FA Sem 1 Concepts Booklet Merged 25.02.21

SIMSREE Financial Accounting (FA) Sem I
Booklet Niranjan Punjabi (NP) Concepts

Sem I Financial Accounting (FA) SIMSREE
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Concepts Niranjan Punjabi (NP) Booklet

01 Basics of Book-Keeping Concepts 01 to 19

Solutions S 01 to 02
02 Journal Concepts 20 to 28
03 Ledger Concepts 29 to 32
04 Trial Balance Concepts 33 to 36

05 Inventories Concepts 37 to 39
06 Depreciation Concepts 40 to 44
07 Final Accounts : Sole Proprietor Concepts 45 to 57

08 Cost Sheet Concepts 58 to 66

09 Cash Flow Concepts 67 to 76

10 Capital & Revenue Concepts 77 to 79

11 Frauds & Errors Concepts 80 to 89

12 Company Final Accounts Concepts 90 to 98
13 Computerised Accounting Concepts 99 to 102
LMR Pages 103 to 108

LMR Pages S 73 to 74


Basics of
Book-keeping
1.1 Introduction
01 Book-keeping  Maintaining systematic record of business

transactions on day to day basis is called ‘Book-
keeping’.
02 Account  An Account is a summarized record of transactions
relating to :
 any person or
 any property or
 any expense / income.
03 Classification Accounts
of Accounts
Personal Impersonal
(Name)
Real Nominal
(Assets / Property) (Exps / Losses
Incomes / Gains)
04 Personal  Personal Accounts include the accounts of persons and
Account group of persons with whom the business deals. These
accounts can be classified into three categories :
a Natural Personal Account : The term natural
personal account means an account related to
individual human beings, egs : Ram’s A/c, Sonali’s
A/c, Raj’s A/c, etc.
b Artificial Personal Account : These accounts
include accounts of organisation, associations,
institutions which are recognised as an artificial
person by law in business dealings. Eg Sports Club
A/c, Insurance Co A/c, Bank of India A/c.
c Representative Personal Accounts : These
accounts represent a certain person or group of
persons in business dealings. Accounts relating to
Outstanding and Prepaid items are called
Representative Personal Accounts.
05 Real Account  The account which denotes things, articles or
commodities is called ‘Real Account’. These accounts
indicate the value of various assets held by the
business, eg : Land & Bldg, Machinery, Furniture, etc.
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 These accounts are sub-divided into two :

a Tangible Real Accounts : Tangible Real accounts
are those which relate to such things which can be
seen, touched, felt and measured and have
physical existence. Eg : Cash A/c, Goods A/c,
Building A/c, etc.
b Intangible Real Accounts : These accounts
represent such things which cannot be seen,
touched but they can be measured in terms of
money. Eg : Goodwill A/c, Patents A/c, Trademark
A/c, Copyright A/c, etc.
06 Nominal  The account of expenses and losses and incomes and
Accounts gains are called nominal accounts.
 These accounts exist in name only but they don’t
represent any tangible thing.
 Egs : Salary A/c, Rent A/c, Commission Recd A/c, etc.
07 Debit and  An Account has two sides called Debit and Credit.
Credit  Left hand side of an account is called as ‘Debit’ &
Right hand side of an account is called as ‘Credit’.
 Debit indicates benefit derived by that account.
Credit indicates benefit given by that account.
08 Golden Rules  Personal Account : Debit the receiver
Credit the giver
 Real Account : Debit what comes in
Credit what goes out
 Nominal Account : Debit all expenses / losses
Credit all incomes / gains
 One more rule : Debit all Assets
Credit all Liabilities

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1.2 Basic Accounting Terminology

01 Proprietor  Owner of a business is called ‘Proprietor’.
 This word indicates that there is only one owner, and
it is not a partnership business.
 In such cases all profits of the business will be taken
by the proprietor only.
 In Accountancy, business and owner are treated as
two separate persons.
 Proprietor’s Account is a Personal Account.
02 Partner  Each owner of a partnership business is called
‘Partner’.
 Partners are joint owners of partnership business.
 Profits of partnership business are shared in agreed
profit sharing ratio (PSR).
 Partners Account is a Personal Account.
03 Capital  Amount brought into business by the owner is called
‘Capital’.
 It is money invested by the owner in the business.
 For business, Capital is treated as a Liability.
 Capital Account is a Personal Account.
04 Drawings  Amount withdrawn by the owner from the business is
called ‘Drawings’.
 Whenever owner requires money for personal use he
withdraws from business. This is called as Drawings.
 Drawings Account is a Personal Account.
05 Goods  A commodity in which business deals is called ‘Goods’.
 Goods Account is a Real Account.
 Something may be goods for one person and not
goods for another person.
 For Eg : For Bata Limited shoes are goods, but for us
it is not goods because we are not dealing in shoes.
 Goods A/c is further classified as Purchase A/c,
Purchase Return A/c, Sales A/c Sales Return A/c and
Stock A/c.
 P, PR, S and SR are Nominal A/c but
Stock A/c is a Real Account.
06 Debtors  A customer to whom goods are sold on credit basis is
called ‘Debtor’.
 Amount is receivable by the business from the debtor,
therefore, it is an asset having debit balance.
 All customers are not debtors, but all debtors are our
customers.
 Customers to whom goods are sold on cash basis are
our customers but not our debtors.
 Debtors Account is a Personal Account.
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07 Creditors  A Supplier from whom goods are purchased on credit

basis is called ‘a Creditor’.
 Amount is payable by the business to the Creditor,
therefore, Creditor is a Liability having credit balance.
 All Suppliers are not Creditors, but, all Creditors are
Suppliers.
 Persons from whom goods are purchased on cash
basis are our Suppliers but not Creditors.
 Creditors Account is a Personal Account.
08 Bad Debts  Amt which cannot be recovered from a Debtor is called
‘Bad Debt’.
 It is a loss for our business.
 A question of bad debt arises only in credit sales.
 Bad Debt Account is a Nominal Account.
09 Bad Debt  Amt which was earlier written off as bad debt but now
Recovery recovered is called ‘Bad Debt Recovery’.
 It is an income for the business.
 Bad Debt Recovery Account is a Nominal Account.
10 Discount  Reduction in price or reduction in payment is called
Cash Discount ‘Discount’.
Trade Discount  Discount Account is a Nominal Account.
 Disc on Purchases = Discount Recd = Income = Credit
 Disc on Sales = Discount Allowed = Expense = Debit
 Discount is of two types viz Trade Disc and Cash Disc.
 Reduction in price is Trade Discount. It is allowed on
all transactions.
 Trade Disc is never recorded in the books of account.
 Reduction in payment is Cash Discount. It is allowed
only on cash transactions. It is recorded in the books
of account.
11 Assets  Property of business is called ‘Asset’.
Tangible A  Asset may be ‘fixed asset’ or ‘other assets’.
Intangible A  Fixed Asset may be ‘tangible’ or ‘intangible’.
 ‘Tangible Assets’ means Assets which can be seen
and touched.
 ‘Intangible Assets’ means asset which cannot be
seen or touched but can only be felt.
 Eg of Tangible Assets : Pl & Mach, Furniture, Motor
Car, etc.
 Eg of Intangible Assets : Goodwill, Patents,
Trademark, Copyright, etc.
12 Liabilities  Amt payable by business to others is called Liability.
 For eg : Creditors (Suppliers), Bills Payable, Bank
Loan, etc. Liabilities are classified as :
a Fixed Liabilities : One of the major source of
funds in the business are ‘fixed liabilities’. It may
be in the form of secured loans from banks,
financial institutions, etc.
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b Current Liabilities : Short Term Liabilities

payable within a yr are called ‘Current Liabilities’.
They constitute short term sources of finance.
Current liabilities arise in the regular current
operations of the business. These liabilities are
normally not secured.
13 Contingent  Contingent means Doubtful. Liabilities, the payment
Liabilities of which is uncertain are called ‘Contingent Liabilities’.
Whether there will be a liability or not would depend
on future happening which is uncertain.
 For eg : Claim for penalty pending in the court.
 As it is not confirmed or perfect liability, it does not
affect financial position of the business and therefore,
it is not shown on liability side of the Balance Sheet,
but shown by way of foot note to Balance Sheet simply
as information.
14 Goodwill  Reputation of business is known as ‘Goodwill’.
 Goodwill is the benefit and advantage of the good
name, reputation and connection of a business.
 It is an intangible asset.
 Goodwill Account is a Real Account.
15 Fixed Assets  Property of business is called as ‘Asset’.
 Any Asset which is -
a having life of more than one year; and
b is purchased with intention not to sell
is called ‘Fixed Asset’.
 Eg : Goodwill, Pl & Machinery, Furniture, etc.
 All Fixed Assets Account are Real Account.
16 Current Assets  Assets which remain in the business for only a short
time and can be converted into cash very easily are
called as ‘Current Assets’.
 Eg : Debtors, Bills Receivable, etc.
17 Fictitious  These assets are not represented by tangible
Assets possession or Property. They are imaginary assets but
do not have any exchange value.
 Eg : Preliminary Exps, Deferred Advt Exps, etc.
18 Net Worth  ‘Net Worth’ is the amount of funds provided by the
owners. It is also known as Owners Funds.
 Net Worth = Capital + Reserves (undistributed profit)
19 Accounting  Accounting Equation is the means by which the
Equation relation between assets, liabilities and owner’s capital
are expressed in mathematical terms.
 The Accounting Equation can be given as :
Total Assets = Liabilities + Capital OR
Capital = Assets - Liabilities
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20 Solvent /  A person whose assets are more than liabilities is

Insolvent called ‘Solvent’.
 Solvent is in a position to pay off all his liabilities.
 A person whose liabilities are more than assets is
called ‘Insolvent’.
 Insolvent is not in a position to pay off all his liabilities.
21 Accounting  Accounts are prepared for a particular period. This
Year period is called ‘Accounting Period’.
 Generally accounting period is one year.
 An Accountant has to prepare final accounts at the end
of its accounting year.
22 Capital  Expenditure incurred on :
Expenditure a Pur of Fixed Asset. Here ‘Fixed Asset’ means :
i asset having life of more than one year and
ii purchased with intention not to sell
b Any exp on Fixed Assets upto dt of installation.
c Any exp which would result into increase in the
production / earning capacity of the business.
 The benefit of such expenditure is not exhausted in
one year.
 For eg : Machinery purchased.
23 Revenue  Expenditure incurred on :
Expenditure a Purchase of Asset. Here ‘Asset’ means :
i asset having life of less than 1 year or
ii purchased with intention to sell
b Any exp on Fixed Assets after dt of installation.
c Any exp which would maintain the production /
earning capacity of the business.
 The benefit of such exp is exhausted in one year.
 For eg : Machinery repairing charges.
24 Deferred  Expenditure which is basically revenue expenditure
Revenue but due to following two reasons it is classified as DRE
Expenditure a huge amount
b future benefit
 No new asset is created.
 The benefit of such exps is not exhausted in one year.
For eg : heavy advertisement expenses.
25 Trading  Trade means buying and selling of goods.
Concern  A Concern which purchases and sells goods with profit
motive is known as a Trading Concern.
 It includes producers, wholesalers, retailers, etc.
 Trading concerns pur & sell goods with profit motive.
26 Not for Profit  A Concern whose object is to provide services to
Concern people without any intention to get profit is known as
‘Not for Profit Concern’.
 Eg : A Club, An Orphanage, etc.
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27 Transaction  A dealing between two or more persons is called as

transaction.
 Only business transactions are recorded in the books
of account.
 A transaction may be a cash or a credit transaction.
 If money is received or paid immediately against
goods then it is called ‘Cash Transaction’.
 If money is not received or paid against goods /
services then it is called ‘Credit Transaction’.
28 Monetary  Transactions which involves an exchange of money or
Transaction & money’s worth directly or indirectly are called
Non-monetary ‘Monetary Transactions’.
Transaction  Monetary Transactions include both cash transactions
and credit transactions.
 A Transaction in which there is no cash payment,
neither present nor future is called ‘Non-Monetary
Transaction’.
 It is also known as ‘Transaction in Exchange’ or ‘Barter
System’. Eg : Exchange of two old cars for a new car.
29 Profit / Loss a Excess of Income (Revenue) over Expenses during the
accounting year is ‘Profit’. It increases the Owners’
Capital’.
b Excess of Expenses over Income during accounting
year is ‘Loss’. It decreases Owners’ Capital.
c Profit may be Gross Profit, Operating Profit, Non-
Operating Profit, Net Profit.
d Gr Profit = Net Sales (-) Cost of Goods Sold (COGS)
If COGS is more then Sales, it is Gross Loss.
Net Sales = Cash Sales + Cr Sales – Sales Return (SR)
e Operating Profit = Gross Profit (-) Operating Exps
Here, Op Exps = O&A Exps + S&D Exps + Fin Exps
If Op Exps are more than Gross Profit, it is Op Loss.
f Non-Operating Profit=Non Op Income–Non Op Exps
NOI and NOE arise as a result of non op activities.
g Net Profit = Op Profit + Non Op Profit.
30 Income  It is revenue arising as a result of business
transactions. Eg : Sale of Goods, Receipt of Rent,
Interest, Commission, Dividend, etc.
 Amt recd over and above the cost is called Profit,
whereas Any Revenue Receipt is called Income.
 Profit = SP – Cost. No such equation is required for
Income.
 Goods costing ` 5,000 sold for ` 7,000 in this
transaction ` 2,000 is Profit whereas ` 7,000 (sale
proceeds) is Income.
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1.3 Show Accounting Equation

No. Transaction Assets Liabilities Capital
1 Commenced business with Cash + 20,000 + 20,000
` 20,000.
2 Purchased Furniture for ` 5,000. + 5,000
- 5,000
3 Purchased Goods for ` 1,000 in

cash.
4 Purchased Goods for ` 2,000 on

credit.
5 Sold goods costing ` 2,500 for `

4,000.
6 Owner withdrew ` 2,000 for

personal use.
7 Paid Rent ` 1,000.
8 Paid to Creditors ` 2,000.
9 Purchased household goods for `

15,000 paying ` 5,000 in cash &
balance through loan.
10 Repaid Loan ` 5,000.
11 Started business with cash `

50,000.
12 Opened a Bank A/c depositing `

25,000.
13 Purchased goods of ` 5,000 and

cheque issued.
14 Issued cheque of ` 2,000 for

salary.
15 Recd cheque of ` 2,000 towards

commission.
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No. Transaction Assets Liabilities Capital

16 Withdrew cash from bank `
1,000 for office use.
17 Withdrew cash from bank for

personal use ` 500.
18 Bank charged our A/c ` 100

towards Bank Charges.
19 Deposited Cash ` 1,000 in Bank.
20 Received cheque of ` 5,000

towards loan.
1.4 Classification of Accounts : Examples
Personal Accounts Real Accounts Nominal Accounts

01 Bank A/c 01 Stock of Statn A/c 01 Stationery A/c
02 Bank of India A/c 02 Cash A/c 02 Bank Charges A/c
03 Bills Payable A/c 03 Bills Receivable A/c 03 Discount Recd A/c
04 Salesman’s A/c 04 Equipment A/c 04 Discount Allowed A/c
05 Mr Sam's Loan A/c 05 Furniture Fitting A/c 05 Advertisement A/c
06 Adv to Sam A/c 06 Plant & Mach A/c 06 Brokerage on Sh A/c
07 Vibhuti Stores A/c 07 Share & Stock A/c 07 Typing Charges A/c
08 Jay CHS Ltd A/c 08 Typewriters A/c 08 Dividend A/c
09 Mumbai Univ A/c 09 Investments A/c 09 Income Tax A/c
10 Tata Trust A/c 10 Railway Siding A/c 10 Royalty A/c
11 O/s Salaries A/c 11 Laptop A/c 11 Carriage Inwards A/c
12 Prepaid Sal A/c 12 Freehold Prem A/c 12 Carr Outwards A/c
13 E’ee Prov Fund A/c 13 Leasehold Prem A/c 13 Managers Salary A/c
14 Advance A/c 14 Loose Tools A/c 14 Depreciation A/c
15 Loan to Govind A/c 15 Securities A/c 15 Interest Received A/c
16 Loan from Jay A/c 16 Shares A/c 16 Professional Fees A/c
17 HDFC’s A/c 17 Units of MF A/c 17 Taxes A/c
18 Prepaid Advt A/c 18 Debentures A/c 18 Loss by fire A/c
19 O/s Advt A/c 19 Livestock A/c 19 Conveyance A/c
20 Cash at Bank A/c 20 Goodwill A/c 20 Wages A/c
21 Bank Overdraft A/c 21 Patents A/c 21 Salaries A/c
22 Rent Owing A/c 22 Trademark A/c 22 Ins Premium A/c
23 PQ Ad Agency A/c 23 Copyright A/c 23 Oil and Fuel A/c
24 AbhiAsh Corpn A/c 24 Insurance Claim A/c 24 Audit Fees A/c
25 Insurance Co A/c 25 Stk of Oil & Fuel A/c 25 Directors Fees A/c
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1.5 Book-keeping And Accountancy
01 Meaning and  Maintaining systematic record of business

Definition of transactions on day to day basis is called as ‘Book-
Book-keeping keeping’.
 J R Batliboi : Book-keeping is the art of recording
business dealings in a set of books.
 Northcott : Book-keeping is the art of recording in the
books of account the monetary aspect of commercial
or financial transactions.
02 Features of  It is an art of recording transactions scientifically.
Book-keeping  There must be a documentary support of each and
every transaction.
 The system of recording should be universal.
 The recording is made of monetary transactions only.
 The business records its own transactions with others.
 Recording of transactions is made in a given set of
books only.
03 Objectives of  To know profit / loss.
Book-keeping  To know the financial position.
 To have systematic record.
 To know the capital invested.
 To understand cash and stock balance.
 To review the progress.
 To prevent errors and frauds.
 To keep a check on property.
 To provide valuable information for decision-making.
04 Importance of  Facilitates Planning.
Book-keeping  Evidence in litigation.
 Decision-making.
 Settlement of tax liability.
 Controlling.
 Helpful in getting loans.
 Aid to memory.
 Protection against theft/dishonesty.
 Comparative study.
05 Utility of Book-  Owner : It helps to find out profits, losses, assets in
keeping the business at any time.
 Management : It helps management in planning,
decision making, controlling and managing the overall
business activities.
 Government : Various departments of govt will be able
to find out the taxes due from various owners.
 Investors : It enables investors to take a decision
whether to invest or not.
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 Customers : Customers can judge the financial

capacity of the business and can remain assured about
smooth supply of goods.
 Lenders : Lenders can study creditworthiness of
business firm with help of books of accounts which
assures continuous supply of funds.
06 Accountancy  Accountancy is a wider concept than Book-keeping.
 Book-keeping is recording branch of Accountancy.
 Accountancy includes recording (book-keeping),
classifying, summarising and interpreting of the
business transactions.
 It makes easy to take decisions relating to business.
 Accountancy starts where Book-keeping ends.
07 Basis of  Cash Basis : Cash basis is one of the most popular
Accounting basis whereby income is recorded when cash is
actually received and expenses are recorded when
cash is actually paid. Under this system, only cash
transactions are recorded.
 Accrual Basis : Income is recorded when it accrues (is
earned) and expenses are recorded when they
become payable.
 Cash as well as credit transactions are recorded.
Accrual Basis records income and expenses as they
are earned or incurred and not as per amount received
or paid. This is also known as ‘Mercantile Basis of
Accounting’.
08 Qualitative  Reliability : The important qualitative characteristic
Characteristics is its reliability. It means that every accounting info
of Accounting should be based on verifiable documentary evidence.
Information It requires that accounting information must possess
the features of verifiability and faithfulness.
 Relevance : The accounting information disclosed by
the books of accounts and financial statements must
be relevant. It means that accounting information
should not contain unnecessary and irrelevant
information. Every important information must find a
place in the books of accounts.
 Understandability : Accounting information should
be recorded presented and interpreted in such a way
that it should be easily understood by users.
 Comparability : It is one of the important
characteristic of accounting information. In order to
bring accuracy in the comparison methods and
practice of recording and presenting accounts,
information should be consistent and must not change
from year to year otherwise comparability will suffer.
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Niranjan Punjabi (NP)

11
Booklet Concepts
09 Branches of  In order to satisfy the needs of different people

Accounting interested in the accounting info, different branches of
accounting have been developed.
1 Financial Accounting : It is the original form of
accounting. The purpose of this branch is to keep
systematic records to ascertain financial
performance & financial position and to
communicate the accounting information to the
interested parties.
2 Cost Accounting : It is the process of accounting
and controlling the cost of a product, operation or
function. The purpose of this branch is to ascertain
the cost, to control the cost and to communicate
information for decision making.
3 Management Accounting : It is an accounting
for the management i.e. accounting which
provides necessary information to the top level
management for discharging its functions. The
purpose of this branch is to supply all information
that management may need in taking decisions
and to evaluate the impact of its decisions and
actions.
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1.6 Concepts And Conventions
01 Accounting  Principles means Origin or Source.

