केन्द्रीय विद्यालय संगठन

KENDRIYA VIDYALAYA SANGATHAN

शिक्षा एवं प्रशिक्षण का आं चशिक सं स्थान, चं डीगढ़

ZONAL INSTITUTE OF EDUCATION AND TRAINING, CHANDIGARH

अध्ययन सामग्री /Study Material

शैक्षिक सत्र /Session – 2022-23

किा / Class – ग्यारहवीीं / XI
ववषय / Subject – लेखाींकन / ACCOUNTANCY
ववषय कोड / Subject Code - 055

तैयारकताा - रवव कुमार, सह-प्रशशिक (वाणिज्य)

Prepared by: RAVI KUMAR, TRAINING ASSOCIATE (COMMERCE)

शिक्षा एवं प्रशिक्षण का आं चशिक सं स्थान, चं डीगढ़

ZONAL INSTITUTE OF EDUCATION AND TRAINING, CHANDIGARH
सेक्टर 33-सी, चंडीगढ़ / SECTOR-33C, CHANDIGARH
वेबसाइट / Website : zietchandigarh.kvs.gov.in
ईलेि- / e-mail :kvszietchd@gmail.com दरू भाष / Phone : ,0007320-2710 0007302
 हलारे संरक्षक

श्रीलती ननधि पांड,े भा.सू.से. SMT. NIDHI PANDEY, IIS

आयुक्त COMMISSIONER

श्री सत्य नारायण गुशिया SHRI SATYA NARAIN GULIA,

संयुक्त आयुक्त (ववत्त) JOINT COMMISSIONER (FINANCE)

श्री एन. आर. लुरिी SHRI N. R. MURALI

संयक्
ु त आयक्
ु त (िैक्षक्षक) JOINT COMMISSIONER (ACADEMIC)

श्रीलती अजीता िोंग्जल SMT. AJEETA LONGJAM

संयुक्त आयुक्त (प्रिासन-I) JOINT COMMISSIONER (ADMIN-I)

डॉ. जयदीप दास DR. JAIDEEP DAS

संयक्
ु त आयक्
ु त (प्रिासन-II) JOINT COMMISSIONER (ADMIN-II)

श्री पी. दे वाकुलार SHRI P. DEVAKUMAR

संयक्
ु त आयक्
ु त (काशलिक) JOINT COMMISSIONER (PERSONAL)

श्रीलती चंदना लंडि SMT. CHANDANA MANDAL

संयक्
ु त आयक्
ु त (प्रशिक्षण) JOINT COMMISSIONER (TRAINING)
 शनदे िक महोदय का संदेि

ववद्याधथियों की िैक्षक्षक प्रगनत को ध्यान लें रखते हुए उपयोगी अध्ययन सालग्री उपिब्ि कराना
हलारा लहत्त्वपूणि उद्दे श्य है । इससे न केवि उन्हें अपने िक्ष्य को प्राप्त करने लें सरिता एवं सुवविा
होगी बल्कक वे अपने आंतररक गण
ु ों एवं अशभरुधचयों को पहचानने लें सक्षल होंगे। बोडि परीक्षा लें
अधिकतल अंक प्राप्त करना हर एक ववद्याथी का सपना होता है । इस संबंि लें तीन प्रलुख आिार
स्तंभों को एक कड़ी के रूप लें दे खा जाना चाहहए- अविारणात्लक स्पष्टता, प्रासंधगक पररधचतता एवं
आनुप्रयोधगक वविेषज्ञता।

राष्रीय शिक्षा नीनत 2020 के उद्दे श्यों की लूिभूत बातों को गौर करने पर यह तथ्य स्पष्ट है
कक ववद्याधथियों की सोच को सकारात्लक हदिा दे ने के शिए उन्हें तकनीकी आिाररत सलेककत शिक्षा के
सलान अवसर उपिब्ि कराया जाए। बोडि की परीक्षाओं के तनाव और दबाव को कल करने के उद्दे श्य
को प्रलख
ु ता दे ना अनत आवश्यक है ।

यह सविलान्य है कक छात्र-छात्राओं का भववष्य उनके द्वारा वतिलान कक्षा लें ककए गए प्रदििन पर
ही ननभिर करता है । इस तथ्य को सलझते हुए यह अध्ययन सालग्री तैयार की गई है । उम्लीद है कक
प्रस्तत
ु अध्ययन सालग्री के लाध्यल से वे अपनी ववषय संबंिी जानकारी को सलद्
ृ ि करने लें अवश्य
सफि होंगे।

िभ
ु कालनाओं सहहत।

मक
ु े श कुमार
उपायक्
ु त एवीं ननदे शक
 अनुक्रलणणका / INDEX

क्रमाींक / पाठ / पष्ृ ठ सींख्या /

S NO. PAGE NO.
CHAPTER
01. Syllabus 02
02. Ch - 01: Introduction to Accounting 08
03. Ch - 02: Basic Accounting Terms 11
04. Ch - 03: Theory Base of Accounting, Accounting Standards 14
and Indian Accounting Standards (Ind-AS)
05. Ch - 04: Bases of Accounting 16
06. Ch - 05: Accounting Equation 18
07. Ch - 06: Accounting Procedures - Rules of Debit and Credit 22
08. Ch - 07: Origin of Transactions – Source Documents and 24
Preparation of Vouchers
09. Ch - 08: Journal 25
10. Ch - 09: Ledger 29
11. Ch - 10: Special Purpose Books I- Cash Book 32
12. Ch - 11: Special Purpose Books II - Other Books 38
13. Ch - 12: Accounting of Goods and Services Tax (GST) 42
14. Ch - 13: Bank Reconciliation Statement 46
15. Ch - 14: Trial Balance 51
16. Ch - 15: Depreciation 53
17. Ch - 16: Provisions and Reserves 59
18. Ch - 17: Rectification of Errors 61
19. Ch - 18: Financial Statements of Sole Proprietorship 64
20. Ch - 19: Adjustments in Preparation of Financial Statements 72
 ACCOUNTANCY (Code No. 055)

Rationale
The course in accountancy is introduced at plus two stage of senior second of school education, as the
formal commerce education is provided after ten years of schooling. With the fast changing economic
scenario, accounting as a source of financial information has carved out a place for itself at the senior
secondary stage. Its syllabus content provide students a firm foundation in basic accounting concepts and
methodology and also acquaint them with the changes taking place in the preparation and presentation of
financial statements in accordance to the applicable accounting standards and the Companies Act 2013.
The course in accounting put emphasis on developing basic understanding about accounting as an
information system. The emphasis in Class XI is placed on basic concepts and process of accounting
leading to the preparation of accounts for a sole proprietorship firm. The students are also familiarized
with basic calculations of Goods and Services Tax (GST) in recording the business transactions. The
accounting treatment of GST is confined to the syllabus of class XI.
The increased role of ICT in all walks of life cannot be overemphasized and is becoming an integral part
of business operations. The learners of accounting are introduced to Computerized Accounting System at
class XI and XII. Computerized Accounting System is a compulsory component which is to be studied
by all students of commerce in class XI; whereas in class XII it is offered as an optional subject to
Company Accounts and Analysis of Financial Statements. This course is developed to impart skills for
designing need based accounting database for maintaining book of accounts.
The complete course of Accountancy at the senior secondary stage introduces the learners to the world of
business and emphasize on strengthening the fundamentals of the subject.
Objectives:
1. To familiarize students with new and emerging areas in the preparation and presentation of
financial statements.
2. To acquaint students with basic accounting concepts and accounting standards.
3. To develop the skills of designing need based accounting database.
4. To appreciate the role of ICT in business operations.
5. To develop an understanding about recording of business transactions and preparation of financial
statements.
6. To enable students with accounting for Not-for-Profit organizations, accounting for
Partnership Firms and company accounts.

1
 SYLLABUS
Accountancy (Code No.055)
Course Structure
Class - XI (2022-23)
Theory: 80 Marks 3 Hours
Project: 20 Marks
Units Periods Marks
Part A: Financial Accounting-1
Unit-1: Theoretical Framework 25 12
Unit-2: Accounting Process 115 44
Part B: Financial Accounting-II
Unit-3: Financial Statements of Sole Proprietorship 60 24
Part C: Project Work 20 20

PART A: FINANCIAL ACCOUNTING - I

Unit-1: Theoretical Frame Work

Units/Topics Learning Outcomes

Introduction to Accounting After going through this Unit, the students will be able to:
 Accounting- concept, meaning, as a source  describe the meaning, significance, objectives,
of information, objectives, advantages and advantages and limitations of accounting in the modem
limitations, types of accounting information; economic environment with varied types of business and
users of accounting information and their non-business economic entities.
needs. Qualitative Characteristics of  identify / recognise the individual(s) and entities that use
Accounting Information. Role of accounting information for serving their needs of
Accounting in Business. decision making.
 Basic Accounting Terms- Entity, Business  explain the various terms used in accounting and
Transaction, Capital, Drawings. Liabilities differentiate between different related terms like current
(Non Current and Current). Assets (Non and non-current, capital and revenue.
Current, Current); Expenditure (Capital  give examples of terms like business transaction,
and Revenue), Expense, Revenue, Income, liabilities, assets, expenditure and purchases.
Profit, Gain, Loss, Purchase, Sales, Goods,  explain that sales/purchases include both cash and credit
sales/purchases relating to the accounting year.
Stock, Debtor, Creditor, Voucher, Discount differentiate among income, profits and gains.
(Trade discount and Cash Discount)  state the meaning of fundamental accounting
assumptions and their relevance in accounting.
Theory Base of Accounting
 describe the meaning of accounting assumptions and
 Fundamental accounting assumptions:
the situation in which an assumption is applied during
GAAP: Concept
the accounting process.
 Basic accounting concept : Business Entity,

2
 Money Measurement, Going Concern,  explain the meaning, applicability, objectives, advantages
Accounting Period, Cost Concept, Dual and limitations of accounting standards.
Aspect, Revenue Recognition, Matching,  appreciate that various accounting standards developed
Full Disclosure, Consistency, nationally and globally are in practice for bringing parity
Conservatism, Materiality and Objectivity in the accounting treatment of different items.
 System of Accounting. Basis of  acknowledge the fact that recording of accounting
Accounting: cash basis and accrual basis transactions follows double entry system.
 Accounting Standards: Applicability in  explain the bases of recording accounting transaction and to
IndAS
appreciate that accrual basis is a better basis for depicting
 Goods and Services Tax (GST):
the correct financial position of an enterprise.
Characteristics and Advantages.
 Explain the meaning, advantages and
characteristic of GST.

Unit-2: Accounting Process

Units/Topics Learning Outcomes
Recording of Business Transactions After going through this Unit, the students will be
 Voucher and Transactions: Source documents and able to:
Vouchers, Preparation of Vouchers, Accounting  explain the concept of accounting equation and
Equation Approach: Meaning and Analysis, Rules appreciate that every transaction affects either both
of Debit and Credit. the sides of the equation or a positive effect on one
 Recording of Transactions: Books of Original item and a negative effect on another item on the
Entry- Journal same side of accounting equation.
 Special Purpose books:  explain the effect of a transaction (increase or
 Cash Book: Simple, cash book with bank column
and petty cashbook Purchases book decrease) on the assets, liabilities, capital,
 Sales book  revenue and expenses. appreciate that on the basis of
 Purchases return book source documents, accounting vouchers are
 Sales return book prepared for recording transaction in the books of
 Journal proper accounts.
Note: Including trade discount, freight and cartage  develop the understanding of recording of
expenses for simple GST calculation. transactions in journal and the skill of calculating
 Ledger: Format, Posting from journal and GST.
subsidiary books, Balancing of accounts  explain the purpose of maintaining a Cash Book and
Bank Reconciliation Statement: develop the skill of preparing the format of different
 Need and preparation, Bank Reconciliation types of cash books and the method of recording
Statement cash transactions in Cash book.

3
Depreciation, Provisions and Reserves • describe the method of recording transactions other than
 Depreciation: Meaning, Features, Need, cash transactions as per their nature in different
Causes, factors subsidiary books .
 Other similar terms: Depletion & • appreciate that at times bank balance as indicated by cash
Amortisation book is different from the bank balance as shown by the
 Methods of Depreciation: pass book / bank statement and to reconcile both the
i.Straight Line Method (SLM) balances, bank reconciliation statement is prepared.
ii. Written Down Value Method (WDV) • develop understanding of preparing bank reconciliation
Note: Excluding change of method statement.
 Difference between SLM and WDV; • appreciate that for ascertaining the position of individual
Advantages of SLM and WDV accounts, transactions are posted from subsidiary books
 Method of recoding depreciation and journal proper into the concerned accounts in the
i. Charging to asset account ledger and develop the skill of ledger posting.
ii. Creating provision for • explain the necessity of providing depreciation and
depreciation/accumulated depreciation A/c develop the skill of using different methods for
 Treatment of disposal of asset computing depreciation.
 Provisions, Reserves, Difference • understand the accounting treatment of providing
Between Provisions and Reserves. depreciation directly to the concerned asset account or by
 Types of Reserves: creating provision for depreciation account.
Revenue reserve
i.
• appreciate the method of asset disposal through the
ii. Capital reserve
iii. General reserve
concerned asset account or by preparing asset disposal
iv. Specific reserve account.
v. Secret Reserve • appreciate the need for creating reserves and also making
Difference between capital and revenue reserve
provisions for events which may belong to the current
Trial balance and Rectification of Errors
year but may happen in next year.
• Trial balance: objectives, meaning &
• appreciate the difference between reserve & reserve fund.
preparation
• state the need and objectives of preparing trial balance
(Scope: Trial balance with balance method only)
and develop the skill of preparing trial balance.
 Errors: classification-errors of omission,
• appreciate that errors may be committed during the
commission, principles, and compensating;
process of accounting.
their effect on Trial Balance.
• understand the meaning of different types of errors and
 Detection and rectification of errors;
(i) Errors which do not affect trial balance
their effect on trial balance.
• develop the skill of identification and location of errors
(ii) Errors which affect trial balance
and their rectification and preparation of suspense
 preparation of suspense account. account.

4
 Part B: Financial Accounting - II

Unit 3: Financial Statements of Sole Proprietorship

Units/Topics Learning Outcomes

Financial Statements After going through this Unit, the students will be able
Meaning, objectives and importance; Revenue and to:
Capital Receipts; Revenue and Capital  state the meaning of financial statements the
Expenditure; Deferred Revenue expenditure.  purpose of preparing financial statements.
Opening journal entry. Trading and Profit and  state the meaning of gross profit, operating profit and
net profit and develop the skill of preparing trading
Loss Account: Gross Profit, Operating profit and
and profit and loss account.
Net profit. Preparation. Balance Sheet: need,  explain the need for preparing balance sheet.
grouping and marshalling of assets and liabilities.  understand the technique of grouping and marshalling
Preparation. Adjustments in preparation of of assets and liabilities.
financial statements with respect to closing stock,  appreciate that there may be certain items other than
outstanding expenses, prepaid expenses, accrued those shown in trial balance which may need
income, income received in advance, depreciation, adjustments while preparing financial statements.
bad debts, provision for doubtful debts, provision  develop the understanding and skill to do adjustments
for discount on debtors, Abnormal loss, Goods for items and their presentation in financial statements
taken for personal use/staff welfare, interest on like depreciation, closing stock, provisions, abnormal
capital and managers commission. Preparation of loss etc.
Trading and Profit and Loss account and Balance  develop the skill of preparation of trading and profit
and loss account and balance sheet.
Sheet of a sole proprietorship with adjustments.

Part C: Project Work (Any One)

1. Collection of source documents, preparation of vouchers, recording of transactions with the help of
vouchers.
2. Preparation of Bank Reconciliation Statement with the given cash book and the pass book with
twenty to twenty-five transactions.
3. Comprehensive project of any sole proprietorship business. This may state with journal entries and
their ledgering, preparation of Trial balance, Trading A/c, Profit and Loss Account and Balance Sheet.
Expenses, incomes and profit (loss), assets and liabilities are to be depicted using pie chart / bar
diagram.
PROJECT WORK
It is suggested to undertake this project after completing the unit on preparation of financial statements.
The student(s) will be allowed to select any business of their choice or develop the transaction of
imaginary business. The project is to run through the chapters and make the project an interesting
process. The amounts should emerge as more realistic and closer to reality.

5
Specific Guidelines for Teachers
Give a list of options to the students to select a business form. You can add to the given list:
1. A beauty parlour 10. Men's wear 19. A coffee shop
2. Men's saloon 11. Ladies wear 20. A music shop
3. A tailoring shop 12. Kiddies wear 21. A juice shop
4. A canteen 13. A Saree shop 22. A school canteen
5. A cake shop 14. Artificial jewellery shop 23. An ice cream parlour
6. A confectionery shop 15. A small restaurant 24. A sandwich shop
7. A chocolate shop 16. A sweet shop 25. A flower shop
8. A dry cleaner 17. A grocery shop
9. A stationery shop 18. A shoe shop
After selection, advise the student(s) to visit a shop in the locality (this will help them to settle on a realistic
amounts different items. The student(s) would be able to see the things as they need to invest in furniture,
decor, lights, machines, computers etc.

A suggested list of different item is given below.

1. Rent 19. Wages and Salary
2. Advance rent [approximately three months] 20. Newspaper and magazines
3. Electricity deposit 21. Petty expenses
4. Electricity bill 22. Tea expenses
5. Electricity fitting 23. Packaging expenses
6. Water bill 24. Transport
7. Water connection security deposit 25. Delivery cycle or a vehicle purchased
8. Water fittings 26. Registration
9. Telephone bill 27. Insurance
10. Telephone security deposit 28. Auditors fee
11. Telephone instrument 29. Repairs & Maintenance
12. Furniture 30. Depreciations
13. Computers 31. Air conditioners
14. Internet connection 32. Fans and lights
15. Stationery 33. Interior decorations
16. Advertisements 34. Refrigerators
17. Glow sign 35. Purchase and sales
18. Rates and Taxes

At this stage, performas of bulk of originality and ledger may be provided to the students and they
may be asked to complete the same.

In the next step the students are expected to prepare the trial balance and the financial statements

6
 Suggested Question Paper Design
Accountancy (Code No. 055) Class XI (2022-23)

Theory: 80 Marks 3 hrs.

Project: 20 Marks

S.No. Typology of Questions Marks Percentage

1. Remembering and Understanding:
Exhibit memory of previously learned material by recalling facts,
terms, basic concepts, and answers. 44 55%
Demonstrate understanding of facts and ideas by organizing,
comparing, translating, interpreting, giving descriptions, and
stating main ideas
2. Applying: Solve problems to new situations by applying
acquired knowledge, facts, techniques and rules in a different 19 23.75%
way.
3. Analysing, Evaluating and Creating:
Examine and break information into parts by identifying
motives or causes. Make inferences and find evidence to support
generalizations. 17 21.25%
Present and defend opinions by making judgments about
information, validity of ideas, or quality of work based on a set of
criteria.
Compile information together in a different way by combining
elements in a new pattern or proposing alternative solutions.
TOTAL 80 100%

7
 Ch - 01: Introduction to Accounting

Accounting:-
Accounting is an art of recording, classifying and summarizing the monetarytransactions in an
efficient manner and interpreting the results.

