Beruflich Dokumente
Kultur Dokumente
CHAPTER NO
PARTICULAR
Page no.
1.
2.
Transaction of Data
3.
Journal Entry
4.
Ledger Account
5.
Subsidiary Book
6.
Trial Balance
7.
Final Account
8.
Conclusion
Chapter 1
FINANCIAL STATEMENT ON SOLE TRADING
INTRODUCTION
A form of business in which one person owns all the assets of the business, in contrast to a
partnership or a corporation.
A person who does business for himself is engaged in the operation of a sole trader. Anyone who
does business without formally creating a business organization is a sole proprietor. Many small
businesses operate as sole traders. Professionals, consultants, and other service businesses that
require minimum amounts of capital often operate this way.
A sole trader is not a separate legal entity, like a partnership or a corporation. No legal
formalities are necessary to create a sole trader, other than appropriate licensing to conduct
business and registration of a business name if it differs from that of the sole proprietor. Because
a sole trader is not a separate legal entity, it is not itself a taxable entity. The sole proprietor must
report income and expenses from the business on Schedule C of her or his personal federal
income tax return.
A major concern for persons organizing a business enterprise is limiting the extent to which their
personal assets, unrelated to the business itself, are subject to claims of business creditors. A sole
trader gives the least protection because the personal liability of the sole proprietor is generally
unlimited. Both the business assets and the personal assets of the sole proprietor are subject to
claims of the sole trader's creditors. In addition, existing liabilities of the sole proprietor will not
be extinguished upon the dissolution or sale of the sole trader.
Unlike the managers of a corporation or a partnership, a sole proprietor has total flexibility in
managing and controlling the business. The organizational expenses and level of formality in a
sole trader are minimal as compared with those of other business organizations. However,
because a sole trader is not a separate legal entity, it terminates when the sole proprietor becomes
disabled, retires, or dies. As a result, a sole trader lacks business continuity and does not have a
perpetual existence as does a corporation.
For working capital, a sole trader is generally limited to the individual funds of the sole
proprietor, along with any loans from outsiders willing to provide extra capital. During her
lifetime, a sole proprietor can sell or give away any asset because the business is not legally
separate from the sole proprietor. At the death of the sole proprietor, the business is usually
dissolved. The proprietor's estate, however, can sell the assets or continue the business.
ADVANTAGES
It is easy to organize the needs only small amounts of capital needs to start and run a business.
It permits a high degree of flexibility for the owner since he/she is the boss of the business
establishment.
Due to the owner's unlimited liability, some creditors are more willing to extend credit.
The owner receives all the profit of the business.
There is secrecy in sole trader.
The owner of a sole trader is very likely to take a high level of personal interest in operations.
There are tax advantages in many juristictions.
Chapter 2
Journal
Definition and Explanation:
The word "journal" has been derived from the French word "jour". Jour means day. So
journal means daily. Transactions are recorded daily in journal and hence it has been named
so. It is a book of original entry to record chronologically (i.e. in order of date) and in detail
the various transactions of a trader. It is also known Day Book because it contains the
account of every day's transactions.
Characteristics of Journal:
The following arte the advantages of journal:
2. Since the transactions are kept recorded in journal, chronologically with narration, it
can be easily ascertained when and why a transaction has taken place.
3. For each and every transaction which of the two concerned accounts will be debited
and which account credited, are clearly written in journal. So, there is no possibility
of committing any mistake in writing the ledger.
4. Since all the debits of transaction are recorded in journal, it is not necessary to
repeat them in ledger. As a result ledger is kept tidy and brief.
1. That each entry in the journal should be so clear that at any future time we may,
without the aid of memory, perceive the exact nature of the transactions.
2. That each transaction should be so classified that we may easily obtain the
aggregate effect of such transactions at the end of a certain period.
Form of Journal:
Date
(1)
Particulars
(2)
L.F.
(3)
Dr. Amount
Cr. Amount
TRANSACTION
Illustration.1:
On first April 1991 a Aryan started business with a capital of $15,000 and his transactions
of the month were as follows:
April 2
April 3
April 7
April 8
April 10
April 12
Received cash from R & Sons $1,450, allowed him discount of $50.
April 15
April 16
April 17
April 20
April 21
Purchased from K goods of the list price of $600 subject to a 10 percent trade
discount.
April 22
April 25
April 27
Distributed goods worth $200 as free samples and goods taken away by the
proprietor for personal use $100
April 28
April 31
Solution:
Journal
of Aryan ltd.
Date
April 1
Particulars
Cash Account
...Dr.
