07

To Bank

18

65890

Cr

74250

30-03-07

By Purchases

72590

Cr

146840

Personal Accounts:Personal accounts may have either a debit or credit balance. When it is a Debit Balance it means that the person has received more than what he has given. i.e. he is a debtor - he owes money to the business. When it is a Credit Balance, he has given more than what he has received i.e., he is a creditor - he is owed to by the business. Real Accounts:Real accounts are basically Assets accounts and they always have a debit balance, since all Assets are debited when they come into the business and are credited when they go out. It is therefore but common sense that if we want to remove this asset from the Asset a/c then it should be removed at its cost and cannot be removed at more or less than what it has originally cost otherwise the remaining assets will not be shown at their correct cash values. However if we have sold the assets at a value higher or lower than what they had cost us then obviously we have received more or lesser money than what we had when we bought that asset. It therefore means that we have made a profit or loss by selling that asset. This profit now permanently belongs to us and therefore becomes an income and the loss is a permanent outflow. The income is therefore credited and the loss debited ( Rule: Cr all incomes and gains and Dr all losses) and the asset a/c is credited (credit what goes out) to extent of its cost. But more of this later. Nominal Accounts:Nominal accounts may have debit or credit balances. Since expenses are debited when incurred, all expenses and losses are debit balances and since incomes are credited when received, all incomes and profits are credit balances.

CHAPTER FOUR OTHER SUBSIDIARY BOOKS CONTENTS

Sr No 1 2 3 4 5 6 7 Particulars THE ACCOUNTING STORY LESSON NO 1- TYPES OF SUBSIDIARY BOOKS THE ACCOUNTING STORY- continued LESSON NO 2- THE PURCHASES BOOK & PURCHASES RETURNS BOOK LESSON NO 3- THE SALES BOOK & SALES RETURNS BOOK LESSON NO 4- THE CASH BOOK ILLUSTRATIONS 12 Page No 4 8 9

THE ACCOUNTING STORY

Ram, when the Double Entry Book-Keeping System was first introduced, the Journal was the only book of original or prime entry and therefore all types of business transactions were recorded in it. But because of large sizes of business concerns and the large number of transactions, it was found convenient to have separate journals for recording separate types of business transactions. Therefore the Journal was split up into a number of separate journals and a particular Journal was used for recording a distinct type of transaction. These Journals are known as Subsidiary Books. These books are also called as the Books of Original Entry because the transaction is first recorded in one of these books according to the type of transaction and then the posting is made in the ledger. However after the advent and use of Computerized Accounting Software Systems, the importance and utility of these subsidiary books has greatly diminished since these systems require only the expert knowledge and use of how to pass Journal Entries. All the other Subsidiary Books, the Ledger, and the Final Accounts are automatically formatted by the System itself based on the Journal Entry entered by the Accountant in the System. So if the Accountant has made a wrong Journal Entry all these records will also get wrongly formatted! Therefore the person making the entry in the System still requires proper knowledge of what and how much to debit and credit! The knowledge of how to write and format these Subsidiary Books and how to post them to the Ledger, take out a Trial Balance and make up the Final Accounts is now purely academic but necessary in case the accounts have to be written manually and also to understand the implications of the information contained in the accounts so automatically formatted by the computerized systems.

LESSON NO 1 TYPES OF SUBSIDIARY BOOKS

Purchases Book:Maintained to record credit purchases only (not cash purchases) of goods purchased. Purchases Returns Book:Maintained to record the goods returned to Suppliers. Sales Book:Maintained to record credit sales only (not cash sales) of goods sold. Sales Returns Book:Maintained to record goods returned by Customers. Cash Book:Maintained to record Cash and Bank transactions only. Journal Proper Book ( the normal Journal):Maintained to record the transactions which cannot be recorded in any other Subsidiary Book. The following Subsidiary Books are also maintained by some business concerns: Bills Receivable Book:Maintained to record Bills Receivables drawn by the business concern. Bills Payable Book:Maintained to record Bills Payables accepted by the business concern.

THE ACCOUNTING STORY- continued

1. Now we will go into the details of the Purchases, Sales and the various Cash Books, as to which type of transactions are entered in each, their formats and their uses. 2. Sir, is it necessary to do that? 3. I know what you are thinking of. Computer software, no? 4. Yes, Sir, you yourself mentioned earlier that the accounts software takes care of entering the transactions into the Books of Accounts and that what is necessary to understand is how to understand a transaction and be able to debit and credit the required accounts. This is what we have now learnt-then why is it necessary to go further? 5. Because, my dear friend , unless we understand how the Final Accounts, i.e., the Profit and Loss a/c and the Balance Sheet, is structured we will never understand how to make use of them. When I say use, I mean how do I use the information contained in these Final Accounts for the purpose of running a business? If I do not know the sources of this information and how and from where it is compiled , would I be able to run an effective business? 6. No, Sir, I now sees your point. What you are telling me is that I should be able to identify where the values of my Assets and Liabilities have come from and where I will be able to inspect their correctness, if I have any doubts about it, and also be able to control my expenditure and income by evaluating the various business transactions concerning them in detail. Isnt that what you mean? 7. Well, Ram, a very long speech for you, I must say!!! Yes, that is exactly what I meant. Unless you are aware of the Books from which these amounts are arrived at, you will not be able to verify their correctness and genuineness. But now enough of this discussion. Let us go on to the next lessons-Lesson Nos 2 to -

LESSON NO 2 PURCHASES BOOK

This Book is maintained to record the credit purchases of goods. Cash Purchases are not to be recorded in the Purchase Book, only credit purchases are recorded. The Purchase Book will be totaled at the end of every month. This total of the Purchase Book means the total of credit purchases for the month. This total is posted to the debit of the Purchase Account. The credit is given to the respective parties accounts individually transaction by transaction in their ledger accounts and their Ledger Folio in the Ledger where each such individual amount is posted, is entered in the LF Column of the Book. By posting the total monthly purchases, fewer accounting entries will be there in the Ledger. Tips Cash purchases are not recorded. Purchase of assets other than the goods (revenue assets) purchased are not recorded. When goods are purchased partly by cash and credit, only the credit part is recorded. Trade discount is deducted from the invoice price and therefore the Invoice Amount is recorded after deducting this amount.

ILLUSTRATION:
X & Co a trading firm and purchases various goods on credit and cash basis. During the month of March 2010 the following purchases were made. Account for the same in the Purchases Book and post into Ledger. 1. On 2-3-10, purchased on cash from ABC Corporation (ST No NA 103856) goods worth Rs 75,000 vide Cash Memo No 1945 dated 2-3-10, inclusive of Rs 8000 being the amount of VAT. 2. On 6-3-10, purchased on credit from ABC Corporation (ST No NA 103856) goods worth Rs 2,75,000 vide Invoice No 23908 dated 4-3-10, inclusive of Rs 28000 being the Excise Duty and Rs 34500 being the amount of VAT. 3. On 9-3-10, purchased on credit from STU Corporation (ST No MB 108876) goods worth Rs 75,000 vide Invoice No 127927 dated 7-3-10, inclusive of Rs 8000 being the Excise Duty and Rs 4500 being the amount of VAT.

4. On 12-3-10, purchased on credit from STU Corporation (ST No MB 108876) goods worth Rs 5,45,000 vide Invoice No 204876 dated 10-3-10, inclusive of Rs 48000 being the Excise Duty and Rs 44500 being the amount of VAT and Rs 11,000 being Octroi charges. 5. On 16-3-10, purchased on credit from CAT Corporation (ST No NA 157676) goods worth Rs 1,25,000 vide Invoice No 458231 dated 14-3-10, inclusive of Rs 8000 being the Excise Duty and Rs 14500 being the amount of VAT. 6. On 26-3-10, purchased on credit from ABC Corporation (ST No MB 103856) goods worth Rs 2,25,000 @ 10% trade discount vide Invoice No 392780 dated 22-3-10, exclusive of Rs 18000 being the Excise Duty and Rs 18500 being the amount of VAT.

7. On 30-3-10, purchased on cash from CAT Corporation (ST No MB 157676) goods

worth Rs 50,000 vide Cash Memo No 2034 dated 30-3-10, inclusive of Rs 6000 being the amount of VAT.

Answer: Purchases Book for March 2010.-Folio 1

Sr No Date of Purchase Purchase Bill No & Date Supplier Name & Sales Tax No LF Total Amount Rs Bill Whereof Basic Cost Rs Whereof Excise DutyRs Whereof VAT / CST Rs Whereof Other ChargesRs

1 2 3

6-3-10 9-3-10 12-3-10

23908 4-3-10 127927 7-3-10 204876 10-3-10 458231 16-3-10 392780 22-3-10

ABC Corporation ST No NA 103856 STU Corporation ST No MB 108876 STU Corporation ST No MB 108876 CAT Corporation ST No NA 157676 ABC Corporation ST No NA 103856

1 2 2

275,000 75,000 545,000

212,500 62,500 441,500

28,000 8,000 48,000

34,500 4,500 44,500 11,000 Octroi Payable

4 5

16-3-10 26-3-10

3 1

125,000 239,000 1,259,000

102,500 202,500 1,021,500 LF 4

Posted in total to debit of the Purchases a/c

8,000 18,000 110,000 LF 5

Posted in total to the debit of the Excise paid on Purchases a/c.

14,500 18,500 116,500 LF 6

Posted in total to the debit of the Vat paid on Purchases a/c

11,000 LF 7
Posted to the debit of the Octroi paid on Purchas es a/c

The Total Bill Amount of each supplier will be posted to each of their accounts in the folio of the Ledger where it is maintained.

Ledg er folio of supp liers a/c

No posting is done of this total amount as individual amounts are posted

1. Cash Purchases are not recorded in Purchases Book. Therefore the first and last transactions-the seventh, will be recorded in the Cash Book. 2. In the 6th transaction, Goods worth Rs 225000 are sold @ 10 %discount i.e. the Purchase Price or Basic Cost is Rs 2,02,500 and the excise duty and VAT are added to it to arrive at the total Bill amount unlike in the earlier transactions where they were included in the total invoice price and were therefore deducted from the total to arrive at the basic cost. Columnar Ledger Accounts posted: Folio 1

ABC Corporation a/c

Date Particulars SB Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

6-3-10 6-3-10 6-3-10 26-3-10 26-3-10 26-3-10

By Purchases a/c By Excise Duty Paid on Purchases a/c By VAT Paid on Purchases a/c By Purchases a/c By Excise Duty Paid on Purchases a/c By VAT Paid on Purchases a/c

1 1 1 1 1 1

212,500 28,000 34,500 202,500 18,000 18,500

Cr Cr Cr Cr Cr Cr

212,500 240,500 275,000 477,500 495,500 514,000

Folio 2
STU Corporation a/c
Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

9-3-10 9-3-10 9-3-10

By Purchases a/c By Excise Duty Paid on Purchases a/c By VAT Paid on Purchases a/c By Purchases a/c By Excise Duty Paid on Purchases a/c By VAT Paid on Purchases a/c By Octroi Paid on Purchases a/c

1 1 1

62,500 8,000 4,500

Cr Cr Cr

62,500 70,500 75,000

12-3-10 12-3-10 12-3-10

1 1 1

441,500 48,000 44,500 11,000

Cr Cr Cr Cr

441,500 489,500 534,000 545,000

Folio 3
CAT Corporation a/c
Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

16-3-10 16-3-10 16-3-10

By Purchases a/c By Excise Duty Paid on Purchases a/c By VAT Paid on Purchases a/c

1 1 1

102,500 8,000 14,500

Cr Cr Cr

102,500 110,500 125,000

Folio 4 Purchases a/c

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

31-3-10

To Sundry Creditors a/c

1,021,500

Dr

1,021,500

Folio 5 Excise Duty Paid on Purchases a/c

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

31-3-10

To Sundry Creditors a/c

110,000

Dr

110,000

Folio 6 VAT Paid on Purchases a/c

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

31-3-10

To Sundry Creditors a/c

116,500

Dr

116,500

Folio 7 Octroi Paid on Purchases a/c

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

31-3-10

To Sundry Creditors a/c

11,000

Dr

11,000

Purchases Returns Book

This book is maintained to record the goods returned from Suppliers. It is also known as Returns Outward Book. The goods are purchased on credit but sometimes due to certain defect or for any other reason, they are returned to the supplier. A debit note is prepared and issued to the supplier when goods are returned to him. This is issued to inform him that his account has been debited. Posting of Returns Outward book in the Ledger Total of Returns Outward Book is taken monthly. In the ledger, the monthly total of the returns is debited to each individual Suppliers a/c to whom the goods have been returned since they have received the Goods, and the monthly total is credited to the Purchases or Purchases Returns a/c since goods have gone out. The format is the same as that of the Purchases Book. However the accounting entries are exactly opposite to that in the Purchases Book. The Purchases and other a/cs, like Excise Duty, VAT, Octroi, which had been debited when the credit purchases were made, will be credited in total instead of debited and the suppliers accounts will be debited individually.

LESSON NO 3 SALES BOOK

This register is maintained for recording credit sales only. It is also known as Sales Day Book. Cash Sales are not recorded in the sales book. Only Credit Sales of goods in which the trader is dealing, are recorded. The total of sales book is taken monthly and this shows the total credit sales for the month. The total of the Sales Book is posted in the Sales Account on the credit side. The debit effect is given to the respective customers individual accounts on their debit sides transaction by transaction in their ledger accounts and their Ledger Folio in the Ledger where each such individual amount is posted, is entered in the LF Column of the Book. Tips Cash sales are not recorded. Sale of an asset is not recorded (only sale of goods-revenue assets) When Sales are effected partly in cash and on credit, only credit part is recorded. Trade discount is deducted from the invoice price and therefore the Invoice Amount is recorded after deducting this amount.

ILLUSTRATION:
AB & Co is a trading firm and sells various goods on credit and cash basis. During the month of March 2010 the following Sales were effected. Account for the same in the Sales Book and post into the Ledger. 1. On 2-3-10, sold on cash from to XY Corporation (ST No NA 1039721) goods worth Rs 1,75,000 vide Cash Memo No 2015 dated 2-3-10, inclusive of Rs 18,000 being the amount of VAT. 2. On 6-3-10, sold on credit to XY Corporation (ST No NA 1039721) goods worth Rs 3,75,000 vide Invoice No 21009 dated 4-3-10, inclusive of Rs 28,000 being the Excise Duty and Rs 34,500 being the amount of VAT. 3. On 9-3-10, sold on credit to VW Corporation (ST No MB 192092), Plant & Machinery worth Rs 6,75,000 vide Invoice No 21792 dated 7-3-10, inclusive of Rs 58,000 being the Excise Duty and Rs 74,000 being the amount of VAT. 4. On 12-3-10, sold on credit to STU Corporation (ST No MB 1812932) goods worth Rs 7,25,000 vide Invoice No 21010 dated 10-3-10, inclusive of Rs 68,000 being the

Excise Duty and Rs 84,500 being the amount of VAT and Freight forwarding charges of Rs 12,500 and Rs 21,000 being Octroi charges in transit. 5. On 16-3-10, sold on credit to CAT Corporation (ST No NA 157676) goods worth Rs 2,25,000 vide Invoice No 21011 dated 14-3-10, inclusive of Rs 18,000 being the Excise Duty and Rs 24,500 being the amount of VAT. 6. On 26-3-10, sold on credit to XY Corporation (ST No NA 1039721) goods worth Rs 3,25,000 @ 10% trade discount vide Invoice No 21012 dated 22-3-10, exclusive of Rs 25,000 being the Excise Duty and Rs 23,500 being the amount of VAT.

Ans: Sales Book for March 2010.-Folio 1

Sr No Sales Invoice No Invoice Date Customer Name & Sales Tax No LF Total Invoice Amount Rs Whereof Basic Amount-Rs Whereof Excise DutyRs Whereof VAT / CSTRs Whereof Other Charges-Rs

1 2

6-3-10 12-3-10

21009 4-3-10 21010 10-3-10

XY Corporation (ST No NA 1039721) STU Corporation (ST No MB 1812932)

8 2

375,000 725,000

312,500 539,000

28,000 68,000

34,500 84,500 12,500

Freight & Forwarding 21,000 Octroi

3 4

16-3-10 26-3-10

210111 4-3-10 21012 22-3-10

CAT Corporation (ST No NA 157676) XY Corporation (ST No NA 1039721) Totals

The Total Invoice Amount of each Customer will be posted to each of their accounts in the folio of the Ledger where it is maintained.

3 8

225,000 341,000 1,666,000

182,500 292,500 1,326,500 LF 9

Posted in total to the credit of the Sales a/c

18,000 25,000 139,000 LF 10

Posted in total to the credit of Excise Duty Payable a/c.

24,500 23,500 167,000 LF 11

Posted in total to the credit of VAT Payable a/c

33,500
Posted Credit to Freight & Forwarding Recoverable a/c LF 12-Rs 12,500 and to credit of Octroi Recoverable a/c LF 13Rs 21,000

Led ger foli o of Cus tom ers a/c whi ch are deb ited

1. Cash Sales are not recorded in Sales Book. Therefore the first transaction is not recorded. This will be recorded in the Cash Book.