Functions of Accounting:-
● Identifying: Identifying the business transactions from various sources is the first step of
accounting. It involves observing all business activities and identifying those which are
considered as financial transactions.
● Recording: Only those transactions are recorded in books of accounts which can be measured in
terms of money. It involves recording them in a journal and keeping a systematic record of all of
them.
● Classifying: After recording the transactions they are classified. Classification refers to the
grouping of all the transactions of same nature at one place.
● Summarising: It is the process of putting the balances of all accounts at one place i.e. Trial
balance.
● Communicating: Accounting also includes the communication of financial data like financial
statements to the users who analyse them as per individual requirements.
Objectives of Accounting:-
a) To maintain proper records of business transactions according to specified rules which helps
them to minimize the chance of omission and fraud.
b) To ascertain the net profit or loss suffered on account of business transactionsduring a particular
period and to know the exact reasons leading to profit or loss.
c) To ascertain the financial position of business by means of financial statement i.e, Balance sheet.
d) To ascertain the progress of business from year to year and to detect errors andfrauds.
e) To provide accounting information to various interested parties like owners, creditors, banks,
employees etc. who perform an in depth analysis as per the requirement of the stakeholders.
Advantages of Accounting:-
a) Accounting provides permanent records for all business transactions and provides reliable
information to various parties.
b) Accounting provides the Profit and loss of a business for a given period of time.
c) Accounting provides the facility of comparative study of the various aspects of business like
profit sales, purchase, etc. with that of previous years and helps businessmen to make decisions.
d) Accounting forms a basis in the process of performance evaluation to improve the performance
of employees, divisions, activities, etc.
e) Accounting records act as an approved evidence in legal matters.
Limitations of Accounting:-
● One of the major limitations of accounting is that it considers only monetary transactions. Non
monetary aspects like quality, honesty, skills are ignored in accounting.
● It considers only historical transactions and the figures given in the financial statement do not
8
 consider price level changes.
● It is influenced by personal judgements and not free from personal bias which affects its
credibility.
● It is affected by window dressing which means manipulation of accounts so that financial
statements describe a more favourable position than the actual position.
● Financial accounts are unsuitable for forecasting because they are only records of past events.
Book Keeping, Base of Accounting:-
Book keeping is an art of recording the transactions in the books of accounts. Only those
transactions which bear a monetary value are recorded. It is the first step of accounting.
Difference between Book Keeping & Accounting:-
Basis of distinction Book Keeping Accounting
1. Scope It is concerned only with It also includes classifying, summarizing,
recording of monetary analysing and also communicating the
transactions. results to users.
2. Stage It’s a primary stage. It’s a secondary stage.
3. Objective To maintain systematic records of To calculate the net profit or net loss in
business. the business.
4. Nature Routine and clerical. Analytical.
5. Staff involved It is done by junior level staff. It is done by senior level staff.

Subfields of Accounting:-
1. Financial Accounting: The main purpose of this branch is to record the business transactions in a
systematic manner, to ascertain profit or loss and topresent the financial position of the business with
the help of a balance sheet.
2. Cost Accounting: The main purpose of cost accounting is to ascertain the totalcost and per unit cost
of goods produced and services rendered by business.
3. Management Accounting: The main purpose of this branch is to present the accounting
information in such a way as to assist the management in planningand controlling the operations of
business.
Users of Accounting Information:-
Users may be categorised into internal users and external users.
(A) Internal Users:-
 Owners: Owners contribute capital in the business and thus they are exposed to maximum risk.
So, they are always interested in the safety of their capital.
 Management: Accounting information is used by management for taking various decisions.
 Employees: Employees are interested in the financial statements to assess the ability of the
business to pay higher wages and bonuses.
(B) External Users:-
 Banks and financial institutions: Banks and Financial Institutions provide loans to business.
So, they are interested in financial information to ensure the safety and recovery of the loan.
 Investors: Investors are interested to know the earning capacity of business and safety of the
investment.
 Creditors: Creditors provide the goods on credit. So they need accounting information to
ascertain the financial soundness of the firm.

9
  Government: The government needs accounting information to assess the tax liability of the
business entity.
 Researchers: Researchers use accounting information in their research work.
 Consumers: They require accounting information for establishing good accounting control,
which will reduce the cost of production.
Qualitative Characteristics of Accounting Information:-
Accounting information should be prepared and presented in such a way that is able to depict a
clear view of business enterprise.
1. Reliability: It implies that information must be factual and verifiable. And freefrom errors.
2. Relevance: Accounting information must be relevant to the objectives of enterprise. To be
relevant, information must help the users of accounting information in making decisions.
3. Understandability: Accounting information should be presented in such a manner that they are
understood easily by their users such as investors,employees, etc.
4. Comparability: It is a very useful quality of accounting information. Financial statements should
contain previous year data so that it can be compared with current year so that current performance
be compared with past performance.
System of accounting:-
There are following two systems of recording transactions in the books of accounts:
A. Double Entry System
B. Single Entry System
A. Double Entry System:
 The double entry system is based on the Dual Aspect Principle.
 Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
 This system of accounting recognises and records both aspects of the transaction.

Advantages of the Double-entry System of Accounting:

Following are the main advantages of the double-entry system of accounting:
1. Scientific system:
As compared to the other systems, this system of recording transactions is more scientific and useful
to achieve the objective of accounting.
2. A complete record of the transaction:
Since both the aspects of transactions are considered there is a complete recording of each and every
transaction. Using these records we are able to compute profit or loss easily.
3. Checks arithmetical accuracy of accounts:
Under this system, by preparing a Trial Balance we are able to check the arithmetical accuracy of the
records.
4. Determination of profit/loss and depiction of financial position:
Under this system by preparing ‘Profit & Loss A/c’ we get to know about the profit earned or loss
incurred. By preparing the ‘Balance Sheet’ the financial position of the business can be ascertained,
i.e. position of assets and liabilities is depicted.
5. Helpful in decision making:
Administration and management are able to take decisions on the basis of factual information under
the double-entry system of accounting.
B. Single entry system:-
 Under this system, both aspects are not recorded for all the transactions.
 Either only one aspect is recorded or both the aspects are not recorded for all the transactions.

10
 Ch - 02: Basic Accounting Terms

In business, various accounting terms are used. It is as follows:

1. Entity: An economic unit, which may be business entity (enterprise) or non-business entity.
2. Business Transaction: A Business transaction is an economic activity ofbusiness that changes
its financial position.
3. Account: It is a record of all business transactions relating to a particularperson or item. It is
a T-Shaped Performa.
4. Capital: It refers to the amount invested by the owner in a business. The amount invested
could be in the form of cash, goods, etc.
5. Drawing: Any cash or goods withdrawn by the owner for personal use made out of business funds
are known as drawings.
6. Liabilities: Liabilities refer to financial obligations of business. It denotes the amount which a
business owes to others.eg.- Creditors, loan, etc. It is of 2 types;
(a) Non- current liabilities: It refers to those which fall due for payment in a relatively longer
period. For eg- long term loans.
(b) Current liabilities: It refers to those which are to be paid in the near future.
For Example-Creditors, Outstanding expenses etc..
7. Assets:- These are properties or economic resources of an enterprises which can be expressed in
monetary terms it can be divided in two parts.
(a) Non-Current Assets:-
 Fixed Assets : Tangible & Intangible assets ( more than 1 year period)
Tangible Assets Intangible Assets
Land and Building Goodwill
Plant and Machinery Patents
Furniture Trademarks
Office Equipments Copyright
Computer Software

(b) Current assets (less than 1 year period)

Examples of Current Assets are:
(a) Debtors
(b) Bills Receivable
(c) Cash in hand
(d) Cash at bank
(e) Cheques in hand
(f) Drafts in hand
(g) Stock
(h) Prepaid Expenses.
8. Receipts: Amount received from sale of goods and/ or services or both.
9. Expenditure: It involves spending cash or incurring a liability for the purpose of acquiring
11
assets, goods or services. It is of 3 types.
(a) Revenue Expenditure: It refers to any expenditure, the full benefit of which is received during
one accounting period. Example- salaries, rent etc.

(b) Capital Expenditure: It refers to expenditure, the benefit of which is receivedduring more than
one year. Example- Machinery.
(c) Deferred Revenue Expenditure: It refers to expenditure which are revenue in nature but
benefit of which is likely to be derived over no of years. Example- Advertisement.
10. Expenses: It is the amount used in order to produce and sell goods and services.
(a) Prepaid Expenses: Expenses paid in the current year but relating to next financial year or years.
(b) Outstanding Expenses: Expenses incurred but not paid.
11. Revenue: Gross inflow of cash (Received or Receivable), receivables or other consideration in
the normal course of business.
12. Income: It is the difference between revenue and expense.
13. Profit: It is the excess of total revenue over total expense of a business. Profit=Revenue-Expenses.
14. Gain: It is a monetary benefit resulting from events or transactions which are incidental to
business like profit on sale of fixed assets.
15. Loss: The excess of expenses over related revenue is known as loss. Loss=Expenses-Revenue.
16. Purchases: It refers to the amount of goods bought by business for resale or use in production.
It can be of cash or credit.
17. Purchase return: When purchased goods are returned to suppliers, it is referred to as
purchase return.
18. Sales: It means transfer of goods or services for money in the normal course of business.
19. Sales return: When customers return the goods sold to them it is known assales returns.
20. Revenue from Operation: Amount received or receivable from the sale of goods and/ or
services or both.
21. Goods: Goods purchased for resale or for manufacturing product.
22. Stock/ Inventory: It includes goods unsold on a particular date.
23. Trade Receivables: Amount receivable against sale of goods and/or services or both.
(a) Debtors: A person or entity to whom goods are sold and / or services are rendered on credit.
(b) Bills Receivable: Acceptance (Bills of Exchange) received from a debtor.
24. Trade Payables: Amount payable against purchase of goods and /or services or both.
(a) Creditors: It refers to those persons whose business buys goods on credit andpayment has not
been done yet.
(b) Bills Payable: Acceptance (Bill of Exchange) given to a creditor.
25. Cost: Expenses on purchasing and/or manufacturing goods.

12
 26. Voucher: A voucher is a written document which is created in support of a particular
transaction. It may be in the form of a cash memo, invoice or receipt. Voucher is a necessary
component of auditing.
27. Discount: It is the rebate given by the seller to the buyer. It is of 2 types: Cash Discount and
Trade Discount.
(a) Trade Discount: This is a type of discount allowed by the sellers to their customers at a fixed
percentage on the list price of goods and also it is not entered in the books of accounts.
(b) Cash Discount: When discount is allowed to customers for making promptpayment. It is
always recorded in books of accounts.
(c) Rebate: Reduction allowed in the sale value due to (say) poor quality, excess supply, etc.
28. Bad Debts: It refers to the amount that debtor has not paid even after repeated reminders and has
no intention of paying in the future.
29. Balance Sheet: A statement of balances of assets and liabilities.
30. Book Value: Value of assets as existing in the books of accounts.
31. Books of Accounts: Books in which transactions are recorded or transferred (posted).
32. Credit: Traditionally, right side of an account is credit side.
33. Debit: Traditionally, left side of an account is debit side.
34. Depreciation: Decrease in book value of an asset due to its use or efflux of time or obsolescence.
35. Entry: Recording business transaction in the books of account.
36. Insolvent: A person or entity unable to pay his/its debts.
37. Solvent: A person or entity who is in a position to pay his/its debts.
38. Proprietor: A person who owns the business.
39. Financial Statements or Final Accounts: Statements prepared at the end of the accounting
period to determine financial performance and financial position.

13
 Ch - 03: Theory Base of Accounting, Accounting Standards and Indian
Accounting Standards (Ind-AS)

Accounting Principles:
Accounting statements disclose the profitability and solvency of business tovarious parties. It is
necessary to prepare such a statement in a standard language following a standard set of rules and
regulations. These rules are known as “Generally Accepted Accounting Principles” or GAAP.
Features of Accounting Principles:
1. Accounting principles are manmade.
2. Accounting principles are generally accepted.
3. Accounting principles are flexible in nature.
Need of Accounting Principles:
To make the accounting information meaningful to its external and internal users, it is necessary
that financial statements are prepared according to theseprinciples.
Fundamental Accounting Assumptions or Concepts:-
1. Going Concern Assumption: As per this concept it is assumed that the business will continue to
exist for a long period in future and the transactions are recorded in the books of business on the
assumption that itis a continuing enterprise.
2. Consistency Assumption: It states that accounting principles and methods should remain
consistent from one year to another. It helps them to comparethe profit and loss of different periods
and draw meaningful conclusions.
3. Accrual Assumption: As per this concept revenue is recorded when sales are made and it is
immaterial whether cash received or not and same applies toexpenses also. It provides more
appropriate information about business enterprise as compared to cash basis.
Accounting Principles (Others):-
1. Accounting Entity or Business Entity Principles: As per this concept, business organisations are
treated as separate entities and owners and persons are separate entities.
2. Money Measurement Principles: As per the accounting conventions only those transactions are
recorded which can be expressed in monetary terms.Example- the event of machinery breakdown is
not recorded as it does nothave a monetary value.
3. Accounting Period Principles: An accounting period is the interval of time, at the end of which
the financial statements are prepared to ascertain the financial performance of business. The
accounting period is normally considered to be a period of 12 months.
4. Full Disclosure Principles: Accounting statements should disclose fully and completely all the
significant information, based on which, decisions can be taken by various interested parties.
5. Materiality Principles: It requires the disclosure of the significant information, exclusion of
which would influence the decisions. Unimportant information can be merged with other items.
6. Prudence or Conservatism Principles: The essence of this principle is ‘anticipateno profit and
provide for all possible losses’. This means that all prospective losses are taken into consideration.
7. Cost Concept Or Historical Cost Principle: As per this concept, an asset is ordinarily recorded
at the price actually paid or incurred to acquire it.
14
8. Matching Concept or Matching Principle: Matching the revenues earned during an
accounting period with the cost associated with the period to ascertain the accurate resultof
business concern during that period is called matching concept.
9. Dual Aspect or Duality Principle Concept: It is the basis for the double entry system of
book keeping that means all business transactions recorded in accounts have twoaspects- debit
and credit. The value of benefit received is equal to benefit given.
10. Revenue Recognition or Realization Concept: As per this concept, revenueshould be
accounted for only when it is actually realised or it has become certain that the revenue will be
realized.
11. Verifiable Objective Concept: This principle of accounting specifies that the transactions
should be recorded in an objective manner and should be unbiased in nature.
Accounting Standards:-
Accounting standards are those written statements, which are issued from timeto time by the
accounting professional body, specifying uniform rules or practices for the preparation of the
financial statements.
Need for Accounting Standards:
Accounting standards are needed to improve reliability and bring uniformity in accounting
practices and to ensure transparency, consistency and comparabilityin financial information.
Benefits of Accounting Standards:
1. Accounting standards makes the financial statements more reliable.
2. Accounting standards help in resolving conflict of financial interestamong various groups.
3. Accounting standards ensure the consistency and comparability offinancial statements.
4. Accounting standards significantly reduce the chances of manipulationsand frauds.
Note- Accounting standards are applicable everywhere except the purely charitable organization.

International Financial Reporting Standards (IFRS):

The term IFRS refers to financial reporting standards issued by the International Accounting
Standards Board (IASB) in order to make financial statements more consistent and transparent.
Need for IFRS
The need for IFRS arises from the following reasons-
1. Easy access to global capital markets.
2. Easy to make Comparisons.
3. Uniformity in financial reporting.
4. True and fair valuation of assets.
5. Difficult to commit fraud and manipulate the accounts.
Practice Question:
Q. State the accounting concepts/ conventions involved in each of the following situations:
a) Advance received from a customer is not taken as income or sales.
b) Revenue must be recognised when it is realised and expenses are recognised when incurred.
c) Closing stock is valued at lower of cost or market value.
d) Purchase of a pen is treated as expense.

15
 Ch - 04: Bases of Accounting

Profit earned or loss incurred by the business can be determined either by

1. Cash Basis of Accounting and,
2. Accrual or Mercantile Basis of Accounting.

1. Cash Basis of Accounting:

Under this method only cash transactions are recorded in the books of accounts. Entries are made
only if cash is received or paid.
Advantages:-
(a) It is simple basis of accounting as adjustment for outstanding expenses, Prepaid Expenses,
Accrued income and income received in advance is not made.
(b) This approach is more objective.
(c) This basis of accounting is suitable for those enterprises where most of the transactions are on
cash basis.
Disadvantages:
(a) It does not give a true and fair view of the profit or loss and the financial position of an enterprise.
(b) It does not follow the Matching Principle of accounting.
(c) This system does not distinguish between capital and revenue items.

2. Accrual Basis of Accounting:

Under this method all transactions are recorded in the books of accounts (Cash and Non-Cash).
Entries are made on the Accrual basis, it means cash and Non-cash both transactions are recorded in
the books of accounts.
Advantages:
(a) It is more scientific compared to Cash basis of Accounting.
(b) This basis of accounting shows a complete picture of financial transaction of the business.
(c) This basis discloses correct profit or loss for a particular period also exhibits true financial
position of the business on a particular day.
(d) It reflects true profit or loss during the accounting period and therefore has wide acceptability.
Disadvantages:
(a) This system is not as simple as Cash Basis of Accounting.
(b) The accounting process is too elaborate.
(c) A quick appraisal of the profit/loss is not possible because many adjustments are required to
ascertain the true financial position of the business.

Difference between Accrual Basis of Accounting and Cash Basis of Accounting:

Basis Accrual Basis of Accounting Cash Basis of Accounting
1. Nature of Both cash and credit transactions are Cash transactions are recorded.
Transactions recorded.
2.Prepaid/Outstanding Prepaid & Outstanding expenses are Prepaid & outstanding
Expenses ; accounted in the Profit & loss A/c. expenses are not adjusted.
Accrued Income/ Accrued income and income received Similarly, accrued income and

16
Income received in in advance are also accounted and income received in advance
Advance shown in the Balance Sheet. are not adjusted.
3. Profit or Loss Correct profit or loss is ascertained Correct profit or loss is not
because it records both cash and credit ascertained because it records
transactions. only cash transactions.
4. Technical The Accrual Basis of Accounting It does not require much of
Knowledge require technical knowledge as many technical knowledge as is
adjustment like prepaid, outstanding, required for Accrual Basis of
capital and revenue are required to be Accounting.
made.
5. Legal Position Accrual basis of Accounting is Cash basis of Accounting is
recognised by the Companies Act, not recognised by the
2013. companies Act, 2013.
6. Acceptability Accrual basis of Accounting is more Cash basis of accounting is not
acceptable in business as it reveals acceptable in business as it
correct income and expenses besides does not reveal the required
assets and liabilities. information.

17
 Ch - 05: Accounting Equation

Accounting equation shows the relationship between the assets, liabilities and owner’s capital of
a person or business
A=L+C
Where A=
assets
L= liabilities
C= capital
The above equation can be presented in the following forms as its derivatives to enable the
determination of missing figures of Capital(C) or Liabilities (L).
(i) A – L = C
(ii) A – L = C
Since the accounting equation shows the fundamental relationship among the items of the balance
sheet, it is also called the Balance Sheet Equation
The claim of the proprietors is called capital and that which is taken from another person from the
outside is known as liabilities.
The asset side of the balance sheet records all the assets of the business. The liabilities side of the
balance sheet is the detailed list of owner’s capital and outsider’s claims.
Let us take an example:-
Parul started the business with a capital of ₹ 10, 00,000. From the accounting point of view, the
resources of this business entity are in the form of cash, i.e. ₹ 10, 00,000. Sources of this business
entity are the contribution by Parul (Proprietor) ₹ 10, 00,000 as Capital.
If we put this detail in the form of equality of resources and sources, the picture will emerge
somewhat as follows:-
In the Books of Parul
Balance sheet as on…....
Liabilities Amt. (₹) Assets Amt. (₹)
Liabilities 10,00,000 Asset 10,00,000

In the above balance sheet the total of assets is equal to the total of liabilities. Now we will analyse
the transactions listed in example 1 & its effect on different elements and you will observe that the
accounting equation always remain balanced:-
(1) Opened a bank account in bank of India with an amount of ₹ 5, 00,000.
(Analysis of transaction: This transaction increases the cash at bank (assets) & decreases cash (asset) by
₹ 5, 00,000.)
(2) Bought furniture for ₹ 1, 00,000 and a cheque was issued on the same day.
(Analysis of transaction: This transaction increases furniture (assets) & decreases bank (assets) by
₹ 1, 00,000.)
(3) Bought plant and machinery for the business for ₹ 1, 10,000 and an advance of ₹ 10,000 in cash is
paid to M/s Ram.
(Analysis of transaction: This transaction increases Plant and Machinery (assets) by ₹ 1, 10,000,
decreases cash by ₹ 10,000 and increases liabilities (M/s Ram as creditor) by ₹ 1, 00,000.)
(4) Goods purchased from M/s Akshat Traders for ₹ 55,000.
(Analysis of transaction: This transaction increases goods (assets) and increases liabilities (M/s Akshat
Traders as creditors) by ₹ 55,000.)
18
(5) Goods costing ₹ 15,000 sold to Samul Enterprises for ₹ 25,000.
(Analysis of transaction: This transaction decreases stock of goods (assets) by ₹ 15,000 and increases assets
(Samul Enterprises as debtor’s ₹ 25,000) and capital (with the profit of ₹ 10,000)).
In the Books of Parul
Journal entries for the year ending…….
Date Particulars L.F Debit(₹) Credit (₹)
1. Bank A/c. Dr. 5,00,000
5,00,000
To Cash /c
(Being A/c opened in the bank.)
2. Furniture A/c. Dr. 1,00,000
1,00,000
To Bank A/c
(Being furniture purchased and Payment made through the bank.)
3. Plant and machinery A/c. Dr. 1,10,000
10,000
To Cash A/c
1,00,000
To Ram A/c
(Being plant and machinery purchased on credit and some
amount is paid in cash)
4. Purchases A/c. Dr. 55,000
55,000
To Akshat Traders A/c
(Being goods purchased on credit from Akshat traders.)
5. Cash A/c Dr. 25,000
To Sales A/c 15,000
To Profit and Loss A/c 10,000
(Being goods sold on profit)
The final equation as per the above transactions analysis table can be summarised in the form of
balance sheet:-
Liabilities Amt. (₹) Assets Amt. (₹)
Outsiders liability (creditors) 1,55,000 Cash 4,90,000
Capital 10,10,000 Bank 4,00,000
Furniture 1,00,000
Debtors 25,000
Stock 40,000
Plant and Machinery 1,10,000
11,65,000 11,65,000

Q1. Show Accounting Equation on the basis of the following transactions:

1. Anil started business with cash ₹ 1, 00,000.
2. Purchased goods in cash ₹ 50,000.
3. Purchased furniture from M/s Sam Furniture ₹ 20,000.
4. Sold goods costing ₹ 25,000 for ₹ 35,000 against cash.
5. M/s Sam Furniture’s was paid in cash.