L.F
Debit
Credit
15,000
To Capital Account
15,000
(Capital introduced)
April 2
Machinery Account
7,000
To Cash Account
7,000
(Machinery purchased)
April 3
Furniture Account
2,500
To Cash Account
2,500
April 7
Purchases Account
To Cash Account
(Goods purchased for cash)
3,000
3,000
April 8
R & Sons
1,500
To Sales Account
1,500
April 10
Purchases Account
3,000
To B
1,000
To C
2,00
April 12
Cash Account
Discount
1,450
50
To R & Sons
1,500
April 15
1,000
To Cash Account
975
To Discount account
25
(Salaries paid)
April 16
500
To Purchases Return Account
500
(Goods returned to C)
April 17
Din Mohammad
800
To Sales Account
800
April 20
200
To Din Mohammad
200
April 21
Purchases Account
540
To K
540
April
22
1,500
To Cash Account
1,500
(Cash paid to C)
April
25
Charity Account
80
To Cash Account
50
To Purchases Account
30
April
27
200
Drawings Account
100
To Purchases Account
300
April
28
Drawings Account
To Cash
(Cash drawn by the proprietor)
200
200
April
31
Salaries Account
500
To Cash Account
500
37320
TOTAL
37320
Illustration .2.
On first January, 1991 Aryan started business with capital of $20,000 and his transactions of
the month were as follows:
Jan.2
8,000
Jan.8
1,000
Jan.15
500
Jan.20
Goods returned to C
100
Jan.22
Sold goods to R
400
Jan.25
R returned goods
Jan.31
200
Jan.31
150
25
Solution:
Journal of Aryan ltd
Date
Jan. 1
Particulars
Cash Account
...Dr.
To Capital Account
(Capital introduced)
L.F
Debit
Credit
20,000
20,000
Jan 2.
Building Account
...Dr.
8,000
To Cash Account
8,000
Jan. 8
Purchases Account
...Dr.
1,000
To Sales Account
1,000
...Dr.
500
To Sales Account
500
Jan. 20 C
...Dr.
100
100
(Goods returned to C)
Jan. 22 R
...Dr.
400
To Sales Account
400
25
To R
25
...Dr.
200
To Cash Account
200
(Salaries paid)
...Dr.
150
To Cash Account
150
Total
30,375
30,375
Chapter 3
Ledger
Meaning of Ledger
Although Journal is chronological record of all business transactions, yet it cannot provide all
information regarding a particular account at one place. The journal cannot show the net effect of
various transactions affecting a particular person, assets, revenue and expense. For example, if a
trader wants to know the amount due to a particular supplier or the amount due from a particular
customer, he will have to go through the whole journal. It would be a tedious and time
consuming process. To overcome this difficulty, another book of account, in addition to
Journal/special purpose books, is maintained. This book is called Ledger. Ledger is a book of
account which contains a condensed and classified record of all transactions of the business
posted from the journal. It is also called the book of final entry. In other words, the book, which
contains accounts, is known as the ledger, also called the Principal Book. Ledger provides
necessary information regarding various accounts. Personal accounts in ledger show how much
money firm owes to the creditors and the amount it can recover from its debtors. The real
accounts show the value of properties and also the value of stock. Nominal accounts reflect the
sources of income and also the amount spent on various items.
In accounting all transactions are ultimately recorded in the ledger. In this book, separate
accounts are opened for each account head and all transactions relating to a particular account
head will be posted in the concerned account. An account for each person, each type of revenue,
expense, assets and liability is opened in the ledger. For example, all transactions relating to a
particular supplier; say Vivek will be posted to the account of Vivek. This helps in ascertaining
the amount due to Vivek. Ledger is generally maintained in the form of a bound register. First
few pages of the ledger has ordinary horizontal ruling for indexing. Remaining pages area ruled
like an account and is consecutively numbered. The index pages are used for writing the names
of accounts and the Folio No. (Page No.) where a particular account has been opened for easy
location. The ledger may also be maintained in loose-leaf form instead of one bound book
Ledger is the King of all the books of accounts
Ledger is called the king of all the books of account, because it is the book which alone can
exhibit the position of each account head in a convenient form. It can supply all the useful
information such as the net result of various transactions involving an asset, a liability, capital,
revenue and an expense.
Ledger is the ultimate destination of all transactions because posting is made from the journal to
the ledger. The information available in the ledger in classified and summarised form also
facilitates the preparation of a Trading and Profit and Loss Account and a Balance Sheet. Thus,
Ledger is called the King of all books because no other book of account can supply all the
information like ledger.
account head can be ascertained by finding out the balance of that account. For example, how
much is due from a customer or how much is payable to a creditor or what is the total amount of
purchases or what has been the expenditure on different heads? All these information can be
ascertained by balancing the accounts appearing in the ledger.
(d) Trial Balance: As both the aspects are recorded, the net debit effect and the net credit on the
accounts must be equal on a particular date. This is verified by preparing a statement called Trial
Balance. This is possible only if the ledger accounts are maintained.
(e) Preparation of final accounts: Ledger is the store-house of all information relating to the
transactions. It facilitates the preparation of a Profit and Loss Account from the balances of
revenue and expenses accounts. It also, facilitates the preparation of a Balance Sheet from the
balances of assets, liabilities and capital accounts.
Purpose of Ledger:
A businessman requires various information to ascertain the net results, financial position and
progress of the business. Ledger can provide various information, which are given below.
(a) Information regarding Debtors: A trader can know the amount of money receivable from
various customers and others who are known as debtors.
(b) Information regarding Creditors: A trader can know the amount of money payable to
various suppliers and others who are known as creditors.
