1090041118class Xi Accounts Ro NW

KVS
(RAIPUR REGION)
Brings for its students
STUDY MODULE
For
CLASS-XI - Accountancy (2015-16)

Under the leadership of
Ms.P.B.S.Usha
Deputy Commissioner
(Chief Patron)
Mr. Girish Chand
Principal, KV-Nabarangpur
(Patron)
Content Formation by:

Sh. G. Shrivastav, Sh. A. K. Maurya,
PGT-Commerce, KV-1, Raipur (IST shift) PGT- Commerce KV, NTPC Korba.
Sh. R.K. Thakur Sh. Bikash Anand

PGT- Commerce, KV-No.2, Raipur. PGT-Commerce, KV, Bhawanipatna
Sh. Rakesh Chawala Ms. M.D.P. Mukherjee

PGT-Commerce, KV, Koraput PGT-Commerce KV, Bilaspur
Sh.V. Jaiswal, PGT-Commerce, Mr. M.K. Bhardwaj,

PGT-commerce, KV, Durg PGT-commerce, KV, Durg
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KVS RAIPUR REGION
STUDY MODULE
CLASS-XI - Accountancy
Points deserve your attention while taking examination :-

*Use proper format with correct heading.
*Write the narration for every transaction.
*Write the amount in proper sequence (i.e. once digit number below once and so on).
*Close particular cell after every entry.
*Show the working notes clearly.
* Always do a numerical question from a fresh page, try to complete an account/ statement on a
single page
*Don’t draw the margin line, just fold the answer sheet from both the sides (left and right).
*Put the question number clearly on the middle of the page and highlight it by underlining.
*Solve all the parts of the question together.
* do your calculations in a separate rough column or on the last one or two pages of the answer-
sheet
*Utilise the early 15 minutes to read the question paper carefully. Plan and organise your answers
in mind. Try to ascertain the level of difficulty of various questions and decide the sequence in
which the paper is to be attempted. Also try to analyse and break a long question in small parts
for easy understanding.
*Do not spend more than requisite time on a particular question.
*Use your watch to keep track of time so as to finish the paper well in time and do a quick revision
before the exam ends.
*Write your answers from 2nd page as far as possible. Avoid writing on front page or back side of
the front page .i.e.1st page of answer book.
Points deserve your attention to learn Accountancy better:-
*Learn the rules of debit and credit as per both modern and traditional approach and try to form
the journal entries by applying them instead of cramming the journal entries and also “how to do
posting in ledger”.
* Learn to draw formats of various accounts and statements with proper headings.
*Learn and understand the terms like fixed assets, current assets, liquid assets, current liabilities,
fictitious assets, capital and revenue receipts/payments, reserves/accumulated profits and losses,
debt, equity, capital employed, cost of goods sold, working capital, operating and non-operating
expenses and incomes, cash equivalents, operating, investing, financing activities, major headings
of balance sheet, etc.
*Learn to write precise narrations explaining the journal entries correctly.
*Learn “how to prepare working notes showing explanatory calculations for main values with
appropriate statements.”
*Solve Latest CBSE sample papers available at CBSE’s website (cbse.nic.in) CBSE question
papers asked in 2014 & 2015. These papers must be done in examination like conditions i.e.
Within a time limit of three hours.
* Learn and solve this Study Module.
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Theoretical Frame Work
INTRODUCTION TO ACCOUNTING
Content mapping
Accounting- concept, objectives, advantages and limitations, types of

accounting information; users of accounting information and their needs.
Basic accounting terms: business transaction, account, capital, drawings,

liabilities (non - current and current); assets (non-current and current) fixed
assets (tangible and intangible assets), receipts (capital and revenue),
expenditure (capital, revenue and deferred), expense, income, profits, gains
and losses,
purchases, purchases returns, sales, sales returns, goods, stock, inventory,
trade receivables (debtors and bills receivable), trade payables (creditors and
bills payable), cost, vouchers, discount - trade and cash.
_____________________________________
Accounting: ‘‘Accounting is an 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 financial character, and interpreting the results thereof.’’
Objectives of Accounting:
1. To provide useful information to various interested parties.

2. To Maintain systematic and complete Records of Business Transactions
3. To Calculate Profit and Loss
4. To ascertain the financial position of the business.
Interested Users of Information:
There are number of users interested in knowing about the financial soundness and the
profitability of the business.
Users Classification Information the user want

Internal Owner return on their investment, financial health of their
company/business
Management to evaluate the performance, to take various decisions
External Investors and potential
safety and growth of their investments, future of the business
Investors
Creditors Assessing the financial capability, ability of the business to pay its
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debts
Lenders Repaying capacity, credit worthiness
Tax Authorities assessment of due taxes, true and fair disclosure of accounting
information
Employees Profitability to claim higher wages and bonus, whether their dues
(PF, ESI etc.) deposited regularly.
Others Customers, Researchers etc. may seek different information for
different reasons.
Qualitative Characteristics of Accounting Information :
Accounting information is useful for interested users only if it possess the following
characteristics :
1. Reliability: Means the information must be based on facts and be verified

through source documents by anyone. It must be free from bias.
2. Relevance: To be relevant, information must be available in time and
must influence the decisions of users by helping them form prediction
about the outcomes.
3. Understandability: The information should be presented in such a
manner that users can understand it well.
4. Comparability: The information should be disclosed in such a manner
that it can be compared with previous years’ figures of business itself and
other firm’s data.
Limitations of Accounting :
The accounting information suffers from the following limitations:
1. Based on historical data

2. Biasness
3. Qualitative information not shown
4. Ignores price level changes
BASIC ACCOUNTING TERMS :
Transaction : An economic activity that affects financial position of the business and can be
measured in terms of money e.g. sale of goods, paying for expenses etc.
Voucher : The documentary evidence in support of a transaction is known as voucher. For

example, if we buy goods for cash we get cash memo, if we buy on credit we get an invoice,
when we make a payment we get a receipt and so on.
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Capital : Amount invested by the owner in the firm is known as capital. It may be brought in
the form of cash or assets by the owner.
Assets : Assets are economic resources of an enterprise useful in its operations. Assets can
be broadly classified into two types :
1. Fixed Assets are assets used for normal operations and held on a long-term basis, such as
land, buildings, machinery, plant, furniture and fixtures etc.
2. Current Assets are assets held for a short-term and converted into cash within one year
such as debtors, stock etc.
Liabilities : Liabilities are obligations or debts that an enterprise has to pay at some time in the
future. Liabilities can be classified as :
1. Long-term liabilities are those that are usually payable after a period of one Year e.g. a
long term loan from a financial institution.
2. Short-term liabilities are obligations that are payable within a period of one year, for
example, creditors, bills payable, bank overdraft etc.
Sales : Sales are total revenues from goods sold or services provided to customers. Sales
may be cash sales or credit sales.
Revenues : Revenue means the income from any source. It should be of regular nature. For
example sales of goods/providing services to customer, commission, interest, dividends etc.
Expenses : Costs incurred by a business for earning revenue are known as expenses. For
example rent, wages, salaries, interest etc.
Expenditure : Spending money or incurring a liability for acquiring assets, goods or services is
called expenditure. The expenditure is classified as
1. Revenue expenditure : If the benefit of expenditure is received within a

year it is called revenue expenditure e.g. rent, interest etc.
2. Capital expenditure : If any expenditure lasts for more than a year, it is
treated capital expenditure such as purchase of machinery, furniture etc.
Profit : The excess of revenues over its related expenses during an accounting year is profit.
Profit = Revenue - Expenses.
Gain : A non-recurring profit from events or transactions incidental to business such as sale of
fixed assets, appreciation in the value of an asset etc.
Loss : The excess of expenses of a period over its related revenues its termed as loss. e.g.,
cash or goods lost by theft of fire etc. Loss = Expenses - Revenue
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Discount : Discount is the rebate given by the seller to the buyer. It can be classified as :
1. Trade discount : The purpose of this discount is to persuade the buyer to

buy more goods. It is Offered at an agreed percentage of list price at the
time of selling goods. This discount is not recorded in the account books
as it is deducted in the invoice/cash memo.
2. Cash discount : The objective of providing cash discount is to encourage
the debtors to pay the dues promptly. This discount is recorded in the
account books.
Goods : The products in which the business deal in. The items that are purchased for the
purpose of resale not for use in the business are called goods.
Drawings: It the owner withdraw money and/ or goods from the business for personal use it is
known as drawings.
Purchases: The term Purchases is used only for the goods procured by a business for resale.
In case of trading concerns it is purchase of final goods and in manufacturing concern this is
purchase of raw materials. Purchases may be cash purchases or credit purchases.
Closing Stock: It is the value of the goods lying unsold at the end of accounting year. Closing
stock of one year becomes the opening stock of next year.
Debtors; Debtors are persons and/ or other entities to whom business has sold goods and
services on credit and amount has not received yet. These are assets of the business.
Creditors: If the business buys goods/ services on credit and amount is still to be paid to the
persons and/ or other entities, these are called creditors. These are liabilities for the business.
THEORY BASE OF ACCOUNTING
Content mapping:
Fundamental accounting assumptions: going concern, consistency and accrual.

Accounting principles: accounting entity, money measurement, accounting period,
full disclosure, materiality, prudence, cost Concept, matching concept and dual aspect.
Accounting Standards and IFRS (International Financial Reporting Standards): concept
and objectives
Double entry system of accounting.
Bases of accounting - cash basis and accrual basis.
______________________________________
Generally Accepted Accounting Principles (GAAP) ; It refers to the rules or guidelines

adopted for recording and reporting of business transactions, in order to bring uniformity and
consistency in the preparation and the presentation of financial statements.
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FUNDAMENTAL ACCOUNTING ASSUMPTIONS :
1. Going Concern Assumption :
This concept assumes that an enterprise has an indefinite life or existence. It means that the
intentions of the business are to continue for sufficiently longer period of time. It will not be
dissolved or liquidated in the immediate future. If a machinery purchased is expected to last (to
be used for) next 10 year, then the cost of machinery will be spread over the next 10 year for
calculating net profit or loss of each year (Dep. Charged.)
The full cost of the machine would not be treated as expense in the year of purchase
itself. Market value of the asset is irrelevant and is not recorded in the balance sheet, as
these assets are not going to be sold in the near future.
Relevance :
(a) Distinction is made between a capital expenditure and revenue expenditure.

(b) Classification of assets and liabilities into short term and long term respectively.
(c) Depreciation charged on fixed assets or fixed assets appears in the balance Sheet at book
value, without having reference to their market value.
2. Consistency Assumption :
a. It implies that accounting practices once selected and adopted, should be applied

consistently year after year.
b. Same Accounting practices will be followed for similar items year after year. This will
ensure a meaningful study of the performance of the business for a number of years.
c. When the accounting principles and practices are uniformly/consistently followed from
year to year that the result obtained will be comparable.
Consistency assumption does not mean that particular practices once adopted cannot be
changed. The only requirement is that when a change is desirable, it should be fully
disclosed in the financial statements along with its effect on income statement and
financial position (Balance Sheet) of the year in which that change is made.
This assumption is important when alternative accounting practices are equally

acceptable. E.g. two methods of charging depreciation, written down value method and
Straight line method are equally acceptable. If a firm adopts one method in the previous year
and the other method in next year, the result will not be comparable.
3. Accrual Assumption :
Accrual concept applies equally to revenue and expenses. As per this assumption, revenue

is recognized when it is accrued/ earned, that is, when sale is complete or services are
rendered. It is immaterial, whether the cash is received or not. E.g. if a credit sale for Rs.
15,000 of two month is made on 15th Feb. 2011, then the revenue earned is to be recorded on
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15th Feb. 2011 not on the date of cash realized, i.e, after two months. Similarly, expenses are
recognized in the accounting period in which they facilitate in earning the
revenues, whether the cash is paid for them or not. E.g. if at the end of year the two month
salary is due but not paid. Then the expenses of salary will be recorded in the current year in
which salary is due, not in the next year in which it will be paid.
Relevance :
Earning of a revenue and consumption of a resource (expenses) can be accurately matched to

a particular accounting period Accounting Principles
Accounting principles
1. Accounting Entity. / Business Entity :
An entity has a separate existence from its owner. According to this principle, business is
treated as an entity, which is separate and distinct from its owner. Therefore business
transactions are recorded; analyzed and financial statements are prepared from the
business point of view and not of the owner.
i. The owner is treated as a creditor (liability) for his investment in the business, as
if the firm has borrowed from its owner instead of the outside parties.
ii. Interest on capital is treated as expense like any other business expense.
iii. His private expenses are treated as drawings leadings to reduction in capital.
iv. This concept is applicable to all forms of business organizations – sole
proprietorship, partnership or a company.
2. Money Measurement Principle:
According to this principle, only those transactions that are measured in money or can be
translated in term of money are recorded in the books of accounts of the enterprises.
i. Money means the currency of a country.

ii. Money is a common measuring unit for recording and reporting business
transactions.
Example : purchases cost Rs. 15,000 will be recorded in the books of accounts but the good
human relationship within organization will not be recorded.
Limitations :
1. it ignores qualitative aspects e.g. efficient human resources (Assets), satisfied

customers (Assets) and dishonest employee (liabilities)
2. Self-generated goodwill not recorded.
3. Value of money (currency) is not stable.
4. The facts which cannot be expressed in money cannot be recorded.
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5. To make accounting records simple, relevant, understandable and homogeneous, facts
are expressed in a common unit of measurement - money.
3. Accounting Period Principle :
According to this principle, the whole indefinite life of an enterprise is divided into part,
known as accounting period.
Accounting period is defined as interval of time, at the end of which the profit and loss
account and balance sheet are prepared. So the performance is measured at regular
intervals and decision can be taken at the appropriate time. This interval may be quarterly,
half-yearly and one year. Accounting period is usually a period of one year and that year may
be financial year or calendar year.
Relevance :
1. As per income tax law, tax on income is calculated on annual basis from 1st April to
31st March (Financial Year)
2. Accounting period concept is responsible for the preparation of income statement on
accrual basis as distinguished from cash basis of accounting.
4. Full Disclosure Principle:
According to this principle, apart from legal requirements all significant and material
information related to the economic affairs of the entity should be completely disclosed
in its financial statement and accompanying footnotes.
Disclosure of material information will result in better understanding of users, so, they take
good and sound decision from the information. E.g. footnotes such as :
1. Contingent liabilities in respect to a claim of a very big amount against the

business are pending in a court of law.
2. Change in the method of providing depreciation.
3. Market value of investment.
Disclosure of all material facts is compulsory but is does not imply that even those figures
which are irrelevant are to be included in financial statements
5. Materiality Principle :
According to this principle, only those items or information should be disclosed that have
material effect and relevant to the users. So, item having an insignificant effect or being
irrelevant to user need not be disclosed separately, these may be merged with other item.
If the knowledge of any information may effect the decision of a user of account, is termed as
material information.
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It should be noted that an item material for one enterprise may not be material for another
enterprise. E.g. an item of expenses Rs. 60,000 is material for an enterprise having turnover of
Rs. 1,50,000 but it is not material for an enterprise having turnover of Rs.100 crore.
The nature of transaction should be taken into consideration for materiality of information. E.g.
a difference of Rs. 200 in the valuation of stock may be immaterial but the difference of Rs. 50
in cash could be termed as material.
6. Prudence/ conservatism Principle :
According to this principle, profit in anticipation should not be recorded but loss in

anticipation should immediately be recorded. The objective of this principle is profit of the
enterprise in no case overstated.
When there are different equally acceptable alternative methods are available, the method
which having least favourable immediate effect on profit should be adopted. e.g.
1. Valuation of stock at cost or realizable values whichever is lower.

2. Provision for doubtful debts and Provision for discount on debtor is made.
3. Ignore provision for discount on creditors.
7- Cost concept:
The cost concept requires that all assets are recorded in the book of accounts at their
purchase price, which includes cost of acquisition, transportation, installation and making the
asset ready to use. To illustrate, on June 2005, an old plant was purchased for Rs. 50 lakh by
Shiva Enterprise, which is into the business of manufacturing detergent powder. An amount of
Rs. 10,000 was spent on transporting the plant to the factory site. In addition, Rs. 15,000 was
spent on repairs for bringing the plant into running position and Rs. 25,000 on its installation.
The total amount at which the plant will be recorded in the books of account would be the sum
of all these, i.e. Rs. 50,50,000. The concept of cost is historical in nature as it is something,
which has been paid on the date of acquisition and does not change year after year. For
example, if a building has been purchased by a firm for Rs. 2.5 crore, the purchase price will
remain the same for all years to come, though its market value may change.
8. Matching concept:
The process of ascertaining the amount of profit earned or the loss incurred during a particular
period involves deduction of related expenses from the revenue earned during that period. The
matching concept emphasises exactly on this aspect. It states that expenses incurred in an
accounting period should be matched with revenues during that period. It follows from this that
the revenue and expenses incurred to earn these revenues must belong to the same
accounting period.
As already stated, revenue is recognised when a sale is complete or service is rendered rather
when cash is received. Similarly, an expense is recognized not when cash is paid but when an
asset or service has been used to generate revenue. For example, expenses such as salaries,
rent, insurance are recognized on the basis of period to which they relate and not when these
are paid. Similarly, costs like depreciation of fixed asset is divided over the periods during
which the asset is used.
9. Dual aspect:
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Dual aspect is the foundation or basic principle of accounting. It provides the very basis for
recording business transactions into the book of accounts. This concept states that every
transaction has a dual or two-fold effect and should therefore be recorded at two places. In
other words, at least two accounts will be involved in recording a transaction. This can be
explained with the help of an example. Ram started business by investing in a sum of Rs.
50,00,000 The amount of money brought in by Ram will result in an increase in the assets
(cash) of business by Rs. 50,00,000. At the same time, the owner’s equity or capital will also
increase by an equal amount. It may be seen that the two items that got affected by this
transaction are cash and capital account.
10. Revenue Recognition (Realisation) Concept

The concept of revenue recognition requires that the revenue for a business transaction should
be included in the accounting records only when it is realised. Here arises two questions in
mind. First, is termed as revenue and the other, when the revenue is realised. Let us take the
first one first. Revenue is the gross inflow of cash arising from (i) the sale of goods and
services by an enterprise; and (ii) use by others of the enterprise’s resources yielding interest,
royalties and dividends. Secondly, revenue is assumed to be realised when a legal right to
receive it arises, i.e. the point of time when goods have been sold or service has been
rendered. Thus, credit sales are treated as revenue on the day sales are made and not when
money is received from the buyer. As for the income such as rent, commission, interest, etc.
these are recognized on a time basis.
Accounting Standards:
Accounting standards are written statements of uniform accounting rules and guidelines or
practices for preparing the uniform and consistent financial statements and for other
disclosures affecting the user of accounting information. However, the accounting standards
cannot override the provision of applicable laws, customs, usages and business environment
in the country. The Institute tries to persuade the accounting profession for adopting the
accounting standards, so that uniformity can be achieved in the presentation of financial
statements.
the Institute of Charted Accountants of India (ICAI) constituted an Accounting Standards Board
(ASB) in April, 1977 for developing Accounting Standards. The main function of ASB is to
identify areas in which uniformity in standards is required and develop draft standards after
wide discussion with representative of the Government, public sector undertakings, industry
and other organisations. ASB gives due consideration to the International Accounting
Standards as India is a member of International Account Setting Body. ASB submits the draft
of the standards to the Council of the ICAI, which finalises them and notifies them for use in
the presentation of the financial statements. ASB also makes a periodic review of the
accounting standards.
International Financial Reporting Standards (IFRSs);

