Basic Accountancy

CHAPTER 1
Introduction to Accounting
LEARNING OBJECTIVES
After studying this chapter, you will be able to:
state the meaning of and need for accounting;
appreciate the relevance of accounting as an information
system and its sub-systems;
identify internal and external users of accounting
information;
distinguish between book keeping and accounting;
explain objectives, role and limitations of accounting.
ACCOUNTANCY 2
For centuries, accounting had been
generally confined to the financial
record keeping functions of the
accountant. The role of an accountant
has gradually changed from that of the
mere recorder of transactions to that
of the member providing relevant
information to the decision-making
team. Accounting is now regarded as
an information system and forms
integral part of management
information system. As an information
system, it collects data and
communicates economic information
about a business enterprise or other
entity to a wide variety of persons
whose decisions and actions are
related to the activity. This chapter,
therefore, deals with accounting as an
information system.
1.1 Meaning of Accounting
In 1941, the American Institute of
Certified Public Accountants (AICPA)
defined accounting as the art of
recording, classifying, and summa-
rizing in a significant manner and in
terms of money, transactions and
events which are, in part, at least, of a
financial character, and interpreting
the results thereof.
With greater economic
development, the meaning of the term
accounting gradually became broader.
In 1966 the American Accounting
Association (AAA) defined Accounting
as: The process of identifying,
measuring and communicating
economic information to permit
informed judgments and decisions by
users of the information.
Further, in 1970 the Accounting
Principles Board of AICPA stated that
the function of accounting is to provide
quantitative information, primarily
financial in nature, about economic
entities, that is intended to be useful
in making economic decisions.
Accounting can, therefore be defined
as: The process of identifying,
measuring, recording and communi-cating
the economic events are considered in
terms of economic and business
transactions of the organization to
interested users of the information.
The above definition contains four
essential characteristics of the
accounting:
Economic events
Identification, measurement,
recording, and communication
Organization
Interested users of information
1.1.1 Economic Events
An economic event has been defined as
a happening of consequence to a business
entity. Economic events are classified
into external and internal types.
An external event, involves the
transfer or exchange of something of
value between two or more entities. It
is called a transaction. The following
are some examples of transactions:
Sale of shoes by Allen Cooper
Shoe Company to customers.
Rendering services to customers
by Samsung Limited.
Payment of wages to employees
by Maruti Udyog Limited.
Payment of monthly rent to the
landlord.
INTRODUCTION TO ACCOUNTING 3
Purchase of raw materials by an
enterprise from some other
business enterprise.
Purchase of ticket from an
airline.
An internal event is an economic
event that occurs entirely within one
enterprise, e.g. supply of raw material
or equipment by the stores department
to the manufacturing department.
1.1.2 Identification, Measurement,
Recording and
Communication
Identification: It means determining
what to record, i.e., to identify events
which are to be recorded. It involves
observing activities and selecting those
events that are considered to be the
evidence of economic activity. Further,
these events should be related to a
business organization. The business
transactions and other economic
events are evaluated for considering
whether it has to be recorded as an
accounting transaction. The value of
human resources, changes in
managerial policies or change in
personnel are important but none of
these items are recorded in financial
accounts. However, when a company
makes a cash sale or purchase, it is
recorded in the books of accounts.
Measurement: It means quantification
(including estimates) of business
transactions into financial terms by
using monetary unit, i.e. rupees and
paise, as a measuring unit. If an event
cannot be quantified in monetary
terms, it is not considered for
recording in financial accounts. Thas
is why important items like the
appointment of a new managing
director, signing of contracts or
changes in personnel are not shown
in the books of accounts.
Recording: Once the economic events
are identified and measured in
financial terms, they are recorded in
a chronological order and systematic
manner. An item should be written in
both words and numbers. The
amount should be included in the
totals of the books of account. The
accountant also clarifies by
summarizing these items.
Communication: The economic events
are classified, measured and recorded
in a order that the pertinent informa-
tion is generated and communicated
in a certain form to management and
other internal and external users. The
information is communicated through
preparation and distribution of
accounting reports. The most common
reports are in the form of financial
statements (Balance Sheet and Profit
and Loss Statement).
The accounting information
system should be designed in such a
way that the right information is
communicated to the right person at
the right time. Reports can be daily,
weekly, monthly, or quarterly,
depending upon the needs of the user.
An important element in the
communication process is the
accountants ability and responsibility
to interpret the reported information.
This is done by analyzing and
explaining the meaning, uses and
limitations of reported data with the
help of the ratios, percentages etc.
ACCOUNTANCY 4
1.1.3 Organization
It is an entity performing business
activities which can be for a profit or
not-for-profit motive. The activities can
be organized by choosing appropriate
form of organization to suit the level
of business operations. It can either
be sole-tradership, partnership,
company, cooperative society or board
such as Cantonment board, Municipal
board, Cricket board.
1.1.4 Interested Users of
Information
Different categories of users need
different kinds of information for
making decisions. The users can be
divided into two broad groups: internal
users, external users.
Internal users are the persons who
manage the business, i.e. manage-
ment at the top, middle, and lower
levels. Their requirement of
information is different because they
make different types of decisions. The
top level is more concerned with
strategic planning; the middle level is
concerned equally with operational
planning and control; and the lower
level is considered more with
execution and controlling operations.
Information is supplied on different
aspects, e.g. cash resources, sale
estimates, result of operations,
financial position, sources and
application of funds (figure 1.1).
External users are the persons other
than internal users (officers and staff
concerned with decision-making in a
business organization) come in the
group of external users. External
users can be divided into two groups:
(a) those having direct interest; and
(b) those having indirect interest in a
business organization. The main
sources of information for external
users are annual, half-yearly, and
quarterly reports of business
organizations. These reports state the
financial position and performance,
and give the auditors reports,
directors report and other infor-
mation. Half-yearly and quarterly
financial reports are unaudited.
Besides these reports, the external
users can access the websites of
companies and stock exchanges to
obtain updated performance reports
and current decisions of the board
directors.
External users having direct
financial interest: Investors and
creditors-present and potential-
are the external users having
direct interest. Investors
(owners), on the basis of
quantities of information, decide
about buying, holding or selling
investments in a business
entity. Creditors (banks,
financial institutions, debenture
holders and other lenders),
evaluate the risk of granting
credit or lending money to a
particular business
organization on the basis of
accounting and other
information obtained about that
Accounting process and its users
Identification
of
Economic events
(transactions)
Measurement
(quantity)
Rs. and paise
Recording
(record, classify, and
summarize)
Communication
(Prepare (Analyze and
Accounting Interpret)
Reports) External users
Internal users
Management at Direct Interest Indirect interest
all levels
Office and Present and Potential Regulatory Agencies
other staff Investors Tax Authorities
Customers Customers
Labour Unions
Trade Associations
Stock Exchanges
Public
Fig. 1.1: Accounting Process and Users of Accounting Information
ACCOUNTANCY 6
organization.
External users having indirect
financial and non-financial
interest: Tax authorities,
regulatory agencies (such as
Department of company affairs,
Registrar of joint stock
companies, Securities
Exchange Board of India),
customers, labour unions, trade
associa-tions, stock exchanges
and others are indirectly
interested in the companys
financial strength, its ability to
meet short-term and long-term
obligations, its future earning
power, etc. for making various
decisions.
1.2 Types of Accounting
Information
Since times immemorial, accounting
has been the primary source of
generating information about the day
to day working and future planning of
the organization. The accountant has
performed this role. Much of the
recording function in today s
organization is computerized. This has
been possible due to the advances in
the field of information technology,
which has made accounting activities
possible just in time.
From the definition of accounting,
it is clear that the social role of
accountant is that of information
scientist. Insofar as business entities
are concerned, a distinction is
normally made between financial
accounting and management
accounting. Financial accounting
deals with recording and analysis of
financial results of transactions as a
means of arriving at a measure of
organizations success and financial
soundness. Financial accounting
information relates to the past period
and is essentially monetary in nature.
However, its decision-usefulness is
limited. Management accounting is
concerned with the activity of
providing information (financial and
non-financial) to enable management
to take decisions about operations of
business. Management accounting
draws all financial information
from financial accounting. Besides,
it develops other information
(quantitative and qualitative, financial
and non-financial), which is futuristic
in character and relevant for decision-
making in the organization. Thus, it
includes estimates, forecasts of sales,
cash flows, purchase requirements,
manpower needs, pollution data,
health and safety data about
employees, product and plants.
Further, financial accounting
information serves the stewardship
function while management
accounting aids in internal decision-
making by management. Therefore,
financial accounting is a sub-system
of accounting information system
(AIS), which in turn is part of
management information system
Information
Consists of
Non-quantitative Information
Quantitative
Information
Consists of
Accounting Non-Accounting
Information Information
Consists of
Operating Financial Management
Information Reporting Accounting
Fig. 1.2: Types of Accounting Information

(MIS).
Stewardship
A person who manages property or
financial affair of other person(s) is
called steward. When such a person
presents his account to another
whose property or financial affairs
he manages is called stewardship
accountability. The profit and loss
account and balance sheet are part
of stewardship reporting by
managers (Board of directors) to the
shareholders and creditors.
Box 1.1
Information is the processed data,
fact or any observation that adds to
the knowledge. A singular datum such
as 1000 is no information, but 1000
units of finished goods is information
because it indicates the position of
stock at hand. We can summarize the
information as follows (figure 1.2)
1.3 Accounting as an Information
System
Earlier, the accounting work was

ACCOUNTANCY 8
entirely manual and accounting
department used to take excessively
long time in processing the
transactions and generating the
accounting reports. The modern
technology has enabled the accounting
department in: (i) eliminating the
redundancy, (ii) reducing the number
of people involved in processing of
transaction by removing the
unnecessary control points, and (iii)
automated posting of transaction from
electronic voucher to ledger, preparing
the trial balance, profit and loss
account and balance sheet. The
accounting information system is
divided into following sub-systems
( figure 1.3 and figure 1.4)
1.3.1 Cash sub-system
It deals with the receipt and payment
of cash both physical cash and
electronic fund transfer. Electronic
fund transfer takes place without
having the physical cash entry or exit
by using the credit cards or electronic
banking.
1.3.2 Sales and accounts
receivable sub-system
It deals with recording of sales,
maintaining of sales ledger and
receivables. It generates periodic
reports about sales, collections made,
overdue accounts and receivables
positions as also ageing schedule of
receivables/debtors.
1.3.3 Inventory sub-system
It deals with the recording of different
items purchased and issued
specifying the price, quantity and date.
It generates the inventory positions
and valuations reports.
1.3.4 Accounts payable sub-system
It deals with the purchase and
payments to creditors. It provides for
ordering of goods, sorting of purchase
Personnel
Fig. 1.3 : Interaction of Accounting Information System
Research and
Development
Accounting
Marketing
Administration
Budget
Inventory
Control
Production
Engineering
Fig. 1.4 : Accounting Information System
expenses and payment to creditors. It
also generates periodic reports about
the performance of suppliers,
payments schedule and position of
creditors.
1.3.5 Payroll accounting sub-system
It deals with payment of wages and
salary to employees. A typical wage
report details information about basic
pay, dearness pay, dearness allo-
wance, other allowances and bonus
and deductions from salary and wages
on account of provident fund, loans,
advances, taxes and other charges.
The system generates reports about
wage bill, overtime payment and
payment on account of leave
encashment, etc.
1.3.6 Fixed assets accounting
sub-system
It deals with the recording of purchase,
addition, deletion, usage of fixed assets
such as land and building, machinery
and equipment, etc. It also generates
reports about the cost, depreciation
book value of different assets.
1.3.7 Costing sub-system
It deals with the ascertainment of cost
of goods produced. It has linkages with
other accounting sub-systems for
obtaining the necessary information
about cost of material, labour and
other expenses. This system generates
information about the changes in the
cost that take place during the period
under review.
1.3.8 Budget sub-system
It deals with the preparation of budget
for the coming financial year as well
as comparison with the current budget
of the actual performances.
The foregoing discussion brings
ACCOUNTANCY 10
out clearly that systems perspective
enables one to see that accounting is
one sub-system interacting with the
whole organization. The different sub-
systems of an organizational entity
could be operating system, financial
system, accounting system, personnel
system and marketing system.
Accounting as an integral part of
management information system,
interacts not only with all these
internal sub-systems but also with the
external environment having
government, lenders, consumers and
other sub-systems of socio-economic
environment. This manner of viewing
the organization makes accounting
system most important for the
following reasons:
The accounting information
system is the only one, which
enables management and
external information users to
get a picture of the whole
organization.
Accounting information system
links other important informa-
tion systems such as marketing,
personnel, research and
development and production in
such a manner that the
information of other sub-system
is ultimately expressed in
financial terms to facilitate
financial planning.
Non-financial information in
such areas as social respon-
sibility and human resource are
integrated with accounting
information so as to permit
corporate decision-making.
The integration of accounting
with other sub-systems leads to
greater accuracy and higher
speed in the delivery of
information to the users.
1.4 Qualitative Characteristics of
Accounting Information System
The objective of accounting is to
provide information about the
financial position, performance and
changes in financial position of an
enterprise that is useful to wide range
of users in making economic decisions.
To be useful the accounting
information must possess the
characteristic of reliability, relevance,
understand-ability and comparability.
1.4.1 Reliability
Information is said to be reliable if it
is free from error and bias and
faithfully represents what it seeks to
represent. Information must be
believed and depended upon by the
users for a given purpose. To ensure
that i nformati on i s rel i abl e, i t
must be verifiable, neutral and
faithful in representing the economic
condition.
1.4.2 Relevance
Information is said to be relevant if it
influences the decisions. To be
relevant, information must be
available in time, must help in
prediction, and help in feedback.
1.4.3 Understandability
The accounting information must
possess the quality of economic
significance to the user, i.e. to
understand the content and signifi-
cance of financial statements and
reports. The qualities that distinguish
between good and bad communication
in a message are fundamental to the
understandability of the message. A
message is said to be communicated
when it is interpreted by the receiver
of the message in the same sense in
which the sender has sent.
1.4.4 Comparability
The quality of information that enables
users to identify changes in the economic
phenomena over a period of time,
between two or more entities. Accounting
reports should be comparable across the
firms to identify similarities and
differences. To be comparable,
accounting reports must belong to a
period, use common unit of measure-
ment and common format of reporting.
1.5 Difference between Book
Keeping and Accounting
Book keeping usually involves only the
recording of business transactions
(transactions) and is therefore, just
one part of the accounting process.
Accounting on the other hand, involves
the entire accounting process, i.e.
identification, measurement, recor-
ding, and communication. Now-a-
days, much of the book keeping
function is performed by the computer
and other machines.
1.6 Objectives of Accounting
The basic objective of accounting is to
provide information to the interested
users to enable them to make business
decisions. The necessary information,
particularly in the case of external
users, is provided in the basic financial
statements: Profit and loss statement
and Balance sheet
Besides the above sources of
information, the internal users,
officers and staff of the enterprise, can
obtain additional information from the
records of business. Thus the primary
objectives of accounting can be stated
as :
Maintenance of Records of
Business transactions.
Calculation of Profit or Loss
Depiction of Financial Position.
Provide Information to the Users
1.6.1 Maintenance of Records of
Business
First record, then pay; if there is an
error, trace i t from the records.
Human memory is short. Even the
most brilliant executive or manager
cannot accurately remember what
he might have observed regarding
the daily operations. He need not
strain his memory unnecessarily, if
proper and complete records of all
busi ness transacti ons are kept
regularly. More-over, records can be
used by di f f er ent of f i ci al s f or
di f f erent deci si on-maki ng
purposes.
1.6.2 Calculation of Profit or Loss
Earning profit is the main purpose for
which a business is carried on. This
information is available from the profit
and loss statement. Profit is calculated
by deducting expenses from the
ACCOUNTANCY 12
associated revenues. Profit is a
measure of the performance of the
enterprise.
1.6.3 Depiction of Financial
Position
A balance sheet depicts the financial
position of an enterprise. It is a
statement of assets and liabilities. It
shows the resources(assets) owned by
an enterprise and depicts the claims
(liabilities) against the resources. The
balance of assets minus the external
liabilities shows the capital (owners
equity).
1.6.4 Provide Information to the
Users
Generation of information is not an
end in itself. It is a means to facilitate
the dissemination of information
among dif ferent user groups.
Therefore, communication of infor-
mation is the essential function of
accounting. Accounting information is
communicated in the form of reports,
statements, graphs and charts to the
internal and external users who need
it in different decision situations.
Internal users: The officers and staff
of an enterprise need useful and timely
information for making different types
of business decisions. A major
objective of accounting is to provide
management with relevant and reliable
information. For example, some of the
questions a manager might ask are:
How much profit did the
company make during the last
accounting period?
Is the return to share holders
adequate? How can it be
improved?
Does the company have enough
cash on hands to pay debts
when they fall due? What are
the projected cash needs in the
next quarter?
Which are the most profitable
products?
What is the cost of manufac-
turing each product?
Which costs exceed the budget?
How much money should
be borrowed to expand the
business?
External users: The outside users have
limited authority, ability or resources
to obtain information. Unlike internal
users, they have to rely on financial
statements (Balance sheet, Profit and
Loss statement) as their principal
source of information about an
enterprise s economic activity.
Primarily the external users are
interested in the following:
The amount and the time when
they are likely to receive cash
in the future from dividend,
interest etc.
Reliable information about
economic resources (assets) and
obligations (liabilities) of a
business enterprise in order to
evaluate its strengths and
weaknesses, and its financial
position in general.
Information about the perfor-
mance and the earning power
of the business enterprise.
Any other information relevant
to the users needs.
1.7 Role of Accounting
Accounting is not an end in itself; it is
a means to an end. It performs the
service activity by providing
quantitative financial information that
helps the users in making better
business decisions. Accounting also
describes and analyses the mass of
data of an enterprise through
measurement, classification, and
summarization, and reduces that data
into reports and statements, which
show the financial condition and
results of operations of that enterprise.
Accounting as an information system
collects, processes and communicates
information about an enterprise to a
wide variety of interested parties.
1.8 Limitations of Accounting
Accounting records relate to the past
transactions, which provide fairly good
account of the economic activity of the
business enterprise. However, from
decision-making viewpoint we need
information, which relates not only to
past but also about present and
future. Financial accounting makes
provision for financial information but
it does not provide non-financial
information such as behavioural and
socio-economic. If the objective of
accounting reports is to influence the
behaviour through decision-making
then it must provide the data
concerning the behaviour and
outcome of human activity to facilitate
performance evaluation. Therefore, the
accounting information does not fully
meet different types of information-
requirements of varied decision
making situations. Accounting
provides stewardship information and
not decisional information.
1.9 Basic Terms in Accounting
1.9.1 Financial Statements
There are two basic financial
statements which are prepared by an
enterprise: (1) Profit & Loss Statement,
and (2) Balance Sheet.
1.9.2 Accounting Equation
The three components of a balance
sheet can be stated in the form of
following basic accounting equation
Assets = Liabilities + Capital (owners
equity)
Rs.50,000=Rs.10,000+Rs.40,000
This equation tells at a glance that
the resources of this enterprise total
Rs. 50,000 and these assets are
financed by two sources Rs.10,000
by the creditors(liabilities), also known
as outsiders claims, and Rs.40,000 by
the owner (capital), also known as
owner equity.
1.9.3 Business Transactions
It is an economic event that relates to
a business entity. It can be a purchase
of goods, collection of money, payment
to creditors for goods and expenses.
An event to be a transaction must
possess the quality of economic
substance, relate to business and
affect the economic results. In other
words, an event must be capable of
ACCOUNTANCY 14
being measured in monetary terms
and related to business enterprise in
terms of economic consequence.
1.9.4 Assets
These are economic resources of an
enterprise that can be usefully
expressed in monetary terms. Assets
are things of value used by the
business in its operations. For
example, Departmental Store owns a
fleet of trucks, which is used by it for
delivering food stuff; the trucks, thus,
provides economic benefits to the
enterprise. This item will be shown of
the asset side of the balance sheet of
Departmental Store. Assets can be
broadly classified into two types : Fixed
Assets and Current Assets.
Fixed Assets are assets held on
a long term basis, such as land,
buildings, machinery, plant,
furniture and fixtures. These
assets are used for doing
business and not for re-sale in
normal course of operation.
Current Assets are assets held
on a short term basis such as
debtors (account receivable),
bills receivable (notes receivable),
stock (inventory),temporary
investment in securities, cash
and bank balances. Normally
the short term refers to an
accounting year.
1.9.5 Liabilities
These are the obligations or debts that
the enterprise must pay in money or
services at sometime in the future.
They, therefore, represent creditors,
claims against assets of the firms. Both
small and big businesses find it
necessary to borrow money at some
time or the other, and to purchase
goods on credit. Super Bazaar, for
example, purchases goods for
Rs.10,000 on credit for a month from
Fast Foods Products Company on 25
December 2001. If the balance sheet
of Departmental stores is prepared as
at 31 December 2001, Fast Food
Products Company will be shown as
creditors (accounts payable) on the
liabilities side of the balance sheet. If
the departmental store also takes a
loan for a period of three years from
Delhi State Cooperative Bank Ltd., this
will be shown as a liability in the
balance sheet of the Departmental
Stores.
Long term liabilities are those
that are usually payable after a
period of one year, for example,
a term loan from financial
institution or debentures
(bonds) issued by the company.
Short term liabilities are
obligations that are payable
within a period of one year,
for example, creditors (accounts
payable), bills payable (notes
payable), cash credit overdraft
from a bank for a short period.
1.9.6 Capital
Investment by the owners for the use
in the firm is known as capital. From
the accounting equation given earlier,
it can easily be found that the capital
is Rs.40,000. Owners equity is the
ownership claim on total assets. It is
equal to total assets minus total
external liabilities: E=A-L This is also
called residual interest. Owners equity
is equal to capital.
1.9.7 Sales
Sales are total revenues from goods
sold and/or services sold or provided
to customers. Sales may be cash sales
or credit sales.
1.9.8 Revenues
These are the amounts the business
earns by selling it products or
providing services to customers. These
are called sales revenues. Other items
and sources of revenues common to
many businesses are: sales, fees,
commission, interest, dividends,
royalties, rent received, etc.
1.9.9 Expenses
These are costs incurred by a business
in the process of earning revenues.
Generally, expenses are measured by
the cost of assets consumed or services
used during an accounting period. The
usual items of expenses are: depre-
ciation, rent, wages, salary, interest,
costs of heat, light and water,
telephone, etc.
1.9.10 Expenditure
Expenditure is the amount of
resources consumed. Usually, it is of
long term in nature. Therefore, its
benefit is to be derived in future. For
example, capital expenditure.
1.9.11 Loss
Loss is the gross decreases in the
assets or gross increases in the
liabilities. It is the excess of expenses
over revenues. It represents reduction
in owners equity due to inability of the
firm to recover the assets used in the
business. For example, a firm spends
Rs. 70,000 and generates a revenue
of Rs. 60,000, there is a loss of Rs.
10,000 which represents non-recovery
of assets consumed in doing business.
1.9.12 Income
Income is the increase in the net worth
of the organization either from
business activity or other activities.
Income is a comprehensive term,
which includes profit also. In
accounting income is the positive
change in the wealth of the firm over a
period of time.
1.9.13 Profit
Profit is the excess of revenues over
expenses during an accounting year.
It increases the owners equity.
1.9.14 Gains
Gain is the change in the equity (net
worth) arising from change in the form
and place of goods and holding of assets
over a period of time whether realized or
unrealized. It may either be of capital
nature or revenue nature or both.
1.9.15 Drawings
It is the amount of cash or other assets
withdrawn by the owner for his
personal use.
ACCOUNTANCY 16
1.9.16 Purchases
Purchases are total amounts of goods
procured by a business on credit and
for cash, for use or sale. In a trading
concern, purchases are made of
merchandise for resale with or without
processing. In a manufacturing
concern, raw materials are purchased,
processed further into finished goods
and then sold. Purchases may be cash
purchases or credit purchases.
1.9.17 Stock
Stock (inventory) is a measure of
something on hand-goods, spares and
other items-in a business. It is called
stock on hand.
In a trading concern, the stock on
hand is the amount of goods which
have not been sold on the date on which
the balance sheet is prepared. This is
also called closing stock (ending
inventory). In a manufacturing
company, closing stock comprises raw
materials, semi-finished goods and
finished goods on hand on the closing
date.
Similarly, opening stock
(beginning inventory) is the amount
of stock at the beginning of the
accounting year.
1.9.18 Debtors/ Accounts Receivable
Debtors (accounts receivable) are
persons and/or other entities who owe
to an enterprise an amount for
receiving goods and services on the
credit. The total amount due from such
persons and/or entities on the closing
date is shown in the balance sheet
as the sundry debtors (account
receivables) on the asset side.
1.9.19 Creditors/ Accounts Payable
Creditors (accounts payable) are
persons and/or other entities who have
to be paid by an enterprise an amount
for providing the enterprise goods and/
or services on credit. The total amount
standing due to such persons and/or
entities on the closing date, is shown
on the balance sheet as sundry creditors
(accounts payable) on the liability side.
SUMMARY WITH REFERENCE TO LEARNING OBJECTIVES
1. Meaning of accounting as an information system
Accounting as an information system is the process of identifying, measuring,
recording and communicating the economic events of the organization to interested
users of the information.
2. Users of accounting information
Accounting plays a significant role in society by providing information to
management at all levels and to those having direct financial interest in the
enterprise, such as present and potential investors and creditors. Accounting
information is also important to external users such as regulatory agencies, tax
authorities, customers, labour unions, trade associations, stock exchanges and
others.
3. Difference between book keeping and accounting
Book keeping involves only the recording of business transactions, while accounting
involves identifying, measuring, recording, processing and communication of
financial information.
4. Objectives of accounting
The primary objective of accounting is to:
maintain records of business;
calculate profit or loss;
depict the financial position; and
make information available to various groups and users.
5. Role of accounting
Accounting is not an end in itself. It is a means to an end. It plays the role of:
providing service to the users;
describing, analyzing and reducing a mass of data into reports statement that
show the finan-cial status and performance results of an enterprise; and
an accounting information system.
6. Basic terms in accounting
Assets are the economic resources of an enterprise that can be expressed
in monetary terms.
Liabilities are obligations or debts that an enterprise must pay in money or
services at sometime in the future.
Capital is investment by the owners for use in the firm. It is equal to total
assets minus total liabilities.
Revenues are the amount a business earns by selling its products or
providing services to the customers.
Expenses are the costs incurred by a business in the process of earning
revenue.
Purchases are the total amount of goods procured by business on credit
and for cash, for use, or sale.
Sales are total revenues from goods sold and/or services provided to
customers.
Stock is the measure of something on hand-goods, spares and other items
in a business.
Debtors (account receivables) are persons or entities who owe to an enterprise
an amount for receiving goods and services on credit.
Creditors (accounts payables) are persons or entities who have to be paid by
an enterprise an amount for providing the enterprise goods and services on
credit.
ACCOUNTANCY 18
EXERCISES
Objective Type Questions
1. Determine whether the following are assets, liabilities, revenue, or expenses
or none of them:
(i) Sales
(ii) Debtors (accounts receivable)
(iii) Creditors (accounts payable)
(iv) Salary paid to manager
2. Which of the following statements is not an objective of accounting?
(i) To provide information about the enterprises assets, liabilities and
capital.
(ii) To provide information on the personal assets and liabilities of the
owner of enterprise.
(iii) To maintain records of business.
(iv) To provide information about the performance of the enterprise.
3. The information provided in the annual financial statement of an enterprise
pertains to :
(i) Individual business enterprise
(ii) Business industries
(iii) The economy as whole
(iv) None of the above
4. Do the following events represent business transactions? (State True or False)
(i) An employee dismissed from the job.
(ii) The owner of the business withdraws cash from the business for his
personal use Rs. 500.
(iii) Goods are purchased on credit Rs. 1,000 from Y.
(iv) A perspective employee is interviewed.
(v) Goods ordered for delivery next month.
(vi) The owner of the firm dies.
(vii) Land is purchased for cash Rs. 5,00,000.
Short Answer Questions
5. Explain the meaning of accounting?
6. Distinguish between book keeping and accounting?
7. List the main objectives of accounting.
8. What is primary reason for the business students and others to familiarize
themselves with the accounting discipline?
9. Which decision makers use accounting information?
10. What information do the users need?
11. Define assets, liabilities and capital?
12. How will you define revenues and expenses?
13. Describe the role of accounting?
14. What accounting information system will be needed by the following:
(i) A newspaper vendor.
(ii) A newspaper distributor.
(iii) A newspaper publisher.
Essay Type Questions
15. Define accounting and explain its features.
16. What is accounting information system? What are the qualitative
characteristics of accounting information?
17. Explain the objectives of accounting? What are the limitations of accounting
information?
18. Explain the sub-systems of the accounting information system?
19. Distinguish between the scope and objectives of the following accounting
information sub-systems?
(i) Financial accounting information sub-system.
(ii) Managerial accounting information sub-system.
20. Explain the following sub-systems of an accounting information system:
(i) Budget sub-system.
(ii) Payables and Receivables sub-system.
Check-list of Key Letters/Words
1. (i) Revenue
(ii) Debtors
(iii) Liability
(iv) Expenses
2. (ii)
3. (i)
4. (i) No
(ii) Yes
(iii) Yes
(iv) No
(v) No
(vi) No
(vii) Yes
42 ACCOUNTANCY
CHAPTER 3
Origin and Recording of Transaction
LEARNING OBJECTIVES
state and explain the meaning of source documents;
apply the accounting equation to explain the effect of
transactions;
record the transactions using rules of debit and credit;
explain the double entry book keeping system;
explain the journal and record the transactions;
appreciate the need for special purpose books and record
the transactions therein;
explain ledger and post the journal entries to ledger
accounts, and balance it;
explain the meaning and need of bank reconciliation and
prepare it;
ascertain the correct bank balance.
43 ORIGIN AND RECORDING OF TRANSACTION
Accounting process starts with
identifying the transactions to be
recorded in the books of accounts. In
the earlier chapters, the general
principles involved in the recording
and measurement of accounting
transactions were discussed. In this
chapter, we will discuss the process of
recording the transactions. The first
step involves identifying the
transactions to be recorded and
preparing the source documents. We
will begin with explaining the meaning
of source documents and then the
steps involved in recording the
transactions.
3.1 Source Documents
A document which becomes the basis
for recording a transaction in the books
of accounts is called source document.
Source document provides the
necessary information about the
nature of transaction and the amount
involved. It also acts as a written
documentary evidence of the
transaction that has taken place.
Thus, the correctness of a transaction
recorded can be verified with the help
of a source document. There are
various types of business documents,
like, vouchers, invoices, cash memos,
and bill receipts, etc., which constitute
source documents. There must be a
source document for each entry to be
recorded in the books of accounts.
Even for internal events like
depreciation charged, materials issued
to production department for
manufacturing of finished goods, the
source documents are prepared.
Source document, thus, can be
said to initiate the accounting process.
The transaction is to be recorded in
the books of accounts by looking at the
effect it has on accounting equation.
3.2 Accounting Equation
Accounting equation states the
equality of debits and credits. The left
side of the equation represents Assets
(Debit) and right side represents
Liabilities and Owners Equity (Credit).
The relationship of assets on the left
side and liabilities and owners equity
on the right side in the equation form
is known as Accounting Equation as
given below:
Assets (A) = Liabilities (L) + Owners
Equity (E)
The above equation can be stated
in any of the following forms:
A = L +E
or A - L = E
or A - E = L
or A - L - E = 0
Since the components of balance
sheet are depicted in the accounting
equation, it is also called as Balance
Sheet Equation. The owners equity
represents the amount invested by
owners in the business plus retained
earnings.
Let us take for example, Mr. Jacob
started his business by introducing
Rs.1,00,000 into the business. The
assets purchased are Land Rs. 30,000;
Buildings Rs.20,000, Furniture
Rs.5,000, inventory for Rs.20,000, and
Rs.20,000 are deposited into the bank
44 ACCOUNTANCY
account. Then the accounting equation will represent this situation as below:
Cash + Bank + Land + Buildings + Furniture + Inventory = Owners Equity
5,000 + 20,000 + 30,000 + 20,000 + 5,000 + 20, 000 = 1,00,000
This can be presented in the form of Balance Sheet as below:
Transaction 1:
On 1 April, Mr. Mohan brings Rs. 1,00,000 as his capital. The position as on 1 April will be as under:
Assets = Liabilities + Owners Equity (Capital)
(Rs.) (Rs.) (Rs.)
Cash
1,00,000 = 0 + 1,00,000
Balance Sheet of Mr. Jacob as at _____________
Amount Amount
(Rs.) (Rs.)
Capital (Owners Equity) 1,00,000 Land 30,000
Buildings 20,000
Furniture 5,000
Inventory 20,000
Cash at Bank 20,000
Cash in Hand 5,000

Total: 1,00,000 1,00,000

In the above balance sheet, the total
assets are equal to the capital (amount
invested by the owner). Since, the
business has not yet started its
activities and has not earned any
profits, the equity is still Rs.1,00,000.
In case, any profits are earned, it will
increase owners equity. On the other
hand, if the business suffers any
losses, it will decrease owners equity.
3.3 Analysis of Transactions
An event that affects assets, liabilities
or owners equity is called a transac-
tion. Each transaction is to be recorded
in the books of accounts in chrono-
logical order. We need to analyze each
transaction to ascertain its effect on
dif ferent elements of accounting
equation which will help us to decide
which account is to be debited and
which account is to be credited.
The transaction analysis, as
explained above, reveals the effect on
assets, liabilities, and owners equity.
After each transactions effect is taken
into consideration, the equation still
remains balanced i.e., A = L + E.
We will analyze some transactions
and its effect on different elements and
will observe that the accounting
equation always remain balanced.
Transaction 2:
On 2 April, Mr. Mohan purchased land for Rs. 35,000 for cash.
Assets = Liabilities + Owners Equity
Cash + Land = Liabilities + (Capital)
Rs. Rs. Rs. Rs.
Old Bal. 1,00,000 + 0 = 0 + 1,00,000
Effect of
Transaction 2 -35,000 + 35,000
New Balance 65,000 + 35,000 = 0 + 1,00,000
Transaction 3:
On 30 April paid Rs. 23,000 on completion of building constructed by contractor
Cash + Land + Building = Liabilities + (Capital)
Rs. Rs. Rs. Rs. Rs.
Old Balance 65,000 + 35,000 = 0 + 1,00,000
Effect of
Transaction 3 -23,000 + 23,000
New Balance 42,000 + 35,000 + 23,000 = 0 + 1,00,000
Transaction 4:
On 3 May purchased furniture for Rs. 4,000
Cash + Land + Building + Furniture = Liabilities +(Capital)
Rs. Rs. Rs. Rs. Rs. Rs.
Old Balance 42,000 35,000 23,000 0 1,00,000
Effect of
Transaction 4 - 4,000 + 4,000
New Balance 38,000 + 35,000 + 23,000 + 4,000 = 0 + 1,00,000
Transaction 5:
On 8 May purchased stock for Rs. 18,000 for cash
Cash + Land + Building + Furniture + Inventory = Liabilities + Capital
Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Old Balance 38,000 35,000 23,000 4,000 = + 1,00,000
Effect of
Transaction 5 -18,000 + 18,000
New Balance 20,000 + 35,000 + 23,000 + 4,000 + 18,000 = 0 + 1,00,000
46 ACCOUNTANCY
Transaction 6:
On 10 May Deposited Rs. 15,000 in bank account opened in the name of business.
Cash + Land + Building + Furni- + Inven- + Bank = Liabi- + Capital
ture tory lities
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Old 20,000 35,000 + 23,000 + 4,000 + 18,000 = 0 + 1,00,000
Balance
Effect of - 15,000 + 15,000 =
Transac-
tion 6
New
Balance 5,000 + 35,000 + 23,000 + 4,000 +18,000 + 15,000 = 0 + 1,00,000
Transaction 7:
On 11 May purchased goods on credit for Rs. 3,000 from Bright & Co.
Owners
Equity
Cash + Land + Building +Furniture +Inventory + Bank = Creditors + (Capital)
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Old Bal. 5,000 + 35,000 + 23,000 + 4,000 + 18,000 + 15,000 = 0 + 1,00,000
Effect of
Transac + 3,000 = 3,000
tion 7
New
Balance 5,000 + 35,000 + 23,000 + 4,000 +21,000 + 15,000 = 3,000 + 1,00,000
Summary of effect of transactions on assets, liability and equity of Mohan Enterprises
Assets = Liabilities + Owners
(Rs.) (Rs.) Equity
(Rs.)
Transac- Cash + Land + Building + Furniture + Inven- + Bank = Creditors + Capital
tion No. tory
1 1,00,000 0 1,00,000
2 - 35,000 + 35,000
3 - 23,000 + 23,000
4 - 4,000 + 4,000
5 - 18,000 + 18,000
6 - 15,000 + 15,000
7 + 3,000 + 3,000
Balance 5,000 + 35,000 + 23,000 + 4,000 + 21,000 + 15,000 = 3,000 + 1,00,000
Illustration 1 Given below are the transactions and their effect on the accounting equation
of M/s Fair Traders for the month of April 2001.
Solution
Transaction 1:
On 1 April Mr. Gaurav starts his business under the name Fair Traders and invests
Rs.4,00,000 as his capital. This transaction increases cash (assets) and Gauravs capital
(owners equity) by Rs. 4,00,000.
The position as on 1 April will be as under:
Assets = Liabilities + Owners
(Rs.) (Rs.) Equity
(Rs.)
Cash Capital
Effect of Tr. 1 4,00,000 4,00,000
Transaction 2:
On 2 April bank account was opened and Rs. 3,00,000 were deposited in it.
This Transaction increases Bank (assets) and decreases cash (assets) by Rs. 3,00,000
Cash + Bank = Liabilities + Owners Equity
Rs. Rs. Rs. Rs. (Capital)
Old 4,00,000 0 4,00,000
Balance
Effect of Tr.
2 3,00,000 + 3,00,000 =
New
Balance 1,00,000 + 3,00,000 = 0 + 4,00,000
Transaction 3:
On 5 April Purchased furniture for Rs. 48,000 payment made by cheque. This transaction increases
furniture (assets) and decreases cash (assets) by Rs. 48,000.
Cash + Bank + Furniture = Liabilities + Owners Equity
Rs. Rs. Rs. Rs. Rs. (Capital)
Old Balance 1,00,000 + 3,00,000 4,00,000
Effect of Tr.
3 48,000 + 48,000 =
New Balance 1,00,000 + 2,52,000 + 48,000 = 0 + 4,00,000
Transaction 4:
On 7 April purchased goods costing Rs. 76,000 payment made through bank.
This transaction increases inventory (assets) and decreases cash at bank (assets) by Rs. 76,000.
Cash + Bank + Furniture + Inventory = Liabilities + Owners
Rs. Rs. Rs. Rs. = Rs. Equity (Capital) Rs.
Old Balance 1,00,000 + 2,52,000 + 48,000 + = + 4,00,000
Effect of Tr. 4 76,000 + 76,000 =
New Balance 1,00,000 + 1,76,000 + 48,000 + 76,000 = 0 + 4,00,000
48 ACCOUNTANCY
Transaction 5:
On 10 April purchased goods for Rs. 56,000 on credit from Honest Traders.
This transaction increases inventory (assets) and creditors (liabilities) by Rs. 56,000.
Cash + Bank + Furniture + Inventory = Liabilities + Owners
Rs. Rs. Rs. Rs. Rs. Equity (Capital) Rs.
Old Balance 1,00,000 + 1,76,000 + 48,000 + 76,000 = 0 4,00,000
Effect of Tr. 5 + 56,000 = 56,000 +
New Balance 1,00,000 + 1,76,000 + 48,000 + 1,32,000 = 56,000 + 4,00,000
Transaction 6:
On 12 April sold goods for Rs. 18,000 (costing Rs. 14,200) to Mr. Hira Lal on credit.
This transaction increases debtors (assets) by Rs. 18,000, inventory (assets) by Rs. 14,200 and increases
profit (owners, equity) by Rs. 3,800.
Cash + Bank +Furniture + Inventory + Debtors = Creditors + Owners
Rs. Rs. Rs. Rs. Rs. Rs. Equity (Capital) Rs.
Old 1,00,000 +1,76,000 + 48,000 + 1,32,000 + = 56,000 + 4,00,000
Balance
Effect of Tr. 6 14,200 + 18,000 = + 3,800
New
Balance 1,00,000 +1,76,000 + 48,000 +1,17,800 + 18,000 = 56,000 + 4,03,800
Transaction 7:
On 14 April paid M/S Honest Traders Rs. 36,000 on his account by cheque on 14 April.
This transaction decrease cash at Bank (assets) and creditor (liabilities) by Rs. 36,000.
Old Balance 1,00,000 + 1,76,000 + 48,000 + 1,17,800 + 18,000 = 56,000 + 4,03,800
Effect of 36,000 + = 36,000 +
Tr. 7
New
Balance 1,00,000 +1,40,000 + 48,000 +1,17,800 + 18,000 = 20,000 + 4,03,800
Transaction 8:
On 18 April Goods sold for Rs. 23,800 (costing Rs. 19,000) on cash on 18 April.
This transaction increases cash (assets) by Rs. 23,800, decreases inventory (assets) by Rs. 19,000 and
increases profit (owners equity) by Rs. 4,800.
Old 1,00,000 +1,40,000 + 48,000 + 1,17,800 + 18,000 = 20,000 + 4,03,800
Balance
Effect of + 23,800 19,000 4,800
Tr. 8
New
Balance 1,23,800 +1,40,000 + 48,000 + 98,800 + 18,000 = 20,000 + 4,08,600
Transaction 9:
On 21 April received cheque for Rs. 18,000 from Mr. Hira Lal.
This transaction increases cash at bank (asset) by Rs. 18,000 and decreases another asset (amount due
from customer, debtor) by Rs. 18,000
Old 1,23,800 + 1,40,000 + 48,000 + 98,800 + 18,000 = 20,000 + 4,08,600
Balance
Effect of 18,000 18,000
Tr. 9
New
Balance 1,23,800 +1,58,000 = 48,000 = 98,800 + 0 = 20,000 + 4,08,600
Transaction 10:
On 27 April paid the balance amount in cash to M/s Honest Traders.
This transaction reduces cash (assets) by Rs. 20,000 and liabilities (amount due to supplier, credit) by
Rs. 20,000.
Cash + Bank + Furniture + Inventory + Debtors = Creditors + Owners
Old 1,23,800 + 1,58,000 + 48,000 + 98,800 + 0 = 20,000 + 4,08,600
Balance
Effect of 20,000 = 20,000
Tr. 10
New
Balance 1,03,800 +1,58,000 + 48,000 + 98,800 + 0 = 0 + 4,08,600
Illustration 2
Show the impact of following transactions on the accounting equation and check whether the equation
remains balanced or not:
1. Umesh commences business with Rs. 1,00,000.
2. Purchased land for Rs. 24,000.
3. Constructed building at a cost of Rs. 25,000 paid in cash.
4. Purchased furniture for Rs. 5,000.
5. Purchased goods for Rs. 8,000 on cash.
6. Purchased goods for Rs. 13,000 on credit from M/s Prem Traders.
7. Sold goods for cash Rs. 18,000 costing Rs. 12,600.
50 ACCOUNTANCY
8. Paid salary Rs. 2,000 to Salesman.
9. Paid Rs. 7,000 to M/s Prem Traders on account.
10. Paid Insurance premium on buildings Rs. 500.
Solution:
Summary of Effects of Transactions on Accounting Equation:
Transa- Cash + Land + Building + Furniture + Inventory + Debtors = Creditors + Owners
ction No. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Equity Rs.
(Current 1,00,000 1,00,000
Position)
2 - 24,000 + 24,000
New Bal. 76,000 24,000 = 1,00,000
3 - 25,000 25,000
New Bal. 51,000 24,000 25,000 = 1,00,000
4 - 5,000 5,000
New Bal. 46,000 24,000 25,000 5,000 = 1,00,000
5 - 8,000 8,000
New Bal. 38,000 24,000 25,000 5,000 8,000 = 1,00,000
6 13,000 13,000
New Bal. 38,000 24,000 25,000 5,000 21,000 = 13,000 1,00,000
7 + 18,000 - 12,600 + 5400
New Bal. 56,000 24,000 25,000 5,000 8,400 = 13,000 1,05,400
8 - 2,000 - 2,000
New Bal. 54,000 24,000 25,000 5,000 8,400 = 13,000 1,03,400
9 - 7,000 - 7,000
New Bal. 47,000 24,000 25,000 5,000 8,400 = 6,000 1,03,400
10 - 500 - 500
New Bal. 46,500 + 24,000 + 25,000 + 5,000 + 8,400 = 6,000 + 1,02,900
account is defined and the rules of debit
and credit are explained in the context
of the accounting equation.
3.4.1 Definition of an Account
To record every transaction, one
account is debited and the other
account is credited. An account is a
formal record of all transactions
relating to changes in a particular item.
Transactions of similar nature are
brought together at one place in an
account which are opened in a book
called ledger.
3.4 Rules of Debit and Credit
The terms, debit and credit, in
accounting indicate whether the
transactions are to be recorded on the
left hand side or right hand side of the
account. Every transaction involves give
and take aspect. The debit represents
take aspect and credit the give aspect
in a transaction. For example, when
furniture is purchased for cash, then
furniture represents take aspect and
cash represents give aspect. Thus,
furniture is debited and cash is
credited. In the following paragraphs,
3.4.2 Rules of Debit and Credit
The basic rule of debit and credit are
as follows:
Any increase on the left hand
side of the equation is a debit.
Any decrease on the left hand
side of the equation is a credit.
Any increase on right hand side
of the equation is a credit.
Any decrease on the right hand
side of the equation is a debit.
As discussed earlier, the profit and
loss will change the owners equity. The
profit or loss represents the net
difference between revenues and
expenses. Therefore, the basic
accounting equation discussed earlier
can be expanded in the following
manner:
Assets = Liabilities + Capital +
Revenues - Expenses
where, Capital + Revenue - Expenses
= Owners Equity
The debit and credit for different
elements of the accounting equation
will represent increase or decrease in
these elements as given below.
Elements of Debit Credit
Accounting Equation
Assets Increase Decrease
Liabilities Decrease Increase
Capital Decrease Increase
Revenues Decrease Increase
Expenses Increase Decrease
It is clear from the table given above
that debit may represent increase in
some elements while decrease in other
elements. Similarly, credit may
represent increase in some elements
while decrease in other elements.
3.5 Double Entry Book Keeping
The recording of transactions
considering the debit and credit aspect
is known as double entry book keeping
system. The different books in which
The effect of these rules on different accounts is shown below:
(1) (2)
Debit Assets Credit Debit Liabilities Credit
Increase (+) Decrease (-) Decrease (-) Increase (+)
(3) (4)
Debit Capital Credit Debit Revenues Credit
Decrease (-) Increase (+) Decrease (-) Increase (+)
(5) (6)
Expenses Owners Equity (3+4+5)
Debit Credit Debit Credit
Increase (+) Decrease (-) Decrease (-) Increase (+)
(Expenses, (Investment
Losses, by Owners,
Distribution Revenues,
to Owners) Gains)
52 ACCOUNTANCY
the transactions are recorded are
discussed below:
3.5.1 Books of Original Entry
The book in which the transaction is
recorded for the first time is called
journal or book of original entry. The
source document, as discussed earlier,
is required to record the transaction
in the journal.
The transactions are recorded in
chronological order in journal and then
need to be posted to ledger. In the
following paragraphs, we will discuss the
process of journalizing and posting the
transactions. There are few types of
transactions which occur repetitively in
the business. For economic reasons,
instead of recording all the transactions
in journal, the similar transactions are
recorded separately in subsidiary books.
The following are the books of original
entry normally used by the enterprises.
journal
cash book
other day books
purchases book
sales book
purchase returns book
sales returns book
bills receivables book
bills payables book
3.5.2 Journal
In this book the transactions are
recorded in the chronological order in
which they take place. Since, the
transactions are recorded first time, it
is called book of original entry. The
process of recording transactions in the
journal is called journalizing. Each
transaction is separately recorded after
determining the particular accounts to
be debited and credited. The first column
in a journal is date column which shows
the date on which the transaction
recorded against it took place. In the
particulars column the account to be
debited is written in the first line starting
from the left hand corner of this column.
In the second line the account to be
credited is written leaving sufficient
margin on the left side. After writing
these two accounts, within the brackets
a brief explanation of the transaction
(also called narration) is given. The
explanation can be in simple words and
there is no need to start the narration
with the word being which was a practice
earlier. The journal provides date wise
complete record of transactions along
with the documentary evidence available
to prove the occurrence of the
transactions. Following is the format of
the journal showing the recording of the
transaction, such as, Rs. 500 paid to
Mr. Ali on 1 April 2001.
JOURNAL
Date Particulars L.F. Debit Credit
Amount (Rs.) Amount (Rs.)
1 April Ali A/c Dr. 500.00
2001
Cash A/c 500.00
(Paid Rs. 500 to Ali)
At the time of the posting to the
ledger, we need to write the Ledger Folio
(in the computerized accounting the
traditional ledger folio is referred to as
Reference Number. Besides each
account has its code number.) in the
ledger where the entry is posted in the
L.F. column. The ledger folio (LF) column
in the manual system of accounting is
filled in at the time of posting of these
transactions in ledger only.
Some examples of journalizing the
transactions are given below:
Illustration 3. Journalize the following
transactions:
Transaction 1: On 1 April 2001 Mr.
Mohan brings Rs.1,00,000
as his capital.
Transaction 2: On 2 April 2001 Mr.
Mohan purchases land
for Rs. 35,000 for cash.
Transaction 3: On 30 April 2001 paid Rs.
23,000 on completion of
buil-ding constructed by
contractor.
Transaction 4: On 3 May 2001 purchased
furniture for Rs. 4,000.
Transaction 5: On 8 May 2001 purchased
stock for Rs.18,000 for
cash.
Transaction 6: On 10 May 2001 Depo-
sited in bank account
opened in the name of
business Rs.15,000.
Transaction 7: Purchased goods on 11
May 2001 from Bright
and Co. on credit for
Rs. 3,000.
Solution JOURNAL
Amount
2001 (Rs.) (Rs.)
1 April Cash A/c Dr. 1,00,000
Mohans Capital A/c 1,00,000
(Mohan invested capital in the firm)
2 Land A/c Dr. 35,000
Cash A/c 35,000
(Land purchased for cash)
30 Buildings A/c Dr. 23,000
Cash A/c 23,000
(Paid to contractor on completion of
construction of building)
3 May Furniture A/c Dr. 4,000
Cash A/c 4,000
(Purchased furniture for cash)
8 Purchases A/c Dr. 18,000
Cash A/c 18,000
(Purchased goods in cash)
Balance c/f 1,80,000 1,80,000
54 ACCOUNTANCY
Illustration 4: Analyze and Record
the Journal entries relating to
transactions given below:
Tr. Date Particulars
No.
1 2002 Mr. Gaurav started
1 April business by investing
Rs.4,00,000.
2 1 April Deposited Rs.3,00,000
in the bank account
opened in the name
of business.
3 3 April Purchased fur -
niture for Rs.48,000,
payment made by
cheque.
4 8 April Purchased goods
costing Rs.76,000
against payment
made by cheque.
5 10 April Purchased goods
from Honest Tra-
ders on account for
Rs. 56,000.
6 12 April Sold goods to M/s
Hira Lal for
Rs. 18,000 (costing
Rs. 14,200) on
account (on credit).
7 15 April Paid to Honest
Traders Rs.36,000
by cheque.
8 18 April Goods sold for
Rs. 23,800 (costing
Rs.19,000) on cash.
9 22 April Received cheque for
Rs.18,000 from
Hira Lal.
10 26 April Paid the balance
amount (Rs.20,000)
to M/s Honest
Traders by cheque.
Solution
Analysis of transactions:
Transaction 1: This transaction
increases cash (asset) and Gauravs
Capital (owners equity) by
Rs. 4,00,000.
i ncreases cash at bank ( asset)
and decreases cash ( asset) by
Rs. 3,00,000
increases furniture (asset) and
decreases cash (asset) by Rs. 48,000.
Total b/f 1,80,000 1,80,000
10 Bank A/c Dr. 15,000
Cash A/c 15,000
(Deposited cash in newly opened
Bank Account)
Bright & Co 3,000
(Purchased goods on credit from
Bright & Co.)
Total 1,98,000 1,98,000
increases inventory (asset) and
decreases cash at bank (asset) by
Rs. 76,000
increases inventory (asset) and
creditors (liabilities) by Rs. 56,000.
increases sales (revenue) by Rs. 18,000
and debtors (asset) by Rs. 18,000. On
further analysis cost of goods sold
(expenses) increases by Rs.14,200,
profit by Rs. 3,800 and debtors (asset)
by Rs. 18,000.
decrease cash at bank (asset) and
creditor (liability) by Rs. 36,000.
increases cash (asset) by Rs. 23,800,
decreases inventory (asset) by
Rs.19,000 and increases profit
(owners equity) by Rs. 4,800.
increases cash at bank (asset) by
Rs.18,000 and decremes Debtors
(asset) by Rs.18,000.
decreases cash at bank (asset) by
Rs. 20,000 and liability (creditors) by
Rs. 20,000.
The transactions are recorded in
journal as under:
JOURNAL
Amount Amount
2000 Rs. Rs.
April 1 Cash A/c Dr. 4,00,000
Gauravs capital A/c 4,00,000
(Gaurav invested capital in the firm)
April 1 Bank A/c Dr. 3,00,000
Cash A/c 3,00,000
(Cash deposited in newly opened
Bank Account)
April 3 Furniture A/c Dr. 48,000
Bank A/c 48,000
(Furniture purchased and payment made
by cheque)
April 8 Inventory A/c
1
Dr. 76,000
Bank A/c 76,000
(Inventory purchased on payment by cheque)
April 10 Inventory A/c Dr. 56,000
Honest Traders A/c 56,000
[Inventory purchased from
M/s Honest Traders on account (credit)]
Total c/f 8,80,000 8,80,000
56 ACCOUNTANCY
Total b/f 8,80,000 8,80,000
April 12 Hira Lal A/c Dr. 18,000
Sales A/c 18,000
[sold goods to Hira Lal on account (credit)]
April 12 Cost of goods sold A/c
2
Dr. 14,200
Inventory A/c 14,200
(cost of goods sold transferred to inventory)
April 15 M/s Honest Traders Dr. 36,000
Bank A/c 36,000
(cheque given to M/s Honest Traders)
April 18 Cash A/c Dr. 23,800
Sales A/c 23,800
(goods sold for cash)
April 18 Cost of goods sold A/c Dr. 19,000
Inventory A/c 19,000
(cost of goods sold transferred to inventory)
April 22 Bank A/c Dr. 18,000
M/S Hira Lal A/c 18,000
(Received cheque from Hira Lal)
April 26 M/S Honest Traders A/c Dr. 20,000
Bank A/c 20,000
(cheque given to M/s Honest Traders)
Total 10,29,000 10,29,000
Note:
1
Inventory purchased may be debited to purchases account also.
2
In real life, we do not ascertain the cost of goods sold, each time a sale is made.
Therefore, we do not need to pass this entry individually each time a sale is made.
3.5.3 Ledger
The ledger is the main book of
accounting system. It contains
different accounts where transactions
relating to that account are recorded.
A ledger is a collection of all the
accounts, debited or credited, in the
general journal and various special
journals. A ledger may be in the form
of a bound register, or cards, or
separate sheets may be maintained in
a loose leaf binder. In the ledger, each
account is opened preferably on a
separate page or card.
Utility
A ledger is very useful and is of
the utmost importance in any
organization. The relationship of
the firm in respect of a
particular account on a given
date can be ascertained only
from the ledger. For example, if
the management wants to know,
on a particular date, the amount
due from a certain customer, or
the amount the firm has to pay
to a particular supplier, such
information can be found only
in the ledger. Such information
is very difficult to ascertain from
journal. Since, in a journal, the
transactions are recorded in
chronological order, it defies
classification. This problem is
obviated by the ledger which
helps the classification of
transactions relating to a
particular account in such a
manner that it helps obtaining
necessary information about the
account which is used for
decision-making. For easy
posting and location, accounts
are opened in the ledger in some
definite order. For example, they
may be opened in the same
order as they appear in the Profit
and Loss Account and Balance
Sheet. In the beginning, an
index is also provided. For easy
identification, in big organi-
zations, each account is also
allotted a code number.
Format
The ledger account is
conventionally in T shape and,
thus, sometimes called T
account. The left side of the T
account is called the debit side
and the right side is called the
credit side. In other words, all
debits will be recorded on the
left side and all credits will be
recorded on the right side. Each
side of the account has four
columns to record necessary
details of each transaction as
shown below:
According to this format the columns
will contain the information as given
below:
Column Information
No.
(1) The date on which a transaction
is recorded.
(2) Particulars relating to a
transaction.
(3) In journal folio column (JF), a
reference is made to the page
number of the book of original
entry.
(4) The amount related to the
transaction is entered in this
column.
An account is debited or credited
according to the rules of debit and
credit already explained in respect of
each category of account.
Dr. Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(1) (2) (3) (4) (1) (2) (3) (4)
(Rs.) (Rs.)
Fig. 3.1 : Format of an Account
58 ACCOUNTANCY
In the particulars column write the
name of the account through which
it has been debited in the journal.
For example, when X pays
Rs. 50,000 in cash as his capital,
cash is debited and Xs capital is
credited in the journal. In the
ledger, cash account will debited
(left hand side) by writing Xs
capital A/c in the particulars
column. This signifies that increase
in capital has resulted by inflow of
cash into the business. In the
similar way, capital account will be
credited (right hand side) by writing
Cash A/c in the particulars
column to signify that cash
contribution has been made to raise
the capital (owners equity)
Enter the page number of the journal
in the J.F. column and write the page
number of the ledger where the entry
is posted in the L.F. column in
journal (you may recall this column
was left blank when entry was
originally recorded in the journal).
Enter the amount in the relevant
amount column (debit or credit).
It may be noted that the same
procedure is follow for entering credit
entries in the ledger. An account is
opened only once in the ledger and the
entries relating to a particular account
are posted on the debit or credit side,
as the case may be.
Illustration 5
Transactions journalized earlier on page
55 (Illustration 4) are posted in the
ledger in various accounts as given
below: (J.F. numbers have been omitted)
3.5.3 Classification of Ledger
Accounts
We have seen earlier that all ledger
accounts are put into five categories,
viz., assets, liabilities, capital, revenues
and expenses. All permanent accounts
are balanced and carried forward to
the next accounting period. The
temporary accounts are closed at the
end of the accounting period by
transfer to the Trading and Profit Loss
Account. All permanent accounts will
appear in the Balance Sheet. Thus, all
assets, liabilities and capital accounts
are permanent accounts and all
revenues and expenses accounts are
temporary accounts. This classifi-
cation is also relevant for preparing
financial statements.
3.6 Posting from Journal
Posting is the process of transferring
entries from books of original entry to
the ledger. In other words, posting
means grouping of all the transactions
in respect to a particular account at
one place for meaningful conclusion
and to further the accounting process.
Posting may be done daily, weekly,
fortnightly or monthly, according to the
convenience and requirements of the
business. The complete process of
posting from the journal to the ledger
has been discussed below:
Locate the account to be debited or
credited in the ledger as entered in
the journal.
If an account is to be debited/
credited, enter the date of the
transaction in the date column on
the debit/credit side.
Solution
BOOKS OF GAURAV
Cash Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
April Gouravs 4,00,000 April 2 Bank 3,00,000
1 Capital
18 Sales 23,800
Bank Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
April 2 Cash 3,00,000 April 1 Furniture 48,000
22 Hira Lal 18,000 8 Inventory 76,000
15 Honest Traders 36,000
26 Honest Traders 20,000
Inventory Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
April 8 Bank 76,000 April Cost of goods 14,200
10 Honest Traders 56,000 12 sold
18 Cost of goods 19,000
sold
Sales Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
April
12 Hira Lal 18,000
18 Cash 23,000
Cost of Goods Sold Account
Dr. Cr.
2002 (Rs.) (Rs.)
April
12 Inventory 19,800
18 Inventory 14,200
60 ACCOUNTANCY
Honest Traders Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
April April
15 Bank 36,000 10 Inventory 56,000
26 Bank 20,000
Hira Lals Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
April April
12 Sales 18,000 22 Bank 18,000
Furniture Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
April
3 Bank 48,000
3.7 Special Purpose Books
The process of recording the
transactions in the journal and then
posting to ledger accounts, as
explained above, requires each and
every transaction to be recorded first
and then posted to ledger accounts. If
we try to analyze the transactions, we
may find that more than 95 per cent
of the transactions relate to cash
(bank), purchase, sales, purchase
returns, sale returns, bills received
and bills accepted. Since these few
types of transactions constitute bulk
of the total transactions, we can save
time and efforts by recording them in
separate books rather than first
recording in the journal and then
individually posting to ledger accounts
each entry separately. The books
maintained to record these
transactions separately are called
special purpose journal or day books.
In the following paragraphs, we will
discuss these special purpose books.
3.7.1 Cash Book
Cash book is used to record those
transactions that involve either receipt
or payment of cash. It serves the
purpose of journal as well as ledger
(cash) account. Since cash book is
considered as book of original entry,
cash transactions are recorded in cash
book and not in the journal. Since it is
also a ledger account, posting to cash
account is not required. This implies
that for all the transactions recorded
in cash book, only one posting is
required, unlike in case of entries
recorded in journal, where two
postings are required.
The amount column in the cash
book may be more than one depending
upon the needs of the organization. If
the organization has only cash
transactions, cash book with single
amount column on either side is
maintained. This is usually referred to
as simple cash book. However, this is
a remote possibility in todays world,
where we can think even of personal
transactions purely in cash because
of security and legal considerations the
transactions have to be routed through
banking system. This requires addition
of one more amount column on that
cash and bank transaction may
be recorded separately and
simultaneously.
Simple Cash Book
When all receipts and payments
are in cash only, the cash book
contains only one column on
each (debit and credit) side. It
is called simple cash book or
single column cash book. A
format of simple cash book is
given in (Fig. 3.2).
Illustration 6 : Record the following
transactions in cash book:
April 2002
1 Gurdev Singh brings
Rs. 5,00,000 into business as
capital
2 Purchased land & building for
Rs. 3,50,000 (land Rs. 1,30,000
and buildings Rs. 2,20,000)
13 Purchased furniture for cash
Rs. 5,000
18 Purchased inventory for Cash
Rs, 20,000
19 Purchased personal Computer
for Cash Rs, 30,000
30 Opened bank A/c by depositing
Rs. 20,000
.
Page_______
Dr. Receipts Payments Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
(Rs.) (Rs.)
Fig. 3.2 : Format of Simple Cash Book
62 ACCOUNTANCY
Solution
CASH BOOK OF GURDEV SINGH
Page ______
Date Particulars L.F. Amount Date Particulars L.F. Amount
2001 (Rs.) 2001 (Rs.)
April Gurdevs 5,00,000 April
1 Capital 2 Land 1,30,000
2 Buildings 2,20,000
13 Furniture 5,000
18 Inventory 20,000
30 Computer 30,000
30 Bank 20,000
April Balance c/f 75,000
30
Total 5,00,000 Total 5,00,000
Note: Explanation for each transaction and documentary evidence is recorded, though
omitted here.
Double Column Cash Book
In the above illustration,
Rs. 20,000 were deposited in the
bank on 30 April 2001. This is
to be noted that this transaction
is a banking transaction. So
long as, we dont have multiple
transactions with the bank,
single cash book will suffice.
However, the real life is different.
We have more transactions
through the bank which
requires the ascertainment of
cash position both, in hand and
at bank, this necessitates the
addition of one more column on
either side in the cash book to
facilitate the recording of
banking transactions of the
business. A businessman
generally opens an account with
a bank which may either be
savings bank account (in case
of proprietary business, current
account) or a term deposit
account. Usually a business-
man prefers to maintain a
current account which provides
the facility of routing the large
volume of transactions. In the
current account, a customer
can deposit and withdraw
money without any restriction.
Banks do not allow any interest
on the balance in current
account but charge a small
amount, called bank charges,
for the services rendered.
For depositing cash/cheques in the
bank account, a voucher (pay-in-slip)
has to be filled up, which is available
from the bank. It contains a counterfoil
which is returned to the customer
(depositor) with the signature of the
cashier, as a receipt. The bank issues
blank cheque forms usually free of
charge up to a certain limit, to the
account holder for withdrawing money.
The depositor writes the name of the
party to whom payment is to be made
after the words pay printed on the
cheque. Cheque forms have the
printed word bearer, which means
payment is to be made to the person
whose name has been written after the
words pay or the bearer of the
cheque. When the word bearer is
struck off by drawing a line, the cheque
becomes an order cheque. It means
payment is to be made only to the
person whose name is written on the
cheque or to his order after proper
identification.
Date ....................
Pay.............................................................................................................................
...............................................................................................................OR BEARER
RUPEERS ................................................................................ Rs.
A/c No L.F INTLS
STATE BANK OF INDIA
N.C.E.R.T, NEW DELHI - 110 016
MSBL/221
||556242|| 110002078||: 10
Fig. 3.3 : Format of a cheque
Fig. 3.4 : Format of Pay-in-slip
-- ||-| n| -i |+/~-|
SAVINGS BANK PAY-IN-SLIP CASH/TRANSFER
||-i +/STATE BANK OF INDIA
z|||| ||-| +.
......................BRANCH A/C NO.
l<-| +/DATE .................................... 20
FOR THE CREDIT OF THE
SAVINGS BANK ACCOUNT OF ...........................................................
.............................................. -- ||- n n| +- ln(
| + /- +| +| l| |lz|/AMOUNT
DETAILS OF CASH/CHEQUES ./Rs. ./P.
. z|<| n/Rs, IN WORDS
| + ~l+|i/
| +l | |=+-|| ~l+|i/
CASHIER CASH OFFICER/ ./Rs.
PASSING OFFICER
l-|i~ -| ln|-| +| = ni |< n| l+| | |
NOTE-Transfer Instruments will be credited after realisation.
l-|i || -+< + ~|tl- ln|-| =n|z|| - ln|-| ~| ~- ||-| ln|-| ln( ~n l- | +| | +
NOTE: Use separate slips for depositing cash, instruments drawn on bank, clearing instruments and outstation instruments.
-- ||-| n| -i ||-i + |+/~-|
SAVINGS BANK PAY-IN-SLIP STATE BANK OF INDIA CASH/TRANSFER
z|||| l<-| +
..........................................BRANCH DATE ..........................20
FOR THE CREDIT OF THE ||-| ti ||-| +.
SAVINGS BANK ACCOUNT OF ........................................................... LEDGER ACCOUNT NUMBER
.............................................. -- ||- n n| +- ln(
~<|+-|| + z|||| - + +. | + /CASH |lz|/AMOUNT
DRAWN ON BANK BRANCH CHEQUE NO. -| /NOTES ./Rs. ./P.
. z|<| n/Rs, IN WORDS
| +l |/~--| | +l | | + ~l+|i/ = -i ti n|+-|| n ./Total Rs.
=||i +. CASHIER |=+-|| ~l+|i/ +. t-|-|
CASHIER'S/ CASH OFFICER/ JOTTING DEPOSITED BY
TRANSFER PASSING BOOK NO. (SIGNATURE)
SCROLL NO. OFFICER
l-|i~ -| ln|-| +| = ni |< n| l+| | | NOTE-TRANSFER INSTRUMENTS WILL BE CREDITED AFTER REALISATION.
X500
X100
X50
X20
X10
X5
X2
X1
l=+ /Coins
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64 ACCOUNTANCY
A/c Payee only. A bearer cheque can
be passed on by mere delivery. An order
cheque can be transferred by
endorsement and delivery. Endor-
sement means the writing of instructions
to pay the amount of the cheque to a
particular person and then signing it.
This is done on the back of the cheque.
When the number of bank
transactions is large, as discussed
earlier, it is better if transactions relating
to both, cash and bank, are recorded in
the same cash book. Similar to cash
transactions, all bank receipts are
recorded on the left side of the cash book
under bank column. Payments through
bank are recorded on the right side of
the cash book under bank column.
Contra Transactions It is a transaction
which is recorded on both sides of the
cash book but in different columns. Cash
deposited in bank is recorded on the
receipts (debit) side of bank column and
payments on (credit) side of cash column.
When cash is withdrawn from the bank
for business purposes, the transaction
is recorded on receipts (debit) side under
the cash column and payments (credit)
side under the bank column. Thus,
whenever for business purposes, the
cash is deposited into or withdrawn from
the bank, both aspects of the
transaction are recorded in the cash
book itself. These being contra entries,
the word c is written in the L.F. column
indicating that these entries are not to
be posted to any other ledger account.
When a cheque is received, it may
be deposited into the bank on the same
day or it may be deposited on another
day. In case it is deposited on the same
Cheques are generally crossed in
practice. The payment of a crossed
cheque cannot be made direct to the
party on the counter. It is to be paid
only through a bank. A cheque is said
to be crossed when two parallel
transverse lines are drawn across the
cheque. The following are the various
types of crossing providing different
degrees of safety to the payment.
Fig. 3.5 : Crossing of Cheque
In case of an A/c Payee only
crossing, the amount of the cheque can
be deposited only in the account of the
person whose name appears on the
cheque. It is called general crossing.
When the name of the bank is written
between two parallel lines, it becomes
a special crossing and the payment can
be made only to the bank whose name
has been specified.
A cheque can be transferred by the
payee (the person in whose favour the
cheque has been drawn) to another
person, (not very common through
practice in real life) if it is not crossed as
&

C
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.
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t

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o
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o
f