2. The third transaction is concerned with the Sale of Machinery which is a fixed asset. This entry will be accounted for in the Journal because in the Sales Book, only Sales of revenue assets and services are accounted for. 3. In the 6th transaction, Goods worth Rs 325,000 are sold @ 10 %discount i.e. the Sales or Basic amount is Rs 292,500 and the excise duty and VAT are added to it to arrive to the total Invoice amount, unlike in the earlier transactions where they were included in the total invoice price and were therefore deducted from the total to arrive at the basic amount. Columnar Ledger Accounts posted: Folio 2
STU Corporation a/c
Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

12-3-10 12-3-10 12-3-10 12-3-10

12-3-10

To Sales a/c To Excise Duty Payable a/c To VAT Payable a/c To Freight & Forwarding Recoverable a/c To Octroi Recoverable a/c

1 1 1 1

539,000 68,000 84,500 12,500

Dr Dr Dr Dr

539,000 607,000 691,500 704,000

21,000

Dr

725,000

Folio 3
CAT Corporation a/c
Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

16-3-10 16-3-10 16-3-10

To Sales a/c To Excise Duty Payable a/c To VAT Payable a/c

1 1 1

182,500 18,000 24,500

Dr Dr Dr

182,500 200,500 225,000

XY Corporation a/c
Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

Folio 8

6-3-10 6-3-10 6-3-10 26-3-10 26-3-10 26-3-10

To Sales a/c To Excise Duty Payable a/c To VAT Payable a/c To Sales a/c To Excise Duty Payable a/c To VAT Payable a/c

1 1 1 1 1 1

312,500 28,000 34,500 292,500 25,000 23,500

Dr Dr Dr Dr

312,500 340,500 375,000 667,500 692,500 716,000

Folio 9 Sales a/c

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

31-3-10

By Sundry Debtors a/c

1,326,500

Cr

1,326,500

Folio 10 Excise Duty Payable a/c

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

31-3-10

By Sundry Debtors a/c

139,000

Cr

139,000

Folio 11 VAT Payable a/c

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

31-3-10

By Sundry Debtors a/c

167,000

Cr

167,000

Folio 12 Freight & Forwarding Recoverable a/c

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

31-3-10

By Sundry Debtors a/c

12,500

Cr

12,500

Folio 13 Octroi Recoverable a/c

Date Particulars SBF Debit Amt in Rs Credit Amt in Rs Bal Type Bal Amt in Rs

31-3-10

By Sundry Debtors a/c

21,000

Cr

21,000

Sales Returns Book

This book is maintained to record the return of goods from customers. known as the Inwards Returns Book. Reasons for Customer Returns:Goods are not as per quality Goods are not as per order Goods are defective Goods are excess in quantity Prices of goods are overcharged When the goods are returned by customers a Credit Note is issued to the customer to indicate to him that his account has been credited to extent of the goods returned by him. The accounting entry is to debit the Sales or Sales Returns a/c (because goods have come in) and credit the customers a/c since he is the giver. Sales a/c is debited because at the time of Sales, the customers a/c was debited. Posting of the Sales Returns Total of the Sales Returns Inward Book is taken monthly. This monthly total is debited to the Sales a/c. The credit is individually posted to those accounts of customers who have returned the goods. It should be noted that the accounting entries will be reverse of those passed for recording Sales. Same format as the Sales Book It is also

LESSON NO 4 THE CASH BOOK

The Cash Book is a subsidiary book in which, all Cash Receipts and Payments are recorded. As cash transactions in a business are numerous, it is found convenient to make use of the cash book itself as a cash and bank account, instead of opening a separate cash and bank account in the ledger. This saves time, labor, stationery and duplication of work. Thus cash book is therefore both a Subsidiary Book and a Ledger. As the Cash Book is a subsidiary book, cash transactions are entered into it directly and no journal entries are required to be passed for them. As it serves as a Cash Account the form of the cash book is like that of a T account with Debit & Credit sides. Nowadays because of the requirements of computerized accounting technicalities, it will be in the columnar ledger form and not in the T form. Posting from Cash Book:As Cash book is also a cash a/c as well as a Bank a/c (in case of 2 & 3 columnar Cash Books), from the debit side of the cash book, posting is made to the Ledger on the credit side of the other concerned account, and from the credit side of the cash book posting is made to the Ledger on the debit side of the other concerned account. Also the Cash Balance is arrived at from the Cash Book itself. No Cash or Bank Account is therefore maintained in the Ledger. Kinds Of Cash Book:Cash book with Cash or Bank columns only (Simple Cash Book or Simple Bank Book) Cash book with both Cash and Bank columns (Two Columnar) Cash book with Cash, Bank and Cash Discount columns (Three Columnar)

Simple Cash Book

This type of cash book has only one amount column i.e. on the debit (receipts) side for cash received and the credit (payments) side for cash paid. It always has a debit balance as we cannot pay more than what we have. This type of cash book is maintained by those who generally do not have much of cash discount (receivable or payable) and bank transactions. Whenever they allow or receive cash discount the entry for discount or for a transaction concerning bank, the entries are passed through the Journal. A separate Discount and Bank A/c is opened in the ledger and the postings to these accounts are made from the journal. Since the Cash Book is an alternative for a Journal Entry, every entry therein must be supported by a suitable narration in brief.

Balancing:Since the cash book is nothing but the cash account, it must be balanced regularly. Practically businessmen balance the cash book every day and tally the actual cash balance. It must be remembered that we cannot pay more cash than we have received. So debit/receipt side is always more than or equal to the credit/payment side. Since therefore more cash is received than paid, there will always be a debit balance in the Cash Account. This is in the case of the Simple Cash Book. Simple Bank Book The Bank Book has only one amount column on the debit (receipts) side for cheques and interest or dividends received by the firm and deposited into as also cash deposited into the firms bank account, and one on the credit (payments) side for cash withdrawn from the bank account as also cheques paid by the bank on behalf of the firm from the firms bank account. It normally has a debit balance as the bank will not pay from the bank account more than what has been deposited in it by the firm. But if an arrangement is made with its bankers for such a purpose, then the Bank will allow more payments or withdrawls than what has been deposited. Then in this case the Bank account will be a credit balance. This balance is also known as an Overdraft Balance. This means that the Bank has allowed the firm to overdraw from its account. Since the Bank Book entry is an alternative for a Journal Entry, every entry therein must be supported by a suitable narration in brief. Balancing:Since the Bank Book is nothing but the bank account, it must be balanced regularly and that balance must be compared with the balance of the firms account in the Bank to determine whether all the transactions have been accounted for or not. This comparison is called Bank Reconciliation. We will learn more about it later.

The Two Columnar Cash Book

If bank transactions are numerous then it is convenient to provide a column for Bank A/c on each side of the cash book. Thus Cash & Bank columns represent Cash & Bank accounts and they are balanced at the end of the period to find out their balances. However in computerized accounting, two columnar and three columnar cash books are not maintained. Separate Cash Books for Cash and Bank transactions are maintained (Simple Cash Books for Cash & Bank transactions which are nothing but the Ledger account for Cash and Bank). Therefore these types of multi-columnar Cash Books which were very useful at the time of manual accounting are no longer applicable but we will look at an illustration to compare and understand the importance of these Books later.

Some common Banking terms and transactions are explained below:

Cheque:- A Cheque is a written unconditional order drawn on a specified banker signed by the drawer directing the banker to pay a certain amount to or on order, to the payee. The three concerned parties to a Cheque are as follows: Drawer :- Is a depositor who draws a Cheque. Drawee :- Is a bank on whom a Cheque is drawn. Payee :- Is a person in whose favour a Cheque is drawn and to whom the amount of the Cheque is payable. Bearer Cheque:A bearer Cheque can be en-cashed by any person who holds it. Any person who holds the Cheque can receive cash from the bank on the counter. Order Cheque:An order Cheque is payable to the payee whose name appears on the Cheque or to the person on whom the Cheque is endorsed, under the order of the payee. Crossed Cheque:A crossed Cheque is one on which two parallel lines are drawn on the left top corner of the Cheque with or without the words& Co Not negotiable A/c Payee only The payment of crossed Cheques cannot be made in cash but only by crediting the payees bank account. Honor and dishonor of Cheque:A Cheque is said to be honored when it is paid by the banker and when the payment is refused by the banker it is said to be dishonored. Bank Pass Book or Bank Statement:It is a copy of customer's account maintained by the bank in its ledger. It is given to the customer by the bank for his information about his a/c in the bank. The customer has to give the Pass Book to the bank from time to time to get it updated. The Bank Statement is given to the customer normally at the end of every calendar month.

Contra Entry:This is an important concept as far as the two or three columnar cash books are concerned. If cash is paid into bank, cash account is credited because cash goes out, and bank account is debited because bank is the receiver. When cash is withdrawn from the bank, cash account is debited because cash comes in and bank account is credited because bank is the giver. As the Cash A/c and Bank A/c are on the same page of the cash book the double entry of these transactions is effected on the same page on opposite sides. Therefore such accounting entries are called Contra Entries. Contra means both the debits and credits are recorded in cash and bank columns as the case may be, on the opposite sides of the Cash Book on the same day. The letter 'C' is written in the L.F column against such entry. This is because no cash and bank a/cs are maintained in the ledger and therefore the cash book itself is also the ledger apart from its subsidiary book status. So in the case of contra entries both the debit and credit entries are available in the cash book only but on the opposite sides in order to account for both the debit and credit.

The Three Columnar Cash Book

Similar to the Two-columnar Cash Book, except that an additional column for Cash Discount is added to both the Receipts and Payments side. Cash Discount is given to a customer when the business induces him to pay moneys due to it, earlier than the due date. Similarly cash discount is allowed to the business when it pays the amount due to a supplier earlier than the due date. The cash discount allowed by the business is a loss for the business and therefore the Discount a/c is to be debited and the Customers a/c to be credited. Therefore in this Cash Book the actual amount received ( i.e., after deducting the discount allowed) from the customer ,is recorded in the cash or bank column depending on the mode of receipt and the discount amount is recorded in the discount column, thus the total dues from the customer are shown as received with the additional information of the amount of discount allowed. Vice-versa for the discount received from the Supplier, except that this entry is made on the Payments side of the cash book. In this type of cash book, cash and bank columns are balanced properly but discount columns are not balanced but only totaled because discount columns in Cash Book do not have opening or closing balance. Unlike the Cash and Bank columns in the

Cash Book, in which case the Cash book also acts a Ledger a/c , the total of the Discount column in the cash book on both the sides is posted to the Discount a/c maintained in the ledger.

Illustration: Given below is a problem in which you have to account for the transactions in all the types of Cash Books.
Pass the requisite accounting entries in the various types of Cash/Bank Books of Vibgyor Corporation and balance the same. Date 1-3-10 1-3-10 1-3-10 1-3-10 Particulars Amount in Rs Opening Balance of Cash 10,000.00 Opening Balance of Bank a/c 50,000.00 Cash amount received against Cash Sales vide Cash Memo No 267 dated 1-3-10 34,789.00 Paid in cash to Real Stationers against their Bill No 3194 dated 29-2-10 for computer stationery, not Accounted for earlier 1,789.00 Received cheque from XYZ & Co against Sales Invoice No 2106 dated 18-2-10 and deposited into the Bank after allowing cash discount of Rs 800.00 40,000.00 Paid to M/s ABC & Co by cheque against their Bill No 54957 dated 25-2-10 after being allowed a cash discount of Rs 1,800.00 60,000.00 Cash withdrawl from the Bank 15,000.00 Paid by cheque Bill No 273 dated 15-2-11 of M/s Indtravels (not accounted for earlier) for travel expenses 11,230.00 Cash deposited into the Bank 25,000.00

2-3-10

3-3-10

5-3-10 5-3-10

7-3-10

ANSWERS: IF MANUAL ACCOUNTING IS BEING DONE: First Answer is given on the assumption that Vibgyor Corporation maintains the Simple Cash and Bank Books and since it is employing manual accounting, both these Books will be in the T-Format : The Simple Cash Book of Vibgyor Corporation in the T Format :

Date
1-3-10

Receipts-Dr
To Balance b/d (Being the opening balance)

LF

Amt in Rs
10,000.00

Date
1-3-10

Payments-Cr
By Stationery Expenses a/c (Being the purchase of computer stationery as per Bill No 3194 dated 29-2-10 of Real Stationers) By Bank a/c (Being the cash deposited into the Bank a/c)

LF

Amt in Rs
1,789.00

1-3-10

To Cash Sales a/c (Being the amount of cash sales vide Cash Memo No 267 dated 1/3/10) To Bank a/c (Being the cash amount withdrawn from the Bank a/c)

34,789.00

7-3-10

25,000.00

5-3-10

15,000.00

7-3-10 Totals 7-3-10 To Balance b/d 59,789.00 33,000.00

By Balance c/d Totals

33,000.00 59,789.00

Format of the Simple Bank Book. The T Format

Date 1-3-10 Receipts To Balance b/d (Being the opening balance) LF Amt in Rs 50,000.00 Date 2-3-10 Payments By Cash Discount a/c (Being the cash discount allowed to XYZ & Co against our Invoice No 2106 dated 18-2-10) By ABC & Co a/c (Being the cheque amount paid against their Bill No 54957 dated 25-2-10) By Travel Expenses a/c (Being the cheque amount paid to M/s Indtravels Ltd against their Bill No 273 dated 15-2-11) By Cash a/c (Being the cash withdrawn from the Bank a/c) By Balance c/d LF Amt in Rs 800.00

2-3-10

To XYZ & Co a/c (Being the cheque amount received against our Sales Invoice No 2106 dated 18-210) To Cash Discount a/c (Being the cash discount received from ABC & Co against their Bill No 54957 dated 25-2-10) To Cash a/c Being Cash deposited into the Bank a/c)

40,800.00

3-3-10

61,800.00

3-3-10

1,800.00

3-3-10

11,230.00

7-3-10

25,000.00

5-3-10

15,000.00

7-3-10

28,770.00

Totals

117,600.00

Totals

117,600.00

7-3-10

To Balance b/d

28,770.00

NOTES: 1. From the above it can be seen that whatever is entered on the receipts side of the Cash Book, it means that the Cash a/c is debited and the corresponding a/c for this e.g., the receipt of cash due to cash sales of Rs 34,789.00 as shown above will be the Cash Sales a/c which is credited and vice versa in the case of payments of cash. Similarly in the case of the Bank Book in this case the Bank a/c is debited or credited. 2. On 2-3-10, Rs 40,000 was received by cheque from XYZ & Co after allowing cash discount of Rs 800.00. Cash discount is given as an incentive to pay earlier than the date on which it is contracted to be paid. This results into a lesser payment than what was due, therefore this discount is a loss and should be debited. Since XYZ & Co has paid Rs 40,000.00 it follows that it actually owed Rs 40,800 and because it was allowed this discount of Rs 800.00, no further amount is owed from it after this payment of Rs 40,000.00. Therefore it should be credited with Rs 40,800.00 to make its account Nil. (It has been debited earlier with Rs 40,800.00 when the Sales Invoice was accounted for). Also the Cash Discount a/c will have to be debited with Rs 800.00 as it is a loss. Therefore this will results into a net receipt of Rs 40,000.00. 3. In the Simple Bank Book this is done by showing on the Receipts side the full amount of Rs 40,800.00 which will automatically credit the XYZ & Co a/c with that amount. On the payments side the Discount a/c will be debited by showing it as a payment of Rs 800.00. 4. Similarly for the payment of Rs 60,000.00 to ABC & Co in the Bank Book above. Here Vibgyor owed Rs 61,800.00 and had credited ABC & Cos a/c with that amount when it accounted for the credit purchases earlier. But ABC & Co has allowed a discount of Rs 1,800.00 to it for making an earlier payment. Therefore on the Payments side, Rs 61,800.00 is shown which results into the ABC & Co a/c in the ledger being debited by Rs 61,800, which will cancel the credit of the same amount earlier posted from the Purchases Book. On the receipts side the amount of Rs 1,800.00 Cash Discount a/c is shown, which means that the Bank is credited and the discount a/c credited. Since Vibgyor has to pay Rs 1,800.00 less than the actual due amount, this is therefore a gain and is correctly credited.

Manual Accounting 2nd Answer :Now look at the same answer in the two and three columnar Cash Books.