International Financial reporting Standards (IFRSs) are globally accepted accounting
standards developed by International Accounting Standard Board (IASB). IFRS is a set of
accounting standards for reporting different types of business transactions and events in the
financial statements. The objective is to facilitate international comparisons for true and fair
valuation of a business enterprise. The qualitative characteristics associated with the
preparation of financial statements are useful to the users of accounting information in making
financial decisions.
In an effort to narrow down the gap in the presentation of corporate financial statements, the
Ministry of Corporate Affairs, Government of India has opted for the convergence of Indian
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Accounting Standards with IFRSs for bringing uniformity, comparability, transparency,
rationalization and adaptability in the field of accounting.
Question bank:
Q.1 What is meant by Accounting?
Ans: Accounting is the art of recording, classifying, summarizing and communicating financial
information to users for correct decision making.
Q.2 Give any two objectives of accounting?
Ans: a) To keep the records of the business systematically.
b) To ascertain profit earned or loss suffered by the business during a specified period.
Q.3 Give one point of distinction between Book-Keeping and Accounting.
Ans: The main purpose of Book-Keeping is to maintain the systematic records of business
transaction. And the main objective of Accounting is ascertain the profit or loss and the
financial position of the business.
Q.4 What is the end product of financial accounting?
Ans: Financial Statements (i.e. Profit & Loss Account and Balance Sheet) and report which
provide information to different users of it for making decisions.
Q.5 Who are the internal users of accounting?
Ans: Persons, directly involved in managing and operating the business activities, are the
internal users of accounting. Example: partners, managers, officers.
Q.6 Who are the external users of accounting?
Ans: Persons, who are not involved directly in managing and operating the business
activities, are the internal users of accounting. Example: potential investors, creditors,
lenders, employees unions, customers, government etc.
Q7 Write one limitation of accounting.
Ans: Window dressing, i.e. accounts are manipulated by the accountant or management in
favour of business in such a way that they do not present correct financial position of
the business.
Q.8 State the qualitative characteristics of accounting.
Ans: Reliability, relevancy, understandability, comparability.
Q.9 “Accounting information should be verifiable and free from personal bias.” Identify the
qualitative characteristic of accounting information denoted by this statement.
Ans: Reliability.
Q.10 What is meant by window dressing?
Ans: It refers to the practice of manipulating accounts, so that financial statement may
disclose a more favourable position than the actual position. For example: purchase
made in the year may not be recorded or closing stock may be over valued.
Q.11 Which value is involved in adopting the same method of depreciation year after year?
Ans: Comparability.
Q.12 What is voucher?
Ans: A voucher is a document on the basis of which transactions are first recorded in the
books.
Q.13 Define merchandise.
Ans: Merchandise goods purchased for resale.
Q.14 Distinguish between gain and profit.
Ans: Profit is the excess of revenues over expenses during an accounting period. It is the
result of business transactions which are of regular nature. Gain arises from events or
transactions which are incidental to business such as sale of a fixed assets or winning a
lottery prize.
Q.15 Distinguish between revenue expenditure and capital expenditure.
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Ans: If the benefit of expenditure is exhausted within a year, it is treated as revenue
expenditure (also called expense). If the benefit of expenditure lasts for more than a
year it is treated as capital expenditure.
Q.16 Distinguish between debtor and creditor.
Ans: Debtors are the persons to whom the enterprise sales the goods or services on credit.
Creditors are the persons from whom the enterprise purchases the goods or services on
credit.
Q.17 Mr. Ajay, who owed us Rs. 1,00,000 became insolvent and paid only 40% of this
amount. What is the term used for the amount not received?
Ans: Bad Debts.
Q.18 Give the two characteristics of accounting principles.
Ans: a) Accounting principles are man made
b) Accounting principles are flexible
Q.19 What is money measurement principle?
Ans: Only those transactions and events are recorded in accounting which can be expressed
in terms of money.
Q.20 What is going concern principle?
Ans: Business will continue for a long time and there is no intention to close down it in near
future.
Q.21 Closing stock is valued at lower of cost or realizable value’. Which principle of
accounting is applied here?
Ans: Principle of prudence or conservatism.
Q.22 What is meant by GAAP?
Ans: Generally Accepted Accounting Principles.
Q.23 Mohan, the owner of a business receives an order for supply of goods worth Rs.
2,00,000. He has also received Rs. 25,000 against this order. Mohan wants to record it
as sale. Is Mohan correct in doing so?
Ans: No. Under matching concept, revenue is recognized as earned only when cost incurred
to earn that revenue is also recognized as expense in that period.
Q.24 Which of the following transactions will be recorded in the books of accounts?
a) Credit purchase
b) Strike by employees.
c) Goods worth Rs. 5,000 taken from the business and given by the proprietor to his
friend as gift.
d) Withdrawing of money by proprietor for his personal use.
e) Interviewing the candidates for employment.
f) Sale of household furniture for Rs. 20,000
g) Payment of school fees of proprietor children from his personal account.
h) Make promise to send the goods.
i) Receiving an order to send the goods.
j) Loss of goods by fire.
Ans: a, c, d and j.
Q.25 State whether the following statements are true or false:
a) Accounting is the language of business. True
b) Accounting is helpful in raising loans. True
c) Accounting is not accepted as evidence in legal matters. False
d) Management of an enterprise is internal user of its accounting information. True
e) Accounting makes a record of qualitative aspects of business. False
f) Accounting is a service function. True
g) Accounting involves only the recording of business transactions. True
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h) Accounts are prepared on the basis of historical costs. True
i) Only those transactions are recorded in accounting which can be expressed in terms
of money True
j) Book-keeping starts where accounting ends. False
k) Creditors are external users of accounting information. True
l) A creditor would use an entity’s financial report to determine where or not credit may
be granted to the firm. True
m) Accounting may be affected by window dressing. True
Q.26 Choose the best alternate:
A: In accounts recording is made of:
a) Only financial transactions * b) Only non-financial transactions
c) Financial as well as non-financial transactions d) personal transactions of the
proprietor
B: Ghanshyam is a furniture dealer. Which one of the following will not be
recorded in his books?
a) purchase of Timber for Rs. 10,000 b) Sofa set worth Rs, 20,000 taken to
his home
c) Sale of house hold furniture for Rs. 20,000 * d) Dining table of Rs. 15,000 given as
gift
C: Which of the following transactions is not of financial character?
a) Purchase of asset on credit b) Purchase of assets for cash
c) withdrawing of money by proprietor for personal use d) strike by employees *
D: Last step of accounting process is:
a) Provide information to various parties who are interested in business enterprise *
b) Record transactions in the books.
c) To make summary in the form of financial statements.
d) To classify the transactions under separate heads in the ledger.
E: Internal users of accounting information are:
a) Potential investors b) Creditors
c) Management * d) Employees
F: External users of accounting information are:
a) Researchers b) Government
c) Potential Investors d) All of the above *
G: External users of accounting information are not:
a) Lenders b) Officers *
c) Employees d) Public
H: Which of the following is not a limitation of accounting?
a) Based on accounting conventions b) Evidence in Legal matter *
c) Incomplete information d) Omission of qualitative information.
I: Which of the following is not an objective of accounting?
a) To provide information about the assets, liabilities and capital of the enterprise.
b) To provide information about the private assets and liabilities of the proprietor. *
c) To maintain records of the business.
d) To provide the information regarding the profit and loss of the enterprise.
J: If accounting information is based on facts and it is verifiable by documents it
has the quality of ……………
a) relevance b) reliability *
c) understandability d) comparability
K: Which of the following transaction is of a financial character and will be
recorded in the business?
14 | P a g e
a) Goods taken from the business by the proprietor for her personal use *
b) Interviewing the candidates for employment
c) Sale of household furniture
d) Received an order for sale of goods
L: Current Liability includes
a) Bills payable b) Creditors
c) Outstanding expenses d) all the above *
M: Trade discount is:
a) Which is allowed at the time of receiving the payment
b) Which is allowed at the time of the sale of goods. *
c) Which is allowed both at the time of receiving the payment and sale of goods.
d) Allowed in all the above
N: Consider the following items:
1. Prepaid Salary 2. Accrued Interest 3. Loan (short term) 4. Bank
overdraft
Current liability includes:
a) 1,2,3,4, b) 2,3,4 c) 4,3,1 d) 3,4 *
O: As per Income Tax, Accounting period is:
a) from 1st January to 31st December b) from 1st April to 31st March *
c) From 1st July to 30th June d) From Diwali to Diwali
P: Principle of conservatism takes into accounts:
a) All future profits and losses b) All future profits not losses
c) All future losses not profits * d) Neither profits nor losses of future.
Q: The owner of the firm records his medical expenses in the firm’s income
statement. Indicate the principle that is violated.
a) cost principle b) prudence c) full disclosure d) entity concept *
R: Omission of paise and showing the round figures in financial statement is
based on …………
a) conservatism concept b) money measurement concept
c) materiality concept * d) consistency concept
S: Income is measured on the basis of:
a) Matching concept * b) consistency concept
c) cost concept d) None of the above
T: Due to which of the following, Contingent Liabilities are shown in the Balance
Sheet:
a) Dual Aspect Principle b) Principle of full disclosure *
c) Principle of materiality d) Going concern concept
U: During the life-time of an entity accounting produce financial statements in
accordance with which basic accounting concept:
(a) Conservation (b) Matching (c) Accounting period * (d) None of the
above
V: When information about two different enterprises have been prepared
presented in a similar manner the information exhibits the characteristic of:
(a) Verifiability (b) Relevance (c) Reliability (d) None of
the above *
W: A concept that a business enterprise will not be sold or liquidated in the near
future is known as:
(a) Going concern * (b) Economic entity
(c) Monetary unit (d) None of the above
15 | P a g e
X : The primary qualities that make accounting information useful for decision-
making are :
(a) Relevance and freedom from bias (b) Reliability and comparability *
(c) Comparability and consistency (d) None of the above
Q.27 Higher Order Thinking Skills (HOTS) Questions:

a) What is the traditional function of Accounting?
b) Is the basic objective of book-keeping to maintain systematic records or to ascertain
net results of operations of financial transactions?
c) Recording of financial transactions and preparing the financial statements are the
only objectives of accounting. Do you agree?
d) What is the first step of Accounting Process?
e) Which is the last step of Accounting Process?
f) On 1st Jan, 2014, Mr. Robert was appointed as Marketing Manager of the firm with a
salary of Rs. 50,000 per month. State whether this event will be recorded in the books
of accounts.
g) The firm follows a practice of giving the figures of previous year along with the figure
of current year. Now the Accountant of the firm wants to discontinue this practice. Do
you justify this decision?
h) Give two examples of transactions which are not recorded in accounting.
i) A firm has received a large order to supply the goods. Will it be recorded in the
books?
Ans: a) Recording of financial transactions.

b) The basic objective of book-keeping is to maintain systematic records of financial
transactions.
c) No. Besides these two accounting has other objectives also such as providing useful
information to various users.
d) Recording of transactions in the books.
e) Communicating the final results to the users who analyze them as per the individual
requirement.
f) No. The appointment will not be recorded.
g) No. Comparability of current year figures with that of previous year is a qualitative
characteristic of financial information. Firm should not discontinue this practice.
h) i. Resignation by the employee.
ii. Value of human resources
i) No. Only the receipt of order has not resulted in any change in the financial position of
the firm.
16 | P a g e
Accounting Process
Recording of Transactions:
Content mapping:
Accounting equation: analysis of transactions using accounting equation.
Rules of debit and credit: for assets, liabilities, capital, revenue and expenses.
Origin of transactions- source documents/supporting vouchers (invoice, cash
memo, pay in slip, cheque), debit note, credit note, preparation of accounting
vouchers – cash (debit and credit) and non cash (transfer).
Books of original entry: format and recording - Journal.
Cash book: simple cash book, cash book with discount column and cash book
with bank and discount columns, petty cash book.
Other books: purchases book, sales book, purchases returns book, sales returns
book and journal proper.
_______________________________________
Accounting Equation:
Total Assets = Capital + Liabilities
1. Mohit has the following transactions, prepare accounting equation:
(i) Business started with cash 1,75,000

(ii) Purchased goods from Rohit 50,000
(iii) Sold goods on credit on Manish (costing Rs.17,500) 20,000
(iv) Purchased furniture for office use 10,000
(v) Cash paid to Rohit in full settlement 48,500
(vi) Cash received from Manish 20,000
(vii) Rent paid 1,000
(viii) Cash withdrew for personal use 3,000
Soln:-
Transaction No. Assets = Liabilities +

Capital
Cash + Stock + Debtors + Furniture = Creditors +
Capital
(i) Business started with 1,75,000 0 0 0 0 1,75,000
cash
New Equation 1,75,000 0 0 0 0 1,75,000
(ii) Purchased goods from 0 50,000 0 0 50,000 0
Rohit
New Equation 1,75,000 50,000 0 0 50,000 1,75,000
(iii) Sold goods on credit to 0 (17,500) 20000 0 0 2,500
Manish(costing Rs.17,500)
New Equation 1,75,000 32,500 20,000 0 50,000 1,77,500
(iv) Purchased furniture for (10,000) 0 0 10,000 0 0
17 | P a g e
office use
New Equation 1,65,000 32,500 20,000 10,000 50,000 1,77,500
(v) Cash paid to Rohit in full (48,500) 0 0 0 (50,000) 1,500
settlement
New Equation 1,16,500 32,500 20,000 10,000 0 1,79,000
(vi) Cash received from 20,000 0 (20,000) 0 0 0
Manish
New Equation 1,36,500 32,500 Nil 10,000 0 1,79,000
(vii) Rent paid (1,000) 0 0 0 0 (1,000)
New Equation 1,35,500 32,500 0 10,000 0 1,78,000
(viii) Cash withdrew for (3,000) 0 0 0 0 (3,000)
personal use
Final Equation 1,32,500 32,500 nil 10,000 0 1,75,000
Closing Capital = Closing Assets – Closing Liabilities
Profit = Closing Capital + Drawings – Additional Capital- Opening Capital
2. On 31st March 2015, the total assets and external liabilities were Rs.6,00,000 and Rs.18,000
respectively.
During the year, the proprietor had introduced capital of Rs.60,000 and withdrawn Rs.36,000 for
personal
use. He made a profit of Rs.60,000 during the year. Calculate the capital as on 1 st April 2014
(Opening
Capital)
Soln:- Closing Capital = Closing Assets – Closing Liabilities
Closing Capital = 6,00,000 – 18,000 = 5,82,000
Profit = Closing Capital + Drawings – Additional Capital- Opening Capital
60,000 = 5,82,000 + 36,000 -60,000 – Opening Capital
Opening Capital = 5,82,000 + 36,000 -60,000 -60,000 = Rs. 4,98,000
Capital as on 1st April 2014 (Opening Capital) = Rs. 4,98,000
Rules of Debit and Credit
Under Double Entry System of Book keeping each transaction has two aspects. One is receiving or
incoming aspect- Debit aspect; another giving or outgoing aspect- Credit aspect.
i Increase in assets are debits; decreases are credits.

ii Increase in liabilities are credits; decreases are debits.
iii Increase in owner’s capital are credits; decreases are debits.
18 | P a g e
iv Increase in expenses are debits; decreases are credits.
v Increase in revenues or incomes are credits; decreases are
debits.
OR
Personal Accounts - Debit the Receiver; Credit the Giver
Real Account - Debit what comes in; Credit what goes out
Nominal Account - Debit all expenses and losses; credit all incomes and gains.
Personal Account- related to persons- Ram’s Account, Annu’s account etc.; account of limited company,
Outstanding Rent account etc.
Real Account- related to tangible or intangible assets.- Land, building, stock, cash etc.
Nominal Account- related to expenses- losses, gains, revenue ,income- interest account
Account
Account is a summarized record of transactions at one place relating a particular head. It records not
only the account of transactions but also their effect and direction.
Name Of The Account
Date Particulars J.F Amount Date Particulars J.F Amount
JOURNAL
Journal is a book in which transactions are recorded in the order in which they occur. It is the book of
original entry as transactions are initially recorded in it.
Date Particulars L.F. Dr.Amount Cr.Amt
Entries of specific transactions:-
1. Bad Debts:
Bad Debts A/c
To Debtor’s Personal A/c
(Being the amount not received written off as bad debt)
2. Bad Debts Recovered:

Cash or Bank A/c
19 | P a g e
To Bad Debts Recovered A/c
(Being bad debt recovered)
3. Cash withdrawn for personal Use:
Drawings A/c
To Cash A/c
(Being the cash withdrawn for personal use)
4. Discount :
(i) Trade Discount : Deduction from the sale value and sale is recorded in the books of
accounts at net amount.
(ii) Cash Discount: It is allowed when payment is made.
Trade discount is allowed first , thereafter cash discount is allowed .
5. Goods taken for Personal Use:

Drawings A/c
To Purchases A/c
(Being the goods taken for personal use)
6. Goods Given as charity:
Charity A/c
To Purchases A/c
(Being the goods given as charity )
7. Distribution of Goods as Free samples:
Advertisement A/c Dr
`To Purchases A/c
(Being the goods distributed as fee samples)
8. Loss of Theft or Fire
Loss by theft or Fire A/c
To Purchases A/c
(Being the loss of goods by theft or fire)
9. Central Sales Tax ( CST)
Cash or Debtors A/c

To Sales A/c
To Central Sales tax A/c
(Being the sales made and Central Sales Tax collected)
Central sales Tax A/c

To Cash or Bank A/c
(Being the Central Sales Tax collected and deposited in Government Account)
10. Value Added Tax:
(i) When VAT is paid at the time of purchases:
Purchases A/c Dr
VAT Paid A/c
To Cash or Bank or Creditors A/c
(Being the purchases made and VAT paid recorded)
20 | P a g e
(ii) When VAT is collected at the time of sales:
Cash or Bank or Debtors A/c
To Sales A/c
To VAT Collected A/c
(Being the sales made and VAT collected recorded as liability)
(iii) When VAT is paid to the Government:

(a) VAT Collected A/c
To VAT paid A/c
(Being the balance in VAT paid A/c transferred to VAT collected A/c)
(b) VAT Collected A/c

To Cash or Bank A/c
(Being the balance in VAT Collected A/c after transfer of balance in VAT Paid A/c
deposited)
11. Closing Stock:
Closing Stock A/c Dr.
To Trading A/c
(Being Closing Stock recorded)
12. Outstanding Expenses:
Expenses A/c Dr
To Outstanding Expenses A/c
(Being the outstanding expenses accounted)
13. Prepaid Expenses:

Prepaid Expense A/c Dr
To Expense A/c
(Being the amount transferred to Prepaid Expenses A/c for the period)
14. Depreciation:
Depreciation A/c Dr
To Asset A/c
(Being the depreciation on asset provided)
15. Accrued Income:

Accrued Income A/c
To Income A/c
(Being the income earned but not yet received)
16. Income received in advance or Unearned Income:
Income A/c
To Income received in advance
(Being income received in advance)
17. Interest on Capital

Interest on Capital A/c
To capital A/c
(Being interest on capital allowed @ …%)
21 | P a g e
18. Interest on Drawings:
Capital A/c Dr.
To Interest on Capital A/c
( Being the interest on drawings charged @ …%)
3. Journalise the following transactions in the books of Harpreet Bros:
(i) Goods worth Rs.50,000 and Cash Rs.20,000 were stolen by an employee.
(ii) Goods costing Rs.10,000 were returned to Ram Bros as the goods were hazardous for health
of the consumers. Also give value affected in each of the above case. (KVS
2015)

Loss by theft or Fire A/c 70,000
To Purchases A/c 50,000
To Cash A/c 20,000
(Being the loss of goods by theft or fire)
Ram Bros A/c Dr 10,000

To Returns Outwards A/c 10,000
(Being goods returned to Ram Bros)
Value effected is- (i) Honesty (ii) Consumer Protection
LEDGER
It is the book of second or final entry. Entries are transferred from journal. Ledger is also called the
principle book / book of final entry of accounting system. All the transactions recorded in the books of
original entry are transferred to ledger. It contains a summarized form of all the accounts recorded at one
place.
The process of transferring the entries from the books of original entry (journal) to the ledger is called
posting.
Balancing of an account is the process of ascertaining the difference between the total of debits and total
of credits appearing in an account, this difference is written on the side whose total is short.
Personal and real accounts are balanced and nominal accounts are closed by transferring it to trading and
profit and loss account.
4. Journalise the following transactions in the journal of Vimal and post them to the ledger and balance
them
2013 Amt (Rs.)
Aug 1 Vimal started a business with cash 2,50,000
Aug 2 Bought goods for cash 76,250
Aug 7 Opened bank account with cash 1,25,000
Aug 10 Sold goods for cash 1,00,000
Aug 17 Bought goods from Jaya on credit 75,000
Aug 25 Sold goods to Prateek on credit 62,500
Aug 27 Purchased Plant & Machinery and payment is made by cheque 41,500
22 | P a g e
Aug 30 Paid to Jaya 74,500 as full and final settlement
Journal

2013
Aug 1 Cash A/c 2,50,000
Dr 2,50,000
To Capital A/c
(Being business started with cash)
Aug 2 Purchases A/c 76,250
Dr 76,250
To Cash
(Being goods purchased for cash)
Aug 7 Bank A/c 1,25,000
Dr 1,25,000
To Cash A/c
(Being bank account opened)
Aug 10 Cash A/c Dr 1,00,000

To Sales A/c 1,00,000
(Being goods sold for cash)
Aug 17 Purchases A/c Dr 75,000

To Jaya 75,000
(Bought goods on credit)
Aug 25 Prateek A/c Dr 62,500
To Sales A/c 62,500
(Being goods sold to Prateek on credit)
Aug 27 Plant & Machinery A/c Dr 41,500
To Bank A/c 41,500
(Being plant & machinery purchased by cheque)
Aug 30 Jaya Dr 75,000
To Cash A/c 74,500
To Discount A/c 500
(Being the amount paid to Jaya as full settlement of her
claim and discount received Rs.500)
Ledger
Cash Account

2013 2013
Aug 1 To Capital A/c 2,50,000 Aug 2 By Purchases A/c 76,250
Aug To Sales A/c 1,00,000 Aug 7 By Bank 1,25,000
10 Aug By Jaya 74500
23 | P a g e
30 By Balance c/d 74250
Aug
3,50,000 31 3,50,000
Capital A/c

2013 2013
Aug 31 To Balance c/d 2,50,000 Aug By Cash A/c 2,50,000
1
2,50,000 2,50,000
Purchases A/c

2013 2013
Aug 2 To Cash A/c 76,250 Aug By Balance c/d 1,51,250
Aug 17 To Jaya 75,000 2
1,51,250 1,51,250
Bank A/c

2013 2013
Aug 7 To Cash 1,25,000 Aug By Plant & Machinery 41,500
27 By Balance c/d 83,500
Aug
1,25,000 31 1,25,000
Sales A/c

2013 2013
Aug 31 To Balance c/d 1,62,500 Aug By Cash A/c 1,00,000
10 By Prateek 62,500
Aug
1,62,500 25 1,62,500
Plant & Machinery A/c
24 | P a g e
2013 2013
Aug 31 To Bank A/c 41,500 Aug By Balance c/d 41,500
31
41,500 41,500
Discount A/c

2013 2013
Aug 30 To Balance c/d 500 Aug By Jaya 500
31
500 500
Cash Book
Types of Cash Book-
1) Single Column Cash Book

2) Double Column Cash Book (Cash Book with Discount Column)
3) Three Column Cash Book ( Cash Book with Bank and Discount Column)
i) Contra Entries- Means entries that are made on both sides of cash book. These are not posted in
ledger. The letter ‘C’ is written in the L.F. column.
ii) Cheques Received and deposited into Bank on same day. Bank is and debtor is creditor.
iii) Cheques Received and deposited on different dates.
Cheque in hand A/c Dr.
To Debtor
OR
(a) When cheque is received- Cash A/c Dr (b) When cheque is deposited - Bank A/c Dr
To Debtor A/c To Cash A/c
iv) Cheque Received, Endorsed in Favour of a Creditor

When cheque is received- Cash A/c Dr (b) When cheque is deposited - Creditor A/c Dr
To Debtor A/c To Cash A/c
v) Cheque deposited into Bank Dishonoured- Debtor A/c Dr

Bank A/c
Dr Cr
Dat Particula L.F Discou Cas Ban Dat Particula L.F Discoun Cas Ban
e rs . nt h k e rs . t h k
Allowe Rs. Rs. Receive Rs. Rs.
d d
25 | P a g e
Rs. Rs.
Petty Cash Book
Petty Cash Book is used for the purposes of recording the payment of petty cash expenses.
Two systems- Ordinary System, Imprest System
Receipts Payments
Dat Particul Cas Tot Dat Particul Vouch Postag Carta Printing Mis Tot
e ars h al e ars er e/ ge & c al
Boo No. telegra Station
k m ery
5. Record the following in the appropriate book of original entry
2013 Amt (Rs.)

