AMF 102 Financial Accounting Book

AMF 102 FINANCIAL ACCOUNTING
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.
Tanu Agrawal
FINANC IAL ACCOUNTING
Course Objective:
To develop conceptual understanding of the fundamentals of financial system which

processes transactions and other events through a book-keeping mechanism to prepare
financial statements, and also to impart skills in accounting for recording various kinds of
business transactions.
Course Contents:
Module I
Basics of book-keeping and accounting definition and its usefulness. Branches of

accounting. Financial accounting principles, concepts and convention. Accounting
standards national and international (basic knowledge)
Module II
System of book keeping double entry system, books of prime entry (Journal),
preparation of ledger accounts & balancing, subsidiary books, recording of cash and
bank transactions (Cash book).
Module III
Bank reconciliation statement, Depreciation accounting and its methods: Straight Line
Method, Written down value method, Depreciation Recording & Change of method of
depreciation
Module IV
Final accounts Trial Balance, Concept of capital, revenue and deferred revenue
expenditure, opening, entries, closing entries, adjustment entries, trading, and profit and
loss account and balance sheet.
Module V
Accounting for bills of exchange bills receivable and payable, acceptance, endorsement
discounting, dishonor and renewal of bills, accommodation bills.
Text & References:
Dr. S.N. Maheshwari, Finacial Accounting

BS Raman. Financial Accounting
Grewal and Gupta, Advanced Accounting
P.C Tulsian, Financial Accounting
D.K. Goyal & Rajesh Goel, Higher Accoutancy.
Master of Finance & Control Copyright Amity university India Page 1

INDEX
Chapter No. Chapter Name Page No.
Chapter 1 Meaning & Scope of Accounting 2
Chapter 2 Accounting Principles, Conventions And 10

Concepts
Chapter 3 Accounting Standards 16
Chapter 4 Systems of Book-Keeping & Accounting 22
Chapter 5 Recording of Accounting Transactions 29
Chapter 6 Subsidiary Books I- Cash Book 45
Chapter 7 Subsidiary Book II- Other Books 55
Chapter 8 Bank Reconciliation Statement 63
Chapter 9 Depreciation & Its Methods 70
Chapter 10 Final Accounts & Adjustments 85
Chapter 11 Bills of Exchange 109
Answer Key to end chapter questions Page no 129

Syllabus Page no 130
Bibliography Page no 131

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, wouldnt you like to know whether
youve 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
organizations 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:
Accountancy
Accounting
Book-Keeping
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, In addition it involves
measurement, recording & summarizing classified
classification of transactions. Analyzing,
transaction interpreting & communicating
the same.
2 Stage Its a primary stage Its a secondary stage, starts
where book-keeping ends
3 Basic Objective To maintain systematic To ascertain net results of
records operations & financial position
of the co
4 Who Performs Performed by junior staff By senior staff
5 Knowledge level Not required a high level It needs a high level of

of knowledge knowledge

6 Analytical Skill Not required Required

7 Nature of Job Routine & clerical Analytical
8 Supervision & Supervised by an Whereas its work is not

Checking accountant supervised by a book-keeper
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

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
2.3 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 lands 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.
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 Auditors 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 weightage 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 AUDITORS 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

Test Exercise:
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 CASH
BASIS BASIS
1 Prepaid/outstanding These things are treated Whereas no entry is done in
expenses/accrued/unaccrued in this accounting cash basis accounting
income
2 Income status in case of Income statement will Income statement will show
prepaid expenses & accrued show a relatively high lower income
income income
3 Income status in case of o/s Income statement will Income statement will show a
exp and unaccrued income show a relatively lower high income
income
4 Recognition under companies It is recognized Not recognized
Act 1956
5 Availability of choosing Under this an accountant Whereas under this an
accounting option like has an option accountant has no option to
LIFO/FIFO/SLM/WDV make a choice as such

Test Questions:
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 Credit

Rs. 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
Date Particulars L.F. Debit. Credit
Rs. Rs.
5.1.2001 Cash a/c Dr. 1,000
To Geet & Co. a/c 1,000
(Being cash received from Geet & Co.)
Let us apply the rules of debit and credit for a few sample transactions after ascertaining dual
aspects
Transaction Aspects Account Reason for Account Reason for the

Debited the Debit Credited Credit
ABC Ltd. Aspect 1 cash Cash a/c Cash a/c is Gupta & Co. Gupta & Co a/c is a
received of Rs.5,000 is a Real a/c. Personal a/c. The
Rs.5,000 received. The rule of rule of Credit the
from Gupta Aspect 2 The Debit what giver applies.
& Company amount is comes in
(In the books given by Gupta applies.
of ABC Ltd.) & Co.
PQR Ltd. Aspect 1 Inventor Inventory X Co. a/c X Co. a/c is a
purchased Goods of y a/c (or a/c or personal a/c. The
Rs.6,000 Rs.6,000 are Purchase Purchases rule of Credit the

Transaction Aspects Account Reason for Account Reason for the

Debited the Debit Credited Credit
worth of received. s a/c) a/c in giver applies.
goods from Aspect 2 The Nominal
X Co. goods are a/c. The
(In the books supplied by X Rule is
of PQR Ltd.) Co. Debt all
Expenses.
XYZ Ltd. Aspect 1 Salaries Salaries a/c Bank a/c Bank a/c is a
paid the Payment of an a/c is a personal a/c the rule
salaries of expense of Nominal of Credit the giver
Rs.15,500 to Rs.15,500. a/c. The applies
its staff for Aspect 2 Bank rule of
the month balance is Debit all
through bank reduced by expenses
transfer. Rs.15,500. applies.
(In the books
of XYZ Ltd.)
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:
Debit Credit
Date Particulars L.F
Rs. Rs.
i. Cash A/c Dr 7,50,000
To Capital A/c 7,50,000
(Being cash invested in the business)
ii. Bank A/c Dr. 2,00,000
To Cash A/c 2,00,000
(Being cash deposited in the Bank)
iii. Purchases A/c Dr. 1,00,000
(Being goods purchased from Tandon & Co. for cash)
iv. Purchases A/c Dr. 2,00,000
To Burman A/c 2,00,000
(Being goods purchased from Burman on credit)
v. Burman A/c Dr. 50,000
To Returns outward A/c 50,000
(Being goods returned to Burman)
vi. Burman A/c Dr. 1,50,000
To Returns outward A/c 1,40,000
To Discount Received A/c 10,000
(Being cash paid to Mr Burman and received discount)
vii. Rent A/c Dr. 50,000
To Cash A/c 50,000
(Being rent paid in cash)
viii. Drawings A/c Dr. 60,000
To Cash 60,000
(Being cash withdrawn for household expenses)
ix. 2,50,000
Cash A/c Dr.
To Sales A/c 2,50,000
(Being goods sold for cash)
x. Dev A/c Dr. 1,00,000
To Sales A/c 1,00,000
(Being goods sold to Dev on credit)
xi. Returns Inward A/c Dr. 25,000
25,000
To Dev A/c
(Being goods returned by Dev)
xii. Cash A/c Dr. 70,000
Discount Allowed A/c Dr. 5,000
75,000
To Dev A/c
(Being cash received from Dev and allowed him
xiii. discount) 35,000
Cartage Inward A/c Dr. 35,000

