UNIT -V: Introduction to financial accounting, rules of debit-credit, Double-Entry Book Keeping, Journal, Ledger, Trial Balance- Final

Accounts
(Trading Account, Profit and Loss Account and Balance Sheet) with simple adjustments, Preparation of final account and other related accounting
statements.

INTRODUCTION TO FINANCIAL ACCOUNTING

 Meaning of Accounting:

The main purpose of accounting is to ascertain profit or loss during a specified period, to show financial
condition of the business on a particular date and to have control over the firm's property. Such accounting records are
required to be maintained to measure the income of the business and communicate the information so that it may be used
by managers, owners and other interested parties.
Accounting is a discipline which records, classifies, summarizes and interprets financial information
about the activities of a concern so that intelligent decisions can be made about the concern.

 Definition:
The American Institute of Certified Public Accountants (AICPA) has defined the Financial Accounting
as " the art of recording, classifying and summarizing in a significant manner and in terms of money
transactions and events which are, in part at least of a financial character, and interpreting the results
thereof ".

 Objectives of Accounting: The following are the main objectives of accounting:

1. To Maintain Systematic Record: It is quite essential to keep a systematic record of business transactions to judge the
performance of a business. The memory of a human being is very limited. It is not possible for him to remember all
his business transactions. So, there should be a systematic record of business transactions.

2. To Ascertain profit or loss of the Business: Business is run to earn profits. Whether the business earned profit or
incurred loss is ascertained by accounting by preparing Profit & Loss Account or Income Statement. The profit-and-
loss account gives the amount of profit earned or loss incurred by the businessman during a particular period.

3. To depict financial position of the business: A businessman is also interested in ascertaining his financial position at
the end of a given period. For this purpose, a position statement called Balance Sheet is prepared in which assets and
liabilities are shown.

Just as a doctor will feel the pulse of his patient and know whether he is enjoying good health or not, in
the same way by looking at the Balance Sheet one will know the financial health of an enterprise. If the assets exceed
liabilities, it is financially healthy, i.e., solvent. In the other case, it would be insolvent, i.e., financially weak.
4. To Make Information Available to Various Groups and Users: The officers and staff (Management) of an
enterprise need useful and timely information for making different types of business decisions. A major objective of
accounting is to provide management with relevant and reliable information. For example, some of the questions a
management might ask are:

• How much profit did the company make during the last accounting period?
• What is the cost of manufacturing each product?
• Which costs exceed the budget?
• How much money should be borrowed to expand the business?
Apart from the management, accounting makes the information available to all the individuals, groups
and organizations who are interested on performance and earning power of a business enterprise.
 5. To Meet Legal Requirements: Another objective of accounting is to devise such a system as will meet the legal
requirements. The provisions of various laws such as the companies act, income tax act, etc., require the submission
of various statements like income tax returns, annual accounts and so on. Accounting system aims at fulfilling this
requirement of law.

 Branches of Accounting:
Different branches of accounting came into existence keeping in view various types of accounting
information needed by a different class of people viz. owners, shareholders, management, suppliers, creditors, taxation
authorities and various government agencies, etc. There are three main branches of accounting which include:

i) Financial Accounting
ii) Cost Accounting and
iii) Management accounting
1. Financial accounting: The object of financial accounting is to ascertain the results (profit or loss) of business
operations during the particular period and to state the financial position (balance sheet) as on a date at the end of the
period.

2. Cost accounting: The object of cost accounting is to find out the cost of goods produced or services rendered by a
business. It also helps the business in controlling the costs by indicating avoidable losses and wastes.
3. Management accounting: The object of management accounting is to supply relevant information at appropriate
time to the management to enable it to take decisions and effect control.

 Accounting Functions: In order to accomplish its main objective of communicating information to the users,
accounting embraces the following functions.
a. Identifying: Identifying the business transactions from the source documents.
b. Recording: The next function of accounting is to keep a systematic record of all business transactions, which are
identified in an orderly manner, soon after their occurrence in the journal or subsidiary books.
c. Classifying: This is concerned with the classification of the recorded business transactions so as to group the
transactions of similar type at one place i.e., in ledger accounts. In order to verify the arithmetical accuracy of the
accounts, trial balance is prepared.
d. Summarizing: The classified information available from the trial balance is used to prepare profit and loss account
and balance sheet in a manner useful to the users of accounting information.
e. Analyzing: It establishes the relationship between the items of the profit and loss account and the balance sheet. The
purpose of analyzing is to identify the financial strength and weakness of the business. It provides the basis for
interpretation.
f. Interpreting: It is concerned with explaining the meaning and significance of the relationship so established by the
analysis. Interpretation should be useful to the users, so as to enable them to take correct decisions.
g. Communicating: The results obtained from the summarized, analyzed and interpreted information are communicated
to the interested parties.

 Generally Acceptable Accounting Principles (GAAP):

Rules and guidelines used in preparing accounting reports is termed as
Generally Accepting Accounting Principles. In order to maintain uniformity and consistency in preparing and maintaining
books of accounts, certain rules or principles have been evolved. These rules/principles are classified in to two categories.
They are Accounting Concepts and Accounting Conventions.
 Accounting Principles

Accounting Concepts Accounting Conventions

• Business Entity Concept
• Going Concern Concept • Consistency
• Money Measurement Concept • Full Disclosure
• Cost Concept
• Conservatism
• Dual Aspect Concept
• Realization Concept • Materiality
• Accrual Concept
• Accounting Period Concept
• Matching Concept

I. Accounting Concepts: Accounting concept refers to the basic assumptions and rules and principles which work as
the basis of recording of business transactions and preparing accounts.

▪ Business Entity Concept: This concept assumes that, for accounting purposes, the business enterprise and its
owners are two separate independent entities. Thus, the business and personal transactions of its owner are
separate. For example, when the owner invests money in the business, it is recorded as liability of the business to
the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not
treated as business expense. Thus, the accounting records are made in the books of accounts from the point of
view of the business unit and not the person owning the business.
This concept helps in ascertaining the profit of the business as only the business expenses and revenues
are recorded and all the private and personal expenses are ignored.

▪ Going Concern Concept: It is assumed that the business will be continuing for a long time. This is an important
assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet. According
to this concept recording the actual value of asset. Although the market value of that asset is high does not take
into account.

