Financial Accounting for Online

[Financial Accounting]

ABF 103

[ACeL] In business, however, it is a more serious matter. The student may not

be questioned by his parents or the housewife may just meet her

expenses as and when they come without bothering to find out how

much she spent, but in business it is a must. You cannot run a

business unless you know how much you owe outsiders and how

much outsiders owe you. And when you invest money in a business,

wouldn‟t you like to know whether you‟ve recovered it, increased it

or lost it?

[Amity University]

PREFACE

This Financial Accounting module seeks to discuss the concept of

accounting & their application in the organization. The principle concern

of the book is to show how financial accounting theory can be applied to

solve the problems in practice. An attempt has been made to relate

theory to practice to make it understandable easily for all kind of

students i.e. from accounts or non-accounts background.

Each chapter is having various illustrations relating to each topic

covered and followed by numerous questions and multiple choice

questions also, which are designed to reinforce concepts & procedure

presented in the body of chapter.

I wish to express my sincere thanks to many of the authors who have

received due acknowledgements, without whom, this module would not

have been completed.

I have taken every possible effort to remove the errors either of principle

or of printing. Even then, if the reader comes across any error, he/she is

requested to point out the same to me.

I hope that many students will find this module interesting & helpful.

Further suggestion for the improvement of the module is solicited.

By- Tanu Agrawal

Table of Contents PREFACE ........................................................................................................................................................ 2

CHAPTER-1 MEANING & SCOPE OF ACCOUNTING ...................................................................................... 6

1.1 MEANING OF ACCOUNTING.................................................................................................................... 6

1.2 The Accounting Process/Accounting Cycle: ............................................................................................ 7

1.3 ACCOUNTANCY, ACCOUNTNG & BOOK-KEEPING: - ............................................................................... 8

1.4 BRANCHES OF ACCOUNTING: ............................................................................................................... 10

1.5 OBJECTIVES OF ACCOUNTANCY: ........................................................................................................... 10

1.6 USERS OF FINANCIAL STATEMENT ........................................................................................................ 10

1.7 ADVANTAGES OF ACCOUNTING ........................................................................................................... 11

Chapter1- End Chapter Quizzes .................................................................................................................. 12

CHAPTER 2 ACCOUNTING PRINCIPLES, CONVENTIONS AND CONCEPTS ................................................. 14

2.1 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: .............................................................................. 14

2.2 Acceptance of accounting principles depends on following three criteria: ......................................... 14

2.3 ACCOUNTING CONCEPTS: ..................................................................................................................... 15

2.4 ACCOUNTING CONVENTIONS: .............................................................................................................. 17

End Chapter Quizzes ................................................................................................................................... 18

CHAPTER 3 ACCOUNTING STANDARDS ..................................................................................................... 20

3.1 MEANING OF ACCOUNTING STANDARDS ............................................................................................. 20

3.2 INTERNATIONAL ACCOUNTING STANDARDS ........................................................................................ 20

3.3 The list of accounting standards issued by the IASC is given below: .................................................... 21

3.4 AUDITOR’S DUTIES IN RELATION TO ACCOUNTING STANDARDS ......................................................... 23

3.5 ACCOUNTING STANDARDS ISSUED BY ASB OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF

INDIA ........................................................................................................................................................... 23


CHAPTER 4 SYSTEMS OF BOOK-KEEPING & ACCOUNTING ...................................................................... 27

4.1 SINGLE ENTRY SYSTEM:- ....................................................................................................................... 27

4.2 DOUBLE ENTRY SYSTEM:- ..................................................................................................................... 27

End Term Quizzes ........................................................................................................................................ 32

CHAPTER 5 RECORDING OF ACCOUNTING TRANSACTIONS ..................................................................... 35

5.1 TYPES OF ACCOUNTS: ........................................................................................................................... 35

5.2 DEBIT & CREDIT: .................................................................................................................................... 36

5.3 MAENING & FORMAT OF JOURNAL ...................................................................................................... 37

5.4 STEPS IN JOURNALIZING ....................................................................................................................... 37

5.5 COMPOUND JOURNAL ENTRY: ............................................................................................................. 42

5.6 OPENING ENTRY: ................................................................................................................................... 43

5.7 TRADE DISCOUNT V/S CASH DISCOUNT ............................................................................................... 43

5.8 LEDGER .................................................................................................................................................. 44

5.9 BALANCING OF LEDGER ........................................................................................................................ 45

End Term Quizzes ........................................................................................................................................ 49

CHAPTER 6 SUBSIDIARY BOOKS I- CASH BOOK ......................................................................................... 51

6.1 MEANING OF SPECIAL JOURNALS OR SUNSIDIARY BOOKS: ................................................................. 51

6.2 ADVANTAGES OF SPECIAL JOURNALS (SUBSIDIARY BOOKS) ................................................................ 51

6.3 CASH BOOK ........................................................................................................................................... 52

6.4 TYPES OF CASH BOOK ........................................................................................................................... 53

6.5 CONTRA ENTRIES .................................................................................................................................. 57

MULTIPLE CHOICE QUESTIONS: .................................................................................................................. 60

CHAPTER 7 SUBSIDIARY BOOK II- OTHER BOOKS ..................................................................................... 62

7.1 MEANING .............................................................................................................................................. 62

7.2 PURCHASE BOOK ................................................................................................................................... 62

7.3 PURCHASES RETURNS BOOK: ................................................................................................................ 63

7.4 SALES BOOK: ......................................................................................................................................... 63

7.5 SALES RETURNS BOOK : ........................................................................................................................ 64

7.6 BILLS RECEIVABLE BOOK ....................................................................................................................... 64

7.7 BILLS PAYABLE BOOK ............................................................................................................................ 65

7.8 JOURNAL PROPER ................................................................................................................................. 65


CHAPTER 8- BANK RECONCILIATION STATEMENT .................................................................................. 71

8.1 MEANING: ............................................................................................................................................. 71

8.2 REASONS FOR DIFFERENCE BETWEEN BANK BALANCES AS PER CASHBOOK AND PASSBOOK: ............ 71

8.3 Advantages of Bank Reconciliation Statement ..................................................................................... 72

8.4 Steps in Preparation of BRS .................................................................................................................. 72


CHAPTER 9 DEPRECIATION & ITS METHODS ............................................................................................. 78

9.1 Meaning of Depreciation: ..................................................................................................................... 78

9.2 DEPRECIATION METHODS ..................................................................................................................... 78

9.3 COMPARISON BETWEEN SLM & WDV METHODS OF DEPRECIATION .................................................. 80

9.4 RECORDING DEPRECIATION .................................................................................................................. 81

9.5 CHANGE IN THE METHOD OF DEPRECIATION ....................................................................................... 87


CHAPTER 10 FINAL ACCOUNTS & ADJUSTMENTS .............................................................................. 93

10.1 TRIAL BALANCE: .................................................................................................................................. 93

10.2 CAPITAL AND REVENUE EXPENDITURE ............................................................................................... 95

10.3Preparation of Trading & Profit and Loss account from a given Trial Balance .................................... 95

10.4 Adjustment Entries: ............................................................................................................................ 98

End Chapter Quizzes ................................................................................................................................. 114

CHAPTER- 11 BILLS OF EXCHANGE .................................................................................................. 116

11.1 CONCEPT ........................................................................................................................................... 116

11.2 ACCOUNTING FOR BILLS OF EXCHANGE ........................................................................................... 116

11.3 Dishonor of Bills ................................................................................................................................ 121

End Chapter Quizzes ................................................................................................................................. 134

BIBLIOGRAPHY .......................................................................................................................................... 137

CHAPTER-1 MEANING & SCOPE OF ACCOUNTING At the end of the chapter you will be conversant with:

1.1 Meaning of Accounting

1.2 The Accounting Process/Accounting Cycle

1.3 Accountancy, Accounting & Book-keeping

1.4 Branches of Accounting

1.5 Objectives of Accountancy

1.6 Users of Financial Statement

1.7 Advantages of Accounting

1.1 MEANING OF ACCOUNTING

All of us do some accounting, often without realizing it. It is a part of our life. Let us say you

realize suddenly, one morning, that you needed to buy a book urgently. You ask one of

your parents for the money. „But‟ the parent says, “What happened to the money I gave last

week?” You either recollect how you spent it or if you believe in being systematic and have

noted it in your diary you explain how the money was spent. You are „accounting‟ for the

money given to you. When a housewife tries to note down her household expenses, strike the

balance she has on hand at the end of the month, or determines how much she needs for the

expenses which would arise, she is „accounting‟ for the money she withdrew or was given to

run the household.

In business, however, it is a more serious matter. The student may not be questioned by his

parents or the housewife may just meet her expenses as and when they come without bothering

to find out how much she spent, but in business it is a must. You cannot run a business unless

you know how much you owe outsiders and how much outsiders owe you. And when you invest

money in a business, wouldn‟t you like to know whether you‟ve recovered it, increased it or lost

it?

All this requires systematic record keeping of all that happens on a day-to-day basis in

business and analyzing this information to aid business decision making.

In simple words, „accounting‟ merely means, „reckoning‟ or „recounting‟. In an organizational

context too, „accounting‟ has more or less the same meaning. As an organization comes into

being and commences operations, one would like to evaluate the organization‟s past performance

for various reasons. However, in order to be able to do so, it is necessary that as far as possible

whatever has transpired in the organization be „reckoned‟ or „recounted‟ in a summarized form

in monetary terms. Thus, the process of accounting involves recording, classifying and

summarizing of past events and transactions of financial nature, with a view to enabling the user

of accounts to interpret the resulting summary.

The American Institute of Certified Public Accountants defines accounting as “the art of

recording, classifying and summarizing 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”.

This definition brings out the following as attributes of accounting:

1. Events and transactions of a financial nature are recorded while the events of a non-

financial nature cannot be recorded.

2. The record should reflect the importance of the transactions so recorded both

individually and collectively, which includes summarization, thereby making it

amenable to analysis.

3. The users of the financial statements should be able to obtain the message encompassed

in such financial statements.

1.2 The Accounting Process/Accounting Cycle: It is a complete sequence beginning with the recording of the transactions & ending with the

preparation of final accounts. The steps involved in accounting cycle are as follows:

Step 1: - Identification of Transactions & Events:- Accounting identifies transactions &

events of a specific entity. A transaction is an exchange in which each participant receives or

sacrifices value (e.g. purchase of raw material). An event is a happening of consequences to an

entity (e.g. use of raw material for production). An entity means an economic unit that performs

economic activities.

Step 2: Preparation of Business Documents:- After identifying, we measure those transactions

& events in monetary terms & to record them we prepare business documents.

Step 3:- Journalizing:- It is concerned with the recording of identified & measured financial

transactions in an orderly manner, and this process is called as Journalizing.

Step 4:- Posting:- It is concerned with classification of the recorded transactions so as to group

the transactions of similar type at one place. This function is performed by maintaining the

ledger in which different accounts are opened to which related transactions are brought to one

place by posting

Step 5: - Preparation of Trial Balance:- It is concerned with the balancing & summarization

of the classified transactions in a manner useful to users. It can further be classified into

preparation of unadjusted trial balance & passing the adjustment entries. After balancing all the

accounts, we do some adjustments to match our expenses & revenues & then prepare adjusted

accounts.

Step 6:- Preparation of Income Statement & Position Statement:- After preparing Trial

Balance we prepare Income Statement i.e. Trading & Profit & Loss Account & position

statement i.e. Balance Sheet.

We can present the same graphically as follows:

1.3 ACCOUNTANCY, ACCOUNTNG & BOOK-KEEPING: -

Book-keeping is a part of Accounting. Accounting is a part of Accountancy. Accountancy:

refers to a systematic knowledge of accounting.

Accounting: Refers to the actual process of preparing & presenting the accounts.

Book-keeping: is the part of accounting & is concerned with record keeping or maintaining of

books of accounting which is often routine & clerical in nature.

Diagrammatically the relationship can be viewed as follows:

Relationship B/w These Three:

We must also understand the difference & relationship between the terms „accounting’ &

„book-keeping’. Accounting is broader in scope than bookkeeping, which is merely concerned

with orderly record keeping. Going beyond the narrow confines of bookkeeping, accounting

involves analysis and judgment at different stages such as recording of transactions,

classification, summarization and interpretation.

Distinction B/w Accounting & Book-keeping in Tabular form can be presented as follows:

Basis of Distinction Book-keeping Accounting

1 Scope It involves identification,

measurement, recording &

classification of

transaction

In addition it involves

summarizing classified

transactions. Analyzing,

interpreting & communicating

the same.

2 Stage It‟s a primary stage It‟s a secondary stage, starts

where book-keeping ends

3 Basic Objective To maintain systematic

records

To ascertain net results of

operations & financial position

of the co

4 Who Performs Performed by junior staff By senior staff

5 Knowledge level Not required a high level

of knowledge

It needs a high level of

knowledge

6 Analytical Skill Not required Required

7 Nature of Job Routine & clerical Analytical

8 Supervision &

Checking

Supervised by an

accountant

Whereas its work is not

supervised by a book-keeper

Accountancy

Accounting

Book-Keeping

1.4 BRANCHES OF ACCOUNTING:

Classification of Accounting

Financial Accounting:- Accounting involves recording, classifying and summarizing of

past events and thus is historical in nature. It is Historical accounting which is better

known as Financial accounting whose primary intention is to prepare the Statements

revealing the Income and financial position of the business on the basis of events which

have happened in the period being reckoned.

Cost Accounting:- It shows classification and analysis of costs on the basis of functions,

processes, products, centers etc. It also deals with cost computation, cost saving, cost

reduction, etc.

Management Accounting:- It deals with the processing of data generated in financial

accounting and cost accounting for managerial decision-making. It also deals with

application of managerial economic concepts for decision-making.

1.5 OBJECTIVES OF ACCOUNTANCY:

1. It is a means of recording the monetary transactions and events.

2. It required to ascertain the earnings of the company, which is achieved by preparation

of Profit and Loss account.

3. It is required to identify the obligations (liabilities) and resources (asset) of the

organization.

4. Accounting records are required to be maintained statutorily by certain government

and regulatory bodies.

5. Accounting records are also required by the management for taking the financial

decisions.

6. Generally, investors and certain lenders also require the preparation of financial

statements.

1.6 USERS OF FINANCIAL STATEMENT Management

Shareholders, Security Analyst & Investors

Lenders (Long-term)

Suppliers/Creditors (short-term)

Customers

Employees

Government & Regulatory Agencies

Researchers

1.7 ADVANTAGES OF ACCOUNTING Facilitate To Replace Memory

Facilitate to comply with legal requirement

Facilitate to ascertain net result of operations

Facilitate to ascertain financial position

Facilitate the users to take decision

Facilitate a comparative study

Facilitate control over assets

Facilitate the settlement of tax liability

Facilitate the ascertainment of value of business

Facilitate Raising Loan

Acts as legal evidence

Chapter1- End Chapter Quizzes

Test Questions:

Q1 The prime function of accounting is to:

(a) record economic data

(b) provide the information basis for action

(c) classifying & recording business transactions

(d) attain non-economic goals.

Q2 The basic function of financial accounting is to:

(a) record all business transactions

(b) interpret financial data

(c) assist the management in performing functions effectively

(d) All of the above

Q3 Management Accounting provides invaluable services to the management in performing:

(a) All management functions

(b) Co-ordinating management functions

(c) Controlling functions

(d) None of the above

Q4 Book-keeping is mainly concerned with

(a) recording of financial data relating to business operations

(b) designing the systems in recording, classifying, summarizing the recorded data.

(c) Interpreting the data for internal & external end users.

(d) All of the above.

Q5 Who among the following is not considered as an external user of Financial Statements?

(a)Government Agencies

(b) Creditors

(c)Customers

(d)Board of Directors.

Q6 Which of the following events is/are not recorded in the books of a business?

(a) Significant Monetary events after the balance sheet dates.

(b) Death of a chief executive of the business

(c) Government Investigation into the pricing of the business

(d) Both (b) & (c) above

Q7 Which of the following is/are the objectives of Accounting:

(a) To keep systematic records

(b) To ascertain the Financial Position of the company

(c) To compare the balance sheets of two dates.

(d) Both (a) & (b) Above

Q8 Which of the following is/are branches of accounting:

(a) Cost Accounting

(b) Management accounting

(c) Social Responsibility Accounting

(d) All of Above

Q9 Which of the following is/are the internal users of accounting information:

(a) Creditors

(b) Employees

(c) Investors

(d) Both (a) & (b) Above

Q10 Which of the following is not a function of accounting:

(a) Recording

(b) Classifying

(c) Summarizing

(d) Controlling

CHAPTER 2 ACCOUNTING PRINCIPLES, CONVENTIONS AND

CONCEPTS

At the end of second chapter you will get to know:

2.1 Meaning of GAAP

2.2 Acceptance Criteria

2.3Accounting Concepts

2.4 Accounting Conventions

2.1 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: The double entry system of accounting is based on a set of principles which are called Generally

Accepted Accounting Principles (GAAP). GAAP may be defined as those rules of action or

conduct which are derived from experience and practice and when they prove useful, they

become accepted as principles of accounting.

These principles enable to a certain extent standardization in recording and reporting of

information so that the users, once they are aware of the principles, can read and understand the

financial statements prepared by diverse organizations.

2.2 Acceptance of accounting principles depends on following three criteria:

Relevance:- A principle is relevant to the extent it results in information that is

meaningful & useful to the users of accounting information.

Objectivity:- it connotes reliability & trustworthiness.

Feasibility:- A principle is feasible to the extent it can be implemented without much

complexity & cost.

Principles can be classified into two categories:

(i) Accounting concepts

(ii) Accounting conventions

2.2 Acceptance of accounting principles depends on following three

criteria:

Relevance:- A principle is relevant to the extent it results in information that is

meaningful & useful to the users of accounting information.

Objectivity:- it connotes reliability & trustworthiness.

Feasibility:- A principle is feasible to the extent it can be implemented without much

complexity & cost.

Principles can be classified into two categories:

(iii) Accounting concepts

(iv) Accounting conventions

2.3 ACCOUNTING CONCEPTS: The term concepts includes those basic assumptions or conditions upon which the science of

accounting is based. The following are the important accounting concepts:

(1) Money Measurement Concept: In financial accountancy, a record is made only of information that can be expressed

in monetary terms. Recording, classification and summarization of business

transactions requires a common unit of measurement which is taken as money. If

events cannot be quantified in monetary terms then they do not facilitate accounting.

Money is the standard of exchange and the changes in purchasing power caused by

inflation are ignored for the purpose of accounting because the assumption about the

stability of money, notwithstanding its limitations, is a necessity for ensuring a

smooth accounting process. Hence, all transactions are recorded through a common

denominator, namely the monetary unit.

(2) Cost Concept:- Cost concept implies that in accounting, all transactions are generally recorded at

cost, and not at market value. For example, if a piece of land is acquired for Rs.1

lakh, it would continue to be shown in the balance sheet at Rs.1 lakh, even when the

market value of the land rises to say Rs.2 lakhs. Why should this be so? This is

because, cost concept is in fact closely related to the going concern concept. If the

land is acquired for the operations of the business and would continue to be used for

its operations and would not be sold shortly, then it is largely immaterial what the

land‟s market value is, since it is not going to be sold anyway. Thus, it is consistent

with going concern concept to keep recording the land at cost, i.e. Rs.1 lakh on an

ongoing basis.

(3) Business Entity/Separate Entity Concept: The legal entity of a corporate business, as distinct from the entity of its owners is

well understood today. Less understood, however, is the accounting entity of a

business as distinct from its owners. For example, for many purposes, the legal entity

of a sole proprietary business may not be very distinct from the entity of the

proprietor himself. However, the business entity concept requires that this should not

come in the way of treating the business as a distinct accounting entity for the

purposes of treating transactions relating to the operations of the business. It is in

accordance with this concept that when an owner brings capital into the business, the

business in turn is deemed to owe the capital to the owner.

(4) Going Concern Concept: A business entity is assumed to carry on its operations forever. Seemingly

inconsequential, this is a fundamental concept which has far reaching consequences.

This is because it is difficult to envisage any economic activity on the part of a

business entity if its liquidation were shortly expected. Going concern concept

implies that the resources of the concern would continue to be used for the purposes

for which they are meant to be used. For instance, in a manufacturing concern, the

land, buildings, machinery etc., are primarily required for carrying out the production

and selling of certain products. Going concern concept implies that these land,

buildings, machinery etc., would continue to be used for this purpose

(5) Duality or Accounting Equivalence Concept:

It can easily be seen that in business, as elsewhere, funds can be raised in any of the

following ways:

Additional capital (increases owners‟ equity)

Additional loans (increases outside liability)

Earning revenue (increases owners‟ equity)

Making profits (increases owners‟ equity)

Disposing or reducing some of the assets (reduces assets).

Thus, all increases in liabilities (including owners‟ equity) and reduction in assets

represent sources of funds.

Similarly, the funds thus raised, may be put to any of the following uses:

Purchasing of assets (increases assets)

Incurring operational expenses (decreases owners‟ equity)

Discharging earlier liabilities (decreases liability)

Keeping idle funds so that cash balance increases (increases assets)

Suffering losses (decreases owners‟ equity).

Thus all increases in assets and decreases in liabilities (including owners‟ equity) are

uses of funds.

A little reflection must reveal that in a business, the sum of the Sources of Funds must

equal the sum of Uses of Funds. This is because, whatever funds are raised by the

business, either through capital or operations or from outsiders, must be tied up in one

or the other form of uses.

Thus the duality or accounting equivalence concept implies that:

Owners’ Equity + Outside Liability = Assets

This equation is known as the „Fundamental Accounting Equation‟.

(6) Accounting Period Concept:

To be able to prepare the income statement for a business, the period for which it is to be

prepared must first be specified. Very often the accounting period chosen is a calendar

year (January 1 – December 31) or a fiscal year (April 1 – March 31).

(7) Realization Concept: With this concept, accounts recognise transactions (and

any profits arising from them) at the point of sale or transfer of legal ownership - rather

than just when cash actually changes hands. For example, a company that makes a sale to

a customer can recognise that sale when the transaction is legal - at the point of contract.

The actual payment due from the customer may not arise until several weeks (or months)

later - if the customer has been granted some credit terms.

(8) Matching Concept:

In order to determine the profits or losses accrued in an accounting period, the expenses

must relate to the goods or services sold during the period. For instance, assume a

situation where nine products are manufactured in an accounting period, seven products

are dispatched and money is received on only five. Let the selling price and cost per

product be Rs.10 and Rs.6 respectively. Then, depending on whether the sale is

recognized at production or dispatch or collection, the revenue would be Rs.90 or Rs.70

or Rs.50 respectively. And the cost of goods sold under the three situations will be

Rs.54, Rs.42 and Rs.30 respectively. Thus it is clear that the „cost‟ derives its relevance

only from the „sale‟ and not vice-versa. It is for this reason that revenue recognition

always precedes the matching of cost. If revenue or sale is not defined, the „cost‟ cannot

be defined either.