To Cash A/c 80,000

xiv. (Being cartage paid on goods purchased) 80,000
Cartage Outwards A/ Dr.
xv. (Being cartage paid on goods sold) 1,00,000
Furniture A/c Dr.
xvi (Being furniture purchased on cash for office) 1,00,000
Purchases A/c Dr.
xvii. (Being furniture purchased on cash for re-sale) 1,50,000
Cash A/c Dr.
To Sales A/c 40,000
xviii. (Being furniture meant for resale sold for cash) 40,000
Rent A/c Dr.
To Capital A/c
(Being rent paid out of personal cash)
Illustration 4:
Special transactions:
Journalize the following transactions in the Books of Rakesh for the month of January,
2001
Date Transactions
2.1.2001 Withdrawn cash for personal use Rs.2,500
8.1.2001 Withdrawn goods for personal use (Sale price Rs.1,500, CostRs.1,250)
9.1.2001 Goods distributed to children in an orphanage (Sale price Rs.2,000 Cost
10.1.2001 Rs.17,000)
11.1.2001 Goods distributed as free samples (Sale price Rs.1,200; Cost Rs.1,000)
12.1.2001 Goods stolen (Sale price Rs.1,000 Cost Rs.800)
12.1.2001 Goods destroyed by fire (Sale price Rs.1,500 Cost Rs.1,250)
25.1.2001 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
28.1.200 written off as bad earlier.
Rs.250 payable by Rakesh was written off as bad.
Solution:
In the Books of Rakesh
Journal Entries
Debit Credit
Date Particulars L.F.
Rs. Rs.
2.1.2001 Drawings a/c Dr. 2,500
To Cash a/c 2,500
(Being cash withdrawn for personal use) 1,250
8.1.2001 Drawings a/c. Dr. 1,250
To Purchases a/c
(Being goods withdrawn for personal use) 1,700
9.1.2001 Donation a/c Dr. 1,700

To Purchases a/c
(Being goods distributed to the children in an orphanage)
Sales Promotion a/c Dr. 1,000
10.1.2001 To Purchases a/c 1,000
(Being goods distributed as free samples) 800
Loss by Theft a/c Dr. 800
To Purchases a/c
11.1.2001 (Being goods stolen) 1,250
Loss by fire a/c Dr. 1,250
To Purchases a/c 1,750
12.1.2001 (Being goods destroyed by fire) 1,750
Office furniture a/c Dr.
To Purchases a/c 150
12.1.2001 (Being goods used in furnishing the office) 150
Cash a/c Dr.
To Bad Debts Recovered a/c 250
25.1.2001 (Being cash recovered out of an amount which was
written off as bad earlier) 250
Bad Debts a/c Dr.
To Rakesh a/c
28.1.2001 (Being amount due from Rakesh written off as bad)
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 Purchased goods from Arora at the list price of Rs.8,000. A trade discount
of 10% was allowed.
8.1.2001 Sold goods to Flora at a list price of Rs.4,000. A trade discount of 5% was
allowed.
15.1.2001 Received a cheque from Flora for Rs.3,600 in full settlement.
20.1.2001 Paid Arora Rs.7,000 by cheque in full settlement.
25.1.2001 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
Debit Credit
Date Particulars L.F.
Rs. Rs.
2.1.2001 Purchases a/c Dr. 7,200
To Arora a/c 7,200
(Being goods purchased from Arora for
Rs.8,000 at a trade discount of 10%)
8.1.2001 Flora a/c Dr. 3,800
To Sales a/c 3,800
(Being goods sold to Flora for Rs.4,000
at a trade discount of 5%)
15.1.2001 3,600
Bank a/c Dr.
200
Discount Allowed a/c Dr.
3,800
To Flora a/c
(Being cheque received from Flora in full
settlement)
20.1.2001
Arora a/c Dr. 7,200 7,000
To Bank a/c
200
To Discount received a/c
(Being cheque paid to Arora in full
settlement)
Cash a/c Dr. 1,500
25.1.2001 Bad Debts a/c Dr. 1,000 2,500
To Shyam a/c
(Being 60 paise in a rupee received
from Shyam in full settlement of dues)
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 Cash in hand Dr 50,000
April1 Stock Dr. 20,000
Land & Building Dr. 1,00,000
Plant & Machinery Dr 50,000
Furniture Dr 20,000
To X Ltd 15000
To Loan from Y Ltd 10,000

To Rams capital A/c 2,15,000
(being the balance brought forward
from the last year)
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 A reduction granted by supplier from the
the list price of goods/ service on business invoice price in consideration of immediate
consideration other than for prompt payment or payment in stipulated period.
payment
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 It is opened in ledger
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 Date Particulars J.F. Amoun
nt 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/fon 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
Garewals Account
Dr. Cr.
Date Particulars J.F. Amount Date Particular J.F. Amount
Rs. Rs.
1.1.2001 To Sales A/c 75,000 4.1.2001 By Cash A/c 40,000

6.1.2001 To Sales A/c 37,500 4.1.2001 By Discount Allowed a/c 40,000
By Returns Inward 12,500
18.1.2001 To Sales A/c 1,50,000 9.1.2001 By Bank A/c 60,000
25.1.2001 To Bank A/c 15.1.2001 By Discount Allowed 6,000
Cheque dishonored 60,000 15.1.2001 A/c 1,00,000
By Bills Receivable A/c 75,000
By Cash a/c 31,000
By Balance c/d
28.1.2001
25.1.2001 To Discount Allowed 6,000 31.1.2001
Cancellation of discount
3,28,500
3,28,500
1.2.2001 To Balance b/d

31,000
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 & cos cheque deposited into bank.
3. March 5, 08 Ramesh & Cos 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.

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 As A/c
(c) Debit As 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 Xs A/c
(d) Debit Xs 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 Cash transactions
(b) cash book with discount column Cash & discount transactions
cash book with bank & discount column Cash, bank & discount transactions
(d) petty cash book Petty cash transactions
2 Goods Journals
(a) Purchase book Credit purchases of goods
(b) Sales book Credit sales of goods
Sales return book (return inward book) Goods returned by those customers to
whom goods were sold on credit
(d) Purchase return book (return outward Goods returned to those customers from
book) whom goods were purchased on credit
3. Bills Journals
(a) Bills receivable book Bills receivable drawn
(b) Bills payable book 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. To Capital a/c 80,000 2.1.2001 By Furniture a/cBy 5,000
1.20011 To Loan from 20,000 3.1.2001 Petty Expenses a/c 2,000
Basant a/c
5.1.2001 To Sales 10,000 4.1.2001 By Purchases a/c 20,000
5.1.2001 To Haris a/c 38,000 4.1.2001 By Charat a/c 20,000
16.1.2001 By Drawings a/c 1,000
31.1.2001 By Salary a/c 1,500
31.1.2001 By Interest on Loan
a/c 300
31.1.2001 By Loan from Basant
a/c 20,000
31.1.2001 By Balance c/d 78, 200
1,48,000 1,48,000
To Balance b/d
78,200
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 Cash Date L.F Discount Cash
Rs. Rs. Rs. Rs.
1.3.2001 To Capital 65,000 3.3.200 By Purchases 6,850

9.3.2001 A/c 30,000 14.3.2001 a/cBy Mohan a/c 50 950
15.3.2001 To Sales A/c 25,000 6.3.200 By Bank a/c 40,000
19.3.2001 To Sales A/c 150 4,850 16.3.2001 By Office Furniture 4,650
To Tilak A/c a/c
12.3.2001 By Wages a/c
1,200
13.3.2001 By Stationary a/c
400
17.3.2001 By Miscellaneous
450
Expenses a/c
2,500
21.3.2001 By Drawings a/c
4,000
22.3.2001 By Salary a/c
900
25.3.2001 By Rent a/c
350
28.3.2001 By Electricity a/c
400
29.3.2001 By Advertising a/c
25,000
31.3.2001 By Bank a/c
37,200
31.3.2001 By Balance c/d
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 Cash Bank Date Payments Discount Cash Bank
allowed received
2001 2001
April, To 1,500 13,000 April, By Wage 50
1 Balance 2 for Casual
b/f Sweeper
6 800 5 By Electricity 400
7 50 2,000 8 By Plumbing 400
To Sales Repairs
11 To Arvind 60 2,350 15 By Y Ltd. 10,800
20 Co 500 30 By Balance c/f 150 2,350 6,150
To Beta
Corpn
To sales
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 Cash Bank Date Particulars LF Discount Cash Bank
Allowed
1.3.2001 To Balanceb/f - - 2,500 10,000 2.3.2001 By Bank a/c C 1,000
By Furniture a/c - - - -
2.3.2001 To Cash a/c C - - 1,000 5.3.2001
By Purchases a/c - - - 2,000
12.3.2001 To Mohinder a/c - 20 980 - 8.3.2001
By Aamranth a/c - - 500 -
14.3.2001 To Sales a/c - - 4,000 - 16.3.2001 By Bank a/c - - - -
19.3.2001 To Cash C - - 400 19.3.2001 By Drawings a/c 50 - 1450
24.3.2001 To Patel a/c 20 - 1,430 23.3.2001 By Cash a/c C - 400 -
28.3.2001 To Bank C 2,000 28.3.2001 By Rent a/c - - -
By Balance c/d - - 600
30.3.2001 C
-- 2,000
30.3.2001 7580 -
800
-
5,980
31.3.2001 40 9,480 12,830 - 40 9,480 12,830
To Balance b/d - 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 managers salary Rs 350, rent Rs 200 & wages Rs 150.