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n
d
i
a
day the amount is recorded in the bank
column of the cash book on the
receipts side. If the cheque is deposited
on another day, in that case, on the
date of receipt it is treated as cash
received and hence recorded in the
cash column on receipts side. On the
date of depositing the cheque into the
bank, entry for deposit will be passed,
i.e. the amount will be recorded on the
receipts side in bank column and on
the payments side in the cash column.
This is a contra entry.
If a cheque is dishonoured and
intimated, the bank will return the
dishonoured cheque, and debit the
firms account. On receipt of such
cheque/intimation from the bank, the
firm should make an entry on the
credit side of the cash book by entering
the amount of the dishonoured cheque
in the bank column and the name of
the party (from whom the cheque was
received) in the particulars column.
This entry will restore the position
prevailing before the receipt of the
cheque from the party and its deposit
in the bank. Dishonour of a cheque
means return of the cheque unpaid,
generally due to insufficient funds in
the partys account with the bank.
If the bank debits the firm on
account of interest, commission or
other charges for bank services, the
entry will be made on the credit side
in bank column. If the bank credits
the firms account for direct collection
of interest, dividends, etc. the entry will
be made on the receipts (debit) side of
the cash book in the bank column.
The bank column is balanced in
the same way as the cash column.
However, in the bank column, there
may be credit balance also because of
overdraft taken from the bank.
Overdraft is a situation when cash
withdrawn from the bank exceeds the
amount of cash deposited. The format
and entries in the two-column cash
book are illustrated below:
Illustration 7
Enter the following transactions in the double column cashbook of Mr. Rakesh
Khurana and balance it.
2002 Amount
May (Rs.)
1 Opening balance: Cash in hand 8,500
Cash at bank 27,500
2 Paid to petty cashier 5,000
2 Sold goods for cash 3,500
2 Paid to Mr. Arup Ghosh by cheque 7,500
3 Received cheque from Mr. Robert 9,000
6 Received cheque from Mr. Javed 12,000
8 Purchased goods for cash 5,000
8 Paid rent by cheque 5,000
9 Withdrew cash from bank 5,000
66 ACCOUNTANCY
15 Purchased stationery for cash 2,000
21 Deposited cash in bank 20,000
24 Withdrew cash for personal use 3,000
31 Paid salaries by cheque 18,000
Solution
Cash Book (Double Column-Cash and Bank) of Mr. Rakesh Khurana
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
2002 Amount Amount Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
May 1 Balance b/f 8,500 27,500 May 2 Petty cash 5,000
2 Sales 3,500 2 Mr. Arup Ghosh 7,500
3 Mr. Robert 9,000 8 Purchases 5,000
6 Mr. Javed 12,000 8 Rent 5,000
9 Bank C 5,000 9 Cash C 5,000
10 Sales 7,500 15 Stationery 2,000
20 Sales 13,500 21 Bank C 20,000
21 Cash C 20,000 24 Rakeshs 3,000
drawings
31 Salaries 18,000
Balance c/f 3,000 33,000
38,000 68,500 38,000 68,500
1 July Balance b/f 3,000 33,000
Note: Receipt/Voucher numbers have been omitted.
3.7.3 Petty Cash Book
In every organization, a large number
of small payments, such as, for
conveyance, cartage, postage,
telegrams and other expenses
(collectively recorded under
miscellaneous expenses) are made.
These are generally repetitive in
nature. If all these payments are
handled by the cashier and are
recorded in the main cash book, the
procedure is found to be very
cumbersome. The cashier may be
overburdened and the cash book may
become very bulky. To avoid this, large
organizations normally appoint one
more cashier (petty cashier) and
maintain a separate cash book to
record these transactions. Such a cash
book maintained by petty cashier is
called petty cash book.
The petty cashier works on the
imprest system. Under this system, a
definite sum, say Rs. 5,000, is given
to the petty cashier at the beginning
of a certain period. This amount is
called imprest money. The petty
cashier goes on making all small
payments out of this imprest amount,
and when he has spent the substantial
portion of the imprest amount say
Rs. 4,780, he gets reimbursement of
the amount spent from the main
cashier. Thus, he again has the full
imprest amount in the beginning of the
next period. The reimbursement may
be made on a weekly, fortnightly or
monthly basis, depending on the
frequency of small payments. In
certain cases, the petty cash system
is operated through the main cash
book itself. In such instances, the petty
cash book is not maintained
independently.
The petty cash book generally has
a number of columns for the amount
on the payment side (credit) besides
the first total amount column. Each
of the other amount columns is
allotted for items of specific payments
which are most common. The last
amount column is designated as
Misce-llaneous followed by a
Remarks column. In the
miscellaneous column those
payments are recorded for which a
separate column does not exist. In the
remarks column the nature of payment
is recorded. At the end of the period,
all amount columns are totaled. The
total amount column will show the
total amount spent and to be
reimbursed. On the receipt (debit) side,
there is only one amount column.
Columns for the date, voucher number
and particulars are common for both
receipts and payments. The format and
entries in the petty cash book are
illustrated below:
Amount Date Voucher Particulars Total Postage Cartage Refreshments Misc. Remarks
Received No. Amo- Ex-
unt pense
Rs. Rs. Rs. Rs. Rs. Rs.
Fig.3.6 : Format of peatty cash book
Illustration 8
A petty cashier is paid Rs. 3,000 as imprest money on Monday, January 1,
2002. During the month his expenses were as under:
January Voucher Particulars of Payment Amount
No. (Rs.)
1 1 Taxi fare for manager 125
2 Courier charges for the letters dispatched 75
3 stationery purchased 185
4 Cartage 45
5 Refreshments 95
4 6 Courier charges 50
7 Cartage 35
68 ACCOUNTANCY
January Voucher Particulars of Payment Amount
No. (Rs.)
8 taxi fare 185
9 Refreshments 175
11 10 Taxi fare 150
11 Revenue stamps purchased 50
12 Cartage 45
13 Refreshments 115
18 14 Conveyance 85
15 Refreshments 125
16 Stationery 125
25 17 Taxi fare 145
18 Cartage 95
19 Courier charges 75
20 Refreshments 65
31 21 Courier charges 45
22 Refreshments 75
23 Office cleaning expenses 175
Record the above transactions in
the petty cash book (see solution on
page 69).
3.7.4 Balancing of Cash Book
On the left side, all cash transactions
relating to cash receipts (debits) and
on the right side, all transactions
relating to cash payments (credits) are
entered date-wise. When a cash book
is maintained, a separate cash account
in the ledger is not opened. The cash
book is balanced in the same way as
an account in the ledger. But it may
be noted that cash book will always
show debit balance since cash
payments can never exceed cash
available (opening balance of cash plus
receipts during the period).
The source document for cash
receipts is generally the receipt issued
by the cashier. For payment, any
document, invoice, bill, receipt, etc. on
the basis of which payment has been
made will serve as a source document
for recording transactions in the cash
book. When payment has been made,
all these documents, popularly known
as vouchers, are given a serial number
and filed in a separate file for future
reference and verification.
3.8. Posting from Cash Book
The left side of the cash book shows
receipts of cash in the cash column or
amount deposited in the bank in the
bank column from various sources. All
those accounts through which cash/
bank has been debited are opened in
the ledger.
All the accounts appearing on the
debit side of the cash book are credited
70 ACCOUNTANCY
because cash/cheque has been
received in respect of them. Thus, if
on the debit side of the cash book, an
entry sales Rs. 3,500 appears, it
means that goods have been sold for
cash. Therefore, in the ledger, sales
account will be credited by writing,
Cash Rs. 3,500 in the relevant
columns.
The right side of the cash book
shows all the payments made in the
cash or through the bank indicating
items of payment which are to be posted
in the respective account by writing
cash/bank A/c in the particulars
column on the left hand side.
It may be noted that the cash book
serves the purpose of ledger, for cash
and bank transactions. Therefore,
cash bank account are not opened in
the ledger. All entries marked C
(being contra entries as explained
earlier) are ignored while posting from
the cash book to the ledger. These
entries represent debit and credit
aspect in the cash book itself
signifying the completion of double
entry process.
Posting from the petty cash book
is made at the end of the month. Totals
of various expense columns including
miscellaneous column of the petty
cash book are posted to the debit side
of the concerned ledger accounts on
the last day of the month as sundries,
indicating that all petty amounts for
the month have been put together. The
ledger folio number is written for every
total expense amount to indicate that
the entry has been posted in the ledger.
In the J.F. column of the ledger
account, the page number of the petty
cash book is written for cross/future
reference purposes.
Illustration 9
Post the transactions recorded in the double column cash book appearing on
page 66 at illustration 7
Sales Account
Dr. Cr.
(Rs.) 2002 (Rs.)
May 2 Cash 3,500
10 Cash 7,500
20 Cash 13,500
Arup Ghosh Account
Dr. Cr.
2002 (Rs.) (Rs.)
May 2 Bank 7,500
Purchases Account
Dr. Cr.
2002 (Rs.) (Rs.)
May 8 Cash 5,000
Robert Account
Dr. Cr.
(Rs.) 2002 (Rs.)
May 3 Bank 9,000
Javed Account
Dr. Cr.
(Rs.) 2002 (Rs.)
May 6 Bank 12,000
Stationery Account
Dr. Cr.
2002 (Rs.) (Rs.)
May Cash 2,000
15
Rent Account
Dr. Cr.
2002 (Rs.) (Rs.)
May 18 Bank 5,000
Rakeshs Drawings Account
Dr. Cr.
2002 (Rs.) (Rs.)
May Cash 3,000
24
Petty Cash Account
Dr. Cr.
(Rs.) (Rs.)
May 2 Cash 5,000
72 ACCOUNTANCY
Salaries Account
Dr. Cr.
2002 (Rs.) (Rs.)
May Bank 18,000
31
3.9 Other Day Books
When there are large number of
transactions of the similar type, the
firm can maintain a special journal for
recording transactions of similar
nature in one book only. In that case,
transactions of repetitive nature such
as purchases, sales, purchases
returns, sales returns are recorded in
special journals and the remaining
transactions are recorded in the
journal called the general journal.
Special journals are also called day
books.
Special journals are explained
below. (Cash book has already been
explained).
3.9.1 Purchases Journal (Book)
All credit purchases of merchandise
are recorded in the purchases journal,
cash purchases are recorded in the
cash book. Other purchases such as
purchase of of fice equipment,
furniture, building, are recorded in the
general journal if purchased on credit
or in the cash book if purchased for
cash. The source documents for
recording entries in the books of
accounts are invoices or bills received
by the firm from the suppliers of the
goods. Entries are made with the net
amount of the invoice. Trade discount
and other details of the invoice need
not be recorded in this book. The
format of the purchases journal is the
same as that of the general journal
except that one more column (credit)
for the invoice number is added after
the date column, while one amount
column is deleted. The monthly total
of the purchases book is posted to the
debit of Purchases Account in the
ledger. Posting to the credit side of
individual suppliers account may be
made daily.
The format and preparation of the
purchases journal with imaginary
entries is illustrated below:
Illustration 10
Record the following transactions in
the purchases journal
Date Transactions
2002 Purchased from Bright
April1 Enterprises, 1000 kg. of
chemical X @ 28.4 per kg.
7 Purchased from Ali Brothers, 200
kg. of chemical Y @ Rs. 25 per
kg. and 500 kg. of chemical Z @
Rs. 60.4 per kg.
14 Purchased from Robert Stores,
100 kg. of chemical X @ Rs. 28.4
per kg., 200 kg. of chemical Z @
Rs. 60.4 per kg. and 100 kg. of
chemical M @ Rs. 39.8 per kg.
15 Purchased from Nathan Traders,
Solution
Purchases Journal
Date Particulars Voucher L.F. Details Amount
No. (Rs.) (Rs.)
1.4.02 M/s Bright Enterprises vide invoice
No
1000 kg. of chemical X @ 28.4 28,400 28,400
per kg.
7.4.02 M/s Ali Brothers vide invoice
No..
200 kg. of chemical Y @ Rs. 25 5,000
per kg.
500 kg. of chemical Z @ Rs. 60.4 30,200 35,200
per kg.
14.4.02 M/s Robert Stores vide invoice
No..
100 kg. of chemical X @ Rs. 28.4 2,840
per kg.
200 kg. of chemical Z @ Rs. 60.4 12,080
per kg.
100 kg. of chemical M @ Rs. 39.8 3,980 18,900
per kg.
15.4.02 M/s Nathan Traders vide invoice
No..
50 kg. of chemical W @ Rs. 31.6 1,580
per kg.
800 kg. of X @ 28.4 per kg. 22,720 24,300
18.4.02 M/s Hazi Traders vide invoice
No.
500 kg. of chemical W @ Rs. 31.6 15,800 15,800
per kg.
21.04.02 M/s Narain Brothers vide invoice
No.
248 kg. of chemical Y @ Rs. 25 6,200
per kg.
500 kg. of chemical X @ Rs. 28.4 14.200 20,400
per kg.
Total 1,43,000
50 kg. of chemical W @ Rs. 31.6
per kg. and 800 kg. of X @ 28.4
per kg.
18 Purchased from Hazi Traders 500
kg. of chemical W @ Rs. 31.6 per kg.
21 Purchased from Narain Brothers
248 kg. of chemical Y @ Rs. 25
per kg. and 500 kg. of chemical
X @ Rs. 28.4 per kg.
74 ACCOUNTANCY
Posting from the Purchases Day
Book
Posting to suppliers accounts is done
daily to their respective accounts with
the relevant amounts on the credit side
by writing Purchases A/c in the
particulars column.
The total of the purchases Day
Book is periodically posted to the debit
of the purchases account as sundries,
normally on a monthly basis. However,
if the number of transactions is very
large, the total may be done and posted
at some other convenient time interval
such as daily, weekly or fortnightly.
Illustration 11
Post the transactions recorded in the
purchases journal as given in
Illustration 10 on page 73.
The above entries are posted into the ledger account of individual supplies as under:
Bright Enterprises Account
Dr. Cr.
(Rs.) 2002 (Rs.)
April 1 Purchases 28,400
Ali Brothers Account
Dr. Cr.
(Rs.) 2002 (Rs.)
Robert Stores Account
Dr. Cr.
(Rs.) 2002 (Rs.)
Solution:
Purchases Account
Dr. Cr.
2002 (Rs.) (Rs.)
April 1 Sundries 1,43,000
Nathan Traders Account
Dr. Cr.
(Rs.) 2002 (Rs.)
Hazi Traders Account
Dr. Cr.
(Rs.) 2002 (Rs.)
Narain Brothers Account
Dr. Cr.
(Rs.) 2002 (Rs.)
3.9.2 Sales Journal (Book)
All credit sales of goods are recorded in
the sales journal. The format of the
sales journal is similar to that of the
purchases journal explained earlier.
The source documents for recording
entries in the sales journal are sales
invoices or bills issued by the firm. The
date of sale, invoice number, name of
the customer and amount of the invoice
are recorded in the sales journal. Other
details about the sales transaction
including terms of payment are
available in the invoice. In fact, two or more
than two copies of a sales invoice are
prepared for each sale. The book keeper
makes entries in the sales journal from
one copy of the sales invoice. Periodically,
at the end of each month the amount
column is totaled and posted to the credit
of sales account in the ledger. Posting
to the debit side of individual custo-
mers accounts may be made daily.
sales journal is illustrated:
Illustration 12
the sales journal:
Date Transactions
2002 Sold to Sunaina Trading
April 2Company, 20 musical alarm
clocks @ Rs. 150 per piece and
15 wall clocks @ Rs. 70 per piece
3 Sold to Asha Enterprises, 20
wall clocks @ Rs. 70 per piece
and 20 deluxe wall clocks @
Rs. 105 per piece.
5 Sold to Mehboob Stores, 20
economy al arm cl ocks @
Rs. 60 per pi ece and 13
super -deluxe wall clocks @
Rs. 200 per piece.
11 Sold to Ram Prakash & Co., 30
wall clocks @ Rs. 70 per piece
76 ACCOUNTANCY
Solution
Sales Book (Journal)
Date Particulars Invoice L.F. Details Amount
2000 No. (Rs.) (Rs.)
Apr 2 M/s Sunaina Trading Co.
20 musical alarm clocks @ 3,000
Rs. 150 per piece
15 wall clocks @ Rs.. 70 per piece 1,050 4,050
Apr 3 M/s Asha Enterprises
20 wall clocks @ Rs. 70 per piece 1,400
20 deluxe wall clocks @ Rs.. 105 per piece 2,100 3,500
Apr 5 M/s Mehboob Stores
20 economy alarm clocks @ Rs. 60 1,200
per piece
13 super-deluxe wall clocks @ Rs.. 200 2,600 3,800
per piece
Apr 11 M/s Ram Prakash & Co.
30 wall clocks @ Rs.. 70 per piece 2,100
2 super-deluxe wall clocks @ Rs. 200 400 2,500
per piece
Apr 14 M/s Dorjee & Co.
20 wall clocks @ Rs. 70 per piece 1,400
17 super-deluxe wall clocks @ Rs. 200 3,400 4,800
per piece
Apr 27 M/s John & Co.
30 economy alarm clocks @ Rs. 60 1,800
per piece 2,400 4,200
16 musical alarm clocks @ Rs. 150
per piece
Total 22,850
and 2 super-deluxe wall clocks
@ Rs. 200 per piece
14 Sold to Dorjee & Co., 20 wall
clocks @ Rs. 70 per piece and 17
super-deluxe wall clocks @
Rs. 200 per piece
27 Sold to John & Co., 30 economy
alarm clocks @ Rs. 60 per piece
and 16 musical alarm clocks @
Rs. 150 per peice
Posting from the Sales Journal
From the sales journal, entries are posted
to the debit of customers accounts kept
in the ledger on daily basis. The sales
journal is totaled generally on monthly
basis, and the total is credited to sales
account accordingly. However, depending
upon the need, the sales journal may be
totaled more frequently, say on weekly
or fortnightly basis.
Illustration 13
Post the transactions recorded in the sales journal in Illustration 12 on
page 76.
Sales Account
Dr. Cr.
(Rs.) 2002 (Rs.)
April Sundries 22,850
Sunaina Traders Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr 2 Sales 4,050
Asha Enterprises Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr 3 Sales 3,500
Mehboob Stores Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr 5 Sales 3,800
Ram Prakash & Company Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr 11 Sales 2,500
Dorjee & Company Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr 14 Sales 4,800
John & Company Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr 27 Sales 4,200
78 ACCOUNTANCY
3.9.3 Purchases Returns Journal
(Book)
In this book, goods returned to
supplier and recorded. Sometimes,
goods purchased are returned to the
supplier for various reasons such as,
the goods are not of the required
quality, or are defective, etc. For every
return, a debit note (in duplicate) is
prepared. The original note is sent to
the supplier for making necessary
entries in his book and the duplicate
copy is retained.. The supplier may
also prepare a note which is called the
credit note. The source document for
recording entries in the purchases
returns journal is generally a debit
note. A debit note will contain the
name of the seller (to whom the goods
have been returned), details of the
goods returned and the reason for
returning the goods. Each debit note
is serially numbered and dated. The
format of the purchases returns
journal is also similar to that of the
purchases journal. The format and
preparation of the purchases returns
journal are illustrated below:
Illustration 14
the purchases returns journal:
Date Transactions
2002 Returned to Bright Enterprises,
Apr 3 10 kg. of chemical X purchased on
April 1 @ Rs. 28.4 per kg.
18 Returned to Ali Brothers, 5 kg. of
chemical X purchased on April 7 @
Rs. 60.4 per kg.
24 Returned to Hazi Traders, 10 kg. of
chemical W purchased on April 18
@ Rs. 3.16 per kg.
25 Returned to Narain Brothers 10 kg.
of chemical Y purchased on April
21, @ Rs. 25 per kg.
Solution:
Purchases Returns Book (Journal)
2002 No. (Rs.) (Rs.)
Apr 3 M/s Bright Enterprises
10 kg. of chemical X purchased on 284 284
Apr 18 M/s Ali Brothers
5 kg. of chemical X purchased on 302 302
Apr 24 M/s Hazi Traders
10 kg. of chemical W purchased on
April 18 @ Rs. 3.16 per kg. 316 316
Apr 25 M/s Narain Brother
10 kg. of chemical Y purchased on
April 21, @ Rs. 25 per kg. 250 250
Total 1,152
Posting from the Purchases Returns
(Returns Outward) Journal
The posting from the purchases
returns journal requires that the
suppliers individual accounts are
debited with the amount of returns
and the purchases returns account is
credited on periodical basis, as is done
in the case of posting from the sales
journal.
Illustration 15
Purchases Returns Journal in
Illustration 14 on page 78.
Solution:
Purchases Returns Account
Dr. Cr.
(Rs.) 2002 (Rs.)
April Sundries 1,152
Bright Enterprises Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr 3 Purchase 284
Returns
Ali Brothers Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr Purchase 302
18 Returns
Hazi Traders Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr Purchase 316
24 Returns
Narain Brothers Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr Purchase 250
25 Returns
80 ACCOUNTANCY
3.9.4 Sales Returns Journal (Book)
This journal is used to record sales
returns from customers to whom the
goods were sold credit. On receipt of
goods from the customer, a credit note
is prepared, like the debit note for
purchase returns referred to earlier.
The difference between the credit note
and the debit note is that the former
is prepared by the seller and the latter
is prepared by the purchaser. Like the
debit note, the credit note is also
prepared in duplicate and contains
details relating to the name of the
customer, details of the merchandise
received back and the amount. Each
credit note is serially numbered and
dated. The source document for
recording entries in the sales returns
book is generally the credit note. The
format of the sales returns journal is
similar to that of the purchases return
journal.
sales returns journal are illustrated
below:
Illustration 16
the Sales Returns journal
Date Transactions
2002 Returned by Sunaina Trading
April Co. 2 musical alarm clocks sold
8 on April 3 @ Rs. 150 per piece
11 Returned by Mehboob Stores,
3 economy alarm clocks sold on
April 11 @ Rs. 60 per piece
14 Returned by Ram Parkash & Co.
4 wall clocks sold on April 11 @
Rs. 70 per piece.
Solution:
Sales Returns Book (Journal)
2002 No. (Rs.) (Rs.)
April 8 M/s Sunaina Trading Co.
2 musical alarm clocks sold on
April 3 @ Rs. 150 per piece 300 300
11 M/s Mehboob Stores
3 economy alarm clocks sold on
14 M/s Ram Prakash & Co.
4 wall clocks sold on
Total 760
Posting from the Sales Returns
(Returns Inward) Journal
The posting from the sales return
journal requires that the customers
account be credited with the amount
of returns and the sales returns
account be debited with the periodical
total in the same way as is done in the
case of posting from the purchases
journal.
Illustration 17
Sales Returns Journal in illustration
16 on page 80.
3.9.5 Bills Receivable Book
The sales on credit may be made on
an open account system or the seller
may insist on the buyer to accept the
bill for the value of goods purchased.
A bill in such a case, is bill receivable
for the seller, whereas, bills payable
for the purchaser. If the bills are
received against credit sales, the seller
may record the bills so received in a
separate book which helps in getting
the full information about the bills. The
format of Bills Receivable Book is given
in Fig. 3.7. We will discuss more about
this in the chapter on bills of exchange.
Solution
Sales Returns Account
Dr. Cr.
2002 (Rs.) (Rs.)
Apr Sundries 760
Sunaina Trading Co. Account
Dr. Cr.
(Rs.) 2002 (Rs.)
April 3 Sales Returns 300
Mehboob Stores Account
Dr. Cr.
(Rs.) 2002 (Rs.)
April 11 Sales Returns 180
Ram Parkash & Co. Account
Dr. Cr.
(Rs.) 2002 (Rs.)
Apr 14 Sales Returns 280
82 ACCOUNTANCY
3.9.6 Bills Payable Book
When the bills are more commonly
accepted to acknowledge debt, it is better
to maintain the record of bills accepted
in a separate book. The format of Bills
Payable Book is given in figure 3.8.
3.10 Balancing of Accounts
Accounts in the ledger are periodically
balanced, generally at the end of the
accounting period, with the objective
of ascertaining the precise position of
the business firm with regard to them.
Balancing of an account means
that the two sides are totaled and the
difference between them is inserted
on the side which is shorter in order
to make their totals equal. The words
balance c/d or c/f are written
against the amount of the difference
between the two sides. The amount
of balance is brought down in the next
accounting period indicating that it is
a continuing account, till finally
settled or closed.
In case, the debit side exceeds the
credit side, the difference is written on
the credit side and is called a debit
balance. If the credit side exceeds the
debit side, the difference between the
two appears on the debit side and is
called credit balance.
The balancing of an account is
illustrated below with the help of an
illustration explaining the complete
process of recording the transaction,
posting to ledger and balancing the
account.
Illustration 18
the books of Ranganathan, post it to
ledger accounts and balance the
accounts.
No. Date Date From Drawer Acceptor Where Term Due Ledger Amount Cash Remarks
of Received of Whom pay- Date Folio Book
Bill bill Received able Folio
Fig.3.7 : Format of Bills Receivable Book
No. Date To Drawer Payee Where Term Due Ledger Amount Date Cash Remarks
of of bill whom payable date folio paid book
Bill given folio
Fig.3.8 : Specimen of Bills Payable Book
Date Transactions
2002 Ranganathan brings
April 1 Rs.5,00,000 as his capital.
1 Deposited Rs.4,50,000 in a
newly opened bank account.
2 Rented a shop by paying
security deposit of Rs.1,00,000
and rent for April Rs.5,000.
10 Furniture & fittings installed
for Rs.38,000. Payment made
by cheque.
15 Purchased goods for Rs.65,000
on cash, payment made by cheque.
18 Purchased goods for Rs.18,000
from Sunshine Enterprises on
credit.
21 Purchased stationery for
Rs.1,800 on cash
22 Paid cash Rs.1,500 for printing
and distribution of pamphlets.
29 Purchased goods Rs.37,500 on
cash payment made by cheque.
30 Paid Rs.6,000 for flowers,
refreshments and rent for
chairs on account of opening
ceremony.
30 Goods sold on cash for
Rs. 7,650.
Solution
JOURNAL
Amount Amount
2000 (Rs.) (Rs.)
April 1 Cash a/c Dr. 5,00,000
Capital a/c 5,00,000
(Ranganathan invests capital in the firm)
1 Bank a/c Dr. 4,50,000
Cash a/c 4,50,000
(Cash deposited in a newly opened
bank account)
2 Security Deposit a/c Dr. 1,00,000
Rent Expense a/c 5,000
Bank a/c 1,05,000
(paid sec. deposit & rent for current month)
10 Furniture & Fitting a/c Dr. 38,000
Bank a/c 38,000
(Furniture & Fittings installed in the shop)
15 Purchases a/c Dr. 65,000
Bank a/c 65,000
(purchased goods on cash)
18 Purchase a/c Dr. 18,000
Sunshine Enterprises a/c 18,000
(purchased goods on credit)
Total c/f 11,76,000 11,76,000
84 ACCOUNTANCY
Total b/f 11,76,000 11,76,000
21 Stationery a/c Dr. 1,800
Cash a/c 1,800
(purchased stationery on cash)
24 Advertisement Expense a/c Dr. 1,500
Cash a/c 1,500
(paid for printing & dist. of pamphlets)
29 Purchases a/c Dr. 37,500
Bank a/c 37,500
(purchased goods on cash)
30 Opening Ceremony Expense a/c Dr. 6,000
Cash a/c 6,000
(paid expense on opening of shop)
30 Cash a/c Dr. 7,650
Sales a/c 7,650
(cash sales made)
Total 12,30,450 12,30,450
Cash Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 1 Capital 5,00,000 April 1 Bank 4,50,000
30 Sales 7,650 21 Stationery 1,800
30 Opening cere- 6,000 24 Advertising 1,500
mony Expense Expense
30 Balance c/f 48,350
5,07,650 5,07,650
Capital Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 30 Bal. c/f 5,00,000 April 1 Cash a/c 5,00,000
5,00,000 5,00,000
Bank Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
April Cash a/c 4,50,000 April 2 Security deposit 1,00,000
2 Rent expense 5,000
10 Furniture & fittings 38,000
15 Purchases 65,000
29 Purchases a/c 37,500
30 Balance c/f 2,04,500
4,50,000 4,50,000
Rent Expense Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 2 Bank a/c 5,000 April 30 Bal. c/f 5,000
5,000 5,000
Security Deposit Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 2 Bank a/c 1,00,000 April 30 Bal. c/f 1,00,000
1,00,000 1,00,000
Furniture & Fittings Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr Bank a/c 38,000 April 30 Bal. c/f 38,000
110 38,000 38,000
Purchases Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 15 Bank a/c 65,000 April 30 Bal. c/f 1,20,500
18 Sunshine 18,000
Ent. a/c
29 Bank a/c 37,500
1,20,500 1,20,500
86 ACCOUNTANCY
Sunshine Enterprise Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 30 Balance c/f 18,000 April 18 Purchases 18,000
18,000 18,000
Stationery Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 21 Cash 1,800 April 30 Bal. c/f 1,800
1,800 1,800
Advertisement Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
1,500 1,500
Opening Ceremony Expenses Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
6,000 6,000
Sales Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 3 Balance c/f 7,650 April 30 Cash 7,650
7,650 7,650
3.11 Bank Reconciliation
Statement
It is generally experienced that the bank
balance shown by the cash book does
not tally with, pass book balance or
balance shown by the statement of
account provided by the bank. Since the
balance shown by cash book is normally
different from the balance shown by the
pass book/statement of account, there
is a need to reconcile the two balance.
This is facilitated by the preparation of
cheques with the bank, it
immediately debits the bank
column in the cash book. But
the bank will credit the firms
account only after these
cheques have been collected
through the clearing process.
The collection generally takes a
few days. In the case of
outstation cheques, this gap
may be longer. In the
intervening period this will lead
to a difference between the bank
balance as shown by the cash
book and the balance shown by
the bank pass book.
Interest credited by the bank
If the interest is credited by the
bank but the advise has not
been communicated to the
customer, this will result into
difference because the bank has
credited the amount to the
customers account but it has
not yet been recorded in the
cash book.
Interest and expenses charged
by the bank
The bank charges interest on
overdrafts, and commission,
etc., for the services rendered to
the customer. These are called
bank charges which are debited
to the customers account from
time to time. But the customer
will record these in the cash
book either on receiving advice
from the bank in this regard or
when customer obtains updated
bank reconciliation statement (BRS).
Also, there is a need to ascertain the
correct bank balance. The traditional
bank reconciliation statement does not
help in ascertainment of correct bank
balance. We can modify the statement
to meet the twin objectives.
It is a statement prepared to show
the items of difference between the
items shown in the pass book/
statement and bank column of the
cash book. The causes of differences
between the two balances are
discussed below:
Cheques issued but not yet
presented for payment
When a cheque is issued to a
party, it is immediately
recorded in the cash book in the
bank column and will reduce
the bank balance as shown in
the cash book. However, bank
will debit the firms account
only when bank makes the
payment. But there is a gap
between the issue of a cheque
and its presentation to the
bank. In the intervening period,
there will be difference between
the bank balance shown by the
cash book and the balance
shown by the bank pass book
on account of unpresented
cheques. This leads to difference
between the two balances to the
extent of the amount of cheques
issued but not presented.
Cheques paid into the bank but
not yet collected
When a firm deposits the
88 ACCOUNTANCY
pass book/statement. In the
intervening period, the two
balances will differ.
Credits by the bank without the
knowledge of the firm
The bank, under the instruction
of the customer may collect
directly dividend/interest on the
investments made by the firm.
The bank credits the firms
account immediately on receipt
of such amounts, but the firm
will make entries in the
cashbook only after receiving
intimation in this regard. This
leads to the difference between
the two balances till such
amounts are recorded in the
cashbook.
Direct deposits made by parties
The debtors of the customer
may directly pay in the bank.
This will result in immediate
increase in the bank balance.
The firm will record this only
when intimation in this regard
is received, and thus, will lead
to the difference between the
two balances till such amounts
are recorded in the cashbook.
Direct payments made by the
bank on behalf of the customer
An account holder may give
instructions to the bank to
make certain payments such as
insurance premium, on his
behalf. The bank will debit the
partys account, as and when,
the payment, are made, but the
firm will be able to record these
transactions in the cash book
only when receives updated
pass book/statement.
Dishonour of a bill discounted/
cheque deposited with the bank
Occasionally, the customer
discounts a bill of exchange
before its maturity with the
bank. If, on the due date, such
a bill is not honoured by the
acceptor, the bank will debit the
customer s account. The
customer will record entries in
this regard only on receiving
intimation from the bank.
Similarly, if the cheque
deposited is not collected by the
bank, this will also lead to
difference in the two balances.
Errors and omissions
An error or omission either on
the part of the customer or the
bank will cause the difference
between the bank balance
shown by the cash book and the
balance shown by the bank pass
book. A dif ference on this
ground can be eliminated when
the error/omission is detected.
A cheque may be recorded twice
in the bank column (once while
it was received and again when
it was deposited into the bank).
This will increase the bank
balance in cash book due to
error of recording a receipt
twice. A bank may, also commit
an error by wrongly debiting
the customers account on
presentation of a cheque which
belongs to some other account.
Till such errors are rectified, the
two balances will not reconcile.
3.11.1 Need and Importance
It is essential to tally the bank balance
shown by the cash book with the
balance shown by the bank pass book
and, in case of any difference, to
identify the reasons for the difference.
This is possible only by preparing a
bank reconciliation statement. The
importance of this statement lies in the
fact that it ensures that the bank
balance shown by the cash book is
reconciled with that of the bank pass
book. In the absence of a bank
reconciliation statement, the customer
cannot be sure of the correctness of
the bank balance depicted by the cash
book. Hence, periodic preparation of
the bank reconciliation statement is
essential.
3.11.2 Preparation of the Bank
Reconciliation Statement
As already stated, the traditional bank
reconciliation statement is prepared to
reconcile the bank balance shown in
the cash book with the balance shown
by the bank pass book. Before
preparing the bank reconciliation
statement, items appearing in the
bank pass book are checked and ticked
with the items appearing in the cash
book. All such items which remain
unticked in both the books cash
book and bank pass book are listed
according to the nature of their
dif ference. The first item in the
statement is the balance as per cash
book or pass book. Then the
adjustments are required to be made
to this balance for the items listed
above (leading to the dif ference
between the two balances given in
3.11). The adjusted balance if equal to
the balance as per pass book or cash
book, the two are reconciled. Following
steps may be initiated to prepare the
bank reconciliation statement:
To prepare the BRS obtain the
balance of Cash Book and Pass
Book which is the first item.
Add the cheques issued but not
yet presented to the cash book
balance.
Subtract the cheques deposited
but not yet collected/
dishonoured from the cash book
balance.
Add the interest credited by the
bank.
Subtract interest and expenses
charged by the bank.
Add direct collection made by
the bank.
Add direct deposits made by the
debtors.
Subtract direct payments made
by the bank.
Add/subtract errors or
omissions in the cash book and
pass book.
Any error/omission in cash book
resulting in decrease in balance or in pass
book resulting in increase in balance are
added. On the other hand, if such errors/
omissions result in increase in cash book
balance or decrease in pass book balance
are subtracted.
90 ACCOUNTANCY
Date Particulars Amount Amount
(Rs.) (Rs.)
Balance as per xx or Xx
1
Cash Book
Add Cheques issued but x
not yet presented
Less Cheques deposited
but not yet collected
Less Bills/cheques deposited X
but dishonoured
Add Interest credited x
by bank
Less Interest & expenses X
charged by bank
Add Direct deposits by x
customers
Less Direct payments X
made by bank
Add Errors/omissions in x
cash book/pass book
Less Errors/omissions in X
cash book/pass book
Balance as per pass book x
1
x
(Balancing Figure)
Total xx or xx
1
The bank overdraft is recorded in this
column.
Fig. 3.9 : Format of Bank Reconciliation Statement
Generally, the bank reconciliation
statement is prepared after passing
adjustment entries in respect of items
relating to errors and omissions. If this
is done, the bank reconciliation
statement will show only two
categories of items:
cheques deposited but not yet
collected;
cheques issued but not yet
presented for payment;
Bank charges;
Direct payments made by bank;
and
Direct collections by bank.
The preparation of the bank
reconciliation statement is illustrated
below:
Illustration 19
The following particulars relate to the
business of Akram on March 31, 2002.
Amount
(Rs.)
Balance as shown by 20,000
cash book
Balance as shown by the 22,000
bank pass book
Cheques issued but not yet 8,000
presented for payment
Cheques deposited but not 6,000
yet collected
Solution
Bank Reconciliation Statement of Akram on
31 March 2002.
(Starting with bank pass book balance)
Amount Amount
(Rs.) (Rs.)
Balance as per 22,000
bank pass book
Add: Cheques deposited 6,000
Less: Cheques issued but not 8,000
yet presented for payment
Balance as per bank book 20,000
Total 28,000 28,000

Bank Reconciliation Statement of Akram on
31March 2002.
(Starting with cash cash balance)
Amount Amount
(Rs.) (Rs.)
Balance as per Cash book 20,000
Less: Cheques deposited 6,000
Add: Cheques issued but 8,000
not yet presented for
payment
Balance as per bank 22,000
pass book
Total 28,000 28,000
Illustration 20
The bank pass book of Messers Bose &
Co. showed a balance of Rs. 45,000 on
31 May 2002. Cheques issued before 31
May 2002, amounting Rs. 25,940, had
not been presented for encashment. Two
cheques of Rs. 3,900 and Rs. 2,350 were
deposited into the bank on 31 May but
the bank gave credit for the same in
June. There was also a debit in the pass
book of Rs. 2,500 in respect of a cheque
dishonoured on May 31. Prepare a
reconciliation statement as on May
31, 2002.
Solution
Bank Reconciliation Statement
as on 31 May 2002.
Amount Amount
(Rs.) (Rs.)
bank pass book
Add: Cheques deposited
before 31 May
but credited by
the bank in June
Cheque No 2,350
Cheque No 3,900
Balance c/f 51,250
Balance b/f 51,250
The amount of a 2,500
cheque dishonoured
and not adjusted in
the cash book
Less: Cheques issued but 25,940
not yet presented before
31 May
Balance as per cash book 27,810
Total 53,750 53,750
Illustration 21
On 31 March 2002, Rohans pass
book showed a balance of Rs.48,000
to your credit. On 29 March 2002,
Rohan had i ssued cheques
amounting to Rs.34,500, of which
cheques amounting to Rs.5,700 have
so far been presented for payment.
A cheque for Rs.5,400 paid by Rohan
into the bank on 29 March has not
yet been credited in the pass book.
He had also received a cheque for
Rs. 3,480 which, although entered
by him in the bank column of the
cash book, was not deposited in the
bank. On 29 March a cheque for
Rs.3,750, received by him was paid
into the bank and the same was
credited by the bank in his account
but was not entered in the cash
book. The bank credited interest
amounting to Rs. 555 and debited
Rs.30 for bank charges. The cash
book shows bank bal ance as
Rs. 23,805.
Draw up a reconciliation statement
to reconcile the bank balance shown
by Rohans cash book with the balance
shown by the bank pass book.
92 ACCOUNTANCY
Solution
as on 31 March 2002
Amount Amount
(Rs.) (Rs.)
bank pass book
Add: Cheques paid in 5,400
but not yet credited
by the bank
Cheques not banked, 3,480
though entered in
the cash book
Bank charges debited 30
but not adjusted in
the cash Book
Less: Cheques issued 28,800*
but not presented
Cheques deposited 3,750
in bank but not entered
in the cash Book
Interest credited by 555
the bank but not
entered in the cash book
Total 56,910 56,910
* (cheques issued but not presented =
Rs. 34,500 Rs.- 5,700 = Rs.28,800)
Illustration 22
From the following particulars, you are
required to ascertain the bank balance
as would appear in the cash book of
M.S. Swaroop as on 31 October 2002.
1. The bank pass book showed an
overdraft of Rs. 66,000 on
31 October.
2. Interest of Rs.5,000 on overdraft
up to 31 October 2002, has been
debited in the bank pass book,
but it has not been entered in
the cash book.
3. Bank charges debited in the bank
pass book amounted to Rs.140.
4. Cheques issued, prior to
31October 2002 but not
presented till that date,
amounted to Rs. 46,000.
5. Cheques paid into the bank
before 31 October but not
collected and credited up to that
date, were for Rs.10,000.
6. Interest on Investments collected
by the bankers and credited in
the bank pass book amounted
to Rs.7,200.
Solution
as on 31 October 2002.
Amount Amount
(+) (Rs.) (-) (Rs.)
Overdraft as per 66,000
bank pass book
Add: Interest on overdraft 5,000
debited in the pass
book but not entered
in the cash book
Add: Bank charges debited 140
in the pass book
Add: Cheques paid into 10,000
the bank, but not
yet collected bank
Less: Cheques issued 46,000
but not presented
Less: Interest on investments 7,200
credited by the bank
but not adjusted in
the cash book
Bank overdraft as 1,04,060
per cash book
Total 1,19,200 1,19,200
3.11.3 Correct Bank Balance
Bank reconciliation statement
prepared, as stated above, helps in
reconciling the cash book and pass
book balance. But, at the year end we
need to record the correct bank
balance in the balance sheet. Bank
Reconciliation Statement prepared in
the traditional way does not help in
this respect, since, neither cash book
balance nor pass book balance can be
taken as the correct bank balance.
There is a need to ascertain correct
bank balance. Because some of the
receipts/payments may be missing
from these books and errors if any,
need to be rectified, therefore, we need
to look at the entries/errors recorded
in both the statements, and other
available information to compute the
correct bank balance.
Since, traditional Bank Reconcili-
ation helps in reconciling the two
balances only, but not in ascertaining
the correct bank balance to be reported
in the balance sheet. We need to follow
an approach, whereby, the twin
objectives are achieved, i.e. reconciling
for the reason that the certain
transactions recorded by the bank
have got to be effected in the bank
balance shown by the cash book and
other corrections need to be made. If
the correct bank balance computed
from pass book balance and cash book
balance is same, the reconciliation is
automatically done. For showing the
correct bank balance, the journal
entries are required to be passed for
making adjustments shown in the
statement prepared on the basis of
cash book balance. This will bring the
cash book balance to the correct
amount.
Steps for computing correct bank
balance
Scrutinize the receipts recorded
in the cash book to ask the
question, whether it is actually
a receipt or not? If Yes, no
adjustment is required, if no,
subtract this amount from the
cash book balance.
Find out the receipts recorded
in the pass book but not in the
cash book and ask the
question whether it is actually
a receipt or not? If yes, add to
the cash book balance, if no,
then no adj ustment i s
required.
Scrutinize the payments
recorded in the cash book to ask
the question, whether it is
constitutes a payment or not, if
yes, no adjustment is required,
if no, add this amount to the
cash book balance.
Find out the payments recorded
in the pass book but not
recorded in the cash book and
ask the question whether it
constitutes a payment or not, if
yes, subtract this from the cash
book balance, if no, then no
adjustment is required.
For any errors and omissions in
cash book, adjustment is
required to be made whereas for
errors or omissions in pass book
no adjustment is required.
94 ACCOUNTANCY
For reconciliation, as well as,
ascertainment of correct bank balance
by using the pass book balance,
following steps are required:
Repeat these steps to arrive at the
correct bank balance as per pass book
by repeating the process discussed
above by scrutinizing the entries in
pass book & comparing with the cash
book. If the correct cash balance
arrived at as per cash book and pass
book is same, the two statements are
reconciled.
Illustration 23
Reconcile the balance as per cash
book and pass book and compute
the correct cash balance of M/s
Bose & Co. from the information
given in illustration 21 on page 92.
Solution
Computation of Correct Bank Balance
Particulars Amount Amount
(Rs.) (Rs.)
Balance as per Pass Book 48,000
Add Cheques not yet
collected by bank 5,400
Less Cheques yet not
presented to bank 28,800
Correct Bank Balance 24,600
Total 53,400 53,400
(Rs.) (Rs.)
Balance as per Cash Book 23,805
Add Cheque deposited
into bank but not
entered in cash book 3,750
Add Interest credited
by bank 555
Balance c/f 28,110
Balance b/f 28,110
Less Cheque not yet
deposited into bank
but entered in
cash book 3,480
Less Bank charges 30
Total 28,110 28,110
Since, the correct bank balance as
per pass book and cash book is same,
the two balances are reconciled.
Illustration 24
Reconcile the balance as per cash book
and pass book and compute the
correct bank balance of Rohan from
the information given in Illustration 22
on Page 92.
Solution
(Rs.) (Rs.)
Balance as per Cash 1,04,060*
Book (overdraft)
Less Interest charged
on overdraft 5,000
Add Interest collected
by bank 7,200
Correct Bank 1,02,000
Overdraft
Total 1,09,200 1,09,200
(Rs.) (Rs.)
Pass Book (overdraft)
Less Cheques issued but not yet 46,000
presented to bank
Add Cheques deposited 10,000
Correct Bank 1,02,000
overdraft
Total 1,12,000 1,12,000
* The balance of cash book is taken from
the solution to Illustration 22.
Illustration 25
Journalizing & Posting of transactions and
Balancing of ledger accounts.
Mr. Murli Manohar started a new business.
During the first month of operations, the
following transactions took place.
2002 transactions
April 1 Mr. Murli Manohar paid Rs.5,00,000
in cash as capital.
1 Deposited in Bank Rs.4,50,000.
1 Paid cheque for purchase of office
equipment for Rs.60,000.
2 Purchased a second hand car
Rs.1,60,000 for office use, Amount
paid by cheque.
2 Paid by cheque Rs.9,000 cash for a
one-year insurance policy on the car.
8 Purchased goods on account for a
total of Rs.1,10,000.
15 Sold goods for Rs.72,000, amount
received by cheque.
17 Paid by cheque to creditors
Rs.80,000 for supply of goods.
28 Sold goods on credit for Rs.40,000.
30 Cash withdrawn from bank Rs. 5,000
for personal use.
30 Paid by cheque Rs.7,500 as salary to
an assistant employed on April 1,
2002.
Record the transactions in the journal, post
them to ledger accounts and balance the
accounts.
Solution
Books of Murli Manohar
JOURNAL
Amount Amount
2000 (Rs.) (Rs.)
April 1 Cash a/c Dr. 5,00,000
Capital a/c 5,00,000
(Capital investment
in the business)
1 Bank a/c Dr. 4,50,000
Cash a/c 4,50,000
(deposited into Bank)
1 Office equipment a/c Dr. 60,000
Bank a/c Dr. 60,000
(Purchased Office
equipment for cash)
2 Office Car a/c Dr. 1,60,000
Bank a/c 1,60,000
(Purchased office car
for cash)
2 Insurance for Car a/c Dr. 9,000
Bank a/c 9,000
(paid insurance premium for
car for one year)
Total c/f 11,79,000 11,79,000
96 ACCOUNTANCY
Total b/f 11,79,000 11,79,000
Purchases a/c Dr.
Creditors a/c 1,10,000
(Purchased goods on credit)
15 Bank a/c Dr. 72,000
Sales a/c 72,000
(Sold goods for cash)
April 17 Creditors a/c Dr. 80,000
Bank a/c 80,000
(Paid cash to creditors)
28 Debtors a/c Dr. 40,000
Sales a/c 40,000
(Sold goods on credit)
30 Drawings a/c Dr. 5,000
Bank a/c 5,000
(withdraw cash for
private use)
30 Salary a/c Dr. 7,500
Bank a/c 7,500
(Paid salary)
Total 14,93,500 14,93,500
Cash Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 1 Capital 5,00,000 Apr 1 Bank 4,50,000
30 Drawing 5,000
30 Bal. c/f 45,000
5,00,000 5,00,000
Capital Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 30 Bal. c/f 5,00,000 Apr 1 Cash 5,00,000
5,00,000 5,00,000
Bank Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 1 Cash 4,50,000 Apr 1 Office 60,000
2 Equipment
15 Sales 72,000 Office Car 1,60,000
2 Insurance for Car 9,000
17 Creditors 80,000
30 Salary 7,500
30 Bal. c/f 2,55,500
5,22,000 5,22,000
Office Equipment Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 1 Bank 60,000 Apr 30 Bal. c/f 60,000
60,000 60,000
Office Car Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 2 Bank 1,60,000 Apr 30 Bal. c/f 1,60,000
1,60,000 1,60,000
Insurance for Car Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
9,000 9,000
Purchases Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 8 Creditors 1,10,000 Bal. c/f 1,10,000
1,10,000 1,10,000
98 ACCOUNTANCY
Creditors Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 17 Bank 80,000 Apr 8 Purchases 1,10,000
30 Bal. c/f 30,000
1,10,000 1,10,000
Sales Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 30 Bal. c/f 1,12,000 Apr 15 Bank 72,000
28 Debtors 40,000
1,12,000 1,12,000
Debtors Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 28 Sales 40,000 Apr 30 Bal. c/f 40,000
40,000 40,000
Drawings Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
Apr 30 Cash 5,000 Apr 30 Bal. c/f 5,000
5,000 5,000
Salary Account
Dr. Cr.
2002 (Rs.) 2002 (Rs.)
7,500 7,500
Illustration 26
Reconciliation of cash book and pass
book balance and ascertain of correct
bank balance.
The bank balance shown by pass book
of Rustomjee Trading Company was
Rs.59,280 whereas the cash book shows
the balance of cash at bank as Rs.61,890.
The following differences were located
while comparing the transactions
recorded in the cash book and pass book
of Rustomjee Trading Company:
Rs.
(i) Cheques deposited but not 18,500
yet collected by bank
(ii) A cheque from Fancy 4,200
Stores dishonoured
(iii) A bill discounted with the 5,000
bank earlier was dishonoured
when presented on maturity
(iv) Cheques issued but not 21,500
yet presented
(v) Bank charges 750
(vi) Amounts deposited by 3,800
customers directly
into the bank
(vii) Collection of interest & 1,820
dividends by bank
(viii) Direct payments made by 1,780
the bank
(ix) A cheque issue from 2,500
personal account of Rustomjee
debited to firms account
(x) A cheque deposited into 3,000
the bank and collected but
not recorded in the cash book
Required
Reconcile the balance as per
cash book and balance as per
pass book.
Compute the correct bank
balance and reconcile the two
balances.
Solution (i)
(Rs.) (Rs.)
i) Less Cheque deposited but not yet collected 18,500
ii) Less Cheque dishonoured 4,200
iii) Less Bill discounted earlier dishonoured 5,000
iv) Add Cheques issued but not yet presented 21,500
v) Less Bank charges 750
vi) Add Direct deposits by customers into the bank account 3,800
vii) Add Collection by bank 1,820
viii) Less Direct payments by bank 1,780
ix) Less Cheque wrongly debited to bank account 2,500
x) Add Cheque deposited but not recorded in cash book 3,000
Total 92,010 92,010
100 ACCOUNTANCY
Solution (ii)
(Rs.) (Rs.)
Less Cheque deposited but dishonoured 4,200
Less Bill discounted earlier dishonoured 5,000
Add Direct deposits into the bank account 3,800
Add Direct collection by bank 1,820
Less Direct payments by bank 1,780
Add Cheque collected by bank but not recorded 3,000
Correct bank balance 58,780
Total 70,510 70,510
Add Cheques deposited but not yet collected 18,500
Less Cheques issued but not presented 21,500
Add Cheque wrongly debited to the account 2,500
Total 80,280 80,280
1. Meaning of Source Documents
Various business documents such as invoice, bills, cash memos, vouchers, which
form the basis and evidence of a business transaction recorded in the books of
account are called source documents.
2. Meaning of Accounting Equation
A statement of equality between debits and credits signifying that the assets of a
business are always equal to the total of liabilities and owners equity.
3. Rules of Debit and Credit
An account is divided into two sides. The left side of an account is known as Debit
and the right side is known as Credit. The rules of Debit and Credit depend on the
nature of an account. Debit and Credit both may represent either increase or decrease,
depending on the nature of an account. These rules are summarized below:
Nature (Type) of an Account Debit Credit
Assets Increase Decrease
Liabilities Decrease Increase
Owners equity (Capital) Decrease Increase
Revenues Decrease Increase
Expenses Increase Decrease
4. Description of Double Entry Book Keeping
A system of accounting in which every transaction is recorded considering the debit
and credit aspect. In this system of accounting every transaction affects at least
two accounts on the opposite sides.
5. Meaning of Books of Original Entry
Those books in which a transaction is recorded for the first time from a source
document. The following are the important books of original entry:
Journal Basic book of original entry.
Cash Book A book used to record cash receipts and payments.
Petty Cash Book A book used to record small cash payments.
Purchases Journal (Book) A special journal (day book) in which only credit
purchases are recorded.
Sales Journal (Book) A special journal (day book) in which only credit
sales are recorded.
Purchases Returns Journal (Book) A special journal (day book) in which
returns of merchandise purchased on credit are recorded.
Sales Returns Journal (Book) A special journal (day book) in which returns
of merchandise sold on credit are recorded.
Bills Receivable Book A special book to record detailed infor-mation relating
to bills received.
Bills Payable Book A special book to record the detailed information about
bills accepted.
6. Meaning of Ledger
A book containing all the accounts to which entries are transferred from the books
of original entry.
Posting A process of transferring entries from books of original entry to the ledger.
Balancing of account Ascertaining the balance of an account after totaling all the
debits and credits for a given period.
7. Meaning of Bank Reconciliation Statement
A statement prepared to reconcile the bank balance as per cash book with the
balance as per bank pass book or statement, by showing the items of difference
between the two accounts.
8. Correct Bank Balance
TERMS INTRODUCED IN THE CHAPTER
Source document Day books
Accounting equation Purchases journal
Debit Sales journal
Credit Purchases returns journal
Account Sales returns journal
Double entry book keeping Ledger
Books of original entry Posting
Journal Balancing of account
Cash book Bank reconciliation statement
Petty cash book
102 ACCOUNTANCY
EXERCISES
Multiple Choice Questions
1. The journal is a book of:
(i) Only cash transactions
(ii) Original entry
(iii) Credit sales and purchases
(iv) Secondary entry
2. The ledger is a book of:
(i) Original entry
(ii) Secondary entry
(iii) All Cash transactions
(iv) Petty cash transactions
3. The purchases journal contains:
(i) All purchases
(ii) All purchases of merchandise
(iii) Credit purchase of merchandise
(iv) Cash purchase of merchandise
4. Which of the following is correct?
(i) Capital = Asset + Liabilities
(ii) Assets = Liabilities - Capital
(iii) Liabilities = Capital + Assets
(iv) Capital = Assets - Liabilities
5. Recording of transaction in the journal is called:
(i) Posting
(ii) Journalizing
(iii) Tallying
(iv) Casting
6. Writing of transactions in the ledger is called:
(i) Costing
(ii) Balancing
(iii) Journalizing
(iv) Posting
7. When a firm maintains a cash book, it need not maintain:
(i) Sales journal
(ii) Purchases journal
(iii) General journal
(iv) Cash account in the ledger
8. The source document for recording entries in the purchases returns journal
is generally:
(i) A credit note
(ii) An invoice
(iii) A bill
(iv) A debit note
9. Double Column Cash Book records:
(i) Only cash transactions
(ii) All transactions
(iii) Cash purchase and cash sales transactions
(iv) Cash and bank transactions
Fill in the Blanks
1. The source documents provide information about the nature of the __________
and the _____________ involved in it.
2. The accounting equation is a statement of ___________ between the debits
and credits.
3. An account is a formal record of _____________ in items of ___________ nature.
4. The left side of an account is known as ______________ and the right side as
_______________.
5. In double entry book keeping, every transaction affects at least two
_____________.
6. The debit and credit both may represent either ______________ or _____________
in an account balance.
7. The journal is the basic book of ______________ entry.
8. recording of transactions in the journal is called ______________.
9. When cash book is maintained, the transactions of cash are not recorded in
the ________________.
10. the word(c) against an entry in the cash book signifies that this entry is not
to be _______________ to the ledger.
11. The petty cashier generally works on ___________ system.
12. In the purchases journal, all ____________ purchases of merchandise are
recorded.
13. In the sales journal, all ____________ sales of merchandise are recorded.
14. The process of transferring entries from books of original entry to the ledger
is called _____________.
15. Assets are always equal to liabilities plus ________________.
1. Explain the meaning of source documents with examples.
2. Explain the meaning of the accounting equation.
3. Justify the statement that the Accounting Equation (A = L+C) holds good
under all circumstances. Give atleast three transactions to show that the
equality condition holds three goods.
4. Describe two basic purposes of source documents.
5. What is owners equity? Give an equation for calculating owners equity.
104 ACCOUNTANCY
6. Give two transactions that will:
(i) Increase an asset and increase a liability.
(ii) Increase an asset and decrease another asset.
(iii) Decrease an asset and decrease capital.
7. Explain the rules of debit and credit.
8. Explain the meaning of double entry book keeping.
9. What are the books of original entry?
10. What is a general journal?
11. Why is a journal sub-divided?
12. What is a special journal? Give a specimen of such a journal showing at
least five entries.
13. Explain that the cash book is a journal as well as a ledger account.
14. What do you understand by a contra entry?
15. What do you understand by petty cash book?
16. Explain the meaning and utility of a cash book.
17. What is the meaning of an account?
18. What is the purpose of a ledger?
19. Explain the rules of debit and credit.
20. On which side of the account are the following decreases recorded
(i) Assets
(ii) Liabilities
(iii) Owners equity
(iv) Revenues
(v) Expenses
21. Indicate the nature (debit or credit) of normal balance in the following
accounts:
(i) Cash
(ii) Accounts receivable (debtors)
(iii) Accounts payable (creditors)
(iv) Furniture
(v) Merchandise
(vi) Capital
(vii) Miscellaneous expenses
(viii) Rent payable
(ix) Salaries paid
22. List the various subsidiary (special) journals.
23. At the time of recording a transaction in the general journal, should the
account(s) to be credited or debited be entered first?
24. Explain the meaning of posting.
25. Explain the meaning and purpose of the Ledger Folio (L.F.).
26. What is a bank reconciliation statement? Why is the preparation of the
bank reconciliation statement necessary?
27. Explain the reasons on account of which the balance as shown by the bank
pass book does not agree with the balance as shown by the bank column of
the cash book.
1. What is the purpose of each subsidiary journals? Give specimen of the
purchases journal and sales journal with four imaginary entries.
2. How is a bank reconciliation statement prepared? Prepare a bank
reconciliations statement with imaginary figures.
3. Explain the procedure of recording the journal entries in a journal. Give
specimen of a journal with five transactions recorded in it.
4. Explain the procedure of posting journal entries from the subsidiary books.
Problems
1. Show the accounting Equation on the basis of the following transactions:
Rs.
(i) Ram Started business with cash 50,000
(ii) Purchased goods from Shyam on credit 20,000
(iii) Sold goods to Sohan costing Rs. 3,000 for cash 3,600
2. Develop the accounting Equation from the following transactions:
Rs.
(i) Mohan commenced business with cash 50,000
(ii) Purchased goods for cash 30,000
(iii) Purchased goods on credit 20,000
(iv) Sold goods (cost Rs. 10,000) for cash 12,000
(v) Bought furniture on credit 2,000
(vi) Paid cash to a creditor 15,000
3. Anil had the following transactions:
(i) Commenced business with cash Rs. 50,000
(ii) Purchased goods for cash Rs. 20,000 and credit Rs. 30,000
(iii) Sold goods for cash Rs. 40,000 costing Rs. 30,000
(iv) Rent paid in Cash Rs. 500
(v) Rent outstanding Rs. 100
(vi) Bought furniture for Rs. 5,000 on credit
(vii) Bought refrigerator for personal use for cash Rs. 5,000
(viii) Purchased building for cash Rs. 20,000
Use the accounting equation to show the effect of the above transactions on
his assets, liabilities and capital and show the final Accounting Equation.
4. How will the following items be dealt with while preparing the bank column
of the cash book:
(i) Paid into bank Rs. 2,000
(ii) Withdrew from bank for office use Rs. 3,000
(iii) Withdrew from bank for private use Rs. 1,500
106 ACCOUNTANCY
5. Prepare a two-column cash book from the following transactions and post
them to appropriate ledger accounts:
2002 March Rs.
1 Cash balance 7,000
2 Bank balance (Dr.) 1,00,000
3 Cash sales 60,000
6 Rent paid by cheque 24,000
8 Cash deposited in bank 60,000
10 Wages paid 1,000
10 Rent paid 1,800
12 Received cheque from Ram 8,000
14 Goods purchased on cash 4,000
16 Withdrawn from bank for office use 20,000
18 Issued cheque to Hari 14,000
20 Withdrawn cash for personal use 4,000
22 Received cheque from Shyam and deposited in bank 10,000
24 Shyam dishonoured the cheque 10,000
26 Furniture purchased and cheque issued 6,000
29 Received interest on investments by cheque 3,000
30 Paid salaries in cash 4,800
6. Enter the following transactions in the petty cash book. The imprest is
Rs. 5000.
2002 March Rs.
1 Chowkidars wages 1,800
2 Pencils purchased 60
8 Postage stamps 400
14 Cartage 150
15 Scooter fare to assistant 75
16 Cleaning expenses 185
20 Taxi fare to manager 175
24 Refreshment for customer 120
25 Writing pads and registers 180
27 Bus fare to peon 20
28 Cartage 210
29 Postage stamps 210
30 Purchase of 4 tube lights 135
31 Cleaning expenses 110
7. M.S. Brothers carry on business as cloth dealers. From the following, write
up, their purchases book for January, 1988:
1989 January
3 Purchased on credit from Ambika Mills:
100 meters long cloth @ Rs. 30 per meter
50 meters shirting @ Rs. 50 per meter
8 Purchased for cash from Arvind Mills:
50 meters muslin @ Rs. 40 per meter
15 Purchased on credit from India Textiles Ltd.
120 meters suiting @ Rs. 100 per meter
100 meters shirting @ Rs. 60 per meter
20 Purchased Laser printer on credit from
Bharat Computers Ltd. for Rs. 12,800.
8. From the following particulars, prepare the sales book of Akbar & Co., who
deals in furniture:
June, 1989
5 Sold on credit to Anand & Co.:
10 tables @ Rs. 300
20 Chairs @ Rs. 150
10 Sold to Bannerji & Co. on credit:
5 almirahs @ Rs. 1,500
5 stools @ Rs. 100
20 Sold old typewriter -for Rs. 600 to Mohan and Co. on credit.
25 Sold to Ram Lal & Bros. on credit
5 tables @ Rs. 500
1 revolving chair @ Rs. 600
9. Enter the following transactions of Anil & Co. in the proper books:
July, 1989
5 Sold on credit to Sethi & Co.:
10 electric irons @ Rs. 25
5 electric stoves @ Rs. 15
8 Purchased on credit from Hari & Sons:
25 heatres @ Rs. 40
10 water heaters @ Rs. 20
10 Purchased for cash from Mohan & Co.
10 electric kettles @ Rs. 30
15 Sold to Gopal Bros. on credit:
10 heaters @ Rs. 50
18 Returned to Hari & Sons:
5 heaters, being defective
20 Purchased from Kohli & co.:
10 toasters @ Rs. 20
26 Gopal Bros. returned one water heater as defective
10. Sangma Traders maintain General journal, Double column cash book (cash
and bank), Purchases journal, and Sales journal to record the transactions.
Record the following transactions in the proper books.
108 ACCOUNTANCY
(i) Ram started business with cash Rs.1,50,000. (ii) He deposited
Rs. 1,30,000 in a newly opened bank account. (iii) He purchased goods
for cash Rs. 8,000. (iv) He purchased goods for Rs.10,000, payment
was made through bank. (v) He withdrew Rs 2,000 from the bank for
office use. (vi) He withdrew Rs.1,000 from the bank for personal use.
(vii) He sold goods for cash Rs.15,000 out of this he again deposited
Rs.12,000 in the bank. (viii) He paid salary in cash Rs.200. (ix) He
gave a cheque for rent Rs.300. (x) Sold goods on account to Y, Rs.8,000.
(xi) Purchased goods on account from X, Rs. 5,000. (xii) Sold goods for
cash Rs.1,000. (xiii) Purchased goods from Z for cash Rs.2,500.
(xiv) Purchased goods for cash Rs.2,800. (xv) Cash paid to X, Rs.3,000.
(xvi) Cash received from Y, Rs.1,600. (xvii) Machinery purchased for
cash Rs 20,000. (xviii) Machinery purchased from Anil on account Rs
30,000. (xix) Sold a machine to Satish for cash Rs.5,000. There was a
loss on sale of Rs.1,000. (xx) Interest earned Rs.5,400. (xxi) Interest
paid Rs.1,200.
11. From the following particulars, prepare a bank reconciliation statement to
ascertain the correct bank balance as on 31 March 2002:
The following cheques were paid into the firms current account in March
2002, but were credited by the bank in April 2002:
A Rs. 2,500; B Rs. 3,500; and C Rs. 1,900.
The following cheques were issued by the firm in March, 2002 and were
cashed in April 2002:
P Rs. 2,500; Q Rs. 4,500; and R Rs. 4,000.
A cheque for Rs.1,000 which was received from a customer was entered in
the bank column of the cash book in March 2002, but the same was paid
into the bank in April 2002.
The pass book shows a credit of Rs.2,500 for interest and a debit of
Rs.1,000 for bank charges.
The balance as per cash book was Rs.1,80,000 and as per pass book
Rs.1,83,600 on 31 March 2002.
12. The bank pass book of Mr. X showed an overdraft of Rs. 33,575 on
31 March 2002 and the bank overdraft as per cash book was Rs. 30,295.
On going through the pass book, the accountant found the following:
(i) A cheque of Rs.1,080 deposited on 28 March was dishonoured. There
was no entry in the cash book about the dishonour of the cheque until
31 March.
(ii) Bankers had credited his account with Rs. 2,800 for interest collected
by them on his behalf; the same has not been entered in his cash
book.
(iii) Cheques amounting to Rs. 7,500 were not yet collected by bank as on
31 March.
(iv) Out of cheques amounting Rs. 7,800 drawn by him on 27 March a
cheque for Rs. 2,500 was encashed on 3 April.
Prepare bank reconciliation statement on 31 March 2002. Also ascertain
the correct bank balance.
13. From the following particulars, prepare a bank reconciliation statement
showing the balance as per bank pass book on March 31, 2002:
The following cheques were paid into the firms bank account in March
2002, but were credited by the bank in April 2002:
Rs.
S.M. Bannerjee 2,000
S.P. Gupta 3,100
R.A. Kalra 1,800
The cheque were issued by the firm in March 2002, but were presented for
payment in April 2002:
Rs.
A.P. Sharma 4,000
N.A. Dua 5,000
S.B. Agarwal 3,420
The cheque for Rs. 1,000 which was received from a customer in full
settlement of his account was entered in the bank column of the cash book
in March 2002 but the same was paid into the bank in April 2002.
The bank balance as per cash book was Rs.19,900 on 31 March 2002.
14. On 31 December 2001, your cash book showed cash at bank Rs. 5,435 and
bank pass book showed a credit balance of Rs. 15,010. Before that date,
you had issued cheques amounting to Rs. 12,000 but they were not
presented for payment. A cheque for Rs. 1,500 paid by you into the bank
was not credited. On December 31, 2001, you had also received a cheque
for Rs. 1,100, which, though entered in the cash book, was not paid into
the bank. Besides, there was an entry of Rs. 175 for interest to your credit.
Draw up a bank reconciliation statement to determine the correct bank
balance.
110 ACCOUNTANCY
15. Prepare a bank reconciliation statement and ascertain correct bank balance
for the following particulars as on 31 March 2002:
Rs.
Balance as per pass book 5,750
Cheques issued but not presented for 2,100
payment till, March 31
Cheques paid into the bank but not yet cleared 1,200
Interest allowed by the bank but no entry 200
appeared in the cash book
Bank charges not entered in to cash book 100
16. From the following particulars, prepare a bank reconciliation statement to
ascertain the correct bank balance as on 31 December 2001:
Rs.
Cash at bank 25,798
Balance as per pass book as per cash book 19,820
The following cheques were issued by the
firm in December but were presented for
payment in January 2002:
Sh. Rajni Deshmukh 6,840
Sh. C.D. Patel 7,068
Sh. D. Natarajan 4,535
The following cheques were sent to the bank for collection in December but
were credited in the account in January 2002:
Rs.
Sh. Rajesh 3,200
Sh. Mukesh 6,750
Sh. Kamaljeet 5,340
The customer directly deposited in the firms account Rs. 3,200. The bank
paid Rs. 400 insurance premium which was not entered in the cash book.
The bank credited interest to the account Rs. 85.
The bank debited the account for charges Rs. 60.
17. On 31 March 2002, the cash book India Traders showed, in the bank column,
a debit balance of Rs.1,140 and the pass book of India Traders showed a
debit balance of Rs.2,820. On checking the entries in the cash book with
the bank pass book, it was ascertained that cheques for
Rs.18,700 were paid into the bank in the month of March. Cheques for
Rs.10,800 were realized till March 31 and a cheque of Rs.1,800 was returned
dishonoured but it was not recorded in the cash book. Out of cheques for
Rs.12,700 issued in March, cheques encashed upto 31 March were to the
amount of Rs.7,300. Another cheque for Rs.1,300 was entered in the cash
book in March but was sent to the bank in April 2002. The bank has debited
Rs. 120 for interest and Rs. 40 for bank charges.
(Hint: The cash book shows cash at bank, whereas, the pass book shows
bank overdraft)
18. Prepare a bank reconciliation statement to ascertain the correct bank
balance as on 31 March 2002, from the following particulars:
Rs. 750 paid by the bank for insurance premium under a standing order of
the account holder had not been entered in the cash book.
A customer paid Rs.2,400 directly into the bank account but advice from
the bank was not received till 31 March.
Out of cheques issued for Rs.9,800 in March, cheques of Rs.4,300 only
were cashed before 31 March.
Cheques of Rs.16,400 were paid into the bank in March out of them, cheques
of Rs.8,200 were credited in April and one of Rs.700 was returned
dishonoured.
An amount of Rs.1,200 paid into the bank was not entered in the cash
book.
Rs.400 collected by the bank as interest on investment was not entered in
the cash book.
There was a credit in the pass book of Rs.240 for interest and a debit of Rs.
70 for bank charges. These amounts did not find a place in the cash book.
The balance as shown by the pass book on 31 March 2002, was Rs.18,000
and by cash book Rs.17,980.
19. The following information is provided relating to transactions recorded in
cash book and pass book of Divakar Enterprises:
1. Balance as per the bank statement dated 31 March 2002, was
Rs. 8,900 and as per cash book was Rs.7,980.
2. Deposit of Rs.2,600 on 31 March was not included in the bank
statement.
3. Cheques issued but not presented as of 31 March totaled Rs.2,100.
4. The bank erroneously debited for a cheque of Janta Traders Account
for Rs.400.
5. During March, the bank credited the account with the proceeds of a
cheque for Rs.2,020 that it received directly from Janta Traders.
6. Service and collection charges for the month amounted to Rs.200.
Reconcile the two balances and ascertain correct bank balance as on 31
March 2002.
112 ACCOUNTANCY
ANSWERS
Multiple Choice
1. (ii) 6. (iv)
2. (ii) 7. (iv)
3. (iii) 8. (iv)
4. (iv) 9. (iv)
5. (ii)
Fill in the blanks
1. Transaction, amount 9. journal
2. Equality 10. posted
3. Changes, similar 11. imprest
4. debit, credit 12. credit
5. accounts 13. credit
6. increase, decrease 14. posting
7. original 15. owners equity
8. journalizing
Exercises
1. Asset Rs. 70,600 = Liabilities Rs. 20,000+Owners Equity Rs. 50,600
2. Assets Rs. 59,000 = Liabilities Rs. 7,000+ Owners Equity Rs. 52,000
3. Assets Rs. 89,500 = Liabilities Rs. 35,100+ Owners Equity Rs. 54,400
5. Balance Cash Rs. 11,400. Bank (Dr.) Rs. 1,07,000
6. Petty cash balance Rs. 500
7. Total of purchases book Rs. 23,500
8. Total of sales book Rs. 17,100
9. Total of sales book Rs. 95; Purchases book Rs. 1,700; Returns outwards
book Rs. 200; Returns inwards book Rs. 25.
11. Correct bank balance Rs. 1,81,500
12. (i) Overdraft as per cash book Rs. 30,295
(ii) Correct bank overdraft Rs. 28,575
13. Balance as per bank pass book Rs. 24,420
14. Correct bank balance Rs. 4,510
17. Correct Overdraft Rs. 2,120
CHAPTER 4
Trial Balance and Rectification of Errors
LEARNING OBJECTIVES
state the meaning of trial balance;
check the accuracy of accounting records;
prepare the trial balance;
identify the nature of balances in various accounts;
state the different types of errors;
detect and rectify errors; and
appreciate the need for preparing suspense account.
114 ACCOUNTANCY
In the previous chapters, you have
learnt how to record and classify the
transactions in the various accounts
along with balancing there of. All
balances of the accounts are listed in
a statement, called trial balance. It is
a summary statement of all balances.
This summary of balances enables us
to check the arithmetical accuracy of
the transactions recorded in the ledger
accounts. Since every debit has a
corresponding credit, the total of debits
should be equal to the total of credits
in the trial balance. This chapter
explains the meaning and process of
preparation of trial balance. It is
followed by a discussion of different
types of errors and their rectification.
4.1 Meaning of Trial Balance
A trial balance is a summary of
balances of all accounts recorded in
the ledger. The format of trial balance
in given in fig. 4.1.
Trial Balance of as on 31
st
March 2002
Account Account Debit
Code Title Amount Amount
Rs. Rs.
Fig. 4.1 : Showing Format of a Trial Balance
The trial balance is prepared at the
end of a chosen period which may
either be monthly, quarterly, half-
yearly or annually or as and when
required. Since, every debit should
have a corresponding credit as per the
rules of the double entry system, the
total of the debit and credit balances
should tally. In case there is a
dif ference, one has to check the
correctness of the balances brought
Trial Balance as at 31 March 2002
Account Account Title Debit Credit
Code Amount Amount
Rs. Rs.
001 Cash 45,000
002 Capital 5,00,000
003 Bank 2,05,500
004 Office Equipment 60,000
005 Office Car 1,60,000
006 Insurance of Car 9,000
007 Purchases 1,10,000
008 Creditors 30,000
009 Sales 1,12,000
0.10 Debtors 40,000
0.11 Drawings 5,000
0.12 Salary 7,5000
Total 6,42,000 6,42,000
Fig. 4.2 : Trial Balance for Illustration 25 Chapter 3 on page 95
115 TRIAL BALANCE AND RECTIFICATION OF ERRORS
forward from the respective accounts.
This type of checking of accounts leads
to ascertainment of arithmetical
accuracy of the balances of various
accounts in a summarized form.
Besides checking the arithmetical
accuracy, trial balance also aims at
ascertaining the correctness of the
nature of balances in relation to the
type of account. All assets, expenses,
receivables shall have debit balances.
Similarly, all liabilities, revenues,
payables will have credit balances
(figure 4.2).
4.2 Objectives of Preparing a Trial
Balance
In order to provide a summary
statement view of the balances of
various accounts, we need to prepare
the trial balance. This also indicates
the correct nature of the balances of
various accounts. A trial balance is
prepared to fulfill the following
objectives:
check the arithmetical accuracy
of the ledger accounts;
help in locating errors; and
provide a basis for preparing the
financial statements.
These objectives are explained in
detail hereunder:
4.2.1 To Check the Arithmetical
Accuracy of Accounts
A trial balance is prepared to check
whether all debits and the
corresponding credits are properly
recorded in the ledger or not. When
the totals of all the debits and credits
in the trial balance are equal, it is
assumed that the posting and
balancing of ledger accounts is
arithmetically accurate.
4.2.2 To Help in Locating Errors
Whenever the trial balance does not
tally, the accountant know that errors
have crept in at the stage of recording,
posting, balancing, or transfer of
balances. The accountant, at this
stage, is faced with the problem of
errors. It is immaterial whether the
amount of difference is small or large.
Even a small amount of difference
requires careful attention to be paid
to achieve accuracy in accounts.
Once the errors are detected and
located, these are rectified and then
the corrected trial balance is
prepared.
4.2.3 To Provide a Basis for the
Preparation of Financial
Statements
Since the balances of all accounts
appear in the trial balance, it provides
a basis for the preparation of the
financial statements. A tallied trial
balance, therefore becomes the first
step in the preparation of financial
statements.
Al l revenues and expenses
accounts from trial balance, are
transferred to the trading and profit
and l oss account. Al l assets,
liabilities and capital accounts along
with the balance of the profit and loss
account are shown in the balance
sheet.
116 ACCOUNTANCY
4.3 Detection of Errors Revealed
by the Non-agreement of Trial
Balance
If the trial balance does not tally, the
accountant should initiate the
following steps to detect and locate the
errors:
Recast the totals of debit and
credit columns of the trial
balance.
Compare the account head/title
and amount appearing in the
trial balance, with that of the
ledger to detect any difference in
amount or omission of an
account.
Compare the trial balance of the
current year with that of the
previous year to check additions
and deletions of any accounts
and also verify whether there is
a large difference in amount,
which is neither expected nor
explained.
Re-do and check the correctness
of balances of individual
accounts in the ledger.
Re-check the correctness of the
posting in accounts from the
books of original entry.
If the difference between the
debit and credit columns is
divisible by two, there is a
possibility that an amount equal
to one-half of the difference may
have been posted to the wrong
side of another ledger account.
For example, if the total of the
debit column of the trial balance
exceeds by Rs.1,500, it is quite
possible that a credit item of
Rs.750 may have been wrongly
posted in the ledger as a debit
item. To locate such errors, the
accountant should scan all the
debit entries of an amount of Rs.
750.
The difference may also indicate
a complete omission of a
posting. For example, the
difference of Rs.1,500 given
above may be due to omissions
of a posting of that amount on
the credit side. Thus, the
accountant should verify all the
credit items with an amount of
Rs.1,500.
If the difference is a multiple of
9 or divisible by 9, the mistake
could be due to transposition of
figures. For example, if a debit
amount of Rs. 459 is posted as
Rs.954, the debit total in the
trial balance will exceed the
credit side by Rs. 495 (i.e. 954-
459 = 495). This difference is
perfectly divisible by 9. A
mistake due to wrong placement
of the decimal point may also be
checked by this method. Thus,
a difference in trial balance
divisible by 9 helps in checking
the errors for a transpose
mistake.
4.4 Preparation of the Trial Balance
The first step in the preparation of the
trial balance is to balance all ledger
accounts. This is done after posting of
all the entries from books of original
entry to the ledger. Balancing of an
account is done by putting the
Account Name of the Account Debit Credit
Code Amount Amount
Rs. Rs.
Capital Account
Fixed Asset Accounts:
Land and Buildings
Plant and Machinery
Equipment
Furniture and Fixtures
Current Asset Accounts:
Cash in Hand
Cash at Bank
Accounts Receivables
Bills Receivable
Stock of Raw Materials
Work in progress
Stock of Finished goods
Purchases
Carriage inwards
Carriage outwards
Sales
Sales Returns
Purchase Returns
Interest paid
Commission/Discount received
Salaries
Long term loan
Bills Payable
Accounts payable
Outstanding Salaries
Prepaid Insurance
Outstanding interest earned
Advances from Customers
Drawings
Reserves and Surplus
Provision for bad and doubtful debts
Total xxx xxx
Fig. 4.3 : Illustrative Trial Balance
difference between the two sides of an
account on the side, which is short.
This leads to the equalization of two
sides of an account. A trial balance has
four columns. The first column is the
account code/number, the second
column is the title/name of the
account, the third and fourth columns
are the debit and credit columns
respectively where the amount of
balance of each account is entered. It
is shown in fig. 4.3.
118 ACCOUNTANCY
Solution
Books of Asha General Stores
Cash Book
Receipts Payments
Cash - 001,Bank- 002
Date Particulars L.F. Cash Bank Date Particulars LF Cash Bank
2002 (Rs.) (Rs.) 2002 (Rs.) (Rs.)
Jan 1 Capital 25,000 Jan 1 Purchases 10,000
1 Loan from father 50,000 Jan 1 Bank 20,000
1 Sales 7500 Jan 2 Purchases 30,000
Total c/f 82,500 Total c/f 60,000
Illustration 1
Ajay started a small general store and
agreed to pay a rent of Rs.500 p.m.
His uncle provided him with some
furniture for the shop.He invested his
personal savings of Rs. 25,000 and his
father gave him Rs.50,000. He named
his shop as Asha General Store. The
shop was inaugurated on 1 January
2002. As Ajay is educated he wanted
to run his business in a professional
way. He requested his friend Anand to
prepare books of account for the shop.
The following were the transactions of
the stores in the first week:
January 2002
1 Purchased goods worth
Rs.10,000 from Ganesh
Enterprises by paying cash.
Made cash sales of Rs.7,500 to
people who attended the inaugu-
ration. Opened an account with
United Bank of India by depo-
siting Rs.20,000.
2 Made payment of Rs.2,000 to a
caterer who supplied refresh-
ments during the inauguration
ceremony. Cash purchases
made for Rs.30,000.
3 Purchased goods worth Rs.35,000
from Subhash and Co. paying
Rs.5,000 cash and remaining on
credit with a promise to pay in
30 days. Made a sale to Rajaram
for Rs.8,000 on account. Cash
sales were also made for Rs.26,000.
4 Paid license fees of Rs.400.
Rent Rs.500. Purchases worth
Rs.7,500. Made cash sales for
Rs.9,600
5 Made a payment to Subhash
and Co., Rs.5,000 by cheque.
Paid postage Rs150. Withdrew
for personal use Rs.7,000.
Sales to Mary Export House
Rs.47,600. Cash sales were for
Rs.3,300
6 Paid electricity charges Rs.550
and Rs.250 to Raja who agreed
to clean the shop and also
worked as a shop assistant.
7 Purchased furniture and fittings
from Lokesh Enterprises on
credit for Rs. 36000.
Record the above transactions in
various subsidiary books and post
them to the relevant ledger accounts
and prepare the trial balance after
balancing the various ledger accounts.
Jan Total b/f 82,500 Jan Total b/f 60,000
1 Cash 20,000 2 Business 2,000
expenses
3 Sales 26,000 3 Purchases 5,000
4 Sales 9,600
5 Sales 3,300 4 License fee 400
4 Rent 500
Purchases 7,500
5 Subhash & Co. 5,000
Postage 150
Drawings 7,000
Electricity 550
Wages 250
Balance c/f 38,050 15,000
1,21,400 20,000 1,21,400 20,000
Journal Proper
Date Particulars L.F Debit Credit
Amount Amount
2002 Rs. Rs.
Jan 2 Furniture & 36,000
Fixtures
Lokesh 36,000
Enterprises
(Purchased
furniture)
Total 36,000 36,000
Purchases Book
Date Particulars L.F Amount
2002 Rs.
Jan 3 Subhash and Co. 30,000
30,000
Sales Book
Date Particulars L.F Amount
2002 Rs.
Jan 3 Rajaram 8,000
Jan 5 Mary Export 47,600
House
55,600
Capital Account 003
Dr. Cr.
2002 Rs. 2002 Rs.
Jan1 Cash 25,000
Drawings Account 004
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 5 Cash 7,000
120 ACCOUNTANCY
Purchases Account 005
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 1 Cash 10,000 3 Jan Balance c/f 82,500
Jan 3 Subhash & Co. 30,000 31 Dec
(creditors)
Jan2 Cash 30,000
Jan3 Cash 5,000
Jan4 Cash 7,500
82,500 82,500
Loan Account 006
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 1 Cash 50,000
Subhash and Company Account 007
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 5 Bank 5,000 Jan 2. Purchases 30,000
31 Dec Balance c/f 25,000
30000 30000
Mary Export House Account 008
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 5 Sales 47,600 Dec 31 balance c/f 47,6000
47,6000 47,6000
Electricity Account 009
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 6 Cash 550
Postage Account 010
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 5 Cash 150
License Fees Account 011
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 4 Cash 400
Wages Account 012
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 6 Cash 250
Furniture Account 013
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 2 Lokesh 36,000
Enterprises
Lokesh Enterprises 014
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 2 Furniture 36,000
& Fitting
Sales Account 015
Dr. Cr.
2002 Rs. 2002 Rs.
31 Dec Balance c/f 1,02,000 Jan 1 Cash 7,500
Jan 3 Cash 26,000
Jan 4 Rajaram 8,000
Jan 4 Cash 9,600
Jan 5 Cash 3,300
Jan 5 Mary Export 47,600
House
1,02,000 1,02,000
122 ACCOUNTANCY
Rent Account 017
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 4 Cash 500
Rajaram Account 018
Dr. Cr.
2002 Rs. 2002 Rs.
Jan 3 Sales 8,000
Trial Balance of Asha General Stores as on 7 January 2002
Account Account Debit Credit
Title Amount Amount
Rs. Rs.
01 Cash 38,050
02 Bank 15,000
03 Capital 25,000
04 Drawings 7,000
05 Purchases 82,500
06 Loan A/c 50,000
07 Subash and company 25,000
08 Mary Export House 47,600
09 Electricity 550
010 Postage 150
011 License 400
012 Wages 250
013 Furniture and fittings 36,000
014 Lokesh Enterprises 36,000
015 Sales 1,02,000
016 Business expenses 2,000
017 Rent 500
018 Rajaraman 8,000
Total 2,38,000 2,38,000
Illustration 2
Following balances of ledger accounts
have been obtained from which you are
required to prepare a trial balance:
Cash Rs.41,733; Expenses Rs.12,150;
Sales Rs.1,46,616; Fixed Assets
Rs.12,000; Purchases Rs 1,10,850;
Accounts Receivables Rs.24,436;
Capital Rs. 50,000; Creditors Rs.8,553;
Merchandise Rs 4,000.
Solution
Account Title Debit Credit
Amount Amount
Rs. Rs.
Cash 41,733
Expenses 12,150
Fixed Assets 12,000
Sales 1,46,616
Purchases 1,10,850
Accounts 24,436
Receivable
Merchandise 4,000
Capital 50,000
Creditors 8,553
Total 2,05,169 2,05,169
4.5 Errors
The trial balance is prepared to check
the arithmetical accuracy of accounts.
If the trial balance does not tally, it
implies that there are arithmetical
errors in the accounts which require
location, detection and rectification
thereof. Even if the trial balance tallies,
there may still exist some errors. There
are two types of errors: (a) errors which
are not revealed by the trial balance,
and (b) errors which are revealed by
the trial balance. Errors may happen
at any of the following stages of the
accounting cycle.
A. At Recording Stage
1. Errors of principle
2. Errors of omission
3. Errors of commission
B. At Posting Stage
1. Error of omission
i. Complete
ii. Partial
2. Error of commission
i. Posting to wrong account
ii. Posting on the wrong side
iii. Posting of wrong amount
C. Balancing Stage
1. Wrong totaling
2. Wrong balancing
D. Preparation of Trial Balance
1. Error of Omission
2. Error of Commission
i. Taking wrong amount
ii. Taking wrong account
iii. Taking to the wrong side
Errors can be classified into the
following four categories on the basis
of the nature of errors and explained
here under.
i. Errors of commission
ii. Errors of omission
iii. Errors of principle
iv. Compensating (offsetting)
errors.
4.5.1 Errors of Commission
These errors by definition, are of
clerical nature. These errors may be
committed at the time of recording
and/or posting. At the time of
recording, the wrong amount may be
recorded in journal which will be
carried throughout. Such errors will
not affect the agreement of the trial
balance. These errors may also be
committed at the time of posting, by
way of posting wrong amount, to the
wrong side of an account or in the
wrong account. The errors resulting in
posting to wrong account will not affect
agreement of trial balance, whereas,
other errors of posting will resulting
disagreement of trial balance. For
example, an amount of Rs.10,000
124 ACCOUNTANCY
received from customer (Debtor) is
correctly recorded on the debit side of
the cash book but while posting, the
customers account is credited with
Rs.1,000. This is an error, which is
committed at the time of posting, by
posting wrong amount to the account.
This will result in disagreement of trial
balance, since, the credit total of the
trail balance will be short by Rs. 9,000.
4.5.2 Errors of Omission
The errors of omission may be
committed at the time of recording the
transaction in the books of original
entry or while posting to the ledger. An
omission may be complete or partial.
Such errors are known as errors of
omission. For example, Machinery
purchased for Rs. 50,000 by issuing a
cheque is recorded first in the credit
side of cash book, in the bank column.
Suppose it is not posted to the debit of
machinery account, it is an error of
partial omission. The trial balance will
not tally. Suppose the transaction is
not entered in the cash book and hence
ignored completely, this is a case of
complete omission. It means as if the
transaction has not taken place at all.
It will not affect the trial balance and
hence the trial balance will tally. This
is true only in case of complete
omission.
4.5.2 Errors of Principle
Accounting entries are recorded as per
the generally accepted accounting
principles. If any of these principles are
violated or ignored, errors resulting
from such violations are known as
errors of principle. As an illustration,
Periodicity principle requires
maintaining proper distinction
between capital and revenue items. An
error of principle may occur due to
incorrect classification of expenditure
or receipts between capital and
revenue. This is very important
because it will have an impact on
financial statements. It may lead to
under/over stating of income or assets
or liabilities, etc. For example, amount
spent on additions to the buildings
should be treated as capital expen-
diture and must be debited to the asset
account. Instead, if this amount is
debited to maintenance and repairs
account, it is treated as a revenue
expense. This is an error of principle.
Since instead of asset account, i.e.
buildings, the maintenance and
repairs account (expense) is debited,
the trial balance will still tally but
would not be correct as per generally
accepted accounting principles.
Such errors are not disclosed by
the trial balance. This will result in
understating of income due to extra
charge under maintenance and repairs
account and understating the value of
buildings in the balance sheet.
4.5.4 Compensating Errors
When two or more errors are
committed in such a way that the net
effect of these errors on the debits and
credits of accounts is nil, such errors
are called compensating errors. They
do not effect the tallying of the trial
balance. For example: In a credit sale
transaction, the sales account is
credited in excess by say, Rs.5,000 and
similarly the suppliers account in case
of a credit purchase is understated by
Rs.5,000, this is a case of two errors
compensating for each others effect.
It is to be noted that extra credit to the
sales account is offset by lower credit
to the creditors account, both being
credit balance. Since, one plus is set
off by the other minus, the net effect
of these two errors being of
compensating nature and do not affect
the agreement of trial balance.
4.6 Classification of Errors - for
the Purpose of Rectification
From the point of view of rectification,
errors are classified into two
categories:
Errors which affect the trial
balance; and
Errors which do not affect the
trial balance.
4.6.1 Errors which Affect the
Agreement of Trial Balance
These errors are due to the mistake
having being committed on the one
side of the account. They may happen
at any of the stages of the accounting
process, like recording, posting,
balancing, etc. such errors can be
rectified by giving an explanatory note
or by passing a journal entry with the
help of a special account called
suspense account. The nature and
treatment of suspense account is
discussed later in this chapter.
Examples of this group of errors are:
errors of partial omission; error of
casting (totaling); error of carrying
forward; error of balancing; error of
posting to the correct account but with
wrong amount; error of posting to the
correct account but on the wrong side;
posting to the wrong side with the
wrong amount and omitting to show
an account in the trial balance.
4.6.2 Rectification
An error in the books of original entry
if discovered before posting to the
ledger, may be corrected by crossing
out the wrong amount by a single line
and writing the correct amount above
the struck off amount and putting an
initial at the place.
An error in an amount posted to
the correct ledger account may also be
corrected in a similar way or by making
an additional posting for the difference
in amount and giving an explanatory
note in the particulars column
provided that trial balance is not
prepared. But errors should never be
corrected by erasing. Crossing/
Erasures reduce the authenticity of
accounting records and give an
impression that something is being
concealed or manipulated.
Examples
Under casting in the sales book
(less total) by Rs.1,000. Since
the total of sales journal is
posted to sales account in the
ledger, only the sales account is
credited by an amount which
is lower by Rs.1,000. The
individual customer accounts
will be posted correctly to their
debit side. To rectify this error,
126 ACCOUNTANCY
sales account is credited by an
additional amount of Rs.1,000
with the comment in the
particulars column as follows:
Mistake in totaling the sales
journal on page .
Errors committed while carrying
forward or balancing can also be
rectified in this manner.
An amount of Rs.6,300 for credit
purchases from Ashok on
16.4.2001, correctly entered in
the purchases journal, but while
posting, his account has been
credited with Rs.3,600, thus
under crediting his account by
Rs.2,700.
In this case since the entry has
been made correctly in the
purchases journal, posting to
the purchases account may be
assumed to be free of errors.
Therefore, the error is only in
Ashoks account. This can be
rectified by entering additional
credit of Rs.2,700 in his account
with the comment in the
particular column as Mistake
in posting on 16.4.2001.
A credit sale of Rs.7,500 to Ajay
on 1.8.2001 is wrongly credited
to his account. In this case, Ajay
is a debtor, his account should
have been debited. Since it was
correctly entered in the sales
journal, there is not an error in
the sales account. Therefore, the
error is only in Ajays account.
This error can be rectified by
debiting his account with
Rs.15,000 (the amount of error
is double because instead of
debit to Ajays account, his
account was wrongly credited
with Rs.7,500. Thus, there is a
need for debiting his account by
double the original amount of
Rs.7,500, i.e. Rs.15,000 with
the explanation Mistake in
posting on 1.8.2001.
The above stated procedure for
correction is applicable in as
situation when trial balance has
not been drawn, but, errors are
detected. However, all these
error are generally rectified by
the use of suspense account
after the trial balance is
prepared and tallying it through
suspense account.
4.6.3 Errors which do not
affect the trial balance
Errors which do not affect the trial
balance are committed in two or more
accounts. They can be rectified by
passing a journal entry giving the
correct debit and credit to the
concerned accounts. These correcting
entries can be recorded in the journal
proper. Examples of these errors are:
omission to pass an entry in the books
of original entry; wrong amount of
transaction recorded in the journal,
complete omission of the posting of
accounts in the ledger. Examples of
these errors are:
Complete omission at the
recording stages of the
transaction in the books of
original entry;
Recording of the transaction
with the wrong amount in the
books of original entries;
Complete omission of posting
of a transaction;
Errors of principle;
Posting of correct amount on the
correct side but to a wrong
account.
Examples
A payment of Rs.25,000 made to a
supplier Classic Enterprises is wrongly
recorded as payment to Classic
Traders. Suppose that the following
entry has been made and posted:
Debit Credit
Amount Amount
Rs. Rs.
Classic Traders A/c Dr. 25,000
Bank A/c
(Transaction wrongly 25,000
recorded )
Here, instead of Classic Enter-
prises the account of Classic Traders
has been wrongly debited. The
correcting entry will be:
Debit Credit
Amount Amount
Rs. Rs.
Classic Enterprises A/c Dr. 45,000
Classic Trader A/c 45,000
(to correct the wrong debit)
When posted to the respective
accounts, this primal entry would
nullify the effect of the earlier error.
We have learnt earlier that errors
of principle also do not affect the
tallying of the trial balance. For
example, purchase of machinery on
credit for Rs.50,000 is debited to
Purchases account. Actually, the
Machinery account which is of a
capital nature should have been
debited instead of Purchases account,
which is a revenue account, though
the suppliers account is properly
credited. To correct this error, the
following journal entry will be passed.
Debit Credit
Amount Amount
Rs. Rs.
Machinery A/c Dr. 50,000
Purchases A/c 50,000
4.7 Suspense Account
In spite of best efforts, locating errors
is not an easy task and may take some
time. Unless detected and located,
errors cannot be corrected. To avoid
delay in the preparation of financial
statements, the amount of difference
of the trial balance is temporarily put
in an account called Suspense
Account so as to tally the trial balance
by putting the difference on the shorter
side. When all errors are located and
rectified, the suspense account would
close automatically. But in case some
balance still remains in the suspense
account, due to non location of errors,
it will be shown in the balance sheet
on the asset side in case of debit
balance and on the liabilities side in
case of credit balance.
4.7.1 Utility of Suspense Account
The main use of suspense account is
128 ACCOUNTANCY
Solution:
Books of Indu Journal
Date Particulars Debit Credit
Amount Amount
Rs. Rs.
2001 Purchases A/c Dr. 500
April 1 Suspense A/c 500
(being Purchases Day Book total under
cast by Rs.500, now rectified)
Sales A/c Dr. 5,000
Suspense A/c 5,000
(Sales Day Book, total overcast by
Rs.5,000, now rectified)
Office Equipment A/c Dr. 3,645
Suspense A/c 3,645
(Office equipment was under debited
by Rs.3,645, now rectified)
to facilitate the preparation of financial
statements. Later on errors affecting
the trial balance are located,
rectification entries are passed
through the suspense account.
4.7.2 Preparation and Treatment
of Suspense Account
The following example highlights how
a suspense account is used to rectify
the errors.
Illustration 3
Indu prepared a Trial balance of her
shop for the year ended on 31 March
2001. The debit total of the trial
balance was short by Rs.9,145. She
transferred the deficiency to a
suspense account. In April 2001, after
a close examination, she found the
following errors:
(i) Purchases day book for
September 2000 was under cast
by Rs.500.
(ii) Sales day book of November
2000, was overcast by Rs.5,000
(iii) A second hand computer
purchased for office use for
Rs.4,050 was recorded in the
office equipment account as
Rs.405.
(iv) A bill drawn by her for
Rs.20,000 was not entered in
the bills receivable book.
(v) A machinery purchased for
Rs.50,000 was entered in the
Purchases day book.
Pass the necessary journal entries
to rectify the above errors to help Indu
in finalizing her trial balance.
2001 Bills Receivable A/c Dr. 20,000
April 1 Sundry Debtors A/c 20,000
(Bill drawn completely omitted in the
books, now recorded)
Purchases A/c 50,000
(Purchases account wrongly debited
instead of machinery account, now rectified)
Total 79,145 79,145
Suspense Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
2001 Rs. 2001 Rs.
March Balance b/f 9,145 Apr 1 Purchases A/c 500
31 (balancing Sales 5,000
figure in the Office 3,645
trial balance) Equipment
9,145 9,145
Illustration 4
The trial balance of Anand Dealers
prepared on 31