▪ Money Measurement Concept: According to this concept all transactions should record in books in terms of
money instead of their measurements like meters, liters, kilos, pieces etc.
▪ Cost Concept: According to this concept an asset is record in the books of accounts at its purchase price, which
includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets
like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them.
▪ Dual Aspect Concept: Dual aspect is the foundation or basic principle of accounting. It provides the very basis
of recording business transactions in the books of accounts. According to this concept every business transaction
has two aspects:
▪ Receiving the benefit.
▪ Giving of equal benefit.
While recording the transactions in the accounting books these two aspects should take into account.
For example, goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods.
These two aspects are to be recorded.
▪ Realization Concept: According to this concept unearned/unrealized revenues should not be taken into account.
In other words, it states that revenue from any business transaction should be included in the accounting records
only when it is realized. The term realization means creation of legal right to receive money. Selling goods is
realization, receiving order is not.
 ▪ Accrual Concept: The meaning of accrual is something that becomes due especially an amount of money that is
yet to be paid or received at the end of the accounting period. It means that revenues are recognized when they
become receivable. Though cash is received or not received and the expenses are recognized when they become
payable though cash is paid or not paid. Both transactions will be recorded in the accounting period to which
they relate.
▪ Accounting Period Concept: As the life of the business unit is assumed to be infinite, we have to wait to know
the result of the business (profit or loss) till an infinite period or liquidation. Waiting for such a long period is
ridiculous. Therefore, accounting period concept is introduced by splitting the longevity of the business into a
shorter and convenient period, say, 12 months duration based on the convenience of the business unit. However,
to facilitate uniformity in assessment, the tax laws suggest the accounting period between April 1 st and March
31st (12 months).
▪ Matching Concept: This concept seeks to establish a causal relationship between revenue and expenses as they
are the basic factors considered for ascertaining the profit or loss of the business unit. The main text of this
concept is that the revenue earned during the current period and the expenses incurred during the same period
should be considered (matched) to ascertain the result of the business unit.

II. Accounting Conventions: An accounting convention refers to common practices which are universally followed in
recording and presenting accounting information of the business entity. They are followed like customs, tradition, etc. in a
society. The most important conventions which have been used for a long period are:
▪ Consistency: According to this concept it is essential that accounting procedures, practices and method should
remain unchanged from one accounting period to another. This enables comparison of performance in one
accounting period with that in the past. If different accounting procedures and practices are used for preparing
financialstatementsof differentyears,then the result will not be comparable.
For e.g. If material issues are priced on the basis of FIFO method the same basis should be followed
year after year. Similarly, if depreciation is charged on fixed assets according to diminishing balance method it
should be done in subsequent year also.
▪ Full Disclosure: Convention of full disclosure requires that all material and relevant facts concerning financial
statements should be fully disclosed. Full disclosure means that there should be full, fair and adequate disclosure
of accounting information. Adequate means sufficient set of information to be disclosed. Fair indicates an
equitable treatment of users. Full refers to complete and detailed presentation of information. Thus, the
convention of full disclosure suggests that every financial statement should fully disclose all relevant financial
information to all interested parties like investors, lenders, creditors, shareholders etc.
▪ Conservatism: This is the policy of playing safe game. According to this convention financial statements are
usually drawn up on a conservative basis, anticipated profits are ignored but anticipated losses are taken into
account while drawing the statements.

The main objective of this convention is to show minimum profit. Profit should not be overstated. If
profit shows more than actual, it may lead to distribution of dividend out of capital. This is not a fair policy and it
will lead to the reduction in the capital of the enterprise.
▪ Materiality: According to this convention immaterial amounts may be aggregated with the amounts of a similar
nature or function and need not be presented separately in the accounting books. Materiality depends on the size
and nature of the item
For Example:

→ Small payments such as postage, stationery and cleaning expenses should not be disclosed separately. They
should be grouped together as sundry expenses.
 → The cost of small-valued assets such as pencil, sharpeners, calculator and paper clips should be written off to
the profit and loss account as revenue expenditures, although they can last for more than one accounting
period.

 Users of Accounting Information:

There are many different users of accounting information and the users may be inside or outside the
organization. Accounting information is economic information, as it relates to financial or economic activities of a
business organization. The users may be classified into Internal and external users.

A. Internal users: Internal users of accounting information are persons related to the organisation itself.
▪ Management- Management may consist of top management (i.e., CEOs, CFOs, BODs, GM,) of the company,
Middle Management (i.e., Purchase Manager, Sales Manager, Marketing Manager, Department Head) and
Lower Level Management (i.e., Supervisors, Forman, Clerks). Accounting information is of great assistance to
management for planning, controlling and decision-making process. Also, management needs the accounting
information to evaluate the performance of the organization and position, so that the necessary measures may be
taken to bring improvements in terms of business results. Besides, accounting information is useful to help
mangers to do their jobs better.

▪ Employees - Employees use the accounting information to find out the financial health, amount of sales and
profitability of business to determine their job security, the possibility of future remuneration, retirement benefits
and employment opportunities.

▪ Owners – Owners may consist of shareholders, partners and proprietors. Owners use the accounting information
for analyzing the viability and profitability of their investments. Accounting information enables the owners to
assess the ability of the business organization to pay dividends. It also leads them to determine any future course
of action.

B. External users:

▪ Creditors – Creditors means supplier of goods and services on credit, banks and lenders of money who want to
know the financial position of a concern before providing loans or granting credit. They need accounting
information relating to current assets, quick assets and current liabilities which is available in the financial
statements.
▪ Investors – Those who want to invest money in an organization want to know the financial health of the
organization. They need accounting information which will help them in evaluating past performance and future
prospects of the organization.
▪ Customers – Customers have interest in the accounting information for assessing the financial position of a
business, especially, when they have a long-term involvement with, as it enables to maintain a steady source of
business.
▪ Government and Regulatory Authorities - They want to know how much money a company made in order to
know how much taxes the company should be paying. This is a vital part of our economy, and even though we
don't always like it, paying taxes is what keeps our world spinning.
Various Government departments such as Company law department, Reserve Bank of India, Registrar
of Companies etc. require information to be filed with them under law. By examining this accounting
information, they ensure that concerned companies are following the rules and regulations.
▪ Research Scholars - Accounting information helps research scholars who want to make a study into the
financial operation of a particular firm.
 Advantages of Accounting:

▪ Maintenance of Business Records: It records all the financial transaction pertaining to the respective year
systematically in the books of accounts. It is not possible for management to remember each and every transaction
for a long time due to their size and complexities.

▪ Preparation of Financial Statements: Financial statements like Trading and profit and loss account, Balance
Sheet can be prepared easily if there is a proper recording of transactions. Proper recording of all the financial
transactions is very important for the preparation of financial statements of the entity.
▪ Comparison of Results: It facilitates the comparison of the financial results of one year with another year easily.
Also, the management can analyze the systematic recording of all the financial transactions according to
the policies of the entity.
▪ Decision Making: Decision making becomes easier for management if there is a proper recording of financial
transactions. Accounting information enables management to plan its future activities, make budgets and
coordination of various activities in various departments.

▪ Evidence in Legal Matters: The proper and systematic records of the financial transactions act as evidence in the
court of law.
▪ Provides Information to Related Parties: It makes the financial information of the organization available to
stakeholders like owners, creditors, employees, customers, government etc. easily.
▪ Helps in Taxation Matters: Various tax authorities like income tax, indirect tax depends on the accounts
maintained by the management for settlement of taxation matters.
▪ Valuation of Business: For proper valuation of an entity’s business accounting information can be utilized. Thus, it
helps in measuring the value of the entity by using the accounting information in the case of sale of the entity.