Principles  It is fundamental truth.
 It is a belief on which other theories are founded.
 Such Principles are universally accepted.
 Accounting Principles are not nature made, they are
man-made, hence, they are flexible, not rigid.
 They are subject to change according to need and
circumstances.
 Development of Accounting Standards / Principles is a
continuous process.
 Accounting Principles are adopted by accounting
bodies viz ICAI, Stock Exchange, etc.
 Accounting Principles are classified into 2 parts viz :
1 Accounting Concepts
2 Accounting Conventions
Accounting Principles
Accounting Accounting
Concepts Conventions
02 Concepts  Concepts means some common idea.
 It is a basic assumption on which accounting principles
are based. It is a basic idea or opinion formulated for
accounting purpose.
 They are universally accepted.
 They are fundamental assumptions or conditions upon
which accounting is based.
 They are not fixed / not rigid.
 They are continuously changing.
 There is inter-relationship between different
accounting concepts.
03 Conventions  Convention means some customs which is followed
since many years.
 They are also known as ‘rules of statement of practice’
04 Business  Also known as ‘Accounting Entity Concept’.
Entity Concept  ‘Entity’ means status / personality.
 In Accountancy, it is assumed that the business and
its owners are two separate persons.
 As an Accountant, we are concerned with business.
 As an Accountant, we are not concerned with the
Owner, we maintain books of account of the business
and not of owner.
 Based on this Concept, we treat Capital of the Owner
as the Liability of the business.
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Booklet Concepts
05 Money  It is also known as monetary unit concept.

measurement  All business transactions are recorded in monetary
Concept value (money).
 Transactions which can be measured in money to be
recorded in the books of accounts because money is
used as a common measuring unit.
 Transactions which cannot be expressed in terms of
money are not to be taken into account.
06 Cost Concept  Cost Price is the price paid at the time of purchase.
 All Accounting Entries are normally based on cost.
 Eg : Asset of reasonable proper value of ` 90,000 is
purchased by us for ` 85,000, then, we pass the entry
for ` 85,000 only because that is the actual cost of
asset.
07 Going Concern  This concept is also called as ‘Concept of Permanency’,
Concept ‘Concept of Continuity’ or ‘Concept of Continued
Activity’.
 Continuing activity is the normal business process.
 It is believed that business has long life and it is not
only one year.
 Business has perpetual succession (indefinite life).
 This Concept makes distinction between Capital and
Revenue Expenditure.
 Life of business is not fixed and is unpredictable.
08 Dual Aspect  This is a basic Concept in Accounting.
Concept  As per this concept, every business transaction has a
dual effect.
 It tells that minimum two accounts should be affected
by a business transaction, then only it can be
recorded.
 For eg : Gave two ` 50 notes in exchange of one ` 100
note as change, is not to be recorded because two
accounts are not involved, it is only Cash Account.
09 Realisation  According to this concept, profit should be accounted
Concept for only when it is actually realised.
 Revenue / Income is recognised only when sale is
effected or the services are rendered.
 However, to recognise revenue, receipt of cash is not
essential.
 Even credit sale results in realisation as it creates a
definite asset called Debtors.
10 Accrual  ‘Accrual System’ is a method whereby revenue and
Concept expenses are identified with specific period of time like
month, year, etc.
 It implies recording of revenues and expenses of a
particular accounting period, whether they are
received / paid in cash or not.
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 Under ‘Cash System’, the revenues and expenses are

recorded only if they are actually received / paid in
cash irrespective of the accounting period to which
they belong.
11 Convention of  Consistency’ means whatever principles, rules,
Consistency methods, etc are followed should not be changed from
year to year. The comparison of one accounting year
with other is possible only when the convention of
consistency is followed.
 Any change from one method to another would lead
to inconsistency. However, consistency does not mean
non-flexibility. Introduction of improved techniques of
accounting is permitted.
12 Convention of  It refers to ‘playing safe’. It takes into consideration
Conservatism all future losses but not all prospective profits.
 According to this principle profits should not be taken
into consideration unless it is unconditionally due,
earned and all possible losses must be fully
considered.
 According to this principle, stock is to be valued at cost
or market price whichever is less.
13 Convention of  To disclose means to show or to make clear.
Disclosure  In financial statements and reports all material and
relevant facts must be mentioned clearly so that
readers get a clear idea of it without any doubt.
 By giving full details investors will not be misdirected.
 Full disclosure does not mean all small points should
be mentioned.
14 Convention of  Materiality means relative importance of some
Materiality transactions.
 An item should be regarded as material, if there is a
reason to believe that knowledge of it would influence
the decision of informed investors.
 Materiality depends upon size of amt and its nature.
 An item may be material for one concern but
immaterial for another. It may be material for one
year but immaterial for next year.
 It is the relative importance which matters more.
15 Revenue  This principle is mainly concerned with revenue being
Recognition recognized in the Income Statement of an
Principle organization. Revenue is the gross inflow of cash
receivables or other considerations arising in the
course of ordinary activities.
 Revenue is recognized in period in which it is earned
irrespective of the fact whether it is received during
that period.
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Booklet Concepts
16 Matching  Expenses incurred in an accounting period should be

Principle matched with the revenue recognized in that period.
Eg. if revenue is recognized on all goods sold during a
period, cost of those goods sold should also be
charged to that period.
 This concept is considering accrual basis and therefore
considers all adjustments of prepaid expenses,
outstanding expenses, accrued and un-accrued
expenses.
17 Accounting  AS are written policy documents issued by the
Standards Government.
(AS)  It covers following various aspects :
1 Recognition
2 Measurement
3 Treatment
4 Presentation
 Standards of Accounting is recommended by the ICAI
and prescribed by the Central Govt in consultation
with NACAS. (National Advisory Committee of
Accounting Standards).
18 Objectives of  To standardize accounting policies.
AS  To eliminate non comparability of financial statements
 To add reliability to financial statements.
19 IFRS  IFRS (International Financial Reporting Standard) is a
single set of high quality, understandable and
enforceable global accounting standards.
 It is a principle based on set of standards which are
drafted in a simple manner and are easy to
understand and apply.
 IFRS brings uniformity in the accounting practices
followed.
 IFRS comprises of :
1 International Accounting Standards (IAS)
2 International Financial Reporting Standards
(IFRS)
3 Standing Interpretation Committee (SIC)
 In addition to above there is a framework for the
preparation & presentation of financial statements
which describes the principles underlying IFRS.
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16

1.7 Double Entry System
01 Systems of  There are different systems i.e. methods of

Book-keeping maintaining books
1 Indian System
2 Single Entry Accounting System
3 Double Entry Accounting System
02 Indian System  Also known as Mahajani/Marwari/Desi Nama method.
 It is most conventional method of accounting.
 Generally records are maintained in Indian languages
like Marathi, Hindi, Gujarati, etc.
 Transactions are maintained in long books called
‘Bahis’ and method of recording is called ‘Bahikhata’.
 Principles of double entry system debit and credit are
adopted here also but names of the two sides are
reversed.
03 Single Entry  Incomplete record of business transactions are
System maintained.
 Under this system, only cash book and personal
accounts are maintained.
 This system fails to give proper information to the
owner.
 It is not a scientific method/system.
 In single entry system records of business are
incomplete.
 A diary is maintained in 3 sections viz :
1 Cash transactions
2 Ughrani Nondh / Collection Book
3 Jama Nondh / Payment Book
04 Double Entry  This system was invented by an Italian Merchant
System named Luca D Pacioli. He is the father of Double Entry
System. He published his book on Double Entry
System in 1494.
 Double Entry System is based on the Principle that
‘every debit must have a corresponding credit’.
 The debit aspect is recorded or posted to the debit side
of an Account while credit aspect is posted to the
credit side of another Account.
05 Principles of  Every business transaction has two aspects, one
Double Entry receiving benefit and the other giving it. Thus, ‘Every
System debit has a corresponding credit’.
 Both the aspects are recorded in the books of account.
 The two fold effect of a business transaction is
recorded by debiting one account and crediting the
other account, at the same time.
 Every debit has equal and opposite credit. i.e. Every
debit has a corresponding credit.
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Booklet Concepts
06 Advantages of  It is very easy to calculate profit/loss, receivable /

Double Entry payable amts.
System  Trial Balance can be prepared to check the
arithmetical accuracy.
 Mistakes / errors can be easily detected and rectified.
 Useful method to compare accounts of two periods.
 It is complete, scientific and satisfactory system.
07 Disadvantages  It is difficult to locate business transaction which is not
of Double recorded.
Entry System  A compensating error may not be detected.
 If wrong amount is recorded in the books of original
entry, then such mistake cannot by detected by this
system.
 Posting under wrong account head, but on the proper
side, such error may not be detected by this system.
1.8 Accounting Cycle

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18

1.9 Distinguish Between
Real Account Nominal Account

1 These are Accounts of Assets / 1 These are Accounts of expenses /
Properties. losses or incomes / gains.
2 They represent something 2 They do not represent anything
tangible or real. tangible or real.
3 Real Accounts represent assets 3 They do not continue year after year.
which continue year after year They appear in the accounts of the
until they are sold off. year in which they are incurred.
4 At year end, the balance of Real 4 At year end, the balance of Nominal
Account is shown on asset side of Account is transferred to Profit & Loss
Balance Sheet. Account.
Conventional Accounting System Double Entry Book-keeping System

1 This method records incomplete 1 This method is scientific and records
business transactions. complete business transactions.
2 It is the method covering less 2 It covers complete details of business
detains of transactions. transactions.
3 It is traditional method. 3 It is modern method.
4 Accuracy is not guaranteed. 4 Arithmetical accuracy is assured.
5 Only 2 books are prepared, Cash 5 All subsidiary books / Journals and
Book and Ledger. Ledger are prepared.
6 All transactions are basically 6 All transactions are recorded in
recorded in only one book i.e. different Subsidiary Books / Journals.
Cash Book.
Trade Discount (TD) Cash Discount (CD)

1 Reduction in price is called TD. 1 Reduction in payment is called CD.
2 Generally, TD is allowed for bulk 2 Generally, CD is allowed for quick
purchases. payment.
3 TD is calculated on Gross Amount. 3 CD is calculated on net amount, i.e.
after deducting TD, if any.
4 TD is never recorded in the books 4 CD is always recorded in the books of
of accounts. accounts.
5 TD is allowed on all cash and 5 CD is allowed only on cash
credit transactions. transactions. CD is not allowed on
credit transactions.
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Booklet Concepts
Journal
2.1 Basics
01 Journal is a book of original / prime entry.
02 Word Journal is derived from French word ‘Jour’.
03 Brief explanation of an entry is called ‘narration’, it starts with the word

‘being’ and is written below the entry in Journal.
04 Transactions are recorded in Journal in chronological order.
05 Entry in which one account is debited and another account is credited is

called ‘Simple Entry’.
06 Entry in which more than one account is debited or credited is called

‘Combined Entry’.
07 A page or a leaf is called ‘folio’; and, Page of a Journal is called ‘Journal

Folio’.
08 In accountancy, totaling of accounts is called ‘casting’.
09 Format of Journal :
Journal of M/s . . . . . . . . . . . .
Date Particulars LF Debit ₹ Credit ₹

2020
April 01 Cash A/c . . . . . . . . . . . . . . . Dr 50,000
To Capital A/c . . . . . . . . . 50,000
(Being Capital introduced by
Proprietor Mr Sanjay)
Page
20

2.2 State the Accounts Affected
No. Transaction Debit Account Credit Account
01 Started business with Cash A/c Debit. Capital A/c Credit.

Cash. Real Account. Personal Account.
Debit what comes in. Credit the giver.
02 Received cash from

Ashok.
03 Paid cash to Suresh.
04 Bought goods for Cash.
05 Bought goods from Amit

on credit basis.
06 Sold goods to Kiran on

credit.
07 Withdrew cash from

office for personal use.
08 Paid Rent.
09 Sold goods to Akshay

for cash.
10 Paid Cash for Private

Expenses.
11 Paid Salaries to clerk

Avinash.
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21
Booklet Concepts
12 Paid Wages to Workers.
13 Received Commission.
14 Paid Interest on
Sanjay’s Loan.
15 Received Dividend.
16 Bought Goods from S

Sampat on credit.
17 Invoiced goods to
Narayan.
18 Bought from Rahim

goods for cash.
19 Narayan sent us cash

on account.
20 Ramesh bought goods

from us.
21 Opened a bank account

and deposited cash.
22 Sold goods to Naresh

for cash.
Page
22

23 Purchased goods from

Sudhir for cash.
24 Cash Sales.
25 Cash Purchases.
26 Paid to Ram by Cheque.
27 Received a cheque from

Arun.
28 Paid Municipal Tax.
29 Purchased Furniture.
30 Paid Rent to Amitabh.
31 Paid office cash for

personal expenses.
32 Recd order form Hari for

goods to be dispatched
next week.
33 Cash deposited in the

bank.
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23
Booklet Concepts
34 Cash withdrawn from

Bank.
35 Purchased Machinery.
36 Purchased Machinery
from Batliboi & Co.
37 Purchased Machinery
from Batliboi & Co. and
paid cash.
38 ` 5,000 due from

Ramesh and he became
insolvent.
39 ` 500 earlier written off

as bad debt now
recovered from Mr Sam.
40 Received free samles

worth ` 2,000 from Big
Bazaar.
41 We deposited ` 1,200
into bank account of
Sajana.
42 Distributed free samples

worth ` 250.
Page
24

2.3 Journalise the following transactions

2020
Jan 01 Paid to Vidya on account ` 1,800.
Jan 02 Cash recd from Mr Ravi ` 2,500 in settlement of his account of ` 2,850.
Jan 04 Paid to Mehta ` 1,450 in full settlement of ` 1,500.
Jan 07 Mr Cashier is absconding (stealing and misusing) with cash ` 600 from
cash box.
Jan 07 We sold goods for ` 5,150 vide cash memo no. 4684 to Mr Sunil.
Jan 08 Received ` 550 from sale of old newspapers and magazines.
Jan 12 Cheque received from Sujeet ` 20,000.
Jan 15 Opened a current account in Bank of Maharashtra depositing ` 40,000.
Jan 17 Received a cheque of ` 1,000 from Rajnikant on account.
Jan 21 Cheque received from Mr Rajnikant, returned dishonoured.
Jan 25 Issued 2 cheques to Mr C for Rent & Mr D for Salary ` 4,000 and ` 8,000
respectively.
Jan 29 Cheque issued to Mr C is returned dishonoured by bank for difference in

signature.
Feb 01 Bank debited our account for interest on overdraft ` 785 and credited
our account by ` 500 towards dividend collected.
Feb 04 Bank transferred to personal recurring deposit a/c ` 1,000.
Feb 05 Issued a bearer cheque to Tulsi for ` 2,500 as professional fees.
Feb 06 Transferred ` 15,000 from saving bank a/c of proprietor to business

(current) Bank A/c.
Feb 08 Paid Rent to landlord as advance ` 75.
Feb 09 Commission paid to Kiran ` 200 for securing order for goods.
Feb 13 Paid Insurance Premium for Goods ` 250 and Life Insurance of the owner
` 500.
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Booklet Concepts
Feb 15 Paid for advertisement ` 27,000 out of which 11 1/9th % of the amt is
for next year.
Feb 16 Received dividend ` 450.
Feb 18 Received Interest ` 5,000 from Neema & Co for the loan given to them.
Feb 20 Exchanged goods of ` 5,000 for Typewriter of the same cost.
Feb 23 Recd from Sita one hundred rupee note and gave her change for it.
Feb 24 Loan taken from Mr Malpani ` 10,000 at interest @ 24% p.a.
Feb 25 Repaid Abhay's loan of ` 10,000 with interest by a cheque of ` 10,200.
Feb 28 Gave loan to Sumit by cheque ` 4,000 at 12% interest p.a.
Mar 01 Goods with selling price ` 1,250 were distributed as free samples. We
sell goods @ cost plus 25% on cost.
Mar 01 Goods representing cost ` 500 and selling price ` 700 were donated to
the poor.
Mar 05 Received free samples worth ` 500 from Sonal.
Mar 09 Free samples received from Sonal was sold to Monal at ` 400.
Mar 10 Goods worth ` 100 were damaged in transit.
Mar 13 Goods burnt by fire ` 1,050.
Mar 15 Insured goods of ` 5,000 destroyed by fire and we expected claim for `
3,000.
Mar 19 Insurance company paid the amount by cheque for the above.
Mar 22 Withdrew cash ` 300 and goods worth ` 500 for personal use.
Mar 23 Purchased Furniture for personal use worth ` 3,000, amount paid
through personal bank account.
Mar 28 Proprietor Yogesh gave present of ` 21 to his wife on her birthday.
Mar 31 Proprietor Yogesh gave present of ` 51 to secretary Miss Sweety on her

birthday.
April 04 Settled Bhavesh's a/c of ` 10,000 by issuing a cheque after deducting