The Two Columnar Cash Book -The T Format

Date

Receipts

LF

Cash Amt in Rs
10,000.00

Bank Amt in Rs
50,000.00

Date

Payments

LF

Cash Amt in Rs
1,789.00

Bank Amt in Rs

1-3-10

To Balance b/d (Being the opening balance)

1-3-10

By Stationery Expenses a/c (Being the purchase of computer stationery as per Bill No 3194 dated 29-2-10 of Real Stationers) By Cash Discount a/c (Being the cash discount allowed to XYZ & Co against our Invoice No 2106 dated 18-2-10) By ABC & Co a/c (Being the cheque amount paid against their Bill No 54957 dated 25-2-10) By Travel Expenses a/c (Being the cheque amount paid to M/s Indtravels Ltd against their Bill No 273 dated 15-2-11) By Cash a/c (Being the cash withdrawn from the Bank a/c) By Bank a/c (Being the cash deposited into the Bank a/c) By Balance c/d Totals C

1-3-10

To Cash Sales a/c (Being the amount of cash sales vide Cash Memo No 267 dated 1/3/10) To XYZ & Co a/c (Being the cheque amount received against our Sales Invoice No 2106 dated 18-2-10) To Cash Discount a/c (Being the cash discount received from ABC & Co against their Bill No 54957 dated 25-2-10) To Bank a/c (Being the cash amount withdrawn from the Bank a/c) To Cash a/c Being Cash deposited into the Bank a/c) C

34,789.00

2-3-10

800.00

2-3-10

40,800.00

3-3-10

61,800.00

3-3-10

1,800.00

3-3-10

11,230.00

5-3-10

15,000.00

5-3-10

15,000.00

7-3-10

25,000.00

7-3-10

25,000.00

7-3-10 Totals 7-3-10 To Balance b/d 59,789.00 33,000.00 117,600.00 28,770.00

33,000.00 59,789.00

28,770.00 117,600.00

The Three Columnar Cash Book Format-The T Format

Date Receipts L F Discount Amt in Rs Cash Amt in Rs
10,000.00

Bank Amt in Rs

Date

Payments

L F

Discount Amt in Rs

Cash Amt in Rs

Bank Amt in Rs

1-3-10

To Balance b/d (Being the opening balance)

50,000.00

1-3-10

By Stationery Expenses a/c (Being the purchase of computer stationery as per Bill No 3194 dated 29-2-10 of Real Stationers) By ABC & Co a/c (Being the cheque amount paid after obtaining cash discount against their Bill No 54957 dated 25-2-10) 1,800.00

1,789.00

1-3-10

To Cash Sales a/c (Being the amount of cash sales vide Cash Memo No 267 dated 1/3/10) To XYZ & Co a/c (Being the cheque amount received and cash discount allowed against our Sales Invoice No 2106 dated 18-2-10) To Bank a/c (Being the cash amount withdrawn from the Bank a/c) To Cash a/c Being Cash deposited into the Bank a/c) C 800.00

34,789.00

3-3-10

60,000.00

2-3-10

40,000.00

3-3-10

By Travel Expenses a/c (Being the cheque amount paid to M/s Indtravels Ltd against their Bill No 273 dated 15-2-11)

11,230.00

5-3-10

15,000.00

5-3-10

By Cash a/c (Being the cash withdrawn from the Bank a/c)

15,000.00

7-3-10

25,000.00

7-3-10

By Bank a/c (Being the cash deposited into the Bank a/c)

25,000.00

To Balance c/d

1.000.00

7-3-10

By Balance c/d

33,000.00

28,770.00

Totals

1,800.00

59789.00

115,000.00

Totals

1,800.00

59789.00

115,000.00

7-3-10

To Balance b/d

33,000.00

28,770.00

7-3-10

By Balance b/d

1000.00

Notes: 1. In both the two and three columnar cash books, whenever cash is deposited or withdrawn from the Bank, both the receipt and payment entries are made simultaneously on the same page of the cash books because only the cash and bank accounts get affected and both these accounts are in the cash book and not in the ledger. Therefore no ledger folio is referred but a letter C is inserted in the ledger folio column to indicate that the corresponding account appears on the opposite (contra) side. Therefore these are called contra entries.

2. In the three columnar cash book the entry for cash discount received (when payment is made to supplier/creditors) and cash discount allowed ( when money is received from customers/debtors) is inserted into the discount column. This discount column is balanced every month and the balance is then posted to the Cash discount account in the ledger. The total of the amount in the discount and that in either the cash or bank columns (depending whether the amount is received or paid by cash or cheque) is posted to the customers or suppliers account in the ledger. 3. In the simple cash and bank books and the two columnar cash book, there is no discount column, therefore the suppliers and customers account are debited and credited with the full amount owed and then the discount amount received and allowed is entered on the opposite side as shown. This discount account therefore gets posted individually in the ledger. In computerized accounting , simple cash and bank books are maintained in the columnar format as shown below: Format of the Simple Cash Book. The Columnar Format (This is more in use after the introduction of computerized accounting)
Date 1-3-10 1-3-10 Particulars To Balance b/d (Being the opening balance) To Cash Sales a/c (Being the amount of cash sales vide Cash Memo No 267 dated 1/3/10) By Stationery Expenses (Being the purchase of computer stationery as per Bill No 3194 dated 29-2-10 of Real Stationers) To Bank a/c (Being the cash amount withdrawn from the Bank a/c) By Bank a/c (Being the cash deposited into the Bank a/c) 15,000.00 25,000.00 LF Receipts Rs-Dr in Payments Rs-Cr in Bal Type Dr Dr Balance in Rs 10,000.00 44,789.00 10,000.00 34,789.00

1-3-10

1,789.00

Dr

43,000.00

5-3-10 7-3-10

Dr

58,000.00 33,000.00

Format of the Simple Bank Book. The Columnar Format (This is more in use after the introduction of computerized accounting)
Date 1-3-10 2-3-10 Particulars To Balance b/d (Being the opening balance) To XYZ & Co a/c (Being the cheque amount received against our Sales Invoice No 2106 dated 3-2-10) By ABC & Co a/c (Being the cheque amount paid against their Bill No 54957 dated 15-2-10) By Travel Expenses a/c (Being the cheque amount paid to M/s Indtravels Ltd against their Bill No 273 dated 15-2-19) By Cash a/c (Being the cash withdrawn from the Bank a/c) To Cash a/c Being Cash deposited into the Bank a/c) LF Receipts in Rs-Dr 50,000.00 40,000.00 Payments Rs-Cr in Bal Type Dr Dr Balance in Rs 50,000.00 90,000.00

3-3-10

60,000.00

Dr

30,000.00

5-3-10

11,230.00

Dr

18,770.00

5-3-10

15,000.00

3,770.00

7-3-10

25,000.00

28,770.00

The Petty Cash Book

In all large business transactions small payments like postage, printing, conveyance etc are involved and they are numerous. When all receipts are banked and all payments are made by cheques for better control over cash there arises a necessity to have separate record for these small or petty expenses. It is practically inconvenient to issue cheques for small expenses, and if they are entered in the main Cash Book much time and energy will be wasted and the Main Cash Book will become bulky. As a solution a "Petty Cash Fund" is established by transferring a small amount of cash from the Head Cashier to the Petty Cashier. The Petty Cashier will record all the petty expenses transactions in a separate book called a "Petty Cash Book". Receipts of Petty cash - Debit Side Payments of Petty cash - Credit Side

The Petty Cashier is given petty cash either on the Ordinary System or on the Imprest System. In the Ordinary System the Petty Cashier is given a lump sum amount of cash and after spending nearly the entire amount, he submits the account for the amount spent and draws further cash from the Main Cashier for the future expenses. This system does not provide a good control over the quantum of money given for petty cash expenses. In the Imprest System a fixed sum of money is allocated and given to the Petty Cashier as sufficient to meet petty cash expenses for an agreed period of time--(month,week). At the end of the agreed period the Petty Cashier submits an account of the amounts spent by him. The exact sum spent by the Petty Cashier is then reimbursed (further given to him for spending for the next period), thus increasing the balance of cash with him to the original sum given . The Petty Cash Book will be in a columnar form. In this type a separate column is used for each commonly occurring expense item such as Postage, Travel, Sundry Expenses, Conveyance, Stationary .etc. For each important petty expenses head, there is a separate column and so it is known as the Columnar Petty Cash Book. The main aim of a Columnar Petty Cash Book is to save the task of posting each item of expenses separately in the ledger. The periodic total of various columns will only be posted in the ledger. Only one column is maintained for the receipts of cash either from the Main Cashier or from any other source. The difference between the debit and the credit columns of the Petty Cash Book represents the balance of petty cash in hand and should agree with the actual balance with the petty cashier. This balance is required to be included in the Trial Balance along with that of the Main Cash Book. Analysis columns on the payments side are not fixed in number. According to the requirements and the frequency of transactions for a particular head of petty expenses, columns can be increased or decreased.

The Petty Cash Book Format

The columnar totals of each Expense A/c Head is posted to the Ledger in those expenses a/cs in the Ledger at the end of the month. Date  Cash Bal in Rs  Particu lars  Total Recpts in Rs  Total Pmts in Rs  Convynce in Rs  Postag e Cash Bal in Rs  Particu lars  Total Recpts in Rs  Total Pmts in Rs  Convynce in Rs  Postag e Particul ars  Total Recpts in Rs  Total Pmts in Rs  Convy-

nce in Rs  Postag e Total Recpts in Rs  Total Pmts in Rs  Convynce in Rs  Postag e Total Pmts in Rs  Convynce in Rs  Postag e Convynce in Rs  Postag e Postage in Rs  Stn & Ptg in Rs Sun dry Stn & Ptg in Rs Sun dry Sundry Expens es  1/1/ 071200  To bal b/d  1200        2

/1/07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200   1/1/07  1200  To bal b/d  1200        2 /1/07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200 

1/1/07  1200  To bal b/d  1200        2 /1/07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200  1200  To bal b/d  1200        2 /1/07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256

from X & Co 10    10      Tot al 1200  To bal b/d  1200        2 /1/07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200  1200        2 /1/07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256

from X & Co 10    10      Tot al 1200        2/ 1/07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200       2/1 /07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot

al 1200      2/1/ 071170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200     2/1/0 71170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200    2/1/07  1170  By Auto fare from D Gym

to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200   2/1/07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200  2/1/07  1170  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By

Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200  1170By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200  By Auto fare from D Gym to Aundh   30 30      2/1 /07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot

al 1200   30 30  30 30   30          2/1/ 071160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200     2/1/0 71160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200    2/1/07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200   2/1/07  1160  By Xerox 10

copies of ltr no 1256 from X & Co 10    10      Tot al 1200  2/1/07  1160  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200  1160By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200  By Xerox 10 copies of ltr no 1256 from X & Co 10    10      Tot al 1200   10    10      Tot al 1200  10   10

     Tot al 1200    10      Tot al 1200   10      Tot al 1200  10      Tot al 1200      Tota l 1200  4 0 30  1 0       Total  1200 4 0 30  1 0      Total   Total 1 200 40  Total 12 00 40 3 0  10   1200 40  30   10    40 30   30  10   10    10      

CHAP TER FIVE

THE TRIAL BALA NCE CONT ENTS

Sr No Par ticulars  Page No  1  Particu lars Pa ge No  1  Page No  1   1 THE A C C O U N T I N G S T O R Y  1 THE A C

C O U N T I N G S T O R Y  T H E A C C O U N T I N G S T O R Y  4  2 L E S S O

N N O 1 T H E T R I A L B A L A N C E   2  LES S O N N O 1 T H E T R I A L B

A L A N C E  2 LESS O N N O 1 T H E T R I A L B A L A N C E  L E S S O N N O

1 T H E T R I A L B A L A N C E  8  3 L E S S O N N O 2 R E C T I F I C A T

I O N O F E R R O R S   3  LES S O N N O 2 R E C T I F I C A T I O N O F E R R

O R S  3 LESS O N N O 2 R E C T I F I C A T I O N O F E R R O R S  L E S S O

N N O 2 R E C T I F I C A T I O N O F E R R O R S  9   

THE ACCOU

NTING STORY
Ram, we have now finished the BookKeeping part of The Basics of Accounti ng. We will now learn how to use the data entered in the Account Books to know how our business has performe d. How, Sir? Come on Ram dont tell me a MBA like you does not know which

are the financial statemen ts from which you can find out the business performa nce? Oh, do you mean the Profit & Loss a/c and Balance Sheet? Yes, of coursenow we will have to make these financial statemen ts from the Accounts Books. How to do it, i.e., how to prepare these Final Accounts , is what

we will now learn. The first step in this learning process is to prepare a Trial Balance and also rectify any errors before the Final Accounts are prepared . . The next lesson is all about this. So, on to the next two Lessons of this ChapterThe Trial Balance and Rectificat ion of Errors.

LESSO N NO 1 THE

TRIAL BALAN CE
At the end of the year ledge r acco unts are close d and their balan ces are calcul ated. Merel y closin g the acco unts and findin g their balan ces is not suffic ient. At the

end of the finan cial year, Final Acco unts are to be prep ared to find out the profit or loss out of year' s trans actio ns and also to know the finan cial positi on of the busin ess. While recor

ding in the book s of acco unts every debit has an equal and oppo site credit . Ther efore the total of all debit s must be equal to the total of all credit s. Whe n balan ces are calcul ated then

the total debit balan ces must be equal to the total credit balan ces provi ded all posti ngs are corre ct. A Trial Balan ce is defin ed as a state ment or a list of all debit and credit balan ces of all the

acco unts in the ledge r. A Trial Balan ce is a state ment whic h finds out whet her the total of all the debit balan ces are equal to the total of all the credit balan ces or not. A Trial

Balan ce recor ds the name s of all ledge r acco unts, their closin g balan ces and whet her they show a debit balan ce or a credit balan ce. After writin g the balan ces of all the acco unts, the total

of debit balan ces and the total of credit balan ces are taken . If both the totals are equal then it is said that the trial balan ce has tallie d and then only after it is tallie d, the Final Acco

unts are prep ared. The Trial Balan ce is gene rally prep ared at the end of the year. Whe n a Trial Balan ce agre es it auto matic ally mean s that for each trans actio n durin g the year the amou

nts of the acco unts debit ed were equal to amou nts of the acco unts credit ed. In a comp uteriz ed envir onme nt, the comp uter progr am ensur es that the Trial Balan ce auto matic ally tallie

s once the acco untin g entry is pass ed in the syste m. How? Whe never any acco untin g entry is enter ed into the syste m via the requi site data entry mod ule of the syste m, the syste

m Cheq ues befor e savin g it into its data base, whet her the total of all the amou nts debit ed in that entry are equal to the total of all the amou nts credit ed in that entry !! Other wise it prom pts

the User to Cheq ue the Entry . Some Syste ms even go furth er as the User is maki ng the entry and he has debit ed an amou nt say Rs 5000 then it displ ays the balan ce amou

nt yet to be credit ed, in this case Rs 5000. If furth er the User has debit ed anot her acco unt with Rs 3000, then it prom pts the User that he still has to Credi t a furth er Rs 8000. If now

the User credit s anot her acco unt with Rs 5000, then it prom pts the User that still there is a balan ce of Rs 3000 yet to be credit ed. What does this mean ? It mean s that in a comp uteriz

ed envir onme nt the total of debit s will alwa ys be equal or tally with the total of credit s and unles s there is some thing wron g with the progr ammi ng of the Syste m or there is some corru ption in

the data base, there will not be any differ ence and there fore the Trial Balan ce will alwa ys tally arith metic ally, witho ut any input from the Acco unta nt!! How ever this does not mean that the

Trial Balan ce can now be used for prep aring the Final Acco unts. The Syste m Cheq ues the arith metic al accur acy of each and every trans actio n but we still do not have syste ms whic h can Cheq

ue comp letely that what acco unt shoul d have been debit ed or credit ed has in fact been done. Take an exam ple Supp ose an amou nt of Rs 5000 00 has been paid by Cheq ue to Mr. A.

The corre ct entry woul d be to debit Mr. A with Rs 5000 00 and credit the Bank acco unt with Rs 5000 00. How ever if the Acco unta nt make s a mista ke and inste ad of debiti ng Mr. A , he debit s the

Bank A/c, and inste ad of credit ing the Bank , he credit s Mr. A , both with the same amou nt of Rs 5000 00. Now some comp uteriz ed syste ms do have some safeg uards Whe n a Cheq ue paym ent is to be

made the User has to first speci fy that and then proce ed with the entry and if he has speci fied that he is maki ng a paym ent, then the Syste m does not allow him to debit the Bank a/c !! But if such

safeg uards do not exist or if the User has chos en by mista ke Recei pts inste ad of Pay ment s, then the Syste m will acce pt this wron g entry !! This wron g entry will only be foun d out

when we do the Bank Reco ncilia tion beca use the Bank woul d have debit ed us and inste ad of credit ing the Bank, we have debit ed it. Once such wron g entri es or error s, whic h are calle d Error

s of Princi ple, are foun d out we have to rectif y them and henc e we now turn our atten tion to the Topic of Recti ficati on of Error s.

LES SON NO 2 REC TIFI CAT ION OF ERR ORS

If at the end of the year trial balan ce is tallie d then Final Acco unts are prep ared. But if the trial balan ce does not agre e, then the differ ence in the trial balan ce is due to some error s.