 Disadvantages of Accounting:

▪ Does Not Records All Events: Accounting does not record all events. Only financial transactions that can be
measured in monetary terms are recorded in accounting systems. This means that many important non-financial
events, such as changes in customer satisfaction or employee morale, are not captured in financial statements.

▪ Does Not Reflect Current Value: Traditional accounting practices often focus on the historical cost and
depreciation, which means financial statements may not capture the current market value of assets, leading to
potential gaps between what’s recorded in the books and what those assets are worth today.

▪ Estimates Based on Personal Judgement: Another disadvantage of accounting is that it is based on estimates.
This is because many financial transactions cannot be measured with complete certainty at the time of recording.
Example, if a business estimates that a machine will last 10 years but it actually lasts only 5 years, the company
would have understated its depreciation expenses for the first few years, inflating profits.

▪ Omission: Omission is a significant accounting disadvantage because it can lead to incomplete records,
inaccurate financial statements, and potential regulatory issues. For example, A company makes a sale of $5,000
but fails to record it. At the end of the year, the financial statements will show lower revenue than the actual
amount, leading to incorrect profit calculations.

▪ Manipulation of Accounts: The accountant or management can manipulate or misrepresent the profits of an
entity. This practice can be illegal and unethical, with serious consequences for businesses and stakeholders like
legal penalties, loss of trust etc.
 DOUBLE-ENTRY BOOK KEEPING

Double-entry bookkeeping is the most common type of accounting used by businesses. It’s based on the
concept that every financial transaction has two sides: a debit side and a credit side. The ledgers must have every transaction
in a business with at least one debit entry and one credit entry. This system ensures that the total value of a company's
‘assets’ always equals its ‘liabilities’ and ‘equity’.
Double-entry bookkeeping is based on the fundamental accounting equation i.e., Assets = Liabilities +
Equity. The total of both sides of the equation should be the same. If the total assets are not equal to the total liabilities plus
capital, then there is a mistake in the books of accounts. Thus, every transaction has two entries, and if the liabilities increase,
then the assets must also increase for the books to be balanced.

 Rules / Principles of Double-Entry Bookkeeping: There are 3 major components to the double-entry method in
bookkeeping. They are:

1. Every business transaction or accounting entry has to be recorded in at least two accounts in the books: a debit and a credit.
2. Debit is written to the left, credit on the right
3. Every debit must have a corresponding credit
4. Debit receives the benefit, and credit gives the benefit
5. For each transaction, the total debits recorded must equal the total credits recorded.
6. Total assets must always equal total liabilities plus equity (net worth or capital) of a business.

 Advantages of Double Entry System:

1. Accuracy: By recording every transaction in two accounts (debits and credits), errors are more easily detected,
helping to ensure the accuracy of financial records.
2. Comprehensive Financial Picture: It provides a complete view of a business's financial situation, as it captures both
the source and use of funds.
3. Better Fraud Detection: The dual nature of entries makes it harder to commit fraud unnoticed, as discrepancies will
show up in the accounting equation.
4. Improved Financial Reporting: It allows for the preparation of detailed financial statements (like balance sheets and
income statements), which are essential for stakeholders.
5. Historical Record: It creates a clear historical record of transactions, making it easier to track financial trends over
time.
6. Facilitates Budgeting and Forecasting: Detailed records support more accurate budgeting and financial forecasting.
7. Regulatory Compliance: Many jurisdictions require double entry bookkeeping for financial reporting, ensuring
compliance with accounting standards.

8. Enhanced Decision Making: The comprehensive data it provides allows business owners to make informed financial
decisions.
Overall, double entry bookkeeping enhances the reliability and transparency of financial information,
benefiting businesses of all sizes.

 Single-Entry Bookkeeping Vs Double-Entry Bookkeeping:

A company’s monetary transactions can be recorded using either a single-entry bookkeeping system or
double-entry bookkeeping system. Single-entry accounting is a simple method that records financial transactions once,
either as an expense or income, making it suitable for small businesses. Double-entry accounting, however, records each
transaction twice, as both a debit in one account and a credit in another. It ensures the accounting equation (Assets =
Liabilities + Equity) remains balanced. This method provides a more comprehensive and accurate financial picture,
making it essential for larger businesses.

CLASSIFICATION OF ACCOUNTS AND THEIR DEBIT AND CREDIT RULES

An account is a summarized record of business transactions. All the business transactions are broadly
classified into three categories: (i) those relating to persons, (ii) those relating to property (assets), and (iii) those relating
to income and expenses. Thus, three classes of accounts are maintained for recording all business transactions. They are:

Accounts

Personal Accounts Real Accounts Nominal Accounts

A) Personal Accounts: Accounts relating to names of persons, firms or companies are called as ‘Personal Accounts’.
Ex: Rama Account, Gopal Account, Nagarjuna Finance Limited Account, Andhra Bank Account etc.
▪ Debit-Credit Rule:
Debit the receiver
and
Credit the giver

B) Real Accounts: Accounts relating to properties or assets are known as ‘Real Accounts’. Ex: Machinery Account,
Furniture Account, Cash Account etc.
▪ Debit-Credit Rule:
Debit what comes in
and
Credit what goes out

C) Nominal Accounts: Accounts relating to expenses, losses, incomes and gains are known as ‘Nominal Accounts’.
Ex: Salaries Account, Commission Received Account, Interest paid Account etc.

▪ Debit-Credit Rule:
Debit all expenses and losses
and
Credit all incomes and gains
 JOURNAL
The word “Journal” is derived from the Latin word ‘Journ’ which means a day. Therefore, Journal
means a day book wherein day-to-day business transactions are recorded in chronological order (in order of date).

Journal is treated as the book of original entry or first entry or prime entry. All the business transactions
are first entered in this book before they are posted in the ledger. The process of recording a transaction in the journal is
called Journalizing and the record of each transaction in the journal is called Journal Entry.
Journal Proforma
L.F. Debit Credit
Date Particulars
No. (Rs.) (Rs.)
Name of the account to be debited
Name of the account to be credited
(Narration or Explanation)

1. Date: The year is written at the top of the date column of each page of the journal. Thereafter on the next line of
the date column, the month and date of the first entry are written.
2. Particulars: The name of the account to be debited is entered on the extreme left of the particulars ‘column’ and
“Dr” is written at the right end. The name of the account to be credited is entered on the next line with a prefix
“To”. A short explanation of the transaction (i.e., narration) is given immediately below the account credited.
The narration should be adequate to explain the transaction and should always appear within brackets. It always
starts with the word ‘Being’. At the end, a thin line is drawn to indicate that the entry of a transaction is complete
from all aspects.
3. Ledger Folio (L.F): In this column, the page number of the ledger on which the debit and credit accounts are
posted is recorded. Practically this column is not used, because the page number of ledgers is not known
beforehand.