Jan 1 Cash in hand 12,400
Jan 1 Bank Overdraft 1,400
Jan 3 Deposited into bank 3,000
Jan 5 Received cheque from Sharma 5,400
Jan 6 Deposited Sharma’s cheque into bank
Jan 31 Bank charges 65
Dr Three column cash book Cr
Date Particulars L. Dis Cash Bank Date Particulars L.F. Discoun Cash Bank
F. co Rs. Rs. t Rs. Rs.
unt Receive
All d
ow Rs.
ed
Rs.
2013 201
Jan To Balance 12,400 - 3 By Balance
b/d
1 To Cash A/c -- 3000 Jan b/d -- 1400
Jan To cheque in -- 5400 1 By Bank C 3000 --
hand A/c
26 | P a g e
3 (Sharma) A/c
Jan To Balance Jan C -- 65
6 b/d 3 By Bank
Charges 9400 6935
Jan By Balance
Feb 1 12,400 8,40 31 c/d 12,40 8,40
To Balance
0 0 0
c/d
9400 Jan
6935 31
Feb 1
SUBSIDIARY BOOKS
1. Purchase Book or Purchase Journal – Records all credit purchases of goods. Cash purchases and
other purchase are not recorded in purchase journal or book. This book records net trade discount/
quantity discount.
6. Record the following in the appropriate book of original entry

Aug 04 Purchased from M/s Neema Electronics (Invoice no.3250). 20 mini size TV @Rs.2,000
per piece, 15 tape recorders@ Rs.12,500 per piece. Trade discount @20%.
Aug 10 Bought from M/s Pawan Electronics(Invoice no.8260). 10 video cassettes @ Rs.150 per
piece, 20 tape recorders @1,650 per piece. Trade discount@ 10%
Aug 18 Purchased from M/s Northern Electronics (Invoice no.4256). 15 northern stereos
@Rs.4000 per piece, 20 northern colour TV @Rs.14,500 per piece. Trade discount
@12.5%.
Soln: Purchase Journal
Date Particulars Invoice L.F Details Total

No. Rs. Amt Rs.
2010
Aug 04 Neema Electronics; 3250
20 Mini size TV@Rs.2000 per piece 40000
15 Tape Recorders @Rs.12,500 per piece 1,87,500
2,27,500
(-) Trade discount @20% 45,500 1,82,000
Aug 10 Pawan Electronics; 8260

10 Video Cassettes@Rs.150 per piece 1500
20 Tape recorders @Rs.1,650 per piece 33000
34500
(-)Trade discount @10% 3450 31,050
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Aug 18 Northern Electronics 4256
15 Northern Stereos @Rs.4000 per piece 60,000
20 Northern Colour TV @Rs.14,500 per piece 2,90,000
3,50,000
(-)Trade discount @12.5% 43,750 3,06,250
Aug 31 Purchases A/c Dr 5,19,300
2. Sales Book or Sales Journal
Records all credit sales of goods. Does not record the cash sales of goods or any other asset. Also
known as day book.
7 .Record the following in the appropriate book of original entry of M/s Koina supplier who sold on
credit;
(i) Two water purifiers @Rs.2,100 each and five buckets @Rs.130 each to M/s Raman Traders
(Invoice no. 178 dated 6th April 2010)
(ii) Five road side containers @Rs. 4,200 each to M/s Nutan enterprises (Invoice no.180 dated
9th April 2010)
(iii) 100 big buckets @Rs.850 each to M/s Raman traders (Invoice no.209, dated 28th April 2010).
The above stated transactions will be entered in a sales journal as follows;
Sales Journal
Date Particulars Invoice L. Details Total

No. F Rs. Amt Rs.
2010
Apr 06 Raman Traders 178
2 Water Purifiers @ Rs.2100 each 4200
5 Buckets @Rs.130 each 650 4850
(-) Trade discount @20%
Apr 09 Nutan Enterprises

5 Road Side Containers@Rs.4200 180 21,000
Apr 28 Raman Traders

100 Big Buckets @Rs.850 209 85000
Apr 30 Sales A/c Cr 1,10,850
3. Purchase Return or Return Outwards Book
28 | P a g e
Records purchase return of goods. It does not record the returns of goods purchased on cash.
Entries are made on the basis of debit notes issued to the suppliers and credit notes received from the
suppliers.
4. Sales Return or Return Inwards Book
Records sales return of goods. It does not record the returns of goods sold on cash basis. Entries
are made on the basis of credit notes issued to the customers and debit notes issued by the customers.
5. Journal Proper
A book maintained to record transactions which do not find a place in special journals
(i.e. subsidiary books)
Following transactions are recorded:
a) Opening Entries
b) Closing Entries
c) Adjustment entries
d) Rectification entries
e) Transfer entries
f) Other entries.
Trial Balance
29 | P a g e
Trial balance is a statement, prepared with the debit and credit balances of leger accounts to test the
arithmetical accuracy of the books.
It shows the final position of all accounts and helps the preparation of financial statements. It is not an
account. It is prepared for a particular period and all accounts are considered while preparing it.
Methods of preparing:
1) Totals Method 2) Balance method 3) Total cum Balance method
Balance method is most commonly used. Trial balance is prepared by showing the balances of all ledger
accounts.
8. The following trial balance has been prepared by an inexperienced accountant. Redraft it in the
correct form:
Name of Accounts LF Debit Balance Rs. Credit Balance Rs.

Cash in hand 4000
Machinery 25000
Purchases 66000
Sundry debtors 24000
Carriage inwards 2000
Carriage outward 1000
Wages 18000
Rent & Taxes 5000
Sundry Creditors 15500
Discount allowed 1000
Returns outwards 2500
Returns inwards 10000
Capital 30000
Drawings 6000
Bank Loan 10000
Interest on Loan 1500
Opening Stock 26000
Sales 130000
Discount Received 1500
Total 1,89,500 1,89,500
Solution:
30 | P a g e
Name of Accounts LF Debit Balance Rs. Credit Balance Rs.
Cash in hand 4000

Machinery 25000
Purchases 66000
Sundry debtors 24000
Carriage inwards 2000
Carriage outward 1000
Wages 18000
Rent & Taxes 5000
Sundry Creditors 15500
Discount allowed 1000
Returns outwards 2500
Returns inwards 10000
Capital 30000
Drawings 6000
Bank Loan 10000
Interest on Loan 1500
Opening Stock 26000
Sales 130000
Discount Received 1500
Total 1,89,500 1,89,500
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Preparation of Bank Reconciliation Statement, Ledger and Trial Balance
Content mapping:
Bank reconciliation statement- concept, calculating bank balance at an
accounting date: need and preparation. Corrected cash book balance.
Ledger - format, posting from journal, cash book and other special purpose
books, balancing of accounts.
Trial balance: objectives and preparation {Scope: Trial balance with balance
method only)
____________________________________
Bank Reconciliation Statement

Bank Reconciliation Statement is a statement, which is prepared mainly to reconcile the difference
between the bank balance as shown by the cash book and bank pass book.
Reasons of Difference between Cash Book and Pass Book Balances:-
32 | P a g e
A. Difference due to timing-
1. Cheques issued by the Bank but not yet presented for payment.
2. Cheques paid/ deposited into the bank but not yet collected
B. Transactions Recorded by the Bank
1. Direct Debits made by the Bank on behalf of the customer.
2. Amounts Directly deposited in the bank account by the customer.
3. Interest & Dividend collected by the bank.
4. Direct payments made by the bank on behalf of the customers.
5. Interest credited by the bank but not recorded in the cash book.
6. Cheque deposited/ bills discounted dishonoured.
C. Differences Caused by Errors
1. Errors committed I recording transactions by the firm
2. Errors committed in recording transactions by the bank.
Bank Reconciliation Statement
Particulars Plus Rs. Minus Rs.

Balance as per Cash/Pass Book XXX
Items to be added-
i) All the cheques issued but not yet presented for payment, amounts directly deposited in
the bank account.
ii) All the credits given by bank such as interest on dividends collected, etc. and direct
deposits in the bank are added.
Items to be deducted-
i) The cheques deposited but not yet collected.

ii) All the items of charges such as interest on overdraft, payment by bank on standing
instructions and debited by the bank in the pass book but not entered in cash book, bills
and cheques dishonoured etc.
iii) Adjustment for errors are made according to the principles of rectification of errors.
iv) The net balance shown by the statement should be same as shown by the pass book.
1. Prepare a bank reconciliation statement from the following particulars on 31st March 2013:
Amt (Rs.)
i) Cheques issued but not presented for payment 34,500
ii) Cheques paid into bank but not yet collected 7,500
iii) Interest credited by the bank but not entered in cash book 1,650
iv) Bank Charges debited in the pass book but not entered in the cash book 105
v) Credit balance as shown by pass book 1,06,590
vi) Debit balance as shown by the cash book 78,045
Ans: Bank Reconciliation Statement

33 | P a g e
Balance as per Cash/Pass Book 78045
Add:- Cheques issued but not presented for payment 34500
Interest credited in the pass book 1650
Less: Cheques paid to the bank but not yet cleared 7500
Bank charges debited in pass book 105
Favorable balance as per Pass Book 106590
1,14195 1,14,195
2. On 31st Dec 2013, the cash book of Rohan showed an overdraft of Rs.5,600. From the following
particulars make out a bank reconciliation statement
i) Cheques drawn but not cashed before 31st December 2013 amounted to Rs.3946.
ii) Cheques paid into bank but not credited before 31st dec 2013 amounted to Rs.4891.
iii) A bill receivable for Rs.520 previously discounted with the bank had been dishonoured
and bank charges debited in the pass book amounted to Rs.55.
iv) Debit is made in the pass book for Rs.120 on account of interest on overdraft.
v) The bank has collected interest on investment and credited Rs.760 in the pass book.
Ans: Bank Reconciliation Statement

As on 31st December 2013
Overdraft per Cash/Pass Book 5600
Add:- Cheques drawn but not cashed 3946
Interest on investment collected & credited 760
bank 4891
Less: Cheques paid to the bank but not credited till
31st Dec 520
Bills receivable dishonoured previously
discounted 55
with the bank 120
Bank charges debited in pass book 6480
Interest on overdraft debited as per Pass Book
Overdraft balance as per Pass Book
11,186 11,186
34 | P a g e
Depreciation, Provisions and Reserves
Content mapping
Depreciation: concept need and factors affecting depreciation; methods of computation of

depreciation: straight line method, written down value method (excluding change in
method)
 accounting treatment of depreciation: by charging to asset account, by creating provision
for depreciation/ accumulated depreciation account, treatment of disposal of asset.
 Provisions and reserves: concept, objectives and difference between provisions and
reserves; types of reserves- revenue reserve, capital reserve, general reserve and specific
reserves.
_________________________________________________________________________
“Depreciation is gradual and permanent decrease in the value of an asset from any cause.” – Carter
Features of Depreciation:
(1) It is decline in the book value of fixed assets.
(2) It is a continuing process.
(3) It includes loss of value due to efflux ion of time, usage or obsolescence.
(4) It is an expired cost and must be deducted before calculating taxable profit.
Causes of Depreciation:
35 | P a g e
(1) Wear and tear due to use or passage of time.
(2) Obsolescence.
(3) Expiration of legal rights.
(4) Abnormal factors.
Need or Objectives of Depreciation:

(1) To ascertain the true profit or loss.
(2) For consideration of tax.
(3) To ascertain the true and fair financial position.
(4) Compliance with legal provisions.
Factors or Basis for providing Depreciation:

(1) Cost of asset.
(2) Estimated net residual value.
(3) Depreciable cost.
(4) Estimated useful life.
Methods of calculating Depreciation:
(1) Straight line method (Fixed installment method):
This method is based on the assumption of equal usage of time over asset’s entire useful life. According to this
method a fixed and equal amount is charged as depreciation in every accounting period during the life time of an
asset. Depreciation amount can be calculated by the following formula:
Depreciation = cost of asset – estimated net residual value

No. of years of expected life
(2) Written Down value method(Diminishing balance method):

In this method depreciation is charged on the book value of the asset. The amount of depreciation
reduces year after year.
Method of recording depreciation:
(1) When depreciation is charged to asset account:

(2) In this method depreciation is deducted from the asset value and charged (debited) to profit and
loss account.
Journal entries for recording under this method are as follows.
(a) For purchase of an asset
Asset A/c Dr.
To Bank/ vendor A/C
(With the cost of an asset including installation expenses, freight etc.)
(b) Following entries are recorded at the end of each year
(i) Depreciation A/c Dr.
To Asset A/c
(With an amount of depreciation)
(ii) Profit and loss A/c Dr.
To Depreciation A/c
(With an amount of depreciation)
(3) When provision for depreciation/Accumulated depreciation account is maintained:
Following journal entries are recorded at the end of each year.
(a) Depreciation A/c Dr
36 | P a g e
To provision for depreciation A/c
Basis Straight line method Written down value method
(With the
amount of
Charging On original cost of an asset On book value of an asset
depreciation
Amount of Fixed year after year Declines year after year
depreciation
Recognition by Not recognized Recognized
income tax law
Calculation Easy to calculate Difficult to calculate
depreciation)
(b) Profit and loss A/c Dr
To depreciation A/c
(With the amount of depreciation)
Difference between Straight line method and written down value method:
Q1. Soham purchased a machinery for Rs. 1,00,000 on 1st July, 2009. Another machine was purchased
for Rs. 50,000 on 1st January, 2011. Depreciation is charged at 10% p.a. by straight line method.
Accounts are closed on 31st December each year. Pass the necessary Journal entries, show machinery
A/c and Depreciation A/c for the year 2009, 2010, 2011.
(a) When Provision for depreciation a/c is not maintained.
(b) When Provision for depreciation a/c is maintained.
37 | P a g e
Solution:
(a) When Provision for depreciation a/c is not maintained.
In the Books of Soham

Journal
Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)
2009
July 1 Machinery A/c Dr. 1,00,000
To Bank A/c 1,00,000
(Being machinery purchased for Rs. 1,00,000)
Dec 31 5,000
Depreciation A/c Dr. 5,000
To Machinery A/c
Dec 31 (Being depreciation charged to machinery A/c) 5,000
5,000
Profit and Loss A/c Dr
To Depreciation A/c
(Being depreciation amount transferred to Profit and
Loss A/c)
2010 Depreciation A/c Dr. 10,000

Dec 31 To Machinery A/c
(Being depreciation charged to machinery A/c) 10,000
Dec 31 Profit and Loss A/c Dr 10,000

To Depreciation A/c 10,000
(Being depreciation amount transferred to Profit and 50,000
Loss A/c) 50,000
15,000
Machinery A/c Dr. 15,000
2011 To Bank A/c
Jan 1 (Being machinery purchased ) 15,000
15,000
Depreciation A/c Dr.
To Machinery A/c
Dec 31
(Being depreciation charged to machinery A/c)

Dec 31 To Depreciation A/c
Loss A/c)
Dr. Machinery A/c Cr.
Date Particulars J.F. Rs. Date Particulars J.F Rs.

38 | P a g e
.
2009 2009
Jul 1 To Bank A/c (M-I) 1,00,000 Dec 31 By Depreciation A/c 5,000
Dec 31 By Balance c/d 95,000
2010 1,00,000 2010 1,00,000

Jan 1 To Balance b/d Dec 31 By Depreciation A/c
Dec 31 By Balance c/d
95,000 10,000
85,000
2011 2011
Jan 1 To Balance b/d 95,000 Dec 31 By Depreciation A/c 95,000
Jan 1 To Bank A/c( M-II) (M-I – 10,000 + M-II
Dec 31 – 5,000)
85,000 By balance c/d
2012 50,000 15,000
Jan 1 To balance b/d
1,20,000
1,35,000 1,35,000
1,20,000
Dr. Depreciation A/c Cr.
Date Particulars J.F Rs. Date Particulars J.F Rs.

. .
2009 2009
Dec 31 To Machinery A/c 5,000 Dec 31 By Profit and loss A/c 5,000
5,000 5,000
2010
2010 Dec 31
Jan 1 To Machinery A/c 10,000 By Profit and loss A/c 10,000
10,000 10,000
2011 2011
Jan 1 To Machinery A/c Dec 31 By Profit and loss A/c
15,000 15,000
15,000 15,000
(b) When Provision for depreciation A/c is maintained.

In the Books of Soham
Journal
39 | P a g e
Date Particulars L.F. Dr. (Rs.) Cr.(Rs.)
2009
July 1 Machinery A/c Dr. 1,00,000
To Bank A/c 1,00,000
(Being machinery purchased for Rs. 1,00,000)
Dec 31 5,000
Depreciation A/c Dr. 5,000
To Provision for Depreciation A/c
Dec 31 (Being depreciation charged to machinery A/c) 5,000
5,000
To Depreciation A/c
2010
Dec 31 10,000
Loss A/c)
10,000
Dec 31 To Machinery A/c 10,000
(Being depreciation charged to machinery A/c) 10,000

2011 To Depreciation A/c
Jan 1 (Being depreciation amount transferred to Profit and 50,000
Loss A/c) 50,000
Dec 31 15,000
Machinery A/c Dr. 15,000
To Bank A/c
Dec 31 (Being machinery purchased for Rs. 1,00,000) 15,000
15,000
To Provision for Depreciation A/c
(Being depreciation charged to machinery A/c)

To Depreciation A/c
Loss A/c)

.
2009 2009
Jul 1 To Bank A/c (M-I) 1,00,000 Dec 31 By Balance c/d 1,00,000
1,00,000 1,00,000
40 | P a g e
2010 2010
Jan 1 To Balance b/d Dec 31 By Balance c/d
1,00,000 2011 1,00,000

2011 Dec 31 By balance c/d
1,00,000 1,00,000
Jan 1 To Balance b/d
Jan 1 To Bank A/c( M-II)
1,00,000 1,50,000
50,000
2012
1,50,000 1,50,000
1,50,000
Dr. Provision for Depreciation A/c Cr.

. .
2009 2009
Dec 31 To Balance c/d 5,000 Dec 31 By Depreciation A/c 5,000
5,000 2010 5,000

2010 Jan 1 By Balance b/d
Dec 31 To Balance c/d Dec 31 By Depreciation A/c
15,000 5,000
10,000
15,000 2011 15,000

2011 Jan 1 By balance b/d
Jan 1 To Balance c/d Dec 31 By Depreciation A/c
30,000 (M-I Rs. 10,000 + M- 15,000
II Rs. 5,000)
15,000
30,000 2012 30,000

Jan 1 By balance b/d
30,000
Dr. Depreciation A/c Cr.
41 | P a g e
. .
2009 2009
Dec 31 To Provision for Dec 31 By Profit and loss A/c 5,000
Depreciation A/c 5,000
2010 5,000 2010 5,000

Dec 31 To Provision for Dec 31 By Profit and loss A/c
Depreciation A/c
10,00 10,000
0
2011 2011
Dec 31 To Provision for 10,00 Dec 31 By Profit and loss A/c 10,000
Depreciation A/c 0
15,00 15,000
0
15,00 15,000
0
Sale of an Asset
(1) On the date of sale of an Asset
Cash / Bank A/c Dr.
To Asset A/c
(Being an Asset sold)
(2) If case of profit
Asset A/c Dr.
To Profit and Loss A/c
(Being profit on sale of an asset transferred to profit and Loss A/c)
(3) In case of loss
Profit and Loss A/c Dr.
To Asset A/c
(Being loss on sale of an asset transferred to profit and Loss A/c)
Q2. Rohan Ltd. purchased a Machinery on 1st May, 2009 for Rs. 60,000. On 1st July, 2010 it
purchased another Machine for Rs. 20,000. On 31 st March, 2011 it sold off the first machine
purchased in 2009 for Rs. 39,000. Depreciation is provided at 20% on the original cost each
year. Accounts are closed each year on 31 st December. Show the Machinery account from 2009
to 2011.

. .
2009 2009
42 | P a g e
May 1 To Bank A/c (M-I) 60,000 Dec 31 By Depreciation A/c 8,000
2010 60,000 2010 60,000

Jul 1 To Bank A/c(M-II) (M-I Rs. 12,000 +
52,000
Dec 31 M-II Rs. 2,000)
20,000 14,000
By Balance c/d
(M-I Rs. 40,000 +
58,000
M-II Rs. 18,000)
2011 72,000 2011 72,000

Jan 1 To Balance b/d Mar 31 By Bank A/c (Sale)
Mar 31 To Bank A/c Mar 31 By Depreciation
(M-III) 58,000 A/c(M-I) 39,000
Mar 31 To Profit and Loss 50,000 Dec 31 By Depreciation A/c 3,000
A/c (profit on sale) (M-II Rs. 4,000 +
2,000 M-III Rs. 7,500) 11,50
0
(M-II Rs. 14,000 +
M-III Rs. 42,500) 56,500
2012
Jan 1 To balance b/d 1,10,000 1,10,000
56,500
Working notes:
Calculation of profit or loss on sale of machinery:
Book value as on 1st January, 2011 Rs. 40,000
Less: Depreciation (60,000*20/100*3/12) Rs. 3,000
Book value as on 31st March, 2011 Rs. 37,000
Less: sale of machinery Rs. 39,000
Profit on sale of machine Rs. 2,000
Q3.Suyashi Ltd. purchased on 1st January, 2009 a machinery for Rs. 36,000 and spent Rs. 4,000 on its
installation. On 1st July, 2009 another machine purchased for Rs. 20,000. On 1st July, 2011, machine
bought on 1st January, 2009 was sold for Rs. 12,000 and a new machine purchased for Rs. 64,000 on the
same date. Depreciation is provided on 31st December @ 10% p.a. on the written down value method.
Prepare machinery A/c from 2009 to 2011.
Solution:
Dr. Machinery A/c Cr

. .
43 | P a g e
2009 2009
Jan 1 To Bank A/c (M-I) Dec 31 By Depreciation A/c
(36,000 + 4,000) 40,000 (M-I Rs. 4,000 + M- 5,000
July 1 To Bank A/c 20,000 Dec 31 II Rs. 1,000)
By Balance c/d 55,000
(M-I Rs. 36,000 +
M-II Rs. 19,000)
2010 60,000 2010 60,000

(M-I Rs. 3,600 + M-
55,000
II Rs. 1,900)
5,500
(M-I Rs. 32,400 +
49,500
M-II Rs. 17,100)
2011 55,000 2011 55,000

Jan 1 To Balance b/d July 1 By Bank A/c (Sale)
July 1 To Bank A/c July 1 By Depreciation
(M-III) 49,500 A/c(M-I) 12,000
64,000 July 1 by Profit and Loss 1,620
A/c (profit on sale)
Dec 31 By Depreciation A/c 18,780
(M-II Rs. 1,710 +
Dec 31 M-III Rs. 3,200) 4,910
By Balance c/d
(M-II Rs. 15,390 + 76,190
2012 M-III Rs. 60,800)
1,10,000 1,10,000
76,190
Working notes:
Calculation of Profit or loss on machine sold:
Book value of machine sold as on 31st December, 2010 Rs. 32,400
Less: Depreciation (32400*10/100*6/12) Rs. 1,620
Book value of machine sold as on 1st July, 2011 Rs. 30,780
Less: sale of machine Rs. 12,000
Loss on sale of machine Rs. 18,780
Disposal of an Asset:
Under this method a new account is opened named ‘Asset Disposal A/c’ at the time of sale of an asset.
Following journal entries required for preparation of Asset Disposal A/c
(a) When provision for depreciation A/c is maintained.

(1) Asset disposal A/c Dr.
44 | P a g e
To Asset A/c
(With the original cost of asset being sold)
(2) Provision for depreciation A/c Dr.
To Asset disposal A/c
(Transfer of accumulated depreciation)
(3) Bank A/c Dr.
(With the net sales proceeds)
(4) Asset disposal A/c Dr.
To Profit and Loss A/c
(For profit on sale of the asset)
(5) Profit and Loss A/c Dr.

(For loss on sale of an asset)
(b) When provision for depreciation A/c is not maintained
In this case replace entry no. 2 from above journal entries by passing following journal entry.
Q4. On 1st April, 2008, Jasmeet Ltd. purchased a machine for Rs. 12,00,000. On 1st October, 2010, a part
of machine purchased on 1st April, 2008 for Rs. 80,000 was sold for Rs. 45,000 and a new machine was
purchased for Rs. 1,58,000 on the same date. Company provides depreciation @10% p.a. on written
down value method. Prepare necessary ledger accounts
(a) When provision for depreciation A/c is not maintained.
(b) When provision for depreciation A/c is maintained.
Solution.
(a) When provision for depreciation A/c is not maintained.