(c) Information regarding Purchases and Sales: The total purchase of goods and the total sale
of goods during a specific period can be known by preparing Purchase A/c and Sales A/c.
(d) Information regarding Revenue and Expenses: The amount of revenue earned from
different sources and the amount of expenses incurred on different accounts heads for a
General Ledger: This ledger contains all accounts other than the accounts of Debtors and
Creditors for goods. All accounts falling in the category of Assets, Liabilities (except debtors and
creditors for goods), Capital, Revenue and Expense are maintained in this proper ledger. For
example, if a machine is sold to Ram on credit, his account will appear in General Ledger; again,
if goods are sold to him on credit, his account will appear in the Debtors Ledger. General Ledger
is also known as Impersonal Ledger or Nominal Ledger.
Illustration 1 :
On 1st January 2008, Aryan ltd. started business with a capital Rs. 18,000
Journal of M/r Aryan ltd.
Date
2008
Jan1
L.
F.
Particulars
Cash A/c
Dr.
To Capital A/c
(Being cash brought in as capital)
Dr.
Amount
(Rs.)
Cr.
Amount (Rs.)
18,000
18,000
In the above entry, the accounts affected are Cash A/c and Capital A/c. Therefore, in the ledger,
Cash A/c and Capital A/c will be opened. Posting in both the accounts are shown as under.
Date
2008
Jan1
Cr
Particulars
L
F
Amount
Rs.
Date
Particulars
L
F
Amount
Rs.
18,000
To Capital A/c
As the Cash A/c has been debited in the Journal, Cash account will also be debited in the Ledger.
This means that posting will be made in the debit side of the Cash A/c. On the debit side, in the
date column, date will be written. In the Journal i.e. 2008, Jan. 1, the date of the transaction,
will be written. In particulars column, the account which has caused an effect in the Cash A/c
will be written. As per the entry in the journal, Capital A/c will be written in the particulars
column with To as prefix. In the J.F. column, the Folio number (page number) where the
entry appears in journal will be written. In the amount column in the ledger, the figure stated
against Cash account in the journal, as shown above, will be entered.
Cr.
Date
Particulars
L
F
Amount
Rs.
Date
Particulars
2008
Jan 1
By Cash A/c
L
F
Amount
Rs.
18,000
Illustration 2 :
Purchase of furniture from Modern Furnishers Rs.12,000 on January 1,2008
Journal Entry:
Furniture A/C Dr.
12,000
To Modern Furnishers A/C Rs.
12,000
(Being furniture purchased)
The amount of Rs. 12,000 will be debited to the Furniture A/C and credited to Modern furnishers
A/C in the following way
Ledger
Furniture Account
Dr.
Date
Particulars
Cr
L
F
Amount
Rs.
Date
Particulars
L
F
Amount
Rs.
2008
Jan1
12,000
To Modern
Furnishers
Ledger
Modern Furnishers Account
Dr.
Date
Particulars
Cr
L
F
Amount
Rs.
Date
2008
Jan1
Particulars
By Furniture
Account
L
F
Amount
Rs.
12,000
Chapter 4
Subsidiary books
Introduction:
So far we have discussed that transactions are first recorded in journal, and then posted to ledger.
In case of large organizations where there are numerous transactions, it will be difficult to record
all these transactions through journal. Hence, for convenience of recording, the journal is divided
into a number of special journals. These are known as subsidiary books. The number of
subsidiary books maintained by a business organization depends on the size of the organization
and the nature of transactions. Now, we will discuss the subsidiary books maintained by a
business organization in general.
Though the principle of journalising all transactions, known as continental system of bookkeeping is quite
perfect in actual business but in a large business it is found inconvenient to Journalise every transaction
and sometime it becomes rather impossible for one man to Journalise numerous transactions on a business
in one journal. Therefore, the journal is sub-divided into different journals known as the subsidiary
books or books of prime entry or books of original entry. These are the books in which are recorded
the details of transactions as they take place from day to day, in a classified manner.
In every trading concern, the transactions, however numerous they may be, can be grouped into small
number of classes. They consist chiefly of receipts and payments of cash, purchases and sales of goods,
returns of goods purchased and sold, bills receivable and bills payable. The journal is divided in such a
way that a separate book is used for each class of transactions.
The important subsidiary books used in modern business world are the following:1. Cash Book: It is used to record all cash receipts and payments.
2. Purchases Book: It is used to record all credit purchases.
3. Sales Book: It is used to record all credit sales
4. Purchases returns book: It is used to record all goods returned by us to our suppliers.
5. Sales Returns Book: It is used to record all goods returned to us by our customers.
6. Bills Receivable Book: It is used to record all accepted bills received by us.
7. Bills payable Book: It is used to record all bill accepted by us to our creditors.
8. Journal Proper: It is used for recording those transactions for which there is no separate book.
1. Cash Book
Definition :
1. Define and explain cash book.
2. How a cash book is balanced.
3. Prepare a format of the simple cash book.
Cash book is a book of original entry in which transactions relating only to cash receipts and payments
are recorded in detail. When cash is received it is entered on the debit or left hand side. Similarly, when
cash is paid out the same is recorded on the credit or right hand side of the cash book.