Thes e error s are first to be corre cted to obtai n the tallie d trial balan ce. How ever in today s comp uteriz ed envir onme nt, the Trial Balan ce will be auto matic ally tallie d and there fore

such a situat ion will only arise if acco untin g is still being done manu ally. Diffe rent Type s Of Erro rs:All the follo wing error s are possi ble in Manu al Acco untin g but not in Com puter ized Acco

untin g. Ther efore again st each type of error, an asteri x mark indic ates that the error mark ed is possi ble in a comp uteriz ed envir onme nt also. Erro rs of Omi ssio n Com plete Omis sion.

Parti al Omis sion. Open ing and Closi ng Balan ces are omitt ed. Erro rs of Com miss ion Entry is pass ed in the wron g subsi diary book. Posti ng the amou nt in the Wron g

Acco unt. Posti ng Of Wron g Acco unt. Posti ng the amou nt on the wron g side of the Acco unt. Doub le Posti ng. Com pens ating Error s Erro rs in Cast ing (Acc ount ing

term for total ing) Error s in takin g totals Thes e are arith metic error s. Error s in takin g totals and calcul ating the balan ces. Erro rs of Prin ciple (*) Whe n capit al expe nditu

re is show n as reven ue expe nditu re. Expe nses made on asset s are debit ed to nomi nal acco unts. Thou gh arith metic ally the entry is corre ct, acco unts head s are wron gly recor ded.

Suspen se Account :The Trial Balan ce is prep ared at the end of the year. If the trial balan ce tallie s, it is assu med that the book s are arith metic ally corre ct and then the final acco unts are prep

ared. But if the trial balan ce does not agre e, then the differ ence betw een the two totals is trans ferre d temp oraril y to a separ ate acco unt know n as "Sus pens e A/c". After rectifi catio n of

error s the differ ence in the trial balan ce that is the balan ce of susp ense acco unt shoul d be canc elled. But till then the Susp ense acco unt will show some balan ce. Dep endi ng on the type of

the bala nce, Susp ense A/c Dr. Bala nce is sho wn as an Asse t Susp ense A/c Cr. Bala nce is sho wn as a Liabi lity Whe n all erro rs are recti fied the bala nce of the susp

ense acco unt will be zero. This is as far as the Manu al Acco unts are conc erne d. In the Com pute rized Acco unts also there will be a Susp ense a/c but only when the Acco unt Head

s are not know n e.g., if we find a credit in our Bank State ment , not recor ded in our book s of acco unts, the origin of whic h is not clear nor infor matio n imme diatel y avail able but the acco

untin g entry has to be pass ed, then it will be as follo ws: Bank A/c Dr To Susp ense a/c (Bein g the amou nt credit ed by the Bank to our a/c witho ut detail s being made avail able of the Giver

of the mone y) This is credit ed to the Susp ense a/c beca use the identi ty of the Giver is not know n.

Susp ense Acco unt come s into being only if there is a Trial Balan ce differ ence and

when any one side of a trans actio n cann ot be identi fied, as is show n abov e. How ever if any Error of Princi ple is identi fied durin g the cours e of recor ding trans actio ns, then the rules to rectif y the

error woul d be as unde r. Thes e rules may super sede the three basic rules of Debi t and Credi t. Rule 1Rev erse the wro ng entr y total ly. It mea ns und o wha t has been done

wro ng. Rule 2Pass the corr ect entr y as per the thre e basi c rules of acco unta ncy. Do wha t was to be corr ectly done . Let us take an exam ple. Tran sacti on

was as follo wsRece ived a Che que from M/s A & Co of Rs 100 000 for pay men t of their credi t sale s dues . The Acco unta nt has pass ed the follo wing entry in the

Cash Book. Inste ad passi ng the entry on the Recei pts side, this entry was pass ed on the Paym ents side i.e., the Bank a/c was credit ed with Rs 1000 00 inste ad of being debit ed with Rs

1000 00 and vice versa for A & Cos a/c. Ther efore in the Ledg er, the A & Cos a/c is debit ed with Rs 1000 00 inste ad of being credit ed with that amou nt and the Bank a/c will be show ing a

lesse r balan ce as it was credit ed inste ad of being debit ed. Credi ting the bank reduc es the Bank balan ce and debiti ng it incre ases the balan ce. Now we have to rectif y this wron g entry as

follo ws: Reve rse this entry in the Cash Book by enter ing on the Recei pts side in the Bank colu mn the amou nt of Rs 1000 00 and then post the credit of Rs 1000 00 to A & Cos a/c in the

Ledg er. This will nullif y the wron g debit and credit to both these a/cs and the statu s quo will be resto red. Then pass the corre ct entry of Rs 1000 00 also on the recei pts side of the Cash

Book in the Bank colu mn. This will result into the corre ct debit being given to the Bank a/c and the corre ct credit of Rs 1000 00 being given to A & Cos a/c in the Ledg er. How ever we can

comb ine both these entri es by enter ing on the recei pts side of the cash book the amou nt of Rs 2000 00 in the Bank colu mn and then credit ing A & Cos a/c in the Ledg er with Rs 2000 00. This

credit of Rs 2000 00 along with the wron g debit of Rs 1000 00 in that a/c, will then result into the corre ct credit (net) to that a/c. Simil arly the Bank a/c in the cash book will also get corre ctly debit ed

net with Rs 1000 00 (Rs 2000 00 less Rs 1000 00). The thre e colu mna r cash book is sho wn belo w, after pass ing the abov e entri es: FIRS T MET HOD Date R eceipts  Receipt s LF Di sco-unt

Amt in Rs Cas h Amt in Rs Ban k Amt in Rs Date  Payme nts LF  LF Disc o-unt Amt in Rs Cas h Amt in Rs Ban k Amt in Rs Date  Payme nts LF  Discount Amt in Rs Cas h Amt in Rs Ban k Amt in Rs Date  Payme nts LF  Cash Amt in Rs Ban k Amt in Rs Date  Payme nts LF  Bank Amt in Rs Date  Payme nts LF 

Date Pa yments  LF Dis co-unt Amt in Rs Cas h Amt in Rs Ban k Amt in Rs       Paymen ts LF D isco-unt Amt in Rs Cas h Amt in Rs Ban k Amt in Rs       LF Disc o-unt Amt in Rs Cas h Amt in Rs Ban k Amt in Rs       Discount Amt in Rs Cas h Amt in Rs Ban k Amt in Rs       Cash Amt in Rs Ban k Amt

in Rs       Bank Amt in Rs              30
-4-11 By A & Cos a/c       304-11 By A & Cos a/c      30-411 By A & Cos a/c     30-411 By A & Cos a/c    30-411 By A & Cos a/c   30-411 By A & Cos a/c  30-411 By A & Cos a/c 30-411 By A & Cos a/c By A & Cos a/c (being the amount received from A & Co by Cheque) 1 0    10000

0.00  30 -4-11 To A & Cos a/c 10    1000

00.00  3 0-4-11 To A & Cos a/c   100000. 00  304-11 To A & Cos a/c  100000.0 0  30-411 To A & Cos a/c

100000.00  30-411 To A & Cos a/c

 30-4-

11 To A & Cos a/c 30-411 To A & Cos a/c To A & Cos a/c (being the reversal of the wrong entry passed on the payments side instead of the receipts side) 10   10    1000 00          100000   100000   100000         

       3
0-4-11 To A & Cos a/c     304-11 To A & Cos a/c    304-11 To A & Cos a/c   30-411 To A & Cos a/c  30-411 To A & Cos a/c

 

 30-4-

11 To A & Cos a/c 30-411 To A &

Cos a/c To A & Cos a/c (being the entry to record the receipt of amount received from A & Co by Cheque) 1 0    10000 0        10    1000 00          100000   100000   100000         

                     
OR SEC OND MET HOD Date R eceipts  Receipt s LF Di sco-unt Amt in Rs Cas h Amt in Rs Ban k Amt in Rs Date

 Payme nts LF  LF Disc o-unt Amt in Rs Cas h Amt in Rs Ban k Amt in Rs Date  Payme nts LF  Discount Amt in Rs Cas h Amt in Rs Ban k Amt in Rs Date  Payme nts LF  Cash Amt in Rs Ban k Amt in Rs Date  Payme nts LF  Bank Amt in Rs Date  Payme nts LF  Date Pa yments  LF Dis co-unt Amt in Rs Cas h Amt in

Rs Ban k Amt in Rs       Paymen ts LF D isco-unt Amt in Rs Cas h Amt in Rs Ban k Amt in Rs       LF Disc o-unt Amt in Rs Cas h Amt in Rs Ban k Amt in Rs       Discount Amt in Rs Cas h Amt in Rs Ban k Amt in Rs       Cash Amt in Rs Ban k Amt in Rs       Bank Amt in Rs              30
-4-11 By A & Cos a/c       30-

4-11 By A & Cos a/c      30-411 By A & Cos a/c     30-411 By A & Cos a/c    30-411 By A & Cos a/c   30-411 By A & Cos a/c  30-411 By A & Cos a/c 30-411 By A & Cos a/c By A & Cos a/c (being the amount received from A & Co by Cheque) 1 0    10000 0.00  304-11 To A & Cos a/c 10    1000 00.00  304-11 To A & Cos a/c   100000. 00  30-411 To A & Cos a/c  100000.0 0  30-411 To A & Cos a/c 100000.00   30-411 To A & Cos a/c  30-411 To A & Cos a/c 30-411 To A & Cos a/c To A & Cos a/c (Being the rectificatio n of the

entry passed on the payments side instead of the receipts side of the amount received by Cheque from A & Co) 10    10    2000 00          200000   200000   200000                                                                                                                                                              

------------=wr ong entr y/ie s ------------=cor rect

entr y/ie s Nor mall y the Seco nd Met hod is follo wed The Ledger Account of A & Co after passing the above entries.
Date  Particulars  SBF Amt in Rs Date  Particulars  SBF Amt in Rs      FIR ST METHOD   Particulars  SBF Amt in Rs Date  Particulars  SBF Amt in Rs      FIR ST METHOD   SBF Amt in Rs Date  Particulars

 SBF Amt in Rs      FIR ST METHOD   Amt in Rs Date  Particulars  SBF Amt in Rs      FIR ST METHOD   Date  Particulars  SBF Amt in Rs      FIR ST METHOD   Particulars  SBF Amt in Rs      FIR ST METHOD   SBF Amt in Rs      FIR ST METHOD   Amt in Rs      FIR ST METHOD       FIRST METHOD      FIRST METHOD     FIRST METHOD    FIRST METHOD   FIRST METHOD        30-411 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD       30-411 To Bank a/c 5 10000

0.00 30-411 By Bank a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD      30-411 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD     30-411 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD    30-4-11 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD   30-4-11 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD   To Bank a/c 5 10000 0.00 30-411 By Bank

a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD   5 100000.0 0 30-411 By Bank a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD   100000.00  30-4-11 By Bank a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD   By Bank a/c 5 10000 0.00       3 0-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD   5 100000.0 0       304-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD   100000.00        30-411 By Bank a/c 5 10000 0.00      O R SECOND METHOD       30-411 By Bank a/c 5 10000 0.00      O R SECOND METHOD      30-411 By Bank a/c 5 10000 0.00      O R SECOND METHOD     30-4-

11 By Bank a/c 5 10000 0.00      O R SECOND METHOD    30-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD   30-4-11 By Bank a/c 5 10000 0.00      O R SECOND METHOD   By Bank a/c 5 10000 0.00      O R SECOND METHOD   5 100000.0 0      OR SECOND METHOD   100000.00       OR SECOND METHOD      OR SECOND METHOD     OR SECOND METHOD    OR SECOND METHOD   OR SECOND METHOD        30-411 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 20000 0.00            30-411 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 20000 0.00           30-411 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 20000 0.00          30-411 To Bank a/c 5 10000 0.00 30-4-

11 By Bank a/c 5 20000 0.00         30-4-11 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 20000 0.00        30-4-11 To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 20000 0.00        To Bank a/c 5 10000 0.00 30-411 By Bank a/c 5 20000 0.00        5 100000.0 0 30-411 By Bank a/c 5 20000 0.00        100000.00  30-4-11 By Bank a/c 5 20000 0.00        By Bank a/c 5 20000 0.00        5 200000.0 0           200000.00                                                        


Take an example of another transaction passed wrongly in the Journal. Transaction was as followsPurchased on 30-4-11, Plant & Machinery for Rs 2500000 on credit from M/s Sulakhe Machinery Trading Corporation . Wrong entry passed in the Journal was as follows:
Date  Particular s Particulars  LF LF

 Debit Amount in Rs Debit Amount in Rs  Credit Amount in Rs Credit Amount in Rs   30-411 Sulakhe Machinery Corporation a/c Dr  10 250000 0.00     To Plant & Machinery a/c 12  250 0000.00   

 30-4-

11 Sulakhe Machinery Corporation a/c Dr  10 250000 0.00     To Plant & Machinery a/c 12  250 0000.00    30-411 Sulakhe Machinery Corporation a/c Dr  10 250000 0.00     To Plant & Machinery a/c 12  250 0000.00    Sulakhe Machinery Corporation a/c Dr  10 250000

0.00     To Plant & Machinery a/c 12  250 0000.00    10 2500000 .00     To Plant & Machinery a/c 12  250 0000.00    2500000.00     To Plant & Machinery a/c 12  250 0000.00       To Plant & Machinery a/c 12  250 0000.00   

  To Plant

& Machinery a/c 12  250 0000.00     To Plant & Machinery a/c 12  250 0000.00    To Plant & Machinery a/c 12  250 0000.00    12  250000 0.00    (Bei ng the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)       2500000.0 0    (Being the Plant &

Machinery purchased from Sulakhe Machinery Corporation on credit)      2500000.00    (Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)     

  (Being

the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)       (Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)      (Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)            

 


Recti fied entri es to be pass ed in the Journ al shoul d be as follo ws: FIRS T MET HOD
Date  Particular s Particulars  LF LF  Debit Amount in Rs Debit Amount in Rs  Credit Amount in Rs Credit Amount in Rs   30-411 Plant &

Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)             30-411 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)            30-411 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe

Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)            Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)            10 2500000 .00     Sula khe Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for

purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)            2500000.00     Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)               Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)              Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of

the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)             Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)            Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)            12  250000 0.00    (Bei ng the

reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)             2500000.0 0    (Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)            2500000.00    (Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)              (Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from

Sulakhe Machinery Corporation)             (Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)            (Being the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery on credit from Sulakhe Machinery Corporation)                      3 0-4-11 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)               30

-4-11 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)              304-11 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)             304-11 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from

Sulakhe Machinery Corporation on credit)            30-411 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)           30-411 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)          30-411 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation

a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)         30-411 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)        30-411 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)       30-411 Plant & Machinery

a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)      30-411 Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)      Plant & Machinery a/c Dr  10 250000 0.00     Sul akhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation

on credit)      10 2500000 .00     Sula khe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)      2500000.00     Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)         Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)        Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the

Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)       Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)      Sulakhe Machinery Corporation a/c 12  250 0000.00    ( Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)      12  250000 0.00    (Bei ng the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)       2500000.0 0    (Being the Plant & Machinery purchased from

Sulakhe Machinery Corporation on credit)      2500000.00    (Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)        (Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)       (Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)      (Being the Plant & Machinery purchased from Sulakhe Machinery Corporation on credit)               

SEC OND

MET HOD
Date  Particular s Particulars  LF LF  Debit Amount in Rs Debit Amount in Rs  Credit Amount in Rs Credit Amount in Rs   30-411 Plant & Machinery a/c Dr  10 500000 0.00     Sul akhe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation

, and of the correct entry )       30-411 Plant & Machinery a/c Dr  10 500000 0.00     Sul akhe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )      30-411 Plant & Machinery a/c Dr  10 500000 0.00     Sul akhe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for

purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )      Plant & Machinery a/c Dr  10 500000 0.00     Sul akhe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )      10 5000000 .00     Sula khe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of

the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )      5000000.00     Sulakhe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )         Sulakhe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of the wrong entry passed

on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )        Sulakhe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )       Sulakhe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of

Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )      Sulakhe Machinery Corporation a/c 12  500 0000.00    ( Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )      12  500000 0.00    (Bei ng the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe

Machinery Corporation , and of the correct entry )       5000000.0 0    (Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )      5000000.00    (Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )        (Being the rectification by combination

of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )       (Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe Machinery Corporation , and of the correct entry )      (Being the rectification by combination of the reversal of the wrong entry passed on 30-4-11 at JF 5 for purchase of Plant & Machinery of Rs 2500000 on credit from Sulakhe

Machinery Corporation , and of the correct entry )               

These rules for rectifica tion of errors are useful in the reconcil iation of Persona l Account s especial ly in the reconcil iation of Bank Account s which is the subject of the next Chapter .