2.4 ACCOUNTING CONVENTIONS: Conventions are based on what is practicable, these are the methods or procedures employed

generally by accounting practitioners. For example, dividing a centimeter into ten equal parts is a

convention rather than a concept. They are based on custom and are subject to change as new

developments arise.

Some of the accounting conventions are as follows:

(1) Materiality:

An important convention. As we can see from the application of accounting standards and

accounting policies, the preparation of accounts involves a high degree of judgment. According

to this , the accountant should attach importance to material details & ignore insignificant details.

(2) Prudence/Conservatism:

Profits are not recognized until a sale has been completed. In addition, a cautious view is

taken for future problems and costs of the business. For example, a sales manager might have

finalized a deal with his client for, say, sale of 100 units of their product. But unless these items

are produced and delivered to the client there is no reasonable certainty about receiving the

payment for these 100 units. It is only thereafter that he can record the sales amount on those

100 units as due from the client. But, on the other hand, if he comes to know that a customer

has lost all his assets and is likely to default payment, then he should immediately provide for

such loss.

(3) Consistency:

There are in practice several ways of treating an event that may be recorded in the accounts.

The consistency concept requires that once an entity has decided on one method, it will treat all

subsequent events of the same character in the same fashion unless it has a sound reason to

change the method of treatment of that event. For example, if a concern is valuing its inventory

by a particular method in one year it is expected to value its inventory in the subsequent years

also in the same method unless there is a strong reason to change the same. Similarly, if it is

charging depreciation by one method it is expected to follow the same method in the

subsequent years also.

(4) Full disclosure:

According to this convention accounting report should disclose fully & fairly the information

they purport to represent. They should be honestly prepared & sufficiently disclose information

which is of material interest to proprietors, to present & potential creditors & to investors.

End Chapter Quizzes

Test Questions:

Q1 Accounting principles are generally based on:

(a) Practicability

(b) Subjectivity

(c) Convenience in recording

(d) All of above

Q2 The basic concepts related to balance sheet are

(a)Cost Concept

(b) Business Entity

©Accounting period concept

(d)Both (a) & (b) Above

Q3 The basic concepts related to P&L Account are

(a)Realization Concept

(b) Matching Concept

© Cost Concept

(e) Both (a) & (b) above

Q4 As per the double entry concept

(a) Assets + Liability = Capital

(b) Capital= Assets -Liability

(c) Capital – Liability = Assets

(d) Capital +Assets =Liabilities

Q5 Only the significant events which affect the business must be recorded as per the principle

of:

(a) Separate Entity

(b) Accrual Concept

(c) Materiality Concept

(d) None of above

Q6 P&L account is prepared for a period of one year by following:

(a) Consistency Principle

(b) Conservatism Principle

(c) Time period concept

(d) Cost Concept

Q7 Under which of the following concepts are shareholders treated as creditors for the amount

they paid on the shares they subscribed to?

(a) Cost Concept

(b) Duality Concept

(c) Separate Entity Concept

(d) Cost Concept

Q8 The underlying accounting principle(s) necessitating amortization of intangible asset(s)

is/are:

(a) Cost Concept


(c) Realization Concept


Q9 Which of the following practices is not in consonance with the convention of

conservatism?:

(a) Creating Provision for bad debts

(b) Creating provision for discount on debtors

(c) Creating provisions for discount on creditors

(d) Creating provision for tax

Q10 Recording of fixed assets at cost ensures adherence of:

(a) Cost Concept


(c) Realization Concept


CHAPTER 3 ACCOUNTING STANDARDS

At the end of this chapter you will be conversant with:

3.1 Meaning of Accounting Standards

3.2 International Accounting Standards

3.3 List of accounting standards issued by IASC

3.4 Auditor‟s duties in relation to accounting standards

3.5 Accounting Standards Issued By ASB of the Institute of Chartered Accountants of

India

3.1 MEANING OF ACCOUNTING STANDARDS

An accounting standard is a selected set of accounting policies or broad guidelines regarding

the principles & methods to be chosen out of several alternatives. Accounting Bodies all over

the world have tried to achieve some uniformity in the accounting policies by prescribing

certain accounting standards in order to narrow the range of alternatives available to an

organization in respect of collection and presentation of accounting information.

The main objective of accounting standards is to harmonize the diverse accounting policies and

practices & ensure comparability of accounts because of uniformity in their presentation.

3.2 INTERNATIONAL ACCOUNTING STANDARDS

Accounting Bodies throughout the world are striving to achieve a reasonable degree of

uniformity in the accounting policies by prescribing certain accounting standards with respect

to collection and presentation of accounting information. To formulate the accounting

standards, they have established a committee called the International Accounting Standards

Committee (IASC) in 1973. Accounting bodies of most of the countries, including the Institute

of Chartered Accountants of India, are members of this body and these members have resolved

to conform to the standards developed by IASC, subject to variations needed due to local

conditions or laws.

The objectives of the committee according to its constitution are:

a. formulating, publishing and promoting the use of the accounting standards worldwide,

and

b. to work for the improvement and harmonization of regulations, accounting standards

and procedures relating to financial statements

The International Accounting Standards have assumed great importance in recent times for the

following reasons:

a. Globalization of the economy has led to Indian companies expanding their operations

across the borders and this calls for uniformity in accounts of units located in different

countries.

b. Foreign investors would give more weight age to the accounts of those companies

which are based on International Accounting Standards.

If there is a conflict between the International Accounting Standards and the local standards or

the local laws and regulations, the local standards, laws and regulations will prevail.

3.3 The list of accounting standards issued by the IASC is given

below:

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 7 Cash Flow Statements

IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in

Accounting Policies

IAS 10 Events after the Balance Sheet Date

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 14 Segment Reporting

IAS 15 Information Reflecting the Effects of Changing Prices

IAS 16 Property, Plant and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of Government

Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 22 Business Combinations

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27 Consolidated Financial Statements

IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 30 Disclosures in the Financial Statements of Banks and Similar

Financial Institutions

IAS 31 Financial Reporting of Interests in Joint Ventures

IAS 32 Financial Instruments: Disclosure and Presentation

IAS 33 Earnings per Share

IAS 34 Interim Financial Reporting

IAS 35 Discontinuing Operations

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IAS 40 Investment Property

IAS 41 Agriculture

3.4 AUDITOR’S DUTIES IN RELATION TO ACCOUNTING STANDARDS In case the company does not conform to any of the mandatory accounting standards, the

auditor will have to qualify his report justifying his deviation. In case he fails to do so the ICAI

can take disciplinary action against him on the ground of professional misconduct.

3.5 ACCOUNTING STANDARDS ISSUED BY ASB OF THE INSTITUTE OF

CHARTERED ACCOUNTANTS OF INDIA

(AS 1) Disclosure of Accounting Policies

(AS 2) Valuation of Inventories

(AS 3) Cash Flow Statements

(AS 4) Contingencies and Events Occurring after the Balance Sheet Date

(AS 5) Net Profit or Loss for the Period, Prior Period and Extraordinary Items and

Changes in Accounting Policies

(AS 6) Depreciation Accounting

(AS 7) Construction Contracts (Revised Accounting Standard)

(AS 8) Accounting for Research and Development

(AS 9) Revenue Recognition

(AS 10) Accounting for Fixed Assets

(AS 11) (Revised 2003), The Effects of Changes in Foreign Exchange Rate

(AS 12) Accounting for Government Grants

(AS 13) Accounting for Investments

(AS 14) Accounting for Amalgamations

(AS 15) Accounting for Retirement Benefits in the Financial Statement of Employers

(AS 16) Borrowing Costs

(AS 17) Segment Reporting

(AS 18) Related Party Disclosures

(AS 19) Leases

(AS 20) Earnings Per Share

(AS 21) Consolidated Financial Statements

(AS 22) Accounting for Taxes on Income

(AS 23) Accounting for Investments in Associates in Consolidated Financial Statements

(AS 24) Discontinuing Operations

(AS 25) Interim Financial Reporting

(AS 26) Intangible Assets

(AS 27) Financial Reporting of Interests in Joint Ventures

(AS 28) Impairment of Assets

(AS 29) Provisions, Contingent Liabilities and Contingent Assets

End Chapter Quizzes

Q 1 The Objective of Formulating Accounting Standards is to:

(a) harmonize the diverse accounting policies and practices & ensure comparability of accounts.

(b) To control the cost

© to Increase the profitability of the Organization

(d) All of Above

Q2 When International Accounting Standards Committee (IASC) was formulated:

(a) 1970

(b) 1973

(c) 1980

(d) 1982

Q3 How many international accounting standards are there:

(a) 20

(b) 30

(c) 41

(d) 50

Q4 Which one is IAS 2:

(a) Inventories

(b) Events after the Balance Sheet Date

(c) Income Taxes

(d) Segment Reporting

Q5 Which one is IAS 8 :

(a) Segment Reporting

(b) Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting

Policies

(c) Events after the Balance Sheet Date

(d) None of above

Q6 Which one IAS 20:

(a) Events after the Balance Sheet Date

(b) The Effects of Changes in Foreign Exchange Rates

(c) Accounting for Government Grants and Disclosure of Government Assistance

(d) None of above


(a) Segment Reporting

(b) Leases

(c) Revenue

(d) Employee benefits


(a) Earnings per Share

(b) Financial Reporting in Hyperinflationary Economies

(c) Financial Instruments: Disclosure and Presentation (d) Interim Financial Reporting


(a) Interim Financial Reporting

(b) Discontinuing Operations (c) Investments in Associates


Q10 Which on is IAS 39:

(a) Investments in Associates

(b) Investment Property (c) Financial Instruments: Recognition and Measurement (d) Agriculture

CHAPTER 4 SYSTEMS OF BOOK-KEEPING & ACCOUNTING


4.1 Single Entry System

4.2 Double Entry System

4.3 Systems of Accounting

4.1 SINGLE ENTRY SYSTEM:-

An incomplete double entry can be termed as a single entry system. According to Kohler “it is

a system of book-keeping in which as a rule only records of cash & personal accounts are

maintained, it is always incomplete double entry, varying with circumstances.” This system has

been developed by some business houses where, for their convenience, only some essential

records are kept. Since all records are not kept, the system is not reliable & can be used only by

small business firms.

4.2 DOUBLE ENTRY SYSTEM:-

All the business transactions have two fold effect. Recording of both aspects of a transaction is

called Double Entry system of bookkeeping.

Accounting Equation:

In Chapter 2, it was stated that, under the duality concept that sources of funds must always

equal to uses of funds and from this equality was derived. The fundamental accounting

equation:

Total Liabilities = Total Assets

(or)

Owners‟ Equity + Outside Liability = Assets

(or)

Assets = Capital + Liabilities

(or)

Resources = Sources of Finance

(or)

Assets = Internal Equity + External Equity

Where assets refer to resources which are owned by business enterprises, liabilities are debts

payable to parties external to business and capital means the amount payable to owner of the

business enterprise.

It was also evident from the earlier discussions that any of the following is a source of funds, in

business:

– Incurring Liability (including owners‟ equity)

– Earning Revenue

– Making Profits.

It stands to reason that a decrease in liability, revenue or profit must be a use of funds being the

opposite of a source.

Similarly, any of the following is a use of funds:

– Acquiring Assets

– Incurring Expenses

– Incurring Losses.

A business is started with a capital of Rs.10,000 brought in cash. The above event gives rise to

a cash balance of Rs.10,000, which, being an increase in an asset (namely cash), is a use.

At the same time, the business now owes Rs.10,000 to the owner who invests the capital in it,

so that the owners‟ equity in the business is Rs.10,000. This being a liability of the business

towards the owner, constitutes a source.

Steps Involved In Developing Accounting Equation:

An accounting equation may be developed by taking the steps given below:

Step 1 –Ascertain the variables of an equation affected by a transaction

Step 2- Find out the effect of a transaction on the variables of an equation

Step 3 – Show the effect on the appropriate side of an equation and ensure that the total of right

hand side is equal to the total of left hand side

Illustration 1:- A started business with Rs 1,00,000. Analyze the transaction and give

Accounting Equation.

Step 1- Variables affected Asset & Capital

Step 2- Effect of transactions on affected variables Increase in asset & Capital

Step 3- Accounting equation Asset = Liability + Capital

1,00,000 = 0+ 1,00,000

Illustration 2:- Borrowed Rs 50,000 from ICICI Bank.

Step 1- Variables affected Asset & Liability

Step 2- Effect of transactions on affected variables Increase in asset & Liability


1,00,000 = 50,000+ 0

Illustration 3: - Purchased furniture worth Rs. 100000.

Step 1- Variables affected Assets

Step 2- Effect of transactions on affected variables Increase & Decrease in assets


+1,00,000 – 1,00,000 = 0 + 0

Illustration 4: - Purchased goods for cash 20,000.


Step 2- Effect of transactions on affected variables Increase & Decrease in assets


+20,000-20,000 = 0 + 0

Illustration 5: - Purchased goods on credit for Rs 50000.

Step 1- Variables affected Asset and Liability

Step 2- Effect of transactions on affected variables Increase in asset & Liability


50,000 = 50,000 + 0

Illustration 6 :- Sold goods costing Rs 10,000 for Rs 12000.

Step 1- Variables affected Assets & Capital

Step 2- Effect of transactions on affected variables Increase in one asset &

Decrease in another asset &

Increase in Capital


+12,000-10,000 = 0 + 2000

Illustration 7: - Sold goods costing Rs 20,000 on credit for Rs 25,000.

Step 1- Variables affected Assets & Capital


Decrease in another asset &

Increase in Capital


+25,000-20,000 = 0 + 5000

Illustration 8:- Returned goods costing Rs 5,000 to suppliers of goods.

Step 1- Variables affected Asset & Liability

Step 2- Effect of transactions on affected variables decrease in asset & Liability


-5000 = -5000+ 0

Illustration 9:- Received cash from a customer Rs 20,000.



Decrease in another asset.


+20,000 – 20,000 = 0+ 0

Illustration 10: -Withdrew cash Rs 2,000 for personal use.

Step 1- Variables affected Asset & Capital

Step 2- Effect of transactions on affected variables decrease in asset & Capital


-2000 = 0 - 2000

Problem:-

Mr. Irshad has the following transactions. Draw accounting equation to show the effect of

these transactions on his assets, liabilities and capital. Also show his balance sheet:

1. Commenced business with cash Rs 20,000.

2. Purchase goods for cash Rs 5000 and credit Rs 6000.

3. Purchased office equipment for cash Rs 8000.

4. Paid office rent Rs 1000.

5. Sold goods for cash Rs. 10,000 (costing Rs 7000)

6. Sold goods on credit for Rs 6000 (costing Rs 3000)

7. Fore insurance premium paid in advance Rs 500

8. Salary due but not paid yet (o/s) Rs 1500

Systems of Accounting:-

ACCRUAL BASIS OF ACCOUNTING & CASH BASIS OF ACCOUNTING

Accrual Basis of accounting is a method of recording transactions by which revenue, cash, assets

& liabilities are reflected in the accounts for the period in which they accrue. Whereas cash basis

accounting in which actual receipts or actual payments are made. These two methods can be

differentiated in tabular form as follows:

BASIS OF DISTINCTION ACCRUAL

BASIS

CASH

BASIS

1 Prepaid/outstanding

expenses/accrued/unaccrued

income

These things are treated

in this accounting

Whereas no entry is done in

cash basis accounting

2 Income status in case of

prepaid expenses & accrued

income

Income statement will

show a relatively high

income

Income statement will show

lower income

3 Income status in case of o/s

exp and unaccrued income

Income statement will

show a relatively lower

income

Income statement will show a

high income

4 Recognition under companies

Act 1956

It is recognized Not recognized

5 Availability of choosing

accounting option like

LIFO/FIFO/SLM/WDV

Under this an accountant

has an option

Whereas under this an

accountant has no option to

make a choice as such

End Term Quizzes

Problem 1: Show the accounting equation on the basis of the following transactions & present a

balance sheet: -

Rs

Mohan commenced business with 70,000

Purchased goods on credit 14,000

Withdrew for private use 1,700

Purchased goods on cash 10,000

Paid wages 300

Paid to creditors 10,000

Sold goods on credit 15,000

Sold goods for cash (cost price 3000) 4,000

Purchased furniture 500

Problem2 Show accounting equation on the basis of the following transactions, also prepare

balance sheet:

Rs

i. Manu started business with cash 50,000

ii. Purchased goods on credit 2,500

iii. Purchased goods on cash 6000

iv. Purchased furniture for 3000

v. Paid rent 1200

vi. Withdrew for private use 4200

vii. Received interest for 600

viii. Sold goods on credit (cost Rs 300) for 4200

ix. Paid to creditor 24000

x. Paid salaries for 1200

Problem 3: Show the accounting equation on the basis of following transactions:

(i) Harish started business with cash Rs 15000

(ii) He purchased goods on credit Rs 7000.

(iii) He purchased furniture for cash Rs 500

(iv) He deposited into bank Rs 2000.

(v) He sold goods on credit to Satish costing Rs 4000 for Rs 6000.

(vi) He withdrew cash fir private use Rs 200.

(vii) He paid salaries Rs 300.

MULTIPLE CHOICE QUESTIONS:

Q1 Cash purchases:

(a) Increase assets

(b) Results in no change of assets

(c) Decrease Assets

(d) Increase liability

Q2 Purchase of goods on credit from A increases:

(a) Assets

(b) Liability & Assets

(c) Capital

(d) Assets & Capital

Q3 Rent outstanding Rs 400 :

(a) Increases capital by 400 & increase liability by 400.

(b) Decreases capital by 400 & increase liability by 400.

(c) Does not affect capital

(d) Increase assets by 400

Q4 Paid for salaries Rs 10,000:

(a) Decrease asset & increase capital

(b) Increase assets & liability both

(c) No effect on asset

(d) Decrease in Assets & Capital both

Q5 Drew for personal use Rs 500:

(a) Increase assets & Capital

(b) Decrease liability

(c) Decrease assets & capital both

(d) None of above

Q6 If a firm borrows a sum of money, there will be:

(a) Increase in capital

(b) Decrease in capital

(c) No effect on capital

(d) Increase liability

Q7 Which of the following is correct:

(a) Assets = Liability – Capital

(b) Assets = capital – liability

(c) Liability = Assets – capital

(d) Assets = External equity

Q8 Ram has assets of Rs 10,000 & liability of Rs 2,000, his capital would be :

(a) 10,000

(b) 2000

(c) 8000

(d) 12000

Q9 Mr Mohan has assets of Rs 60,000 & Capital of 45,000. Liabilities as on date shall be:

(a) 15000

(b) 45000

(c) 105000

(d) 60,000

Q10 He sold goods on credit for Rs 10,000:

(a) Increase assets & Liability

(b) Increase one asset & decrease another asset

(c) Increase capital

(d) Increase liability & Capital

CHAPTER 5 RECORDING OF ACCOUNTING TRANSACTIONS


5.1 Classification of accounts

5.2 Rules of Debit & Credit

5.3 Meaning & Format of Journal

5.4 Steps in Journalizing

5.5 Compound Entry

5.6 Opening Entry

5.9 Cash discount v/s Trade discount

5.8 Ledger

5.9 Balancing

5.1 TYPES OF ACCOUNTS: The accounts maintained by a business organization are classified into three types as shown

in the Figure 5.1:

Figure 5.1 Types of Accounts

Personal Account: It deals with accounts of individuals like creditors, debtors, bank, etc. It

shows the balance due to these individuals or due from them on a particular date.

Real Account: It represents assets like plant and machinery, land and buildings, goodwill, etc.

As on a particular date, this account shows the worth of the asset.

Nominal Account: It consists of different types of expenses or incomes or loss or profit. These

accounts show the amount of income earned or expenses incurred for a particular period say a

month, a year, etc.

Illustration1:

Classify the following a/c among real, nominal & personal

Capital brought in, drawings A/c, building purchased, purchase A/c, sales A/c, Carriage inward

paid, carriage outward paid, cash received, cash paid, interest paid, interest received, discount

allowed, repairs, bank a/c, bank overdraft, outstanding rent.

Solution:

Personal Account:- Capital brought in, Drawings, bank a/c, bank overdraft

Real Account:- Building purchases, purchase a/c, sales a/c, cash received, cash paid

Nominal Account:-carriage inward paid, carriage outward paid, interest paid, interest received,

discount allowed, repairs, outstanding rent

5.2 DEBIT & CREDIT:

It is necessary to point out at the outset that the words „debit‟ and „credit‟ represent

two different concepts. The nature of Debit and Credit is explained in the Figure 5.2: Figure 5.2 Nature of Debit & Credit

RULES OF DEBIT & CREDIT:

Whether an Account has to be debited or credited is decided by using the rules indicated in

Figure 5.3.

Figure 5.3: Rules of Debit and Credit

5.3 MAENING & FORMAT OF JOURNAL

A journal is a book in which transactions are recorded in chronological order. It is called a book

of prime entry or original entry.

FORMAT OF JOURNAL

Date Particulars L.F. Debit

Rs.

Credit

Rs.

The date on which transactions have taken place is entered in the date column. Two aspects of the

transaction are recorded in the particulars column. A brief description of the transaction is also

given in the particulars column. The Ledger Folio (L.F.) column is meant for writing the

number of the page in the ledger in which the particular transaction is entered. The amount to

be debited is entered in the debit column and the amount to be credited is entered in the credit

column.

5.4 STEPS IN JOURNALIZING

1. Ascertain what accounts are involved in a transaction?

2. Ascertain what is the nature of the accounts involved?

3. Ascertain what rule of debit & credit is applicable for each of the accounts involved?

4. Ascertain what account is to be debited and credited?

5. Record the date of transaction in the date column.

6. Write the name of accounts to be debited & credited (with abbreviation Dr. & Cr.) in

particular column.

7. Write narration in brief describing the transaction.

8. Draw a line to separate one journal entry from other.

Note:- L.F. column is filled at the time of posting into the ledger.

Illustration 2:-

XYZ Ltd. received Rs.1,000 from Geet & Co. on 5-1-2001

Recording the journal entry in the books of XYZ Ltd.

Step 1 The two accounts involved in the above transaction are (i) money being received, and (ii)

the person paying the amount i.e., Geet & Co.

Step 2 The nature of the accounts are (i) Real account, and (ii) Personal account

respectively.

Step 3

(a) The rule applicable to real account is „debit what comes in and credit what goes out‟. In

the given transaction, cash is coming in, therefore debit cash account.

(b) The rule for personal account is „debit the receiver and credit the giver‟. In the above

transaction, Geet & Co. is the giver, therefore credit Geet & Co.

Journal

Let us

apply the rules of debit and credit for a few sample transactions after ascertaining dual aspects

Transaction Aspects Account

Debited

Reason for

the Debit

Account

Credited

Reason for the

Credit

ABC Ltd.

received

Rs.5,000

from Gupta

& Company

(In the books

of ABC Ltd.)