19
 Solution:

No. Transactions Assets = Liabilities + Capital

₹ ₹ ₹
1. Anil started business with cash 1,00,000 = 0 + 11,00,000
2. Purchased goods in cash + 50,000
– 50,000
New Equation 1,00,000 = 0 + 11,00,000
3. Purchased furniture from M/s Sam Furnitures (Note 1) + 20,000 = 20,000 + 0
New Equation 1,20,000 = 20,000 + 11,00,000
4. Sold goods costing ₹25,000 for ₹ 35,000 (Note 2) – 25,000
+ 35,000 = 0 + 110,000
New Equation 1,30,000 = 20,000 + 11,10,000
5. Payment to M/s Sam Furnitures – 20,000 = – 20,000 + 0
New Equation 1,10,000 = 0 + 11,10,000

Q2. Prepare the Accounting Equation on the basis of the following: ₹

1. Ramesh commenced business with cash. 1,50,000

2. Furniture purchased for cash. 20,000
3. Purchased goods from Manish on credit. 25,000
4. Sold goods (costing ₹ 10,000) to Mohini for cash. 14,000
5. Additional capital introduced. 20,000
6. Commission received in advance. 2,000
7. Paid to creditor (Manish) in full settlement. 22,500
8. Sold goods (costing ₹ 15,000) for ₹ 18,000 out of which₹ 5,000 received in cash.
9. Depreciation on furniture provided @ 10%.
Solution:
No Transactions Assets = Liabilities + Capital
Cash + Furniture + Stock + Debtors = Creditors + Comm. + Capital
Rec. inAdvance
₹ ₹ ₹ ₹ ₹ ₹ ₹
1 Ramesh Commencedbusiness with cash 1,50,000 + 0 + 0 + 0 = 0 + 0 + 1,50,000
2. Furniture purchasedfor cash –20,000 + 20,000 + 0 + 0 = 0 + 0 + 0
New Equation 1,30,000 + 20,000 + 0 + 0 = 0 + 0 + 1,50,000
3. Purchased goodsfrom Manish 0 + 0 + 25,000 + 0 = 25,000 + 0 + 0
New Equation 1,30,000 + 20,000 + 25,000 + 0 = 25,000 + 0 + 1,50,000
Cash Sales(Profit₹14,000–₹10,000) 14,000 + 0 – 10,000 + 0 = 0 + 0 + 4,000
4. New Equation 1,44,000 + 20,000 + 15,000 + 0 = 25,000 + 0 + 1,54,000
Additional capitalintroduced 20,000 + 0 + 0 + 0 = 0 + 0 + 20,000
5.
New Equation 1,64,000 + 20,000 + 15,000 + 0 = 25,000 + 0 + 1,74,000
Commission receivedin advance 2,000 + 0 + 0 + 0 = 0 + 2,000 + 0
6 New Equation 1,66,000 + 20,000 + 15,000 + 0 = 25,000 + 2,000 + 1,74,000
Paid to creditor Manish ₹22,500 in
7 full settlement –22,500 + 0 + 0 + 0 = –25,000 + 0 + 2,500
New Equation 1,43,500 + 20,000 + 15,000 + 0 = 0 + 2,000 + 1,76,500
8 Sold goods (costing ₹15,000) for
₹18,000 out of which ₹ 5,000 received
in cash 5,000 + 0 – 15,000 + 13,000 = 0 + 0 + 3,000
9 New Equation 1,48,500 + 20,000 + 0 + 13,000 = 0 + 2,000 + 1,79,500
Dep. on furniture @ 10% on ₹ 20,000
0 – 2,000 + 0 + 0 = 0 + 0 – 2,000
New Equation
1,48,500 + 18,000 + 0 + 13,000 = 0 + 2,000 + 1,77,500
20
Q3. How are the following items dealt in Accounting Equation?
(i) Interest due but not received ₹ 5,000.
(ii) Rent received in advance ₹ 10,000.
(iii) Insurance premium paid in advance ₹ 15,000.
(iv) Salaries due but not paid ₹ 20,000.
Solution:
(i) Interest due but not received shall be added to assets on one side & to the capital on other
side.
(ii) It will increase cash on the assets side and increase the liabilities.
(iii) It will decrease one asset (cash) and increase another asset (Prepaid insurance).
(iv) Salary being an expense will be deducted from the capital and being unpaid will be
added to liabilities.

Q4. Give an example for each of the following types of transactions:

1. Increase in one asset, decrease in another asset.
2. Increase in asset, increase in liability.
3. Increase in asset, increase in owner’s capital.
4. Decrease in asset, decrease in liability.
5. Decrease in asset, decrease in owner’s capital.
6. Decrease in liabilities, increase in owner’s capital.
7. Increase in one liability, decrease in another liability.
8. Increase in liabilities, decrease in owner’s capital.
Solution:
1. Purchase of furniture for cash—Increase in furniture and decrease in cash.
2. Purchase of furniture on credit—Increase in furniture and increase in liability.
3. Capital introduced by proprietor—Increase in cash and increase in capital.
4. Payment to creditors—Decrease in cash and decrease in creditors.
5. Cash withdrawn by proprietor—Decrease in cash and decrease in capital.
6. Conversion of partner’s loan into capital—Increase in capital and decrease in loan.
7. Bills Payable accepted—Increase in bills payable and decrease in creditors.
8. Outstanding expenses provided—Increase in creditors for outstanding expenses and
decrease in capital.

Practice Question:
Q. Prepare Accounting Equation from the following.
i) Raju started business with cash ₹ 1, 50,000
ii) Bought goods for cash ₹ 80,000 and credit for ₹ 40,000.
iii) Goods costing ₹ 75,000 sold at a profit of 100/3%. Half of the payment received in cash.
iv) Goods costing ₹ 10,000 sold for ₹ 12,000 on credit.
v) Paid for Rent ₹ 2,000 and for salaries ₹ 4,000.
vi) Goods costing ₹ 20,000 sold for ₹ 18,500 for Cash.

21
 Ch - 06: Accounting Procedures - Rules of Debit and Credit

Transactions are recorded in the books of account on the basis of evidences, i.e., source documents,
such as invoices for purchase, invoices for sale, debit and credit notes etc.
Account: Account is a record of transactions under a particular head. It records not only the amount
of transactions but also their effect and direction.
Meaning of Debit and Credit
Debit refers to the left side of an account and credit refers to the right side of an account. In the
abbreviated form Dr. stands for debit and Cr. stands for credit.
Rules of debit and credit:-
Under Double Entry System of accounting each transaction has two aspects. One aspect is debit, i.e.,
receiving or incoming aspect. Another aspect is credit, i.e., giving or outgoing aspect.

Classification of Accounts:
Accounts can be classified in two ways:
(A) Traditional Classification: and (B) Modern Classification.
(A) Traditional Classification: Under this classification accounts are classified into two groups as
shown below:
1. Personal Accounts and, 2. Impersonal Accounts
1. Personal Accounts: Accounts which relate to persons, i.e., individuals, firms, companies, debtors
or creditors, etc. are Personal Accounts. Ex. of Personal A/c are the account of Mohan & Co., a
customer (Debtor).
Personal Accounts can be classified into three categories:
(i) Natural Personal A/c’s:- The term’ Natural Person’ means persons who are creations of God.
Therefore, these will include accounts in individual name. Like Sita’s A/c, Mohan’s A/c, etc.
(ii) Artificial Personal A/c’s:- These accounts include accounts of corporate bodies or institutions
which are recognised as person in business dealings. Like then account of a limited company, the
account of a club etc.
(iii) Representative Personal A/c’s:- These are accounts which represent a certain person or a group
of persons. Like if rent is due to the landlord, an Outstanding Rent Account will be opened in the
books.
Rule of Debit and Credit - Debit the receiver, Credit the giver.

2. Impersonal Accounts: Account which are not personal such as Machinery A/c, Furniture A/c,
Cash A/c etc. are termed as Impersonal Account. These can be further subdivided into two accounts;
(a) Real A/c’s: Real accounts are the accounts which relate to tangible or intangible assets of the
firm (excluding debtors.
Tangible assets like – Building, Land, Plant and Machinery and Investment, Cash in hand or stock.
Intangible assets like- Patents, Trademark and Goodwill.
Rule of Debit and Credit - Debit what comes in, Credit what goes out.
(ii) Nominal (Revenue or Expense) Accounts:- Accounts which relate to expenses , losses, gains,
revenue, etc. are termed as Nominal Accounts. These are Rent A/c, Salary A/c, Sales A/c,
Commission Received A/c etc.
Rule of Debit and Credit - Debit all expenses and losses, Credit all incomes and gains.

22
B. Modern Classification:-
Under this classification, all the accounts are classified into the following five categories.
1. Asset Accounts. 2. Liability Accounts. 3. Capital Accounts.
4. Revenue Accounts. 5. Expense Accounts.

1. Asset Accounts: Asset account are those accounts which relate to the economic resources of an
enterprise such as Plant & Machinery, Land & Building etc.
Rule of Debit and Credit - Debit the increases, Credit the decreases.

2. Liability Accounts:- Liability accounts are accounts of lenders, creditors for goods, outstanding
expenses, etc.
Rule of Debit and Credit - Debit the decreases, Credit the increases.

3. Capital Accounts:- These are the accounts of proprietors/partners who have invested amount in
the business. It includes both Capital and Drawings Account.
Rule of Debit and Credit - Debit the decreases, Credit the increases.

4. Revenue Accounts:- These are accounts of incomes and gains. Examples are- Sales, Discount
received, Interest received, bad debts recovered etc.
Rule of Debit and Credit - Debit the decreases, Credit the increases.

5. Expense Accounts:- These are the accounts of expenses or losses incurred in carrying the
business. Examples are: Purchases, Wages, Salaries Discount allowed etc.
Rule of Debit and Credit - Debit the increases, Credit the decreases.

23
 Ch - 07: Origin of Transactions - Source Documents and Preparation of Vouchers

Source Documents:-
A written document which provides evidence of the transactions is called the Source Document. Source
document is the first evidence of a transaction which takes place such as Cash Memo, Bill or Invoice,
Receipt, Pay-in-slip, cheques, Debit-Note & Credit -Note.
(a) Cash Memo: It is prepared by the Seller at the time of Sale of goods on Cash. It contains details such
as goods sold, quantity, amount received, date etc.
(b) Invoice (Bill): An invoice is prepared by Seller at the time of sale of goods on credit. It contains details
such as the goods sold, the party to whom goods are sold, sales amount, date etc.
(c) Pay-in-Slip: It is used to deposit cash or cheque into bank. It has a counterfoil which is returned to the
depositor with the Signature of the authorized person.
(d) Receipt: it is used when a customer give cash to the Business firm. It is an acknowledgement of
payment or cash received by firm.
(e) Cheque: A cheque is an order in writing, drawn upon a specified banker and payable on demand.
(f) Debit Note: it is prepared when a buyer returns goods to seller or when purchased return transaction is
entered in the books of accounts. It is prepared by the buyer of the goods.
(g) Credit Note: it is prepared when a seller received goods from buyer or when Sales return transaction is
entered in the books of accounts. It is prepared by the Seller of the goods.

Voucher:-
A voucher is a document evidencing a business transaction. Recording in books of accounts are done on
the basis of voucher. It is an accounting evidence of a business transaction.
Classification of Accounting Vouchers:
Vouchers Further classification Purpose
Debit Vouchers To show Cash Payment
Cash Vouchers
Credit Vouchers To show Cash Receipt
Non Cash Voucher Transfer Voucher To show Transactions not involving cash

(a) Cash Vouchers:-

Cash voucher is prepared to record all the transactions which involve cash either in the form of receipt or
payment. Thus cash voucher is further classified into Debit Voucher & Credit Voucher.
(i) Debit Voucher:
Debit voucher is prepared for all cash payment made by the business firm such as Payment of Rent
payment of salary, payment for purchase of goods etc.
(ii) Credit Voucher:
Credit voucher is prepared for cash received by the business firm Such as Sale of goods for Cash,
Payment received from any of Debtors, Income received etc.
(b) Non-Cash Voucher /Transfer Voucher:-
This type of voucher is prepared in those transactions which do not involve Cash. Such as Credit Sales,
Credit Purchases, Bad Debts, Depreciation charged etc.

24
 Ch - 08: Journal

Journal:-
The first book in which the transactions of a business unit are recorded is called Journal. Here, business
transactions are recorded in chronological order i.e. in the order in which they occur. Each record in a
journal is called an entry. As the journal is the first book in which entries are recorded, it is also known as
a book of original entry.
Format of Journal:
Date Particulars L.F. Dr. (₹) Cr. (₹)

Ledger Folio (L.F.): Ledger Folio is the page No. of Ledger on which the Debit A/c & Credit A/c are to be
posted.
Types of Entries
1. Simple Entry: It is that entry in which only two accounts are affected i.e. one account is debited and
another account is credited with an equal amount.
2. Compound Entry: It is that entry in which more than two accounts are involved. Compound Entries
can further be classified into single compound entry and double compound entry.
3. In Single Compound Entry several accounts are to be debited and only one account is to be credited or
only one account is to be debited and several accounts are to be credited.
4. Opening Entry: The entry passed to record the closing balances of the previous year is called opening
entry. While passing an opening entry, all assets accounts are debited and all liabilities accounts are
credited.

Transactions related to Goods:

1. Goods purchased for cash: 2. Goods purchased from ram on Credit:
Purchase A/c Dr. Purchase A/c Dr.
To Cash A/c To Ram
(Being goods purchased for cash) (Being goods purchased from Ram on credit)
3. Goods sold for cash: 4. Goods sold on credit to Mohan:
Cash A/C Dr. Mohan Dr.
To Sales A/c To Sales A/c
(Being goods sold for cash) (Being goods sold to Mohan on credit)
5. Withdrawal of goods by owner for personal use: 6. Goods distributed as free samples:
Drawings A/c Dr. Advertisement A/c Dr.
To Purchase A/c To Purchase A/c
(Being goods withdrew by owner for personal use) (Being goods distributed as free samples)
7. Goods given as charity: 8. Goods lost by fire/flood/theft etc.:
Charity A/c Dr. Loss by fire/theft A/c Dr.
To Purchases A/c To Purchase A/c
(Being goods given as charity) (Being goods lost by fire/flood/theft)
Note : Purchases A/c is credited in the above mentioned entries at S. No. 5 to 8 because the goods are
going out of our business on cost and it is not a sale hence, deducted from the Purchases A/c.

25
Transactions related to Bank:-
1. Cash deposited into the bank:
Bank A/c...... Dr.
To Cash A/c
(Being cash deposited to bank)
2. Cash withdrawn for office use:
Cash A/c...... Dr.
To Bank A/c
(Being cash withdrew from bank for office use)
3. When cheque is received from customer and deposited into bank same day:
Bank A/c..... Dr.
To Customer’s personal A/c
(Being cheques deposited into bank)
4. Cash withdrawn for personal use by owner:
Cash A/c...... Dr.
To Bank A/c
(Being cash withdrew for personal use)
5. When cheque is received from customer and not deposited into bank same day:
Cheque-in-hand A/c.... Dr.
To customer’s personal A/c
6. When above cheque (Point 5) is deposited later into bank:
Bank A/c ......Dr.
To cheque-in-hand A/c
(Being cheques deposited into bank received from …………….. On ………)
7. When payment is made through cheque:
Personal A/c .......Dr.
To Bank A/c
(being payment made to …….. by cheque)
8. When expense is paid through cheque:
Expense A/c ........Dr.
To Bank A/c
(Being expense paid by cheque)
9. When interest is allowed by the bank:
Bank A/c........ Dr.
To Interest A/c
(Being interest allowed by bank)
10. When Bank charges for the services provided:
Bank Charges A/c...... Dr.
To Bank A/c
(Being Bank charges deducted)
Note:- Bank A/c will be debited if the amount is deposited/credited by bank & Bank A/C will be credited if
the amount is withdrawn/debited by bank.

26
Note:- Cash will also be debited if business receives it & Credited if Business paid it.
Transactions related to Expense or Income:-

1. Expense paid by bank / Cash by the Business: 2. Expense is outstanding during a Current F.Y:
Expense A/c …..Dr. Expense A/c…… Dr.
To Cash / Bank A/c To Outstanding Exp. A/c
(Being expense paid by cash/Bank) (Being expense is due but not paid)
3. Expense paid in advance: 4. Income received in Cash/Bank:
Prepaid Expense A/c….. Dr. Cash/Bank A/c….. Dr.
To Cash/Bank A/c To Income A/c
(Being expense paid in advance by cash/ Bank) (Being Income received in cash / bank)
5. Income due but not received: 6. Income received in cash/Bank in advance:
Accrued/Outstanding Income A/c…. Dr. Cash/Bank A/c…... Dr.
To Income A/c To Prepaid Income A/c
(Being Income due but not received) (Being income received in advance)

Transactions related to Assets/Liabilities:-

1. When Assets is purchased in Cash/Bank: 2. Depreciation charged on assets:
Assets A/c…… Dr. Depreciation A/c….. Dr.
To Cash / Bank A/c To Assets A/c
(Being Assets purchased in cash/Bank) (Being Depreciation charged on assets @ …. %)
3. Assets Sold by the business: 4. Liability arise when business raise funds:
Cash/Bank A/C…. Dr. Cash/Bank A/c……. Dr.
To Assets A/c To Liability A/c
(Being Assets sold in cash/Bank) (Being fund raised)
5. Payment of Liability:
Liability A/c….. Dr.
To Cash/Bank A/c
(Being Liability paid in Cash/Bank)

Some other Journal Entries:-

1. Bad Debts (when Debtors fail to pay due): 2. Bad Debts Recovered:
Bad Debts……. Dr. Cash / Bank A/c ……Dr.
To Debtors A/c To Bad Debts Recovered A/c
(Being amount Bad Debts ) (Being bad debts recovered )
3. Debtors Become insolvent: 4. Interest on Capital:
Cash/Bank A/c.. Dr. (Amt. Received) Interest on Capital A/c ….Dr.
Bad Debts A/c....Dr. (Amt. not rec.) To Capital A/c
To Debtors A/c (The due Amt.) (Being Interest on capital credited by business in
(Being Debtors become insolvent could pay only capital A/c)
…….. paisa in a Rupees)
5. Interest on drawing:
Capital A/C ……Dr.
To Interest on Drawing A/c
(Being interest on Drawing charged by business
from capital A/c)

27
 Important : Besides opening Journal entries, any transaction which is not covered under any of the
Subsidiary Book is recorded in Journal proper.
Discount: There are two types of discount that are explained below:
(a) Trade discount:- Trade discount is allowed by wholesalers and manufacturers to the retailers at a
fixed percentage. Trade discount is not to be shown in the books.
(b) Cash discount:- Cash discount is allowed to the customers for making an early payment.
Ex: If a retailer sells goods of list price Rs.10000 at 10% trade discount & 2% cash discount
Solution: ₹
List price 10000
Less: Trade discount @ 10% (1000)
9000
Less: Cash discount @ 2%. (₹ 9000×2÷100) (180)
8,820
Practice Question:-

Q1. Pass Journal Entries for the following:

a) Goods worth ₹ 45,000 and cash ₹17,000 were stolen by an employee.
b) Charge Depreciation @ 10% p.a. for two months on machine costing ₹ 25,000.
c) Paid to landlord by cheque ₹ 12,000 for Rent. Half of the building is occupied by the proprietor for
residential use.
d) Sold goods to Raj costing ₹ 40,000 at a profit of 25% & allowed him10% trade discount and paid for
cartage ₹ 1,000 to be charged from him.
Q2. Journalise the following transactions with narrations:
a) Withdrawn goods for personal use (Cost ₹ 700, Sales Price ₹ 800).
b) Salaries due to Ram Prasad, Clerk ₹ 550.
c) Rohan is declared insolvent. Received from his official receiver 70 paisa in the rupee on a debt of ₹ 900.
d) Goods costing ₹ 3,000 were destroyed by fire.
e) Bought a horse of ₹ 1, 00,000 for business.
f) Paid rent ₹ 600 of building by Cheque 1/3rd of the building is used by the proprietor for residential use.
g) Paid to Manohar ₹ 6,800 & discount allowed by them ₹ 200.
i) Received cash for a bad debts written off last year ₹ 330.