. .
2008 2009
Apr 1 To Bank A/c 12,00,00 Mar 31 By Depreciation A/c 1,20,000
0 Mar 31 By Balance c/d 10,80,000
12,00,00 12,00,000
2009 0 2010
Apr 1 To Balance b/d Mar 31 By Depreciation A/c
Mar 31 By Balance c/d
10,80,00 1,08,000
2010 0 9,72,000
Apr 1 10,80,00 2010 10,80,000
Oct 1 To Balance b/d 0 Oct 1 By Bank A/c (Sale)
To Bank A/c Oct 1 By Profit and Loss
45 | P a g e
Oct 1 A/c (Loss on sale)
2011 By Depreciation A/c
9,72,000 Mar 31 45,000
1,58,000 Mar 31 By Depreciation A/c 16,560
By Balance c/d
3,240
2011 To balance b/d
Apr 1 98,620
9,66,580
11,30,00 11,30,000
0
9,66,580
(b) When provision for depreciation A/c is maintained.

.
2008 2009 12,00,

Apr 1 To Bank A/c 12,00,00 Mar 31 By Balance c/d 000
0
2009 12,00,00 2010 12,00,000

Apr 1 To Balance b/d 0 Mar 31 By Balance c/d
12,00,00 12,00,000
0
2010 2010
Apr 1 To Balance b/d 12,00,00 Oct 1 By Machine Disposal 12,00,000
Oct 1 To Bank A/c 0 A/c
2011
Mar 31 By Balance c/d
12,00,00 80,000
2011
0
Apr 1 To balance b/d
12,78,00
1,58,000 0
13,58,00 13,58,000
0
12,78,00
0
46 | P a g e
Dr. Provision for Depreciation A/c Cr.

. .
2009 2009
Mar 31 To Balance c/d 1,20,000 Mar 31 By Depreciation A/c 1,20,000
2010 1,20,000 2009 1,20,000

Mar 31 To Balance c/d Apr 1 By Balance b/d
2010
2,28,000 1,20,000
Mar 31 By Depreciation A/c
1,08,000
2010 2011
Oct 1 To Machinery 2,28,000 Apr 1 By Balance b/d 2,28,000
disposal A/c (8,000 Oct 1 By Depreciation A/c
+ 7,200 + 3,240) 2011
2011 Mar 31 By Depreciation A/c 2,28,000
Mar 31 To Balance c/d 18,440 3,240
98,620
3,11,420 2011
Apr 1
3,29,860 By Balance b/d 3,29,860
3,11,420
Dr. Machinery Disposal A/c Cr.

. .
2010 2010
Oct 1 To Machinery A/c 80,000 Oct 1 By Provision for 18,440
Dep. A/c 4
Oct 1 By Bank a/c (sale) 5,000
Oct 1 By Profit and loss 16,
A/c (Loss on sale) 560
80,000 80,000
Working notes:
Calculation of profit or loss on machine sold
Cost as on 1st April, 2008 Rs. 80, 000
47 | P a g e
Less: dep. For 2008-09 Rs.8,000
st
Book value as on 1 April, 2009 Rs. 72,000
Less: dep. For 2009-10 Rs.7,200
st
Book value as on 1 April, 2010 Rs. 64,800
Less: dep. For 2010 (64,800*10/100*6/12) Rs.3,240
(April to October)
Book value as on 1st October, 2010 Rs.61,560
Less: sale of machine Rs.45,000
Loss on sale of machine Rs.16,560
Calculation of depreciation on remaining machine

Old machine (9,72,000 – 64,800 = 9,07,200*10/100) Rs. 90,720
New machine (1,58,000*10/100*6/12) Rs. 7,900 (October to March)
Rs. 98,620
Q5. On January 1, 2008, a firm bought a machine for RS.90,000 and spend RS.6,000 on its installation and
RS.4,000 on its carriage. It is decided to charge depreciation @ 10% on straight line method. Books are closed on
December 31, each year. Show Machinery Account for the year 2008 to 2010
Solution
Dr. Machinery Account Cr.
Date Particulars J.F ? Date Particulars J.F ?
2008 2008
Jan. 1 To Bank A/c 90,000 Dec 31 By Depreciation A/c 10,000
Jan. 1 To Cash a/c 6,000 Dec 31 By Balance c/d 90,000
Jan. 1 To Cash a/c 4,000
1,00,000 1,00,000
2009 2009
Jan. 1 To Balance b/d 90,000 Dec 31 By Depreciation A/c 10,000
90,000 90,000
2010 2010
Jan 1 To Balance b/d 80,000 Dec 31 By Depreciation A/c 10,000
80,000 80,000
Provision for Depreciation is shown on the liabilities side of Balance Sheet.
Q 9.Krishna lifestyle limited purchased a machine for RS. 1,25,000 including installation cost on January 1, 2008.
On October 1, 2010, machine was sold for RS. 50,000. Depreciation was provided @ 20% p.a. on Fixed
Installment method and accounts are closed on December 31 each year. Show the Machinery Account and
Provision for Depreciation Account for the year 2008 to 2010.
48 | P a g e
Solution :
Machinery Account
Date Particulars J.F Date Particulars J.F

2008 2008
Jan. 1 To Bank A/c 1,25,000 Dec. 31 By Balance c/d 1,25,000
2009 To Balance b/d 1,25,000 2009 By Balance c/d 1,25,000

Jan. 1 Dec. 31
2010 To Balance b/d 1,25,000 2010
By Provision for 68,750
Jan. 1 Oct. 1
Dep. A/c
By Bank A/c 50,000
Oct. 1
By Profit & Loss A/c 6,250
Oct. 1
1,25,000 1,25,000
Provision for depreciation a/c

2008 2008
Dec.31 To Balance c/d 25,000 Dec.31 By Depreciation A/c 25,000

2009 2009
Dec.31 To Balance c/d 50,000 Jan. 1 By Balance b/d 25,000
Dec.31 By Depreciation 25,000
A/c
50,000 50,000
2010 2010
Oct. 1 To Machinery 68,750 Jan. 1 By Balance b/d 50,000
A/c Oct. 1 By Depreciation A/c 18,750
68,750 68,750
Important Point : Total Depreciation is charged on Machine : 25,000+25,000+18,750 = 68,750
Q 10. On the basis of information given in Q 9, show the Machinery Account and Provision for Depreciation is
provided @ 20% p.a. on written Down Value Method.
Solution :
Machinery Account

2008 2008
Jan. 1 To Bank A/c 1,25,000 Dec.31 By Balance c/d 1,25,000
2009 2009
To Balance b/d 1,25,000 By Balance c/d 1,25,000
Jan. 1 Dec. 31
49 | P a g e
2010 To Balance b/d 1,25,000 2010
Jan. 1 Dec. 31 By Provision 57,000
for Dep. A/c
Oct. 1 By Bank A/c 50,000
Oct. 1 By Profit & Loss 18,000
A/c
1,25,000 1,25,000
Provision for depreciation

2008 2008
To Balance c/d 25,000 By Depreciation A/c 25,000
Dec.31 Dec. 31
2009 2009 By Balance b/d 25,000
To Balance c/d 45,000
Dec.31 Jan. 1 By Depreciation A/c 20,000
Dec. 31
45,000 45,000
2010 57,000 2010
Oct. 01 To Machinery Jan. 1
A/c By Balance b/d 45,000
Important
Oct. 1 By Depreciation A/c 12,000
Point: Total
57,000 57,000
Depreciation is charged on Machine : 25000+20,000+12,000 = 57,000
50 | P a g e
Provisions and Reserves
Provisions
Provision is an amount set aside by charging (debited) it in the profit and loss account, to provide for
known liability the amount which can not be determined accurately because they are not yet incurred.
For example; Provision for Depreciation, Provision for Bad and doubtful debts etc.
Reserves
Reserves are the amount set aside out of profits. It is an appropriation of profits to strengthen the
financial position of the business. For example, General reserve, Capital reserve etc.
Types of Reserves
(a) General reserve – It is the amount set aside out of profits for no specific purpose. It is available
for strengthen the financial position or expansion of business.
(b) Specific reserve – This is created for specific purpose and can be utilized only for that purpose.
(c) Secret reserve – It is a reserve the existence or the amount of which is not disclosed in the
balance sheet. It is also known as hidden reserve.
Distinguish between Reserves and Provisions
Basis Reserves Provisions

Nature It is an appropriation of profit It is charge of profit
Purpose It is created to strengthen the It is created to meet known liability
financial position of business for which the amount is not
determined.
Effect on It reduces the taxable profit. It has no effect on taxable profit
taxable profit
Distribution of It can not be used for dividend It can be used for dividend
dividend distribution. distribution.
Difference between revenue reserve and capital reserve

Basis of Revenue reserve Capital reserve
difference
Source of creation These reserves created from revenue These reserves created from
profits capital profits
Usage These reserves can be used to give These reserves cannot be
dividend to shareholders used for giving dividend to
members.
Purpose These reserves are created for meeting It is used for writing off the
unforeseen losses capital losses.
51 | P a g e
ACCOUNTING FOR BILLS OF EXCHANGE
Content mapping
Bills of exchange and promissory note: definition, features, parties, specimen and
Distinction. Important terms : term of bill, due date, days of grace, date of maturity, discounting of bill,
endorsement of bill, bill sent for collection, dishonour of bill,
noting of bill , retirement and renewal of a bill.
Accounting treatment of bill transactions
__________________________________________________________________________________
A Bill of Exchange and Promissory Note both are legal Instruments which facilitate the credit
sale of goods by assuring the seller that the amount will be recovered after a certain period.
Both of these are legal instruments under the Negotiable Instruments Act, 1881.
BILL OF EXCHANGE DEFINITION
“A Bill of Exchange is an instrument in writing containing an unconditional

order signed by the maker, directly 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” Section 5 of the Negotiable Instrument Act, 1881.
Features of Bills of Exchange

{i} Bill of Exchange is a written order.
{ii} It is drawn and signed by the maker, i.e., drawer of the bill.
{iii} It is an unconditional order to a person, i.e., drawee , to pay the specified amount. the drawee
must accept it to make it a valuable document.
{iv} The specifies amount is payable to the person named in the bill or to his order or to the bearer.
{v} It specifies the date by which the amount should be paid.
{vi} It is accepted by the drawee.
Parties to a bill of exchange:

{i} Drawer: Drawer is the person who makes or writes the Bill of Exchange. He is a person who has
granted credit to the person on whom the Bill of Exchange is drawn.
{ii} Drawee: Drawee is the person on whom the Bill of Exchange is drawn, for his acceptance. He is a
person to whom credit has been granted by the drawer of the Bill of Exchange.
{iii} Payee: payee is the person named in the Bill of Exchange to whom the amount is to be paid. Payee
may be the drawee himself or a third person.
Types of Bills of Exchange:

{i} Trade Bill: A Bill of Exchange drawn and accepted for a trade transaction, is called Trade Bill.
{ii} Accommodation Bill: A Bill of Exchange drawn and accepted for mutual help, is called
Accommodation Bill.
Advantages of Bills of Exchange:
52 | P a g e
{i} Purchase and Sales of Goods on Credit:
Goods can be sold and purchased on credit without difficulty with the Bill of Exchange as it is an
unconditional promise to pay.
{ii} Discounting Facility:
Bills of Exchange can be discounted with a bank so that the enterprise allowing the credit can receive
the amount immediately without the debtor having to pay before time.
{iii} Easy to Recover the Amount:
If a Bill of Exchange is dishonoured, it is easier to recover the amount legally than in the case of an
ordinary debt.
{iv} Endorsement: A Bill of Exchange can be endorsed to other parties; thus it serves almost the
same purpose as cash.
{v} Certainty as to Payment: Date of payment being certain; the enterprise which has to pay and that
which has to receive the amount can thus plan cash management.
{vi} No Reminder to Debtor: The recovery of the dept is possible without having to reminder the
debtor.
{vii} Convenient Mean of Trade Remittance: Bill of Exchange is a convenient mean of making and
receiving payment as the amount is transacted through bank.
{viii} Valid Evidence : Bill of Exchange is a written acknowledgement of debt duly signed and stamped.
It is a legal document under the negotiable Instruments Act, 1881.
“Promissory Note”
“A Promissory Note is an instrument in writing(not being a bank note or currency note) containing an
unconditional undertaking signed by the maker to pay a certain sum of money only to or to order of a
certain person or to the bearer of the instrument”
Features of a Promissory Note;

{i} Promissory Note is an unconditional written undertaking to pay the specified amount.
{ii} It is drawn and signed by the maker, i.e., promisor.
{iii} It specifies the name of the payee, i.e., to whom payment is to be made.
{iv} Specified amount is payable to the specified person or to his order or to the bearer.
{v} Date of payment is specified.
Parties to a Promissory Note:
{i} Maker: Maker is the person who makes the promise to pay the amount. It is a person who has
availed the credit.
{ii} Payee: Payee is the person to whom payment is to be made. It is a person who has granted the
credit.
DISTINCTION BETWEEN BILL OF EXCHANGE AND PROMISSORY NOTE
Basis Bill of Exchange Promissory Note

1. Drawer Creditor is the Drawer. Debtor is the Drawer.
2. Order and Promises It is an order to pay. It is promise to pay.
3. Acceptance It needs acceptance by It does not need acceptance
53 | P a g e
drawee. by drawee.
4. Parties It has three parties namely It has two parties namely –
-Drawer, Drawee and payee. Promisor and Payee.
5. Liability Liability of the drawer arises Promisor has the primary
only if acceptor doesn’t pay. liability to pay.
6. Noting and Protesting In case of dishonour, it is In this case nothing is
better to get it noted for non- necessary.
payment
7. Copies In case of foreign bills, three Only one copy is prepared
copies are made but whether it is foreign or local.
otherwise only one copy is
prepared.
8. Stamp Bill payable on demand need It has to be stamped in any
not to be stamped but case.
otherwise stamps would be
necessary.
Important Terms
1. Term of a Bill: Period intervening between the date on which a bill is drawn and that on which it
becomes due is called Term of the bill. If a bill is drawn after sight, the term of the bill begins to run
from the date of “sighting”, i.e., when the bill accepted. When the bill is drawn ‘after date’, the term of
the bill begins to run from the date of drawing the bill.
2. Due Dates: Due dates is the date on which the payment of the bill is due for payment.
3. Days of Grace: Days of Grace are three extra days added to the period of bill. It is a custom to add
the days of grace.
4. Date of Maturity: The date which comes after adding three days to the due date of a bill, is called
Date of Maturity.
5. Bill at Sight or Demand: Bill at sight (or instrument payable demand) means the instruments in
which no time for payment is mentioned. A cheque is always payable on demand when no time for
payment is specified or it is expressed to be payable on demand.
6. Discounting of a Bill: A bill may be presented to a bank deducts its charges against it. It is known as
‘Discounting of a Bill’ The bank deducts its charges (Discounting Charge) from the bill amount and
disburses the balance amount.
7. Endorsement of Bill: Endorsement means transfer of Bill of Exchange or Promissory Note to
another person. The person receiving the Bill of Exchange or Promissory Note becomes authorized to
receive the payment. The person who transfer the Bill of Exchange or Promissory Note in favour of
other person is called endorser. The person to whom the Bill of Exchange or Promissory Note is
endorsed is called the endorsee.
8. Bill sent for Collection: A bill received may be retained till the date of maturity .but, it may be
deposited with the bank, with instructions that the bill be retained till maturity and realized on its due
date. It is known as ‘Bill Sent for Collection’.
9. Dishonour of a Bill: Dishonour means that the bill is not paid by the Drawee on its due date. It arises
when the acceptor refuses or is unable to pay the amount of the bill, i.e., Bill of Exchange, Promissory
Note or cheque, (say because of insolvency).
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10. Nothing of a bill: Bill when sent through a notary public and is dishonoured, Notary public makes a
noting of dishonour. It is known as ‘Noting of a Bill’.
11. Notary Public: Notary Public is an officer appointed by the Central or Sate Government to exercise
the power and functions relating to nothing and protesting of negotiable instruments for dishonour.
12. Noting Charges: Noting Charges is the fee paid to the Notary Public for noting and protesting the
Bill of Exchange of its dishonour.
14 Retirement of a Bill: When the Drawee pays the bill before its due dates, it is called Retirement of a
Bill. The holders allow him a rebate of certain amount calculated at a certain rate per cent per annum,
from the date of retirement to the date of maturity.
15. Renewal of a Bill: When the acceptor of a bill is not in a position to meet the bill on its due
date, he may, with the consent of the holder accept a fresh bill in place of the old bill (after cancelling
the old bill), it is called Renewal of a bill. The fresh bill may include interest for the extended period or
it may be paid separately, stamp duty and other incidental expenses incurred by the holder.
16. Holder: The Holder of a negotiable instrument, i.e., Bill of Exchange, Promissory Note or cheque, is
a person entitled in his own name to the possession thereof and to receive or recover the amount
due thereon from the parties.
* (HOTS) Questions
Q.1 Promissory Note requires the acceptance. Comment.
Ans. A Promissory Note does not require acceptance because it is a valuable instrument. A Bill
Receivable requires acceptance.
Q.2 A bill given to a creditor is called Bill Payable. Why?
Ans. A bill given to a creditor is called bill payable because the debtor commits to pay by the creditor
Q.3 A has drawn a bill no B. B accepts the same. Can B endorse the bill to C?
Ans. B cannot endorse the bill to C because he is a Drawee. Only A, the Drawer, can do so.
Q. 4 Do you think that a cancellation entry is not required when a bill is renewed?
Ans. When the bill is renewed, entries are passed for cancellation of the old bill and then for recording
the new bill.
Q.5 Cancelling an old bill and drawing a new bill is called Renewal of a Bill. Is this true or false?
Ans. It is true. When the acceptor of a bill fails to make the payment on due date, a new bill may be
drawn on him after cancellation of the old bill. It is known as Renewal of a Bill.
Q.6 At the time of renewal of a bill, the interest Account is debited in the books of the Drawee. Is
this true or false?
Ans. Yes, at the time of renewal of a bill, the interest Account is debited in the books of a drawee
because it represents an expenses for the Drawee.
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Q.7 A bill of Rs. 5,000 is discounted with the banker for Rs. 4,750. The bill is dishonoured at
maturity. The drawee pays 60% of his acceptance. What is the amount of Bad Debts?
Ans. Bad Debts = rs.2,000, i.e., 40% of rs.5,000
Q.8 Refusal by the acceptor to pay the bill on the maturity date is called the Retirement of the Bill.
Comment.
Ans. Refusal by the acceptor to make payment of the bill on the maturity date is not Retirement of the
Bill but is Dishonour of the Bill.
Q.9 Find the due date of a Bill of Exchange dated 9th December,2007, payable after 45 days.
Ans. 25th January 2008, because 26th January, 2008 is a public holiday.
Reason: If the date falls on a day which is a public holiday or a gazetted holiday, the maturity date of
the bill shall be preceding business day.
Q.9 What is mean by Renewal of a Bill?
Ans. Renewal of Bill of Exchange means substituting the Old Bill with New Bill.
* SHORT ANSWER TYPE QUESTIONS
Q.1 Define the Bill of Exchange.
Ans. Bill of Exchange an instrument in writing containing an unconditional order signed by the maker,
directly 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.
Q.2 Define Promissory Note.
Ans. A Promissory Note is an instrument in writing (not being a bank note or a currency note)
containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or
to the order of a certain person or to the bearer of the instrument.
Q.3 Give one special Feature of promissory note.
Ans. No acceptance is required for promissory note.
Q.4 Distinguish between a Bill of Exchange and a Promissory Note. (Two Points)
Ans.(i) In the case of Bill of Exchange, creditor is the drawer while in the case of Promissory Note
debtor is the drawer.
(ii) Bill of Exchange contains an order to pay while Promissory Note contains a promise to pay.
Q.5 Who are the Parties of Bill of Exchange?
Ans. Bill of Exchange has three parties namely Drawer, Drawee and Payee.
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Q.6 Who are the Parties to a Promissory Note?
Ans. Promissory Note has two parties namely the Promissory and Payee
Q.7 What are Trade Bills?
Ans. When the Bills of Exchange are drawn and accepted for a genuine trade transaction, these are
called Trade bills.
Q.8 Explain the Discounting a Bill of Exchange.
Ans. Discounting a Bill of Exchange means taking the amount from bank against the bill before its due
date. The bank charges interest for the remaining period of the bill.
Q.9 What are the different options available to the receiver of a Bill of Exchange?
Ans. (i) Retain the Bill till maturity,

(ii) Discounting the Bill with the Bank
(iii) Endorse the Bill in favour of a creditor, and
(iv) Send the Bill for Collection.
Q.10 What is meant by Retiring a Bill under Rebates?
Ans. Retiring a Bill means that the Drawee pays the Bill before its Due Date.
OBJECTIVE TYPE QUESTION (MCQ)

1. Choose the correct alternative:
(i) A Bill of Exchange has …….. Parties
(a) two (b) three (c) four.
(ii) The party which is ordered to pay the amount is known as……….
(a) drawer. (b) payee. (c) drawee.
(iii) Three days are added for ascertaining the date of maturity. These are known as days of…….
(a) maturity. (b) grace. (c) payment.
(iv) A Bill of Exchange cannot be………
(a) endorsed. (b) crossed. (c) accepted.
(v) A Bill of Exchange is Renewed generally at the request of the……..
(a) drawer. (b) bank. (c) drawee.
(vi) A Promissory Note is made by the……
(a) seller. (b) purchaser. (c) endorsee
(vii) if Ram’s acceptance which was endorsed by us in favour of Saleem is dishonoured, then the
amount will be debited in our books to
(a) Saleem. (b) Ram. (c) Bills Receivable Account.
st
(viii) A 4 months bill drawn on 1 January, 2012 will mature for payment on
(a) 3rd may, 2012. (b) 4th may, 2012. (c) 5th may, 2012.
(ix) The Bills Receivable Book is part of
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(a) the journal. (b) the ledger. (c) the profit.
(x) The Rebate on a Bill shows that
(a) It has been paid before the date of maturity.
(b) It has been paid after the date of maturity.
(C) It has been Dishonoured
2. State whether the following statements are True or False
(i) Bill of Exchange is a legal evidence of debt. True
(ii) Promissory Note must be accepted by the Drawee. False
(iii) Days of Grace are not allowed when the bill is payable on demand. True
(iv) The creditor is the person on whom the bill is drawn. False
(v) Discount on bills is a loss for the Drawer and a gain for the Drawee. False
(vi) A bill is generally discounted on the due dates. False
(vii) A bill can be endorsed by the Drawer to his creditor in full or a part settlement of dues .True
(viii) There are only two parties in case of a Bill of Exchange. False
ACCOUNTING TREATMENT OF BILL TRANSACTIONS

A. On the Due Date bill is Honoured –
The accounting treatment under this heading is based on the assumption that bill is duly honoured at
maturity of the bill. The drawer can treat the bill in the following ways:
Case - I Bill is retained by the drawer till date of maturity:
Transaction In the books of DRAWER In the books of DRAWEE

1. When Goods Drawee A/c Dr. Purchases A/c Dr.
are sold on To Sales A/c To Drawer A/c
credit (Being goods Sold on credit) (Being goods purchased from
Drawer)
2. When Bill Bills Receivable A/c Dr. Drawer A/c Dr.
is Drawn To Drawee A/c To Bills Payable A/c
(Being acceptance received from (Being acceptance given to
drawee) drawer)
3. When Bill is Cash/Bank A/c Dr. Bills Payable A/c Dr.