Aspect 1 cash

of Rs.5,000 is

received.

Aspect 2 The

amount is

given by Gupta

& Co.

Cash a/c Cash a/c is

a Real a/c.

The rule of

„Debit what

comes in‟

applies.

Gupta & Co. Gupta & Co a/c is a

Personal a/c. The

rule of „Credit the

giver‟ applies.

PQR Ltd.

purchased

Rs.6,000

worth of

goods from

X Co.

(In the books

of PQR Ltd.)

Aspect 1

Goods of

Rs.6,000 are

received.

Aspect 2 The

goods are

supplied by X

Co.

Inventor

y a/c (or

Purchase

s a/c)

Inventory

a/c or

Purchases

a/c in

Nominal

a/c. The

Rule is

Debt all

Expenses.

X Co. a/c X Co. a/c is a

personal a/c. The

rule of „Credit the

giver‟ applies.

XYZ Ltd.

paid the

salaries of

Rs.15,500 to

its staff for

the month

Aspect 1

Payment of an

expense of

Rs.15,500.

Aspect 2 Bank

balance is

Salaries

a/c

Salaries a/c

is a

Nominal

a/c. The

rule of

„Debit all

Bank a/c Bank a/c is a

personal a/c the rule

of „Credit the giver‟

applies

Date Particulars L.F. Debit.

Rs.

Credit

Rs.

5.1.2001 Cash a/c Dr.

To Geet & Co. a/c

(Being cash received from Geet & Co.)

1,000

1,000

Transaction Aspects Account

Debited

Reason for

the Debit

Account

Credited

Reason for the

Credit

through bank

transfer.

(In the books

of XYZ Ltd.)

reduced by

Rs.15,500.

expenses‟

applies.

Illustration 3:

Journalize the following transactions in the books of Dixit Enterprises.

i.Started business with a capital of Rs.7,50,000.

ii.Opened a bank account with State Bank of India for Rs.2,00,000.

iii.Purchased goods from Tandon & Co. for cash Rs.1,00,000.

iv.Purchased goods from Burman for Rs.2,00,000.

v.Goods returned to Mr Burman Rs.50,000.

vi.Paid Rs.1,40,000 to Mr Burman in full settlement of his dues.

vii.Paid Mr Dharam, the landlord Rs.50, 000 towards rent.

viii.Withdrew cash for household expenses Rs.60,000.

ix.Sold goods to Mr. Karan for cash Rs.2,50,000.

x.Sold goods to Mr Dev on credit Rs.1,00,000.

xi.Goods returned by Mr. Dev for Rs.25, 000.

xii.Received cash from Mr. Dev Rs.70, 000 in full settlement.

xiii.Paid cartage on goods purchased Rs.35, 000.

xiv.Paid cartage on goods sold Rs.80,000.

xv.Purchased furniture for office purpose Rs.1,00,000.

xvi.Purchased furniture for re-sale Rs.1, 00,000.

xvii.Sold furniture out of those meant for resale Rs.1, 50,000.

xviii.Paid rent out of personal cash Rs.40, 000.

Solution:

Date Particulars L.F Debit

Rs. Credit

Rs.

i.

ii.

iii.

iv.

v.

vi.

vii.

viii.

ix.

x.

xi.

xii.

xiii.

xiv.

xv.

xvi

xvii.

Cash A/c Dr

To Capital A/c

(Being cash invested in the business)

Bank A/c Dr.

To Cash A/c

(Being cash deposited in the Bank)

Purchases A/c Dr.

To Cash A/c

(Being goods purchased from Tandon & Co. for cash)

Purchases A/c Dr.

To Burman A/c

(Being goods purchased from Burman on credit)

Burman A/c Dr.

To Returns outward A/c

(Being goods returned to Burman)

Burman A/c Dr.

To Returns outward A/c

To Discount Received A/c

(Being cash paid to Mr Burman and received discount)

Rent A/c Dr.

To Cash A/c

(Being rent paid in cash)

Drawings A/c Dr.

To Cash

(Being cash withdrawn for household expenses)

Cash A/c Dr.

To Sales A/c

(Being goods sold for cash)

Dev A/c Dr.

To Sales A/c

(Being goods sold to Dev on credit)

Returns Inward A/c Dr.

To Dev A/c

(Being goods returned by Dev)

Cash A/c Dr.

Discount Allowed A/c Dr.

To Dev A/c

(Being cash received from Dev and allowed him

discount)

Cartage Inward A/c Dr.

To Cash A/c

(Being cartage paid on goods purchased)

Cartage Outwards A/ Dr.

To Cash A/c

(Being cartage paid on goods sold)

Furniture A/c Dr.

To Cash A/c

(Being furniture purchased on cash for office)

Purchases A/c Dr.

To Cash A/c

(Being furniture purchased on cash for re-sale)

Cash A/c Dr.

7,50,000

2,00,000

1,00,000

2,00,000

50,000

1,50,000

50,000

60,000

2,50,000

1,00,000

25,000

70,000

5,000

35,000

80,000

1,00,000

1,00,000

1,50,000

7,50,000

2,00,000

1,00,000

2,00,000

50,000

1,40,000

10,000

50,000

60,000

2,50,000

1,00,000

25,000

75,000

35,000

80,000

1,00,000

1,00,000

1,50,000

xviii. To Sales A/c

(Being furniture meant for resale sold for cash)

Rent A/c Dr.

To Capital A/c

(Being rent paid out of personal cash)

40,000

40,000

Illustration 4:

Special transactions:

Journalize the following transactions in the Books of Rakesh for the month of January, 2001

Date Transactions

2.1.2001

8.1.2001

9.1.2001

10.1.2001

11.1.2001

12.1.2001

12.1.2001

25.1.2001

28.1.200

Withdrawn cash for personal use Rs.2,500

Withdrawn goods for personal use (Sale price Rs.1,500, CostRs.1,250)

Goods distributed to children in an orphanage (Sale price Rs.2,000 Cost

Rs.17,000)

Goods distributed as free samples (Sale price Rs.1,200; Cost Rs.1,000)

Goods stolen (Sale price Rs.1,000 Cost Rs.800)

Goods destroyed by fire (Sale price Rs.1,500 Cost Rs.1,250)

Goods used in furnishing the office (Sale prices Rs.2,000 Cost price Rs.1,750)

Recovered from Pramod half the amount which was written off as bad Rs.300 was

written off as bad earlier.

Rs.250 payable by Rakesh was written off as bad.

Solution:

In the Books of Rakesh

Journal Entries


Rs.

Credit

Rs.

2.1.2001

8.1.2001

9.1.2001

10.1.2001

11.1.2001

12.1.2001

12.1.2001

Drawings a/c Dr.

To Cash a/c

(Being cash withdrawn for personal use)

Drawings a/c. Dr.

To Purchases a/c

(Being goods withdrawn for personal use)

Donation a/c Dr.

To Purchases a/c

(Being goods distributed to the children in an orphanage)

Sales Promotion a/c Dr.

To Purchases a/c

(Being goods distributed as free samples)

Loss by Theft a/c Dr.

To Purchases a/c

(Being goods stolen)

Loss by fire a/c Dr.

To Purchases a/c

(Being goods destroyed by fire)

Office furniture a/c Dr.

To Purchases a/c

(Being goods used in furnishing the office)

Cash a/c Dr.

2,500

1,250

1,700

1,000

800

1,250

1,750

150

2,500

1,250

1,700

1,000

800

1,250

1,750

150

25.1.2001

28.1.2001

To Bad Debts Recovered a/c

(Being cash recovered out of an amount which was

written off as bad earlier)

Bad Debts a/c Dr.

To Rakesh a/c

(Being amount due from Rakesh written off as bad)

250

250

5.5 COMPOUND JOURNAL ENTRY: Sometimes there are a number of transactions on the same date relating to one particular account

or of one particular nature. Such transactions may be recorded by means of a single entry instead

of passing several journal entries. Such an entry is termed as „compound journal entry‟. It may be

recorded in any of the following three ways:

(i) One particular account may be debited while several other accounts may be credited.

(ii) One particular account may be credited while several other accounts may be debited.

(iii) Several accounts may be debited and several accounts may be credited.

Illustrations 5:

Journalize the following transactions in the Books of Rakesh for the month of January, 2001.

Date Transactions

2.1.2001

8.1.2001

15.1.2001

20.1.2001

25.1.2001

Purchased goods from Arora at the list price of Rs.8,000. A trade discount

of 10% was allowed.

Sold goods to Flora at a list price of Rs.4,000. A trade discount of 5% was

allowed.

Received a cheque from Flora for Rs.3,600 in full settlement.

Paid Arora Rs.7,000 by cheque in full settlement.

Shyam is declared insolvent and received from his official receiver, a first

& final dividend of 60 paise in a rupee against a debt of Rs.2,500

Solution:

Journal Entries


Rs. Credit

Rs.

2.1.2001

8.1.2001

15.1.2001

Purchases a/c Dr.

To Arora a/c

(Being goods purchased from Arora for

Rs.8,000 at a trade discount of 10%)

Flora a/c Dr.

To Sales a/c

(Being goods sold to Flora for Rs.4,000

at a trade discount of 5%)

Bank a/c Dr.

Discount Allowed a/c Dr.

To Flora a/c

(Being cheque received from Flora in full

settlement)

7,200

3,800

3,600

200

7,200

3,800

3,800

20.1.2001

25.1.2001

Arora a/c Dr.

To Bank a/c

To Discount received a/c

(Being cheque paid to Arora in full

settlement)

Cash a/c Dr.

Bad Debts a/c Dr.

To Shyam a/c

(Being 60 paise in a rupee received

from Shyam in full settlement of dues)

7,200

1,500

1,000

7,000

200

2,500

5.6 OPENING ENTRY: A journal entry by means of which the balances of various assets, liabilities & capital appearing

in the balance sheet of previous accounting period are brought forward in the books of current

accounting period, is known as „opening entry‟.

Illustration 6:

Pass the opening entry in the journal of Ram (as on 1st April 2008):

Cash in Hand Rs 50,000, stock of Rs 20,000, land & building Rs 1,0,00,00 plant & machinery Rs

50,000, furniture 20,000 owings from X ltd 15000, loan from Y ltd 10,000.

Solution:

Date Particulars L.F. Dr (Rs) Cr (Rs)

2008

April1

Cash in hand Dr

Stock Dr.

Land & Building Dr.

Plant & Machinery Dr

Furniture Dr

To X Ltd

To Loan from Y Ltd

To Ram‟s capital A/c

(being the balance brought forward

from the last year)

50,000

20,000

1,00,000

50,000

20,000

15000

10,000

2,15,000

5.7 TRADE DISCOUNT V/S CASH DISCOUNT

TRADE DISCOUNT:

It is a reduction granted by a supplier from the list price of goods or service on business

considerations (such as quantity bought, trade practices etc) other than for prompt payment. For

example: If a supplier sells goods worth Rs 10,000 at trade discount of 10%, trade discount will

be calculated as follows:

Price of Goods Rs 10,000

Less: Trade discount Rs 1,000

Amount payable as per invoice Rs 9,000

CASH DISCOUNT:

A reduction granted by a supplier from the invoice price in consideration of immediate payment

or payment within a stipulated period. Example: If in the above example, terms of payment 2%,

30 days, it means buyer will get 2% cash discount if he makes payment within 30 days. And the

cash discount will be calculated as follows:

Amount payable as per invoice Rs 9,000

Cash discount Rs 180

Cash paid within 30 days Rs 8,820

Difference between these two discounts can be presented in tabular form as follows:

Trade Discount Cash Discount

It is a reduction granted by supplier from

the list price of goods/ service on business

consideration other than for prompt

payment

A reduction granted by supplier from the

invoice price in consideration of immediate

payment or payment in stipulated period.

It is given to promote sales It is allowed to encourage prompt payment

It is allowed on purchase It is given at the time of payment within

stipulated time period

It is shown in invoice itself. It is not shown in invoice

Trade discount account is not opened in

ledger

It is opened in ledger

It may vary with quantity purchased It may vary with the payment period

5.8 LEDGER

Ledger contains a classified summary of all transactions recorded in Cashbook and journal. It is

the main book of account. Ledger is also called Principal book as final information pertaining to

the financial position of a business emerges only from the accounts

Format of ledger:

Dr. Account Title Cr.

Date Particulars J.F. Amou

nt

Date Particulars J.F. Amoun

t

The date column records the year, month and date of the transactions. Particulars column records

the title of the other account affected. Name of the account in particulars column on the debit and

credit side are preceded by the words „To‟ and „By‟ respectively. Journal Folio (J.F.) column

records the page number of the journal from which the posting to the ledger has taken place.

Amount column on debit and credit side records the amount mentioned in journal entry against

the title of the account prepared.

Ledger Posting

The process of transferring of debits and credits entries from the journal to the ledger is called

ledger posting.

STEPS IN LEDGER POSTING:

First of all the opening balance (if any) has to be posted. The opening entry for various

assets should be posted by writing „To Balance b/f‟on the debit side of the relevant

account. Similarly, liabilities accounts should be posted by writing „By Balance b/f‟ on the

credit side of the relevant account.

1. Enter the date of the transaction on the debit side of the relevant account.

2. The title of the account to be credited is preceded by the word “To” is entered in the

particulars column.

3. In Journal Folio (J.F.) column enter the page number of the journal on which the

journal entry is passed.

4. Amount column records the amount mentioned in the journal against title of the

account under consideration.

For posting of the account to be credited, above mentioned steps are followed but with

one difference. Now the recording is done on the credit side of the account and in the

particulars column title of the amount to be debited is preceded by the word “By”.

Illustration 7

Cash received from Geet & Co. Rs.1,000 on 5.1.2001

Cash a/c Dr. 1,000

To Geet & Co. a/c 1,000

Dr CASH A/C Cr

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

5.1.2001 To Geet & Co 1,000

Dr. Geeta & Co A/c Cr.

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

5.1.2001 By Cash a/c 1,000

5.9 BALANCING OF LEDGER

After the posting has been completed accounts are balanced. Balancing of an account

means to make the total of amounts column appearing on the debit and credit side equal

to each other. If the total of debit side is greater than the credit side, the difference

between the two sides is known as debit balance and likewise, if the total of credit side is

greater, the difference is known as credit balance. The difference is placed on the shorter

side, saying “To (or By) balance carried down. The total is written on both sides opposite

each other and the account is ruled off. Personal accounts and real accounts like capital

accounts, machinery account, building account, etc. are balanced. But nominal accounts

representing expenses, revenues and incomes are not balanced. They are transferred to

the trading and profit and loss account at the end of the year.

Illustration 8 From the following information prepare the ledger account of Garewal in the books of

Rahman and bring down the balance as on 31st January, 2001.

1.1.2001 Sold goods for Rs.1,00,000 less 25% trade discount.

4.1.2001 Garewal paid Rs.40,000 on account, discount allowed Rs.4,000.

6.1.2001 Sold goods for Rs.50,000 less 25% trade discount.

9.1.2001 Received back 1/3rd of the goods sold on 6th January.

15.1.2001 Received cheque for Rs.60,000, discount allowed thereon

Rs.6,000.

18.1.2001 Sold goods Rs.2,00,000 less 25% trade discount.

20.1.2001 Bills Receivable accepted by Garewal for Rs.1,00,000.

25.1.2001 Cheque received on 15th January was returned dishonored.

28.1.2001 Received cash Rs.75,000.

Solution:

In the Books of Rahman

Garewal’s Account

Dr. Cr.

Date Particulars J.F. Amount

Rs. Date Particular J.F. Amount

Rs.

1.1.2001

6.1.2001

18.1.2001

25.1.2001

25.1.2001

1.2.2001

To Sales A/c

To Sales A/c

To Sales A/c

To Bank A/c

Cheque dishonored

To Discount Allowed

Cancellation of discount

To Balance b/d

75,000

37,500

1,50,000

60,000

6,000

3,28,500

31,000

4.1.2001

4.1.2001

9.1.2001

15.1.2001

15.1.2001

28.1.2001

31.1.2001

By Cash A/c

By Discount Allowed a/c

By Returns Inward

By Bank A/c

By Discount Allowed

A/c

By Bills Receivable A/c

By Cash a/c

By Balance c/d

40,000

40,000

12,500

60,000

6,000

1,00,000

75,000 31,000

3,28,500

Test Exercise:-

Problem 1. Journalize the following transactions:

i. Ganesh Started his business with Rs 20,000

ii. Borrowed Rs 5,000 from Mahesh.

iii. Deposited into the bank Rs 10,000.

iv. Purchased Fixed Assets for Rs 5,000

v. Bought goods for Rs 1,500.

vi. Sold goods for Rs 9,000.

vii. Purchased goods on credit from Ramesh for Rs 20,000.

viii. Sold goods on credit to Shyam fro Rs 12,000.

ix. Received Rs 11,880 from Shyam after allowing him cash discount Rs 120.

x. Paid Rs19,800 to Ramesh after receiving cash discount Rs 200.

xi. Withdrew goods worth Rs 1000 for personal use.

xii. Cash withdrew from bank for personal purpose Rs 1000

Problem 2:

Journalize: -

1. March 1, 08 Received a cheque from Ramesh & Co to whom goods were sold for Rs

2000 last year, allowed his 1% discount.

2. March 2,08 Ramesh & co‟s cheque deposited into bank.

3. March 5, 08 Ramesh & Co‟s cheque dishonored (bank charged Rs 10)

4. March 20 Ramesh & Co settled his A/c by means of a cheque for Rs 2025, Rs 15 being

for interest charged.

5. March 22, 08 Paid rent of building Rs 12000, half of the building is used by the

proprietor for residential use.

Problem 3: Journalize: -

1. March 21, 08 Purchased machinery from Rajiv for Rs 5000 and paid him by means of

bank draft purchased from bank for Rs 5020.

2. March 22, 08 Discounted a bills of exchange for Rs 10,000 at 1% through bank.

3. March 24, 08 Honored our acceptance in favour of Shyam by cheque Rs 5000.

4. March 25, 08 Received payment of a loan of Rs 5000 and deposited Rs 3000 out of it into

bank.

5. March 28, 08 Supplied goods costing Rs 600 to Mohan & issued invoice at 10% above

cost & allowed 5%

6. Received an order of goods for Rs 40,000 from Ram.

7. Paid s 150 in cost as wages for installation of Machine.

8. Sold goods to Kitty. List price is 10,000. Sales is subject to 10% trade discount. And 5%

cash discount if payment is made immediately. Kitty availed of cash discount.

9. goods worth Rs 4200 distributed as samples.

End Term Quizzes

Select the most appropriate answer:

Q1 Which of the following is an example of personal account?:

(a) Machinery

(b) Cash

(c) Rent

(d) Creditor

Q2 Payment of salary is recorded by:

(a) Debiting salary A/c, crediting cash a/c

(b) Debiting cash A/c, crediting salary a/c

(c) Debiting employee a/c, crediting co a/c


Q3 Journal is a:

(a) Book of original entry

(b) Classified summary of all transactions

(c) Permanent record

(d) Both (a) & (b) above

Q4 Purchase of goods on credit from A is recorded as:

(a) Debit purchase A/c, credit cash a/c

(b) Debit purchase A/c, credit A‟s A/c

(c) Debit A‟s A/c, Credit purchase A/c

(d) Debit Cash A/c, credit purchase A/c

Q5 Goods returned from X is entered as:

(a) Debit X A/c, credit purchase return A/c

(b) Debit X A/c, credit cash a/c

(c) Debit sales return a/c, credit X‟s A/c

(d) Debit X‟s A/c, credit sales A/c

Q6 Trade discount allowed at the time of sale of goods:

(a) Is recorded in sales book

(b) Is recorded in cash book

(c) Is recorded in journal

(d) Is not recorded in books of account

Q7 XYZ Ltd. paid wages of Rs.8,000 for erection of machinery. The journal entry for the

transaction is:

(a) Debit wages & credit cash a/c

(b) Debit Machinery A/c & Credit cash A/c

(c) Debit cash a/c, credit wages a/c

(d) Debit machinery a/c & credit

Q 8 The process of balancing of an account involves equalization of both sides of the account.

If the debit side of an account exceeds the credit side, the difference is put on the credit side.

The said balance is i. A debit balance, ii. A credit Balance iii. It represents either expenditure

or an asset or both iv it is either income or liability or both:

(a) Only (i) above

(b) Only (ii) above

(c) Both (i) & (iii) above

(d) Both (ii) & (iii) above

Q9 Which of the following statements is/are true?

i. Drawings account is a nominal account.

ii. Capital account is a real account.

iii. Salaries account is a nominal account.

iv. Outstanding salaries account is a nominal account.

v. Patents account is a personal account.

(a) Both (i) & (ii)

(b) Only (iii)

(c) (i), (ii) & (iii)

(d) (iv) &(v)

Q10 The entry to record the collection of cash from sundry debtors would involve a i. Debit

to sundry debtors ii. Debit to cash account iii. Credit to sundry debtors iv. Credit to cash

account.:

(a) Only (i) above

(b) Only (ii) above

(c) Only (iii) above

(d) Both (ii) & (iii) above

CHAPTER 6 SUBSIDIARY BOOKS I- CASH BOOK


6.1 Meaning

6.2 Advantages

6.3 Meaning of Cash book

6.4 Types of cash book:- Single Column, Double Column, Triple Column & Petty Cash book

6.5 Contra Entry

6.1 MEANING OF SPECIAL JOURNALS OR SUNSIDIARY BOOKS:

When the number of transactions is large, it is practically impossible to record all the

transactions through one journal. Special journal refer to journals meant for specific transactions

of similar nature. Special journals are also known as subsidiary books or day books. The

Performa & number of special journals vary according to the requirements of each enterprise. In

any large organization following special journals are generally used:

Name of special journal Specific transactions to be recorded

1 Cash Journals

(a) Simple cash book

(b) cash book with discount column

© cash book with bank & discount column

(d) petty cash book

Cash transactions

Cash & discount transactions

Cash, bank & discount transactions

Petty cash transactions

2 Goods Journals

(a) Purchase book

(b) Sales book

© Sales return book (return inward book)

(d) Purchase return book (return outward

book)

Credit purchases of goods

Credit sales of goods

Goods returned by those customers to

whom goods were sold on credit

Goods returned to those customers from

whom goods were purchased on credit

3. Bills Journals

(a) Bills receivable book

(b) Bills payable book

Bills receivable drawn

Bills payable accepted

4 Journal Proper Those transactions which do not fall within

the scope of special journal

6.2 ADVANTAGES OF SPECIAL JOURNALS (SUBSIDIARY BOOKS) 1. Facilitates division of work

2. Permits the installation of internal check system

3. Permits the use of specialized skill

4. Time & labour saving in journalizing & posting

6.3 CASH BOOK

Cashbook is a special journal in which all cash transactions are recorded directly. Cashbook

shows the cash receipts and the cash payments. The Cashbook resembles a ledger with the

debit and credit sides, and the balance represents cash on hand at the end of the accounting

period. As soon as the cash transaction takes place, it is recorded in the Cashbook. Cash

account is not opened separately, when a Cashbook is maintained because Cashbook serves the

purpose of the ledger also.