4. Debit (Rs.): The amount to be debited is entered in this column.

5. Credit (Rs.): The amount to be credited is entered in this column.

Exercise: Journalize the following transactions.

2016 Rs.
Jan 1 Gopal started business 10,000
1 Purchased goods from Bhagat 500
3 Sale of goods for cash 150
5 Purchase goods for cash 200
6 Sale of goods to Charan 400
7 Purchase of goods from Tagore for cash 300
8 Sale of goods to Easwar for cash 250
9 Purchases 150
10 Sales 100
12 Purchase of Office furniture 200
14 Purchase of stationary from Swamy 100
17 Office rent paid 50
18 Commission received from Girish 20
19 Amount received from Charan 300
25 Cash paid to Bhagat 400
29 Sale of old machinery for cash 300
31 Salaries Paid 600
Ans:
Journal Entries in the Books of Mr. Gopal
L.F. Debit Credit
Date Particulars
No. (Rs.) (Rs.)
2016
Jan 1 Cash A/c Dr. 10000
To Capital A/c 10000
(Being business started with Rs.10,000)
Jan 1 Purchases A/c Dr. 500
To Bhagat A/c 500
(Being goods purchased on credit)
Jan 3 Cash A/c Dr. 150
To Sales A/c
(Being goods sold for cash) 150
Jan 5 Purchases A/c Dr.
200
To Cash A/c
200
(Being goods purchased for cash)
Jan 6 Charan A/c Dr. 400
To Sales A/c
400
(Being goods sold on credit)
Jan 7 Purchases A/c Dr. 300
To Cash A/c 300
(Being goods purchased for cash)
Jan 8 Cash A/c Dr. 250
To Sales A/c 250
(Being goods sold for cash)
Jan 9 Purchases A/c Dr. 150
To Cash A/c 150
(Being goods purchased for cash)
Jan 10 Cash A/c Dr. 100
To Sales A/c 100
(Being goods sold for cash)
Jan 12 Furniture A/c Dr. 200
To Cash A/c 200
(Being Office furniture purchased for cash)
Jan 14 Stationary A/c Dr. 100
To Swamy A/c 100
(Being stationary purchased on credit)
Jan 17 Office rent A/c Dr. 50
To Cash A/c 50
(Being office rent paid)
Jan 18 Cash A/c Dr.
20
To Commission A/c
20
(Being commission received)
Jan 19 Cash A/c Dr.
300
To Charan A/c
300
(Being cash received from Charan)
Bhagat A/c Dr. 400
Jan 25
 To Cash A/c 400
(Being cash paid to Bhagat)
Jan 29 Cash A/c Dr. 300
To Machinery A/c 300
(Being sale of old machinery)
Jan 31 Salaries A/c Dr.
600 600
To Cash A/c
(Being salaries paid)

LEDGER
After recording transactions in the journal, the next stage is the transfer of all journal entries in a
chronological order to individual accounts. The process of recording journal entries into the ledger is called posting. The
term ‘posting’ means transferring the debit and credit items from the Journal to their respective accounts in the Ledger.
Ledger is the principal book of accounts. It contains all the accounts of a business whether personal, real or nominal. It is
also called the book of final entry.

Definition:
A ledger may be defined as “a summary statement of all transactions relating to a person, asset,
expense or income, which have taken place during a given period of time and shows their net effect.”

Dr. Ledger Proforma Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
To the name of credit By the name of debit account
Account

In ledger, each account is prepared in ‘T’ shape. Each account is divided into two equal parts by a
vertical line. The left-hand side of the account is known as debit (Dr.) and the right-hand side is known as credit (Cr.).
Each of the two sides is further divided into four columns. They are: date, particulars, journal folio, and amount.

1. Date: This column records year, month and date of transaction

2. Particulars: This column records the name of the account to be credited on the debit side and the name of the
account to be debited on the credit side. The names of the account in particulars column on the debit and credit sides
are preceded by words ‘To’ and ‘By’.

3. Journal Folio: Its records page number of the journal from which the posting to the ledger takes place.
4. Amount: Amount columns on the Dr. and Cr. Sides of the account record the amount of each and every transaction.

Exercise: From the following transactions pass Journal entries and post them in the appropriate Ledger Accounts in the
books of Avinash & Co.
2016 May 1 Started business with Rs.100000
May 5 Purchased goods from Rahul & Co. Rs. 10000
May 7 Sold goods worth Rs. 20000
May 10 Salaries paid Rs. 1500
May 11 Purchased Stationery worth Rs. 1000
May 15 Bought furniture worth Rs. 20000
May 18 Cash deposited into bank Rs. 9000
 May 20 Paid wages Rs. 5000
May 24 Cash withdrawn from bank Rs. 3000
May 28 Paid rent by cheque Rs. 1800
Ans:
Journal Entries in the Books of Avinash & Co
L.F. Debit Credit
Date Particulars
No. (Rs.) (Rs.)
2016
May 1 Cash A/c Dr. 100000
To Capital A/c 100000
(Being business started with cash)
May 5 Purchases A/c Dr. 10000
To Rahul & Co A/c 10000
(Being goods purchased on credit)
May 7 Cash A/c Dr. 20000
To Sales A/c
(Being goods sold for cash) 20000
May 10 Salaries A/c Dr.
1500
To Cash A/c
1500
(Being salaries paid)
May 11 Stationary A/c Dr. 1000
To Cash A/c
1000
(Being stationary purchased for cash)
May 15 Furniture A/c Dr. 20000
To Cash A/c 20000
(Being furniture purchased for cash)
May 18 Bank A/c Dr. 9000
To Cash A/c 9000
(Being cash deposited into bank)
May 20 Wages A/c Dr. 5000
To Cash A/c 5000
(Being wages paid)
May 24 Cash A/c Dr. 3000
To Bank A/c 3000
(Being cash withdrawn from Bank)
May 28 Rent A/c Dr. 1800
To Bank A/c 1800
(Being rent paid by cheque)
 LEDGER

Dr. Cash a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 1 To Capital a/c 1,00,000 May 10 By Salaries a/c 1,500
May 7 To Sales a/c 20,000 May 11 By Stationery a/c 1,000
May 24 To Bank a/c 3,000 May 15 By Furniture a/c 20,000
May 18 By Bank a/c 9,000
May 20 By Wages a/c 5,000
May 31 By Balance c/d 86,500
1,23,000 1,23,000
June 1 To Balance b/d 86,500

Dr. Capital a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 31 To Balance c/d 1,00,000 May 1 By Cash a/c 1,00,000

1,00,000 100,000

June 1 By Balance b/d 1,00,000

Dr. Purchases a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 5 To Rahul & Co a/c 10,000 May 31 By Balance c/d 10,000