C.D. @ 2%.
Page
26

April 05 Mr Bhavesh informed us about the dishonour of our cheque.
April 06 Received chq of ` 4,050 on cash sales. We allowed C D @ 10% to the

customer, Mr Ashok.
April 07 Settled A/c with Suresh 1/3rd by cash and 2/3rd by cheque. Amount due
was ` 6,000.
April 12 Vijay sold to us goods worth ` 7,500 on credit.
April 15 Purchased goods from Mr Ramniklal of ` 7,000 at 10% C.D. on cash

terms.
April 21 Cash Sales at list price ` 8,000, trade discount allowed ` 400, cash
discount ` 200.
April 21 Sold goods worth ` 10,000 to Divakar who paid us ` 6,000 on account.
April 21 Furniture costing ` 20,000, book value ` 15,000 was sold at ` 11,000.
April 24 Purchased Watchdog for ` 750 for office.
April 29 Bought Machinery from Mahendra ` 9,000 & paid loading charges ` 200.
April 30 Installation charges paid on above Machinery ` 200.
May 01 Mr Arun started business with the following assets and liabilities :
Leasehold Premises ` 3,15,000, Machinery ` 1,85,000, Furniture `
62,000, Ashok A/c (Dr) ` 9,500, Abhay A/c (Cr) ` 14,000, Prepaid
Insurance ` 4,500, Balance due to Bank ` 36,000, Accrued Salary `
3,500, Stk of Goods ` 29,000, Loan from Mr Anil ` 35,000.
May 05 Purchased 25 shares in Y & Co Ltd at ` 60 per share & brokerage paid `
25.
May 09 Sold 10 shs in Y Ltd at ` 65 per share, brokerage pd ` 10. These were
pur @ ` 61.
May 12 Ramesh's A/c which is overdue is closed as the amount is not

recoverable ` 700.
May 13 Anil, our Debtor, for ` 500 is declared insolvent and we realised 70% of
the dues.
May 18 Dinesh was declared insolvent and we could receive 50 paise in a rupee
as first and final dividend. Amount due was ` 8,000.
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27
Booklet Concepts
May 21 Received ` 550 from Mr Paresh whose account was written off as bad in
the past.
May 24 Placed an order for goods with Ramnivas for ` 2,000.
May 28 Recd an order for supply of goods ` 10,000; with this, received an
Demand Draft towards 50% advance.
May 30 Placed an order for furn ` 40,000 with Parth & Co, who supplied on next
day.
June 01 Paid Rent ` 75 on behalf of Prakash.
June 02 Prakash paid Rent ` 75 on our behalf.
June 10 Sent goods to Vidya under instructions from Sujata worth ` 5,000.
June 12 Paid rent to landlord ` 6,000. 1/4th of the premises is used for residential
purpose.
June 13 Received free sample of ` 1,500.
June 18 On behalf of Mr Atul, goods of ` 7,000 dispatched to Asha.
June 19 Purchased Computer of ` 40,000 and paid by cheque. Also paid

installation charges ` 1,400 in cash.
June 22 Paid into the bank A/c of our creditor Mr Pradeep ` 5,000.
June 26 Sold old furniture to Mr Dilip of ` 7,000 at a profit of ` 700.
June 28 Goods costing ` 10,000 were sold at a loss of ` 1,500.
June 30 Rent due ` 1,500 to Landlord Mr Bala Thakur.
2.4 Subsidiary Books
 When the number of transactions is large, recording each transaction in

Journal becomes difficult and impractical. In such case, Journal is sub
divided into various books called Subsidiary Books. All such Subsidiary
Books are books of prime entry.
 The various Subsidiary Books are : Cash Book, Petty Cash Book, Purchase
Book, Sales Book, Purchase Return Book, Sales Return Book, etc.
 The residuary transactions for which there is no separate Subsidiary Book,
continue to remain in Journal called as ‘Journal Proper’.
Page
28

Ledger
3.1 Basics
01 Ledger is a book of secondary entry.

02 Ledger contains various personal real and nominal accounts.
03 Each account has two sides, LHS is known as debit side and RHS is known
as credit side.
04 Opening / Closing Balances :
Account Nil Balance Debit Balance Credit Balance
Personal A/c Possible Possible Possible
Real Account Possible Possible Not Possible
Nominal Account Possible Not Possible Not Possible
05 On debit side, we write word ‘To’ and name of opposite account.

06 On credit side, we write word ‘By’ and name of opposite account.
07 No narration to be written in ledger.
08 Process of transferring of entries from Journal / book of prime entry to
ledger is called ‘Posting’.
09 Totaling is called casting.
10 At year end, closing of accounts and determining the balance is called
‘balancing’.
11 Opening balance appears on same side, closing balance appears on opposite
side.
12 Closing balances are listed in Trial Balance. Trial Balance is prepared before
preparing final accounts.
13 Format of Ledger Account :
Books of M/s . . . . . . . .
Dr Sanjay A/c Cr
Date Particulars JF Amt ` Date Particulars JF Amt `
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Booklet Concepts
3.2 Posting
1 A A/c . . . Dr 50 A A/c B A/c

To B A/c 50 To B A/c 50 By A A/c 50
2 C A/c . . . Dr 60 C A/c D A/c

To D A/c 15 To D A/c 15 By C A/c 15
To E A/c 45 To E A/c 45
E A/c
By C A/c 45
3 F A/c . . . Dr 75 F A/c H A/c

G A/c . . . Dr 5 To H A/c 75 By F A/c 75
To H A/c 80 By G A/c 5
G A/c
To H A/c 5
4 I A/c . . . Dr 90 I A/c K A/c

J A/c . . . Dr 10 To Sundries 90 By Sundries 92
To K A/c 92
To L A/c 8
J A/c L A/c
To Sundries 10 By Sundries 8
Page
30

3.3 Problems : Ledger Accounts
Problem 01
From following transactions for the month of April 2020, Prepare Sita’s A/c in the
books of Gita.
April 01 Sita’s A/c shows credit balance in the books of Gita ` 1,000.
April 03 Returned goods to Sita ` 500.
April 05 Purchased goods on credit from Sita ` 3,000.
April 06 Paid cash to Sita ` 800.
April 10 Received cash from Sita ` 2,000.
April 15 Returned goods to Sita ` 700
April 30 Paid ` 3,700 in full settlement of her account.
Problem 02
Prepare Cash A/c from following transactions of January 2020 and ascertain the
balance of cash on hand as on 1st Feb 2020. Amt `
1 Opening Balance 1,000
5 Received Cash from Francis 2,400
8 Paid Cash to George 1,500
10 Cash Sales 4,100
15 Cash Purchases 2,600
18 Paid into Bank 1,200
20 Drew for personal use 700
23 Brought additional capital in business 5,000
25 Received Rent from tenant 900
28 Paid for Postage 100
31 Paid Salaries 800
31 Paid Wages 200
Problem 03
Prepare Goods Account from the following information of Jan 2020 :

01 Value of stock on hand ` 4,000.
04 Bought goods worth ` 3,200 from Anand.
06 Sold goods worth ` 4,500 to Sadanand.
08 Cash Purchases ` 3,500.
10 Cash Sales ` 5,000.
13 Returned goods worth ` 200 to Anand.
15 Sadanand returned goods worth ` 300 to us.
19 Goods worth ` 100 were distributed as free samples.
20 Goods costing ` 1,000 were destroyed by fire.
22 Goods worth ` 350 were stolen from shop.
25 Goods worth ` 500 were withdrawn for personal use.
28 Cash Purchases ` 2,800.
31 Closing Stock ` 1,000.
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Booklet Concepts
Problem 04
From following transactions of Dec'19 Prepare Cash A/c and Pl & Mach A/c in ledger
of Pratik. Also close both the accounts.
1 Started business with Cash ` 10,000 and Machinery ` 2,000

4 Purchased goods worth ` 7,000 from Amar and paid ` 1,000 to Amar
immediately.
6 Office rent paid ` 400.
14 Mr Pratik took away cash ` 450 for his domestic use.
20 Sold goods on credit to Vinay for ` 10,000 with T.D. @ 10%.
27 Pur mach worth ` 7,000 on credit from Atul Engineering Ltd & paid carriage
thereon ` 500.
27 Old machinery worth ` 1,400 was sold for cash ` 1,800.
31 Vinay paid the amount due in cash.
Problem 05
Dr Ram’s A/c Cr
2019 2019
Apr 1 To Balance b/d 7,000 Jun 30 By Sales Return A/c 300
Oct 25 To Sales A/c 13,000 Sep 05 By Cash A/c 6,500
Dec 31 To Sales A/c 10,000 Sep 05 By Discount A/c 200
Oct 05 By Cash A/c 10,000
2020
Mar 31 By Balance c/d 13,000
30,000 30,000
2020
Apr 1 To Balance b/d 13,000
From the above Ram’s Account, answer the following questions.

1 Whether Ram is a Debtor or Creditor on 1st April 2019 ?
2 Give an entry for the Posting dated September 5, 2019.
3 Explain the posting dated October 25, 2019.
4 Whether Ram is a Debtor or Creditor on 31st March 2020 ?
Page
32

Trial Balance
4.1 Basics
01 A Trial Balance is a statement which shows the list of debit and credit
balances of various ledger accounts from the books of accounts as on a
particular date.
02 Trial Bal serves as a test of arithmetical accuracy of the books of accounts.
03 Debit all Assets
Credit all Liabilities.
04 Debit all Expenses / Losses
Credit all Incomes / Gains.
05 Drawings = Debit
Capital = Credit
06 If the trial balance does not tally, the difference is temporarily placed to
‘Suspense Account’.
07 Format : (Horizontal Form)
M/s . . . .
Trial Balance as on . . . . . . . .
Name of Account Debit ` Name of Account Credit `
08 Format : (Vertical Form)

M/s . . . .
Trial Balance as on . . . . . . . .
No. Name of Account LF Debit ` Credit `
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33
Booklet Concepts
4.2 Decide Debit or Credit for Trial Balance
1 Drawings 34 Bills Receivable 67 Provident Fund

2 Capital 35 Bills Payable 68 Provident Fund Invts
3 Return Inwards 36 Customers 69 Int on PF Invts
4 Return Outwards 37 Suppliers 70 Contr to PF
5 Purchases 38 Cash balance 71 Acceptance Recd
6 Sales 39 Petty Cash balance 72 Accceptance Given
7 Bank Balance 40 Goodwill 73 Freehold Premises
8 Bank Overdraft 41 Patents 74 Leasehold Premises
9 Debtors 42 Trademark 75 Rent from Tenant
10 Creditors 43 Copyright 76 Rent to Landlord
11 Interest Paid 44 General Reserve 77 Bad debt Recovered
12 Interest Recd 45 Res for Dis on Drs 78 Balance due to Bank
13 Loan to Mr A 46 Res for Dis on Crs 79 Bal due from Bank
14 Loan from Mr B 47 Net Purchases 80 Disc allowed by business
15 Amount Receivable 48 Net Sales 81 Disc allowed to business
16 Amount Payable 49 Book Debts 82 Income Recd in Adv
17 Carriage Inwards 50 Payable for Pur 83 Income Receivable
18 Carriage Outwards 51 Discount on Pur 84 Duties and Taxes
19 Int on Overdraft 52 Discount on Sales 85 Unpaid Wages
20 Bad Debts 53 Royalty Recd 86 Prepaid Wages
21 Provn for Bad debts 54 Royalty Paid 87 Outstanding Exps
22 Advance Recd 55 Depreciation 88 Outstanding Income
23 Advance Given 56 Return to Suppliers 89 Opening Stock
24 Outstanding Exps 57 Ret from Customers 90 Salaries
25 Prepaid Expenses 58 Dividend Recd 91 Rent
26 Deposit Given 59 Insurance Premium 92 Disc to Customers
27 Deposit Accepted 60 Prepaid Insurance 93 Disc by Suppliers
28 Adv from Customer 61 Insurance Claim 94 Addns to Plant
29 Adv to Supplier 62 Unexpired Insurance 95 Equipments
30 Goods lost by fire 63 Cash Purchases 96 Productive Wages
31 Loose Tools 64 Credit Purchases 97 Unproductive Wages
32 Dead Stock 65 Cash Sales 98 Comm Receivable
33 Advertisement 66 Credit Sales 99 Interest Payable
100 Share Capital
Page
34

4.3 Problems : Prepare Trial Balance
Problem 01
Prepare a Trial Balance from the following ledger of Shri Ganesh as on 31.03.20
Particulars Amt ` Particulars Amt ` Particulars Amt `

Capital 50,000 Carriage 2,500 Bank Loan 2,000
Debtors 2,500 Purchases 15,000 Cash in Hand 1,250
Wages 3,500 Salary 4,500 Rent 2,900
Depreciation 1,500 Sales 40,000 Drawings 1,500
Furniture 12,500 Postage 250 Advertisement 2,500
Creditors 4,000 Bad Debts 600 Land & Bldg 45,000
Problem 02
From following ledger balances, Prepare Trial Balance of Shailaja as on 31.03.20.

Capital 50,000 Wages 2,800 Rent & Taxes 2,300
Plant & Machinery 8,000 Debtors 13,000 Insurance 3,600
Purchases 10,500 Drawings 4,000 Creditors 5,000
Sales 28,500 Motor Van 5,400 Land & Bldg 10,500
Outstanding Exps 400 Stock (01.04.19) 14,000 Office Exps 1,700
Salaries 5,000 Cash at Bank 1,200 Reserve for
Bad Debts 1,000 Carriage Inward 1,400 Doubtful Debts 500
Problem 03
From following ledger balances, Prepare Trial Balance of M/s Hari as on 31.03.20

Stock (01.04.19) 50,000 Goodwill 1,80,000 Drawings 10,000
Purchases 1,50,000 Sales Return 20,000 Bills Receivable 15,000
Capital 3,00,000 Purchase Return 7,250 Bank Loan 1,25,000
Machinery 1,00,000 General Expenses 1,250 S Creditors 75,000
Sundry Debtors 50,000 Sales 2,00,000 Bad Debts 2,500
Building 50,000 Carriage Outward 1,750 Interest Recd 1,800
Postage 2,500 Bills Payable 35,000 Comm Recd 2,000
Cash at Bank 10,550 Rent 2,500 Audit Fees 5,000
Salaries 75,000 Wages 20,000
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Booklet Concepts
Problem 04
Prepare a Trial Balance of Shri Krishna from the following ledger as on 31.03.20.

Capital 5,00,000 Purchases 5,00,000 Bk Overdraft 1,00,000
Stock (01.04.19) 1,00,000 Return Outward 20,000 Ret Inward 10,000
Royalty 2,000 Discount Allowed 1,000 Sales 7,00,000
Import Duty 3,500 Mobile Charges 2,500 Debtors 80,000
Conveyance 500 Pl & Mach 3,00,000 Creditors 50,000
L’hold Premises 2,00,000 Computer 50,000 Furniture 50,000
Salaries 24,000 Wages 25,000 Insurance 2,000
Cash in hand 18,000 Printing & Stat 1,500
Problem 05
Prepare Trial Balance as on 31.03.20 from the following balances extracted from
ledger of M/s Arjun Patil.

Opening Stock 60,000 Capital 40,000 Bills Receivable 600
Drawings 2,500 General Reserve 21,000 Bills Payable 1,000
Insurance 600 Interest Recd 600 Rent 3,500
Sal & Wages 4,500 Carriage 2,500 Unpaid Wages 800
Purchases 65,000 Sales 1,30,000 Return Inward 1,000
Debtors 18,000 Creditors 16,000 Return Outward 500
10% Invts 12,000 Travelling Exps 3,000 Cash at Bank 4,000
Freehold Bldg 20,000 Furn & Fixtures 10,000 Office Exps 2,700
Page
36

Inventories
5.1 Basics
# Opening Stock to appear directly in balance column.
FIFO : 1 Stock is kept lot-wise, in chronological order.

2 Issues are made on FIRST IN FIRST OUT basis.
3 Issue price is determined considering the method adopted, given SP
to be ignored.
4 After every transaction we get balance.
5 Generally FIFO is adopted for perishable goods.
LIFO : 1 Stock is kept lot-wise, in chronological order.

2 Issues are made on LAST IN FIRST OUT basis.
3 Issue price is determined considering the method adopted, given SP
to be ignored.
4 After every transaction we get balance.
5 Generally LIFO is adopted for bulky, non-perishable goods.
Wt Avg : 1 Stock is not kept lot-wise, is merged in balance.