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 debtors 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 Ledger Inward Amount

(Name of Supplier, etc.) Folio Invoice Rs.
No.
2001
April 2 Y Limited 3354 10,95
12 Sharp Enterprises 401 0
20 Best and Company 5542
2,700

3,900
Total 17,55
0
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 Debit Amoun
Folio Note No.* t
Rs.
2001
April, Sharp Enterprises 80 1,00
15 Best and Company 81 0
25
900
Total 1,90
0
* 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 Led Outwa Amo
ger rd unt
Foli Invoic Rs.
o e No.
2001
April,3 Beta Corporation 1001 2,410
5 Zeta Company 1002 3,940
6 Quality Dealers 1003 4,900
15 Sooraj Traders 1004 1,800
25 Star Enterprises 1005 19,50
0
Total 32,5
50

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 Credit Amount
Folio Note Rs.
No.*
2001
April,1 Zeta Company 10 540
0 Star Enterprises 11 2,000
27
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. Date From Acceptor Date of Ter Date of L Where Amount How
No whom Bill m Maturity F Payable Rs. Disposed
. receive
d
1 2001
Quality Quality 8.4.01 90 10.7.01 Bank of 4,900 Discounted
April 12
Dealer Dealers days India, on
2 s Mumbai 20.4.01
April 18 Sooraj 16.4 X 1 60 10.6.01 Union
Sooraj Traders days Bank, 1,800
Trader Mumbai
s
6,700
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. Date Name Payee Date of Ter Date of L Where Amount Remarks
No Accepte of the Bill m Maturity F Payable Rs.
. d drawer
1 2001
Best & Best & 25.04.01 90 27.07.01 Bank of 4,900
April 25
Co. Co. days India,
Mumbai
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 Rs.
e
1. Commenced business with cash 40,000
2. Purchased goods on credit from Shyam 30,000
3. Purchased goods for cash 1,000
4. Paid Gopalan an advance for goods ordered 2,000

Dat Rs.
e
5. Received cash from Murthy as advance for goods 3,000
ordered by him
6. Purchased furniture for office use for cash 2,000
7. Paid wages 500
8. Received commission (in cash) 600
9. Goods returned to Shyam 200
10. Goods sold to Kamal 10,000
11. Paid for postage and telegrams 200
13. Goods returned by Kamal 500
15. Paid for stationery 200
18. Paid into bank 500
20. Goods sold for cash 750
22. Bought goods for cash 1,000
25. Paid salaries 700

28. Paid rent 500
1,000
31. Drew cash for personal use
SOLUTION:
Cashbook
Dr. Cr.
Date Receipts Le Cash Bank Date Payments Le Cash Bank
dg Rs. Rs. dg Rs. Rs.
er er
Fol Fol
io io

Date Receipts Le Cash Bank Date Payments Le Cash Bank

dg Rs. Rs. dg Rs. Rs.
er er
Fol Fol
io io
2001 2001
Jan. 1 To Capital a/c 40,000 Jan. 3 By Purchases a/c 1,000
Jan. 5 To Murthy a/c 3,000 Jan. 4 By Gopalan a/c 2,000
Jan. 8 To Commission 600 Jan. 6 By Furniture a/c 2,000

Jan.18 a/c C Jan. 7 By Wages a/c 500
Jan.20 To Cash a/c 750 500 Jan.12 By Postage &
To Sales a/c Telegrams a/c 200
Jan.15 By Stationery a/c 200
Jan,18 By Bank a/c C
500
Jan.22 By Purchases a/c 1,000
Jan,25 By Salaries a/c 700
Jan.28 By Rent a/c 500
Jan.31 By Drawings a/c 1,000
Jan.31 By Balance c/d 34,750 500
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 Inward Amount

Folio Invoice Rs.
No.
2001
Jan.2 Shyam 30,000
330,000
Total

Purchases Returns Book
Date Name of Ledger Debit Amount

Supplier Folio Note Rs.
No.
2001
Jan. Shyam 200
9
Total 200
Sales Book
Name of Ledger Outward Amo
Customer Folio Invoice unt
No. Rs.
200
1 Kamal 10,0
Jan. 00
10
10,0
Total 00
Sales Returns Book
Name of Ledger Credit Amoun

Customer Folio Note No. t
Rs.
2001
Jan. Kamal
13 500
Total 500

TEST QUESTIONS:
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 customers 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 books 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 banks
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 customers 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 xxxx
Overdraft balance as per Passbook
Add:
1 Cheques issued but not presented for payment xxxx
2 Direct payments made by customers xxxx
3 Amount collected by bank (rent, dividends, interest on xxxx
investments, etc.)
4 Cheques deposited but omitted to be recorded in xxxx
Cashbook
5 Wrong credit on the credit side of Passbook xxxx
xxxx
1 Less: xxxx
2 Cheques deposited but not collected xxxx
Cheques paid into the bank but dishonored
3 xxxx
Bank charges and interest charges
4 xxxx
Payments made by the banker on behalf of the trader
5 Cheques issued but not recorded in the Cashbook xxxx
6 Wrong entry on the debit side of the passbook 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 Date Payments Bank

Rs. Rs.
2001 2001
March,31 To Balance b/d 48,500 March,31 By Bank Charges 1,000
March,31 To InterestReceived 2,500 March,31 By Excel Limited 2,000
March,31 To SwaroopLimited 3,000 March,31 By Balance c/d 51,000
54,000 54,000
Bank Reconciliation Statement as on March 31, 2001
Particulars Rs. Rs.
Bank balance as per Cashbook 51,000
Add: Cheques issued but not presented for payment 8,850

Wrong credit in the bank statement 2,500 11,350
62,350
Less: Cheques deposited and remained uncollected 8,450
Bank balance as per bank statement
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 customerss
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 Alis account in error; it should
have been debited by them to Mr Kalis 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

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 customers account in the banks 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 customers 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 customers 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 companys 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 Depreciation Written down value

depn.
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 The rate of depreciation is ascertained
of the life of the asset by applying the formula
3 The asset may or may not have scrap The asset must have a significant
value scrap value
4 The amount of depreciation per year is The amount of depreciation goes on
same reducing with each passing year.
5 In the first year, the depreciation is In the first year, the depreciation is
charged on the cost of the asset, less scrap charged on the asset
value, if any
6 At the end of its life, the book value of the The book value of the asset never
asset becomes zero 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 To Cash/Bank a/c 2,70,000 1999

Apr. 1 (purchase of cars) Mar. 31 By Depreciation a/c 27,000
Mar. 31 By Balance c/d 2,43,000
2,70,000 2,70,000
1999 2000
Apr. 1 To Balance b/d 2,43,000 Jan. 1 By Car disposal a/c (2) 74,250
Mar. 31 By Depreciation (1) 24,750
Mar. 31 By Balance c/d 1,44,000
2,43,000 2,43,000
2000 By Car disposal a/c (4) 67,500

2000 To Balance b/d 1,44,000 Sept. 1
Apr. 1
2001 By Depreciation a/c (3) 13,500
- Mar. 31 By Balance c/d 63,000
1,44,000
1,44,000
2001 To Balance b/d
April 1
63,000
Car Disposal Account*

Dr. Cr.
Particulars Rs. Particulars Rs.
2000 To Cars a/c 74,250 2000 By Cash/Bank a/c 60,000