CHAP TER SIX THE BANK RECO NCILI ATIO N STATE MENT CONT ENTS
Sr No Par ticulars  Page No  1  Particu lars Pa ge No  1  Page No  1   1 THE A C C O U N

T I N G S T O R Y  1 THE A C C O U N T I N G S T O R Y  T H E A C C O U N T I

N G S T O R Y  4  2 L E S S O N N O 1 T H E M E A N I N G O F B A N K R E C O

N C I L I A T I O N   2  LES S O N N O 1 T H E M E A N I N G O F B A N K R E C

O N C I L I A T I O N  2 LESS O N N O 1 T H E M E A N I N G O F B A N K R E C

O N C I L I A T I O N  L E S S O N N O 1 T H E M E A N I N G O F B A N K

R E C O N C I L I A T I O N  8  3 L E S S O N N O 2 T H E R E A S O N S F O R

P R E P A R I N G T H E B A N K R E C O N C I L I A T I O N S T A T E M E N

T   3  LES S O N N O 2 T H E R E A S O N S F O R P R E P A R I N G T H E B A N

K R E C O N C I L I A T I O N S T A T E M E N T  3 LESS O N N O 2 T H E R E A

S O N S F O R P R E P A R I N G T H E B A N K R E C O N C I L I A T I O N S

T A T E M E N T  L E S S O N N O 2 T H E R E A S O N S F O R P R E P A R

I N G T H E B A N K R E C O N C I L I A T I O N S T A T E M E N T  9  4 L E S S

O N N O 3 H O W T O P R E P A R E T H E B A N K R E C O N C I L I A T I

O N S T A T E M E N T   4  LES S O N N O 3 H O W T O P R E P A R E T H E B A

N K R E C O N C I L I A T I O N S T A T E M E N T  4 LESS O N N O 3 H O W T

O P R E P A R E T H E B A N K R E C O N C I L I A T I O N S T A T E M E N T

 L E S S O N N O 3 H O W T O P R E P A R E T H E B A N K R E C O N C I

L I A T I O N S T A T E M E N T    

THE ACCOU NTING STORY

Ram, now that we know how to prepare how to prepare a Trial

Balance, we can prepare the Final Accounts which will inform us how our business has performe d during the accounti ng period. Sir, what exactly is an accounti ng period? Well, normally it is of one years duration. As per the Indian Tax Laws it is the period starting from 1st

April of every year to 31st March of the next year. It is termed as the Financial Year. This is required to find out (assess) the income on which Indian Income Tax is payable for that period. However some firms may have a different accounti ng year starting from the 1st of the month of any year to end after 12

months from that date. However they will have to prepare their Final Accounts for the financial year in order to get their income assessed by the Income Tax Departm ent!! All transacti ons of the Governm ent of India and its States, its local corporati ons and bodies are evaluate d on the basis of this

Financial Year. All over the World, a year is the period for which every business firms performa nce is evaluate d and then compare d with the previous years to analyze the trends in that performa nce and to determin e the direction in which that firm will perform in future. This helps investors and

owners to take manage ment decisions . But, Ram, all this must have been taught to you in your MBA course. Yes, Sir, but I wanted to be assured by you that what I learnt there was correct. So now you are assured? Absolutel y, Sir. So, now coming back to what I

was saying, we can now prepare the Final Accounts . But before doing that we want to be assured that we have accounte d for all business transacti ons during this accounti ng year, especiall y concerni ng Personal Accounts . Why Personal Accounts , Sir? When we deal with persons, i.e.

individua ls, institutio ns, other business firms, governm ent departm ents/bod ied, or any other person or persons and whether those transacti ons result into a personal asset or liability, we must be totally assured that those transacti ons are not only accounte d for in our Accounts Books, but also in the same

manner, accounte d for in their Books as well. How can we know this? asked Ram. We can know this only if we get a copy of our Account in their Books and then compare it with their account in our Books. If what we have accounte d for is also accounte d for by them then we are sure that all transacti ons have

been accounte d for. If not, then we find out which are the transacti ons causing the differenc es and then we find out whether the differenc es can be sorted out by passing the necessar y accounti ng in our Books or whether they have to pass the accounti ng entries in their Books in order to equalize their

balance in our Books with that in their Books. This is called as Reconcili ation of Personal Accounts . But suppose we do not receive this copy from them? Yes, that is a possibilit y. Then we assume that all the transacti ons in their account in our Books are correctly accounte d for. But there

is one Personal Account where we have a right to receive such a copy, and that is our Account with our Bankers. As per our request and need our bankers supply these copies (called as Bank Stateme nts) or provide us a Book in which transacti ons effected by them on our account are entered by them (called as the

Bank Pass Book). We use these to compare with their Account in our Account Books and find out if there are any differenc es. Please rememb er, Ram that the balance in the Bank a/c is our money in their custody and therefore it is importan t to check that what we are showing in our account

books as lying with them is actually the same amount. As per my experien ce, early on in my career when I was working in the Accounts Departm ent of one of Indias largest marketin g compani es, the importan ce of reconcilia tion of the Bank account was brought home to me! How, Sir?

That company , at that time, was going through a period of labour strife, and the staff in our accounts departm ent was on workto-rule and therefore this reconcilia tion had not been done for about six months. When the issue was finally resolved, and the reconcilia tion was done, it was found that out of the items of differenc

e, there were transacti ons of cash withdraw ls which were not reflected in the company s account books. This was peculiar because cash withdraw ls originate from the company s side and also because of the fact that the cash balance in the company s books was showing the same amount as the physical cash lying with the

bank. So therefore question s were asked as to where this cash, withdraw n from the Bank, had gone. To cut a long story short, it was found out that a staff member had forged the Accounta nts signature on company checks and withdraw n this money for his personal benefit!!! Wow,

was he caught? Yes, because he did not have the sense to run away from the company and was under the wrong impressi on that he would not have been found out! But the the poor guy had not heard of Bank Reconcili ation which finally nailed him. Therefor e, Ram, we are now going to learn in the next

three lessons about the Bank Reconci liation Statem ent.

LESSO N NO 1 THE MEANI NG OF BANK RECON CILIAT ION

A busin essm an maint ains a cash book so as to recor d his cash trans actio ns. In the busin

ess world , the openi ng of a bank acco unt is very com mon beca use the busin essm an can depo sit his surpl us cash in the bank and have safet y and secur ity of his mone y and furth er he gets a num

ber of usefu l servi ces from the bank. The actua l cash balan ce can be easily verifi ed with the balan ce show n by the cash book after a speci fied perio d by physi cally count ing the cash.

This is usual ly done by busin essm en daily. But it is not very easy to physi cally verify the bank balan ce as per the Cash Book (the busin essm ans book s of acco untsthe 2 or 3 colu mnar Cash Book s)

with that of the Bank Pass Book or Bank State ment beca use these two balan ces may not agre e with each other for a num ber of reaso ns. So it beco mes nece ssary to verify the recor d of bank

trans actio ns of both the busin essm an and his bank. It is quite possi ble that the busin essm an or his bank migh t have recor ded a wron g entry of a partic ular trans actio n or it migh t have been

omitt ed it in any one of these book s. The "Ban k Reco ncili atio n Stat eme nt is a stat eme nt prep ared to reco ncile the diffe renc e bet wee n the cash book bank bala nce

as on a parti cula r date and the bank pass book or bank stat eme nt bala nce as on the sam e date indic atin g the reas ons whic h have caus ed the diffe renc e bet wee n

thes e two. " If we comp are the entri es in the cash book (ban k colu mn) of a busin ess and in the bank pass book of the bank, we will find that trans actio ns whic h are recor ded

on the debit side of the cash book are recor ded on the credit side of the pass book and viceversa .

Whe n the cash book bank colu mn show s a debit balan ce, the bank pass book shoul

d show an equiv alent credit balan ce and viceversa . Why? Beca use the busin ess will debit its bank er, When it deposits cash into the bank or When it deposits Cheques (received from its customer s) into the bank,

beca use the bank er is the recei ver in both the cases , in the first case from the busin ess itself and in the seco nd case, from some one else on behal f of the busin ess. The bank in the

abov e cases woul d in turn credit the busin ess a/c in its book s beca use, the busin ess has given the cash and the busin ess custo mers bank has given the amou nt of the Cheq ue on the busin ess

behal f. And vice versa when the bank pays cash to the busin ess (with draw al of cash) or pays the Cheq ue issue d by it to the paye es bank er. Here the bank is the giver in both the cases and

its a/c will be credit ed in the busin ess book s and the bank will debit the busin ess acco unt in its book s beca use the busin ess is the recei ver.

LES SON NO 2 THE REA SON S FOR

PRE PAR ING THE BAN K REC ONC ILIA TIO N STA TEM ENT
Follo wing are some reaso ns whic h gene rally caus e disag reem ent betw een the Cash Book Bank Balan ce as on a partic ular

date and the Bank Pass Book or Bank State ment Balan ce as on the same date: Che ques depo sited into bank but not colle cted and credi ted by the bank : In the busin ess cash book it has imme

diatel y debit ed the bank when it depo sits the Cheq ues but the bank has not yet credit ed the busin ess a/c in its book s beca use it has not recei ved the amou nt from the custo mers bank

er beca use of the time lag in the cleari ng of the Cheq ue. Che ques issu ed but not pres ente d for pay men t: As soon as the busin ess issue s (give s) a cheq ue to some one, in its book

s it credit s the bank a/c beca use the bank is going to pay (give ) on its behal f, but if the cheq ue has not been recei ved by the bank due to the cleari ng time lag, and there fore the bank has

yet to pay, in its book s it has not debit ed the busin ess a/c. Inte rest allo wed and credi ted by the bank : The bank has imme diatel y credit ed the busin ess a/c when it make s an

entry for recor ding the inter est due to the busin ess, but since no intim ation of this entry may have been given to the busin ess, it still has to debit the bank a/c in its book s of a/c. Inte rest

and expe nses char ged by the bank : Whe n the bank has given a loan to the busin ess it will charg e the agre ed rate of inter est and if it has also made some expe nses on the busin ess behal

f or has charg ed for servi ces provi ded to the busin ess, it will imme diatel y debit the busin ess a/c but since again here if no com muni catio n has been recei ved from the bank in these cases , the busin

ess woul d not have credit ed the bank for the amou nts debit ed by the bank. Dire ct pay men ts by bank on beha lf of cust ome rs: This is base d on Stan ding Instr uctio ns given to the Bank

like Telep hone paym ents, Repa ymen ts of Loan s, paym ent of Bills Paya ble. All these paym ents made by the bank on the busin ess behal f are direct ly debit ed by the Bank to the busin ess acco unt.

If no com muni catio n is recei ved from the bank, then these paym ents will not be enter ed in the Bank colu mn on the paym ents side of the Cash Book of the busin ess. Dire ct pay men t

into bank by the busi ness cust ome r. Same logic as in the earlie r prece ding case exce pt that the bank has credit ed the busin ess acco unt but no entry for debit to the bank in the

Cash Book has been made by the busin ess. Che ques depo sited into bank bein g dish ono ured . Whe n Cheq ues had been depo sited into the bank, the bank a/c was debit ed in the Cash Book

and the Bank has credit ed the busin ess a/c in its book s. How ever if the Cheq ue is disho nour ed, then Bank will rever se the entry by debiti ng the busin ess a/c. This fact may not have been conv

eyed to the busin ess by the Bank and there fore in the Cash Book, the bank a/c has not been credit ed.

LES SON NO 3 HO W TO PRE PAR E THE BAN K REC ONC ILIA

TIO N STA TEM ENT

It is presu med here that the as on a partic ular date, the balan ce of the Bank a/c in the Cash Book is not in agre emen t with the busin ess a/c in the Bank s Book s i.e.,

the Bank Pass Book or Bank State ment provi ded by the Bank, and there fore a Reco ncilia tion State ment is to be prep ared. If they were in agre emen t, there woul d not be any need to prep are

such a State ment !!! Pleas e note that we will henc efort h use eithe r the term Bank State ment or Bank Pass Book or Pass Book whic h mean s the same . The tran sacti ons for a parti cula

r peri od in both the Cash Boo k and Ban k Stat eme nt are com pare d and the item s not refle cted in eith er book s are liste d out and sum mari zed in the follo wing man ner:

Che ques depo sited but not yet clear ed: This is a list of all the Cheq ues depo sited in the bank and there fore debit ed to the Bank a/c in the Cash Book, but not yet credit ed by the Bank in the

Bank State ment . Che ques issu ed but not yet pres ente d: This is a list of all cheq ues draw n by the busin ess and issue d to its credit ors, and there fore credit ed to the Bank a/c in the Cash

Book, but whic h have still not been prese nted to the Bank by the credit ors bank ers and there fore not debit ed in the Bank State ment . Debi ts in the Ban k Stat eme nt not credi ted

in the Cash Boo k: A few exam ples could be Cheq ue book charg es, Cheq ue retur ns charg es, inter est charg ed, com missi ons, guar antee charg es, Cheq ues collec tion or disco untin g charg

es, direct paym ents by bank as per the busin ess Stan ding Instr uctio ns, mini mum balan ce charg es, repay ment s of loans direct ly debit ed by the bank, disho nour of Cheq ues/ Bills disco unte d earlie

r etc,. Cred its in the Ban k Stat eme nt not debi ted in the Cash Boo k: A few exam ples could be Inter est on depo sits, divid ends and other reven ues collec ted direct ly by bank, rectifi

catio n of any exces s charg es debit ed earlie r etc,. The items listed out abov e are the items of differ ence and will be utiliz ed in the Reco ncilia tion State ment to be prep ared.

Now it is

to be decid ed from whic h balan ce to start the Reco ncilia tioni.e., we can start with eithe r the balan ce of the Bank a/c in the Cash Book or the Busin ess a/c balan ce in the Bank as repre sente d by the

Bank State ment or Bank Pass Book. If we start with the Ban k bala nce as per the Cash Boo k it mean s that we inten d to adjus t the items of differ ence in such a way to this balan ce

that we woul d be able to arriv e at the balan ce as per the Bank State ment . This is term ed as the Star t Bala nce. This also mean s that we are now consi derin g the Ban k Stat eme

nt bala nce as corre ct and there fore it is term ed as the Corr ect Bala nce

We will now adju st i.e., add to /sub tract from the Star t Bala nce to arriv e at this Corr ect Bala

nce. Ther efor e now the rules for the Ban k Reco ncili atio n Stat eme nt can be set as follo ws: Decid e the Start Balanc e and the Corre ct Balanc e. Adjust the Start Balanc e by-

Doin g what the Correc t Balanc e has done and Undo what the Correc t Balanc e has not done. To clarify this furthe r, assum e that the Bank Balanc e as per the Cash Book is the Start Balanc e and the Balanc e as

per the Bank State ment is the Correc t Balanc e. So what does Doing what the Correc t Balanc e has done mean here? It means that if the Bank has debite d any item which is not credit ed in the Cash Book, then

do what has not been doneCRED IT THAT ITEM IN THE CASH BOO K. Simila rly if the Bank has credit ed any item which is not debite d in the Cash Book, then do what has not been done DEBI T

THAT ITEM IN THE CASH BOO K. Now if in the Cash Book an item has been debite d which has not been credit ed by the Bank, then undo this debit by CRED ITIN G IT IN THE CASH BOO K. Simila rly if

any item has been credit ed in the Cash Book but which is not debite d by the Bank, then undo it by DEBI TING IT IN THE CASH BOO K. Theref ore on the assum ptions of Start and Correc t balanc e given above , let

us now exami ne the items creati ng the differe nce in the balanc es in the Cash Book and Bank State ment, to find how they fit into all this. Cheq ues depo sited not yet clear ed: It means here that in the Cash Book these

items have been debite d to the bank a/c but the bank has not credit ed and theref ore we have to undo this by Credi ting the same. Now if in the Cash Book, the Bank balanc e is a Debit balanc e, it would mean that

we have to deduc t (credit opposi te of debit) these items from the Cash book balanc e. If it was a Credit Balanc e (Over draft) then we would have to add these items. Got it ? Cheq ues issue d but not yet prese nted

: This means that in the Cash Book these items have been credit ed to the bank a/c but the bank has not debite d and theref ore we have to undo this by Debit ing the same. Now if in the Cash Book, the Bank balanc

e is a Debit balanc e, it would mean that we have to add these items to the Cash book balanc e. If it was a Credit Balanc e (Over draft) then we would have to deduc t these items. Got it furth er? Debit s in the Bank State ment

not credi ted in the Cash Book: This means that in the Bank State ment these items have been debite d to the busine ss a/c but in the cash book the bank a/c has not been credit ed and theref ore we have to do what the

Bank has done by Credi ting in the Cash Book. Now if in the Cash Book, the Bank balanc e is a Debit balanc e, it would mean that we have to deduc t (credit opposi te of debit) these items from the Cash book balanc e. If it was a