The cash book, though it serves the purpose of a cash book of original entry viz., cash journal really it
represents the cash account of the ledger separately bound for the sake of convenience. It is more a ledger
than a journal. It is journal as cash transactions are chronologically recorded in it. It is a ledger as it
contains a classified record of all cash transactions. The balances of the cash book are recorded in the trial
balance and the balance sheet.
Vouchers:
For Every entry made in the cash book there must be a proper voucher. Vouchers are documents
containing evidence of payment and receipts. When money is received generally a printed receipt is
issued to the payer but counterfoil or the carbon copy of it is preserved by the cashier. The copy receipts
are called debit vouchers, and they support the entries appearing on the debit side of the cash book.
Similarly when payment is made a receipt is obtained from the payee. These receipts are known as credit
vouchers. All the debit and credit vouchers are consecutively numbered. For ready reference the number
of the vouchers are noted against the respective entries. A column is provided on either side of the cash
book for this purpose.
Balancing Cash Book:
The cash book is balanced at the end of a given period by inserting the excess of the debit on the credit
side as "by balance carried down" to make both sides agree. The balance is then shown on the debit side
by "To balance brought down" to start the next period. As one cannot pay more than what he actually
receives, the cash book recording cash only can never show a credit balance.
Format:
The following is the simple format of a cash book:
Date
Particulars
L.F.
Amount
Date
Particulars
L.F.
Amount
Posting:
The balance at the beginning of the period is not posted but other entries appearing on the debit side of
the cash book are posted to the credit of the respective accounts in the ledger, and the entries appearing on
the credit side of the cash book are posted to the debit of the proper accounts in the ledger.
Particulars
L.F.
Amount
Date
Particulars
L.F.
Amount
Example:
Single Column Cash Book
Write the following transactions in the simple cash book and post into the ledger:
1991
Jan. 1 Cash in hand
15,000
" 6
2,000
" 16
3,000
" 18
Paid to Babar
1,000
" 20
Cash sales
4,000
" 25
" 30
1,000
" 31
2,000
60
Solution:
Cash Book
Date
Particulars
L.F
Amount
Date
Particulars
L.F
Amount
1991
Jan. 1 To Balance b/d
15,000
16 To Akbar
3,000
18 By Babar
20 To sales a/c
4,000
25 By stationary
2,000
1,000
60
30 By Salaries a/c
1,000
31 By Furniture a/c
2,000
By Balance c/d
15,940
22,000
To Balance b/d
22,000
15,940
Akbar
1991
Jan. 16 By Cash
$
3,000
Sales Account
1991
Jan. 2 By Cash
$
4,000
Purchases Account
1991
Jan. 6 To Cash
$
2,000
Babar Account
1991
Jan. 18 To Cash
$
1,000
Stationary Account
1991
Jan. 25 To Cash
$
60
Salaries Account
1991
Jan. 30 To Cash
$
1,000
Furniture Account
1991
Jan. 31 To Cash
$
2,000
Posting:
The cash columns will be posted in the same way as single column cash book. But
as regards discount column, each item of discount allowed (Dr. side of the cash
book) will be posted to the credit of the respective personal accounts. Similarly each
item of discount received will be posted to the debit of the respective personal
account. Total of the discount column on the debit side of the cash book will be
posted to the debit side of the discount account in the ledger and the total of
discount column on the credit side of the cash book on the credit side of the
discount account. The discount columns are not balanced like cash column of the
tow column cash book.
Credit Side
Date
Particulars
Cash
Date
Particulars
Cash
Example
Two Column Cash Book:
From the following transactions write up a two column cash book and post into ledger:
Jan. 1 Cash in hand $2,000
" 7
" 12
" 15
" 20
" 25
" 27
" 28
" 31
Solution:
Cash Book
Debit Side
Date
Particulars
1991
Jan.1 To Balance b/d
" 7 To Riaz & Co.
" 12 To Sales a/c
" 25 To Salman
Credit Side
V.N. L.F. Discount
Cash
Date
15
2,000
200
1,000
500
1991
Jan.5
" 20
" 27
" 28
" 31
25
3,700
10
Particulars
Cash
15
500
300
300
100
100
2,400
15
3,700
2,400
1991
Feb1 To Balance b/d
$
200
10
Sales Account
1991
Jan. 12 By Cash
$
1,000
Salman Account
1991
Jan. 25 By Cash
By Discount
$
500
15
Babar Account
1991
Jan. 18 To Cash
$
1,000
credit balance (overdraft) then it will be put in the credit side of the cash book in the
bank column.
Contra Entries: If an amount is entered on the debit side of the cash book, and
the exact amount is again entered on the credit side of the same account, it is
called "contra entry". Similarly an amount entered on the credit side of an account
also may have a contra entry on the debit side of the same account.