Jan. 1
Jan. 1 Mar. 31 By Profit & Loss a/c 14,250
(Loss)
74,250 74,250

Car Disposal Account*

Dr. Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2000 To Cars a/c 67,500 2000 By Cash/Bank a/c 80,000
Sept.1 Sept 1
2001 To Profit & Loss a/c 12,500
Mar.31 (Profit)
80,00 80,00
0 0
* As two cars have been disposed off on two different dates Car Disposal Account
has been opened twice.
Depreciation account
Date Particulars Amount Date Particulars Amount
Rs. Rs.
1999 To Cars a/c 27,000 1999 By Profit & Loss a/c 27,000
Mar. Mar. 31
31 27,000 27,000
2000 To Cars a/c 2000

24,750
Mar. Mar. 31 By Profit & Loss a/c
31 24,750
24,750
24,750
2001
2001 To Cars a/c Mar. 31 By Profit & Loss a/c
Mar. 13,500 13,500
31
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 15,750
+ 6,750)

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 22,500
(9,000 + 9,000 + 4,500)
67,500
b. If Provision for Depreciation Account is maintained

Cars Account
Dr. Cr.
1998 To Cash/Bank a/c 2,70,000 1999 By Balance c/d 2,70,000

Apr. 1 Mar.31
2,70,000 2,70,000
1999 2000
Apr. 1 To Balance b/d 2,70,000 Jan.1 By Sale of Cars a/c 90,000
Mar.31 By Balance c/d 1,80,000
2,70,000 2,70,000
2000 To Balance b/d 1,80,000 2000 By Sale of Cars a/c 90,000

Apr. 1 Sep. 1
2001 By Balance c/d 90,000

Mar.31
1,80,000 1,80,000
2001
Apr. 1

To Balance b/d
90,000
Provision for Depreciation Account
Dr. Cr.
Rs. Rs.
1999 To Balance c/d 27,000 1999 By Profit & Loss a/c 27,000
Mar.31 Mar.31
27,000 27,000
2000 1999
Mar. 31 To Sale of Cars a/c 15,750 Apr. 1 By Balance b/d 27,00
0
To Balance c/d 36,000 2000 By Profit & Loss a/c
Jan. 1 6,750
Mar. 31 By Profit & Loss a/c
18,000
51,750
51,750
2000 To Sale of Cars a/c (4) 2000 By Balance b/d
22,500
Sep. 1 Apr. 1 36,00
Sep. 1 0
By Profit & Loss a/c
2001 To Balance c/d 27,000
Mar.31 4,500
By Profit & Loss a/c
49,500 9,000
2001 49,500
By Balance b/d
Apr. 1
27,000
Sale of Cars Account

Dr. Cr.
Date Particulars Rs. Date Particulars Rs.
2000 To Cars a/c 90,000 2000 By Provision for 15,750
Jan. 1 Jan. 1 Depreciation a/c
By Cash a/c 60,000
Mar. 31 By Profit & Loss a/c 14,250

(loss) 90,000
90,000 2000
2000 Sep. 1
Sep. 1 22,500
To Cars a/c 90,000 By Provision for
Depreciation a/c 80,000
2001 By Cash a/c.

Mar.31 To Profit & Loss a/c 12,500
(Profit)
1,02,50
1,02,500 0
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.
Date Particulars Rs. Date Particulars Rs.
1999 To Cash/Bank a/c 2,50,000 1999 By Depreciation a/c 24,000
Jan. 1 (Purchase of Dec.31 By Balance c/d 2,26,000
Machinery)
2,50,000 2,50,000
24,000
2000 To Balance b/d 2,26,000 2000 By Depreciation a/c By 2,02,000
Jan. 1 Dec. 31 Balance c/d
Dec. 31
2,26,000 2,26,000
2001
To Balance b/d 2,02,000 Dec. 31 By Depreciation a/c By 24,000
2001 Dec. 31 Balance c/d 1,78,000
Jan. 1
2,02,000 2,02,000
To Balance b/d 1,78,000

2002
Jan. 1
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
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 10,000
By Balance c/d 90,000
1,00,000 1,00,000
1.01.2002 To Balance b/d 90,000 31.12.2002 By Depreciation A/c 10,000
90,000 90,000
80,000 80,000
To P&L A/c (10% of Rs 72,900)
(Excess dep 2,900 By Balance c/d 65,610

written back on
account of
change from
WDV method to
SLM)
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 1st 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 1st 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.

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 Kumars Capital 25,000 (Cr)
Salaries 6,000 (Dr)
Purchases 26,000 (Dr)
Sales 47,000 (Cr)
Trade expenses 1,000 (Dr)
Wages 7,800 (Dr)
Freight inwards 400 (Dr)
Office expenses 500 (Dr)
Discount received 200 (Cr)
Commission paid 600 (Dr)
Postage & Telegrams 1,200 (Dr)
Accounts receivable (1) 30,000 (Dr)
Accounts payable (2) 21,000 (Cr)
Furniture 3,000 (Dr)

Particulars Rs.
Machinery 10,000 (Dr)
Insurance 400 (Dr)
Bills receivable (3) 2,000 (Dr)
Bills payable (4) 6,800 (Cr)
Opening inventory (5) 7,000 (Dr)
Cash in hand 500 (Dr)
Cash at bank 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 Kumars

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 Kumars Capital 25,000

Salaries 6,000
Purchases 26,000
Sales 47,000
Trade expenses 1,000
Wages 7,800
Freight inwards 400
Office expenses 500
Discount received 200
Commission paid 600
Postage & Telegrams 1,200
Accounts receivable 30,000
Accounts payable 21,000

Furniture 3,000
Machinery 10,000
Insurance 400
Bills receivable 2,000
Bills payable 6,800
Opening inventory 7,000
Cash in hand 500
Cash at bank 3,600
Total 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.
Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
By Sales
To Opening stock Less: Returns
Add: Purchases
Less: Returns By Closing stock
To Wages
To Carriage inward
To Gas, Water, Fuel, etc.
To Packaging charges
To Other factory expenses
Gross Profit

Format of a Profit & Loss account is given below:
Profit and Loss Account for the year ending 31st March, 2001
Date Particulars J.F Amount Date Particulars J.F Amount

Rs. Rs.
To Office salaries and wages By Gross profit
To Office rent, rates and taxes By Cash discounts

received
To Office lighting and insurance
By Bad debts
To Printing and stationery recovered
To Postage and telegrams By Income from

investments
To Legal expenses
By Commission
To Trade expenses received
To Audit fees By Interest on

deposits
To Car upkeep expenses
By Gain on sale of
To Telephone expenses fixed assets
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 Salesmens salaries,

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

Rs. Rs.
expenses and commission
To Advertising expenses
To Depreciation on fixed assets
To Net profit (transferred to

capital 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 debtors 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 1.4.1999
To Bad Debts 3,500 By Balance b/d 5,000
a/c
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 1.4.1999
To Bad Debts 3,500 By Balance b/d 5,000
31.3.2000 31.3.2000
To Balance c/d 8,500 By Profit and Loss a/c
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 2,05,000
Bad debts 3,000
Discount 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. 5,000
To sundry Debtors A/c 5,000
(Being the additional discount allowed to debtors)
Profit & Loss A/c Dr. 9.800
To Bad Debts A/c 3,000
To Discount Allowed A/c 6,800
(Being the transfer of bad debts & discount to P&L A/c)
Profit & Loss A/c Dr. 20,000
To provision for doubtful debts A/c 20,000
(being the provision for DD created @10% on 2,00,000)
Profit & Loss A/c Dr. 3,600
To Provision for discount on debtors A/c 3,600
(being the provision for discount created @2% on debtors of
Rs 1,80,000 (i.e. Rs 2,00,000 Rs 20,000)