2 On every purchase, rate is determined, in balance we get
a qty+qty=bal qty
b amt+amt=bal amt
c bal amt / bal qty = balance rate
3 Issue price is the balance rate, given SP to be ignored.
4 After every issue, we get balance as :
a qty-qty=bal qty
b amt-amt=bal amt
c bal rate would remain same.
5 Generally weighted average is adopted for goods which are mixed,
lot-wise separate identification not possible.
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37
Booklet Concepts
5.2 Format of Stock Register

Stock Register of M/s . . . . . . . (. . . . . . method)
Date Receipts Issues Balance

Qty Rate Amt ` Qty Rate Amt ` Qty Rate Amt `
5.3 Problems : Stock Register
Problem 01
The stock on hand on 1st January 2020 was 50 units @ ` 25 each.
From the following particulars, Prepare stock record by FIFO.
Date Transaction Units Rate `

04.01.20 Purchase 40 30
17.01.20 Purchase 60 28
20.01.20 Sale 50 35
22.01.20 Purchase 80 29
25.01.20 Sale 80 33
28.01.20 Sale 20 34
30.01.20 Purchase 100 26
31.01.20 Sale 90 35
Page
38

Problem 02
Stock of material in hand on 01.04.20 was 400 units at ` 50 per unit. Following
receipts & issues were recorded. Prepare Stock Register under LIFO Method.
02.04.20 Purchased 100 units @ ` 55 per unit

06.04.20 Issued 400 units
Problem 03
Stock of materials on 01.03.20 was 1,000 units at ` 10 per unit.

Following purchases and issues were made during the month of March 2020.
Purchases Issues
02.03.20 2,000 units @ ` 11 per unit 05.03.20 5,400 units
21.03.20 5,000 units @ ` 14 per unit
Prepare Stock Register under Weighted Average Cost Method.
Problem 04
From the following information of ABC and XYZ item value closing stock on
31.03.20 applying :
a FIFO to ABC
b Weighted Average to XYZ
Particulars ABC XYZ
Stock (kgs) on 01.03.20 2,000 @ ` 28 4,000 @ ` 13
Purchases (kgs)
i on 11.03.20 1,800 @ ` 27 2,500 @ ` 14
ii on 21.03.20 1,700 @ ` 25 2,000 @ ` 18
Sales (kgs)
i on 06.03.20 1,300 2,500
ii on 15.03.20 1,400 2,000
iii on 18.03.20 700 1,300
iv on 29.03.20 1,100 1,700
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39
Booklet Concepts
Depreciation
6.1 Basics
01 Depreciation  Reduction in the value of fixed asset due to use etc is

called depreciation.
02 Fixed Asset  Any asset which is :
a having life of more than 12 months, and
b purchased with intention not to sell
is called fixed asset.
03 Installation  Expenses on fitting and fixing of fixed asset is called
Charges installation charges.
 It should be added to the cost of fixed asset. That is,
installation charged paid should be debited to the
respective asset account to which it relates.
 In Accounts, there cannot be Installation Charges A/c.
04 Formula  If depreciation percentage is not given,
Estimated Scrap Value given, then
Estimated life given, we apply formula
 Deprn p.a. = total cost of asset (-) esti scrap value
Estimated life of asset
05 Methods of  Following are 2 commonly applied methods :
Depreciation 1 Straight Line Method (SLM)
2 Written Down Value Method (WDV)
06 SLM  Under this method, we apply depreciation percentage
on original total cost.
 Under this method, the amt of deprn every year,
remains the same.
 Also known as : fixed instalment method,
equated instalments method.
07 WDV  Under this method, depreciation percentage is applied
on reducing balance every year.
 Under this method, amt of deprn goes on reducing
every year.
 Also known as : Reducing Balance Method,
Diminishing Balance Method.
08 Zero Value  Under SLM, the book value of asset ultimately
becomes zero.
 Under WDV, amount of depreciation goes on reducing
every year.
Page
40

6.2 Example of Calculations

# Example Particulars 10% SLM 10% WDV
Pur on 01.01.16 Cost 01.01.16 10,000 10,000
Cost ` 10,000 (-) Deprn – 2016 1,000 1,000
31.12.16 / 01.01.17 9,000 9,000
(-) Deprn – 2017 1,000 900
31.12.17 / 01.01.18 8,000 8,100
(-) Deprn – 2018 1,000 810
31.12.18 / 01.01.19 7,000 7,290
(-) Deprn – 2019 1,000 729
31.12.19 / 01.01.20 6,000 6,561
6.3 Specimen : Ledger Accounts

Books of M/s . . . . . . . .
Dr Machinery A/c Cr
Year 2019
To Balance b/d xxx By Deprn A/c xxx
To Bank A/c xxx By Bank A/c (SP) xxx
To Supplier A/c xxx By P & L A/c (loss) xxx
To Bank A/c xxx
To P & L A/c (profit) xxx By Deprn A/c xxx
By Balance c/d xxx
xxx xxx
Year 2020
To Balance b/d xxx
Dr Depreciation A/c Cr
Year 2019
To Machinery A/c xxx
To Machinery A/c xxx By P & L A/c xxx
xxx xxx
Year 2020
Note 1 : Machinery A/c is a real account, therefore, opening balance on debit

side, and, closing balance on credit side.
Note 2 : Depreciation A/c is a nominal account, having no opening closing

balance.
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41
Booklet Concepts
6.4 Specimen : Journal Entries

Journal of M/s . . . . .
Date Particulars LF Debit Credit
1 Machinery purchased :
` `
Machinery A/c . . . . . . . . . . . . . . . . . . . Dr xxx
To Bank A/c . . . . . . . . . . . . . . . . . . . xxx
(Being machinery purchased and amt paid)
............
2 Machinery purchased on credit :

To Supplier A/c . . . . . . . . . . . . . . . . . xxx
(Being machinery purchased and amt due)
...........
3 Instaln chgs paid for new Machinery :

To Bank A/c . . . . . . . . . . . . . . . . . . . xxx
(Being instaln chgs paid for new mach pur)
............
4 Depreciation charged on Machinery :

Depreciation A/c . . . . . . . . . . . . . . . . . Dr xxx
To Machinery A/c . . . . . . . . . . . . . . . xxx
(Being depreciation charged on Machinery)
...........
5 Trf deprn exps to P & L :

P & L A/c . . . . . . . . . . . . . . . . . . . . . . . Dr xxx
To Depreciation A/c . . . . . . . . . . . . . . xxx
(Being depreciation trfd to P & L A/c)
..........
6 On sale of Machinery :
a Depreciation A/c . . . . . . . . . . . . . . . . . . Dr xxx
To Machinery A/c . . . . . . . . . . . . . . . xxx
(Being deprn charged on Machinery sold)
...........
b Bank A/c . . . . . . . . . . . . . . . . . . . . . . . Dr SP
To Machinery A/c . . . . . . . . . . . . . . . SP
(Being machinery sold and amt recd)
.........
ci P & L A/c (if loss) . . . . . . . . . . . . . . . . . .Dr loss

To Machinery A/c . . . . . . . . . . . . . . . loss
(Being loss on machinery sold trfd to P & L)
.........
cii Machinery A/c . . . . . . . . . . . . . . . . . . . Dr profit

To P & L A/c (if profit) . . . . . . . . . . . . profit
(Being profit on machinery sold trfd to P & L)
..........
Page
42

6.5 Problems : Depreciation
Problem 01
New Trading Company, Mumbai purchased Machinery for ` 90,000 on 1st April
2017. On 1st Oct 2017 additional Machinery was purchased for ` 60,000. On 1st
Oct 2019, the Company sold the Machinery purchased on 1st Oct 2017 for `
40,000.
Depreciation is to be charged at 10% p.a. under Straight Line Method on 31st

March every year.
Prepare Machinery A/c and Deprn A/c for 3 years i.e 2017-18; 2018-19; 2019-20.
Problem 02
Ankita & Co, Solapur bought a machinery worth ` 25,000 on 1st April 2017 and
paid ` 5,000 on its installation. The company depreciated the Machinery @ 10%
p.a on original cost on 31st March every year.
On 1st Oct 2019, the company sold a part of the Machinery for ` 7,000; the original
cost of which was ` 10,000; the company purchased new machinery for ` 20,000
on the same date.
Give Journal Entries for the year 2017-18; 2018-19 and 2019-20.
Problem 03
On 1st April 2017, Mahindra & Co, Sangli purchased two Computers for ` 37,000.
The fixation charges were amounted to ` 3,000. They decided to provide deprn on
Computers @ 15% p.a under Fixed Instalment Method.
On 1st Oct 2019, one computer having original cost of ` 20,000 was sold for `
15,000 and on the same date new Computer was purchased for ` 30,000.
Depreciation was provided annually on 31st March.
Give Journal Entries for three years.
Problem 04
Radhika Traders purchased office furniture on 1st Oct 2016 for ` 46,000 and spent
` 16,000 for its fixation.
The estimated life of the furniture to be 10 years. Radhika Traders estimated that
the scrap value at the end of its life would be ` 12,000.
The entire furniture was sold for ` 47,000 on 1st Oct 2019.
Show Furniture A/c and Depreciation A/c for the years 2016-17; 2017-18; 2018-
19 and 2019-20 assuming that accounts were closed on 31st March every year.
Page

43
Booklet Concepts
Problem 05
Ankita Trading Company, purchased furniture on 1st April 2017 for ` 25,000. In
the same year additional furniture was purchased for ` 10,000 on 1st Oct 2017.
On 1st Oct 2018, furniture purchased on 1st April 2017 was sold for ` 15,000 and
on the same date new furniture was purchased for ` 12,000.
The company charges depreciation @ 8% p.a. on Diminishing Balance Method.
Prepare Furniture A/c for 3 years i.e 2017-18; 2018-19; 2019-20 assuming that
the accounting year of the company closes on 31st March every year.
Problem 06
M/s Subhash & Company purchased Machinery on 1st April 2017 for ` 1,50,000.
Additional machinery was purchased on 30th Sept 2017 for ` 20,000. On 31st March
2020, machinery purchased on 30th Sept 2017 became obsolete and was sold for
` 12,000.
The company provides deprn @ 20% p.a on Reducing Balance Method on 31st
March every year.
Prepare Machinery A/c and Depreciation A/c for 3 years ending 31st March 2020.
Problem 07
M/s Medha Trading Company, Nasik purchased machinery of ` 1,20,000 on 1st

April 2017. Additional Machinery costing ` 80,000 was purchased on 1st Oct 2017.
On 1st Oct 2019, Machinery which had cost ` 20,000 on 1st April 2017 was sold for
` 10,000.
Company provides deprn @ 10% under Written Down Value Method on 31st March
every year.
Give Journal Entries for 3 years ending 31.03.18, 31.03.19 and 31.030.20.
Page
44

Final Accounts :
Sole Proprietor
7.1 Basics
01 Final Accounts are a to find out profit / loss during the year.
prepared b to get list of assets and liabilities.
c to know the final capital amount.
02 Given in Problem will a Trial Balance.

be b Adjustments.
03 In Answer, we Prepare a Trading A/c.

b Profit & Loss A/c.
c Balance Sheet.
04 Trial Balance a Every item, we give only one effect, debit

amount debit side, credit amount credit side.
b For balance sheet items, debit all assets; credit
all liabilities.
05 Adjustments a Every adjustment, give 2 effects

b Silent adjustment also, 2 effects.
06 Trading Account a All goods transactions.

b All buying expenses.
c All factory expenses.
d Balancing figure gives gross profit / gross
loss, to be transferred on opp side of P&L A/c.
e If Gross Profit / Gross Loss given in TB, no
need to prepare Trading A/c.
07 Profit & Loss Account a All other income.

b All selling expenses.
c All office expenses.
d All other expenses.
e Balancing figure gives net profit / net loss.
f Net Profit will be added to Capital, Net Loss will
be less from Capital.
Page

45
Booklet Concepts
08 Balance Sheet a Balance Sheet is a statement, not an account.

b Two sides of balance sheet are,
LHS = Liabilities, RHS = Assets.
c No To / By; No Dr / Cr in Balance Sheet.
d Debit all Assets, Credit all Liabilities.
e Balance Sheet should always tally.
09 Contingent Liability a A liability, payment of which is uncertain,

depend on future event, which is contingent, is
called ‘Contingent Liability’.
b Contingent Liability is not to be recorded in the
books of accounts.
c Contingent Liability appears below the balance
sheet, as a note.
d Eg : Amount claimed by customer not
admitted, suit filed, pending in Court.
7.2 Formats
M/s . . . . . .
Dr Trading A/c for the year ended . . . . . . . . . Cr
Particulars Amt ` Amt ` Particulars Amt ` Amt `
To Opening Stock xx By Sales xx
To Purchases xx (-) S Ret (R Inw) xx xx
(-) Pur Ret (R Outw) xx xx
By Goods donated xx
To Carriage Inwards xx By Goods destr by fire xx
To Custom / Import duty xx By Goods distr as
To Comm on Pur xx free samples xx
To Unloading Charges xx By Goods Withdrawn xx
To Wages xx
(+) outstanding xx xx By Closing Stock xx
To Factory Rent xx
To Machinery Repairs xx
To Factory Insurance xx
To Power & Fuel xx
xx xx
To Gross Profit (bal fig) xx
xx xx
Note : If balancing figure is on credit side, it represents Gross Loss, to be

trfd to opposite side in P & L A/c.
Page
46

M/s . . . . . .
Dr Profit & Loss A/c for the year ended . . . . . . . . . Cr
Particulars Amt ` Amt ` Particulars Amt ` Amt `
By Gross Profit xx
To Free Samples xx
To Advertisement xx By Comm Recd xx
To Comm on Sales xx By Discount Recd xx
To Discount Allowed xx By Royalty Recd xx
To Loading Charges xx By Rent Recd xx
To Salaries xx By Interest Recd xx
To Office Rent xx (+) Int Rec’ble xx
To Telephone Charges xx xx
To Printing & Statn xx (-) Int Recd in Adv xx xx
To Conveyance xx By Dividend Recd xx
To Insurance xx
(-) Prepaid xx xx By Profit on sale of Mach xx
To Interest xx By Bad debt Recovery xx
To Bad Debts xx
(+) Further B D (FBD) xx
xx
(+) New RDD (from adj) xx
xx
(-) Old RDD (from TB) xx xx
To Loss on sale of Mach xx
To Deprn : Machinery xx
To Deprn : Furniture xx
To Deprn : Builiding xx
xx xx
To Net Profit (bal fig) xx
xx xx
Note : If Balancing figure is on credit side, it represents net loss, to be deducted

from Capital, on liabilities side of Balance Sheet.
Balancing figure on debit side, represents net profit, to be added to

Capital, on liabilities side of Balance Sheet.
Page

47
Booklet Concepts
M/s . . . . . .
Balance Sheet as on . . . . . . . . .
Liabilities Amt ` Amt ` Assets Amt ` Amt `
Capital xx Goodwill xx
(-) Drawings xx Land & Building xx
xx (-) Depreciation xx xx
(+) Net Profit xx xx Plant & Building xx
(-) Depreciation xx xx
Bank Loan xx Motor Vehicles xx
Loan from IDBI xx (-) Depreciation xx xx
Other Loans xx Loose Tools xx
(-) written off xx xx
Sundry Creditors xx
Bills Payable xx Bills Receivable xx
Outstanding Exps xx Investments xx
Bank Overdraft xx Loan to Sanjay xx
Debtors xx
Adv from Customers xx (-) Further B D xx
Income Recd in Adv xx xx
(-) New R D D xx xx
Closing Stock xx
Cash in hand xx
Bank balance xx
xx xx
7.3 Adjustments
No Adjustment Effects
1 Closing Stock Asset / T.Cr

Closing stock to be valued at cost or MV
whichever is less.
If closing stock is given in TB, only one
effect will be, Balance Sheet, Asset side.
2 Depreciation (-) Asset / P.Dr

Deprn if given in TB, only 1 effect, P.Dr
Deprn always in P & L, never in Trading A/c.
3 Outstanding Expenses Liability / (+) Exps

If given in TB, only 1 effect, in Bal Sheet Liability.
4 Prepaid Expenses Asset / (-) Exps

Note : If given in TB, only 1 effect, Asset.
Page
48

5 Income Receivable Asset / (+) Income
6 Income Recd in Adv Liability / (-) Income
7 Goods withdrawn T.Cr / (-) Capital
8 Goods distr as free T.Cr / P.Dr

samples
9 Goods destr by fire T.Cr / P.Dr
10 Fully insured goods T.Cr / Asset

destroyed by fire.
11 Goods destr by fire, T.Cr Asset P.Dr

claim partly admitted. full amt claim amt loss amt
12 Goods donated T.Cr / P.Dr
13 Write off further bad (-) Debtors / (+) Bad debts

debts
14 Provide for RDD (-) Debtors / (+) Bad debts
15 Provn for disc on Drs (-) Debtors / (+) Discount Allowed in P.Dr
16 Provn for disc on Crs (-) Creditors / (+) Disc Recd in P.Cr
17 Stock of Stationery Asset / (-) Printing & Stationery in P.Dr
18 Personal Trav exps (-) Capital / (-) Trav Exps in P.Dr

incl in Trav Exps A/c
Page

49
Booklet Concepts
7.4 Problems : Final Accounts
Problem 01
Following is the Trial Balance of Mrs Catharin as on 31st March 2020. Prepare
Trading and Profit & Loss A/c for the year ended 31st March 2020 and the Balance
Sheet as on that date.
Debit Balances Amt ` Credit Balances Amt `
Stock (01.04.19) 25,000 Capital 40,000
Drawing 10,000 Sales 1,25,000
Purchases 75,000 Purchase Return 2,000
Sales Return 1,000 Bills Payable 5,700
Salaries 6,000 Commission 1,000
Rent & Taxes 1,000 Discount Received 1,200
Insurance 900 Interest 400
Wages 3,000 Sundry Creditors 14,000
Building 10,000
Carriage 2,000
Machinery 17,000
Sundry Debtors 24,000
Investments 10,000
Cash in hand 3,300
Bad Debts 400
Discount Allowed 700
1,89,300 1,89,300
Adjustments :
1 Stock on 31.03.20 valued at cost price ` 34,000, market value ` 40,000.
2 Provide depreciation on Building at 2%, Machinery @ 10% p.a.
3 Rent of ` 200 and Salaries of ` 500 were outstanding.
4 Interest on Investments ` 500 due but not received.
5 Provide Reserve for Doubtful Debts at 5% on Sundry Debtors.
6 Goods of ` 1,000 taken by Catharin for personal use, not recorded in books
of accounts.
Page
50

Problem 02
Following is the Trial Balance of Miss Piyusha as on 31st March 2020. Prepare
Trading and Profit & Loss A/c for the year ended 31st March 2020 and the Balance
Sheet as on that date.
Bills Receivable 3,000 Capital 45,000
Sundry Debtors 15,000 Sales 1,40,000
Drawings 6,000 Creditors 15,000
Salaries 7,500 Bills Payable 2,000
Wages 4,600 Res for doubtful debts 400
Purchases 92,700 Dividend Received 2,400
Opening Stock 11,500 Purchase Return 200
Postage Charges 2,200
Insurance 2,400
Printing & Stationery 3,600
Carriage Inward 900
Furniture & Fixtures 9,500
Loose Tools 7,000
Plant & Machinery 15,000
Investment 10,000
Office Rent (10 mths) 6,000
Cash in hand 8,100
2,05,000 2,05,000
Adjustments :
1 Closing Stock was valued of ` 24,500 while its market price is ` 25,400.
2 Depreciate Plant & Machinery by 10% p.a. and Loose Tools were revalued
at ` 6,650.
3 Insurance is paid for the year ended 30th September 2020.
4 Create Reserve for doubtful debts at 5% on Sundry Debtors.
Page

51
Booklet Concepts
Problem 03
Given below is the Trial Balance of Mr Prithvi Shah.

Sundry Debtors 22,600 Capital 50,000
Drawings 5,000 Sales 61,000
General Expenses 1,500 RDD 400
Stationery 1,300 Sundry Creditors 20,000
Wages 1,500 Bank Overdraft 2,000
Fuel, Coal & Water 2,500 Outstanding Wages 1,000
Purchases 35,000 Commission 900
Salaries 4,000
Sales Return 2,000
Carriage Inwards 200
Bad Debts 300
Insurance 400
Prepaid Salaries 1,200
Office Rent 600
Opening Stock 10,000
Building 40,000
Bills Receivable 1,200
Furniture 6,000
1,35,300 1,35,300
Adjustments :
1 Closing Stock was valued ` 18,400.
2 Depreciate Building by 5% and Furniture by 10% p.a.
3 Write off Bad debts ` 600 and create R D D at 5% on Sundry Debtors.
4 Commission of ` 300 earned but not received.
5 On 31st March 2020, Stock of Stationery in hand was ` 300.
6 Goods of ` 500 distributed as free samples.
Prepare Trading and Profit & Loss A/c for the year ended 31st March 2020 and the
Balance Sheet as on that date.
Page
52

Problem 04
Given below is the Trial Balance of Miss Divya Madan.