Contra entries are passed when:
1. Cash is deposited into bank by office: It is payment from cash and receipt in bank. Therefore,
enter on credit side, cash column "By Bank" and on debit side bank column "To Cash". The
reason for making two entries is to comply with the principle of double entry which in such
transactions is completed and therefore, no posting of these items is necessary. Such entries are
marked in the cash book with the letter "C" in the folio column
2. Cheque/Check is drawn for office use: It is payment by bank and receipt in cash. Therefore,
enter on the debit side, cash column "To Bank" and on credit side, bank column "By Cash".
Posting: The method of posting three column cash book into the ledger is as
follows:
1. The opening balance of cash in hand and cash at bank are not posted.
2. Contra Entries marked with "C" are not posted.
3. All other items on the debit side will be posted to the credit of respective accounts in the ledger
and all other items on the credit side will be posted to the debit of the respective accounts.
4. As regards discounts the total of the discount allowed will be posted to the debit of the discount
account in the ledger and total of the discount received to the credit side of the discount account.
Particulars
Credit Side
V.N. L.F.
Particulars
V.N. L.F.
DisCash
count
Bank
Example
Illustretion :
On January 1, 1991 Noorani Stores cash book showed debit balance of cash $1,550 and bank $13,575.
During the month of January following business was transacted.
Jan.1 Purchased office typewriter for cash $750; cash sales $315
"
" 4 Received from A. Hussan a cheque for $2,550 in part payment of his account
" 6 Paid by cheque for merchandise purchased worth $1,005
" 8 Deposited into bank the cheque received from A. Hussan.
" 10 Received from Hayat Khan a cheque for $775 in full settlement of his account and allowed him
discount $15.
" 12 Sold merchandise to Divan Bros. for $1,500 who paid by cheque which was deposited in the bank.
" 16 Paid Salman $915 by cheque, discount received $5
" 27 Paid to Gulzar Ahmad by cheque $650
" 30 Paid salaries by cheque $1,750
" 31 Deposited into bank the cheque of Hayat Khan.
" 31 Drew from bank for office use $250.
You are required to enter the above transactions in three column cash book and balance it
Solution:
Noorani Stores
Cash Book
Debit Side
Date
1991
Jan.1
" 1
" 3
" 4
" 8
" 10
" 12
" 31
" 31
Particulars
To Balance
b/d
To Sales a/c
To Cash a/c
To A Hussan
To Cash
To Hayat
Khan
To Sales a/c
To Cash
To Bank
Credit Side
V.N. L.F.
Discount
C
C
15
C
C
15
Cash
Date
Particulars
1991
1,550 13,575 Jan.1 By Office
1,315
" 3 Equip.
500
" 6 By Bank
2,550
" 8 By Purchases
2,550 " 16 a/c
775
" 27 By Bank
1,500 " 30 By Salman
775
" 31 By Gulzar
250
" 31 By Salaries
a/c
By Bank
By Cash
6,440 18,900
By Balanced
c/d
V.N. L.F.
Discount
Cash
750
500
2,550
1,005
5
C
C
915
650
1,750
775
250
1,865 14,330
6,440 18,900
1,865 14,330
1991
Feb.1
To Balance
b/d
Sales Account
1991
Jan. 1 By Cash
" 12 By Cash
$
1,315
1,500
A. Hussan
1991
Jan. 4 By Cash
$
2,550
Posting:
The total of the purchases returns or returns outwards book is credited to returns outward account or
purchases return account (being the goods sent out). Individual suppliers to whom goods are returned are
debited (because they receive the goods).
135
"
20
150
"
31
Saeed Bros.
250
Solution:
Purchases Book
Date
Particulars
D/N
L.F.
1991
Jan. 8 Karim & Sons
" 20 Fazal Din & Co.
" 31 Saeed Bros.
Amount
$
135
150
250
535
$
535
135
Sales Book
Definition and Explanation:
A sales book is also known as sales day book is a book of original entry in which are recorded the
details of credit sales made by a businessman. Total of sales book shows the total credit sales of goods
during the period concerned. Usually the sales book is totaled every month. The sales day book is written
up daily from the copies of invoices sent out.
Posting:
The total of the sales book is credited to sales account. Customers whose names appear in the sales book
are debited with the amount appearing against their names. Double entry is thus completed.
$
Sold goods to ideal college
200
"
10
100
"
20
400
"
31
100
Solution:
Purchases Day Book
Date
1991
Jan. 5
" 10
" 20
" 31
Particulars
Idea college
Ahmad & Co.
Karim Bakhish
Cheap stores
D/N
L.F.
Amount
$
200
100
400
100
800
Posting:
The of the returns inwards book or sales returns book is debited to returns inwards account or sales
returns account. The customers who have returned the goods are credited with the amount shown against
their names
$
Goods returned by Parker & Co.
40
"
20
52
"
31
100
Solution:
Sales Returns Book
Date
Particulars
D/N
L.F.
1991
Jan. 8 Parker & Co.
" 20 Ideal Traders
" 31 Riaz & Co.