Sundry Debtors Account

Dr Cr.
Particulars Rs Particulars Rs
To balance b/d 2,05,000 By discount Allowed A/c 5,000
By balance c/d 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 1,800 By P&L A/c 6,800
To S Debtors 5,000
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 3,000
(as given in the Trial balance)
To provision for doubtful debts 20,000
To discount 1,800
(as given in the trial balance)
Add: Additional discount 5,000 6,800
To provision for discount on debtors 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: Current Assets: xxxx
Bank overdraft xxxx Cash in hand xxxx
Bills payable xxxx Cash at bank xxxx
Outstanding expenses xxxx Bills receivable xxxx
Sundry creditors xxxx Sundry Debtors xxxx
Income received in advance xxxx Prepaid expenses xxxx
Long term Liabilities: xxxx Accrued income xxxx
Loan Closing stock xxxx
Capital: Fixed Asset:
Opening Balance xxxx Investment xxxx
Add: Net Profit xxxx Furniture & Fixture xxxx
Or Less: Net Loss xxxx Plant & Machinery xxxx
Less: Drawing xxxx xxxx Building xxxx
Land xxxx
Building xxxx
xxxx Xxxx
Format of a Balance Sheet in order of Permanence:

Balance Sheet of ..as at
Long term Liabilities: Fixed Asset:
Loan xxxx Investment xxxx
Capital: xxxx Furniture & Fixture xxxx
Opening Balance xxxx xxxx Plant & Machinery xxxx
Add: Net Profit xxxx xxxx Building xxxx
Or Less: Net Loss xxxx xxxx Land xxxx
Less: Drawing xxxx xxxx Building xxxx
Current Liabilities: Current Assets:
Sundry creditors xxxx Closing stock xxxx
Income received in advance xxxx Bills receivable xxxx
Outstanding expenses xxxx Sundry Debtors xxxx
Bills payable xxxx Prepaid expenses xxxx

Bank overdraft xxxx Accrued income xxxx

Cash in hand xxxx
Cash at bank 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 To reflect the net profit or loss of the
Loss Account 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 Particulars Rs.
s.
To Opening Inventory 6,000 By Sales 35000
By Closing 8000
To Purchases 18,000 Inventory
Less: Returns 2,000

To Wages 16,000
7,000
To Gross Profit
14,000
c/d
43,000 43,000

Profit and Loss Account for the year ending 31.12.2001
To Discount allowed 1,200 By Gross Profit b/d 14,000

To Salaries 3,000 By Dividends received 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:
Buildings 1,700
To Net Profit c/d 6,150
17,000 17,000
Sun Shine and Company

Balance Sheet as on 31.12.2001
Liabilities Rs. Rs. AssetsRs.Rs.

Capital 25,000 Fixed Assets :
Add: Net Profit 6,150 31,150 Plant & Machinery 13,000

Less: Depreciation 1,950 11,050
Loan Current Liabilities: 5,000
Accounts Payable 4,000 Buildings 17,000
Bills Payable 5,000 Less: Depreciation 1,700 15,300

Outstanding Rent 100 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 20,000 Sales 2,70,000
Purchases 80,000 Purchase Return 4,000
Sales Return 6,000 Discount 5,200
Carriage inwards 3,600 Sundry Creditors 25,000
Carriage outwards 800 Bills Payable 1,800
Wages 42,000 Capital 75,000
Salaries 27,500
Furniture 8,000
Sundry Debtors 52,000
Bills Receivable 2,500
Cash in Hand 6,300
Traveling Expenses 3,700
Lighting (Factory) 1,400
Rent and Taxes 7,200
General Expenses 10,500
Insurance 1,500
Drawings 18,000
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 10,000 Sales 180500
Stock 40,800 Returns 195
Wages 22525 Loans at 12% (on 20000
Purchases 130295 1.7.2001) 30305
Returns 2400 Creditors 530
repairs 1675 Discount 37500
Bad debts 2310 capital
Interest on loan 600
Salaries 8000
Sales tax 800
Octroi 500
insurance 1000
charity 125
rent 2000
machinery 16000
debtors (including Shyma for dishonoured bill 30000
of Rs 800)
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 Shymas 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 4000 Capital 9000
Cash at bank 1000 Sales 16000
Cash in hand 500 Sundry creditors 4500
Wages 1000 Interest received 300
Purchased 8000
Stock on 1.1.91 6000
Sundry debtors 4400
Bills receivable 2900

Rent 450
Commission 250
General exp 800
Salaries 500
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

Select the most appropriate choice:
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
Customers a/c Dr. Purchases a/c Dr.
To Sales a/c s
To Suppliers a/c
ii. On receipt of acceptance from the drawee

Bills Receivable a/c Dr. Suppliers a/c Dr.
To Customers a/c To Bills Payable a/c
iii On receiving payment on the due date

Cash a/c Dr. Bills Payable a/c Dr.
To Bills Receivable a/c 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 Credit

Rs. Rs.
10.4.01 As a/c Dr. 5,000
To Sales a/c 5,000
(For credit sales to A)
10.4.01 Bills Receivable a/c Dr. 5,000
To As a/c 5,000
(Bills received from A)
13.7.01 Cash a/c Dr. 5,000
To Bills Receivable a/c 5,000
(Being cash received on maturity of bill)
Journal of A (Drawee)

Rs. Rs.
To Xs A/c
(For credit purchases from X) 5000

10.4.01 Xs a/c Dr. 5,000
To Bills Payable a/c
5000
(For the acceptance given)
13.7.01 Bills Payablea/c Dr. 5,000
To Cash a/c
(For payment made on the due date) 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 No entry
bill:- Cash a/c Dr.
Discount a/c Dr.
To Bills Receivable a/c
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. Cr.
Amount Amoun
t
1.6.01 Bills Receivable a/c Dr 6,000
To Bs a/c 6,000
(Being bill drawn on B)
4.7.01 Cash a/c Dr. 5,950
Discount a/c Dr. 50 6,000

(Being bills discounted with bank)
Journal of B
Amount Amount
1.6.01 Bs a/c Dr. 6,000
To Bills Payable a/c 6,000

(Being bill accepted)
4.8.01 Bills Payable a/c Dr. 6,000
To Cash a/c 6,000
(Being bills honored on the due
date)
C.When the bill is endorsed to a third party
Books of Drawer Books of Drawee

i. At the time of endorsement No Entry
Endorsee a/c Dr.

ii. At the time of payment Bills Payable a/c Dr
No Entry 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 10,000
Dr.
To Rohinis a/c 10,000
(For bill drawn on Rohini
for the amount due)
16.4.01 Bharinis a/c 10,000
Dr.
(For bill endorsed in favor of Bharini
JOURNAL OF BHAIRINI
To Ashwinis a/c 10,000
(Being the bill endorsed)

12.6.01 Cash a/c Dr. 10,000
(Being amount received on maturity)
ILLUSTRATION 4
P draws a bill for Rs.15,000 on Q on 1.4.2001 payable after 3 months. After receiving
Qs 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 Amount
To Qs a/c 15,000
(Being bill drawn)
8.5.01 Bills sent for collection a/c Dr. 15,000
(Being bill sent for collection)
4.7.01 Bank a/c Dr. 15,000
To Bills sent for collection a/c 15,000
(Being the bill collected by the bank on the
due date)
4.7.01 Collection charges a/c Dr. 150
To Bank a/c 150

(Being collection charges paid to bank)
Journal of Q
Amount Amount
1.4.01 Ps a/c Dr. 15,000

(Being acceptance given)
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
(Drawers a/c is credited with the (Drawees 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 Amount
1.04.01 Ys a/c Dr. 10,000
To Sales a/c 10,000

(Being goods sold to Y)
To Ys a/c 10,000
(Being the entry for bills received)
a. If bill is retained till maturity and dishonored
4.06.01 Ys a/c Dr. 10,020

To Cash a/c 20
(Being bill dishonored, noting charges paid)

b. If the bill is endorsed in favor of A
As a/c Dr. 10,000
10,000
(Being bill endorsed in favor of A)
4.06.01 Ys a/c Dr. 10,020
To As a/c 10,020
(Being the bill dishonored and noting

charges paid)
c. If the bill is discounted with bank at 6%
4.05.01 Bank a/c Dr. 9,950
Discount a/c Dr. 50