10,000 10,000
June 1 To Balance b/d 10,000

Dr. Rahul & Co a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 31 To Balance c/d 10000 May 5 By Purchases a/c 10,000
3,000 10,000

June 1 By Balance b/d 10,000

 Dr. Sales a/c Cr.
J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 31 To Balance c/d 20,000 May 7 By Cash a/c 20,000
20,000
20,000 June 1 By Balance b/d 20,000

Dr. Salary a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 10 To Cash a/c 1500 May 31 By Balance c/d 1500

1500 1500
June 1 To Balance b/d 1500

Dr. Stationery a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 11 To Cash a/c 1,000 May 31 By Balance c/d 1,000

1,000 1,000
June 1 To Balance b/d 1,000

Dr. Furniture a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 15 To Cash a/c 20,000 May 31 By Balance c/d 20,000

20,000 20,000
June 1 To Balance b/d 20,000

Dr. Bank a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 18 To Cash a/c 9,000 May 24 By Cash a/c 3,000
May 28 By Rent a/c 1,800
May 31 By Balance c/d 4,200
9,000 9,000
June 1 To Balance b/d 4,200
 Dr. Wages a/c Cr.
J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 20 To Cash a/c 5,000 May 31 By Balance c/d 5,000

5,000 5,000
June 1 To Balance b/d 5,000

Dr. Rent a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
May 28 To Cash a/c 1,800 May 31 By Balance c/d 1,800
1,800
1,800
June 1 To Balance b/d 1,800

TRIAL BALANCE

Introduction:
The first step in the preparation of Final Accounts is the preparation of Trial Balance. In the double entry
system of book keeping, there will be credit for every debit and there will not be any debit without credit. When this
principle is followed in writing journal entries, the total amount of all the debits will be equal to the total amount of all the
credits. A trial balance is a statement of debit and credit balances. It is prepared on a particular date with the object of the
checking the arithmetic accuracy of the accounting books.

Definition:
“A Trial Balance is a statement of debit and credit balances extracted from the Ledger with
a view to testing the arithmetical accuracy of the books”.

→ Objectives of Trial Balance: The following are the main objective of trial balance:
▪ To Check Arithmetical Accuracy of Books of Accounts: The main objective of the trial balance is to check the
arithmetical accuracy of the books of accounts. If the total of debit and credit columns of the trial balance is
equal, it is assumed that the trial balance is correct. If it is not agreed, then it means that there is some error.
▪ Summary of Ledger: The main aim of preparing a trial balance is to summarize the balance of all the accounts
of a ledger at one common place in the form of a statement.
▪ Helpful in Preparing Final Accounts: The trial balance records the balances of various ledger accounts at one
place which helps in the preparation of the profit and loss account and the balance sheet which can be used for
knowing the financial position of a business.
▪ To Detect Errors: If the trial balance does not agree, then it means that there are some errors in the recording or
posting or balancing of the accounts. Steps are taken to locate and rectify the errors.

→ Method of Preparing Trial Balance: A trial balance can be prepared by the following methods:
i) Total Method
ii) Balance Method
 i) Total Method: In this method, trial balance is prepared by taking into account the totals of debits and credits of
each account in the ledger. The debit total of the account is recorded on the debit side and the credit total is
recorded on the credit side of the trial balance. After recording all totals, the trial balance is totaled. If both sides
of the trial balance are equal, it is assumed that the books of accounts are arithmetically correct. But this method
is not used now. A specimen of the trial balance under this method is given here:

Trial Balance of ------------------------------------------------------ As on ----------------

Debit Total Credit Total
S.No. Name of Accounts L.F.No.
(Rs.) (Rs.)

ii) Balance Method: In this method of preparing trial balance, only the difference between the debit and credit
sides is taken instead of taking the totals of the two sides. If the debit side is more than the credit side, it is called
debit balance and if the credit side is more than the debit side, it is called as credit balance. After calculating the
balances of all the accounts in the ledger, the debit balance is entered on the debit side and the credit balance on
the credit side of the trial balance. Both sides of the trial balance should match in this method also. This method
of preparing a trial balance is considered as the best method. A specimen of trial balance prepared by this method
is given here:

Trial Balance of ------------------------------------------------------ As on ----------------

Debit Credit
LF
S.No. Name of the Account Balance Balance
No.
(Rs.) (Rs.)

→ Suspense Account: If there is any difference in the Trial Balance due to the errors, the difference will be transferred
temporarily to an account known as ‘Suspense Account’. Suspense Account is an account to which the difference in
the Trial Balance has been put temporarily. After locating the errors and passing the necessary entries suspense
account will be closed later.
The suspense account if it shows debit balance, it will be shown in the Assets side of the
Balance Sheet. On the other hand, the account shows credit balance, it will be shown in the Liabilities Side of the
Balance Sheet.

Table Showing Balance of Different Accounts

Balance
Name of the Account
Debit Credit
1 Debtors Debit ---
2 Creditors --- Credit
3 Bank Balance Debit ---
4 Bank Overdraft --- Credit
5 Capital --- Credit
6 Drawings Debit ---
7 Outstanding Expenses --- Credit
8 Prepaid Expenses Debit ---
9 Accrued Income Debit ---
 10 Income received in advance --- Credit
11 Bills Payable --- Credit
12 Stock:
a. Purchases Debit ---
b. Purchase Returns --- Credit
c. Sales --- Credit
d. Sales Returns Debit ---
e. Opening Stock Debit ---
13 Assets/Properties Debit ---
14 Tangible Assets:
a. Goodwill Debit ---
b. Trademarks Debit ---
c. Preliminary Expenses Debit ---
d. Bills receivable Debit ---
15 Any Expenses / Loss: Discount Allowed Debit ---
16 Any Income / Profit: Discount Received --- Credit
17 All Provisions / Reserves --- Credit
TOTAL XXXX XXXX

Exercise-1: Journalize the following transactions in the books of Rishi Rubens, post them into ledger and prepare a trial
balance as on 30th June 2016.
2016
June 1 Commenced business with a capital of Rs.10,000
3 Purchased office furniture Rs.1,500
5 Purchased goods from Mr.Anil Rs.3,000
10 Sold goods to Mr.Azad Rs.2,500
15 Received cash from Mr.Azad Rs.2,400 in full settlement
20 Paid to Mr.Anil in cash Rs.2,800 and he allowed discount Rs.200
22 Sold goods for cash Rs.800
25 Opened a bank account with Rs.1,100
28 Paid salary to Mr.Gokul Rs.400
30 Withdrew cash from bank for personal use Rs.300
Solution:
JOURNAL ENTRIES IN THE BOOKS OF MR. RISHI RUBENS
L.F. Debit Credit
Date Particulars
No. (Rs.) (Rs.)
2016
June 1 Cash a/c Dr. 10,000
To Capital a/c 10,000
(Being business started with Rs.10,000)
3 Furniture a/c Dr. 1,500
To Cash a/c 1,500
(Being purchase of office furniture for cash)
5 Purchases a/c Dr. 3,000
To Anil a/c 3,000
(Being good purchased on credit)
2,500
Azad a/c Dr.
10 2,500
To Sales a/c
 (Being goods sold on credit) 2,400
15 Cash a/c Dr. 100
Discount allowed a/c Dr. 2500
To Azad a/c
20 (Being cash received from Azad in full 3,000
settlement) 2,800
Anil a/c Dr. 200
To Cash a/c
22 To Discount receive a/c 800
(Being cash paid to Anil and received discount) 800
Cash a/c Dr.
25 To Sales a/c 1100
(Being goods sold for cash)
1100
Bank a/c Dr.
28 To Cash a/c 400
(Being account opened in bank with cash)
400
Salary a/c Dr.
To Cash a/c
30 300
(Being salary paid in cash)
Drawings a/c Dr. 300
To Bank a/c
(Being amount withdrawn from bank for
personal use)

LEDGER
Dr. Cash a/c Cr.
J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 1 To Capital a/c 10,000 June 3 By Furniture a/c 1,500
June 15 To Azad a/c 2,400 June 20 By Anil a/c 2,800
June22 To Sales a/c 800 June 25 By Bank a/c 1,100
June 28 By Salary a/c 400
June30 By Balance c/d 7,400
13,200 13,200
July 1 To Balance b/d 7,400

Dr. Capital a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 30 To Balance c/d 10,000 June 1 By Cash a/c 10,000

10,000 13,200

July 1 By Balance b/d 10,000

 Dr. Furniture a/c Cr.
J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 3 To Cash a/c 1,500 June 30 By Balance c/d 1,500

1,500 1,500
July 1 To Balance b/d 1,500

Dr. Purchases a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 5 To Anil a/c 3,000 June 30 By Balance c/d 3,000

3,000 3,000
July 1 To Balance b/d 3,000

Dr. Anil a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 20 To Cash a/c 2,800 June 5 By Purchases a/c 3,000
June 20 To Discount received 200
a/c 3,000 3,000

Dr. Azad a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 10 To Sales a/c 2,500 June 15 By Purchases a/c 2,400
June 15 By Discount allowed a/c 100
2,500 2,500

Dr. Sales a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 30 To Balance c/d 3,300 June 10 By Azad a/c 2,500
June 22 By Cash a/c 800
3,300 3,300
July 1 By Balance b/d 3,300
Dr. Discount allowed a/c Cr.
J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 15 To Azad a/c 100 June 30 By Balance c/d 100

100 100
July 1 To Balance b/d 100

Dr. Discount received a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 15 To Balance c/d 200 June 30 By Anil a/c 200

200 200

July 1 By Balance b/d 200

Dr. Bank a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 25 To Cash a/c 1,100 June 30 By Drawings a/c 300
June 30 By Balance c/d 800
1,100 1,100
July 1 To Balance b/d 800

Dr. Salary a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 28 To Cash a/c 400 June 30 By Balance c/d 400

400 400
July 1 To Balance b/d 400

Dr. Drawings a/c Cr.

J.F Amount J.F Amount
Date Particulars Date Particulars
No. (Rs.) No. (Rs.)
2016 2016
June 30 To Bank a/c 300 June 30 By Balance c/d 300

300 300
July 1 To Balance b/d 300
 PREPARATION OF TRIAL BALANCE
Method 1: Total Method:
Trial Balance of Mr. Rishi Rubens as on 30th June 2016
Name of Account L.F Debit Total Credit
S. No.
No. (Rs.) Total (Rs.)
1 Cash a/c 13,200 5,800
2 Capital a/c --- 10,000
3 Office Furniture a/c 1,500 ---
4 Purchase a/c 3,000 ---
5 Anil a/c 3,000 3,000
6 Azad a/c 2,500 2,500
7 Sales a/c --- 3,300
8 Discount allowed a/c 100 ---
9 Discount received a/c --- 200
10 Bank a/c 1,100 300
11 Salary a/c 400 ---
12 Drawings a/c 300 ---
25,100 25,100

Method 2: Balance Method:

Trial Balance of Mr. Rishi Rubens as on 30th June 2016
L.F. Debit Credit
S.No. Name of Account
No. Balance (Rs.) Balance (Rs.)
1 Cash a/c 7,400 ---
2 Capital a/c --- 10,000
3 Office Furniture a/c 1,500 ---
4 Purchase a/c 3,000 ---
5 Sales a/c --- 3,300
6 Discount allowed a/c 100 ---
7 Discount received a/c --- 200
8 Bank a/c 800 ----
9 Salary a/c 400 ----
10 Drawings a/c 300 ----
13,500 13,500

Exercise-2: From the following ledger balances of Dinesh prepare the Trial Balance as on 31-03-2016
Particulars Rs. Particulars Rs.
Capital 1,00,000 Furniture 20,000
Purchases 1,50,000 Debtors 2,00,000
Outstanding Expenses 4,000 Salaries 30,000
Sales 3,21,000 Purchase returns 5,000
Wages 20,000 Commission to be received 15,000
Sales Returns 10,000 Bad debts 7,000
Creditors 1,20,000 Drawings 24,000
Provision for bad debts 6000 Stationary 8,000
Insurance 12000 Stock (1-4-2015) 50,000
Goodwill 12000 General Reserve 2,000
Solution:
Trial Balance of Dinesh as on 31th March 2016
L.F. Debit Credit
S. No. Name of Account
No. Balance (Rs.) Balance (Rs.)
1 Capital ----- 1,00,000
2 Furniture 20,000 ------
3 Purchases 1,50,000 -------
4 Debtors 2,00,000 -------
5 Outstanding Expenses ----- 4,000
6 Salaries 30,000 ------
7 Sales ----- 3,21,000
8 Purchase returns ----- 5,000
9 Wages 20,000 ------
10 Commission to be received 15,000 ------
11 Sales returns 10,000 ------
12 Bad debts 7,000 ------
13 Creditors ------ 1,20,000
14 Drawings 24,000 ------
15 Provision for bad debts ------ 6,000
16 Stationary 8,000 ------
17 Insurance 12,000 ------
18 Opening stock 50,000 -----
19 Goodwill 12,000 -----
20 General reserve ----- 2,000
5,58,000 5,58,000
 FINAL ACCOUNTS
Final accounts are prepared by an organization at the end of the financial year to know the operational
efficiency and financial position of the business. Financial accounts for a trading firm refer to:
1. Trading and Profit and Loss Account
2. Balance Sheet
Trail balance is the basis for preparing of final accounts.

▪ Trading Account: This account is prepared by those concerns, which deal in the purchase and sale of goods. It is
prepared to find out the amount of gross profit or gross loss in a particular period. Gross profit or gross loss is the
amount of difference between the cost of goods sold and the selling price. Gross profit or loss can be ascertained with
the help of the following equations:
Gross profit = Sales – Cost of goods sold.
Gross loss = Cost of goods sold – Sales.
When the amount of sales is more than the cost of goods sold, the result is gross profit. If the amount of
sales is less than the cost of goods sold, the result is gross loss. The gross profit or gross loss earned in this account is
transformed to profit and loss account.

Dr. Trading Account of ----------------------------- for the year ending------------ Cr.

Amount Amount
Particulars Particulars
(Rs.) (Rs.)
To Opening stock xxxx By Sales xxxx
To Purchases xxxx Less: Sales returns xx xxxx
Less: Purchase returns xx xxxx (or) return inward
(or) return outward By Closing stock xxxx
Direct expenses: By Gross loss c/d xxxx
To Carriage inward xxxx (Transferred to P&L a/c)
To Coal, Gas and Water etc. xxxx
To Power or Motive power xxxx
To Octroi xxxx
To Import duty xxxx
To Custom duty xxxx
To Wages or wages & salaries xxxx
To Factory expenses xxxx
To Manufacturing expenses xxxx
To Royalty xxxx
To Consumable Stores xxxx
To Salary of foremen/works manager xxxx
To Gross Profit c/d xxxx
(Transferred to P&L a/c)
xxxx xxxx

▪ Profit and Loss Account: Profit & Loss account is a report of income, expenses and the resulting profit or losses
of a company during an accounting period. This account is prepared to calculate the net profit of the business. The
Profit & Loss account is also known as Income Statement. The trading accounts simply depict the gross profit or
gross loss made by a businessman on the sale and purchase of goods. It does not take into account the other operating
or indirect expenses incurred by him during the course of running the business. Hence, the P&L account is prepared
to find out the indirect amount of net profit of net loss of the firm in a particular period.
Dr. P&L Account of --------------------------------------for the year ending-------------- Cr.
Amount Amount
Particulars Particulars
(Rs.) (Rs.)
To Gross loss b/d xxxx By Gross profit b/d xxxx
(Transferred from trading a/c) (Transferred from trading a/c)
To Administrative & Office By Income received:
expenses: xxxx By Interest received xxxx
To Rent, rates and taxes xxxx By Discount xxxx
To Office salaries xxxx By Commission xxxx
To Printing and stationery xxxx By Dividends xxxx
To Postage and telegram xxxx By Income from investments xxxx
To Heating and lighting xxxx By Rent from tenants xxxx
To Insurance xxxx By Apprenticeship premium xxxx
To Audit fee xxxx By Insurance claims xxxx
To Legal charges xxxx By Miscellaneous receipts xxxx
To Repairs and maintenance xxxx By Bad debts recovered xxxx
To General expenses xxxx By Net loss (transferred to capital xxxx
To Depreciation account c/d)
To Selling and distribution
expenses: xxxx
To Advertising and publicity xxxx
To Salesmen’s salaries xxxx
To Packing expenses xxxx
To Bad debts xxxx
To Godown rent xxxx
To Export expenses xxxx
To Salesmen’s commission xxxx
To Delivery van’s expenses xxxx
To Carriage outwards xxxx
To Travelling expenses xxxx
To Agents’ commission xxxx
To Brokerage xxxx
To Provision for bad debts
To Financial expenses:
To Interest on capital xxxx
To Interest on debentures xxxx
To Interest on loans xxxx
To Discount on bills xxxx
To Discount allowed xxxx
To Bank charges xxxx
To Extraordinary Expenses:
To Loss by fire (not covered xxxx
by insurance)
To Loss on sale of fixed assets xxxx
To Loss by theft xxxx
To Cash defalcations xxxx
To Net profit (transferred to xxxx
capital account c/d.) xxxx xxxx
▪ Balance Sheet: The third part of the final accounts is called the balance sheet. After ascertaining the net profit or
net loss of the business, a trader wants to know the financial position of his business. He prepares a statement of
assets and liabilities which is popularly known as the balance sheet. Balance sheet explains the financial position of
business as on particular date.

✓ Horizontal Form of B/s:

Balance sheet of --------- as on -------
Amount Amount
Liabilities Assets
(Rs.) (Rs.)
Current Liabilities: Current Assets:
Sundry creditors xxxx Cash in hand xxxx
Bills payable xxxx Cash in bank xxxx
Bank over draft xxxx Bills receivable xxxx
Short-term loans xxxx Sundry debtors xxxx
Outstanding expenses xxxx Prepaid expenses xxxx
Long-term Liabilities: Closing stock xxxx
Debentures xxxx Stock-in-trade xxxx
Long-term loans xxxx Short-term investments xxxx
Fixed Liabilities: Fixed Assets:
Capital xxxx Investments xxxx
Add/less: Net Profit/loss xxx Land and building xxxx
xxxx Plant and machinery xxxx
Add: Interest on capital xxx Furniture and fittings xxxx
Less: Drawings xxx Vehicles xxxx
Less: Income tax xxx xxxx Goodwill xxxx
Trademark xxxx
Copy rights xxxx
Patents xxxx
xxxx xxxxx
Adjustments:

A. Closing Stock: Closing stock is the stock of unsold at the end of the accounting year. It involves raw-materials,
semi-finished goods, and finished goods. The valuation of stock is done at the cost price or the market price
whichever is less.
1. Shown on the credit side of the trading account as “By Closing stock”.
2. Shown as an asset in the balance sheet

B. Outstanding Expenses: Outstanding expenses are those expenses which have incurred during the accounting period
but are not paid yet. Eg: Outstanding salaries, rent yet to be paid, etc.
1. Shown in the concerned account on the debit side of the trading or P&L a/c.
2. Shown on the liabilities side of the balance sheet.

C. Prepaid (or Unexpired) Expenses: Prepaid expenses are those expenses, the payment of which are made in advance
in the current accounting period but which relate to the next accounting period. Eg: Insurance pre-paid.
1. Deducted from those particular expenses on the debit side of the P&L a/c.
2. Shown on the assets side of the balance sheet.

D. Accrued Income (or Outstanding Income): Accrued income is that which has been earned or has become due but
not received till the end of an accounting period. Eg: Rent receivable, Interest receivable etc.
1. Added to the concerned account on the credit side of P&L a/c.
2. Shown as an Asset in the balance sheet.
E. Income Received in Advance (or Unearned Income): Income received during an accounting period, which belongs
to the next accounting period are called as income earned in advance.
1. Deducted from the concerned income on the credit side of P&L a./c
2. Shown as a liability in the balance sheet.
F. Depreciation: It is the reduction in the value of an asset due to usage, wear and tear, or obsolescence. It is an
expense.
1. Shown on the debit side of the P&L a/c.
2. Deducted from the concerned asset on the assets side of the balance sheet.