December 2000 did not
tally. The difference was placed in the
suspense account on the debit side Rs.
39,180. A detailed examination of his
books revealed the following mistakes:
(i) A payment of Rs.20,000 to John
was posted to the credit of his
account.
(ii) Goods returned by Amrita a
regular customer for Rs.5,800
was posted to the credit of sales
account
(iii) Charges on renovation to the
slow windows of the shop of
Rs.23,640 was debited to the
furniture and fixtures account
as Rs.32,460.
(iv) A payment received from Rohan
for Rs.49,240 was credited to
Roshans account.
(v) Glass purchased for show
windows from Aftab suppliers
on a credit for Rs.38,450 was
recorded in the purchases day
book. At the time of posting,
their account was credited with
Rs.34,850.
You are required to correct the
above mistakes by passing the
necessary rectifying errors in the
General journal and find out amount
that was transferred to suspense
account where the trial balance did not
tally.
130 ACCOUNTANCY
Solution
Date Particulars Debit Credit
Amount Amount
Rs. Rs.
2001, Johns A/c Dr. 40,000
Dec 31 Suspense A/c 40,000
(being wrongly credited, now rectified)
Sales return A/c Dr. 5,800
Sales A/c Dr. 5,800
" Suspense A/c 11,600
(being sales account wrongly credited
and sales returns account not debited,
now rectified)
Suspense A/c Dr. 8,820
" Furniture & Fixtures A/c 8,820
(being furniture & fixture credited wrongly,
now rectified)
Roshans A/c Dr. 49,240
" Rohan A/c 49,240
(being correction of wrong entry in Roshans
account by correctly crediting Rohan)
1.Furniture and Fixture A/c Dr. 38,450
" Purchases A/c 38,450
(being purchases account wrongly debited,
now stands corrected)
2.Suspense A/c Dr. 3,600
" Aftab A/c 3,600
(being wrong posting to Aftabs account,
now rectified)
Total 1,51,100 1,51,100
Suspense Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
2001 Rs. 2001 Rs.
April 1
Furniture & Fixtures 8,820 March 31 John 41,800
Dec. Aftab 3,600 Sales Returns 5,800
31 Balance b/f 39,180 Sales 5,800
51,600 51,600
Terms Introduced in this Chapter
Trial Balance
Errors of Commission
Errors of Omission
Compensating Errors
Errors of Principle
Suspense Account
1 Meaning of Trial Balance
A statement showing the extract of the balances, either credit or debit of various
accounts in the ledger.
2 Objectives of Trial Balance
to check the arithmetical accuracy of the ledger accounts;
to help in locating errors;
to provide a basis for preparing the financial statements.
3 Preparation of Trial Balance
A Trial Balance has four columns, the first column contains account code, the
second column is for the title of the account, the third column is for writing the
debit balance and the final column is where the credit balance of the account in the
ledger is written.
4 Types of Errors
There are four types of errors:
Errors of Commission
Errors caused due to wrong recording of a transaction, wrong posting, wrong
totaling, wrong balancing, etc.
Errors of Omission
Errors caused due to omission of recording a transaction either fully or
partially in the books of accounts.
Errors of Principle
Errors caused due to ignoring the accounting principles which may lead
to wrong classification or identification of receipts and payments between
revenue and capital receipts and revenue expense and capital
expenditure.
Compensating Errors
Two or more errors committed in such a way that they nullify the effect of
each other on the debits and credits.
132 ACCOUNTANCY
5 Rectification of Errors
Errors affecting only one account can be rectified by giving an explanatory note or
by passing a journal entry. Errors which affect two or more accounts are rectified
by passing a journal entry.
6 Meaning and Utility of
Suspense Account
An account in which the difference in a trial balance is put temporarily till such
time that errors are located and rectified. It facilitates the preparation of provisional
financial statements even when the trial balance does not tally.
7 Disposal of Suspense Account
When all the errors are located and rectified by passing the necessary journal entries,
the suspense account automatically stands disposed off.
EXCERCISES
1. Fill in the Blanks
(i) Errors of principle ____________ affect the Trial Balance.
(ii) The equality of ___________ and ___________ of the Trial Balance does
not mean that the individual accounts are also _________
(iii) All ______________ and ______________ accounts appearing in the Trial
Balance are transferred to the Trading and Profit and Loss Account.
(iv) If the Trial Balance does not ___________ it indicates that some
___________ have been committed.
(v) A Suspense Account facilitates the ____________ of financial statements
even when the ___________ has not tallied.
2. Multiple Choice Questions
(a) Which of the following errors will not affect the Trial Balance?
(i) Wrong balancing of an account
(ii) Writing an amount in the wrong account but on the correct side
(iii) Wrong totaling of an account
(b) Which of the following errors is an error of omission?
(i) Sale of Rs.500 was written in the purchases journal
(ii) Wages paid to Mohan have been debited to his account.
(iii) The total of the sales journal has not been posted to the Sales Account
(c) Purchase of office furniture for Rs.3,400 has been debited to General
Expenses Account. It is:
(i) An error of commission
(ii) An error of omission
(iii) An error of principle
(d) Which of the following errors will affect the Trial Balance Account?
(i) Repair to buildings have been debited to buildings.
(ii) The total of purchases journal is Rs.1,000 short.
(iii) Freight paid on new machinery has been debited to the Freight
account
(e) Errors of commission do not allow:
(i) Correct totaling of the Balance Sheet
(ii) Correct totaling of the Trial Balance
(iii) The Trial Balance to agree
(f) The preparation of a Trial Balance helps in:
(i) Locating errors of complete omission
(ii) Locating errors of principle
(iii) Locating errors of commission
(g) Which of the following errors is an error of principle
(i) Rs. 500 received from Ganpat has been debited to his account
(ii) Purchase of Rs.1,000 has been entered in the sales journal
(iii) Repairs to buildings have been debited to Buildings Account
(h) Which of the following errors is an error of principle
(i) Rs.500 received from Rakesh has been debited to his account
(ii) Sales of Rs.1,000 has been entered in the Purchases journal
(iii) Repairs to Machinery have been debited to Machinery Account
(i) The type of account with a normal credit balance is:
(i) An asset
(ii) A drawing
(iii) A revenue
(iv) An expense
(j) The form listing the balances and the title of the accounts in the
ledger on a given date is the :
(i) Income statement
(ii) Balance Sheet
(iii) Retained earnings statement
(iv) Trial Balance
134 ACCOUNTANCY
3. Indicate whether the following accounts will have debit or credit balances:
(i) Sales Returns
(ii) Carriage Inwards
(iii) Purchases
(iv) Outstanding Wages
(v) Capital Account
(vi) Machinery
(vii) Goodwill
(viii) Cash in Hand
(ix) Cash at Bank
(x) Bills Payable.
4. State the meaning of trial balance?
5. What is the purpose of preparing trial balance?
6. What is the purpose of preparing Suspense account?
7. Explain compensating errors and give two examples of such errors?
8. Explain errors of principle and give two examples of such errors?
9. Explain the limitations of the Trial Balance.
10. Name the errors that do not affect the agreement of Trial Balance.
11. Explain the meaning and Objectives of the Trial Balance.
12. What is a Trial Balance? Name the errors which affect the Trial Balance?
13. If a Trial Balance tallies, can it be concluded that there are no errors?
Why?
14. Explain errors of omission and give two examples of such errors with
measures to rectify them.
15. Explain errors of commission and give two examples of such errors with
measures to rectify them.
Problems
16. Give rectifying journal entries for the following errors:
(i) A sale of goods to Mohit amounting to Rs.2,500 has been wrongly
passed through the purchases book.
(i) Rs. 15,000 paid for Furniture purchased has been charged to
Purchases Account.
(i) A cheque for Rs.15,000 received from Ram K. Gupta was dishonored
and has been posted to the debit of Sales Returns Account.
(i) An amount of Rs.400 due from Mukesh which was written off as a
bad debt was unexpectedly recovered and was posted to the personal
account of Mukesh.
(i) Rs. 12,000 paid by cheque for a printer was charged to the Office
Expense Account instead of Office Equipment account.
17. Rectify the following errors:
(i) Rs. 700 allowed as Trade in allowance has been credited to Sales
Account.
(ii) Rs. 1,000 paid as rent to the landlord was debited to the Landlords
Account.
(iii) Materials from the store for Rs.1,000 and wages of Rs.400 had been
used in making tools and implements for use in the factory but no
adjustments were made in the books.
(iv) The purchases book was overcast by Rs.100.
(v) A sale of Rs.500 to Gupta & Co. was credited to its account.
(i) Wages paid for the Construction office were debited to Wages Account,
Rs.15,000
(ii) Cartage paid for the newly purchased Furniture, Rs.100 charged to
the Cartage Account
(iii) Furniture purchased on credit from Babu Ram for Rs.3,000 recorded
as Rs.300
(iv) Wages paid Rs.2,550 were posted in the Wages Account as Rs.2,505
(v) Purchases from Mamata Rs.1,002 were omitted from the books.
19. The trial balance of a book-keeper shows an excess of debits over credits
by Rs.361. This difference is placed in the Suspense Account. Later, the
following errors were discovered.
(i) A credit item of Rs.2490 has been debited to The personal account of
Dinesh as Rs.4290
(ii) Rs.9000 paid for Furniture bought has been charged to Purchases
Account
(iii) A discount allowed to Ramesh has been credited to him as Rs.1450
in place of Rs.1540
(iv) The total of the returns inward book was Rs.10 short.
(v) A cheque for Rs.100 for miscellaneous expense was not posted to
Miscellaneous Expenses Account.
You are required to rectify the errors through Suspense Account and
prepare the Suspense Account.
20. Rectify the following errors
(i) The total of sales book was overcast by Rs.200.
(ii) Rs.4,000 paid for Furniture purchased has been charged to Office
Equipment Account.
(iii) Rs.450 paid to Ramesh was debited to Rameshachars Account.
(iv) A sum of Rs.300 paid to Shyam Lal, the clerk, was debited to his
personal account.
(v) Rs.150 paid for regular maintenance for the building was debited to
the Building Account.
136 ACCOUNTANCY
21. Rectify the following errors
(i) The total of purchases book was undercast by Rs.900
(ii) Goods invoiced Rs.2,500 and entered in the sales book on December
25 were returned on December 29. Although taken into stock on
December 31, no entry was passed in the books.
(iii) Discount allowed to Bharat Bhushan of Rs.150 was not entered in
the discount account though posted to the credit of his personal
account.
(iv) A payment of Rs.1,720 to Girish was debited to his account as
Rs.1,270.
(v) A sum of Rs.320 written off for depreciation on an asset has not been
posted to the Depreciation Account.
(vi) Total of debit column of journal proper was short on the debit by
Rs.360
22. The Trial Balance of New Delhi Dealers as on 31 March 1999, showed a
difference, and on scrutiny, the following discrepancies were observed.
(i) A sales bill for Rs.8,750 was wrongly debited to the customers account
as Rs.7,850.
(ii) Sales to Santosh of Rs.4,000 was entered in the sales return book
but was correctly debited to Santosh.
(iii) Bill received from Inderjeet Singh of Rs. 5,000 was entered in the
bills payable book.
(iv) An amount of Rs.6,800 owing by a customer had been omitted from
the list of Sundry Debtors.
(v) Goods bought from M. Kamlesh for an amount of Rs.6,400 has been
credited to his account as Rs. 8,400.
(vi) Rs.987.90 received from Mushtaq was entered in the cash book as
Rs.990.87.
Give journal entries rectifying the above errors.
23. Will you rectify the following errors?
(i) Rs.900 paid for the telephone bill of the telephone at the proprietors
residence was debited to Telephone Expense Account.
(ii) Cash sales of Rs. 1,200 to Manohar was correctly entered in the
Cash Book but was wrongly posted to account of Mohan
(iii) Rs. 1,500 spent on repairs of a machine was debited to Machinery
Account.
(iv) The amount of Rs.1,200 written off as bad debt, was recovered and
was credited to Rameshs personal account.
(v) Rs.2,000 included in the wages account was spent on the construction
of a cycle shed in the factory.
(vi) An amount of Rs.1,200 withdrawn by the proprietor for his personal
use has been debited to the Trade Expenses Account.
(i) A customer Suresh, returned goods of the value of Rs.700 which
were not recorded in the books.
(ii) The debit side of Radhey Lal, a debtor, is overcast by Rs.7,000.
(iii) A cheque of Rs.1,400 received from Rajneesh & Sons was dishonored
and debited to Allowances Account.
(iv) A fax machine purchased for the office for Rs.6,200 was entered in
the purchases book.
(v) Purchase of goods from Sushil & Co. for Rs.3,800 was entered in the
sales book as Rs. 4,800.
(vi) A credit sale to P.Mathur of Rs. 10,000 has been wrongly passed
through the purchases book.
(vii) Rs. 250 being the total discount allowed to debtors has been posted
to the credit of Discount Received Account.
ANSWERS
Fill in the Blanks
(i) do not
(ii) debit, credit, accurate
(iii) revenue, expense
(iv) tally, errors
(v) preparation, trial balance
Multiple Choice
(i). (b); (ii). (c); (iii). (c); (iv). (b); (v). (c); (vi). (c); (vii). (c); (Viii). (c); (ix).
(c); (x). (d).
Debit or Credit Balance
(i). Credit; (ii) debit; (iii) debit; (iv) credit; (v) debit;
(vi) debit; (vii) debit; (viii) debit; (ix) debit; (x) credit.
138 ACCOUNTANCY
CHAPTER 5
Depreciation Provisions and Reserves
LEARNING OBJECTIVES
explain the meaning of depreciation and other similar
terms;
state the need for providing depreciation and identify its
causes;
compute depreciation according to different methods (in
terms of Accounting Standard VI);
record transactions relating to depreciation and
disposition of assets;
define Provision and Reserves and distinguish between
them;
discuss the different type of Provisions and Reserves and
the accounting thereof.
139 DEPRECIATION PROVISION AND RESERVES
Depreciation, provisions and reserves
are two separate topics, therefore, they
are being presented as two different
sections. First section deals with
depreciation and section two deals
with provisions and reserves.
SECTION I
Depreciation
This section of the chapter deals with
the determination of the cost of fixed
assets; the allocation of this cost to
appropriate accounting periods; the
disposal of assets, and accounting
treatment thereof according to the
Accounting Standard VI of the Institute
of Chartered Accountants of India. In
the preparation of financial
statements, depreciation on fixed
assets has a special significance. It lies
in the fact that depreciation involves
relatively large amounts as expenses,
which are crucial for the ascertainment
of net profit and determination of the
balances of fixed assets, which are to
be shown in the balance sheet.
Depreciation, in general, is concerned
with the manner in which capital
expenditure gradually converts into
revenue expense for calculating net
income over a period of time.
5.1 Meaning of Depreciation
Depreciation may be described as a
permanent, continuing and gradual
shrinkage in the book value of fixed
assets. It is the cost of assets
consumed in business.
The Accounting Standard VI,
which lays down guidelines for
depreciation accounting, defines the
depreciation as follows:
Depreciation is a measure of the
wearing out, consumption or other loss
of value of a depreciable asset arising
from use, ef fluxion of time or
obsolescence through technology and
market changes. Depreciation is
allocated so as to charge fair
proportion of depreciable amount in
each accounting period during the
expected useful life of the asset.
Depreciation includes amortization of
assets whose useful life is pre-
determined.
Thus, the subject matter of
depreciation, or its base, are
depreciable assets which:
are expected to be used during
more than one accounting
period;
have a limited useful life; and
are held by an enterprise for use
in production or supply of goods
and services, for rental to
others, or for administrative
purposes and not for the
purpose of sale in the ordinary
course of business.
Further, depreciation is the
allocation of depreciable amount
which is the Historical Cost, or other
amount substituted for historical cost
less estimated salvage value.
Another point in the allocation of
depreciable amount is the expected
useful life of an asset. It has been
described as either (i) the period over
which a depreciable asset is expected
to be used by the enterprise, or (ii) the
number of production or similar units
140 ACCOUNTANCY
expected to be obtained from the use
of the asset by the enterprise.
According to Accounting
Terminology Bulletin No.1 of the
Committee on Accounting Procedures
of American Institute of Certified Public
Accountants depreciation accounting
is, A system of accounting which aims
to distribute cost, or other tangible
value, of capital asset, less salvage if
any, over the estimated useful life of
the unit (which may be a group of
assets) in a systematic and rational
manner. It is a process of allocation
and not of valuation.
The analysis of the foregoing
definition derives one to conclude that
depreciation is the cost of doing
business representing consumption
of facilities and loss in value for
production decisions.
5.2 Depreciation and Analogous
Terms
There are some terms-like depletion,
obsolescence and amortization, which
are also used in connection with
depreciation. This has been due to the
similar treatment given to them in
accounting on the basis of similarity
of their outcome, since they represent
the expiry of the usefulness of different
assets.
5.2.1 Depletion
It refers to the process of estimating
and recording the periodic charges to
operations owing to the exhaustion of
natural resource such as oil, coal or
standing timber. The main difference
between depletion and depreciation is
that the former is concerned with the
utilization of a bundle of economic
resources, but the latter relates to the
usage of an asset. In spite of this, the
result is erosion in the volume of
natural resources and expiry of the
service potential. Therefore, depletion
and depreciation are given similar
accounting treatment.
5.2.2 Obsolescence
It refers to a state of an existing asset
becoming out of date on account of the
availability of a better model due to
improvements in technology or changes
in demand pattern. Obsolescence is
the outcome of events external to the
asset, which significantly reduces the
net economic value of the physical
output, provided by it. However,
depreciation is physical deterioration
that arises from change in asset itself,
e.g., an engineer can observe changes
in machines output per period with the
passage of time like reduced machine
speed, more frequent breakdowns or
higher scrap rates. Yet their end-result
is the same, i.e., the shortening of their
estimated useful life, for being put
together for accoun-ting treatment.
5.2.3 Amortization
It is often used as a general term to
write off intangible assets such as
patents, copyrights, franchises,
leasehold mines which have entitle-
ment to use for a specific contracted
time. The procedure for amortization or
periodic write off, of a portion of the cost
of intangible assets is the same as for
recording depreciation of fixed assets.
5.3 Need for Depreciation
The need for providing depreciation in
accounting records arises from
conceptual, legal, and practical
business considerations. These
considerations impart to depreciation
a particular significance as a business
expense.
5.3.1 Matching of Costs and
Revenue
The rationale of the acquisition of fixed
assets in business operations is that
these are used in the earning of
revenues. Every asset is bound to
undergo some wear and tear, and loss
in value, once it is put to use in
business. Therefore, consumption of
the value of an asset is as much an
expense as any other expense incurred
in the normal course of business like
salary, carriage, postage and
stationary, etc. It is a charge against
the revenues of the corresponding
period before arriving at net profit
according to generally accepted
accounting principles.
5.3.2 Consideration of Tax
Depreciation is deductible expense for
tax purposes. This helps in reducing
the tax liability of the entity. Therefore,
tax authorities make their own rules
for the calculation of depreciation.
These rules need not necessarily be
similar to current business practices
or regulations other than taxation.
5.3.3 Fair Financial Position
If depreciation on assets is not
provided for, then the assets will be
over valued and the balance sheet will
not depict the correct financial position
of the business. Also, this is not
permitted either by established
accounting practices or by specific
provisions of law.
5.3.4 Recording the True Impact
of an Expense
Depreciation is a device for maintai-
ning a proper record of capital and
revenue expenditure of a business
entity. This becomes quite clear when
an outright purchase of an asset is
compared with taking of an asset on
hire rent or fee which is charged against
periods revenue assuming for at net
profit. Therefore, purchase of an asset
indirectly implies that the asset has
been given on hire by capital to revenue.
Recording of this crucial expense goes
a long way in providing more complete
information for the computation of
product cost of goods manufactured.
5.3.5 Compliance with Law
Apart from tax regulations, there are
certain specific legislations that
indirectly compel some business
organizations like corporate enter-prises
to provide depreciation on fixed assets.
5.4 Factors Affecting Depreciation
These have been very cogently spelt out
as part of the definition of depreciation
in the Accounting Standard VI and are
being elaborated here.
142 ACCOUNTANCY
5.4.1 Wear and Tear
Wear and tear means deterioration,
and the consequent diminution in its
value, arising from its use in business
operations for earning of revenue. It
reduces the asset s technical
capitalizes to serve the purpose for,
which it has been meant. Another
aspect of wear and tear is the physical
deterioration. A asset deteriorates
simply with the passage of time, even
though they are not being put to any
use. This happens especially when the
assets are exposed to the rigours of
nature like weather, winds, rains, etc.
5.4.2 Expiration of Legal Rights
Certain categories of assets lose their
value after the agreement governing
their use in business comes to an end
after the expiry of pre-determined
periods. Examples of such assets are
patents, copyright, leases, etc. whose
utility to business is extinguished
immediately upon the removal of legal
backing to them.
5.4.3 Obsolescence
Obsolescence is another factor leading
to depreciation of fixed assets. In
ordinary language, obsolescence
means the fact of being out of date.
Obsolescence has reference to an
existing asset becoming out of date an
account of the availability of better type
of asset. It arises form such factors as:
technological changes;
improvements in production
methods;
change in market demand for
the product or service output of
the asset, and
legal or other description.
5.5 Determinants of Depreciation
The determination of deprecation
focusses on the parameters involving
cost, estimated useful life and probable
salvage value in estimating its
amount.
5.5.1 Cost of Asset Installed
The cost of the asset generally includes
its purchase price plus all the
expenditure required to secure title to
it and to get it ready for operational
use. Thus, the cost of land also
consists of legal charges, brokers fees
and transfer taxes; the cost of building
as well comprises permit fee,
engineering fees, remodelling costs; the
cost of machinery is represented by
additional expenses of transportation,
installation and all other costs
incurred in putting it into a position
to start its operations. Similarly, when
an old plant is acquired, all
expenditures incurred in bringing it to
its full operational level paint
overhauling, replacement parts, etc-
are treated as cost of the asset.For
example, a pressing machine was
purchased for Rs.10,000 at 2 per cent
discount net condition. Rs.250 were
paid for its transportation to the
workshop site, Rs. 150 was the wiring
cost incurred on it and special
foundation for it required an
expenditure of Rs. 220. The cost of the
machine for use in operations would
include following:
Rs Rs
Purchase price 10,000
Less 2% cash discount 200
Net purchase price 9,800
Add installation costs:
Transportation 250
Wiring 150
Special foundation 220 620
Total cost of the asset 10,420
The journal entry for the purchase of
machine would be:
Rs. Rs.
Cash/Bank A/c 10,420
(Cash purchase of
machine)
5.5.2 Estimated Useful Life
Depreciation denotes the cost of an
asset allocated to accounting period
either according to a time-bound
programme or as per production
capacity of the asset. The estimated
useful life of the asset is of critical
importance as a determinant of
depreciation. Useful life of the asset
is represented by the number of
years of estimated serviceable life
span of an asset. Thus, if an asset
is expected to last for ten years
bef ore compl etel y l osi ng i ts
usefulness for business operations,
its useful life is taken to be ten years.
The useful life of a depreciable asset
is shorter than its physical life and
is:
pre-determined by legal or
contractual limits, such as,
expiry dates of leases;
directly governed by extraction
or consumption;
dependent on the extent of use
and physical deteriorations on
account of wear and tear which
again depends on operational
factors, such as, the number of
shifts for which the asset is to
be used, repairs and mainte-
nance policy of the enterprise, etc.
Determination of the useful life of
the asset is a matter of estimation.
These days such estimates are
provided by the supplier of the asset
himself to the buyer at the time of
purchase. Such estimation is more
difficult for an asset using new-
technology or used in production of a
new-product due to rapidity of
inventions and innovations. In the case
of internally generated assets,
depreciation is provided on the
peculiar operational features of the
asset concerned or standard operating
policies of the enterprise in this
connection by using managements
estimate about the life of an asset.
5.5.3 Estimated Salvage Value
When the useful life of the asset comes
to an end, it may either become entirely
value less or may fetch a very small
amount when sold in the market as
scrap. The value of the asset that is so
realized is referred to as Residual,
Breakup or Salvage value.
Determination of the residual value is
normally a difficult matter. If such a
value is considered insignificant, it is
generally regarded as nil. In case the
residual value is likely to be significant,
it is estimated at the time of
144 ACCOUNTANCY
acquisition/ installation or at the time
of the subsequent revaluation of
assets. It is mostly regarded that
experience alone will enable a business
to arrive at a salvage value factor.
5.6 Methods of Depreciation
The depreciation to be provided for
during an accounting year is the
function of depreciable amount and
the method of allocation. For this, two
methods are mandated by law and
enforced by professional accounting
practice in India, these are the Straight
Line Method and Written Down Value
Method. These methods are discussed
hereunder:
5.6.1 Straight Line Method
This is the earliest and one of the most
widely used methods of providing
depreciation. It is based on the
assumption of equal usage of the asset
over its entire useful life. This is also
called Straight Line Method for the
reason that if the amount of
depreciation and corresponding time
period is plotted on a graph, it will
result in a straight line (figure 5.1). It
is also called fixed installment method
because the annual charge of
depreciation remains constant from
year to year over the useful life of the
asset. According to this method, a
fixed and an equal, amount is charged
as depreciation in every accounting
period during the life-time of an asset.
The amount annually charged to
depreciation is such that it reduces the
original cost of the asset to its scrap
value, at the end of its serviceable life.
The depreciation to be provided under
this method is computed by using the
following formula:
Depreciation = Acquisition Cost of Asset - Estimated
Amount Scrap Value
Estimated Life of the Asset
Total amount of depreciation to be
provided would be equal to cost of
acquisition less scrap value. Rate of
depreciation, under straight line
method is the per cent of the portion
of depreciation to the total cost of the
asset to be provided during the useful
lifetime of the asset. Rate of depre-
ciation is calculated as follows:
Annual Depreciation Amount 100
=
Depreciation Cost of Assets
Fig 5.1: Showing straight line depreciation
when plotted on a graph
5.6.2 Written Down Value Method
Under this method, depreciation is
charged on the book value of the asset.
Since book value keeps on reducing
by the annual charge of depreciation.
It is also known as reducing balance
method. This method involves the
application of a predetermined
proportion/percentage of the book
value of asset at the beginning of every
Rate of
Straight Line Depreciation
0
2000
4000
6000
1 2 3 4 5
Life of Asset
D
e
p
r
e
c
i
a
t
i
o
n
Series1
accounting period, so as to reduce the
asset to its break-up value at the end
of its useful life.
Thus, the rate of depreciation
remains fixed but the amount of
depreciation charged on the asset goes
on diminishing with the passage of
time. This is due to the reason that a
pre-determined percentage is applied
to a gradually shrinking balance on the
asset account every year. Under this
method, large amount is recovered as
depreciation charge in the earlier years
than in the later years.
Rate of Depreciation
Under Written Down Value Method,
the rate of depreciation is computed by
using the following formula:
Rate of Depreciation = [ 1- n S ] 100
(in percentage) C
Where : n = expected useful life
s = scrap value
c = cost of an asset.
Box 1: Computation of rate of depreciation under
written down value method
Illustration 1
Nagi Company Ltd purchased a cold
storage plant for Rs 2,50,000 on 1
January 2001.Depreciation is to be
provided annually according to
straightline method. The useful life of
the plant is 10 years and its scrap value
after 10 years is estimated to be
Rs.10,000. Compute the amount of
depreciation to be charged every year and
also calculate the rate of depreciation.
Solution
Annual Depreciation Amount:
Acquisition Cost of Asset - Estimated Scrap Value
=
Estimated Life of the Asset
Rs. 2,50,000 - Rs.50,000
=
10
= Rs. 20,000
Rate of

Annual Depreciation Amount 100

=

Depreciation

Acquisition Cost
Rate of Depreciation
= Rs. 2,40,000100/2,50,000
= 9.6%
Illustration 2
Gourav Bros. acquired a machine on
1 July 1990, at a cost of Rs.28,000 and
spent Rs.2,000 on its installation. The
firm writes off depreciation at 10% of
the original cost every year. The books
are closed on 31 December every year.
Show the Machinery Account and
Depreciation Account for three years.
Solution:
Books of Gourav Bros Machinery Account
Dr. Cr.
Rs. Rs.
1990 1990
July 1 Bank 28,000 Dec 31 Depreciation 1,500
July 1 Bank 2,000 Balance c/f 28,500
Installation Dec 31
30,000 30,000
146 ACCOUNTANCY
1991 1991
Jan 1 Balance b/f 28,500 Dec 31 Depreciation 3,000
Balance c/f 25,500
28,500 Dec 31 28,500
1992 1992
Dec 31 Balance c/f 22,500
25,500 25,500
1993
Jan 1 Balance b/f 22,500
Depreciation Account
Dr. Cr.
1990 Rs. 1990 Rs.
Dec 31 Machinery 1,500 Dec 31 Profit & Loss 1,500
1991 1991
1992 1992
Solution
Books of Raj Washing House Washing Equipment Account
Dr. Cr.
1999 Rs. 1999 Rs.
Jun. 1 Bank 2,00,000 Dec 31 Depreciation 20,000
Balance c/f ` 1,80,000
2,00,000 2,00,00
2000 2000
Jan 1 Balance b/f 1,80,000 Dec 31 Depreciation 22,000
Bank 20,000 Balance c/f 1,78,000
2,00,000 2,00,000
2001 2001
Jan 1 Balance b/f 1,78,000 Dec 31 Depreciation 22,000
Balance c/f 1,56,000
1,78,000 1,78,000
Illustration: 3
Raj Washing House purchased
washing equipment for Rs. 2,00,000
on 1

January 1999. On 1 January
2000, an additional machinery was
purchased for Rs.20,000. Prepare the
asset account in the book of Raj
Washing House for three years,
providing depreciation at 10% p.a.
using straight line method. The firm
close its book on 31 December every
year.
Book Value of Machine = Rs. 50,000- Rs.13,750
= Rs. 36,250
Depreciation for II year = Rs.36,250 x 27.5
(31 Dec 2002) 100
= Rs.9968.75
Book value of machine = Rs. 36,250 - Rs. 9968.75
= Rs. 26,281.25
Depreciation for III year = Rs. 26,281.25 x 27.5
(31 Dec 2003) 100
= Rs. 7,227.34
Book value of machine = Rs. 26,281 - Rs. 7,227.34
= Rs. 19,053.91
Calculation of Rate of
Depreciation:
Rate of depreciation = [ 1- n S ] 100
c
= 1-10 2,000 100
50,000
= .275 = 27.5%
1
Illustration 5
(Written Down Value Method)
Atul Transport Company purchases a
truck for a sum of Rs. 2,00,000 on
1 January 2001. It charges 20%
depreciation per annum according to
the written down value method. The
truck was sold on 1

July 2002 for a
sum of Rs. 1,60,000. You are required
to prepare the Truck Account for
2001-2002.
Working Notes
Calculation of Amount of Depreciation:
I Year: 10% on Rs 2,00,000 Rs. 20,000
II Year: Depreciation on equipment Rs. 20,000
Purchased on 1 January
1999 10% on Rs 20,000 Rs. 2,000
addition made on 1

Jan 2000
Rs. 22,000
Illustration 4
(Rate of Depreciation Written Down
Value Method)
On 1

January 2001, Shivam Printing
Press purchased a printing machinery
costing Rs. 50,000. Its scrap value is
Rs. 2,000 and expected life is 10 Years.
It is decided to depreciate printing
machinery by written down value
method for initial 3 years.
Calculate the rate of depreciation
under this method and show the
written down value (book value) at the
end of the year.
Solution
Depreciation for I year = Rs.50,000 x 27.5
(31 Dec 2001) 100
= 13,750
Solution
Books of Atul Transport Company
Truck Account
Dr. Cr.
2001 Rs. 2001 Rs.
July 1 Bank 2,00,000 Dec 31 Depreciation 40,000
Dec 31 Balance c/f ` 1,60,000
2,00,000 2,00,000
2002 2002
Jan 1 Balance b/f 1,60,000 Jul 31 Bank (sale 1,60,00
Proceed)
Dec 31 P&L (Profit 16,000 Depreciation 16,000
on Sale) (for 6 Months)
1,76,000 1,76,000
148 ACCOUNTANCY
5.7 Straight Line Method and
Written Down Value Method:
A Comparative Description
5.7.1 Annual Charge of Depreciation
Under straight-line method of
depreciation, a fixed portion of asset
is written down annually with respect
to the original cost. Thus, a fixed
amount is charged every year during
the life-time of an asset. Under written
down value method the charge of
depreciation declines every year with
respect to book value because
depreciation is charged on the book
value and not on the original cost
which is a reducing base.
5.7.2 Basis of Charge
This basis of charge under straight
l i ne method i s the cost of
acquisition/original cost of the asset
whereas the basis of charge is under
written down value method book
value of the asset.
5.7.3 Charge on Profit and Loss
Account
Under straight line method charge to
profit and loss account in respect of
depreciation and repairs are put
together as unequal charge against
income because of the constant
amount of depreciation charge during
the useful life of the asset whereas in
written down method such charge to
profit & loss account remains equal
because of amount of depreciation
being reduced in the later years and
repairs cost increases due to decline
in efficiency and wear and tear of the
asset due to advancing age of the asset.
5.7.4 Deferment
In straight line method, it is not
possible to defer the tax liability
whereas in written down method tax
liability can be deferred (but during the
entire life span of an asset tax liability
remains the same in both the
methods). See figure 5.2 .
S. Basis Straight Line Method Written Down
No. Value Method
1. Annual Charge of It is constant It declines with
Depreciation respect to book value
2. Basis of Charge It is based on cost of It is based on written down
acquisition value
3. Charge to Profit Charge will go on Charge remains almost
and Loss Account increasing year after uniform over years
year
Deferment of Tax It is not possible It is possible
Fig. 5.2 : Comparison of Straight Line Method and Written Down Value Method
Illustration 6
(Comparative Presentation of Methods)
Vishal Plastics acquired a machine on
1

July 1998 at a cost of Rs.1,00,000
on 31 March 2001. The machine was
sold for Rs.55,000. You are required
to prepare machinery account and
depreciation account in the books of
the firm according to both the straight
line and the written down value
assuming the rate of depreciation is 10%.
Methods: The account are balanced
on 31

December every year on its
installation.
Solution
Books of Vishal Plastics
Machinery Account
Dr. Cr.
Date Particulars S.L.M. W.D.V. Date Particulars S.L.M. W.D.V.
Amount Amount Amount Amount
Rs. Rs. Rs. Rs.
1998 Bank 1,00,000 1,00,000 1998 Depreciation 5,000 5,000
Jul 1 (Purchase) Dec 31 for 6 months
Dec 31 Balance c/f 95,000 95,000
1,00,000 1,00,000 1,00,00 1,00,000
1999 1999
Jun 1 Balance b/f 95,000 95,000 Dec 31 Depreciation 10,000 9,500
Dec 31 Balance c/f 85,000 85,500
95,000 95,000 95,000 95,000
2000 2000
Jan 1 Balance b/f 85,000 85,000 Dec 31 Depreciation 10,000 8,500
Dec 31 Balance c/f 75,000 76,500
85,000 85,000 85,000 85,000
2001 2001
Jan 1 Balance b/f 75,000 76,500 Mar 31 Bank-Sale 55,000 55,000
Price
Mar 31 Depreciation 2,500 1912
for 3 months
Mar 31 Profit and 17,500 19,588
Loss Account
(Loss on Sale)
75,000 76,500 75,000 76,500
SLM = Straight Line Method
WDV = Written Down Value Method
150 ACCOUNTANCY
Journal entries under this recording
technique are as follows:
Purchase of Asset (Year of purchase)
Asset A/c Dr.
Bank/Supplier A/c
(Cash or credit purchase of asset)
Depreciation Charged (Every Year)
to an Asset
Depreciation A/c Dr.
Asset A/c
(Depreciation provided on asset)
Transfer of Depreciation (Every Year)
as Business Expense
Profit and Loss Account A/c Dr.
Depreciation A/c
(Depreciation debited to
profit and loss account)
Sale of Asset as Scrap (Year of Sale)
Bank A/c Dr.
Asset A/c
(Asset sold as scrap)
Closure of Asset Account (At End)
5.8 Methods of Recording Depreciation
There are two types of arrangement for
keeping record of depreciation on fixed
assets viz:
depreciation is directly charged to
the asset account; and
depreciation annually provided
and accumulated in a separate
account, especially maintained for
the purpose.
5.8.1 Depreciation on Asset Account
According to this arrangement,
depreciation is provided by being
credited to the asset account every
year. That is, the depreciation, as a
business expense, is transferred to
Profit and Loss Account.
It is possible that, after an asset has
been completely depreciated and its scrap
value is realized, some balance might be
left on the asset account. Such a balance
is debited or credited, as the case may
be, to Profit and Loss Account denoting
profit or loss on sale of the asset.
If there is Profit
Asset A/c Dr.
P&L A/c
If there is Loss
Profit and Loss A/c Dr.
Asset A/c
Balance Sheet Presentation
Throughout the period of its service
tenure, the asset is listed in the balance
sheet at its book value at the beginning
of every year, less depreciation provided
on it at the end of the year.
5.8.2 Depreciation Accumulated
on a Separate Account
This method is designed to accumulate
depreciation provided in an asset on a
separate account generally called
Depreciation Provision or Accumu-
lated Depreciation. Such accumu-
lation of depreciation enables that the
asset account need not be disturbed
in any way and it continues to be
shown at its original cost over the
successive years of its useful life.
There are some basic charac-
teristics of this method of recording
depreciation, which must be focused upon
asset account continues to
appear at its original cost year
after year of its service tenure.
depreciation is accumulated on
a separate account instead of
being adjusted into the asset account
at the end of the accounting period.
recording mechanism has to be
used together with the two
methods of providing depreciation
because it is only a mode of
accounting representation.
The pattern of journal entries for
this method of recording depreciation
is as follows:
denotes either under provision or
excess provision as the case may be,
in respect of depreciation on the asset.
It is, therefore, transferred to profit and
loss account.
Balance Sheet Presentation
Asset is shown at its original cost in
the balance sheet throughout its
serviceable life and the balance on the
accumulated depreciation account is
shown as a deduction from its original
cost. This representation in the
balance sheet is more informative as it
gives both the original cost of, the asset
and the depreciation accumulated up
to the date on the asset account.
Illustration 7
(Methods of Recording Depreciation)
On 1

January 1998, Max GB Limited,
whose accounting year ends on
31 December, purchased ten machines
of Rs.2,000 each. On 31

March 1999,
one machine was sold for Rs.1,600 and,
on 30

September 2000 another machine
was sold for Rs.1,500. A new machine
was purchased on 30 June 2001 for Rs.
2,400. The Company has adopted the
practice of providing depreciation at 10
per cent per annum on original cost of
machines. You are required to prepare
the necessary ledger accounts
incorporating the above transactions of
machines, and providing appropriate
depreciation on them, where:
depreciation is written of f
through machinery account
depreciation is accumulated on
a separate account
Purchase of Asset (Time of
purchase)
Asset A/c Dr.
Bank/Supplier A/c
(Cash or credit purchase
of asset)
Depreciation Provided and
Accumulated (Every year)
Accumulated Depreciation A/c
(Depreciation provision accu-
mulated on a separate account)
Depreciation as Business Expense (End of year)
Profit and Loss Dr.
Account A/c
Depreciation A/c
(Depreciation charged to
profit and loss)
Retirement of Asset (Year of
retirement)
Accumulated Depreciation A/c Dr.
Asset A/c
(Transfer of accumulated
depreciation to asset)
Sale of Asset as Scrap (Year of sale)
Bank A/c Dr.
Asset A/c
(Scrap value of asset realized)
Closure of Asset Account
Some balance is normally left on the
asset account after an asset has been
complety depreciated and its scrap
value is realized. Such a balance
152 ACCOUNTANCY
Solution
1. Depreciation written off to machinery account
Books of Max GB Limited
Machinery Account
Dr. Cr.
Rs. Rs.
1998 1998
July 1 Bank 20,000 Dec 31 Depreciation 20,000
1
(Purchase) Dec 31 Balance c/f 18,000
20,000 20,000
1999
Jan 1 Balace b/f 18,000 Mar 31 Bank (sale) 1,600
Mar 31 P&L (Loss on 150
2
Sale)
Mar 31 Depreciation 50
Dec 31 Depreciation 1,800
Balance c/f 14,400
18,000 18,000
2000
Jan 1 Balance b/f 14,400 Mar 31 Bank (Sale) 1,500
Sep 30 Profit & Loss 50 Dec 31 Depreciation 1,750
14,450 14,450
2001
Jun 30 Bank 2,400 Dec 31 Balance c/f 11,880
(Purchase)
13,600 13,600
Working Notes:
Calculation of Depreciation amount for 1998
On Rs. 20,000 at 10 per cent for 1 year Rs. 2,000
1
(a) Loss on Sale of First Machine
Original Cost of Machine Sold Rs. 2,000
Less depreciation provided:
1998 - On Rs. 2,000 at 10% for one year Rs. 200
1999 - On Rs. 2,000 10% for 3 months Rs. 50 Rs. 250
Book value on 31

March 1999 Rs. 1,750
Less scrap value on sale Rs. 1,600
Loss on sale Rs. 150
2
(b) Depreciation amount for 1999:
On Rs. 18,000 (Rs. 20,000) at 10 per cent for year Rs. 1,800
On Rs. 2,000 at 10 per cent for three months Rs. 50
Total Rs. 1,850
(c) Profit on sale of second machine
Original cost of machine sold Rs. 2,000
Less depreciation provided:
1998 - Rs. 2,000 at 10% for 1 year Rs. 200
1999 - Rs. 2,000 at 10% for 1 year Rs. 200
2000 - Rs. 2,000 at 10% for 9 months Rs. 150 Rs. 550
Book value on 30

September 2000 Rs. 1,450
Less scrap value on sale Rs. 1,500
Profit on sale Rs. 50
(d) Depreciation amount of 2000
On Rs. 16,000 (Rs. 20,000 - Rs. 4,000) at 10% for 1 year Rs. 1,600
On Rs. 2,000 at 10% for 9 months Rs. 150
Total Rs. 1,750
(e) Depreciation amount for 2001
On Rs. 16,0001 at 10% for 1 year Rs. 1,600
On Rs. 2,400 at 10% for 6 months Rs. 120
Total Rs. 1,720
II. Depreciation Accumulated on a Separate Account
Machinery Account
Dr. Cr.
Rs. Rs.
1998 1998
July 1 Bank 20,000 Balance c/f 20,000
(Purchase)
20,000 20,000
1999 1999
Jan 1 Balance b/f 20,000 Mar 31 Bank (sale) 1,600
Mar 31 Accumulated 250
Depreciation
(Transfer)
Mar 31 P&L (Loss on 150
Sale)
Mar 31 Balance c/f 18,000
20,000 20,000
154 ACCOUNTANCY
Jan 1 Balance b/f 18,000 Mar 31 Bank 1,500
Sep 30 Profit & Loss 50 Dec 31 Accumulated 550
on Sale Dec 31 (Transfer) 16,000
18,050 18,050
2001
Jan 1 Balance b/f 16,000 2001 Balance c/f 18,400
Jun 30 Bank Purchase 2,400 2001
18,400 18,400
Books of Max GB Limited
Depreciation Account
Dr. Cr.
Rs. Rs.
1998 1998
July 31 Balance c/f 2,000 Dec 31 Profit and Loss 2,000
(Provision)
2,000 2,000
1999 1999
Mar 31 Machines- 250 Balance b/f 2,000
Transfer Dec 31 Provision & 1,850
Dec 31 Balance c/f 3,600 Loss
Dec 31 (Provision)
3,850 3,850
2000 2000
Sep 30 Machine- 550 Jan 1 Balance b/f 3,600
Dec 31 Transfer Dec 31 Profit & Loss 1,750
Balance c/f 4,800 (Provision)
5,350 5,350
2001 2001
Dec 31 Balance c/f 6,520 Jan 1 Balance b/f 4,800
Profit & Loss 1,720
Dec 31 (Provision)
6,520 6,520
5.9 Asset Disposal Account
Asset disposal account is designed to
provide a complete and clear view of
all the transactions involved in the sale
of an asset under one account head.
The concerned variables are the
original cost of the asset, depreciation
accumulated on the asset up to date,
sale price of the asset, value of the
parts of the asset used for retained, if
any, and the resultant profit or loss
on disposal. The balance of this
account is transferred to the profit and
loss account.
An important point about asset
disposal account is that it is of a
temporary nature and has to be closed
as soon as its purpose is achieved.
Therefore, it has to be prepared every
time an asset is sold, as its balance is
not carried over.
The journal entries required for
operating the Asset Disposal Account
are as follows:
Transfer from Asset Account
Asset Disposal A/c Dr.
Asset A/c
(Transfer from asset account for sale)
Transfer of Depreciation Provision Account
Depreciation Provision/Accumulated
Asset Disposal A/c
(Balance of depreciation provision transferred)
Sale of Asset
Bank A/c Dr.
Asset Disposal A/c
(Sale of asset)
Retained Parts of Asset
Stores/New Asset A/c Dr.
Asset Disposal A/c
(Value of retained parts brought into account)
Closure of Asset Disposal Account
Asset disposal account may
ultimately show a debit or credit
balance depending upon the details
entered in it. The debit balance on the
account would indicate either loss on
disposal, or inadequacy of depreciation
provided, and would be dealt with as
follows:
Profit and Loss A/c
Asset Disposal A/c Dr.
(Loss on disposal transferred to
profit and loss a/c)
The credi t bal ance of the
account, may be taken either as
prof i t on di sposal or excessi ve
provision of depreciation on asset,
and would be closed by the following
Journal entry:
Asset Disposal A/c
(Profit on disposal transferred to
profit and loss a/c)
Illustration 8:
(Disposal of Assets)
On 1

January 1999, Nagi Bros.
purchased six machineries for
Rs. 15,000 each.
Depreciation at the rate of 10 per
cent on original cost of machines has
been provided and accumulated on
Depreciation Provision Account.
On 1

January 2000, one machine
was sold for Rs.12,500 and, on
1 January 2001, a second machine
was also sold for Rs.13,000.
An improved model with a cost of
Rs.28,000 was purchased on 1

July
2000 and the arrangement for
providing depreciation was kept to be
the same as for older machines.
You are required to show of
Machinery A/c, Depreciation Provision
and Asset Disposal A/c.
156 ACCOUNTANCY
Machinery Disposal Account
Dr. Cr.
Rs. Rs.
2000 2000
Jan 1 Machine 15,000 Jan 1 Depreciation 1,500
(Purchase) Provision
Jan 1 Bank 12,500
Profit & Loss
Jan 1 (loss on sale) 1,000
15,000 15,000
2001
Depreciation
Jan 1 Machinery 15,000 Jan 1 Provision 3,000
(transfer)
Jan 1 Profit and Loss 1,000 Jan 1 Bank (sale price) 13,000
(gain on sale)
16,000 16,000
Solution
Books of Nagi Bros
Machinery Account
Dr. Cr.
Rs. Rs.
1999 1999
Jan 1 Bank 90,000 Dec 31 Balance c/f 90,000
(Purchase)
90,000 90,000
2000
Jan 1 Balance b/f 90,000 2000
Bank 28,000 Jan 1 Machine Disposal 15,000
(Purchase) (transfer)
Dec 31 Balance c/f
1,03,000
1,18,000 1,18,000
2001 1,03,000 2001
Jan 1 Balance b/f Jan 1 Machine Disposal 15,000
(transfer)
1,03,000 1,03,000
Depreciation Provision Account
Dr. Cr.
Rs. Rs.
1999 1999
Dec 31 Balance c/f 9,000 Dec 31 Depreciation 9,000
1
9,000 9,000
2000 2000
Jan 1 Machine 1,500 Jan 1 Balance b/f 9,000
Disposal
(Transfer)
Dec 31 Balance c/f 16,400 Dec 31 Depreciation 8,900
2
17,900 17,900
2001 2001
Jan 1 Machine 3,000 Jan 1 Balance b/f 16,400
Disposal
(transfer)
Dec 31 balance c/f 22,200 Dec 31 Depreciation 8,800
3
25,200 25,200
Working Notes:
Calculation of Amount of Depreciation amount
1999
10% on Rs. 90,000 for one year Rs. 9,000
1
2000
10 % on Rs. 75,000 for one year Rs. 7,500
10 % Rs 28,000 for six months Rs. 1,400
Rs. 8,900
2
2001
10 % on Rs. 60,000 (Rs. 75,000-Rs. 15,000)
for one year Rs. 6,000
10 % on Rs 28,000 for one year Rs. 2,800
Rs. 8,800
3
II Loss on sale of First Machine
Original Cost on 1

January 1999 Rs. 15,000
Less Depreciation at 10%
for the year Rs. 1,500
Book Value on 1
st
January 2000 Rs.13,500
Sale Price Realized Rs. 12,500
Loss on Sale Rs. 1,000
4
III Profit on Sale of Second Machine
Original Cost on 1

January 1999 Rs.15,000
Less Depreciation at 10% for
two year Rs. 3,000
Book Value on 1

January 2001 12,000
Sale Price Realized Rs. 13,000
Profit on Sale 1,000
5
Illustration 9
On 1.4.2001, following balances
appeared in the books on M/s Anil
Traders: Furniture account
Rs. 20,000, Provision for Depreciation
on Furniture Rs. 12,000.On 1.10.2001
a part of furniture purchased for
Rs.8,000 on 1.4.99 was sold for
Rs.3,000. On the same date a new
158 ACCOUNTANCY
furniture costing Rs.12,000 was
purchased. The depreciation was
provided @ 10% p.a. on original cost
of the asset and no depreciation was
charged on the asset in the year of
same. Prepare furniture account,
provision for depreciation on furniture
account for the year ending 31.3.2002.
Solution:
Books of Anil Traders
Furniture Account
Dr. Cr.
2001 Rs. 2001 Rs.
Apr 1 Balance c/f 20,000 Oct 1 Bank 3,000
Oct 1 Bank 12,000 Oct 1 Provision 1,600
Oct 1 Loss on Sale 3,400
Mar 31 Balance b/f 24,000
32,000 32,000
Dr. Cr.
2001 Rs. 2001 Rs.
Apr 1 Furniture 1,600 Apr 4 Balance c/f 12,000
2002 2002
May Balance c/f 12,200 May 31 Depreciation 1,800
31
13,800 13,800
Illustration 10
(Asset Disposal Account)
Solve problem 3, if asset disposal
account is to be prepared along
wi t h f ur ni t ur e account and
pr ovi si on f or depreci at i on on
furniture account.
Solution:
Books of Anil Traders
Furniture Account
Dr. Cr.
Rs. Rs.
2001 2001
Apr 1 Balance c/f 20,000 Oct 1 Furniture 8,000
Disposal A/c
2001 2002
Oct 1 Bank 12,000 Mar 31 Balance c/f 24,000
32,000 32,000
Dr. Cr.
Rs. Rs.
2001 2001
Oct 1 Furniture 1,600 Apr 1 Balance c/f 12,000
disposal
2002 2002
May Balance c/f 12,200 May 31 Depreciation 1,800
31
13,800 13,800
Furniture Disposal Account
Dr. Cr.
Rs. Rs.
2001 2001
Oct 1 Furniture 8,000 Oct 1 Depreciation 1,600
Bank 3,000
Profit & Loss
(loss on sale) 3,400
8,000 8,000
160 ACCOUNTANCY
Illustration 11 (Loss by Fire)
On 1.1.98, Neha Ltd purchased from
M/s Varun Bros plant costing
2,00,000 on instalment basis payable
as follows:
On 1.1.98 50,000
On 1.7.98 50,000
On 1.1.99 50,000
On 1.1.00 50,000
The company spent Rs. 5,000 on
transportation and installation of the
plant. It was decided to provide for
depreciation on straightline method.
For this purpose, the useful life of the
plant was estimated at 5 years. It was
also estimated that at the end of the
useful life, realizable value of the plant
would be Rs.6,000 (Gross) and
dismantling cost of the plant, to be paid
by the company was estimated at Rs.
1,000. The plant was destroyed by fire
on 31-12-01 and an insurance claim
of Rs. 25,000 was admitted by the
insurance company. Prepare plant
Account, Accumulated Depreciation
Account, Plant Disposal Account and
Loss on Sale of Plant assuming that
the company closes its books on
31

December every year.
Books of Neh Ltd
Plant Account
Dr. Cr.
Rs. Rs.
1998 1998
Jan 1 M/s Varun Bros. 2,00,000 Dec 31 Balance c/f 2,05,000
Bank 5,000
2,05,000 2,05,000
1999 1999
Jan 1 Balance b/f 2,05,000 Dec 31 Balance c/f 2,05,000
2,05,000 2,05,000
2000 2000
Jan 1 Balance b/f 2,05,000 Dec 31 Balance c/f 2,05,000
2,05,000 2,05,000
2001 2001
Jan 1 Balance b/f 2,05,000 Dec 31 Plant Disposal 2,05,000
2,05,000 A/c 2,05,000
Accumulated Depreciation Account
Dr. Cr.
Rs. Rs.
1998 1998
Dec Balance c/f 40,000 Dec 31 Depreciation 40,000
31 A/c
40,000 40,000
1999 1999
Dec Balance c/f 80,000 Jan 1 Balance c/f 40,000
31 Dec 31 Depreciation 40,000
80,000 80,000
2000 Balance c/f 1,20,000
Dec Jan Balance c/f 80,000
31 Dec 31 Depreciation 40,000
1,20,000 1,20,000
2001 2001
Dec Plant Dis- 1,60,000 Jan 1 Balance b/f 1,20,000
31 posal A/c Dec 31 Depreciation 40,000
1,60,000 1,60,000
Plant Disposal Account
Dr. Cr.
Rs. Rs.
2001 2001
Dec Plant 2,05,000 Dec 31 Accumulated 1,60,000
31 Depreciation
Insurance Co, 25,000
Profit & Loss 20,000
(Loss on Sale)
2,05,000 2,05,000
Loss on Sale Account
Dr. Cr.
Rs. Rs.
1998 1998
Dec 31 Plant Disposal 20,000 Dec 31 Profit and Loss 20,000
20,000 20,000
162 ACCOUNTANCY
SECTION II
Provisions and Reserves
In the previous section, we had
discussed about depreciation accoun-
ting and this section deals with
Provisions and Reserves.
Every business enterprise,
irrespective of its form of organization,
likes to conduct its operations in a
prudent manner so as to be able to
meet all eventualities both expected
and unexpected. This is done, among
other things, by making provisions,
and creating reserves, at the time of
the preparation of financial statements.
5.10 Meaning of Provisions
The term provision means an amount,
which is: written off, or retained, by
way of providing for depreciation,
renewals, diminution in the value of
assets; or retained by way of providing
for any unknown future liability of
which the amount cannot be
determined with reasonable accuracy.
Oviously, where the amount of a
liability is known, or can be
ascertained, a definite liability should
be created, e.g., liability for
outstanding interest. Examples of
provisions are provision for doubtful
debts, provision for depreciation,
provision for repairs, provision for
discount on debtors, provision for
taxation, provision for legal damages
likely to arise from a pending suit.
Provision is a charge against the profit
of the year and hence, it is debited to
profit and loss account before
calculating the net profit for the year,
and is shown in the balance sheet after
the certain liabilities on the liability
side. It is to be noted that provision
has to be made irrespective of the fact
whether a firm make a profit or not,
othervise it leads to breach of
prudential business behaviour.
5.11 Meaning of Reserves
Reserve means amount set aside out
of profits (as calculated by the profit
and loss account) or other surpluses
which are not meant to cover any
liability, contingency, commitment or
legal requirement. Thus, reserve
covers the case of amount which is
neither a liability nor a provision. It
is allocation of the profit and not a
charge against the current revenues.
It, in fact, belongs to the proprietors
over and above the capital contributed
by them. In case amount equal to a
reserve is invested in outside
securities, it is called Reserve Fund
but the absence of this conditions
entitles it to be called simply reserve.
When it is called fund and meant for a
given purpose, it is called Specific
Reserve, otherwise General Reserve.
Examples of reserves are Capital
Reserve, General Reserve, Contingency
Reserve, Dividend Equalization Reserve,
Debenture Redemption Fund, etc.
5.12 Importance of Provisions
and Reserves
A business firm in general, and a
corporate enterprise in particular may
consider it proper to set up some
mechanism to protect itself from the
consequences of known liabilities and
losses it may be required to bear in
future. It may also regard it as more
appropriate in certain cases to reduce
the amount that can be drawn by the
proprietors as profit in order to
conserve business resources to meet
certain significant demands for them
in future. An example of such a
demand is the much-needed
expansion in the scale of business
operations. This is presented as the
justification for the role of provisions
and reserves in business activities and
in accounting.
The amount so set aside may be
meant for the purpose of:
fulfilling some specific
requirements like repairs and
renewals of an asset;
meeting a future liability or loss;
strengthening the general
financial position of an
undertaking;
redeeming a long-term liability
like debentures.
5.13 Distinction
The identification and understanding
of the precise scope of provisions and
reserves require explanation of
dif ferences between them for
clarification of their respective roles in
business and in accounting.
5.13.1 Purpose
A provision is created for some specific
liability in view but reserve is meant
to meet the future legal obligations or
investment requirements of business
for development.
5.13.2 Mode of Creation
A provision is a charge against profit
and loss account of the year and has to
be created even when profits are not
expected. A reserve is an appropriation
of profits and can be made out of either
profits earned during a year or from already
existing surplus, e.g. contingency reserve.
5.13.3 Presentation in Balance Sheet
A provision is generally presented as
a deduction from the item for which it
has been created on the asset side of
the balance sheet or as a liability after
current liabilities as part of external
equities. Reserve is listed as distinct
item on the liabilities side of the
balance sheet.
5.13.4 Utilization
Very rigid restrictions are enforced in
practice on the use of provisions in
business operations to make them
adhere to the purpose for which they
have been meant. Contrary to this, the
balance of general reserve, or any
account of such a nature, is always
available for any bonafide requirements
of business. However, reserves created
under specific legal obligations such as
Capital Redemption Reserve or
Debenture Redemption Reserve is to be
used within the framework of the law only.
5.13.5 Identification with
Operations
A provision is made for meeting a
particular liability or likely loss on a
specific item. Therefore, they cannot
be distanced from business operations
164 ACCOUNTANCY
and their investment outside the
business is just not possible. Reserves,
being of a general nature, can be
invested outside the business to avoid
the possibility of their non-availability
in the event of need as well as to earn
some additional income with their help.
However, outside investment of
reserves by business is not mandatory
in all situations.
5.13.6 Inter Transfers
Provision cannot directly be trans-
ferred to any reserve but reserves,
where required, can be transferred to
provisions to boost their balances.
5.13.7 Support for Profit
Distribution
The severely restrictive rules governing
provisions do not make it possible for
them to provide a helping hand in as
genuine a business need as distribution
of profits to proprietors. However, the
balances on reserves are freely
available, and are commonly used, for
distribution of profits especially in the
case of corporate enterprises.
5.13.8 Demonstration Effect
The maintenance of provisions creates
a distinct impression of the entitys
affairs having been looked after in a
business like manner with due care
being taken of asset values as part of
the exercise of conservation of resources.
All this is in conformity with manage-
ments accountability of stewardship
accounting. On the other hand, the
creation of reserves build a positive
image of the enterprise in general, and
its management in particular, for their
prudent and progressive financial
policies. It is of far reaching significance
from the viewpoint of long-term
interests of the undertaking in
attracting long-term investors.
5.14 Types of Provisions
The number of provisions maintained
by a business undertaking depends
upon its requirements, which are
governed by the volume, range and
nature of its operations. Generally, a
business firm creates and maintains
provisions for taxations, repairs and
renewals, depreciation, discount on
debtors, bad and doubtful debts. But
provision for doubtful debts and
provision for discount on debtors has
been discussed at appropriate stages
in concerned chapters of the book.
5.14.1 Provision for Doubtful Debts
When business transaction take place on
credit basis, debtors may be of three types:
Good Debtors are those from
where collection of debt is certain.
Bad Debts are those debtors
from where collection of money
is not possible and the amount
of credit is a loss.
Doubtful Debts are those who
may pay but firm is not sure
about cent per cent collection
from them. In fact, as a matter
of business experience, some
percentage of such debtors are
not likely to pay, hence treated
as doubtful debts.
When it is certain that a debt will
not be recovered, the amount is written
off as bad debts. But it is also likely
that some of the remaining debts may
not be recovered in full. This will be a
loss to the business. Hence, it is a
common practice to make a suitable
provision for doubtful debts at the time
of ascertaining the profit or loss. The
balance sheet will not show the true
position of sundry debtors. The
provision for doubtful debts is usually
calculated as a certain percentage of
the total amount due from sundry
debtors after writing off all known bad
debts. Provision for doubtful debts is
also called Provision for Bad Debts, or
Provision for Bad and Doubtful debts.
Such a provision is made by debiting
the amount of doubtful debts to the
profit and loss account and crediting
the account of provision for doubtful
debts. Thus, the journal entry for
creating such a provision is as follows:
Provision for Doubtful Debts A/c
The bad debts arising during the
year are first written off from the
provision for doubtful debts account.
In doing so, the opening balance
standing to the credit of the provision
for doubtful debts account may not be
sufficient to meet the current amount
of bad debts as also the requirements of
future doubtful debts. This deficit is to
be provided for at the end of the year by
a charge to the profit and loss account.
In case, the annual amount provided for
is to be adjusted for any unused surplus
representing credit balance.
The following are the journal
entries required when the provision for
bad debts exists in the books:
For writing off further bad debts given
outside the trial balance:
Bad Debts A/c Dr.
Sundry Debtors A/c
For transferring the total bad debts to the
provision for Bad Debts Account:
Provision for Doubtful Debts A/c Dr.
Bad Debts A/c
For debiting the Profit and Loss Account
with the amount of new provision plus the
excess of bad debts over the old provision:
Provision for Doubtful Debts A/c
For crediting the Profit and Loss Account
with excess of the old provision over the
total bad debts plus new provision, if any:
Provision for Doubtful Debts A/c Dr.
Profit and Loss A/c
Illustration 12
(Provision for Doubtful Debts)
An extract of trial balance on
31 December 2001 is given below:
Name of the Account Debit Credit
Amount Amount
Rs. Rs.
Sundry Debtors. 80,000
Bed Debts 4,000
Provision of Bad Debts 7,000
Additional Information:
Bad Debts proved bad but not
recorded amounted to Rs. 5,000
Provision to be maintained at 10%
of Debtors.
Prepare necessary accounting
entries for writing off the bad debts and
creating the provision for doubtful
debts account.
166 ACCOUNTANCY
Solution
Dr. Journal Cr.
Date Particulars L.F Amount Amount
Rs. Rs.
Dec 31 Bad Debts A/c Dr. 5,000
Sundry Debtors 5,000
(Bad Debts written off)
Dec 31 Provision for Doubtful Debts A/c Dr. 9,000
Bad Debts A/c 9,000
Dec 31 Profit and Loss A/c Dr. 9,500
Provision for Doubtful Debts
1
9,500
(Charged short-fall and provision
for doubtful debts)
Total 23,500 23,500
Provision for Bad and Doubtful Debts Account
Dr. Cr.
Rs. Rs.
2001 2001
Dec Bad Debts 9,000 Jan 1 Balance b/f 7,000
31
Dec Balance c/f 7,500 Dec 31 P & L 9,500
31
16,500 16,500
Bad Debts Account
Dr. Cr.
Rs. Rs.
2001 2001
Dec Balance c/f 4,000 Dec 31 Provision for 9,000
31 Bad and
Dec Sundry 5,000 Doubtful Debts
31 Debtors
9,000 9,000
Profit and Loss Account for the year ended 31 December, 2001
Dr. Cr.
Rs. Rs.
Provision for 9,500
Bad and
Doubtful debts
Balance Sheet as at 31 December, 2001*
Assets Amount Liability Amount
Rs. Rs.
Less: Bad Debts 5,000
75,000
Less: Provision 7,500 67,500
for Bad and Doubtful Debts
*Relevant items only Working Notes
Provision for Doubtful Debts 7,500
required to be maintained
Add: Short fall of the
current provision:
Opening Balance 7,000
Less Bad Debts (9,000) 2,000
9,000
5.13.2 Provision for Discount on
Debtors.
In practice, business enterprises allow
cash discount to their customers. The
tenure of the cash discount period
may spilt-over into the following
accounting year for the sales made
during the current year. This requires
a provision to be made on debtors. and
is treated as a loss for the current year.
The accounting treatment is given
hereunder;
Accounting Treatment
Discount is allowed to debtor:
Discount Allowed A/c Dr.
Debtors A/c
Discount allowed transferred to P&L A/c
Provision for Discount on Debtors A/c
Total bad debts transferred to
provision for doubtful debts.
Provision for Discount on
Debtors A/c Dr.
Discount Allowed A/c
Illustration 13
(Provision for Discount on Debtors)
Following is the extract of Trial Balance
as at March 31, 2001
Name of Account Debit Credit
Amount (Rs) Amount (Rs)
Sundry Debtors 2,50,000
Discount Allowed 2,000
Provision for Discount 1,500
Allowed
168 ACCOUNTANCY
Additional information
Provision for Discount Allowed is to be maintained at 2%.
Solution
Journal
Dr. Cr.
Date Particulars J.F. Debit Credit
Amount Amount
Rs. Rs.
2001
March Provision for Discount on Debtor A/c Dr. 2,000
31 Discount Allowed A/c 2,000
(Discount Allowed written off)
March Profit and Loss A/c Dr. 5,500
31 Provision for Discount on Debtors A/c 5,500
1
(Provision for discount on debtors)
Total 7,500 7,500
Discount Allowed Accounts
Dr. Cr.
Rs. Rs.
2001 Balance b/f 2,000 2001 Provision for 2,000
Mar Mar Discount on
31 31 Debtors
2,000 2,000
Provision for Discount on Debtors Accounts
Dr. Cr.
Rs. Rs.
200 2000
Mar Discount 2,000 Apr 1 Balance b/f 1,500
31 Allowed 2001
Mar Balance c/f 5,000 Mar 31 Profit & Loss 5,500
7,000 7,000
Profit and Loss Account for the year ended March 31, 2001
Dr. Cr.
Rs. Rs.
Provision for 5,500
Discount on
Debtors
Balance Sheet as at 31