Honored on Date of To Bills Receivable A/c To cash/Bank A/c
Maturity (Being payment of bill received from (Being payment of bill made to
Drawee) drawer)
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Case II : When the bill is discounted from the Bank by the Drawer
Transaction In the books of Drawer In the books of Drawee
1. When the bill Bank A/c Dr.
is discounted Discounting Charges A/c Dr. No Entry
from Bank To Bills Receivables A/c
(Being bill discounted for the Bank)
2. When the bill Bills Payable A/c Dr.
is honored on To Cash/Bank A/c
date of maturity No Entry (Being the payment of bill
made)
Case III : When bill is endorsed in favour of a creditor
Transaction In the books of Drawer/ Endorser In the books of Drawee

1. When bill Endorsee A/c Dr.
is endorsed To Bills Receivable A/c No Entry
(Being bill receivable endorsed)
2. When bill is Bills Payable A/c Dr.
honored on No Entry To Cash/Bank A/c
date of maturity (Being the payment of bill made)
Transaction In the Books of Endorse

1. When bill is Bills Receivable A/c Dr.
endorsed To Endorser
(Being bill received from debtor through endorsement)
2. When bill is Cash/Bank A/c Dr.
honoured on date To Bills Receivable
of maturity (Being Bill realised on date of maturity)
Case - IV When Bill is sent to the Bank for collection

1. When bill Bills sent for Collection A/c Dr.
is sent To Bills Receivable A/c
collection (Being bill sent for collection) No Entry
to Bank
2. When the Bank A/c Dr. Bill Payable A/c Dr.

amount is realised To Bill sent for collection A/c To Cash/Bank A/c
on date of maturity (Being the bill sent for collection realised (Being bill paid on date
on maturity) maturity)
Example 1
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Darshan sold goods for Rs 40,000 to Varun on 8.1.2006 and drew upon him a bill of exchange payable
after two months. Varun accepted the bill and returned the same to Darshan. On the due date the bill
was met by Varun. Record the necessary Journal entries in the books of Darshan and Varun in the
following circumstances.
 When the bill was retained by Darshan till the date of its maturity.
 When Darshan immediately discounted the bill @ 6% p.a. with his bank.
 When the bill was endorsed immediately by Darshan in favour of his creditor Suresh.
 When three days before its maturity, the bill was sent by Darshan to his bank for collection.

Case (i): When the bill was retained by Darshan till the date of its maturity.
Books of Darshan
Journal
Debit Credit
Date Particulars L.F. Amount Amount
Rs Rs
2006
Jan.08 Varun Dr. 40,000
To Sales A/c 40,000
(Goods sold to Varun)

Jan.08 Bills Receivable A/c Dr. 40,000
To Varun 40,000
(Varun's acceptance received)

Mar.11 Cash A/c Dr. 40,000
To Bills Receivable A/c 40,000
(Bill met on due date)

Books of Varun
Journal
Debit Credit
Rs Rs
2006
Jan.08 Purchases A/c Dr. 40,000
To Darshan 40,000
(Goods bought from Darshan)

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Jan.08 Darshan Dr. 40,000
To Bills Payable A/c 40,000
(Bill of two months accepted for Darshan)

Mar.11 Bills Payable A/c Dr. 40,000
To Cash A/c 40,000
(Varun cleared his acceptance on the due
date)

Case (ii): When Darshan immediately discounted the bill @ 6% p.a. with the bank

Books of Darshan
Journal
Debit Credit
Rs Rs
2006
To Sales A/c 40,000

To Varun 40,000

Jan.08 Bank A/c Dr. 39,600
Discount A/c Dr. 400
(Bill discounted with bank @ 6 p.a.)

Books of Varun
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Journal
Debit
Credit
Date Particulars L.F. Amount
Amount Rs
Rs
2006
To Darshan 40,000

(Bill of two months accepted for Darshan)

To Bank A/c 40,000

(Varun cleared his acceptance on the
due date)

Case (iii): When the bill was endorsed immediately by Darshan in favour of his creditor Suresh

Books of Darshan
Journal
Debit Credit
Rs Rs
2006
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To Sales A/c 40,000

To Varun 40,000

Jan.08 Suresh Dr. 40,000
(Varun's acceptance endorsed in favour of
Suresh)

Books of Varun
Journal
Debit Credit
Rs Rs
2006
To Darshan 40,000

(Darshan’s bill accepted payable after two months)

To Cash A/c 40,000
(Amount of bill paid on maturity to the holder
of the bill)

Case (iv): When three days before its maturity, the bill, as sent by Darshan to his bank for Collection

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Books of Darshan
Journal
Debit Credit
Rs Rs
2006
Jan.08 Varun A/c Dr. 40,000
To Sales A/c 40,000

To Varun A/c 40,000
(Varun's acceptance received for two
months)

Mar.08 Bill Sent for Collection A/c Dr. 40,000
(Bill sent to bank for collection)

Mar.11 Bank A/c Dr. 40,000
To Bill Sent for Collection A/c 40,000
(Bill amount met on maturity)

Books of Varun
Journal
Debit Credit
Rs Rs
2006
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To Darshan 40,000

(Darshan’s bill accepted payable after two
months)

To Bank A/c 40,000
(Amount of bill paid to bank on maturity)

Example 2.
A sold good to B on April 1, 2014 for Rs. 20,000 on credit and drew upon him a bill for the same
amount payble after 3 months. B accepted the bill and returned into to A. On the due date bill was
dishonoured.
Pass Journal entries in the books of A and B if Case I :Bill is retained by A till the
date of maturity.,
Case II :Bill is discounted by A from his bank on 4th April, 2014 @ 6% per
annum.
Case III :Bill is endorsed in favour of C on April, 4th, 2014.
Case IV :Bill is sent to bank for collection on July 1, 2014.
Solution :
In the books of A (Drawer)
Journal
Date Particulars L.F. Dr. Cr.
Rs. Rs.
2014
April, 1 B Dr. 20,000
To Sales A/c 20,000
(Being goods sold to B
on credit)
April, 1 Bills Receivable A/c Dr. 20,000

To B A/c 20,000
(Being bill received from B)
Case-I : When bill is retained by A
July, 4 B A/c Dr. 20,000
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(Being bill received from B
dishonoured)
Case - II : When bill is discounted
from the Bank
April, 4 Bank A/c Dr. 19,700
Discounting charges A/c Dr. 300
(Being bill discounted from the
bank ; discounting charges are
6 3
= 2000 × × =300
100 12
July, 4 B A/c Dr. 20,000
To Bank A/c 20,000
(Being bill discounted from,
dishonoured on date of maturity)
Case - III : When bill is endorsed
in favour of ‘C’
April, 4 C A/c Dr. 20,000
(Being bill endorsed in favour of C)
July, 4 B A/c Dr. 20,000
To C A/c 20,000
(Being bill received from B and
endorsed to C dishonoured on
maturity date)
Case - IV : When bill is sent for
collection
July, 1 Bill sent for Collection A/c Dr. 20,000

(Being bill received from B sent
for collection)
July, 4 B A/c Dr. 20,000
To Bills Sent for Collection A/c 20,000
(Being bill sent for collection to bank,
dishonoured on date of maturity)
In the Books of B (DRAWEE)

(In All Cases)
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Rs. Rs.
2014
April, 1 Purchases a/c Dr. 20,000
To A a/c 20,000
(Being goods purchased on credit)
April,1 A a/c Dr. 20,000
To Bills Payble a/c 20,000
(Being acceptance given to A)
July, 4 Bills Payable a/c Dr. 20,000
To A a/c 20,000
(Being bill Payable to
A dishonoured on date of
maturity)
Example 3.
A sold goods to B on May 1st, 2014 for ` 30,000 on credit and drew upon him a bill for the same
amount payable after 2 months. B accepted the bill and returned it to A. On date of maturity, B fails to
make payment of bill. Noting charges amounted to ` 100.
Pan Journal Entries in the books of A and B if.
Case 1 : A retains the bill till the date of maturity and also paid the noting charges.
Case 2 : A discounts the bill from his bank on 4th June @ 12% per annum. Noting
charges has been paid by bank.
Case 3 : A endorses the bill n favour of C on June 1. C paid the noting charges.
Case 4 : A sent the bill to his bank for collection on July 1. Bank paid the noting
charges.
Solution :
In the Books of A (DRAWER)

Rs. Rs.
2014
May, 1 B A/c Dr. 30,000
To Sales A/c 30,000
(Being goods sold to B on Credit)
May, 1 Bills Receivables A/c Dr. 30,000
To B A/c 30,000
(Being acceptance received
from B)
Case 1 : When A retains the bill
July, 4 B A/c Dr. 30,100
To Cash A/c 100
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(Being bill dishonoured and noting
charges paid by A)
Case 2 : When bill is discounted

from the bank
June, 4 Bank A/c Dr. 29,700
Discounting charges A/c Dr. 300
To Bills Receivable A/c
(Being bill discounted from 30,000
the bank, discounting charges
amounted to
12 1
` =3000× × = ` 300)
100 12
July, 4 B A/c Dr. 30,100
To Bank A/c 30,100
(Being bill discounted from bank
dishonoured and noting charges
paid by bank)
Case 3 : When bill is endorsed in favour of C

June, 1 C A/c Dr. 30,000
(Being bill sent to bank for
collection)
July 4 B A/c Dr. 30,100
To C A/c 30,100
(Being bill received from
B and endorsed to C dishonoured
on maturity )
Case 4 : When bill is sent for
Collection
July, 1 Bill Sent for Collection A/c Dr. 30,000
(Being bill sent to bank
for collection)
July, 4 B A/c Dr. 30,100
To Bills sent for
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Collection A/c 30,000
To Bank A/c 100
(Being bill received from B
dishonoured on maturity)
In the Book of B (DRAWEE)

(In all Cases)
Rs. Rs.
2011
May, 1 Purchases A/c Dr. 30,000
To A a/c 30,000
(Being goods purchased from A)
May, 1 A a/c Dr. 30,000

(Being acceptance given to A)
July, 4 Bills Payable A/c Dr. 30,000
Noting Charges A/c Dr. 100
To A a/c 30,100
(Being bill dishonoured and
noting charges debited)
C . Renewal of a Bill
Transaction In the Books of In the Books of

Drawer Drawee
Cancelling the Drawee Dr. Bills Payable A/c Dr.
Original Bill To Bills Receivable A/c To Drawer
(Being the cancellation of bill (Being the bill payable
receivable) cancelled)
Recording Drawee Dr. Interest A/c Dr.
Interest for To Interest A/c To Drawer
extended Period (Being interest charged for (Being interest payable for
extended period) extended period)
Past Payment Cash or Bank A/c Dr. Drawer Dr.
Received/ made To Drawee To Cash Bank A/c
69 | P a g e
(Being the part payment (Being the part payment
received) made).
New Bill Drawn / Bills Receivable A/c Dr. Drawer Dr.
Accepted To Drawee To Bills Payable A/c
(Being a new bill drown) (Being a new bill accepted.)
Example 4.
On 1st April, 2014 Anil accepts a bill drawn by Sunil for 2 months for Rs. 15000, in payment of a debt.
On the date of maturity bill was dishonoured and Sunil had to pay Rs. 150 as noting charges. On 4th
June 2014, Anil requested to Sunil to draw a new bill for the amount due. Sunil agreed to draw a new
bill for 73 days but he charged interest @ 15% per annum in cash. This bill is duly met on its maturity.
Pass Journal entries in the books of both the parties.
Solution :
In the books of Sunil Journal
Rs. Rs.
2014
April, 1 Bills Receivable A/c Dr. 15,000
To Anil A/c 15,000
(Being acceptance received)
June, 4 Anil A/c Dr. 15,150
To Bills Receivable A/c 15000
To Cash A/c 150
charges paid)
June, 4 Anil A/c Dr. 454.50

To Interest A/c 454.50
(Being interest charged
15 73
= (15150 × × )
100 365
June, 4 Cash A/c Dr. 454.50
To Anil A/c 454.50
(Being interest received in cash)
June, 4 Bills Receivable A/c Dr. 15,1,50
To Anil A/c 15,1,50
(Being a new bill drown M Anil and
acceptance received)
Aug., 19 Bank A/c Dr. 15,1,50
To Bills Receivable A/c 15,1,50
(Being amount received on
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maturity of bill)
In the Books of Anil (DRAWEE)

Journal
Rs. Rs.
2011
April, 1 Sunil A/c Dr. 15,000
(Being acceptance gave)
June, 4 Bills Payable A/c Dr. 15,000
To Sunil A/c 15,150
(Being bill dishonoured and
noting charges due)
June, 4 Interest A/c Dr. 454.50
To Sunil A/c 454.50
(Being interest payable to Sunil)
June, 4 Sunil A/c Dr. 454.50

To Cash A/c 454.50
(Being interest paid in cash)
June, 4 Sunil A/c Dr. 15,150

(Being acceptance of new bill given)
Aug. 19 Bills Payable A/c Dr. 15,150

To Bank A/c 15,150
(Being bill accepted, paid on
maturity)
Example 5.
P sold goods to Q for ` 10,000 on January 1, 2014 and on the same day draws a bill on Q for the same
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amount for 3 months. Q accept it and returns it to P, who discounts it on 10th January, 2014 with his bank
for ` 9850. The acceptance is dishonoured on the due date and the noting charges were paid by bank being
` 50.
On 4th April, Q paid ` 2,050 (including noting charges) in cash and accepted a new bill at 3 months for the
amount due to P together with interest @ 12% per annum.
Make Journal Entries in the books of P and Q to record these transactions.
Solution :
Journal of P
Rs. Rs.
2014
Jan., 1 Q A/c Dr 10,000
To Sales A/c 10,000
(Being goods sold to Q)
Jan., 1 Bills Receivable A/c Dr. 10,000

To Q A/c 10,000
Jan., 10 Bank A/c Dr. 9,850

Discounting Charges A/c Dr. 150
(Being bill discounted from Bank)
April, 4 Q A/c Dr. 10,050

To Bank A/c 10,050
(Being bill discounted from bank
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dishonoured and noting charges
paid by bank)
April, 4 Cash A/c Dr. 2050

To Q A/c 2050
(Being part payment received in cash)
April, 5 Q A/c Dr. 240

To Interest A/c 240
(Being interest charged
12 3
= ( 8000 × × )
100 12
April, 4 Bills Receivable A/c Dr. 8240

To Q A/c 8240
(Being a new bill drawn on
Q together with interest)
Journal of Q (DRAWEE)

Rs. Rs.
2014
Jan., 1 Purchases A/c Dr. 10,000
To P A/c 10,000
Jan., 1 P A/c Dr. 10,000
(Being acceptance given to P)
April, 4 Bills Payable A/c Dr. 10,000
To P A/c 10,050
charges due)
April, 4
P A/c Dr. 2,050
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To Cash A/c 2,050
(Being part payment made
in cash)
April, 4 Interest A/c Dr. 240

To P A/c 240
(Being interest payable on outstanding
amount for 3 months)
April, 4 P A/c Dr. 8,240

(Being acceptance given to P)
D. Retiring a bill under Rebate:
Transaction In the Books of In the Books of

Drawer Drawee
When Drawee Cash/Bank A/c Dr. Bills Payable A/c Dr.

retires the bill Rebate A/c Dr. To Cash/Bank A/c
before date of To Bill Receivable A/c To Rebate A/c
Maturity (Being the amount received (Being the amount paid
before date of maturity and before date of maturity and
rebate allowed. rebate received.)
Points to Remember:-
1. In the books of Drawer, Rebate Account is DEBITED because it is a
loss for Drawer.
2. In the books of Drawee, Rebate Account is CREDITED because it is a
gain for Drawee.
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Example 6.
Mukesh sold goods to Jitender on July 1, 2014 for ` 30,000 and drew a bill for the some amount for
3months. Jitender accepted the bill and returned it to Mukesh. Jitender retired his acceptance on 4th
August, 2014 under rebate of 8% per annum Give Journal entries in the books of Mukesh and Jitender.
Solution :
In the books of MUKESH
Journal
Rs. Rs.
2014
July, 1 Jitender A/c Dr. 30,000
To Sales A/c 30,000
(Being goods sold on credit)
July, 1 Bill Receivable A/c Dr. 30,000
To Jitender A/c 30,000
Aug., 4 Cash A/c Dr. 29,600
Rebate A/c Dr. 400
(Being amount received on bill
before maturity and rebate allowed,
2 8 = 400)
Rebate =3000× ×
12 100
In the books of JITENDER
Journal
Rs. Rs.
July, 1 Purchases A/c Dr. 30,000

To Mukesh A/c 30,000
July, 1 Mukesh A/c Dr. 30,000

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(Being acceptance given to
Mukesh)
Aug., 4 Bill Payable A/c Dr. 30,000
To Cash A/c 29,600
To Rebate A/c 400
(Being acceptance retired with rebate)
E. Insolvency of Acceptor :
When Drawee Entry for dishonour of bill Bills Payable A/c Dr.
is Insolvent shall be passed (depending To Drawer
up on the case) (Being bill dishonoured)
When nothing Bad Debts A/c Dr. Drawer Dr.
could be To Drawee
Recovered (Being amount of Bill To Deficiency A/c
written off as bed debts) Or
To P &L A/c
(Being the amount of bill
written off.)
When Amount Cash/Bank A/c Dr. Drawer Dr.
is Received Bad Debts A/c Dr. To Cash A/ c
Partially To Drawee To Deficiency A/c
Or
(Being the amount received To P & L A/c.
partially and
the remaining amount written off
due to (Being the amount payable
Settled by payment of......%
Insolvency of drawer.) only.
Example 7.
Ashok sold goods Rs.14,000 to Bishan on October 30, 2005 and drew three bills for Rs.2,000, Rs.4,000
& Rs.8,000 payable after two, three, and four months respectively. The first bill was kept by Ashok with
him till maturity. He endorsed the second bill in favour of his creditor Chetan. The third bill was
discounted on December 03, 2005 at 12% p.a. The first and second bills were duly met on maturity but
the third bill was dishonoured and the bank paid Rs.50 as noting charges. On March 03, 2006 Bishan
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paid Rs.4,000 and noting charges in cash and accepted a new bill at two months after date for the
balance plus interest Rs.100. The new bill was met on maturity by Bishan.
You are required to give the journal entries in the books of both Ashok ans Bishan and prepare Bishan’s
account in Ashok’s books and Ashok’s account in Bishan’s books.
Solution:
Books of Ashok
Journal
Date Particulars L.F. Debit Credit
Amount Amount
Rs. Rs.
2005
Oct. 30 Bishan’s A/c Dr. 14,000
To Sales A/c 14,000
(sold goods to Bishan on credit)

Oct. 30 Bills Receivable A/c Dr. 14,000
To Bishan’s A/c 14,000
(Received three acceptances from Bishan.
First for Rs. 2,000 payable after two months,
second for Rs. 4,000 payable after three months
and the third for Rs. 8,000 payable after
four months)

Bill of Exchange 311

Oct. 30 Chetan’s A/c Dr. 4,000
To Bills receivable A/c 4,000
(Endorsed second bills in favour of
creditor Chetan)
Apr. 03 Bank A/c Dr. 7,760
Discount A/c 240
To Bill receivable A/c 8,000
(Third bill discounted at 12% p.a.)

2006
Apr.02 Bank A/c Dr. 2,000
Bills receivable A/c 2,000
(Bishan met his first acceptance on due date)

Mar. 03 Bishan A/c Dr. 8,050
To Bank A/c 8,050
(Bishan dishonoured his third acceptance
and bank paid Rs.50 as noting charges)
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Mar. 03 Cash A/c Dr. 4,050
(Cash received from Bishan)

Mar. 03 Bishan’s A/c Dr. 100
To Interest A/c 100
(Interest charged from Bishan for the
extended period)

Mar. 03 Bills Receivable A/c Dr. 4,100
(Received new acceptance from Bishan for
two months)
May 12 Bank A/c Dr. 4,100
To bills Receivable A/c 4,100
(Bishan met his new acceptance on maturity)

Bishan’s Account
Dr. Cr.
Date Particulars J. F. AmountDate Particulars J.F. Amount
Rs. Rs.
2005 2005
Oct. 30 Sales 14,000Oct. 30 Bills 14,000
2006 2006
Mar. 03 Bank 8,050Mar. 03 Cash 4,050
Mar. 09 Interest 100Mar. 03 Bills Receivable 4,100
22,150 22,150

Books of Bishan
Journal

Date Particulars L.F. Debit Credit
Amount Amount
Rs. Rs.

2005
Jan. 30 Purchases A/c Dr. 14,000
To Ashok’s A/c 14,000
(Purchases goods on credit from Ashok)

Jan.30 Ashok’s A/c Dr. 14,000
(Accepted three drafts of Ashok, the first for
Rs. 2,000 payable after 2 months, second for
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Rs. 4,000 Payable after 3 months and the third
for Rs. 8,000 Payable after 4 months)

2006
Jan. 02 Bills Payable A/c Dr. 2,000
To Bank A/c 2,000
(Met first acceptance for Rs. 2,000 in
favour of Ashok.)

Feb.02 Bill Payable A/c Dr. 4,000

To Bank A/c 4,000
(Met second acceptance for Rs. 4,000 in
favour of Ashok on maturity)

Mar. 03 Bill Payable A/c Dr. 8,050
Noting charges A/c Dr. 50
To Ashok A/c 8,050
(Third acceptance in favour of Ashok
dishonoured and noting charges Rs. 50)

Mar. 09 Ashok’s A/c Dr. 4,050
To Cash A/c 4,050
(Paid to Ashok Rs. 4,000 plus noting charges)

Mar. 09 Interest A/c Dr. 100
To Ashok’s A/c 100
(Interest allowed to Ashok)

Mar. 09 Ashok’s A/c Dr. 4,100
(New draft of Ashok for two months accepted)
May 12 Bills Payable A/c Dr. 4,100
To Bank A/c 4,100
(Met new acceptance for Rs. 4,100 in favour of Ashok on maturity)
Ashok’s Account
Dr. Cr.