Amount
$
40
52
100
192
$
192
1991
Jan. 8 By Sales returns
$
40
Posting:
In the ledger the account of the person from whom each bill is received is credited with the amount of that
bill and the periodical total of the book is posted to the debit of bills receivable account.
the bills receivable book is ruled according to the requirements of a particular account
Example:
From the following transactions of a trader prepare the bills receivable book and post it into ledger:1991
January 5
"
10
"
20
"
30
Solution:
Bills Receivable Book
Date
1991
Jan. 5
" 10
" 20
" 30
Particulars
Term
2 m/d
3 m/d
3 m/d
2m/d
Due Date
March 8
April 13
" 21
March 3
L.F.
Amount
$
700
1,000
800
100
2,600
Posting: In the ledger, the account of each person whose bill has been accepted is
debited with the amount of the bill. The monthly total of the bills accepted is
credited to the bills payable account ledger.
Example:
From the following transactions of a trader prepare the bills payable book and post
it into ledger:January 5
"
20
"
30
Solution:
Bills Payable Book
Date
Particulars
1991
Jan. 5 Rahmat & Co.
" 20 Kamal
" 30 Feroz & Co.
Term
3 m/d
2 m/d
1 m/d
Due Date
L.F.
April 8
March 23
"
30
Amount
$
200
500
500
1,200
Bills Payable Account
1991
Jan. 31 By Sundries as per B/p Book
Chapter 5
Trial Balance
$
1,200
Introduction
When all the transactions have been recorded in their respective ledgers,
there will be numerous books of accounts. It would be difficult to tell at a
spar of a moment, which accounts has what balance. A trial balance would
help put this in perspective. A trial balance is a statement showing the list of
debit and credit balances of accounts. It is a check on the arithmetical
accuracy of the double entry regarding the business transactions at a given
period of time. The total of items recorded in all the accounts on the debit
side of the books should be equal in total with the items in all the accounts
on the credit side of the books. All the debit balances are listed in one
column and all the credit balances listed in another. The totals of these two
columns should be identical
TRIAL BALANCE
DR
Assets
xxx
Expenses
xxx
CR
xxx
xxx
Capital
xxx
Liabilities
xxx
xxx
xxx
To make this process simple the accounts should be balanced off so as to get their balances at the end of
the financial period. The balancing of accounts involves the following steps.
The difference between the two sides is called the balance and in accounting procedure should be
inserted on the side having the lesser amount so as to balance the two sides. This process leads to a
common terminology in accounting, that is balance carried forward (or carried down) written in short as
balance c/f (or balance c/d). A second term is balance brought forward (or balance brought down) denoted
as balance b/f (or balance b/d) . Balance carried forward (or down) is the balancing figure at end of the
accounting period. It is the difference in amounts between the two sides of the accounts at the end of the
accounting period. Balance brought forward (or down) on the other hand is the balance in the account at
the beginning of the accounting period.
The balance brought forward is used to tell whether the account has a debit balance or a credit balance. If
the account is having its balance brought down on the debit side, it is said to have debit balance and if it is
on the credit side, it is said to have a credit balance.
2. Help in the preparation of Final Accounts: Trial Balance facilitates the preparation of
Trading Account, Profit and loss Account and the Balance Sheet. Preparation of these financial
statements is very clumsy. If the ledger accounts balances are collected and grouped under the
two headings of Debit and Credit in the Trial Balance, it becomes easier to prepare the final
accounts.
3. Providing summary information of Financial result and position: A close and intelligent
observation of the Trial Balance gives us some information of the profit or loss and the financial
position of the firm.
4. Help in locating errors: Some of the errors in the books of accounts can be located with the
help of the Trial Balance. If the Trial Balance does not agree, an intelligent scrutiny to the items
and their amounts may reveal the cause of disagreement of the Trial Balance. Thus Trial Balance
discloses some of the errors in the books of accounts.
5. Completion of Double Entry: Trial Balance, if it agrees, i.e. the two sides are equal, proves
the completion of double entry.
two method of constructing a Trial Balance
1. Horizontal Format
2. T shape Format
Trial Balance
As on 31-03-1995
Heads of Accounts
Total:
L.F.
Heads of Accounts
L.F.
Debit Balance
Heads of
Accounts
L.F.
Rs.
Rs
Illustration:
From the following balances prepare a Tri al Balance as on 31-03-2008
Items
Credit
Balance
Rs.
1. Capital
50,000
2. Cash
46,700
3. Furniture
11,000
4. Computer
42,000
5. Insurance
1,800
6. Purchases
36,000
7. Debtors
12,000
8. Creditors
16,000
9. Drawings
2,000
10. Sales
86,000
11. Salary
1,500
1,000
2
3
Solution:
Trial Balance as on 31-12-94
Heads of Accounts
L.F.
Heads of Accounts
Credit
Balance
Rs.
Cash
46,700
Creditors
16,000
Furniture
11,000
Sales
86,000
Computer
42,000
Capital
50,000
Insurance
1,800
Interest
received
Purchases
36,000
Debtors
12,000
Drawings
2,000
Salary
1,500
1,000
Total:
153,000
153,000
Chapter 6
Final Accounts
Introduction
Having proved the arithmetical accuracy of ledger by means of trial balance we should
proceed to ascertain our profit or loss for a period, in order to determine the profit or loss of
a business and its financial position, final accounts at the end of a particular period are
prepared. The term "final accounts" means statements which are finally prepared to show
the profit earned or loss suffered by the firm and financial state of affairs of the firm at the
end of the period concerned. In order to know the profit or loss earned by a firm, income
statement or trading and profit and loss account is prepared. This statement is also called
"statement of operations." While the financial position is judged by means of preparing a
balance sheet of the business. This statement is also called "position statement" or
"statement of financial condition". In this section of the website we shall study the method
of preparing these two statements.
The basis of these statements is trial balance. The trial balance includes all the accounts
from the ledger. the nature of which may be either, personal, real, or nominal. It should be
noted that from the trial balance only nominal accounts are transferred to the profit and loss
account. The real or personal accounts go to the balance sheet.
Trading Account
Definition and Explanation:
A trading account is an account which contains, " in summarized form, all the
transactions, occurring, throughout the trading period, in commodities in which he deals"
and which gives the gross trading result. In short, trading account is the account which is
prepared to determine the gross profit or the gross loss of a trader.
1. The value of opening stocks of goods (i.e., the stock of goods with which the
business was started).
2. Net purchase made during the year (i.e., purchases less returns).
3. Direct expenses, if any.
Credit Side Items:
1. Total sales made during the period less the value of returns, i.e., net sales.
2. The value of closing stock of goods.
The difference between the two sides of the trading account represents either gross profit or
gross loss. Thus if the credit side is heavier that would mean that the trader has earned
gross profit i.e., the excess of selling price of the goods sold over their purchase price. If the
1. A trader can find out the gross profit and thereby can ascertain the percentage of
profit he has earned on the cost of goods sold. This percentage of gross profit may
serve as his ready guide for the adjustment of future sale price.
2. A trading account help a trader to compare his stock at open with that at the close.
He can further find out whether the purchases he has made during the period of
account have been judicious.
3. Once can compare the figure of sales with similar figure of the previous year and
can find out whether business is improving or declining.
4. If the gross profit disclosed by the trading account is less than expected, an
enquiry can be made into the cause responsible for the decline. And if the gross
profit is more than was expected, steps can be taken to maintain it.
Dr.
PARTICULAR
To Opening stock
To purchases
.........
Less Returns
.........
To Carriage inwards
To Cartage
To dock charges
To Wages
To Duty
To Freight
To Clearing charges
To Etc. Etc.,
To Gross profit (Transferred to
profit and loss account)
PARTICULAR
Cr.
........ By Sales
.........
Less returns
.........
........ By Closing stock
.........By Gross loss transferred to
.........profit and loss account
.........
.........
.........
.........
.........
.........
.........
Profit and loss account is the account whereby a trader determines the net result of his
business transactions. It is the account which reveals the net profit (or net loss) of the
trader.The profit and loss account is opened with gross profit transferred from the trading
account (or with gross loss which will be debited to profit and loss account). After this all
expenses and losses (which have not been dealt in the trading account) are transferred to
the debit side of the profit and loss account. If there are any incomes or gains, these will be
credited to the profit and loss account. The excess of the gain over the losses is called the
net profit and that of the loss over the gain is called the net loss. The account is closed by
transferring the net profit or loss to capital account of the trader
To Gross Loss
To Salaries
To Rent
To Rent and Rates
To Discount Allowed
To Commission Allowed
To Insurance
To Bank Charges
To Legal Charges
To Repairs
To Advertising
To Trade Expenses
To Office Expenses
To Bad Debts
To Traveling Expenses
To Etc., Etc.
To Net Profit(trns to cap
a/c)
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
ex.
xxxx
xxxx
xxxx
xxxx
xxxx
By
By
By
By
By
By
Gross Profit
Interest Received
Discount Received
Commission Received
Other Receipts
Etc., Etc.
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
Balance Sheet:
Definition and Explanation:
A balance sheet is a statement drawn up at the end of each trading period stating
therein all the assets and liabilities of a business arranged in the customary order to
exhibit the true and correct state of affairs of the concern as on a given date.
A balance sheet is prepared from a trial balance after the balances of nominal accounts are
transferred to the trading account or to the profit and loss account. The remaining balances
of personal or real accounts represent either assets or liabilities at the closing date. These
assets ant liabilities are shown in the balance sheet in a classified form - the assets being
shown on the right side and the liabilities on the left hand side.
Rs.
Assets
Cash in hand
Cash at Bank
Investments
Bills Receivables
Debtors
Stock (Closing)
Stores
Furniture & Fixtures
Plant & Machinery
Land & Buildings
Rs.
Rs.
Capital
Trade Creditors
Loans
Bills Payable
Assets
Rs.
Classification of Assets:
The properties and possessions of a business are called assets and they are classified into
the following classes:
Fixed assets: are assets which are acquired not for sale but for permanent use in the
business e.g., land and buildings, plant and machinery, furniture etc. These assets help the
business to be carried on.
Current assets: denote those assets which are held for sale or to be converted into cash
after some time e.g., sundry debtors. bills receivables, stock of goods etc.
Liquid assets: are those assets which are with us in cash or easily converted into cash e.g.,
cash in hand, cash at bank, investments etc.
Wasting Assets:
The assets that depreciate through "wear and tear", whose values expire with lapse of time
or that become exhausted through working are known as wasting assets. This is a subclass of fixed assets e.g., plant machinery, mines etc.
Contingent Assets:
A contingent asset is one which comes into existence upon the happening of a certain
event. If that event happens the asset becomes available, otherwise not. For example
uncalled capital of a limited company.
Outstanding Assets: Expenses paid in advance i.e., prepaid expenses, and income
earned but not received are known as outstanding assets.
Classification of Liabilities:
follows:
Fixed Liabilities: These are the liabilities which are payable immediately or in the near
future. These liabilities are payable after a long period. Long term loans, capital of the
proprietor are the examples of such kind of liabilities.
Current Liabilities: These are the liabilities which are payable immediately or in the near
future, such as creditors, bank loans etc.
Contingent Liabilities: Contingent liabilities are those liabilities which arise only on the
happening of some event. The event may or may not happen. Thus a contingent liability
may or may not involve the payment of money. Examples of contingent liabilities are:
1. Liabilities on bills discounted: In case the bill is dishonored by the acceptor, the
holder may be called upon to pay the amount to the discounter.
2. Liability under guarantee: In case the debtor fails to fulfill his obligation, the man
who has given a guarantee or surety have to make good the loss to the creditor.
Trading Capital: The portion of the funds of a concern which is represented by the fixed
and floating assets is called the trading capital
Fixed Capital: The portion of the funds of a concern which is represented by the fixed
assets is called fixed capital.
Illustration:1
From the following balances extracted from the books of X & Co., prepare a trading and
profit and loss account and balance sheet on 31st December, 1991.
particular
$
11,000
4,500
39,000
particular
Returns outwards
500
Trade expenses
200
Office fixtures
1,000
Wages
Insurance
Sundry debtors
2,800
Cash in hand
500
700
Cash at bank
4,750
1,100
1,450
30,000
Carriage inwards
800
Carriage outwards
Commission (Dr.)
800
Sales
Interest on capital
700
Bills payable
Stationary
450
Creditors
19,650
Capital
17,900
Returns inwards
1,300
60,000
3,000
Solution: 1
X & Co.
Trading and Profit and Loss Account
For the year ended 31st December, 1991
particular
Dr. Amt
Cr.Amt
particular
Dr. Amt
11,000
By Sales
60,000
39,000
Less returns
i/w
500
To Opening stock
To Purchases
Less returns o/w
To Carriage inwards
To Wages
To Gross profit c/d
38,500
800
2,800
30,600
Cr.Amt
1,300
58,700
By Closing stock
25,000
83,700
83,700
|
|
To Stationary
450
1,100
To Carriage outwards
1,450
To Insurance
700
To Trade expenses
200
To Commission
800
To Interest on capital
700
To Net profit
transferred to capital
a/c
By Gross profit
b/d
30,600
25,200
|
|
30,600
30,600
Balance Sheet
As at 31st December, 1991
Liabilities
Creditors
Bills payable
Assets
500
4,750
Capital
17,900
Sundry debtors
25,200
Bill receivable
43,100 | Stock
|
Office equipment
30,000
4,500
25,000
1,000
65,750 |
65,750
illustration 2
The following trial balance was taken from the books of Habib-ur-Rehman on December 31, 19 ....
particular
Dr.Amt
Cash
13,000
Sundry debtors
10,000
Bill receivable
8,500
Opening stock
45,000
Building
50,000
10,000
Investment (Temporary)
5,000
15,500
Dr.Amt
Bills payable
9,000
Sundry creditors
20,000
Habib's capital
78,200
Habib's drawings
Sales
1,000
100,000
Sales discount
400
Purchases
30,000
Freight in
1,000
Purchase discount
500
5,000
Advertising expenses
4,000
500
8,000
1,000
Interest income
1,000
Interest expenses
800
Total
2,08,700
2,08,700
Required: Prepare income statement/trading and profit and loss account and balance sheet from the above
trial balance in report form.
Solution:
Habib-ur-Rehman
Income Statement/Profit and Loss Account
For the year ended December 31, 19.....
Gross sales
Less: Sales discount
100,000
400
Net Sales
99,600
30,000
1,000
31,000
500
Net purchases
45,000
30,500
75,500
10,000
65,500
Gross profit
34,100
-Operating Expenses:
Selling Expenses:
Sales salary expenses
Advertising expenses
Misc. selling expenses
5,000
4,000
500
9,500
General Expense:
Office salaries expenses
Misc. general expenses
8,000
1,000
9,000
18,500
15,600
1,000
800
200
15,800
Habib-ur-Rehman
Balance Sheet
13,000
10,000
8,500
10,000
5,000
46,500
50,000
15,500
10,000
Less: Drawings
75,500
122,000
20,000
9,000
29,000
78,200
15,800
94,000
1,000
93,000
122,000