Particulars Debit Credit
Capital - 1,00,000
Stock on 01.04.19 40,000 -
Bills Receivable 6,000 -
Machinery 50,000 -
Purchases & Sales 80,000 1,18000
Reserve for doubtful debts - 1,000
Furniture 26,000 -
Investment 14,000 -
Return Outward - 1,000
Sundry Debtors & Creditors 30,000 55,000
Salaries 8,000 -
Wages 8,000 -
Insurance 5,000 -
General Expenses 3,000 -
Advertisement (for 3 years) 3,000 -
Interest - 2,000
Carriage Inwards 2,000 -
Prepaid Wages 2,000 -
2,77,000 2,77,000
Adjustments :
1 Stock on 31.03.20 Cost price ` 25,000; Market price ` 28,000.
2 Insurance included ` 2,000 paid for Life Insurance Premium.
3 Interest ` 1,500 due but not received on Investment.
4 Depreciate Machinery by 10%; Furniture by 5%.
5 Provide Reserve for Doubtful Debts at 5% on Drs and Disc on Crs @ 2%.
Prepare Final Accounts.
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53
Booklet Concepts
Problem 05
Given below is the Trial Balance of M/s Shubham Traders. Prepare Trading and
Profit & Loss A/c for the year ended 31st March 2020 and the Balance Sheet as on
that date.
Land & Building 30,000 Sundry Creditors 45,000
Sundry Debtors 45,000 RDD 1,000
Machinery 25,000 Unpaid Wages 1,000
Purchases 48,000 Sales 1,34,100
Stock (01.04.19) 25,000 Discount 2,500
Wages 3,000 Capital 40,000
Factory Expenses 28,000 12% Bank Loan 10,000
Royalties 1,800 (01.12.19)
Carriage Inward 1,300
Carriage Outward 1,700
Office Expenses 2,500
Bad Debts 800
Furniture 3,000
Drawings 5,000
Cash in Bank 5,000
Cash at hand 4,300
Advertisement 3,000
Insurance 1,200
2,33,600 2,33,600
Adjustments :
1 Closing Stock at the end of the year was ` 18,000.
2 Goods worth ` 3,000 taken over by Mr Shubham for his domestic use.
3 Goods of ` 1,500 distributed as free samples.
4 Write off ` 1,000 for bad debts & create bad debts reserve on Drs at 5%.
5 Insurance is paid for the year ended 30th September 2020.
6 Provide deprn at 10% on Furniture and Machinery revalued at ` 24,000.
Page
54

Problem 06
Given below is the Trial Balance of Mr Rohit Zende. Prepare Trading and Profit &
Loss A/c for the year ended 31st March 2020 and the Balance Sheet as on that
date.
Particulars Amt ` Particulars Amt `
Opening Stock 10,000 Creditors 25,000
Purchases 60,000 Bank Loan 30,000
Wages 7,000 Sales 1,22,000
Carriage 2,500 RDD 700
Salaries 4,500 Capital 45,000
Printing & Stationery 3,100 Commission 5,000
Advertisement 1,000 Discount Recd 3,000
Bad Debts 2,000
Discount Allowed 3,400
Debtors 16,000
Bills Receivable 12,000
Building 30,000
Machinery 40,000
Cash in hand 8,400
Leasehold Premises 20,000
Drawings 4,800
Deprn on Building 2,000
Deprn on Machinery 4,000
2,30,700 2,30,700
Adjustments :
1 Cost price of closing stk was ` 21,000 while its market price was ` 24,000.
2 O/s Exps were Salary ` 500; Wages ` 600; Interest on Bank Loan ` 2,000.
3 Reserve for doubtful debts is to be maintained at 5% on Debtors.
4 Sales included ` 2,000 sales of old newspaper.
5 Leasehold Premises is to be run for 10 years.
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55
Booklet Concepts
Problem 07
Given below is the Trial Balance of M/s Andrew Traders. Prepare Trading and Profit
& Loss A/c for the y e 31st March 2020 and the Balance Sheet as on that date.
Capital - 35,000
Drawings 8,000 -
Purchases & Sales 29,000 56,000
Opening Stock 10,000 -
Carriage 1,000 -
Salaries 3,500 -
Rent 1,200 -
Rates & Taxes 200 -
Sundry Expenses 3,000 -
Sales Return 1,500 -
Bad Debts 800 -
Interest Received - 200
RDD - 1,500
Discount Received - 300
Debtors & Creditors 21,400 7,000
Furniture 3,000 -
Machinery 5,000 -
Cash in hand 200 -
Cash at Bank 5,000 -
Wages 7,200 -
1,00,000 1,00,000
Adjustments :
1 Closing Stock was valued at ` 19,000.
2 Write off ` 1,400 for Bad Debts and Provide 5% RDD on Debtors.
3 Depreciate Machinery by 10% and Furniture by 5% p.a.
4 Rent included ` 500 paid for house rent of Proprietor.
5 Salary ` 500 and Wages ` 800 were outstanding.
Page
56

Problem 08
Given below is the Trial Balance of M/s Sunit Kulkarni. Prepare Trading and Profit
& Loss A/c for the y e 31st March 2020 and the Balance Sheet as on that date.
Opening Stock 25,000 -
Purchases & Sales 1,30,000 1,80,000
Returns 2,000 5,000
Debtors & Creditors 20,000 25,000
Wages 4,000 -
Furniture 11,000 -
Machinery 30,000 -
Advertisement (for 2 yrs) 4,000 -
Salaries 8,000 -
Investment 6,000 -
Insurance 500 -
Cash in hand 900 -
Cash at Bank 8,000 -
Postage Charges 1,000 -
Commission - 500
Reserve Fund - 4,000
Bills Payable - 6,000
RDD - 500
Capital - 31,000
Drawings 1,600 -
2,52,000 2,52,000
Adjustments :
1 Closing Stock was valued at ` 23,000.
2 Depreciate Furniture by 20% and Machinery by 10% p.a.
3 Wages ` 500 were unpaid and Insurance prepaid ` 300.
4 Create RDD at 5% on Debtors.
5 Goods of ` 1,400 taken over by Sunit Kulkarni for his personal use.
6 Commission ` 200 due but not received.
Page

57
Booklet Concepts
Cost Sheet
8.1 Basics
01 Introduction  Financial Accounting (FA) has disadvantages like :

a FA deals with overall results i.e. profit of the
business as a whole and not product-wise.
b FA deals with past events; FA is like post-mortem
of events that have already occurred.
c FA does not give future information and therefore
does not help in decision making.
d FA is not helpful while submitting tenders,
quotations, etc.
02 Costing  Costing means finding out cost of the product.
 There are different methods of costing viz
a Unit Costing (Cost Sheet)
b Process Costing
c Contract Costing
03 Cost  Cost means total expenditure from purchase of Raw
Materials (RM) upto sale of Finished Goods (FG).
 However, it should not include non-cost items.
04 Classification Cost
of Cost
Direct Indirect
DM DL DE F O&A S&D
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8.2 Non Cost Items
# Non-Cost  Items which are not to be included in Cost Sheet are

Items called Non-Cost Items. Some of the examples are :
a Financial Exps : Bad debts, Disc Allowed, Interest.
b Non Business Exps : Loss by fire, Loss by theft,
loss on sale of Investments.
c Other Income : Dividend Recd, Discount Recd,
Share trf fees recd, Interest Recd, Comm Recd.
d Any Reserves, Any Provision : RDD, Reserve for
Disc on Drs, Res for Disc from Crs, Provn for tax.
e All types of Dividend : Proposed Dividend, Interim
Dividend, Final Dividend.
f Balance Sheet items : Machinery, Computers.
g Capital Expenditure : Carriage on Purchase of new
Machinery, Wages paid for installation of
Machinery, Installation Charges for Machinery.
h Various write-off : Goodwill written off, Share issue
exps written off.
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8.3 Cost Sheet : Format
Units Produced : ______ units Total Amount Per Unit

Units Sold : ______ units ` ` `
Direct Materials / R M Consumed :
Op Stock of RM xxx
(+) RM Purchased xxx
(+) Buying Exps / Carriage Inwards xxx
xxx
(-) Cl Stock of RM xxx
R M Consumed xxx xx.xx
Direct Labour xxx
(+) Outstanding xxx xxx xx.xx
Direct Expenses xxx xx.xx
Prime Cost / Direct Cost xxx xx.xx
Add : Factory Overheads : xxx

Indirect Materials xxx
Indirect Labour xxx
Factory Rent xxx
Repairs to Pl and Machinery xxx
Loose Tools written off xxx
Depreciation on Factory Assets xxx
xxx
(-) Sale of Scrap xxx xxx xx.xx
xxx xx.xx
Add : Opening Stock of WIP xxx
xxx
Less : Closing Stock of WIP xxx
Works Cost / Factory Cost xxx xx.xx
Add : Office & Administrative Overheads :

Office Salaries xxx
Office Rent xxx
Printing & Stationery xxx
Postage Charges xxx
Sundry Exps / General Exps / Misc Exps xxx
Deprn on Office Assets xxx xxx xx.xx
Cost of Production (COP) xxx xx.xx
Add : Opening Stock of F G xxx
xxx
Less : Closing Stock of F G xxx
Cost of Goods Sold (COGS) xxx xx.xx
Add : Selling & Distribution Overheads :

Advt / Commission on Sales xxx
Carriage Outwards / Delivery Exps xxx
Depreciation on showroom assets xxx xxx xx.xx
Cost of Sales (COS) xxx xx.xx
Add : Profit (balancing figure) xxx xx.xx
Sales (given) xxx xx.xx
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8.4 Problems : Cost Sheet
Problem 01
From following particulars, Prepare a Cost Statement showing component of Total

Cost and Profit for the year ended 31st Dec 2020 :
Particulars 01.01.20 31.12.20
Stock of Finished Goods 6,000 15,000
Stock of Raw Materials 40,000 50,000
Work in Progress 15,000 10,000

Purchase of R Materials 4,75,000 Sales for the year 8,60,000
Carriage Inwards 12,500 Income Tax 5,000
Wages 1,75,000 Dividend 2,500
Works Managers Salary 30,000 Debenture Interest 10,000
Factory Employees Salary 60,000 Trf to Sinking Fund for
Factory Rent, Taxes & Ins 7,250 replacement of Machinery 20,000
Power Expenses 9,500 Goodwill written off 10,500
Other Production Exps 43,000 Selling Expenses 16,000
General Expenses 32,500
Problem 02
From the following information, Prepare detailed Cost Statement for the year
ended 31.03.20.
Op Stock : RM 20,000 Machinery lost in fire 1,00,000
FG 30,000 Deprn : Plant & Mach 80,000
Purchase of RM 15,00,000 Delivery Van 20,000
Direct Wages 12,00,000 Income Tax 1,20,000
Power 99,500 Salaries 2,50,000
Carriage on Pur of RM 20,000 Donations 70,000
Cost of Special Design 50,000 Establishment Exps 1,00,000
Custom Duty on RM 60,000 Rent of Showroom 65,000
Rent & Taxes : Office 50,000 Interest on Loan 45,000
Factory 70,000 Sale of Factory Scrap 7,500
Telephone Expenses 30,000 Dividend Recd 17,500
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Advertisement 75,000 Directors Fees 60,000

Electricity : Office 15,000 Cl Stock : R M 1,85,000
Factory 30,000 FG 30,000
Charges of Sale Literature 10,000
Other Information :
01 60% of Telephone Expenses relate to Office and 40% to Sales Department.
02 Salaries to be allocated to Factory, Office and Sales Department in the ratio
of 1 : 2 : 1.
03 Establishment Expenses are to be apportioned equally between Office and
Sales Department.
04 Sales are made to earn Profit @ 20% on Selling Price.
Problem 03
The following particulars have been extracted from the books of M/s Sohan
Manufacturing Company for the year ended 31.03.20.
Opening Stock of R M 2,35,000 Salesman’ Sal & Comm 42,000
Closing Stock of R M 2,50,000 Productive Wages 7,00,000
Raw Materials Purchased 10,40,000 Deprn on Plant & Mach 35,500
Drawing Office Salaries 48,000 Deprn on Office Furniture 3,000
Royalty on Production 70,000 Directors Fees 30,000
Carriage Inwards 41,000 Gas & Water Chgs (Factory) 7,500
Cash Discount Allowed 17,000 Gas & Water Chgs (Office) 1,500
Repairs to Plant & Mach 53,000 Manager’s Salaries 60,000
Rent & Taxes (Factory) 15,000 Cost of Catalogues Printing 10,000
Rent & Taxes (Office) 8,000 Loose Tools Written Off 8,000
Office Conveyance 15,500 Trade Fair Expenses 10,000
Out of 48 hours in a week, manager devotes 40 hours for factory and 8 hours for
office per week for the whole year.
The Management has fixed the selling price @ 110% of cost.
Prepare detailed cost statement for the year ended 31.03.20.
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Problem 04
From the books of accounts of M/s Avdhoot Enterprises, the following details have
been extracted for the quarter ended December 31, 2020 :

Stock of Materials : Opening 2,70,000 Purchase of Materials 12,48,000
Stock of Materials : Closing 3,00,000 Direct Wages 3,57,600
Direct Expenses 1,20,000 Indirect Wages 24,000
Salaries to Admn Staff 60,000 Carriage Inwards 48,000
Carriage Outwards 37,500 Manager’s Salary 72,000
General Charges 37,200 Legal Chgs : criminal suit 20,000
Commission on Sales 28,000 Fuel 96,000
Electricity Charges (factory) 72,000 Director’s fees 36,000
Repair to Plant & Machinery 63,000 Rent & Taxes : Factory 18,000
Rent Rates and Taxes : Office 9,600 Deprn on Plant & Mach 45,000
Deprn on Furniture 3,600 Salesmen’s Salaries 50,000
Audit Fees 18,000
Other Information :
01 The Manager’s time is shared between the factory and the office in the ratio
of 20:80.
02 Carriage Outwards include ` 7,500 being carriage inwards on Plant &
Machinery.
03 Selling Price is 120% of the cost price.
Prepare detailed cost sheet for the quarter ending 31.12.20 and ascertain sales.
Problem 05
Following details are furnished by MBA Ltd of expenses incurred during the year
31.03.2020.
Direct Material 3,40,000 Direct Wages 2,60,000
Op Stk of F G (1,000 units) 85,250 Advertisement 1,85,250
Cl Stk of F G (2,000 units) ? Deprn on Computers 1,72,000
Deprn on Plant & Mach 96,000 Drawing & Designing Exps 54,000
Loss on Sale of Machinery 17,500 Purchase of Machinery 1,90,000
Trade Fair Expenses 85,500 Deprn on Delivery Van 1,14,000
Direct Expenses 1,60,000 Office Maintenance Chgs 1,88,000
General Manager’s Salary 3,80,000 Factory Rent 1,50,000
Dividend Paid 7,800 Sales (19,000 units) 22,80,000
Closing Stock of Finished Goods to be valued at Cost of Production.

Prepare Cost Sheet showing various elements of cost both in total and per unit
and also find out Total Profit and Per unit Profit.
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Problem 06
Prepare a cost sheet showing the total and per tonne cost of paper manufactured
by Times Paper Mills Limited for the month of March 2020. There were 26 working
days in the month. Also find the profit earned by the company.
The details are as under :
Direct Raw Materials Paper Pulp : 6,000 tons @ ` 900 per ton
Direct Labour 280 skilled workmen : ` 250 per day
300 semi skilled workmen : ` 150 per day
470 unskilled workmen : ` 100 per day
Direct Exps Special Equipment’s hire charges : ` 12,000 per day
Special Dyes : ` 250 per tonne of total R M input
Works Overheads Variable : @ 50% of direct wages
Fixed : ` 2,70,000 per month
Administration Ovhs @ 12% of Works Cost
Selling & Distrbn Ovhs ` 80 per tonne sold
Opening Stock of Paper 500 tonnes valued @ ` 2,501.60 per ton
Closing Stock of Paper 300 tonnes valued at cost of production
The paper is sold @ ` 3,000 per tonne.
Problem 07
Rajendra furnishes data relating to manufacture of `X' standard product during

mth of April 2020.
Raw Materials Consumed ` 15,000
Direct Labour Charges ` 9,000
Machine hours worked 900 hours
Machine hour rate ` 5 per hour
Administrative Ovhs 20% on works cost
Selling Overheads ` 0.50 per unit
Units Produced 17,100 units
Units Sold 16,000 at ` 4 per unit
Prepare Cost Sheet showing Cost per unit; Profit per unit sold and Profit for the
period.
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Problem 08
Dunkel Ltd started a factory in Navi Mumbai on 1st April 2019. Following details
are furnished about its activity during the year ended 31st March 2020 :
Raw Material consumed : 40,000 units @ ` 7 per unit.
Direct Wages a Skilled Worker ` 9 per unit;
b Unskilled Worker ` 6 per unit.
Royalty (on raw material consumed) @ ` 3 per unit.
Works Overheads @ ` 8 per machine hour. Machine Hours worked 25,000.
Office Ovhs at 1/3 of Works Cost.
Sales Commission @ ` 4 per unit.
Units Produced 40,000.
Stock of units at end 4,000 units to be valued at cost of production p u.
Sales price is ` 50 per unit.
Prepare Cost Sheet showing the various elements of cost.
Problem 09
Following information of Samson Ltd for Sept 2020 is furnished for Product A :
Particulars Units
Op Stk of F Goods 2,500
Production 25,000
Sales 20,000
Particulars Op Stk Purchases Cl Stk

Raw Materials 3,00,000 7,00,000 2,50,000
Indirect Materials 1,00,000 20,000 30,000
Packing Materials 12,500 20,000 17,500
Finished Goods 80,000 - -
Particulars Op O/s Exps Paid Cl O/s