March 2001
Assets Amount Liability Amount
Rs. Rs.
Debtors Rs. 2,50,000
Less
Provision for Rs. 5,000
Discount on
Debtors 2,45,000
5.14 Types of Reserves
Reserves are broadly of two types
Capital Reserve and Revenue Reserve
5.14.1 Capital Reserve
Capital Reserve is an accounting
mechanism for conserving profits. The
amount so set apart as Capital
Reserve imparts an element of stability
to the over all finances of a business
enterprise. Capital reserve arises either
as a gain on sale of long-term assets
or an settlement of liabilities. Again of
capital nature may also arise due to
the basic transaction of being of capital
nature. For example: sale of equity
shares at a premium. Further,
allocation of revenue reserve may be
made to capital reserve due to legal
obligations. Capital reserve does not
include any free balance that might be
used for the distribution of profits. It
Working Notes
Provision for discount on debtors: Rs.
Provision required for discount 5,000
allowed on debtors
Less
Opening Balance of Provision 1,500
for discount allowed
500
Provision to be charged to Profit 5,500
and Loss Account
Alternative Calculation: Rs.
Provision required for discount on 5,000
debtoRs. as on March 31, 2001
Add Discount Allowed during the 2,000
year as per Trial Balance
Total amount received 7,000
Less Provision for discount of 1,500
debtors. as per Trial Balance
Provision to be charged to Profit and 5,500
Loss account for the
Year ended March 31, 2001
170 ACCOUNTANCY
clearly stated in the balance sheet
either in its body itself or by way of a
foot-note to the financial statements.
This is due to the reason that there
are rigid restrictions, both laid down
by law and enforced by accounting
standards, on the use of capital
reserve.
5.14.2 Revenue Reserves
Revenue reserves are created out of
revenue profit which are usually
distributable profits. All distributable
profits are not always available for
paying dividend since a certain
amount may be required to be kept
aside either by law (minimum) or as a
managerial decision (higher amount)
for business needs. It is only after this
that profit will be available for
distribution by way of dividend.
Examples of revenue reserves are:
General Reserve
Dividend Equalisation Reserve
Debenture Redemption Reserve
(only after complete redemp-tion
of those debenture under whose
trust deed this reserve were
created).
is this crucial factor alone which tends
to provide the much-needed financial
stability to an corporate undertaking.
Capital reserve comes into existence
from out of the capital profits arising from:
profits emerging from the
revaluation of fixed assets after
observing all restrictions;
profits accruing on the sale of
fixed assets;
profits from the re-issue of share
once forfeited by a companys
issue of shares at premium
profits arising at the time of
amalgamation and absorption of
companies
profit prior to incorporation of a
company;
Creation of capital Redemption
Reserve upon the redemption
preference shares.
Capital reserves, always have
credit balance which are shown on the
liabilities side of the balance sheet.
Whenever this reserve is utilized,
capital reserve account is debited. It
is also required that the manner of
the utilization of capital reserve
during an accounting period must be
5.15 Distinction between Revenue Reserve and Capital Reserve
Basis Revenue Reserve Capital Reserve
Creation It is created out of revenue It is created out of capital
profits gains and revenue profits.
Distribution of Dividend It can be used for distribution It can not be used for cash
of dividends. dividend distribution.
Objective Its objective is to strengthen It is created for meeting the
the financial position, meeting legal requirements or
unforeseen contingencies or accounting practice.
some specific purpose.
Usage It can be used for revenue as It can only be used for setting
as well as capital purposes of capital loss or other purposes specified by law
General Reserve
A general reserve is a retention of a
portion of revenue profits for the
improvement of the overall financial
status of an enterprise and to improve
its health in general.
An important point about general
reserve is that it is a salient feature of
corporate finance. The creation and
maintenance of general reserve helps
in realizing certain well recognized
purposes especially from the viewpoint
of financial management.
Improvement of the general
financial position of the
business by conserving
resources, which would have
otherwise been frittered away
at the expense of prudent
management.
Arrangement for meeting
unforeseen and abnormal losses
irrespective of their nature.
Providing avenues for the
further expansion of business
operations.
General reserve is created by debiting
the profit and loss appropriation
account and crediting general reserve
account. The latter account is placed
on the liabilities side of the balance
sheet. When the balance on this
account is used for any purpose,
general reserve account is debited.
Any such use of general reserve has to
be stated in some way in the balance
sheet. A number of provisions have
been included in the companies Act for
the regulation, creation and utilization
of general reserve. This underlines the
importance attached to it in the
functioning of corporate enterprises. A
word of caution about the commonly
perceived role of general reserve is
necessary. General reserve is widely
regarded as a means of strengthening
the overall financial position of the
business entity. However, this depends
upon the proper valuation of the assets
and liabilities of the business. In case
assets and liabilities are properly
valued, the balance on general reserve
is indicative of the financial health of
an enterprise but it is not so in the
absence of this vital condition.
Specific Reserves
A business undertaking in contem-
porary times is involved in a range of
business activities in pursuance of its
goal of creating value of the organi-
zation. Some of the of contingency
situations can be looked after and
financially managed by the creation of
provisions for known or expected
contingencies. Management may as
well like to provide a second line of
deface against some of these contin-
gencies as a measure of abundant
caution. A specific reserve is created
for a given purpose. It cannot be used
for any other purpose except for which
they are created. There can possibly
be any number of reserves in business,
every one of them characterized by
some peculiar feature dictated by the
specific purpose which they are meant
to serve. However, there is an under
current of common characteristics
shared by them.
172 ACCOUNTANCY
They are sharply focussed from
the viewpoint of their use
because they are built up for
some specific purpose or the
other.
A business-like approach to the
management of these reserves
may require that their balances
be invested outside the business.
All specific reserves are presented
on the liabilities side of the balance
sheet, as they are credit balances.
When any specific reserve is utilized,
the amount drawn upon is debited
to the account of the reserve
concerned. The reserves are credited
at the time of the preparation of
financial statements by allocations
decided to be made to them by
management and the corresponding
credit is given to profit and loss
appropriation account.
Depreciation
Depletion
Obsolescence
Amortization
Salvage value/ Residual value/ Scrap value
Written down value/Reducing value/Diminishing value
Straight line/Fixed Instalment
Asset Disposal
Accumulated Depreciation
1. Meaning of Depreciation
Depreciation is a permanent and gradual diminution in the value of an asset caused
by usage and effluxtion of time.
2. Factors Affecting Depreciation
Wear and Tear
Expiration of legal rights
Obsolescence
3. Determinants of Depreciation
Cost of asset installed
Estimated useful life
Estimated salvage value
4. Accounting Treatment
The accounting treatment is designed to record all transactions of purchase
and sale of an asset and charging of depreciation with the objective of reducing
the value of an asset to zero or its residual value as the case may be.
5. Methods of Calculating Amount of
Depreciation
Straight Line method: Under this, the fixed amount is charged as depreciation
every year during the lifetime of asset.
Written Down Value Method: In this method, a fixed percentage is applied to
the book value of an asset at the beginning of every accounting period,
rather than the original cost.
6. Methods of Depreciation
There are two methods of recording depreciation in the books of accounts
By maintaining a provision for depreciation account
Without maintaining a provision for depreciation account.
7. Asset Disposal Account
This account prepared to provide a complete and clear view of all the vari-ables involved
in the sale of an asset.
8. Provision
It is an amount written off or retained by way of providing depreciation, renewals,
diminution in the value of assets and for known liabilities. It is a charge on
profits and must for the ascertain-ment of true profits of business.
9. Reserve
It is allocation of profit. It is an amount set aside out of profits and is meant to
strengthen, the general financial position of a business enterprise.
10. Types of Reserves
Capital reserve: It is a mode for retaining profits in business, which are not
available for distribution as dividends. It is always a credit balance.
General reserve: It means retention of a portion of profit, not for any particular
purpose, but for the improvement of overall financial position of an enterprise.
11. Types of Provisions
Provision for doubtful debts: This provision is made on certain percentage of
total debtors appearing in the trial balance. It is meant for the recovery of
doubtful overdue account.
Provision for discount on debtors: This provision is also made on debtors and
is treated as a loss for the current year.
EXERCISES
I Multiple Choice Questions
(a) Depreciation arises due to:
(i) Physical wear and tear of the asset
(ii) Fall in the market value of asset
(iii) Fall in the value of money
(iv) None of these
174 ACCOUNTANCY
(b) Under diminishing balance method of charging depreciation, it:
(i) Increase every year
(ii) Decrease every year
(iii) Constant every year
(iv) None of these
(c) Under straight line method, depreciation is calculated on:
(i) Written down value
(ii) Original cost
(iii) Cost less scrap value
(iv) Original Cost less scrap value.
(d) The term depletion is used for:
(i) Fixed assets
(ii) Intangible assets
(iii) Natural resources
(iv) None of these
(e) Resources are the items of:
(i) current liabilities
(ii) owners equity
(iii) long-term liabilities
(iv) none of these
2. Fill in the blanks
(i) Depreciation represents a__________________ in the value of fixed
assets.
(ii) Scrap value of an asset means the ___________ that it fetched on sale
at the end of its ______________.
(iii) The assumption underlying the fixed instalment method of
depreciation is that of ___________________ of the asset over different
years of its useful life.
(iv) Capital reserve are those which are generally not distributed
as________________.
(v) The purpose of reserve is generally to ___________ the financial position
of a business enterprise.
3. True and False
(i) Depreciation can not be provided increase of loss, in a financial year.
(ii) Under written down value method, depreciation is charged on the
original cost of the asset.
(iii) Provision are the charges against profits for all apprehended losses.
(iv) Capital reserves are freely distributed as profits.
(v) All reserves appear on the liability side of the balance sheet.
4. Define depreciation?
5. What are the factors effecting depreciation?
6. Why should depreciation on fixed assets be brought into account?
7. Explain, in brief, the determinants of providing depreciation?
8. What is the purpose of capital reserves?
9. What is provision for doubtful debts? Why it is created?
10. Define depreciation as per Accounting Standard VI? Explain the need and
significance of providing depreciation?
11. Explain the determinants of providing depreciation?
12. Name and explain different types of provisions? Also write their accounting
treatment?
13. State the meaning of reserves? Explain the different types of reserves?
14. Distinguish between:
(i) Provision and Reserve
(ii) Capital Reserve and Revenue Reserve
Problems
Q. 15
On 1

Jan 2001, Alpha Fabrics Limited purchased a machine for Rs.52,000 and
spent Rs. 3,000 on its carrige and Rs.1,000 on its erection. On the date of
purchase it was estimated that the effective life of the machine will be 10 years
and after 10 years it scrap value will be Rs. 6,000.
Prepare Machine Account and Depreciation Account for four year. Depreciation
is charged on Straight Line basis Account are closed on 31

Dec each year.
Q. 16
Dinesh Garments purchased a machinery on 1

April 1997 for Rs.80,000. On
1

July 1997 another machinery costing Rs.2,00,000 was purchased. The
machinery purchased on 1

April 1997 was sold on 30

September 2001 for
Rs.9,850. The company charges depreciation @ 15% per annum on straight line
method. You are required to prepare machinery account for the years 1997-98
to 2001-02.
Q. 17
ACC Ltd purchased a machinery costing Rs. 60,000 on 1

April 1999. Another
machinery costing Rs. 40,000 was acquired on 1

Oct 1999. On 1

July 2000,
another machinery for Rs. 20,000 was purchased. On 1

Jan 2001, one third of
the machinery , which was installed on 1

April 1999 became obsolete and was
sold for Rs. 6,000. Prepare machinery account as it would appear in the books
of accounts. The depreciation is provided at 10% p.a. on straight line basis. The
books are closed on 31

March every year.
Q. 18
Excel Company Limited has a debit balance in its machinery account Rs. 15,000
(Original Cost of Rs. 50,000) as on 1

Jan 2000. On 1

April 2000, it purchased a
machinery costing Rs.30,000. It further purchased machinery on 1

Oct 2000
costing Rs. 20,000. On 1

Jan 2001, machinery purchased on 1

April 2000 became
obsolete and was sold for Rs. 2,000 and on 1

July 2001, an additional machinery
was purchased for Rs.10,000. Show how machinery account would appear in
176 ACCOUNTANCY
the books of Excel Company. The machinery is depreciated on Straight line
basis @ 10% p.a. Calculate the value of machinery as on 31

Dec 2000. The
books are closed on 31 December every year.
Q. 19
Nagi Road Transport Corporation (NRTC) purchased 25 Mini buses at
Rs. 2,00,000 each on 1

April 2000. On 1

Oct 2002, one of the buses met with an
accident and was completely destroyed. Insurance Co. paid Rs. 90,000 in full
settlement of the claim. On the same day, NRTC purchased a used Mini-Bus for
Rs. 1,00,000 and spent Rs. 20,000 on its overcharging. Prepare Mini-Bus Account
for 3 year ending on 31

Dec 2002. The depreciation is charged @ 20% on Straight
line basis.
Q. 20
Nandan Milk Foods Ltd. purchased the dairy machinery for Rs. 15,00,000 on
1 April 1995. The cost of installation was Rs. 1,00,000. On 1

July 1995, under
its expansion programme, the company purchased old machinery from Gopal
Milk Foods, which was under the process of winding off for Rs. 8,00,000. The
company charges depreciation of the @ 10% p.a. on straight line basis. On
1

Jan 1996, it was found that machinery purchased from Gopal Milk Foods was
not working effectively. Therefore, the company decided to sell it off for
Rs. 4,00,000. On the same date a new machinery cost Rs. 20,00,000 was
purchased. Your are required to prepare machinery account, for the year 1995-96
to 1998-99. The books of accounts are closed on 3 March every year.
Q. 21
Amrit Raj Data Processing Company whose accounting year is a calendar year.
purchased on 1

April 1990, a data processing unit costing Rs. 30,000. On
1

Oct 1990, it made additions to it costing Rs. 20,000 and on 1

July 1991 costing
Rs. 10,000. On 1

Jan 1992, a part of data processing unit installed on 1

April
1990 became obsolete and was sold for Rs. 3,000. The asset is depreciated on
written down value @ 10% p.a. Prepare the asset account and show the balance
as on 1

Jan 1993.
Q.22
On 1

Jan 1980, Aroma Fabricators purchased two machines for Rs. 60,000 and
40,000 respectively. On 1

Jan 1981 another machine was purchased for
Rs. 1,00,000. On 1

Jan 1982, the machine purchased on 1.1.80 for Rs. 60,000
got out of order and a new machine costing Rs. 1,20,000 was purchased after
surrendering the old machine which got out of order and paying cash Rs. 30,000.
On 1

Jan 1983 the machine which was purchased on 1

Jan 1981 for Rs. 10,00,00
was destroyed by fire and insurance company paid Rs. 60,000 only.
Depreciation is charged @ 10% p.a on written down value basis. Show the
machinery account for 1980, 1981, 1982, 1983. Also prepare machinery
disposal account and machinery lost by fire account. The books are closed on
31 December eveary year.
Q. 23
1.1.2001 Madras Printing House purchased ten machines of Rs. 1,80,000. On
30.6.2002, it acquired another machine at a cost of Rs. 30,000. On 31.3.2003,
one of the machines purchased on 1.1.2001 had become obsolete and was
disposed off for Rs. 2,500. Rs. 500 was paid as commission on sale of the machine.
It was replaced by a new machine costing Rs. 20,000. Show machinery account
from 2001 onwards it
Depreciation @ 10% on Straight line method
Depreciation @ 10% on Written Down Value method
Q.24
The following information relates to the business of Maharaja Enterprises for
the year ended Dec 31, 2001.
a. A debit balance on the Plant and Machinery account on Jan 1, 2001
Rs.26,840.
b. During the year 2001, three machines standing in the books at Rs.1,286
were sold for Rs.600.
c. On April 1,2001 new machine costing Rs.5,880 were purchased and were
installed by the manufacturers workman at an expenditure of Rs. 216 (i.e.
wages Rs. 174 and materials Rs. 42).
d. It is the practice of the business to write-off 15% depreciation to all additions
to the plant during a year and 20% to all old plants. Prepare the Plant and
Machinery account as it would appear on Dec 31, 2001.
Q. 25
A Limited Company purchased machinery for Rs. 40,000 on 1 Jan 1987. The
machinery was depreciated at 10% p.a. on Straight line basis. On 31 March
1989, the machinery was sold for Rs. 35,000. Give the machinery account in
companys books if the depreciation provision account is maintained.
Q. 26
Jinney soaps Ltd. Purchased a truck on 1 April 1998 for Rs. 5,00,000. On 1
July 1999 an other truck was purchased for Rs. 5,50,000. On 1

Oct 2001, the
truck purchased on 1

April 1998 met with an accident the claim for Rs. 1,50,000.
The company charges depreciation @ 20% on written down value basis and
maintain of provision for depreciation account. Prepare turck account, provision
for deprecation on truck account, truck disposal account.
Q. 27
A firm write off 95% of the cost of machinery acquired over a period of ten
years under Straight line method, remaining 5% as estimated scrap value.
Full depreciation is written off even if the machinery is in use only for par of
a year. On Dec 31, 1997, the original cost of the machinery in use was as
follows:
Purchased in 1987 or earlier Rs. 1,20,000
Purchased in 1989 Rs. 40,000
Purchased in 1993 Rs. 30,000
A machine acquired in 1993 at a cost of Rs. 15,000 was sold for Rs. 5,000. On
the same date, new machinery was acquired for Rs. 45,000. Prepare the
Machinery Account for the year 1998 in books of the firm, the accounts being
closed every year on Dec 31.
178 ACCOUNTANCY
Q. 28
Pass the necessary Journal entries and clearly show the working notes separately.
Debit Credit
Amount Amount
Rs. Rs.
Debtors 40,000
Bad Debts 2,000
Provision for Doubtful Debts 2,500
Provision for discount on DebtoRs. 900
Additional information
It is desired to create a provision for Bad and Doubtful debts at 5% on Debtors and
Provision for discount on debtors at 20%.
Q. 29
From the following, pass the journal entries, prepare the necessary ledger accounts,
also show how these items will appear in Profit and Loss account and Balance
Sheet.
Extract of Trial Balance as on 31

Dec 2002.
Debit Credit
Amount Amount
Rs. Rs.
Bad debts 1,200
Bad Debts provision 1.1.2002 3,650
Additional Information
Write off further bad debts Rs. 2,000
Provide for doubtful debts at 10% on sundry debtors
ANSWERS
1. Multiple Choice
a. (i) , b. (ii), c. (ii), d. (iii), e. (ii)
2. Fill in the Blanks
(i) Diminution,
(ii) Amount or Value,
(iii) Equal usage ,
(iv) Dividends,
(v) Strengthen ,
(vi) Allocation, Creation
3. True and False
(i) False
(ii) False
(iii) True
(iv) False
(v) True
Problems
15. Depreciation amount Rs. 5,000
Balance of Machinery Account 36,000
16. Loss on sale Rs.1,50,150
Balance of Machinery Account Rs. 1,41,500
17. Loss on Sale Rs.10,500
Balance of Machinery Account Rs. 84,500
18. Balance of Machinery Account Rs. 31,000
19. Loss on Bus Destroyed Rs. 10,000
Balance of Bus Account Rs. 4,74,000
20. Loss on Sale Rs. 3,00,000
21. Loss on Sale Rs. 5,325
Balance on 1

Jan 1993, Rs. 39,330
22. Balance of Machinery Account Rs. 97,200
Loss by fire Rs. 21,000
23. SLM- Loss on Sale Rs. 11,950
WDV- Loss on Sale Rs. 12,215
24. Balance of Machinery Account Rs. 25,626 approx
25. Provision for Depreciation Rs. 9,000
Profit on Sale Rs. 40,000
Balance of Machinery Account Rs. 40,000
26. Balance of Truck Account Rs. 4,25,0750.
27. Balance of Machinery account Rs. 54,675 approx
28. Provision for doubtful debts Rs. 1,500
Provision on discount on Debtors Rs. 860
29. Amount Debited to P&L account Rs. 9,550
Net Debtor Shown in Balance Sheet Rs. 90,000
180 ACCOUNTANCY
CHAPTER 6
Bills of Exchange
LEARNING OBJECTIVES
state the meaning of bill of exchange and promissory note;
describe features of bill of exchange and promissory note;
identify the parties to a bill of exchange and a promissory
note;
distinguish between a bill of exchange and a promissory
note;
explain the meaning of different terms involved in the
bill transaction, i.e. term of bill and days of grace, date of
maturity, bill after date, negotiation, endorsement,
discounting of bill, dishonour and noting of bill, insolvency
of acceptor, retirement and renewal of a bill; and
record accounting transactions of bills of exchange.
181 BILLS OF EXCHANGE
Goods can be sold or bought for cash
or on credit. When goods are sold or
bought for cash, payment is received/
made immediately .On the other hand
when goods are sold/bought on credit
then payment is deferred to a future
date. In such a situation, instruments
of credit are used through which the
buyer assures the seller that the
payment shall be made according to
the agreed conditions as stated in the
instrument of credit. The instruments
of credit in India have been in use since
time immemorial and are popularly
known as Hundies .The hundies are
written in Indian languages. Now-a-
days these instruments of credit are
called as bills of exchange or
promissory notes. The most important
point about these instruments is that
they contain an unconditional order
to pay a certain amount on an agreed
date in case of bills of exchange and
an unconditional promise to pay a
certain sum of money on a certain date
in case of promissory notes. These
instruments in India are governed by
the Indian Negotiable Instruments Act
1881.
6.1 Meaning of Bills of Exchange
According to the Negotiable Instru-
ments Act 1881, a bill of exchange is
defined as an instrument in writing
containing an unconditional order,
signed by the maker, directing a
certain person to pay a certain sum of
money only to, or to the order of a
certain person or to the bearer of the
instrument. The following features of
a bill of exchange emerge out on the
basis of this definition.
A bill of exchange must be in
writing and not oral.
It is an order to make payment.
The order to make payment is
unconditional.
The maker of the bill of
exchange must sign it.
The payment to be made must
be certain.
The date on which payment is
made must also be certain.
The bill of exchange must be
payable to a certain person.
The amount mentioned in the
bill of exchange is payable either
on demand or on the expiry of a
fixed period of time.
It must be stamped as per the
requirement of law.
ments Act, a bill of exchange is
generally drawn by the creditor on his
debtor. It has to be accepted by the
debtor or someone else on his behalf.
It is called a draft before its acceptance.
Therefore, one of the underlying
features of a bill of exchange is that it
has to be accepted either by the person
upon whom it is drawn or by someone
else on his/her behalf. For example,
Amit sold goods to Rohit on credit for
Rs.10,000 for three months. If agreed
so, Amit can draw a bill of exchange
upon Rohit for Rs. 10,000 payable after
three months. Before it is accepted by
Rohit it will be called a draft. It will
become a bill of exchange only when
Rohit writes the word accepted on it
and puts his signature to commu-
nicate the acceptance.
182 ACCOUNTANCY
6.1.1 Parties to a Bill of
Exchange
There are three parties to a bill of
exchange:
Drawer is the maker of the bill
of exchange. A seller/creditor
who is entitled to receive money
from the debtor can draw a bill
of exchange upon the buyer/
debtor. The drawer after writing
the bill of exchange has to sign
it as maker of the bill.
Drawee is the person upon
whom the bill of exchange is
drawn. Drawee is purchaser of
the goods upon whom the bill
of exchange is drawn. The dawee
has to write the word accepted
if he accepts to make the
payment given in the bill on the
due date and has to put his
signatures on it. After the
drawee of a bill has signed his
assent on the face of the bill, he
is called the acceptor and this
process is called acceptance. A
bill of exchange becomes a legal
document after acceptance and
binds the drawee to honour the
bill on the due date. Acceptance
however may be general or
qualified. The general accep-
tance requires signatures of the
acceptor only without stating
any conditions, thereto. However,
mention of a bank or a specified
place of payment or part
payment thereof, makes the
acceptance qualified.
A qualified acceptance varies the
express terms of the bill as
originally drawn and thereby the
drawer can refuse to consider
the bill as accepted. Sometimes
the bill of exchange may be
accepted by another person on
behalf of the drawee. For
example a bill of exchange
drawn by Ram upon Shyam may
be accepted by Ghanshyam.
Payee is the person to whom the
payment is made. The drawer of
the bill himself will be the payee
if he keeps the bill with him till
the date of its payment. The
payee may change in the
following situations.
In case the drawer has got the
bill discounted, the person who
has discounted the bill will
become the payee;
In case the bill is transferred in
favour of a creditor of the drawer
then the creditor will become the
payee.
Normally, the drawer and the payee
is the same person. Similarly, the
drawee and the acceptor is normally
the same person.
For example, Mamta sold goods
worth Rs.10, 000 to Jyoti and drew
a bill of exchange upon her for the
same amount payable after three
months. Here Mamta is the drawer
of the bill and Jyoti is the drawee. If
the bill is retained by Mamta for
three months and the amount of
Rs.10,000 is received by her on the
due date than Mamta will be the
payee.
If Mamta gives away this bill to her
creditor, Ruchi then Ruchi will be the
payee.If Mamta gets this bill
discounted then the banker will
become the payee.
In the above mentioned bill of
exchange, Mamta is the drawer and
Mamta New Delhi
Rs.10,000 1

April 2002
Three months after date pay to me or my order, the sum of Rupees Ten Thousand
only, for value received.
Accepted
(Signed) (Signed)
Jyoti Mamta
1.4.2002 196, Karol Bagh
73-B, Mahipalpur New Delhi
New Delhi 110 037
To
Jyoti
73-B, Mahipalpur
New Delhi 110 037
Fig. 6.1 : Showing the specimen of bills of exchange
the bearer.
However, according to the Reserve
Bank of India Act, a promissory note
payable to bearer is illegal. Therefore,
a promissory note cannot be made
Stamp
Jyoti is the drawee. Since Jyoti has
accepted the bill she is the acceptor.
Suppose in place of Jyoti the bill is
accepted by Ashok then Ashok will
become the acceptor.
6.2 Promissory Note
ments Act 1881, a promissory note is
defined as an instrument in writing
(not being a bank note or a currency
note), containing an unconditional
undertaking signed by the maker, to
pay a certain sum of money only to or
to the order of a certain person, or to
payable to the bearer.
This definition suggests that when
a person gives a promise in writing to
pay a certain sum of money uncon-
ditionally to a certain person or
according to his order then the
document is called as a promissory
note.
Following features of a promissory
note emerge out of the above definition.
It must be in writing.
It must contain an unconditional
promise to pay.
It must be signed by the maker.
The maker must be a certain
184 ACCOUNTANCY
person.
The person to whom payment is
to be made must also be certain.
The sum payable must also be
certain.
It should be properly stamped.
A promissory note does not require
any acceptance because the maker of
the promissory note himself promises
to make the payment.
Ashok Kumar
Rs.30,000 New Delhi
1

April 2002
Three month after date I promise to pay Sh. Harish Chander or order a
sum of Rupees Thirty Thousand only for value received.
To
Harish Chander Ashok Kumar
24, Ansari Road 2, Dariba Kalan
Darya Ganj Chandani Chowk
New Delhi 110 002 Delhi 110 006
Fig. 6.2 : Showing specimen of a promissory note
Stamp
6.2.1 Parties to a Promissory Note
There are two parties to a promissory
note:
Maker or Drawer is the person
who makes or draws the
promissory note to pay a certain
amount as specified in the
promissory note. He is also
called the promisor.
Drawee/Payee is the person in
whose favour the promissory
note is drawn. He is called the
promisee. Generally, the drawee
is also the payee, unless, it is
otherwise mentioned. In the
above specimen of promissory
note, Ashok Kumar is the
drawer or maker who promises
to pay Rs.30,000 and Harish
Chander is the drawee or payee
to whom payment is to be made.
If Harish Chander transfers
this promissory note in favour
of Rohit then Rohit will become
the payee. Similarly, if Harish
Chander gets this promissory
note discounted from the bank
then the bank will become the
payee.
6.3 Distinction between a Bill of
Exchange and a Promissory
Note
Both a bill of exchange and a
promissory note are instruments of
credit and are similar in many ways.
However, there are certain basic
differences between the two (fig. 6.3).
6.4 Advantages
The bills of exchange as instruments
of credit are used frequently in
business because of the following
advantages.
Frame for Relationship: A bill of
exchange represents a device,
which provides a framework for
enabling the credit transaction
between the seller /creditor and
buyer/debtor on an agreed
basis.
Certainty of Terms and Conditions:
The creditor knows the time
when he would receive the
money so also debtor is fully
aware of the date by which he
has to pay the money. This is
due to the fact that terms and
conditions of the relationship
between debtor and creditor
such as amount required to be
paid; date of payment; interest
to be paid, if any; place of
payment are clearly mentioned
in the bill of exchange.
Convenient Mode of Credit: A bill
of exchange enables the buyer
to buy the goods on credit and
pay after the period of credit.
However, the seller of goods even
after extension of credit can get
payment immediately either by
discounting the bill with the
bank or by endorsing it in favour
of a third party.
Conclusive Proof: The bill of
exchange is a legal evidence of
a credit transaction implying
thereby that during the course
of trade buyer has obtained
credit from the seller of the
goods, therefore, he is liable to
pay to the seller. In the event of
refusal of making the payment,
the law requires the creditor to
obtain a certificate from the
Notary to make it a conclusive
evidence of the happening.
Easy Transferability: A debt can
be settled by transferring a bill
of exchange through endor-
sement and delivery.
6.5 Maturity
When a bill of exchange or a promi-
ssory note is not payable on demand,
the payment is deferred to the date of
maturity of the instrument. It is the
date on which the instrument becomes
due for payment. In arriving at the
maturity date three days, known as
days of grace, must be added to the
date on which the instrument is
payable. Thus, if a bill dated March 5
is payable 30 days after date it falls
due on April 7, i.e. 33 days after March
5. However, if it were payable one
month after date, the due date would
be April 8, i.e. one month and 3 days
after March 5. But where the date of
maturity is a public holiday, the
instrument will become due on the
186 ACCOUNTANCY
S. Basis Bills of Exchange Promissory Note
No
1 Drawer It is drawn by the creditor
2 Order or It contains an order to
Promise make payment
3 Parties There can be there parties to it,
viz. the drawer, the acceptor and
the payee.
4 Acceptance It requires acceptance by the
drawee or someone else on his
behalf.
5 Payee Drawer and payee can be the
same party
6 Liability Liability of the drawer is
secondary and the liability of the
acceptor is primary.
7 Notice In case of its dishonour due
notice of dishonour is to be given
by the holder to the drawer
8 No. of copies One copy of a bill of exchange is
prepared in case of a local bill
and three copies are prepared
in case of a foreign bill.
9 Revenue Stamps are not required to
Stamps be fixed on the bills of exchange
payable on demand otherwise
stamps would be necessary.
It is drawn by the debtor
It contains a promise to make
payment.
There are only two parties to it.
The drawer or the maker who
draws the promissory note and
signs it and the payee to whom
the amount is payable.
It does not require any
acceptance.
Drawer cannot be the payee of
it.
The liability of the drawee is
primary.
No notice needs to be given in case
of its dishonour.
Only one copy is prepared in both
the cases.
Stamps have to be fixed on all
types of promissory notes.
Fig. 6.3 : Distinction between Bills of Exchange and Promissory Note
preceding business day. In this case if
8

April (maturity) is a public holiday
then the 7

April will be the maturity
date. When an emergent holiday is
declared under the Negotiable
Instruments Act 1881, by the
Government of India which may
happen to be the date of maturity of a
bill of exchange, then the date of
maturity will be the next working day
immediately after the holiday. For
example, the Government declared a
holiday on April 5, which happened to
be the day on which a bill of exchange
drawn by X upon Y for Rs.20,000
became due for payment. Since 5 April
has been declared a holiday under the
Negotiable Instruments Act, therefore,
April 6 will be the date of maturity for
this bill.
6.6 Negotiability
Negotiability means that the holder of
the instrument can transfer the title.
Bills of exchange and promissory notes
are negotiable instruments within the
meaning of Section 13 of Negotiable
Instruments Act 1881, however in case
of promissory note the negotiation is
restricted, but it does not render it to
the status of not-negotiable instru-
ment. This implies that a bill of
exchange can be transferred by
negotiation but a promissory note
cannot be. However, this is subject to
the condition that the holder acquires
them
without notice of defect in the
title of the transferor, i.e. in good
faith,
for a consideration, and
before maturity.
If these conditions are met, it does
not matter if the title of the transferor
was defective. Thus, if Rakesh steals a
bill of exchange and transfers it to
Rajesh who is not aware of Rakeshs
mode of acquiring the bill and he takes
it over for value and before the date of
its maturity, Rajesh will be entitled to
get payment on the bill of exchange.
However, if the words or order are
omitted from the bill, it cannot be
negotiated and becomes payable to the
person named therein and to him
alone. Bills of exchange and promi-
ssory notes can be passed on from one
person to another by endorsement and
delivery. If a bill of exchange or a
promissory note is dishonoured, that
is if payment is not made on the due
date by the drawee, the amount of
bill can be claimed from any of the
previous endorsers.
6.7 Endorsement of Bill
Any holder may transfer a bill unless
its transfer is restricted, i.e. the bill has
been negotiated containing words
prohibiting its transfer.
The bill can be initially endorsed
by the drawer by putting his signatures
at the back of the bill along with the
name of the party to whom it is
being transferred. The act of signing
and transferring the bill is called
endorsement.
6.7.1 Effects of Endorsement
Once an endorsement has been
made, the person endorsing the
bill is called an endorser. The
person to whom the bill is
endorsed is known as an
endrosee and the bill is said to
have been endorsed.
After a bill has been endorsed
and delivered to a third person
(endorsee), it would become
payable to him instead of
original holder (endorsee). The
endorsee may again endorse it
in favour of a fourth person
(unless endorsement is restricted)
188 ACCOUNTANCY
and this may continue to any
extent till the date of maturity.
An unrestricted endorsement
provides a mechanism for
settling the business payments.
6.7.2 Types of Endorsement
A bill may be endorsed in any one of
the following ways:
Blank Endorsement : It requires
signatures to be put by the
transferor, as follows:
Signed
Raja Ram
This makes the bill transferable by
mere delivery.
Special Endorsement: Special
endorsement necessitates wri-
ting the name of the party in
whose favour the property rights
of the bill are endorsed under
the signature of the endorser.
Suppose Vishal & Co wants
to endorse a bill in favour of
Arun & Co., it will be shown at
the back of the bill as follows.
Pay Arun & Co. or order
Vishal & Co.
Official Signatory or Stamp
Restricted Endorsement: This is
an endorsement in favour of a
definite person, and to him
alone. This restricts further
endorsement of the bill. This is
expressed as follows:
Pay Rakesh only
Signed
Ajay
Endorsement Sans Recourse
(i.e. Without recourse): The
endorsement of the bill in this
manner enables the endorser to
relieve himself from the liability
to all subsequent endorsees
indicated by the word Sans
Recourse added to the signa-
tures. This is generally made by
persons who acts in a repre-
sentative capacity as agents and
not as principal. The endorse-
ment is done in the following way;
Pay Varun or order
Signed
Ankit
Sans Recource
Facultative Endorsement: This
is the endorsement by which
the endorser waives some of the
rights to which he is entitled.
The right which is given up is
clearly stated as a part of the
endorsement itself. The endorse-
ment is effected in the following
manner:
Pay Aleem or order
Notice of dishonour waived
Signed
Raja Ram
The implication of this is that the
notice of dishonour need not be given
by the endorsee before demanding the
payment from the endorser.
6.8 Accounting Treatment
For the person who draws the bill of
exchange and gets it back, after its due
acceptance, it becomes a bill
receivable. For the person who accepts
it, the same becomes bills payable.
In case of a promissory note for the
maker it is a bills payable and for the
person in whose favour the promissory
note is drawn it is a note receivable.
Bills/Notes receivables are assets and
Bills/Notes payables are liabilities.
Bills and Notes are used
interchangeably.
6.8.1 Books of Receiver
A bill receivable can be treated in the
following four ways by its receiver.
He can retain it till the date of
maturity, and
(i) get it collected on date of
maturity directly, or
(ii) get it collected through the
banker.
He can get the bill discounted
from the bank.
He can endorse the bill in favour
of his Creditor.
He can pledge the bill receivable
as a security for obtaining cash
credit and overeraft facilities.
The accounting treatment in the
books of receiver under all the four
alternatives is given below under the
assumption that the bill is duly
honoured on maturity by the acceptor.
1. (a) When the bill of exchange is
retained by the receiver with
him till the date of its maturity,
the following journal entries
are passed.
On receiving the bill
Bills Receivables A/c Dr.
Debtors. A/c
On maturity of the bill
Cash/Bank A/c Dr.
Bills Receivable A/c
(b) When the bill of exchange is
retained by the receiver with him
and sent to bank for collection a
few days before maturity.
For sending the bill for collection
Bills sent for collection A/c Dr.
(c) On receiving the advice from the
bank that the bill has been
collected
Bank A/c Dr.
Bills sent for collection A/c
1. When the receiver gets the bill
discounted from the bank.
Bills Receivable A/c Dr.
Debtors. A/c
On discounting the bill
Bank A/c Dr.
Discount A/c Dr.
On maturity
No Entry
Since the bill becomes the property of
the bank, therefore, the bank will
collect the amount of the bill from the
acceptor and no journal entry will be
passed in the books of the receiver.
2. When the bill is endorsed by the
receiver in favour of his Creditor
Bills Receivable A/c Dr.
Debtors A/c
On endorsing the bill
Creditor A/c Dr.
On maturity
No Entry
190 ACCOUNTANCY
Since the bill has been transferred in
favour of the creditor, therefore the
creditor becomes its owner and will
receive the payment on maturity.
Hence, no entry will be passed in the
books of the receiver.
3. For pledging the bills receivables as
a security for obtaining cash credit
and overdraft facilities:
Pledging of the bill is a legal-cum-
financial arrangement with the
bank, whereby the bank authorizes
the customer to make withdrawals
up to a specific amount. This fact
is noted as a marking on the
account of the customer in the
banks ledger and no journal entry
is required until the customer
actually withdraws the money.
However, such a pledged bill is
always collected through the bank
only because bank has the first
right to claim the amount of the
bill. The journal entries to be
passed for this are as follows:
On Pledging the bill
No Entry
On Maturity
(i) Bills sent for collection A/c Dr.
(ii) Bank A/c Dr.
Bills sent for collection A/c
6.9 Books of Acceptor/Promissor
The following journal entries are
passed in the books of the acceptor
under all the four circumstances
discussed above.
On accepting the bill
Creditors A/c Dr.
Bills payable A/c
On maturity of the bill
Bills payable A/c Dr.
Bank A/c
The journal entries in the books of
the drawer and the acceptor under all
the four cases have been given in the
form of a table for better under
standing.
1. When the drawer retains the bill with him till the date of its maturity and gets the
same collected directly.
Transaction Books of Books of
Creditor/Drawer Debtor/Acceptor
Sale/Purchase of Debtors A/c Dr. Purchase A/c Dr.
goods Sales A/c Creditors A/c
Receiving/Accepting Bills Receivable A/c Dr. Creditors A/c Dr.
the bill Debtors A/c Bills Payable A/c
Collection of the bill Cash/Bank A/c Dr. Bills Payable A/c Dr.
Bills Receivable A/c Dr. Cash/Bank A/c
2. When the bill is retained by the drawer with him and sent to bank for collection a
few days before maturity.
Sending the bill Bills sent for collection A/c No Entry
for collection Bill Receivable A/c Dr.
On Receiving the Bank A/c Dr. Bills Payable A/c Dr.
bank advice that the Bill sent for collection A/c Bank A/c
bill has been collected
3. When the drawer gets the bill discounted from the bank.
Discounting the bill Bank A/c Dr.
Discount A/c Dr. No Entry
Bill Receivable A/c
On maturity of the No Entry Bills Payable A/c Dr.
bill Bank A/c
4. When the bill is endorsed by the drawer in favour of his creditor.
Endorsing the bill Creditors A/c Dr. No Entry
Bill Receivable A/c
On maturity of the No Entry Bills Payable A/c Dr.
bill Bank A/c
192 ACCOUNTANCY
5. When the bill is pledged as security for obtaining cash credit and overdraft facilities.
Sending the bill for Bill sent for collection A/c Dr. No Entry
collection Bill Receivable A/c
When bill is collected Bank A/c Dr. Bills Payable A/c Dr.
Bills sent for collection Bank A/c
Illustration 1
Amit sold goods for Rs. 20,000 to Sumit
on Credit on 1

Jan 2002. Amit drew a
bill of exchange upon Sumit for the
same amount for three months. Sumit
accepted the bill and returned it to
Amit. Sumit met his acceptance on
maturity. Pass the necessary journal
entries in the books of Amit and Sumit
under the following circumstances.
(i) Amit retained the bill till the
date of its maturity.
(ii) Amit discounted the bill @ 12 %
p.a. from his bank.
(iii) Amit endorsed the bill to his
Creditor Ankit.
(iv) On 31 March 2002 Amit sent
the bill for collection to its bank.
On 5 April 2002 bank advised
was received.
Solution Books of Amit
Journal
(i) When the bill was retained till its maturity.
Date Particulars L.F Debit Credit
Rs. Rs.
2002
Jan1 Sumits A/c Dr. 20,000
Sales A/c 20,000
(Sold goods to Sumits on credit)
Jan 1 Bills Receivable A/c Dr. 20,000
Sumits A/c 20,000
(Received Sumits acceptance
payable after three months)
Apr 4 Bank A/c Dr. 20,000
Bills Receivable A/c 20,000
(Sumit met his acceptance on maturity)
Total 60,000 60,000
(ii) When the bill was discounted from the bank.
Journal
Amount Amount
Rs. Rs.
2002
Mar 1 Summit's A/c Dr. 20,000
Sales A/c 20,000
(Sold goods to Sumit)
Mar 1 Bills Receivable A/c Dr. 20,000
Sumits A/c 20,000
(Received Sumits
acceptance for three months)
Mar 1 Bank A/c Dr. 19,400
Discount A/c Dr. 600
Bills Receivable 20,000
(Sumits acceptance
discounted with the bank)
Total 60,000 60,000
(iii) When Amit endorsed the bill in favour of his creditor Ankit.
Journal
Amount Amount
Rs. Rs.
2002
Jan 1 Sumit's A/c Dr. 20,000
Sales A/c 20,000
(Sold goods to Sumit on Credit)
Sumits A/c 20,000
(Received Sumits
Jan 1 Ankits A/c Dr. 20,000
(Sumits acceptance
endorsed in favour of Ankit)
Total 60,000 60,000
194 ACCOUNTANCY
(iv) When the bill was sent for collection by Amit to the bank.
Journal
Amount Amount
Rs. Rs.
2002
Jan 1 Sumits A/c Dr. 20,000
Sales A/c 20,000
(Sold goods to Sumit on credit)
Sumits A/c 20,000
(Received Sumits
Mar 31 Bills sent for collection A/c Dr. 20,000
(Bills sent for collection)
Bills sent for collection A/c 20,000
(Bills sent for collection collected
by the bank
Total 80,000 80,000
The following Journal entries will be made in the books of Sumit under all the four
circumstances.
Journal
Amount Amount
Rs. Rs.
2002
Jan 1 Purchases A/c Dr. 20,000
Amits A/c 20,000
(Purchases goods from Amit on credit
Jan 1 Amits A/c Dr. 20,000
Bills Payable A/c 20,000
(Accepted bill drawn by Amit payable
after three months)
Apr 4 Bills Payable A/c Dr. 20,000
Bank A/c 20,000
(Met acceptance maturity
Total 60,000 60,000
his creditor Poonam in full settlement
of her debt of Rs. 8,250. On 15 May
Poonam discounted the bill with her
bank @ 12% p.a. On the due date
Deepak met the bill. Pass the
necessary journal entries in the books
of Ramesh, Deepak, Poonam.
Illustration 2
On 15 March

2001 Ramesh sold goods
for Rs.28,000 to Deepak on credit.
Deepak accepted a bill of exchange
Drawn upon him by Ramesh payable
after three months. On 15 April
Ramesh endorsed the bill in favour of
Solution
Books of Ramesh
Journal
Amount Amount
Rs. Rs.
2001
Mar 15 Deepak A/c Dr. 8,000
Sales A/c 8,000
(Sold goods to Deepak on Credit)
Mar 15 Bills Receivable A/c Dr. 8,000
Deepak A/c 8,000
(Received Deepaks
acceptance for 3 months)
Apr 15 Poonams A/c Dr. 8,250
Bill Receivable A/c 8,000
Discount Received A/c 250
(Bill endorsed in favour of Poonam
in full Settlement of her
debt of Rs. 8,250
Total 24,250 24,250
196 ACCOUNTANCY
Books of Deepak
Journal
Amount Amount
Rs. Rs.
2001
Mar 5 Purchase A/c Dr. 8,000
Ramesh A/c 8,000
(Purchased goods on credit
from Ramesh)
Mar 5 Rameshs A/c Dr. 8,000
(Accepted Rameshs draft
payable after 3 months)
June 18 Bills Payable A/c Dr. 8,000
Bank A/c 8,000
(Met the acceptance in favour
of Ramesh on maturity)
Total 24,000 24,000
Books of Poonam
Journal
Amount Amount
Rs. Rs.
2001
May 15 Bills Receivable A/c Dr. 8,000
Discount Allowed A/c Dr. 250
(Rameshs A/c 8,250
(Ramesh endrosed Deepaks
acceptance in our favour for
discharge has debt of Rs. 8,250
in full settlement)
May 15 Bank A/c Dr. 7,920
Discount allowed A/c Dr. 80
Total 16,250 16,250
6.10 Dishonour of a Bill
Bill is said to have been dishonoured
when the acceptor fails to meet his
commitment on the date of maturity.
In this situation liability of the acceptor
comes into being again. Therefore the
entries made on the receipt of the bill
should be reversed. For example Anju
received bill of exchange accepted by
Manju, which was dishonoured. The
entries of dishonour will be as follows
in the books of Anju (receiver) :
When the bill was kept by Anju with
her till maturity
Manjus A/c Dr.
Bill Receivables A/c
When the bill was endorsed by Anju
in favour of Sandhya
Manjus A/c Dr.
Sandhyas A/c
When the bill was discounted by Anju
with his bank
Manjus A/c Dr.
Bank A/c
When the bill was sent for collection
by Anju
Manjus A/c Dr.
Bill sent for collection A/c
Illustration 3
On 1.1.2002 Shieba sold goods to Vishal
for Rs.10,000 and drew upon him a bill
of exchange for 2 months. Vishal
accepted the bill and returned it to
Shieba. On the date of maturity the bill
was dishonoured by Vishal. Pass the
necessary journal entries in the following
cases in the books of Shieba and Vishal.
When the bill was kept by Shieba
till the date of its maturity.
When the bill was discounted
by Shieba from his bank
immediately @ 12% p.a.
When the bill was endorsed by
Shieba in favour of his creditor
Lal Chand.
When the bill was sent for
collection to the bank.
(i) When the bill was kept by Shieba till its maturity
Solution Books of Sheiba
Journal
Amount Amount
Rs. Rs.
2002
Jan 1 Vishals A/c Dr. 10,000
Sales A/c Dr. 10,000
(Sold goods to Vishal)
Jan 1 Bills Receivable A/c Dr. 10,000 10,000
Vishals A/c
(Received Vishals acceptance)
Vishals A/c Dr. 10,000
Bills Receivables A/c 10,000
Feb 4 (Vishal dishonoured his acceptance)
Total 30,000 30,000
198 ACCOUNTANCY
(ii) When the bill was discounted by Shieba
Journal
Amount Amount
Rs. Rs.
2002
Sales A/c Dr. 10,000
Jan 1 (Bills Receivable A/c) Dr. 10,000
Vishals A/c 10,000
(Received Vishals acceptance)
Jan 1 Bank A/c Dr. 9,800
(Vishals Bill discounted)
Mar 4 Vishals A/c Dr. 10,000
Bank A/c 10,000
(Discounted bill dishonoured
by Vishal)
Total 40,000 40,000
(iii) When the bill was endorsed by Shieba to Lal Chand
Journal
Amount Amount
Rs. Rs.
2002
Sales A/c 10,000
Vishals A/c 10,000
(Receivable Vishals acceptance
Jan 1 Lal Chands A/c Dr. 10,000
(Vishals acceptance endorsed in
favour of Lal Chand)
Mar 4 Vishals A/c Dr. 10,000
Lal Chands A/c 10,000
(Endorsed bill dishonoured by Vishal)
Total 40,000 40,000
The following entires will be passed in the books of Vishal in all the four cases
Books of Vishal Journal
Amount Amount
Rs. Rs.
2002
Shiebas A/c 10,000
(Purchased goods from Shieba)
Jan 1 Shiebas A/c Dr. 10,000
(Accepted Shiebas draft)
Mar 4 Bills Payable A/ Dr. 10,000
Shiebas A/c 10,000
(Acceptance in favour of
Shieba dishonoured)
Total 30,000 30,000
6.11 Noting Charges
A bill of exchange should be duly
presented for payment on the date of
its maturity. Acceptor is absolved of
his liability if the bill is not duly
presented. Proper presentation of the
bill means that it should be presented
on the date of maturi ty to the
acceptor during business working
hours. To establish beyond doubt
that the bill was dishonoured, despite
its due presentation, it has got
preferably to be noted by Notary
Public. Therefore, Noting authen-
ticates the facts of dishonour. For
providing this service, a fees is
charged which is called Noting
Charges.
The following facts are generally
noted by the Notary:
Date, fact and reasons of
dishonour,
If the bill is not expressly
dishonoured, the reasons why
he treats it as dishonoured,
and
The amount of noting charges.
The entries for noting charges in
the drawers books will be as follows:
When Drawer himself pays
Acceptors A/c Dr.
Cash A/c
Where endorsee pays
Acceptors A/c Dr.
Endorsee A/c
200 ACCOUNTANCY
When the bank pays on discounted bill
Acceptors A/c Dr.
Bank A/c
When the bank pays in the event of
sending the bill for collection to the
bank
Acceptors A/c Dr.
Bank A/c
It may be kept in mind that
whosoever pays the noting charges,
ultimately these have to be borne by the
acceptor. That is why the acceptor is
invariably debited in the drawers books.
This is because he is responsible for the
dishonour of the bill and hence, he has
to bear these expenses. For recording the
noting charges in his books, the acceptor
opens Noting Charges Account. He
debits the noting charges account and
credits the drawers account.
Noting charge A/c Dr.
Drawers A/c
Illustration 4
A sold goods for Rs.15,000 to B and
immediately draw a bill upon him on
1.1.2002 payable after 3 months. On
maturity the bill was dishonoured and
Rs. 50 were paid by the holder of the
bill as noting charges. Pass the
of A and B under the following cases:
When the bill was kept by A till
its maturity.
When the bill was discounted by
A with his bank immediately @
12% p.a.
When the bill was endorsed by
A in favour of his creditor C.
Solution
Books of A
Journal
(i) When the bill was retained by A
Amount Amount
Rs. Rs.
2002
Jan 1 Bs A/c Dr. 15,000
Sales A/c 15,000
(Sold goods to B)
Bs A/c 15,000
(Received Bs acceptance)
Apr 4 Bs A/c Dr. 15,050
Cash A/c 50
(B dishonoured his acceptance and
paid Rs. 50 as noting charges)
Total 45,050 45,050
(ii) When the bill was discounted with the bank
Journal
Amount Amount
Rs. Rs.
2002
Jan 1 Bs A/c Dr. 15,000
Sales A/c 15,000
(Sold goods to B)
Bs A/c 15,000
(Received Bs acceptance payable
after three months)
(Bs acceptance discounted)
Apr 4 Bs A/c Dr. 15,050
Bank A/c 15,050
(B dishonoured his acceptance on
maturity and bank paid noting
charges)
Total 60,050 60,050
(iii) When the bill was endrosed to C
Journal
Amount Amount
Rs. Rs.
2002
Jan 1 Bs A/c Dr. 15,000
Sales A/c 15,000
(Sold goods to B)
Bs A/c 15,000
(Received Bs acceptance)
Jan 1 Cs A/c Dr. 15,000
(Cs acceptance dishonoured)
Apr 4 Bs A/c Dr. 15,050
Cs A/c 15,050
(B dishonoured disacceptance and C
paid Rs. 50 as noting charges)
Total 60,050 60,050
202 ACCOUNTANCY
The following Journal entires will be made in the books of B in all the three cases
Books of B Journal
Amount Amount
Rs. Rs.
2002
Jan 1 Purchase A/c Dr. 15,000
As A/c 15,000
(Purchased goods from A)
Jan 1 As A/c Dr. 15,000
(Accepted As draft)
April 4 Bills Payable A/c Dr. 15,000
Noting charges A/c Dr. 50
As A/c 15,050
(Acceptance in favour
of a dishonoured)
Total 45,050 45,050
6.12 Renewal of the Bill
Sometimes the acceptor of the bill finds
it difficult to meet the obligation of the
bill on maturity. He may therefore,
approach the drawer with the request
to renew the existing bill, which may
be exceeded to by the drawer. If it is so
the old bill is to be cancelled and the
fresh bill with new terms of payment
is to be drawn and duly accepted and
delivered. Since, cancellation of the bill
is mutually agreed upon, noting of the
bill is not required.
The acceptor may have to pay
interest to the drawer for the extended
period of credit. The interest is paid in
cash or may be include in the amount
of new bill. Sometimes, the original bill
may be cancelled partly for a new bill
and partly for cash. For example, a bill
of Rs.10,000 may be cancelled on a
cash payment of Rs.3000 and on
acceptance of a new bill for the balance
of Rs.7000 plus interest as agreed
between the parties.
The journal entries in the books of
the drawer and the acceptor will be the
same as that of dishonour of bill. Cash
paid by the acceptor towards interest
is treated as income. However, if
interest is not paid in cash the drawer
in his books debits the acceptor and
credits the interest account. The
acceptor debits the interest and credits
the drawers account in his books.
The journal entries for the
cancellation of the old bill, for interest
and for the drawal / acceptance of the
new bill in the books of the drawer and
acceptor have been given below:
Transaction Books of Drawer Books of Acceptor
Cancellation Acceptors A/c Dr. Bills Payable A/c Dr.
of old bill Bills Receivable A/c Drawers A/c
Interest Acceptors A/c Dr. Interest A/c Dr.
Interest A/c Drawers A/c
New Bill Bill Receivable A/c Dr. Drawers A/c Dr.
Acceptors A/c Bills Payable A/c
Illustration 5
On 1.2.2002 Ravi sold goods to Mohan
for Rs.18,000, Rs.3,000 were paid by
Mohan immediately and for the
balance he accepted a three months
bill drawn upon him by Ravi. On the
date of maturity of the bill Mohan
requested Ravi to cancel the old bill
and draw a new bill upon him for a
period of 2 months. He further agreed
to pay interest in cash to Ravi @ 12%
p.a. Ravi agreed to Mohans request
and cancelled the old bill and drew a
new bill. The new bill was met on
maturity by Mohan. Pass the Journal
entries in the books of Ravi and Mohan.
Solution
Books of Ravi
Journal
Amount Amount
Rs. Rs.
2002
Feb 1 Mohans A/c Dr. 18,000
Sales A/c 18,000
(Sold goods to Mohan)
Feb 1 Cash A/c Dr. 3,000
Bills Receivable A/c Dr. 15,000
Mohans A/c 18,000
(Received Rs. 3000 in cash from Ravi
and an acceptance for the balance)
May 4 Mohans Account Dr. 15,000
Cash A/c Dr. 300
Interest A/c 300
(Cancelled old bill and Ravi paid
Rs 300 as interest
Balance c/f 51,300 51,300
204 ACCOUNTANCY
Balance b/f 51,300 51,300
May 4 Bills Receivable A/c Dr. 15,000
Mohans A/c 15,000
(Received new acceptance
from Mohan)
July 7 Bank A/c Dr. 15,000
(Mohan met his new acceptance)
Total 81,300 81,300
Books of Mohan
Journal
Amount Amount
Rs. Rs.
2002
Feb 1 Purchases A/c Dr. 18,000
Ravi A/c 18,000
(Purchased goods from Ravi)
Feb 1 Ravis A/c Dr. 18,000
Cash A/c 3,000
(Received cash from Ravi &
his acceptance)
May 4 Bills Payable A/c Dr. 15,000
Interest A/c Dr. 300
Ravi A/c 15,000
Cash A/c 300
(Old bill cancelled by Ravi and
paid Rs. 300 as interest)
May 4 Ravis A/c Dr. 15,000
(Accepted new bill drawn by Ravi)
July 7 Bills payable A/c Dr. 15,000
Bank A/c 15,000
(Met acceptance of the new
bill on maturity)
Total 81,300 81,300
Illustration 6
On 15.1.2002 Sachin sold goods
Rs. 30,000 to Narain and drew upon
the later a bill for the same amount
payable after 3 months . The bill was
accepted by Narain. The bill was
discounted by Sachin from his bank
for Rs.29,250 on 31.1.2002. On
maturity of the bill Narain requested
Sachin to cancel the bill . He further
agreed to pay Rs. 10,500 in cash
including Rs.500 interest and accept
a new bill for two months for the
remaining Rs.20,000. The new bill was
endorsed by Sachin in favour of his
creditor Kapil for settling a debt of
Rs.20,800. The new bill was duly met
by Narain on maturity. Pass the
of Sachin and Narain.
Solution
Books of Sachin
Journal
Amount Amount
Rs. Rs.
2002
Jan 15 Narain A/c Dr. 30,000
Sales A/c 30,000
(Sold goods to Narain)
Narain A/c 30,000
(Received Narains acceptance)
Bills receivable A/c 30,000
(Narains Acceptance discounted
with bank)
April 19 Narains A/c Dr. 30,500
Bank A/c 30,000
Interest A/c 500
(Narains acceptance cancelled)
April 19 Bank A/c Dr. 10,500
Narain A/c 30,500
(Received cash from Narain and a
new acceptance for the balance)
April 19 Kapil A/c Dr. 20,800
Bills Received A/c 20,000
Discount Received A/c 800
Narains acceptance endorsed in
favour of Kapil and he allowed
discount)
Total 1,71,800 1,71,800
206 ACCOUNTANCY
6.13 Retiring of Bill
There are instances when a bill of
exchange is arranged to be retired
before the due date by mutual
understanding between the drawer and
the drawee. This happens when the
acceptor of the bill has funds at his
disposal and makes a request to the
drawer to accept the payment of the
bill before its maturity. If the holder
agrees to do so, the bill is said to have
been retired.
6.13.1 Effects of Retiring
The retiring of a bill draws a curtain
on the bill transactions before the
expiry of its normal term.
To encourage the retirement of
the bill, the holder allows some
discount called Rebate on retired
bills for the period between date of
retirement and maturity. The rebate
is calculated at a certain rate of
discount.
Books of Narain
Journal
Amount Amount
Rs. Rs.
2002
Sachin A/c 30,000
(Purchased goods from Sachin)
Jan 15 Sachin A/c Dr. 30,000
(Accepted Sachins draft)
Bills Payable A/c Dr. 30,000
Apr 19 Interest A/c Dr. 500
Sachin A/c 30,500
(Cancelled old bill & Sachin charged
interest)
Apr 19 Sachin A/c Dr. 30,500
Bank A/c 10,500
(Paid Sachin and accepted a new
draft for the balance)
Jul 22 Bills Payable A/c Dr. 20,000
Bank A/c 20,000
(Met new acceptance on maturity)
Total 1,41,000 141,000
Amount Amount
Rs. Rs.
2001
Jan 1 Bs A/c Dr. 10,000
Sales A/c 10,000
(Sold goods to B)
Bs A/c 10,000
(Received Bs acceptance for three
months)
Mar 4 Cash A/c Dr. 9,950
Rebate on bills A/c Dr. 50
(B tried his acceptance and rebate
allowed to him)
Total 30,000 30,000
6.13.2 Accounting Treatment
The accounting treatment on the
retirement of a bill is similar to the
accounting treatment when a bill is
honoured by the acceptor on the due
date in the ordinary course. The only
difference between the two relates to
the granting of rebate. The following
Journal entries are passed.
Books of the Holder
Cash A/c Dr.
Rebate on Bills A/c Dr.
Bills Receivables A/c
(Acceptor retired his acceptance and
allowed rebate)
Books of the Acceptor
Bills Payable A/c Dr.
Cash A/c
Rebate on bills A/c
(Acceptance retired and rebate received)
Illustration 7
A sold goods Rs.10,000 to B on
1.1.2001 and immediately draw a bill
on B for the same amount B accepted
the bill and returned it to A. On March
4, 2001 B retired his acceptance under
rebate of 6% per annum.
Record these transactions in the
books of A and B by passing Journal
entries and prepare the necessary
ledger accounts.
Books of A
Journal
208 ACCOUNTANCY
Bs Account
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.
2001 Sales 10,000 2001 Bills Receivable 10,000
Jan 1 Jan1
10,000 10,000
Bill Receivable Account
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.
2001 B
s
A/c 10,000 2001 Cash 9,950
Jan 1 Mar 4 Rebate on Bills 50
10,000 10,000
Books of B
Journal
Amount Amount
Rs. Rs.
2001
As A/c 10,000
(Purchased goods from A)
Jan 1 As A/c Dr. 10,000
(Accepted As draft payable after
three months)
Mar 4 Bills Payable A/c Dr. 10,000
Cash A/c 9,950
Rebate on Bills A/c 50
(Acceptance in favour of A retired and
rebate received)
Total 30,000 30,000
As Account
Dr. Cr.
Rs. Rs.
2001 2001
Jan 1 Bills Payable 10,000 Jan 1 Purchases 10,000
10,000 10,000
6.14 Insolvency
A person may find himself in a
situation when his liabilities exceed the
realizable value of his assets and fails
to honour his commitments. In such
a situation, he may approach the court
for declaring him insolvent. If the court
accept his request, the debtor is
declared as insolvent and the
administrator is appointed by the court
for realizing the assets and settlement
of liabilities. If realized value of assets
is less than the total claim the creditor
are paid proportionately. The portion
of unpaid liabilities is called bad debts/
deficiency from the view point of
creditor (drawer of the bill) and from
the view point of the acceptor
respectively.
The following will be the journal
entries for this in the books of debtor
and creditor.
Books of Creditor
Bank A/c Dr.
Bad Debts A/c Dr.
Debtors A/c
Books of Debtor
Creditors A/c Dr.
Bank A/c
Deficiency A/c
Illustration 8
X sold goods Rs.10,000 to Y on 1.1.2001
and drew upon him a bill for the same
amount of three months. Y accepted the
bill and returned it to X. On the same
date X got the bill discounted with his
bank at 10% per annum.
Bills Payable Account
Dr. Cr.
Rs. Rs.
2001 2001
Jan 1 Cash 9,950 Jan 1 A
s
A/c 10,000
Rebate on Bills 50
10,000 10,000
210 ACCOUNTANCY
The bill was dishonoured on the
due date and the bank paid Rs. 50 as
noting charges. X agreed to accept a
sum of Rs. 5,300 in cash from Y and
agreed to draw two new bills on Y. one
for Rs. 3,000 for two months and the
other for Rs. 2,000 for three months
in full satisfaction of his claim.
Y accepted the bills and returned
term to X.
X endorsed the first bill to Z and
the same was duly paid on maturity.
The second bill was dishonoured
as Y became insolvent and a dividend
of 25 paise in the rupees was received
from his estate.
Pass necessary journal entries to
record these transactions in the books
of X and Y and prepare Ys account in
the books of X and Xs account in the
books of Y.
Books of X
Journal
Amount Amount
Rs. Rs.
2001
Jan 1 Ys A/c Dr. 10,000
Sales A/c 10,000
(Sold goods to Y)
Y A/c 10,000
(Received Ys acceptance)
Jan 1 Cash A/c Dr. 9,750
Ys acceptance discount with bank)
Jan 1 Ys A/c Dr. 10,050
Bank A/c 10,050
(Y dishonoured his acceptance on
maturity and back paid Rs. 50 as
noting charges
April 4 Cash A/c Dr. 5,300
Ys A/c 5,300
(Partial payment received from Y)
April 4 Ys A/c Dr. 250
Interest A/c 250
(Interest for the entended
period debited to Y)
April 4 Bill Receivable A/c Dr. 5,000
Ys A/c 5,000
(Received two acceptance from Y)
Balance c/f 50,600 50,600
Apr 4 Balance b/f 50,600 50,600
Apr 4 Zs A/c Dr. 3,000
(Ys acceptance endorsed in favour of Z)
Jul 7 Ys A/c Dr. 2,000
(Y dishonoured the second bill)
Jul 7 Cash A/c Dr. 500
Bad Debts A/c Dr. 1,500
Ys A/c 2,000
(A dividend of 25 paise in a rupee received from
Ys estate and the balance written off as bad debts)
Total 57,600 57,600
Ys Account
Dr. Cr.
Rs. Rs.
2001 2001
Jan 1 Sales 10,000 Jan 1 Bills Receivable 10,000
Apr 4 Cash 10,050 Apr 4 Cash 5,300
Apr 4 Interest 250 Apr 4 Bill Receivables 5,000
Jul 7 Bills Receivable 2,000 Jul 7 Cash 500
Jul 7 Bad Debts 1,500
22,300 22,300
212 ACCOUNTANCY
Books of Y
Journal
Amount Amount
Rs. Rs.
Jan 1 Xs A/c 10,000
(Purchased goods from X)
Jan 1 Xs A/c Dr. 10,000
(Accepted Xs draft)
Apr 4 Bills Payable A/c Dr. 10,000
Noting Charge A/c Dr. 50
Xs A/c 10,050
(Acceptance in favour of X dishonoured)
Apr 4 Xs A/c Dr. 5,300
Cash A/c 5,300
(Partial Payment made to X)
Apr 4 Interest A/c Dr. 250
Xs A/c 250
(Interested on extended Credit
period allowed to X)
Apr 4 Xs A/c Dr. 5,000
(Accepted two drafts of X)
Jun 7 Bills Payable A/c Dr. 3,000
Cash A/c 3,000
(Met acceptance in favour of
X on maturity)
Jul 7 Bills Payable A/c Dr. 2,000
Xs A/c 2,000
(Acceptance in favour of X dishonoured
on becoming Insolvent)
Jul 7 Xs A/c Dr. 2,000
Cash A/c 500
Deficiency A/c 1,500
(Dividend of 25 paise a rupee paid to Xs
account transferred to insolvent account)
Total 42,600 42,600
Xs Account
Dr. Cr.
Rs. Rs.
2001 2001
Jan 1 Bills Payable 10,000 Jan 1 Purchases 10,000
Apr 4 Cash 5,300 Apr 4 Bills Payable 10,000
Apr 4 Bills Payable 5,000 Apr 4 Noting Charges 50
Jul 4 Cash 500 Apr 4 Interest 250
Jul 4 Deficiency 1,500 Jun 7 Bills Payable 2,000
22,300 22,300
Bills Receivable Book
No. Date Date From Drawer Acceptor Where Term Due Ledger Amount Cash Remarks
of Received of whom Payable Date Folio Book
Bill Bill received Folio
Fig. 6.4 : Showing specimen bills receivable book
6.15 Bills Receivable and Bills
Payable Books
When large number of bills are drawn
and accepted, their recording by
means of journal entry for every
transaction relating to the bills become
a very cumbersome and time
consuming exercise. It is then
advisable to record them separately in
special subsidiary booksthe bills
receivables in the Bills Receivable Book
and the bills payable in the Bills
Payable Book. The reason for the use
of subsidiary books for recording bill
transaction is the same as that in the
case of other subsidiary books for cash,
purchases, sales and the like.
An important point in connection
with these subsidiary books for bill
transactions is that they do not record
the entire range of transactions
relating to the bills, e.g., endorsement,
dishonour, discounting, cancellation,
retirement, etc. a part from a passing
reference for these aspects.
6.15.1 Bills Receivable Books
It has been designed as a summary of
information regarding a duly accepted
bill received by a drawer. All the details
of the bill-date, acceptors name,
amount, term, place of payment, etc.
are entered in the bills receivable book
for presentation and further reference.
214 ACCOUNTANCY
The proforma of a bills receivable
book is given on page 213.
The bills receivable book, like any
other subsidiary book, is totaled
periodically. This total is debited to the
Bills Receivable Account where as the
account of every individual debtor form
whom the bills received is credited in
the ledger. The bills receivable account
is the account of an asset and would
always have debit balance. This
balance on any date would represent
the amount of bills receivable
unmatured and on hand.
6.15.2 Bills Payable Book
It is maintained like a bills receivable
book. It is meant to record all the
details, relating to the bills accepted
by a person or a party, which are
retained for being use in the future, in
case of need. The proforma of a bills
payable book is given in (Figure 6.5).
The postings from this books are
to the debit of the account of every
creditor to whom acceptance has been
given and the periodical total of the
books is credited to the Bills Payable
Account in the ledger.
The Bills Payable Account,
representing as it does the liability of
the acceptor in respect of bills accepted
by him, always has a credit balance, if
any. The credit balance of this account
on any particular date must be the
same as the total amount worth of bills
payable yet to be presented for
payment as ascertained from the bills
payable book.
Illustration 9
Enter the following transactions in the
Bills Receivable and Bills Payable
books maintained by a trader and post
them in the ledger as well:
2002
Jan 7
Received from S. Mitra bill duly
accepted for Rs. 1,325 dated January
4, payable three months after date.
Jan 9
Accepted S.Wardens draft for Rs. 970
at two months.
Jan 13
Pradhan drew on the trader at three
months date and the same was
accepted for Rs. 390.
Bills Payable Book
No. Date of To Drawer Payee Where Term Due Ledger Amount Date Cash Remarks
of Bill whom Payable Date Folio Paid Book
Bill given Folio
Fig. 6.5 : Showing specimen bills payable
Bills Receivable Book
No. Date Date of From Drawer Acceptor Where Term Due Ledger Amount Cash Re-
of Received Bill whom payable Date Folio Rs Book marks
Bill received Folio
2002 2002 2002
1 Jan 7 Jan 4 S. Mitra Self S. Mitra Bombay 3 month Apr 17 1,325
2 Jan 15 Jan 14 R. Rakesh R. Rakesh Amritsar 1 month Feb 17 250
3 Jan 21 Jan 21 G. Ghosh G. Ghosh Calcutta 2 month Mar 24 310
4 Jan 22 Jan 17 D. Dhiman D. Dhiman A. Vakil Bombay 3 month Apr 20 200
5 Jan 23 Jan 23 D. Kanga Self K. Kanga Bangalore 1 month Feb 26 300
6 Jan 27 Jan 20 C. Shah M. Meyers P. Parson Madras 2 month Mar 23 350
Total : Rs. 2,735
Jan 14
Drew on R.Rakesh at one month for Rs.
250 and he accepted the draft next day.
Jan 18
Gave acceptance at two months for
Rs. 420 to S.Parkar.
Jan 21
Received from G.Ghosh his acceptance
for Rs. 310 at two months.
Jan 22
Received from D. Dhiman, A. Vakils
acceptance for Rs. 200 at three months
from Jan 17.
Jan 23
K.Kanga accepted my draft at one
month for Rs. 300.
Jan 27
Received from C.Shah bill for Rs. 350
dated January 20, accepted by P.
Parson and drawn by M. Meyers.,
payable two months after date.
Jan 31
Gave acceptance for Rs. 215 at one
month to A. Roberts.
Bills Payable Book
No. Date To whom Drawer Payee Where Term Due Ledger Amount Date Cash Rem
of of given Payable Date Folio Paid Book arks
Bill Bill Folio
2002 2002
1 Jan 9 S. Warden S. Warden 2 month Mar 12 970
2 Jan 13 Pradhan Pradhan 3 month Apr 16 390
3 Jan 18 S. Parkar S. Parkar 2 month Mar 21 420
4 Jan 31 A. Roberts A. Roberts 1 month Mar 3 215
Total : Rs. 1,995
216 ACCOUNTANCY
S.Mitras Account
Dr. Cr.
Rs. Rs.
2002 2002
Jan 1 Sales 1,325 Jan 7 Bills 1,325
Receivable
1,325 1,325
R. Rakeshs Account
Dr. Cr.
Rs. Rs.
2002 2002
Jan 14 Sales 250 Jan 15 Bills 250
Receivable
250 250
G. Ghoshs Account
Dr. Cr.
Rs. Rs.
2002 2002
Receivable
310 310
D. Dhimans Account
Dr. Cr.
Rs. Rs.
2002 2002
Receivable
200 200
K. Kangas Account
Dr. Cr.
Rs. Rs.
2002 2002
Receivable
300 300
C. Shahs Account
Dr. Cr.
Rs. Rs.
2002 2002
Receivable
350 350
Bill Receivables Account
Dr. Cr.
Rs. Rs.
2002 2002
Jan 31 Sundries 2,735 Jan 31 Balance c/f 2,735
2,735 2,735
S. Wardens Account
Dr. Cr.
Rs. Rs.
2002 2002
Jan 9 Bill Payable 970 Jan 9 Purchases 970
970 970
218 ACCOUNTANCY
Pradhans Account
Dr. Cr.
Rs. Rs.
2002 2002
Jan 13 Bill Payable 390 Jan 13 Purchases 390
390 390
S. Parkars Account
Dr. Cr.
Rs. Rs.
2002 2002
Jan18 Bill Payable 420 Jan 18 Purchases 420
420 420
A. Roberts Account
Dr. Cr.
Rs. Rs.
2002 2002
Jan31 Bill Payable 215 Jan 31 Purchases 215
Receivable
215 215
Bill Payables Account
Dr. Cr.
Rs. Rs.
2002 2002
Jan 31 Balance c/f 1,995 Jan 31 Sundries 1,995
Receivable
1,995 1,995
Note : The drawings and acceptance of a bill always pre-supposes some background of sale or purchase
transaction. Therefore, in posting bill transactions from the two books to the accounts of deb-
tors and creditors, it has been necessary sales and purchases have been effected.
Illustration 10
On 1

Jan 2002 Vinay sold goods to Ravi
for Rs. 8,000 and drew four bills of
exchange on him. The first for
Rs. 1,500 for one month the second for
Rs. 1,000 for two months. The third for
Rs. 2,000 for three months and the
fourth for Rs. 3,500 for four months.
Ravi accepted the bills and returned the
same to Vinay.The second bill was
discounted with the bank on 4

Jan at
12% p.a and on the same day the third
bill was endorsed to Ahmad. The first
bill was sent for collection on 30