Date Particulars J. F. AmountDate Particulars J.F. Amount
Rs. Rs.
2005 2005
Oct. 30 Bills payable 14,000Oct. 30 Purchases 14,000
2006 2006
Mar. 03 Cash 4,050Mar. 03 Bills Payable 8,000
Noting charges 50
Mar. 09 Bills Payable 4,100Mar. 09 Interest 100
22,150 22,150

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Self-practice :
Test Your Understanding – I

Write ‘True’ or ‘False’ against each statement regarding a bill of exchange:
(i) A bill of exchange must be accepted by the payee.

(ii) A bill of exchange is drawn by the creditor.
(iii) A bill of exchange is drawn for all cash transaction.
(iv) A bill payable on demand is called Time bill;
(v) The person to whom payment is to be made in a bill or exchange is called payee.
(vi) A negotiable instrument does not require the signature of its maker.
(vii) The hundi Payable at sight is called Darshani hundi.
(viii) A negotiable instrument is not freely transferable.
(ix) Stamping of promissory note is not mandatory.
(x) The time of payment of a negotiable instrument need not be certain.
Test Your Understanding – II
Fill in the blanks with suitable word(s)
(i) The person to whom the amount mentioned in the promissory note is payable is known as
_____________.
(ii) Transfer of a negotiable instrument to another person by signing on it, is known as

_____________.
(iii) In a promissory note, the person who makes the promise to pay is called as ____________.
(iv) A person who endorses the promissory note in favour of another is known as____________.
Test your understanding-I
False (ii) True (iii) False (iv) False (v) True
False (vii) True (viii) False (ix) False (x) False

Test Your Understanding II;
(iii)
(i)Promise (ii) Endorsement Promisors (iv) Endorser
1. When calculating Date of Maturity the following points must be considered:

1. In case of “Bill at sight” or “Bill on demand” 3 days of grace are NOT allowed.
When the period is stated in months the date of maturity shall be calculated in terms of
calendar months ignoring the no. of days in a month
(1) When the term of bill is mentioned in no of days, then
Date of drawing the bill is not included.
Date of payment is included in determining date of maturity.
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(2) If date of maturity falls on a day which is public holiday, the maturity date of the bill
shall be “PRECEDING DAY’.
(3) If maturity date is on an emergent holiday declared under the Negotiable Instrument
Act. 1881, the next working day immediately after the holy day will be considered as
the date of maturity.
2-- Noting Charges :
1. Noting charges are not an expense for the drawer.
2. It is always debited as ‘Noting chargers in the books of drawee.
3. Noting charges are recovered by drawer from drawee.
4. Nothing of the bill is NOT required when the bill is CANCELLED with the
consent of both the parties, especially at the time of RENEWAL of Bill.
5. Noting charges are paid only when noting of the bill is necessary at the time
of dishonour of bill.
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Rectification of Errors
Content mapping:
Errors: types-errors of omission, commission, principles, and compensating; their
effect on Trial Balance.
Detection and rectification of errors; preparation of suspense account
________________________________________________
Introduction
A trial balance is a statement showing the balances, or total of debits and credits, of all the accounts in
the ledger with a view to verify the arithmetical accuracy of posting into the ledger accounts. Verify
that the sum of the debit balances equal the sum of credit balances of trail balance. If they do not tally,
it indicates that there are some errors.
Meaning of Rectification of Errors;
Correcting the errors of accounting by passing journal entry is known as rectification of error.
Objectives of Rectification of Errors
1. To Make the arithmetical accuracy of the ledger accounts.
2. To locate errors and rectify.
Error affecting or disclosed by trial balance
1. Errors of additions and subtractions: -
Wrong totaling and balancing of ledger, totaling of trial wrong totaling of trial balance.
2. Posting at the wrong side of an account: -
Instead of debiting amounts by mistake are written in credit.
3. Entering incorrect amount:-
Incorrect copying, Transposing figure (Writing 56 in place of 65), sliding figure (8000 in place of 800),
doubling the wrong figure and duplicate posting.
4. Errors of omission:-
Not posted in subsidiary accounts, accounts are not opened in the ledger.
5. Wrong posting in the trial balance:-
Instead of writing debit side accounts has posted in credit side.
Errors not affecting by trail balance (Limitations of trail balance)
1. Errors of omission:-
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Transactions not recorded in books. For example:- goods return to supplier not recorded.
2. Errors of principle:-
Disobey of accounting principles, (salary paid to manager) manager’s accounts are debited.
3. Compensating errors: -
Sales of goods to Rani for Rs.100 debited to Rina's account with Rs.10 and Rs.100 cash received for
Ajay was credited to Ajay with Rs.10.
4. Incorrect account in the original book: -
Instead of B .Singh’s account recorded in B. Sinha’s account affected by writer.
5. Posting to wrong account: -
Instead of writing in purchases book, Witten in sales book.
1. Errors of omission: - Forget to write the transaction in books.

Example:
1. Goods worth Rs.5,000 returned by a customer was not recorded in the books.
2. Goods worth Rs.3,000 sold to Anil was not recorded in the books.
Solution:
Journal Entry
1. Return Inward A/C Dr. 5,000
To Customer’s A/C 5,000
(Being goods returned was not passed in the books , now
recorded.
2. Customer’s A/C Dr. 3,000
To Sales A/C 3,000
(Being goods sold was not passed in the books , now
recorded.
2. Errors of commission: - Under casting and Over casting in books.

Example:
1. Purchase book was under cast by Rs.5,000
2. Sales book was over cast by Rs.2,000
Journal Entry ( By Raising Suspense Account)

1. Purchase A/C Dr. 5,000
To Suspense A/C 5,000
(Being under casting of purchase book now rectified)
2. Sales A/C Dr. 2,000
To suspense A/C 2,000
(Being Over casting of sales book now rectified.
3. Errors of Principles: - Mistake in posting such as instead of sale ,furniture account is credited,
Wages is paid and posted in salary account.
Example:
1. Purchase of Building was passed in purchase book amounting Rs.10,000
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2. Wages paid for extension of building was debited to wages account amounting Rs.6000
Journal Entry
1. Building A/C Dr. 10,000
To Purchase A/C 10,000
(Being purchase of building wrongly debited in purchase
account ,is now rectified)
2. Building A/ C Dr. 6,000
To wages A/C 6,000
(Being payment of wages for extension of building
wrongly debited in wages account, is now rectified)
4. Compensating errors : - Mistake in posting such as posting at wrong side of account.

Example:
1. Salary paid amounting Rs.500 was credited to salary account.
2. Rent paid amounting Rs.600 was credited to rent account as 60.
Solution:
Journal Entry ( By Raising Suspense Account)
1. Salary A/C Dr. 1,000
To suspense A/C 1,000
(Being payment of salary account wrongly credited ,is
now rectified)
2. Rent A/C Dr. 660
To suspense A/C 660
(Being payment of account wrongly credited , is now
rectified)
Suspense account;
When Trial balance does not agree, the difference of amount will be transferred into suspense
account.
Treatment of Suspense account:-When mistakes are detected and rectified, Suspense account will be
closed. Balance of suspense account will be transferred in to Balance sheet.
Point to be remembered:
(Debit balance of suspense account will be at assets side. Credit balance will be at liabilities side of
balance sheet)
Example :
Pass journal entry for following cases assuming the use of suspense account
1. Under casting in sales day book by Rs.5,000
2. Goods returned By Amit costing Rs.2,000 was not recorded in the books
3. Salary paid Rs.1500 was debited in wages account.
4. Interest due on investment Rs.2, 500 was not recorded in the books.
Journal Entry
1. Suspense A/C Dr. 5,000
To Sales A/C 5,000
( Being under casting of sales book ,is now rectified)
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2. Returned inward A/C Dr. 2,000
To Amit 2,000
(Being omission of return inward book , is now rectified)
3. Salary A/C Dr. 1,500
To wages A/C 1,500
(Being payment of salary account wrongly debited in
wages account ,is now rectified)
4. Accrued interest A/C Dr. 2,500
To Interest A/C 2,500
(Being Interest due on investment is now recorded .)
PRACTICE THEORETICAL QUESTIONS

1. How Trial Balance help in Locating Error?
Ans. When a trial balance does not tally (that is, the totals of debit and credit columns are not equal),
we know that at least one error has occurred. The error may have occurred at one of those stages
in the accounting process:
1. Totalling of subsidiary books
2. Posting of journal entries in the ledger
3. Calculating account balances
4. Carrying account balances to the trial balances
5. Totalling the trial balance columns
If may be noted that the accounting accuracy is not ensured even if the totals of debit and credit
balance are equal because some errors do not affect equality of debits and credits. For examples,
the book keeper may debit a correct amount in the wrong account while making the journal entry
or in posting a journal to the ledger.
2. What are the different types of errors that are usually committed in recording business
transaction?
Ans:
1. Errors of omission− When an entry gets omitted during recording in the book of original entry
or during posting the transaction, then error of omission is committed. There are two types of
errors of omission, viz.:
A Partial omission−When a transaction is correctly recorded in one side of account but is

not recorded in the other side of the account. For example, goods sold to Mahesh recorded in
sales but omitted to be recorded in Mahesh’s account. It affects the trial balance.
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B Complete omission− When a transaction gets completely omitted to be recorded in the
books, then it is the case of complete omission . For example, transaction related to purchase
of goods from Rakesh is not recorded in the purchases book. Such omissions doesnot affect the
trial balance.
2. Errors of principle−These refer to those errors that are committed when recording of
transactions in the book of the original entry is done against the accounting principle. These errors
affect the trial balance.
1) These errors are committed when proper distinction is not made between revenue income or
expenditure and capital income or expenditure. These are of two types:
2) When revenue transactions are treated as capital transactions When capital transactions are
treated as revenue transactions. For example, repairs made to machinery, recorded in machinery
account.
3 Errors of commission−These refer to those errors that are committed when transactions are
recorded with wrong amounts, wrong balancing, wrong posting and/or wrong carrying forwarded is
done.
These are of two types:
1. Trial balance does not agree
When trial balance does not agree, then there exist one-sided errors that affect only one account and
thereby are easily detectable. These one-sided errors exist due to the following reasons:
i. Wrong casting of subsidiary book Posting wrong amount in ledger Posting on the wrong side of
account Wrong balancing of account
2. Trial balance agrees
i. When the trial balance agrees, then it should not be taken for granted that there are no errors,
as the tallied trial balance just ensures the absence of arithmetical errors. These errors are not
easily detectable; as these do not affect the trial balance. These errors arise due to: Recording
wrong amount in the original book
ii. Posting amount in the wrong account but in the correct side
6. Compensating errors−When effects of one error are cancelled by the effects of another error of
an equal amount, then compensating errors are committed. For example, Mr. A’s account was
credited by Rs 2,000 instead of 200 and Mr. B’s account was credited by Rs 200 instead of
2,000. In this case, the error in Mr. A’s account will be compensated by the error in Mr. B’s
account.
3. What do you mean by Suspense Account?
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Ans. The account in which the difference of trial balance is placed temporarily till the errors are located
and rectified.
4. In case of errors of partial omission, will the trial balance agree? Why?
Ans. No, the trial balance will not agree because a trial balance will agree only if both aspects of a
transaction are posted into ledger account with correct amount.
5. What is meant by error of commission?
Ans. Error of commission are those errors which arise due to wrong recording, wrong posting, wrong
carrying forward, wrong casting, wrong balancing, etc.
6. Give two examples of error of commission?
Ans. a) Recording purchases of goods for Rs.5,000 as Rs.50,000.
b) Cash balance of Rs.1,000 carried forward as Rs.10,000.
7. What is meant by compensating error?
Ans. Compensating Error is the error the effect of which is nullified by another error of equal amount.
8. What is One-Sided Error?
Ans. One-Sided Error are those error which have occurred in one side “Debit or Credit” of an account
because of which Trial Balance will not agree.
9. What Two-Sided Error?
Ans. Two-Sided Error are those errors that have been committed on both sides, i.e., debit and credit.
Although errors has been committed yet the Trial Balance will agree.
10. Give two examples of One-Sided Error.
Ans. a) Depreciation on computers not posted to Depreciation A/c.
b) Purchase of stationary of Rs.500 posted twice to Stationary A/c.
11. Give two examples of Two-Sided Error.
Ans. a) Machinery purchased recorded in the Purchases Book.
b) Old furniture sold recorded as sales of goods.
11.Give one example of Compensating Error?
Ans. a)Sales of Rs. 10,000 recorded as Rs.1,000
b)Purchases of Rs.10,000 recorded as Rs1,000

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12.Give two examples of errors which are not disclosed by a trial balance in spite of it being agreed.
Ans. a)Errors of Principle: Example- Recording of machinery purchased as purchases
b) Errors of complete omission: Example-Goods purchase from Sita ram of Rs.5,000 but recorded in
the books of accounts.
13.What is meant by Rectifying Entry?
Ans. Rectifying Entry means an entry passed to correct the error omitted.
14. Name the error committed by violating the rule of accounting.
Ans. Error of Principle.
15. Salary of Rs 2,100 Paid was posted as Rs 2,000 in Salary A/c and Advertisement of Rs.7,700 was
posted as Rs 7,800 . Identify the type of Error?
Ans. Error of Commission or Error of Posting.
 Numerical questions:
Question 1:
Rectify the following errors and ascertain the amount of difference in trial balance by preparing
suspense account:
(a) Credit sales to Mohan Rs 7,000 were posted as Rs 9,000.
(b) Credit purchases from Rohan Rs 9,000 were posted as Rs

6,000.
(c) Goods returned to Rakesh Rs 4,000 were posted as Rs 5,000.
(d) Goods returned from Mahesh Rs 1,000 were posted as Rs

3,000.
(e) Cash sales Rs 2,000 were posted as Rs 200.
Debit Credit
No. Particulars L.F. Amount Amount
Rs Rs
(a) Suspense A/c Dr. 2,000
To Mohan 2,000
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(Sold goods to Mohan Rs 7,000 wrongly posted as Rs 9,000,
now rectified)
(b) Suspense A/c Dr. 3,000
To Rohan 3,000
(Purchased goods from Rohan Rs 9,000 wrongly posted as Rs 6,000,

now rectified)
(c) Suspense A/c Dr. 1,000
To Rakesh 1,000
(Goods returned to Rakesh Rs 4,000 wrongly posted as Rs 5,000,

now rectified)
(d) Mahesh Dr. 2,000
To Suspense A/c 2,000
(Goods returned from Mahesh Rs 1,000 wrongly posted as 3,000,
now rectified)
(e) Suspense A/c Dr. 1,800
To Sales A/c 1,800
(Goods sold for cash Rs 2,000 wrongly posted as Rs 200,now

rectified)
Suspense Account
Dr. Cr.
Amount Amount
S. No. Particulars J.F. Rs S. No. Particulars J.F. Rs
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(a) Mohan 2,000 (d) Mahesh 2,000
(b) Rohan 3,000
(c) Rakesh 1,000
(e) Sales 1,800 Balance c/d 5,800
7,800 7,800
Note it has been assumed that all the errors mentioned in this question are errors of partial omission.
Question 2:
Rectify the following errors assuming that suspense account was opened.
Ascertain the difference in trial balance.
(a) Credit sales to Mohan Rs 7,000 were recorded in Purchase Book.

However, Mohan’s account was correctly debited.
(b Credit purchases from RohanRs 9,000 were recorded in sales book.

) However, Rohan’s account was correctly credited.
(c) Goods returned to RakeshRs 4,000 were recorded in sales return book.
However, Rakesh’s account was correctly debited.
(d Goods returned from Mahesh Rs 1,000 were recorded through purchases

)
return book. However, Mahesh’s account was correctly credited.
(e Goods returned to NareshRs 2,000 were recorded through purchases

) book.
However, Naresh’s account was correctly debited.
Journal
Debit Credit
S. No. Particulars L.F. Amoun Amoun
t Rs t Rs
14,00
(a) Suspense A/c Dr. 0
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To Sales A/c 7,000
(Goods sold to Mohan wrongly recorded in Purchases

Book;
however, Mohan's Account was correctly debited, now

rectified)
(b) Purchases A/c Dr. 9,000
Sales A/c Dr. 9,000
18,00
To Suspense A/c 0
(Purchased goods from Rohan wrongly recorded in Sales

Book.
However, Rohan's Account was correctly credited, now

rectified)
(c) Suspense A/c Dr. 8,000
To Purchases Return A/c 4,000
To Sales Return A/c 4,000
(Goods returned to RakeshRs 4,000 wrongly entered in
Sales Return Book; however, Rakesh's Account was

correctly
debited, now rectified)
(d) Sales Return A/c Dr. 1,000
Purchases Return A/c Dr. 1,000
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To Suspense A/c 2,000
(Goods Returned from Mahesh wrongly entered in
Purchases Return Book; however, Mahesh's Account was
correctly credited, now rectified)
(e) Suspense A/c Dr. 4,000
To Purchases Return A/c 2,000
(Goods returned to Naresh wrongly entered in Purchases
Book; however, correctly debited to Naresh's Account,
now rectified)
Suspense Account
Dr. Cr.
Amount Amount
S. No. Particulars J.F. Rs S. No. Particulars J.F. Rs
(a) Sales 7,000 (b) Purchases 9,000
Purchases 7,000 Sales 9,000
(c) Purchases Return 4,000 (d) Sales Return 1,000
Sales Return 4,000 Purchases Return 1,000
(e) Purchases Return 2,000
Purchases 2,000 Balance c/d 6,000
26,000 26,000
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Numerical questions for practice:
Q.1 Pass journal entries for following cases:

1. Interest paid amounting Rs.600 was credited to interest account as Rs. 60.
2. Salary paid to employee Rs.5,000 was debited to his personal account.
3. Goods purchased from AB limited costing Rs.8,000 not recorded in books.
4. Machinery sold for Rs.6,000 was wrongly credited in Furniture account.
Q.2 Rectify the following errors and ascertain the amount of difference in trial balance by
preparing suspense account :
(a)Credit sales to Mohan Rs. 7,000 were not posted.
(b)Credit purchases from RohanRs. 9,000 were not posted.
(c)Goods returned to RakeshRs. 4,000 were not posted.
(d)Goods returned from Mahesh Rs. 1,000 were not posted.
(e)Cash paid to Ganesh Rs. 3,000 was not posted.
(f)Cash sales Rs. 2,000 were not posted.
Q3. Trial balance of Kohli did not agree and showed an excess debit of Rs. 16,300. He put the
difference to a suspense account and discovered the following errors:
(a)Cash received from Rajat Rs. 5,000 was posted to the debit of Kamal as Rs. 6,000.
(b)Salaries paid to an employee Rs. 2,000 were debited to his personal account as Rs. 1200.
(c)Goods withdrawn by proprietor for personal use Rs. 1,000 were credited to sales account as
Rs. 1,600.
(d)Depreciation provided on machinery Rs. 3,000 was posted to Machinery account as Rs. 300.
(e)Sale of old car for Rs. 10,000 was credited to sales account as Rs. 6,000. Rectify the errors
and prepare suspense account.
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Financial Statements of Sole Proprietorship: From Complete and
Incomplete Records
Content mapping:
Financial statements: objective and importance.
 Trading and profit and loss account: gross profit, operating profit and net profit.
 Balance sheet: need, grouping, marshalling of assets and liabilities.
 Adjustments in preparation of financial statements : with respect to closing stock, outstanding
expenses, prepaid expenses, accrued income, income received in advance, depreciation, bad debts,
provision for doubtful debts, provision for discount on debtors, abnormal loss, goods taken for
personal use,
goods distributed as free samples and manager’s commission.
Preparation of Trading and Profit and Loss account and Balance Sheet of sole proprietorship.

Incomplete records: uses and limitations.

 Ascertainment of profit/loss by statement of affairs method.
___________________________________________________________________
financial statements : The statements which helps to ascertain the performance (i.e. gross profits,
operating profits & net profits) for an accounting period and to depict the financial position/
soundness/ status of a business firm on a particular period of time.
The financial statements contain two statements:
(1) Income Statement: To show performance of a business firm by matching between all the
expenses, losses and revenues, incomes & gains of the particular accounting period.
(2) Position Statement: To show financial strength of a business firm in terms of the value of assets &
liabilities.
Trading Account and Profit & Loss Account is a part of Income Statement and the name of position
statement is called Balance Sheet.
Trading Account:
The trading account ascertains the result from basic operational activities of the business. The basic
operational activities involve the manufacturing, purchasing and selling of goods. It is prepared to
ascertain whether the selling of goods and/ or rendering of services to customers have proved
profitable for the business or not.
A purchase is one of the main constituents of expenses in business organisation. Besides purchases,
remaining expenses are ‘direct expenses’. Direct expenses means all expenses which are directly
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connected with the manufacturing, purchases of goods & bringing to the point of sale (i.e. carriage
inwards, freight inwards, wages, factory lighting, coal, water & fuel, royalty on production, etc.).
Similarly, sales constitute the main item of revenue for the business.
The excess of sales over purchases & direct expenses is called ‘gross profits’. If the amount of
purchases & direct expenses is more than the sales revenue, is called ‘gross loss’.
Gross Profit = Sales –Cost of goods sold
The gross profit or gross loss is transferred to Profit & Loss Account.
Profit and Loss Account:

The profit & loss account ascertains the result of the overall performance of a business organisation in
terms of operating profit and net profit.
It will start with the gross profit or gross loss derived from the trading account. The other constituents
are indirect expenses and indirect incomes/gains for an accounting period of a business organisation.
Operating profit: Operating profit is the excess of operating revenue over operating expenses. While
calculating operating profit, the incomes & expenses of a purely financial nature and loss by fire etc.
are not taken into account:
Operating Profit = Net Profit + Non-Operating Expenses - Non-Operating Income OR
Operating Profit = Gross Profit + Operating Income – Operating Expenses OR
Operating Profit = Sales Revenue – Operating Cost OR
 Operating Cost = Cost of Goods Sold + Operating Expenses
 Operating Expenses = Office & Administration and Selling & Distribution Expenses
Net Profit: Net Profit is that profit which is earned after deducting all operating expenses as well as all
non-operating expenses from the gross profit and other incomes.
Balance Sheet:
The Balance sheet is a statement prepared for showing the financial position of the business
summarising its assets and liabilities at a given date. It is prepared at the end of accounting period after
the trading and profit & loss have been prepared.
It is called balance sheet because it is a statement of balances of ledgers accounts that have not been
transferred to trading and profit & loss account and are to be carried forward to the next year with the
help of an opening entry made in the journal at the beginning of the next year.
Grouping and Marshalling of Assets & Liabilities:
Grouping: The items of the balance sheet are presenting in the particular group having similar nature is
called grouping of assets and liabilities. (i.e. all the assets which are to be used not more than one year,
must be shown under the head of ‘Current Assets’ such as cash in hand, cash in hand, debtors etc.)
Marshalling: In the balance sheet, the assets & liabilities are arranged either in the order liquidity or
permanence is called ‘marshalling’.
In case of ‘permanence’, the most permanent asset or liability is put on the top in the balance sheet
and thereafter the assets are arranged in their reducing level of permanence.
Trading and Profit & Loss Account
(for the year ended March 31st 20……)
Expenses/Losses Amount in Revenues/ Gain Amount in
Opening stock xxxx Sales xxxx
Purchases xxxx Closing stock xxxx
Wages xxxx Gross loss xxx
Carriage inwards xxxx (if it is derived)
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Freight inwards xxxx
Cartage xxxx
Gross profit b/d xxxx
XXX XXX
Gross loss (if derived) xxx Gross profit c/d xxx
Rent/rates & taxes xxx Commission xxx
Salaries xxx Discount xxx
Repairs & Renewal xxx Received
Bad debts xxx
Interest paid xxx
Carriage outwards xxx
Net Profit xxx
(transferred to capital A/c)
XXX XXX
Balance Sheet
(As on/at March 31st 20……)
Liabilities Amount in Assets Amount in
Capital xxxx Building xxxx
xxxx Machinery xxx
+/- Net profit/loss xxx xxx Furniture xxx
Bank Loan xxx Debtors xxx
Creditors xxx Cash in hand xxx
Bank overdraft
XXX XXX
Question 01: Prepare a Trading Account of M/s Anal from the following information
related to 2014-15.
Opening stock 50,000; Purchases 1,10,000; Return inwards 5,000; Sales 3,00,000;
Return outwards 7,000; Factory rent 30,000 and Wages 40,000.
Sol.: Trading Account (For the year ended March 31 st 2015)
Particulars Amount in Particulars Amount in
Opening Stock 50,000 Sales 2,95,000
Purchases 1,10,000 3,00,000
Less: Return outwards (7,000) 1,03,000 Less: Return inwards (5,000)
Factory Rent 30,000
Wages 40,000
Gross Profit (transferred to 72,000
profit
& loss account) c/d
2,95,000 2,95,000
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Question 02: Following balances are abstracted from the books of a trader ascertain
gross profit, operating profit and net profit for the year ended March 31 st 2015.
Sales 75,250; Purchases 32,250; Opening stock 7,600; Sales return 1,250;
Purchases return 250; Rent 300; Stationary & printing 250; Salaries 3,000; Misc.
Expenses 200; Travelling expenses 500; Advertisement 1,800; Commission paid
150; Office expenses 1,600; Wages 2,600; Profit on sale of Investment 500;
Depreciation 800; Dividend on investment 2,500; Loss on sale of old furniture 300.
Closing stock (March 31st 2015) valued at 8,000.
Sol.: Trading and Profit & Loss Account

(For the year ended March 31st 2015)
Opening stock 7,600 Sales 74,000
Purchases 32,250 75,250 8,000
Less: Return outwards (250) 32,000 Less: Return inwards (1,250)
Wages 2,600 Closing stock
Gross profit b/d 39,800
82,000 82,000
Rent/rates & taxes 300 39,800
Salaries 3,000 Gross profit c/d
Stationary & printing 250
Misc. Expenses 200
Travelling expense 500
Advertisements 1,800
Commission paid 150
Office expenses 1,600
Depreciation 800
Operating Profit c/d 31,200
39,800 39,800
Loss on sale of old furniture 300 31,200

Net Profit 33,900 Operating profits b/d 500
(transferred to capital A/c) Profit on sale of investment 2,500
34,200 Dividend on investment 34,200
Question 03: Prepare Trading and Profit & Loss Account and Balance Sheet of M/s Royal
Traders from the following Trail Balance as on March 31 st 2015.
Name of Accounts L.F. Debit Credit Amount
Amount
Stock 20,000 Sales 2,45,000
Cash 5,000 Creditors 10,000
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Bank 10,000 Bills Payable 4,000
Carriage on 1,500 Capital 2,00,000
purchases 1,90,000
Purchases 9,000
Drawings 55,000
Wages 1,00,000
Machinery 27,000
Debtors 300
Postage 1,700
Sundry Expenses 4,500
Rent 35,000
Furniture
4,59,000 4,59,000
Closing stock valued on March 31 2015 at
st
8,000.

Opening stock 20,000 Sales 2,45,000
Purchases 1,90,000 Closing stock 8,000
Carriage on 1,500 Gross Loss b/d 13,500
purchases 55,000
Wages
2,53,000 2,53,000
13,500 Net Loss 20,000
Gross Loss c/d 4,500 (transferred to capital A/c)
Rent/rates & taxes 300
Postage 1,700
Sundry Expenses 34,200 34,200
Balance Sheet
(As on/at March 31st 2015)
Capital 1,71,000 Machinery 1,00,000
2,00,000 Furniture 35,000
Less: Drawings (9,000) Debtors 27,000
+/- Net profit/loss (20,000) 4,000 Bank 10,000
Bills Payable 10,000 Cash in hand 5,000
Creditors Closing 8,000
Bank overdraft stock
1,85,000 1,85,000
Financial Statements with adjustments
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Adjustments in preparation of Financial Statements with respect to Closing stock, outstanding
expenses, prepaid expenses, accrued income, income received in advance, depreciation, bad debts,
and provision for doubtful debts, provision for discount on debtors, manager's commission, abnormal
loss, goods taken for personal use and goods distributed as free samples.
Adjustment Adjustment Treatment in Trading, Treatment in

Entry Profit & Loss Account Balance Sheet
Closing Stock Closing stock A/c Dr. Shown on the credit side Shown on the assets
To Trading A/c of trading account side
Outstanding Expense A/c Dr. Added to respective Shown on the
Expenses To O/s Expenses Expense on the debit side liabilities
Side
Prepaid/ unexpired Prepaid expense A/c Deducted from respective Shown on the assets
expense Dr. Expense on the debit side Side
To Expense A/c
Accrued Income Accrued income A/c Added to respective Shown on the assets
Dr. Income on the credit side side
To Income A/c
Income Received Income A/c Dr. Deducted from respective Shown on the
in advance To Received in Income on the credit side liabilities
advance Side
Depreciation Depreciation A/c Dr. Shown on the debit side Deducted from the
To Asset A/c Respective assets
Bad Debts Bad Debts A/c Dr. Shown on the debit side of Deducted from
To Debtors Profit & Loss A/c debtors
On the assets side
Provision for Profit & Loss A/c Dr. Shown on the debit side of Deducted from
doubtful debts To Provision A/c Profit & Loss A/c debtors
On the assets side
Provision for Profit & Loss A/c Dr. Shown on the debit side of Deducted from
Discount on debtors To Provision A/c Profit & Loss A/c debtors
On the assets side
Provision for Profit & Loss A/c Dr. Shown on the debit side of Shown on the
manager’s To Provision A/c Profit & Loss A/c liabilities
Commission Side
Goods taken as Sample A/c Dr. Deducted from purchases
free sample To Purchase A/c &
Shown on debit side of P/L
A/c
Goods taken for Drawing A/c Dr. Deducted from purchases Deducted from
Personal use To Purchases A/c Capital,
on the liabilities side
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Question 04: From the following Trial Balance extracted from the books of Vine,
prepare Trading and Profit & Loss A/c for the year ending 31 st March, 2015 and a
Balance Sheet on that date.
Trial Balance
Dr. Cr.
Furniture 640
Loose Tools 6250
Building 7500
Capital 12500
Bad Debts 125
Sundry Debtors & Creditors 3800 2500
Stock on April 1,2010 3460
Purchase & Sales 5475 15450
Bank Overdraft 2850
Return Inward & Outward 200 125
Stationery 250
Interest 118
Commission 375
Cash in Hand 650
Taxes & Insurance 1250
General Expenses 782
Salaries 3300
------------ -------------
33800 33800
Adjustments:
(a) The book value of Closing stock 2,200 and it has market value 2,000.
(b) Furniture depreciated to 600.
(c) Make a provision for doubtful debts on debtors @ 5%.
(d) Commission received in advance 70 and Outstanding salaries 300.
(e) Proprietor taken goods of 200 for domestic purpose.
(f) Make a provision for Manager’s commission on net profit @ 10% p.a. before charging
such commission.
Opening stock 3,460 Sales 15,450 15,250
Purchases 5,475 5,150 Less: Return 200
Less: Drawings 200 2,000
Less: Return 125 Closing stock
Gross Profit c/d 8,640
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17,250 17,250
Bad debts 125 8,640
Stationery 250 Gross Profit b/d 305
Interest 118 Commission 375
Taxes & Insurance 1,250 Less: Received in Adv. 70
General expenses 782
Salaries 3,300 3,600
Add: Outstanding 300
Depreciation on Furniture 40
Provision for doubtful debts 190
Provision for Manager’s 259
Comm. 2,331
Net Profit
(Transferred to Capital A/c) 8,945 8,945
Balance Sheet
(As on/at March 31st 2015)
Capital 12,500 14,631 Building 7,500
Less: Drawings (200) Furniture 600
Add: Net profit 2,331 Debtors 3,610
Creditors 2,500 Loss tools 6,250
Bank overdraft 2,850 Cash in hand 650
Commission received in Adv. 70 Closing stock 2,000
Salary Outstanding 300
Provision for Manager’s Comm. 259
20,610 20,610
# Calculation of manager’s commission on net profit, after charging such commission

If on the above question, manager’s commission to be calculated 10% on net profit, after
charging such commission:
Balance of Profit & Loss A/c i.e. 2,590 X % of comm. i.e. 10
Manager’s Commission = ------------------------------------------------ = 235

100 + % of commission i.e. 110
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ACCOUNTS FROM INCOMPLETE RECORDS:
Under this system of accounting, the cash book and personal accounts of debtors and creditors are
maintained, real and nominal accounts are not maintained. Since both the aspects of transactions
are not recorded, the system is known as accounts for incomplete records or Single entry system of
accounting.
FEATURES OF ACCOUNTS FROM INCOMPLETE RECORDS:
(i) It is suitable for small- size business .

(ii) Only cash book and personal accounts are prepared, real and nominal accounts are not
prepared .
(iii) Dependence on original vouchers.
Difference between Double Entry System and Single Entry System
S.N. Basis Double Entry System Single Entry System

1 Aspects Both aspects of the transaction Both aspects of the transaction are
are recorded. not recorded.
2 Accounts Under this system All personal Under this system Only cash book
,real and nominal accounts are and personal accounts are
prepared prepared, real and nominal
accounts are not prepared
3 Trial balance Under this system Trial balance is Under this system Trial balance can
prepared to verify the accuracy not be prepared due to incomplete
of the books of accounts. system of accounting
4 Suitability It is suitable for all the business. It is suitable only for small business.
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Ascertaining profit under the single Entry system
It can be ascertained by the following two methods:
(I) Statement of affairs methods(Net worth methods) and
(ii) Conversion Methods.
Statement of affairs methods (Net worth methods)
A statement of affairs is a statement of assets and liabilities. Difference between the amount of the two
sides is taken as capital.
Under Single entry system , it is necessary to prepare Statement of affair at the end of the year , and
also in the beginning of the year.
Assets = Liabilities + Capital

Capital = Assets - Liabilities
Profit = Capital at the end + Drawings – Additional capital introduced – capital at the beginning
Statement of profit or loss
Particulars Rs.
Capital at the end -------
Add: Drawings during the year -------
--------
Less: Additional capital introduced during the year (--------)
--------
Less: Capital in the beginning (-------)
Profit or Loss for the year ----------
STATEMENT OF AFFAIRS
AS ON ……………………… ………………………………
Liabilities (Rs.) Assets (Rs.)
Sundry Creditors XXX Cash in hand XXX

Bank Overdraft XXX Cash at bank XXX
Capital(Balancing figure) XXX Sundry debtors XXX
Bills Receivable XXX
Stock in trade XXX
Furniture XXX
Plant & Machinery XXX
XXX XXX
Practical Questions
Q.N. 1: Adarsh maintains books on single entry system. He gives you the following information.
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Rs.
Capital on 1st April, 2014 50,800
Capital on 1st April, 2015 60,000
Drawings made during the year 2014-15 10,500
Additional capital introduced on 1 st july 2014 8,800
You are required to calculate the profit or loss made by Adarsh.
Solution:

For the year ended 31st March 2015
Particulars Rs.
Capital at the end(31st march, 2015 ) 60,000
Add: Drawings during the year 2014-15 10,500
70,500
Less: Additional capital introduced during the year 2014-15 (8,800)
61,700
Less: Capital in the beginning(1st April, 2014) (50,800)
Profit or Loss for the year 10,900
Q.N.2: A k Maurya keeps his books under single entry system . His assets and liabilities were as under :
31st March 2014 31st March 2015

Cash 3000 1500
Sundry debtors 41,000 47,000
Stock 36,000 35,000
Plant & machinery 63,000 83,000
Sundry creditors 18,000 17,000
Bills Payable -------- 6,500
During the year 2014-15 , He introduced Rs 15000 as new capital . He withdrew Rs. 4200 every month
for his household exps. Ascertain his profit for the year ended 31 st March 2015.
Solution: STATEMENT OF AFFAIRS
AS ON 1ST APRIL 2014

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Sundry Creditors 18,000 Cash in hand 3000

Capital(Balancing figure) 1,25,000 Sundry debtors 41,000
Stock in trade 36,000
Plant & Machinery 63,000
1,43,000 1,43000
AS ON 31ST MARCH 2015

Bills payable 6,500 Sundry debtors 47,000
Capital(Balancing figure) 1,43,000 Stock in trade 35,000
Plant & Machinery 83,000
1,66,500 1,66,500

Particulars Rs.
Capital at the end(31st March, 2015 ) 1,43,000
Add: Drawings during the year 2014-15 (4200 x12=50,400) 50,400
1,93,400
Less: Additional capital introduced during the year 2014-15 (15,000)
1,78,400
Less: Capital in the beginning(1st April, 2014) (1,25,000)
Profit or Loss for the year 53400
Q.N.3: Alisha provisional retail store had not kept proper books of account . From the details given you are
required to ascertain the profit or loss for the year ended as on 31 st March 2015 and also to prepare its
statement of affairs as at that date.
31st March 2014 31st March 2015

Cash in hand 300 1500
Sundry debtors 11,500 17,000
Stock in trade 16,000 25,000
Fixtures &fittings 3,000 8,000
Sundry creditors 15,400 17,000
Bills Payable 6,000 8,500
Motor van 2,000 5,000
Bills Receivable 14,000 15,500
Bank balance --------- 4,000
Drawings during the year amounted to Rs. 5400. Depreciate Fixtures &fittings by 10%. Rs. 1000 is
irrecoverable from debtors. Provide 5% for doubtful debts .
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Solution:
AS ON 1ST APRIL 2014

Bills Payable 6,000 Sundry debtors 11,500
Capital(Balancing figure) 25,400 Stock in trade 16,000
Fixtures &fittings 3,000
Motor van 2,000
Bills Receivable 14,000
46,800 46,800

Bills payable 8,500 Sundry debtors 17,000
Capital(Balancing figure) 50,500 Stock in trade 25,000
Fixtures &fittings 8,000
Motor van 5,000
Bank balance 4,000
76000 76,000
Statement of profit or Loss
Particulars Rs.
Capital at the end(31st March, 2015 ) 50,500
Add: Drawings during the year 2014-15 5,400
55,900
Less: Capital in the beginning(1st April, 2014) (25,400)
Profit before adjustment 30,500
Less: Depreciate Fixtures &fittings Rs. 800
Bad debts Rs.1,000
Prov. For doubtful debts Rs. 800
(2,600)
Net Profit for the year 27,900
FINAL STATEMENT OF AFFAIRS
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Sundry Creditors 17,000 Cash in hand 1,500

Bills payable 8,500 Sundry debtors 17000 15,200
Capital 25,400 Less: Bad debts (1000)
Less: Drawings 5,400 16000
20,000 Less: Prov. Bad debts (800)
Add: net profit 27,900
47,900 Stock in trade 25,000
Fixtures &fittings 8000 7,200
Less: Dep. (800)
Motor van 5,000
Bank balance 4,000
73,400 73,400
FINANCIAL STATEMENTS OF NOT – FOR – PROFIT ORGANIZATIONS
Content mapping
Not-for-profit organizations: concept.
Receipts and Payments Account: features and preparation.
Income and Expenditure Account: features, preparation of income and expenditure account
And balance sheet from the given receipts and payments account with additional information
______________________________________________________________
The organizations formed for not to earn profit but for providing services to its members and public are
known as NOT – FOR – PROFIT ORGANIZATIONS. These include Clubs, hospitals, libraries, schools,
charitable trusts, religious institute etc. The main motive of these organizations is to provide services.
As the main motive of these organizations is not to earn profit, they do not prepare ‘Trading and Profit
& Loss Account’. They prepare ‘Income & Expenditure Account’ to know the profit or loss during the
specific period. They prepare ‘Balance Sheet’ also to know the financial position of the organization at
particular point of time.
The main features (or characteristics) of Not for Profit organizations are:
1. Service motive
2. These organizations are set up in the form of charitable trusts or societies, and subscribers of
these organizations are called members.
3. An NPO is having separate legal entity from its members. It is not affected by admission or
death or insolvency of any member.
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4. The management is in the hands of elected members of the organization.
5. Major source of income are: (a) subscription (b) donations (c) financial assistance from
government (d) income from investors.
6. Surplus (profit) is not shared among members. It is added to the capital fund of the
organization.
7. These organizations have to prepare proper accounts for proper utilization of funds. Financial
records are prepared every year.
Accounting Records of Not-for-Profit Organizations
Most of their transactions are in cash or through the bank. These institutions are required by law to
keep proper accounting records and keep proper control over the utilization of their funds. This is why
they usually keep a cash book in which all receipts and payments are duly recorded. They also maintain
a ledger containing the accounts of all incomes, expenses, assets and liabilities which facilitates the
preparation of financial statements at the end of the accounting period. In addition, they are required
to maintain a stock register to keep complete record of all fixed assets and the consumables. They do
not maintain any capital account. Instead they maintain capital fund which is also called general fund
that goes on accumulating due to surpluses generated, life membership fee, donation, legacies, etc.
received from year to year.
Financial Statements:
NPOs are not required to make Trading and Profit & Loss Account but it is necessary to know whether
the income during the year was sufficient to meet the expenses or not. Not only that they have to
provide the necessary financial information to members, donors, and contributors and also to the
Registrar of Societies. For this purpose, they have to prepare their final accounts at the end of the
accounting period and the general principles of accounting are fully applicable in their preparation on
as stated earlier, the final accounts of a ‘not-for-profit organization’ consist of the following:
(i) Receipt and Payment Account
(ii) Income and Expenditure Account, and
(iii) Balance Sheet.
The Receipt and Payment Account is the summary of cash and bank transactions which helps the
preparation of Income and Expenditure Account and the Balance Sheet. Besides, it is a legal
requirement as the Receipts and Payments Account has also to be submitted to the Registrar of
Societies along with the Income and Expenditure Account, and the Balance Sheet. Income and
Expenditure Account is akin to Profit and Loss Account.
Receipt and Payment Account
It is prepared at the end of the accounting year on the basis of cash receipts and cash payments
recorded in the cash book. It simply is a summary of cash and bank transactions under various heads.
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Salient Features of receipt and payment account:
1. It is a summary of the cash book. Its form is identical with that of simple cash book (without discount
and bank columns) with debit and credit sides. Receipts are recorded on the debit side while payments
are entered on the credit side.
2. It shows the total amounts of all receipts and payments irrespective of the period to which they
pertain.
3. It includes all receipts and payments whether they are of capital nature or of revenue nature.
4. No distinction is made in receipts/payments made in cash or through bank.
5. No non-cash items such as depreciation outstanding expenses accrued income, etc. are shown in this
account.
6. It begins with opening balance of cash in hand and cash at bank (or bank overdraft) and closes with
the year end balance of cash in hand/ cash at bank or bank overdraft.
Income and Expenditure Account
It is the summary of income and expenditure for the accounting year. It is just like a profit and loss
account prepared on accrual basis in case of the business organizations. It includes only revenue items
and the balance at the end represents surplus or deficit. The Income and Expenditure Account serves
the same purpose as the profit and loss account of a business organization does. All the revenue items
relating to the current period are shown in this account.
Distinction between Income and Expenditure Account and Receipt and Payment Account
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Subscriptions: Subscription is a membership fee paid by the member on annual basis. This is the main
source of income of such organizations. Subscription paid by the members is shown as receipt in the
Receipt and Payment Account and as income in the Income and Expenditure Account.
Donations: It is a sort of gift in cash or property received from some person or organization. It appears
on the receipts side of the Receipts and Payments Account. Donation can be for specific purposes or for
general purposes.
(i) Specific Donations: If donation received is to be utilised to achieve specified purpose, it is called
Specific Donation. The specific purpose can be an extension of the existing building, construction of new
computer laboratory, creation of a book bank, etc. Such donation is to be capitalized and shown on the
liabilities side of the Balance Sheet irrespective of the fact whether the amount is big or small. The
intention is to utilise the amount for the specified purpose only.
(ii) General Donations: Such donations are to be utilised to promote the general purpose of the
organization. These are treated as revenue receipts as it is a regular source of income hence, it is taken
to the income side of the Income and Expenditure Account of the current year.
Legacies: It is the amount received as per the will of a deceased person. It appears on the receipts side
of the Receipt and Payment Account and is directly added to capital fund/general fund in the balance
sheet, because it is not of recurring nature. However, legacies of a small amount may be treated as
income and shown on the income side of the Income and Expenditure Account.
Life Membership Fees: Some members prefer to pay lump sum amount as life membership fee instead
of paying periodic subscription. Such amount is treated as capital receipt and credited directly to the
capital/general fund.
Entrance Fees: Entrance fee also known as admission fee is paid only once by the member at the time
of becoming a member. In case of organizations like clubs and some charitable institutions, is limited
and the amount of entrance fees is quite high. Hence, it is treated as non-recurring item and credited
directly to capital/general fund. However, for some organizations like educational institutions, the
entrance fees is a regular income and the amount involved may also be small. In their case, it is
customary to treat this item as a revenue receipt. However, if there is specific instruction, it is advisable
to treat the entire amount as capital receipt and the relevant amount should be directly added to
capital/general fund.
Sale of old asset: Receipts from the sale of an old asset appear in the Receipts and Payments Account
of the year in which it is sold. But any gain or loss on the sale of asset is taken to the Income and
Expenditure Account of the year. For example, if an item furniture with a book value of Rs. 800 is sold
for Rs. 700, this amount of Rs. 700 will be shown as receipt in Receipts and Payments Account and Rs.
100 on the expenditure side of the Income and Expenditure
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Account as a loss on sale of old asset and while showing furniture in the balance sheet Rs. 800 will be
deducted from its total book value.
Sale of Periodicals: It is an item of recurring nature and shown as the income side of the Income and
Expenditure Account.
Sale of Sports Materials: Sale of sports materials (used materials like old balls, bats, nets, etc) is the
regular feature with any Sports Club. It is usually shown as an income in the Income and Expenditure
Account.
Payments of Honorarium: It is the amount paid to the person who is not the regular employee of the
institution. Payment to an artist for giving performance at the club is an example of honorarium. This
payment of honorarium is shown on the expenditure side of the Income and Expenditure Account.
Endowment Fund: It is a fund arising from a bequest or gift, the income of which is devoted for a
specific purpose. Hence, it is a capital receipt and shown on the Liabilities side of the Balance Sheet as
an item of a specific purpose fund.
Government Grant: Schools, colleges, public hospitals, etc. depend upon government grant for their
activities. The recurring grants in the form of maintenance grant is treated as revenue receipt (i.e.
income of the current year)
and credited to Income and Expenditure account. However, grants such as building grant are treated as
capital receipt and transferred to the building fund account. It may be noted that some Not-for-Profit
organizations receive cash
subsidy from the government or government agencies. This subsidy is also treated as revenue income
for the year in which it is received.
Special Funds: The Not-for-Profit Organizations office create special funds for certain purposes /
activities such as 'prize funds', 'match fund' and 'sports fund', etc. Such funds are invested in securities
and the income earned on such investments is added to the respective fund, not credited to Income and
Expenditure Account. Similarly, the expenses incurred on such specific purposes are also deducted from
the special fund. For example, a club may maintain a special fund for sports activities. In such a
situation, the interest income on sports fund investments is added to the sports fund and all expenses
on sports deducted therefrom. The special funds are shown in balance sheet. However, if, after
adjustment of income and expenses the balance in specific or Special fund is negative, it is transferred
to the debit side of the Income and Expenditure Account or adjusted as per prescribed directions.
Fund based accounting system: It is accounting system in which a fund is created for completing some
special purpose. All the incomes related to this purpose are credited (added) and all the related
expenses are debited (subtracted) from this fund. This system of accounting is known as fund based
accounting. For example a match fund can be created for completing a tournament. All the incomes
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related to tournament will be added, while all the expenses related to tournament will be subtracted
from match fund.
Subscription
Q.1 As per Receipt and Payment Account for the year ended on March 31, 2014, the subscriptions
received were Rs. 2,50,000. Additional Information given is as follows:
1. Subscriptions Outstanding on 1.4.2013 Rs. 50,000

2. Subscriptions Outstanding on 31.3.2014 Rs.35,000
3. Subs. Received in Advance as on 1.4.2013 Rs.25,000
4. Subs. Received in Advance as on 31.3.2014 Rs.30,000
Ascertain the amount of income from subscriptions for the year 2013–14 and show how
relevant items of subscriptions appear in opening and closing balance sheets.
(Ans: Rs. 2,30,000)
Q.2 Extracts of Receipt and Payment Account for the year ended March 31, 2014 are given below:
Receipt Subscriptions (Rs.)