Conceptual framework is presented for Financial Accounting in the following figure: Figure: Conceptual Framework and Financial Accounting

In other words:

The subject of Financial Accounting is based on the double entry system of

accounting using debits and credits.

Cash transactions are entered in Cashbook.

Credit transactions (non-cash transactions) are entered in the Journal.

The transactions of Cashbook and journal are integrated into the Ledger,

which is a summary of all cash and credit entries.

When all the ledger accounts are tabulated as a summary statement it is

known as „Trial Balance‟.

Trial Balance establishes the arithmetical accuracy of the accounting

records.

From the trial balance two separate accounting documents are prepared

namely Profit and Loss Account and Balance Sheet.

All income and expenditure accounts are taken to Profit and Loss Account.

All assets and liabilities accounts are taken to Balance Sheet.

The net result of Profit and Loss Account namely Profit or Loss is taken to

Balance Sheet.

Thus the Balance Sheet tallies.

The recording of transactions in the books of accounts may be represented as in Figure

3.5.

Figure 3.5: Recording of Transactions

6.4 TYPES OF CASH BOOK

1. Simple Cashbook/Single Column Cashbook

2. Double Column Cashbook

3. Three Column Cashbook

4. Petty cash book

1. SIMPLE CASH BOOK: In simple Cashbook all the cash transactions are recorded in chronological order. All cash

receipts are entered on the debit side and cash payments on the credit side of the

Cashbook. The difference between the two sides is the cash in hand.

Illustration:

Prepare a single column Cashbook of Raja Ram from the following particulars:

1.1..2001 He commenced business with Rs 1,00,000of which 20,000 was

borrowed from Mr Basant

2.1.2001 Purchased furniture for office use worth Rs 5,000

3.1.2001

Paid petty cash expenses of Rs.2,000.

4.1.2001 Bought goods from Mohan for cash Rs.20,000.

4.1.2001 Paid Rs.20,000 to Charat for goods purchased on credit.

5.1.2001 Sold goods to Shyam for cash Rs.10,000. Received Rs.38,000

from Hari for goods sold on credit.

16.1.2001 Drew cash for personal use Rs.1,000.

31.1.2001 Paid salary to Sri Ram, an employee, Rs.1,500.

31.1.2001 Repaid the loan taken from Mr. Basant including interest @18%

p.a.

Solution:

Cash book

Dr. Cr.

Date Particulars LF Rs. Date Particulars LF Rs.

1.1.2001.

1.20011

5.1.2001

5.1.2001

To Capital a/c

To Loan from

Basant a/c

To Sales

To Hari‟s a/c

To Balance b/d

80,000

20,000

10,000

38,000

1,48,000

78,200

2.1.2001

3.1.2001

4.1.2001

4.1.2001

16.1.2001

31.1.2001

31.1.2001

31.1.2001

31.1.2001

By Furniture a/cBy

Petty Expenses a/c

By Purchases a/c

By Charat a/c

By Drawings a/c

By Salary a/c

By Interest on Loan

a/c

By Loan from Basant

a/c

By Balance c/d

5,000

2,000

20,000

20,000

1,000

1,500

300

20,000

78, 200

1,48,000

2. Double Column Cashbook (Cashbook with cash and discount columns)

This Cashbook is an extension of simple Cashbook. An additional column is maintained to

record discount involved in the settlement of debtors and creditors in the double column

Cashbook. Cash discount usually occurs in the settlement of trade debts. It is an allowance

made by the receiver of cash to the payer for the prompt payment. Cash received from

debtors is recorded in the cash column and discount allowed in the discount column on

the debit side of the Cashbook. Similarly, credit side of the Cashbook records cash paid to

the creditors in cash column and discount received in the discount column

Double column cashbook also can be with cash and bank columns. In this type of cashbook,

the transactions involving cash and transactions involving receipts and payments by

cheques are recorded. It facilitates and enables the business to maintain both cash and

bank accounts simultaneously.

Illustration:

Compile Cashbook with discount column from the following transactions for the month of

March, 2001

1.3.2001 Mr. Ganesh commenced business with cash Rs.65,000.

3.3.2001 Bought goods for cash Rs.6,850.

4.3.2001 Paid Mr. Mohan cash Rs.950; discount was allowed thereon Rs.50.

6.3.2001 Deposited in bank Rs.40,000

6.3.2001 Paid for office furniture by cash Rs.4,650.

9.3.2001 Sold goods for cash Rs.30,000.

12.3.2001 Paid wages by cash Rs.1,200.

13.3.2001 Paid for stationery Rs.400.

15.3.2001 Sold goods for cash Rs.25,000.

17.3.2001 Paid for Miscellaneous expenses Rs.450.

19.3.2001 Received cash from Mr. Tilak 4,850; Allowed him discount Rs.150.

21.3.2001 Purchased a radio set for Rs.2,500 for personal use.

22.3.2001 Paid salary Rs.4,000.

25.3.2001 Paid rent Rs.900.

28.3.2001 Paid electricity bill Rs.350.

29.3.2001 Paid advertising expenses Rs.400.

31.3.2001 Paid into bank Rs.25,000.

Solution:

CASH BOOK

Date Particulars LF Discount

Rs. Cash Rs.

Date L.F

Discount

Rs. Cash Rs.

1.3.2001

9.3.2001

15.3.2001

19.3.2001

To Capital

A/c

To Sales A/c

To Sales A/c

To Tilak A/c

150

65,000

30,000

25,000

4,850

3.3.200

14.3.2001

6.3.200

16.3.2001

12.3.2001

13.3.2001

17.3.2001

21.3.2001

22.3.2001

25.3.2001

28.3.2001

29.3.2001

31.3.2001

31.3.2001

By Purchases

a/cBy Mohan a/c

By Bank a/c

By Office Furniture

a/c

By Wages a/c

By Stationary a/c

By Miscellaneous

Expenses a/c

By Drawings a/c

By Salary a/c

By Rent a/c

By Electricity a/c

By Advertising a/c

By Bank a/c

By Balance c/d

50

6,850

950

40,000 4,650

1,200

400

450

2,500

4,000

900

350

400

25,000

37,200

150 1,24,850 50 1,24,850

3. Three Column Cashbook (Cashbook with cash, discount and bank

columns)

With the development of banking sector, and frequent use of banking instrument,

Cashbook with additional column for bank transactions came into existence. Thus, the

three column Cashbook is nothing but ledger accounts for cash and bank with additional

information about discount allowed and discount received.

An illustrative format of this type of Cashbook is given below:

Cashbook of Excellent Enterprises

Dr. Cr.

Date Receipts Discount

allowed Cash Bank Date Payments Discount

received Cash Bank

2001

April,

1

6

7

11

20

To Balance

b/f

To Sales

To Arvind

Co

To Beta

Corpn

To sales

50

60

1,500

800

500

13,000

2,000

2,350

2001

April,

2

5

8

15

30

By Wage

for Casual

Sweeper

By Electricity

By Plumbing

Repairs

By Y Ltd.

By Balance c/f

150

50

400

2,350

400

10,800

6,150

110 2,800 17,350 150 2,850 17,350

The Cashbook normally carries columns for Cash Memo No., Ledger Folio No., Voucher No.,

etc.

The unique feature of the Cashbook is that it performs the functions of a Journal and

the General Ledger with regard to the cash and bank transactions. In other words,

Cashbook is the book of first entry for all such transactions and the ledger accounts for

cash in hand and cash at bank will not be maintained in the General Ledger.

4. PETTY CASHBOOK:

When the petty cash fund is operated as an imprest fund, the recording of the petty

expenses paid will be made in the Petty Cashbook. This would also avoid recording too

many small value transactions in the main Cashbook. The Petty Cashbook would contain a

number of analytical columns for grouping the various expenses under a few classifications

which would facilitate subsequent posting into the General Ledger.

THE IMPREST SYSTEM :

When an analytical Petty Cashbook is maintained for recording the petty expenses, it will be

practically more convenient to consider the petty cash as a separate account and take

cheques issued for the petty cash imprest as a debit to petty cash account and all petty expenses paid as credits in petty cash account.

6.5 CONTRA ENTRIES

If a transaction affects both cash account and bank account in the opposite sides, the entry

for recording the transaction is called a contra entry. Entries which are made on both sides

of the Cashbook are called contra entries. For contra entries no posting is required because

the double entry is completed in the Cashbook itself. For example, cash deposited into bank

and cash withdrawn from bank affect cash and bank account only. Both aspects of these

transactions are recorded in cash column and bank column of the Cashbook respectively. No

ledger posting is required, because both aspects of the transaction are recorded in the

Cashbook itself. This fact is indicated in the Cashbook by writing „C‟ in L.F. column

Illustration

1.3.2001 Cash in hand 2,500

Cash at bank 10,000

2.3.2001 Paid into bank 1,000

5.3.2001 Bought furniture and issued cheque 2,000

8.3.2001 Purchased goods for cash 500

12.3.2001 Received cash from Mohinder 980

Discount allowed to him 20

14.3.2001 Cash Sales 4,000

16.3.2001 Paid to Amaranth by cheque 1,450

Discount received 50

19.3.2001 Paid into Bank 400

23.3.2001 Withdrawn from Bank for private expenses 600

24.3.2001 Received cheque from Patel 1,430

allowed him discount 20

28.3.2001 Withdrawn cash from bank for office use 2,000

30.3.2001

Paid rent by cheque

800

Solution: CASH BOOK

Dr. Cr.

Date Particulars LF Discount

Allowed

Cash Bank Date Particulars LF Discount Cash Bank

1.3.2001

2.3.2001

12.3.2001

14.3.2001

19.3.2001

24.3.2001

28.3.2001

31.3.2001

To Balanceb/f

To Cash a/c

To Mohinder a/c

To Sales a/c

To Cash

To Patel a/c

To Bank

To Balance b/d

-

C

-

-

C

C

-

-

20

-

-

20

2,500

-

980

4,000

-

-

2,000

10,000

1,000

-

-

400

1,430

2.3.2001

5.3.2001

8.3.2001

16.3.2001

19.3.2001

23.3.2001

28.3.2001

30.3.2001

30.3.2001

-

-

By Bank a/c

By Furniture a/c

By Purchases a/c

By Aamranth a/c

By Bank a/c

By Drawings a/c

By Cash a/c

By Rent a/c

By Balance c/d

C

-

-

-

-

C

C

–

-

-

-

-

50

-

-

-

1,000

-

-

500

-

-

400

-

-

--

7580

–

-

2,000

-

-

1450

-

-

600

2,000

-

800

5,980

40 9,480 12,830 40 9,480 12,830

- 7,580 5,980 - - -

Test Questions:

Problem 1 Record the following transactions in Three Column Cash book:

1996

Jan 1 Balances: Cash Rs 500 and Bank (cr) Rs 12000.

Jan 2 Investment additional capital of Rs 12000.

Jan 5 Deposited Rs 8000 in the bank.

Jan 8 Received from Roy Rs 890, allowed him discount Rs 5.

Jan 12 Paid Rs 1200 to Ghose who allowed us discount of Rs 30.

Jan 15 Bought merchandise for cash Rs 1000.

Jan 18 purchased furniture by cheque Rs 1500.

Jan 19 received a crossed cheque of Rs 230 from Sundram in full settlement of debt of Rs 240.

Jan 22 Paid commission Rs 150 by cheque.

Jan 25 Withdrew for personal use Rs 300.

Jan 26 Paid to Krishnan Rs 700 by cheque, discount received Rs 20.

Jan27 Withdrew for personal use Rs 300.

Jan 29 received dividend by an order cheque Rs 30, deposited in the bank on the same day.

Jan 30 cleared telephone bill Rs 50.

Jan 31 paid manager‟s salary Rs 350, rent Rs 200 & wages Rs 150.

MULTIPLE CHOICE QUESTIONS:

Choose the most appropriate answer:

Q1 Which of the following statements is/are true? i. Cash book records all cash receipts and cash

payments. ii. Cash book records all sale and purchase transactions of goods both in cash and on

credit. iii.Cash book records discount on cash payments.

(a) Only (i)

(b) Only (ii)

(c) Only (iii)

(d) Both (i) & (iii)

Q2 The periodical total of discount column on receipts side of a triple column cash book is

recorded to the:

(a) Credit side of discount column

(b) Credit side of provision of discount column

(c) Debit side of discount column

(d) Credit side of debtor‟s account

Q3 Which of the following statements is false?

(a) Credit side of total of discount column is an income

(b) Debit balance of bank column is a liability

(c) Debit balance of cash column is an asset


Q4 Cash book is used to record

(a) All receipts only

(b) All payment only

(c) All cash & credit sale

(d) All receipts & payments of cash

Q5 Single column cash book may show:

(a) Only debit balance

(b) Only credit balance

(c) Either debit or credit balance


Q6 When a cheque is received on a particular dale is not deposited into bank on the same dale, it

is entered in:

(a) Cash column on the debit side

(b) Bank column on debit side

(c) Cash column on credit side

(d) Bank column on credit side

Q7 When a cheque is returned dishonored, it is recorded in:

(a) Cash column on credit side

(b) Cash column on debit side

(c) Bank column on credit side

(d) Bank column on debit side

Q8 If the debit as well as credit aspects of a transaction are recorded in the cash book itself, it is

called:

(a) An opening entry

(b) A compound entry

(c) A transfer entry

(d) A contra entry

Q9 Which is not a contra entry:

(a) Cash deposited into bank

(b) Cash withdrew from bank

(c) Cash withdrew from bank for personal use

(d) None of above

Q 10 Bank column may show:

(a) Only a debit balance

(b) Only a credit balance

(c) Either debit balance or credit balance

(d) None of above

CHAPTER 7 SUBSIDIARY BOOK II- OTHER BOOKS


7.1 Meaning

7.2 Purchase Book

7.3 Purchases Returns Book

7.4 Sales book

7,5 Sales return book

7.6 Bills receivable Book

7.7 Bills payable book

7.8 Journal Proper

7.1 MEANING

The Books of Accounts maintained by an organization other than the Cashbook may be

classified into Journals and Ledgers. The Journal is used as the book of first entry for all

transactions which cannot be recorded in the Cashbook. In other words, all non-cash

transactions should be recorded in the journal. The journal is inadequate as the single

book of the original entry when the transactions are voluminous in number. The journal is

divided into divisions and they are commonly termed as subsidiary books. Some of the

subsidiary books are:

i.Purchase Book

ii.Purchase Returns Book

iii.Sales Book

iv.Sales Returns Book

v.Bills Receivable Book

vi.Bills Payable Book

vii.Journal Proper.

7.2 PURCHASE BOOK Also known as the Purchases Journal, this book is used to record credit purchases of goods only.

The term „goods‟ covers only those items procured by the business for resale.

A simple format of purchase book is given below:

Purchase book of XYS Ltd Date Particulars

(Name of Supplier, etc.) Ledger Folio

Inward Invoice

No.

Amount Rs.

2001

April 2

12

20

Y Limited

Sharp Enterprises

Best and Company

3354

401

5542

10,950

2,700

3,900

Total

17,550

7.3 PURCHASES RETURNS BOOK:

This subsidiary book is used to record the goods purchased on credit and sent back to

suppliers as not conforming to specifications or for any other reason.

simple format of purchase return book is given below:

Purchase return book of XYZ Ltd Date Name of Supplier Ledger

Folio Debit

Note No.* Amount

Rs.

2001

April,

15

25

Sharp Enterprises

Best and Company

80

81

1,000

900

Total

1,900

* Debit note is document prepared by the purchaser to inform the supplier that his

account has been debited with the amount mentioned & for reason stated therin. Debit

note contains the date of return, name of supplier to whom the goods has been

returned, details of goods. Each debit note is serially numbered.

7.4 SALES BOOK:

Also known as the Sales Journal, this subsidiary book is used to record the sale of goods

on credit.

simple format of sales book is given below:

SALES BOOK OF XYZ Ltd

Date Name of Customer Ledg

er

Folio

Outwar

d

Invoice

No.

Amount

Rs.

2001

April,3

5

6

15

25

Beta Corporation

Zeta Company

Quality Dealers

Sooraj Traders

Star Enterprises

1001

1002

1003

1004

2,410

3,940

4,900

1,800

1005 19,500

Total 32,550

7.5 SALES RETURNS BOOK :

This book is used to record the transactions relating to goods sold on credit and received

back from the customers as not conforming to the specifications or for any other reason.

Simple format of sales return book is given below

SALES RETURN BOOK OF XYZ LTD

Date Name of Customer Ledger

Folio Credit

Note

No.*

Amount

Rs.

2001

April,1

0

27

Zeta Company

Star Enterprises

10

11

540

2,000

Total 2,540

* A credit note is a document prepared by the seller to inform the buyer that his

account has been credited with the amount mentioned & for he reason stated

therein.

7.6 BILLS RECEIVABLE BOOK The Bills Receivable of an enterprise consists of all Promissory Notes given or Bills of

Exchange accepted by customers in respect of amounts due from them. The bills receivable

book is used to record all promissory notes given or Bills of Exchange accepted by

customers

Simple format of Bill Receivable Book is given below:

BIILS RECEIVABLE BOOK OF XYZ LTD

S.

No

.

Date From

whom

receive

d

Acceptor Date of

Bill Ter

m Date of

Maturity L

F Where

Payable Amount

Rs. How

Disposed

1

2

2001

April 12

April 18

Quality

Dealer

s

Sooraj

Trader

s

Quality

Dealers

Sooraj

Traders

8.4.01

16.4 X 1

90

days

60

days

10.7.01

10.6.01

Bank of

India,

Mumbai

Union

Bank,

Mumbai

4,900

1,800

6,700

Discounted

on

20.4.01

7.7 BILLS PAYABLE BOOK

The Bills Payable consists of all Promissory Notes given or Bills of Exchange accepted by

the business in respect of amounts owing to its suppliers. The Bills Payable Book is used to

record all such Promissory Notes given or Bills of Exchange accepted by the business.

Simple format of Bill Payable Book is given below:

BIILS PAYABLE BOOK OF XYZ LTD

S.

No

.

Date

Accepte

d

Name

of the

drawer

Payee Date of

Bill Ter

m Date of

Maturity L

F Where

Payable Amount

Rs. Remarks

1

2001

April 25

Best &

Co.

Best &

Co.

25.04.01

90

days

27.07.01

Bank of

India,

Mumbai

4,900

7.8 JOURNAL PROPER This book is used to record all transactions which cannot be included in the Cashbook or any

of the other six subsidiary books discussed so far. The transactions that will be recorded in

journal proper are, purchase or sale of fixed assets and investments on credit, adjusting

entries, rectification entries, etc. Format Given below:

JPURNAL PROPER OF XYZ LTD

Date Particulars Doc. Ref. Ledger Debit Credit

Folio Rs. Rs.

2001 Furniture and Fittings a/c Dr. 4,000

April,10 To Furniture Marta/c 4,000

(being the purchase of furniture on credit)

April,30 Repairs to Machinery a/c Dr. 500

To Machinery a/c 500

(being the rectification of a wrong posting

of a repair expense to asset a/c) We will now take up the transactions of a business during a month and study how they will

be recorded in the various subsidiary books of accounts:

ILLUSTRATION:

During January 2001, Narayan transacted the following business:

Dat

e Rs.

1.

2.

3.

4.

Commenced business with cash

Purchased goods on credit from Shyam

Purchased goods for cash

Paid Gopalan an advance for goods ordered

40,000

30,000

1,000

2,000

Dat

e Rs.

5.

6.

7.

8.

9.

10.

11.

13.

15.

18.

20.

22.

25.

28.

31.

Received cash from Murthy as advance for goods

ordered by him

Purchased furniture for office use for cash

Paid wages

Received commission (in cash)

Goods returned to Shyam

Goods sold to Kamal

Paid for postage and telegrams

Goods returned by Kamal

Paid for stationery

Paid into bank

Goods sold for cash

Bought goods for cash

Paid salaries

Paid rent

Drew cash for personal use

3,000

2,000

500

600

200

10,000

200

500

200

500

750

1,000

700

500

1,000

SOLUTION:

Cashbook

Dr. Cr.

Date Receipts Le

dg

er

Fol

io

Cash

Rs.

Bank

Rs.

Date Payments Le

dg

er

Fol

io

Cash

Rs.

Bank

Rs.

2001

Jan. 1

Jan. 5

Jan. 8

Jan.18

Jan.20

To Capital a/c

To Murthy a/c

To Commission

a/c

To Cash a/c

To Sales a/c

C

40,000

3,000

600

750

500

2001

Jan. 3

Jan. 4

Jan. 6

Jan. 7

Jan.12

Jan.15

Jan,18

Jan.22

Jan,25

Jan.28

Jan.31

Jan.31

By Purchases a/c

By Gopalan a/c

By Furniture a/c

By Wages a/c

By Postage &

Telegrams a/c

By Stationery a/c

By Bank a/c

By Purchases a/c

By Salaries a/c

By Rent a/c

By Drawings a/c

By Balance c/d

C

1,000

2,000

2,000

500

200

200

500

1,000

700

500

1,000

34,750

500

Date Receipts Le

dg

er

Fol

io

Cash

Rs.

Bank

Rs.

Date Payments Le

dg

er

Fol

io

Cash

Rs.

Bank

Rs.

44,350 500 44,350 500 Note: The letter „C‟ in the Ledger Folio column denotes a „contra entry‟. That is an entry for which the debit and credit aspects are found in the Cashbook itself

Purchases Book

Date Name of Supplier Ledger

Folio Inward

Invoice

No.

Amount

Rs.

2001

Jan.2

Shyam

Total

30,000

330,000

Purchases Returns Book

Date Name of

Supplier Ledger

Folio Debit

Note

No.

Amount

Rs.

2001

Jan.

9

Shyam

Total

200

200

Sales Book

Name of

Customer Ledger

Folio Outward

Invoice

No.

Amo

unt

Rs.

200

1

Jan.

10

Kamal

Total

10,0

00

10,0

00 Sales Returns Book

Name of

Customer Ledger

Folio Credit

Note No. Amoun

t

Rs.