Jan.
On 4

Feb the bank informed that the
bill had been collected. All the bills were
met by Ravi on maturity.Pass journal
entries in the books of Vinay and Ravi.
Books of Vinay
Journal
Amount Amount
Rs. Rs.
2002 Ravi A/c Dr. 8,000
Jan 1 Sale A/c 8,000
(Sold goods to Ravi on Credit)
Jan 1 Bill Receivable A/c Dr. 8,000
Ravi A/c 8,000
(Four bills of Rs. 1,500, Rs. 1,000,
Rs. 2,000 & Rs. 3,500 payable after one
two, three, and four months respectively
accepted by Ravi)
Jan 4 Bank A/c Dr. 980
Discount A/c Dr. 20
(Second bill discounted)
Jan 4 Ahmad A/c Dr. 2,000
(Third bill endorsed in favour of Ahmad)
Jan 30 Bills sent for collection A/c Dr. 1,500
(First bill collected by Bank)
Feb 4 Bank A/c Dr. 1,500
(First bill collected by Bank)
May 3 Bank A/c Dr. 3,500
(Fourth bill met by Ravi on marutity)
Total 25,500 25,500
220 ACCOUNTANCY
Books of Vinay
Journal
Amount Amount
Rs. Rs.
Jan 1 Vinay A/c 8,000
(Purchase goods on credit from Vinay)
Jan 1 Vinays A/c Dr. 8,000
Bills payable A/c 8,000
(Accepted four bills drawn by Vinay)
Feb 3 Bill Payable A/c Dr. 1,500
Bank A/c 1,500
(Met first acceptance in favour of Vinay
on maturity)
Mar 3 Bill payable A/c Dr. 1,000
Bank A/c 1,000
(Met 2nd acceptance in favour of
Vinay on maturity
Apr 3 Bills payable A/c Dr. 2,000
Bank A/c 2,000
(Met 3rd acceptance in favour
of Vinay on maturity)
May 3 Bills Payable Dr. 3,500
Bank A/c 3,500
(Met 4th bill in favour of Vinay on
maturity)
Total 24,000 24,000
Illustration 11
Ashok sold goods Rs. 14,000 to
Bishan on 30

October 2001 and drew
three bills for Rs.2,000, Rs.4,000 &
Rs. 8,000 payable after two, three,
and four months respectively. The
first bill was kept by Ashok with him
till maturity. He endorsed the second
bill in favour of his creditor Chetan.
The third bill was discounted on 3
December 2001 at 12% p.a. The first
and second bills were duly met on
maturity but the third bill was
dishonoured and the bank paid Rs.50
as noting charges. On 8

March 2002
Bishan paid Rs. 4,000 and noting
charges in cash and accepted a new
bill at two months after date for the
balance plus interest Rs.100. The
new bill was met on maturity by
Bishan.You are required to give the
journal entries in the books of both
Ashok and Bishan and prepare
Bishans account in Ashoks books
and Ashoks account in Bishans
books.
Books of Ashok
Journal
Amount Amount
Rs. Rs.
2001 Bishan Dr. 14, 000
Oct. 30 Sales A/c 14,000
(Sold goods to Bishan on Credit)
Oct. 30 Bills Receivable A/c Dr. 14,000
Bishan 14,000
(Received three acceptances from Bishan.
First for Rs. 2,000 payable after two
months, second for 4,000 payable after
three months and the third for Rs. 8,000
payable after four months)
Oct. 30 Chetan A/c Dr. 4,000
(Endorsed second bill in favour of
creditor Chetan)
Dec. 3 Bank A/c Dr. 7,760
(Third bill discounted at 12% p.a)
2002 Bank A/c Dr. 2,000
Jan. 2 Bills Receivable A/c 2,000
(Bishan met his first acceptance on due date)
March 3 Bishan Dr. 8,050
Bank A/c 8,050
(Bishan dishonoured his third acceptance
and bank paid Rs. 50 as noting charges
March 8 Cash A/c Dr. 4,050
Bishan 4,050
(Cash Received from Bishan)
March 8 Bishan Dr. 100
Interest A/c 100
(Interest charged from Bishan for the
extended period
March 8 Bills Receivable A/c Dr. 4,100
Bishan 4,100
(Received new acceptance from Bishan
for 2 months)
May Bank A/c Dr. 4,100
12 Bills Receivable Account 4,100
(Bishan met his new acceptance on maturity)
Total 62,400 62,400
222 ACCOUNTANCY
Bishans Account
Dr. Cr.
Rs. Rs.
2001 2001
Oct 30 Sales 14,000 Oct 30 Bills Receivable 14,000
2002 2002
Mar 3 Bank 8,050 Mar 9 Cash 4,050
Mar 9 Interest 100 Mar 9 Bills Receivable 4,100
22,150 22,150
Books of Bishan
Journal
Amount Amount
Rs. Rs.
Oct 30 Ashok A/c 14,000
(Purchases goods on credit from Ashok)
Oct 30 Ashok A/c Dr. 14,000
(Accepted three drafts of Ashok, the first
for Rs. 2,000 payable after 2 months,
second for Rs. 4,000 payable after 3
months & 3rd for Rs. 8,000 payable
after 4 months
2002
Jan. 2 Bills payable A/c Dr. 2,000
Bank A/c 2,000
(Met first acceptance for Rs. 2,000
in favour of Ashok)
Feb 2 Bill Payable A/c Dr. 4,000
Bank A/c 4,000
(Met second acceptance for Rs. 4,000 in
favour of Ashok on maturity)
Balance c/f 34,000 34,000
Balance b/f 34,000 34,000
Mar 3 Bill payable A/c Dr. 8,000
Noting charges A/c Dr. 50
Ashok 8,050
(Third acceptance in favour of Ashok
dishonoured and noting charges Rs. 50)
Mar 8 Ashok Dr. 4,050
Cash A/c 4,050
(Paid to Ashok Rs. 4,000 plus noting
charges)
Mar 8 Interest A/c Dr. 100
Ashok 100
(Interest allowed to Ashok)
Mar 8 Ashok Dr. 4,100
(New draft of Ashok for two
months accepted)
Mar 12 Bills payable A/c Dr. 4,100
Bank A/c 4,100
(Met new acceptance for Rs. 4,100
in favour of Ashok on maturity)
Total 54,400 54,400
Ashoks Account
Dr. Cr.
Rs. Rs.
2001 2001
Oct 30 Bills payable 14,000 Oct 30 Purchases A/c 14,000
2002 2002
Mar 8 Cash A/c 4,050 Mar 3 Bills Payable 8,000
Noting charges 50
Mar 8 Bills payable 4,100 Mar 8 Interest 100
22,150 22,150
224 ACCOUNTANCY
Illustration 12
Sunil receives three promissory notes
from Anil, dated 1

January 2000 for 3
months. One bill is for Rs. 3,000, the
second is for Rs. 4,000 and the third
is for Rs.5,000. The second bill is
immediately endorsed in favour of Ajit
and on 4

January 2000 the third bill
is discounted with the bank for
Rs.4,700. Pass the entries in Sunils
journal assuming (i) the bills are met
on maturity, and (ii) they are
dishonourned.
Amount Amount
Rs. Rs.
2000
Anils A/c 12,000
(Three promissory notes for Rs. 3,000,
Rs. 4,000 and Rs. 5,000
received from Anil)
Jan 1 Ajits A/c Dr. 4,000
(The bill for Rs. 4,000 received from Anil,
now endorsed in favour of Ajit
(The bill for Rs. 5,000 discounted with
the bank for Rs. 4,700, i.e. at a
discount of Rs. 300)
(i)
April 4 On maturity, suppose the bills are met:
Cash / Bank A/c Dr. 3,000
(Cash / Cheque received in respect of the
bill for Rs. 3,000 held till maturity
(ii)
April 4 On maturity, suppose the bills are
dishonoured:
Anils A/c Dr. 3,000
(The bill for Rs. 3,000 dishonoured by Anil
Balance c/f 27,000 27,000
Books of Sunil
Journal
Balance b/f 27,000 27,000
April 4 Anils A/c Dr. 4,000
Ajits A/c 4,000
(Dishonour of Anils promissory note for
Rs.4,000 which was endorsed in
favour of Ajit)
April 4 Anils A/c Dr. 5,000
Bank A/c 5,000
(Dishonour of Anils promissory note for
Rs. 5,000 which was discounted
with bank)
Total 36,000 36,000
Solution
Books of Aashirwad
Journal
Amount Amount
Rs. Rs.
2000
Aakarshaks A/c 10,000
(The Bill of exchange received
from Aakarshak)
Jan 1 Prateeks A/c Dr. 10,000
(The bill of exchange received
from Aakarshak, endorsed to Prateek)
Balance c/f 20,000 20,000
Illustration 13
Aashirwad draws on Aakarshak a Bill
of exchange for 3 months for
Rs. 10,000 which Aakarshak accepts
on 1st January 2000. Aashirward
endorses the bill in favour of prateek.
Before maturity Aakarshak
approaches Aashirwad with the
request that the bill be renewed for a
further period of 3 months at 18 per
cent per annum interest. Aashirward
pays the sum to Prateek on the due
date and agrees to the proposal of
Aakarshak. Pass journal entries in the
books of Aashirwad, assuming that the
second bill is duly met.
226 ACCOUNTANCY
Balance b/f 20,000 20,000
Apr 4 Aakarshaks A/c Dr. 10,000
Prateeks A/c 10,000
(Cancellation of the bill of exchange
received from Aakarshak now
with Prateek)
Apr 4 Prateeks A/c Dr. 10,000
Bank A/c 10,000
(Payment of the amount due to Prateek)
Apr 4 Aakarshaks A/c Dr. 450
Interest A/c 450
(Interest due from Aakarshak on
Rs. 10,000 for 3 months at 18% p.a.)
Apr 4 Bills Receivable A/c Dr. 10,450
Aakarshaks A/c 10,450
(The new bill recieved from Aakarshak for
the amount due for him.)
July 7 Bank A/c Dr. 10,450
(The amount received from Aakarshak in
respect of the renewed bill.)
Total 61,350 61,350
Illustration 14
Ankit owes Nikita a sum of Rs.6,000.
On 1

April,2000 Ankit gives a
promissory note for the amount for 3
months to Nikita who gets it
discounted with her bankers for
Rs.5,760. On the due date the bill is
dishonoured, the bank paid Rs.15 as
noting charges. Ankit then pays
Rs.2,000 in cash and accepts a bill of
exchange drawn on him for the
balance together with Rs.100 as
interest. This bill of exchange is for 2
months and on the due date the bill
is again dishonoured, Nikita paid
Rs.15 as noting charges. Draft the
journal entries to be passed in
Nikitas books.
Solution
Books of Nikita
Journal
Amount Amount
Rs. Rs.
2000
Apr Bills Receivable A/c Dr. 6,000
Ankits A/c 6,000
(Ankits promissory note received in
settlement of his account)
Discount A/c 240
(Ankits promissory note discounted
for Rs. 5,760)
July 4 Ankit A/c Dr. 6,015
Bank A/c 6,015
(The promissory note dishonoured by
Ankit the amount of the bill and the
noting charges recoverable from Ankit
and payable to Bank)
Jul 4 Cash A/c Dr. 2,000
Ankits A/c 2,000
(The amount received from Ankit)
Jul 4 Ankits A/c Dr. 100
Interest A/c 100
(Interest due from Ankit for the
second bill)
Jul 4 Bills Receivable A/c Dr. 4,115
Ankits A/c 4,115
(Ankits acceptance for 2 months in
settlement of amount due)
Sep 7 Ankits A/c Dr. 4,115
(The dishonour by Ankit of his acceptance)
Sep 7 Ankits A/c Dr. 15
Cash A/c 15
(Payment of noting charges, recoverable
from Ankit
Total 28,360 28,360
228 ACCOUNTANCY
Illustration 15
Mohit sends his promissory note for
3 months to Rohit for Rs. 6,000 on
May 1, 2000. Rohit gets it discounted
with his bankers. at 18 per centper
annum on 4

May. On the due date the
bill is dishonoured, the bank paying
Rs.10 as noting charges. Rohit agrees
to accept Rs. 2,170 in cash (Rs. 130
for noting charges and interest) and
another promissory note for Rs.4,000
at 2 months. On the due date, Mohit
approaches Rohit again and asks for
renewal of the bill for a further period
of 3 months. Rohit agrees to the
request, provided Mohit pays Rs.200
as interest in cash. This last bill is
paid on maturity. Draft journal
enteries in the books of Mohit and
Rohit.
Solution
Books of Mohit
Journal
Amount Amount
Rs. Rs.
2000
May 1 Rohits A/c Dr. 6,000
(The amount of the promissory note
sent to Rohit)
Aug 4 Bills payable A/c Dr. 6,000
Noting Charges A/c Dr. 10
Rohits A/c 6,010
(The dishonour of the promissory note
and Rs. 10 being payable as noting
charges to Rohit
Aug 4 Interest A/c Dr. 120
Rohits A/c 120
(Interest due to Rohit for part renewal
of the promissory note)
Aug 4 Rohits A/c Dr. 6,130
Cash A/c 2,130
(Payment of Rs. 2,130 in cash and a new
promissory note For Rs. 4,000 sent to
Rohit to Settle his account)
Oct 7 Bills Payable A/c Dr. 4,000
Rohits A/c 4,000
(Cancellation of the bill due today)
Balance c/f 22,260 22,260
Balance b/f 22,260 22,260
Oct 7 Interest A/c Dr. 200
Rohits A/c 200
(The amount due as interest to Rohit
on the renewed bill)
Oct 7 Rohits A/c Dr. 4,200
Cash A/c 200
(Payment to Rohit of Rs. 200 in cash and
the promissory note sent to him)
2001 Bills Payable A/c Dr. 4,000
Jan 10 Cash A/c 4,000
(Payment made to meet the bill due this day)
Total 30,660 30,660
Books of Rohit
Journal
Dr. Cr.
Amount Amount
Rs. Rs.
2000
May 1 Bill Receivable A/c Dr. 6,000
Mohits A/c 6,000
(Mohits promissory note received
this day)
May 4 Banks A/c Dr. 5,730
(The discounting of the promissory note by
Mohit at 18% on Rs. 6,000 for 3 months)
Aug 4 Mohits A/c Dr. 6,010
Bank A/c 6,010
(The dishonour of the promissory note
by Mohit Rs. 10 being charged by bank
for noting charges)
Aug 4 Mohits A/c Dr. 120
Interest A/c 120
(The amount agreed to be paid as interest
by Mohit)
Balance c/f 18,130 18,130
230 ACCOUNTANCY
Amount Amount
Rs. Rs.
Balance b/f 18,130 18,130
Aug 4 Cash A/c Dr. 2,130
Bill Receivable A/c Dr. 4,000
Mohits A/c 6,130
(Cash and promissory note received from
Mohit for the amount due from him)
Oct 7 Mohits A/c Dr. 4,000
Cancellation of Mohits promissory note
Oct 7 Mohits A/c Dr. 200
Interest A/c 200
(The amout due from Mohit as interest)
Oct 7 Cash A/c Dr. 200
Mohits A/c 4,200
(Cash and promissory note received
from Mohit)
2001 Cash / Bank /A/c Dr. 4,000
Jan 10 Bills Receivable A/c 4,000
(Mohit met his acceptance on maturity)
Total 36,660 36,660
Illustration 16
Journalize the following transactions
in the books of J. Jaggi:
(a) Our acceptance to M. Madan for
Rs. 3,000 retired before due
date, rebate allowed Rs.45.
(b) K. Kaku s acceptance for
Rs.4,000 renewed for a further
period of 3 months, interest
charged at 15 per cent.
(c) Our acceptance to P. Swamy for
Rs.8,000 renewed for 3 months
on the condition that Rs.2,000
is paid in cash immediately and
the remaining balance to carry
out interest at 18 per cent.
(d) D. Dutts promissory note for
Rs.7,000 which we had endorsed
in favour of P. Mukerjee
dishonoured. P. Mukerjee paid
Rs.10 as noting charges. We pay
P. Mukerjee by cheque and accept
from D. Dutt another bill for the
amount due plus interest, Rs.315.
(e) Our promissory note in favour
of A. Alam for Rs. 2,150 which
we pay by cheque.
(f) Our promissory note for
Rs.5,000 in favour of Patel
settled by sending him Tannas
acceptance for Rs.5,000
Solution
Books of J. Jaggi
Journal
Amount Amount
Rs. Rs.
Bank A/c 2,955
Discount A/c 45
(The amount paid and discount received
on retirement of our acceptance before
due date)
K. Kakus A/c Dr. 4,000
Bills receivable A/c 4,000
(The Cancellation of K. Kakus acceptance
in order to renew it)
K. Kakus A/c Dr. 150
Interest A/c 150
(Interest due on renewal of bill for three
months rate of interest being 15%)
K. Kakus A/c 4,150
(K. Kakus acceptance for the amount due)
P. Swamys A/c 8,000
(Cancellation of our acceptance to
P. Swamy prior renewal)
P. Swamy A/c 270
(Interest due to P. Swamy for his
readiness to accept a new bill for the
amount due which after paying Rs 2,000
cash, will be Rs. 6,000)
P. Swamys A/c Dr 8,270
Cash 2,000
(Settlement of P. Swamys account by
paying him cash Rs. 2,000 and the
balance by a bill of exchange)
Balance c/f 27,840 27,840
232 ACCOUNTANCY
Balance b/f 27,840 27,840
D. Dutts A/c Dr. 7,010
P. Mukerjees A/c 7,010
(Dishonour of D. Dutts acceptance which
was sent to P. Mukerjee who claims
another Rs. 10 for noting charges)
P. Mukerjees A/c Dr. 7,010
Bank A/c 7,010
(Amount paid to P. Mukerjee)
D. Dutts A/c Dr. 315
Interest A/c 315
(Interest due from D. Dutt for renewal
of his acceptance)
D.Dutts A/c 7,325
(Acceptance received from D. Dutt)
Noting Charge A/c Dr. 10
A. Alam A/c 2,510
(A. Alam for dishonoured bill and noting
charges)
(Tannas acceptance of Rs. 5,000 sent to
Patel settlement of own acceptance to
him for Rs. 5,000)
Total 59,520 59,520
dates. The first bill was duly met. But
due to some temporary financial
difficulties, C failed to honour his
acceptance for Rs.20,000 on the due
date and the bank had to pay Rs.20 as
noting charges. However, on 14 August
2000 it was agreed between C and D
that D would immediately pay Rs.8,020
in cash and accept a new bill at three
Illustration: 17
On 12

May 2000 C sold to D goods for
Rs. 36,470 and drew upon the latter
two bills of exchange; One for
Rs.16,470 at one month and the other
for Rs.20,000 at three months. D
accepted both the bills.
On 5

June 2000 C sent both the
bills to his bank for collection on due
months for Rs.12,480 which included
interest for postponement of part
payment of the dishonoured bill. C
immediately sent the new acceptance
to its bank for collection on due
date.On 1October 2000 D approached
C offering Rs.12,240 for retirement of
his acceptance. C acceded to the
request.
Pass journal entries for all the above-
mentioned transactions and prepare
ledger accounts in the books of C.
Books of C
Journal
Amount Amount
Rs. Rs.
2000
May 12 Ds A/c Dr. 36,470
Sales A/c 36,470
(Sales to D)
May Bills Receivable A/c Dr. 36,470
12 Ds A/c 36,470
(two acceptance received from D; one for
Rs 16,470 at one month and the other
for Rs. 20,000 at three months)
Jun 5 Bills Sent for Collection A/c Dr. 36,470
(Ds acceptance sent to bank for
collection on due date)
2000
Jun 15 Bank A/c Dr. 16,470
(Ds Acceptance for Rs. 16,470 collected
by bank on due date)
Aug 14 D A/c Dr. 20,020
(Dishonour of Ds acceptance earlier sent
to bank for collection; bank being
credited for noting charges paid by it)
Aug 16 Ds A/c Dr. 480
Interest A/c 480
(Interest agreed to be paid by D for post-
ponement of part payment of the bill)
Balance c/f 1,46,380 1,46,380
234 ACCOUNTANCY
Balance b/f 1,46,380 1,46,380
Aug 16 Bank A/c Dr. 8,020
Ds A/c 20,500
(Cash and new acceptance received
from D in settlement of his account)
Aug 19 Bill sent for collection A/c Dr. 12,000
(Ds new acceptance sent to bank for
collection on due date)
Oct 14 Bank A/c Dr. 12,000
Rebate A/c Dr. 480
(Retirement by D of his acceptance for
Rs. 12,480 for rebate of Rs. 240)
Total 1,91,840 1,91,840
Ds Account
Dr. Cr.
Rs. Rs.
2000 2000
May 12 Sales 36,470 May 12 Bills Receivable 36,470
Aug 14 Bills Sent for 20,000 Aug 16 Bank 8,020
Collection Aug 16 Bill Receivable 12,480
Aug 14 (Dishonour 20
of Bill)
Aug 16 Bank 480
Interest
56,970 56,970
Bills Receivable Account
Dr. Cr.
Rs. Rs.
2000 2000
May12 Ds 36,470 June 5 Bills sent for 36,470
collection
May 16 Ds 12,480 Aug 16 Bills sent for 12,000
collection
Interest 480
48,950 48,950
Bills sent for collection
Dr. Cr.
Rs. Rs.
2000 2000
Jun 5 Bills Receivable 36,470 Jun 5 Bank 16,470
Aug 16 Bills Receivable 12,000 Aug 14 Dc 20,000
Oct 1 Bank 12,240
Oct 1 Rebate 240
48,950 48,950
(a) Drawer: A person who makes or draws a bill.
(b) Drawee: A person on whom the bill is drawn for its acceptance by him.
(c) Payee: A person in whose favour a bill is Drawn.
(d) Bill Receivable: A bill is a bill receivable for a person who has to receive the
payment on the due date.
(e) Bill Payable: A bill is a bill payable for one who has to pay it on the due date.
(f) Drawing of a Bill: When a creditor writes and signs an unconditional order
on the debtor to make payment, the former is said to have drawn a bill.
(g) Acceptance of a Bill: When the drawee puts his signature on the draft received
by him, he is said to have accepted the bill.
(h) Payment of a bill: When the amount of the bill is realized on the due date, it
is said to have been paid off.
236 ACCOUNTANCY
1. Bill of Exchange as an Instrument
A bill of exchange is a device by which the purchaser or debtor in a credit transaction
is not required to make immediate payment but satisfies the seller or creditor by
accepting in writing the liability to pay the amount due from him.
2. Meaning of Bill of Exchange and Promissory Note
A bill of exchange is a written acknowledgement of debt given by one person to
another, incorporating all the terms and conditions of payments.A promissory note
is an undertaking in writing given by the debtor to the creditor to pay the latter a
certain sum of money in accordance with the conditions stated therein.
3. Difference between a Bill and a Note
(a) A bill is prepared by the creditor and accepted by the debtor; a note is
prepared by the debtor.
(b) There are three parties to a bill; there are only two parties to a note.
(c ) A bill requires acceptance to acquire financial status; a note in itself has
financial status.
4 Features and advantages of a bill
(a) A bill is a written unconditional order; it is signed by the creditor and accepted
by the debtor; the amount of the bill is payable either on demand or at a
fixed or determinable future time; the amount is payable either to the bearer
or a specified person or to the order of the latter.
(b) Advantages
A frame for relationship; certainty of terms and conditions; convenience for debtor;
financing facility for creditor; conclusive proof; means of remittance; easy
transferability.
EXERCISES
Q. 1 Fill in the blanks:
(i) A bill of exchange is a _______________________ instrument.
(ii) A bill of exchange is drawn by the ___________upon his ____________.
(iii) A promissory note is drawn by_______________in favour of his ____________.
(iv) There are ________________parties to a bill of exchange.
(v) There are ________________parties to a promissory note.
(vi) drawer and _____________can be the same parties in case of a bill of exchange.
(vii) drawer and ___________can not be the same parties in case of a promissory note.
(viii) A bill of exchange requires _____________________.
(ix) A promissory note does not require_____________.
(x) According to the provision of Reserve Bank of India Act, a promissory note
cannot be made payable to ___________________.
(xi) Meeting a bill of exchange by the acceptor before the date of its maturity is
called______________.
(xii) Bills of exchange in Indian language are called as___________.
(xiii) The process of transferring the owners hip of the bill is called_______________.
(xiv) _______________days of grace are added in the terms of the bill to calculate the
date of its________________.
(xv) The act of non-payment of the amount of the bill on its due presentation is
called _________of the bill.
(xvi) If the date of maturity of a bill is on holiday then the bill will mature on
_____________day.
(xvii) If the date of maturity of a bill of exchange is declared as a holiday by the
Government of India under the negotiable instruments act then the bill will
mature on _____________day.
Q.2 Define a bill of exchange?
Q.3 What is meant by a promissory note?
Q.4 Give the meaning of negotiable instruments.
Q.5 What is meant by maturity of a bill of exchange?
Q.6 What is meant by dishonour of a bill of exchange?
Q.7 Name the parties to a bill of exchange.
Q.8 Name the parties to a promissory note.
Q.9 What is meant by acceptance of a bill of exchange?
Q.10 Give the meaning of Noting of a bill of exchange
Q.11 What is meant by renewal of a bill of exchange?
Q.12 Give the Performa of a bills receivable book.
Q.13 What is meant by retirement of a bill of exchange?
Q.14 Give the Performa of a bills payable book.
Q.15 What is meant by insolvency?
Q.16 Give the meaning of rebate.
Q.17 Give the Performa of a bill of exchange.
(i) Distinguish between a bill of exchange and a promissory note.
(ii) Briefly explain the effects of dishonour and noting of a bill of exchange.
(iii) Explain briefly the procedure of calculating the date of maturity of a bill of
exchange?
(iv) What is meant by due presentation of a bill of exchange? Explain briefly.
(v) Briefly explain the purpose and benefits of retiring a bill of exchange to the
debtor and the creditor.
(vi) Explain briefly the difference between dishonour of a bill of exchange and
renewal of a bill of exchange.
(vii) Describe briefly the purpose and advantages of maintaining of a bills
receivable book.
(viii) Briefly explain the benefits of maintaining a bills payable book.
238 ACCOUNTANCY
Problems
Q.9 On 1.1.2002 Rao sold goods Rs. 10,000 to Reddy. Half of the payment was
made immediately and for the remaining half Rao drew a bill of exchange upon
Reddy payable after 30 days. Reddy accepted the bill and returned it to Rao. On the
due date Rao presented the bill to Reddy and received the payment.
Journalize the above transactions in the books of Rao and Reddy. Prepare
Reddys account in the books of Rao and Raos account in the books of Reddy.
Q. 10 On 1.1.2002, Shankar purchased goods from Parvati for Rs. 8,000 and
immediately drew a promissory note in favour of Parvati payable after 3 months.
On the date of maturity of the promissory note, the Government of India declared
holiday under the Negotiable Instrument Act 1881. Since, Parvati was unaware
about the provision of the Law regarding the date of maturity of the bill, she handed
over the bill to her lawyer, who duly presented the bill and received the payment.
The amount of the bill was handed over by the lawyer to Parvati immediately. Pass
the necessary Journal entries in the books of Parvati and Shankar.
Q. 11 Vishal sold goods for Rs. 7,000 to Manju on 5

Jan 2002 and drew upon her
a bill of exchange payable after 2 months. Manju accepted Vishals draft and handed
over the same to Vishal after acceptance. Vishal immediately discounted the bill
with his bank @12% p.a. On the due date Manju met her acceptance. Journalize
the above transactions in the books of Vishal and Manju.
Q. 12 On 1

Feb 2002, John purchased goods for Rs.15,000 from Jimmi. He
immediately made a payment of Rs. 5,000 by cheque and for the balance accepted
the bill of exchange drawn upon him by Jimmi. The bill of exchange was payable
after 40 days. Five days before the maturity of the bill, Jimmy sent the same to his
bank for collection. The bank duly presented the bill to John on the due date and
accordingly informed Jimmi. Pass the necessary Journal entries in the books of
John and Jimmi. Prepare John account in the books of Jimmi and Jimmi account
in the books of John.
Q13 On 15 Jan 2002, Kartar Sold goods for Rs. 30,000 to Bhagwan and drew upon
him three bills of exchange of Rs. 10,000 each payable after one month, two month,
and three months respectively. The first bill was retained by Kartar till its maturity.
The second bill was endorsed by him in favour of his creditor Ratna and the third
bill was discounted by him immediately @ 6% p.a. All the bills were met by Bhgwan.
Journalize the above transactions in the books of Kartar and Bhagwan. Also prepare
ledger account in books of Kartar and Bhagwan.
Q. 14 On 4

Jan 2002 Arun sold goods for Rs. 30,000 to Sunil. 50% of the payment
was made immediately by Sunil on which Arun allowed a cash discount of 2%.
For the balance Sunil drew a promissory note in favour of Arun payable after 20
days. Since, the date of maturity of bill was a public holiday, Arun presented the
bill on a day, as per the provisions of Negotiable Instrument Act which was met by
Sunil.
State the date on which the bill was presented by Arun for payment and
Journalize the above transaction in the books of Arun and Sunil.
Q. 15 Darshan sold goods for Rs. 40,000 to Varun on 8.1.2002 and drew upon
him a bill of exchange payable after two months. Varun accepted the bill and
returned the same to Darshan. On the due date the bill was met by Varun. Pass
the necessary Journal entries in the books of Darshan and Varun in the following
circumstances.
When the bill was retained by Darshan till the date of its maturity.
When Darshan immediately discounted the bill @ 6% p.a. with his bank.
When the bill was endorsed immediately by Darshan in favour of his creditor
Suresh.
When three days before its maturity, the bill was sent by Darshan to his
bank for collection .
Q. 16 Bansal Traders allow a trade discount of 10% on the list price of the goods
purchased from them. Mohan traders, who runs a retail shop made the following
purchases from Bansal Traders.
Date Amount
21.12.2001. 1,000
26.1.2.2001 1,200
28.1.2.2001 2,000
31.12.2001 5,000
For all the purchases Mohan Traders drew promissory notes in favour of Bansal
Traders payable after 30 days. The promissory note for the sale of 21.12.2001 was
retained by Bansal Traders with them till the date of its maturity. The promissory
note drawn on 26.12.2001 was discounted by Bansal Traders from their bank at
12% p.a. The promissory note drawn on 28.1.2.2001 was endorsed by Bansal Traders
in favour of their creditor dream soaps in full settlement of a purchase amounting
to Rs. 1,900. On 25.1.2002 Bansal Traders sent the promissory note drawn on
31.12.2001 to their bank for collection. All the promissory notes were met by Mohan
Traders.
Pass the necessary journal entries for the above transactions in the books of
Bansal Traders and Mohan Traders and prepare Mohan Traders account in the
books of Bansal Traders and Bansal Traders account in the books of Mohan Traders.
Q.17 Narayanan purchased goods Rs. 25,000 from Ravinderan on 1.2.2002.
Ravinderan drew upon Narayanan a bill of exchange for the same amount payable
after 30 days. On the due date Narayanan dishonoured his acceptance.
Pass the necessary journal entries in the books of Ravinderan and Narayanan
in following cases.
When the bill was retained by Ravinderan with him till the date of its maturity.
When the bill was discounted by Ravinderan immediately with his bank @
6% p.a.
When the bill was endorsed of his creditor Ganeshan.
When the bill was sent by Ravinderan to his bank for collection a few days
before it maturity.
Q. 18 Ravi sold goods for Rs. 40,000 to Suders han on Feb 13, 2002. He drew four
bills of exchanges upon Sudershan. The first bill was for Rs. 5,000 payable after
240 ACCOUNTANCY
one month. The second bill was for Rs. 10,000 payable after 40 days; the third bill
was for Rs. 12,000 payable after three months and fourth bill was for the balance
amount payable after 19 days. Sudershan accepted all the bills and returned the
same to Ravi. Ravi discounted the first bill with his bank at 6% p.a. He endorsed
the second bill to his creditor Mustaq for the full settlement of a debt of rs. 10,200.
The third bill was kept by Ravi with him till the date of maturity. Five days before
the maturity of the fourth bill, Ravi sent the bill to his bank for collection. All the
four bills was dishonoured by Sudershan on maturity. Sudershan settled Ravis
claim in cash three days after the dishonour of each bill along with interest @ 12%
p.a. for the terms of the bills.
You are requested to pass the necessary journal entries in the books of Ravi,
Sudershan, Mustaq and bank for the above transaction.
Also prepare Sudershan account and Mustaq account in the books of Ravi.
Q19 On I Jan Neha sold goods for Rs. 20,000 to Muskan and drew upon her a bill
of exchange payable after two months. One month before the maturity of the bill
Muskan approached Neha to accept the payment against the bill at a rebate @ 12%
p.a. Neha agreed to the request of Muskan and Muskan retired the bill under the
agreed rate of rebate.
Journalize the above transactions in the books of Neha and Muskan.
Q 20 On 15 Jan 2002 Raghu sold goods worth Rs. 35,000 to Devendra and drew
upon the latter three bills of exchanges. The first bill was for Rs. 5,000 payable
after one month, the second bill was for Rs.10,000 payable after two months and
the third bill was for Rs. 20,000 payable after three months. Raghu endorsed the
first bill in favour of his creditor Dewan in full settlement of a debt of Rs. 5,200. The
second bill was discounted by Raghu @ 6% p.a. and the third bill was retained by
Raghu with him till the date of maturity. Devendra dishonoured the bill on maturity
and the bank paid Rs. 30 as noting charges. The second bill was also dishonoured
on maturity and the bank paid Rs. 50 as noting charges. Four days before the
maturity of the third bill Raghu sent the same for collection to his bank. The third
bill was also dishonoured by Devendra and the bank paid Rs. 200 as noting charges.
Five days after the dishonour of the third bill Devendra paid the entire amount due
to Raghu along with interest Rs.1,000 for this purpose Devendra obtained a short
term loan from his bank.
You are requested to pass the necessary journal entries in the books of Raghu,
Devendra and Dewan and prepare Devendras account in Raghus books and Raghus
account in Devendras account.
Q.21. Vimal purchased goods Rs. 25,000 from Kamal on 15.1.2.2001 and accepted
a bill of exchange drawn upon him by kamal payable after two months. On the date
of the maturity the bill was duly presented for payment. Vimal dishounoured the
bill.
Pass the necessary journal entries in the books of Kamal and Vimal when.
The bill was retained by Kamal till the date of its maturity.
The bill was immediately discounted by Kamal with his bank @ 6% p.a.
The bill was endorsed by Kamal in favour of his creditor Sharad.
A five days before its maturity the bill was sent by Kamal to his bank for
collections.
Q. 22 Abdula sold goods to Tahir on 17.1.2002 for Rs. 18,000. He drew a bill of
exchange for the same amount on Tahir for 45 days. On the same date which Tahir
accepted the bill and returned to Abdulla. On the due date Abdulla presented the
bill to Tahir which was dishonoured. Abdulla paid Rs. 40 as noting charges. Five
days after the dishonour of his acceptance Tahir settled his debt by making a
payment of Rs.18,700 including interest and noting charges.
Pass the necessary journal entries in the books of Abdulla and Tahir . Also prepare
Tahirs account in the books of Abdulla and Abdullas account in the books of
Tahir.
Q 23 Asha sold goods worth Rs.19,000 to Nisha on 2

March 2002. Rs. 4,000 were
paid by Nisha immediately and for the balance she accepted a bill of exchange
drawn upon her by Asha payable after three months. Asha discounted the bill
immediately with her bank. On the due date Nisha dishonoured the bill and the
bank paid Rs. 30 as noting charges.
Pass the necessary journal entries in the books of Asha and Nisha.
Q 24 On 2

Feb 2002, Verma purchased from Sharma goods for Rs.17,500. Verma
paid Rs.2,500 immediately and for the balance gave a promissory note to Sharma
payable after 60 days. Sharma immediately endorsed the promissory note in favour
of his creditor. Gupta for the full settlement of a debt of Rs. 15,400. On the due date
of the bill Gupta presented the bill to Verma which the latter dishonoured and
Gupta paid Rs. 5,000 noting charges. On the same date Gupta informed Sharma
about the dishonour of the bill. Sharma settled his debt to Gupta by cheque for Rs.
15,500 which. Include noting charges and interest. Verma settled Sharmas claim
by cheque for the same amount.
Pass the necessary journal entries is the bank of Sharma, Gupta and Verma
for the above transaction and prepare Vermas and Guptas account in the books of
Sharma. Sharmas account in the books of Verma. And also Sharmas account in
the books of Gupta.
Q. 25 Lilly sold goods to Mathew on 1.3.2002 for Rs. 12,000 and drew upon Mathew
a bill of exchange for the same amount payable after two months. Lilly immediately
discounted the bill with her bank at 9% p.a. The maturity date of the bill was a non
business day (holiday), therefore, Lilly had to present the bill as per the provisions
of the Indian Instruments Act 1881.The bill was dishonoured by Mathew and Lilly
paid Rs.45 as noting charges. Mathew settled the claim of Lilly five days after the
dishonour of the bill by a cheque, which include interest @ 12% for the term of the
bill.
Journalize the above transactions in the books of Lilly and Mathew and prepare
Mathews account in the books of Lillys and Liilys account in the books of Mathew.
Q. 26 Kapil purchased goods for Rs. 21,000 from Gourav on 1.2.2002 and accepted
a bill of exchange drawn by Gourav for the same amount. The bill was payable after
one month. On 25.2.2002 Gourav sent the bill to his bank for collection. The bill
was duly presented by the bank. Kapil dishonoured the bill and the bank paid Rs.
100 as noting charges.
Pass the necessary journal entries for the above transactions in the books of
Kapil and Gourav.
242 ACCOUNTANCY
Q. 27 On 14.2.2002 Rashmi sold goods Rs. 7,500 to Alka. Alka paid Rs. 500 in
cash and for the bank balance accepted a bill of exchange drawn upon her by
Rashmi payable after two months. On 10.4.2002 Alka approached Rashmi to cancel
the bill since she was short of funds. She further requested Rashmi to accept
Rs. 2,000 in cash and draw a new bill for the balance including interest Rs. 500.
Rashmi accepted Alkas request and drew a new bill for the amount due payable
after 2 months. The bill was accepted by Alka. The new bill was duly met by Alka on
maturity.
Pass the necessary journal entries in the books of Rashmi and Alka and prepared
Alkas account in the books of Rashmis and Rashmis account in the books of
Alkas.
Q. 28. Nikhil sold goods for Rs. 23,000 to Akhil on 1.12.2001. He drew upon Akhil
a bill of exchange for the same amount payable after 2 months. Akhil accepted the
bill and sent it back to Nikhil. Nikhil discounted the bill immediately with his bank
@ 12% p.a. On the due date Akhil dishonoured the bill of exchange and the bank
paid Rs. 100 as noting charges. Akhil requested Nikhil to draw a new bill upon him
with interest @ 10% p.a. which agreed. The new bill was payable after two months
a week before the maturity of the second bill Akhil requested Nikhil to cancel the
second bill. He further requested to accept Rs. 10,000 in cash immediately and
draw a third bill upon him including interest of Rs. 500. Nikhil agreed to Akhils
request. The third bill was payable after one month. Akhil met the third bill on its
maturity. Pass the necessary journal entries in the books of Nikhil and Akhil and
also prepare Akhils account in the books of Nikhil and Nikhils account in the
books of Akhil.
Q 29. On 1

Jan 2002 Vibha sold goods worth Rs. 18,000 to Sudha and drew upon
the latter a bill of exchange for the same amount payable after two months. Sudha
accepted Vibhas draft returned the same to Vibha after acceptance. Vibha endorsed
the bill immediately in favour of her creditor Geeta. Five days before the maturity of
the bill Sudha requested Vibha to cancel the bill since she was short of funds. She
further requested to draw a new bill upon her including interest of Rs. 200. Vibha
accepted Sudhas request. Vibha took the bill from Geeta by making the payment
to her in cash and cancelled the same. Then she drew the new bill upon Sudha as
agreed. The new bill was payable after one month. The new bill was duly met by
Sudha on maturity. Pass the necessary journal entries in the books of Vibha.
Q. 30 On 1.1.2002 Adhikari sold goods Rs. 37,000 to Bhandari. On the same day
he drew upon Bhandari a bill of exchange payable after two months. A week before
the maturity of the bill Bhandari requested Adhikari to cancel the old bill and draw
upon him a new bill including interest of Rs.1,500. Adhikari agreed to Bhandaris
request and cancelled the old bill. Adhikari drew a new bill with interest Rs. 1,500
payable after one month. The bill was duly accepted by Bhandari.On the maturity
of the second bill Bhandari became insolvent and a dividend of 50 paise in a rupee
was received from his estate.
Pass the necessary journal entries in the books of Adhikari and Bhandari
account and prepare Bhandari account in the books of Adhikari and Adhikari
account in the books of Bhandari.
Q. 31 On 12.10.2001 Arun sold goods Rs. 50,000 to Kapil for which the latter
accepted four bills of Rs. 12,500 each. Payable after one month, 1.5 months, 2
months and 3 months respectively. The second bill was sent for collection. The
third bill was endorsed in favour of Vishal and the fourth bill was discounted by
Arun with his bank @ 12% per annum. The first bill was met on the due date. As
regards the second bill, Kapil approached Arun on 25 November 2001, paid him Rs.
2,500 in cash and requested him to draw a new bill for the balance together with
interest @ 12% per annum. The term of the new bill was one month and it was duly
paid on maturity. The third bill was also duly met by Kapil. On maturity on 15.1.2002
Kapil was disclosed insolvent and only 50 paise in a rupee were recovered from his
estate.
Pass necessary journal entries in the books of Aurn and Kapil and prepare
Kapils account in Arun ledger and Aruns account in Kapil ledger.
Q. 32 Here under are the following transactions in the books of Radhe Shyam.
(i) Raj Kumar acceptance in our favour Rs. 5,000 was duly met on maturity.
(ii) Our acceptance Rs. 7,000 in favour of Rs. 4,500 was duly met on maturity.
(iii] Paramjeet acceptance in favour of Jaipal Rs. 3,000 endorsed in our favour
was duly met on maturity.
(iv] Our acceptance in favour of L.Kumar endorsed in favour of Kiran Rs.
12,000 was duly met on maturity
(v) Ashoks acceptance for Rs. 3,800 in our favour discounted with the bank
was dishonoured and the bank paid Rs. 50 as noting charges.
(vi] Gouravs acceptance for Rs. 5,500 in favour of Varun. Endorsed in our
favour was dishonored on maturity and we paidrs. 120 as noting charges.
(vii) We retired on acceptane Rs.7,000 in favour of Pramod one month before
maturity under a rebate of 12% per annum.
(viii) Arun acceptance in our favour Rs. 9,000 endorsed in favour Mahender
was dishonoured by Mahinder and he paid Rs. 200 as noting charges.
Arun settled his debt by paying a cheque for the amount due including
interest Rs. 500
(ix) Neha acceptance in our favour for Rs. 8,000. She was remembered for a
further period of two months. Neha agreed to pay interest Rs. 500 in
cash.
(x) On his becoming insolvent Vishal could not fully meet an acceptance of
Rs.12,000 and a final dividend of 60 paise in a rupee was received from
his estate.
Q. 34 Sukumari sold goods for Rs. 21,000 to Jayant on 1.1.2002 and drew upon
Jayant a bill of exchange payable after one month. On 29 Jan 2002 Jayant requested.
Sukumari to cancel the bill drawn on 1.1.2002. He further requested her to accept
Rs. 7,000 in cash which included Rs. 2,000 for interest and draw a new bill for the
balance payable after two months. This bill was endorsed by Sukumari in favour of
her creditor Bhagwati. Bhagwati duly presented the bill to Jayant on its maturity
and which was dishonored Bhagwati paid Rs.100 as noting charges. Jayant again
requested Sukumari to accept Rs. 2,000 in cash and draw upon him another bill of
exchange payable after one month including interest for Rs. 500. Sukumari accepted
Jayants request and drew the third bill which was accepted by Jayant. On the
244 ACCOUNTANCY
maturity of the new bill, Jayant became insolvent and a claim of 60 paise in a rupee
was received from him.
Journalize the above transaction in the books of Sukumari and Jayant and
prepare Jayants account in the book of Sukumari and Sukumari account in the
Jayant ledger.
Q. 35 On 15

April 2001 Anil sold goods to Bijoy for Rs. 30,000. Bijoy paid Rs.30,000
in cash and accepted three bills of exchange for the remaining amount. The first
bill was fro Rs. 7,000 payable after one month the second bill was for Rs. 8,000
payable after two months and the third bill was for Rs. 9,000 payable after three
months.
On 20

April 2001, Anil endorsed the first bill to his creditor Cristopher in final
settlement of his account of Rs.7,200. He discounted the second bill with his bank
at a discount of Rs. 100. Anil retained the third bill with his till the date of its
maturity.
The first bill was met on maturity. The second bill was dishonoured on its due
presentation by cristopher and cristopher paid Rs. 100 as noting charges. Anil
charged Rs. 200 for interest and drew upon Bijoy a fourth bill for the amount due
payable after three months. Bijoy accepted it and returned it to Anil. The third bill
was also met on maturity but before the due date of the fourth bill Bijoy become
insolvent and only 40 recovered from him.
Give journal entries to record the above transaction in the bill of Anil and Bijoy
and prepare Bijoys account in Anils books and Anils account in Bijoys books.
Q. 36 Following was the position of debtor and creditor of Gautam as on 1.1.2002.
Debtors Creditors
Rs. Rs.
Babu 5,000 -
Chanderkala 8,000 -
Kiran 13,500 -
Anita 14,000 -
Anju - 5,000
Sheiba - 12,000
Manju 6,000
The following transactions took place in the month of Jan 2002:
Jan 2
Drew on Babu at two months after date at full settlement Rs. 4,800. Babu accepted
the bill and returned it on 5.1.2002.
Jan 4
Babus bill discounted for Rs. 4,750.
Jan 8
Chanderkala sent a promissory note for Rs. 8,000 payable three months after date.
Jan 10
Promissory note received from Chanderkala discounted for Rs. 7,900.
Jan 12
Accepted Sheiba Draft for the amount due payable two months after date.
Jan 22
Anita sent his promissory note payable after two months.
Jan 23
Anitas promissory note endorsed in favour of Manju.
Jan 25
Accepted Anjus Draft payable after three months.
Jan 29
Kiran sent Rs. 2,000 in cash and a promissory note for the balance payable after
three months.
Record the above transactions in the proper subsidiary books.
Check-list of key letters/words
ANSWERS
(i) Negotiable
(ii) Drawer, Drawee
(iii) Maker, Payee
(iv) Three
(v) Two
(vi) Payee
(vii) Payee
(viii) Acceptance
(ix) Acceptance
(x) Bearer
(xi) Returning of a bill
(xii) Hundi
(xiii) Endorsement
(xiv) 3, Maturity
(xv) Dishonour
(xvi) Preceding working day
(xvii) Next working day
CHAPTER 7
Financial Statements
LEARNING OBJECTIVES
After studying the chapter, you will be able to:
state the meaning of financial statements;
appreciate the uses of financial statements;
state the meaning of gross profit, operating profit and net profit;
describe the need for Profit and Loss Account and Balance Sheet;
develop the skill of grouping and marshalling of assets and
liabilities;
record the accounting treatment of adjustments required to be
made for different outstanding, prepaid, accrued and advance
payments of items of incomes and expenses;
understand and explain the adjustments regarding bad debts,
provision for bad debts, provision for discount on debtors,
managers commission, abnormal loss, goods sent for approval
and in transit; and
develop the skill of preparing Profit and Loss Account and
Balance Sheet of a sole proprietorship firm.
ACCOUNTANCY 248
The p r oced u r e of r ecor d ing t he
transactions in the subsidiary books, their
ledger posting and preparation of trial
balance have been described in preceding
chapters. In this chapter we will discuss
the concepts and steps involved in the
p r ep ar at ion of financial st at ement s.
Preparation of financial statements is the
last step of the accounting cycle. You may
recall that the transactions recorded in the
account ing books ar e post ed int o t he
relevant ledger accounts. The balances of
ledger accounts are checked for accuracy
by preparing the trial balance. For this
purpose these balances are posted in the
two column of the trial balance. Debit
balance in the debit column and credit
balance in the credit column. Having done
this, the next stage is set to prepare Profit
and Loss Account and Balance Sheet ,
collect ively r efer r ed t o as financial
statements.
One of the objectives of accounting is
t o find ou t t he p r ofit ear ned or loss
sust ained by t he fir m d ur ing a given
period of time and its financial position at
a given point of time. For this purpose, the
fir m pr epar es t he following financial
statements.
Profit & Loss Account, and
Balance Sheet
Profit and Loss Account is also known
as income statement. It is prepared to
d et er mine t he p r ofit ear ned or loss
su st ained by t he bu siness ent er p r ise
during a period of time. Generally, in the
large size organisations only one account
is prepared and gross profit, operating
profit and net profit is ascertained by
p r ep ar ing Pr ofit and Loss Accou nt .
Whereas in small-size organizations, this
account is bifurcated into two parts viz.
t r ad ing accou nt and p r ofit and loss
account. Trading account is prepared to
ascertain gross profit whereas Profit and
Loss Account is prepared to ascertain
operating profit and net profit.
Balance Sheet is also known as the
position statement, which is prepared to
d et er mine t he p osit ion of asset s and
liabilities of the business at a given point
of time.
7.1 Profit and Loss Account
Profit and Loss Account is prepared to
d et er mine t he p r ofit ear ned or loss
su st ained by t he bu siness ent er p r ise
during the accounting period, usually, as
a business custom the profit is ascertained
in three stages:
Ascertainment of gross profit
Ascertainment of operating profit
Ascertainment of net profit
Gross Profit: Gross Profit is the excess
of revenue over direct cost. In order to
ascertain gross profit, revenue implies sale
of goods or rendering services and cost
implies the cost of goods sold or services
rendered. The excess of such revenue over
cost directly related thereto is called gross
profit. It is also called gross margin. When
the result of this computation is negative,
it is referred to as gross loss. Gross Profit is
the overall result of trading, i.e. purchasing
and selling of goods. It is ascertained to
know whether selling of goods and or
rendering of services to customers has
proved profitable for the business or not.
Gross profit , therefore, is the difference
between net sales revenues and cost of
sales. The cost of goods sold and services
rendered is called cost of sales.
FINANCIAL STATEMENTS 249
Cost of goods sold or cost of services
rendered is the material consumed and
expenses r elat ed t her et o d ur ing an
accounting year. Material consumed is
calculated by subtracting the amount of
closing stock for the total of opening stock
and net pur chases for t he year . In
manufact ur ing fir ms and r et ailing
business, it is often called cost of goods sold.
It can be shown in the form of an equation
as follows:
Gross Profit =Net Sales Cost of Goods Sold
Where, Cost of Goods Sold = Opening Stock +
Net Purchase + Direct Expenses Closing Stock
Here, net sales means total sales less
sales returns. Cost of goods sold can be
calculated as follows:
Particulars Amount
Rs.
Opening Stock ***
Add: Net Purchases ***
Add: Direct Expenses ***
Cost of goods available for sale ***
Less: Closing Stock ***
Cost of goods sold ***
Illustration I
From the following figures calculate the
amount of Gross profit earned by Vinod,
a bookseller, for the year ending 31

March
2002.
Cash sales Rs.5,00,000; Credit sales
Rs.2,00,000; Sales returns Rs. 5,000; Cost
of books sold during the year Rs. 6,00,000.
Solution
Gross profit = Net Sales Cost of goods sold
Net Sales = Total Sales Sales Return
= Cash sales + Credit sales Sales return
= Rs.5,00,000 + Rs.2,00,000 Rs.5,000
= Rs.6,95,000
Gross Profit = Rs.6,95,000 Rs.6,00,000
= Rs.95,000
Illustration 2
From the following balances extracted
from the books of Haryana Handlooms
for t he year end ing 31 Mar ch 2002.
Calculate the amount of Gross Profit.
Op ening st ock Rs. 1,00,000; Net
purchase Rs. 20,00,000; Direct expenses
Rs. 50,000; Net sales d ur ing t he year
Rs. 30,00,000. Closing stock Rs. 1,50,000.
Illustration 3
Calculate the amount of gross profit/ gross
loss fr om t he following infor -mat ion
compiled from the books of Shudh Desi
Statement of Gross Profit or Gross Loss of Haryana Handlooms for the year ending 31
st
March 2002.
Rs. Rs.
Net Sales 30,00,000
Less:
Opening Stock 1,00,000
+ Net Purchases 20,00,000
+ Direct Expenses 50,000
Cost of goods available for sale 21,50,000
Less: Closing Stock 1,50,000
Cost of goods sold 20,00,000
Gross Profit 10,00,000
ACCOUNTANCY 250
Ghee for the year ended 31

March 2002.
Opening Stock of Ghee Rs. 10,000;
Pu r chase of Ghee d u r ing t he year
Rs. 95,000; Dir ect Exp enses incu r r ed
Rs. 15,000; Closing stock of Ghee Rs. 20,000
and Sales Rs. 80,000.
Solution
Statement of Gross Profi t or Gross Loss of Shudh Desi Ghee
for the year endi ng 31st March 2002
Rs. Rs.
Sales 80,000
Less:
Opening Stock 10,000
+ Purchases 95,000
+ Direct Expenses 15,000
Cost of Ghee available for sale 1,20,000
Less: Closing Stock 20,000
Cost of Ghee sold 1,00,000
Gross Loss 20,000
Illustration 4
from the books of M/ s Lovely Sweets,
calculate the amount of gross profit earned
during the year ended 31

March 2001:
Opening stock Rs.18,000; Cash purchases
Rs. 2,40,000; Credit purchases Rs.6,99,000;
Cash Sales Rs.3,70,000; Credit Sales
Rs.11,87,000; Wages Rs.90,000; Salaries
Rs.1,20,000; Closing stock Rs.27,000. Sales
returns Rs.12,000 and Purchases Returns
Rs.8,000, Wages Rs.90,000.
Solution
Statement of Gross Profit of M/S Lovely Sweets for the year ending 31

March 2001
Rs. Rs.
Net Sales 15,45,000
2
Less:
+ Net Purchases 9,31,000
1
+ Direct Expenses:
Wages 90,000
Cost of goods available for sales during the year 10,39,000
Less: Closing Stock 27,000
Cost of goods sold during the year 10,12,000
Gross Profit 5,33,000
Working Notes
Total Sales = Cash Sales + Credit Sales
= Rs.3,70,000 + Rs. 11,87,000
= Rs.15,57,000
Net Sales = Gross Sales Sales Return
= Rs.15,57,000 Rs.12,000
= Rs. 15,45,000
2
Total Purchases = Cash Purchases+ Credit
Purchases
= Rs.2,40,000 +Rs. 6,99,000
= Rs. 9,39,000
Net Purchases = Total Purchases Purchases
Returns
= Rs.9,39,000 Rs. 8,000
= Rs. 9,31,000
1
Operat ing Profit : It is t he pr ofit
ear ned t hr ou gh t he nor mal
operat ions and act ivit ies of t he
business. Operating profit is the
excess of operating revenue over
op er at ing exp enses. While
calcu lat ing op er at ing p r ofit
ext r aneou s t r ansact ions and
exp enses of a p u r ely financial
nature are not taken into account.
Operating profit is the profit before
int erest and t ax. Similarly, non
operating expenses or losses such
as loss by fire, etc. are also not taken
into account. Operating profit can
be calculated as follows:
Operating Profit = Gross Profit Operating
Expenses
or
Operating Profit = Gross Profit (Administration
Expanses + Selling & Distribution Expenses).
Illustration 5
Calculate the amount of operating profit
from the following balances obtained form
t he books of Hind Tr ad er s: Net sales
Rs.5,00,000; Cost of goods sold Rs.3,00,000;
Operating expenses Rs.1,20,000.
Solution
Calculation of operating profit
Expenses
where,
Gross Profit = Net Sales Cost of goods sold
= Rs.5,00,000 Rs. 3,00,000
= Rs.2,00,000
Operating profit = Rs.2,00,000 Rs. 80,000
= Rs.1,20,000
Illustration 6
Calculate the amount of operating profit
from the following balances obtained from
the books of M/ S Raj Nath & Sons for the
year ended 31 March 2002. Opening stock
Rs.20,000; Net purchases Rs.4,60,000; Net
sales Rs.8,00,000; Dir ect exp enses
Rs.48,000; Selling and d ist r ibu t ion
expenses Rs. 42,000; Ad minist r at ions
exp enses Rs.33,000; Loss d u e t o fir e
Rs.15,000 Closing Stock Rs. 50,000.
Solution
Expenses
= Rs.3,22,000 Rs.75,000
= Rs.2,47,000
Working Notes
Cost of Goods Sold = Opening Stock + Net Purchases
+ Direct Expenses Closing Stock
= Rs.20,000 + Rs.4,60,000 +
Rs.48,000 Rs. 50,000
= Rs.4,78,000
Gross Profit = Net Sales Cost of Goods Sold
= Rs.8,00,000 Rs. 4,78,000
= Rs.3,22,000
Operating Expenses = Selling & Distribution Expenses
+ Administration Expenses
= Rs.42,000 + Rs.33,000
= Rs.75,000.
ACCOUNTANCY 252
Net Profit : It is t he differ ence
between the operating profit less
non-operating expenses plus non-
operating incomes. When from the
operating profit we deduct non
operating expenses like interest and
add to it non- operating incomes
like gain on sale of fixed assets, etc.
the resultant is the net profit. Net
profit can be calculated with the
help of the following equation.
Net Profit : Operating profit Non operating
expenses + Non-operating incomes
Non-oper at ing expenses include
expenses of extraneous nature and financial
expenses like, interest, tax, loss on sale of
fixed assets, etc. Similarly non-operating
incomes include such incomes which are not
due to the operations of the business for
example, gain on sale of fixed assets, interest
r eceived on invest ment s, commission
received, rent received, etc. such incomes
are the result of the non- operating activities
of the business.
Alternatively, net profit can also be
calculated with the help of the following
equations:
Net Profit = Net Sale + Non-operating incomes (Cost
of good sold + Operating expenses + Non- operating
expenses)
Illustration 7
Operating profit earned by a firm during
the year was Rs. 80,000. Its non-operating
expenses were Rs.30,000 and non-
op er at ing incomes wer e Rs.5,000.
Calculate the amount of net profit earned
by the firm.
Solution
Net Profit = Operating profit Non-operating
expenses + Non-operating incomes
= 80,000 30,000 + 5,000
= Rs. 55,000
Illustration 8
Sales of an enterprise during the year
ended 31
st
March 2002 was Rs.3,20,000.
Its sales returns were Rs.20,000; Opening
Stock (1 April 2001) Rs.50,000; Purchases
made by the firm during the year Rs.
1,00,000; Cartage Rs.5,000; Wages during
the year Rs.15,000; Closing stock on 31
December 2002 was Rs.20,000; Salaries paid
during the year Rs.12,000; Loss on sale of
furniture Rs.1,000; Gain on sale of old
machinery Rs.3,000. During the year, the
firm paid Rs.2,000 as interest on loan and
Rs.20,000 as income tax. Calculate Gross
pr ofit , Oper at ing pr ofit and Net
profit earned during the year ended 31
March 2002.
Solution :
Rs. Rs.
Sales 3,20,000
Less Sales Returns 20,000 3,00,000
Opening stock 50,000
Purchases 1,00,000
Cartage 5,000
Wages 15,000
Bal c/f 1,70,000
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
Opening stock *** Sales ***
Purchases *** Less Sales Returns ***
Less Returns *** ____ *** ***
Direct Expenses: Closing stock ***
Wages *** Gruss Loss if any c/ f
Cartage ***
Fuel ***
Royalty ***
Packaging ***
Material ____ ***
Gross Loss if any b/ f *
Gross profit c/ f ***
Operating Expenses: Gross profit b/ f * ***
Administrative *** operating loss of any c/ f
Selling Exp ***
Distribution Exp ***____ ***
Operating profit c/ f ***
operating lon if any b/ f
Non operating Expenses:
Interest *** Operating profit b/ f ***
Tax *** ____
*** Non-operating incomes ***
Net Profit transferred to *** Other incomes ***
Capital Account *** Net loss for transferred to ***
capital Account
7.1.1 Proforma of Profit and Loss Account
Profit and Loss account of for the year ended (Date)
(Name of the firm)
Balance b/f 1,70,000
Less Closing stock 20,000
Gross profit 1,50,000
Less: Operating expenses 12,000
Operating profit 1,38,000
Less: Non-operating expenses:
Loss on sale furniture 1,000
Interest 2,000
Income tax 20,000 23,000
1,15,000
Add Non Operating Income
Gain on sale of machinery 3,000
Net Profit 1,12,000
.Fig. 7 . 1 : Proforma of Profit and Los s Account
* Only one item appears in profit and loss account
ACCOUNTANCY 254
7.1.2 Relevant t erms in Profit and
Loss Account
(i) Items on the debit side
Opening Stock: It is the stock of
goods in hand at the beginning of
the accounting year. This is the
stock of goods which is carried
forward from the previous year
and remains unchanged during the
year and ap p ear s in t he t r ial
balance at the end of the year. In
the P &L account it appears on the
debit side because it forms the part
of cost of sales for t he cu r r ent
accounting year.
Purchases : This account in the trial
balance shows total purchases (cash
as well as credit) made during the
year. It is shown on the debit side.
Good s which ar e r et ur ned t o
suppliers are termed as purchase
r et ur ns. Pur chases r et ur ns ar e
shown by the way of deduction form
purchases. Net Purchases means
Total Purchases Purchases Returns.
Direct Expenses: In case of trading
concerns, all expenses incurred on
purchases of goods and bringing
t hem in saleable condit ions are
called direct expenses. However, in
case of manufacturing concerns,
cost of conversion of raw material
into finished products also from
p ar t of d ir ect exp enses. Dir ect
expenses include the following:
(a) Wages/ Direct Wages Product ive
Wages: These include wages paid to
the workers who are directly engaged
in the production, wages paid to the
workers for loading, unloading and
production of goods.
(b) C a r r i a g e / C a r t a g e / F r e i g h t /
CarriageInwards/ Cargo Expenses/
Shipping: These Expense are the items
of transport expenses which are met for
bringing the material purchased to the
business place. All these items fall
under the category of direct expenses.
(c) Import Duty/ Customs Duty: When
goods are import ed, import dut y,
customs duty or dock charges, etc.
have t o be p aid . Since, t hese ar e
r elat ed t o pur chases of good s for
resale purpose these are included in
direct expenses.
(d) Fu el/ Power / Gas/ Wat er : These
it ems ar e u sed in t he pr od u ct ion
process and hence are included in
direct expenses.
(e) Royalty: It is the amount paid to the
owner for u sing his r ight s. For
example, the royalty is paid by the
Lesse of a coal mine to its owner for
taking out the coal from the coal mine.
Similarly, royalty is paid to the owner
of a patent for the use of patent right.
It is to be noted that when royalty is
paid on the basis of production it is
treated as direct expense. In contract
to this when royalty is based on sales
revenue such as in book publishing
business it is t o be consid er ed as
indirect expense.
(f) Packaging Material and Packaging
Charges: Cost of packaging material
and packaging charges used in the
product are direct expenses.
Gross Loss: Gross Loss if any as
shown is the first stage of P&L
account becomes the first item to
be d ebit ed t o Pr ofit and Loss
Account.
Salaries: These include salaries paid
to the administration, godown and
warehouse staff for the services
rendered by them for running the
business. These are of indirect
nature. In case of partnership firms
salar ies may be allowed t o t he
partners as per the provision of the
p ar t ner ship agr eement . In t he
nor mal cou r se of bu siness,
employees are paid net salaries
after deduction of all dues to the
organization. It is to be noted that
the amount of salary to be shown
on the debit side of profit and loss
account is the gross amount of the
salar y (inclu d ing d ed u ct ion of
Income tax, Provident fund and
Gratuity ).If salaries are paid after
d ed u ct ion of Income Tax or
Provident Fund, then these should
be ad d ed back t o get t he
gr oss figu r es of salar ies t o be
d ebit ed t o t he Pr ofit and Loss
Account.
If salaries are paid in kind by
providing certain facilities to the
emp loyees su ch as r ent fr ee
accommodation, meals, uniform,
medical facilities than the monetary
value of such facilities should be
regarded as salaries and the same
should be debited to the Profit and
Loss Account.
Rent , Rat es and Taxes: These
include office and godown rent,
mu nicip al r at es and t axes.
However, factory rent, rates and
taxes should be debited to Profit
and Loss Account. If rent is paid
aft er d ed u ct ion of some t ax at
source then the same should be
added back to calculate the total
amount of rent. This total (Gross
rent) is debited to Profit and Loss
Account.
Interest: Interest paid on loans,
bank overdraft, renewal of bills of
exchange, etc. is an expense and is
d ebit ed t o t he Pr ofit and Loss
Account.
Commission: Commission paid or
payable on business transac-tions
undertaken through the agents is
an item of expense and is debited
to Profit and Loss Account.
Repairs: Rep air s and small
renewals/ replacements relating to
plant and machinery, furniture,
fixtures, fittings, etc. for keeping
t hem in wor king cond it ion ar e
included under this head. Such
expenditure is debited to Profit
and Loss accou nt . However , it
should be noted that any expen-
d it ur e on r epair s and r enewals
which incr eases t he bu siness
cap acit y is an exp end it u r e of
capital nature and is debited to the
concer ned asset accou nt , e.g.
expenditure on renewals of the
bu ild ing of a Cinema Hall
r esu lt ing int o incr ease in it s
capacit y will be d ebit ed t o t he
building account and not to the
Depreciat ion: It is an exp ense
arising out of use due to wear and
t ear , lapse of t ime. This is t he
estimated value of assets consumed
during the period and is debited to
the profit and loss account.
ACCOUNTANCY 256
Miscellaneous Expense: Thou gh
expenses are classified and booked
under different heads, but certain
expenses being of small amount
clubbed together and are called
miscellaneous expenses. In normal
usage these expenses are called
Su nd r y Exp enses or Tr ad e
Expenses.
If the total of the credit side of the
Profit and Loss Account is more
than the total of the debit side, the
difference is the net profit as per the
books of accounts of the business
firm for the period of which the
Profit and Loss Account is being
prepared. On the other hand, if the
total of the debit side is more than
t he t ot al of t he cr ed it sid e, t he
difference is the net loss sustained
by the business firm. Net profit or
net loss so computed is transferred
to the capital account in case of sole
pr opr iet or ship and par t ner ship
fir ms. Net p r ofit incr eases t he
owner s equ it y and net loss
decreases it.
(ii) Items on the Credit side
Sales: Sales account in trial balance
shows gross total sales (cash as well
as credit) made during the year. It
is shown on the credit side of the
trading account. Goods returned
by cust omer s ar e called r et ur n
inwar d s and ar e shown as
deduction from total sales.
Net Sal es means Total Sal es
Sales Return
Closing St ock: It represent s t he
value of unsold goods lying in the
stock at the end of the accounting
period. At the end of the year a list
of the items remaining unsold is
p r ep ar ed and it s valu e is p u t .
Closing stock is valued at lower of
cost or net realizable value. It is
shown on the credit side of the
Besides this, gains and incomes are
also recorded in the Profit and Loss
Accou nt . Examp les ar e Rent
r eceived , Divid end r eceived ,
Int er est r eceived , Discou nt
received, Bad debts recovered, etc.
7.1.3 Closing Ent ries
Those entries which are made during the
preparation of financial statements are called
closing entries. All items of revenue and
expenses appearing in the trial balance are
transferred to Profit and Loss Account by
passing the following entries.
Opening stock account, Pur-chase
account, Wages account, Carriage
Inward account and Direct expenses
account are closed by transferring to
the debit side of the Profit and Loss
Account. This is done by passing the
following entry.
Profit and Loss a/ c Dr.
Opening Stock a/ c
Purchases a/ c
Wages a/ c
Carriage Inwards a/ c
All other direct expenses a/ c
The Purchases Returns or Return outwards account is closed by transferring its
balance to the purchases account.
The following entry is passed for this purpose
Purchase returns a/ c Dr.
Purchases a/ c
Same way, the sales return or returns inwards account is closed by transferring
its balance to the sales account as follows.
Sales a/ c Dr.
Sales returns a/ c
The sales account is closed by transferring its balance to the credit side of the
Profit and Loss Account by means of the following entry.
Sales a/ c Dr.
Profit and Loss a/ c
Items of expenses, losses, etc. are closed by means of the following entries.
Expenses (Individually) a/ c
Losses (Individually) a/ c
Items of incomes, gains, etc. are closed by means of the following entries.
Incomes (Individually) Dr.
Gains (Individually) Dr.
Profit and Loss a/ c.
Transfer of net profit or net loss.
(i) For transfer of net profit.
Capital a/ c.
or
For transfer of net loss
Capital a/ c Dr.
Profit and Loss a/ c
ACCOUNTANCY 258
Illustration 9
Given below is the trial balance of Shri Hari Prakash. Pass the necessary closing entries
and prepare the Profit and Loss account of Shri Hari Prakash for the year ended 31
March 2002.
Trial Balance of Hari Prakash as on 31st March 2002
Particulars Debit Credit
Amount Amount
Rs. Rs.
Stock as on 1.4.2001 50,000
Sales 2,90,000
Sales returns 10,000
Purchases 2,45,000
Purchase Returns 5,000
Carriage Inwards 4,000
Carriage Outwards 6,000
Wages 12,000
Salaries 18,000
Printing and Stationery 900
Discount allowed 900
Discount received 600
Depreciation 3,000
Building 2,08,100
Insurance Premium 600
Trade Expenses 5,000
Capital 2,72,900
Accounts Receivables 20,000
Accounts Payables 15,000
5,83,500 5,83,500
Closking Stock on 31.3.2002 Rs. 65,000
Solution
Shri Hari Prakash
Journal
Dat e Particulars L.F Debit Amount Credit Amount
2002 Rs. Rs.
March 31 Profit and Loss a/ c Dr. 3,21,000
Stock a/ c 50,000
Purchases a/ c 2,45,000
Sales Returns a/ c 10,000
Carriage Inward a/ c 4,000
Wages a/ c 12,000
(Closing entry for opening stock,
purchases, sales returns, carriage
inwards and wages)
March 31 Closing Stock a/ c Dr. 65,000
Sales a/ c Dr. 2,90,000
Purchase Returns a/ c Dr. 5,000
Profit and Loss a/ c 3,60,000
(Closing only for closing stock,
Sales & Purchase Returns)
March 31 Profit and Loss a/ c Dr. 34,400
Carriage outwards a/ c 6000
Salaries a/ c 18,000
Printing and Stationery a/ c 900
Discount allowed a/ c 900
Depreciation a/ c 3,000
Insurance premium a/ c 600
Trade expenses a/ c 5,000
(Closing entry for Carriage outwards,
Salaries, Printing and Stationery,
discount allowed, depreciation,
insurance premium and trade
expenses
March 31 Discount received a/ c Dr. 600
Profit and Loss a/ c 600
(closing entry for discount received)
March 31 Profit and Loss a/ c Dr. 5,200 5,200
Capital a/ c
(Net profit transferred to Capital a/ c)
ACCOUNTANCY 260
Profit and Loss Account of Shri Hari Prakash for the year ended 31
st
March 2002
Dr. Cr.
Rs. Rs.
Opening Stock 50,000 Sales 2,90,000
Purchases 2,45,000 Less Returns 10,000 2,80,000
Less Returns 5,000 2,40,000 Closing Stock 65,000
Carriage Inwards 4,000
Wages 12,000
Gross Profit c/ f 39,000
3,45,000 3,45,000
Carriage Outwards 6,000 Gross Profit b/ f 39,000
Salaries 18,000 Discount Received 600
Printing and Stationery 900
Discount Allowed 900
Depreciation 3,000
Insurance Premium 600
Net Profit (transferred 5,200
to capital account)
39,600 39,600
7.2 Balance Sheet
In order to know the position of assets and
liabilities of the business, a statement is
prepared which is called Balance Sheet.
This statement contains the information
regarding assets and liabilities of business
at a particular point in time at a particular
date.
The Balance Sheet has two sides. On
the left hand side the liabilities of the
business and on the right hand side the
assets of the business are shown.
7.2.1 Proforma of t he Balance
Sheet
There is no prescribed form of the Balance
Sheet for a proprietary and partnership
concern, however, schedule VI Part I of
The Companies Act 1956 prescribes the
format and the order in which the assets
and liabilities of a company should be
shown. In the case of a sole tradership
for m of bu siness ent er p r ise and a
partnership firm the assets and liabilities
of a business can be shown in any order.
It is t he narrat ion of balances carried
forward for those assets whose value is to
be realized or liabilities to be paid of in
the future. Being a sheet of balances, it is
called a Balance Sheet.
The asset s and liabilit ies can be
arranged in the Balance Sheet in any of the
following orders.
Marshalling of Assets & Liabilities
(i) Order of liquidity
(ii) Order of permanence
(i) Order of liquidit y: When an
ent er pr ise d ecid es t o show t he
assets and liabilities in order of
liquidity then the assets which are
more readily convertible into cash
are shown first followed by the
assets which cannot be so readily
conver t ed int o cash and so on.
Similarly, the liabilities which are
payable immediately are shown
fir st followed by t he liabilit ies
which are to be paid later on and
so on. In essence the principle of
ar r angement s of it ems is fr om
liquidity to fixidity. The Performa
of the Balance Sheet in order of
liquidity is given in Fig. 7.2:
(ii) Order of Permanence: When an
ent er pr ise follows t he or d er of
permanence to show its assets and
liabilit ies in t he Balance Sheet
then the most permanent assets
are shown first followed by the less
p er manent asset s and so on.
Similarly, the long term liabilities
are shown first followed by the
medium-term liabilities and short-
term liabilities. We can say that the
order of permanence is just the
reverse of the order of liquidity.
(Arrangement of asset s and liabilit ies
either in order of liquidity or permanence
is also called Marshalling of Assets and
Liabilities).
The proforma of the Balance Sheet
showing the assets and liabilities in order
of permanence is given in Fig. 7.3.
Fig. 7 . 2 : Proforma of Balance Sheet as per the order of permanence
Balance Sheet of ................................ as at .....................
Liabilities Amount Assets Amount
Rs. Rs.
Current Liabilities: - Current Assets -
Bills Payable - Cash in hand -
Sundry Creditors - Cash at Bank -
Short-term loan - Prepaid Expenses -
Outstanding Expenses - Bills Receivables -
Bank overdraft - Sundry Debtors -
Owners Equity (capital) - Finished goods -
Long term loans - Work-in-progress -
Raw Material -
Closing stock: -
Fixed Assets -
Goodwill -
Land -
Building -
Furniture -
-
...... .........
ACCOUNTANCY 262
7.2.2 Import ant it ems of t he
Balance Sheet
The following are the important items of
liabilities and assets which find place in
Balance Sheet.
Liabilities: The term liabilities denotes
claims against the enterprise as a separate
ent it y. The t er m equ it y is mor e
appropriate than the term liabilities. The
terms equity stands both for owners
(owners claims) as well as for the outsiders
equity (outsiders claims). Liabilities can be
divided into two categories as follows.
(i) Current Liabilities
(ii) Long-term Liabilities
(i) Current Liabilities: The liabilities
which are payable within a period
of one year from the date of the
Balance Sheet eit her out of t he
exist ing cu r r ent asset s or by
creating new current assets are
called cu r r ent liabilit ies. The
imp or t ant it ems of cu r r ent
liabilities are given below:
(a) Accou nt s p ayable which
inclu d es bills p ayable and
trade creditors.
(b) Outstanding expenses are the
expenses for which the firm
has availed the services but the
payment has not been made.
(c) Bank over d r aft : is money
drawn over the balance.
(d) Short-term loan: are loans from
banks and other sources which
are payable within one year of
the preparation of the Balance
Sheet.
(e) Advances received: These are the
money received by the business
for the services to be rendered or
goods to be supplied in the near
future.
Long Term Liabilities: All liabilities other
than the current liabilities. Long term
liabilities usually are payable after one
year of the date of the Balance Sheet. The
important items of long term liabilities are
long-term loans, owners equity (capital).
Asset s: The t er m Asset s d enot es t he
resources acquired by the business either
from the funds made available by the
owners or by the creditors of the business.
These include all r ight s or pr oper t ies
which an enterprise owns. Some of the
examples of assets are cash, cash at bank,
invest ment s, st ock, bills r eceivable,
d ebt or s, land , bu ild ing, p lant and
machinery, trade marks, patent right, etc.
All the assets of a business enterprise can
be classified into the following categories.
(a) Current Assets: The assets which are
acquir ed wit h t he int ent ion of
converting them into cash during the
normal business operations of the
enterprise. Current assets include
cash and other resources which are
reasonably expected to be realized
in cash or sold during the normal
operating cycle of the business, e.g.
cash, cash at bank, stock of raw
materials, work-in-progress, and
finished goods, bills receivable,
debtors, short-term investments,
prepaid expenses, etc.
(b) Liquid Assets: Those current assets
which can be immed ia-t ely
conver t ed int o cash ar e called
liquid assets. These assets include
cash, bank balance, debtors,
receivable, etc.
Books of Jai
Journal
2002 Rs. Rs.
March 31 Profit & Loss a/ c Dr. 2,24,500
Opening stock a/ c 5,000
Purchases a/ c 1,95,000
Wages a/ c 14,000
Return Inwards a/ c 6,500
Carriage Inwards a/ c 4,000
purchases, returns Inwards carriage
inwards)
March 31 Sales a/ c Dr. 2,50,000
Returns outwards Dr. 25,000
Closing Stock Dr. 17,500 2,92,500
Profit & Loss a/ c
(Closing entry for sales, returns
outwards closing stock)
Profit and Loss a/ c Dr. 27,500
Insurance a/ c 5,500
Commission Paid a/ c 4,000
Total c/f 5,17,000 5,17,000
(c) Fixed Assets: These are the assets
which ar e acquir ed for use for
relatively long period for carrying
out the business of the enterprises.
Such assets are not acquired for the
p u r p ose of r esale, e.g. land ,
building, plant and machinery,
furniture and fixtures, etc. some
times the term Fixed Block or
Block Capit al is also used for
them.
(d) Intangible Assets: These are such
assets which cannot be seen or
touched , e.g. goodwill, patents,
trademarks, etc. are some examples
of intangible assets.
Illustration 10
The following balances were extracted from
the books of Jai on 31 March 2002. You are
required to pass the necessary closing entries
and prepare Profit and Loss Account and a
Balance Sheet as on 31
st
March 2002.
Opening Stock Rs. 5,000, Commission
(Cr.) Rs. 2,000; Bills Receivable Rs. 22,500;
Returns outward Rs. 2,500; Purchases
Rs. 1,95,000; Trade Expenses Rs. 1,000;
Wages Rs. 14,000; Insurance Rs. 5,500;
Debtors Rs. 1,50,000; Carriage Inwards Rs.
4,000; Commission (Dr.) Rs. 4,000; Interest
on capital Rs. 3,500; Stationary Rs. 2,250;
Returns Inwards Rs. 6,500; Office Fixtures
and Furniture Rs. 20,000; Cash in hand Rs.
20,000; Cash at Bank Rs. 55,000; Rent and
Rat es Rs. 7,250; Car r iage ou t war d s
Rs. 3,250; Sales Rs. 2,50,000; Bills Payable
Rs. 15,000; Creditors Rs. 79,250; Capital
Rs. 1,52,750
Closing stock on 31 March 2002 was
valued as Rs.17,500.
ACCOUNTANCY 264
Total b/f 5,17,000 5,17,000
Interest on capital a/ c 3,500
Stationary a/ c 2,250
Trade expenses a/ c 1,000
Rent & Taxes a/ c 7,250
Carriage outwards a/ c 4,000
(Closing entry for indirect expenses)
Commission Received a/ c Dr. 2,000
Profit and Loss a/ c 2,000
(Closing entry for commission received)
Profit and Loss a/ c Dr. 20,000 20,000
Capital a/ c
(Net profit earned during year
5,66,500 5,66,500
Profit and Loss Account of Jai for the year ended 31 March 2002
Dr. Cr.
Rs. Rs.
Purchases 1,95,000 Less Returns 6,500 2,43,500
Less Returns 2,500 1,92,500
Closing Stock 17,500
Wages 14,000
Carriage inwards 4,000
2,61,000 2,61,000
Insurance 5,500 Gross Profit b/ f 45,500
Commission Paid 4,000 Commission Received 2,000
Interest on Capital 3,500
Stationary 2,250
Rent & Taxes 7,250
Carriage Outwards 4,000
Net Profit 20,000
47,500 3,08500
Illust rat ion 11: Fr om t he following infor mat ion ext r act ed fr om t he books of
M/ s Pragati Printers. Pass the necessary closing entries, prepare a Profit and Loss Account
and a Balance Sheet.
Rs. Rs.
Depreciation 7,000 Commission Received 2,000
Capital 1,71,300
Carriage Inwards 700 Creditors 17,500
Furniture 8,000 Bills Payables 5,000
Carriage Outwards 500 Return outwards 13,800
Plant & Machinery 2,00,000
Cash 8,900
Salaries 7,500
Debtors 19,000
Discounts 1,500
Bills Receivable 17,000
Wages 16,000
Sales Returns 14,000
Purchases 86,000
3,98,600 3,98,600
Closing stock on 31-3-2002 was Rs 45,000
Liabilit ies Amount Asset s Amount
Rs. Rs.
Creditors 79,250 Cash in hand 20,000
Bills Payable 15,000 Cash at Bank 55,000
Capital 1,52,750 Bills Receivable 22,500
Add Net Profit 20,000 Debtors 1,50,000
closing stock 17,500
172750 Office Furniture & 20,000
Fixture
2,67,000 2,67,000
Balance Sheet of Sai as at 31 March 2002
ACCOUNTANCY 266
Books of Pragati Printers
Journal
2002 Rs. Rs.
Purchase 86,000
Carriage Inwards 700
Wages 16,000
Sales Returns 14,000
purchases, carriage inwards, wages,
sales returns)
Closing stock a/ c Dr. 45,000
Returns outwards a/ c Dr. 13,800
(Closing entry for sales, closing
stock return outwards)
Carriage outwards 500
Salaries 7,500
Discount 1,500
Depreciation 7,000
(Closing entry for carriage outwards,
salaries and discount allowed)
March 31 Commission a/ c Dr. 2,000
Profit and Loss 2,000
(Closing entry for commission receivable)
Capital a/ c 1,04,100
(Net profit earned during year)
4,99,600 4,99,600
Profit and Loss Account of Pragati Printers for the year ended 31-3-2002
Rs. Rs.
Purchase 86,000 -Returns 14,000 1,75,000
- Returns 13,800 72,200 Closing stock 45,000
Carriage Inwards 700
Wages 16,000
Gross profit c/ f 1,18,600
2,20,000 2,20,000
Carriage outwards 500 Gross profit b/ f 1,18,600
Salaries 7,500 Commission Received 2,000
Discount 1,500
Depreciation 7,000
Net Profit 1,04,100
1,20,600 2,20,600
Balance Sheet of Pragati Printers as on 31.3.2002
Rs. Rs.
Capital 1,71,300 Plants and Machinery 2,00,000
Net Profit 1,04,100 2,75,400 Furniture 8,000
Closing stock 45,000
Creditors 17,500 Debtrors 19,000
Bills Payable 5,000 Bills Receivable 17,000
Cash 8,900
2,97,900 2,97,900
7.3 Final Account wit h Adjust ment s
While preparing Profit and Loss
Accou nt all t he exp enses and
incomes of the year of which the
account is being prepared should
be t aken int o consid er at ion. It
means if an exp ense has been
incurred during the accounting
p er iod bu t has not been p aid ,
liability for the unpaid account
should be created. Similarly, if an
income has been earned but has not
been received the same must also
be taken into account at the time of
preparing the final accounts. All
expenses and incomes should be
ad ju st ed t hr ou gh t he books of
accounts by passing journal entries.
Such entries, which are required to
be, p assed at t he end of t he
accou nt ing p er iod ar e called
ad ju st ment ent r ies. These
ACCOUNTANCY 268
adjustments generally relate to the
following items:
Closing stock;
Outstanding expenses;
Prepaid expenses;
Accr u ed or ou t st and ing
incomes;
Incomes received in advance or
incomes not ear ned bu t
received;
Depreciations;
Bad Debts;
Provision for doubtful debts;
Pr ovision for d iscou nt on
debtors
Interest on capital;
Differed Revenue expenditure
Loss of stock by fire;
Reserve Fund;
Good s d ist r ibu t ed as fr ee
samples;
Managers commission;
Good s on sale on ap p r oval
basis, etc.
(i) Closing St ock-(Invent or y): It
represents the value of unsold goods
lying in the stores at the end of the
accounting period. The adjustment
regarding closing stock have the
following effects:
(a) Closing stock will be shown on
the asset side of the Balance
Sheet.
(b) The Profit and Loss Account
will be cr ed it ed wit h t he
amount of closing stock.
Closing stock of a year becomes the
opening stock of the next year and will be
shown in the trial balance of the next
period.
Some t imes op ening and closing
stocks are adjusted through purchases
account. In such a situation there will be
no opening st ock in t he t rial balance.
Adjusted purchases and closing stock
(Debit balance) will be given in the trial
balance. Adjusted purchases will be taken
on the debit side of the profit and loss
account and closing stock will be shown
on the asset side of the balance sheet. Here,
it should be noted that closing stock will
not be shown on the credit side of the
profit and loss account as closing stock has
already been adjusted through purchases
account. The two types of situations have
been made clear wit h t he help of t he
following:
Books of Mohan
Trial Balance as on 31.3.2002
Particulars Debit Amount Credit Amount
Rs. Rs.
Purchases 1,90,000 2,40,000
Sales
2,40,000 2,40,000
Closing stock on 31.3.2002 was Rs. 70,000.
*Relevant items only
In this case the closing stock has been
given ou t sid e t he t r ial balance. The
different items will appear in the final
accounts as follows;
Profit and Loss Account Books of Mohan for the year ending 31.3.2002
Dr. Cr.
Rs. Rs.
Opening stock 50,000 Sales 2,40,000
Purchases 1,90,000 Closing stock 70,000
Gross profit c/ f 70,000
3,10,000 3,10,000
Net profit transferred to 70,000 Gross profit b/ f 70,000
capital account
2,40,000 2,40,000
Balance Sheet as at 31.3.2002
Biabilit ies Amount Asset s Amount
Rs. Rs.
Capital 70,000 Closing stock 70,000
70,000 70,000
When the opening and closing stock are adjusted
through the purchases account, it is done by passing
the journal entries given below.
In this case the adjusted purchases will indicate the
goods conumed and the items in the Profit and Loss
Account will appear as follows.
Books of Mohan
Journal
Rs. Rs.
Purchases a/ c Dr. 50,000
Opening stock a/ c 50,000
(Opening stock adjusted through purchases)
Stock a/ c Dr. 70,000
Purchases a/ c 70,000
(Closing stock adjusted through purchases)
ACCOUNTANCY 270
(ii) Outstanding Expenses: Out-standing
expenses are those expenses which
have been incurred but have not
yet been p aid d u r ing t he
accounting period for which the
final accounts are being prepared.
This generally, happens in case of
such business expenses, which
accrue from day to day business
operations, but which are recorded
only when t hey ar e p aid , e.g.
wages, salary, rent, interest, etc.
Some of su ch exp enses may
remain unpaid at the end of the
accounting period. For example,
the salaries for the month of March
2002 for the year ended 31.3.2002
have not been p aid . These ar e
outstanding salaries. In order to
ascertain the true profit earned or
loss su st ained d u r ing t he year
ended 31.3.2002 and the positions
of the assets and liabilities of the
bu siness as on 31.3.2002. It is
necessary that such outstanding
salary must be taken into account.
The following adjustment journal
ent r y will be p assed for su ch
outstanding expenses.
Expenses a/ c Dr.
Outstanding Expenses a/ c
Outstanding expenses as a result of the
above ent r y will be ad d ed t o t he
concer ned exp enses and will also be
shown on the liability side of the Balance
Sheet.
Books of Mohan
Profit and Loss Account as on 31.3.2002
Particulars Debit Amount Particulars Credit Amount
Rs. Rs.
Purchases 1,70,000 Sales 2,40,000
2,40,000 2,40,000
Net profit transferred to
capital account 70,000 Gross profit b/ f 70,000
70,000 70,000
Balance sheet as at 31.3.2002
Rs. Rs.
Capital 70,000 Closing stock 70,000
70,000 70,000
Illustration 12
The following are the extracts from the
Trial Balance of Ram as on 31.3.2002
Trial balance as on 31.3.2002
Amount Amount
Rs. Rs.
Salaries 20,000
Wages 10,000
Rent 15,000
Interest 7,000
(a) Salaries @Rs. 2,000 per months for two
months was outstanding
(b) Wages Rs 3,000 were outstanding
(c) Interest on a loan of Rs. 1,00,000 @6% p.a.
was outstanding for two months.
(d) Rent Rs 2,000 was outstanding for 3
months. You are required to pass the
necessary adjustment entries and show
how the above items will appear in the
Profit and Loss Account of Ram.
Journal
Dat e Particulars Debit Amount Credit Amount
Rs. Rs.
2002
March 31 Salary a/ c Dr. 4,000
Wages a/ c Dr. 3,000
Rent a/ c Dr. 2,000
Interest a/ c Dr. 1,000
Outstanding salary 4,000
Outstanding wages 3,000
Outstanding Rent 2,000
Outstanding Interest 1,000
(Adjustment entry for outstanding
salaries, wages rent and interest)
March 31 Profit and loss a/ c Dr. 13,000
Wages a/ c 13,000
(Closing entry for wages)
Salaries 24,000
Interest 8,000
Rent 17,000
(Closing entry for salaries, interest
and rent)
ACCOUNTANCY 272
Profit and Loss Account for the year ended 31.3.2002
Particulars Debit Particulars CAmount
Amount Amount
Rs. Rs.
Wages 10,000
+ Outstanding Wages 3,000
13,000
Salaries 20,000
+ Outstanding Salaries 4,000
24,000
Rent 15,000
+ Outstanding Rent 2,000
17,000
Interest 7,000
+Outstanding Interest 1,000
8,000
Balance Sheet as at 31.3.2002
Rs. Rs.
Outstanding salaries 4,000
Outstanding rent 2,000
Outstanding interest 1,000
(iii) Prepaid Expenses: Expenses which
have been paid in advance are
called pre-paid expenses. These are
the expenses which have been paid
in the accounting year for which
final accounts are being prepared
but they belong to the next year.
For examp le, d u r ing t he
accounting year ended 31.3.2002
insurance premium for the year
ended 30.6.2002 might have been
paid. It means insurance premium
for three months has been paid in
advance. In order to ascertain the
amount of profit earned or loss
su st ained only t he exp enses
relating to the accounting period
should be charged to the profit and
loss account and the expenses paid
in ad vance shou ld be car r ied
for war d t o t he next year . The
following adjustment journal entry
will be made for an expense paid
in advance.
Prepaid Expenses a/ c Dr.
Expenses a/ c
The effects of the above entry will be
that to the extent of the prepaid expense the
concerned expense will reduce and pre-paid
expense being asset will be shown on the
assets side of the Balance Sheet.
Illustration 13
Following are the extracts from the Trial Balance of Ashok for the year ended 31-3-2002.
Trial Balance of Ashok as on 31.3.2002
Rs. Rs.
Insurance 15,000
Rates and Taxes 7,500
Rent 6,000
* Relevant Items only
(a) Insurance premium Rs 2,500 has been paid in advance for the next year.
(b) Rates and Taxes Rs 1,250 have been paid in advance for the next year.
(c) Rs. 1,000 rent has been paid in advance.
You are required t o pass t he necessary adjust ment and closing ent ries for t he
above items in the books of Ashok and show how these items will appear in the final
accounts.
Books of Ashok
Journal
Dat e Particulars L.F. Debit Amount Credit Amount
2002 Rs. Rs.
March 31 Prepaid Insurance Premium a/ c Dr. 2,500
Prepaid Rates & Taxes a/ c Dr. 1,250
Prepaid Rent a/ c Dr. 1,000
Insurance Premium a/ c 2,500
Rates and Taxes a/ c 1,250
Rent a/ c 1,000
(Adjustment entry for prepaid
insurance premium prepaid rates &
taxes and for prepaid rent)
March 31 Profit and Loss a/ c Dr.
Insurance Premium a/ c 23,750
Rates & Taxes a/ c 12,500
Rent a/ c 6,250
(Closing entry for insurance premium, 5,000
rates and taxes and rent) 28,500 28,500
ACCOUNTANCY 274
(iv) Accrued or Outstanding Incomes:
These are the incomes which have
become due during the accounting
year bu t which have not been
received by the business enterprise
so far. In order to ascertain the
correct amount of profit earned or
loss sustained by the firm adjust-
ment for such incomes must be
made. The following adjustment
journal entry is passed in the books
for such items.
Accrued income / Outstanding income Dr.
Income A/ c
A distinction should be made between
accrued income and outstanding income.
Both have been earned but have not yet
been received. However, accrued income
is the income, which has not yet become
due to the business whereas outstanding
income is the income, which has already
become due to the business. For example,
suppose the firm has given a loan of Rs.
1,00,000 at 12% and the interest is to be
received monthly; if the interest for one
month Rs 1,000 has not been received than
this will be termed as outstanding interest
(income). Bu t somet imes int er est is
payable on a definite date. Suppose the
fir m has p u r chased Rs. 1,00,000 12%
debentures of a company and the interest
is payable six monthly on 30