Credit Balanc e (Over draft) then we would have to add these items. Got it even furth er? Credi ts in the Bank State ment not debit ed in the Cash Book: This means that in the Bank State ment these items have been credit ed to

the busine ss a/c but in the cash book the bank a/c has not been debite d and theref ore we have to do what the Bank has done by Debit ing in the Cash Book. Now if in the Cash Book, the Bank balanc e is a Debit balanc e, it

would mean that we have to add these items to the Cash book balanc e. If it was a Credit Balanc e (Over draft) then we would have to deduc t these items. Got it absol utely ? To make it simpl er, look at the follo

wing expla nator y Chart and then solve the probl ems in the Syste m. STAR T BALA NCE IS THE BANK ACCO UNT BALA NCE IN THE CASH BOO K
Sr No  Items of Difference Items of Difference Action done in Bank column of Cash Book Action done in Bank column of Cash Book (Start

Balance)  Action done in Bank Pass Book Action done in Bank Pass Book (Correct Balance)  Action to be taken to reconcile Cash Book Balance (Start Balance) with Bank Balance (Correct Balance)   1 Amoun

ts of Cheques Deposited not yet cleared

Action to be taken to reconcile Cash Book Balance (Start Balance) with Bank Balance (Correct Balance)   1 Amoun

ts of Cheques Deposited not yet cleared  1 Amount s of Cheques Deposited not yet cleared 1 Amounts of Cheques Deposited not yet cleared Amounts of Cheques Deposited not yet

cleared  Debited Debited  Not Credited Not Credited  Undo the debit by crediting in Cash Book Undo the debit by crediting in Cash Book i.e. Subtract if Cash Book Bank Balance is a debit balance. Add if Cash Book Bank Balance is a credit balance (Overdraft)   2 Chequ es issued but not yet presented  2 Cheque s issued but not yet presented 2 Cheques issued but not yet presented Cheques issued but not yet presented  Credited Credited  Not debited Not debited  Undo the credit by debiting in

Cash Book Undo the credit by debiting in Cash Book i.e. Add if Cash Book Bank Balance is a debit balance. Subtract if Cash Book Bank Balance is a credit balance (Overdraft)   3 Debits in the Bank Statement not credited in the Cash Book  3 Debits in the Bank Statement not credited in the Cash Book 3 Debits in the Bank Statement not credited in the Cash Book Debits in the Bank Statement not credited in the Cash Book Debits in Cash Book not credited in Bank Statement 

Not Credited Debited D ebited Debited Not Credited D o what is done by Bank-credit in Cash Book /Undo what has not been done by the Bank Do what is done by Bank-credit in Cash Book /Undo what has not been done by the Bank i.e. Subtract if Cash Book Bank Balance is a debit balance. Add if Cash Book Bank Balance is a credit balance (Overdraft)   4 Credit s in the Bank Statement not debited in the Cash Book  4 Credits in the Bank Statement not debited

in the Cash Book 4 Credits in the Bank Statement not debited in the Cash Book Credits in the Bank Statement not debited in the Cash Book  Not Debited Not Debited  Credited Credited  Do what is done by Bank-debit in Cash Book i.e., Do what is done by Bank-debit in Cash Book i.e., Add if Cash Book Bank Balance is a debit balance. Subtract if Cash Book Bank Balance is a credit balance (Overdraft)   5 Differe nce in Opening Balances in Cash Book and Bank Book

 5 Differe nce in Opening Balances in Cash Book and Bank Book 5 Differenc e in Opening Balances in Cash Book and Bank Book Difference in Opening Balances in Cash Book and Bank Book  Debit Balance Debit Balance Credit Balance

Debit Balance Credit Balance Cr edit Balance Credit Balance Debit Balance

Debit Balance Credit Balance  Find out the difference between the two

(by deducting the lower balance from the higher) and add/subtra ct to the Cash Balance to arrive at the Bank Balance Find out the difference between the two (by deducting the lower balance from the higher) and add/subtra ct to the Cash Balance to arrive at the Bank Balance

Find out the difference between the two (by adding the two balances) and add/subtra ct to the Cash Balance to arrive at the Bank Balance

  

STAR T BALA NCE IS THE BANK STAT EMEN T BALA NCE

Sr No  Items of Difference Items of Difference Action done in Bank Pass Book Action done in Bank Pass Book (Start Balance)  Action done in Bank column of Cash Book Action done in Bank column of Cash Book (Correct Balance)  Action to be taken to reconcile Bank Balance (Start Balance) with Cash Book Balance (Correct Balance)   1 Amoun

ts of

Cheques Deposited not yet cleared

Action to be taken to reconcile Bank Balance (Start Balance) with Cash Book Balance (Correct Balance)   1 Amoun

ts of Cheques Deposited not yet cleared  1 Amount s of Cheques Deposited not yet cleared 1 Amounts of Cheques Deposited not yet cleared Amounts of Cheques Deposited not yet cleared  Not Credited Not Credited  Debited Debited  Credit in Bank Pass Book (do what has been done in the Cash Book) Credit in Bank Pass Book (do what has been done in the Cash Book)

i.e. Add if the Bank Pass Book Balance is a credit balance. Subtract if the Bank Pass Book Balance is a debit balance (Overdraft)   2 Chequ es issued but not yet presented  2 Cheque s issued but not yet presented 2 Cheques issued but not yet presented Cheques issued but not yet presented  Not debited Not debited  Credited Credited  Debit in Bank Pass Book (do what has been done in the Cash Book) Debit in Bank Pass Book (do what has been done in the Cash Book) i.e. Add if the Bank Pass Book Balance is

a debit balance (Overdraft) Subtract if the Bank Pass Book Balance is a credit balance   3 Debits in the Bank Statement not credited in the Cash Book Debit ed Not Credited U ndo the debit in Bank Pass Book by crediting in Bank Pass Book  3 Debits in the Bank Statement not credited in the Cash Book Debit ed Not Credited U ndo the debit in Bank Pass Book by crediting in Bank Pass Book 3 Debits in the Bank Statement not credited in the Cash Book Debit ed Not Credited U ndo the debit in Bank Pass Book by

crediting in Bank Pass Book Debits in the Bank Statement not credited in the Cash Book Debit ed Not Credited U ndo the debit in Bank Pass Book by crediting in Bank Pass Book Debited  Not Credited U ndo the debit in Bank Pass Book by crediting in Bank Pass Book Not Credited U ndo the debit in Bank Pass Book by crediting in Bank Pass Book Undo the debit in Bank Pass Book by crediting in Bank Pass Book i.e. Add if the Bank Pass Book Balance is a credit balance. Subtract if the Bank Pass Book

Balance is a debit balance (Overdraft)   4 Credits in the Bank Statement not debited in the Cash Book  4 Credits in the Bank Statement not debited in the Cash Book 4 Credits in the Bank Statement not debited in the Cash Book Credits in the Bank Statement not debited in the Cash Book  Credited Credited  Not Debited Not Debited  Undo the credit in Bank Pass Book by debiting in Bank Pass Book Undo the credit in Bank Pass Book by debiting in Bank Pass Book i.e., Add if Bank Pass Book Bank Balance is

a debit balance. (Overdraft) Subtract if Bank Pass Book Bank Balance is a credit balance   5 Differe nce in Opening Balances in Cash Book and Bank Book  5 Differen ce in Opening Balances in Cash Book and Bank Book 5 Differenc e in Opening Balances in Cash Book and Bank Book Difference in Opening Balances in Cash Book and Bank Book  Debit Balance Debit Balance Credit Balance Debit Balance Credit Balance  Credit

Balance Credit Balance Debit Balance

Debit Balance Credit Balance  Find out the difference between the two (by deducting the lower balance from the higher) and add/subtra ct to the Pass Book Balance to arrive at the Cash Book Balance Find out the difference between the two (by deducting the lower balance from the higher) and add/subtra ct to the Pass Book Balance to arrive at the Cash

Book Balance Find out the difference between the two (by adding the two balances) and add/subtra ct to the Pass Book Balance to arrive at the Cash Book Balance   

CHAP TER SEVE N THE FINAL ACCO UNTS CONT ENTS

Sr No Par ticulars  Page

No  1  Particu lars Pa ge No  1  Page No  1   1 THE A C C O U N T I N G S T O R Y  1 THE A C C O U N T I N G S T O

R Y  T H E A C C O U N T I N G S T O R Y  4  2 L E S S O N N O 1 T H E M E A

N I N G O F F I N A L A C C O U N T S   2  LES S O N N O 1 T H E M E A N I N G

O F F I N A L A C C O U N T S  2 LESS O N N O 1 T H E M E A N I N G O F F I N

A L A C C O U N T S  L E S S O N N O 1 T H E M E A N I N G O F F I N A L

A C C O U N T S  8  3 L E S S O N N O 2 A D J U S T M E N T S & A D J U S T

E D T R I A L B A L A N C E   3  LES S O N N O 2 A D J U S T M E N T S & A D

J U S T E D T R I A L B A L A N C E  3 LESS O N N O 2 A D J U S T M E N T S &

A D J U S T E D T R I A L B A L A N C E  L E S S O N N O 2 A D J U S T

M E N T S & A D J U S T E D T R I A L B A L A N C E  9  4 L E S S O N N O 3 -

T H E T R A D I N G A C C O U N T   4  LES S O N N O 3 T H E T R A D I N G A C

C O U N T  4 LESS O N N O 3 T H E T R A D I N G A C C O U N T  L E S S O N N

O 3 T H E T R A D I N G A C C O U N T    5  LE S S O N N O 4 T H E P R O F I

T & L O S S A C C O U N T   5  LES S O N N O 4 T H E P R O F I T & L O S S

A C C O U N T  5 LESS O N N O 4 T H E P R O F I T & L O S S A C C O U N T 

L E S S O N N O 4 T H E P R O F I T & L O S S A C C O U N T    6  LE S S O N

N O 5 T H E B A L A N C E S H E E T   6  LES S O N N O 5 T H E B A L A N C E

S H E E T  6 LESS O N N O 5 T H E B A L A N C E S H E E T  L E S S O N N O 5

T H E B A L A N C E S H E E T    7 TH E A C C O U N T I N G S T O R Y c o n

ti n u e d   7 THE A C C O U N T I N G S T O R Y c o n ti n u e d  7 THE A C C O U

N T I N G S T O R Y c o n ti n u e d  T H E A C C O U N T I N G S T O R Y

 c o n ti n u e d    

THE ACC OU NTI NG STO RY

After ensur ing that the Trial Balan ce is prop erly tallie d

and after ensur ing that all perso nal acco unts are recon ciled, espe cially the Bank Acco unts, Ram, we will now prep are the Final Acco unts. As ment ioned earlie r, we prep are these Acco unts for evalu

ating the busin ess perfo rman ce for an acco untin g year. Ram, this is last Chap ter of the Acco untin g Story , and the most impo rtant, espe cially for you. Whe n you start your own busin ess, they

will be its most impo rtant finan cial state ment s base d on all the busin ess trans actio ns recor ded in its Book s of Acco unts durin g any acco untin g year. How these Final Acco unts are prep ared and

prese nted is the subje ct matt er of the follo wing five Lesso ns.

LES SON NO 1 THE MEA NIN G OF FIN AL ACC OU NTS

A Trial Balan ce chec ks arith metic accur acy of

the book s of acco unts. But merel y recor ding the trans actio ns & chec king arith metic accur acy is not the aim of the busin essm an in maint ainin g acco unts. He is inter ested in know ing the profit or

loss of his busin ess & the finan cial positi on of his busin ess. In order to find out the Profit or Loss & finan cial positi on, he prep ares final acco unts at the end of the year. Final acco unts

mea n Trad ing a/c, Profi t & Loss a/c and Bala nce Shee t. Thes e Final Acco unts are prep ared from the Trial Balan ce. Thes e Final Acco unts are prep ared at the end of the

acco untin g perio d. The Tradi ng a/c and Profit & Loss a/c are a sum mary of all the inco mes and expe nses of the busin ess for the acco untin g perio d and there fore give infor matio

n whet her the busin ess has made profit or loss for that acco untin g perio d. It cover s all the busin ess trans actio ns relati ng to all the nomi nal acco unts durin g that perio d. The Balan

ce Shee t is not an Acco unt thou gh it is said to be a part of the Final Acco unts. It is a State ment of all Asset s and Liabil ities as on the last date of the acco untin g perio d. Ther efore

out of the three Classi ficati ons of Acco unts, all Nomi nal Acco unts are trans ferre d to eithe r the Tradi ng a/c or the Profit & Loss a/c. All Real & Perso nal Acco unts balan ces are prese

nted in the Balan ce Shee t.

LESS ON NO 2 ADJ UST MEN TS & ADJ USTE D TRIA L BALA NCE

The Final Accou nts are prepar ed on accrua l basis. What does this mean ?

In actual practi ce it is alway s found that some expen ses and incom es are not includ ed in the Trial Balanc e becau se some expen ses of the curren t year are not paid till the year endin g. Simila rly some of the incom

es of the curren t year are not receiv ed till the year endin g. All such expen se and incom es of the curren t year which are not paid or not receiv ed till the last date of the year, are to be includ ed in the final accou

nts. The inclusi on of such unpai d expen ses and incom es which belon g to the accou nting period , is terme d as the Accru al Basis. This is based on the princi ple that all incom es pertai ning to the accou nting year

should be accou nted for and that all expen ses made which have contri buted to the gener ation of such incom es should also be accou nted for, in the same accou nting year. This princi ple is called the Match ing Princi ple in

Accou nting. All such entrie s are know n as adjust ment entrie s and they are gener ally as follow s: Outst andin g Expe nses Expen ses of the curren t year but not paid so far are know n as outsta nding expen ses. The

accou nting entry for this adjust ment is as under : Debit the Tradin g or Profit & Loss a/c depen ding on the nature of the expen ses: (i.e. addin g to the total of the releva nt expen se a/c) Credi t a liabilit y a/c calling it O/s

Expen ses a/c: Outst andin g Inco me Curre nt year's incom e not receiv ed so far is know n as outsta nding incom e or accrue d incom e. The accou nting entry for this adjust ment is as under : Debit an asset a/c

namin g it as Accru ed Incom e a/c: Credi t the Tradin g or Profit & Loss a/c depen ding on the nature of the accrue d incom e: (i.e. addin g to the total of the releva nt incom e a/c) Prep aid Expe nses Expen ses of the next

accou nting year paid in the curren t accou nting year are know n as prepai d expen ses. The accou nting entry for this adjust ment is as under : Debit an asset a/c calling it as Prepa id Expen ses a/c: Credi t the Tradin

g or Profit & Loss a/c depen ding on the nature of the expen ses prepai d: (i.e. subtra cting it from the total of the releva nt expen se a/c) Prerecei ved Inco mes Thes e are inco mes recei ved in adva nce.

The acco untin g entry for this adjus tmen t is as unde r: Debi t the Inco me a/c with the prerecei ved amou nt: (i.e. Subtr act from the total of the relev ant inco me a/c) Cred it a liabili ty

a/c term ed as Inco mes Recd in Adva nce a/c: Depr eciat ion Of Asse ts Depr eciati on is the reduc tion in the value of the fixed asset s. Fixed Asset s remai n in the busin ess for a speci

fied life of each asset . Every year a part of this asset s cost value is reduc ed base d on its life, obsol ensc e and wear and tear due to prolo nged use. The mini mum amou nt to be reduc ed is speci

fied by certai n statu tory laws or Acco untin g Stan dards the busin ess can opt to provi de for an incre ased reduc tion in value . The accou nting entry for this adjust ment is as under : Debi

t Depr eciati on a/c. This is a loss in the value of fixed asset s and will there fore be trans ferre d to the debit of the Profit & Loss a/c: Cred it the asset a/c with the reduc ed value . (i.e. reduc e

from the total of the relev ant fixed asset a/c) Bad Debt s Whe n good s are sold on credit the amou nts are recei vable from the parti es. The perso ns to who m the good s are sold on credit

are know n as debt ors. If debt ors do not pay us the amou nt due then such nonrecov erabl e amou nts result into a loss for the busin ess and are know n as bad debts . Till the busin essm

an is absol utely sure or he finds that it is not finan cially viabl e to spen d effort s on its recov ery, he will not recor d this loss in his acco unts. The acco untin g entry for this adjus tmen t is as unde r:

Debi t Bad Debt s a/c. This is a loss in the value of debt ors whic h are asset s and will there fore be trans ferre d to the debit of the Profit & Loss a/c: Cred it the partic ular debt ors a/c with the amou

nt nonrecov erabl e, to recor d this loss: Rese rve for Dou btful Debt s/Pr ovisi on for Dou btful Debt s: Doub tful Debt mean s our debt ors are not payin g us the amou nt for a fairly long time &

there fore we are doub tful regar ding recov ery of these debts . Thes e doub tful debts may turn into bad debts in futur e and there fore a reser ve or a provi sion is to be made for such debts in

the profit and loss acco unt. The acco untin g entry for this adjus tmen t is as unde r: Debi t Profit & Loss a/c as this is an expe ctatio n of loss of Debt ors value and has cryst allize d (com

e to know ) in the acco untin g year: Cred it to a liabili ty a/c term ed as Reser ve or Provi sion for Doub tful Debt s a/c. This a/c amou nt being a credit balan ce is subtr acted from the total Debt ors amou

nt in Balan ce Shee t: Rese rve For Disc ount On Debt ors & Rese rve For Disc ount On Cred itors : Some busin esses whils t prep aring Final a/cs also provi de for the futur e expe nses

and inco mes on cash disco unts on amou nts respe ctivel y owin g as on the last date beca use they have a polic y in that respe ct. How ever in my opini on these do not form the expe nse or

inco me of the curre nt year and will only accru e when the actua l paym ent or recei pt trans actio n takes place . So no entry is to be pass ed for these items (in my opini on). Afte

r pass ing all the Adju stme nt entri es and posti ng the sam e to the Ledg er and after the affec ted acco unts are bala nced , it woul d be nece ssar y to agai n take out a Trial Bala

nce and this new Trial Bala nce is term ed as the Adj uste d Trial Bala nce. This Adju sted Trial Bala nce will ther efor e be diffe rent from the earli er one. It will have to tally befo re

we use it for prep arin g the Final Acco unts .