2012-13 2,500
2013-14 26,750
2014-15 1,000
Total 30,250
Additional Information:
Total number of members: 230. Annual membership fee: Rs. 125.
Subscriptions outstanding on April 1, 2013: Rs. 2,750.
Prepare a statement showing all relevant items of subs. viz., income, advance, outstandings,
etc. (Ans: Rs. 28750)
Q.3 From the following extract of Receipt and Payment Account and the additional information
given below, compute the amount of income from subscriptions and show as how they would
appear in the Income and Expenditure Account for the year ending March 31, 2015 and the
Balance Sheet on that date:
Subscriptions:
2013-14 7,000
2014-15 30,000
2015-16 5,000
Total 42,000
Additional Information: Rs.
1. Subscriptions outstanding March 31, 2014 8,500
2. Total Subscriptions outstanding March 31, 2015 18,500
3. Subscriptions received in advance as on March 31, 2014 4,000 (Ans: Rs.
51,000)
Q.4 Calculate the amount of subscriptions to be shown in Income & Expenditure Account for the
year ending 31.03.2013, from the following particulars of a Baba Charitable Trust.
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31.3.2012 31.03.2013
Outstanding subscription 36,000 45,000
Subscription received in advance 2,700 5,200
Total subscription received during the year ending 31.03.2013 Rs. 2,70,000.
Also show the relevant items in the balance sheet as at 31.03.2008 and 31.03.2009. (Ans: Rs.
2,76,500)
Q.5 From the following Receipts & Payments Account show subscription to be shown in Income and
Expenditure Account for the year ending 31.03.2013 and 31.03.2014.
Receipt and Payment Account (an extract)

Particulars Amount Particulars
Amount
To Subscription:
For 2013-14 18,000
For 2014-15 1,80,000
For 2015-16 9,000 2,07,000
The charitable trust has 1,000 member each paying 200 as annual subscription. Outstanding
subscription as on 31.03.2015 was Rs. 27,000. (Ans: Outstanding subscription for
2014-15 is Rs. 20,000)
Q.6 Ramkrishna Club received Rs. 8,000 as subscriptions during the year 2013-14. This amount
included Rs. 400 which were outstanding as at 31 st March 2013 and Rs. 400 received for the
year 2014-15. The subscription due but not received on 31 st March, 2014 were Rs. 500. Calculate
the amount of subscriptions to be credited to Income and Expenditure Account for the year
ended 31st March, 2014. (Ans: Rs. 7,700)
FUND BASED ACCOUNTING
Q.1 Show how you would deal with the following items in the final account of a Club:
Details Debit Amount(Rs.) Credit Amount (Rs.)

Prize Fund 80,000
Prize Fund Investments 80,000
Income from Prize Fund Investments 8,000
Prizes awarded 6,000
Q.2 (a) Show the following information in financial statements of a ‘ Not-for-Profit’ Organization:
Details Amount (Rs.)

Match Expenses 16,000
Match Fund 8,000
Donation for Match Fund 5,000
Sale of Match tickets 7,000
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(b) What will be the effect, if match expenses go up by Rs. 6,000 other things remaining the
same?
Q.3 (a) Show the following information in financial statements of a ‘ Not-for-Profit’ Organization:

Tournament Fund Expenses 18,000
Tournament Fund 8,000
Donation for Tournament Fund 2,500
Sale of Tournament tickets 4,000
(b) What will be the effect, if tournament expenses go up by Rs. 20,000 other things remaining
the same?
Q.4 Show the treatment of following transactions while preparing final Account of a Non-Profit
Organization for the year ended 31st March 2015:
Tournament fund = Rs. 50,000

Interest accrued on Tournament fund Investment = Rs. 3,000
Tournament Expenses 20,000
Tournament fund investment = Rs. 30,000
Tournament fund receipts = Rs. 7,500 (Ans: Tournament Fund = Rs. 40,500)
Q.5 Show the treatment of following transactions while preparing final Account of a Non-Profit
Organization for the year ended 31st March 2015:
Tournament fund as on 1 April 2014 was Rs. 50,000. Tournament expensed incurred Rs. 20,000.
Donations received for tournament fund during the year was Rs. 7,500. 9% Tournament Fund
Investment as at 31st March 2014 was RS. 37,500. Interest received on tournament fund
investment was Rs. 2,500. (Ans: Tournament Fund. = 40,875)
Q.6 In the following alternative cases, how will you deal with them while preparing final Accounts of
a Non-Profit Organization for the year ended 31st March, 2015?
(i)Tournament expenses = Rs. 30,000

(ii) Tournament fund = Rs. 50,000. Tournament Expenses = Rs. 30,000
(iii) Tournament Fund = Rs. 50,000. Tournament Expenses = Rs. 30,000. Receipt from
tournament = Rs. 20,000.
(iv) Tournament Fund = Rs. 50,000. Match Expenses = Rs. 30,000
Calculation of Material consumed
Q.1 From the following information compute the amount charged through Income and Expenditure
Account for the year ended 31st March 2015:
(a) Amount paid for medicines during the year Rs. 8,000
Stock of medicine in hand on 31st March, 2015 Rs. 2,000 (Ans: Rs. 6,000)
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(b) Amount paid for medicines Rs. 8,000
Stock of medicine on 1st April, 2014 Rs. 1,000
Stock of medicine on 31st March, 2015 Rs. 2,000 (Ans: Rs. 7,000)
(c) Stock of medicine on 1st April, 2014 Rs. 6,000

Creditors for medicines on 1st April, 2014 Rs. 2,500
Advances for medicines on 1st April, 2014 Rs. 500
Amount paid during the year Rs. 8,000
Stock of medicine on 31st March, 2015 Rs. 1,000 (Ans: Rs. 6,000)
(d) Stock of medicine on 1st April, 2014 Rs. 6,000

Creditors for medicines on 1st April, 2014 Rs. 2,500
Advances for medicines on carried forward from 2014-15 Rs. 500
Stock of medicine on 31st March, 2015 Rs. 800
st
Creditors for medicines on 31 March 2015 Rs. 1,500
Advance for medicines paid during 2014-15 Rs. 1,200 (Ans: Rs.
6,500)
Q.2 From the following information compute the amount charged through Income and Expenditure
Account for the year ended 31st March 2015:
(a) Amount paid for stationery during the year Rs. 24,000
Stock of stationery in hand on 31st March, 2015 Rs. 6,000 (Ans: Rs. 18,000)
(b) Amount paid for stationery Rs. 24,000

Stock of stationery on 1st April, 2014 Rs. 3,000
Stock of stationery on 31st March, 2015 Rs. 6,000 (Ans: Rs. 21,000)
(c) Stock of stationery on 1st April, 2014 Rs. 3,000

Creditors for stationery on 1st April, 2014 Rs. 7,500
Advances for stationery on 1st April, 2014 Rs. 1,500
Amount paid during the year Rs.24,000
Stock of stationery on 31st March, 2015 Rs. 3,000 (Ans: Rs. 18,000)
(d) Stock of stationery on 1st April, 2014 Rs. 3,000

st
Creditors for stationery on 1 April, 2014 Rs. 7,500
Advances for stationery on carried forward from 2014-15 Rs. 1,500
Stock of stationery on 31st March, 2015 Rs. 2,400
st
Creditors for stationery on 31 March 2015 Rs. 4,500
Advance for stationery paid during 2014-15 Rs. 3,600 (Ans: Rs.
19,500)
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Q.3 Extract of a Receipt and Payment Account for the year ended on March 31, 2014:
Payments:
Stationery Rs. 23,000
Details April 1, 2005 March 31, 2014
Stock of stationery 4,000 3,000
Creditors for stationery 9,000 2,500 (Ans: Rs. 17,500)
Q.4 Find out the cost of medicines consumed during 2014-15 from the following information:

Payment for purchase of medicines 3,70,000
Additional Information
Detail 01.04.2014 31.03.2015
Creditors for medicines purchased: 25,000 17,000
Stock of Medicines: 62,000 54,000
Advance to suppliers of medicines: 11,500 18,200 (Ans: Rs. 3,63,300)
Long Answer Type Questions:
Q.1. From the following particulars relating to Golden Point Club, prepare a Receipts and Payments
account for the year ending 31st March 2000
(Ans: Total of Receipt and Payment A/c = Rs. 25,000, Closing balance of Bank = Rs. 6,600)
Q.2 From the following particulars of Faridabad Sports Club, prepare the Income and Expenditure
Account for the year ending 31st December 2002:
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(Excess of Income Over Expenditure = 22,000)
Q.3 From the under mentioned Receipts and Payments Account for the year ending 31 st December
2002 of Nagi’s Club, prepare an Income and Expenditure Acocunt for the same period:
(01.04.2002)
(Excess of Income Over Expenditure = 7075)
Q.4 From the following Receipt and Payment Account of a club, prepare Income and Expenditure
Account for the year ended December 31, 2014 and the Balance Sheet as on that date.
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Q.5 Shiv-eNarain Education Trust provides the information in regard to Receipt and Payment
Account and Income and Expenditure Account for the year ended March 31st 2015:
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(Ans: Total of Opening Balance Sheet : Rs. 254,000 & Total of Closing Balance Sheet ; Rs. 3,14,980)
Q.6 Prepare Income and Expenditure Account and Balance Sheet for the year ended March 31 st
2015 from the following information:
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(Ans: Surplus : Rs. 3,24,800; Total of Cl. B/S : 15,87,600; Capital Fund O/B = 12,49,400; Total
of Op. B/S : 12,57,000)
Q.7 From the following information of Azad Hind Fauz Club, New Delhi, prepare Income and
Expenditure Account for the year 31st March 2015 and Balance Sheet as at 31st March 2015:
Receipt and Payment Account
(For the year ended 31st March, 2004)

Receipts Amount Payments Amount
To Balance b/d 19,500 By Investment 10,000
To Donations 25,000 By Salaries 22,000
To Interest on Investment (@5%p.a.) 4,000 By Medicines 18,000
To Realisation from Children's Day 12,000 By Fax Machine (01.10.2007) 11,000
To Subscriptions 47,000 By Misc. Exp. 2,000
By Exp. On Children Day 2,500
By Balance c/d 42,000
107,500 107,500
Balance Sheet
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(As as 01st April 2014)
Liabilities Amount Assets Amount

Creditors for Medicines 1,000 Cash 19,500
Suscription Received in Advance 500 Subscription Due 1,600
Capital Fund (Bal. Fig.) 174,600 Stock of Medicines 10,000
Computers 40,000
Printers 15,000
Investments 90,000
176,100 176,100
1. Subscription due but not received for the year 2014-15 on 31.03.2015 were Rs. 1,200.
2. Subscription received in advance as on 31.03.2015 amounted to Rs. 890.
3. Subscription for the year 2014-15 were still in arrears.
4. Medicines remaining unused in the Godown amounted to Rs. 15,000.
5. Miscellaneous Expenses due for 2014-15 amounted to Rs. 500
6. Investment were made in 5% Govt. Securities on 01.10.2014.
7. Donations were to be capitalized
8. Depreciation @ 1q0% was to be charged on Computers, printers and Fax Machines
Computers in accounting
Content Mapping:-
Introduction to computer and accounting information system {AIS}: Introduction to computers
(elements, capabilities, limitations of computer system).
Introduction to operating software, utility software and application software. Introduction to
accounting information system (AIS) as a part of MIS.
Automation of accounting process: meaning
Stages in automation: (a) Accounting process in a computerized environment; comparison between
manual accounting process and computerized accounting process, (b) Sourcing of accounting software;
kinds of software: readymade software; customized software and tailor-made software; generic
considerations before sourcing accounting software (c) creation of account groups and hierarchy (d)
generation of reports - trial balance, profit and
Loss account and balance sheet.
___________________________________________________________
Computer – is an electronic device which performs various functions and operated through the set of
instructions.
Components of a Computer
1. Input Devices: Such as Keyboard, Mouse etc.
2. CPU: It has three components – The control unit, memory unit and the logical unit.
121 | P a g e
3. Output Devices: Such As Monitor, Printer.
4. Hardware & Software
The System Software such as MS DOS, Windows 7 etc.- are a set of programs which control the
operations & help processing. The Application software such as MS Word, Tally etc. enables the user
to perform useful specific functions.
Management Information System (MIS): Is an information system that provides the needed
information to the managers to manage the organization effectively. It combines the three resources
viz; technology, information & people for the efficient management of an enterprise.
Accounting Information System (AIS): Is an information system based on the accounting database of
an organization, helping in storage, processing, summarizing & reporting information about an
organization. It has 3 elements viz: Computerized Accounting, Information and System.
Advantages of Computerized AIS :
1. High Speed: of recording, storage, processing & retrieval of information.
2. Accuracy: As all the calculations etc. are done by the computer it has accuracy.
3. Reliability: The information is reliable.
4. Real Time User Interface: AIS enables direct & simultaneous interaction between user & the
machine.
Limitations of Computerized AIS :

1. Staff Opposition: As it reduces the no of employees, staff usually opposes it.
2. High Development Costs: Development requires qualified engineering staff & training also, so its a
costly affair.
3. Security Considerations: Cyber crime & hacking etc. are becoming very common these days,
therefore security is always a concern.
4. High Costs makes it suitable only for medium & large sized firms & not for small firms.
Role of Computers in Accounting Owing to Globalization the business operations are becoming large
scale & complex. The need therefore arose to record, compile, summarize & present the accounting
information to the large number of interested users with greater speed, accuracy & utility. Thus
accounting is the only appropriate solution to these needs. Computerized accounting serves this
purpose by using both the AIS & MIS very effectively by combining the following:
1. Customer Relationship Management (CRM)
2. Debtors Management
3. Inventory Management
4. Supply Chain Management
5. Payroll Accounting
6. Enterprise Resource Planning (ERP)
7. Enterprise Performance Management (EPM)
8. Computerized preparation of Financial Statements
9. Tax Planning & Management
10. Sales & Marketing Management
Database & Database Management System Database is data bank storing voluminous information
about the entities within an organization and also the entities interacting with the organization.
Database Management System is the electronic data processing of information stored in the database.
122 | P a g e
DBMS is “a set of programs that controls and manages creation, utilization and maintenance of
database of a business organization.”
Components of Database System:
 Data
 Hardware
 Software
 Users
Advantages of DBMS : 1. Reduced Data Redundancy

2. Protection of information
3. Greater Consistency
4. Reduced Costs
5. Back-up & Recovery facility
Limitations of DBMS:
1. High setting up costs
2. Lack of Expertise Knowledge
3. Security Problems
4. Hardware & Software costs due to fast obsolescence.
Accounting software: it can be classified as

1. Ready made Software.
2. Customized Software.
3.Tailor made software.
1. Readymade Software; Readymade Software are the software that are available that are available off
the shelf. They are not developed for specific users but for the users in general.
2. Customized Software; Customized soft wares are the soft wares that are readymade soft wares
which are amended to meet the needs of the user.
3.Tailor made software; Tailor made soft wares are developed for a particular user. It means it is user
specific.
Comparison between Customized & Readymade Software Packages;
Basis Readymade Software Customized Software

Time It saves time as it It takes time for
readymade development
Cost It is cost effective as money It is costlier
is not to be spent on its
development
After Sales Service Is promptly available Has to depend on the
because of well developed programmer who has
professionals as well as developed the package
market specially for the needs of
the firm
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Ready Availability It is readily available in the It is not readily available as
market it is tailor made to the firms
need.
Balance and Final Accounts.

Existence of Partial Errors Since the accounting Since recorded transactions
process is performed by are stored in the database
the accounts clerk who and further process is
may commit one sided performed and completed
errors hence trial balance by the software so partial
will not tally error can never take place.
Use of Internal check Since the complete work of Since computer is a
accounting performed by machine so while
several clerks so error and performing accounting
fraud may take place work it does not show any
unless internal check short of business. Hence
technique is used in the internal check is not
organization required here.
Need of opening entry After the close of No opening entry is passed
accounting year, final here. The process of closing
accounts are prepared. of accounts is performed
Next year, opening entries by the software itself and
are passed in the journal. opening balances of
accounts for next year are
automatically stored in
database.
Structured Query Language:

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It is a 4th generation Computer Programming language which greatly facilitates the writing of a
program or application by the programmer in one tenth of time taken in older & third generation
language like COBOL.
VALUE BASED QUESTION;

Q. Mr. Paul uses his office computer for his personal use. Is he right in his conduct?
Ans. Mr. Paul does not follow ethical value as he should not use office computer for personal use.
Q. Mr. Rohit an Accountant of a company uses his office computer for checking of accuracy of
accounts regularly. Which values are affected?
Ans. Honesty and Sincerity.
Questions;
Q1. Which of the following is not an operating software?
A.MS Dos B. Windows XP C. MS Word
Ans. B. Windows XP
Q2. Which of the following is not an input device?
Scanner B. Keyboards C. Monitors
Ans. C. Monitors
Q3. Which of the following is an output device?
Scanner B. Printer C. Smart card reader
Ans. B. Printer
Q4. Which of the following is secondary storage device?
RAM B.ROM. C. Pen drive
Ans. C. Pen drive
Q5. What is DBMS?
Ans. Database management system is the electronic data processing of information stored in the
database . DBMS is a set of programs that controls and manages creation, utilization and maintenance
of database of a business organization
125 | P a g e

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KVS

CLASS-XI - Accountancy (2015-16)

Content Formation by:

Sh. R.K. Thakur Sh. Bikash Anand

Sh. Rakesh Chawala Ms. M.D.P. Mukherjee

Sh.V. Jaiswal, PGT-Commerce, Mr. M.K. Bhardwaj,

Points deserve your attention while taking examination :-

Accounting- concept, objectives, advantages and limitations, types of

Basic accounting terms: business transaction, account, capital, drawings,

Accounting: ‘‘Accounting is an art of recording, classifying and summarizing in a

1. To provide useful information to various interested parties.

Interested Users of Information:

Users Classification Information the user want

Qualitative Characteristics of Accounting Information :

1. Reliability: Means the information must be based on facts and be verified

The accounting information suffers from the following limitations:

1. Based on historical data

BASIC ACCOUNTING TERMS :

Voucher : The documentary evidence in support of a transaction is known as voucher. For

1. Revenue expenditure : If the benefit of expenditure is received within a

1. Trade discount : The purpose of this discount is to persuade the buyer to

THEORY BASE OF ACCOUNTING

Fundamental accounting assumptions: going concern, consistency and accrual.

Generally Accepted Accounting Principles (GAAP) ; It refers to the rules or guidelines

1. Going Concern Assumption :

(a) Distinction is made between a capital expenditure and revenue expenditure.

a. It implies that accounting practices once selected and adopted, should be applied

This assumption is important when alternative accounting practices are equally

Accrual concept applies equally to revenue and expenses. As per this assumption, revenue

Earning of a revenue and consumption of a resource (expenses) can be accurately matched to

1. Accounting Entity. / Business Entity :

2. Money Measurement Principle:

i. Money means the currency of a country.

1. it ignores qualitative aspects e.g. efficient human resources (Assets), satisfied

3. Accounting Period Principle :

4. Full Disclosure Principle:

1. Contingent liabilities in respect to a claim of a very big amount against the

6. Prudence/ conservatism Principle :

According to this principle, profit in anticipation should not be recorded but loss in

1. Valuation of stock at cost or realizable values whichever is lower.

10. Revenue Recognition (Realisation) Concept

International Financial Reporting Standards (IFRSs);

Q.27 Higher Order Thinking Skills (HOTS) Questions:

Ans: a) Recording of financial transactions.

Total Assets = Capital + Liabilities

1. Mohit has the following transactions, prepare accounting equation:

(i) Business started with cash 1,75,000

Transaction No. Assets = Liabilities +

Final Equation 1,32,500 32,500 nil 10,000 0 1,75,000

Closing Capital = Closing Assets – Closing Liabilities

Profit = Closing Capital + Drawings – Additional Capital- Opening Capital

Closing Capital = 6,00,000 – 18,000 = 5,82,000

Profit = Closing Capital + Drawings – Additional Capital- Opening Capital

60,000 = 5,82,000 + 36,000 -60,000 – Opening Capital

Opening Capital = 5,82,000 + 36,000 -60,000 -60,000 = Rs. 4,98,000

Capital as on 1st April 2014 (Opening Capital) = Rs. 4,98,000

Rules of Debit and Credit

i Increase in assets are debits; decreases are credits.

Personal Accounts - Debit the Receiver; Credit the Giver

Name Of The Account

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

Date Particulars L.F. Dr.Amount Cr.Amt

Entries of specific transactions:-