G. Bad Debts: When goods are sold on credit basis, the buyer of the goods is called as “debtor”. If the debtor does not
pay the amount payable, such an amount is considered to be a “Bad debt”.
 When given in the Trial balance only:
Shown on debit side of P&L a/c only
 When given in the adjustments only:
i. Shown on debit side of P&L a/c .
ii. Deduct the amount from sundry debtors on the assets side of balance sheet.
 When given in the Trial balance as well as Adjustments:
i. Shown on debit side of P&L a/c by adding both balances.
ii. Bad debts which are given in the adjustments only subtract from the Debtors.

H. Provision for Bad and Doubtful Debts: The provision for doubtful debts is the estimated amount of bad debt that
will arise from goods debtors in the future. It is created to show the true profit and financial position of the business.
 When given in the Trial balance only:
It will be shown in the debit side of P&L a/c only.
 When given in the adjustments only:
1. Shown in the debit side of P&L a/c.
2. Deduct from the debtors in the assets side of the B/s.
 When given in both Trial balance and Adjustments:
1. In the P&L a/c the difference in old and new fund taking into consideration.
✓ When the new provision is more than old provision the difference should be debited to the P&L a/c .
✓ When the old provision is more than new provision the difference should be credited to the P&L a/c .
2. The amount of new provision should be deducted from debtors in assets side in the balance sheet. (after
deduction of further bad debts, if any).

I. Interest on Capital: It is the interest charged by the proprietor from business on the amount invested by him.
1. Shown on the debit side of P&L a/c.
2. Added to capital in the liabilities side of the balance sheet.

J. Interest on Drawings: It is the interest charged by the business from the proprietor on the amount with drawn by the
proprietor from the business for his personal use.
1. Shown on the credit side of the P&L a/c.
2. Deducted from capital in the liabilities side of the balance sheet.
Exercise: From the following Trail Balance of Surya & Sons’ Co prepare Trading and
P&L a/c for the year ended 31-03-2014 and a Balance Sheet as on that date:

Debit (Rs.) Credit (Rs.)

Sales 1,80,000
Purchases 1,15,000
Sales Returns 6,000
Purchase Returns 4,000
Opening Stock 13,000
Freight 1,200
Salaries 18,000
Interest Received 830
Wages 3,250
Office Expenses 2,650
Discount 650 450
Rent 6,300
Drawings 2,800
Bills Payable 5,550
Bills Receivable 8,560
Furniture 26,000
Machinery 76,000
General Expenses 1,500
Postage & Telegrams 850
Capital 1,01,500
Sundry Debtors 19,000
Cash in hand 1,250
Cash at bank 3,950
Sundry Creditors 13,630
Total 3,05,960 3,05,960

Adjustments:
Closing Stock Rs.27, 500
Outstanding Wages Rs.750
Prepaid Rent Rs.800
Depreciate Machinery by 10% and Furniture by 5%.
Write off bad debts Rs.1000 and provide 3% reserve for doubtful debts
Interest on Capital to be @10% per annum.
Solution: Trading and Profit and Loss a/c of Surya and Sons for the year ending 31-03-2014

Amount Amount
Particulars Particulars
(Rs.) (Rs.)

To Opening Stock 13,000 By Sales 1,80,000

To Purchases 1,15,000 Less: Sales Returns 6,000 1,74,000
Less: Purchase Returns 4,000 1,11,000 By Closing stock 27,500
To Freight 1,200
To Wages 3,250
Add: Outstanding wages 750 4,000
To Gross Profit c/d 72,300
(transferred to P&L a/c) 2,01,500 2,01,500
72,300
To Salaries 18,000 By Gross Profit b/d
To Office Expenses 2,650 (transferred from trading a/c)
To Discount 650 By Interest received 830
To Rent 6,300 By Discount 450
Less: Prepaid rent 800 5,500
To General expenses 1,500
To Postage & Telegram 850
To Depreciation on Machinery 7,600
To Depreciation on Furniture 1,300
To Bad debts 1,000
To Provision for bad debts 540
To Interest on Capital 10,150
To Net Profit 23,840
(transferred to Capital a/c)
73,580 73,580

Balance Sheet of Surya and Sons for the year ended 31st March 2014
Amount Amount
Liabilities Assets
(Rs.) (Rs.)
Creditors 13,630 Cash in hand 1,250
Outstanding wages 750 Cash at bank 3,950
Bills Payable 5,550 Bills receivable 8,560
Capital 1,01,500 Closing Stock 27,500
Add: Net Profit 23,840 Prepaid rent 800
1,25,340 Debtors 19000
Add: Interest on Capital 10,150 Less: Bad debts 1000
1,35,490 18000
Less: Drawings 2,800 1,32,690 Less: Provision for doubtful 540 17,460
Debts
Furniture 26000
Lee: Depreciation 1300 24700
Machinery 76,000
Less: Depreciation 7,600 68,400
1,52,620 1,52,620
Exercise: Prepare a Trading and Profit & Loss account for the year ended 31st Dec 2015 and a Balance Sheet as on that
date from the following trial balance:

Debit (Rs.) Credit (Rs.)

Capital --- 13,000
Cash 7,450 ---
Purchases 21,750 ---
Discount allowed 1,300 ---
Wages 6,500 ---
Salaries 2,000 ---
Sales --- 35,000
Travelling expenses 400 ---
Commission 425 ---
Carriage inward 275 ---
Administration expenses 105 ---
Trade expenses 600 ---
Interest 250 ---
Buildings 5,000 ---
Furniture 200 ---
Debtors 4,250 ---
Creditors --- 2,100
Total 50,100 50,100

Adjustments:

1. Depreciation on building 20%

2. Stock on 31-12-2015 is Rs. 6,000.
3. Provision for bad debts at 10% on debtors,
4. Outstanding wages Rs. 475
Solution:

Trading and Profit and Loss a/c for the year ending 31 st Dec.2015
Amount Amount
Particulars Particulars
(Rs.) (Rs.)
To Purchases 21750 By Sales 35000
To Wages 6500 By Closing stock 6000
Add: Outstanding 475 6975
To Carriage inward 275
To Gross Profit c/d 12000
(transferred to P&L a/c) 41000 41000
Direct expenses: 2000 12000
To Salaries 1300 By Gross Profit b/d
To Discount 400 (transferred from trading
To Travelling Expenses 425 a/c)
To Commission 105
To Administrative expenses 600
To Trade expenses 250
To Interest 1000
To Depreciation on Buildings 425
To Provision for bad debts 5495
To Net Profit
12000 12000
(transferred to Capital a/c)

Balance Sheet for the year ended 31st December 2015

Amount Amount
Liabilities Assets
(Rs.) (Rs.)

Creditors 2100 Cash in hand 7045

Outstanding wages 475 Debtors 4250
Capital 13000 Less: Provision for bad debts 425 3825
Add: Net Profit 5495 18495 Closing Stock 6000
Furniture 200
Buildings 5000
Less: Depreciation 1000 4000
21070 21070