(Being the bill discounted with bank)
4.06.01 Ys a/c Dr. 10,020
To Bank a/c 10,020
(Being bill dishonored and noting charges

paid)
d. If the bill is sent to bank for collection
Bills for Collection a/c Dr. 10,000
(Being bills sent to bank for collection)

4.06.01 Ys a/c Dr. 10,020
To Bills sent for Collection a/c 10,000

To Bank a/c (Noting Charges)
20
(Being the bill sent to bank for collection
dishonored and noting charges paid)
Journal of Y (Drawee)

Amount Amount
To Xs a/c 10,000
(Being goods purchased from X)
1.04.01 Xs a/c 10,000

Dr. 10,000
(Being bill accepted in favor of X)
a. When the bill is retained till the due date
Bills Payable a/c Dr. 10,000

Noting Charges a/c Dr. 20 10,020
To Xs a/c
(Being the bill dishonored and noting charges

paid)
b. When the bill is endorsed in favor of A

Noting Charges a/c Dr. 20
To Xs a/c 10,020
(Being the endorsed bill dishonored)
c. When the bill is discounted

To Xs a/c 10,020

paid)

20
Noting Charges a/c Dr.
10,020
To Xs a/c

paid)
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 Amount
1.4.01 Bs a/c Dr. 20,000

To Sales a/c 20,000
(Being goods sold to B)

To Bs a/c
20,000
(Being the entry for bill
received)
a. If bill is retained till maturity and dishonored
4.6.01 Bs a/c Dr. 20,020

20,000
To Cash a/c
20
(Being bill dishonored, noting
charges paid)
b. If the bill is endorsed in favor of X
Xs a/c Dr. 20,000

To Bills Receivable 20,000
a/c
(Being bill endorsed in
favor of X)
Bs a/c Dr. 20,020
To Xs 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
a/c
(Being the bill discounted with
bank)
4.6.01 Bs 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 Dr. 20,000

a/c
a/c
(Being bill sent to bank for

collection)
4.6.01 Bs 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 Amount

To As a/c 20,000
(Being goods purchased
from A)
1.4.01 As a/c Dr. 20,000
(Being bill accepted in
favor of A)
a. When the bill is retained till the due date

To As a/c 20,020
(Being the bill
dishonored and noting
charges paid)
b. When the bill is endorsed in favor of X

To As a/c 20,020
(Being the endorsed
bill dishonored)
c.When the bill is discounted

To As 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 As 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
Drawees a/c Dr. Bills Payable a/c Dr.
To Bills Receivable a/c To Drawers a/c
2. For the part-payment Drawers a/c Dr.
received To Cash a/c
Cash a/c Dr.
To Drawees a/c
3. For interest receivable on
renewal of bill
a. When interest is paid in cash
Cash a/c Dr. Interest a/c Dr.
To Interest a/c To Cash a/c
b. When interest is included in

the new bill
Drawees a/c Dr. Interest a/c Dr.
To Interest a/c To Drawers a/c
4. For the new bill received
Drawers a/c Dr.
Bills Receivable a/c Dr.
To Drawees a/c
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 Amount

To Chandras a/c 10,000
(Being the entry for
acceptance received from
Chandra)
Chandras a/c Dr. 10,000

(Being the old bill canceled
for renewal)
Chandrasa/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 Chandras a/c 8,200

(Being the entry for the new bill accepted)
Cash a/c Dr. 2,000
To Chandras a/c
(Being the entry for the 2,000
balance paid in cash)
Cash a/c 8,200 Dr.
(Being the payment received
on the due date)
Journal of Chandra

Amount Amount
1.04.01 Surajs a/c Dr. 10,000

(Being acceptance given)
To Surajs a/c 10,000
(Being the old bill canceled)
Interest a/c Dr. 200
To Surajs a/c 200
(Being the entry for the
interest on the new bill)
Surajs a/c Dr. 8,200
(Being the entry for the new
bill accepted)
Surajs 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 As
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

Rs. Rs.
1st Dr. 1,800

March Bills receivable a/c
To B a/c 1,800
Dr. 1,770
Bank a/c
Dr. 30
Discount a/c
To Bills receivable a/c 1,800
Dr. 900
B a/c
885
To Bank a/c
15
To Discount received a/c
Dr. 900
B a/c
900
Dr. 441
Bank a/c
Dr. 9
Discount allowed a/c
450
To B a/c
Dr. 1,800
4th July B a/c
To Bank a/c 1,800
Dr. 900
Bills payable a/c
To Bank a/c 900
Dr. 337.5
Bank a/c
To B a/c 337.5
Dr. 1012.5
Bad debts a/c

To B a/c 1012.5
In the Books of B
Rs. Rs.
1st A a/c Dr. 1,800

March
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 Bills Payable a/c Dr. 1,800
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 others bill each meeting his own bill
when it falls due and paying the expenses of discounting the others 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. 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.
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 Rams acceptance that was endorsed by us to Saleem is dishonoured, the
amount should be debited in our books to-
(a) Saleems account
(b) Rams account
(c) Bills receivable account.
(d) Bills payable account
3) When bill discounted with the bank is dishonored?:

(a) Acceptors 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 drawees account
iii. Credit drawees 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
ASSIGNMENTS
Subject code : subject Name:
Subject Name & code

Study centre
Permanent enrollment Number
Student Name
INSTRUCTIONS:
a) Students are required to submit three assignments
ASSIGNMENTS DETAILS MARKS

Assignment A Five subjective questions 15
Assignment B Three subjective questions + case study 15
Assignment C 40 objective questions 10
b) Total Weightage given to these assignments is 40%.

c) All assignments are to be completed in your own handwriting/ typed.
d) All assignments are to be completed by due dates.
f) The evaluated assignments can be collected from your study centre/ACel office
after six weeks. Thereafter, these will be destroyed at the end pf each semester.
g) The students have to attach a scan signature in the form.
Signature: ___________________________________
Date:_______________________________________
() Tick mark in front of the assignments submitted
Assignment A Assignment B Assignment C
ASSIGNMENT A
Q 1. Define Accounting. How does it differ from book-keeping?

Q 2 What is basic accounting equation?
Q 3 What is Journalizing? Give a format of Journal & briefly explain its content.
Q 4 what are the advantages of special Journal & list them.
Q 5 State the reasons for the difference between the cash book balance & pass book
balance.
ASSIGNMENT B
Q1 Define depreciation. Differentiate, with suitable example, between Diminishing

Balance Method & Straight Line Method of charging depreciation.
Q2 Define Bills of Exchange and explain the parties involved in it.
Q3 Distinguish between capital expenditure & revenue expenditure.
Q 4 Case Study:
The following is the Trial Balance of Gupta as on 30th June, 2001
Trial Balance of Gupta for the year ending
30th June, 2001
Dr. Cr.
Cash 540 Sales account 98,780

Cash at Bank 2,630 Returns outwards 500
Purchases 40,675 Capital 62,000
Return inwards 680 Accounts payable 6,300
Wages 8,480 Rent 9,000
Fuel and power 4,730
Carriage on sales 3,200
Carriage on Purchases 2,040
Inventory (1st July, 2000) 5,760
Buildings 32,000
Freehold land 10,000
Machinery 20,000
Patents 7,500
Salaries 15,000
General expenses 3,000
Insurance 600
Drawings 5,245
Accounts receivable 14,500
1,76,580 1,76,580
Taking into account the following adjustments prepare the Trading, Profit and Loss
account as on 30th June, 2001.
1. Inventory on hand on 30th June, 2001 is Rs.6,800.
2. Machinery is to be depreciated at the rate of 10% and Patents at the rate of 20%.
3. Salaries for the month of June 2001amounting to Rs.1,500 were unpaid.

4. Insurance includes an annual premium of Rs.170 on a policy expiring on 31st
December, 2001.
5. Bad debts to be written off are Rs.725.
6. Rent receivable Rs.1,000.
ASSIGNMENT C OBJECTIVE QUESTIONS
In each of the following cases indicate the alternative which you consider to be correct:
Q1. Which of the following financial statements is prepared as of a particular date?