LES SON NO 3 THE TRA DIN G ACC OU NT

The Tradi ng Acco unt is prep ared to find out the profit or loss out of tradi

ng trans actio ns. In other word s , this acco unt show s the profit or loss out of buyin g and sellin g or manu factu ring of good s for sale and there fore it conta ins trans actio ns of a tradi ng

perio d havin g a direct conn ectio n to the sale and cons umpt ion of mate rials. The Expe nses side of the Tradi ng a/c consi sts of the follo wing items : Open ing Stock of Trad ed Good s,

Raw Mate rials/ Cons umm ables for Manu factu ring, Finis hed Prod ucts or Work -inProce ss whic h arise as a result of the manu factu ring oper ation s; Purc hase s of mate rials for tradi ng or for manu

factu ring oper ation s; All direct expe nses whic h arise or are made beca use of the tradi ng or manu factu ring oper ation s. The Inco mes side of the Tradi ng a/c consi sts of the follo wing

items : Sales ; Closi ng Stock of Trad ed Good s, Raw Mate rials/ Cons umm ables for Manu factu ring, Finis hed Prod ucts or Work -inProce ss whic h arise as a result of the manu factu ring oper

ation s. The openi ng stock , purc hase s, direct expe nses and sales a/cs are prese nt in the adjus ted Trial Balan ce. Thro ugh the Journ al, entri es are pass ed to close these acco unts and trans

fer their amou nts to the Tradi ng a/c as follo ws: Trad ing a/c Dr (total of the debit balan ces of the a/cs credit ed belo w) To Openin g Stock (Cr with the balance amt in the adjusted Trial Balance) To

Purchas es (Cr with the balance amt in the Trial Balance) To each Direct Expens e (Cr with the balance amt in the Trial Balance) Sale s a/c (Dr with the balan ce amt in the Trial Balan ce) To Trad ing a/c (Cr with the Sales a/c

balan ce amt in the Trial Balan ce) Profit or Loss does not occur unles s a tradi ng or manu factu ring busin ess sells its good s. An isolat ed purc hase of good s result s into neith er a profit nor

loss. It is only when the good s are sold then it is possi ble to deter mine the reven ue, from whic h the cost of good s sold whic h we term as the Cost of Sales --is dedu cted and then the

profit or loss on that sale can be deter mine d. Ther efore it woul d not be possi ble to deter mine this unles s the cost of unsol d good s are reduc ed from the total of the openi ng stock

and purc hase s made durin g the year. How ever it woul d be diffic ult to exact ly deter mine the amou nt of this Closi ng Stock to be dedu cted from each of the Open ing Stock a/c and Purc hase s a/c.

Ther efore we creat e a separ ate a/c term ed as the Closi ng Stock a/c. Earlie r we have trans ferre d the Open ing Stock and Purc hase s a/cs to the debit of the Tradi ng a/c. Also we have trans

ferre d the Sales a/c to the credit of the Tradi ng a/c. Now unles s the Closi ng Stock a/c, is not trans ferre d to the Tradi ng a/c, the profit and loss cann ot be arriv ed at. How ever this acco unt is

not in the Book s of acco unts and will there fore not be in the Trial Balan ce. Ther efor e a Jour nal Entr y is pass ed as follo ws: Closi ng Stoc k a/c To Trad ing a/c (Bei

ng the entr y to reco rd the closi ng stoc k in the book s of A/cs ) If now the total of the credit side of the Tradi ng acco unt is more than the total of its debit side then the differ ence

is gross profit . If debit side total of the tradi ng acco unt is more than its credit side total then the differ ence is gross loss. This Gross Profit or Loss has to be trans ferre d to the Profit & Loss a/c by

the follo wing entri es in the Journ al. If ther e is gros s profi t, entr y is:Trad ing A/c Dr To Profi t & Loss A/c If ther e is gros s loss, entr y is:Profi t & Loss A/c Dr

To Trad ing A/c

THE TRADIN G ACCOU NT FORMA T

       E

 Amt in Rs

xpense s LF

 Incom

es LF  Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more

than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals           Ex

in Rs

penses  LFAmt

 Incom

es LF  Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To

Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals    

     Exp F Amt in Rs

enses L
 Incom

es LF  Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes

are more than expenses)        To tals    Totals         Exp

enses L
F Amt in Rs  Incom

es LF  Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals    

   Expe  Amt in Rs

nses LF

 Incom

es LF  Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals    
  Expe  Amt in Rs

nses LF

 Incom

es LF  Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals    
 Expen

ses LF  Amt in Rs es LF  Amt in Rs  To Opening Stock    By

 Incom

Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals    

 Amt in Rs

Expens es LF

 Incom

es LF  Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less

Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     LF Amt in Rs

 Incom

es LF  Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss

transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     Amt in Rs  Incom

es LF  Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward

       To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals    

 Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)

Incom es LF

       To tals    Totals     LF Amt in Rs  To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     Amt in Rs   To Opening Stock    By Sales (less Sales Returns)     To

Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals      To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses

are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     To Opening Stock    By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more

than expenses)        To tals    Totals       By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals      By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To

Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     By Sales (less Sales Returns)     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L

a/c (if the incomes are more than expenses)        To tals    Totals        To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals       To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss

transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals      To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To

tals    Totals     To Purchases( less Purchases Returns)    By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals       By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages

       To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals      By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     By Closing Stock     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To

Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals        To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals       To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage

Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals      To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     To Freight Inward    By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages

       To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals       By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals      By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more

than expenses)        To tals    Totals     By Loss transferred to P & L a/c (if the expenses are more than incomes)     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals        To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals       To Carriage Inward        To Wages        To Profit transferred to P & L

a/c (if the incomes are more than expenses)        To tals    Totals      To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     To Carriage Inward        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals           To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals

         To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals         To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals        To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals       To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals

   Totals      To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     To Wages        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals           To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals          To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals         To Profit transferred

to P & L a/c (if the incomes are more than expenses)        To tals    Totals        To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals       To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals      To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals     To Profit transferred to P & L a/c (if the incomes are more than expenses)        To tals    Totals    

      Tot als    Totals          Tota ls    Totals         Total s    Totals        Totals    Totals       Totals    Totals      Totals    Totals     Totals    Totals       Totals      Totals     Totals          

LES SON NO 4 THE PRO FIT & LOS S ACC OU NT

All

remai ning expe nses not trans ferre d to the Tradi ng a/c are trans ferre d to the Profi t and Loss acco unt throu gh Journ al entri es by: Credi ting each and every expe nse a/c, and, Debit ing the

total of these expe nses to the Profit and Loss a/c. Each and every Inco mes and Gains acco unt not taken into acco unt for arrivi ng at the Gross Profit /Loss (i.e. not credit ed to Tradi ng a/c) will be

trans ferre d to the Profi t and Loss acco unt throu gh Journ al entri es by: Debit ing the total of all these acco unts, and. Credi ting each and every inco me and gain a/c to the Profit and Loss acco

unt. If the Credi t side total is more than the Debit side total then it mean s that the inco mes are more than the expe nses and the differ ence is the net profit . If the Debit side total is more than

the Credi t side total then it mean s that the expe nses are more than the inco mes and the differ ence is the net loss. This net profit or net loss belon gs to the owne r or propr ietor and there fore a

Journ al entry has to be pass ed to recor d this. The net profi t is credi ted and the net loss debi ted to the Own ers Capi tal acco unt. This is done throu gh a Journ al entry as unde

r: If it is net profi tDebi t the Profit & Loss a/c (this will close the Profit & Loss a/c) Cred it the Propr ietor s Capit al a/c With the amou nt of the Net Profit If it is net lossDebi t the

Propr ietor s Capit al a/c Cred it the Profit & Loss a/c (this will close the Profit & Loss a/c) With the amou nt of the Net Loss

THE PRO FIT & LOS S ACC OU NT

FOR MAT

Expen ses      Incom es  To

Gross Loss transferr ed to P & L a/c (if the Trading expenses are more than Trading incomes)  LF Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries  

    Incom es  To
Gross Loss transferr ed to P & L a/c (if the Trading expenses are more than Trading incomes)

 LF Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries  

   Incom es  To

Gross Loss transferr ed to P & L a/c (if the Trading expenses are more than Trading incomes)  LF Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries  

  Incom es  To
Gross Loss transferr ed to P & L a/c (if the Trading expenses

are more than Trading incomes)  LF Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries  

 Incom es  To

Gross Loss transferr ed to P & L a/c (if the Trading expenses are more than Trading incomes)  LF Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries  

Incom es  To
Gross Loss transferr

ed to P & L a/c (if the Trading expenses are more than Trading incomes)  LF Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries    To Gross Loss transferr ed to P & L a/c (if the Trading expenses are more than Trading incomes)  LF Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries   To Gross Loss transferr ed to P & L a/c (if the Trading

expenses are more than Trading incomes)  LF Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries   LF Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries   Amt in Rs By Gross Profit (if the Trading expenses are more than Trading incomes)  LF Amt in Rs  To Salaries   By Gross Profit (if the Trading expenses are more than Trading

incomes)  LF Amt in Rs  To Salaries   LF Amt in Rs  To Salaries   Amt in Rs  To Salaries    To Salaries   To Salaries     By Other Incomes   By Other Incomes  By Other Incomes     To Telephon e expenses        T o Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance     To Telephon e expenses        T o Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance    To

Telephon e expenses        T o Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance   To Telephon e expenses        T o Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance         To Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance        To Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance       To

Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance      To Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance     To Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance    To Travelling expenses        T o each and every expense not in Trading a/c-from the Trial Balance   To Travelling expenses        T o each and every expense not in Trading a/c-from the Trial

Balance         To each and every expense not in Trading a/c-from the Trial Balance        To each and every expense not in Trading a/c-from the Trial Balance       To each and every expense not in Trading a/c-from the Trial Balance      To each and every expense not in Trading a/c-from the Trial Balance     To each and every expense not in Trading a/c-from the Trial Balance    To each and every expense not in Trading a/c-from the Trial Balance   To each and every expense not in

Trading a/c-from the Trial Balance         To Profit transferr ed to Capital a/c (if the incomes are more than expenses )    By Net Loss transferr ed to Capital a/c (if the expenses are more than the incomes)     Total s    Total  s         To Profit transferr ed to Capital a/c (if the incomes are more than expenses )    By Net Loss transferr ed to Capital a/c (if the expenses are more than the incomes)     Total s    Total  s        To Profit transferr ed to Capital

a/c (if the incomes are more than expenses )    By Net Loss transferr ed to Capital a/c (if the expenses are more than the incomes)     Total s    Total  s       To Profit transferr ed to Capital a/c (if the incomes are more than expenses )    By Net Loss transferr ed to Capital a/c (if the expenses are more than the incomes)     Total s    Total  s      To Profit transferr ed to Capital a/c (if the incomes are more than expenses )    By Net Loss transferr

ed to Capital a/c (if the expenses are more than the incomes)     Total s    Total  s     To Profit transferr ed to Capital a/c (if the incomes are more than expenses )    By Net Loss transferr ed to Capital a/c (if the expenses are more than the incomes)     Total s    Total  s    To Profit transferr ed to Capital a/c (if the incomes are more than expenses )    By Net Loss transferr ed to Capital a/c (if the expenses are more than the incomes)     Total

s    Total  s      By Net Loss transferr ed to Capital a/c (if the expenses are more than the incomes)     Total s    Total  s     By Net Loss transferr ed to Capital a/c (if the expenses are more than the incomes)     Total s    Total  s    By Net Loss transferr ed to Capital a/c (if the expenses are more than the incomes)     Total s    Total  s       Totals    Totals       Totals   Totals   Totals      Totals   Totals   Totals        

LES SON NO 5 THE BAL ANC E SHE ET

It will be seen that when all the inco mes and expe nses acco unts in the Adjus ted Trial Balan ce are trans ferre d eithe r to the Tradi

ng or Profit and Loss a/c, their balan ces in the Ledg er beco me zero after the posti ng of the Journ al entri es to recor d such trans fers. Ther e will also be adde d to it the debit balan ce of the asset acco

untthe Closi ng Stock a/c beca use of the entry for recor ding the Closi ng Stock at the end of the acco untin g perio d. (Plea se see the entry abov e in the lesso n on the Tradi ng Acco

unt). Ther efore this Adjus ted Trial Balan ce now consi sts only of Asset s and Liabil ities acco unts since all the expe nses and inco mes have been close d and trans ferre d to the Tradi ng and Profit

& Loss a/c. Then these two acco unts are balan ced as given in lesso n num bers 3&4 and the net profit /loss is arriv ed at and trans ferre d to the Propr ietor s Capit al a/c. Ther efore after

this entry , a Seco nd Adjus ted Trial Balan ce is prep ared whic h will now consi st only of Asset s and Liabil ities items (inclu ding the Propr ietor s Capit al a/c duly adjus ted with the net profit /loss) .

From this Seco nd Adjus ted Trial Balan ce, all Asset s balan ces are trans ferre d to the Balan ce Shee t on the Asset s side and all Liabil ities balan ces to the Liabil ities side. How these balan ces

are prese nted in the Balan ce Shee t is as show n as per the form ats given belo w. Rem emb er, Bala nce Shee t is not an acco unt but is a Stat eme nt of Wor th. It sho ws the

fina ncial posit ion of the busi ness on a parti cula r day and ther efor e the bala nce shee t is valid only on that date . It will chan ge as soon anot her busi ness tran sacti on/s take plac

e. It is nor mall y prep ared at the end of the acco unti ng peri od. All the Asse ts and Liabi lities bala nces are then carri ed forw ard to the next Acco unti ng Year as

the open ing bala nces in the rele vant Ledg er acco unts in the Ledg er for the next acco unti ng year . For ever y year acco unti ng year sepa rate Acco unts Boo ks are mai

ntai ned.