28
 Ch - 09: Ledger

Meaning of Ledger: After recording the business transactions in the Journal or special purpose
Subsidiary Books, the next step is to transfer the entries to the respective accounts in the Ledger.
Ledger is a book where all the transactions related to a particular account are collected at one
place.
Definition: The Ledger is the main or principal book of accounts in which all the business transactions
would ultimately find their place under various accounts in a duly classified form.
Utility of Ledger:
To know the collective effect of all the transactions pertaining to one particular account.
By this classification/collective effect, we are able to know the following-
 It provides complete information about all accounts.
 It provides position of Assets and Liabilities.
 It facilitates the preparation of Trial Balance.

Important: Ledger is also called the Principal Book of Accounts.

Performa for Ledger
Each ledger account is divided into two equal parts.
Left Hand Side →→ Debit side (Dr.)
Right Hand Side →→ Credit side (Cr.)
Name of the Account
Format of Ledger Account
Dr. Cr.
Date Particulars J.F Amt. (₹) Date Particulars J.F Amt. (₹)

Example:-
1. Capital introduced- ₹ 1,00,000 on 1/4/2019
2. Furniture & Equipment purchased- ₹ 15,000 on 1/4/2029
3. Goods purchased- ₹ 75,000 on 1/4/2019
4. Salaries paid- ₹ 10,000 on 30/4/2019.
5. Sold goods- ₹ 95,000 in 30/04/2019.
Journal Entries for the year ending…..
Date Particulars L.F Debit (₹) Credit (₹)
1/4/2019 Cash A/c Dr. 1,00,000
To Capital A/c 1,00,000
(Being capital invested)

29
 1/4/2019 Furniture and Equipment A/c Dr. 15,000
To Cash A/c 15,000
(Being furniture and equipment purchased)
1/4 /2019 Purchases A/c Dr. 75,000
To Cash A/c 75,000
(Being goods are purchased)
30/4/2019 Salaries A/c Dr. 10,000
To Cash A/c 10,000
(Being salaries paid)
30/4/2019 Cash A/c Dr. 95,000
To Sales A/c 95,000
(Being goods are sold)

Ledger Accounts
Dr. Cash A/c Cr.
Date Particulars J.F Amt. (₹) Date Particulars J.F Amt. (₹)
1/4/2019 To Balance b/d - 1/4/2019 By Furniture & equipment 15,000
1/4/2019 To Capital A/c 1,00,000 1/4/2019 By Purchases A/c 75,000
30/4/2019 To Sales A/c 95,000 30/4/2019 By Salaries A/c 10,000
30/4/2019 By Balance c/d 95,000

1,95,000 1,95,000

Dr. Capital A/c Cr.

Date Particulars J.F Amt. (₹) Date Particulars J.F Amt. (₹)
30/4/2019 To Balance c/d 1,00,000 1/4/2019 By Balance b/d -
1/4/2019 By Cash A/c 1,00,000
1,00,000 1,00,000

Dr. Furniture A/c Cr.

Date Particulars J.F Amt. (₹) Date Particulars J.F Amt. (₹)
1/4/2019 To Balance b/d - 30/4/2019 By Balance c/d 15,000
1/4/2019 To Cash A/c 15,000
15,000 15,000

Dr. Purchases A/c Cr.

Date Particulars J.F Amt. (₹) Date Particulars J.F Amt. (₹)
1/4/2019 To Balance b/d - 30/4/2019 By Balance c/d 75,000
1/4/2019 To Cash A/c 75,000
75,000 75,000

30
 Dr. Sales A/c Cr.
Date Particulars J. F Amt. (₹) Date Particulars J. F Amt. (₹)
30/4/2019 To Balance c/d 95,000 1/4/2019 By Balance b/d -
30/4/2019 By Cash A/c 95,000
95,000 95,000

Dr. Salaries A/c Cr.

Date Particulars J.F Amt. (₹) Date Particulars J.F Amt. (₹)
30/4/2019 To Balance c/d 20,000 1/4/2019 By balance b/d 10,000
30/4/2019 By Cash A/c 10,000
20,000 20,000

31
 Ch - 10: Special Purpose Books I- Cash Book

Cash Book:
Cash book shows all the transactions related to cash receipts and payments. Cash book serves two
purposes. First, all the cash transactions are recorded first time in cash book it becomes Book of
original entry. Second, there is no need to prepare Cash A/c in ledger it also play the role of Principal
Book.
Simple Cash Book:
All the cash receipts are shown in left hand side i.e. Debit side and all the cash payments are shown
in right hand side i.e. Credit Side.
Points to Remember:
 Cash in hand/opening balance of cash is shown in Dr. side of the Cash book as “To Balance b/d”.
 Only transactions of cash receipts and payments are recorded in this book.
 This book never shows a credit balance because one can’t pay more than the cash one have.
Performa of Simple Cash book
Dr. Simple Cash book
Cr.
Date Particulars V.no L.F (₹) Date Particulars V.no L.F (₹)
To…….. By…

Let’s practice it with a question :-

Illustration 1. Enter the following transaction in a single column cash book:-
2022, March 01. Commenced business with cash ₹ 10,000.
March 02. Bought goods for cash ₹ 2,500.
March 05. Sold goods for cash ₹ 2,000.
March 10. Goods purchased from Ravi on credit ₹ 5,000.
March 13. Paid to Ravi ₹ 3,500.
March 15. Cash sale ₹ 4,000.
March 18. Purchased furniture for cash ₹ 3,000.
March 20. Paid wages ₹ 190.
March 24. Paid rent ₹ 200.
March 26. Received commission ₹ 300.
March 28. Withdrew for personal use ₹ 500.
March 31. Paid salary ₹ 450.
Solution:-
Dr. Simple Cash Book Cr.
Date Particulars L.f (₹) Date Particulars L.f (₹)
2017, Mar 1 To Capital A/c 10,000 2017, Mar 2 By Purchases 2,500
5 To Sales A/c 2,000 13 By Ravi A/c 3,500
15 To Sales A/c 4,000 18 By Furniture A/c 3,000
26 To Commission A/c 300 18 By wages A/c 190
20 By Rent A/c 200
24 By Drawings A/c 500
28 By salary A/c 450
31 By Balance c/d 5,960
16,300 16,300
2017, April 1 By Balance b/d 5,960

32
 Double Column cash Book (Cash Book with Cash and Bank Column):
In this case the Cash Book is ruled with two amount columns on either side of the cash book namely,
“Cash and Bank”. Cash columns in such a case will record actual cash received in the debit side and
payments in the credit side. Cheques received should be entered on the debit side of the bank column
when it deposited in the bank. The payments by cheques should be entered on the credit side in bank
column and also when cash is withdrawn from the bank.
Performa of Double Column Cash Book
Dr. Double Column Cash Book Cr.
Date Particulars V. L. Cash Bank Date Particulars V. L. Cash Bank
no F no F
To…….. By…

Important Entries:-
1. Contra Entries: These entries affect cash and bank columns both at the same time. To indicate
contra entry “C” is mentioned in the L.F. column of the cash Book. Following two cases result in
Contra entries.
(a) Depositing cash into Bank ₹ 1,000. It will increase bank balance, so bank column is debited and
flash balance will decrease, so cash column is credited.
Dr. Cash Book (with Cash & Bank Column) Cr.
Date Particulars L.F. Cash(₹) Bank (₹) Date Particulars L.F. Cash (₹) Bank (₹)
2021, To Cash A/c C 1,000 2021, By Bank A/c C 1,000
Apr. 01 Apr. 01

(b) Withdrawn from Bank for office use ₹ 1,000. It will increase cash balance, so cash column is
debited and bank balance will decrease, so bank column is credited.
Dr. Cash Book (with Cash & Bank Column) Cr.
Date Particulars L.F. Cash (₹) Bank (₹) Date Particulars L.F. Cash (₹) Bank (₹)
2021, To Bank A/c C 1,000 2021, By Cash A/c C 1,000
Apr. 01 Apr. 01
(2) Entries relating to cheques:
1. When any payment is made by cheque: It will reduce the bank balance and thus bank column will
be credited.
2. When any payment is received in the form of cheque and no information about its deposit into
bank is given. In this case it is assumed that the cheque is deposited into bank on the same day,
when it is received & so bank A/c will be debited.
3. When any payment is received in the form of cheque and it is deposited into bank on same day
than bank A/c will be debited.
When payment is receive in the form of cheque on one day & it is deposited into Bank on other
day i.e. when two dates, one for the receipt of cheque and the other for deposit. In this case no
entry it to be recorded at the time of receiving the cheque. Entry is to made when cheque deposited
in the bank, as bank column is debited.

33
 Illustration 2. - Enter the following transaction in a Double column cash book (Cash & Bank):-
Amt. (₹)
Date Details
Sep. 01, 2021 Bank balance. 21,000
Sep. 01. Cash balance. 7,500
Sep. 04. Purchased goods by cheque. 6,000
Sep. 08. Sale of goods for cash. 3,000
Sep. 13. Purchase of machinery by cheque. 2,750
Sep.16. Sold goods and received cheques (deposited same day.) 2,250
Sep. 17. Purchase goods from Mira in cash. 8,700
Sep. 20. Purchase stationery by cheque. 550
Sep. 24. Cheque given to Rohit. 750
Sep. 27. Cash withdrawn from the bank. 5,000
Sep. 31. Rent paid by cheque. 1,250
Sep. 31. Paid salary. 1,750

Solution:-
Dr. Double column Cash Book Cr.
Date Particulars LF Cash(₹) Bank(₹) Date Particulars L.F Cash(₹) Bank(₹)
2021, 2021,
01 Sept To balance b/d 7,500 21,000 04 Sept By Purchases 6,000
08 Sept To Sales A/c 3,000 13 Sept By Machinery A/c 2,750
16 Sept To Sales A/c 2,250 17 Sept By Purchases A/c 8,700
27 Sept To Bank A/c C 5,000 20 Sept By Stationery A/c 550
24 Sept By Rohit 750
27 Sept By Cash A/c C 5,000
31 Sept By Rent A/c 1,250
31 Sept By Salary A/c 1,750
31 Sept By Balance c/d 5,050 6,950
15,500 23,250 15,500 23,250
2021,
Oct 1 To balance b/d 5,050 6,950
Illustration 3. Prepare Two-column Cash Book from the following transactions:
2022, March 01. Cash in Hand ₹ 15,000; Cash at Bank ₹ 50,000.
March 03. Purchased goods for cash ₹ 6,000.
March 05. Deposited in bank ₹ 5,000.
March 08. Cash sales ₹ 10,000.
March 10. Cash withdrew from bank for office use ₹ 2,000.
March 12. Received cash from Kamini ₹ 3,000, allowed her discount of ₹ 100 against dues.
March 15. Received cheque from Simrat ₹ 2,000 and allowed her discount ₹ 75 against dues.
March 18. Received a post dated cheque (dated: 23rd March, 2022) from Deep for ₹ 5,000.
March 23. Cheque received from Deep deposited in the bank.
March 24. Issued cheque of ₹ 2,500 to Chandan, he allowed discount ₹ 125.
March 27. Withdrew from bank for personal use ₹ 1,500.
March 28. Sold gods to Alok ₹ 40,000.
March 30. Purchased goods from Chandan ₹ 50,000.
March 31. Received cheque from Alok ₹ 2,000 and deposited in the bank.

34
 Solution:-
Dr. Double column Cash Book Cr.
Date Particulars L.F Cash(₹) Bank(₹) Date Particulars L.F Cash(₹) Bank(₹)
2022, 2022,
Mar.1 To Balance b/d 15,000 50,000 Mar.3 By Purchases A/c 6,000 ---
Mar.5 To Cash A/c C --- 5,000 Mar.5 By Bank A/c C 5,000 ---
Mar.8 To Sales A/c 10,000 --- Mar.10 By Cash A/c C --- 2,000
Mar.10 To Bank A/c C 2,000 --- Mar.24 By Chandan --- 2,500
Mar.12 To Kamini 3,000 --- Mar.27 By Drawings A/c --- 1,500
Mar.15 To Simrat --- 2,000 Mar.31 By Balance c/d 19,000 58,000
Mar.23 To Cheque in Hand A/c --- 5,000
Mar.31 To Alok --- 2,000
30,000 64,000 30,000 64,000
2021,
Apr. 1 To balance b/d 19,000 58,000

Petty Cash Book:

Business has to incur small expenses which are repetitive in nature. To save the time and eff orts of
head cashier, business appoints a petty cashier. He is entrusted with the duty of paying these
expenses.
Imprest System of Petty Cash Book:-
Under this system, Head cashier gives a fixed amount to petty cashier for a definite period. At the
end of given period, Head cashier reimburses the amount actually spent by the petty cashier
resulting the same amount with petty cashier which he had in the beginning of the period.
This can be illustrated as under.
Head Cashier →→ Petty Cashier

Advantage of Petty Cash Book:

 Saving of time and efforts of Head cashier.
 Control on Petty expenses.
 Less chances of fraud.
Illustration 4. Prepare an Analytical Petty Cash Book on the Imprest System from the following:
2022, ₹
Jan.01. Received for Petty Cash…………………………………………… 10,000
Jan. 02 Paid Metro fare. 50
Jan. 02 Paid Cartage. 250
Jan. 03 Paid for postage…………………………………………………… 500
Jan. 03 Paid wages for casual labours. 600
Jan. 04 Paid for stationery. 400
Jan. 04 Paid auto charges………………………………………………… 200

35
 Jan. 05 Paid for repairs of chairs. 1,500
Jan. 05 Paid Bus fare. 100
Jan. 05 Paid Cartage. 400
Jan. 06 Paid Postage…………………………………………………… 700
Jan. 06 Paid for conveyance charges. 300
Jan. 06 Paid Cartage. 300
Jan. 06 Paid Telephone bill ……………………………………………… 200
Solution:

In the books of ........

Petty Cash Book
Receipts Date V. Particulars Total Conveyance Cartage StationeryPostage Repairs Telephone Sundries
No Pay- (₹) (₹) (₹) (₹) (₹) Expenses (₹)
ments(₹) (₹)
10,000 2022,
Jan.1 1 To Cash A/c
Jan.2 1 By Conveyance A/c 50 50
2 By Cartage A/c 250 250
Jan.3 3 By Postage A/c 500 500
4 By Wages A/c 600 600
Jan.4 5 By Stationery A/c 400 400
6 By Conveyance A/c 200 200
Jan.5 7 By Repairs A/c 1,500 1,500
8 By Conveyance A/c 100 100
9 By Cartage A/c 400 400
Jan.6 10 By Postage A/c 700 700
Jan.6 11 By Conveyance A/c 300 300
Jan.6 12 By Cartage A/c 300 300
Jan.6 13 By Telephone
Expenses A/c 200 200
5,500 650 950 400 1,200 1,500 200 600
Jan.6 4,500
10,000 10,000

4,500 Jan.7 To Balance b/d

5,500 Jan.7 To Cash A/c

Practice Question:
Q1. Prepare Double column Cash Book with Cash and Bank Columns from following information.

2022 (₹)
Feb. 1 Cash in Hand............................................................................. 15,000
Bank Overdraft 70,000
Feb. 3 Paid wages 4,000
Feb. 5 Cash Sales 1,40,000
Feb. 10 Cash deposited in Bank............................................................. 80,000
Feb. 14 Goods purchased against Cheque 40,000
Feb. 20 Paid Rent 10,000
Feb. 22 Drew from bank for personal use.................................................... 8,000
Feb. 27 Salary paid 20,000

36
Q2. Entre the following transactions in the Triple-column Cash Book of Sh. Ramana:

2022
Jan. 01 Cash at Office ₹ 146, & Bank Balance (Cr.) ₹ 5,500.
Jan. 03 Cash Sales ₹ 3,100.
Jan.04 Deposited into Bank ₹ 4,500.
Jan. 06 Mohan settled his account for ₹ 1,500 by giving a Cheque for ₹ 1,450.
Jan. 08 Mohan’s Cheque deposited into bank.
Jan. 10 Bought goods for ₹ 900 & paid by Cheque.
Jan. 12 Purchased stationary for ₹ 250.
Jan. 15 Mohan’s Cheque returned dishonoured.
Jan. 17 Received a Cheque for ₹ 3,500 from Prabhat which is deposited into bank.
Jan. 20 Withdrew for office use ₹ 950.
Jan. 25 Sold goods to Dharmesh for ₹ 5,000.
Jan. 30 Paid Rent by Cheque ₹ 1,000.

37
 Ch - 11: Special Purpose Books II - Other Books

Books of Original Entry/Special Purpose Books:

As the business grows and number of transactions increase, it becomes necessary for the necessary
for the business to divide the recording work. The books maintained are illustrated below:
Transactions Further classification Subsidiary Books Maintained
Only Cash Simple Cash Book
Cash & Bank Related
Cash & Bank Transactions Double Column Cash book
Transactions
Cash payment of small amount Petty Cash Book
Credit Sale Sales Book
Credit Purchases Purchases Book
Transaction Other than
Sales Returns/ Returns Inward Sales returns Book
Cash & Bank
Purchases Returns /Returns outward Purchases Returns Book
Any other transaction Journal Proper

Advantages of Maintaining Subsidiary Books:-

(a) Division of work
(b) Leads to Specialization
(c) Easy to maintain Ledger
(d) Check on frauds
(e) Easy to fix responsibility
(f) Quick availability of required information.
Special Purpose Subsidiary Books:-
Purchases Book:-
In this book, only those transactions are recorded which are related to credit purchases of goods in
which the business deals in. Recording is made on the basis of Bills/ Invoices issued by the
Suppliers.
Transactions not recorded in purchases Book:
 Purchases of goods for cash.
 Purchases of Assets meant for long term, not for resale.

Illustration 1. From the following information of M/s Raghav & Co. Delhi, prepare the Purchases
Book for the month of March, 2022:
2022 March 1. Purchased from M/S Browni & Co., Kolkata:
5 gross pencils @ ₹ 1,200 per gross.
2 dozen registers @ ₹ 500 per dozen.
Less: Trade Discount @ 10%.
March 4. Purchased from The Paper Co., Delhi:
8 reams of white paper @ ₹ 500 per ream.
10 reams of ruled paper @ ₹ 600 per ream.
Less: Trade Discount @ 10%.
March 5. Purchased 80 Reynolds Pen @ ₹ 5 each from M/s Verma Bros., Delhi.

38
 Solution: Purchases Book
Date Particulars Inv.No. L.F Details (₹) Amt. (₹)
2022 M/S Browni & Co., Kolkata:
Mar.1 5 gross pencils @ ₹ 1,200 per gross. 6,000
2 dozen registers @ ₹ 500 per dozen. 1,000
7,000
Less: Trade Discount @ 10% 700 6,300

Mar. 4 The Paper Co., Delhi:

8 reams of white paper @ ₹ 500 per ream. 4,000
10 reams of ruled paper @ ₹ 600 per ream. 6,000
10,000
Less: Trade Discount @ 10%. 1,000 9,000
Mar. 5 M/s Verma Bros., Delhi.
80 Reynolds Pen @ ₹ 5 each from 400
Mar.31 Purchases A/c .....................................Dr. 15,700

Sales Books/Sales Journal:

In this book, transactions for credit sales of goods are recorded. The source documents for this book
is duplicate copy of invoice/bills issued to the customers.
Transactions not recorded in Sales Book
 Sales of goods for cash
 Sales of Assets.
Illustration 2. Record the following transactions of M/s. Kishore & Sons, Delhi in their Sales Book:
2022, 1 Apr. Sold to M/s. Gupta& Verma, Delhi:
30 shirts @ ₹ 400 each.
20 trousers @ ₹ 600 each.
Less: Trade Discount @ 10%.
5 Apr. Sold old furniture to M/s Sehgal & Co. Delhi for ₹ 8,000.
7 Apr. Sold 50 shirts to M/s Jain & sons, Kanpur @ ₹ 400 each.
15 Apr. Sold M/s Mathur & Jain, Kolkota:
100 shirts@ ₹ 400 each.
10 Overcoats @ ₹ 1,000 each.
Less: Trade Discount @ 10%
Solution: Sales Book
Date Particulars Inv.No. L.F Details (₹) Amt. (₹)
2022, M/s. Gupta& Verma, Delhi:
1 Apr. 30 shirts @ ₹ 400 each. 12,000
20 trousers @ ₹ 600 each. 12,000
24,000
Less: Trade Discount @ 10%. 2,400 21,600
7 Apr. M/s Jain & sons, Kanpur:
50 shirts @ ₹ 400 each. 20,000
15 Apr.
M/s Mathur & Jain, Kolkota:
100 shirts @ ₹ 400 each. 40,000
10 Overcoats @ ₹ 1,000 each. 10,000
50,000
Less: Trade Discount @ 10% 5,000 45,000
30 Apr. 86,600
Sales A/c ....................................Cr.

39
 Purchases Returns/Returns Outward Book:
This book includes only those transactions which are related to returns of goods bought on credit.
The goods may be returned due to various reasons such as goods bought being defective, supply of
inferior quality goods etc. Entries in this book are made on the basis of Debit Note. A Debit note
contains the name of the supplier to whom good are returned, details of goods returned.
Illustration 2. Enter the following transaction in the Purchases Return Book of Sh. Girdhari Lal:
2022 April 15. Returned gods ton Ram Krishan &Sons for ₹ 2,000, allowed Trade Discount @ 10%.
April 20. Returned goods to Gopal & Sons for ₹ 5000, as the goods were not as per sample.

Solution: Purchase Return Book

Date Particulars Inv.No. L.F Details (₹) Amt. (₹)
2022,
April, 15 Ram Krishan &Sons 30 shirts @ ₹ 400 each. 2,000
Less: Trade Discount @ 10%. 200 1,800
April, 20 Gopal & Sons 5,000
April, 30 Purchase Return A/c ............................Cr. 6,800

Sales Returns Book:

This book includes all the returns by customers of credit sales of goods. The Credit Note is used for
recording entries in this book. The credit note contains the details of customers and goods returned.

Illustration 4. Prepare Sales Return Book in the Books of Lal & Co. Delhi from the following
transactions:
2022 April 6. Goods returned by Ganga Prashad & Co. Delhi:
2 Table Fans @ ₹ 1,000 each.
Less: Trade Discount @ 15%.
April 12. Prabhat Electricals, Agra returned defective Room cooler ₹ 4,250.
Solution: Sales Return Book
Date Particulars Inv.No. L.F Details (₹) Amt. (₹)
2022,
April, 15 Ganga Prashad & Co. Delhi:
2 Table Fans @ ₹ 1,000 each. 2,000
Less: Trade Discount @ 15%. 300
1,800 1,700
April, 12 Prabhat Electricals, Agra 4,250
April, 30 Sales Return A/c ....................................Dr. 5,950

Journal Proper or General Journal:

Journal Proper is used for recording those transactions which cannot be recorded in any of the other
subsidiary books.

40
Practice Questions:
Q1. Prepare Sales book from the following transactions of Gama Traders dealing in furniture:-
2020
Jan. 01 Sold to M/s Girja Furniture House, Dehradun:
100 Chairs @ ₹ 1,500 per Chair
40 Tables @ ₹ 2,000 per Table
Less:Trade Discount @ 5%

Jan. 15 Sold to M/s Baljeet Singh & Sons, Agra:

150 Desks @ ₹ 1,000 per Desk
160 Chairs @ ₹ 1,500 per Chair
Less: Trade Discount @ 5%

Jan. 17 Sold to M/s Ideal Furniture House, Darjeeling for cash:

10 Almirah @ ₹ 5,000 per Almirah.

Jan. 20 Sold to M/s Singhania Furniture House, Mathura:

10 Sofa sets @ ₹ 75,000 per Sofa set
5 Almirah @ ₹ 3,000 per Almirah.
25 Round Tables @ ₹ 4,000 per Round table.
Less: Trade Discount @ 10%

Q2. Prepare Purchase Book & Sales Book from the following transactions:
2022
1st April Bought from M/s Jai Dutt, Chennai, on Credit:
250 Copies of Economics @ ₹ 100 each
100 Copies of Accountancy of T.S Grewal @ ₹ 70.
Less: 10% Trade discount.

5th April Sold to Chand Bros, Delhi:

50 Copies of English @ ₹ 200 each.
45 Copies of Hindi @ ₹ 50 each.

10th April Mohit Co. Mumbai, Purchased from us:

400 Copies of Accountancy @ ₹ 150.
250 Copies of Business Studies @ ₹ 90 each.
Less: 5% Trade Discount.

12th April Purchased from M/s Shri Ram & Sons, Chandigarh in cash:
2 Computers of @ ₹ 20,000 each.
24th April Mahindra Singh & Sons, Meerut sold to us:
70 Copies of Economics @ ₹ 110 each.
85 Copies of Computer Science @ ₹ 100 each.

41
 Ch - 12: Accounting of Goods and Services Tax (GST)

Goods and Services tax (GST):

GST is an indirect tax levied on the sale of goods and rendering of services.
GST came into effect from July 1, 2017 and replaced existing multiple cascading taxes levied by the
Central and State Governments.
GST is levied at every step in the production process, but is refunded to all parties in the chain of
production other than the final consumer.
Goods and Services are divided into five tax slabs for collection of tax i.e. 9%, 5% 12%, 18% and
28% except petroleum products and alcoholic drinks.

Characteristics of GST:
1. Most of the indirect taxes of the Centre and states are integrated under the GST.
2. The Centre and States will store GST tax revenues at 50:50 ratios (except the IGST). The GST
going to the Centre is called Central GST and that goes to the states is known as State GST.
3. GST belongs to the VAT family as tax revenues are collected on the basis of value added i.e.
GST paid (Input GST) is SET OFF AGAINST GST COLLECTED (OUTPUT GST) and thus
GST is levied on the incremental value of goods or services supplied.
4. GST integrates goods and service taxes into one unified tax regime. Earlier goods and services
were imposed and administered differently.
5. GST proposes a four-tier rate structure. The tax slabs are fixed at 5%, 12%, 18% and 28%
besides the 0% tax on essentials.

Objectives of Goods and Services Tax:

1. GST has eased the doing of business as most of the indirect taxes of Centre and states are
integrated under it (GST).
2. GST reduces the cost of goods as GST paid (input GST) is set of against GST collected (output
GST) and thus tax on tax is eliminated.
3. GST ensure timely collection of taxes and electronic return filing which reduces the
possibilities of tax evasion.
4. Introduction of GST and removal of multiple indirect taxes will increase foreign direct
investment also in the country.
5. GST integrates goods and service taxes into one unified tax regime by eliminating various
unnecessary indirect taxes.
Types of Taxes Under GST:
GST is levied under following three types
1. Central GST (CGST)
2. State GST (SGST)
3. Integrated GST (IGST)
Both CGST and SGST are levied on intra-state supply (i.e. sales within the state) at half of the
prescribed rate of tax. Suppose the rate of GST is 18% then 9% will be levied as CGST and 9% as
SGST. In fact, CGST indicate the share of Central Government while SGST indicate the share of
State Government. In case of Union Territory like Delhi, Chandigarh etc. Union territory GST
(UTGST) is levied instead of SGST along with CGST.

Integrated GST (IGST) is levied on interstate supply (i.e. sales outside the state) and the entire
amount will go to Central Government. Suppose, a dealer of Gujarat Sell Goods of Worth Rs.10,000

42
to a dealer of Maharashtra and IGST rate is 18%, the Rs. 1800 will be charged as IGST by the Seller
and the whole amount will go to Central Government.

GST paid is categorised into input CGST, input SGST/UTGST and input IGST while GST collected
is categorised into output CGST, output SGST/UTGST and output IGST.
GST paid is set of against GST collected in the prescribed order as given in the diagram.
put IGST paid Input CGST paid Input SGST paid
↓↓ ↓↓ ↓↓
Set off against Set off against Set off against
Output IGST Output IGST Output IGST
Output CGST Output IGST Output IGST
Output SGST Output IGST Output IGST

Note: Input IGST is first set of against output IGST, then against output CGST and then against
output CGST, if required.
Input CGST is first set of against output CGST & then against output IGST.
Similarly Input SGST is set off first against output SGST and then against output IGST, if required.

Accounting Entries/Journal Entries involving GST:

(i) For Purchase of Goods:
Purchase A/c Dr.
Input CGST A/c Dr.
Input SGST A/c Dr.
To Creditors/Bank A/c
(ii) For Sale of Goods:
Debtors/Bank A/c Dr.
To Sales A/c
To output CGST A/c
To output SGST A/c
(ii) For payment of expense:
Expense A/c Dr.
Input CGST A/c Dr.
Input SGST Dr.
To Bank A/c
(iv) For distributing goods as free samples:
Advertisement A/c Dr.
To Purchases A/c
To Input CGST A/c
To Input SGST A/c
(v) For Purchase returns:
Creditor’s A/c Dr.
To purchase returns A/c
To Input CGST A/c
To Input SGST A/c
(vi) For Sales Returns:
Sales Return A/c Dr.
Output CGST A/c Dr.
Output SGST Dr.
To Debtor’s A/c
43
 (vii) For Purchase of Fixed Assets:
Fixed Asset A/c Dr.
Input CGST A/c Dr.
Input SGST A/c Dr.
To Bank/Vendor A/c
(viii) For setting off Input CGST against output CGST:
Output CGST A/c Dr.
To Input A/c
(ix) For setting off input SGST against output SGST:
Output SGST A/c Dr.
To Input SGST
(x) For setting off input IGST against output IGST:
Output IGST A/c Dr.
To Input IGST A/c
(xi) For payment of GST to Government:
Input CGST A/c Dr.
Input SGST A/c Dr.
Input IGST A/c Dr.
To Bank A/c

Accounting entries under goods and services tax:

Record necessary Journal entries assuming CGST @ 5% and SGST @ 5% and all transactions have
occurred within Delhi.
(i) Amit bought goods ₹ 5, 00,000 on credit
(ii) He sold them for ₹ 1, 00,000 in the same state on credit
(iii) He paid for railway transport ₹ 4,000
(iv) He bought a computer printer for ₹ 10,000
(v) Paid postal charges ₹ 1,000 Journal Entries for the year ending.

Ans: Journal entries

Date Particulars L.F Debit (₹) Credit (₹)

1. Purchases A/c Dr. 5,00,000
Input CGST A/c Dr. 25,000
Input SGST A/c Dr. 25,000
To Creditors A/c 5,50,000
(Purchased goods on credit)
2. Debtors A/c Dr. 11,00,000
To Sales A/c 1,00,000
To Output CGST A/c 50,000
To Output SGST A/c 50,000
(Sales goods on credit)
3. Transportation charges A/c Dr. 40,000
Input CGST A/c Dr. 2,000
Input SGST A/c Dr. 2,000
To Bank A/c 44,000
(Being transport charges paid)

44
4. Computer printer A/c Dr. 10,000
Input CGST A/c Dr. 500
Input SGST A/c Dr. 500
To Bank A/c 11,000
(Being Computer printer purchased)
5. Postal charges A/c Dr. 1,000
Input CGST A/c Dr. 50
Input SGST A/c Dr. 50
To Bank A/c 1,100
(Being Postal charges paid)

45
 Ch - 13: Bank Reconciliation Statement

Definition:
● Bank Reconciliation Statement (BRS) is a statement that is prepared by a firm to reconcile the
balances as per cash book prepared by the firm and thebalances as per pass book recorded by the
bank.
● The need for bank reconciliation statements arise from the fact that manytimes there is a
difference in both the balances.
Causes of Differences in Balance:
The differences in balances in Cash Book and Pass Book may arise due to:
a. Difference in timings for recording the transaction
b. Errors made by bank or firm while recording the transaction.
Difference in timings for recording the transaction
There may be a difference in balance caused by the timings gap both for payment as well as for
receipts. Some of the factors responsible for these gaps are:
a. Cheques issued by banks not yet presented for payments.
b. Cheques paid into the bank but not yet collected.
c. Direct debits made by the bank on behalf of the customer.
d. Amounts directly deposited in the bank account.
e. Interest and dividends collected by the bank.
f. Direct payments made by the bank on behalf of the customers.
g. Cheques deposited/bills discounted dishonoured.
Errors made by bank or firm while recording the transaction Sometimes there may be an error
while recording a transaction that can result ina difference in balances. Such errors can be made both
by banks or firms, hencethey are of two types:
a. Errors committed by firm:
(i) Wrong amount debited or credited in the cash book.
(ii) Omission of any transaction.
(iii) Error in totalling or balancing the bank column of the Cash book.
b. Errors committed by bank:
(i) Wrong amount debited or credited in the pass book.
(ii) Omission of any transaction.
(iii) Error in totaling or balancing the bank column of the Pass book.
Benefits of Bank Reconciliation Statement:
(a) Helps in tracking errors.
(b) Helps terminate the risks of fraud.
(c) Helps in tracking transaction status periodically.
(d) Helps in achieving accurate balance.

Preparation of Bank Reconciliation Statement:

● A BRS is prepared by taking either the balance of Pass book or Cash Book asa starting
46
 point.
● Bank records all the deposits in the credit and withdrawals in the debit side ofthe Pass
book.
● Tally the debit side of the cash book and the credit side of the pass book andvice-versa and note
the point of differences.

Method for preparing Bank Reconciliation Statement:

The format for preparing BRS is given below:
There can be an alternative format for preparing BRS with one column showing additions and
another showing deductions:
Particulars Amt. (+) Amt. (-)
Balance as per Cash Book ……….
Items Credit in Pass Book but not recorded in Cash Book. ……….
Items credit in Cash Book but not recorded in Pass Book. ……….
Items debit in Cash Book but not recorded in Pass Book. ……….
Item debit in Pass Book but not recorded in Cash Book. ……….
Balance as per the Pass Book ……….

Points to remember:

● If the BRS starts with Balance as per Cash Book it will give the Balance asper Pass Book at the
end and vice-versa.
● The Debit balance as per Cash book or Credit balance as per Pass Book is written on the
positive side. It denotes that the deposits of the firm are morethan the withdrawals and is
considered to be a favorable situation.
● The Credit balance as per Cash book or Debit Balance as per Pass Book is written on the
negative side. It denotes that the deposits of the firm are lessthan the withdrawals and is
considered to be an unfavorable situation or overdraft balance.
● The main concept behind adjustments is when the balance in a cash book is getting
unnecessarily deducted (i.e., items credited in cash book not recordedin pass book or items
credited in pass books not recorded in Cash Book) we increase the balance in Cash Book so we
add in it.
● When the balance in the cash book is getting over-amounted (i.e., items debited in Pass book
are not recorded in cash book, or items debited in Cash book are not recorded in Pass Book) we
reduce the amount hence we subtractthose items
Items which increase the Pass Book Balance or decreases the Cash Book Balance:
(a) Cheques issued but not yet presented.
(b) Credits made by the bank for interests.
(c) Amount directly deposited by the customers directly into the bank account.
(d) Interest and dividend collected by the bank.
(e) Cheques paid into the bank but omitted to be recorded in the Cash – Book

Items which decrease the Pass Book Balance or increase the Cash Book Balance:
1. Cheques sent to the bank for collection but not yet credited by the bank.
2. Cheques paid or bills discounted in the bank but dishonoured.
3. Direct payments made by the bank.
4. Bank charges, commission etc. debited by the bank.
5. Cheques issued but omitted to be recorded in the Cash Book.
47
Illustration 1. From the following information, prepare Bank Reconciliation Statement as on 31st
March, 2022:
(i) Debit Balance of Bank Column as per Cash Book as on 31st March, 2022 ₹ 24,000.
(ii) Balance (Credit) as per Bank Statement as on that date ₹ 33,000.
(iii) Out of The total cheques issued of ₹ 14,000, cheques of ₹ 8,000 were debited on 5th April, 2022
and the remaining have not been presented yet.
(iv) Cheques deposited of ₹ 7,000 were credited on 4th April, 2022.
(v) Bank had debited ₹ 200 as bank charges and had collected ₹ 400 as interest on investment.
(vi) A cheque issued to Mehta Ltd. for ₹ 6,800 was recorded in the Cash Book as ₹ 8,600.
Solution:
Bank Reconciliation Statement as on 31st March, 2022
Particulars Plus Items Minus Items
(₹) (₹)
Balance as per Cass Book (Dr.) 24,000
Cheques issued but not yet presented for payment. 14,000
Cheques deposited but not yet credited. 7,000
Interest allowed by the bank. 400
Bank charges charged by bank. 200
Cheques paid for ₹ 6,800 wrongly entered in Cash Book as ₹ 8,600 1,800
Balance as per Bank Statement (Cr.) (₹40,200 - ₹ 7,200) 33,000
40,200 40,200

Alternatively, Bank Reconciliation Statement may be presented as follows:

Particulars Amt. Details Amt.

(₹) (₹)
Balance as per Cash Book (Dr.) 24,000
Add: Cheque issued but not yet presented for payment. 14,000
Interest credited by Bank but not recorded in Cash Book. 400
Cheque paid to Mehta Ltd. for ₹ 6,800 wrongly entered in the 1,800
Cash Book as ₹ 8,600. 16,200
40,200
Less: Cheques deposited but not yet credited. 7,000
Bank charges charged by bank but not recorded in Cash Book. 200 7,200
Balance as per Bank Statement (Cr.) 33,000

Illustration 2. From the following particulars prepare Bank reconciliation statement of Arun Ltd. as
on 31st March, 2021:
(a) Balance as per Pass Book was ₹ 14,000.
(b) Bank collected a cheque of ₹ 500 on behalf of Arun Ltd. but forgot to record it in the Pass Book.
(c) Bank deposits a cash deposit of ₹ 2,589 as ₹ 2,598.
(d) The payment of a cheque of ₹ 700 was recorded twice in the Pass Book.
(e) Dividend collected by bank ₹ 450.
(f) Bank charges ₹ 250 debited by the bank.

48
Solution: In the books of Arun Ltd
Bank Reconciliation Statement as on 31st March, 2021
Particulars Amt. Details(₹) Amt. (₹)
Balance as per Pass Book 14,000
Add: Cheque omitted to be recorded 500
Cheque recorded twice 700
Bank charges debited by bank 250 1,450
15,450
Less: Excess Credit for Cash Deposit 9
Dividend collected by bank 450 459

Balance as per the Cash book 14,991

Explanation:
1. We start with Balance as per Pass Book as the starting point to arrive at Cash Book Balance.
2. When the bank collected the cheque on behalf of Arun Ltd. and omitted to record it in the pass
book the balance is undercasted and hence it should be added so as to tally it with the cash
balance.
3. Bank recorded an error of ₹ 9 in excess and hence it must be brought down.Therefore, it should
be subtracted.
4. When the payment is recorded twice it will reduce the balance of the passbook with a twice
amount (₹1400) but the balance in the cash book is reduced only once (₹ 700) and hence it must
be added back.
5. Dividend collected by the bank will increase the balance in the Pass book butthe Cash book
balance is unchanged and hence it is deducted.
6. Bank charges paid by the bank will reduce the pass book balance and hence it must be
added back to reconcile it with the Cash book.