2001 Jan.

13

Kamal

Total

500

500

End Chapter Quizzes


Q (1) Purchase book is maintained to record:

(a) Purchase of goods

(b) All cash purchases

(c) All credit purchases

(d) All credit purchases of goods

Q (2) The periodical total of purchase book is posted to the:

(a) Debit of purchase a/c

(b) Debit of sales a/c

(c) Credit of purchase a/c

(d) Credit of cash a/c

Q3 sales book is mainained to record:

(a) Credit sales of goods only

(b) Cash sales of goods only

(c) All credit sales

(d) Both (a) & (c)

Q4 the periodical total of the sales book is posted to the:

(a) Debit of sales a/c

(b) Credit of sales a/c

(c) Credit of cash a/c

(d) Credit of customer‟s a/c

Q5 Return inward book is maintained to record:

(a) Return of goods purchased

(b) Return of goods sold

(c) Return of anything purchased

(d) Return of anything sold

Q6 Return inward book‟s periodical total is posted to:

(a) Credit of return inward a/c

(b) Debit of return outward book

(c) Debit of return inward a/c

(d) Credit of supplier

Q7 The debit notes are used to prepare:

(a) Sales book

(b) Sales return book

(c) Purchase return book

(d) Purchase book

Q8 Closing entries are recorded in:

(a) Cash book

(b) Ledger

(c) Journal proper

(d) Balance sheet

Q9 Cash book is:

(a) Ledger a/c

(b) A book of original entry

(c) Journal as well as ledger

(d) None of these

Q10 When a customer returns the goods:

(a) An invoice is sent to him

(b) A debit note is sent to him

(c) A credit note is sent to him


CHAPTER 8- BANK RECONCILIATION STATEMENT


8.1 Meaning of BRS

8.2 Reasons for difference between Bank Balances as per Cashbook and Passbook

8.3 Advantages of Bank Reconciliation Statement

8.4 Steps in Preparation of BRS

8.1 MEANING: The Bank Reconciliation Statement is an aid used to ensure the accuracy of transactions

appearing in the bank columns of the Cashbook. Such transactions can be verified through

an external record, namely, the bank statement received periodically from the banker. While

the business keeps a record of its transactions through the bank columns in the Cashbook,

the banker in turn maintains the bank‟s transactions with the business in his ledger. An

extract from this ledger showing details of the transactions during a specified period is sent

at frequent intervals by the bank to the business and this extract is referred to as a bank

statement.

8.2 REASONS FOR DIFFERENCE BETWEEN BANK BALANCES AS PER CASHBOOK AND

PASSBOOK:

The relationship between the customer and the banker is that of a creditor and a debtor.

So, if the bank column of the Cashbook shows a debit balance as on a specified date the

bank statement should show an equal amount of credit balance as on that date and vice

versa. However, the balances shown by the two independent records may not always agree

due to the following:

1. Cheques issued by the business to its suppliers or other parties may not have

been presented for payment.

2. Cheques received from customers and deposited may not have been collected

by the banker.

3. Deposits may have been directly made by the customers into the bank account

of the enterprise.

4. Collection charges, service charges and interest on overdraft are charged by the

banker. The business can ascertain the exact amount of charges and record

them in the Cashbook only after the receipt of the bank statement.

5. Interest credited by bank for the balance maintained with it and any other

income such as interest on securities, dividend, etc. collected by the bank on

behalf of the business can be ascertained only from the bank statement.

6. Wrong entries made by the business in the Cashbook or errors committed by

the bank in its ledger.

7. Omission of entries in the two sets of books.

8. Dishonor of customer‟s cheques deposited in the bank account

8.3 Advantages of Bank Reconciliation Statement

(1) Error Detection:

It helps in detection of errors of omission of transactions or wrong recording of

transactions either by the bank or the business enterprises. Errors identified in the

books by preparing BRS can be rectified.

(ii) Delay in Collection Revealed:

The delay in the collection of cheques, bills, etc., if any, is revealed, when BRS is

prepared. The matter can be pursued to avoid unnecessary delays in collection. It also

helps the management to keep track of the cheques and bills sent for collection.

(iii) Completion of Cashbook:

Business enterprises get information about bank charges, cheques dishonored, direct

payments, direct deposits, etc. from the bank statement only. Entries of the same are

made in the Cashbook on the basis of bank statement. Thus to complete the

Cashbook, comparison and reconciliation of Cashbook and bank book is essential.

(iv) Chances of Embezzlements are Reduced:

Periodical comparison of Cashbook and passbook keeps a check on the office staff. For

example, entry for cash deposit is appearing in the Cashbook but not in the passbook,

indicates fraud being committed by the staff. This type of frauds come to light when

Bank Reconciliation Statement is prepared.

8.4 Steps in Preparation of BRS

(1) Take the Cashbook or passbook balance as starting point. The following points

have to be noted while taking the opening balance.

1. Dr. balance as per Cashbook indicates favorable balance.

2. Cr. balance as per Cashbook means overdraft or unfavorable balance.

3. Dr. balance as per passbook means overdraft or unfavorable balance.

4. Cr. Balance as per passbook means favorable balance.

If the starting point denotes a favorable balance as per Cashbook or passbook, take it

as a positive figure. However, if the starting point denotes negative unfavorable

balance, take it as a negative figure.

(2) Adjust the starting point amount as per the information given and analyze its

impact on the other balances.

(3) After adjusting all the differences or errors, the balance as per the other book is

obtained. If the final balance is positive, it denotes favorable balance (Dr. balance as

per Cashbook or credit balance as per the passbook). However, if the final balance is

negative, it denotes the unfavorable balance or overdraft. (Cr. balance as per

Cashbook or debit balance as per passbook).

The following table summarizes the impact of various differences and errors on the

starting balance.

Bank Reconciliation Statement (BRS)

Items Rs Rs

Bank Balance as per Cashbook

Or

Overdraft balance as per Passbook

xxxx

1

2

3

4

5

Add:

Cheques issued but not presented for payment

Direct payments made by customers

Amount collected by bank (rent, dividends, interest on investments, etc.)

Cheques deposited but omitted to be recorded in

Cashbook

Wrong credit on the credit side of Passbook

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

1

2

3

4

5

6

Less:

Cheques deposited but not collected

Cheques paid into the bank but dishonored

Bank charges and interest charges

Payments made by the banker on behalf of the trader

Cheques issued but not recorded in the Cashbook

Wrong entry on the debit side of the passbook

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

Xxxx

Balance as per other book xxxx

Illustration:

On March 31, 2001, the bank column of Cashbook of Prithvi Limited showed a bank

balance (debit) of Rs.48,500. However, the bank statement showed a credit balance of

Rs.53,900 as on the same date. A detailed comparison of entries revealed the following:

1. Customers‟ cheques amounting to Rs.8,450 had not been collected by the

bank as on 31.3.2001.

2. Certain cheques amounting to Rs.8,850 had not been presented for

payment as on 31.3.2001.

3. Bank charges of Rs.1,000 and interest on investments of Rs.2,500 collected

by the banker appear only in the bank statement.

4. On 30.3.2001, there was a wrong credit of Rs.2,500 in the bank statement.

5. Swaroop Limited, a customer, had paid into the bank directly a sum of

Rs.3,000 on March 29, 2001. This has not been recorded in the Cashbook.

6. A cheque for Rs.2,000 received from Excel Limited, a customer, which was

deposited had been returned unpaid. The dishonor of this cheque has not

been entered in the Cashbook.

Solution: Prithvi Limited will first pass the necessary rectification entries in the Cashbook and then

prepare a reconciliation statement

Cashbook of Prithvi Limited (Bank Columns only)

Date Receipts Bank

Rs.

Date Payments Bank

Rs.

2001

March,31

March,31

March,31

To Balance b/d

To InterestReceived

To SwaroopLimited

48,500

2,500

3,000

2001

March,31

March,31

March,31

By Bank Charges

By Excel Limited

By Balance c/d

1,000

2,000

51,000

54,000 54,000

Bank Reconciliation Statement as on March 31, 2001

Particulars Rs. Rs.

Bank balance as per Cashbook

Add: Cheques issued but not presented for payment 8,850

Wrong credit in the bank statement 2,500

Less: Cheques deposited and remained uncollected

Bank balance as per bank statement

51,000

11,350

62,350

8,450

53,900

Test Questions:

Problem 1. From the following particulars, prepare a Bank Reconciliation Statement as on 31st

December, 2007:

Balance as per Cash book Rs 5,800.

Cheques issued but not presented for payment RS 2,000.

Cheques sent for collection but not collected up to 31st December,2007 rs 1500.

The bank had wrongly debited the account of the firm by Rs200, which was rectified by them

after 31st December.

Balance as per Pass book is Rs 6,100.

Problem 2: Prepare a Bank reconciliation Statement from the following particulars. You are required to

ascertain the bank balance as it would appear in the cash book of Shri Gobind as on 31st December, 1995.

(a) The bank pass book showed an overdraft of Rs 9500 on 31st December, 1995.

(b) Interest of Rs 250 on overdraft for six month ending 31st December, 1995 is debited in the pass

book, but is not entered in the bank column of cash book.

(c) Cheques issued but not cashed, prior to 31st December, 1995 amounted to Rs 1500.

(d) Club bill for Rs 2700 was directly debited to his bank account and not yet reflected in the cash

book.

(e) Cheques paid into bank, but not cleared and credited before 31st December, 1995 amounted to Rs

2500.

(f) Interest on investments collected by the Bankers and credited in the pass book amounted to Rs

1800.

Shri Govind issued a cheque of Rs 900 for his LIC premium, which was returned as the amount

mentioned in figure and in words did not tally. Shri Govind, therefore paid the premium by cash but this

was not reflected in his books of account.

Problem 3: on 30th

November 1997, the cash book of Mrs P Ali showed an overdrawn position of

Rs 3630 although her bank statement showed different balance. Detailed examination of the two

records revealed the following:

1. The debit side of the cash book had been undercast by Rs 300.

2. (A cheque for Rs 1560 in favour of X suppliers Ltd had been omitted by the bank from its

statement, the cheque having been debited to another customers‟s account.

3. A cheque fro Rs 182 drawn for payemnet of telephone bill had been enetered in the cash

book at Rs 128 but was shown correctly in the bank st.

4. A cheque of Rs 210 from A banerjee having been paid into bank was dishonoured and

shown as such on the bank st, although no entry relating to the dishpnoted chqque had

been made in the cash book

5. The bank had debited a cheque for Rs 126 to Mrs Ali‟s account in error; it should have

been debited by them to Mr Kali‟s account

6. A dividend of RS 90 had been collcted ny the bank, but not recorded in the cash book

7. Cheques totaling Rs 1260 drawn on Nov, had not been presented for payment.

8. Cheque of Rs 1080 deposited on 30th

Nov, had not been credited by the bank.

9. Int amounting to Rs 228, had been debited by the bank, but noy entered in the cash book.

You are required to prepare a BRS on 30th

Nov 1997

End Chapter Quizzes


Q1 The Bank Reconciliation Statement is prepared :

(a) To rectify the mistakes of the cash book

(b) To rectify the mistakes of the bank statement

(c) To arrive at its bank balance

(d) To bring out the reasons for the differences between the balance as per cash book &

balance as per bank statement

Q2 A bank pass book is a copy of:

(a) A customer‟s account in the bank‟s books.

(b) Cash book relating to bank column.

(c) Cash book relating to cash column


Q3 A bank reconciliation statement is prepared to know the causes for the difference between:

(a) Balance as per cash column of cash book & balance as per pass book

(b) Balance as per bank column of cash book & balance as per pass book

(c) Balance as per cash column of cash book & balance as per bank column of cash book

(d) Neither of above

Q4 A BRS is:

(a) Part of cash book

(b) Part of bank account

(c) Both of above

(d) None of above

Q5 A BRS is prepared with the help of:

(a) Bank pass book & bank column of cash book

(b) Bank pass book & cash column of cash book

(c) Cash column of cash book & bank column of cash book


Q6 The balance shown on the bank statement is Rs.3,093 but this does not agree with the cash

book. The differences are found to be a cheque written by the firm for Rs.30 not yet presented; a

standing order of the firm to bank for payment of Rs.21 recorded in cash book only; a dividend

of Rs.84 paid direct to the bank.

(a) 2958

(b) 2988

(c) 3000

(d) 3126

Q7 If a cheque has been issued for payment to the supplier, but the same is not presented into the

bank for payment till date, this would:

(a) Increase the balance of bank column as per cash book

(b) Increase the balance of cash column as per cash book

(c) Increase the balance as per pass book


Q8 If a cheque has been collected for payment from the customer, but the same is not presented

into the bank for payment till date, this would:

(a) Decrease the balance of bank column as per cash book

(b) Increase the balance of cash column as per cash book

(c) Decrease the balance as per pass book


Q9 Bank has credited interest of Rs 500 directly in customer‟s account, but the same has not

been entered in the cash book. Due to this:

(a) Cash book balance will be more than pass book balance by Rs 500

(b) Cash book balance will be less than pass book balance by Rs 500

(c) It will not affect both the balances.


Q10 When cash is withdrawn from the bank, the bank ____ the customer‟s account:

(a) Debit

(b) Credit

(c) Does not touch


CHAPTER 9 DEPRECIATION & ITS METHODS

After reading this chapter, you will be conversant with:

9.1 Concept of Depreciation

9.2 Methods of Charging Depreciation

9.3 Comparison between SLM & WDV methods of depreciation

9.4 Recording Depreciation in the books of accounts

9.5 Change in the method of depreciation

9.1 Meaning of Depreciation: Provision is created in a company‟s account towards depreciation to account for the wear

and tear of its assets caused by usage, passage of time, technological obsolescence, etc.

while depreciation does not involve payment of money to any third party, it is nevertheless

an accounting entry in the books.

Depreciation is the acquisition cost of an asset (less the expected salvage value) spread

over the economic life of that asset. The purpose of charging depreciation over the

economic life of the asset is to match the cost of the asset over the period for which

revenue is earned by using the asset.

9.2 DEPRECIATION METHODS

The two methods which are basically used for charging depreciation are

1.Straight Line Method

Under the straight-line method, the net acquisition cost or construction cost is charged off

in equal proportion during the useful economic life and the quantum of the depreciation is

arrived at by dividing the net acquisition or construction cost by the number of years of

useful economic life. The net acquisition or construction cost is calculated by deducting

salvage value from the acquisition or construction cost.

Depreciation =

For example, if the cost of an asset is Rs.1,00,000, the expected salvage value is

Rs.20,000 and the estimated useful life is 8 years, the annual depreciation would be =

Rs.10,000 or 10% per annum.

This method has the following advantages:

1. the amount of depreciation and the rate does not change over the useful economic

life of the asset;

2. the calculation is relatively simple; and

3. it realistically matches cost and revenue.

2. The Written Down Value Method/Diminishing Balance Method

Under this method the depreciation charged in the various years will not be equal over the

useful life of the asset. This is because the depreciation charge every year is calculated as a

percentage of the outstanding balance of the asset as at the beginning of that particular

year and not on the original cost of the asset.

While preparing final accounts, if depreciation is shown as an item under adjustments,

calculate the amount of depreciation and charge it off to profit and loss account by debiting P

& L account and crediting depreciation; show depreciation as a deduction from the asset value

on the assets side of Balance Sheet.

If depreciation is shown in the trial balance, then, the amount of depreciation should be

charged to only P & L account. The percentage of depreciation to be charged under the declining balance method can be

determined as under

r = 1 – (or) 1 – (s/c)1/n

where,

r = rate of depreciation under the written down value method

n = estimated useful life of the asset in years

s = residual value or scrap value of the asset

c = original cost of the asset.

Please note that if the residual or scrap value of an asset is zero, the rate of depreciation cannot

be determined using the above formula.

Illustration 1

Original Cost of the Machine- Rs.1,00,000

Estimated Scrap Value - Rs.30,000

Useful Life - 6 years

The calculation of depreciation for each of the years would be as follows:

r = 1 – (30,000/1,00,000)1/6 = 18%

At the end of the 1st year, the depreciation is calculated by applying the rate to the original cost.

Then the written down value is arrived at by deducting the depreciation so arrived at from the

original cost. At the end of the 2nd year, the depreciation rate is applied to the written down

value at the end of the 1st year. This depreciation amount is again deducted to arrive at the

written down value at the end of the 2nd year. In the above

mentioned asset the depreciation calculations will be as follows:

Year Calculation of

depn. Depreciation Written down value

1 1,00,000 x 18% 18,000 82,000

2 82,000 x 18% 14,760 67,240 3 67,240 x 18% 12,103 55,137

4 55,137 x 18% 9,925 45,212

5 45,212 x 18% 8,138 37,074

6 37,074 x 18% 6,673 30,401

(The small difference between the estimated scrap value and the written down value at the end of

the sixth year is due to approximation of the depreciation rate)

The following are the advantages of Diminishing Balance Method.

1. It matches the service of the asset in the sense that higher depreciation is charged in the

initial years, when the machine is most efficient compared to later years.

2. It recognizes the risk of obsolescence by concentrating the major part of the depreciation

in the early years of the life of the asset.

3. It equalizes the expenses of depreciation and repair charges taken together. It is assumed

that repairs are the lowest in the initial years and higher in the later years while the

depreciation under this method is higher in the initial years and lower in the later years.

4. It results in a better cash flow through tax deferral as under this method the net income to

be taxed is lower in the initial years and higher in the subsequent years.

The disadvantages of declining balance method are:

1. It requires elaborate bookkeeping.

2. As the amount of the depreciation varies from year to year, intra-enterprise

comparability is lost and that income is understated in early years and overstated in

subsequent years.

9.3 COMPARISON BETWEEN SLM & WDV METHODS OF DEPRECIATION

Explanation: In the above diagram we see that irrespective of the time period the amount of

depreciation charged is same under the straight line method. But in case of written down value

method, the amount of depreciation charged falls down as the time period increases. The

depreciation charged under this method is more in the initial years and keeps on falling as the

number of years of usage increase.

We can draw the following differences between the diminishing balance method and straight line

method. They are:

Straight Line Diminishing Balance

1 A fixed amount of depreciation is charged A fixed rate of depreciation is charged

2 The rate of depreciation is the reciprocal

of the life of the asset

The rate of depreciation is ascertained

by applying the formula

3 The asset may or may not have scrap

value

The asset must have a significant

scrap value

4 The amount of depreciation per year is

same

The amount of depreciation goes on

reducing with each passing year.

5 In the first year, the depreciation is

charged on the cost of the asset, less scrap

value, if any

In the first year, the depreciation is

charged on the asset

6 At the end of its life, the book value of the

asset becomes zero

The book value of the asset never

reduces to zero.

9.4 RECORDING DEPRECIATION There are two methods of recording depreciation.

When no provision for depreciation account is maintained

When Provision for depreciation account is maintained

When no provision for depreciation account is maintained Under the first method, the asset account is directly credited for the depreciation and the written

down value is readily ascertained. The journal entry to record depreciation under the method is

Depreciation a/c Dr

To Asset a/c

For transferring depreciation to Profit and Loss Account

Profit and Loss Account Dr.

To Depreciation account

When Provision for depreciation account is maintained Under the second method, the depreciation charged is credited to a depreciation provision and

the written down value of the asset is shown in the balance sheet by deducting the provision from

the original cost of the asset. The journal entry recorded under this method is:

Depreciation a/c Dr

To Depreciation Provision a/c

(Being the depreciation provided for the

accounting period)

After the expiry of useful life of the asset, these two accounts are closed by debiting accumulated

depreciation account and crediting asset account and – any balance in asset account is transferred

to the Profit and Loss account.

P&L a/c Dr

To Depreciation a/c

Illustration 2

An enterprise whose accounting period ends on 31st March, purchased three cars for Rs.90,000

each on 1st April, 1998. Depreciation is charged @ 10% on cost of the Machinery. On 1st

January, 2000 one car was damaged in an accident and was sold for Rs.60,000. Another car was

sold for Rs.80,000 on 30th September, 2000.

You are required to prepare necessary accounts on the basis of straight line method while: (a)

charging to the Asset Account (b) maintaining Provision for Depreciation Account.

Solution:

a. Direct Charge to the Asset Account

Cars Account

Dr. Cr.

Rs. Rs.

1998

Apr. 1

1999

Apr. 1

2000

Apr. 1

2001

To Cash/Bank a/c

(purchase of cars)

To Balance b/d

To Balance b/d

-

To Balance b/d

2,70,000

2,70,000

2,43,000

2,43,000

1,44,000

1,44,000

1999

Mar. 31

Mar. 31

2000

Jan. 1

Mar. 31

Mar. 31

2000

Sept. 1

2001

Mar. 31

By Depreciation a/c

By Balance c/d

By Car disposal a/c (2)

By Depreciation (1)

By Balance c/d

By Car disposal a/c (4)

By Depreciation a/c (3)

By Balance c/d

27,000

2,43,000

2,70,000

74,250

24,750

1,44,000

2,43,000

67,500

13,500

63,000

1,44,000

April 1 63,000

Car Disposal Account*

Dr. Cr.

Particulars Rs. Particulars Rs.

2000 To Cars a/c 74,250

Jan. 1

2000 By Cash/Bank a/c 60,000 Jan. 1 Mar. 31 By Profit & Loss a/c 14,250 (Loss)

74,250 74,250

Car Disposal Account*

Dr. Cr.

Date Particulars Amount Rs.


2000 Sept.1 2001 Mar.31

To Cars a/c To Profit & Loss a/c (Profit)

67,500 12,500

2000 Sept 1

By Cash/Bank a/c

80,000

80,00

0 80,00

0

* As two cars have been disposed off on two different dates ‘Car Disposal Account’ has

been opened twice.

Depreciation account



1999 Mar. 31 2000 Mar. 31 2001 Mar. 31

To Cars a/c To Cars a/c To Cars a/c

27,000

27,000

24,750

24,750

13,500

1999 Mar. 31 2000 Mar. 31 2001 Mar. 31

By Profit & Loss a/c By Profit & Loss a/c By Profit & Loss a/c

27,000

27,000

24,750

24,750

13,500

13,500 13,500

Working Notes:

1. Depreciation for 1999-00 Rs.

For two cars 9,000 x 2 18,000

For the third car for 9 months 9,000 x 9/12 6,750

24,750

2. Determination of book value of car:

Cost 90,000

Less: Depreciation provided up to the date of disposal (9,000

+ 6,750) 15,750

74,250

3. Depreciation for 2000-01

For one car for one year 9,000

Another car for 6 months 4,500

13,500

4. Determination of book value of the car sold in September,

2000:

Cost of the car 90,000

Less: Depreciation provided up to the date of disposal

(9,000 + 9,000 + 4,500) 22,500

67,500

b. If Provision for Depreciation Account is maintained

Cars Account

Dr. Cr. Particulars Rs. Particulars Rs.

1998 Apr. 1

1999 Apr. 1

2000 Apr. 1

To Cash/Bank a/c

To Balance b/d

To Balance b/d

2,70,000

2,70,000

2,70,000

2,70,000

1,80,000

1999 Mar.31

2000 Jan.1 Mar.31

2000 Sep. 1

By Balance c/d

By Sale of Cars a/c

By Balance c/d

By Sale of Cars a/c

2,70,000

2,70,000

90,000

1,80,000

2,70,000

90,000

2001 Apr. 1

To Balance b/d

1,80,000

90,000

2001 Mar.31

By Balance c/d

90,000

1,80,000

Provision for Depreciation Account

Dr. Cr. Rs. Rs.