THE HOR IZO NTA L FOR MAT OF THE BAL ANC E SHE ET
Liabilities  Amt in Rs Amt in Rs Assets  Amt in Rs Amt in Rs  Own ers Capital   Amt in Rs Amt in Rs Assets  Amt in Rs Amt in Rs  Own ers Capital   Amt in Rs Assets  Amt in Rs Amt in Rs  Own ers Capital   Assets A mt in Rs Amt in Rs  Own ers Capital   Amt in Rs Amt in

Rs  Own ers Capital   Amt in Rs  Own ers Capital    Owners Capital   Owners Capital    500000 G ross Fixed Assets 47 5000    Lo ans-long term  300 000 Less Depreciatio n 50000   500000 Gr oss Fixed Assets 47 5000    Lo ans-long term  300 000 Less Depreciatio n 50000   Gross Fixed Assets 47 5000    Lo ans-long term  300 000 Less Depreciatio n 50000   475000      Loanslong term  300 000 Less Depreciatio n 50000    Loanslong term  300 000 Less Depreciatio n 50000   Loanslong term  300 000 Less Depreciatio

n 50000    300000 L ess Depreciatio n 50000   300000 Le ss Depreciatio n 50000   Less Depreciatio n 50000   50000    L oansshort term   50000 N et Fixed Assets  4 25000  Cu rrent Liabilities :    Inves tments     Loansshort term   50000 N et Fixed Assets  4 25000  Cu rrent Liabilities :    Inves tments    Loansshort term   50000 N et Fixed Assets  4 25000  Cu rrent Liabilities :    Inves tments   Loansshort term   50000 N et Fixed Assets  4 25000  Cu rrent Liabilities :    Inves tments    50000 N

et Fixed Assets  4 25000  Cu rrent Liabilities :    Inves tments   50000 Net Fixed Assets  4 25000  Cu rrent Liabilities :    Inves tments   Net Fixed Assets  4 25000  Cu rrent Liabilities :    Inves tments    425000   425000  C urrent Liabilities :    Inves tments    Current Liabilities :    Inves tments   Current Liabilities :    Inves tments     Invest ments  5 0000  Tra de Creditors 3 00000  Cu rrent Assets:    Investm ents  500 00  Trade Creditors 3 00000  Cu rrent Assets:   Investme nts  5000 0  Trade Creditors 3 00000  Cu rrent Assets:  

 50000  T rade Creditors 3 00000  Cu rrent Assets:   50000  Tr ade Creditors 3 00000  Cu rrent Assets:    Trade Creditors 3 00000  Cu rrent Assets:   Trade Creditors 3 00000  Cu rrent Assets:   300000  C urrent Assets:    Current Assets:   Current Assets:      Provisio n for Expenses    Provision for Expenses   Provision for Expenses  Provision for Expenses  75000  Ca sh & Bank Balances 2 5000    Ot her Current Liabilities   Cash & Bank Balances 2 5000    Ot her Current Liabilities  Cash & Bank

Balances 2 5000    Ot her Current Liabilities  25000    O ther Current Liabilities    Other Current Liabilities   Other Current Liabilities  Other Current Liabilities  25000 400 000 Stock of Goods 300 000       400000 St ock of Goods 300 000       Stock of Goods 300 000       300000         Trad e Debtors 35 0000          Trade Debtors 35 0000         Trade Debtors 35 0000        Trade Debtors 35 0000       Trade Debtors 35 0000      Trade Debtors 35 0000      350000         Other Current Assets 100 000 77500 0             Other

Current Assets 100 000 77500 0            Other Current Assets 100 000 77500 0           Other Current Assets 100 000 77500 0          Other Current Assets 100 000 77500 0         Other Current Assets 100 000 77500 0         100000 77 5000      775000            T otal  125 0000 Tot al  1250 000          To tal  1250 000 Total   125000 0         Tot al  1250 000 Total   125000 0        Tota l  12500 00 Total      Total     Total     Total    Total  1 250000 T otal  125 0000   Total  12 50000 To tal  1250 000    1250000  Total  1

250000   1250000  Total  12 50000    1250000   1250000  

THE VER TIC AL FOR MAT OF THE BAL ANC E SHE ET Partic ulars in

 Amt
Rs A mt in Rs A mt in

 Rs

Amt in Rs A mt in Rs A mt in

 Rs

Amt in Rs A mt in

 Rs

Amt in

 Rs  Sour ces of Funds:

  

Sourc es of Funds:

         O
wners Capital

     Ow
ners Capital

  
 Owne

rs Capital Owner s Capital

  

     50 0000  5000  00 L

oans-

Long

Term
 0 Lo ansLong

50000

Term  Loans -Long Term LoansLong

Term

  30 0000  3000  00 L

oansShort Term
 0 Lo ansShort

30000

Term  Loans -Short Term LoansShort

Term

  50  000  5000  0 To
tal

Sourc

es 
  Tot

50000

al Sourc

es   Total Sourc es  Total Sourc

es 

  85

plicati on of Funds:

  Ap

0000

    850 000
 0 A pplica tion of Funds:

85000

  
 Appli

cation of Funds:

  

Applic ation of Funds:

         G
ross Fixed Assets

  47 5000   Gro
ss Fixed Assets

  47 5000
 Gross

Fixed Assets

  47 5000
Gross Fixed Assets

  47 5000  4750 00 

  Les  0 

47500

s Deprec iation

  50 000
 Less

Deprec

iation

  50 000
Less Deprec iation

  50 000  5000  0 
et Fixed Assets
   N

50000

     Net
Fixed Assets
 Net

  
Fixed Assets Net Fixed Assets

  

     42 5000  4250  00 I

nvestm ents 42500

 0 In

vestme nts  Inves tments Invest ments

        50  000  5000  0 C
urrent Assets :  
  Cur

50000

rent Assets

:    Curre nt Assets :   Curre nt Assets

:  

      C
ash & Bank Balanc es 25

  Cas

000

h& Bank Balanc

es 25

000  Cash & Bank Balanc es 25 000

Cash & Bank Balanc es 25 000

      S
tock of Goods

25000

 3000 00    Sto

ck of Goods

 3000 00 
 Stock

of Goods

 3000 00 
Stock of Goods

 3000

00  30000
   T

0 

otals c/f to next page

 325 000   Tot

als c/f to next page

 325 000
 Total

s c/f to next page

 325 000
Totals c/f to next page

 325 000
0  4 75000 32500

 475 000

 

47500


0 

Particul ars A mt in Rs A mt in Rs A mt in

 Rs T otal b/f from previo us page

 325 000
Amt in Rs A mt in Rs A mt in

 Rs T otal b/f from previo us page

 325 000
Amt in

Rs A mt in

 Rs T otal b/f from previo us page

 325 000
Amt in
 Rs T otal b/f from previo us page

 325 000
 Total

b/f from previo us page

 325 000
Total b/f from previo us page

 325 000
32500

0  4 75000 de Debtor
  Tra

s 350

 475 000
 0 Tr ade Debtor

000

47500

s 350

000  Trade Debtor s 350 Trade Debtor 000

s 350

000 0 

35000
   O

ther Curren t Assets

 1000 00    Oth

er Curren t

Assets

 1000 00 
 Other

Curren t Assets

 1000 00 
Other Curren t Assets

 1000 00 
10000
   T

0 

otal Curren t Assets

  77 5000   Tot
al Curren t Assets

  77 5000
 Total

Curren t Assets

  77 5000

Total Curren t Assets

  77 5000  7750 00 

  Les  0 

77500

s: Curre nt Liabili

ties:  Less: Curre nt Liabili ties: Less: Curre nt Liabili

ties:

      T
rade Credito rs 30
  Tra

0000

de Credito rs 30 0000

 Trade

Credito rs 30 0000

Trade Credito rs 30 0000 30000

   P

0 

rovisio ns for Expens es 75

  Pro

000

visions for Expens es 75 000  Provis ions for Expens es 75 000

Provisi ons for Expens es 75 000

      O
ther

75000

Curren t Liabiliti es 25 000

  Oth

er Curren t Liabiliti es 25

000  Other Curren t Liabiliti es 25 000

Other Curren t Liabiliti es 25 000

      T
otal Curre nt Liabili

25000

ties al Curre nt Liabili

  Tot

ties

 Total

Curre nt Liabili Total Curre nt Liabili

ties

ties

 4000 00 
  Net  0 

40000

Curre nt Assets
 Net

  
Curre nt Assets Net Curre nt Assets

  

     37 5000  3750  00 T

otal Applic ations

  

 0 To tal Applic ations

37500

  
 Total

Applic ations Total Applic ations

  

     85

0000

 850 000
85000
 0

 

THE ACCOUNTING STORYcontinued

Sir, I still have not understood how both the sides of the Balance are equal. Why, what exactly is your difficulty? Look, Sir, we transfer all the nominal accounts balance to the Trading and Profit & Loss Accounts, right? Yes. What is left in the Trial Balance are only the Assets and Liabilities balances. Therefore obviously these remaining items in the Trial Balance will not tally because only when it had included the nominal accounts, it had tallied. Now we use these Assets and Liabilities balances to make up the Balance Sheet and yet the Balance sheet is supposed to tally!! How?? Good question, Ram. It shows that you are thinking out of the box!! However you have forgotten that we have added the net profit or subtracted the net loss from the Proprietors Capital a/c and then taken this adjusted balance of the Capital a/c to the Balance Sheet. What does this mean? It means that we have summarized (as we do in any Ledger Account) all the nominal items into a net balance which is termed as a net profit or loss. That means further that we have taken out a balance of all the debit and credit balances of these nominal accounts and if it is a credit balance (if credits are more than debits) we have called this as net profit and added to the Proprietors Capital a/c credit balance. Please also understand that it will be vice-versa if the Proprietors Capital a/c is a debit balance. That means net profit will be subtracted and net loss added to it. A Proprietors Capital a/c could be a debit balance if his drawings exceed the amounts of cash or assets brought in by him into the business. Drawings include proprietors withdrawls of cash or any other asset or incurrence by the business of an expense on behalf of the proprietor like paying his personal insurance premium or paying the rent of a house used for personal purposes, etc.

The adjusted Proprietors Capital a/c, if it is a credit balance, is shown on the liabilities side of the Balance Sheet because the business owes the Proprietor that amount. It is shown on the Assets side if it is a debit balance, because the proprietor owes this amount to the business and is therefore a debtor to the business. Therefore automatically the net amount of all the items transferred to the Trading and Profit & Loss Accounts are included in the Assets and Liabilities amounts transferred to the Balance Sheet and therefore if your original Trial balance is tallied then your Balance Sheet will always tally. Therefore I advocate that after all the adjustment entries have been made including the one transferring the net profit ir loss is transferred to the Proprietors Capital a/c, a fresh Trial Balance which I call as the Final Trial Balance should be taken out, tallied and then only the Balance Sheet be prepared.

Sir, I have now understood. But, still, I have one more question. Your procedure for preparing the Final Accounts is perfect for an accountant in a business. But what about the student who has to solve this question in an examination? Will he have the time to follow this procedure? Ram, this is the correct procedure and will help the student to get these type of problems absolutely right. But as for your concern about the paucity of time, instead of passing journal entries for the adjustments, in the examinations, the student can add/deduct from the balances in the original Trial Balance and include the new accounts also in it (as a result of the adjustments) and then take out the adjusted Trial Balance which will be utilized for the placing of the items either in the Trading or Profit & Loss a/c or in the Balance Sheet. Please check the following Illustration: IILUSTRATION: Prepare the Final Accounts of Puja Traders as at 31-3-10 as per the following Trial Balance:

Sr No
A B C D E F G H I J K L M N O P Q R s t u v

Account Head
Capital Loans Buildings Machinery Furniture Opening Stock Purchases Sales Sundry Debtors Loans & Advances Salaries Carriage Outward Travel Expenses Office Expenses Wages Stationery Expenses Interest Investments Interest on Investments Cash Bank Carriage Inward Totals

Dr Amt in Rs

Cr Amt in Rs
545000 250000

267800 146700 56900 153350 1104670 1765900 378450 36570 146700 25450 18300 15600 32800 9450 22300 110000 9670 12900 28750 3880 2570570 2570570

Adjustments to be made are as follows: Sr No a b c d e f g h i Adjustment Details Closing Stock Interest accrued on Loans not yet paid Provide for Outstanding Expenses for Salaries Provide for Outstanding Expenses for Travel Expenses Salaries paid in advance Depreciation on Buildings @ 5% Depreciation on Machinery@ 15% Depreciation on Furniture @ 10% Interest accrued on Investments not yet received 1640 Amt in Rs 169450 3570 22340 2670 10000

Answer given below:

Sr No A B c d e f g h i j k l m n o p q r s t u v w x y z a1 b1 c1 d1

Account Head Capital Loans Buildings Machinery Furniture Opening Stock Purchases Sales Sundry Debtors Loans & Advances Salaries Carriage Outward Travel Expenses Office Expenses Wages Stationery Expenses Interest Investments Interest on Investments Cash Bank Carriage Inward Closing Stock (B/s) Closing Stock (P&L) Outstanding Interest Expenses Outstanding Salaries Expenses Outstanding Travel Expenses Prepaid Salaries Depreciation Interest Income Accrued Totals

Dr Amt in Rs

Cr Amt in Rs 545000 250000

Dr Amt in Rs

Cr Amt in Rs

Dr Amt in Rs

Cr Amt in Rs 545000 250000

B/s-Liabilities B/s-Liabilities B/s-Assets B/s-Assets B/s-Assets Trading-Expenses Trading-Expenses

267800 146700 56900 153350 1104670 1765900 378450 36570 146700 25450 18300 15600 32800 9450 22300 110000 9670 12900 28750 3880 169450 3570 2670 22340

13390 22005 5690

254410 124695 51210 153350 1104670 1765900 378450 36570

Trading-Incomes B/s-Assets B/s-Assets P&L-Expenses P&L-Expenses P&L-Expenses P&L-Expenses Trading-Expenses P&L-Expenses P&L-Expenses B/s-Assets

10000

159040 25450 20970 15600 32800 9450 25870 110000

1640 12900 28750 3880 169450 169450 3570 22340 2670 10000 41085 1640 10000 41085 1640

11310

P&L-Incomes B/s-Assets B/s-Assets Trading-Expenses B/s-Assets

169450 3570

Trading-Incomes B/s-Liabilities

22340

B/s-Liabilities
2670

B/s-Liabilities B/s-Assets P&L-Expenses B/s-Assets

2570570

2570570

250755

250755

2770240

2770240

In the Trial Balances above, the first two amounts columns represent the Original Trial Balance, the next two amounts columns represent the Trial Balance of all the adjustment entries passed (except the transfers of net profit/loss to the Proprietors Capital a/c), and the last two amounts columns represent the adjusted Trial Balance. Beyond the amounts columns is given the Final Account to which that adjusted TB amount will be transferred and the side to which it should be transferred. The highlighted items above are those which will be transferred to the Trading & P&L accounts and the remaining items will be utilized for preparing the final adjusted Trial Balance. After transfer, the Trading and Profit & Loss Accounts are given in the columnar format as below:
Expenses in Rs

Trading Account a/c

Incomes in Rs

a b c d e f g

By Sales To Opening Stock To Purchases To Wages To Carriage Inward To Closing Stock (P&L) To Gross Profit c/d Total of Trading a/c 640650 1935350 153350 1104670 32800 3880

1765900

169450

1935350

Profit & Loss a/c a b c d e f g h i By Gross Profit b/d To Salaries To Carriage Outward To Travel Expenses To Office Expenses To Stationery Expenses To Interest By Interest on Investments To Depreciation 41085 159040 25450 20970 15600 9450 25870 11310 640650

To Net Profit transferred to Prop Capital a/c Total of P&L a/c

354495 651960 651960

The Final Adjusted Trial Balance after passing the entry transferring the net profit/loss to the Proprietors Capital Account is given under: Final Adjusted Trial Balance

Dr Amt in Rs

a1 a2 a3 b C D E F G H I J K L M N O P Q

Capital-as per TB Add: Net Profit as per P&L a/c Total Capital Loans Buildings Machinery Furniture Investments Cash Bank Closing Stock (B/s) Sundry Debtors Loans & Advances Outstanding Interest Expenses Outstanding Salaries Expenses Outstanding Travel Expenses Prepaid Salaries Interest Income Accrued Balance Sheet Totals

Cr Amt in Rs 545000 354495 899495 250000

254410 124695 51210 110000 12900 28750 169450 378450 36570 3570 22340 2670 10000 1640 1178075 1178075

From the above final adjusted TB we will prepare the Balance Sheet of Puja Traders as at 31-3-10 as under:
Liabilities Amt in Rs Amt in Rs Assets Amt in Rs Amt in Rs

Owners Capital Loans-long term

899,495 250,000

Fixed Assets@w.d.v. Buildings Machinery 254410 124695 51210

Current Liabilities:

Furniture

Outstanding Interest Expenses Outstanding Salaries Expenses Outstanding Travel Expenses

3570 22340 2670 28580

Total Fixed Assets@w.d.v. Investments Current Assets: Cash Balances Bank Balances Stock of Goods Trade Debtors Loans & Advances Prepaid Salaries Interest Income Accrued 12900 28750 169450 378450 36570 10000 1640

430315 110000

637760

Total

1178075

Total

1178075

Ram, if we solve this question as shown above, there will be less chances of our Balance sheet not tallying and it will take the same time as in other method. Yes, Sir, this is definitely a more structured way and we can always find out where our mistakes are, if any. Ram, are you now clear about the way Accounting of business transactions is done and how this method assists the businessman to evaluate his performance and how that performance has affected his net worth-has it increased or decreased. The net worth in the above Balance Sheet is represented by the amount of Owners Capital shown on the liabilities side. The Trading Account helps the businessman to plan his Sales to achieve a certain Gross Profit. From the Gross Profit generated, other business expenses are deducted in order to find out the Net Profit. The businessman also gets a clear idea as to what his various expenses were during the accounting year and therefore it acts as a tool for him to help control them in the future to increase the profits. How to do this is the subject matter of Management Accountancy. From the Balance Sheet the businessman gets an idea that as at the end of the accounting year how much money (including the net profit generated) had come into

the business up to that date and how it was utilized for the creation of the various Assets of the business upto that date. The moneys which have come into the business is represented by the Liabilities of the business including its Qwners Capital and the moneys utilized (gone out) is represented by the Assets of the business. Remember the Accounting Equation?? Therefore the Balance Sheet is a statement which equalizes the Capital and Liabilities with the Assets. Sir, now I shall solve all the problems in Vikronet Finacs and reinforce the knowledge gained in the last three months and come back to you if I have any difficulties. But, Sir, thank you for giving me now a more comprehensive knowledge of Accounting. I most definitely now appreciate the importance of having Accounting knowledge for any business entrepreneur or manager. Ram, we have covered only the fundamentals or basics of accounting. If we really want to go deeper then we will have to learn about the various techniques of Accounting in different types of Business Entities (like Partnership Firms, Limited Companies, Cooperative concerns, Joint Ventures, etc.) and for different types of businesses. (e.g. Banking & Insurance business, Trading and Manufacturing, Services, IT, etc.) But for you this should be enough for the time being.