June and 31
December then interest for the year ended
31-3-2002 for the three months from. Jan
to March has been earned but will become
due for payment on 30 June only. This
interest is accrued interest.
Dr. Cr
Rs. Rs.
Insurance Premium 1,500
- Prepaid Premium 2,500
12,500
Rent & Taxes 7,500
- Prepaid Rent & Taxes 1,250
6,250
Rent 6,000
- Prepaid Rent 1,000
5,000
Balance Sheet of Ashok as on 31.3.2002
Rs. Rs.
Prepaid Insurance Premium 2,500
Prepaid Rent & Taxes 1,250
Prepaid Rent 1,000
Books of Neha
Journal
Rs. Rs.
2002
March 31 Outstanding interest a/ c Dr. 3,000
Interest on 9% Loan a/ c 3,000
(Outstanding interest on 12%
loan for 3 months)
March 31 Accrued interest a/ c Dr. 4,500
Interest on 12% Debenture a/ c 4,500
(Accrued interest on 12% debenture
for 3 months)
March 31 Interest on 9% Loan a/ c Dr. 12,000
(Closing entry for interest on 9% loan)
March 31 Interest on 12% Debentures a/ c Dr. 18,000
(Closing entry for interest on 9% debenture)
37,500 37,500
Illustration : 14
The following balances have been extracted from the Trial Balance of Neha as
on 31.3.2002.
Rs. Rs.
12% Loan 1,00,000
9% Debenture of T ltd. (interest payable on 2,00,000
30

June and 31 December)
Interest Received on 12% Loan upto 31.12.2001. 9,000
Interest on 9% 13,500
* Relevant Items only
Pass the necessary adjustment entries for outstanding interest and accrued interest
and show how these items will appear in the Profit and Loss Account and Balance Sheet
of Neha.
ACCOUNTANCY 276
(vi) Incomes Received in Ad vance:
Sometimes a firm receives certain
incomes against whom cor r es-
ponding services have not been
r end er ed by it d u r ing t he
accounting year. Such incomes are
called incomes received in advance
or u near ned incomes. While
p r ep ar ing t he Pr ofit & Loss
Account for the year such incomes
are not taken into account so as to
cer t ain t he t r u e p r ofit or loss.
Following ad ju st ment ent r y is
passed for Incomes received in
advance.
Income a/ c Dr.
Income Received in Advance a/ c
The effect of the above entry will be
that to the extent of incomes received in
advance the total incomes will decrease
and income r eceived in ad vance ar e
liabilities and will be shown on the liability
side of the Balance Sheet.
Illustration: 15
from the Trial Balance of Raghu on 31
March 2002. You are required to pass the
necessary adjustment entry and closing
ent ry and show how t hese it ems will
appear in the final accounts.
Rs. Rs.
Rent Received for 12 months 24,000
ending 30.06.2002
Profit and Loss Account of Neha for the year ended 31-3-2002
Dr. Cr.
Rs. Rs.
Interest on 12% Loan
Received 9,000
+Outstanding 3,000 12,000
Interest on 9% / Debentures
Received 13,500
Accrued 4,500 18,000
Balance Sheet of Neha as on 31.3.2002
Rs. Rs.
Outstanding interest on 12% 3,000
Loan
Accrued interest on 9% 4,500
Debentures
(vii) Depreciation:
Depreciation is an expense and
hence to calculate the true profit
earned or the loss sustained by the
business depreciation should be
taken into account. Depreciation is
the decrease in the value of an asset
due to use, passage of time, wear
and tear, accidents, obsolesince, etc.
Books of Raghu
Journal
2002 Rs. Rs.
March 31 Rent a/ c Dr. 6,000
Rent Received in advance a/ c 6,000
(Rent for three months received in
advance adjusted)
March 31 Rent a/ c Dr. 18,000
Profit & Loss a/ c 18,000
(Closing entry for rent)
24,000 24,000
Dr. Cr.
Rs. Rs.
Rent 24,000
Less:
Received in Advance 6,000 18,000
Balance Sheet of Raghu as at 31.03.2002
Rs. Rs.
Rent Received in advance 6,000
The following journal entry is passed
for charging depreciation.
Depreciation a/ c Dr.
Fixed Assets a/ c
Illustration : 16
The following extracts have been obtained
from the Trial Balance of Darshan for the
year ended 31.03.2002.
ACCOUNTANCY 278
Amount Amount
Rs. Rs.
Building 5,00,000
Plant 1,00,000
Furniture 50,000
6,50,000 6,50,000
* Relevant items only
(a) Charged Depreciation on building @5% p.a.
(b) Charged Depreciation on plant @10% p.a.
(c) Charged Depreciation on furniture @15% p.a.
You are required to pass the necessary adjustment and closing entries for
depreciation in the books of Darshan.
Books of Darshan
Journal
2002 Rs. Rs.
March 31 Depreciation a/ c Dr. 42.500
Building a/ c 25,000
Plant a/ c 10,000
Furniture 7,500
(Depreciation Charged)
Profit and Loss Account Dr. 42,500
Depreciation a/ c
(Closing entry for Depreciation)
85,000 85,000
Profit and Loss Account for the year ended 31.03.2002.
Dr. Cr.
Rs. Rs.
Depreciation:
Building 25,000
Plant 10,000
Furniture 7,500
42,500
While p r ovid ing d ep r eciat ion it
should be kept in mind that depreciation
should be charged on the asset for that
period of time for which it was used by
the business during the accounting period.
For example, if the accounting period of a
firm ends on 31

March of the year and a
fixed asset was purchased on 1

July of the
previous year then depreciation on this
asset should be charged only for the period
between 1

July of the previous year to 31
March of the current year, i.e. for 9 months
only. Similarly, when the asset is sold
d u r ing t he cou r se of t he year t hen
depreciation on such an asset should be
charged only upto the date on which it was
sold. For example if an asset is sold on 30
September and the accounting year of the
firm ends on 31 March of the next year
then depreciation will be charged for the
period 1 April to 30 September i.e., for 6
months only.
Illustration 17
Following are the extracts from the Trial
Balance of Vishal as on 31.03.2002.
Amount Amount
Rs. Rs.
Building 10,00,000
Plant & Machinery 2,00,000
12,00,000
(a) Charged Depreciation on building
and plant & machinery @10% and
20%p.a. respectively.
(b) Building costing to Rs. 5,00,000 was
purchased on 01.01.2001.
Pass necessar y jour nal ent r ies for
providing depreciation and closing entries
for the same. Also show how these items
will be shown in the Final Accounts of
Vishal.
Balance Sheet of Darshan as on 31.03.2002
Rs. Rs.
Building 5,00,000
Less: Depreciation 25,000
4,75,000
Plant 1,00,000
90,000
Furniture 50,000
42,500
6,07,500 6,07,500
ACCOUNTANCY 280
Books of Vishal
Journal
Rs. Rs.
2002 Depreciation Account Dr. 1,15,000
March 31 Building 75,000
Plant & Machinery 40,000
(Charged Depreciation on
building @10% p.a., and on plant &
machinery @20% p.a.)
2002 Profit and Loss Account Dr. 1,15,000 1,15,000
March 31 Depreciation
(Closing entry for Depreciation)
2,30,000 2,30,000
Profit and Loss Account of Vishal for the year ended 31.03.2002
Dr. Cr.
Rs. Rs.
Depreciation
Building 75,0000s
Plant & Mach. 40,000 1,15,000
Balance Sheet of Vishal as on 31.03.2002
Rs. Rs.
Building 10,00,000
Plant & Mach. 2,00,000 9,25,000
Less: Depreciation 40,000 1,60,000
10,85,000 10,85,000
Working Notes
Calculation of Depreciation on Building:
On Rs.5,00,000 @10% p.a.
for one year.
On Rs.5,00,000 building purchased
o n 01.01.2001 for six months
Total Depreciation: Rs.75,000
000 , 50 . Rs
100
10
000 , 00 , 5 . Rs = =
000 , 25 . Rs
2
1
100
10
000 , 00 , 5 . Rs = =
(viii) Bad Debts : These days large number
of credit sales transac-tions take place.
Despite due care in estimating credit
worthiness of the buyer, he may not
make the payment on the due date
due to financial constraints. If these
financial constraints lead to default in
payment, such amount becomes
irrecoverable. In such a situation it
amounts to bad debts. The following
entry is passed in this context.
Bad Debts a/ c Dr.
Debtors a/ c
Illustration: 18
Following are the extracts from the Trial
Balance of Ajanta for the year ended
31.03.2002.
Amount Amount
Rs. Rs.
Suresh a debtor became insolvent and it
was found on 31.03.2002 that out of the total
debt of Rs.400 only Rs.100 will be recovered
from him.
You are required to pass the necessary
adjust ment and closing ent ries for t he
above items and show how the same will
appear in the Profit & Loss Account and
Balance Sheet of Ajanta.
Books of Ajanta
Journal
2002 Rs. Rs.
March 31 Bad Debts Account Dr. 300
Debtor (Mr. Suresh) 300
March 31 Profit and Loss Account Dr. 300
Bad Debts Account 300
(Closing entry for Bad Debts)
600 600
Profit and Loss Account as on 31.03.2002.
Dr. Cr.
Rs. Rs.
Bad Debts 300
ACCOUNTANCY 282
The total of the Bad Debts written off
during the year are shown in the trial
balance, whereas the bad debts which have
t o be wr it t en off on t he d at e of t he
pr epar at ion of final account s ar e not
shown in the trial balance. The bad debts
which are written off on the date of the
preparation of the trial balance will have
a dual effect. Firstly it will increase the
total amount of the bad debts written off
Trial Balance of Akbar as on 31.03.2002
Rs. Rs.
Debtors 2,00,000
Bad Debts 5,000
Additional Information writen off further
bad debts Rs.1,000.
Pass the necessary adjustment entry and
closing entry for the above items and show
how these items will be shown in the final
accounts of Akbar.
Books of Akbar
Journal
2002 Rs. Rs.
March 31 Bad Debts a/ c Dr. 1,000
Debtor a/ c 1,000
(Written off further Bad Debts)
Bad Debts a/ c 6,000
(Closing entry for Bad Debts)
7,000 7,000
Balance Sheet of Ajanta as at 31.03.2002
Rs. Rs.
Debtors 10,000
Less: Bad Debts 300
9,700 9,700
and secondly it will reduce the amount
of debtors to the extent of this amount. It
has been illustrated with the help of the
following illustration.
Illustration 19
The following balances have been
extracted from the Trial Balance of Akbar
as on 31.03.2002.
(ix) Pr ovision for Dou bt fu l Debt s:
Accor d ing t o t he p r incip le of
prudence, while recording business
t ransact ions all expect ed losses
should be taken into consideration.
Since, it is not possible to accurately
know the amount of bad debts, it is
desir able t o make a r easonable
estimate of such loss likely to arise
in the next accounting year and
make a provision for the same. The
provision for bad debts is created
by debiting profit and loss account
and crediting provision for bad
debt account. The following journal
entries passed in this context.
Provision for Bad Debts
Provision for bad debts is a liability
and is shown either on the liability side of
the balance sheet or as a deduction from
the debtors on the asset side of the balance
sheet.
Illustration 20
The following balance has been extracted
from the Trial Balance of Amit as on 31-3-
2002.
Trial Balance of Amit as on 31-3-2002
Amount Amount
Rs. Rs.
Debtors 20,000
Ad d it ional Infor mat ion: Cr eat e a
provision of 5 per cent on debtors.
Profit and Loss Account for the year ended 31.03.2002.
Dr. Cr.
Rs. Rs.
Bad Debts 5,000
Add Further Written off 1,000
6,000
Balance Sheet of Ajanta as on 31.03.2002
Rs. Rs.
Debtors 2,00,000
Less Further Bad
Debts Written off 1,000 1,99,000
1,99,000 1,99,000
ACCOUNTANCY 284
Solution
Books of Amit
Journal
2002 Rs. Rs.
Provision for bad debts 1,000
Rs. Rs.
Provision for Bad Debts 1,000
Balance Sheet of of Amit as at 31-3-2002
Rs. Rs.
Debtors 20,000
Illustration : 21
Following are the extracts from the Trial Balance of Sonam as on 31.3.2001.
Trial Balance of Sonam as on 31-3-2001
Amount Amount
Rs. Rs.
Bad Debts 5,000
amount of Rs. 7,000 due from him was
irrecoverable.
(b) Create a provision of 8 per cent for bad
and doubtful debts.
Pass the necessary journal entry for
creating the provision and show how it
will appear in the Profit and Loss account
and Balance Sheet of Amit.
(a) After preparing the trial balance it
was discovered that a debtor. Sunil
had become insolvent and the entire
Dr. Cr.
Date Particulars L.F. Debit Amount Credit Amount
2001 Rs. Rs.
Sunil 7,000
(Irrecoverable amount from sunil
written off as bad debts)
Bad Debts 12,000
(Closing entry for bad debts)
(Credit provision for bad debts @
8% of debtors)
Profit and Loss account for the year ended 31.3.2001
Rs. Rs.
Bad Debts 12,000
Balance Sheet of Sonam as on 31.3.2002
Rs. Rs.
Debtors 1,50,000
Less:
Further 7,000
Bad Debts
1,43,000
Less:
Provision for 11,440 1,31,560
Bad Debts
You are required to pass the necessary adjustment and closing entries and show
how these items will appear in the final account of Sonam.
When provision for bad debts exists
t han t he bad d ebt s d ur ing a year ar e
written off out of the existing provision
and aft er war d s t he new p r ovision is
created. This has been made clear with the
help of the following illustration.
ACCOUNTANCY 286
Trial Balance as on 31-3-2002
Particulars L.F. Debit Amount Credit Amount
Rs. Rs.
Debtors 90,000
Bad Debts 5,000
Provision for Bad debts 6,000
Illustration 22
Following are the extracts from the trial balance of Nagi & Sons as on 31.3.2002.
Create a provision of 10% for bad and
doubtful debts.
adjust ment and closing ent r ies in t he
books of Nagi & Sons also show how these
items will appear in their final accounts.
Nagi and Sons
Journal
2002 Rs. Rs.
March 31 Provision for bad debts a/ c Dr. 5,000
Bad Debts 5,000
(Bad debts written off)
(created provision for bad debts
equal to 10% of the detors)
Provision for Bad Debts Account
Dr. Cr.
Rs. Rs.
Bad debts 5,000 Balance b/ f 6,000
Balance c/ f 9,000 Profit and Loss 8,000
14,000 14,000
Profit and Loss Account as on 31.3.2002
Dr. Cr.
Rs. Rs.
Balance Sheet of Nagi & Sons as at 31-3-2002
Rs. Rs.
Debtors 90,000
Illustration 23
Following are the extracts from the Trial Balance of Harish Chander as on 31.3.2002.
Trial Balance of Harish Chander as on 31.3.2002.
Rs. Rs.
Debtors 2,00,000
Bad Debts 10,000
(a) Write off further bad debts Rs. 2,000.
(b) Create a provision of 5% for bad debts
Books of Harish Chander
Journal
2002 Rs. Rs.
Debtors a/ c 2,000
(further bad debts written off)
March 31 Provision bad debts a/ c Dr. 12,000
Bad Debts 12,000
(Bad Debts transferred to provision for
bad debts account)
(Created a provision of 5% for bad debts)
journal entries regarding the above items
and also show how these items will appear
in the Profit and Loss account and Balance
Sheet of Harish Chander. Also prepare
provision for bad debts account.
ACCOUNTANCY 288
Provision for Bad debts Account
Dr. Cr.
Rs. Rs.
Bad Debts 12,000 Balance b/ f 8,000
Balance b/ f 9,900 Profit and Loss a/ c 13,900
21,900 21,900
Balance Sheet of Harish Chander as on 31.3.2002
Rs. Rs.
Debtors 2,00,000
Less Further 2,000
Bad Debts
1,98,000
Less Provision 9,900 1,88,100
(ix) Provision for Discount on Debtors: To
motivate the debtors to make prompt
payments discount may be allowed to
them. Since the debtors for the current
accounting year may be collected in the
next account ing year , hence a
provision for discount on such debtors
at a certain percentage may have to be
made. This provision is created by
passing the following journal entry.
Provision for discount on debtors a/ c
It should be noted that the provision for
discount on debtors will be created only on
good debtors, i.e. debtors who intend to
make payment. In other words it will be
made after deducting further bad debts and
provision for bad debts from the debtors. The
forgoing discussion makes it clear that
debtors are either good, doubtful and bad.
Provision for discount is made on goods
debtors which are arrived at by deducting
bad debts given outside the Trial Balance and
the provision for bad and doubtful debts
required to be made at the end of the year.
Illustration 24
Following are the balances extracted from
t he Tr ial Balance of Thomas as on
31.3.2002.
Amount Rs. Amount Rs.
Debtors 93,000
Bad debts 5,000
(a) Write of further bad debts Rs. 3,000
(b) Create a provision for bad debts @5% on debtors and a provision for discount on
debtors @2.5% of debtors
Pass necessary journal entries for the above items and show how these items will
appear in the final accounts of Thomas.
Solution
Books of Thomas
Journal
Particulars L.F. Debit Amount Credit Amount
Rs. Rs.
Bad Debts a/ c Dr. 3,000
Debtors a/ c 3,000
(Further bad debts written off)
Bad Debts a/ c 8,000
(closing entry for bad debts)
Provision for doubtful debts a/ c 4,500
(created provision for doubtful debts on debtors
remaining after writing off further bad debts)
Profit and Loss a/ c Dr. 2,137.50
Provision for discount on debtor a/ c 2,137.50
(Create provision for discount on debtors
remaining after writing off bad debts and
provision for bad debts)
Dr. Cr.
Rs. Rs.
Bad Debts 8,000
Provision for discount on debtor 2,137.50
Balance Sheet of Thomas as at 31.3.2002
Rs. Rs.
Debtors 93,000
Less:
Further Bad Debt 3,000
90,000
Less:
Provision bad debt 4,500
85,500
Less:
Provision for
Discount on debtors 2,137.50
83,362.50
ACCOUNTANCY 290
Books of Zafer
Dr. Bad Debts Account Cr.
Rs. Rs.
Balance b/ f 5,000 Provision for doubtful debts 10,000
Debtors 5,000
10,000 10,000
Discount Account
Dr. Cr.
Rs. Rs.
Balance b/ f 2,000 Provision for discount on debtors 2,500
Debtors 500
2,500 2,500
Provision for Doubtful Debts Account
Dr. Cr.
Rs. Rs.
Bad Debts 10,000 Balance b/ f 7,000
Balance c/ f 19,450 Profit and Loss 22,450
29,450 29,450
Illustration 25
The following balances have been
extracted from the trial balance of Zafar
as on 31.3.2002.
Trial Balance of Zafar as on 31.3.2002
Amount Amount
Rs. Rs.
Debtors 2,00,000
Bad debts 5,000
Provision for discount 1,000
Discount 2,000
(a) Wr it e off fu r t her bad d ebt s
Rs. 5,000
(b) Ad d it ional d iscou nt allowed
Rs. 500
(c) Create a provision of 10% for bad
d ebt s and a p r ovision of 5% for
discount on debtors.
Prepare Bad Debts account, Discount
Account, Provision for bad debts account,
provision for discount account and also
show how these items will appear in the
Profit and Loss account and Balance Sheet
of Zafar.
Provision for Discount on Debtors Account
Dr. Cr.
Rs. Rs.
Discount 2,500 Balance b/ f 1,000
Balance c/ f 9,252.50 Profit and Loss 10,752.50
11,725.50 11,752.50
Dr. Cr.
Rs. Rs.
Provision for doubtful debts.
Bad debts 5,000
Add
Further bad debts 5,000
10,000
Add:
New provision 19,450
29,450
Less:
Old Provision 7,000 22,450
Provision for discount
on debtors
Discount 2,000
Add:
Additional Discount 500
2,500
Add:
New Provision 9,252.5
11,725.5
Less:
Old Provision 1,000 10,725.50
Balance Sheet of Zafar as at 31.3.2002
Rs. Rs.
Debtors 2,00,000
Less:
Further bad debts 5,000
1,95,000
Less
Additional Discount 500
1,94,500
Less:
Provision for
Bad Debts 19,450
1,75,050
Less:
Provision for
Discount 9,252.50 1,65,797.50
ACCOUNTANCY 292
(xii)Interest on Capital: Money invested
by the proprietor in the business is
called capital. In order to determine
t he t r u e p r ofit ear ned by t he
business it is necessary that interest
on capital should be deducted from
it which the proprietor could have
ot her wise ear ned . Int er est on
cap it al is an exp enses for t he
business and hence is debited to
profit and loss account, at the same
time it increases the capital of the
owner. The following journal entry
is passed for interest on capital.
Interest on capital a/ c Dr.
Capital a/ c
Interest on capital is allowed on capital
in the beginning of the year. However, if
further capital is introduced by the owner
than interest on it is allowed from the date
of it s int r od uct ion t ill t he end of t he
accounting year.
Illustration 26
Yogesh started his business on 1 April 2000
with a capital Rs. 2,00,000. On 1.7.2000. He
introduced further capital Rs.1,00,000.
interest on capital is allowed at @6% per
annum. Yogesh closes his books on 31
March every year. Calculate interest on
capital and pass necessary adjustment and
closing entry for the same.
(xiii) Interest on Drawings: Drawings is
t he amount wit hd r awn by t he
owner for his personal use. When
interest on capital is allowed then
int er est on d r awings of t he
proprietor should also be charged
from him. Interest on drawings is an
income for the enterprise and it
reduce the capital of the proprietor.
Interest on drawings should be
charged for the period for which
drawings have been made by the
proprietor in the accounting year, i.e.
from the date on which the money
is withdrawn till the date on which
the accounting year of the firm
Books of Yogesh
Journal
2001 Rs. Rs.
March 31 Interest capital a/ c Dr. 16,500
Capital 16,500
(allowed interest on capital on
Rs. 2,00,000 for one year and on
Rs. 1,00,000 for amount @6% p.a.)
Interest on capital 16,500
(closing entry for interest capital)
closes. The following journal entry
is passed for interest on drawing.
Capital a/ c Dr.
Interest on Drawings a/ c
Illustration 27
Ravi had withdrawn Rs. 10,000 on 1

July
2002 and Rs, 15,000 on 1

Sept 2002 from
his business. He closes his books on 31
March every year. Calculate interest on
Ravis d r awings and p ass necessar y
journal entry for the same, also pass the
jou r nal closing ent r y for int er est on
drawing. Interest on drawing is to be
calculated @12% p.a.
(xiii) Deferred Revenue Expenditure: The
expenditure incurred in the initial
stages but the benefits of which are
available in subse-quent years also
is called d efer r ed r evenu e
expenditure. Such expenditure is
sp r ead over t he year s equ ally
d u r ing which benefit s will be
available, e.g. an expenditure of Rs.
20,000 on advertisement whose
benefits will be available for 5 years
will be spread equally over the
year s. Ever y year Rs. 20,000
= 4,000 will be charged to the profit
and loss account and the balance
of such expenditure is shown as an
asset in the balance sheet.
Working Notes:
Calculation of interest on drawings
On Rs. 10,000 for 9 months = 10,000 * 9/ 12 * 12/ 100 = 900
On Rs. 15,000 for 7 months = 15,000 * 7/ 12 * 12/ 100 = 1,050
Total interest on drawings 1,950
Books of Ravi
Journal
2001 Rs. Rs.
March 31 Capital a/ c Dr. 1,950
Interest on Drawing 1,950
(Changed interest on Ravis drawing)
March 31 Interest on drawing Dr. 1,950
(Closing entry for interest on drawing)
Solution
ACCOUNTANCY 294
Illustration 28
Deepak spent Rs.50,000 on advertise-ment
on 1

April 2001. The benefit s of t he
advertisement are expected to be available
for 5 years. Pass the necessary journal entry
for the same and show how advertisement
will be shown in the final accounts of
Deepak.
Solution
Books of Deepak
Journal
Rs. Rs.
2001 Advertisement a/ c Dr. 50,000
April 1 Bank 50,000
(paid for depreciation)
2002 Profit and Loss a/ c Dr. 10,000
April 1 Advertisement 10,000
(Depreciation for one year transferred
to P&L account)
Dr. Cr.
Rs. Rs.
Advertisement 10,000
Balance Sheet of Deepak as at 31.3.2002
Rs. Rs.
Advertisement (Deferred) 40,000
(xv) Loss of stock by fire: In the business loss
of goods may occur due to fire. The
treatment of loss of goods due to fire
will depend upon the fact whether the
goods lost due to fire have been
insured or not. The following journal
entries will be passed:
(i) Loss by fire a/ c Dr.
Purchases a/ c
(ii) Insurance claim a/ c Dr.
Loss by fire a/ c
Illustration 29
The physical stock verification showed
t hat good s cost ing Rs. 18,000 wer e
destroyed by fire during the year, but no
entries have been made in the books of
account for the same. You are requested
to pass the necessary journal entries in
each of the following cases.
(a) Stock was completely uninsured.
(b) Stock was fully insured and the
insurance company admitted full
claim.
(c) Stock was partly insured and the
insurance. Company admitted a
claim of
Rs. 10,000 only. The firm closed its
books on 31.3.2002.
Journal
2002 Rs. Rs.
Trading a/ c 18,000
(When stock was completely uninsured)
March 31 Insurance company account a/ c Dr. 18,000
Trading a/ c 18,000
(loss of goods due to fire and the full
claim admitted by the insurance company
March 31 Insurance company a/ c Dr. 10,000
Trading a/ c 18,000
(Loss of goods due to fire Rs. 18,000
and the insurance company admitted
the claim of Rs. 10,000 only
Note: Trading account: The upper part of the profit and loss account.
It is prepared by small trading organisations.
(xvi)Goods sent on approval: Sometimes
goods are sold to the customers on
approval basis. If they approve the
goods it will become sale. If these
good s ar e laying wit h t he
customers on the last day of the
accounting year, and these can be
yet returned by the customers then
the same should be treated as stock
lying wit h t he cu st omer s. The
following journal entries will be
made.
(a) Sales a/ c Dr.
Debtor a/ c
The above entry is passed with the sale price of
the goods.
(b) Stock a/ c Dr.
Trading a/ c
This entry is passed with cost price of the goods.
Illustration 30
A fir m sent good s Rs10,000 t o it s
customers on a sale or return basis and has
included this amount in its sales. The
ACCOUNTANCY 296
approval of the customer was not received
till the close of the accounting year. The
price of goods include a profit of 30% on
sales. You ar e r equ ir ed t o p ass t he
necessary journal entries.
Solution :
Journal
Rs. Rs.
Sales a/ c Dr. 10,000
Customers a/ c 10,000
(Cancellation of goods sent on
approval taken as sale)
Stock on approval a/ c Dr. 7,000
Trading a/ c 7,000
(Stock lying with the customer for
approval at cost)
(xvii)Goods dist ribut ed as free sample:
Sometimes in order to promote the
sale of goods, some of the goods are
distributed as free samples. The
cost of such goods is included in
the advertisement expenses and to
this extent stock of goods at hand
will be less. The following journal
ent r y will be past ed for good s
distributed as free samples
Advertisement a/ c Dr.
Purchases a/ c
(xviii) Managers Commission: Some-
times, a manager employed by a
bu siness ent er p r ise may be
allowed commission as a
p er cent age of t he net p r ofit .
Commission as a percentage of the
net profit may be before or after
charging such commission. In the
absence of any infor-mation, it is
assu med t hat commission is
allowed as a percentage of the net
p r ofit before charging such
commission.
Suppose the net profit of a business
amounts to Rs. 84,000 before charging
commission. The manager is allowed a
commission of 5% on the net profit before
charging such commission. In this case, his
commission would be:
5/ 100 84,000 or Rs. 4,200
if, in the above case, the manager is
allowed commission on the net profit after
char ging su ch commission, t he
computation of his commission would be
as follows;
Let net profit after charging commission be Rs. 100.
Commission Rs. 5 (5% of Rs. 100)
Net profit before charging commission
Rs. 100 + 5 = Rs. 105
Commission payable to the manager
Rs. 5/ 105 84,000 = 4,000
The managers commission will be
ad just ed in t he books by passing t he
following entry:
Managers commission a/ c Dr.
Outstanding commission a/ c
(Commission payable to the manager provided for)
The managers commission account
will be closed by transferring it to the
Profit and Loss account.
The following journal endtry will be
Passed:
Profit and Loss a/ c Dr
Managers Commission.
The out st and ing commission will
appear on the liabilities side of the Balance
Sheet.
Illustration 31
From the following Trial Balance of Mr.
Ar u n as on 31

Mar ch 2002 p ass t he
necessary adjustment and closing entries
and prepare Profit and Loss account and
Balance Sheet.
He furnishes you the following information:
(i) Closing stock on 31

March 2002 is Rs. 16,000
(ii) Machinery and patents are to be depreciated @10% p.a. and 20% p.a. respectively.
(iii) Salaries amounting to Rs. 2,000 were unpaid.
(iv) A provision fo1r bad and doubtful debts is to be created to the extent of 5% on
debtors.
Rs. Rs. Rs.
Cash in hand 1,500
Cash at bank 7,000
Purchases 70,000
Sales 1,20,000
Return inwards 600
Returns outwards 700
Wages 10,400
Power & Fuel 7,000
Carriage outward 3,000
Carriage inward 4,000
Stock (April 1,2001) 12,000
Building 40,000
Machinery 35,000
Patents 10,000
Salaries 14,000
General expenses 3,000
Drawings 10,000
Capital 80,000
Account receivable 40,000
Account payable 60,000
Bills payable 6,800
2,67,500 2,67,500
ACCOUNTANCY 298
Solution
Books of Arun
Journal
Adjusting Entries Particulars Debit Credit
2002 Amount (Rs.) Amount (Rs.)
March 31 Depreciation a/ c Dr. 5,500
Machinery a/ c 3.500
Patents a/ c
(Amount written off as depreciation on
machinery @10% p.a. and on patents @20% p.a.)
March 31 Salaries a/ c Dr. 2,000
Outstanding a/ c 2,000
(Amount of salary unpaid on March 31,2002)
Provision for bad and doubtful debts a/ c 2,000
(Amount of provision required to the
maintained for bad and doubtful debts)
Closing Ent ries
2002
Stock a/ c 12,000
Purchases a/ c 70,000
Wages a/ c 10,400
Power a/ c 7,000
Carriage inwards a/ c 4,000
Return inwards a/ c 600
(The transfer of balances of various
accounts to the Profit and Loss a/ c)
Returns outwards a/ c 700
(Transfer of balances of the sales
account and Returns outwards account)
Carriage outward a/ c 3,000
Salaries a/ c 16,000
General expenses a/ c 3,000
Depreciation a/ c 5,500
(Transfer of various expenses accounts to
the profit and loss account)
Capital a/ c 3,200
(Transfer of net profit to the capital
account)
March 31 Capital a/ c Dr. 10,000
Drawing a/ c 10,000
(Transfer of drawings to the capital
account)
Profit and Loss Account for the year ending 31st

March 2002
Dr. Cr.
Rs. Rs.
Opening Stock (1.4.2001) 12,000 Sales 1,20,000
Purchases 70,000 Less
Less Return inwards 600 1,19,400
Return outward 700 69,300 Closing stock 16,000
Wages 10,400
Power 7,000
1,35,400 1,35,400
Depreciation:
Machinery 3,500
Patents 2,000 5,500 Gross profit b/ f 32,700
Salaries 1,4000
Add:
Outstanding salaries 2,000 16,000
Carriage outwards 3,000
Provision for bad & doubtful debts 2,000
Net profit (transferred to the 3,200
capital account)
32,700 32,700
Balance Sheet as at 31st

March 2002
Rs. Rs.
Outstanding expenses Cash in hand 1,500
Salaries 2,000 Cash at bank 7,000
Bills payable 6,800 Sundry Debtor 40,000
Account Payable 60,000 Less
Provision for bad
Capital 80,000 and doubtful debts 2,000 38,000
Add Net Profit 3,200
83,200 Stock
Patents 10,000
Less drawing 10,000 73,200 Less depreciation 2,000 8,000
Machinery 35,000
Less depreciation 3,500 31,500
Building 40,000
Closing Stock 16,000
1,42,000 1,42,000
ACCOUNTANCY 300
Illustration 32
Kohlis Group is the proprietor of a large business of cotton price goods. The following
Trial Balance was prepared form his books as on 31

March 2002
Trial Balance as on 31

March 2002
Debit Balance Amount Credit Balance Amount
Rs. Rs.
Land and Building 40,000
Purchases 3,26,700
Return inwards 2,500
Traveling expenses 6,900
Printing and stationery 1,600
Cash at bank 30,795
Discount allowed 1,800
Misc. Expenses 18,620
Sundry debtors 64,000
Postage 800
Furniture 8,000
Cash in hand 5,900
Motor car 16,000
Investment (market value Rs. 14,000) 12,000
Drawings 10,000
Bills receivable 4,800
Stock (1.4.2001) 63,680
Interest on bank loan 3,000
Salaries (including advance
Rs. 1,500) 22,000
Establishment Expenses 1,595
Advertisements 16,000
Sales 4,68,100
Income from investments 990
12% Bank Loan secured on 40,000
fixed assets (no movement
during the year)
Capital 80,000
Bills payable 2,600
Sundry creditors 63,100
Return outwards 3,700
Discount received 1,200
The following further information was
obtained:
(i) Stock as on 31

March 2002 was Rs.
1,20,000,
(ii) Sundry debtors include a sum of
Rs. 3,000 due from Mr. Varun and
sundry creditors include a sum of
Rs. 4,000 due to Mr. Arun,
(iii) The reserve for doubtful debts is
t o be maint ained @ 10% on
sundry debtors and reserve for
discount on debtors and discount
on credit ors are t o be creat ed
@5%,
(iv) Bills r eceivable inclu d e a
dishonored bill for Rs. 600,
(v) Stock worth Rs. 10,000 destroyed
by fire on 25.2.2002 in respect of
which the insurance company
admits claim for only Rs. 7,500,
(vi) The manager of Kohlis Groups
is entitled to a commission of 10%
of Net Pr ofit calcu lat ed aft er
charging such commission
(vii) 3/ 4

of the Advertisement Expenses
is to be carried forward.
(viii) 2.5% of the Net Profit is to be
carried to Reserve Fund.
(ix) Depreciation to be charged on
Land & Building @2.5%,
Furniture @10%, and
Motor Car @20%.
You are required to prepare the Profit and Loss a/ c for the year ended 31

March
2002 and to draw up the Balance Sheet as on that date.
Solution
Kohlis Group
Profit and Loss Account
for the year ending 31

March 2002
Dr. Cr.
Rs. Rs.
Opening stock 63,680 Sales 4,68,100
Purchases 3,26,700 Less Return 2,500 4,65,600
Less Return 3,700 3,23,000
Loss by fire 10,000
Carriage 3,000 Closing stock 1,20,000
Gross profit c/ f 2,05,920
5,95,600 5,95,600
Traveling expenses 6,900 Gross profit b/ f 2,05,920
Printing & Stationary 1,600 Income from investment 990
Discount 1,800 Discount Received 1,200
Misc. Expenses 18,620 Reserve for Discount on 3,005
Postage 800 Creditors
Interest on Bank loan 3,000
Add Outstanding 1,800 4,800
Salaries 22,000
Less Prepaid 1,500 20,500
Less Prepaid 12,000 4,000
Loss on fire 2,500
Provision for
Doubtful debts 6,160
Add: Provision
For discount on 2,772 8,932
Debtors
Depreciation on :
Furniture 800
Motor car 3,200 5,000
Manager commission 12,188
1,34,068 10
110
Net Profit 1,18,833
Reserve Fund 3.047 1,21,880
2,11,115 2,11,115
( )
ACCOUNTANCY 302
Sundry creditor (after
adjustment the amount
of Varun as debtor Rs. 3,000)
60,100
Less:
Reserve for Discount
on creditors @5% 3,005 57,095
Bills payable 2,600
Bank loan 40,000
capital 80,000
Add: Net Profit 1,18,833
1,98,833
Less Drawing 10,000 1,88,833
Outstanding interest on 1,800
bank loan
Reserve fund 3,047
Managers commission 12,188
outstanding
3,05,563
Balance Sheet as at 31

March 2002
Rs. Rs.
Cash in hand 5,900
Cash at bank 30,795
Less: Amount due
From Arun adjusted 3,000
As he being a creditor
61,000
Add: Bill Dishonored 600
61,600
Less: Provision for
Doubtful debts 6,160
55,440
Less: Provision for
Discount 2,772 52,668
Less Bills Dishonored 600 4,200
Investment 12,000
Furniture 8,000
Less Depreciation 800 7,200
Motor Car 16,000
Less Depreciation 3,200 12,800
Less Deprecation 1,000 39,000
Advertisement (carried 12,000
forward)
Insurance claim 7,500
Prepaid salary 1,500
Closing Stock 1,20,000
3,05,563
1. Meaning usefulness and types of Financial Statements
After the agreement of the trial Balance, a business enterprise proceeds to prepare financial
statements. Financial statements are the statements which present periodic reports on the
process of a business enterprises and the results achieved during a given period.
Financial statements include Profit and Loss Account, Balance Sheet and other statements
and explanatory notes which form part thereof. Information provided by financial statements
is useful to management to plan and control the business operations. Financial statements
are also useful to creditors, shareholders and employees of the enterprise.
2. Meaning, need and preparation of Profit and Loss Account
The Profit and Loss account highlights the profit earned or loss sustained by the business
entity in the course of business operations during a given period.
The need for preparing the Profit and Loss Account is to ascertain the net results of business
operations during a given period. Analysis of the Profit and Loss accounts is helpful in
controlling expenses which are incurred in running a business enterprise.
Depreciation
Discount allowed
Discount received
Cash
Trade expenses
Factory expenses
Financial statements
Fixed assets
Freight
Gross loss
Gross profit
Grouping and Marshalling
Income Tax
Interest on capital
Interest on drawings
Net loss
Net profit
Order of liquidity
Order of performance
Revenue expenditure
Revenue receipt
Salaries
Sales
Sales returns
Accrued income
Accounts payable
Accounts receivable
Adjusting entries
Bad debts
Balance Sheet
Bank overdraft
Bills payable
Bills receivable
Capital
Capital expenditure
Capital receipts
Carriage inwards
Carriage outward
Cash at bank
Closing entries
Closing stock
Managers commissions
Current assets
Currents liabilities
Purchases returns
Rent
Return inward
Return outward
Revenue expenditure
ACCOUNTANCY 304
The profit and loss account shows the items of revenue expenses and losses on the
debit side while items of gain and gross profit are shown on the credit side. For the preparation
of the profit and loss account, closing entries are passed to transfer balances of account of
items of expenses and gain. Net profit or net loss shown by the Profit and Loss Account is
transferred to the capital account.
3. Meaning, Characteristic, need and structure of the Balance Sheet
The Balance Sheet is a statement of assets and liabilities of a business enterprise and shows
the financial position at a given date. Information contained in a Balance Sheet is true only
on that date.
The Balance Sheet is a part of the Final Accounts. But it is not an account; it is only a
statement. In a Balance Sheet the totals of assets and liabilities are always equal. It portrays
the accounting equation.
A Balance Sheet has to be prepared to know the financial position of the business; and
the nature and values of its assets and liabilities.
All the accounts which have not been closed till the preparation of the Profit and Loss
account are shown in the Balance Sheet. Assets and liabilities shown in the Balance Sheet
are marshaled in order of liquidity or order of permanence.
Q.1. Objective Type Questions
In each of the following questions tick mark (v) the correct answer out of the choices given:
I. The following items appear in Amits Trial Balance:
Outstanding Wages Rs. 1,500.
It will appear in:
(a) Profit and Loss Account
(b) Balance Sheet
(c None of the above
II. Returns inwards are deducted from:
(a) Sales
(b) Purchases
(c) Returns outward
III. Income tax paid by Mr. Arun amounts to Rs.2,000.
The accounting treatment is:
(a) To be credited to the Profit and Loss Account
(b) To be ignored altogether
(c) To be deducted from capital
(d) To be debited to the Profit and Loss a/ c
IV Bimals Trial Balance shows the following item:
Opening stock Rs. 30,000
(a) Debited to the Profit and Loss Account
(b) Deducted from the closing stock in the Balance Sheet
(c) None of the above
V. Ajits Trial Balance contains the following information:
Bad debts Rs. 2,000
Provision for Bad debts Rs. 2,500
It is desired to make a provision for bad debts of Rs 3,000 at the end of the year.
The amount to be debited to the Profit and Loss Account is:
(a) Rs. 3,000
(b) Rs. 4,500
(c) Rs. 2,500
(d) Rs. 5,000
(e) Rs. 7,500
VI. Mohans trial balance provides you the following information:
Bad debts Rs. 800
Provision for bad debts Rs. 3,000
It is desired to maintain a provision for bad debts of Rs.2,000
The accounting treatment of these adjustments is:
(a) Rs 1800 to be debited to the Profit and Loss Account
(b) Rs. 200 to be credited to the Profit and Loss Ac count
(c) Rs. 200 to be debited to the Profit and Loss Account
(d) Rs. 4,200 to be debited to the Profit and Loss Account
VII. Govinds Trial Balance contains the following information:
Discount allowed Rs. 500
Provision for discount on debtors Rs. 1,000
The amount to be debited to the Profit and Loss Account is:
(a) Rs. 1,200
(b) Rs. 3,200
(c) Rs. 700
(d) Rs. 2,200
VIII. Dines trial balance contains the following information:
Discount received Rs. 1,000
Provision for discount on creditors Rs. 1,500
It is desired to maintain a provision for discount on creditors at Rs.1,000.
ACCOUNTANCY 306
The account to be credited to the Profit and Loss Account is:
(a) Rs. 1,500
(b) Rs. 3,500
(c) Rs. 1,000
(d) Rs. 500
IX. Bishans capital on January 1,1988 Rs. 50,000
Interest on drawings Rs. 2,000
Interest on capital Rs. 5,000
Drawings Rs. 20,000
Profit for the year Rs. 10,000
His capital at the end of the year is:
(a) Rs. 67,000
(b) Rs. 43,000
(c) Rs. 47,000
(d) Rs. 69,000
X. Yogeshs trial balance contains the following information:
Bad debts Rs. 3,000
Sundry debtors Rs.25,000
It is desired to create provision for bad debts at 10% on sundry debtors at the end of
the year.
Sundry debtors will appear in the Balance Sheet at a figure of:
(a) Rs. 22,500
(b) Rs. 21,000
(c) Rs. 18,000
(d) Rs. 15,500
(e) Rs. 23,500
XI. Chetans trial balance contains the following information:
Bad debts Rs. 4,000
Discount allowed Rs. 2,000
Provision for discount on debtors Rs. 2,200
Sundry debtors Rs.50,000
At the end of the year, it is desired to maintain a provision for bad debts at
Rs. 4,000 and provision for discount on debtors at Rs, 2,000.
Sundry debtors will appear in the Balance Sheet at a figure of:
(a) Rs. 44,000
(b) Rs. 38,000
(c) Rs. 44,700
(d) Rs. 31,300
XII. Baijnaths trial balance as on March 31,2000, contains the following information:
Bank loan Rs. 50,000
(12% rate of interest)
Interest paid Rs. 5,000
Interest debited to the Profit and Loss Account is:
(a) Rs. 6,000
(b) Rs. 5,000
(c) Rs. 5,500
(d) Rs. 1,000
Q. 2 State whether the following expenditure is capital or revenue and why? Give reasons
for your answers:
(a) Expenditure incurred on repairs and whitewashing at the time of purchase of an
old building in order to make it usable.
(b) Expenditure incurred to provide one more exit in a cinema hall in compliance
with a government order.
(c) Registration fees paid at the time of purchase of a building
(d) Expenditure incurred in the maintenance of a tea garden which will produce tea
after four years.
(e) Depreciation charged on a plant.
(f) The expenditure incurred in erecting a platform on which a machine will be fixed.
(g) Advertising expenditure, the benefits of which will last for four years.
Long Answer Questions
Q.3 What are Financial Statements? What information do they provide?
Q.4 What are closing entries? Give four examples of closing entries?
Q.5 What is a Balance Sheet? What are its characteristics? What is the need of preparing
a Balance Sheet?
Q.6 Explain the rationale of preparing a Balance Sheet. How does it differ from a Trial
Balance?
Q.7 What do you understand by Grouping and Marshalling of Assets and Liabilities?
Explain the ways in which a Balance Sheet may be Marshalled.
Q.8 Distinguish between
(i) Capital and Revenue Expenditure
(ii) Capital and Revenue Receipts
ACCOUNTANCY 308
Q.9 Explain the rationale of making adjustments at the time of preparing the Final Accounts?
Mention any three important adjustments that are made for the preparation of the
EXERCISES
Simple Final Accounts
Q 10 The Trial Balance of Mr. Brown shows the following balances on March 31, 2000.
Debit Balance Amount (Rs.)
Purchase 70,000
Sales returns 5,000
Bank charges 500
Salaries 4,500
Wages 5,000
Freight-in 4,000
Freight-out 1,000
Rent, Rates & Taxes 5,000
Advertising 6,000
Cash in hand 1,000
Cash at bank 70,000
2,41,000
Credit Balances
Capital account 56,000
Sales 1,50,000
Purchase returns 4,000
2,41,000
The closing stock was valued at Rs. 30,000. You are required to prepare the Profit and Loss
Account for the year ending 31 March 2000, and the Balance Sheet as on that date.
Q.11 From the following Trial Balance extracted from the books of Mohinder Singh, prepare
the Profit and Loss Account for the year ending March 31, 2000 and the Balance Sheet
as on that date.
Q. 12 The following balances were extracted from the books of Mr. Brijesh Chandra on
March 31, 2001.
Debit balances Credit balances
Capital
Building 80,000
Machinery 70,000
Furniture 15,000
Stock 50,000
Power 10,000
Wages 70,000
Carriage 8,000
Rent & rates 12,000
Insurance 5,000
Salaries 35,000
Bank charges 1,000
Income tax 2,000
Bad debts 5,000
Debit balances Credit balances
Capital 20,000 1,89,000
Drawings 80,000
Plant and Machinery 70,000
Sundry creditors 1,10,000
Purchases
Purchases returns 7,000
Sales 2,20,000
Wages 40,000
Cash in hand 5,000
Cash at bank 10,000
Salaries 30,000
Repairs 8.000
Stock 45,000
Rent 10,000
Manufacturing expenses 7,000
Bills payable 20,000
Bad debts 5,000
Carriage 9,000
Furniture 15,000
4,86,000 4,86,000
Closing stock was valued at Rs. 50,000.
ACCOUNTANCY 310
Commission received 9,000
Purchases 1,50,000
Sales 3,40,000
Bills payable 30,000
Bank overdraft 20,000
Cash in hand 2,000
5,50,000 5,50,000
The closing stock was valued at Rs. 60,000. You are required to prepare the Profit and
Loss Account for the year ending March 31 2001 and the Balance Sheet as on the date.
Q.13 The following balances are extracted from the books of Rameshwar Prasad on
March 31, 2001.
Debit Balances Amount (Rs.)
Building 50,000
Furniture & fittings 10,000
Bad debts 2,500
Stock (January 1, 1988) 40,000
Purchases 1,20,000
Sales returns 5,000
Advertising 9,000
Interest 5,000
Cash in hand 2,000
Taxes and insurance 4,000
General charges 3,000
Salaries 1,000
Cash at bank 5,000
3,26,000
Credit Balances Amount (Rs.)
Capital 60,000
Bills payable 7,000
Sales 2,20,000
Commission 5,000
3,26,000
Closing stock on March 31, 2002 was Rs. 20,000. From the above, prepare the Profit
and Loss Account for the year ending March 31, 2002 and the Balance Sheet as on that
date.
Q.14 The balances are extracted from the books of Mr. Chetan as on 31 March 2002:
Purchases 2,00,000
Bank charges 2,000
Salaries 40,000
Wages 50,000
Rent, rates & taxes 12,000
Cash in hand 5,000
Discount 5,000
Furniture 6,000
Building 20,000
80,000
6,98,000
Capital 1,80,000
Sales 3,70,000
Purchase returns 20,000
Discount 10,000
6,98,000
The closing stock was valued at Rs.80,000. Prepare the Profit and Loss Account for the
year ending 31 March 2002 and the Balance Sheet as on that date.
ACCOUNTANCY 312
Final Accounts with Adjustments
Q.15 From the following Trial Balance, prepare the Profit and Loss Account for
the year ending 31 March 2002 and the Balance Sheet as on that date.
Debit Balances Credit Balances
Salaries 25,000
Cash in hand 5,000
Furniture 15,000
Scooter 8,000
Building 50,000
Capital 90,000
Bad debts 4,000
Machinery 68,000
Debtors 80,000
Creditors 90,000
Purchases 1,00,000
Sales 2,10,000
Returns 15,000
Advertising 10,000
Interest 14,000
Commission 4,000
4,37,000 4,37,000
The following adjustments are to be made:
(1) Stock on March 31, 2002 was Rs. 50,000
(2) Depreciate building at 5%, furniture and machinery at 10% and scooter at 20%.
(3) Rs.1000 is due for interest on overdraft.
(4) Insurance account to Rs.1,000 is prepared.
(5) Provision for bad debts is to be maintained at 5% on debtors.
Q.16 The following is the Trial Balance of Mr. Ashoka as on 31 March 2002.
Land & building 70,000
Loose tools 10,000
Purchases 1,40,000
Sales 2,00,000
Wages 40,000
Carriage 5,000
Salaries 25,000
Rent & rates 5,000
Cash at bank 7,000
Cash in hand 1,000
Debtors 80,000
Bad debts 4,000
Furniture 20,000
Advertising 8,000
Returns 15,000 12,000
Capital 1,50,000
Creditors 97,000
5,59,000 5,59,000
Adjustments
(i) Closing stock on 31 March 2002 was valued at Rs. 70,000
(ii) Depreciate plant and machinery at 10%; loose tools at 20%; furniture at 10%
and land and building at 5%.
(iii) Make a provision for discount on debtors @2% and a provision for bad and
doubtful debts at 5% on debtors.
You are requested to prepare Profit and Loss account and Balance Sheet.
ACCOUNTANCY 314
Q.17 From the following balances for the year ending 31 March 2002 and additional
Information, prepare the Profit and Loss Account and Balance Sheet of
M/ s Paul & Sons.
Capital 57,000
Purchases 90,000
Sales 1,70,000
Sales returns 2,000
Building 50,000
Debtors 50,000
Creditors 40,000
Furniture 15,000
Wages 20,000
Rent 5,000
Sales tax payable 6,500
Commission Received 4,000
Insurance 3,000
Salaries 10,000
Bad debts 1,5000
Cash in hand 1,000
Cash at bank 8,000
2,85,500 2,85,500
(1) Closing stock was valued at Rs. 20,000
(2) Provide depreciation on building @5% p.a. and furniture @10% p.a.
(3) Further bad debts Rs. 1000
(4) Make provision for bad debts at 5%
Q.18 From the following Trial Balance extracted from the books of Narendra Kumar prepare
the Profit and Loss Account for the year ending 31 March 2002 and a Balance Sheet
as on that date.
Capital 81,000
Drawings 10,000
Debtors 40,000
Creditors 45,000
Purchases & Sales 80,000 1,40,000
Returns 4,000 5,000
Wages 15,000
Cash in Hand 1,000
Cash at Bank 6,000
Salaries 10,000
Repairs 4,000
Rent 4,500
Stock 20,000
Manufacturing, expenses 5,000
Bad debts 1,000
Carriage 2,000
2,72,500 2,72,500
The following adjustments are made:
(1) Closing stock was valued at Rs.30,000
(2) Depreciate plant and machinery @10% p.a.
(3) Allow interest on capital @5% p.a.
(4) Rent paid in advance Rs. 500.
ACCOUNTANCY 316
Q.19 The following balances were extracted from the books of Chand Ram on
31 March 2002
Drawings 20,000 Capital 1,00,000
Purchases 1,30,000 Sales 2,50,000
Sales returns 20,000 Purchases returns 15,000
Stock 50,000 Provision for bad debts 4,000
Sundry debtors 70,000 Sundry creditors 80,000
Rates and insurance 2,000 Bills payable 10,000
Discount 1,000 Rent received 5,000
Wages 40,000 3,000
Building 60,000
Carriage 5,000
Office expenses 5,000
Postage and telegrams 1,000
Cash in hand 1,000
Cash at bank 5,000
Furniture 10,000
Salaries 2,000
4,47,000 4,67,000
Adjustments
(1) Closing stock was valued at Rs.40,000.
(2) Additions to building amounting to Rs.10,000 were made on June 30.2001.
This has been recorded in the book. Depreciate building @10% p.a.
(3) Increase the bad debts provision by Rs. 1000.
You are required to prepare the Profit and Loss Account for the year ending
31 March 2002 and the Balance Sheet as on that date.
Q.20 The following is the Trial Balance of Mr. Gopal Das as on 31 March 2002.
Purchases 1,12,000
Returns inward 10,000
Rent 27,500
Wages 40,000
Salaries 38,500
Insurance (paid for the year 4,800
ending March 31 2002)
Stock 35,000
Furniture 20,000
Cash in hand 4,000
Cash at bank 9,000
Capital 1,50,000
Loan 28,000
Sales 2,00,000
Returns outward 12,000
Bad debts 3,200
4,48,000 4,48,000
(1) Closing stock was valued at Rs. 40,000.
(2) Maintain provision for bad debts at 6% on sundry debtors.
(3) Depreciate plant & machinery @10% p.a. and furniture @20% p.a.
Expenses for rent and salaries are uniform throughout the year and those for March
have not been paid.
You are required to prepare the Profit and Loss Account for the year ending 31 March 2002,
and a Balance Sheet as on that date.
ACCOUNTANCY 318
Q.21. The following is the Trial Balance of Anwar Ali as on 31 March 2002.
Plant & Machinery 1,00,000 Sales 4,00,000
Furniture & fixtures 30,000 Bills payable 30,000
Stock 80,000 Sundry creditors 66,000
Debtors 90,000 Provision for bad debts 5,000
Cash in hand 10,000 Returns outward 10,000
Cash at bank 20,000 Discount received 6,000
Wages 70,000 Capital 1,70,000
Purchases 1,80,000
Drawings 30,000
Rent 15,000
Factory lighting 5,000
Telephone charges 2,000
Insurance 4,000
Advertising 10,000
Bad debts 4,000
6,87,000 6,87,000
(1) Closing stock was valued at Rs. 70,000:
(2) Rent due but not paid Rs. 1,000.
(3) Unexpired insurance Rs. 500.
(4) Provision for bad and doubtful debts to be increased to Rs.6000.
(5) Provide for 2% discount on debtors and creditors.
You are required to prepare the Profit and Loss Account for the year ending 31 March
2002 and the Balance Sheet as on that date.
Q.22. Mohan Singh has extracted the following trial balance from his books as on
March 31, 2000.
Cash 7,000
Petty cash 1,000
Land & buildings 30,000
Salaries 12,000
Debtors 50,000
Wages 40,000
Cash at bank 12,000
Capital 1,00,000
Rent 8,000
Office lighting 4,000
Power 8,000
Advertising 9,000
Creditors 70,000
Purchases 2,00,000
Postage and telegrams 1,000
Sales 3,10,000
Discount 7,000
Drawings 30,000
4,80,000 4,80,000
You are required to prepare the Profit and Loss Account for the year ending March 31, 2000,
and the Balance Sheet as on that date, after taking into account the following additional
information:
1. Closing stock at market price as on March 31, 2000 was Rs. 80,000. However, its cost
was Rs. 60,000.
2. Allow interest on capital at 5% p.a.
3. Depreciate land and building by 10%.
4. Write off bad debts amounting to Rs. 5,000.
5. Create a provision for bad debts at 10% of debtors.
(Hint: Closing stock is valued at cost following the principle cost or market price,
whichever is less.)
ACCOUNTANCY 320
Q.23 The following balances have been extracted from the books of Quality
Stores as on 31 March 2002.
Furniture 15,000
Capital 1,00,000
Cash in hand 4,000
Purchases 1,60,000
Fixed deposit with bank 10,000
Drawings 30,000
Bad debts 6,000
Salaries 30,000
Insurance 6,000
Rent 13,000
Debtors 90,000
Sales 3,00,000
Creditors 50,000
Advertising 20,000
4,57,000 4,57,000
1. Closing stock was valued at Rs. 40,000.
2. Depreciate furniture by 20% p.a.
3. Rent paid for the accounting year ending March 31, 2002 amounted to Rs.12,000.
4. Increase the provision for bad debts by Rs.1,000.
5. 50% of the expenses for advertising are to be carried forward to the next year.
Q.24. An inexperienced clerk. Moti Lal prepared the following Trial Balance as on
March 31, 2001.
Capital 68,000 Building 50,000
Loan at 10% 60,000 Furniture 10,000
Creditors 30,000 Plant 40,000
Bills receivable 12,000 Debtors 50,000
Returns outward 6,000 Bills payable 11,000
Carriage outward 4,000 Commission received 5,000
Sales 1,50,000 Opening stock 30,000
Wages 15,000
Salaries 12,000
Rent & rates 10,000
Printing & stationery 4,000
Purchases 80,000
Interest on loan (Paid 5,000
upto 31
st
October)
3,30,000 3,30,000
Prepare the correct Trial Balance, Profit and Loss Account for the year ending 31 March 2001
and the Balance Sheet as on that date after taking the following adjustments into account:
1. Closing stock was valued at Rs. 40,000.
2. Depreciate building and furniture by 10% and plant by 15%.
3. Outstanding salaries amounted to Rs.1,000.
4. Write off bad debts of Rs. 1,000.
ACCOUNTANCY 322
Q. 25. The following is the Trial Balance of Radha Krishna on 31 March 2001.
Cash in hand 1,000
Cash at bank 17,000
Stock on 1.1.2001 41,000
Furniture & equipment 30,000
Land & building 1,20,000
Loan on mortgage 50,000
Capital 1,00,000
Drawings 12,000
Sales 4,50,000
Sales returns & allowances 5,000
Rent receivable 6,000
Purchase 2,80,000
Purchase returns & allowances 4,000
Transportation inward 4,000
Salaries 54,000
Advertising 20,000
Interest on loan 3,000
Insurance premium 8,000
Utilities expenses 7,000
6,58,000 6,58,000
Adjustments
1. Insurance premium is for the year ending 31 March 2001.
2. Depreciation to be provided on furniture and equipment at 5% and on land and
building at 2%.
3. Interest on loan is 12% p.a. and is unpaid for six months.
4. Stock in hand on March 31, 2001 is Rs. 24,000.
Q.26. From the following Trial Balance of Aziz Ahmed, prepare the and Profit and
Loss Account and Balance Sheet as on March 31, 2001.
Cash in hand 950 Sales 1,38,000
Bills receivable 7,600 Return outward 2,800
Purchases 74,500 Trade creditors 12,300
Opening stock 14,450 Rent from sublet 6,500
Return inwards 1,700 Discount 800
Carriage 3,500 Capital 50,000
Wages 8,000 Bank overdraft 10,000
Drawings 24,000 Bad debts reserve 700
Power 3,600
Salaries 14,000
Debtors 16,800
Insurance 1,800
Rent 11,000
Plant & machinery 24,000
Furniture & fittings 7,000
Bad debts 5,00
2,21,800 2,21,800
The following adjustments are necessary:
1. The closing stock was Rs.8,700.
2. Rent is paid for 11 months but is received for 13 months
3. Insurance is paid for the year ending March 31, 2001. Further, bad debts amounted
to Rs.800 and provision is made at 5% on debtors for doubtful debts.
4. Interest on bank overdraft was outstanding Rs.250.
ACCOUNTANCY 324
Q.27. From the following Trial Balance and the accompanying additional data of Ashok
prepare Profit and Loss Account for the year ending March 31, 2001 and a Balance
Sheet as on that date.
Cash at bank 22,900
Accounts receivable 40,650
Merchandise inventory 61,100
Stores equipment 38,500
Office equipment 20,800
Accumulated depreciation 12,225
Stores equipment 9,250
Office equipment 38,600
Accounts payable 32,000
Salaries 85,000
Capital 24,000
Drawings 3,57,000
Sales
Sales & returns 4,120
Purchases 2,12,400 2,720
Purchase returns
Delivery expenses 12,200
Selling expenses 1,200
Rent expenses 8,400
Insurance expenses 7,750
5,04,820 5,04,820
Adjustments
1. Merchandise inventory on 31.3.2001 is Rs.56,300.
2. Depreciation for current year Stores equipment Rs.3,100.
3. Depreciation for current year Office equipment rs.2,700.
4. Rs.1,600 for rent is due but not paid.
5. A typewriter of the value of Rs.5,000 purchased during the year is included in the
purchases.
Q.28. From the following ledger balances extracted at the close of a trading year ended
March 31, 2001, prepare a Profit and Loss Account and Balance Sheet as on that date
after giving effect to the under mentioned adjustments:
Capital Account 1.4.2000 80,000 Printing and stationery a/ c 1,250
Stock Account 1.4.2000 18,000 Rates & taxes a/ c 3,350
Net purchases 1,20,000 Travelling expenses a/ c 750
Net sales 1,80,000 Business premises 55,000
Carriage outward account 4,500 Furniture and fixtures 12,500
Wages account 6,300 Bills receivable 13,000
Salaries account 15,500 Bills payable a/ c 12,500
Rent account 11,600 Sundry debtors 30,000
Freight inward 4,400 Sundry creditors 25,800
Fir insurance premium 1,800 Packing machinery 24,500
Bad debts account 2,100 Loan a/ c 50,000
Discount a/ c (Dr) 500 Cash in hand 1,250
Cash at bank 3,500
Proprietors withdrawals 18,000
Adjustments to be made for the current period are:
1. Stock in hand on March 31, 2001 Rs.27,000.
2. Fire insurance premium include Rs.600 paid on July 17,2000, to run for one
year from July 1.1.2000 to June 2001.
3. Depreciate: Business premises by 5%. Furniture and fixtures by 10% and packing
machinery by 10%.
4. Further bad debts amounted to Rs.1,000. Create a reserve on debtors for doubtful
debts at 5% and for discount at 2%.
5. Create a reserve on creditors for discounts at 2%.
6. Interest on loan for one year has accrued at 12%.
ACCOUNTANCY 326
Q.29. The following is the Trial Balance of Rajesh as on 31
st
March 2002
Capital 1,00,000
Drawings 10,000
Stock 25,000
Purchases 90,000
Return Inward 2,000
Return outward 1,000
Furniture & Fixture 10,000
Freight 2,000
Rent, rate & taxes 5,000
Trade expenses 1,200
Bad debts 1,500
Provision for doubtful debts 2,000
Bills payable 7,700
Discount 1,000
Wages & salaries 5,000
Cash in hand 6,000
Cash at bank 12,000
Sales 1,28,000
2,68,700 2,68,700
1. The closing stock on 31
st
March 2002, is Rs. 40,0000
2. Provision for doubtful debts is to be maintained at 5% on sundry debtors
3. Provide for depreciation on furniture and fixtures and plant & machinery @10%
p.a.
4. Machinery costing Rs. 20,000 was purchased on Sep 1, 2001
5. A fire occurred on 31
st
March 2002, and stock of the value of Rs. 7,000 was destroyed.
It was fully insured and the insurance company admitted the claim in full.
You are required to prepare Profit and Loss Account for the year ending 31
st
March
2002 and a Balance Sheet as on date.
Q. 30 The Following Trial Balance is extracted from the books of Gaurav Kumar on 31
March 2002.
Salaries 30,000
Stock 40,000
Purchases 82,000
Wages 4,000
Sales 1,50,000
Commission 3,000
Advertising 8,000
Interest 3,000
Furniture 10,000
Building 80,000
Motor vehicles 60,000
Capital 1,22,000
Sundry creditor 47,500
Bad debts 2,000
Loan 45,000
3,80,000 3,80,000
The following adjustment are to be made:
1. Stock on hand on 31st March 2002 was estimated to be Rs. 35,000
2. Depreciation
Building @5% p.a.
Furniture @10% p.a.
Motor vehicles @20% p.a.
3. Rs. 1,500 is due for interest on loan
4. Insurance amounting to Rs. 1,200 is prepaid
5. One third of the commission received is in respect of work to be done next year.
6. Write off further Rs. 1,000 as bad debts and provision for bad debts is to be made
equal to 5% on sundry debtors.
Prepare Profit and Loss account for the year ending 31
st
March 2002 and a Balance
Sheet as on the date.
ACCOUNTANCY 328
Q.31. The following is the Trial Balance of Raj Cloth House as on 31
st
March 2002.
Drawings 12,000 Capital 1,00,000
Sundry debtors 70,000 Sundry creditors 85,000
Cash in hand 3,000 Loan 40,000
Interest 2,000 Sales 1,60,000
Stock 40,000 Purchases returns 8,000
Cash at bank 9,000 Discount 2,000
Bad debts 4,000 Bills payable 10,000
Land & building 90,000 Rent received 3,000
Sales returns 7,000 Provision for bad debts 5,000
Purchases 1,20,000
Establishment charge 14,500
Rates, taxes & insurance 4,000
Advertisement 6,000
Wages 10,000
4,13,000 4,13,000
1. The stock in hand on March 31
st
, 2002 is valued at Rs. 60,000
2. Prepaid insurance amounted to Rs. 500
3. Depreciation land and building at 5% p.a.
4. Bad debts provision is to be increased by Rs. 1,000
5. Provide for the managers commission at 5% on the net profits after charging such
commission.
You are required to prepare Profit and Loss Account for the year ending 31
st
March
2002 and a Balance Sheet as on that date.
Q. 32 The following is the Trial Balance of Nagis Ltd., as on 31
st
March 2000. You are
requested to prepare the Profit and Loss Account for the year ended 31
st
March 2000
and Balance Sheet as on that date after making the necessary adjustments.
ParticularsDebit Credit
Sundry Debtors
Sundry Creditors
Outstanding Liability for Expense
Wages
Carriage Outwards
Carriage Inwards
General Expenses
Cash Discount
Bad debts
Motor car
Printing and Stationary
Furniture and Fittings
Advertisement
Insurance
Salesmens Commission
Postage and Telephone
Salaries
Rates and Taxes
Drawings
Capital Account
Purchases
Sales
Stock on 1-4-99
Cash at Bank
Cash in Hand
1. Stock on 31
st
March 2000 was valued at Rs 7,25,000
2. A Provision for Bad and Doubtful Debts is to be created to the extent of 5 per cent
on Sundry Debtors.
3. Depreciation:
Furniture and Fittings by 10%
Motor-Car by 20%
4. Nagis Ltd, had withdrawn goods worth Rs. 25,000 during the year.
5. Sales include goods worth Rs. 75,000 sent out to Vishal & Company on approval
and remaining unsold on 31
st
March 2000. The cost of goods was Rs. 50,000.
6. The Salesmen are entitled to a Commission of 5% on total sales.
7. Debtors include Rs. 25,000 bad debts
5, 00, 000
-
55, 000
1, 00, 000
1, 10, 000
50, 000
70, 000
20, 000
10, 000
2, 40, 000
15, 000
1, 10, 000
85, 000
45, 000
87, 500
57, 500
1, 60, 000
25, 000
20, 000
. .
15, 50, 000
.
2, 50, 000
60, 000
10, 500
3 6 , 3 0 , 5 0 0
2, 00, 000
14, 43, 000
19, 87, 500
36,30,500
ACCOUNTANCY 330
8. Printing and Stationary expenses of Rs. 55,000 relating to 1998-1999 had not
been provided in the year .
9. Purchases include purchase of Furniture worth Rs. 50,000
Q. 33 From the following Trial Balance of Mr. Subhash prepare Profit and Loss
Account for the year ended 31