1999 Mar.31

2000 Mar. 31

2000 Sep. 1 2001 Mar.31

To Balance c/d

To Sale of Cars a/c

To Balance c/d

To Sale of Cars a/c (4)

To Balance c/d

27,000

27,000

15,750

36,000

51,750

22,500

27,000

49,500

1999 Mar.31

1999 Apr. 1 2000 Jan. 1 Mar. 31

2000 Apr. 1 Sep. 1

2001 Apr. 1

By Profit & Loss a/c

By Balance b/d



By Balance b/d



By Balance b/d

27,000

27,000

27,00

0

6,750

18,000

51,750

36,00

0

4,500

9,000

49,500

27,000

Sale of Cars Account Dr. Cr.

Date Particulars Rs. Date Particulars Rs. 2000 Jan. 1

To Cars a/c 90,000 2000 Jan. 1

By Provision for 15,750

2000 Sep. 1

2001 Mar.31

To Cars a/c

To Profit & Loss a/c (Profit)

90,000

90,000

12,500

1,02,500

Mar. 31

2000

Sep. 1

Depreciation a/c

By Cash a/c


(loss)

By Provision for

Depreciation a/c

By Cash a/c.

60,000

14,250

90,000

22,500

80,000

1,02,500

Illustration 2.

On 1st January 1999, the Supreme Manufacturers purchased a machine for Rs.2,50,000.

Depreciation is provided annually according to the straight line method. The estimated useful life

of the machine is 10 years and the scrap value is Rs.10,000. You are required to find out the rate

of depreciation and also show the machine account as on 31st December, 2001.

Determination of amount of depreciation:

Depreciation =

= = 2,40,000/10 = Rs.24,000

Determination of rate of depreciation:

r = (Amount of Depreciation/Cost of the Machine) x 100

= (24000/250000) * 100= 9.6%

Machinery Account

Dr. Cr.

9.5 CHANGE IN THE METHOD OF DEPRECIATION

The depreciation that is charged under the straight line method remains the same every year.

Under the WDV method it reduces gradually. This gives rise to variations in the depreciation

charge calculated as per the two different methods. For instance, let us assume that the following

particulars relate to an asset X:

Original Cost = Rs.12,000

Salvage Value = Rs.2,000

Useful Life = 5 years

Depreciation as per straight line method

=

= Rs.2,000 per annum

Rate of depreciation = (2000/12000) x 100

= 16.67%

Depreciation percentage as per WDV method

Date Particulars Rs. Date Particulars Rs. 1999 Jan. 1

2000

Jan. 1

2001 Jan. 1

2002

Jan. 1

To Cash/Bank a/c

(Purchase of

Machinery)

To Balance b/d

To Balance b/d

To Balance b/d

2,50,000

2,50,000

2,26,000

2,26,000

2,02,000

2,02,000

1,78,000

1999 Dec.31

2000

Dec. 31

Dec. 31

2001

Dec. 31 Dec. 31

By Depreciation a/c By Balance c/d

By Depreciation a/c By Balance c/d

By Depreciation a/c By

Balance c/d

24,000 2,26,000

2,50,000

24,000

2,02,000

2,26,000

24,000

1,78,000

2,02,000

r =

= 1–

The depreciation each year will be as follows:

Year Depn. as per SLM Depn. as per WDV

method

1 2,000 3,600

2 2,000 2,520

3 2,000 1,764

4 2,000 1,235

5 2,000 864

We see that the depreciation in the initial years is higher under the written down value method

and is higher under the straight line method in the latter years of the life of the asset. A company

may use this to manipulate its profits by switching over from one method to another.

Procedure for recording a change in the Method of depreciation

Step 1 – Calculate the total depreciation already provided on assets existing as at the end of

previous accounting year (i.e. assets other than sold/discarded/destroyed up to the end of

previous year) under the existing method up to the end of previous accounting year.

Step 2- Calculate the total depreciation on asset existing as at the end of previous accounting

year by adopting the new method.

Step 3- Calculate the difference between the total depreciation under existing method (as per

step 1) & under new method (as per step 2)

Step 4- Adjust the short depreciation (excess of step 2 over step 1) by debiting Profit & Loss A/c

& crediting the Asset Account/Provision for depreciation a/c

OR

Adjust the excess depreciation (excess of step 1 over step 2) by debiting Asset A/c/Provision for

Depreciation A/c & crediting Profit & Loss A/c.

Step 5- Charge depreciation from current accounting year & onwards by adopting new method.

The following illustration shows the effect of change in the method of depreciation on the

profits of a company:

Illustration:

On 1st January 2001 Bharat Steel Ltd purchased two machines I & II costing Rs 50,000 each &

provided depreciation @10% p.a. on straight line method basis. At the end of 2004, the company

decided to change the method of depreciation from staraight line to written down value method,

the rate remaining the same. Prepare the Machinery Account upto 2004.

Solution:

Step 1- Calculation of depreciation as per old method (SLM) for 3 years = 1,00,000 *10% * 3 =

Rs 30,000

Step 2- Calculation of depreciation as per new method (WDV) =

Rs

A. Cost as on 1.1.2001 1,00,000

B. Less: Depreciation for 2001 10,000

C. Book value as on 1.1.2002 90,000

D. Less: Depreciation for 2002 9000

E. Book Value as on 1.1.2003 81000

F . Less: Depreciation for 2003 8100

E. Book Value as on 1.1.2004 72900

Total Depreciation under new method:

= Rs 10,000 + Rs 9000 + Rs 8100= Rs 27,100

Step 3- Calculate the difference between the total depreciation as per Step 1 & Step 2:

A Total depreciation under old method Rs 30,000

B Total depreciation under new method Rs 27100

C Difference being excess Depreciation Rs 2900s

Step 4-Journal Entry to adjust excess depreciation

Machinery A/c Dr. Rs 2,900

To Profit & Loss A/c Rs 2,900

Step 5- Depreciation for the current accounting year = 10% of Rs 72,900 = Rs 7,290

Step 6- MACHINERY ACCOUNT

Dr. Cr.

Date Particulars Rs Date Particulars Rs 1.01.2001 To Bank A/c 1,00,000 31.12.2001 By Depreciation A/c

By Balance c/d

10,000

90,000

1,00,000 1,00,000

1.01.2002 To Balance b/d 90,000 31.12.2002 By Depreciation A/c

By Balance c/d

10,000

80,000

90,000 90,000

1.01.2003 To Balance b/d 80,000 31.12.2003 By Depreciation A/c

By Balance c/d

10,000

70,000

80,000 80,000

1.01.2004 To Balance b/d

To P&L A/c

(Excess dep

written back on

account of

change from

WDV method to

SLM)

70,000

2,900

31.12.2004 By Depreciation A/c

(10% of Rs 72,900)

By Balance c/d

7,290

65,610

72,900 72900

Test Exercise:

Problem1

A firm purchased on 1st Jan,1989, a second hand Machinery for Rs 36000 and spent Rs 4000 on

its installation. On 1st July in the same year another Machinery costing Rs 20000 was purchased.

On 1st July, 1991, the Machinery bought on 1

st Jan., 1989 was sold off for Rs. 12000 & on the

same date a fresh Machine is purchased for Rs 64000. Depreciation is provided annually on 31st

Dec, @ 10% p.a. on the written down value method. Show the Machine a/c from 1989 to 1992.

Problem 2:

On 1st July, 1987, a company purchased a plant for Rs 20000. Depreciation was provided at the

rate of 10% per annum on straight line method on 31st December every year. With effect from

1.1.1989, the company decided to change the method of depreciation to Dimishing balance

method @ 15% p.a. on 1.7.1990, the plant was sold for Rs 12000. Prepare a plant account from

1987 to 1990 and make adjustments for arrears of depreciation in the year 1989.

Problem 3:

A manufacturing firm purchased on 1st January, 1989 certain mill machinery for Rs. 19,4000 and

spent Rs. 600 on its erection. On 1st July in the same year additional machinery costing Rs.

10,000 was acquired. On 1st July, 1991, the machinery purchased on 1

st January , 1989 having

become obsolete, was auctioned for Rs. 8000 and on the same date fresh machinery was

purchased at a cost of Rs 15,000.

Depreciation was provided annually on 31st Dec @ 10% p.a. on the original cost of asset. In

1992, however the firm changed this method of providing depreciation and adopted the method

of writing off 15% on the written down value. Give the machinery account as it would stand at

the end of each year from 1989 to 1992. Make your calculations to the nearest rupee.

End Chapter Quizzes Choose the most appropriate answer:

Q1 Property, plant and equipment are conventionally presented in the balance sheet at:

(a) Replacement cost less accumulated depreciation

(b) Historical cost less depreciation portion thereof

(c) Historical cost less salvage value


Q2 Which of the following is true with respect to providing depreciation under diminishing

balance method?

(a) The amount of depreciation keeps increasing while the rate of depreciation keeps

decreasing

(b) The amount of depreciation & the rate of depreciation decrease every year.

(c) The amount of depreciation decreases while the rate of depreciation remains same.

(d) The amount of depreciation & the rate of depreciation increases every year.

Q3 Which of the following statements best describes the purpose of depreciation?

(a) Regular reduction of asset value to correspond to change in market value as per asset age

(b) A process of correlating the market value of an asset with its gradual decline in physical

efficiency.

(c) Allocation of cost of an asset to the period in which services are received from the asset


Q4 The main objective of providing depreciation is to:

(a) To calculate the true profit

(b) Show the true financial position in the balance sheet

(c) Reduce tax burden


Q5 Depreciation is a process of

(a) Valuation

(b) Valuation & Allocation

(c) Allocation

(d) Appropriation

Q6 The portion of the acquisition cost of the asset yet to be allocated is known as:

(a) Written down value

(b) Salvage value

(c) Net Realizable value

(d) Accumulated value

Q7 Which of the following statements is true with regard to written down value method of

depreciation? i. The rate at which the asset is written off reduces year after year ii. The amount of

depreciation provided reduces from year to year iii. The rate of depreciation as well as the

amount of depreciation reduce year after year iv. The value of the asset gets reduced to zero over

a period of time.

(a) Only (i)

(b) Only (ii)

(c) Both (i) & (iii)

(d) Both (iii) & (iv)

Q8 The accounting process of gradually converting the unexpired cost of fixed assets into

expenses over a series of accounting periods is:

(a) Depreciation

(b) Physical deterioration of the asset

(c) Decrease in market value of the asset

(d) Valuation of asset at a point of time

Q 9 In which of the following methods, the cost of the asset is spread over in equal proportion

during its useful economic life?:

(a) Straight Line Method

(b) Written down value Method

(c) Unit of production method


Q 10 Provision is:

(a) An appropriation of profit

(b) Charge against the profit

(c) Allocation of resources


CHAPTER 10 FINAL ACCOUNTS & ADJUSTMENTS

After reading this chapter, you will be conversant with:

10.1 Preparation of a Trial Balance from General Ledger Balances

10.2 Concept of Capital, Revenue & Deferred Revenue expenditure

10.3Preparation of Trading & Profit & Loss account from a given Trial Balance

10.4 Adjustments Entries given outside the Trial Balance

10.5 Preparation of Balance Sheet

10.1 TRIAL BALANCE:

A Trial Balance is a summary of all the General Ledger Balances outstanding as on a particular

date. All the debit balances from the ledger are shown on one side and all the credit balances are

shown on the other side. You are aware that a debit balance in a general ledger account indicates

an excess of debit side over the credit side of the ledger. Similarly, a credit balance in a ledger

account indicates the excess of credit side over the debit side. Now, if all the debit and credit

balances were recorded on the two sides of the Trial Balance, it stands to reason that the two

sides should be equal, since in the journal for each item of debit, there was a credit item.

With the help of following illustration, you will get to know „how to prepare Trial Balance from

the ledger balances:

Illustration:

From the following balances pertaining to Kiran Kumar, prepare the Trial Balance as on

March 31, 2001.

Particulars Rs.

Kiran Kumar‟s Capital

Salaries

Purchases

Sales

Trade expenses

Wages

Freight inwards

Office expenses

Discount received

Commission paid

Postage & Telegrams

Accounts receivable (1)

Accounts payable (2)

Furniture

25,000 (Cr)

6,000 (Dr)

26,000 (Dr)

47,000 (Cr)

1,000 (Dr)

7,800 (Dr)

400 (Dr)

500 (Dr)

200 (Cr)

600 (Dr)

1,200 (Dr)

30,000 (Dr)

21,000 (Cr)

3,000 (Dr)

Particulars Rs.

Machinery

Insurance

Bills receivable (3)

Bills payable (4)

Opening inventory (5)

Cash in hand

Cash at bank

10,000 (Dr)

400 (Dr)

2,000 (Dr)

6,800 (Cr)

7,000 (Dr)

500 (Dr)

3,600 (Dr)

Notes:

1. Receivables indicate the total of all personal accounts which have a debit balance. They

owe money to Kiran Kumar.

2. Payables indicate the total of all personal accounts, which have a credit balance. Kiran

Kumar owes money to them.

3. Bills receivable indicate the bills of exchange accepted by Kiran Kumar‟s debtors. Bills

receivable become due for payments by debtors on specified dates.

4. Bills payable indicate the bills of exchange accepted by Kiran Kumar himself in favor

of his creditors. Bills payable become due for payments by Kiran Kumar on specified

dates.

5. Opening inventory indicates the opening inventory of goods at the beginning of the

period.

Solution: Trial Balance of Kiran Kumar as on 31.03.2001

Particulars Debit Rs. Credit Rs.

Kiran Kumar‟s Capital

Salaries

Purchases

Sales

Trade expenses

Wages

Freight inwards

Office expenses

Discount received

Commission paid

Postage & Telegrams

Accounts receivable

Accounts payable

Furniture

Machinery

6,000

26,000

1,000

7,800

400

500

600

1,200

30,000

3,000

10,000

25,000

47,000

200

21,000


Insurance

Bills receivable

Bills payable

Opening inventory

Cash in hand

Cash at bank

Total

400

2,000

7,000

500

3,600

6,800

1,00,000 1,00,000

10.2 CAPITAL AND REVENUE EXPENDITURE

Capital Expenditure

Capital expenditure refers to expenditure that the benefit of which is not fully derived in one

year but spread over several periods. Examples for capital expenditure are – acquisition of

assets for the purpose of earning, additions to fixed assets to improve its capacity, expenditure

resulting in long-term benefit to the business, etc. Expenses like Preliminary expenses, Research and

Development expenditure, Interest paid during Construction period, etc. are taken to assets side of

Balance Sheet and shown under „Miscellaneous Expenditure‟.

Revenue Expenditure

It is an expenditure incurred and the benefit of which is derived in the year in which the

expenditure was incurred. Examples are – raw materials, repairs, depreciation, rent, wages, etc.

Such expenses are debited to Profit and Loss account. Any incomes and gains are credited to

Profit and Loss account. Examples are – Commission received, Dividend received, Interest

received etc. Net Profit is transferred to capital account in the balance sheet. Format of Profit and

Loss account is given below.

Deferred Revenue Expenditure

Deferred revenue expenditure is that expenditure is that expenditure which yields benefits which

extend beyond a current accounting period, but to relatively a short period as compared to the

period for which a capital expenditure is expected to yield benefits. These are also known as

future expenditure. Such expenditure should normally be written off over a period of 3 to 5

years. The example of such expenditure include advertisement, research & development

expenditure.

10.3Preparation of Trading & Profit and Loss account from a given Trial

Balance From a given Trial Balance we can prepare a Trading and Profit and Loss account to determine

the profit or loss made by a business organization during a particular period. At the time of

preparation of Profit and Loss account, the following points may be kept in mind:

1. All expenses are debited to Profit and Loss account.

2. All incomes are credited to Profit and Loss account.

3. In addition to treating the incomes and expenses found in the Trial Balance, we may have

to give special treatment to certain „Adjustments‟ also (They are discussed in detail in the

subsequent paragraphs).

4. The profit is credited to Reserves account. If there is net loss, it is debited to Reserves

account in the Balance Sheet, in the case of companies and in the case of sole trader and

partnership, the net profit is credited to capital account and net loss is debited to capital

account.

Trading account is prepared to ascertain the Gross Profit. Gross profit is the difference between

sales and cost of goods sold.

And by deducting all administrative and selling expenses from gross profit we determine the net

profit. Profit and Loss account is prepared to ascertain net profit.

It is necessary to emphasize here that Profit and Loss account (including Trading account) is

usually prepared on ‘Accrual’ basis. In other words all expenses incurred and due are debited to

Profit and Loss account whether they are actually paid for or not. Similarly all incomes earned

and due are credited to Profit and Loss account whether they are actually received or not.

Format of a Trading account is given below:

Trading Account of XYZ Co. for the year ending

31st March, 2001

Dr. Cr.

Date Particulars J.F Amount

Rs. Date Particulars J.F

Amount

Rs.

To Opening stock

Add: Purchases

Less: Returns

To Wages

To Carriage inward

To Gas, Water, Fuel, etc.

To Packaging charges

To Other factory expenses

Gross Profit

By Sales

Less: Returns

By Closing stock

Format of a Profit & Loss account is given below:

Profit and Loss Account for the year ending 31st March, 2001


Rs.


Rs.

To Office salaries and wages

To Office rent, rates and taxes

To Office lighting and insurance

To Printing and stationery

To Postage and telegrams

To Legal expenses

To Trade expenses

To Audit fees

To Car upkeep expenses

To Telephone expenses

To General expenses

To Cash discounts allowed

To Interest on capital

To Interest on loans

To Discount or Rebate on bills of

exchange

To Bad debts

To Store charges

To Carriage, Freight, Cartage outwards

To Cost of samples,

catalogue expenses

To Salesmen‟s salaries, expenses and

commission

To Advertising expenses

To Depreciation on fixed assets

To Net profit (transferred to capital

By Gross profit

By Cash discounts

received

By Bad debts recovered

By Income from

investments

By Commission

received

By Interest on deposits

By Gain on sale of fixed

assets


Rs.


Rs.

account)

10.4 Adjustment Entries:

Before an accountant can proceed to prepare the financial statements from the trial balance, he

has to process some additional information, which he either already knows or receives from

some other divisions or departments. The following are a few examples showing where

adjustment entries would be required:

a. The accountant may know (or be instructed by the Accounts Manager) that the

depreciation on building is to be charged at the rate of 5%.

b. The accountant would ascertain that the salary of three workers for January is unpaid at

the end of the month.

c. The accountant is informed by the storekeeper that the goods lying unsold in the store

(representing closing stock) is worth Rs.17,000 at cost.

In view of the above information, certain “adjustment entries” will have to be made in the

Journal. Adjustment entries usually represent the recording of additional information and not

actual transactions. Different types of adjustment entries are discussed below.

1. Closing Inventory:

Closing stock refers to the stock of unsold goods at the end of current accounting period which is

carried forward to next accounting period as opening stock. It is valued at cost or net realizable

value whichever is lower. Adjustment Entrynt for the same is given below:

Closing Inventory a/c Dr

To Trading a/c

While the closing inventory appears on the credit side of the trading account to reduce the cost

of goods sold, it also appears as an asset in the balance sheet.

2. Outstanding or Accrued Expense

The nominal accounts record the actual expense paid during the accounting period. However,

prior to the preparation of the financial statements, it must be ensured that all expenses which

have fallen due to be paid but which have not been paid during the accounting period are also

brought into the books to help in the proper matching of revenues and expenses. For example,

ABC Trading Company has the practice of paying the salaries of the employees on the 4th of

the subsequent month. During the financial year ending 31st March, 2001 the salaries account

shows a debit balance of Rs.55,000. The salaries of Rs.6,000 pertaining to March, 2001 were

paid on 4th April, 2001.

While preparing the financial statements for the year ending 31st March, 2001, the salaries of

Rs.6,000 of March must also be included. This is done with the following adjusting journal

entry:

Salaries a/c Dr 6,000

To Outstanding Salaries a/c 6,000

The above journal entry increases the salaries to the correct amount of Rs.61,000 and the

outstanding salaries of Rs.6,000 will be shown as a liability in the balance sheet.

The adjusting journal entry to record any outstanding or accrued expense is

Expense a/c Dr

To Outstanding Expense a/c

While the amount of expense taken from the trial balance will be increased by the amount

outstanding and shown in the trading and profit and loss account, the actual amount outstanding

will be shown as a liability in the balance sheet.

In the subsequent accounting period, the outstanding expense liability will be transferred to the

expense or nominal account and will be set-off by the entry of actual payment when it is made.

3. Prepaid Expense:

Certain expenses paid may relate to more than one accounting period. In such cases, it is

necessary to identify that portion of the expenditure for which the benefit is yet to be received by

the concern and treat that part of the expenditure as prepaid.

ABC Trading Company took an insurance cover for all assets against fire on 1st October, 2000

and paid the annual premium of Rs.2,400 on the same day. Since the benefit of the entire

expenditure will expire only on 30th September, 2001, it becomes necessary to recognize this

aspect while preparing the financial statements as on 31st March, 2001.

The amount of expense prepaid on 1st October, 2000 = (1/2) 2,400 = Rs.1,200

The adjusting entry to record the prepaid insurance is,

Prepaid Insurance a/c Dr 1,200

To Insurance a/c 1,200

This entry ensures that the insurance expense is reported at the correct figure of Rs.1,200 in the

profit and loss account and the prepaid amount is shown as an asset in the balance sheet.

The journal entry to record any prepaid expense is,

Prepaid Expense a/c Dr

To Expense a/c

In the subsequent accounting period, the balance in the prepaid expense account will be

transferred back to the expense account.

4. Outstanding or Accrued Income

An income appearing in the ledger account may not represent the income that must have been

received during the year. If a portion of an income has not yet been received or is outstanding

as at the end of the accounting period then the outstanding amount must be brought into books.

ABC Trading Company holds 14% Debentures of the face value of Rs.5,000 in Bright Limited

as investments. The interest is payable on 30th June and 31st December of every year. The

debentures were purchased on 1st July, 2000.

While ABC Trading Company would have received the interest of Rs.350 (5,000 (14/100) 1/2)

during the accounting period ending 31st March, 2000 the interest of Rs.350 for the next six

months will be received only in the subsequent accounting period. However, while preparing

the financial statements, the total interest revenue to be recognized is the amount of Rs.350

actually received plus the interest of Rs.175 pertaining to the period 1st January, 2001 to 31st March,

2001.

The following adjusting entry will bring into books the amount of outstanding interest:

Outstanding Interest a/c Dr 175

To Interest Received a/c 175

While the interest received will be increased to Rs.525 and shown in the profit and loss

account, the outstanding interest account will be listed as an asset in the balance sheet.

In the subsequent accounting period, the amount in the Outstanding Interest a/c will be

transferred to Interest Received a/c and the actual receipt of the interest will offset the former

transfer entry.