Practice Questions:

Q1. Prepare a Bank Reconciliation Statement of Mahindra Ltd. as on 31 March, 2020 from the
following information:
a) Credit Balance (Overdraft) as per Cash Book ₹ 25,000.
b) A Cheque of ₹ 3,500 issued to a Creditor, was entered by mistake in the Cash Column.
c) Cheques paid into bank for collection ₹ 60,000 but cheques of ₹ 24,000, could only be collected in
March, 2020.
d) A bill receivable for ₹ 8,000 previously discounted with the bank had been dishonoured and bank
charges debited in the Pass Book amount to ₹ 125.
e) In the Cash Book, a bank charge of ₹ 150 was recorded twice while another bank charge of ₹ 40
was not recorded at all.
f) A Cheque of ₹ 10,000 issued on 22nd March was not presented for payment whereas it was
recorded twice in the Cash Book.
Q2. From the following particulars prepare a Bank Reconciliation Statement in the books of Sh.
Kamalkant as on 30th June 2020.
a) Balance as per Pass Book on 30th June, 2020 ₹ 6,000.
b) Out of the total cheques amounting to ₹ 12,000 deposited, cheques aggregating ₹ 7,500 were
credited in June 2020, Cheques aggregating ₹ 2,000 were credited in July 2020 & the rest have not
been collected at all.

49
c) Out of total cheques amounting to ₹ 37,500 drawn by Sh. Kamalkant, cheques aggregating ₹ 5,000
were encashed in June, 2020 cheques aggregating ₹ 4,000 were encashed in July 2020 and rest have
not been presented at all.
d) Amount wrongly debited by bank ₹ 2,400.
e) Bank has charged ₹ 27 as its commission for collecting outstation cheques and has allowed
interest ₹ 330 on his bank balance.
f) A cheque of ₹ 13,300 paid into the bank was returned dishonoured but no intimation was received
from the bank till June 2020.
g) A cheque of ₹ 1,200 was entered in the Cash Book in June 2020, but was sent to the Bank in July
2020.
Q3. From the following particulars, prepare a Bank Reconciliation Statement as on 31st December,
2021:
i) Debit balance as per the Cash Book ₹ 20,000.
ii) A cheque for ₹ 590 deposited in the bank has been dishonoured.
iii) Payment side of the Cash Book has been undercast by ₹ 400.
iv) A cheque for ₹ 1,000 in favour of Karan has not been presented for payment.
v) A bill for Rs 1,400 retired by bank under rebate of ₹ 40, the full amount of the bill was
credited in the Cash Book.
vi) A bill receivable for ₹ 2,000 (Discounted with the bank in November 2021) dishonoured on
31st December, 2021.
vii) A sum of ₹ 800 deposited in the bank has been credited as ₹ 80 in the Pass Book.

50
 Ch - 14: Trial Balance

Meaning of Trial Balance:

When posting of all the transactions into the Ledger is completed and accounts are balanced off,
then the balance of each account is put on a list called Trial Balance.
Definition : Trial Balance is the list of debit and credit balances taken out from ledger. “It also
includes the balances of Cash and bank taken from the Cash Book”.
Preparation : Steps (Only Balance Method)
1. Ledger A/c’s which shows a debit balance is put on the Debit side of the trial balance.
2. The A/c Showing credit balance is put on the Credit side of Trial Balance.
3. Accounts which show no balance i.e. whose Debit and Credit totals are equal are not entered in
Trial Balance.
4. Then the two sides of the Trial Balance are totalled. If they are equal it is assumed that there is
no arithmetical error in the posting and balancing of Ledger A/c’s.
Objectives or Functions of Trial Balance:
 It helps in ascertaining the arithmetic accuracy of ledger accounts.
 Helps in locating errors.
 Provides the summary of Ledger A/c’s.
 Helps in the preparation of Final A/c’s.
Illustration 1:- Prepare a Trail balance as on 31st March, 2022 from the following Ledger balances
of Simple Bros.:
(₹)
Computer A/c …………………………………………………………….. 2,46,000
Capital A/c 2,50,000
Debtor A/c 20,000
Creditors A/c ……………………………………………………………... 22,000
Purchases A/c 35,000
Sales A/c 53,000
Return Outwards A/c …………………………………………………….. 500
Bills Payable A/c 4,000
Bills Receivable A/c 8,000
Bank Overdraft A/c ………………….…………………………………… 6,000
Cash in Hand A/c 1,000
Opening Stock A/c 7,500
Salaries A/c ………………………………………………………………. 15,000
Rent A/c 3,000

Solution:- Trial Balance as on 31st March, 2022

Heads of Accounts L.F Dr. Balance Cr. Balance (₹)
(₹)
Computer A/c 2,46,000 ---
Capital A/c --- 2,50,000
Debtor A/c 20,000 ---
Creditors A/c --- 22,000
Purchases A/c 35,000 ---
Sales A/c --- 53,000
Return Outwards A/c --- 500

51
Bills Payable A/c --- 4,000
Bills Receivable A/c 8,000 ---
Bank Overdraft A/c --- 6,000
Cash in Hand A/c 1,000 ---
Opening Stock A/c 7,500 ---
Salaries A/c 15,000 ---
Rent A/c 3,000 ---
3,35,500 3,35,500

Practice Question:
Q. Following balances were extracted from the books of Sh. P. Paul on 31st March, 2013. You are
required to prepare a Trial Balance:

(₹) (₹)
Opening Stock 2,05,200 Debtors 90,000
Return Outward 96,000 Carriage Outwards 30,000
Salaries 72,000 Capital 3,31,200
Creditors 1,68,000 Machinery 1,08,000
Bank 2,70,000 Return Inward 18,000
Carriage Inwards 36,000 Discount Received 24,000
Rent Received 18,000 Trade Expenses 36,000
Discount Allowed 12,000 Sales 8,40,000
Purchases 6,00,000 Building 60,000
Bills Payable 1,20,000

52
 Ch - 15: Depreciation

Meaning:
Depreciation is a decline in the book value of depreciable assets due to wear andtear, constant use
and expiry of time during the estimated useful life of the asset.
Causes of Depreciation
1. By constant use.
2. By the expiry of time.
3. By accident.
4. By depletion.
5. By permanent fall in the market price.
Importance/need of providing depreciation:-
 For ascertaining the true profit or loss.
 For providing a true and fair view of the financial position.
 To ascertain the accurate cost of the product.
 To provide funds for the replacement of assets.
 For avoiding overpayment of income tax.
Factors determining the amount of Depreciation:-
1. The total cost of the asset.
2. The estimated useful life of assets.
3. Estimated scrap value.
Methods of providing or allocating depreciation:-
1. Straight-line method
2. Written down value method
3. Annuity method
4. Depreciation fund method
5. Insurance policy method
6. Revaluation method
7. Depletion method
8. Machine hour rate method.
Straight Line Method:-
Depreciation is charged at a fixed percentage on the original cost of the asset.
The amount of depreciation remains equal from year to year and as such themethod is also known as
the ‘Equal instalment method'.
(Accounting treatment)
Following entries are passed in this method:-
1. Entry for Purchase of Asset:-
Asset A/c
To Bank A/c
2. Entry for providing Depreciation at the end of each year:-
Depreciation A/c
To Asset A/c
3. Entry for the amount realized on the Sale of Asset:-
Bank A/c
To Asset A/c
4. Entry in case of Loss on Sale of Asset:-
Profit /loss A/c
53
 To Asset A/c
5. Entry in case of Profit on the Sale of Asset:-
Asset A/c
To Profit and Loss A/c
Let’s practice with a question:-
Q1. On 1st April 2009, Ram glass limited purchased a machine for ₹ 90,000 and spent ₹ 6,000 on its
carriage and ₹ 4,000 on its erection. On the date of purchase, it was estimated that the effective life of
the machine will be 10 years and after 10 years its scrap value will be ₹ 20,000.
Prepare Machine A/c and depreciation A/c for 4 years after providing depreciation on the
fixed installment method. Accounts are closed on 31st March every year.
Ans: Dr. Machine A/c Cr.
Date Particulars Amt. (₹) Date Particulars Amt. (₹)
2009,Apr. 1To bank A/c 90,000 2010, Mar.31 By depreciation A/c 8,000
Apr.1To bank A/c (expenses) 6,000 (8% on 1,00,000) 92,000
Apr.1To bank A/c (expenses) 4,000 Mar.31 By balance c/d
1,00,000 1,00,000
2010 Apr.1 To balance b/d 92,000 2011, Mar.31 By depreciation A/c 8,000
(8% on 1,00,000)
Mar. 31 By balance c/d 84,000
92,000 92,000
2011, Apr. 1 To balance b/d 84,000 2012, Mar. 31 By depreciation A/c 8,000
(8% on 1,00,000)
Mar. 31 By balance c/d 76,000
84,000 84,000
2012, Apr. 1 To balance b/d 76,000 2013, Mar. 31 By depreciation A/c 8,000
(8%on 1,00,000)
Mar. 31 By balance c/d 68,000
76,000 76,000
2013, Apr. 1 To balance b/d 68,000

Dr. Depreciation A/c Cr.

Date Particulars Amt. (₹) Date Particulars Amt. (₹)
2009, Apr.1To bank A/c 8,000 2010, Mar.31 By depreciation 1,000
Apr.1 To bank A/c (expenses) 2,000 (10% on Rs.10,000)
Mar.31 By balance c/d 9,000
10,000 10,000
2010, Apr.1 To balance b/d 9,000 2011, Mar.31 By depreciation 900
(10% on Rs.9,000)
Mar.31 By balance c/d 8,100
9,000 9,000
2011, Apr. 1 To balance b/d 8,100 2012, Mar.31 By depreciation 810
(10% on Rs.8,100) 7,290
Mar.31 By balance c/d
8,100 8,100
2012, Apr.1 To balance b/d 7,290 2013, Mar.31 By depreciation 729
(10% on Rs.7,290)
Mar.31 By balance c/d 6,561
7,290 7,290

2013, Apr.1 To balance b/d 6,561

54
Working note:-
As the rate of depreciation is not given in the question, the amount of the annualdepreciation will be
arrived at as under:
= Cost of the asset x estimated net residual value = 1,00,000 - 20,000 = ₹ 8,000
Annual depreciation
No. of years of expected life 10

Rate of depreciation = Amount of Depreciation x 100 = 8,000 x 100 = 8% p.a.

Total Cost of Asset 1,00,000

Written Down Value Method:

Under this method, the value of assets goes on diminishing year after year, the amount of
depreciation charged every year also goes on declining.
For example, if a machine is purchased for ₹ 20,000 and depreciation is to be charged at 10% p.a.
according to written down value method the depreciation willbe charged as:
 1st year
10% of ₹ 20,000 = ₹ 2,000
 2nd year
₹ 20,000- ₹ 2,000 = ₹ 18,000
10% of ₹ 18,000 = ₹ 1,800
 3rd year
₹ 18,000 - ₹ 1,800 = ₹ 16,200
10% of ₹ 16,200 = ₹ 1,620
And so on…
Let’s practice with a question:-
Q1.Tesla traders purchased a machine on April 1, 2019, at a cost of ₹ 8,000 andspent ₹ 2,000 on its
installation. The firm writes off depreciation @10% p.a.by a written down value method. The scrap
value of the plant at the end of its economic life of 4 years is expected to be ₹ 6,561.
Show the machine account for 4 years in the books of Tesla traders. The books are closed on 31
March every year.
Ans: Dr. Machine A/c Cr.
Date Particulars Amt. (₹) Date Particulars Amt. (₹)
2009,Apr.1 To Bank A/c 8,000 2010,Mar.31 By Depreciation 1,000
Apr.1 To Bank A/c (expenses) 2,000 (10% on Rs.10,000)
Mar.31 By Balance c/d 9,000
10,000 10,000
2010Apr.1 To Balance b/d 9,000 2011,Mar.31 By depreciation 900
(10% on Rs.9,000)
Mar.31 By Balance c/d 8,100

9,000 9,000
2011,Apr.1 To Balance b/d 8,100 2012,Mar.31 By Depreciation 810
(10% on Rs.8,100)
Mar.31 By Balance c/d 7,290
8,100 8,100
2012.Apr.1 To Balance b/d 7,290 2013,Mar.31 By Depreciation 729
(10% on Rs.7,290)
Mar.31 By Balance c/d 6,561
7,290 7,290

2013Apr.1 To Balance b/d 6,561

55
 Difference between the Straight line method and Written down value method.
Basis Straight line method Written down value method
1. Amount of Equal depreciation charged every Depreciation goes on decreasing year
Depreciation year. after year.
2. Basis of calculation Depreciation is charged on the Depreciation is charged on the
of depreciation. original cost of the asset. reducing balance of the asset.
3. Zero levels. The book value of the assetcan The book value of the asset cannever
be reduced to zero. be reduced to zero.
4. Approval of Income This method is not approved by This method is approved by income
tax authorities. income tax authorities. tax authorities.

Methods of recording depreciation:-

 First Method:- By charging to an asset account.
 Second Method:- By creating provision for depreciation accounts.
Let’s practice with a question:-
XYZ Ltd. Purchased on April 1, 2008, a Second-hand Plant for ₹ 4,00,000 and immediately spent ₹
80,000 for its overhauling and ₹ 20,000 for its instalment. On 1st Oct, 2011 the Plant became obsolete
and was sold for ₹ 2,00,000. Depreciation is provided at 10% p.a. on the original cost method.
Accounts are closed each year on 31st March.
Show necessary ledger accounts assuming that:-
1. Provision for depreciation account is not maintained, and
2. Provision for depreciation account is maintained.
Ans: 1. When provision for depreciation account is not maintained:-
Dr. Plant A/c Cr.
Date Particulars Amt. (₹) Date Particulars Amt. (₹)
2008,Apr.1 To Bank A/c 4,00,000 2009,Mar.31 By DepreciationA/c 50,000
Apr.1 To Bank A/c(expense ) 1,00,000 Mar.31 By Balance c/d 4,50,000

5,00,000 5,00,000
2009,Apr.1 To Balance b/d 4,50,000 2010,Mar.31 By Depreciation A/c 50,000
Mar.31 By Balance c/d 4,00,000
4,50,000 4,50,000
2010.Apr.1 To Balance b/d 4,00,000 2011,Mar.31 By Depreciation A/c 50,000
Mar.31 By Balance c/d 3,50,000
4,00,000 4,00,000
2011Apr.1 To Balance b/d 3,50,000 2011, Oct.1 By Bank A/c 2,00,000
Oct.1 By Depreciation A/c(6 m) 25,000
Oct.1 By Statement of P/L(B.F.) 1,25,000
3,50,000 3,50,000

2. Provision for depreciation account is maintained.

Dr. Plant A/c Cr.
Date Particulars Amt. (₹) Date Particulars Amt. (₹)
2008,Apr.1 To Bank A/c 4,00,000 2009,Mar.31 By Balance c/d 5,00,000
Apr.1 To Bank A/c (expenses) 1,00,000

56
 5,00,000 5,00,000
2009,Apr.1 To Balance b/d 5,00,000 2010,Mar.31 By Balance c/d 5,00,000

2010,Apr.1 To Balance b/d 5,00,000 2011,Mar.31 By Balance c/d 5,00,000

2011,Apr.1 To Balance b/d 5,00,000 2011,Oct.1 By Bank A/c 2,00,000

Oct.1 By Provision for dep. 1,75,000
Oct.1 By Statement of P/L 1,25,000
5,00,000 5,00,000

Dr. Provision for Depreciation A/c Cr.

Date Particulars Amt. (₹) Date Particulars Amt. (₹)
2009,Mar.31 To Balance c/d 50,000 2009, Mar.31 By Depreciation A/c 50,000
2010,Mar.31 To Balance c/d 1,00,000 2009, Apr.1 By Balance b/d 50,000
2010, Mar.31 By Depreciation A/c 50,000
1,00,000 1,00,000
2011,Mar.31 To Balance c/d 1,50,000 2010, Apr.1 By Balance b/d 1,00,000
2011, Mar.31 By Depreciation A/c 50,000

1,50,000 1,50,000

2011,Oct.1 To Plant A/c (Transfer to 1,75,000 2011, Apr.1 By balance b/d 1,50,000
Plant A/c) Oct.1 By Depreciation A/c 25,000
1,75,000 1,75,000

Asset Disposal Account:

Asset Disposal A/c is opened when an asset (partially or fully) is sold or disposed of all entries
related to sold asset are recorded in the asset disposal A/c. Methods of recording the entries in Asset
Disposal A/c will depend on a fact whether a provision for depreciation A/c is maintained or not.

Format of Assets Disposal Account:

(a) When provision for Depreciation Account is maintained

Particulars Amt. (₹) Particulars Amt. (₹)

To Asset A/c (Original Value) – By Provision for Depreciation A/c –

To Statement of profile – By Bank A/c –
Loss (if loss) – By Statement of profile –
Loss (if Profit) –
- -

(b) When provision for Depreciation Account is not maintained

Particulars Amt. (₹) Particulars Amt. (₹)

To Asset A/c (Original Value-Depreciation) – By Bank A/c –

To Statement of Profile & – By Statement of profile –
Loss (if loss) – Loss (if profit) –
- -

57
Practice Questions:
Q1. Gayatri Ltd. Purchased Machinery for ₹ 80,000 on 1st October, 2018. Depreciation is provided
@ 10% p.a. on Diminishing Balance Method. On 1st January, 2021, one-fourth of Machinery was
found unsuitable and disposed-off for ₹ 12,000. On the same date, a new machinery at a cost of ₹
30,000 was purchased. Write-up the Machinery A/c for 4 years. The Accounts are closed o 31st
March every year.
Q2. The following balances appear in the books of Kartar Ltd. as on 1st April 2021:
₹
Machinery Account 10,00,000
Provision for Depreciation Account 4,50,000
The machinery was depreciated at 10% p.a. on Fixed Instalment Method-the accounting year being
April-March.
On 1st October 2021, a machinery which was purchased on 1st July 2018 for ₹ 2, 00,000 was sold for
₹ 84,000 and on the same date a fresh machinery was purchased for ₹ 4, 00,000.
Prepare the Machinery A/c and Provision for Depreciation A/c for the year 2021-22.
Q3. Dhruv Bros. purchased on 1st April, 2017 a second-hand machinery for ₹ 72,000 and spend ₹
8,000 on its installation.
On 1st Oct. in the same year, another machinery costing ₹ 40,000 was purchased. On 1st Oct. 2019
machinery bought on 1st April, 2017 was sold off for ₹ 24,000 and a fresh machinery was
purchased for ₹ 1, 28,000 on the same date. One more machinery was purchased on 1st Sept, 2020
for ₹ 2,40,000. Depreciation is provided annually on 31st March @ 10% p.a. on the written Down
Value Method.
Show Machinery Account for 4 years ending 31st March, 2021.

Q4. Bhuwan & Company purchased a machinery on 1st April, 2018, for ₹ 54,000 and spend
₹ 6,000on its installation. On 1st December, 2019, it purchased another machine for ₹ 30,000.
On 30th June, 2020 the first machine purchased on 1st April, 2018, is sold for ₹ 36,000 and on the
same date it purchased a new machinery for ₹ 80,000.
On 1st Dec., 2021, the second machine (purchased on 1st Dec, 2019) was also sold off for ₹ 26,000.
Depreciation was provided on machinery @ 10% p.a. on Original Cost Method annually on 31st
March.
Give the Machinery Account for four years.

58
 Ch - 16: Provisions and Reserves

Provision:- Provision can be described as an amount kept aside to cover a known expense/liability in
the future. This is the fund that is to be put aside by a company/organisation to cover the anticipated
losses in the future.
Example:-
1. Provision for depreciation.
2. Provision for bad debts.
3. Provision for discount on debtors.
Difference between provision and Reserve:
Basis Provision Reserve
1. Meaning Provisions are created tomeet a known Reserves are created to meet an
liability. unknown liability in future.
2. Object The objective of creating provisions is to The objective of creating reserves is to
provide for depreciation and other strengthen the financial position of the
specific liabilities. business.
3. Mode of They are created even if there is They are created out of adequate profit
creation insufficient profit. only.
4. Investment Provision cannot be invested outside the Reserves can be invested outside the
outside business.thebusiness. business.

Types of Reserves:-
Revenue Reserve: These reserves come into existence out of profit earned in thecourse of the day to
day business operations.
 General Reserves:- Retained profit of the business for the uncertainties.
 Specific Reserves:- Reserves created for specific purposes.

Capital reserve: Capital reserves are created to write off capital losses and toissue fully paid
bonuses among the equity shareholders.
Example:-
 Profit on Sale of assets.
 Profit on redemption of the debenture
Provision for doubtful debts accounting treatment:-
Profit and Loss A/c Dr.
To Provision for doubtful debts

Example:-
Date Particulars L.F Debit (₹) Credit (₹)
1. Sundry debtors 58,000 58,000

Additional Information:
Bad debts proved bad but not recorded amounted to ₹ 8,000.
Provision is to be maintained at 10% of debtors.

59
Ans:

Date Particulars L.F Debit (₹) Credit (₹)

1. Bad debts A/c Dr. 8,000
To Sundry Debtors A/c 8,000
(Bad debts written off)
2. Profit and Loss A/c. Dr. 8,000
To Bad Debts A/c 8,000
(Bad debts debited to profit and loss A/c)
3. Profit and loss A/c Dr. 5,000
To Provision for doubtful debtsA/c 5,000
(Provision for doubt debts created)
Working note:
Calculation of Provision for doubtful debts.
Provision for doubtful debts 10% on debtors,
Debtors = ₹ 58,000- ₹ 8,000= ₹ 50,000
₹ 50,000 x 10/100= ₹ 5,000.

60
 Ch - 17: Rectification of Errors

Rectification of Errors:
Errors are of two types:
a. Errors that do not affect the Trial Balance
b. Errors that affect the Trial Balance.
Errors that do not affect the Trial Balance:
These are those errors that are being committed in two or more accounts so that it doesn’t affect
the balances in Trial Balance. To rectify this rectifying journal entry is passed.
There are following types of errors that do not affect the Trial Balance:
(i) Error of Omission: When the transaction is omitted to be recorded in the booksof account. For
Example, Goods sold to Mohan were omitted to be recorded in the Sales Book.
(ii) Compensating errors: When the net effects of two or more errors result in nilit is referred to
as compensating errors. For example, if the purchase account has an excess debit of Rs. 5,000
and the Sales Return Account is undercast by the same amount.
(iii) Errors of Principle: If any accounting principle is violated while recording the transaction
such errors do not affect the Trial balance. For example, An addition to machinery was wrongly
debited to Repairs and Maintenance Account considering as revenue expenditure instead of
capital expenditure.
i. Incorrect account in the original book: Instead of Babu’s account, Shyam account is
maintained.
ii. Posting to the wrong account: Instead of posting in the purchase account, thetransaction is
posted in the sales account.
Errors that affects the Trial Balance:
These are those errors that are being committed in one account and they can berectified by opening
The Suspense Account.
There are following errors that affect the Trial Balance:
(i) Error of Omission: When entry is not recorded in only one account giving riseto undercasting
or overcasting of the account. For example, Credit Sales to Mohan was recorded in the Sales book
but was not posted to Mohan’s Account.
(ii) Error of Commission: When an error is made while adding, subtracting, or totaling the
ledger accounts it affects the Trial Balance and is called as Error of commission.
(iii) Wrong Posting: There may be a chance that there is a wrong posting of amount or posting
the amount on the wrong side in the ledger account. Sometimes the amount posted in the ledger is
correct but while posting to the trial balance itself it is posted wrong. In such situations these
errors affect the Trial balance.
Suspense Account:
When Trial Balance Does not agree, then first of all we try to locate the errors. Sometimes, in spite
of the best efforts, all the errors are not located and the Trial Balance does not tally. Then in order to
avoid delay in the preparation of final accounts, a new account is opened which is known as
“Suspense Account” Difference in Trial Balance is posted to this Account.
1. If there is Excess Debit in the Difference is posted to the Credit side of Suspense
→
Trial Baal A/c
2. If there is Excess Credit in the Trial Difference is posted to the Debit side of Suspense
→
Balance A/c

61
Example:
Trial Balance
S .No. Trial Dr. Total (Rs.) Balance (Cr. Total) (Rs.) Difference (Rs.) Posted to Suspense A/c
1. 2,25,000 2,16,500 8,500 (Excess Debit) Credit Side of Suspense A/c
2. 2,16,500 2,25,000 8,500 (Excess Debit) Debit Side of Suspense A/c
Closing of Suspense A/c
 The errors which led to the difference still remain to have to be located.
 These errors will be rectified through Suspense A/c (One sided errors) which will be explained in
the topic Rectification of Errors.
 When all the errors are rectified, this Account closes down automatically. If the difference in
Trial Balance persist, it is shown in the Balance Sheet.
1. Debit Balance of Suspense Account is shown in the Asset Side of the Balance Sheet.
2. Credit Balance of Suspense Account is shown in the Liability Side of the Balance Sheet.

Illustration: 1
Trial Balance of ABC Ltd. doesn’t meet; it showed an excess credit ₹ 20,000. They put the
difference to a suspense account. The errors that they located were:

(i) Sales return book overcast by ₹ 2,000.

(ii) Purchases book was undercast by ₹ 1200.
(iii) In the sales book total of page no. 4 was carried forward to page 5 as ₹ 2,000 instead of ₹ 2,400
and total of page 8 was carried forward to page 9 as ₹ 11,200 instead of ₹ 10,000.
(iv) Goods returned to Ram ₹ 2,000 were recorded through sales book.
(v) Credit purchases from M & Co. ₹ 16,000 were recorded through sales books.
(vi) Credit purchases from S & Co. ₹ 10,000 were recorded through sales books. However, S & Co.
were correctly credited.
(vii) Salary paid ₹ 4,000 was debited to employee’s personal account.
Ans: Rectification entries:
(i) Sales return book overcast by Rs. 2,000.
Suspense A/c .................................... Dr. 2,000
To Sales Return A/c 2,000
(Being Sales returns book overcast by ₹ 2,000, now corrected).
(ii) Purchases book was undercast by ₹ 1,200.

Purchase A/c..................................... Dr. 1,200

To Suspense A/c 1,200
(Being Purchase book undercast by ₹ 1200, now corrected)
(iii) In the sales book total of page no. 4 was carried forward to page 5 as ₹ 2,000 instead of ₹
2,400 and total of page 8 was carried forward to page 9 as ₹ 11,200 instead of ₹ 10,000.
Sales A/c.................................... ……Dr. 800
To Suspense A/c 800
(Being Error in carry forward of sales book, now corrected)
(iv) Goods returned to Ram ₹ 2,000 were recorded through sales book.

Sales A/c.................................... …...Dr. 2,000

To Returns Outwards A/c 2,000
(Being Return Outwards wrongly recorded through sales book, now
rectified)
62
 (v) Credit purchases from M & Co. ₹ 16,000 were recorded through salesbooks.
Purchase A/c..................................... Dr. 16,000
Sales A/c ……………………………Dr. 16,000
To M & Co.’s A/c 32,000
(Being Credit purchases wrongly recorded through sales book, now
rectified)
(vi) Credit purchases from S & Co. ₹ 10,000 were recorded through sales books. However, S & Co.
were correctly credited.

Purchase A/c..................................... Dr. 10,000

Sales A/c …………………………...Dr. 10,000
20,000
To Suspense A/c
(Being Credit purchases wrongly recorded through sales book, however
suppliers account correctly credited,now rectified)
(vii) Salary paid ₹ 4,000 was debited to employee’s personal account.

Salary A/c .................................... …..Dr. 4,000

To Employees Personal A/c 4,000
(Being Salary paid wrongly debited to employee’s personal account, now
corrected)

Dr. Suspense A/c Cr.

Particulars J.F Amt. (₹) Particulars J.F Amt. (₹)
To Difference as per Trial balance 20,000 By Purchases 1,200
To Sales Returns 2,000 By Sales 800
By Purchases 10,000
By Sales 10,000
22,000 22,000

Practice Question:
Q. Pass Journal Entries to rectify the following errors:-
1. An amount of ₹ 1,000 is withdrawn by the proprietor for his personal use has been debited to the
Trade Expenses Account.
2. A purchase of goods from Ram amounting to ₹ 1,500 has been wrongly passed through Sales
Book.
3. Bill for ₹ 820 received from Raju for repairs to Machinery was entered in the Purchase book as ₹
720.

63
 Ch - 18: Financial Statements of Sole Proprietorship

Financial Statements
Financial statement are those statement that show the profitability (Income statement) and the financial
position (Balance Sheet) of the business at the end of accounting period.
In the word of John N. Myer “The financial statement provide a summary of the accounts of a business
enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and the
income statement showing the result of operation during a certain period”
Financial statements include the following statements:
1. Income statement (Trading and Profit and Loss Account) – prepared to ascertain gross
profit/loss and net profit/loss during an accounting period.
2. Statement of Financial Position (Balance Sheet) – prepared to ascertain position (assets,
liabilities and capital) of an enterprise at a particular point of time.
3. Schedules and notes forming part of Balance sheet and Income statement – to give details of
various items shown in both the statements.
These two Financial Statements (Income Statement and Statement of Financial Position) are termed as
‘Final Accounts’.
Objective of Preparing Financial Statements.

1. To present a true and fair view of the financial performance (Profit/Loss) of the business.
2. To present a true and fair view of the financial position (Assets/Liabilities) of the business.

(a) Expenditure:
Whenever there is a payment made for other than settling the existing liabilities it is called
expenditure. On the basis of the nature of this payment expenditure are classified as:
1. Capital Expenditure: These are those non-recurring expenditure benefits ofwhich are extended
to more than one accounting year. For example, Expenditureincurred to purchase machinery, the
benefits of machinery would definitelyextend to more than one accounting year hence this is a
capital expenditure. Capital expenditures are shown on the assets side of the Balance Sheet.
2. Revenue Expenditure: These are those recurring expenditures that are incurred for smooth
conduct of the business benefits of which are extended to only one accounting year. Example,
Salary paid to the employees, advertising expenditures, etc. These are shown on the debit side of
Trading and Profit and Loss Account.

(b) Receipts:
Receipts are the cash inflows that may or may not result in obligation to pay infuture. On the basis
of this nature, receipts can be classified as:
1. Capital receipts: These are that receipt that implies a future obligation to return the money in
future. These are those receipts that are irregular and not received in the normal course of
business. Example: Sale of machinery, Long- term loan taken, Capital brought in by the owner,
etc. These are shown in the balance sheet, either increase in liabilities (Loan taken) or decrease
in assets (Sale of Machinery).
2. Revenue Receipts: These are receipts that do not imply a future obligation to return the money
in future. These are regular receipts that are necessary for operational activities of the business.
Example, Rent received, Interest or commission received, etc. These are shown in the credit
side of the Trading andProfit and Loss Account.

64
 (c) Deferred Revenue Expenditure:
The expenditure which is revenue in nature, but the heavy amount spent and benefit likely to be
derived over a number of years called deferred revenue expenditure e.g. heavy expenses on
advertising on launching of a new product and hence it is capitalized like any fixed asset.
Types of Expenses
Direct Expenses: Those expenses which are incurred on purchasing of goods and for converting the
raw materials into the finished goods e.g. Manufacturing wages, Expenses on purchases (including
all duties and taxes paid on purchases), Carriage/Freight/Cartage inwards, Production expenses (such
as power and fuel, water etc.), factory expenses (e.g. lighting, rent and rates), Royalty based on
Production etc.
Note: All direct expenses are debited to Trading account.
Indirect Expenses: Those expenses which are not directly related to production or purchase of the
goods are called indirect expenses. It includes those expenses which are related to office and
administration, selling and distribution of goods and financial expenses etc.
These expenses are shown on the debit side of the Profit and Loss A/c.
Calculation of Gross Profit
Gross Profit = Net Sales – Cost of Goods Sold
Net Sales= Total Sales – Sales Return.
Cost of goods sold = Opening Stock + Net Purchases + Direct Expenses (Wages, Expenses on
Purchases, Carriage inward etc.) – Closing Stock.
Net Purchases = Total Purchases – Purchases Return
Calculation of Operating Profit
Operating profit = Net sales – Operating cost.
OR = Gross Profit – (Office and Administrative Expenses + Selling and distribution exp.)
Operating Cost = Cost of Goods Sold + Office and Administrative Expenses + Selling and
distribution exp. Net Profit = Operating Profit + Non-operating Income – Non-operating expenses.
Operating expenses: The expenses which are related to the main or normal activities of the business
e.g. office and Administrative expenses, selling and distribution expenses. Operating profit is also
called EBIT (Earnings before interest and taxes).
Income Statement:
It is divided into two parts:
1. Trading Account which shows the gross profit or gross loss.
2. Profit and Loss Account which shows the net profit or net loss.
1. Trading and Profit and Loss Account:
It is the income statement that depicts the profit earned or the loss incurred at the end of the
current accounting year. The net of revenue and expenditure is profit or loss.
Items come under Trading Account:
Items on the debit side:
1. Opening Stock: It is the stock of goods that are in hand at the beginning of the year and is
being carried forward from the previous year.
2. Net Purchases: Goods which are purchased during the year both cash and credit purchases less
goods returned to the suppliers known as Purchase Returns gives Net Purchases.
3. Wages: These are direct wages paid to the factory workers as remuneration.

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 4. Carriage Inwards/ Freight inwards: These are the transportation costs that are incurred for
bringing items to the place of purchase.
5. Fuel/Water/Power/Gas: These are those expenses that are incurred while production of
goods.
6. Packaging Materials and packing charges: These form part of direct expenses for packing and
packaging expenses of goods to be sold.
Items on the Credit Side:
1. Net Sales: It refers to the total sales made during the year both cash and credit sales less the
Sales returns i.e., the goods returned by the customers.
2. Other Incomes: Incomes in the form of Interest received, Commission received, rent received
comes under the credit side of the Profit and Loss Account.
3. Closing Stock: It is the stock of goods that are in hand at the end of the year and is being
carried forward to the upcoming year.
Format of Trading Account:
Name of Business Firm
Trading Account
Particulars Amt.(₹) Particulars Amt.(₹)
To Opening Stock By Sales
To Purchases Less: Returns Inward/Sales Returns
Less: Purchases Returns/Returns outwards By Scrap sales
To All Direct Expenses By Closing Stock
To Wages
To Wages & Salaries By Gross Loss transferred to Profit &
To Carriage of Carriage Inwards or Loss A/c) (Balance figure)
Carriage on purchases
To Direct Expenses
To Gas, Fuel and power
To Freight, Octroi and cartage
To Manufacturing Expenses or
Productive expenses
To Custom or import duty
To Dock and clearing charge
To Excise duty
To Factory rent and lighting
To other direct charges
To Royalty

To Gross Profit transferred to Profit & Loss

A/c)(Balance figure)

Items come under Profit and Loss Account:-

1. Salaries: These are the remuneration paid to administrative, office or godown staff for their
services in the business.
2. Rent Paid: It is the expense of Rent for office, administration building, municipal taxes paid
for running the business.
3. Interest Paid: It is the interest component paid on liabilities, i.e., Interest on loans/debentures,
etc.

66
4. Commission Paid: It is the commission paid to sales agents that are an expense and are debited
to Profit and Loss Account.
5. Repairs: These include the revenue expenditure made on maintenance and repairs of fixed
assets.
6. Miscellaneous Expenses: Some petty or sundry expenses that are so small that cannot come
under one head are clubbed together and are written as miscellaneous expenses.
7. Depreciation: It refers to decrease in the value of asset on account of wear and tear and
passage of time. It is treated as expense and debited to profit and loss account and in the
balance sheet deducted from asset value.
8. Provision for bad debts: It's not possible for the business to know the actual amount of bad
debts; hence we make a reasonable estimate for the loss and provide the loss. It is known as
provision for bad debts.
Formal of Profit & Loss Account Profit & Loss A/c for the Year Ended……
Particulars Amt. (₹) Particulars Amt. (₹)
To Gross Loss By Gross Profit
(Transferred from Trading A/c) (Transferred from Trading A/c)
To Office & Admin. Expenses By Rent Received
To Salaries By Rent (Cr.)
To Rent Rates Taxes
By Discount Received
To Printing and Stationery
By Discount (Cr.)
To Salaries & Wages
To Postages and Telephones By Rebates
To Office Lighting By Commission Received
To Insurance Premium By Interest Received
To Legal Expenses By Dividend Received
To Establishment Expenses By Bad Debts Recovered
To Audit Fees By Apprentice fees or premium
To Trade Expenses By Gain on Sale of Fixed Asset
To Travelling Expenses By Miscellaneous Receipts
To General Expenses By Net Loss (If Dr. side > Cr. side)
To Selling & Distribution Exp. (Transferred to capital Account)
To Carriage and Freight Outwards
By Gross Profit
To Commission
To Brokerage (Transferred from Trading A/c)
To Advertisement By Rent Received
To Publicity By Rent (Cr.)
To Bad Debts By Discount Received
To Export Duty By Discount (Cr.)
To Packing Expenses By Rebates
To Salaries of Salesman By Commission Received
To Delivery Van Expenses By Interest Received
To Financial Exp. By Dividend Received
To Interest paid on loans
By Bad Debts Recovered
To Interest (Dr.)
By Apprentice fees or premium
To Discounts (Dr.)
To Rebate Allowed By Gain on Sale of Fixed Asset
To Bank Charges By Miscellaneous Receipts
To Miscellaneous Exp.
To Repairs
By Net Loss (If Dr. side > Cr. side)
To Depreciation on Fixed Assets
To Conveyance Expenses (Transferred to capital Account)
To Entertainment Expenses
To Donations & Charity
To Loss on Sale of Fixed Assets
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To Stable Expenses
To Loss by Fire
To Loss by theft
To Unproductive Expenses

To Net Profit Transferred to Capital

Account
(If Cr. side > Dr, side)

 The words ‘To’ and ‘By’ are generally not used these days.
 The name of Business Firm is stated on the top of trading & P & L A/c.
Balance Sheet:
Meaning of Balance Sheet
Balance sheet is a summarised statement of assets and liabilities, prepared generally at the end of
financial year to show the financial position of the business. All liabilities are put on the lef hand side
of balance sheet where all assets are shown on its right hand side.
Items comes under Balance Sheet:
1. Current Assets: These are those assets that can be liquefied in cash easily i.e., they can be
converted to cash within one year. For ex- Debtor, Bills receivables,Cash, Bank etc.
2. Current Liabilities: These are those liabilities that are paid within a period of one year. Such
as Creditors, Bills payable, outstanding expenses etc.
3. Fixed Assets: These are those long-term assets that are not easily liquefied into cash and are
kept in business for a longer period of time like, plant and Machinery.
4. Intangible Assets: These are those assets that are not tangible in nature i.e., they cannot be seen
or touched like goodwill, trademark, etc.
5. Investments: These are the investments made in the securities of government or other
businesses. They are generally represented at Cost price.
6. Long-term liabilities: These are those liabilities that are payable after one year such as long-
term bank loan, long-term debentures.
7. Capitals: It is the amount brought in by the owner. It is the difference of liabilities due to
outsiders from assets.
8. Drawings: These are the amounts withdrawn by the proprietor or the owner for personal use
that reduce the amount of capital.
9. Closing Stock: It is the stock of goods that are in hand at the end of the year andis being carried
forward to the upcoming year.

Grouping and Marshalling of Assets and Liabilities:

Grouping: The term ‘Grouping’ means putting together items of a similar nature under a common
heading. For example, under the heading ‘trade Creditors’ the balances of the ledger accounts of all
the suppliers from whom goods have been purchased on credit, will be shown.

Marshalling: It refers to the order in which the various assets and liabilities are shown in the Balance
Sheet. The assets and liabilities can be shown either in the order of liquidity or in the order of
permanence.
Order of Liquidity:
1. The assets are arranged in the order of their liquidity i.e., the most liquid asset (e.g., cash-in-hand),
is shown first. The least liquid asset (e.g., goodwill) is shown last.
2. The liabilities are arranged in the order of timing i.e., the liabilities which are to be paid
immediately {e.g., Creditors) are shown first and which are to be paid later are shown at last (long-
term loans).
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 A general format of a Balance Sheet in order of liquidity is shown below:
Balance Sheet of ……….As at………….
Liabilities Amt. (₹) Assets Amt. (₹)
Current Liabilities: Current Assets:
Bank Overdraft Cash-in hand
Bills Payable Cash at Bank
Sundry Creditors Bills Receivable
Outstanding Expenses Short Term Investment
Income received-in-advance Sundry Debtors
Long-term Liabilities: Prepaid Expenses
Long term loan Accrued Income
Reserve and Surplus Closing Stock
Capital: Investment: (Long term)
Add : Interest on Capital Fixed Assets:
Add : Net Profit Furniture and Fixtures
Less : Drawings Plant & Machinery
Less : Interest on Drawings Building
Less : Income Tax Land
Less : Life Insurance Premium Goodwill
Less : Net Loss

Order of Permanence: This order is exactly reverse of the liquidity order

1. The assets are arranged in the order of their permanence i.e., the least liquid asset (e.g., goodwill)
is shown first and the most liquid asset (e.g., Cash-in-hand) is shown last.
2. The least urgent payment to be made (e.g., short-term creditors) is shown last.
3. A company is required to prepare the balance sheet in the order of permanence.

A general format of a Balance Sheet in the order of performance is shown below:

Balance Sheet of …………As at………….
Liabilities Amt. (₹) Assets Amt. (₹)
Capital: Fixed Assets:
Opening Balance XX Good will
Add: Net Profit XX Land
(Less: Net Loss) Building
Less: Drawings XX Plant & Machinery
Long-term Liabilities: Furniture & Fixtures
Long term loan Investment: (long term)
Current liabilities: Current Assets:
Income received-in-advance Closing stock
Outstanding Expenses Accrued income
Sundry Creditors Prepaid expenses
Bills Payable Sundry Debtors
Bank Overdraft Bills Receivable
Cash at Bank
Cash in Hand

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Illustration: 1
From the following information prepare Trading and Profit and Loss Account andBalance Sheet for
the year ended 31st March, 2021.

Heads of Accounts Amt. (₹) Heads of Accounts Amt. (₹)

Capital 7,20,000 Salaries 1,20,000
Machinery 1,40,000 General Expenses 40,000
Sales 16,40,000 Rent 1,00,000
Purchases 8,00,000 Purchases Return 10,000
Sales Return 20,000 Debtors 6,00,000
Opening Stock 2,00,000 Cash 80,000
Drawings 80,000 Carriage Outwards 40,000
Wages 2,00,000 Advertising 40,000
Carriage Inwards 10,000 Creditors 1,00,000
Closing Stock was valued at ₹ 4, 00,000.
Solution:
Dr. Trading and Profit and Loss Account for the year ended 31st March, 2021 Cr.
Particulars Amt. (₹) Particulars Amt. (₹)
To Opening Stock 2,00,000 By Closing Stock 4,00,000
To Purchases 8,00,000 By Sales 16,40,000
Less: Purchase Returns (10,000) 7,90,000 Less: Sales Return 20,000 16,20,000
To Wages 2,00,000
To Carriage Inwards 10,000
To Gross Profit c/d 8,20,000
20,20,000 20,20,000
To Salaries 1,20,000 By Gross Profit b/d 8,20,000
To General Expenses 40,000
To Rent 1,00,000
To Carriage outwards 40,000
To Advertising 40,000
To Net Profit (trf. to capital A/c) 4,80,000

8,20,000 8,20,000

Balance Sheet as t 31st March, 2021

Liabilities Amt. (₹) Assets Amt. (₹)
Capital 7,20,000 Fixed Assets:
Less: Drawings (80,000) Machinery 1,40,000
Add: Net Profit 4,80,000 11,20,000 Current Assets:
Current Liabilities: Debtors 6,00,000
Creditors 1,00,000 Cash 80,000
Closing Stock 4,00,000

12,20,000 12,20,000

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Practice Questions:
Q1. Calculate Closing Stock from the following details:
Opening Stock ₹ 40,000; Cash Sales ₹ 1, 20,000; Credit Sales ₹ 80,000;
Purchase ₹ 1, 40,000; Carriage Outward ₹ 20,000. Rate of Gross Profit on cost 331/3 %.

Q2. Calculate Opening Stock from the following details:

Cash Sales ₹ 40,000; Credit Sales ₹ 1,65,000; Purchase ₹ 1,24,000;
Carriage Inward ₹ 8,000; Closing Stock ₹ 36,000; Sales Return (out of Credit Sales)
₹ 5,000; Purchases Return ₹ 4,000. Rate of Gross Profit on Sales 40%.

Q3. Prepare the Trading and Profit & Loss account and Balance Sheet of M/s Mohit Traders as on 31 st
March 2021 from the given Trail Balance:
Debit Balances Amt (₹) Credit Balances Amt (₹)
Opening stock 24,000 Sales 4,00,000
Purchases 1,60,000 Return outwards 2,000
Cash in hand 16,000 Capital 1,50,000
Cash at bank 32,000 Sundry creditors 64,000
Return inwards 4,000 Bills payable 20,000
Wages 22,000 Commission received 4,000
Fuel and Power 18,000
Carriage Inward 6,000
Insurance 8,000
Building 1,00,000
Plant 80,000
Patents 30,000
Salaries 28,000
8% Loan to Mr. Xing (01-12-2020) 12,000
Drawings 18,000
Rent 2,000
Debtors 80,000
6,40,000 6,40,000

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 Ch - 19: Adjustments in Preparation of Financial Statements

Adjustment in preparation of financial statements of Sole-proprietor:

Meaning of Adjustment entries: Those entries which need to be passed at the end of the accounting
year to show the accurate profit or loss and fair financial position of the business.

Need of Adjustment: There are number of transactions that may not find the place in the Trial
Balance due to any reason such as Closing Stock (because it is valued at the end of the year),
Manager’s Commission based on Net profits (because its calculation requires preparation of Income
Statement first). These transactions can only be taken into account by passing Adjustment entries so
that their impact on the profitability and financial position can be shown.

1. Closing Stock: the closing stock represents the cost of unsold goods lying in the stores at the end
of the accounting period.

2. Outstanding Expenses: When expenses of an accounting period remain unpaid at the end of an
accounting period, they are termed as outstanding expenses.
As they relate to the earning of revenue during the current accounting year, it is logical that they
should be duly charged against the revenue for computation of the correct amount of profit or loss.

3. Prepaid Expenses: At the end of the accounting year, it is found that the benefits of some expenses
have not yet been fully received; a portion of its benefit would be received in the next accounting
year. This portion of expenses, is carried forward to the next year and is termed as prepaid expenses.

4. Accrued Income: It may sometime happen that certain items of income such as a interest on loan,
commission, rent, etc. are earned during the current accounting year but have not been actually
received by the end of the same year. Such incomes are known as accrued income. .

5. Income Received in Advance: Sometimes, a certain income is received but the whole amount of it
does not belong to the current period. The portion of the income which belongs to the next accounting
period is termed as income received in advance or an Unearned Income.

6. Depreciation: It is the decline in the value of assets on account of wear and tear and passage of
time. It is treated as a business expense and is debited to profit and loss account.
This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the
business for the purpose of earning profits.
Closing Stock Closing Stock A/c Dr. (i) Credit side of Trading A/c.
To Trading A/c (ii) Show on the assets side of Balance sheet.
Outstanding/Unpaid Expenses A/c Dr. (i) Add to the concerned item on the Debit side
Expenses To Outstanding Expenses A/c of Trading/Profit & Loss A/c.
(ii) Shown on the liabilities side of Balance
sheet.
Prepaid Prepaid Expenses A/c Dr. (i) Deduct from the concerned expenses on the
expenses/Unexpired To Expenses A/c debit side of Profit & Loss A/c
expenses (ii) Show on the assets side of Balance sheet.
Accrued income/ Accrued Income A/c Dr. (i) Add to the concerned income on Credit side
Income due but not To Income A/c of Profit and Loss A/c
received (ii) Show on the assets side of Balance sheet.
Unearned Income A/c Dr. (i) Deduct from the concerned income on the
income/Income To Unearned Income A/c credit side of Profit & Loss A/c
received in Advance (ii) Show on the liabilities side of Balance
Sheet.
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Depreciation Depreciation A/c Dr. (i) Show on the debit side of Profit Loss A/c
To Asset A/c (ii) Deduct from the concerned asset in the
Balance Sheet.

7. Bad Debts: The debtors from whom amounts cannot be recovered are treated in the books of
accounts as bad and are termed as bad debts.

8. Further Bad Debts: These Bad debts is a loss that occurred after reparation of Trial Balance.
Further bad debts be added in the bad debts already appearing in the Profit and Loss A/c and Debtors
would be reduced with the same amount.
9. Provision for Bad Debts: In the balance sheet, debtors appears on the assets side of the Balance
Sheet, which is their estimated realisable value during next year. It is quite possible that the whole of
the amount may not be realized in future. However it is not possible to accurately know the amount of
such bad debts.
Hence, a reasonable estimate of such loss is provided in the book. Such provision is called provision
for bad debts. Provision for doubtful debts is shown as a deduction from the debtors on the asset side
of the balance sheet.
Note : The provision for doubtful debts brought forward from the previous year is called the opening
provision or old provision. When such a provision already exists, the loss due to bad debts during the
current year are adjusted against the same and while making provision for doubtful debts required at
the end of the current year is called new provision. The balance of old provision as given in trial
balance should also be taken into account.
10. Provision for discount on Debtors: Discount is allowed to customers to encourage them to make
prompt payment. The discount likely to be allowed to customers in an accounting year can be
estimated and provided for by creating a provision for Discount on debtors.
Provision for discount on debtors is made on good debtors which are arrived at by deducting further
bad debts and provision for bad debts out of Debtors shown in the Balance sheet.
To write off bad Bad Debts A/c Dr. (i) Debit side of P&L A/c.
debts To Debtors (ii) Deduct from debtors on the as-
sets side of Balance Sheet.
Provision for bad Prov. for Doubtful Debts A/c Dr. (i) Debit side of P & L A/c.
and doubtful debts To Debtors A/c (ii) Deduct from debtors on the assets
side of Balance Sheet.
Provision for P & L A/c Dr. (i) Debit side of P & L A/c.
discount on debtors To Prov. for Discount on Debtors A/c (ii) Deduct from debtors on the assets
side of Balance Sheet.

11. Manager’s Commission:

The manager of the business is sometimes given the commission on the net profit of the company.
The percentage of the commission is applied on the profit either before charging such commission or
after charging such commission. In the absence of any such information, it is assumed that
commission is allowed as a percentage of the net profit before charging such commission.
1. Commission on net profits before charging such commission
Commission =Net profit before Commission × Percentage of Commission
100

2. Commission on net profits after charging such commission

Commission =Net profit before Commission × Percentage of Commission
100 + Percentage of Commission

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Interest on Capital Interest on Capital A/c Dr.
(i) Debit side of P & L A/c.
To Capital A/c (ii) Add to capital on the liabilities side
of Balance Sheet.
Interest on drawings Capital/Drawings A/c Dr. (i) Credit side of P & L A/c.
To Interest on Drawings A/c (ii) Deduct from capital on the
liabilities side of Balance Sheet.
Interest payable on Interest on Loan A/c Dr. (i) Debit side of P & L A/c.
loan (borrowed) To Loan A/c (ii) Add to loan on the liabilities side of
Balance Sheet.
Commission payable P& L A/c Dr. (i) Debit side of P & L A/c.
to manager To Comm. Payable to Manage A/c (ii) Show on the liabilities side of
Balance Sheet.

12. Adjustment in Respect of Goods:

Abnormal Loss: Sometimes losses occur due to some abnormal circumstances such as accident, fire,
flood, earthquakes etc. Such losses are called Abnormal losses. These may be divided into two
categories:-
(A) Loss of Goods (B) Loss of fixed assets.

Good taken for personal use (Drawings in goods): When the goods are withdrawn by proprietor for
personal use the cost of such goods deduct from purchases and the amount should be deduct from
capital in Balance Sheet.

Goods distributed as free samples: Sometime goods are distributed as free sample by the
businessman for the purpose of advertisement. The cost of free sample deduct from purchase and
shown in Debit side of profit and loss account.

Abnormal loss of goods by fire, theft, accident, etc.

Adjustment Treatment in Trading & P & L A/c Treatment in Balance Sheet
1) Loss of Goods (By 1) Loss of … A/c Dr. (i) Gross Loss: Deduct from Purchases
accident, Fire, Theft) To Trading A/c or show on the credit side of Trading
(or) A/c.
To Purchases A/c
If goods were note 2) P & L A/c Dr. (ii) Net Loss: Debit side of P&L A/c.
insured To Loss by …… A/c
If goods were insured 2) Insurance company A/c Dr. (iii) Insurance claim: Assets side of
and full claim accepted To Loss by … A/c Balance Sheet.
by insurance company
If full claim not 2) Insurance Company A/c Dr.
accepted by Insurance Profit & Loss A/c Dr.
Company To Loss By …. A/c
2) Goods taken by the Drawings A/c Dr. (i) Deduct the amount of goods from
proprietor for his To Purchases A/c the purchases in Trading A/c.
personal use (ii) Deduct the amount from the capital
on the liabilities side of Balance Sheet.
3) Goods distributed as Advertising A/c Dr. (i) Deduct the amount of goods from
free samples To Purchases A/c the purchases in Trading A/c.
(ii) Show on the debit side of P&LA/c.
4) Goods given as Charity A/c Dr. (i) Deduct the amount from the
charity To Purchases A/c purchases on the debit side of Trading
A/c.
(ii) Show on the debit side of P&L A/c.

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 Key Points:
1. If closing stock is shown in Trial Balance then it will be shown in balance sheet only. It is assumed
that purchases amount already gets adjusted in trial balance.
2. Salary and wages will be shown in profit and loss A/c debit side (assuming that salary is
prominent) while wages and salary will be shown in trading A/c debit side, (wages are prominent).
3. Freight, carriage, cartage will be shown in Dr. side of trading A/c. if inward word attached with
these then it also debited to trading A/c, if outward word attached with these item then it will be
debited to profit and loss account.
4. Any expenses related to factory are debited to trading account like factory lighting, factory rent if
factory word is not given then lighting and rent will be debited to profit and loss account.
5. Trade expenses always debited to profit and loss A/c not as name indicate trading A/c.
6. Packaging material: Cost of packaging material used in product are direct expenses as it refers to
small containers which form part sold, it will debited to trading A/c.
7. Packing: the packing refers to the big containers that are used for transporting the goods and
regarded as indirect expenses and debited to profit and loss account.
8. Adjusted purchases mean the amount of purchases is adjusted by way of adding opening stock and
reduced by the amount of closing stock, e.g., purchases ₹ 1,00,000; opening stock ₹ 12,000, closing
stock ₹ 8,000. Calculate adjusted purchases.
Adjusted Purchases = Purchases + Opening stock – Closing stock
= ₹ 1, 00,000 + ₹ 12,000 – ₹ 8,000 = ₹ 1, 04,000.
When adjusted purchases is given in trail balance, then there is no need of debiting opening stock
and crediting closing stock in trading A/c.
In this case closing stock will be shown in balance sheet only.
Remember:-
While preparing Final Accounts the items which are given inside the Trial Balance are written only
once either in Income Statement or in the Balance Sheet. (Assuming that they have been already
adjusted in the respective account). On the other hand, the items which are given outside the Trial
Balance (known as adjustment) are to be written twice because the double entry in respect of all
adjustments is to be completed in the final accounts itself.
Illustration: 1
From the following information prepare Trading and Profit and Loss Account and Balance Sheet for
the year ended 31st March, 2021.
Heads of Accounts Amt. (₹) Heads of Accounts Amt. (₹)
Capital 7,20,000 Salaries 1,20,000
Machinery 1,40,000 General Expenses 40,000
Sales 16,40,000 Rent 1,00,000
Purchases 8,00,000 Purchases Return 10,000
Sales Return 20,000 Debtors 6,00,000
Opening Stock 2,00,000 Cash 80,000
Drawings 80,000 Carriage Outwards 40,000
Wages 2,00,000 Advertising 40,000
Carriage Inwards 10,000 Creditors 1,00,000

Adjustments:
(a) Closing Stock was valued at ₹ 4, 00,000.
(b) Outstanding salaries amounting to be ₹ 20,000
(c) Rent includes prepaid rent of ₹ 30,000.

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(d) Bad debts amount to ₹ 50,000.

Ans: Trading and Profit and Loss Account for the year ended 31st March, 2021

Particulars Amt. (₹) Particulars Amt. (₹)

To Opening Stock 2,00,000 By Sales 16,40,000
To Purchases 8,00,000 Less: Sales Return (20,000) 16,20,000
Less: Purchase Returns (10,000) 7,90,000 By Closing Stock 4,00,000

To Wages 2,00,000
To Carriage Inwards 10,000
To Gross Profit c/d 8,20,000
20,20,000 20,20,000
To Salaries 1,20,000
Add: Outstanding Salary (20,000) By Gross Profit b/d 8,20,000
1,40,000
To General Expenses 40,000
To Rent 1,00,000
Less: Prepaid Rent (30,000) 70,000
To Carriage outwards 40,000
To Advertising 40,000
To Bad Debts 50,000
To Net Profit (trf to Capital A/c) 4,40,000
8,20,000 8,20,000

Balance Sheet as at 31st March, 2021

Liabilities Amt. (₹) Assets Amt. (₹)

Capital 7,20,000 Fixed Assets:
Less: Drawings (80,000) Machinery 1,40,000
Add: Net Profit 4,40,000 10,80,000 Current Assets:
Current Liabilities: Debtors (6,00,000-50,000) 5,50,000
Creditor 1,00,000 Cash 80,000
Outstanding Salary 20,000 Closing Stock 4,00,000
Prepaid rent 30,000
12,00,000 12,00,000

Practice Questions:
Q1. Prepare Trading and Profit & Loss Account for the year ended 31st March, 2022 and Balance
Sheet as at that date from the following Trial Balance.
Heads of Accounts Dr. (₹) Cr. (₹)
Capital --- 1,00,000
Cash 15,000 ---
Bank Overdraft --- 20,000
Purchases and Sales 1,20,000 1,50,000

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Returns 10,000 20,000
Establishment Expenses 22,000 ---
Taxes and Insurance 5,000 ---
Bad Debts and Bad-debt Provision 5,000 7,000
Debtors and Creditors 50,000 20,000
Commission --- 5,000
Deposits 40,000 ---
Opening Stock 30,000 ---
Drawings 14,000 ---
Furniture 6,000 ---
B/R and B/P 30,000 25,000
3,47,000 3,47,000

Adjustments:
1. Salaries ₹ 1,000 and taxes ₹ 2,000 are outstanding but insurance ₹ 500 is prepaid.
2. Commission ₹ 1,000 is received in Advance for next year.
3. Interest ₹ 2,100 is to be received on Deposits & Interest on Bank Overdraft ₹ 3,000 is to be paid.
4. Bad-debts provision is to be maintained at ₹ 10,000 on Debtors.
5. Depreciate furniture by 10%.
6. Stock on 31st March, 2022 was valued at ₹ 45,000.
Q2. Prepare Trading and Profit & Loss Account for the year ended 31st March, 2022 and Balance
Sheet as at that date from the following Trial Balance.
Heads of Accounts Dr. (₹) Cr. (₹)
Capital --- 50,000
Drawings 10,000 ---
Debtors and Creditors 24,000 16,000
6% Loan --- 10,000
Interest on Loan 300 ---
Cash 3,000 ---
Provision for Bad debt --- 1,000
Wages 6,000 ---
Opening Stock 16,700 ---
Computer 10,000 ---
Bank 7,500 ---
Furniture 20,000 ---
Carriage Outward 4,500 ---
Carriage inward 5,000 ---
Salaries 12,000 ---
Rent 8,000 ---
Bad Debts 600 ---
Purchases and Sales 60,000 1,16,000
Returns 2,000 1,000
Advertising 4,500 ---
Discount --- 2,600
Insurance Premium 2,000 ---
B/R and B/P 10,000 8,000
Commission --- 1,500

2,06,100 2,06,100

77
Adjustment:
a) Depreciate furniture by 5% and Computer10%.
b) Salaries Outstanding by ₹ 1,200.
c) Insurance Premium is paid for the year ending 30th June 2022.
d) Wages have been paid upto 30th June, 2022.
e) Provision for bad debts is to be maintained at 5% on Debtors. .
f) Stock on 31st March, 2022 was valued at ₹ 19,400.

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78
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