March 2001 and Balance sheet as on that due
after giving effect to the under mentioned adjustments:
Drawings 3,250 Bad Debts 400
Stock (1-4-98) 17,445 Patents & Patterns 500
Return Inwards 554 Cash 62
Carriage Inwards 1,240 Discount Allowed 330
Deposit with Anand Gupta 1,375 Wages 754
Carriage Outwards 725 Capital 15,000
Loan to Ashok @5% 1,000 Returns outwards 840
given on 1-4-98
Rent 820 Interest on Loan to Ashok 25
Purchases 12,970 Rent Outstanding 130
Debtors 4,000 Creditors 3,000
Goodwill 1,730 Provision for Doubtful Debts 1,200
Advertisement Expenses 954 Sales 27,914
Adjustments
1. The Manager of Mr. Subhash is entitled to commission @10% of the Net Profit
calculated after charging such commission.
2. Increase Bad Debts by Rs. 600. Make provision for doubtful debts 10% and
Provision for Discount on Debtors 5%
3. Stock valued at Rs. 1,500 destroyed by fire on 25-3-2001 but the Insurance and
Company admitted a claim for Rs. 950 only and paid it in April 2001
4. Rs. 200 out of the Advertisement Expenses are to be carried forward to the
next year.
5. The value of closing stock is Rs. 18,792.
Q. 34 The following Trial Balance was extracted from the books of Bilal as on 31
st
December 2002.
Debit Balance Rs. Credit Balance Rs.
Plant and Machinery 20,000 Capital 80,000
Manufacturing Wages 34,500 Sundry creditors 44,500
Salaries 15,850 Bank loan 15,000
Furniture 10,000 Purchase creditors 1,740
Freight on Purchases 1,860 Sales 2,50,850
Freight on Sales 2,140 Provision for bad debts 2,000
Building 24,000
Motor car 12,000
Purchases 1,02,000
Sales returns 3,100
Bad debts 1,400
Interest and Bank charges 400
Cash at Bank 4,200
Cash in Hand 1,120
Insurance and Tax 4,250
Goodwill 25,000
General Expenses 8,200
Factory Fuel and Power 1,280
Factory Lighting 950
Prepare Profit and Loss Account for the year ended 31
st
December 2002 and the Balance
Sheet as on that date taking into consideration the following information:
a. Stock in hand on 31
st
December 2002 was valued at Rs. 30,500
b. Depreciation plant and machinery by 10%
Furniture by 5%
Motor car by Rs. 1,000
c. Bring provision for bad debts to 5% on Sundry debtors
d. A commission of 1% on the gross profit is to be provided for work manager
e. A commission of 2% on net profit (after charging the Works Manager Commission)
is to be
Credited to the General Manager.
Q. 35 The following is the Trial Balance of M/ s Kohlis Agencies as on 31
st
2002. Prepare
Profit and Loss Account for the year ended 31
st
March 2002 and a Balance Sheet as on
that date:
Capital 15,000 1,00,000
Buildings 18,000
Drawings 7,500
Furniture and Fittings 25,000
Motor van 900
Loan from Mr. Arun @12% Interest 15,000
Interest paid on above 900
Sales 1,00,000
Purchase 75,000
Wages 2,000
ACCOUNTANCY 332
Insurance 1,000 7,500
Commission 10,000
Sundry Debtor and Creditors 28,100
Bank balance 20,000
2,32,500 2,32,500
Adjustment
a. The value of closing stock on 31
st
March 2002 was Rs 2002 was Rs. 32,000
b. Outstanding wages Rs. 5,00
c. Prepared Insurance Rs. 300
d. Commission received in advance of Rs. 800
e. Allow interest on Capial @10% p.a.
f. Depreciation building by 2.5% Furniture and Fitting by 10% and Motor van by 10%
g. Charge interest on Drawings Rs. 500
h. Balance of interest due on the loan in also to be provide for.
Q. 36 From the following Trial Balance prepared from the books of Laxmi Narayan on 30
th
June 2002, prepare Profit and Loss Account and a Balance Sheet on that date:
Laxmi Narains Capital and Drawings 10,550 1,19,400
Bills Received 9,500
Purchases and Sales 2,56,590 3,56,430
Return Inwards 2,780
Commission 5,640
Salaries 11,000
Traveling Expenses 1,880
Debtors (including Mohan for dishonored
cheque of Rs. 1,000) 62,000
Stationary 2,000
Telephone charges 1,370
Interest and Discount 5,870
Bad Debts 3,620
Fixture and Fittings 8,970
Creditors 56,630
6% loan 20,000
Wages 40.970
Cash in hand 530
Cash at bank 18,970
Insurance (including premium of Rs. 300 p.a.
paid up to 31
st
Dec. 2002) 400
Rent and taxes 5,620
5,61,100 5,61,100
Adjustments
1. Stock in trade on 30
th
June 2002 was Rs. 1,28,960
2. Write off half of Mohans cheque
3. Create provision of 5% on Debtors
4. Manufacturing wages include Rs. 1,200 for erection of machine purchased last year.
5. Depreciate Plant and Machinery by 5% and Fixture and Fitting by 10% per year
6. Commission accrued Rs. 600
7. Interest on loan for the last two months is not paid.
Q. 37 From the following Trial Balance of Mr. Ram, prepare Profit and Loss Account for
the year ended 31
st
December 2002 and a Balance Sheet as at that date taking into
consideration the following adjustments:
a. Closing Stock Rs. 9.500
b. One quarter of insurance premium falls in next year
c. Provide 10% depreciation on furniture
d. Loan to X carries 8% interest per year
e. Loan from Y carries 6% interest per year
f. Goods worth Rs 500 have been taken by the proprietor for private use
g. Provide 5% for bad and doubtful debts
h. Salaries include salary to the Proprietor @Rs. 200 per month
Debit balance Rs. Credit balance Rs.
Stock on 1-1-2002 6,000 Capital 40,000
Salaries 6,000 Return outwards 500
Drawings 6,000 Loan from Y 5,000
Carriage inwards 1,000 Rent outstanding 100
Carriage outwards 500 Creditors 13,000
Return inwards 800 Outstanding Expenses 1,900
Loan to X 3,000 Bad Debts Provision 1,000
Rent 1,200 Discount 300
Goodwill 5,000 Sales 73,700
Wages 100 Rent by subletting 500
Insurance premium 600
Bank 8,500
Purchases 60,000
Debtors 30,000
Advertisements 3,000
Bad debts 500
Discount 600
Cash 200
Furniture 3,000
ACCOUNTANCY 334
Q.38 From the following Trial Balance and other particulars given prepare Profit and Loss
Account for the year ended 31
st
December 2002 and a Balance Sheet as on that date:
Capital and Drawings 10,00,000
Personal Debts 1,00,000
Balance at Bank 1,000
Motor Vehicle at cost less depreciation 1,76,000
Debtors and Creditors 1,48,000
Printing and Stationary 2,96,000 2,32,000
Purchases and Sales 6,600
Opening Stock 24,00,000 31,60,000
Bad Debts provision 2,40,000 5,000
Bad debts 11,400
Free hold premises at cost 8,00,000
Repairs and Premises 47,600
General Reserve 2,00,000
Proprietors Remuneration 20,000
Wages and Salaries 2,29,000
Delivery expenses 99,000
Administration Expenses 1,31,000
Rates and Taxes 15,000 124,000
Profit and Loss (Last year)
47,21,000 47,21,000
Adjustments
1. Stock in hand as on 31 December 2002 Rs. 2,80,000
2. Depreciation motor vehicles by Rs. 74,000
3. Sundry Creditors include a claim for damages of Rs. 20,000 made last year and dur-
ing this year settled for Rs. 15,100
4. Unpaid wages Rs. 1,600
5. Rates paid in advance Rs. 3,000
6. Provision for bad debts is to be reduced to Rs. 3,500
7. The item of repairs to Premises includes Rs. 20,000 which has to be capitalized
8. Stock of stationary in hand Rs. 2,200
Ans we rs
Object ive Type Ques t ions
I (c) Balance Sheet
II (a) Sales
III (c) to be deducted from the capital in the Balance Sheet.
IV (a) Deleted to the Trading account
V (c) Rs. 2500
VI (b) Rs. 200 to be credited to Profit and Loss Account
VII (a) Rs. 1,200
VIII (d) Rs. 500
IX (b) Rs. 43,000
X (a) Rs. 22,500
XI (a) Rs. 44,000
XII (a) Rs. 6,000
Problems
10. Net Profit Rs. 62,000
Balance Sheet Rs. 1, 48,000
Balance Sheet Rs. 2,42,000
12. Net profit Rs. 58,000
13. Net Profi0t Rs. 49,000
16. Net Profit Rs. 64, 980
Balance Sheet Rs. 3, 13,980
18. Net Profit Rs. 19, 950
24. Corrected Trial Balance Rs. 3,30,000
Net Profit Rs. 18,000
ACCOUNTANCY 336
Balance Sheet Rs. 63,900
27. Net Profit Rs. 58.400
CHAPTER 8
Accounting for Financial Statements of
Not-for-Profit Organizations
LEARNING OBJECTIVES
state the meaning of Not-for-profit organizations.
d iffer ent iat e bet ween Not -for -p r ofit and ot her bu siness
organizations.
explain the concept of fund accounting.
understand the fund-based accounting entities.
understand the types and mode of receipts, payments and
transfers by Government.
prepare receipt and payment account.
prepare financial statements of Not-for-profit organizations.
ACCOUNTANCY 338
Accounting is always done with respect
to an entity. An accounting entity may be
an individual such as a sole proprietor, a
doctor, a lawyer or a chartered accountant.
An accounting entity may also be a group
of persons such as a Hindu Undivided
Family, a Partnership Firm, a Joint Stock
Company, a Cooperative Society, a Club,
a Hospital, School, etc. On the basis of the
object ives t o be achieved accou nt ing
entities can be divided into two categories.
These are: (i) Entities for profit, and (ii)
Not-for-profit entities (See Exhibit 8.1).
Entities for profit: The objective of such
entities is to conduct business and earn
profit. These entities include manufac-
t u r er s, wholesaler s, r et ailer s, ser vice
providers such as transporters, bankers,
insurance agencies, and professionals such
as doctors lawyer, engineers, architects,
professional advisors, etc.
Not -for-profit ent it ies: The object ive of
such entities is to provide services to the
people without any intentions to seek
profit. The main objective of these entities
may be social, ed ucat ional, r eligious,
cultural or charitable. These entities may
be in the form of sports club, social or
lit er ar y clu b, r eligiou s inst it u t ions,
libraries, hospitals, educational institu-
tions, professional bodies, societies and
char it able inst it ut ions like or phanage
homes, and old age homes.
Some not-for-profit entities such as
sports and recreation clubs exist with the
primary objective of providing services to
its members. These may consist one or
more sub entity, which may undertake
trading in order to add the income from
memberships, subscriptions, donations
and grants. For example, a cricket club, a
not-for-profit organization may run a
restaurant as a sub entity of cricket club
to earn profit and the same fund may be
used for the furtherance of the objectives
of the club.
So far you have st u d ied abou t
accounting of the transactions of Business
Organizations, which are profit-making
and follow accrual system of accounting.
This chapter seeks to explain the concepts
and procedures of accounting followed by
not -for-profit organizat ions. Not -for-
profit organizations follow usually the
Cash system of accounting and partly the
Accrual system of accounting and hence,
the system is hybrid in nature or Modified
Accr u al Accou nt ing. This chap t er is
d ivid ed int o t wo p ar t s. Par t I d eals
wit h Accou nt ing for Gover nment al
Or gani-zat ions and Par t II d eals
with Non-Governmental Not-for-Profit
Organizations.
8.1 Concept of Not-for-Profit
Organizations
The primary reason of the existence of not-
for-profit organizations is the existence of
many social and political groups within
our present-day society, which provide
ser vice and car r y on act ivit ies in t he
interest of society. Thus, the interest of
societ y is consid er ed t o be of p r ime
importance because it is desirable to make
available cer t ain ser vices which
economically and physically challenged
people cannot afford, but are required to
be provided for the empowerment of the
d epr ived people or for pr omot ion of
certain activities, which cannot be pursued
individually. The not-for-profit organi-
zat ions gr ow in any societ y wit h t he
STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 339
gr owt h of it s collect ive social
consciousness, which propels the people
to ameliorate the hardships and sufferings
of the common people. It is for these
reasons that during the last decade a large
nu mber of Non-Gover nment al
Organizations (NGOs) have flourished. A
not -for -p r ofit or ganizat ion d oes not
restrict itself from earning surplus from
its activities. Rather such surplus is used
for t he fu r t her ance of t he act ivit ies
emanating from the objectives for which
the organization was created.
Not-for-profit organizations are those
organizations, which operate with the
purpose of achieving the objectives for
which they are created and not necessarily
for profit motive. It can be defined as an
entity that provides, without profit, a
service beneficial to society and that has
an equity interest that cannot be sold or
traded. According to Emerson O. Henke,
the term without profit in case of Not-
for-profit organizations is not intended to
imply that such an organization cannot
plan or realize profit, but it implies that
t he act ivit ies p u r su ed ar e not solely
governed by the profit motive. Hence, in
normal course of activities a Not-for-profit
organization can have excess of revenues
over expenditure, called surplus. When
such addition takes place to the net assets,
it is used to implement and enlarge the
services of the organization. Equity to
Not-for-profit organizations is provided
by member ship cont r ibut ions, alloca-
tions, contributions, grants or membership
solicitations. It is to be noted that this is
true only in c ase of Non-Governmental
Not-for-profit organizations such as clubs,
hospitals, colleges, sports-boards (such as
Cr icket Cont r ol Boar d ), Mu seu ms,
Temples, Gurudwaras, Wakf Boards and
Chu r ches. In case of Not -for -p r ofit
or ganizat ions in Gover nment sect or
(Univer sit ies, Resear ch Inst it u t ions,
Scient ific Inst it u t ions, Mu nicip al
Cor p or at ions) d o not have equ it y in
t he same sense as t hat in t he case
of commercial enterprises. Since there is
no equ it y in Gover nment sect or ,
financing is done through tax-collections,
surpluses from Public enterprises and
borrowings.
ENTITIES
COMMERCIAL ENTITIES
MANUFACTURING
MINING
FARMING/ FISHING
TRADING
AGENCY SERVICES
FINANCING, Banking, Insurance
PROFESSIONALS
NOT-FOR-PROFIT ENTITIES
GOVERNMENTAL NON-GOVERNMENTAL
CENTRAL
STATE
LOCAL
UNIVERSITIES
INSTITUTIONS
COLLEGES
SCHOOLS
TRUSTS
HOSPITALS
CLUBS
RELIGIOUS
INSTITUTIONS
PRIVATE
EDUCATIONAL
INSTITUTIONS

(Contd. at Page 440)
ACCOUNTANCY 340
PRIMARY MOTIVES is carry on the above mentioned
act ivit ies and t hereby bring financial gain t o t he
owner(s)
PROPRIETORSHIP or interest of the owner(s) or
owners equity represents the proprietors investment
in the business which consists of the original money
put into the business plus the profits not withdrawn
RESULT OF ENTITYS ACTIVITIES is profit, which
represents the difference between sales revenue and
other incomes, if any, over the cost of sales and financial
charges. The profit and may either be withdrawn, or
retained in the business.
ACCOUNTING STATEMENT prepared to serve the
information needs of decision makers include all or
some of the following:
(i) Manufacturing or Production a/ c
(ii) Profit & Loss Account
(iii) Balance Sheet
PRIMARY MOTIVES is to provide services to the
members or to the society at large. Profits arising out
of any trading activities are used to further service
objectives.
PROPRIETORSHIP or int erest of t he members is
known as Capital Fund or Accumulated Fund which
represents the Accumulated surplus of subscriptions,
donations and profits from trading and social activities
over expenses.
RESULT OF ENTITYS ACTIVITIES is the surplus,
which represents the excess of revenue income over
revenue expenditure during a period, and indicates the
extent of utilization of incomes for the pursuit of service
objects. It increases the Accumulated Fund of the
members and cannot be withdrawn by them.
ACCOUNTING STATEMENTS prepared to serve the
information needs of decision makers include
(i) Receipt & Payment Account,
(ii) Income & Expenditure Account,
(iii) Balance Sheet.
8.2 Distinction between Not-for-Profit and Commercial Entities
A Not-for-profit organization can be differentiated from a profit seeking organization
on the following basis:
Exhibit : 8.1
Basis Commercial ent it y Not -for-Profit ent it y
1. Primary motive
2. Ownership
3. Distributions of profit.
4. Result
To carry on the activities for earning
profits.
Proprietors of business are owners and
hence, entitled to share the profits.
Pr ofit s ar e d ist r ibu t ed among t he
owners.
Result of the entitys activities is called
profit, which is the difference between
sales and other incomes, if any, over the
exp enses. The p r ofit eit her be
withdrawn or retained in a business.
Excess of expenses over incomes is
called loss.
To provide services to the members or
to the public at large. Profits earned out
of any trading activities are used to
further the service objectives.
Subscribers to the membership of the
Not -for -pr ofit ent it y ar e called t he
members.
Profits are not distributed among the
members.
Result of the entitys activities is called
t he surplus, which is t he excess of
income over expenses. It increases the
Capital Fund and cannot be withdrawn
by t he member s. The excess of
expenses over incomes is called deficit.
8.3 Concept of Fund Accounting
Government and Not-for-profit organi-
zations are required to organize their
accounting systems on a fund basis. A
fund is defined as an independent fiscal
and accou nt ing ent it y wit h a self-
balancing set of accounts recording cash
and/ or ot her resources t oget her wit h
liabilit ies, obligat ions, r eser ves, and
equit ies which ar e segr egat ed for t he
purpose of specific activities to achieve
cer t ain object ives in accor d ance wit h
sp ecial r egu lat ions, r est r ict ions and
limitations. Thus, each type of fund is a
sub accounting entity for the purpose of
internal as well as external reporting of
financial est imat es, bu d get s and
performances to the stakeholders. Not-for-
profit organization uses it, which are
legally r esp onsible for ensu r ing t hat
cer t ain fu nd s ar e u sed only for su ch
specific purpose for which the same have
been contributed by the donors. Hence,
there is a need for separate accountability
whenever, a Not-for-profit organization
receives such restricted contributions.
8.3.1 Feat ures of Fund Account ing
Following ar e t he feat u r es of fu nd
accounting:
1. This system of accounting is used by
Not-for-profit organizations of both
types, viz., Governmental and Non-
Governmental.
2. Each fund is a separate entity for
accounting and accountability.
3. Each fund has to balance for income
received and expenditure made in
accor d ance wit h t he r est r ict ions
placed on their use.
4. Budget approval and appropriation is
the basis of income generation and
spending.
5. Despite restrictions being placed on
the use of specific funds, there will
always be a general fund from which
or ganizat ional exp enses will be
passed.
6. In ad d it ion t o fu nd accou nt ing
entities, there will be memo-account
gr ou p s which d isclose t he asset s
required and liabilities incurred. In
case of large borrowings, organization
may choose to crate Debt Fund. It
is to be noted that cash generated to
raising of debt is treated as revenue.
In or d er t o bet t er und er st and t he
mechanism of accounting under Fund
Accounting System, the relationship of
var ious account s can be expr essed as
follows:
Assets + Expenditure + Encumbrances +
Estimated revenues + Interfund Claims =
Basis Commercial ent it y Not -for-Profit ent it y
5. Accounting
Statements
The accounting statements are prepared
to serve the information needs of the
u ser s inclu d e all or some of t he
following:
(i) Manufacturing Account
(ii) Profit and Loss Account
The accounting statements prepared to
serve the information needs of the users
include:
(i) Receipts and Payments
Account,
(ii) Income and Expenditure
Account and
ACCOUNTANCY 342
Liabilities + Appropriations + Revenues +
Interfund Obligations + Fund Balance.
8.3.2 Terminology of Fund
Account i ng
Some of the new terms used in the above
equation as also the other terms used in
fund accounting are explained hereunder:
Expendi t ure: It is an amount paid for
transfer of an asset, for acquiring services
or assets or for settling a loss.
Encumbrances: Obligat ions/ liabilit ies
committed during the accounting year by
agreement of purchase or contract. A
portion of general funds may be set aside
to meet the obligations on account of
purchase orders.
Int erfund Claims/Transfers: This implies
ear mar king of r esou r ces for sp ecific
purpose or use. Usually, this is done by
transfers from general revenues or from
other funds. For the purpose of full-
disclosure, it is necessary that Interfund
transfers/ claims be shown clearly to avoid
the mis-reading of financial statement. If
not p r op er ly p r esent ed along wit h
explanations, such transfers may give the
impression of willful manipulation of
r epor t ed income. Since, t r ansfer s ar e
merely internal allocations, they must not
be shown as income of the receiving fund
and expense of transferring fund.
Appropri at i on: Ap p r op r iat ions ar e
internal authorizations to spend money on
a given expenditure head. It is defined as
one that sets out the amount earmarked
or authorized to be spent for a particular
activity or function. Expenses incurred
ou t of Ap p r op r iat e Fu nd s shou ld be
charged as expenses in the year incurred,
and the related appropriations should be
reversed if there is excess. Disclosure
should be made by way of a note.
Rev enues: Revenu es ar e t he cu r r ent
incomes received by way of cash inflows
t hr ou gh gift s, fees, gr ant s, int er est ,
dividend, rent etc.
8.4 Objectives of Accounting for
Not-for-Profit Entities:
Following are the objectives of accounting
for Not-for-profit entities:
To comp ar e t he act u al financial
r esu lt s of op er at ions wit h
organizations approved and legally
adopted budget.
To assess financial performance of the
entity during the current accounting
year.
To determine the compliance with
rules, regulations and laws under
which Not -for -p r ofit accou nt ing
system is operating.
To evalu at e t he or ganizat ions
efficiency in sp end ing money on
meet ing t he assigned t asks and
responsibilities.
8.5 Types of Funds
Following are the most commonly used
group of funds:
Current Unrestri cted or General
Funds: This fund is created to carry
out the general activities and is also
called Op er at ing Fu nd ,
Unr est r ict ed Fu nd or Gener al
Fund. This fund does not contain
any restrictions on the use of assets
contributed to it. This fund is used
for the attainment of objectives for
which t he or ganizat ion was
established. All unrestricted grants,
gifts, contributions and incomes are
r ecor d ed in t his fu nd . If t he
organization does not receive any
restricted fund, this fund would show
all act ivit ies of t he or ganizat ion.
Common example of Unrestricted
funds are annual membership fee,
non-sp ecified gift s and gr ant s,
contributions.
Accounting Entries for General Fund
(a) Receipt of Fund:
Bank/ Cash a/ c Dr.
Contributions a/ c
(b) Use of Funds:
Contributions a/ c Dr.
Fund Balance a/ c
Current Restricted fund: This fund
accounts for contributions received by
the Not-for-profit organization for
carrying out those activities for which
such contributions are made. This
fund is also called Donor-restricted
Fu nd or Fu nd for Sp ecified
Purposes. For example, a school may
receive Rs. 1 Lakh for a programme
of Public Education for Drug Abuse.
In this case, this is a restricted fund,
which is to be used for promoting
Dr u g abu se p r ogr amme. Su ch
amounts are recorded in the specific
funds. In t he given example, t he
amount will be r ecor d ed in Dr ug
Abu se Fu nd Accou nt . Oft en t he
Cu r r ent Rest r ict ed Fu nd s ar e
relatively small in amount and are
used either in the current year or in
t he following year . Usu ally, all
Good Luck Community Service Centre
Current Unrestricted Fund
Statement of Income, Expenses and Charge in
Fund Balances for the year ended 31 March 2002
Particulars Amount Rs. Amount Rs.
Income: 5,40,000
Contribution and Gifts 4,00,000
Service Fees 1,00,000
Investment Income from endowment fund 25,000
Other Incomes 15,000
Expenses: 3,50,000
Salaries 2,00,000
Rent 75,000
Utilities 50,000
Other 25,000
Excess of income: 1,90,000
Over expenses 10,000
Fund balance, beginning of the year 2,00,000
Less: Transfer to fixed asset fund 1,50,000
Fund balance at the end of the year 50,000
ACCOUNTANCY 344
Current Restricted Funds are clubbed
under one head. Another example
would be, the Research Grants Fund
which is the sum-total of the grants
r eceived by d iffer ent t eacher s in
different departments of a college to
carry out specific individual research
projects. It is to be noted that details
of each research project with respect
to the amount sanctioned, amount
received, amount spent and balance
will be shown for each scheme of
research project.
Account ing Ent ries
If a Not-for-Profit Organization:
(a) For Receipt of Funds:
Cash Operating a/ c Dr.
Restricted Fund a/ c
(b) Use of Fund:
Restricted Fund a/ c Dr.
Contributions for Research a/ c
Endowment Fund: End owment
Funds are the assets donated to Not-
for-profit organizations with the legal
condition that the principal amount
will be maintained in perpetuity and
only the income earned from these
assets can be used for the various
activities of the organization. Usually,
income arising from the investment of
Endowment Fund, is unrestricted for
use hence, should be reported in the
Current Unrestricted Funds.
In some cases, endowment donations
are received with restriction on the use of
income from the fund investment. In such
cases, t he income is ad d ed t o t he
End owment Fu nd and r elat ed
expenditure is subtracted from the fund
Current Restricted Fund
Statement of Income, Expenses and Charge in
Particulars Amount Rs. Amount Rs.
Income: 3,00,000
Contributions 2,00,000
Gifts 75,000
Other Incomes 25,000
Expenses: 2,58,000
Sports prizes 1,75,000
Welfare Programme 45,000
Other expenses 38,000
Excess of income:
Over expenses 42,000
Fund balance, beginning of the year 18,000
Fund balance at the end of the year 60,000
income. Any excess of income over
exp ense is ad d ed t o t he fu nd and is
invested to generate further income for the
or iginal p u r p ose. For examp le, a
University may receive Rs. 1 Lakh for
awarding gold medal to the meritorious
student. In this case, the endowment for
Gold Medal is a restriction and hence, the
expenditure on the Gold Medal will be
less than or equal to the interest income
arising from the investment In case of
surplus, the same will be invested and
added to the fund.
Another possibility is that a donation/
grant may be received by the organization.
Such donation is invested and income is
paid to the beneficiary as per the directives
of the donor. For example, an organization
may donate Rs10 lakh for promoting study
of literature. In this case the Rs10 lakh will
be invested and income arising out of that
will be distributed by way of Scholarship
to people pursuing study of Literature.
The donations so received will be shown
as Scholarship Fund.
Accounting entries:
(a) Receipt of Endowment:
Cash/ bank a/ c Dr.
Endowment Fund a/ c
(b) Making of Investment:
Investment a/ c Dr.
Cash/ Bank a/ c
(c) Receipt of Interest/ Dividend:
Cash/ bank a/ c Dr.
Interest/ Dividend a/ c
(d) Transferring interest to
Endowment and matching
expenses
Interest/ dividend a/ c Dr.
Expenditure
Endowment
(e) Purchase of Medals etc.
Expenditure a/ c Dr.
Cash/ Bank
(f) Transfer to Unrestricted Fund
Endowment Fund a/ c Dr.
Unrestricted Fund
Fi xed Asset Fund: The gift s and
contributions received by Not-for-
p r ofit or ganisat ions for t he
acquisit ion/ cr eat ion of asset s ar e
recorded in Fixed Assets Fund/
Bu ild ing & Equ ip ment Fu nd /
Plant Fund. Often amount spent are
funded by both donor restricted and
unrestricted gifts. This fund will also
inclu d e u nsp ent Bu ild ing Fu nd
contributions. Creating a separate
fund and thereby indicating that this
amount is not available for day-to-
day operations of the Not-for-Profit
Or ganizat ions. Somet imes, t he
Abstract Balance Sheet as at 31 March 2001
Liabilit ies Amount Rs. Asset s Amount Rs.
Current Restricted Fund 60,000 Current Restricted Fund 60,000
Investment with
HDFC Bank 30,000
Bank of Baroda 20,000
Cash 10,000 60,000
ACCOUNTANCY 346
amount of unrestricted gifts/ general
fund may be transferred to another
fund. Such transfer of amount is known
as Interfund transfer. Depreciation is
shown in the Plant Fund or in the
unrestricted fund. In the latter case, an
amount equal t o t he d epr eciat ion
charge is transferred from the unres-
t r ict ed fund s t o Plant Fund . The
following explains this process:
Unrestricted Fund
Particulars Rs. Rs.
Provision for Depreciation XXXXXX
Transfer to Plant Fund XXXXXX
Plant Fund
Particulars Rs. Rs.
Transfer from Unrestricted Fund XXXXXX
Accumulated Depreciation XXXXXX
Fixed Asset Fund
Statement of Change in
Particulars Amount Rs.
Fund balance in the beginning of the year 8,00,000
Add: Transfer from ensuer fund 1,50,000
Fund balance at the end of the year 9,50,000
Abstract Balance Sheet as on 31 March, 2001.
(Rs. In lakhs)
Liabilit ies Amount Rs. Asset s Amount Rs.
Sir SayajiRao Diamond Sir SayajiRao Diamond
Jubilee Fund 20 Jubilee Fund 20
Investment with
As per last Account 15 HDFC Bank 10
Exp. As per last Account 3 Bank of Baroda 5
Add: Donations 2 Addition to Building 5
Difference between Fund Accounting and Non-fund Accounting
Fund Account ing Non-Fund Account ing
1. Basis of Book-
keeping
2. Use of Money
Cash Basis.
Except general funds, all other funds are
used for specific purpose and separate
funds are created for recording.
Accrual Basis.
All resources are used for any of the
objectives or basis and all resources are
classified as owners equity and loans.
Abstract Balance Sheet as on 31
st
March, 2001.
(Rs. In lakhs)
Liabilit ies Rs. Asset s Rs.
Fixed Assets Fund 9.5 Fixed Assets 9.5
Fund Account ing Non-Fund Account ing
3. Equity
Accounting
4. Entity of
Accounting
5. Accountability
6. Financial
Statements
7. Surplus v/ s.
income
8. Budget
There is no individual or group of persons
who have economic interest and hence
there is no equity.
Each fu nd is a fiscal and financial
accounting entity.
Accou nt abilit y is t owar d s law,
r egu lat ions, legislat u r e, Par liament ,
contributors and donors of funds.
Budget, income and expenditure account,
statement of changes in funds alongwith
their utilization, summary of debts.
Usually expenditures are more or equal
to receipts, hence deficit is the common
feature. Sometimes individual funds may
have excess of cu r r ent income over
expenses because of restrictions.
Approval of budget is fundamental for
financial t r ansact ions. Hence,
authorizations and appropriations are
sacrosanct. Moreover, all account heads
emanate from budget.
Equity accounting is of primary focus as
these are ownership equities.
Business enterprise is the accounting
ent it y for r ecor d ing and r ep or t ing
business transactions.
Accou nt abilit y is t owar d s all
st akeholder s viz., owner s, cr edit or s,
wor ker s, Gover nment , r egu lat or s,
consumers and all other general public.
Profit & Loss Account, Balance sheet,
cash-flow statement and statement of
changes in financial position of business
entity.
The result of matching of revenues and
expenses may either be profit or loss.
Commercial principles of codification of
accounting are followed and budget
system is optional.
ACCOUNTANCY 348
8.4 Governmental Accounting System
It is to be noted that the discusstion that
follows hereunder is to give a synoptic view
of Government Accounting System of the
Government of India. For further details,
one can refer to Government Accounting
Rules framed and enforced from time-to-
time.
The fu nd ament al object ive of
Governmental Accounting System is to
forecast with greatest possible accuracy
what is expected to be received and paid
during the year and whether the receipts
along with previous years balance of fund
is sufficient to cover the expenses. For this,
every year a Budget is laid before the
Parliament/ State Legislature showing the
Capital and Revenue receipts and capital
and revenue disbursements. Further,
division is made between plan and non-
plan expenditure. The budget has to be
vot ed and passed by t he Parliament /
Legislature and a separate Appropriation
Bill is to be passed to indicate autho-
r izat ions for d iffer ent r eceip t s and
disbursements. On the basis of the budget
and accounts the Government determines
(a) whether it will be justified in curtailing
t he exp end it u r e or exp and ing t he
activities, and (b) whether it can or should
r aise r evenues accor d ingly. In br ief,
following are the purposes of Government
Accounting System:
1. Hist or ical r ecor d of financial
op er at ions of t he Gover nment
alongwith the legally adopted budget.
2. Rep or t exp end it u r e incu r r ed on
various activities.
3. Pr ovid e infor mat ion abou t how
Government financed its activities
and met its cash requirements.
4. Provide aggregate information useful
in evalu at ing t he Gover nment s
performatnce in terms of services,
costefficiency and accomplishments.
5. Pr ovid e help in t he financial
management of the country/ state/
union territory through periodical
reporting.
8.4.1 Met hod of Government al
Account i ng
The mass of Government transactions are
cash based , hence cash syst em of
account ing is followed. However , for
cer t ain t r ansact ions for which
Gover nment act s as banker , r emit t er ,
borrower or lender, accrual System of
Accounting is followed. There are three
pillars viz., elements (expense, revenue,
receipt, disbursements, liabilities, cash
balance), measurement and recongnition.
9. Adjustment
10. Depreciation
Under cash system, outstanding and pre-
paid expenses, accrued income are not
r ecor d ed . However , for r est r ict ed
purposes under modified accrual system,
such adjustments are recorded.
Depreciation is not recorded as cost of
carrying on operations. Depre-ciation is
treated as allocation of funds based on
replacement cost of the asset in use as is
followed in Indian Railways.
All adjustments are made by invoking
t he Gener ally Accept ed Accou nt ing
Principles (GAAP).
Depreciation is recorded as Business
expense and proper asset accounting is
done.
Exhibit : 8.2
These are explained below:
1. Element is and item of transaction
relating to expense, income, receipt,
disbursement, liability, or asset.
2. Measurement is t he p r ocess of
determining the monetary amounts at
which elements are to be recorded.
3. Recognit ion is t he p r ocesss of
incorporating in a financial statement
an item that is within the definition
of an element and satisfies the criteria
for recognition.
Cash Basis of Account ing:
Recognises transaction at exchange of
cash.
Financial result is expressed in terms
of cash received and cash paid.
Elements covered are:
(a) Receipts
(b) Expenditure
(c) Cash balance
Accrual Basis of Account ing: Accr u al
system of Accounting follows Generally
Accepted Accounting Principles and is
recommended for use in case of trusts,
capital projects, special assessment, and
Inter-Governmental transfer of funds. The
modified Accrual basis of accounting is
used for general funds, special reverues
and Debt Service Funds. The modified
accrual basis of accounting is defined as
t hat met hod of accou nt ing in which
expenditures and revenues are recorded
at the exchange of cash except for material
and approved revenues. Revenue sources
which give rise to legally enforceable
claims (such as property taxes, which can
be d u ly ascer t ained and Int er -
Governmental transfers are recorded on
accrual basis. Following are the elements
covered:
Revenues
Expenses
Assets including physical assets
Liabilities
Net assets
Cash flows
Receipt s: Receipts are cash inflows arising
fr om r ecip r ocal and non-r ecip r ocal
t r ansact ions, bor r owings, int er est , or
custodial contributions/ receipts.
Non-Reciprocal Transact ions:
Taxation
Issue of currency
Grants
Donations
Contributions
Reciprocal Transact ions:
Sale of goods and services
Sale of Assets.
Financial Inflows:
Interest receipts
Borrowings
Capital contributions
Custodial receipts
Payment s:
Reciprocal Transact ions:
Purchase of goods and services
Acquisition of asssets
Capital investment and loans
Non-reciprocal Transact ions:
Governmental transfers
Grants
Contributions
Donations
ACCOUNTANCY 350
Financial Out flows:
Interest payment
Repayment of debt
Cust odial payment s
Assets: An asset is a resource controlled
by the entity as a result of past event and
from which future economic benefits are
expected to flow. Assets may be financial
(bonds, securities, shares, debentures etc.),
physical (gold, silver, land & building,
bridges, furniture, fixtures, equipment
and p lant , cu r r ency) and int angible
(patents, copyrights, licences etc.).
Liabilities: A present obligation arising
from past events settlement of which is
exp ect ed t o r esu lt in t he ou t flow of
resources embodying economic benefits.
Examp les of liabilit ies ar e accou nt s
payable, accrued interest payable, accrued
wages and salaries, pension and other
accrued terminal benefits, guarantees and
indemnities likely to be invoked, currency
issued, debt, obligation under accident
compensation.
Commit ment : It is a Gover nment
responsibitlity for a future liability based
on contractual agreement. Obligation is
not certain but when it occurs, it is to be
recognized as a liability because it ceases
to be a commitment.
8.4.2 Classificat ion of Government
Account s
Government accounts are kept in three
parts, viz., Part I Consolidated Fund of
India, Part II Contingency Fund of India
and Part III Public Account of India (See
Exhibit 8.3)
Consolidat ed Fund of India
It is the account of all revenues received,
all loans raised and all money received by
the Government in repayment of loans.
This account has two divisions. The first
Government Account
Consolidated Fund of India Contingency Fund
of India
Public Account of India
Receipts
Tax Revenue.
Non-Tax Revenue.
Grants in aid &
Contributions.
Expenditures
General Services.
Social Services.
Economic Services.
Grants in aid &
Contributions.
Revenue
Section
Capital
Section
Receipts
Small Savings.
Deposits & Advances.
Reserve Fund.
Suspense &
Miscellanceous.
Remittances.
Cash Balance
Expenditures
General Services.
Social Services.
Economic Services.
Grants in aid &
Contributions.
Exhibit 8.3: Structure of Government Account
d ivision consist s of r evenue account ,
d et ailing about r evenue r eceipt s and
expenditure heads. The second division
comprises capital receipts and capital
expenditure. The third section relates to
Public Debt and Loans and Advances
which includ e loans r aised and t heir
r ep ayment by Gover nment su ch as
Internal debt, external debt of Central
Government, Loans and Advances made
by Government and their recoveries.
Cont ingency Fund: It is Par t II of
Government Accounts. The Contingency
Fund is in the nature of an imprest created
through the law by the Parliament and
placed at the disposal of the Government
to enable advances to be made for meeting
u nfor eseen exp end it u r e, p end ing
authorization by the Parliament.
Public Account of India: This is the third
part of Government Accounts. All other
moneys received by or on behalf of the
Government of India shall be credited to
t he Pu blic accou nt of Ind ia. The
transactions leading to debt (other than in
Part I), deposits, advances, remittances
and suspense are recorded in this account.
Sect ors and Sub-sect ors of Account s:
Under each division and section of the
Consolid at ed Fu nd of Ind ia, t he
transactions are grouped into Sectors such
as General Services, Social and Commu-
nit y Ser vices. This classifi-cat ion
highlights the Function or the Service
carried on by the Government. The Sectors
may be divided into Sub-sectors. Each
Sector in a section is distinguished by an
alphabet.
Major, Minor and Detailed Heads: Major
head of account falling in the Consolidated
Fund of India corresponds to the functions
of Gover nment su ch as ser vices like
agr icu lt u r e, d efense pr ovid ed by t he
Government. A Minor head identifies a
p r ogr amme u nd er t aken and a
sub-minor head indicates the scheme or
activity undertaken. A detailed head is
termed as an object classification. It is
meant for it emized cont r ol over
exp end it u r e su ch as salar ies, office
exp enses, gr ant -in aid , loans, and
investments.
Codificat ion of Account s: A fou r -d igit
Ar abic-numer ical cod e is assigned t o
Major Heads followed by two-digit code
for the relevant Major Sub-head followed
by a three-digit code for Minor Heads (See
Exhibit 8.4). This is illust rat ed by t he
following example:
Procedure for Receipt s, Payment s and
Inter-Government Transfers: All receipts
(taxes, borrowings, interest receipts and
Major Head Code in the section for
Receipt Heads Expendit ure Expendit ure Loans and
Funct ion Revenue Heads Heads Capit al Advances
Account Revenue Account
Account
1. Medical and
Public Health 0210 2210 4210 6210
2. Shipping 1052 3052 5052 7052
ACCOUNTANCY 352
ot hers), payment s (expenses for civil,
defense, and general services for each
head) and inter-governmental transfers
ar e car r ied ou t t hr ou gh t he u se of
vouchers, formats whereof are prescribed
in Government of India Accounting Rules,
1990. The p r oced u r e for r eceip t s,
p ayment s and int er -gover nment al
transfers is presented in a synoptic form
in Exhibit 8.5.
Classification and
Codification of Accounts
Characteristics of the Function
Part
Division
Section
Sector
Sub-sector
Sub-sub-sector
Function Itself
Major Head
Function
4 Digit Code
Sub-Major Head
Sub-Function
2 Digit Code
Minor Head
Programme
3 Digit Code
Sub-Minor Head
Scheme
2 Digit Code
Detailed Head
Sub-Scheme
2 Digit Code
Object Head
Item Class
2 Digit Code

Exhibit 8.4: Coding System
Reserve Bank of India
Exhibit 8.5: Procedure for Receipts, Payments and Transfers.
ACCOUNTANCY 354
As revenues are received, cash account is debited and revenue account is credited.
Assuming that (out of Rs. 5,00,000 tax revenue) Rs. 4,50,000 is collected (and distributed
as follows)
Recording of Transact ions
1. Recording Est imat ed Revenue
Estimated revenue is, being an Asset account is debited and Fund Balance is credited.
General Ledger (Rs.) Subsidiary Ledger (Rs.)
Estimated Revenue 9,00,000
Fund Balance 9,00,000
Estimated Revenues Ledger
Tax Revenue 5,00,000
Licenses and Permits 2,00,000
Service charges 1,20,000
Fines and others 80,000
2. Recording Appropriat ions
Fund Balance 8,00,000
Estimated other uses 30,000
Appropriations 7,70,000
Appropriations Ledger
General Government 4,00,000
Public Safety 2,00,000
Public Parks 60,000
Health and Welfare 1,10,000
Estimated other uses 30,000
Cash 4,50,000
Revenue 4,50,000
Revenue Ledger
General Government 3,00,000
Public Safety 30,000
Public Parks 40,000
Health and Welfare 80,000
3. Recording Expenditure
When the authorized liabilities have been
incurred, an appropriation is considered
expended. Expected liabilities are called
encumbrances/ obligations. In order to
record an encumbrance, usually in case of
p u r chase or ot her commit ment s, t he
Encumbrances Controlling Account is
debited and Reserve for Encumbrances is
credited. For example, encumbrances for
the year 2002 are of Rs. 1,00,000. The
transaction is recorded as follows:
Encumbrances 2002 1,00,000
Reserve for Encumbrances 2002 1,00,000
Revenue Ledger
General Government 50,000
Public Parks 20,000
Encumbrances 2002 1,00,000
Reserve for Encumbrances 2002 1,00,000
Revenue Ledger
Public Parks 20,000
When expenditures are actually paid,
expenditures (and its subsidiary account)
is debited and liability account is created
for the amount paid to the creditor. For
example, Rs. 90,000 of Rs. 1,00,000 of the
encumbrances is paid as follows:
Reserve for Encumbrances 2002 90,000
Encumbrances 2002 90,000
Encumbrances Ledger
Public Parks 20,000
Expenditure 2002 90,000
Vouchers Payable 90,000
Expenditure Ledger
Public Parks 20,000
ACCOUNTANCY 356
In t his way, all t r ansact ions ar e
r ecor d ed in t he Gener al Fu nd
(Consolidated Fund of India) and entries
are made in the Budgeting Process. A
Illust rat ion 1
A college has received endowments for furtherance of research. Following are the details
of the various endowments:
Balances as on 1 April, 2000 Rs.
IPCL Research fund in Management 20,00,000
IPCL Research fund in Microbiology 10,00,000
GSFC Fellowship 20,00,000
Interest Balance as on 1 April, 2000
Interest received during the year ending 31