To record any outstanding income in the books of accounts, the journal entry is:

Outstanding Income a/c Dr

To Income A/c

5. Income Received in Advance

While preparing the financial statements, adjustments may be necessary in respect of any

incomes received in advance.

Law Publications has received subscriptions amounting to Rs.50,000 during the financial year

ending 31st December, 2001. Out of this Rs.2,500 represent subscriptions relating to the next

financial year.

The entry to adjust for the income received in advance will be,

Subscriptions a/c Dr 2,500

To Subscriptions received in Advance a/c 2,500

With the posting of the above journal entry, the subscriptions account will be shown in the

profit and loss account at the correct figure of Rs.47,500 and in the balance sheet, the

subscriptions received in advance will be listed as a liability. Any income received in advance

is a liability as benefits are yet to be conferred to the person from whom the amount has been

received.

The journal entry to record the adjustment of any income received in advance is

Income a/c Dr

To Income Received in Advance a/c

6. INTEREST ON CAPITAL:

Interest on capital means the cost of using the capital invested in an enterprise by the proprietor

or partners. It is accounting treatment is summarized as follows:

Interest on Capital A/c Dr.

To Capital A/c

It is shown on debit side of P&L A/c & on liability side of Balance Sheet as addition to capital.

7. ADJUSTMENT OF ABNORMAL LOSS OF STOCK:

It is usually caused by fire, theft, abnormal spoilage/leakage/breakage/pilferage, etc. its

accounting treatment is summarized as given below:

Loss of stock A/c Dr.

To Trading A/c

Total value of abnormal loss (whether recovered or not) is shown on the credit side of trading

account.

And total value of irrecovered loss of stock (i.e. total loss less amount if any recovered for

insurance co) is shown on the debit side as a separate item in Profit & Loss A/c.

The amount if any due from the insurance co is shown on Asset Side as a „Current Assets‟ in the

Balance Sheet.

8. PROVISIONS FOR BAD DEBTS, CASH DISCOUNTS PAYABLE AND CASH

DISCOUNTS RECEIVABLE

(i) Bad Debts

The sales revenue recorded in the books of accounts of an organization represents the amount

realized/to be realized from the sale of goods. When goods are sold on credit it may sometimes

not be able to be realized. That unrealized sale is considered to be bad debt. For instance, if a

customer, subsequent to the date of credit sales, is adjudged as insolvent and his estate cannot

pay anything towards satisfaction of the amount due from him, then, logically, the entry passed

at the time of sale should be removed by reversing it, as the situation is similar to the sale not

having taken place. In practice, however, instead of reversing the previous entry, the amount

which cannot be recovered is considered as a loss called “bad debts”.

The general journal entry for recording bad debts is

Bad debts a/c Dr

To Accounts Receivable a/c

(ii) Provision for Bad and Doubtful Debts:

When bad debts are expected to occur in the future, (a) the exact amount of loss may not be

known and (b) a particular debtor‟s account cannot be identified to write-off the expected loss.

To circumvent these problems, usually, a provision is made for the expected bad debts loss out

of profits of the current year. This reduces the profit. For creating the provision for bad and

doubtful debts, the journal entry is,

Profit and Loss a/c Dr

To Provision for Bad Debts a/c

Treatment of Bad Debts when a Provision for Bad Debts Exists

Let us extend the example of PQR Ltd., to the financial year ending 31st March,

2000.

The following details are available:

Bad debts during the year 3,500

Accounts receivable as on 31/3/1999 1,70,000

PQR Ltd., would like to maintain the provision at 5% of sundry debtors.

The accounts receivable of Rs.1,70,000 as on 31/3/2000 is after accounting for the bad debts of

Rs.3,500.

When bad debts occurred, the following entry would have been passed.

Bad Debts a/c Dr 3,500

To Sundry Debtors a/c 3,500

Since a provision for bad debts to the extent of Rs.5,000 already exists, the actual bad debts of

Rs.3,500 will be transferred at the end of the year to this provision account and not to the profit

and loss account. The entry for the transfer will be,

Provision for Bad Debts a/c Dr 3,500

To Bad Debts a/c 3,500

At this point the provision account will appear as under:

Provision for Bad Debts Account


31.3.2000

To Bad Debts

a/c

3,500

1.4.1999

By Balance b/d

5,000

Since the provision has been utilized to the extent of Rs.3,500, only Rs.1,500 is left for setting

off any bad debts in the forthcoming year. However, PQR Ltd. wishes to maintain the provision

at 5% on debtors. So, the balance required in the provision account as on 31.3.2000 is, (5/100)

1,70,000 = Rs.8,500

To bring up the provision to the required balance a further appropriation of Rs.7,000 (8,500 –

1,500) will have to be made from the profit and loss account. Entry will be,

Profit and Loss a/c Dr 7,000

To Provision for Bad Debts a/c 7,000

The provision account, after posting this entry, will appear as follows:

Provision for Bad Debts Account

Dr. Cr.


31.3.2000

To Bad Debts

31.3.2000

To Balance c/d

3,500

8,500

1.4.1999

By Balance b/d

31.3.2000

By Profit and Loss a/c

5,000

7,000

12,000 12,000

The balance sheet will again show the Accounts Receivable at their realizable value.

Balance Sheet of PQR Ltd. as on 31.3.2000

Liabilities Assets Rs. Rs

Accounts Receivable 1,70,000

Less: Provision for 8,500 1,61,500

Bad Debts

(iii) Recovery of Bad Debts Written off

Sometimes, an amount written off as bad debts may be subsequently recovered. Any such

recovery must be treated as a windfall and transferred to the Profit and Loss account as a gain.

The journal entries will be,

At the time of receipt of the amount

Cash a/c Dr

To Bad Debts Recovered a/c

At the end of the financial year,

Bad Debts Recovered a/c Dr

To Profit and Loss a/c

(iv) Provision for Discounts on Debtors/Accounts Receivable

The organizations which allow the facility of making payments before the due date and enable

their debtors to avail of cash discounts, must take into account the possible amount of discounts

that may be allowed on closing debtors in the forthcoming year.

The principles for creation and maintenance of the provision for discounts on debtors are the

same as those discussed in the section on provision for bad debts. The only additional point to be

noted is that discounts will be estimated on debts considered good, i.e. closing sundry debtors

minus provision for bad debts. Adjusting entry for the same is as follows:

Profit & Loss A/c Dr.

To Provision for discount on debtors A/c

The following illustration clearly explains the mechanics of maintaining a provision for

discounts on debtors.

Illustration :

Following are the extracts from Trial Balance of a firm as at 31st March,2002:

Name of account Dr Balance Rs Cr Balance Rs

Sundry Debtors

Bad debts

Discount

2,05,000

3,000

1,800

(i) Credited a provision for doubtful debts @10% on debtors.

(ii) Credit a provision for discount on debtors @2% on debtors.

(iii) Additional discount given to the debtors Rs 5000.

Required: Pass necessary journal entries & show the relevant accounts.

Solution:

Journal entries

Particulars L.F. Dr (Rs) Cr (Rs)

Discount allowed A/c Dr.

To sundry Debtors A/c

(Being the additional discount allowed to debtors)

5,000

5,000


To Bad Debts A/c

To Discount Allowed A/c

(Being the transfer of bad debts & discount to P&L A/c)

9.800

3,000

6,800


To provision for doubtful debts A/c

(being the provision for DD created @10% on 2,00,000)

20,000

20,000


To Provision for discount on debtors A/c

(being the provision for discount created @2% on debtors of

Rs 1,80,000 (i.e. Rs 2,00,000 – Rs 20,000)

3,600

3,600

Sundry Debtors Account

Dr Cr.

Particulars Rs Particulars Rs

To balance b/d 2,05,000 By discount Allowed A/c

By balance c/d

5,000

2,00,000

2,05,000 2,05,000

Bad debts Account

Dr Cr.


To balance b/d 3,000 By profit & Loss A/c 3,000

Provision for Doubtful debts Account

Dr Cr.


To balance c/d 20,000 By P&L A/c 20,000

Discount Allowed Account

Dr Cr.


To balance b/d

To S Debtors

1,800

5,000

By P&L A/c 6,800

6,800 6,800

Provision for Discount on Debtors Account

Dr Cr.


To Balance b/d 3,600 By P&L A/c 3,600

Profit & Loss A/c for the year ended 31st March,2002

Dr. Cr.


To Bad Debts

(as given in the Trial balance)

To provision for doubtful debts

To discount 1,800

(as given in the trial balance)

Add: Additional discount 5,000

To provision for discount on debtors

3,000

20,000

6,800

3,600

Balance Sheet as at 31st March 2002

Liabilities Rs Assets Rs

Current Assets:

Debtors 2,05,000

Less: Additional Discount 5,000

2,00,000

Less: provision for doubtful debts @10% 20,000

1,80,000

Less: Provision for Discount @2% 3,600

1,76,400

(v)Reserve for Discounts on Accounts Payable/Creditors:

Organizations may like to show the sundry creditors in the balance sheet at the net payable value

by estimating in advance the amount of cash discounts that may be received at the time of

settlement of amounts due. This is usually done by creating a reserve for discounts on creditors

and then transferring the discounts received to such reserve. Since, income in respect of

discounts receivable is recognized in advance, the journal for creation of the reserve will be

Reserve for Discount on Accounts Payable a/c Dr

To Profit and Loss a/c

9. ADJUSTMENT OF DEPRECIATION:

Depreciation represents that portion of the cost of a fixed asset which has been used in the

business for the purpose of earning profits. Its accounting treatment is given below:

Depreciation A/c Dr.

To respective A/c

Note: If depreciation already appears in the Trial Balance, then no adjusting entry is required to

be passed. It will be shown only in P&L A/c , not in the balance sheet.

BALANCE SHEET:

A balance sheet is a statement of assets and liabilities of a business organization at any

particular date. At the end of each accounting period, every business organization prepares a

Balance Sheet to have a clear understanding of its assets and liabilities, which indicate the

financial position of the concern.

The Balance Sheet is prepared from the point of view of the business (as a separate entity,

distinguished from its owners). Another way to understand a Balance Sheet is to consider it as a

statement of sources of funds (i.e., liabilities) and utilization of funds (i.e., assets).

Balance Sheet can be prepared in order of (a) liquidity basis and (b) permanence basis.

When assets and liabilities are arranged according to their realizability and payment preference,

it is liquidity order basis.

When fixed assets and liabilities are arranged on the assumption that these will be sold and paid

only on the liquidation of business it is the permanence/fixity basis.

Format of a Balance Sheet in order of Liquidity:

Balance Sheet of ……..as at……


Current Liabilities:

Bank overdraft

Bills payable

Outstanding expenses

Sundry creditors

Income received in advance

Long term Liabilities:

Loan

Capital:

Opening Balance xxxx

Add: Net Profit xxxx

Or Less: Net Loss xxxx

Less: Drawing xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

Current Assets:

Cash in hand

Cash at bank

Bills receivable

Sundry Debtors

Prepaid expenses

Accrued income

Closing stock

Fixed Asset:

Investment

Furniture & Fixture

Plant & Machinery

Building

Land

Building

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx Xxxx

Format of a Balance Sheet in order of Permanence:

Balance Sheet of ……..as at……


Long term Liabilities:

Loan

Capital:

xxxx

xxxx

Fixed Asset:

Investment

Furniture & Fixture

xxxx

xxxx

Opening Balance xxxx

Add: Net Profit xxxx

Or Less: Net Loss xxxx

Less: Drawing xxxx

Current Liabilities:

Sundry creditors

Income received in advance

Outstanding expenses

Bills payable

Bank overdraft

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

Plant & Machinery

Building

Land

Building

Current Assets:

Closing stock

Bills receivable

Sundry Debtors

Prepaid expenses

Accrued income

Cash in hand

Cash at bank

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

xxxx xxxx

LINKAGE BETWEEN TRIAL BALANCE, PROFIT & LOSS ACCOUNT AND

BALANCE SHEET

It is necessary to understand the linkage between Trial Balance, Profit and Loss Account and

Balance Sheet as shown in the following Figure:

In other words,

– We start with a tallied trial balance.

– We give double-entry effect to all adjustments outside trial balance.

– We take some of the trial balance items (including adjustments) to Profit and Loss

Account.

– We take the result of profit and loss Account (net profit or net loss) to Balance Sheet

(Reserves or Capital).

– We take the rest of the items of trial balance (including adjustments) to Balance Sheet.

Hence the Balance Sheet has to tally. Assets side should be equal to liabilities side. Utilization of

Funds (Assets) should be equal to sources of funds (Liabilities).

We can sum up the whole process of preparation of final accounts in the following

steps:

Start with a tallied trial balance. It proves the arithmetical accuracy of entries made in

the books namely cash book, journal and ledger. However, there are certain errors

which are not disclosed by a trial balance.

On account of certain errors if the trial balance is not tallied, the Suspense Account is

opened with the difference of two sides and the same is inserted on the side having

deficit.

Adjustments given at the end of a trial balance should be given double-entry effect.

Otherwise accounts will not be complete.The balance sheet will not tally.

The treatment of adjustments for expenses and incomes in balance sheet is:

1.Outstanding liabilities for expenses shown on liabilities side;

2.Prepaid expenses shown on assets side;

3.Income received in advance shown on liabilities side;

4.Income earned but not received, and income accrued but not due, shown on assets

side;

5.Fixed assets are recorded at cost minus depreciation;

6.Closing stock recorded at cost price or market price whichever is less.

To sum up our discussion on Profit and Loss Account and Balance Sheet let us take note of the

following important points.

Profit and loss account may be divided into three components:

Trading Account To reflect gross profit or loss arising

out of trading and manufacturing

operations.

Profit and

Loss Account

To reflect the net profit or loss of the

entire business after duly accounting

for all administrative and selling

expenses.

Profit and Loss To reflect the various appropriations

Appropriation Account made out of disposable profits like

dividends, transfer to reserves etc.

Illustration

From the following Trial Balance of Sun Shine and Company prepare Trading, Profit and Loss

account and Balance Sheet.

Trial Balance as on 31.12.2001


Capital 25,000

Loans 5,000

Sales 35,000

Accounts Payable 4,000

Bills Payable 5,000

Purchase Returns 2,000

Dividends Received 3,000

Plant & Machinery 13,000

Buildings 17,000

Receivables 9,650

Purchases 18,000

Discount allowed 1,200

Wages 7,000

Salaries 3,000

Traveling Expenses 750

Freight 200

Insurance 300

Commission paid 100

Cash on hand 100

Bank 1,600

Repairs 500

Interest on loans 600

Opening Inventory 6,000

Total 79,000 79,000

Additional Data:

1. Closing Inventory Rs.8,000.

2. Depreciation on Plant & Machinery at 15% and 10% on Buildings.

3. Provision for doubtful receivables Rs.500.

4. Insurance prepaid Rs.50

5. Outstanding rent Rs.100.

Solution:

Sun Shine and Company

Trading Account for the year ending 31.12.2001 Particulars R

s. Particulars

Rs.

To Opening Inventory

To Purchases 18,000

Less: Returns 2,000

To Wages

To Gross Profit c/d

6,000

16,000

7,000

14,000

43,000

By Sales

By Closing

Inventory

35000

8000

43,000

Profit and Loss Account for the year ending 31.12.2001

To Discount allowed 1,200 To Salaries 3,000 To Traveling expenses 750 To Freight 200 To Insurance 300 Less: Prepaid 50 250

To Commission paid 100

To Repairs 500 To Interest on loan 600 To Rent outstanding 100 To Provision for doubtful receivables 500

To Depreciation: Plant & Machinery 1,950 Buildings 1,700 To Net Profit c/d 6,150

By Gross Profit b/d 14,000

By Dividends received 3,000

17,000

17,000

Sun Shine and Company

Balance Sheet as on 31.12.2001

Liabilities Rs. Rs. AssetsRs.Rs.

Capital 25,000

Add: Net Profit 6,150 31,150

Loan Current Liabilities: 5,000 Accounts Payable 4,000

Bills Payable 5,000 Outstanding Rent 100

Fixed Assets :

Plant & Machinery 13,000 Less: Depreciation 1,950 11,050

Buildings 17,000

Less: Depreciation 1,700 15,300 Current Assets: Cash on hand 100 Cash at Bank 1,600 Accounts Receivable 9,650 Less: Provisions for

doubtful debts 500 9,150 Closing Inventory 8,000 Insurance 50

45,250 45,250

Test Exercise:

Solve the following questions:

Problem1 . From the following Trial Balance of Sh. Rama Nand Sagar, prepare Trading and

Profit & Loss Account for the year ended 31st December, 1993 and a Balance Sheet as on that

date:-

Dr. Balances Rs. Cr. Balances Rs.

Opening Stock

Purchases

Sales Return

Carriage inwards

Carriage outwards

Wages

Salaries

Plant & Machinery

Furniture

Sundry Debtors

Bills Receivable

Cash in Hand

Traveling Expenses

Lighting (Factory)

Rent and Taxes

General Expenses

Insurance

Drawings

20,000

80,000

6,000

3,600

800

42,000

27,500

90,000

8,000

52,000

2,500

6,300

3,700

1,400

7,200

10,500

1,500

18,000

Sales

Purchase Return

Discount

Sundry Creditors

Bills Payable

Capital

2,70,000

4,000

5,200

25,000

1,800

75,000

3,81,000 3,81,000

Adjustments:-

(1) Stock on 31st December, 1993 was valued at Rs. 24,000 (Market Value Rs. 30,000)

(2) Wages outstanding for December 1993 amounted to Rs. 3,000.

(3) Salaries outstanding for December 1993 amounted to Rs. 2,500.

(4) Prepaid Insurance amounted to Rs. 300.

(5) Provide depreciation on Plant and Machinery at 5% and on Furniture at 20%.

Problem 2 . From the following Trial Balance of Mr A, prepare Trading and Profit & Loss

Account for the year ended 31st March,2002 and a Balance Sheet as on that date:-

Particulars Dr(Rs) Cr(Rs)

Cash

Stock

Wages

Purchases

Returns

repairs

Bad debts

Interest on loan

Salaries

Sales tax

Octroi

10,000

40,800

22525

130295

2400

1675

2310

600

8000

800

500

Sales

Returns

Loans at 12% (on

1.7.2001)

Creditors

Discount

capital

180500

195

20000

30305

530

37500

insurance

charity

rent

machinery

debtors (including Shyma for dishonoured bill

of Rs 800)

1000

125

2000

16000

30000

269030 269030

Adjustments:

1) Wages include Rs 2000 for erection of new machinery on 1.4.2001

2) Stock on 31st March 2002 was Rs 40925.

3) Provide depreciation on machinery @ 5% p.a.

4) Salaries unpaid Rs 800.

5) Half the amount of Shyma‟s bills is irrecoverable.

6) Create a provision at 5% on other debtors.

7) Rent paid upto 31st July,2002.

8) Insurance unexpired Rs 300

Problem 3:

The following trial balance has been extracted from the books of Binod Kumar on 31st

Dec.1991:-

Debit balance Rs Credit balance Rs

Machinery

Cash at bank

Cash in hand

Wages

Purchased

Stock on 1.1.91

Sundry debtors

Bills receivable

Rent

Commission

General exp

Salaries

4000

1000

500

1000

8000

6000

4400

2900

450

250

800

500

Capital

Sales

Sundry creditors

Interest received

9000

16000

4500

300

29800 29800

Provide for interest on capital at 5% p.a.. Depreciate machinery at 10%, wages out standing

amount to Rs 50, rent prepaid amounts to Rs 100, stock on 31.12.1991 was Rs 8000.

Prepare Trading & P&L for year ending 31st Dec,1991 & Balance Sheet as on 31.12.91

End Chapter Quizzes 1. Outstanding salaries is shown as:

(a) An asset in the balance sheet

(b) A liability

(c) By adjusting in P & L A/c

(d) Both (b) & (c) both

2. Depreciation appearing in the trial balance should be:

(a) Should be debited to P & L A/c

(b) Shown in balance sheet on liability side

(c) Adjusted in balance sheet by deducting from assets


3. A club paid subscription fees of Rs.1,400. Out of which Rs.200 is prepaid. In such case:

(a) P & L a/c is debited with Rs 1400

(b) P & L A/c is debited with Rs 1200

(c) Rs 200 is shown in assets


4. Bad debts recovered is:

(a) Debited to P & L A/c

(b) Credited to P& L A/c

(c) Deducted from debtors in balance sheet

(d) Added to debtors in balance sheet

5. Bank overdraft is shown as a:

(a) Current liability

(b) Contingent liability

(c) Current asset

(d) Unsecured loan

6. Which of the following is a liability of a firm?

(a) Credit balance of bank pass book

(b) Debit balance of petty cash book

(c) Credit balance of bank column of cash book

(d) Debit balance of bank column of cash book

7. Which of the following relationships is/are false?:

(a) Net profit= Gross profit- administrative & other expenses

(b) Net profit= Gross profit + administrative & other expenses

(c) Opening Stock + purchases – closing stock= cost of sales


8. Gross profit is equal to

(a) Sales – cost of goods sold

(b) Sales – purchases – opening stock

(c) Net profit - administrative expenses

(d) Opening stock + purchases

9. Depreciation is calculated on the:

(a) Cost price of an asset

(b) Cost price + transport + installation charges

(c) Market value of an asset

(d) Cost price of an asset or Market value of an asset whichever is lower

10. Which of the following will not appear in Profit and Loss Account of a business?

(a) Drawings

(b) Bad debts

(c) Accrued expenses

(d) Provision for doubtful debts

CHAPTER- 11 BILLS OF EXCHANGE

At the end of the chapter you will be conversant with:

11.1 Concept of bills of exchange

11.2 Accounting for Bills of Exchange

11.3 Dishonor of Bills

11.4 Renewal of Bills

11.5 Accommodation Bills

11.1 CONCEPT The Negotiable Instruments Act defines a bill of exchange 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 features of bills of exchange are:

1. It is a written document.

2. It is an unconditional order to pay a certain sum of money.

3. It is signed by the maker (or drawer) of the bill.

4. It must be dated and properly stamped.

5. The amount must be payable to a definite person or to his order or the bearer of

the instrument.

6. It must be accepted by the drawee.

The person who draws the bill is called the Drawer. The person who accepts the order is known

as drawee and the person to whom the amount has to be paid is known as the payee. Drawer

and the payee can be the same person.

11.2 ACCOUNTING FOR BILLS OF EXCHANGE

A bill of exchange is treated as bills receivable by the party entitled to receive the payment, and

as bills payable by the party liable to make payment.

Journal entries in the books of Drawer and Drawee in the following cases.

a. In case the bill is retained by the drawer till the due date

A Books of Drawer

B Books of Drawee

A B

i. Entry for sale of goods

Customer‟s a/c Dr.

To Sales a/c s Purchases a/c Dr.

To Supplier‟s a/c

ii. On receipt of acceptance from the drawee

Bills Receivable a/c Dr.

To Customer‟s a/c

Supplier‟s a/c Dr.

To Bills Payable a/c

iii On receiving payment on the due date

Cash a/c Dr.

To Bills Receivable a/c

Bills Payable a/c Dr.

To Cash a/c

IILUSTRATION 1:

X sold goods on credit to A for Rs.5,000 on 10.4.2001. on the same date. A accepted a bill

drawn by X payable after 3 months. On the due date, the bill is duly honored by X. Pass journal

entries in the books of both the parties.

Journal of X (Drawer)

Date Particulars Debit

Rs.

Credit

Rs.

10.4.01 A‟s a/c Dr.

To Sales a/c

(For credit sales to A)

5,000

5,000

10.4.01 Bills Receivable a/c Dr.

To A‟s a/c

(Bills received from A)

5,000

5,000

13.7.01 Cash a/c Dr.


(Being cash received on maturity of bill)

5,000

5,000

Journal of A (Drawee)


Rs.

Credit

Rs.

10.4.01 Purchases a/c Dr.

To X‟s A/c

(For credit purchases from X)

5,000

5000

10.4.01

X‟s a/c Dr.


(For the acceptance given)

5,000

5000

13.7.01 Bills Payablea/c Dr.

To Cash a/c

(For payment made on the due date)

5,000

5000

B When the bill is discounted with the bank

If the holder of the bill receivable needs cash before the due date, he can get the bill discounted

from the bank.

Books of drawer Books of drawee

i. Entry at the time of discounting the

bill:- Cash a/c Dr.

Discount a/c Dr.


No entry

ii. On the due date No Entry Bills Payable a/c Dr.

To Cash a/c

ILLUSTRATION 2.

A draws a bill on B for Rs.6,000 on 1.6.2001 payable after two months. On 4.7.01 he got the

bill discounted from bank at 10% p.a. The bill is duly honored on the due date. Pass journal

entries in the books of A and B.

Journal of A

Date Particulars Dr.

Amount

Cr.

Amoun

t

1.6.01 Bills Receivable a/c Dr

To B‟s a/c

(Being bill drawn on B)

6,000

6,000

4.7.01 Cash a/c Dr.

Discount a/c Dr.


(Being bills discounted with bank)

5,950

50

6,000

Journal of B


Amount

Cr.

Amount

1.6.01 B‟s a/c Dr. 6,000


(Being bill accepted)

6,000

4.8.01 Bills Payable a/c Dr.

To Cash a/c

(Being bills honored on the due

date)

6,000

6,000

c.When the bill is endorsed to a third party

Books of Drawer Books of Drawee

i. At the time of endorsement

Endorsee a/c Dr.


No Entry

ii. At the time of payment

No Entry

Bills Payable a/c Dr

To Cash a/c

ILLUSTRATION 3.

On April 09, 2001 Ashwini draws on Rohini a bill of exchange for Rs.10,000 payable after 2

months. The bill was duly accepted by Rohini on 9th April, 2001. Ashwini endorsed the bill in

favor of Bharini on 16th April, 2001. The bill is honored on the due date. Pass journal entries in the

books of Ashwini, Rohini and Bharini.

Journal of Ashwini (Drawer)

9.4.01 Bills Receivable a/c

Dr.

10,000

To Rohini‟s a/c 10,000

(For bill drawn on Rohini

for the amount due)

16.4.01 Bharini‟s a/c

Dr.

10,000

To Bills Receivable a/c 10,000

(For bill endorsed in favor of Bharini

JOURNAL OF BHAIRINI

16.4.01 Bills Receivable a/c Dr.

To Ashwini‟s a/c

(Being the bill endorsed)

10,000

10,000

12.6.01 Cash a/c Dr.


(Being amount received on maturity)

10,000

10,000

ILLUSTRATION 4

P draws a bill for Rs.15,000 on Q on 1.4.2001 payable after 3 months. After receiving Q‟s

acceptance the bill was sent to bank for collection on 8.5.2001. The bill was duly honored

on the due date. Collection Charges paid were Rs.150. Pass journal entries in the books of

P and Q.

Journal of P


Amount

Cr.

Amount

1.4.01 Bills Receivable a/c Dr. 15,000

To Q‟s a/c

(Being bill drawn)

15,000

8.5.01 Bills sent for collection a/c Dr. 15,000


(Being bill sent for collection)

15,000

4.7.01 Bank a/c Dr. 15,000

To Bills sent for collection a/c

(Being the bill collected by the bank on the

due date)

15,000

4.7.01 Collection charges a/c Dr.

150

To Bank a/c

(Being collection charges paid to bank)

150

Journal of Q


Amount

Cr.

Amount

1.4.01 P‟s a/c Dr. 15,000

To Bills Payable a/c 15,000

(Being acceptance given)

4.7.01 Bills Payable a/c Dr. 15,000

To Bank a/c 15,000

(For payment of bill on the due date)

11.3 Dishonor of Bills

The bill is presented to the drawee for payment on the due date. When the payment is made on

the due date, the bill is said to be honored. However, if the drawee fails to meet the bill on the

due date then the bill is said to be dishonored. The bill must be noted by the notary public.

Recording the fact of dishonor on the bill by the Notary Public is called noting, and the amount

charged by him for his services is called noting charges.

Journal Entries for Dishonor of Bill

Books of Drawee Books of Drawer

a. When the bill is retained till due date

Drawee a/c Dr. Bills Payable a/c Dr.

To Bills Receivable a/c Noting Charges a/c Dr.

To Cash a/c To Drawer a/c

(Drawer‟s a/c is credited with the (Drawee‟s a/c is debited with the

amount of bill and the noting amount of bill and the charges

paid in cash) charges reimbursed.)

b. When the bill is discounted with the bank

Drawee a/c Dr. Bills Payable a/c Dr.

Noting Charges a/c Dr.

To Cash a/c To Drawer a/c

(Amount of bill and noting charges (Drawer a/c is credited by the bill

paid are debited to drawee a/c) amount and the noting charges)

c. When the bill is endorsed

Drawee a/c Dr. Bills Payable a/c Dr

To Endorsee a/c Noting Charges a/c Dr.

To Drawer a/c

(With the bill amount and the noting (With the amount of bill and noting

charges paid by the endorsee ) charges paid in cash)

Entry in the books of Endorsee

Drawer (or endorser) a/c Dr.


To Cash (Noting Charges) a/c

d. When the bill is sent for collection

Drawee a/c Dr. Bills Payablea/c Dr.

To Bills sent for Collection a/c Noting Charges a/ Dr

To Bank a/c (Noting Charges) To Drawer a/c

(Entry for the dishonor of the (Being the bill dishonored and

bill sent to bank for collection) noting charges paid in cash)

ILLUSTRATION 5:

X sold goods worth Rs.10,000 to Y on 1.4.2001. On the same date Y accepted a bill of

exchange payable after 2 months. On maturity Y failed to honor the bill. X paid Rs.20 as noting

charges. Pass journal entries in the books of X and Y if

a. He had retained the bill with him till maturity.

b. He had endorsed the bill to A.

c. He had discounted the bill with his bank at 6% on 4.05.2001.

d. He had sent it to bank for collection

Journal of X (Drawer)


Amount

Cr.

Amount

1.04.01

Y‟s a/c Dr.

To Sales a/c

(Being goods sold to Y)

10,000

10,000

1.04.01


To Y‟s a/c

(Being the entry for bills received)

10,000

10,000

a. If bill is retained till maturity and dishonored

4.06.01

Y‟s a/c Dr.


To Cash a/c

(Being bill dishonored, noting charges paid)

10,020

10,000

20

b. If the bill is endorsed in favor of A

A‟s a/c Dr.


(Being bill endorsed in favor of A)

10,000

10,000

4.06.01

Y‟s a/c Dr.

To A‟s a/c

(Being the bill dishonored and noting

charges paid)

10,020

10,020

c. If the bill is discounted with bank at 6%

4.05.01

Bank a/c Dr.

Discount a/c Dr.


(Being the bill discounted with bank)

9,950

50

10,000

4.06.01

Y‟s a/c Dr.

To Bank a/c

(Being bill dishonored and noting charges

paid)

10,020

10,020

d. If the bill is sent to bank for collection

Bills for Collection a/c Dr.


(Being bills sent to bank for collection)

10,000

10,000

4.06.01

Y‟s a/c Dr.

To Bills sent for Collection a/c

To Bank a/c (Noting Charges)

(Being the bill sent to bank for collection

dishonored and noting charges paid)

10,020

10,000

20

Journal of Y (Drawee)


Amount

Cr.

Amount

1.04.01

Purchases a/c Dr.

To X‟s a/c

(Being goods purchased from X)

10,000

10,000

1.04.01

X‟s a/c

Dr.


(Being bill accepted in favor of X)

10,000

10,000

a. When the bill is retained till the due date



To X‟s a/c

(Being the bill dishonored and noting charges

paid)

10,000

20

10,020

b. When the bill is endorsed in favor of A

4.06.01



To X‟s a/c

(Being the endorsed bill dishonored)

10,000

20

10,020

c. When the bill is discounted

4.06.01



To X‟s a/c


paid)

10,000

20

10,020


4.06.01



To X‟s a/c


paid)

10,000

20

10,020

ILLUSTRATION 6:

A sold goods worth Rs.20,000 to B on 1.4.2001. On the same date, B accepted a bill of

exchange payable after 2 months. On maturity B failed to honor the bill. A paid Rs.20 as noting

charges. Pass journal entries in the books of A and B if

a. He had retained the bill with him till maturity.

b. He had endorsed the bill to X.

c. He had discounted the bill with his bank at 6% on 4.5.2001.

d. He had sent it to bank for collection.

Journal of A (Drawer)


Amount

Cr.

Amount

1.4.01

B‟s a/c Dr.

To Sales a/c

(Being goods sold to B)

20,000

20,000

1.4.01


To B‟s a/c

(Being the entry for bill

received)

20,000

20,000

a. If bill is retained till maturity and dishonored

4.6.01

B‟s a/c Dr.


To Cash a/c

(Being bill dishonored, noting

charges paid)

20,020

20,000

20

b. If the bill is endorsed in favor of X

X‟s a/c Dr. 20,000

To Bills Receivable

a/c

20,000

(Being bill endorsed in

favor of X)

B‟s a/c Dr. 20,020

To X‟s a/c 20,020

(Being the bill

dishonored and noting

charges paid)

c. If the bill is discounted with bank at 6%

4.5.01 Bank a/c Dr. 19,900

Discount a/c Dr. 100

To Bills Receivable

a/c

20,000

(Being the bill discounted with

bank)

4.6.01 B‟s a/c Dr. 20,020

To Bank a/c 20,020

(Being bill dishonored and noting charges paid)

d. If the bill is sent to bank for collection

Bills sent for Collection

a/c

Dr. 20,000

To Bills Receivable

a/c

20,000

(Being bill sent to bank for

collection)

4.6.01 B‟s a/c Dr. 20,020

To Bills sent for Collection a/c 20,000

To Bank a/c (Noting charges) 20

(Being the bill sent to bank for collection

dishonored and noting charges paid)

Journal of B (Drawee)


Amount

Cr.

Amount

1.4.01 Purchases a/c Dr. 20,000

To A‟s a/c 20,000

(Being goods purchased

from A)

1.4.01 A‟s a/c Dr. 20,000


(Being bill accepted in

favor of A)

a. When the bill is retained till the due date


Noting Charges a/c Dr. 20

To A‟s a/c 20,020

(Being the bill

dishonored and noting

charges paid)

b. When the bill is endorsed in favor of X



To A‟s a/c 20,020

(Being the endorsed

bill dishonored)

c.When the bill is discounted



To A‟s a/c 20,020

(Being the bill dishonored and noting charges paid)


4.6.01 Bills Payable a/c D 20,000

Noting Charges a/c 20

To A‟s a/c 20,020


paid)

11.4 RENEWAL OF BILLS

Sometimes, when the drawee is unable to meet the bill on the due date he may request the

drawer for extension of time for paying the amount of the bill. The drawee may make part-

payment of the bill in cash and accept a new bill for the remaining amount payable. The drawer

by accepting his request for cancelation of the old bill, draws a new bill on him for the balance

due. This is known as renewal of bill. For renewal of bill, interest is charged by the drawer for

the period of new bill. Interest may be paid in cash or it can be added to the amount of old bill

and a new bill is accepted by the drawee.

Journal entries for cancellation and renewal of a bill are as follows:

Books of Drawer Books of Drawee

1. For Cancellation of old bill

Drawee‟s a/c Dr.


2. For the part-payment

received

Cash a/c Dr.

To Drawee‟s a/c

3. For interest receivable on

renewal of bill a. When interest is paid in cash

Cash a/c Dr.

To Interest a/c

b. When interest is included in

the new bill Drawee‟s a/c Dr.

To Interest a/c

4. For the new bill received


To Drawee‟s a/c


To Drawer‟s a/c

Drawer‟s a/c Dr.

To Cash a/c

Interest a/c Dr.

To Cash a/c

Interest a/c Dr.

To Drawer‟s a/c

Drawer‟s a/c Dr.


ILLUSTRATION 7

Suraj draws a bill on Chandra for Rs.10,000 on 1.4.2001 payable after 2 months. Chandra was

unable to pay the amount. He approached Suraj before the due date and requested him to draw

a new bill payable after three months for Rs.8,000 plus interest @10% p.a. and the balance

amount is paid in cash. New bill is duly honored on the due date. Pass journal entries in the

books of Suraj and Chandra.

Journal of Suraj


Amount

Cr.

Amount

1.4.01 Bills Receivable a/c Dr. 10,000

To Chandra‟s a/c 10,000

(Being the entry for

acceptance received from

Chandra)

Chandra‟s a/c Dr. 10,000


(Being the old bill canceled

for renewal)

Chandra‟sa/c Dr. 200

To Interest a/c 200

(Being the entry for the

interest)

(8,000 x 10 x 3)/(12 x 100)

Bills Receivable a/c Dr. 8,200

To Chandra‟s a/c 8,200

(Being the entry for the new bill accepted)

Cash a/c Dr. 2,000

To Chandra‟s a/c


balance paid in cash)

2,000

Cash a/c Dr. 8,200


(Being the payment received

on the due date)

Journal of Chandra


Amount

Cr.

Amount

1.04.01 Suraj‟s a/c Dr. 10,000


(Being acceptance given)

Bills Payable a/c Dr. 10,000

To Suraj‟s a/c 10,000

(Being the old bill canceled)

Interest a/c Dr. 200

To Suraj‟s a/c 200


interest on the new bill)

Suraj‟s a/c Dr. 8,200


(Being the entry for the new

bill accepted)

Suraj‟s a/c Dr. 2,000

To Cash a/c 2,000

(Being cash paid to Suraj)


To Cash a/c 8,200

(Being the payment made on

the due date)

11.5 ACCOMMODATION BILLS

Normally bills are drawn and accepted to facilitate trade. But sometimes bills are drawn and

accepted for the purpose of helping one or both the parties involved without any genuine

business transaction between them. These bills are known as accommodation bills or fictitious

bills. The main purpose of accommodation bills is to raise funds for a short period by

discounting the bill with the bank. The discounting charges are shared by the parties in

the ratio of funds they receive.

Journal entries are passed in the similar way as for ordinary bills. The only additional entry to be

passed is for sending or receiving the amount

ILLUSTRATION 8

A, for the mutual accommodation of himself and B, draws upon the later, a bill at 4 months

date for Rs.1,800 dated 1st March. The bill is discounted by A at 5 percent, and half the

proceeds are remitted to B.

B, at the same time, draws a bill at 4 months on A for Rs.900. After securing A‟s acceptance,

the bill is discounted at 6% by B, who remits half the proceeds to A. B becomes insolvent on

31st May, and 25 paise in the rupee is received on 15th July as first and final dividend from his

estate.

Write journal entries in the books of both the parties.

In the Books of A Journal Entries

Date Particulars Debit Rs.

Credit Rs.

1st

March Bills receivable a/c

Dr. 1,800

To B a/c 1,800

Bank a/c

Dr. 1,770

Discount a/c

Dr. 30

To Bills receivable a/c 1,800

B a/c

Dr. 900

To Bank a/c

885

To Discount received a/c

15

B a/c

Dr. 900


900

Bank a/c

Dr. 441

Discount allowed a/c

Dr. 9

To B a/c

450

4th July

B a/c

Dr. 1,800

To Bank a/c 1,800

Bills payable a/c

Dr. 900

To Bank a/c 900

Bank a/c

Dr. 337.5

To B a/c 337.5

Bad debts a/c

Dr. 1012.5

To B a/c 1012.5

In the Books of B


Rs.

Credit

Rs.

1st

March

A a/c Dr. 1,800


Bank a/c Dr. 885

Discount allowed a/c Dr. 15

To A a/c 900

Bills receivable a/c Dr. 900

To A a/c 900

Bank a/c Dr. 882

Discount a/c Dr. 18

To Bills receivable a/c 900

A a/c Dr. 450

To Bank a/c 441

To Discount received a/c 9

4th

July


To A a/c 1,800

A a/c Dr. 1,350

To Bank a/c 337.5

To Deficiency a/c 1012.5

ILLUSTRATION 9:

A and B, business partners, on 1st January agree to draw on the other a bill of exchange for

Rs.1000 for 3 months and to discount the other‟s bill each meeting his own bill when it falls

due and paying the expenses of discounting the other‟s bill. Both bills are accepted and

discounted at 6%. On the due date, B meets his acceptance. A, however, notifies B of his

inability to meet his bill and B has therefore to take it up. A pays Rs.400 on 3rd April and

accepts another bill drawn on him by B at 2 months date for Rs.610 including interest. This bill

of exchange is honored by A at maturity.

Give the journal entries in the books of A.

Journal Entries in the books of A


Rs.

Credit

Rs.

1st January Bills receivable a/c Dr. 1,000

To B a/c 1,000

B a/c Dr. 1,000

To Bills payable a/c 1,000

Bank a/c Dr. 985

Discount a/c Dr. 15

To Bills receivable a/c 1,000

3rdApril Bills payable a/c Dr. 1,000

To B a/c 1,000

Interest a/c Dr. 10

To B a/c 10

B a/c Dr. 1,010

To Bank a/c 400

To Bills payable a/c 610

TEST EXERCISE:

Problem 1:

A bill for Rs 5,000 is drawn by B and accepted by C. Show what entries would be passed in the

books of B in each of the following circumstances:

(a) If he retains the bill till due date and then realized it on maturity.

(b) If he discounted it with his bank for Rs 4,800.

(c) If he endorsed it over to his creditor M in settlement of a debt.

End Chapter Quizzes

Select the most appropriate choice:

In each of the following cases indicate the alternative which you consider to be correct:

1) A four months bill drawn on 1st January 1993 will mature for payment on-

(a) 3rd May 1993

(b) 4th May 1993

(c) 5th May 1993

(d) 4th January,1993

2) If Ram‟s acceptance that was endorsed by us to Saleem is dishonoured, the amount

should be debited in our books to-

(a) Saleem‟s account

(b) Ram‟s account

(c) Bills receivable account.

(d) Bills payable account

3) When bill discounted with the bank is dishonored?:

(a) Acceptor‟s account is debited in the books of drawer

(b) Bills receivable account is credited in the books of drawer

(c) Bank account is debited in the book of drawer

(d) Bills payable account is debited in the books of drawer

4) In the books of the drawer, the accounting treatment involved on receipt of a bill of exchange

duly accepted by the drawee is. i) Debit Bills Receivable account

ii. Debit drawee‟s account

iii. Credit drawee‟s account

(a) only (i) above

(b) both (i) & (ii) above

(c) both (i) & (iii) above

(d) only (ii) above

5) The noting charges levied on dishonour of an endorsed bill by the Notary Public are to be

borne by

(a) The drawer of the bill

(b) The person responsible for dishonor of bill

(c) The holder of the bill

(d) The endorser of the bill

6) The drawer of a trade bill passes relevant entries with regard to the transaction involved in it.

But, in case of an accommodation bill, he passes an entry in addition to the usual entries. The

additional entry so passed is with respect to

(a) Discounting of the bill with the bank

(b) Payment of bill on due date

(c) Remitting or receiving the amount

(d) Sending bill for collection

7) If a bill is endorsed to a third party, the accounting entry in the books of the endorser, at the

time of endorsement involves:

(a) Credit endorsee account

(b) Debit endorsee account

(c) Debit bill receivable account

(d) Credit bills payable account

8) Bills receivable book is a part of the –

(a) journal

(b) ledger

(c) profit and loss account.

(d) Balance sheet

9) A bills receivable book is a

(a) principal book

(b) subsidiary book

(c) book containing blank forms for writing bills of exchange

(d) none of above

10) Bills payable book is a part of the

(a) journal

(b) ledger

(c) profit and loss account

(d) none of above

KEY TO END CHAPTER QUIZES:

CHAPTER 1

1(c), 2 (a), 3 (a), 4 (a), 5 (d), 6 (d), 7 (d) 8 (d), 9 (b) 10 (d)

CHAPTER 2

1 (C), 2 (D), 3 (d), 4 (b), 5 (c), 6 (c), 7 (c), 8 (b), 9 (c), 10 (a)

CHAPTER 3

1 (a), 2(b), 3 (c), 4 (a), 5 (b), 6 (c), 7 (b), 8 (b), 9 (b), 10 (c)

CHAPTER 4

1 (b), 2 (b), 3 (b), 4 (d), 5 (c), 6 (d), 7 (c), 8 (c), 9 (a), 10 (b)

CHAPTER 5

1 (d), 2 (a), 3 (a), 4 (b), 5 (c), 6 (d), 7 (b), 8 (c), 9 (b), 10 (d)

CHAPTER 6

1 (d), 2 (c), 3 (b), 4 (d), 5 (a), 6 (a), 7 (c), 8 (d), 9 (c), 10 (c)

CHAPTER 7

1 (d), 2 (a), 3 (a), 4 (b), 5 (b), 6 (c), 7 (c), 8 (c), 9 (c), 10 (c)

CHAPTER 8

1 (d), 2 (a), 3 (b), 4 (d), 5 (a), 6 (a), 7 (c), 8 (c), 9 (b), 10 (a)

CHAPTER 9

1 (b), 2 (c), 3 (c), 4 (d), 5 (c), 6 (a), 7 (b), 8 (a), 9 (a), 10 (b)

CHAPTER 10

1 (d), 2 (a), 3 (d), 4 (b), 5 (a), 6 (c), 7 (d), 8 (a), 9 (b), 10 (a)

CHAPTER 11

1 (b), 2 (b), 3 (a), 4 (c), 5 (b), 6 (b), 7 (b), 8 (a), 9 (b), 10 (a)

BIBLIOGRAPHY

1. Dr. S.N. Maheshwari, Finacial Accounting

2. D.K. Goyal & Rajesh Goel, Higher Accoutancy

3. P.C Tulsian, Financial Accounting

4. BS Raman. Financial Accounting

5. Grewal and Gupta, Advanced Accounting