Direct Wages 10,000 48,000 12,000
Indirect Factory Exps 4,000 15,000 5,000
Administrative Exps 3,000 8,000 4,000
Sales Expenses 5,000 17,000 6,000
Additional Information :
Cl Stk of F Goods is to be valued at Factory Cost.
F Goods were sold at ` 45 per unit.
Prepare Cost Sheet to show various stages of cost. Also, find out cost and profit.
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Booklet Concepts
Problem 10
The cost of an article at a capacity level of 5,000 units is given under "A" below.
For variation of 25% in capacity above or below this level, individual expenses
vary as indicated in "B":
Column A Amt ` Column B
Material Cost 25,000 100% varying
Labour Cost 15,000 100% varying
Power 1,250 80% varying
Repairs & Maintenance 2,000 75% varying
Stores 1,000 100% varying
Inspection 500 20% varying
Depreciation 10,000 100% varying
Administration Overheads 5,000 25% varying
Selling Overheads 3,000 50% varying
Total Cost 62,750 Cost Per Unit ` 12.55
Find c p u of product under each individual expenses at production levels of 4,000

units and 6,000 units.
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Cash Flow
9.1 About Cash Flow Statement

 A cash flow statement shows the inflows and outflows of cash and cash
equivalents.
 Cash includes cash in hand and demand deposits with the banks while cash
equivalents are highly liquid investments i.e. they can be readily converted
into cash like marketable securities, commercial papers, and short-term
government bonds.
 It explains the changes in the cash in hand and cash at bank at the
beginning and the end of the accounting period.
 Cash flow statement has been classified into three broad categories :
 Operating Activities : representing movements of money due to
regular business operations like the purchase, sale, production, etc.
of goods.
 Investing Activities : representing the movement of cash due to the
purchase or sale of assets or any other investment activities of the
business.
 Financing Activities : accounts for the funds raised through the issue
of shares or debentures, long term loans, etc. and utilised for the
redemption of shares or debentures and payment of dividend, etc.
 There are two methods of preparation of a Cash Flow Statement, they are:
 Direct Method
 Indirect Method
9.2 About Fund Flow Statement

 Funds refer to the working capital of the company, so fund flow statement
is a statement that studies the changes in the working capital of the
business between two accounting years.
 It shows the additions in the working capital through various sources like
issuing shares, debentures or raising loans, etc. and reduction in it through
different applications like the redemption of shares or debentures,
repayment of loans, purchase of fixed assets, etc.
 Fund Flow Statement explains the reasons for the change in the working
capital of the business between two Balance Sheet dates through various
Non-Current Assets and Non-Current Liabilities, which are responsible for
the increase or decrease in the working capital.
 A fund flow statement displays the financial status of an organisation, which
ensures easy comparison and analysis between two accounting periods.
 It is helpful in understanding the variability in the assets, liabilities and
equity of the company.
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Booklet Concepts
9.3 Cash Flow v/s Fund Flow
No. Particulars Cash Flow Fund Flow
1 Meaning A cash flow statement is a A fund flow statement is a

statement showing the statement showing the
inflows and outflows of changes in the financial
cash and cash equivalents position of the entity in
over a period. different accounting years.
2 Purpose of To show the movements in To show the reasons for the
preparation the cash at the beginning changes in the financial
and at the end of the position, with respect to
accounting period. previous year and current
accounting year.
3 Basis Cash Basis of Accounting. Accrual Basis of Accounting.
4 Analysis Cash Flow Statement Fund Flow Statement
analyses the cash examines the firm’s
generating efficiency of the efficiency in utilizing the
entity. working capital.
5 Discloses Inflows and Outflows of Sources and applications of
Cash. funds.
6 Op & Closing Contains opening and Does not contains opening
Balance closing balance of cash and balance of cash and cash
cash equivalents. equivalents.
7 Part of Yes, Cash Flow statement No, Fund Flow Statement
Financial is a part of Financial which is not a part of the
Statements Statement. Financial Statement.
8 Usefulness Cash Flow statement is Fund Flow Statement is
useful for a short term helpful to a long-
financial analysis of cash term analysis of financial
planning. planning.
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9.4 Cash Flow Statement : Provisions of Companies Act

 The Companies Act, 2013 brought in many changes which directly impact
preparation of financial statements and require understanding of the new
definitions and provisions.
 Earlier, The Companies Act 1956 didn’t include ‘Cash Flow Statement’ in the
definition of ‘Financial Statement’.
 The Applicability of Cash Flow Statements is governed by the
Companies (Accounting Standards) Rules, 2006. However as per the
Companies Act, 2013, the Cash Flow Statement shall be prepared and
included in Financial Statements subject to certain exemption specified in
the Act.
 As per Section 2(40) of the Companies Act, 2013 ‘Financial Statement’ in
relation to a company, includes :
(i) a Balance Sheet as at the end of the financial year;
(ii) a Profit & Loss Account for the financial year;
(iii) a Cash Flow Statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any
document referred to in sub-clause (i) to sub-clause (iv):
 Exemption from Applicability of Cash Flow Statements : The financial

statement, with respect to :
 One Person Company (OPC),
 small company and
 dormant company,
may not include the Cash Flow Statement i.e. there is an exemption given to
OPC, small company and dormant Company for preparing the Cash Flow
Statement for purpose of inclusion in Financial Statements.
 One Person Company : As per sec 2(62) of The Companies Act, 2013 ‘One
Person Company’ means a company which has only one person as a
member.
 Dormant Company : As per section 455 of The Companies Act, 2013
‘Dormant Company’ means a company formed and registered under this
Act for a future project or to hold an asset or intellectual property and has
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Booklet Concepts
no significant accounting transaction, such a company or an inactive

company may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.
 Small Company : Sec 2(85) ‘small company’ means a company, other

than a public company :
(i) paid-up share capital of which does not exceed fifty lakh rupees
(Rs 50,00,000) or such higher amount as may be prescribed which
shall not be more than five crore rupees; (Rs 5 Crores) or
(ii) turnover of which as per its last profit and loss account does not
exceed two crore rupees (Rs 2 crore) or such higher amount as
may be prescribed which shall not be more than twenty crore rupees
(Rs 20 crores).
Analysis of Small Company :
(1) A public company will never be a small company.
(2) A Private company should have a maximum of
(a) Paid up capital of Rs 50 Lac;
(b) Turnover of Rs 2 Crores.
(3) Holding and Subsidiary will always be out of the picture of small
companies.
 Format to be used for preparing Cash Flow Statement : Since no

format is prescribed in Schedule III to the Companies Act, 2013, the cash
flow statement shall be prepared in the format prescribed in the AS-3.
 Conclusion : The inclusion of cash flow along with balance sheet and P &
L for all companies is a new requirement. Earlier only listed companies
under listing agreement clause no. 32 were required to prepare cash flow
statement as per AS 3 of Accounting Standards issued by the ICAI.
Simply, we can state that the cash flow statement is applicable for all
companies (including Private Company) however the certain exemption is
provided to OPC, Dormant Companies and Small Companies in respect of
Applicability of Cash Flow Statement.
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Since the Companies Act, 2013 does not lay down any format for
preparation of cash flow statement, companies need to follow AS 3 in this
regard.
In respect of listed companies, the listing agreement requires the indirect

method for preparing cash flow statements. Non-listed companies will have
a choice of either applying the direct or indirect method under AS 3 to
prepare the cash flow statement. Due to the listing agreement requirement,
that choice will not be available to listed companies.
This means a private limited company with :
(i) paid up share capital of less than 50 lakh rupees or such higher
amount as may be prescribed (not exceeding 5 crore rupees) or
(ii) a turnover of less than 2 crore rupees or such higher amount as

may be prescribed (not exceeding 20 crore rupees)
is not required to prepare cash flow statements while preparing financial

statements at the end of the financial year or say Cash Flow Statement is
not applicable to such companies.
Despite non-applicability of Cash Flow Statement, if a small companies want

then they can prepare their cash flow statements and file it with Registrar
of Companies (ROC).
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Booklet Concepts
9.5 Format of Cash Flow Statement : Indirect Method

M/s . . . . .
Cash Flow Statement for the year ended . . . . . . . .
Particulars Amt ₹ Amt ₹
A Cash Flow from Operating Activities :
Net Profit (cl – Op bal of P&L) xxx
Adjustments :
(P.Dr = +ve; P.Cr = -ve Non-Cash and Non-Business Items)
Deprn : Plant & Machinery / Building / etc xxx
Goodwill written off / Staff loan written off xxx
Preliminary Expenses written off xxx
Loss on Machinery Sold xxx
Interest paid on Loans / Debenture Interest xxx
Provision for Tax xxx
Trf to General Reserve xxx
Proposed Dividend / Interim Dividend Paid xxx
Excess Income Tax Provision (xxx)
Profit on Investments Sold / Dividend recd on Invts (xxx)
Interest Received (xxx) xxx
Net Cash before Working Capital Changes xxx
Working Capital Changes
(Incr of CL or Decr of CA = +ve ; Decr of CL or Incr of CA = -ve)
Increase in Creditors xxx
Decrease in Bills Payable (xxx)
Increase in Stock (xxx)
Decrease in Bills Receivable xxx xxx
Cash Generated from Business Operations xxx
Less : Income Tax Paid xxx
xxx
Add / Less Extraordinary Items xxx
Net Cash from Operating Activities xxx
B Cash Flow from Ivesting Activites :

FA & Invts (pur = outflow = -ve ; sold = inflow = +ve)
Machinery Sold xxx
Furniture Purchased / Investments Purchased (xxx)
Interest / Dividend recd on Investments xxx
Net Cash from Investing Activities xxx
C Cash Flow from Financing Activities :

Capital & Loans (recd = inflow = +ve ; paid = outflow = -ve)
Issue of Debentures xxx
Redemption of Debentures (xxx)
Issue of Shares xxx
Buy back of Shares (xxx)
Dividend Paid / Interest Paid (xxx)
Net Cash from Financing Activities xxx
Net Increase in Cash and Cash Equivalents xxx
Cash & Cash Equivalents at begining xxx
Cash & Cash Equivalents at end xxx
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9.6 Format of Cash Flow Statement : Direct Method

M/s . . . . .
Cash Flow Statement for the year ended . . . . . . . .
Particulars Amt ₹ Amt ₹
A Cash Flow from Operating Activities :
Operating Cash Receipts : xxx
Cash Sales xxx
Cash Recd from Debtors xxx
Commission Recd xxx
Royalty Recd xxx
(a) xxx
Operating Cash Payments
Cash Purchases (xxx)
Cash Paid to Suppliers (xxx)
Cash Paid for Business Expenses (xxx)
(b) (xxx)
Cash Generated from Business Operations (a) – (b) xxx
Less : Income Tax Paid xxx
xxx
Add / Less Extraordinary Items xxx
Net Cash from Operating Activities xxx
B Cash Flow from Investing Activites :

FA & Invts (pur = outflow = -ve ; sold = inflow = +ve)
Machinery Sold xxx
Furniture Purchased / Investments Purchased (xxx)
Interest / Dividend recd on Investments xxx
Net Cash from Investing Activities xxx
C Cash Flow from Financing Activities :

Capital & Loans (recd = inflow = +ve ; paid = outflow = -ve)
Issue of Debentures xxx
Redemption of Debentures (xxx)
Issue of Shares xxx
Buy back of Shares (xxx)
Dividend Paid / Interest Paid (xxx)
Net Cash from Financing Activities xxx
Net Increase in Cash and Cash Equivalents xxx
Cash & Cash Equivalents at beginning xxx
Cash & Cash Equivalents at end xxx
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Booklet Concepts
9.7 Objectives : Cash Flow Statement

# Classify the following transactions as to :
a Operating Activities
b Investing Activities
c Financing Activities
d Cash or Cash Equivalents
01 Cash Sales of Goods in Trade.

02 Cash Sales of Scrap.
03 Cash Paid to Suppliers of Raw Materials.
04 Proceeds from Issue of Preference Shares.
05 Dividend Paid on Preference Shares.
06 Interim Dividend paid on Equity Shares.
07 Interest Received on Investments.
08 Div Recd on Shares of other co. held as Invts.
09 Cash Sales.
10 Repayment of a long term loan.
11 Amount paid for purchase of Building.
12 Payment of Patent.
13 Sale of Land.
14 Amount received on sale of Investments.
15 Cheques Received from Debtors.
16 Redemption of Preference Shares.
17 Cash Purchases.
18 Cheques issued to Suppliers of Goods.
19 Office and Administration Expenses Paid.
20 Selling and Distribution Expenses Paid.
21 Manufacturing Overheads Paid.
22 Rent Recd on Property held as Investments.
23 Rent Paid.
24 Brokerage paid on Issue of Debentures.
25 Bank Overdraft.
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9.8 Problems : Cash Flow Statement

Problem 01
Prepare a Cash Flow Statement of EPABX Ltd for the y e 31st December 2020.
Liabilities 31.12.19 31.12.20 Assets 31.12.19 31.12.20

Share Capital 1,35,000 1,35,000 Goodwill 13,950 4,950
Reserves 40,500 54,000 Land & Bldg 32,400 45,000
Loans 45,000 27,000 Plant & Mach 1,13,400 85,050
Fixed Deposits 67,950 62,010 Furniture - 40,500
Creditors 71,640 43,920 Investments 40,500 49,500
Prop Dividend 13,500 16,200 Debtors 94,500 1,14,120
Provn for Taxn 10,800 12,600 Bank Balance 89,640 11,610
3,84,390 3,50,730 3,84,390 3,50,730
Other information :
1 Depreciation is provided @ 10% on Furniture.
2 Depreciation on Land & Building is ₹ 5,000.
3 Investments costing ₹ 8,000 were sold for ₹ 10,000 during the year.
4 Tax of ₹ 13,000 was paid for the year ended 31st Dec 2020.
Problem 02
Foll are Bal Sheet of Mayur Industries Pvt Ltd as on 31.03.19 and 31.03.20.
Liabilities 31.03.20 31.03.19 Assets 31.03.20 31.03.19

Share Capital 5,00,000 5,00,000 Premises 4,75,000 5,00,000
Gen Reserve 1,50,000 1,25,000 Machinery 4,22,500 3,75,000
P & L A/c 76,500 76,250 Equipments 40,500 45,000
Loan ICICI 1,55,000 1,75,000 Stock 74,000 1,00,000
Creditors 2,31,250 2,75,000 Debtors 1,60,000 2,00,000
Provn for Taxn 76,250 84,250 Cash 7,000 3,000
Bank 10,000 -
Goodwill - 12,500
11,89,000 12,35,500 11,89,000 12,35,500
Other Information :
1 Dividend (Interim) of ₹ 25,000 was paid during the year.
2 Depreciation on Premises is provided at 5%.
3 Machinery of ₹ 75,000 was acquired during the year.
4 Income Tax Provision for the year was ₹ 75,000.
Prepare Cash Flow Statement.
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Booklet Concepts
Problem 03
The Balance Sheets of Sugar Ltd are as follows : Prepare Cash Flow Statement.
Liabilities 2019 2020 Assets 2019 2020

Eq Sh Capital 1,50,000 2,50,000 Goodwill 55,000 45,000
Gen Reserve - 30,000 Land & Bldg 80,000 90,000
P & L A/c - 29,000 Pl & Machinery 40,000 1,00,000
Debentures 1,00,000 - Stock 42,000 53,000
S Creditors 57,000 46,000 Debtors 90,000 98,000
Bills Payable 30,000 6,000 Bills Rec 8,000 12,000
Provn for Tax - 25,000 Prepaid Exps 6,000 4,000
Proposed Div - 20,000 Cash in hand 10,000 4,000
P & L A/c 6,000 -
3,37,000 4,06,000 3,37,000 4,06,000
Other Information :
1 During 2020 Deprn of ₹ 8,000 & ₹ 10,000 is charged on L & Bldg and Pl &
Machinery.
2 An Interim Dividend of ₹ 7,500 was paid during the year 2019.
3 During the year 2020 Machinery having a book-value of ₹ 8,000 was sold
for ₹ 7,000.
Problem 04
From Balance Sheet for 2019 & 2020, Prepare a Cash Flow Statement for 2nd yr.
Liabilities 2019 2020 Assets 2019 2020

Equity Capital 2,00,000 3,00,000 Land 2,10,000 2,80,000
Pref Capital 60,000 30,000 Building 4,00,000 3,50,000
General Reserve 40,000 60,000 Stocks 25,000 1,50,000
P & L A/c 1,20,000 1,40,000 Debtors 45,000 80,000
Debentures 50,000 - Prepaid Exps 10,000 20,000
Term Loan 2,00,000 3,20,000 Bank Balance 15,000 60,000
Creditors 40,000 90,000 Misc Expenditure 5,000 -
7,10,000 9,40,000 7,10,000 9,40,000
Additional Information :
1 Company paid Interim Dividend of 10% on opening Equity.
2 Preference Shares were redeemed at 10% premium.
3 Convertible Debentures converted into Equity Shares at par.
4 Income Tax paid ₹ 10,000.
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Capital &
Revenue
10.1 Concept of Capital And Revenue
01 Business  Expenditure / Payments.

Transaction  Income / Receipts.
02 Expenditure  Capital Expenditure.
 Revenue Expenditure.
 Deferred Revenue Expenditure.
03 Income  Capital Income
 Revenue Income
04 Capital  Any Exps on purchase of Fixed Asset :
Expenditure i having life > 1 year; AND
ii intention not to sell.
 Any expense on Fixed Asset upto date of installation.
 Any expense that would increase the Production /
Earning capacity of the business.
 Balance Sheet items including Intangible Assets.
05 Revenue  Any Exps on purchase of Asset :
Expenditure i having life <1 year; OR
ii intention to sell.
 Any expense on Fixed Asset after date of installation.
 Any expense that would maintain the Production /
Earning capacity of the business.
 P & L items items eg Conveyance, Stationery,
Postage, etc.
06 Deferred  Huge amount.
Revenue  Future benefit.
Expenditure  Eg : Preliminary Exps, Sponsorship of event for brand
building.
07 Capital Income  Not Related to business.
 Not Recurring in nature.
 Not Regular transaction.
 Eg : Profit on sale of Machinery.
08 Revenue  Related to business.
Income  Recurring in nature.
 Regular transaction.
 Eg : Profit on sale of Goods.
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Booklet Concepts
10.2 Classify : Capital, Revenue or DRE

Classify the following transactions as Capital, Revenue or DRE. Give reasons.
1 Transaction : Cost of replacement of defective part of machinery.
Answer : Cost of replacement of defective part of machinery is a
Revenue Expenditure because :
. . . . . it is after installation, after put to use.
. . . . . it is for maintaining production capacity.
. . . . . it is P & L item.
2 Transaction : Expenditure incurred in preparing a project report.