March, 2001.
Expenditure during the year
Contribution received for GSFC Fellowship Fund. 2,00,000
Investment at the end of the year
IPCL Research fund in Microbiology
(In Government Bonds) 14,00,000
GSFC Fellowship (LIC Annuities) 36,00,000
pictorial representation of the flow of
receipts and payment procedure is shown
in exhibit 8.5.
Balances of funds are maintained in the Bank Account with the State Bank of India.
From the above information, you are required to prepare Statement of Change in
Endowment Fund. Show the relevant items in the Statement of Affairs.
Solution
Statement of Change in Endowment Fund
Rs. Rs.
A. IPCL Research fund in Management
Opening Balance of Interest 40,00,000
Add: Interest Received 6,00,000
46,00,000
Less: Expenditure during the year 5,00,000
Closing Balance of Interest 41,00,000
Opening Balance of Fund 20,00,000
Closing Balance of Fund 61,00,000
B. IPCL Research Fund in Microbiology
Add: Interest Received 1,50,000
6,50,000
Opening Balance of Fund 10,00,000
Fund received during the year 2,00,000
C. GSFC Fellowship Fund
Add: Interest Received during the year 3,00,000
6,00,000
Add: Opening Balance of Fund 30,00,000
Add: Contributions Received 2,00,000
Total Endowment Fund 1,12,00,000
Statement of Affairs as at 31 March 2001
Rs. Rs.
Endowment Fund: Endowment Fund:
A. IPCL Research fund
in Management 61,00,000 A. IPCL Research fund in
Management
Govt. Bonds 50,00,000
Bank Balance* 11,00,000 61,00,000
B. IPCL Research fund B. IPCL Research fund in
in Microbiology 15,00,000 Microbiology
Govt. Bonds 14,00,000
Bank Balance* 1,00,000 15,00,000
C. GSFC Fellowship C. GSFC Fellowship Fund
Fund 36,00,000 LIC Annuities 36,00,000
TOTAL 1,12,00,000 TOTAL 1,12,00,000
* Balance of Bank account for respective fund
ACCOUNTANCY 358
8.2 Accounting Statement for Non-
Governmental Not-for-Profit
Organizations
The Not-for-Profit organization being a
d iffer ent t ype of ent it y necessit at es a
different type of accounting treatment. This
need arises on account of t he t ype of
information required to be generated to
suppor t t he var ious d ecisions of t he
management. Besides, their funding pattern
is also different as these entities receive
money from members and other agencies
to promote their activities, which is usually
not in the case of business enterprises.
All the accounts are compiled at the end
of the financial year and presented in the
form of following statements:
1. Receipt and payment account (also
known as Receipt and Disbursement
account) stating the actual receipts
and payments made during the year.
This includes for revenue receipts and
payments.
2. Budget is an estimate of receipts and
payments of next financial year-
presented to the Parliament/ Legislature
indicating expenses to be charged, voted,
expenditure to be voted on account and
the receipts under various head such as
tax collection, interest and other receipts
such as revenue receipts and capital
receipts. The capital receipts and disbur-
sement and revenue receipts and disbur-
sement are shown in two sub-heads :
Planned expenditure
Non-Planned expenditure.
3. Appropriation bill is placed in the
Parliament for seeking approval of
the house for the proposal made in
the budget for raising revenue from
receipts, disbursements and payments.
4. Along wit h r eceip t and p ayment
account, a statement of position of
consolidated fund is presented in the
form of a statement.
8.3 Receipt and Payment Account
Receipt and Payment account is a similar
t o cashbook; t her efor e it ser ves t he
purpose of cashbook. Proper classification
of r eceip t s and p ayment s help in
differentiating receipt of capital nature
and revenue nature and of the expenses.
Apart from this, it indicates the opening
and closing balance of cash. Su ch a
classification can help in the preparation
of cashbook from the receipt and payment
accou nt . It is also called Receipt and
Disbursement Account .
The Receipt and Payment Account is
generally presented horizontally (in T-
form) with cash receipts on the left hand
or debit side and cash payments on the
right hand or credit side, as:
Debit | | Credit
Receipts Payments
8.3.1 Preparat ion of Receipt and
Payment Account
Receipt and payment account is prepared
by keeping in view the following points:
1. This account starts with the opening
balance of cash in hand and cash at
bank. Cash in hand always have a
debit balance and, therefore, appears
on the debit side. Cash at bank have
either a debit or favourable balance
or a cr ed it (over d r aft ) or on
favou r able balance. If it has a
favourable balance (debit balance) it
will be shown on the debit side and
an overdraft (credit balance) will be
shown on the credit side.
2. All cash collections made during the
account ing year as shown on t he
receipts or debit side and all cash
payment made during the year as
shown on the payments (credit) side.
The period to which the transactions
may belong (i.e. previous year (s),
current year or future years (s)) and the
nature of the transaction, (whether
capital or revenue) is recorded on the
debit side. For example the payment of
rent, (revenue item) outstanding rent
or prepaid rent will be shown on the
credit side. Similarly, the payment
for the purchase of furniture (capital
item) will also be shown on the credit
side.
3. Only actual receipt of cash and payment
of cash are recorded. All non-cash items
such as outstanding expenses,
depreciation on fixed assets and accrued
incomes do not form the part of the
Receipts and Payments account.
4. The Receipts and Payments account
is balanced at t he end of t he
accounting year to show the closing
balance of cash in hand and at bank
or bank overdraft, as the case may be.
The format of the Receipt and Payment
Account is as given below:
Receipt and Payment Account
Receipt s Amount Rs. Payments Amount Rs.
Salary xxx
Wages xxx
Honorarium xxx
Rent xxx
Taxes xxx
Insurance xxx
Electric Changes xxx
Printing xxx
Postage and Stationary xxx
Repairs xxx
Refreshments purchased xxx
Conveyance xxx
Tournament xxx
Interest on Loan xxx
Interest on Bank xxx
Overdraft xxx
Building xxx
Furniture xxx
Office Equipment xxx
Books xxx
Sports Goods xxx
Sports Equipment xxx
Investments xxx
Loan Advanced xxx
Fixed Deposit xxx
Balance c/ f xxx
Cash
Bank
(Balancing fig.) xxx
Balance b/ f xxx
Cash -
Bank xxx
Subscriptions
2000-
2001-
2002- xxx
Donations xxx
Locker Room Rent xxx
Cloak Rent xxx
Hall Rent xxx
Sale of old news papers xxx
and magazines xxx
Sale of refreshments xxx
Interest received xxx
Life membership xxx
Tournament Fund xxx
Subscriptions xxx
Admission Fee xxx
Specific Donations xxx
Grants xxx
Loan Obtained xxx
Sale of Investments xxx
Sale of Fixed Assets xxx
ACCOUNTANCY 360
8.3.2. It ems of Receipt and
Payment Account
These items may be classified as follows:
(i) Revenue Receipts
(ii) Capital Receipts
(iii) Revenue Payments, and
(iv) Capital Payments.
These items have been discussed on the
following lines.
(i) Rev enue Recei pt s: These ar e t he
amou nt s r eceived on a r ecu r r ing
business and include:
a) Annual membership subscriptions;
b) Donat ions, gr ant s and legacies
r eceived r egu lar ly for gener al
purposes;
c) Admission fees not capitalized;
d) Locker rent and cloakroom rent from
members for the use of locker and
cloakroom;
e) Hall rent received from outsiders for
the use of hall;
f) Receipts from sale of old newspapers
and magazines;
g) Receipts from sale of refreshments,
dinner coupons, tickets for dances and
other social functions;
h) Interest received on investment, fixed
deposit and loans advanced;
i) Any other item of the similar nature.
(ii) Capit al Receipt s: These refer to those
amounts received during the year
which will yield benefit s t o t he
organization during the current year
as well as in t he fu t u r e year s.
Amounts of capital receipts are not
r eceived at r egu lar int er vals.
Following items are included in the
capital receipts-
a) Life membership subscriptions i.e.
amounts received for the life time
membership of the organizations;
b) Ad mission fees t o t he ext ent
capitalized;
c) Donations from outsiders or members
for sp ecific p u r p oses su ch as
constructions of building;
d) Legacies i.e. amounts given to the
organizations under a will on the
death of the contributors for specific
p u r p oses su ch as p r izes and
scholarships;
e) Grants received for meeting capital
expenditure from the government
su ch as const r u ct ion of a p u blic
dispensary;
f) Amount received as loan;
g) Sale proceeds of fixed assets such as
investment, furniture, books etc.
h) Amount received on account of any
other similar item.
iii) Rev enue Pay ment s: These are the
p ayment s for amou nt s sp ent at
regular intervals not resulting in the
formations of fixed assets. Revenue
payments include the following-
(a) Payments for the salaries, wages and
honorarium;
(b) Payment s mad e for r ent , t axes,
insurance premia, electricity charges,
p r int ing, p ost age and st at ionar y
charges and repairs.
(c) Payment s for t r avelling and
conveyance
(d) Payment s for p u r chase of
refreshments, dinners;
(e) Payments for organizing sport meets
and tournaments;
(f) Interest paid on loans and on bank
overdraft and
(g) Payments for other items of similar
nature.
iv) Capi t al Pay ment s: These ar e
p ayment s for t hose it ems whose
benefit s ar e available t o t he
or ganizat ion d u r ing t he cu r r ent
account ing year as well as fut ur e
accou nt ing year also. Cap it al
payments are not made at regular
intervals. Following are included in
the capital payments-
(a) Payment s for const r u ct ion and
extension of building, purchase of
furniture and office equipment;
(b) Payments for purchase of books for
the library;
(c) Payments made for purchase of sports
goods and equipment by a sports
clock;
(d) Cost investments purchased;
(e) Amounts invested in banks as fixed
deposits;
(f) Amounts advanced to outsiders as
loans and;
(g) Any other payment of similar nature.
8.3.3. Uses of Receipt and
Payment Account
On the basis of accounting system adopted
by an or ganizat ion t he Receip t and
Payment account can be used in t wo
alternative ways.
i. Those organizations, which follow
cash basis of accounting, this account
plays a vital role. On the one hand, it
serves the purpose of cashbook, while
on the other hand it provides support
in t he p r ep ar at ion of financial
statements, income statement, and
statement of affairs to be presented to
the members at the year-end as a
result of the enterprises activities. In
such a case, the surplus will be the diffe-
rence of receipts and payments. When
payments will be more than receipts
then it will be a situation of deficit.
ii. In organizations using accrual basis
of accou nt ing t he Receip t and
Payment accou nt wor ks as a
su mmar ized cashbook and is a
su p p lement t o t he Income and
Expenditure account and the Balance
Sheet. These are the basic statements
presented to the members to show
surplus or deficit and the financial
position respectively.
Illust rat ion 2
Membership subscription received by
Modern Cricket Club during the year 2001
amounted to Rs 15,600, which includes Rs
900 received in arrears for the year 2000
and Rs 2,100 received in advance for 2002.
It is found that Rs 2,500 has not been
received as subscription for the current
year (2001) and that Rs 1,000 was received
in advance in 2000 as subscription for 2001.
Calculate the income from subscription for
the year 2001.
In t he above illust r at ion t he t ot al
subscription of the current year have been
wor ked out by d oing ad d it ions and
ACCOUNTANCY 362
subtractions of the items of information to
the subscriptions received in cash during the
cur r ent year . The t ot al amount of
subscriptions due for the current year con
also be prepared by preparing subscriptions
account as has been illustrated in the
illustrations given below:
Illust rat ion 3
Rs.51.500 subscriptions were received by
Sita Tracking Club during the year 2001,
which includes Rs 1,500 received in arrears
for the year 2000 and Rs2,500 received in
advance for the year 2002. It is found that
Rs3000 has not been r eceived as
subscriptions for the current year and that
Rs 1,800 was received in advance in the
2000 for the year 2001. Find out the income
from subscriptions for the year 2001 by
preparing a subscription account.
Solution: Rs
Amount collected for subscription in cash. 15,600
Add subscriptions received in 2000 for 2001 1,000
Add subscriptions received in 2001 not yet received 2,500
________
18,100
Less subscriptions received in arrears for 2000 900
Subscriptions received in advanced for 2002 1,200
2,100
Income from subscriptions to be transferred to Income and
Expenditure Account 17000
Dr. Subscription Account Cr.
Dat e Particulars Amount Dat e Particulars Amount
Rs. Rs.
1 Balance b/ f Cash-
outstanding 1,500 subscription
subscription received 51,500
received for 2000 Advance
Advance subscription 1,800
subscription received in 2000
(Income and balance c/ f
Expenditure 2,500 outstanding
Account) subscription of 3,000
Subscription for current year)
current year 52,300
56,300 56,300
Solution:
Illust rat ion 4
With the help of the following information extracted from the books of Rajdhani Club,
Calculate Sub-scriptions for the Current Year, 2001.
Subscriptions received during the year Rs.1,50,000
Year 2000 Year 2001
Rs. Rs.
Outstanding Subscription 3,700 4,200
Advance Subscriptions 3,900 5,000
Solution
Statement showing calculations of subscription of the current year 2001.
Rs.
Subscriptions received in cash for 2001 1,50,000
Add: Outstanding received in cash Rs.4,200
Advance Subscription received Rs.3,900 8,100
In 2000 for 2001. 1,58,100
Less: Outstanding subscription of Rs.3,700
the year 2000 received in 2001
Advance subscriptions received Rs.5,000 8,700
in 2001 for 2002.
Subscription 2001 14,940
Dr. Subscription Account Cr.
Rs. Rs.
Balance b/ f 3,700 Pay Balance c/ f 3,900
(outstanding (advance
Subscription in subscriptions
the beginning) in the beginning.)
Income & 1,49,400 Cash - Subscription 1,50,000
Expenditure received.
Account By Balance c/ f 4,200
Subscription (outstanding
for current year. subscription
Balance c/ f 5,000 in the end.)
(advance
subscription
in the end.)
1,58,100 1,58,100
Alternatively the problem can be solved by preparing a subscription account as shown
below:
ACCOUNTANCY 364
Illust rat ion 5
In 2001 the subscriptions received were
Rs.2,10,000/ -. These subscriptions include
Rs.3,000/ - for the year, 2000 and Rs4,000/
- for t he year , 2002. On 31.12.2001
subscription due but not received were
Rs.5,000/ . Pass necessary journal entries
to record the above transactions, prepare
su bscr ip t ions accou nt , su bscr ip t ions
outstanding account and subscription
received in advance account of Royal
Gym.
Royal Gym
Journal
Dat e Particulars L.F. Debit Credit
Amount Amount
2001 Rs. Rs.
Dec. 31 Cash a/ c Dr. 2,10,000
Subscription a/ c 2,10,000
(Subscriptions received during, 2001)
Dec. 31 Subscriptions a/ c Dr. 3,000
Subscriptions Outstanding a/ c 3,000
(Amount of subscriptions relating to 2000
transferred from subscriptions A/ c to
subscription outstanding account)
Dec. 31 Subscriptions a/ c Dr. 4,000
Subscriptions received in advance a/ c 4,000
(Advance subscriptions received in 2001 for
2002 transferred to subscriptions received in
advance account)
Dec. 31 Subscription outstanding a/ c Dr. 5,000
Subscriptions a/ c 5,000
(Amount of subscriptions still due for
2001 but not yet received. Credited to
subscriptions account)
Dec. 31 Subscription a/ c Dr. 2,08,000
Income & Expenditure a/ c 2,08,000
(Subscription for 2001 credited to
Subscription a/ c)
Dr. Subscriptions Account Cr.
2001 Rs. 2001 Rs.
March 31 Subscription 3,000
Outstanding Dec. 31 Cash 2,10,000
2001 Outstanding 5,000
March 31 Subscription 4,000 Dec. 31 Subscription
received in advance
Income & Expenditure 2,08,000
Dec. 31 2,15,000 2,15,000
Illustration 6
From the following particulars relating to Golden Point Club, prepare a Receipts and Payments account for
the year ending 31
st
March 2002.
Sale of old sports materials 1,200
Rs. Donation received for pavilion 4,600
Opening cash balance 1,000 Rent paid 3,000
Opening bank balance 7,200 Sports materials purchased 4,800
Subscriptions collected for: Purchase of refreshments 600
Expenses for maintenance of tennis:
1999 Rs. 500 court 2,000
2000 Rs. 7,600 Salary paid 2,500
2001 Rs. 900 9,000 Tournament expenses 2,400
Furniture purchased 1,500
Sale of refreshments 1,000 Closing cash in hand 400
Entrance fees received 1,000
Solution
Golden Point Club,
Receipts and Payments Account
For the year ending 31
st
March 2002
Dr. Cr.
Receipt s Amount Payment s Amount
Rs. Rs.
Balance b/ f Rent 3,000
Cash 1,000 Sports materials purchased 4,800
Bank 7,200 Purchase of refreshments 600
Subscriptions Maintenance expenses for tennis court
1999 500 Salary 2,000
2000 7,600 Tournament 2,500
2001 900 9,000 Furniture purchased 1,500
Sale of refreshments 1,000 Office expenses 1,200
Entrance fees 1,000 Balance c/ f:
Sale of old sports 1,200 Cash 400
materials Bank (balancing figure) 6,600
Donation for 4,600
pavilion 25,000 25,000
Dr. Subscriptions Outstanding Account Cr.
2001 Rs. 2001 Rs.
Dec. 31 Balance b/ f 3,000 Dec. 31 Cash 2,10,000
Subscription 5,000 Outstanding
Subscription 5,000
2002 8,000 8,000
Jan., 1 Balance c/ f 5,000
ACCOUNTANCY 366
8.4 The Income and Expenditure
Account
The Income and Expenditure account is a
revenue account of a Not-for-Profit entity,
like a char it able or cu lt u r al societ y,
educational institutions, hospitals, sports
club etc. It is a type of income statement
similar to profit and loss of other business
or ganizat ions. The income and
expenditure account is prepared on the
basis of some p r incip les, which ar e
applicable in the preparation of profit and
loss account. Fund based expenses are
first matched against the income arising/
accrued from the same fund. Fund based
expenses cannot be in excess of the income
accrued from the fund however a transfer
may be made from general fund to the
specific fund to set off the deficit.
Any surplus arising on the income of
a firm has to either accumulate in the fund
itself or is to be disposed off as for the
specific provisions. Items of revenue
nature alone are dealt with in this account
but they are not confined to actual cash
transacted during the accounting period.
Gains whether received or accrued are
credited and expenses and loses whether
paid or incurred are debited to the Income
and Expenditure Account. Any advance
receipt of income on payment or expense
is duly adjusted. After due adjustment of
accr u als, p r ep ayment s, p r ovisions,
depreciation etc, the final balance of the
account represent an excess of income over
exp end it u r e which is called su r p lu s.
When the expenditure is in excess over the
income then the balance is called deficit.
[Incomes- Expendi tures = Surpl us],
[Expenditures-Income = Deficit]. It must
be kept in mind that in the context of
income and Expenditure account the term
expenditure is used interchangeably but
in the same sense the word expense.
8.4.1 Preparat ion of Income and
Expendit ure Account
Following st ep s ar e involved in t he
p r ep ar at ion of t he Income and
Expenditure Account:
(i) It is generally prepared in T form
with revenue expenditure on the debit
sid e (left hand sid e) and r evenue
income on the credit side (right hand
side). It follows the rules given below:
Debit Expenditure | | Credit Income
(ii) This account can also be prepared in
a vertical form where in incomes are
first shown and added up. There after,
the expenditures are presented and
added up. From the totals of the
income s the totals of expenditure are
d ed u ct ed t o ascer t ain su r p lu s or
deficit.
(iii) The Income and Expenditure account
d oes not st ar t wit h any op ening
balance, because it is prepared t o
ascer t ain only t he cu r r ent year s
surplus or deficit. The previous years
surplus or deficit is therefore , not
relevant.
(iv) This account shows only the revenue
items and hence the capital items are
not recorded. For example building
owned by a sport club should not be
taken into consideration.
(v) In this account only the expenses and
incomes of t he par t icular cur r ent
accounting year are shown. Hence,
t he r evenue r eceipt and payment
pertaining to the pervious year(s) and
future year(s) should be suitably or all
to be adjusted. Similarly, outstanding
exp enses and accr u al incomes
pertaining to the previous accounting
year of which t he income and
exp end it u r e accou nt is being
prepared must be included in the total
of the expenses and incomes.
(vi) The closing balance of this account
shows surplus i.e. excess of revenue
income and revenue expenses. The
surplus is added to and the deficit is
deducted from the Not-for-Profit
organizations capital fund .
8.4.2 It ems of Income and
Expendit ure Account
The above discussion makes it clear that the
Income and Expenditure account includes
only the revenue items of the particular
accounting year for which it is prepared.
Some of the important items, which are
relevant to this account, have been discussed
in the following lines:
Revenue Expenditure: It generally refers
to the revenue expenses paid and due for
a particular year and non-cash losses. It
can be shown as follows in the form of an
equation.
Revenue Expendit ure = Revenue
Payment s made during t he year +
(out st anding revenue payment s of t he
year + prepaid revenue payment s of t he
year at t he beginning of t he year) -
(out st anding revenue payment s in t he
beginning of t he year + prepaid revenue
payments at the end of the year)
Revenue Income: It refers to the revenue
receipts accruing during a particular year.
Therefore;
Revenue Income = Revenue Receipt
during the year + (accrued revenue receipt
at t he end of t he year + revenue receipt s
received in advance at the beginning of the
year) - (accrued revenue receipt s in t he
beginning of t he year + revenue receipt s
received in advance at the end of the year)
+ gain on sale of fixed assets.
The format of Income and expenditure
account is given below:
Subscription
Total received in current year
Add outstanding at the end
Less outstanding in the beginning
Add advance receipt in the previous year
Less advanced received in current year
Total subscription of current year
Gain on sale of assets
Sale price of assets
Expenses
Total paid in current year
Add outstanding at the end
Less outstanding in the beginning
Add Advance paid in previous year
Less Advance paid in current year
Current years expenditure
Purchase of consumable stores:
Opening stock of the item
Add payment / or credits for the items
Income and Expenditure Account of (Name of the Not-for-Profit organizations)
for the year ended (date)
......... .........
ACCOUNTANCY 368
Less closing stock of the item
Less creditors for the items in the beginning
Add creditors for the items at the end
Add advance payments in the previous year
Less advance payment in the current year
Value of items actually used
Expenses out of special collections
Expenses paid
Less collection
Net Expenses
Loss on sale of assets
Book of value of assets sold
Less sale price
Net loss
Other expenses and loses with adjustment
Depreciation
Excess of income over expenditure carried over
to balance sheet-surplus
Less book value of assets sold
Net gain on sale of assets
Receipt for special expenses
Amount received
Less expenses paid
Net income
Other incomes and gains with adjustment
Excess of expenditure over income carried over
to balance sheet -deficit
Note: There shall be one of these items at a time
not both.
Note: There shall be one of these items at a time not both.
Difference between Receipt and Payment Account and Income and Expenditure Account
S.No Basis Receipt and Payment Income and Expendit ure
Account Account
1. Assets
v/ s
Revenue
2. Opening
balance
3. Capital
v/ s
Revenue
4. Cash
v/ s
Non-cash
5 Cash
balance v/ s
Surplus/
deficit
It is a summary of the cash transactions
of a not-for-profit organization showing
cash inflows (Receipt) on the debit side
and cash out flows (Payments) a the
credit side as in case of a cash book.
It starts with an opening balance of cash
in hand and cash at bank.
Capital receipt and payment in cash are
included in this account.
Revenue receipts and payments in cash
are also included in this account.
Non-cash expenses such as depreciation
on fixed assets; bad debts, provisions etc.
are not included in this account.
The closing balance of t his accou nt
represent the closing cash in hand and
at bank or bank overdraft.
It is the revenue account of a not -for -profit
organization similar to profit and loss account
of a profit seeking organization. Incomes are
shown on the credit side and expenditure on
the debit side.
It does not start with any balance.
Capital receipts and payments are excluded
from this account only.
Revenu e r eceip t s and p ayment s in cash
concerning the current year are also shown in
t his account and hence capit al r eceipt is
excluded.
Non-cash expenses relating to the current
accounting year are also included in this
account.
The closing balance of this account excess of
income over expenditure i.e. surplus. When
expenditure is more than income the difference
is called deficit.
.........
.........
.........
.........
.........
.........
.........
.........
.........
8.4.3 Difference bet ween Income
and Expendit ure Account
and Profit and Loss Account
Though Income and Expenditure Account
and Profit and Loss Account are seems to
be similar still they differentiate on the
following grounds:
Type of organizations
End results
Sharing surplus and profit
S.No. Income and Expenditure Account Profit and Loss Account
1. It is presented to ascertain the amount of
surplus or deficit as a result of the not-
for- profit entitys activities.
2. The surplus always increases the capital
fund of the entity and can be used for
further enhancing the objectives of the
organization. It can never be distributed
among the members in any form.
It is prepared to ascertain the net profit earned
which will be paid out to the proprietors, partners,
or shareholders, as the case may be, or retained in
the business.
The net profit obtained belongs to the owner(s) who
may withdrawn it or retain in the business.
Rs.
Prepaid expenses on 31.12.2000 1,500
Expenses Outstanding on 31.12.2000 2,300
Expenses Outstanding on 31.12.2001 2,500
Prepaid Expenses on 31.12.2001 1,400
Ascertain the amount of expenses, which will be debited to the income and expenditure
account for the year, 2001.
Solution
Rupees Rupees
Amount of expenses actually paid. 12,650
Add: Expenses of 2001 paid in advance
In 2000. 1,500
Expenses Outstanding on 31.12.2001 2,500 4,000
Less: Expenses of 2000 paid in 2000. 2,300
Expenses paid in advance in 2001 1,400 3,700
Expenses of 2001 to be debited to Income &
Expenditure Account.
12,950
Illust rat ion 7
Miscellaneous expenses act ually paid
d u r ing t he year , 2001 amou nt ed t o
Rs.12,650.00. Information about prepaid
and outstanding expenses is as under:
ACCOUNTANCY 370
Illust rat ion 8
From the following particulars of Faridabad Sports Club, prepare the Income and Expenditure account for
the year ending 31 March 2002
Subscriptions collected (including Rs. 2,000 for 2001 and Rs. 1,5000 for 2003) 30,000
Subscriptions due but not received in 2002 3,000
Salary paid (including Rs. 300 for 2001 4,500
Salary outstanding for 2002 400
Donations received 1,000
Entrance fees (of which 40 percent is to be treated as capital receipt) 2,000
Entertainment expense 600
Tournament expense 1,500
Rent 1,800
Printing, postage and stationary 1,200
Purchase of sports equipment 5,000
Solution
Faridabad Sports Club
Income and Expenditure Account
For the year ended 31 March 2002
Dr. Cr.
Expendit ure Amount (Rs.) Income Amount (Rs.)
Salary 4,600 Subscription 29,500
Entertainment expenses 600 Donation 1,000
Rent 1,500 Entrance fees 1,200
Tournament expenses 1,800
Printing postage and stationery 1,200
Excess of income over expenditure
transferred to Capital Fund 22,000
31,700 31,700
Not es
(1) The income from subscriptions for 2002 is as follows: Rs
Subscriptions received in cash 30,000
Add: Subscriptions due for 2002 but not received during the year 3,000
33,000
Less: Subscriptions received in arrears for 2001 2,000
Subscriptions received in advance for 2002 1,500 3,500
29,500
(2) Donation received is not for any special purpose and is thus treated as a revenue item.
(3) Since it is the policy of the Club to treat 40 per cent of entrance fees received during
the year as a capital receipt, the remaining 60 per cent is a revenue receipt.
(4) Expenses for salary during 2002 is ascertained below: Rs.
Salary paid in cash during 2002 4,500
Add: Salary outstanding for the year 400
4,900
Less: Salary paid for 2001 300
4,600
Nagis Club
Receipts and Payments Account
for the year ending 31.3.2002
Dr. Cr.
Balance c/ d Bank 25,000
Subscriptions
2001 1,500
2002 10,000
2003 500 12,000
Donations 2,000
Hall rent 300
Interest on bank 450
deposits
Entrance fees 1,000
40,750
Purchase of furniture (1.4.88) 5,000
Salaries 2,000
Telephone expenses 300
Electricity charges 600
Postage and Stationery 150
Purchase of books 2,500
Entertainment expenses 900
Purchase of 5% Government 8,000
papers (1.7.88)
Miscellaneous expenses 600
Balance c/ d 300
Cash 20,400
Bank
40,750
The following additional information is available:
(i) salaries outstanding Rs 1500;
(ii) entertainment expenses outstanding Rs 500;
(iii) bank interest receivable Rs 150;
(iv) subscriptions accrued Rs 400;
(v) 50 per cent of entrance fees is to be capitalised;
(vi) furniture is to be depreciated at 10 per cent per annum.
Nagis Club
for the year ending 31.3.2002
Dr. Cr.
Salaries paid 2,000
Add: Outstanding 1,500 3,500 Subscriptions 10,400
Telephone expenses 300 Donation 2,000
Entrance Fees (50% of 500
Electricity charges 600 Rs.1,000)
Postage and stationery 150 Bank interest 600
Entertainment expenses 1,400 Interest on investment 200
Miscellaneous expenses 600 Hall rent 300
Depreciation on furniture 375
Excess of Income over 7,075
Expenditure transferred to
the Capital Fund
14,000 14,000
Illust rat ion 9
From the undermentioned Receipts and
Payments Account for the year ending 31
st
March 2002 of Nagis Club, prepare an
Income and Expenditure Account for the
same period:
ACCOUNTANCY 372
Rs.
Not es
(1) Income from subscriptions for 2002
Subscriptions received for 2002 10,000
Add: Accrued Outstanding subscriptions 400
10,400
(2) Donations are not for any specific purpose and are,
therefore, treated as revenue income
(3) Income from bank interest for 2002
Bank interest received 450
Add: Interest receivable 150
600
(4) Interest receivable from investments for 2002
5 6
8000 = Rs. 200 200
100 12
(5) Entertainment expenses for 2002:
Entertainment expenses paid 900
Add: Outstanding amount 500
1400
(6) Depreciation on furniture for 2002
10 9
5000 = Rs. 375 375
100 12
8.5 Balance Sheet for Not-for-Profit Organization
The proforma Balance Sheet of a Not-for-Profit organization is given below:
Balance Sheet of (Name) of Not-for-Profit Organisation as at (Date on which it is prepared)
Asset s
Last balance b/ f
Add purchase in current year
Less book value of assets sold
Less depreciation
Closing balance
St ock of consumable it ems
Closing stock as given or
Last balance b/ f
Add purchases in current year
Less value actually consume in
current year.
Closing balance
Cash/ bank saving A/ c
Capit al Fund
Last balance b/ f
Add capitalized incomes
of current year
a) General Donations
b) Entrance fee
c) Legacies
d) Life membership fee etc.
Special Fund Donation
Last balance b/ f
Add a) receipts for the
items during the current years
b) income arising from fund.
Less expenses out of fund/
Illust rat ion 10
Good luck sports club has 2000 members. The
annual subscriptions per member is Rs.50/ -
during the year, 2001 only 1900 members paid
the subscriptions for the current year. On
1.1.2001, the subscriptions in arrears were from
50 members out of which 30members cleared
Solution
Good Luck Sports Club,
Balance Sheet (Memorandum)
of as on 31.12.2000.
Rs. Rs.
Advance 1,250 Outstanding 2,500
subscriptions subscriptions
Illust rat ion 11
The receipt and payment account of Royal
Gym shows a payment of Rs.25,000/ -
towards salary for the year, 2001 ended
31.3.2001. In the records of the Royal Gym
indicate the following details:
31.3.2000
31.3.2001
Rs. Rs.
Outstanding Salary 3,000 2,700
Prepaid Salary 4,000 1,500
donation
Credit ors for purchase
Bank overdraft
Out st anding expenses
Last balance b/ f
Less paid in current year
Add o/ s for current year
Income received in advance
Income and Expenditure A/ c
Last balance (Cr) b/ f
Add surplus
Less deficit if any
Fixed deposit account
Accrued incomes
Last balance b/ f
Less received in current year
Add accrued for current year
Prepaid expenses
their arrears. 25 members paid the subscrip-
tions in advance in the year 2000 and
30members paid the subscriptions in advance
during the year, 2001. Show how the
subscriptions outstanding will be shown in the
balance sheet as on 31.12.2000 and 31.12.2001
respectively.
Good Luck Sports Club,
Memorandum Balance Sheet
of as on 31.12.2000.
Rs. Rs.
Advance 1,500 Outstanding
subscriptions subscriptions
Year, 2000:1,000
Year,2001:3,750 4,750
Pass the necessary adjustment journal
ent r ies and find ou t t he amou nt of
salar y which will be d ebit ed t o t he
income and expenditure account ended
31.3.2001, also indicate on which side
of t he balance sheet s as on 31.3.2000
and 31.3.2001 r espect ively t hese it em
will appear.
ACCOUNTANCY 374
Royal Gym
Journal
Dat e Particulars L.F. Debit Credit
Amount Amount
2001 Rs. Rs.
Cash a/ c 25,000
(salary paid during the year ended 31.3.2001)
March 31 Outstanding salary a/ c Dr. 3,000
Salary a/ c 3,000
(salary for the year ended 31.3.2000
paid during the current year)
Outstanding Salary a/ c 2,700
(outstanding salary for the current year ended
31.3.2001 recorded)
Prepaid salary a/ c 4,000
(salary paid in advance during the year ended
31.3.2000 transferred to salary account)
March 31 Prepaid salary a/ c Dr. 1,500
Salary a/ c 1,500
(advance salary paid during the
year ended 31.3.2001)
March 31 Income and Expenditure a/ c Dr. 27,200
Salary a/ c 27,200
(Total salary for the current year ended
31.3.2001 transferred to Income and
Expenditure account)
Dr. Salary Account Cr.
2001 Rs. Rs.
March 31 Cash 25,000 2001 Salary 3,000
March 31 outstanding
March 31 Prepaid Salary 4,000 March 31 Prepaid Salary 1,500
March 31 Outstanding 2,700 Income and
salary Expenditure A/ c 27,200
31,700 31,700
Salaries outstanding are liabilities
a n d p r ep a i d sa l a r i es a r e a sset s,
therefore, outstanding salary Rs 3000
as on 31.3.2000 will be shown on the
liabilities side of the balance sheet as
on 31.3.2000 and the outstanding salary
of Rs 2,700 as on 31.3.2001 will be
shown on t he liabilit ies sid e of t he
balance sheet as on 31.3.2001. Prepaid
sa l a r y 4, 000 for t h e yea r -en d ed
31.3.2000 will be shown. On the asset
side of the balance sheet as on 31.3.2000
and the prepaid salary Rs 1,500 for the
year ended 31.3.2001 will be shown on
the asset side of the balance sheet as
on 31.3.2001.
Dr. Outstanding Salary Account Cr.
2001 Rs. 2001 Rs.
March 31 Salary 3,000 March 31 Balance b/ f 3,000
March 31 Balance c/ f 2,700 March 31 Salary 2,700
5,700 5,700
Balance b/ f 2,700
Dr. Prepaid Salary Account Cr.
2001 Rs. 2001 Rs.
March 31 Balance b/ f 4,000 March 31 Salary 4,000
March 31 Salary 1,500 Balance c/ f 1,500
5,500 5,500
April 1 Balance b/ f 1,500
TERMS INTRODUCED IN THIS CHAPTER
Entity
Non-profit seeking entity
Receipt and Payment Account
Surplus
Deficit
Entrance Fees
Subscriptions
Donations and Legacies
Subscription in arrears or accrued
subscription
Subscription paid in advance
Accumulated/ Capital/ General Fund
Special Funds
ACCOUNTANCY 376
SUMMARY WITH REFERENCE TO
LEARNING OBJECTIVES
1. Not-for-Profit Organization is an entity to carry on activities of social and welfare
nature and whose primary purpose is not profit-making.
2. Fund Accounting is a system of accounting that combines fiscal and accounting entity.
3. Appropriation is the process of authorizing the future payments from budgeted income.
4. Budget is the estimate of future income and expenditures and spells out fiscal and
accounting entities for controlling and reporting purposes.
5. Accounting entity is the budget head of expenditure and income.
6. General/Unrestricted Fund is the revenue income pooled in a fund from various sources
such as membership fees, gifts, contributions, grants, interest and dividend which can
be used for any activity.
7. Current Restricted Fund is grant, gift, contribution, donation, received to carry on
specific activities as specified in the agreement by the donor.
8. Endowment Fund is the contributions that require the entity to invest and maintain
principal in perpetuity and only interest income to be used.
9. Plant/Assets Fund is created out of specific grants or general funds for acquisition of
assets such as land, building, machinery, furniture etc.
10. Debt Fund is meant for raising loan/ debt/ borrowings of long term nature.
11. Difference between profitseeking and Not-for-profit seeking entities.
Profit-seeking entities undertake activities such as manufacturing, trading, banking
and insurance to bring financial gain to the owners.
Not-for-profit-seeking entities exist to provide services to the members or to the society
at large. Such entities might sometimes carry on trading activities but the profits
arising there from are used to further the service objectives.
12. Appreciation of the need for separate accounting treatment for non-profit organizations.
Since Not-for-profit-seeking entities are guided primarily by a service motive, the
decisions made by their managers are different from those made by their counterparts
in profit-seeking entities. Differences in the nature of decisions implies that the
financial information on which they are based, must also be different in content and
presentation.
13. Explanation of the nature of the principal financial statements prepared by Not-for-
profit organizations.
Not-for-profit organizations that maintain accounts based on the double-entry system
of accounting, generally prepare three principal statements to fulfill their information
needs. These include Receipts and Payments Account, and Income and Expenditure
Account and a Balance Sheet.
The Receipts and Payments Accounts is a summarized cashbook, which records all
cash receipts and cash payments without distinguishing between capital and revenue
1
items, and between items relating to the current year and those relating to previous
or future years.
The Income and Expenditure Account is an income statement which is prepared to
ascertain the excess of revenue income over revenue expenditure or vice versa, for a
particular accounting year, as a result of the entitys overall activities. Although it is
considered to be a substitute for the Profit and Loss Account of a profit-seeking entity,
there are certain conceptual differences between the two statements, which have been
discussed at length in the chapter.
The Balance Sheet is prepared at the end of the entitys accounting year to depict the
financial position on that date. It includes the Capital fund or Accumulated Fund,
special purpose funds, and current liabilities on the left had or liabilities side, and
fixed assets and current assets on the right hand or assets side.
14. Difference between the Receipts and Payments Account and the Income and
Expenditure Account
Many differences exist between the Receipts and Payments Account and the Income
and Expenditure Account, which are evident from the nature and purpose of two
statements.
While the former records both capital and revenue receipts and payments relating to
any accounting year, the latter records only revenue items relating to the current
accounting year. Non-cash expenses such as depreciation on fixed assets and
outstanding incomes and expenses are shown in the latter but omitted in the former.
The Receipts and Payments Account has an opening balance while the Income and
Expenditure Account does not. The closing balance of the former account represents
cash and bank balances on the closing date while in the latter account it indicates
surplus or deficit from the activities of the enterprise.
15. Conversion of a Receipts and Payments Account into an Income and Expenditure
Account.
This essentially involves five steps namely (i) adjusting the revenue receipts on the
debit side to include outstanding incomes and incomes relating to the current
year received earlier and to exclude amounts received in arrears or in advance; (ii)
adjusting revenue payments on the credit side; (iii) identifying and showing non-
cash expenses and losses on the debit side of the Income and Expenditure Account
(iv) computing and showing profits/ losses from trading and/ or social activities on
the credit/ debit side of the Income and Expenditure Account; and (v) ascertaining
the surplus or deficit as the closing balance of the Income and Expenditure
Account.
16. Government Accounts for Not-for-Profit entities are maintained as per the accounting
rules in force from time-to-time by Government of India. All accounts are maintained
in Consolidated Fund of India which has Revenue and Capital sub-sections both for
receipts and expenditures. Part II of the Account relates to Contingency Fund and
Part III Public Account for Loans, Advances, borrowings and Public Debt. All
accou nt ing head s ar e classified int o Major , Su b-major , Minor , Su b-minor ,
Detailed Head and Objects. All accounts are codified by following a four-digit coding
system.
ACCOUNTANCY 378
EXERCISES
Objective type Questions
1. Fill in the blanks:
a. Fund Accounting is used by ___________________organizations.
b. Restricted Fund can be used for _____________________purpose only.
c. Endowment Fund is ______________________ fund.
d. General fund can be transferred to ___________________fund.
e. Appropriation is a budgetary head with a ________________ balance.
f. When expenditures are paid out of Current Restricted Fund, cash/ bank
is credited and _____________ is debited.
g. When cash is transferred, General Fund is debited, and ______is credited.
h. When endowment fund is used for specific purpose, the expense is
charged to _________ account.
i. A Receipts and Payments Account makes no distinction between
____________ and ____________ receipts and payments account.
j. The closing balance of the Receipts and Payments Account represents
____________.
k. Expenditure is shown on the __________ side of the Income and Expenditure
Account.
l. Amount received in respect of _________ or ___________ subscriptions should
be eliminated while preparing the Income and Expenditure Account.
m._____________ represents the excess of assets over liabilities.
2. Multiple choice questions:
(a) Not-for-Profit Organization is
(i) Profit seeking in nature.
(ii) Not profit seeking but can earn surplus.
(iii) Earning money.
(iv) None of the above.
(b) Fixed Assets Fund is
(i) Endowment Fund.
(ii) Current Restricted Fund.
(iii) Current Unrestricted Fund.
(iv) Meant for accounting of assets and depreciation.
(c) Loan fund is for
(i) Paying the loan.
(ii) Raising the loan.
(iii) Payment of interest.
(iv) Loan transactions
3. Select one from the possible alternatives to make the following statements correct:
(i) Subscription received in advance during the accounting year is
(a) an income
(b) an expense;
(c) An asset;
(d) A liability.
(ii) Income and Expenditure Account shows a balance of:
(a) Cash in hand;
(b) Capital account;
(c) Net profit;
(d) Excess of revenue over expenditure or vice versa.
(iii) Donations received for special purposes should be:
(a) Credited to a separate fund account and shown in the Balance Sheet
(b) Treated as revenue;
(c) Treated as revenue unless the amount is large;
(d) Not recorded at all.
(iv) Subscription in arrears for the current year are shown:
(a) On the credit side of the income and expenditure account and the assets
side of a Balance Sheet;
(b) Debit side of the Profit and Loss Account and the liabilities side of a Balance
Sheet;
(c) Only on the assets side of a Balance Sheet.
(v) The Receipts and Payments Account generally shows:
(a) A credit balance;
(b) Cash/ Bank balance;
(c) Capital fund or accumulated fund;
(d) Surplus or deficit.
ACCOUNTANCY 380
4. State whether the following statements are true or false, giving reasons.
(a) A public library is a not-for-profit seeking accounting entity;
(b) A not-for-profit organization never undertakes trading activities;
(c) Outstanding expenses need not be adjusted, its accounts are kept on accrual basis;
(d) Entrance fee to a club is shown as a payment;
(e) Only capital expenses are shown in the Receipts and Payments Account.
(f) Donations received for construction of an auditorium by a club is to be
credited to a separated building fund account.
5. Choose the correct answer from the alternatives given below:
(a) Second hand furniture worth Rs. 5,000 was purchased. It was repaired for Rs. 500
and installed by to whom Rs. 100 was paid as wages. The
furniture should be capitalized for:
(i) Rs. 5,000
(ii) Rs. 5,500
(iii Rs. 5,600
(b) Subscription received in cash during the year amounted to Rs. 4,000; the amount
received in advance for the next year is Rs. 300; the amount outstanding for the current
year is Rs. 200 and the amount received last year for the current year was Rs. 400. The
amount to the credited to the Income and Expenditure Account is:
(i) Rs. 4,000
(ii) Rs. 4,300
(iii) Rs. 4,200
(iv) Rs. 4,600
(c) At the beginning of the accounting year, a club has Rs. 18,000 assets; Rs. 5,000 liabilities;
Rs. 1,800 debit balance of the Income and Expenditure Account. The opening Capital
Fund is:
(i) Rs. 18,000
(ii) Rs. 11,200
(iii) Rs. 14,800
(iv) Rs. 24,800
(d) The opening balance of the Prize Fund of a sports club was Rs. 5,400. Further donations
towards this fund received during the accounting year amounted to Rs. 4,800. During
the year, Rs. 3,500 was spent on prizes and Rs. 400 was received as interest on
investment of the Prize Fund. The closing balance of the Prize Fund is:
(i) Rs. 1,900
(ii) Rs. 10,200
(iii) Rs. 10,600
(iv) Rs. 7,100
(e) Salaries payable for the current year amount to Rs. 7,500 at the end of the year,
outstanding salaries amount to Rs. 300. Salaries paid in advance last year pertaining
to the current year amounted Rs. 500. Prepaid salaries for the next year amount to Rs.
250. Total amount paid for salaries during the year is:
(i) Rs. 7,550
(ii) Rs. 7,500
(iii) Rs. 6,950
(iv) Rs. 6,550
6. What is Fund Accounting?
7. What is Consolidated Fund of India?
8. Explain Endowment Fund.
9. What are encumbrances?
10. Define Public Fund Account.
11. Explain inter-fund transfer.
Long Answer Questions
12. What is an accounting entity? How are such entities classified?
13. The Receipts and Payments Account is a summarized cashbook explains
14. the statement.
15. The Income and Expenditure Account is another name for the Profit and
16. Loss Account. Do you agree with this statement? Given reasons.
17. Discuss the structure and codification of Accounts of Government of
18. India?
19. Enumerate the points of difference between Receipts and Payments
20. Account and an Income and Expenditure Account.
21. (a) What steps would you take to convert a Receipts and Payments
Account into an Income and Expenditure Account?
(b) List the steps to be followed to transform an Income and Expenditure
Account into a Receipts and Payments Account.
ACCOUNTANCY 382
18. Explain the accounting treatment of the following items:
(a) Life membership subscription
(b) Entrance fees
(c) Purchase of sports goods by a sports club
(d) Donations received for the construction of a building by a public library
(e) Annual subscriptions received in arrears.
19. Explain briefly the following
(a) Not-profit seeking entity.
(b) Accumulated or capital fund
(c) Membership subscriptions.
20. What is Fund Accounting? What are the objectives of Fund Accounting?
21. Explain different type of funds used in Fund Accounting.
22. Explain the rationale of Fund Accounting and state the Accounting treatment of
different type of funds.
Problems
23. Record the following transactions in the books of Jindal Public School.
Particulars
Rs.
Grant received from Government 30,00,000
Fee collected from students 10,00,000
Building Fund raised 30,00,000
Salaries and allowances paid from General Fund 30,00,000
Student Welfare Activities 10,000
Gold Medals and Prizes Fund 5,00,000
Interest received on Gold Medal Fund 25,000
Expenditure on Medals and Prizes 20,000
You are required to prepare the appropriate fund accounts and show them in the
Balance Sheet.
24. From the under mentioned particulars relating to Life-Line Clinic, prepare the
subscriptions account for the year ending 31
st
march 2002.
(a) There are 200 members and the subscription payable is Rs 50 each p.a.
(b) Subscription received during the year 20002 is as follows:
For 2001 Rs. 300
For 2002 Rs. 9,300
For 2003 Rs. 400
(c) Subscriptions outstanding at the end of
2001 Rs. 400
2002 Rs. 500
Salaries and wages 1,350
Printing and stationary 320
Purchase of sports 1,610
equipment
Purchase of refreshments 1,350
Rent of grounds 1,200
Other expenses 200
Balance c/ f 1,170
7,300
Receipt and Payment Account for the year ending 31.3.2002
Dr. Cr.
Rs. Rs.
Balance b/ f 340
Entrance fees 1,000
Subscriptions 5,450
Sale of Refreshments 1,410
7,3000
(d) Subscription received in advance for 2002 in 2001 was Rs. 300
25. The following particulars of Hygiene Club have been provided and you are required
to prepare:
(a) Salaries and Wages Account
(b) Locker Rent Account
Salaries and Wages payable during the year 2002 amounted to Rs. 9,000. Salaries
outstanding on 1.1.2002 were Rs. 300 and that on 31.12.2002 was Rs. 550. Rs. 600 was
paid in 2002 as advance wages for 2003.
Locker Rent received during the year amounted to Rs. 3,200. Rent outstanding on
1.1.2002 was Rs. 160 and that on 31.3.2002 was Rs. 230.
26. The Receipts and Payments Account of Aurobindo Sport Club is given below:
The following additional information has been provided.
(a) The stock of stationary on 1.1.2002 was Rs. 25 and at the end of the year it was Rs. 45.
(b) Outstanding subscription on 31.12.2002 was Rs. 230
Outstanding subscription on 1.1.2002 was Rs. 250
Subscription paid in advance in 2001 for 2002 was Rs. 180
(c) The depreciation charge on sports equipment for the year was Rs. 200. You are required
to prepare an Income and Expenditure Account for the year ending 31.12.2002.
27. From the following Receipt and Payment Account and additional information relating
to Khalid Social Club, prepare the Income and Expenditure Account for the year ending
31.3.2002 and a Balance Sheet as on the date.
(a) On 1.4.2001 the club owned sports equipment worth Rs. 1,200.
subscription in arrears on that date was Rs. 350.
(b) Sp or t s equ ip ment is d ep r eciat ed @ 10% p .a. on t he r ed u cing balance
basis.
(c) On 31.3.2002 locker r ent in ar r ear s was Rs. 50, ou t st and ing r ent was
Rs. 120 and Rs. 250 was due for subscriptions.
ACCOUNTANCY 384
28. From the following Income and Expenditure Account and Balance Sheet of Clayton
Tennis Club, Prepare a Receipts and Payments Account for the year ending 31.12.2002.
Khalid Social Club
Receipt and Payment Account for the year ending 31.3.2002
Dr. Cr.
Rs. Rs.
Balance b/ f 1,650 Wages 450
Entrance fees 1,300 Printting, postage and stationery 240
Subscriptions for: Charity show expenses 1,000
2000-2001 300 Investment in 10% Government 4,000
2001-2002 2,500 secyrutues (1.7.2002)
2002-2003 200 3,000 Electricity 370
Locker Rent 150 Periodicals & Newpapeers 240
Interest on investment 200 Sports Expenses 660
Charity show receipts 1,400 Rent 600
Sale of old newspapers 160 Blance c/ f 300
and periodicals
7,860 7,860
Clayton Tennis Club
Income and Expenditure Account for the year ending 31.12.2002
Expendit ure Amount Income Amount
Rs. Rs.
Remuneration to coach 12,000 Subscription 1,00,000
Salaries & Wages 24,000 Surplus from cafeteria
Rent 18,000 Receipts 20,000
Secretarys honorarium 15,000 Expenses 16,000 4,000
Depreciation on sport equipment 6,000 Bank interest 2,000
Miscellaneous expenses Repairs 9,000 Club hall rent 14,000
Surplus 11,000
25,000
1,20,000 1,20,000
Clayton Tennis Club
Balance Sheet as at -
2001 Liabilit ies 2002 2001 Asset s 2002
Capital fund 44,000 27,000 Sports 21,000
Add: Surplus 25,000 Equipment
Entrance fees 10,000 6,000 Outstanding 10,000
44,000 79,000 subscription
3,000 Subscription in advance 2,000 Accrued rent 4,000
2,000 Outstanding liabilities for 3,000 10,000 Fixed deposit 40,000
Salaries 3,000 3,500 Cash at bank 5,750
Repairs 5,000 Cash in hand 7.500
2,500 Rent 1,250
51,500 88,250 51,500 88,250
29. The following information relates to Himalayan Maintaining Club
Income and Expenditure Account for the year ending 31.3.2002
Expendit ure Amount Income Amount
Rs. Rs.
Salaries & wages 12,000 Admission fees 15,000
Remuneration to trainers 15,600 Subscriptions 30,000
General office expenses 16,400 Rent receivable 4,800
Printing and stationary 3,200 Hire charges of equipment 3,300
Deprecation on: Surplus from annual dinner:
Building 1,500 Sale of tickets 7,200
Furniture 500 Less expenses 5,900 1,300
Equipment 4,000 6,000
Surplus 1,200
54,400 54,400
Receipt and Payment Account for the year ended 31.3.2002
Receipts Amount Payments Amount
Rs. Rs.
Balance b/ f 6,000 Salaries and wages (including 11,600
Admission fees for: Rs. 600 for 2001-2002)
2001-2002 4,000
2002-2003 12,600 16,600 Remuneration to trainers 15,000
Purchase of equipment 16,000
Subscription for: Printing and stationary 3,200
2001-2002 3,600 General officer expenses 15,700
2002-2003 27,400 (including prepaid insurance
2003-2003 1,800 32,800 Rs. 200 and electric bill for
Rent 4,400 2000-2001 Rs. 300)
Hire charges of equipment 3,000 Annual dinner 5,900
Sale of annual dinner tickets 7,200 Balance c/ f 2,600
70,000 70,000
30. From the following Trial Balance for the year ended 31.3.2002, and other relevant
information of Apeejay School, prepare Income and Expenditure Account and the
Balance Sheet.
Debit Amount Credit Amount
Rs. Rs.
School furniture 16,000 Creditor for supplies 4,000
Science laboratory 40,000 School fees 1,50,000
School library 50,000 Entrance fees 3,000
School building 2,00,000 Hall rent 5,000
Securities 1,00,000 Miscellaneous Receipts 1,500
ACCOUNTANCY 386
31. The governing board of Soclean Foundation decides to raise funds to build an
endowment. The governing board of Soclean solicits gifts/ contributions. The terms of
gifts specify that gifts will be invested and the return from the investment will be used
for tree plantation in the city. The foundations furnishes to you the following
information:
Particulars Rs.
Tree-guards received 2,00,000
Contributions 3,00,000
Opening balance of Endowment Fund 4,00,000
Investment in Government Securities 4,00,000
Interest received during the year 40,000
Tree saplings purchased 10,000
Wages and salaries 15,000
Watering charges 2,000
Gifts made to other Voluntary Organisations 1,000
Value of investment at the end of the year 7,00,000
From the information given above prepare a Statement of Changes in Endowment
Fund of Soclean Foundation as it would be shown in the financial statements for the
year ended on 31
st
March, 2002.
ANSWERS
1. Objective Type Questions
(a) not-for-profit
(b) Specific
(c) Journal
Staff salaries 1,60,000 Grant received 30,000
Office stationary 10,000 General Fund 3,60,000
General school expenses 6,000 Donation Received for 40,000
Annual function expenses 2,000 compute
Cash in hand 500 Sale of old school furniture 7,000
Cash at bank 16,000
6,00,500 6,00,500
Fees still receivable Rs. 6,000
Salaries still payable Rs.14,000
On 1

Oct 2001 not yet recorded
Furniture sold carries a book value of Rs.10,000
Depreciation charged:
School furniture 10% p.a.
Science laboratory 20% p.a.
School library 10% p.a.
(d) Any other
(e) Debit
(f) Restricted Fund
(g) Endowment Fund
(h) Cash
(i) Endowment Fund
(j) Cash/ Bank Balance
(k) Debit
(l) Outstanding/ Prepaid
(m) Capital Fund/ Equity Fund/ Corpus Fund
2.
(a) (ii)
(b) (iv)
(c) (iv)
3.
(i) a
(ii) d
(iii) a
(iv) a
(v) b
4.
(a) True, because it exists to serve the needs of the reading public.
(b) False, a not-profit organization may undertake trading activities to further its
service objectives
(c) False, outstanding expenses relate to the current accounting year and must be
added to the cash expenses.
(d) False, entrance or admission fees represent amounts which members of not-for-
profit organizations are required to pay at the time of their admission. It is thus
an item of receipt from the viewpoint of the organizations.
(e) False, both capital and revenue expenditures are shown in the Receipts and
Payments Account if they are received in cash.
(f) True, as the donation is received for a special purpose and may be utilized for the
construction of the auditorium only, it should be created to Building Fund Account
and not to the Income and Expenditure Account.
5.
(a) (iii)
(b) (ii)
(c) (iii)
(d) (iv)
(e) (ii)
ACCOUNTANCY 388
25. Subscriptions credited to the Income and Expenditure Account Rs. 10,000. closing
balance of subscription account Rs. 400 (Credit) and Rs. 500 (Debit)
26. (a) Salaries and Wages paid during the year- Rs. 9,410
(b) Locker rent credited to the Income and Expenditure Account Rs. 3,270
27. Excess of income and expenditure Rs. 2,310 Total of Balance Sheet Rs. 5,830 (opening
capital fund Rs. 3,200; subscription for 2001-2002 Rs. 2,750; subscription outstanding
on 31.3.2002 Rs. 300)
28. Total of the Receipts and Payments Account Rs. 1,45,500 (subscription received in
2002 Rs. 95,000; rent received Rs. 19,250, fixed deposits during the year Rs. 30,000.
29. Closing cash in hand and at bank Rs. 11,510, total of Balance Sheet Rs. 85,260 (opening
capital fund Rs. 80,800)
30. Total of opening Balance Sheet Rs. 68,600. Total of closing Balance Sheet Rs. 74,100
(opening capital fund Rs. 68,300)
31. Balance sheet 4,33,900, Deficit 4,100
CHAPTER 9
Accounts from Incomplete Records
LEARNING OBJECTIVES
state the meaning of incomplete records;
distinguish between Balance Sheet and Statement of Affairs;
calculate Profit or Loss using the Statement of Affairs Method;
prepare Profit and Loss Account and the Balance Sheet;
detect the missing figures/ information by preparing the relevant
account.
ACCOUNTANCY 390
We have so far studied accounting records
of firms, which follow the double entry
system of book keeping. This gives us an
impression that all business units follow
this system. However, in practice all firms
do not maintain accounting records as per
t he accr u al syst em, and hence, t he
Generally Accepted Accounting Principles
(GAAP) are not fully observed by them.
Many small size enterprises keep partial
records of their transactions. But, it is
essential for them to know the profit or
loss and the financial position of the firm
for a year. This chapter deals with the
ascer t ainment of p r ofit or loss and
financial position of the firm from its
incomplet e records. For t his purpose,
chapter is divided into three sections.
Sect ion I exp lains t he meaning of
incomplete records and reasons thereof.
Section II deals with the ascertainment of
p r ofit or loss by st at ement of affair s
method. Section III outlines the process
whereby the profit or loss and financial
position could be ascertained by using
principles of double entry system.
9.1 Meaning of Incomplete Records
Accounting records, which are not kept
according to double entry system, are
known as incomplete records. Though some
may refer to it as single entry system it is a
misnomer. There is no system defined as
single entry system. It is also not a short
cut method as an alternative to the double
entry system. One can say that when a firm
does not have a double entry system of book
keeping, it is having partial records. Thus,
records are usually referred to as incomplete
records.
Und er su ch a sit u at ion, nor mally
transactions of cash, debtors and creditors
are recorded by maintaining cashbook,
debtors and creditors accounts. Other
information relating to assets, liabilities,
exp enses and r evenu es ar e p ar t ially
recorded which requires careful scrutiny
to prepare the accounts.
9.2 Reasons for Incomplete Records
Incomplete records may be due to partial
recording of transactions as is the case
with small shopkeepers such as grocers
and vend or s. In case of lar ge sized
organisations, the accounting records may
be rendered to the state of incompleteness
due to natural calamity, theft or fire. Thus,
partial recording of business transactions
may takes place due to:
Lack of knowledge about double
entry system.
Deliberate omission to maintain
r ecor d s t o t ake ad vant age of
taxation.
Unable t o maint ain his/ her
business transactions because of
the time, effort and cost involved.
Loss of records due to fire, theft or
natural calamity.
9.2.1 Li mi t at i ons of Incompl et e
Records
Incompleteness of accounting records by
it self is a d r awback of t he syst em.
Following are the limitations of partial
records:
Ar it hmet ical accu r acy of t r an-
sact ions r ecor d ed in t he books
cannot be checked fr om
ACCOUNTS FROM INCOMPLETE RECORDS 391
incomplete records because trial
balance cannot be prepared.
Internal checks cannot be enforced,
which incr ease t he chances of
cheating and fraud.
Cor r ect ascer t ainment and
evaluation of the financial results
of business operations cannot be
made. This hamper s t he fut ur e
decisions about the business.
9.3 Accounts from Incomplete
Records
It is necessar y t o know t he r esu lt of
business activities to assess the efficiency
and success or failure of the organization.
This gives rise to the need for preparing
the financial statements to disclose:
The profits made or loss sustained
by the firm during a given period,
and
To d isclose t he amou nt of
asset s and liabilit ies as at t he
closing d at e of t he accou nt ing
period.
This is true even for firms which have
incomplete records. The problem faced in
this situation is how to ascertain profit or
loss for an accounting year and determine
the financial position of the entity at the
end of t hat year for m t he incomplet e
records. This problem can be solved by-
Ascertaining the profit or loss by
preparing the Statement of Affairs
at the beginning and at end of the
accounting period, and then analyse
t he changes in owner s equit y
during the accounting period.
Preparing profit and loss account
and balance sheet by putting the
accounting records in proper order.
9.3.1 Ascert ainment of Profit or Loss
by preparing t he St at ement of
Affairs
Under this method, statement of assets
and liabilities at the beginning and at the
end of the relevant accounting period are
prepared to ascertain the change in owners
equity at the end of accounting period.
This is followed by the statement showing
ascertainment of profit by analyzing non
operating changes in owners equity. The
statements so prepared show assets on one
side and the liabilities on the other just as
in case of a balance sheet. The difference
between the totals of the two sides is
known as owners equity. This can be also
exp r essed in t he for m of accou nt ing
equation as follows:
The above equ at ion is r ear r anged t o
ascertain the owners equity as follows-
Owners Equity = Assets Liabilities
Conversely, there may be a situation when
the liabilities may exceed the total assets.
In such a case, the difference will indicate
loss carried forward from the previous
year. In this case, owners equity will be
negat ive.
Thou gh t he St at ement of Affair s
appears t o resemble wit h t he balance
sheet, but it is not a balance sheet, because
t he balances of var iou s asset s and
liabilities are not derived from the ledger
accounts.
The d iffer ence bet ween owner s
equity at two points, i.e. opening and
closing, represents the increase or decrease
ACCOUNTANCY 392
which is to be adjusted for withdrawals
made by the owner and the new capital
int r od u ced by t he him d u r ing t he
accounting period to ascertain the change
in owner s equ it y d u e t o op er at ing
activities. In case, the balance is positive it
will indicate the profit earned during the
year, while in case of negative balance it
will be the loss sustained by the firm.
To ascer t ain t he p r ofit or loss,
following steps are to be taken:
St ep 1
Calculate owners equity at the beginning
(opening owners equity) and at the end
of the period (closing owners equity).
St ep 2
Subtract the opening balance of owners
equity from closing balance of owners
equity. Here, there may be two situations:
(i) The change in owners equity may
be positive, i.e., excess of closing
owner s equ it y over op ening
owners equity.
(ii) The change in owners equity may
be negative, i.e., excess of opening
owner s equ it y over closing
owners equity.
St ep 3
In case of introduction of fresh capital
and/ or withdrawals made by the owner
the following adjustments are required:
(i) Subt r act t he amount of capit al
introduced during the period from
the amount calculated in step 2.
(ii) Add the amount of withdrawals
mad e by t he owner d ur ing t he
period to the amount calculated in
step 2.
St ep 4
If the net result is positive, it represents
profit and if it is negative, it represents
ear ned loss su st ained d u r ing t he
accounting year.
This process of measuring profit or
loss is su mmar ized as follows:
Profit (Loss) = O
1
O
0
+ d I
where;
O
0
= A
0
L
0
O
1
= A
1
L
1
O
0
= Owner Equity at the beginning
A
0
= Assets at the beginning
L
0
= Liability at the beginning
O
1
= Owners Equity at the end
A
1
= Assets at the end
L
1
= Liability at the end
I = Introduction or addition to the
capital during the period
D = Withdrawals during the period
O = Change in owners equity
Illust rat ion 1 (Preparation of Statement of
Profit )
Calcu lat e t he p r ofit or loss fr om t he
following data:
Withdrawals by the proprietor during the
year Rs. 30,000.
Capital at the beginning of the year i.e., 1
Jan. 2001 Rs.1,20,000.
Capital at the end of the year i.e., 31 Dec
2001 Rs. 2,00,000.
Capit al br ou ght in by t he pr opr iet or
during the year Rs. 50,000.
Il l ust rat i on 2 (Preparat ion of Closing
Statement of Affairs)
Bharat started his readymade garments
business on January 1, 2001 with a capital
of Rs. 50,000. He was pur -chasing
readymade dresses of well-known brands.
He was able to procure credit from the
suppliers. There were a few shopkeepers
fr om near by mar ket s who wer e also
purchasing from him on credit basis. During
the year, he introduced fresh capital of Rs.
15,000. He withdrew Rs. 10,000 for his
personal use. On Dec 31, 2001 his position
was as follows:
Accounts payable Rs.90,000; Accounts
Receivable Rs.1,25,600; Stock Rs. 24,750;
Cash at Bank Rs. 24,980
Calculate profit and loss made by
Bharat during the first year of his business,
using (i) Statement of Affairs Method (ii)
Equations Method.
Solution
Statement of Profit for the year ended 31-12-2001
Particulars Amount
Rs.
Owners equity as on 31 December (O
1
) 2,00,000
Less : Owners equity as on 1 January (O
0
) 1,20,000
Change in owners equity (
o) 80,000
Add : Drawings (D) 30,000
1,10,000
Less : Additional capital introduced (I) 50,000
Profit made during the year (P) 60,000
Solution
I. Statement of Affairs Method
Books of Bharat
Statement of Affairs as on 31.12.2001
Rs. Rs.
Accounts Payable 90,000 Cash at Bank 24,980
Accounts Receivable 1,25,600
Owners Equity 85,330 Stock 24,750
1,75,330 1,75,330
ACCOUNTANCY 394
Statement of Profit for year ending 31-12-2001
Particulars Amount
Rs.
Owners equity as on 31 December (O
1
) 85,330
Less : Owners equity as on 1 January (O
0
) 50,000
Change in owners equity (
0
) 35,330
Add : Drawings (D) 10,000
45,330
Profit made during the year (P) 30,330
II. Equations Method
O
1
= A
1
- L
1
(1)
O
0
= A
1
- L
1
(2)
P = O
1
- O
0 +
D I (3)
where :
O
1
= Closing Capital as on 31.12.2001
A
1
=

Assets as on 31.12.2001
L
1
= Liability as on 31.12.2001
O
0
= Opening Capital as on 1.1.2001
A
0
= Assets as on 1.1.2001
L
0
= Liability as on 1.1.2001
D = Drawings during the year 2001
I = Int r od uct ion of ad d it ional capit al
during the year
P = Profit and Loss for the year
O = Change in owners equity
Calculation of Assets as on 31.12.2001
Rs.
Cash at Bank 24,980
Account Receivable 1,25,600
Stock 24,750
Assets (A
1
) 1,75,330
Calculation of Liabilities as
on 31.12.2001
Rs.
Accounts Payable 90,000
Liability (L
1
) 90,000
Calculation of Owners equity as on
31.12.2001
O
1
= A
1
- L
1
O
1
= Rs. 1,75,330 90,000
Owners equity Rs. 85,330
Ascertaining Profit or Loss during the year
P = O
1
-

O
0
+ D I
= (85,330 50,000) + 10,000 15,000
= 35,330 + 10,000 15,000
= 45,330 15,000
Profit = Rs. 30,330
Illust rat ion 3 (Preparation of opening and
closing st at ement of Affairs)
Akhilesh r u ns ABC p r int er s, a small
printing firm. He was maintaining only
some records, which he thought, were
sufficient to run the business. On 1 April
2000 available infor mat ion fr om his
records indicated that ABC printers had
t he following asset s and liabilit ies:
Printing Press Rs. 5,00,000; Building Rs.
2,00,000; Stock of press material Rs. 50,000;
Cash at bank Rs. 65,600; Cash in Hand
Rs.7,980; Dues from customers Rs.20,350;
Payment s d u e t o Accou nt s Payable
Rs.75,340; and Wages pending to workers
Rs.5,000. He withdrew Rs. 8,000 every
month for meeting his expenses. He had
also introduced Rs. 15,000 during the year as additional capital. On 31 March 2001 his
position was as follows: Press Rs. 5,25,000; Building Rs. 2,00,000; Stock of press material
Rs. 55,000; Cash at Bank Rs. 40,380; Cash in hand Rs.15,340; Dues from Customer
Rs.17,210; Payments due to accounts payable Rs. 65,680. Using Statement of Affairs
method, calculation the profit made by ABC printers during the year.
9.4 Preparation of Profit and
Loss Account and Balance Sheet
from Incomplete Records
Generally, the Statement of Affairs method
is used where it is difficult to compile even
a reasonable summary of cash transac-
tions. There is a need to obtain as far as
much information as possible about the
assets and liabilities at the beginning as
well as at t he close of t he year. Bank
ABC Printers
Statement of Affairs as on 31.3.2001
Liabilit ies 1.4.2000 31.3.2001 Asset s 1.4.2000 31.3.2001
Rs. Rs. Rs. Rs.
Accounts 75,340 65,680 Printing Press 5,00,000 5,25,000
Payable
Wages pending 5,000 - Building 2,00,000 2,00,000
Change in
Owners equity 7,63,590 7,87,250 Stock of press 50,000 55,000
Material
Dues from 20,350 17,210
customers
Cash at bank 65,600 40,380
Cash in hand 7,980 15,340
8,43,930 8,52,930 8,43,930 8,52,930
Statement of Profit for year ending 31-3-2000
Particulars Amount
Rs.
Owners equity as on 31 Dec. (O
1
) 7,87,250
Less : Owners equity as on 1 Jan.(O
0
) 7,63,590
Change in owners equity (D
0
) 23,660
Add : Drawings (D) 8000 x 12 96,000
1,19,660
Profit made during the year (P) 1,04,660
ACCOUNTANCY 396
balance can be obtained from the passbook
and cash book with bank column. Value
of fixed assets, may be ascertained from
the purchase documents if available with
the trader or estimated by inquiring from
the supplier of such an asset. Information
should be obtained from the various
documents/ vouchers such as invoices for
sales and purchases receipts for a payment
made and cash obtained.
In some firms detailed information
may be available about business activities.
If details of accounts payable, purchases,
cash received, sales, accounts receivable,
bills r eceivables, bills p ayable, cash
p ayment s, wit h cash su mmar y of
t r ansact ions ar e available, it may be
possible to workout some of the missing
figures by using the logic of double entry
system of accounting. This in turn, will
help in the preparation of Profit and Loss
Account and Balance Sheet.
Her eu nd er , we d emonst r at e how
available infor mat ion can be used t o
p r ep ar e t he accou nt s t o ascer t ain
missing figu r es, which will help in
preparation of Profit and Loss account and
Balance Sheet.
9.4.1 Ascert ainment of Missing
Informat ion about Credit
Purchases and Payables
Credit purchases and Accounts Payables
(creditors and bill payables) are inter-
connected. Therefore, missing information
about the credit purchases and any item
relating to creditors and bills payables can
be obtained by preparing these accounts
simultaneously. Typical Accounts Payable
and Bills Payable accounts are given in
(figure 11.2).
When available information is placed
in these two accounts, one can ascertain
which items are missing. The connecting
items between Bills Payable and Accounts
Payable accounts are: bill accepted during
the year against credit purchases, and
dishonoured bills payable. By making use
of connecting items, missing information
can be ascertained. For example, to calculate
missing information about purchases, the
bills payable account is to be completed/
closed.
Once t he bills payable accou nt is
completed with all the required items
then accounts payable account needs to
be completed. The total credit purchases
made during the year will be available
on the credit side of accounts payable
accou n t . By ad d i n g cash p u r ch ases
(available from the cashbook summary)
to this figure we obtain total purchases
mad e d u r ing t he per iod . If t her e ar e
p u r ch a se r et u r n s, t h ey h a ve t o be
deducted from the total purchases to get
t he net pu r chases. This figu r e of net
pur chases can be placed on t he debit
side of the Profit and Loss Account.
Dr. Total Creditors Account Cr.
Rs. Rs.
Cash (Paid) **** Opening balance ****
Bank **** Bank ****
(Cheques issued) (Cheques dishonoured)
Bills Receivable Bills payable ****
(Endorsed) (Bills dishonoured)
Bills Payable **** Credit Purchases ****
(Bills accepted)
Discount received ****
Purchases returns ****
Closing Balance ****
***** *****
Bills Payable Account
Dr Cr
Rs. Rs.
Bank (bills matured) **** Opening Balance ****
Creditors **** Creditors ****
(Bills accepted)
(Bills dishonoured) ****
Closing balance ****
***** *****
Figure : 11.2
Illust rat ion 4 (Computation of credit
purchases)
The following information is available to
you from the books of M/ s Linsa Traders.
Prepare accounts payable account to find
out the missing information, if any.
Cash paid to accounts payable Rs. 15,000
Cheques paid through bank Rs. 10,000
Bills endorsed Rs 14,500
Bills accepted during the year Rs. 35,000
Discount received Rs. 5,000
Purchases returns Rs. 2,500
Opening balance of accounts Rs. 15,000
payable as on 1 April 2002
Cheques dishonoured Rs. 8,000
Bills dishonoured (bills payable) Rs. 10,000
Balance of accounts payable Rs. 25,000
as on 31

March 2003
ACCOUNTANCY 398
Solution
M/s Linsa Traders
Dr. Accounts Payable Account Cr.
Dat e Particulars J.F Amount Dat e Particulars J.F Amount
Rs. Rs.
Cash (paid) 15,000 Balance b/ f 15,000
Bank 10,000 Bank 8,000
(cheques dishonored) (cheques issued)
Bills Receivable 14,500 Bills payable 10,000
(Bill endorsed) (bills dishonoured)
Bills Payable 35,000 Purchases (Credit ) 74,000
(Balancing figure)
Closing Balance 25,000
1,07,000 1,07,000
Illust rat ion 5 (Calculation of net
purchases)
From the following information, you are
required to calculate Net purchases:
Rs.
Opening Balance of Bill Payable 15,000
Opening Balance of Creditors 18,000
Closing Balance of Bills Payable 21,000
Closing Balance of Creditors 12,000
Bills Payable honoured by firm 26,700
during the year
Returns outwards 3,600
Cash Purchases 77,400
Cash paid to Creditors 90,600
Solution
Dr. Total Creditors Account Cr.
Rs. Rs.
Bills Payable 32,700
1
Opening Balance 18,000
Bills issued
during the year)
Credit Purchases 1,20,900
2
(Balancing figure)
Returns outward 3,600
Cash 90,600
(Bills honoured)
Closing balance 12,000
1,38,900 1,38,900
Solution
Dr. Bills Payable Account Cr.
Rs. Rs.
Cash 26,700 Opening balance 15,000
(Bills honoured)
Closing balance 21,000 Total Creditors 32,700
1
(Balancing figure)
Bills issued
during the year
47,700 47,000
9.4.2 Ascertainment of Missing
Information about Credit
Sales and Receivables
As you have already studied in the chapter
6 based on bills of exchange, that in the
present times sales are made against bills
receivables by raising bills of exchange on
the customers. Only when accepted by the
customers, the bills of exchange become
bills receivable. It is to be noted that credit
sales, Debtors and bills receivable are
interrelated. Debtors and Bills Receivable
account are therefore, prepared simulta-
neou sly. The for mat s of Accou nt s
Receivables (t ot al d ebt or s and Bills
Receivable) are as follows:
Calculation of Net Purchases
Particulars Amount
Rs.
Add: Credit Purchases 1,20,900
2
Total Purchases 1,98,300
Less: Returns Outward 3,600
Net Purchases 1,94,700
ACCOUNTANCY 400
The linking it ems bet ween t he
accounts receivable and bills receivable
are: Bills receivable by customers during
t he p er iod and bills r eceivable
d ishonou r ed d u r ing t he p er iod . By
making use of connecting items missing
infor mat ion can be ascer t ained . For
example, to calculate missing information
abou t net sales, at fir st st age, bills
receivable account is to be completed.
Aft er comp let ing t he bills r eceivable
accou nt s wit h all t he it ems, one can
at t emp t t o comp let e t he accou nt s
receivable account. Once all the items in
both the account are available the credit
sales during the period is ascertained. This
must be added to the cash sales figure
available from the cash book summary to
obtain total sales for the period. In case
any information is available regarding
Total Debtors
Dr. Cr.
Rs. Rs.
Opening Balance **** Cash (received) ****
Bills Receivables Bank ****
(Dishonoured) **** (Cheque received)
Bank Discount allowed ****
(Cheque dishonoured) Bad debts ****
Sales returns ****
Bills Receivable ****
(bills received)
***** ****
Bills Receivable
Dr. Cr.
Rs. Rs.
Cash (bills honoured) ****
Opening Balance **** Bank and Discount ****
Debtors **** (Bills discounted)
(bills received) Debtors (Bills ****
Retained & Dishonored)
Accounts Payable ****
(endorsed to creditors)
***** *****

sales returns, it is deducted from the total
sales to obtain net sales. The figure of net
sales is placed on the credit side of Profit
and Loss Account.
9.4.3 Preparing summary st at ement
of cash t ransact ion t o ascert ain
missing informat ion
Summary of cash transactions record the
cash receipts and cash payments. Cash
receipts indicates opening balance of cash
and receipts on account of cash sales, cash
received from debtors, cash collected on
mat urit y of bills receivable and ot her
receipts such as interest, commission and
tax refund. The cash payments includes
p ayment t o cr ed it or s, p ayment on
retirements of bills payables, payments
of d u es, exp enses and t axes. The
with-drawals made by the proprietor/
partner is also shown on the payments side
along with the closing balance. While
preparing a cash book summary one may
find a missing figure. In case of bank
transactions, a bank overdraft appears on
the other side. The balancing figure has to
be car efully ident ified as t he missing
figure.
To ascertain missing information for
pr epar at ion of final account s, all t he
information available should be carefully
r ecor d ed by simu lt aneou sly op ening
relevant accounts. Then, balance those
accounts, which have only one missing
infor mat ion p ass t r ansfer ent r ies by
making use of connecting items.
Part iculars Source of Informat ion
Closing Assets (except stock) and Closing Statement of Affairs
Liabilities, Capital.
Opening Assets, Liabilities and Capital Opening Statement of Affairs
Purchases (Cash and Credit) Accounts Payable, Purchases Account, Cash Summary
Statement
Sales (Cash and Credit) Cash Sales fr om Cash Summar y, Cr ed it Sales fr om
Accounts Receivable Account and Sales Account
Expenses and Revenues As p er Cash Su mmar y St at ement and ad d it ional
information for outstanding and prepaid expenses
Losses and Gains From all the accounts and scattered information
Bills Receivable received Bills receivable Account/ Account Receivable Account
Bills Payable accepted Bills Payable Account/ Accounts Payable Account
Opening and Closing balance of Cash Summary of Cash and bank transactions.
Figure 11.2: Detecting the Missing Information
ACCOUNTANCY 402
Illust rat ion 6 (Preparation of Accounts
Receivable Account )
From the following information supplied
by Excel Enterprises of Ganesh, prepare
the accounts receivable account and find
out the missing figure, if any.
Rs.
Opening balance of Accounts
Receivable as on 1

April 2002 1,00,000
Bills Receivable dishonoured
during the year 10,000
Cheque dishonoured (Bank) 5,000
Cash received from Accounts
Receivable 25,000
Cheque received and deposited 10,000
in the bank
Bad debts 2,500
Sales Returns 6,000
Closing balance of Accounts 10,000
Receivable as on
31

March 2002
Illust rat ion 7 (Ascertainment of Credit Sales)
From the following information, Calculate the accounts of credit sales
Transact ions 1.1.2000 31.12.2000
Rs. Rs.
Balance of Debtors 30,000 22,500
Balance of Bill Receivables 9,000 12,000
Transactions made during the year:
Cash received from customers during the year 1,48,500
Solution
Dr. Accounts Receivable Account Cr.
Rs. Rs.
1 Apr Opening balance of 1,00,000 Cash (received from 25,000
Accounts Receivables Accounts Receivable)
Balance b/ f
2000 Bills Receivables 10,000 Bank (cheque 10,000
(Dishonoured) received)
Bank 5,000 Discount allowed 4,500
(cheque dishonoured) Bad debts 2,500
Sales returns 6,000
(Balancing figure
being bills
receivable issued
during the year)
Balance c/ f 10,000
(Closing balance of
of Accounts Receivables)
1,15,000 1,15,000
Dr. Tatal Debtors Account Cr.
2000 Rs. 2000 Rs.
1 Jan Balance b/ f 30,000 31 Dec Cash 1,48,500
Bills Receivable 7,500 (Collected from
(Dishonoured) accounts
Sales 1,77,000 receivable)
(Balancing figure) Discount 1,500
being credit sales Bills receivable 31,500
1
(Transfer from
bills receivable
account)
Bad Debts 4,500
Balance c/ f 22,500
2,14,500 2,14,500
Solution
Dr. Bills Receivable Account Cr.
2000 Rs. 2000 Rs.
1 Jan Balance b/ f 9,000 31 Dec Cash 21,000
Accounts Receivable 31,500 Accounts 7,500
Receivable
(B/ R received) (Dishonoured)
(Balancing figure Balance c/ f 12,000
being bills
receivable during
the year)
40,500 40,500
Returns Inwards 6,000
Cash Received against Bills 21,000
Bad Debts 4,500
Bills Receivable (Dishonoured) 7,500
Solution
I. Calculation of credit sales during the year
ACCOUNTANCY 404
Illust rat ion 8 (Colcutation of Net Sales)
From the following information calculate the net sales made during the year.
Transact ions Amount
Rs.
Debtors on 1.1.2000 61,200
Cash received from debtors 1,82,400
during the year
Returns Inward 16,200
Accounts Receivable on 82,800
31.12.2000
Bad Debts 7,200
Cash Sales as per Cash Book 1,69,200
Solution
I Calculation of Credit Sales made during the year
2000 Rs. 2000 Rs.
1 Jan Balance b/ d 31 Dec Cash 1,82,400
(Opening Bal) 61,200 received from
Sales 2,27,400 Accounts
(Balancing figure) Receivable)
being credit sales Return Inwards 16,200
Bad Debts 7,200
Balance c/ f 82,800
(Closing Balance)
2,88,600 2,88,600
II Calculation of Net Sales during the year
Part iculars Amount
Rs.
Cash Sales as per cash book 1,69,200
Add: Credit Sales 2,27,400
Sales 3,96,600
Less: Returns Inwards 16,200
Net Sales 3,80,400
Solution
Dat e Part iculars J.F Amount Dat e Part iculars J.F Amount
Rs. Rs.
Balance b/ f (Opning) 9,000 Cash 30,000
Credit Sales 34,400 Discount Allowed 1,400
(Balancing Figure) Balance c/ f 12,000
(Closing)
43,400 43,400
9.5 Preparation of Final Accounts
Let us now take up few comprehensive
illustrations and study how complete final
accounts can be prepared from incomplete
records.
Illustration 9
Roshan Washing House did not keep his
book of account s und er d ouble ent r y
system. From the following information
available from his records, prepare Profit
and Loss account for the year ending
31-3-2000 and a balance sheet as on that
date, depreciating the washing equipment
@10%.
Other Information
31.3.2000 31.3.2001
Rs. Rs.
Accounts Receivable 9,000 12,000
Accounts Payable 14,400 6,800
Stock of Materials 10,000 16,000
Washing Equipment 40,000 40,000
Furniture 3,000 3,000
Discount allowed during the year 1,400
Discount Received during the year 1,700
Rs. Rs.
Balance b/ f Cash Purchases 14,000
(Opening Balance) 8,000 Paid to Creditors 20,000
Cash Sales 40,000 Sundry Expenses 6,000
Received from accounts 30,000 Cartage 2,000
Drawings 8,000
Balance c/ f 28,000
(Closing balance)
78,000 78,000
receivables
ACCOUNTANCY 406
Statement of Affairs as on 1-4-2000
Part iculars Amount Part iculars Amount
Rs. Rs.
Accounts Payable 14,400 Washing Equipment 40,000
Owners Equity 55,600 Furniture 3,000
(Balancing Figure) Stock of Material 10,000
Accounts Receivable 9,000
Cash 8,000
70,000 70,000
Profit and Loss Account for the year ending 31-3-2000
Part iculars Amount Amount Part iculars Amount Amount
Rs. Rs. Rs. Rs.
Opening Stock 10,000 Sales:
Purchases: Cash 40,000
Cash 14,000 Credit 34,400 74,400
Credit 14,100 28,100
Cartage 2,000 Closing Stock 16,000
90,400 90,400
Sundry Expenses 6,000 Gross profit b/ f
Discount Received 50,300
Depreciation on 4,000
washing equipment 1,700
Net Profit transferred to 40,600
Capital a/ c
52,000 52,000
Dr. Accounts Payable Account Cr.
Dat e Part iculars J.F Amount Dat e Part iculars J.F Amount
Rs. Rs.
Cash 20,000 Balance b/ f 14,400
Discount 1,700 (Opening)
Received Credit Purchase 14,100
Balance c/ f (Closing) 6,800 (Balancing Figure)
28,500 28,500
Dr. Cr.
Balance Sheet as on 1-3-2001
Rs. Rs.
Owner Equity 55,600 Washing equipment 40,000
Add: Net Profit 40,600 Less: Depreciation 4,000 36,000
96,200 Furniture 3,000
Less: Drawings 8,000 88,200 Stock of materials 16,000
Accounts Payable 6,800 Accounts Receivable 12,000
Cash 28,000
95,000 95,000
Incomplete Records
Statement of Affairs
Incomplet e Records: Incomplete records refer to lack of accounting records according to
the double entry system. Degree of incompleteness may vary from highly disorganized
records to organized but still not complete.
Difference bet ween St at ement of Affairs and Balance Sheet : A Statement of Affairs is a
statement showing various assets and liabilities of a firm on date, with difference between
the two sided denoting owners equity. Since the records are incomplete, the values of assets
and liabilities are normally estimates based on information available. They are not the
balances taken from properly maintained ledger like in the case of Balance Sheet. The balance
sheet is derived from a set of books maintained on the basis of double entry system.
Comput at ion of Profit and Loss from Incomplet e Records: The statement of affairs is used
to compute Profit or Loss when a firm has a highly disorganized set of incomplete records.
It may not be possible to prepare a cash summary in such a situation. Two statements of
affairs are prepared to find out opening and closing equity amounts. To the difference
between the closing and opening equity , any sum withdrawn from business are added
back and any additional capital introduced during the year are deducted. To find out Profit
and Loss made for the period.
Preparat ion of Profit and Loss Account and Balance Sheet : When cash summary of a firm
is available along with information about personal accounts of creditors and customers, an
attempt can be made to prepare the Profit and Loss Account and Balance Sheet. Missing
figures about purchases, sales, debtors, and creditors can be obtained by preparing performa
accounts of debtors, creditors, bills receivables and bills payable using the logic of double
entry system. Once a Profit and Loss Account and Balance Sheet are prepared, it will be
possible for the firm to start a complete accounting system for future.
ACCOUNTANCY 408
EXERCISES
Objective Type Questions
1. Mult iple Choice Quest ions
(a) Incomplete records are generally found in use by
(i) Small Traders
(ii) Society
(iii) Company
(iv) Government
(b) When Closing Owners Equity is greater than Opening Owners Equity, it denotes
(i) Profit
(ii) Loss
(iii) Profit, if there is no introduction of fresh capital
(iv) No profit no loss
(c) If owners equity in the beginning is Rs 21,000. Fresh capital introduced during
the year is Rs. 7,000. Amount withdrawn during the year is Rs. 13,000, then the
closing owners equity will be:
(i) Rs. 27,000
(ii) Rs. 15,000
(iii) Rs. 41,000
(iv) Rs. 1,000
(d) Credit Sales is obtained from:
(i) Bills Receivables
(ii) Accounts Receivables
(iii) Accounts Payable
(iv) Cash Summary
(e) Credit purchases can be obtained from:
(i) Statement of Affair
(ii) Bank
(iii) Bills Receivable
(iv) Account Payable
Information about bills received dishonoured can also be obtained from:
(v) Summary of cash transaction
(vi) Profit and Loss account
(vii) Accounts Payable
(viii) Accounts Receivable
(f) Discount received from accounts payable may be obtained from
(i) Cash statement
(ii) Bills Receivables
(iii) Accounts Receivables
(iv) Accounts Payables
2. Fill in the blanks
(a) To find out the profit, closing capital is to be adjusted by ________________
drawings and _____________________ introduction of fresh capital.
(b) If closing owners equity is Rs 1,000; opening owners equity is Rs. 500; profit is Rs
700, then there must be a ___________________________ of Rs 200 during the year.
(c) Cr ed it p u r chase can be ascer t ained as t he balancing figu r e in t he
_____________________.
(d) The amount received from debtors can be traced from ___________________.
(e) Increase in owners equity at the end of the period represents ________________.
3. Calculate the following amounts
(a) Calculate value of Opening Stock
Pu r ch a s es Rs . 17,500
Sales Rs. 45,000
Closing Stock Rs. 13,000
Gross Profit @33
1/ 3
% on Sales.
(b) Calculate the amount of closing stock
Opening Stock Rs. 17,500
Purchases Rs. 37,500
Sales Rs. 60,000
Gross Profit @25% on Cost.
(c ) Mr. Anshul started a business on 1.1.96 without maintaining proper accounts. On
personal
Inquiries and scruting of other papers the following information is obtained.
1996 1997
Rs. Rs.
Purchases 74,000 68,500
Sales 75,000 90,000
Closing Stock
30,000
Goods privately consumed 1,000 1,500
Prepare Profit and Loss account
Calculate Closing Stock of 1996 and Opening Stock of 1997.
Q 4. From the following information calculate the amount of Net Sales, Net Purchases
and Closing Stock in Trade.
Particulars 1.1.98 31.12.98
Rs. Rs.
Account Receivables 31,800 26,500
Account Payables 24,000 16,000
ACCOUNTANCY 410
Bills Payable 21,000 29,000
Bills Receivable 8,800 7,000
Stock in Trade 10,000 ?
Transaction during the year:
Discount received 800
Bills Payable discharge 35,600
Bills Receivable collected 20,900
Return Outward 4800
Bad Debts 2,800
B/ R Dishonoured 1,800
Cash paid to Creditors 1,20,000
Cash received from Debtor 69,000
Cash Sales 40,900
Cash Purchased 1,03,200
Uniform Sales Price of goods being cost plus 25 per cent
5. What are incomplete records?
6. What are the possible reasons for maintaining incomplete records?
7. Differentiate between a Statement of Affairs and a Balance Sheet?
8. What practical difficulties are encountered by a trader due to the incompleteness of
accounting records?
Long Answers Questions
9. What is meant by a Statement of Affairs? How can the Profit or Loss of a trader be
ascertained with the help of a Statement of Affairs?
10. Is it possible to prepare the Profit and Loss Account and the Balance Sheet
fr om t he incomp let e books of accou nt s kep t by a t r ad er . Do you agr ee?
Explain?
11. Describe the procedure of ascertaining credit sales, collection from accounts
receivables, payments to accounts payable closing balance and bills receivable.
12. Explain how the following may be ascertained from incomplete records:
(a) Opening owners equity and closing owners equity
(b) Credit sales and credit purchases
(b) Payments to creditors and collection from debtors
(c) Closing balance of cash
13. Jeevan Lal owns a tailoring shop. He does not maintain complete double entry books of
accounts. From the following information, help Jeevan Lal to prepare Statement of Affairs
and Profit earned during the year ending 31

December 2001.
Particulars Amount (Rs.) Amount (Rs.)
Cash in Hand 20,000 25,000
Bank Overdraft 70,000 45,000
Stock in trade 9.25.000 1,07,500
Sundry Creditors 65,000 55,000
Sundry Debtors 80,000 75,000
Bills receivables 20,000 12,500
Furniture and fittings 12,500 10,000
Machinery 1,00,000 90,000
Building 1,25,000 1,22,500
Bills Payables 10,000 15,000
Motor Vehicles 60,000
Unpaid Expenses 2,000 1,500
14. Mr Kishan who owns a food grains shop, does not maintain complete double entry
books of accounts. From the following details determine the Profit for the year and
Statement of Affairs at the end of the year.
Rs 10,000 (cost) furniture was sold for Rs 50,000 on 1

January 2001; 10% depreciation is
to be charged on furniture . Mr Kishan has drawn Rs 10,000 per month . An amount of
Rs 20,000 was invested by Mr Kishan in 2001.
Particulars 1 Jan 2001 31 Dec 2001
(Rs.) (Rs.)
Stock 4,00,000 6,00,000
Accounts Receivable 3,00,000 4,00,000
Cash 20,000 10,000
Bank 1,00,000 (overdraft) 5,000
Accounts Payable 1,50,000 2,50,000
Out standing expenses 50,000 80,000
Furniture 30,000 20,000
Bank balance on 1 January 2001 is as per cash book, but there was a bank overdraft on 31
December 2001 as per bank statement. Rs 20,000 cheques drawn in December, 2001 have not
been encashed within the year.
15. The following figures are available with Suresh who keeps his books on Single Entry
System
ACCOUNTANCY 412
Particulars 1-1-98 31-12-98
(Rs.) (Rs.)
Sundry Creditors 3,600 3,800
Sundry Debtors 3,900 4,500
Bills Receivable 2,500 3,400
Bills Payable 1,600 2,300
Cash in Hand or at Bank 7,000 1,200
Additional Information is given below:
Cash Received against Bills Rs. 10,000
Cash Paid against Acceptance Rs. 14,300
Payment made to Creditors Rs. 14,700
Discount allowed to Customers Rs. 200
Find out Credit sale and Credit Purchases made during the year.
16. Mr Rajan who was not keeping a full accounting system gives you the following
information for the year 31

March 2001.
Summary of Cash Book
Dr. Cr
Rs. Rs.
Balance at Bank 43,500 Ranjans Drawings 1,55,200
Accounts Receivables 3,84,000 Accounts Payable 2,71,000
Bills Payable 93,000
Accounts Receivable 1,20,000 Wages 3,20,000
realised Salaries 1,65,000
Commission 15,000 Rent and taxes 44,000
receives Insurance 8,000
Cash sales 4,86,000 Carriage 12,000
Balance c/ d Advertising 13,300
10,82,000 10,82,000
Particulars of other assets and liabilities
Rs. Rs.
April 1 2000 March 31 2001
Stock in hand 1,87,000 23,400
Accounts receivable 1,20,000 1,40,000
Accounts payable 90,000 15,000
Bills receivable 40,000 50,000
Bills payable 10,000 12,000
Machinery 1,20,000 1,20,000
A provision of Rs 14,500 is required for doubtful debts and depreciation at 15% is written off
on machiner y and fu r nit u r e. Rs 30,000 is ou t st and ing for wages and
Rs.12,000 for salaries. Insurance has been paid to the extent of Rs. 2,500. Legal expenses
outstanding are Rs. 7,000. Prepare the opening Statement of Affairs, Closing Statement of
Affairs, Statement of Profit and Balance Sheet.
17. Mr Kishore could give only the following information about his business transactions.
Prepare a Profit and Loss Account for the year ended 31 March 2002, together with
Balance Sheet on that date.
Summary statement of transactions
Rs. Rs.
Intrest 1,000 Balance at bank as 24,250
charges 20,000 on 31 March 2001
Personal 85,000 Cash in hand as on 750
withrawals 79,000 31 March 2001
Staff salaries 1,50,000 Accounts receivable 2,50,000
Other business Cash sales 1,50,000
expenses
Accounts
payable paid
ACCOUNTANCY 414
Further details are:
Particulars Amount Amount Particulars Amount Amount
Rs. Rs. Rs. Rs.
1 April 31 1 April 31 March
2001 March 2001 2002
2002
Stock 90,000 1,02,200 Furniture 10,000 10,000
Accounts 80,000 55,000
Payable Office 1,50,000 1,50,000
premises
Debtors 3,00,000 3,00,000
Pr ovid e 5% int er est on Kishor es Cap it al balance as on 1 Ap r il 2001. Pr ovid e
Rs 15,000 for doubtful debts, 5% depreciation on all fixed assets, 5% group incentive
commission to staff has to be provided for on net profit after meeting all expenses and
commissions.
18. Babulal ,keeps a cash book , carbon copies of the customers statements, which are
marked off when settled and a file of creditors for running his stationary business.
Analysis of cash record for the year ended 30

June 2002, shows :
Rs. Rs.
Debt due by 2,32,430 Rent rates and taxes 10,200
customers collected Trade expenses 15,360
Creditors accounts 1,94,070 Purchase of a delivery 4,800
for goods paid van 5,600
Cash purchases 18,230 Cash drawn for 15,360
Wages 24,190 personal use 4,800
5,600
Particulars 1 July 30 Particulars 1 July 30 June
2001 June 2001 2002
2002
Balance at 18,200 Crediors 16,320
Bank Rent 11,460 1,750
Till float 300 Trade 1,500 960
on imprest expenses 3,200
system Delivery van 740
Debtors 12,620 14,790
Stock 17,400 19,250
Sales made during the year were Rs 2,85,300.You are required to prepare :
(a) The Profit and Loss account for the year ending 30

June 2002.
(b) Balance Sheet as on that date.
19. Radha Garments commenced business on 1

April 2001 with Rs. 45,000 as capital. She
maintains books on single entry system. On 31

March 2002, books revealed the following
information:
Account Payable Rs. 25,000
Furniture and Fittings Rs. 50,000
Stock of ready-made garments Rs. 40,000
Accounts Receivables Rs. 45,000
Cash Rs. 10,000
Drawings Rs. 750 per month
Additional Capital introduced: Rs. 20,000
5% accounts receivable proved as bad
Interest on capital 5% p.a.
Depreciation on furniture and fittings 10% p.a.
Provision for baddebts @2.5% and Statement of Affairs ended 31

March 2002.
20. Ganesh is conducting business as a retail merchant. He does not maintain regular
account books. From cash sales effected, by him he makes business and other payments.
He always retains cash of Rs. 10,000 on hand and deposit the balance in the bank. The
inventories for for the year ended 31

December 2001 are lost. However, he informs you
that he has sold goods invariably at a price which yields him a profit of 33.33 % on
cost. From the following information supplied to you, prepare Profit and Loss Account
and a Balance Sheet for the year ended 31 December 2001.
Assets and Liabilities 1 Jan 2001 31 Dec 2001
Rs. Rs.
Cash in hand 10,000 10,000
Cash at bank 40,000 90,000
Accounts receivable N.A. 80,000
Stock of goods 10,00,000 3,50,000
2,80,000 N.A.
ACCOUNTANCY 416
Analysis of the bank pass book reveals the following information:
Particulars Amount Rs.
Payment to accounts payables 7,00,000
Business expenses 1,20,000
Receipts from accounts receivables 7,50,000
Loan from Ajhit(taken on 1 Jan 2000 @10% p.a) 1,00,000
Deposit in the bank 1,00,000
In addition he paid cash Rs 20,000 to accounts payables and salaries Rs 40,000. He retained
Rs 8,000 cash for his personal expenses.
21. Nagi furnishes you the following particulars:
Make 5% provision for doubtful debts and provide 10% depreciation on furniture.
The difference in cash may be taken as drawings on cash sales.
Particulars 31 Dec 1999(Rs.) 31 Dec 2000(Rs.)
Cash at Bank 32,000 48,000
Stock 2,24,000 1,76,000
Account Receivables 4,00,000 3,60,000
Account Payables 1,76,000 1,92,000
Out standing salary 40,000 6,400
Other Transactions:
Rates and Taxes 6,400
Postage Stamps 7,200
Salary 46,000
Creditor 6,24,000
Debtors 7,84,000
Conveyance 4,000
Bad Debts 4,000
Discount Received 2,400
Purchase return 8,000
Sales Return 16,000
22. Mr. S. Senapati Started business as a provision merchant on Jan 1

1996. He opened a
bank account for the business with Rs. 25,000 and immediately spend Rs 12,500 on
fixtures and fittings. The only records kept were of cash Sales which amounted to Rs.
37,500 in 1996 and Rs. 45,000 in 1997. There were no Credit Sales. The following facts
were ascertained.
(1) All expenses of the business had been met by cheque, and an analysis of the bank pass
book showed the following payments in 1996 and 1997:
Rs.
Purchases (Rs.37, 000 on related to 1996) 63,750
Rent and rates 5,100
Salaries 11,000
Advertising 1,400
Other expenses 2,880
(2) The value of the stock on 31 December 1997 was Rs.15, 000. No stock was taken on 31
December 1996,but a uniform rate of gross profit may be assumed.
(3) Liabilities outstanding and on 31 December 1997, were : Rs.
Purchases 7,500
Advertising 500
Other expenses (light, heat, telephone, etc.) 170
(4) Amounts paid in advance at 31 December 1997 were: Rs.
Rates 100
Other Expenses (insurance ) 50
(5) All business expenses arose equally in two periods.
(6) Goods were taken from stock for private consumption, the estimated cost being Rs. 500
in 1996 and Rs 7,50 in 1997.
(7) Private Drawings amounting Rs. 6,620 were met out of cash received and balance was
banked.
(8) Private Income of Rs 2,250 had been paid into the bank.
The fixtures and fittings are to be written off over 10 years in equal installments.
On the basis of the foregoing information prepare :
(a) The Trading and Profit and Loss Account of each of the years 1996 and 1997; and
(b) The Balance Sheet as on 31 December 1997.
23. Saxena keeps his books by Single Entry System. An analysis of his Cash
Book for the year ended 31

December 1993, is as follows:
Cash Receipt s: Rs.
From Accounts Receivables 41,000
From Cash Sales 37,000
From Saxena as additional Capital on 1

April 1993 10,000
Total Cash Receipts 88,000
ACCOUNTANCY 418
Cash Payment s: Rs.
Paid to Accounts Payables 16,200
Productive Expenses 5,400
Salary Paid 8,100
Sundry Expenses 6,500
New Furniture purchased 4,000
Private Payments 7,800
Total Cash Payments 72,000
Assets and Liabilities as on: 31

Dec. 1992 31

Dec. 1993
Rs. Rs.
Accounts Receivables 12,000 ?
Accounts Payables 6,200 ?
Cash 8,000 ?
Stock 20,200 16,100
Other Informations
(1) Credit Sales during the year were Rs.48,000
(2) Sales Returns Rs.2,600
(3) Credit Purchases during the year were Rs.20,000
(4) Discount allowed to Debtors Rs.200
(5) Discount received from creditors Rs.300
(6) Bad Debts written off during the year were Rs.1,200
Adjustments
(1) Write off further bad debts Rs.1,000
(2) Provide 5% for doubtful debts and 2% for discount on Accounts Receivables
(3) Allow interest on Capital @10% per annum
ANSWERS
1. (a) i
(b) ii
(c) i
(d) ii
(e) iv
(f ) i
2. (a) Adding, Subtracting
(b) Drawing
(c ) Accounts Payables
(d) Cash Summary
(e) Profit
3. Opening owners equity Rs. 3,03,000
Closing owners equity Rs. 3,86,000
Profit Rs. 83,000
5. Credit Sales Rs. 10,800
Credit Purchase Rs. 29,200
Profit during the year Rs. 1,60,900
8. Gross Profit Rs. 45,800
9. Gross Profit Rs. 3,67,200
Net Profit Rs. 1,54,000
10. Gross Profit Rs. 3,10,000
Net Profit Rs. 1,40,000
Rs. 15,000
Net Profit Rs. 800
Rs. 3,300

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CHAPTER 1

91 ORIGIN AND RECORDING OF TRANSACTION

ACCOUNTS FROM INCOMPLETE RECORDS 401

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