(a) Profit and loss account
(b) Balance sheet
(c) Cash flow statement
(d) Income and expenditure statement
(e) Profit and loss appropriation account.
Q2. Based on which of the following concepts, share capital account is shown on the
liability side of balance sheet?
(a) Business entity concept
(b) Money measurement concept
(c) Cost concept
(d) Going concern concept
(e) Conservatism concept.
Q3. Which of the following is not an accounting transaction?

(a) Sale of goods for cash
(b) Payment of salary of office staff
(c) Agreement to sell
(d) Purchase of office furniture
(e) Repayment of bank loan.
Q 4. Which of the following is false?

(a) Taking the favourable balance as per pass book as the starting point, the amount in
respect of charges made by the bank will be added to the pass book balance
(b) Taking the favourable balance as per pass book as the starting point, the amount in
respect of dividends received directly will be deducted from the pass book balance
(c) Bank charges recorded twice in cash book will be added to the overdraft as per cash
book in the preparation of reconciliation statement
(d) Cheque issued but not presented for payment will be added when favourable balance
as per cash book is the starting point
(e) The amount of the undercasting of the credit side of the bank column of the cash book
will be deducted from the overdraft as per pass book.
Q5. From the books of Mr.Neelam, it was observed that cheques amounting to
Rs.2,40,000 were deposited in the bank, out of which cheques worth Rs.20,000 were
dishonored and cheques worth Rs.40,000 are still in the process of collection. The
treatment of this while preparing Bank Reconciliation Statement is
(a) Deduct Rs.60,000 from bank balance as per pass book
(b) Add Rs.20,000 and deduct Rs.40,000 from overdraft balance as per cash book
(c) Deduct Rs.60,000 from overdraft balance as per pass book
(d) Add Rs.60,000 to overdraft balance as per pass book
(e) Deduct Rs.40,000 and add Rs.20,000 from overdraft balance as per pass book.
Q6 . Which of the following is true?

(a) Bank account is a personal account
(b) Stock of stationery account is a nominal account
(c) Returns inward account is a personal account
(d) Outstanding rent account is a nominal account
(e) Capital account is a real account.
Q7 . A sales day book is to record

(a) all credit sales only
(b) All cash sales only
(c) all credit and cash sales
(d) credit sales of goods and trade discount
(e) all cash and credit sales and trade discount.
Q8. Which of the following is a liability of a firm?

(a) Debit balance of discount column of cash book
(b) Credit balance of bank pass book
(c) Debit balance of bank column of cash book
(d) Debit balance of cash column of cash book
(e) Credit balance of bank column of cash book.
Q9. Which of the following accounts will invariably have a debit balance?
I. Accounts receivable.
II. Accounts payable.
III. Purchases account.
IV. Bank account.
V. Prepaid expenditure.
(a) Only (III) above
(b) Both (II) and (III) above
(c) Both (I) and (III) above
(d) (I), (III) and (V) above
(e) (I), (III), (IV) and (V) above.
Q10. The following is not a book of original entry

(a) Purchase book
(b) Journal proper
(c) Cash book
(d) General ledger
(e) sales book
Q11. The Accountant of a company is recording the transactions of the day in various
Books of Original Entry. Which
of the following transactions is recorded in the wrong book?
(a) Goods purchased on credit - Purchase Book
(b) Goods sold on credit - Sales Book

(c) Wages paid in cash - Cash Book
(d) General Stationery purchased on credit - Purchase Book
(e) Office Equipment purchased on credit - Journal Proper
Q12. The impact on assets, profit and liabilities of a firm, on account of salary paid will
be
Assets Profit Total Liabilities
(a) No effect Decreases Decreases
(b) Decreases No effect Decreases
(c) Decreases Decreases Decreases
(d) Increases No effect Increases
(e) Decreases Increases Decreases.
Q13. Which of the following is true?

(a) Discount columns in cash book are totaled and not balanced
(b) A petty cash book in which a separate column is provided to record payment under
each head is
called imprest system
(c) The total of purchases book is posted periodically on the credit side of sundry
creditors account
(d) The total of sales book is posted periodically on the debit side of sundry debtors
account
(e) Petty cash book is used to record all cash transactions.
Q14. Total of sales day book at the end of the month indicates
(a) The total sales for the month
(b) The total credit sales for the month
(c) Total cash sales of the month
(d) Total amount due to suppliers
(e) Total amount receivable from credit sales.
Q15. Which of the following is true?

(a) Cash book may be defined as the record of transactions concerning cash receipts and
payments
(b) Discount account should be balanced in the cash book
(c) The ledger is the book of original entry
(d) Sales journal is used for recording cash sales
(e) Purchase return book is used for recording the return of goods purchased from
suppliers against cash.
Q16. Journal entry for receiving interest in cash from Mr. Prashant against the loan given
to him
(a) Interest on loan account Dr.
To Prashant account
(b) Prashant account Dr.
To Interest account
(c) Cash account Dr.
To Prashant account
(d) Cash account Dr.
To Interest on loan account
(e) Cash account Dr.
To Loan account.
Q 17. Which of the following entries recorded in the books of the drawee of a bill is
false?
(a) When a bill is accepted, the account to be debited is drawers a/c
(b) When a bill is discharged, the account to be debited is bills payable a/c
(c) When a bill presented for payment by a bank is dishonored, the account to be debited
is bills
payable a/c
(d) When noting charges of a dishonored bill is paid by the endorsee ,the account to be
debited is
noting charges a/c
(e) At the time of retirement of a bill the account to be debited is the drawers a/c.
Q 18. Which of the following is true?

(a) A bill sent for collection by bank when dishonored, the drawer will credit bank a/c
(b) At the time of renewal of bill interest a/c is credited in the books of the drawee
(c) Accommodation bills are drawn, accepted and endorsed for some consideration
(d) Refusal by the acceptor to make payment of the bill on due date is called dishonor
(e) When a bill is endorsed, the drawer credits the drawees a/c.
Q19. Bills receivable account is a

(a) Nominal account
(b) Personal account
(c) Intangible asset
(d) Real account
(e) Representative Personal account.
Q20 . Closing stock is generally valued at

(a) Cost price
(b) Replacement cost
(c) Market price
(d) Realisable value
(e) Cost price or market price whichever is lower.
Q21. The provision for discount on debtors is calculated on the amount of debtors
(a) Before deducting the provision for doubtful debts
(b) Left after deducting the provision for doubtful debts
(c) Before deducting the actual bad debts
(d) After deducting the actual bad debts
(e) After deducting the actual bad debts and the provision for doubtful debts.
Q22. Consider the following information of Thumbs-up Company for the year 2006-
2007:
Opening balance of provision for debtors account Rs. 20,000

Bad debts during the year Rs. 18,000
Closing balance of Sundry debtors Rs.2,65,000
Estimated provision for doubtful debts 4%
The amount to be debited to profit and loss account to make the estimated provision is
(a) Rs. 8,600
(b) Rs.10,400
(c) Rs.10,520
(d) Rs.10,600
(e) Rs.10,680.
Q23. At the time of preparation of final accounts, bad debts recovered account will be
transferred to
(a) Debtors account
(b) Profit & loss account
(c) Profit & loss adjustment account
(d) Profit & loss appropriation account
(e) Provision for discount on debtors account.
Q24. Which of the following is false about diminishing balance method of depreciation?
(a) Higher amount of depreciation is charged when the machine is more efficient
(b) It recognizes the risk of obsolescence by higher amount of depreciation in the early
years
(c) The total amount of depreciation and repairs is almost uniformally distributed over the
useful
life
(d) It results in better cash flow through tax deferral as taxable income is lower in the
initial years
(e) Depreciation amount throughout the useful life will be uniform.
Q25. The following is not an example of fixed asset

(a) Plant and machinery
(b) Land and building
(c) Royalty
(d) Patent
(e) Office furniture.
Q26. Under depletion method, depletion per unit is calculated as

(a) Acquisition cost divided by average production units per annum
(b) Acquisition cost divided by actual production units in the year
(c) Acquisition cost minus residual value divided by average production units per annum
(d) Acquisition cost minus residual value divided by the actual production units in the
year
(e) Acquisition cost minus residual value divided by the total production units over the
useful life.
Q 27. Which one of the following is a capital expenditure?