Answer : Expenditure incurred in preparing a project report is a
Capital Expenditure if the project is successful. In such case,
according to AS-10, expenditure on creation of fixed asset is
to be included in the cost of FA.
However, if the project is not implemented, then, it is to be
treated as Revenue Expenditure as it becomes sunk cost.
3 Transaction : Expenditure for training employees for better running of

machinery.
Answer : Expenditure for training employees for better running of
machinery is a Revenue Expenditure because :
. . . . . it will enable the workers to maintain the machinery
in good condition.
. . . . . no new asset created.
. . . . . it is a regular business expense.
. . . . . it is P & L item.
4 Expenditure for repairing cinema screen

5 Amount spent on uniform of workers.
6 White washing of the factory building.
7 Cost of stores consumed in manufacturing machinery for installation in own
factory.
8 Wages paid for construction of building extension.
9 Import duty on raw materials purchased.
10 Premium Pd in connection with acquisition of LH Premises.
11 Fees paid for renewal of license of factory.
12 Plant & Machinery which stood in the books at ` 1,50,000- included a
machine at a book value of ` 3,400-; this being obsolete, was sold at ` 900-
and was replaced by a new machine which cost ` 4,800-.
13 Freight and Cartage on the new machine amounted to ` 300- and erection
charges ` 550-.
14 A sum of ` 2,200- was spent on painting the new factory.
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15 Wages paid to Carpenter for making furniture.

16 Term loan taken from bank.
17 Commission received on Sales.
18 Brokerage paid on purchase of Land.
19 Purchase of second-hand machinery for ` 1,00,000-.
20 Legal Exps ` 3,000- in connection with collection of debts.
21 Dividend and Interest received on Investments.
22 Amount paid for obtaining a license to carry on business.
23 Second-hand Computer purchased for ` 12,000- and ` 3,000- spent for
bringing it into working condition.
24 A sum of ` 10,000- spent for alteration of existing Plat incorporating thereby
new devices which could effect substantial reduction in power consumption.
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Booklet Concepts
Frauds &
Errors
11.1 Errors
 The term ‘ERROR’ refers to unintentional mistakes in the financial
statements.
 It is innocent mistake in writing books of accounts.
 Errors occur unintentionally and are not pre-planned.
 Errors
Error of Principle Clerical Errors
Error of Error of Compensating Error of

Omission Commission Errors Duplication
A Error of Principle
 Such errors arise when entries are not recorded as per fundamental
principles of accountancy.
 Such errors do not disturb trial balance but they affect true and fair
view of accounts.
 Due to such errors, accounts show misleading. picture of the financial
statements.
 Eg : wrong allocation of expenditure between capital and revenue,
over or under valuation of assets, excess or short provision of
depreciation, etc.
 Auditor has to be careful while examining accounts so that such
errors may be detected.
 It can be detected by vouching of all material transactions,
verification of assets and liabilities, etc.
B Clerical Errors
1 Error of Omission
 Such errors arise when a transaction has not been recorded in the
books of accounts either wholly or partially.
 There is a complete omission when the transaction is not at all
recorded.
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 When transactions are partly omitted i.e. one aspect is recorded and
the other omitted, it is a partial omission, which affects the trial
balance.
 This type of error may be intentional or unintentional.
 Such error affects profit/loss and assets and liabilities. Thus, state of
affairs of the company is not disclosed correctly due to this type of
error.
2 Error of Commission
 When transaction has been recorded but wrongly entered in the
books of original entry or wrongly posted in the ledger, error of
commission is said to have been made.
 It usually arises due to negligence in recording a transaction.
 They are result of wrong doing on the part of clerks.
 Such an error may be intentional or unintentional.
 Therefore vouching should be done very carefully in order to detect
such an error.
 Other errors of commission are :
a Mathematical Errors : They are errors of calculations which
may occur in voucher, books, ledger, trial balance and so on.
Such error can be detected by checking the calculations on the
voucher, scrutiny of party accounts, etc.
b Casting Errors : They are errors in totalling, carry forward,
extension, etc. They may occur in Day Books, Ledger or Trial
Balance. They can be detected by checking the casting of the
Sales Register.
c Posting Errors : Posting error occur while posting amounts
from Registers into the Ledgers. Error of posting on the wrong
side will affect Trial Balance and can be detected by checking
the posting.
3 Compensating Errors
 It occurs when effect of one error is compensated by another error.
 The existence of compensating errors does not disturb the trial
balance and hence the Auditor should use all his skill to detect such
errors.
 For eg : If Ajay’s A/c was to be debited by ` 400 but was actually
debited by ` 40 while Vijay's A/c was to be debited by ` 40 but was
debited by ` 400. Thus both the A/c's have been debited for a total
sum of ` 440.
 These errors are most dangerous and are difficult to locate. It can be
detected by vouching, obtaining statement of A/c, party
confirmations, etc.
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Booklet Concepts
4 Error of Duplication
 It occurs when transaction is recorded twice in the books of account.
 In such case, Posting is done twice.
 In such a case, debit and credit both are posted twice therefore it will
not affect the agreement of trial balance.
 If an entry is made only once but is posted twice, it results into an
error of duplication.
 Double debit or double credit will appear in the account of the party,
which will remain unadjusted.
 Adjustment entry is required to be passed and trial balance will have
to be tallied again.
 It is easy to detect such errors.
 Detection of Errors if Trial Balance does not tally

 Auditor should follow following procedure to detect errors when TB does not
tally :
1 Check totals of both the sides of the Trial balance.
2 Match nature and balances of accounts.
3 Check ½ the amount of difference in trial balance.
4 Check if the difference in Trial Balance is divisible by 9.
5 Go back through the steps involved in preparing the trial balance.
11.2 Frauds
 Fraud may be defined as “the false representation or untrue entry made in
the books of accounts by management, employees or third parties.”
 Fraud includes willful misrepresentation and an act to conceal the truth.
 It is a deliberate mistake committed in the accounts with a view to get
personal gain.
 Frauds are most difficult to locate and Auditors generally devote greater
attention to these types of intentional errors.
 Frauds
Manipulation of Records Misappropriation
of Cash of Goods
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A Manipulation of Records
 Records may be manipulated or falsified in the following ways :
1 Not Recording Transactions :
 Transactions may not be recorded at all.
 For example, goods sold may not be recorded as sales in sales
register.
 Thus, such fraud occurs when an Error of Omission is
intentional.
2 Recording Dummy Transactions :
 Dummy transactions may be recorded.
 For example, goods sent on consignment may be shown as
actual sales in Sales Register.
 Thus, such fraud occurs when an Error of Commission is
intentional.
3 Misapplication of Accounting Policies :
 Accounting Policies may be applied wrongly.
 For example, income accrued may be shown as advance
received.
 Thus, such fraud occurs when an Error of Principle is
intentional.
B Misappropriation
1 Misappropriation of Cash or Embezzlement of Cash
 In big business concerns, there are more chances of such
frauds.
 In such case, individual owner has no direct control over the
receipts and payments of cash due to which there are more
opportunities of committing frauds.
 A person may defraud his owners in cash transaction by
following methods :
 When cash is received by omitting to record cash sales
and pocketing money received or by not entering cash
received from debtors, etc.
 When cash is paid by recording fictitious purchases and
expenses and thus misappropriating cash or by
recording excess amt than what is actually paid.
2 Misappropriation of Goods
 Goods, which are less bulky but more valuable, can be easily
misappropriated hence chances of misappropriation of such
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Booklet Concepts
goods are more. Misappropriation of goods can be done in the

following ways :
 Goods may be removed out of factory premises without
a proper entry for the same, and are sold privately.
 Showing goods as damaged or obsolete and taking out
the same and realising the same not recording sales.
11.3 Teaming and Lading

 Meaning : This term is used to describe attempts to hide the loss of cash
received from one customer by using cash received from another customer
to replace it. This process is adopted with every subsequent collection from
debtors. This is a method by which the cash is misused for sometime.
 Example : Suppose Mr P, Q and R are Debtors of a company from whom
an equal amount is to be received. When cash is paid by Mr P it is not
recorded in the cash book and is retained by the cashier. Now when cash is
received from Mr Q it is recorded but it is credited to Mr P’s A/c. Later on,
when Mr R pays cash Mr Q's A/c is credited. At year end the cashier makes
arrangement for money he had retained. He brings in money and records it
in the name of Mr R.
 Ultimately it does not result in misappropriation as the cashier finally
returns money back.
 But the cashier uses the money to earn interest without any authority.
 It may result in misappropriation of cash if finally cashier is unable to return
the money.
 Such practice should be prevented.
 Detection of such fraud
 Verify efficiency & existence of internal control system for recording
cash transactions.
 Check the copy of receipt issued to Debtors. More attention should
be given to dates.
 Scrutinize carefully the debtor’s account who are paying their dues
by instalments.
 Discount allowed to customers should be carefully verified.
 Bad debts written off should be properly verified and authorized.
 Surprise cash counting should be done.
 Check Bank Reconciliation from time to time.
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11.4 Window Dressing

 Meaning : It is an art of showing financial position at a much better level
than the existing one. A sound financial position is painted on face of
B/Sheet concealing actual state of affairs. Window Dressing means showing
wrong picture. The fraud through manipulation of accounts is known as
window dressing. Generally, the people at the top management level
commit this type of fraud.
 Objects of Window Dressing :
1 It helps to attract more applications for shares /debentures in case
of issue of shares.
2 To show more profit to facilitate payment of higher remuneration to
managerial personnel.
3 To attract favorable terms from creditors, lenders and financial
institution.
4 It helps in getting easy finance facilities like bank overdraft or loan
from bank and other financial institutions.
5 More goodwill can be demanded in case of absorption / admission of
a new partner.
 Different ways of doing Window Dressing
 A window dressing is created by one of the below given methods :
A Overstatement of Assets
 Recording new fixed assets purchased in the books at a higher
cost.
 Recording fictitious purchases of fixed assets in the books.
 Providing less depreciation on fixed assets by changing
method.
 Recording accrued income and pre-paid expenses at a higher
amount.
B Understatement of Liabilities
 Recording liabilities in the books at a lower amount.
 Omitting to record a liability in the books.
 Recording outstanding expenses at a lower amount.
 Showing current liabilities as Reserves.
 Treating actual liabilities as contingent liabilities.
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Booklet Concepts
 Arguments against Window Dressing

1 No true and fair view : Balance Sheet does not disclose the actual
net worth of concern. Profit and Loss A/c does not disclose actual
working results of the concern.
2 Loss to Shareholders : Shareholders do not get a correct picture
about the value of Investments. Dividend may be paid out of capital.
3 Hide Inefficiency of Management : Window Dressing helps the
management to hide its inefficiency. Rosy picture shown in accounts
is used to hide losses during the current year.
4 Fraud by Management : Company may withdraw for personal use the
profits created through window dressing.
5 Against the law : Window Dressing is against the provisions of
Schedule VI of the Companies Act. This may attract legal action
against the officers who are responsible.
11.5 Secret Reserve

 Meaning : Secret Reserve means any reserve which is not shown on the
face of Balance Sheet. It is also known as Hidden Reserves or Inner
Reserves. This reserve represents the surplus of assets over liabilities and
capital. When Secret Res are created, financial position seems to be worse
than what actually is. It is usually created by joint stock companies
especially banking and financial concerns.
 Objects of Secret Reserve :
1 To mislead competitors by hiding its real earnings.
2 To hide abnormal profits which may not be earned in future. These
profits can be used for maintaining the dividends in future.
3 To avoid increase in wages and bonus, workers are mislead by
creating secret reserves.
4 A secret reserve is legally allowed to be created by the banks.
 Different ways of creating Secret Reserve :
 A secret reserve is created by one of the below given methods :
a Understatement of Assets
 By writing down the assets much below their book value or
market value.
 Providing excess depreciation on fixed assets, by changing
method of depreciation.
 Undervaluing or overvaluing stocks by changing methods of
stock valuation.
 By charging capital expenses to revenue account.
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b Overstatement of Liabilities
 By overvaluing the liabilities.
 By showing contingent liabilities as real liabilities.
 By treating an item of income as a liability.
 By showing reserves as current liabilities.
 Disadvantages / Arguments against Secret Reserve :
1 No true and fair view : Balance Sheet does not disclose the actual
net worth of concern. Profit and Loss A/c does not disclose actual
working results of the concern.
2 Loss to Shareholders : Shareholders do not get to know the true
picture of value of investments. They do not get their due share in
profits.
3 Undue benefit to the Management : Secret Reserve helps the
management to hide its inefficiency. Secret Reserve of previous yr is
used to hide losses during current year.
4 Fraud by Management : Company may withdraw for personal use
funds created through secret reserve. Secret Res could be used by
directors to misuse the powers they hold.
5 Against the law : Secret Reserve is against the provisions of Schedule
VI of the Companies Act. This may attract legal action against the
officers who are responsible.
 Auditors duty regarding Secret Reserve :

1 Disclose in Audit Report : Auditor of the company has to report
whether accounts give true and fair view of the financial position of
the Company. It is the duty of the Auditor to prevent Secret Reserve.
2 Verify Income : Auditor should verify whether the income has been
properly recorded in the books and reported in the final accounts.
3 Verify Assets and Liabilities : Auditor should verify value of assets
and liabilities disclosed in B/Sheet. He should ensure that
contingent liabilities are not shown as actual liabillities.
4 Verify Provisions : Auditor should examine whether provision
for any liability is more than required amount.
5 Verify Closing Stock : Auditor should see that there is no
change in the basis of valuation of closing stock. If there is any
change, its effect on profit should be disclosed.
6 Omission of Assets : Auditor should see that no assets are
omitted from the books.
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Booklet Concepts
11.6 Circumstances indicating Errors and Frauds

 Following circumstances indicate that there may exist errors or frauds :
1 Quality of Management : Management is dominated by one person
or small group. There is high turnover of accounting staff. The
accounts department is understaffed. Auditors and lawyers are
changed frequently.
2 Unusual Pressure on the Concern : Working capital is inadequate.
Credit sales are made to show more income ignoring the risk of bad
debts. There is need to show better financial picture to succeed in
public issue of shares. There is heavy dependence on few products
or customers.
3 Unusual Transactions : There are many transactions near the year-
end affecting amount of profit. There are many transactions with
associates, related parties, etc. There are excessive payments for
services.
4 Problems in Audit : There are inadequate records, incomplete files,
and untallied trial balance. Vouchers are not available or not duly
authorized or supporting documents are altered. There is inadequate
explanation from management.
11.7 Objectives : Window Dressing / Secret Reserves

For the following transactions, state the impact on Profits and Balance
Sheet :
01 Over valuation of Closing Stock.
Ans : It is an example of Window Dressing.
The effect of this, in financial statements will be :
a Profits would be shown higher by such amount;
b The value of Assets shown would be more than actual.
02 Under valuation of Closing Stock.
03 Not passing depreciation entry.
04 Recording depreciation with lesser amount.
05 Recording depreciation with excess amount.
06 Goods sent on approval, approved, fact of approval not recorded.
07 Goods sent on approval, recorded as sales.
08 Goods sent to Agent, recorded as sales.
09 Customer became insolvent, nothing can be recovered, effect of this not
recorded.
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10 Doubtful debts, provision not made.

11 Income accrued, entry not passed.
12 Income received in advance, recorded as current income.
13 Prepaid expenses, adjustment not made.
14 Outstanding expenses, entry not passed.
15 Personal expenses recorded as business expenses.
16 Business expenses recorded as personal expenses.
17 Income Tax demand note received, provision not made.
18 Income receivable recorded in books at higher than real amount.
19 Prepaid expenses recorded in books at higher than proper amount.
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Booklet Concepts
Company
Final Accounts
12.1 Format as per Companies Act

M/s ABC Limited
Balance Sheet as on . . . . . . . . . .
Particulars Note Amt ` Amt `
I Equity & Liabilities
1 Shareholders Funds
a Share Capital 1a xxx
b Reserves & Surplus 1b xxx xxx
2 Share Appln Money Pending Allotment 2 xxx
3 Non-Current Liabilities
a Long Term Borrowings 3a xxx
b Long Term Provisions 3b xxx xxx
4 Current Liabilities
a Short Term Borrowing 4a xxx
b Trade Payables 4b xxx
c Other Current Liabilities 4c xxx
d Short Term Provisions 4d xxx xxx
TOTAL (1 + 2 + 3 + 4) xxx
II Assets :
1 Non-Current Assets
a Fixed Assets Tangible xxx 1a
Intangible xxx xxx
b Non-Current Investments 1b xxx
c Long Term Loans & Advances 1c xxx
d Other Non-Current Assets 1d xxx xxx
2 Current Assets
a Inventories 2a xxx
b Trade Receivables 2b xxx
c Cash & Cash Equivalents 2c xxx
d Short Terms Loans & Advances 2d xxx
e Other Current Assets 2e xxx xxx
TOTAL (1+2) xxx
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M/s ABC Limited

Profit & Loss Statement for the year ending . . . . . . . . . .
Particulars Note Amt ` Amt `
1 Income
a Revenue from Operations 1a xxx
b Other Income 1b xxx
Total Income (a + b) xxx
2 Expenditure
a Cost of Mat Cons / Pur of Stock in Trade 2a xxx
b Changes in Inventories 2b xxx
c Employees benefit Expenses 2c xxx
d Finance Cost 2d xxx
e Depreciation and Amortisation 2e xxx
f Other Expenses 2f xxx
Total Expenses (a to f) xxx
3 Profit Before Tax (PBT) (1 – 2) xxx
4 Provision for Tax xxx
5 Profit/Loss After Tax for the yr (PAT) (3-4) xxx
Notes to Liabilities :
1a Share Capital : 1b Reserves & Surplus :
Authorised : General Reserve xxx
___ Eq Shs of Rs __ each xxx (+) Trfd from P&L xxx xxx
___ Pref Shs of Rs __ each xxx Securities Premium xxx
xxx P & L: Opening xxx
Issued : (+) Profit for the Yr xxx
___ Eq Shs of Rs __ each, xxx (-) Trfd to Gen Res xxx
Rs ___ paid up. (-) Prop Dividend xxx xxx
___ 8% Pref Shs of Rs __ xxx
each, Rs ___ paid up.
xxx xxx
3a Long Term Borrowings : 3b Long Term Provisions :
12% Debentures (secured) xxx Provision for Gratuity xxx
Bank Loan (secured) xxx Prov for Retirement xxx
Fixed Deposits (unsecured) xxx benefits
xxx xxx
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Booklet Concepts
4a Short T Borrowings : 4c Other Curr Liabilities :

Bank Overdraft xxx Outstanding Expenses xxx
(secured) Deb/Loans repayable in
Directors Loans xxx next 12 months xxx
Unclaimed Dividend xxx
Various other Curr Liabs xxx
xxx xxx
4b Trade Payables : 4d Short Term Provisions :

Creditors for Goods xxx Provn for (C/Y) xxx
Creditors for Exps xxx (-) Adv Tax xxx xxx
Bills Payable xxx Proposed Dividend xxx
xxx xxx
Notes to Assets :
Note 1a : Fixed Assets : Tangible :
Particulars Cost Depreciation Net
Op Addns Cl Op Curr Yr Cl WDV
Land xxx - xxx - - - xxx
Building xxx - xxx xxx xxx xxx xxx
Machinery xxx xxx xxx xxx xxx xxx xxx
Furniture xxx xxx xxx xxx xxx xxx xxx
Computers xxx xxx xxx xxx xxx xxx xxx
xxx xxx xxx xxx
1b Non-Current Invts : 2a Inventories :

Investments in Bonds xxx Loose Tools xxx
Debentures of PQR Ltd xxx Closing Stock xxx
xxx xxx
1c LT Loans & Advs : 2b Trade Receivables :

Capital WIP xxx Debtors xxx
Deposit with Customs xxx (-) R D D xxx xxx
Excess Adv Tax from ST xxx Bills Receivable xxx
(Neg Amt of Tax Provn)
xxx xxx
2c Cash & Cash 2e Other Current Assets :

Equivalents :
Cash at Bank xxx Commission Receivable xxx
Cash in hand xxx ITax Refund Receivable xxx
xxx xxx
2d ST Loans & Advs : # Contingent Liabilities :

Prepaid Expenses xxx 1 Suit filed by Customer, pending
Advance to Suppliers xxx disposal.
Staff Advances xxx 2 Uncalled amount of partly paid Invts.
3 I Tax demand, appeal pending.
xxx
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12.2 Explanation on each Note of Format
1a Share Capital  Authorised Share Capital to be written 1st and

its amount not to be considered in total.
 Then, we write Issued Capital. This we get from
Trial Balance.
 If Calls-in-Arrears is there, it will be less from
Share Capital.
 If Share Forfeiture is there, it will come under
this head.
 Information for shares issued for non-cash
consideration to be given in brackets.
1b Reserves & Surplus  Various Reserves and Surplus Accounts to
appear under this head, for eg : General
Reserve, DRR, Capital Reserve, Securities
Premium, etc.
 Op Balance of P & L also to be taken here.
 To this, we Add PAT and Add Approp.Cr items
and Less Approp. Dr items.
 Final amount may become negative also.
2 Share Appln money  If such amount is outstanding as at year end, it
pending Allotment will come under this head from the Trial Balance.
 It is to be shown directly in outer column in
Balance Sheet.
 Generally, not there, hence we write nil.
3a LT Borrowings  Shall be sub-classified as Secured & Unsecured.
 Here, we consider both secured and unsecured
Loans, repayable after 12 mths (=LT)
 Eg : Debentures, Bank Loan, Loan from
Financial Institutions, FD from Public, etc.
 To the extent repayable in next 12 months, we
bifurcate and take it to ‘Other Current Liabilities’.
 Details of security to be shown in brackets.
 If Interest rate given in name of the borrowing,
we can find out whether any interest is
outstanding and pass adjustment entry
accordingly, if required.
3b LT Provisions  Provision for employees benefit,
 Provision for Gratuity,
 Provision for Retirement Benefits, etc
4a ST Borrowings  Shall be sub-classified as Secured and
Unsecured.
 Here, Bank Overdraft is to be taken.
 Directors Loan if temporary loans.
 Details of security, if any, to be given in
brackets.
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Booklet Concepts
4b Trade Payables  Sundry Creditors : for goods

: for expenses
 Bills Payable
4c Other Current Liab  Various Current Liabilities not covered by 4a, 4b
and 4d.
 Interest accrued / due on loans; Outstanding
Expenses.
 Debentures / Loans repayable in next 12
months; that is, Current maturities of LT Debts
 Unclaimed Dividend; Unpaid matured Debenture
 Income Tax Payable / TDS Payable
4d ST Provisions  Proposed Dividend
 Provn for Tax (-) Advance Tax
 If net tax becomes negative amt, then outer
column nil and negative amount to be shown as
Non-CA : LT Loans & Adv
1a Fixed Assets  Intangible FA : Goodwill, Patents, Trademark,
Copyright, Licences, Computer Softwares,
Franchise, etc.
 For Tangible FA, we prepare FA Schedule. From
this, total of column Net FA to be taken to B/s
and total of Current Year Deprn to be taken to
P&L Statement.
1b Non-Current Invts  Trade Investments, Shares of Other Companies,
Govt Securities, Investment in Partnership firm,
etc. Cost of such Investments will be Balance
Sheet Amount.
 Aggregate amount of quoted investments and
market value thereof; Aggregate amount of
unquoted investments; Aggregate provision for
diminution in value of investments.
 If partly paid Investments are there, uncalled
amount to be taken as Contingent Liability.
1c LT Loans &  Deposits given for long period; eg. Deposit with
Advances Customs Dept.
 Negative Amt of I Tax from ST Provisions, to
appear here as ‘Excess Advance Tax Paid’.
 Capital Advances, Security Deposits.
1d Other Non-CA  Non-CAs not covered by 1a, 1b, 1c above, to
appear in this head
 Eg : Preliminary Exps, Share Issue Exps, etc
(balance amts). To the extent to be written off
in next 12 mths, will appear in ‘Other Current
Assets’.
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2a Inventories  Cl Stk of RM, WIP, FG. If Mkt Value of FG is

given, then Stk of FG to be valued at cost or Mkt
Value whichever is less.
 Loose Tools, Stock of Stores & Spares, etc.
2b Trade Receivables  Sundry Debtors; bifurcation to be given as more
than 6 mths and others. RDD to be deducted for
Sundry Debtors.
 Bills Receivable
2c Cash & Cash  Cash in hand,
Equivalent  Petty Cash Balance,
 Bank Balance
 Cheques in hand
 Liquid Investments (upto 3 months)
2d ST Loans &  Prepaid Expenses
Advances  Advances to Suppliers
 Staff Advances, etc
2e Other Curr Assets  Income Receivable
 Preliminary Expenses to be written off in next 12
moths
 I Tax Refund Receivable
# Contingent  It is uncertain liabilities.
Liabilities  Payable or not would be decided by future
uncertain event.
 Eg : Uncalled amt on partly paid Invts.
 Suit for damages against the Company, pending
disposal.
 I Tax demand, disputed, appeal pending.
 Bills discounted but not due.
 Capital Commitments.
 Preference Dividend Arrears.
12.3 Standalone v/s Consolidated Financial Statements

 The main difference between consolidated and stand-alone financial
statements is that the consolidated form reports all activities of a company
and its subsidiaries as a combined entity, while standalone financial
statements report these findings as a separate entity.
 A consolidated financial statement covers the activities of the parent

company and its subsidiaries in a single report, as if they were all a single
company operating under one roof.
 Stand-alone financial statements, by contrast, treat each entity as if it were

entirely separate – the parent unrelated to the subsidiaries, and the
subsidiaries unrelated to one another.
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95
Booklet Concepts
 If a subsidiary earned $1 in income, for example, that $1 would show up

on the parent's consolidated statement and the subsidiary's stand-alone
statement – but not the parent's stand-alone statement.
 It's common for companies to do business with their subsidiaries – and

subsidiaries to do business with each other – as if they were unrelated. An
automaker, for example, might own the company that makes its
transmissions, but it still pays that company for the transmissions it
provides. Or if a subsidiary is struggling financially, its parent company may
loan it money, with the expectation that it will be paid back with money
from the subsidiary's operations. Transactions like these will appear on
stand-alone financial statements because they affect the profitability of the
individual units, which is important for internal book-keeping and
evaluation. But such transactions would not show up on consolidated
statements because they don't affect the overall state of the larger
company.
 Typical transactions that appear on stand-alone statements but not on

consolidated statements include equity investments, sales and loans. When
a parent owns stock in a subsidiary, the stock appears as an asset on the
parent's stand-alone balance sheet but as equity on the subsidiary's sheet.
When the parent buys something from the subsidiary, or vice versa, each
accounts for the transaction separately on its cash flow or income
statements. If one lends money to the other, the loan is an asset on the
lender's balance sheet and a liability on the borrower's. During
consolidation, a company's accountants will eliminate these and other
intracompany transactions. If they didn't, the transactions would in effect
be recorded twice.
 The Financial Accounting Standards Board, which sets rules for U.S.
companies' financial statements, and the International Accounting
Standards Board, which does the same worldwide, requires companies to
prepare consolidated financial statements when they hold a controlling
interest – more than 50 percent ownership – in other businesses.
 When a subsidiary is wholly owned, meaning that the parent owns 100
percent of the subsidiary, its finances are fully incorporated into the
consolidated statement. In other words, from looking at the consolidated
statement, you wouldn't even know the subsidiary exists.
 If the subsidiary is not wholly owned – that is, if another investor or

company holds a minority stake – then that non-controlling interest must
be accounted for on the consolidated balance sheet. Non-controlling interest
appears on the balance sheet as a separate category under stockholders'
equity.
 Finally, wholly owned subsidiaries don't have to produce stand-alone

financial statements, although they frequently do for internal purposes;
non-wholly-owned subsidiaries generally have to produce stand-alone
statements for the sake of their minority owners.
 Hence, Standalone Financial statements represent the standalone numbers/

financials of the company itself and do not include the financials of its
Page
96

subsidiaries. However, the consolidated numbers include the companies

(i.e. standalone financials) and its subsidiaries financial statements.
 People mostly prefer to look through the consolidated financial statements

as it gives a better representation of the company’s financial position.
12.4 Some Terms Explained
1 Current Assets  If an Asset satisfies any of the given criteria, it

is classified as Current Asset.
(a) it is expected to be realised, or is intended
for sale or consumption, in the Company’s
normal operating cycle; or
(b) it is held primarily for the purpose of being
traded; or
(c) it is expected to be realised within twelve
months after the reporting date; or
(d) it is cash or cash equivalent unless it is
restricted from being exchanged or used to
settle a liability for at least twelve months
after the reporting date.
2 Non-Current Asset  Asset other than Current Asset shall be
classified as Non- Current Asset.
3 Operating Cycle  Time between the acquisition of assets for
processing and their realisation in cash or cash
equivalents is called ‘Operating Cycle’.
 Where the normal operating cycle cannot be
identified: It is assumed to have a duration of
12 months.
4 Current Liability  A Liability is classified as ‘Current Liability’ if it
satisfied any of the given criteria :
(a) It is expected to be settled in the Company’s
normal operating cycle; or
(b) It is held primarily for the purpose of being
traded; or
(c) It is due to be settled within twelve months
after the reporting date.
5 Non-Current  Liability other than Current liability shall be
Liability classified as Non-Current.
6 Trade Receivables  It is the amount due on account of goods sold or
services rendered in the normal course of
business.
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97
Booklet Concepts
7 Trade Payables  It is the amount due on account of goods

purchased or services received in the normal
course of business.
8 Difference between a Amortization is used for intangible assets, while
Depreciation and Depreciation is used for tangible assets.
Amortization
b Amortization is almost always implemented using
the straight-line method, whereas Depreciation
can be implemented using either the straight-line
or accelerated method.
c Amortized assets, being intangible, do not have a
salvage value, which is the estimated resale value
of an asset at the end of its useful life.
Depreciated assets, by contrast, often have a
salvage value.
d An asset's salvage value must be subtracted from
its cost to determine the amount in which it can
be depreciated.
Page
98

Computerised
Accounting
13.1 Computers in Accounting
01 Introduction to  Over the past two decades, the way accounting data
Computerised is entered, stored & processed has changed
Accounting considerably due to the introduction of CAS Software.
System (CAS)  CAS software gives many advantages over manual
systems.
 A single entry is made and the software will update all
the appropriate accounts automatically.
 CAS is not only useful for limited entering data but it
is utilised by other departments also to keep
inventory, etc.
02 Concepts of  CAS is a system used by business for recording their
CAS financial information.
 It is an accounting system that processes the financial
transactions & events as per Generally Accepted
Accounting Principles (GAAP) to produce reports.
03 Components of  Following are the components of CAS :
CAS
1 Preparation of Accounting Software : Computer
helps in preparing accounting documents like
Cash Memo, bills & invoices, accounting
vouchers, etc.
2 Recording of transaction : Every day business
transactions are recorded with the help of
computer software. Every account & transaction
is assigned a unique code. This process simplifies
the work of recording the transaction.
3 Preparation of Trial Balance & Financial
Statements : After recording of transaction, data
is transferred into ledger Account automatically
by the computer. Vouchers are prepared with the
help of accounting vouchers.
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99
Booklet Concepts
04 Features of  Following are the features of CAS :

CAS
1 Fast, Powerful, Simple : CAS is designed to
automate and integrate all the business
operations such as purchase, sales, finance, etc.
2 Complete Visibility : With CAS, the company will
have greater transparency into the day to day
business operations & access to vital information.
3 Enhanced User Experience : CAS allows company
to enter data in various ways which makes work
a pleasure.
4 Accuracy, Speed : CAS has user definable
templates which provides fast, accurate data
entry of the transaction.
5 Grouping of Accounts : Groups are collection of
Ledgers of the same nature. Account Groups are
maintained to determine the hierarchy of Ledger
Accounts which is helpful in determining and
presenting meaningful and compliant reports.
05 Importance of  CAS are important to business in various ways.
CAS
1 Time & Cost Saving : CAS saves companies time
and money. Business transactions are entered
into the system and the system posts
transactions accordingly.
2 Organised : When information is entered into the
system, it makes finding the information simple.
Employees can see any financial information
whenever it is needed.
3 Storage : Storing information is vital to a
business. Companies perform backups on the
system regularly to avoid losing any information.
4 Distribution : CAS allows companies to distribute
financial information easily.
5 Management Reports : Data within the CAS is
accurate and upto date. Reports make
management decisions more reliable and timely.
6 Regulatory Compliance : Reports are required on
a regular basis from various govt agencies.
Computer system can organise their data and
reports to comply with these statutory
requirements.
100
Page

06 Limitations of  Following are the limitations of CAS :

CAS
1 Human Errors : Human errors can occur at all
levels within a system, from programming to
user errors. A system could be set up incorrectly,
with an account reporting in wrong report.
2 Costs : Accounting Systems are costly to
purchase and maintain. Extra costs for training
new employees in the system is also required.
3 Security : System security can pose limitations
on accounting software. Hacking, Viruses, spam,
etc are threat to the organisation.
4 Other Consideration : Electrical fluctuation is one
of the limitation to the computer. It can have a
negative impact on accounting data. Again if the
computer network is not properly set up, the
software cannot be accessed and utilised.
07 Codification  A coded accounting system is more convenient where
and Grouping there are numerous account heads and the complexity
of Accounts is high.
 also reduces the possibility of the same account
existing in several names due to spelling mistakes.
 There could be classification based on geographical
location as well.
08 Automation of  AIS is Accounting Information System.
Accounting
Information  Batch processing is the aggregation on several
System (AIS) business events over some period of time with the
subsequent processing these data as a group.
 Executing the journal entry transfers as batch is a
more efficient way of maintaining financial
statements.
09 Designing 1 Displaying Sales Register.
Accounting 2 Displaying Balance Sheet.
Reports (AR) 3 Display Profit & Loss A/c.
4 Displaying Trial Balance.
5 Displaying Day Book.
101
Page

10 Data Exchange  AIS have a close & direct relationship with the other
Information information system.
System
 AIS plays a great role in fulfilling these objectives by
providing appropriate information to management.
 It provides information to :
1 Data or Information provided by AIS to :
i Human Resource Department
ii Marketing Department
iii Production Department
iv Stores Department
v Research & Development
2 Data or Information provided by GRD to AIS.
3 Data or Info provided by Marketing to AIS.
4 Data or Info provided by Production to AIS.
5 Data or Information provided by Stores &
Purchase to AIS.
6 Data or Information provided by R & D to AIS.
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LMR : Last Minute Revision Notes
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SIMSREE Financial Accounting (FA) Sem I

Booklet Niranjan Punjabi (NP) Concepts

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Concepts Niranjan Punjabi (NP) Booklet

01 Basics of Book-Keeping Concepts 01 to 19

04 Trial Balance Concepts 33 to 36

07 Final Accounts : Sole Proprietor Concepts 45 to 57

08 Cost Sheet Concepts 58 to 66

09 Cash Flow Concepts 67 to 76

10 Capital & Revenue Concepts 77 to 79

11 Frauds & Errors Concepts 80 to 89

12 Company Final Accounts Concepts 90 to 98

13 Computerised Accounting Concepts 99 to 102

LMR Pages 103 to 108

Booklet Niranjan Punjabi (NP) Concepts

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Concepts Niranjan Punjabi (NP) Booklet

01 Book-keeping  Maintaining systematic record of business

Booklet Niranjan Punjabi (NP) Concepts

 These accounts are sub-divided into two :

Concepts Niranjan Punjabi (NP) Booklet

1.2 Basic Accounting Terminology

Booklet Niranjan Punjabi (NP) Concepts

07 Creditors  A Supplier from whom goods are purchased on credit

Concepts Niranjan Punjabi (NP) Booklet

b Current Liabilities : Short Term Liabilities

Booklet Niranjan Punjabi (NP) Concepts

20 Solvent /  A person whose assets are more than liabilities is

Concepts Niranjan Punjabi (NP) Booklet

27 Transaction  A dealing between two or more persons is called as

Booklet Niranjan Punjabi (NP) Concepts

1.3 Show Accounting Equation

2 Purchased Furniture for ` 5,000. + 5,000

3 Purchased Goods for ` 1,000 in

4 Purchased Goods for ` 2,000 on

5 Sold goods costing ` 2,500 for `

6 Owner withdrew ` 2,000 for

7 Paid Rent ` 1,000.

8 Paid to Creditors ` 2,000.

9 Purchased household goods for `

10 Repaid Loan ` 5,000.

11 Started business with cash `

12 Opened a Bank A/c depositing `

13 Purchased goods of ` 5,000 and

14 Issued cheque of ` 2,000 for

15 Recd cheque of ` 2,000 towards

Concepts Niranjan Punjabi (NP) Booklet

No. Transaction Assets Liabilities Capital

17 Withdrew cash from bank for

18 Bank charged our A/c ` 100

19 Deposited Cash ` 1,000 in Bank.

20 Received cheque of ` 5,000

1.4 Classification of Accounts : Examples

Personal Accounts Real Accounts Nominal Accounts

Booklet Niranjan Punjabi (NP) Concepts

1.5 Book-keeping And Accountancy

01 Meaning and  Maintaining systematic record of business

Concepts Niranjan Punjabi (NP) Booklet

 Customers : Customers can judge the financial

Niranjan Punjabi (NP)