(a) Compensation paid to Directors on termination of their services
(b) Expenditure for renewal of trade mark
(c) Gratuity paid to employees
(d) Installments paid for the purchase of patent for manufacture and sale of medicine
(e) Compensation paid to workers on retirement.
Q28. Entries passed for outstanding expenses, depreciation, interest on capital etc. are
(a) Opening entries
(b) Journal entries
(c) Adjustment entries
(d) Rectification entries
(e) Closing entries.
Q29. Which of following transactions does not change the total amount of liabilities in
the balance sheet?
(a) Purchase of office furniture on credit
(b) Payment of bank loan
(c) Issue of debentures
(d) Acceptance of bills from creditors
(e) Redemption of preference shares.
Q30. Which of the following is false?

(a) Capital plus liabilities will be equal to assets
(b) The difference between assets and liabilities is bank borrowing
(c) Capital account is a personal account
(d) Investment account is a real account
(e) Outstanding rent account is a representative personal account.
Q31. The expenses and incomes pertaining to full trading period are taken to the Profit
and Loss account of a business, irrespective of their actual payment or receipt. This is in
recognition of
(a) Time period concept
(b) Business entity concept
(c) Going concern concept
(d) Accrual concept
(e) Duality concept.
Q32. Which of the following statements can be used to assess the liquidity of a company?
(a) Balance sheet
(b) Profit and loss account
(c) Profit and loss appropriation account

(d) Bank reconciliation statement
(e) Manufacturing account.
Q33 . Which of the following state that Anticipate no profit and provide for all possible
losses?
(a) Convention of materiality
(b) Convention of consistency
(c) Convention of disclosure
(d) Convention of conservatism
(e) Convention of matching.
Q34. Which of the following statements is/are true?

I. Drawings account is a nominal account.
II. Capital account is a real account.
III. Sales account is a nominal account.
IV. Outstanding salaries account is a nominal account.
V. Patents account is a personal account.
(a) Only (I) above
(b) Only (III) above
(c) Both (II) and (IV) above
(d) (II), (IV) and (V) above
(e) (I), (II), (III) and (IV) above.
Q35. RS Ltd., makes purchases on credit. If the purchases are not as per the
specifications, the company returns them to the suppliers. The book, that is used to record
such returns is
(a) Returns inward book
(b) Returns outward book
(c) Cash book
(d) Journal proper
(e) Purchases day book.
Q36 . Which one of the following is not a reason for discrepancy in the balance as per
cash book and bank pass book of a company?
(a) Cheque issued to suppliers may not have been presented
(b) Cheque deposited in the account may not have been realized
(c) Bill discounted with bank is not due for payment
(d) Customers may have directly deposited money in the companys account
(e) Bank charges not accounted.
Q37. The bank balance in the cash book of Mr.Avinash, a proprietor showed a credit
balance of Rs.10,500 on March 31, 2008. On comparing it with his pass book he
discovered the following discrepancies.
i. Cheque No. 51 for Rs.540 in favour of Mr.Raman has not yet been presented.
ii. A bill of Rs.1,000 was retired by the bank under a rebate for Rs.15, but the full amount
of the bill was credited to bank account in cash book.
The balance as per pass book is
(a) Rs.11,025 (Dr.)
(b) Rs. 9,945 (Dr.)
(c) Rs. 9,945 (Cr.)
(d) Rs. 9,975 (Dr.)
(e) Rs. 9,975 (Cr.).
Q38. The total cost of goods available for sale with a company during the current year is
Rs.12,00,000 and the total sales during the period are Rs.13,00,000. If the gross profit
margin of the company is 25% on sales, the closing inventory during the current year is
(a) Rs.4,00,000
(b) Rs.3,40,000
(c) Rs.2,25,000
(d) Rs.1,60,000
(e) Rs.1,00,000
Q39. Unearned income account is

(a) A current asset
(b) A current liability
(c) An expense
(d) An income
(e) Deferred expense.
Q40. The essentials of double entry book-keeping in sequential order are

(a) Passing journal entries, posting in ledger, appropriate adjusting entries, trial balance,
Profit & Loss a/c and Balance-sheet
(b) Passing journal entries, posting ledger, trial balance, Profit & Loss a/c and Balance-
sheet, passing adjusting entries.
(c) Passing journal entries, posting ledger, passing adjusting entries, Profit & Loss a/c and
Balance sheet, trial balance
(d) Passing adjusting entries, passing journal entries, trial balance, posting in ledger,
Profit & Loss a/c and Balance-sheet
(e) Passing journal entries, posting in ledger, trial balance, passing adjusting entries,
Profit & Loss a/c and Balance-sheet.
SECTION C
Q1 b Q11 d Q21 e Q31 d

Q2 a Q12 c Q22 a Q32 a
Q3 c Q13 a Q23 b Q33 d
Q4 c Q14 b Q24 e Q34 b
Q5 c Q15 a Q25 c Q35 b
Q6 a Q16 d Q26 e Q36 c
Q7 d Q17 e Q27 d Q37 b
Q8 e Q18 d Q28 c Q38 c
Q9 d Q19 d Q29 d Q39 b
Q10 d Q20 e Q30 b Q40 e

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AMF 102 FINANCIAL ACCOUNTING

This Financial Accounting module seeks to discuss the concept of

FINANC IAL ACCOUNTING

To develop conceptual understanding of the fundamentals of financial system which

Basics of book-keeping and accounting definition and its usefulness. Branches of

Text & References:

Dr. S.N. Maheshwari, Finacial Accounting

Master of Finance & Control Copyright Amity university India Page 1

Chapter No. Chapter Name Page No.

Chapter 1 Meaning & Scope of Accounting 2

Chapter 2 Accounting Principles, Conventions And 10

Chapter 4 Systems of Book-Keeping & Accounting 22

Chapter 5 Recording of Accounting Transactions 29

Chapter 6 Subsidiary Books I- Cash Book 45

Chapter 7 Subsidiary Book II- Other Books 55

Chapter 8 Bank Reconciliation Statement 63

Chapter 9 Depreciation & Its Methods 70

Chapter 10 Final Accounts & Adjustments 85

Chapter 11 Bills of Exchange 109

Answer Key to end chapter questions Page no 129

Master of Finance & Control Copyright Amity university India Page 2

1.1 Meaning of Accounting

1.1 MEANING OF ACCOUNTING

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

Master of Finance & Control Copyright Amity university India Page 3

1.2 THE ACCOUNTING PROCESS/ACCOUNTING CYCLE:

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

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

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

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

Master of Finance & Control Copyright Amity university India Page 4

We can present the same graphically as follows:

Master of Finance & Control Copyright Amity university India Page 5

1.3 ACCOUNTANCY, ACCOUNTNG & BOOK-KEEPING: -

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

Relationship B/w These Three:

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

5 Knowledge level Not required a high level It needs a high level of

Master of Finance & Control Copyright Amity university India Page 6

6 Analytical Skill Not required Required

8 Supervision & Supervised by an Whereas its work is not

1.4 BRANCHES OF ACCOUNTING:

Financial Accounting:- Accounting involves recording, classifying and

1.5 OBJECTIVES OF ACCOUNTANCY:

Master of Finance & Control Copyright Amity university India Page 7

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

1.6 USERS OF FINANCIAL STATEMENT

1.7 ADVANTAGES OF ACCOUNTING

Master of Finance & Control Copyright Amity university India Page 8

Q2 The basic function of financial accounting is to:

Q3 Management Accounting provides invaluable services to the management in

Q4 Book-keeping is mainly concerned with

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

Master of Finance & Control Copyright Amity university India Page 9

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

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

Master of Finance & Control Copyright Amity university India Page 10

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

2.1 Meaning of GAAP

2.1 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

2.3 ACCOUNTING CONCEPTS:

(1) Money Measurement Concept:

(2) Cost Concept:-

(3) Business Entity/Separate Entity Concept: