BEFA – UNIT IV

UNIT - IV: Financial Accounting: Accounting concepts and Conventions, Accounting Equation,
Double-Entry system of Accounting, Rules for maintaining Books of Accounts, Journal, Posting to
Ledger, Preparation of Trial Balance, Elements of Financial Statements, Preparation of Final
Accounts (Simple Problems).
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INTRODUCTION TO ACCOUNTING

The purpose of any business is to make profits for that some business activities are to be
conducted. You may involve in transactions daily. Any human activity directed at making
profit is called business. Business is of different types. It may be trading activity or
manufacturing activity. Business may require capital that may be owner’s capital and
borrowed capital. Transactions involve exchange of value likepurchase of goods, sale of
goods for cash or credit and payment of expenses in the course of production and distribution.

History of Accounting:
Accounting is as old as civilization itself. From the ancient relics of Babylon, it can be will
proved that accounting did exist as long as 2600 B.C. However, in modern form
accounting based onthe principles of Double Entry System came into existence in 17th
Century. Fra Luka Pacioli, a mathematician published a book De computic et scripturies in
1494 at Venice in Italy. This book was translated into English in 1543. In this book he
covered a brief section on „book-keeping‟.

Origin of Accounting in India:

Accounting was practiced in India thousands years ago and there is a clear evidence for this.
In his famous book, ‘Arthashastra’ Kautilya dealt with not only politics and economics but
also the art of proper keeping of accounts. However, the accounting on modern lines was
introduced in India after 1850 with the formation joint stock companies in India.
Accounting in India is now a fast developing discipline. The two premier Accounting
Institutes in India viz., Chartered Accountants of India and the Institute of Cost and Works
Accountants of India are making continuous and substantial contributions. The international
Accounts Standards Committee (IASC) was established as on 29th June. In India the
Accounting Standards Board (ASB) is formulating ‘Accounting Standards’ on the lines of
standards framed by International Accounting Standards Committee.
BOOK-KEEPING AND ACCOUNTING

Book – Keeping: Book – Keeping involves the chronological recording of financial

transactions in a set of books in a systematic manner.
Accounting: Accounting is concerned with the maintenance of accounts giving stress to the
design of the system of records, the preparation of reports based on the recorded date and the
interpretation of the reports.
 DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING:

BOOK-KEEPING ACCOUNTING

Concerned with recording of Concerned with classifying, summarizing, analyzing and

1 interpreting the data and communicating to the end users
transactions

Book-keeper maintains the

2 Accountant maintains the accounts of whole
accounts of particular section
organization

He works under an accountant 3 He directs and reviews the work of book-keeper

He has higher level of knowledge, conceptual

He has limited knowledge 4 understanding, analytical skills

His work is clerical in nature 5 His work is executive in nature

SYSTEMS OF BOOK-KEEPING:

Single entry system

 It is incomplete system of double entry system.
 Only cash and personal accounts are maintained.

Double entry system

 It is only the system that records two aspects of a transaction.
 In this system, the transactions are recorded with the help of “Debit-Credit rules”.

Definition of Accounting:
American Institute of Certified Public Accountants (AICPA): “The art of recording,
classifying andsummarizing in a significant manner and in terms of money transactions and
events, which are in part atleast, of a financial character and interpreting the results thereof.”
Thus, accounting is an art of identifying, recording, summarizing and interpreting business
transactions of financial nature. Hence, accounting is the Language of Business.
Basis of Accounting:
The basis of accounting refers to the methodology under which revenues and expenses
are recognized in the financial statements of a business. When an organization refers to
the basis of accounting that it uses, two primary methodologies are most likely to be
mentioned. The two basis of Accounting are:
Cash basis of Accounting: Cash basis accounting documents revenues only when the money
is received, and expenses only when they are paid. This means, there are no recordings of
Credit Transactions.
The most common businesses that opt for cash accounting are:
1. Sole proprietorships and partnerships, because these types of ownerships don’t have
to publish their financial books.
2. Businesses who use single-entry bookkeeping, instead of double-entry bookkeeping.
3. Businesses with few transactions and employees.
4. Businesses with no inventory (Stock).
5. Businesses who don’t sell or buy on credit.

Accrual Basis of Accounting: Accrual system: It is also known as mercantile system of

accounting. It considers outstanding expenses and incomes. It provides clear picture of
financial position of a firm. Company’s Act recommended this system to all companies. In
other words, the accrual basis of accounting recognizes revenue when earned and expenses
when incurred.
BRANCHES OF ACCOUNTING

1. Financial Accounting: The purpose of this Accounting is to ascertain the financial

results i.e. profit or loss in the operations during a specific period. It is also aimed at knowing
the financial position, at the end of the period. It also provides other relevant information to
the management as a basis for decision-making.
2. Cost Accounting: The purpose of this branch of accounting is to ascertain the cost of a
product / operation / project and the costs incurred for carrying out various activities. It also
assist the management in controlling the costs. The necessary data and information are
collected from financial statements and other sources.
3. Management Accounting: Its aim to assist the management in taking correct policy
decision and to evaluate the impact of its decisions and actions. The data required for this
purpose are drawn Financial Accounting and Cost-Accounting.
 FUNCTIONS OF AN ACCOUNTANT

The job of an accountant involves the following types of accounting works :

1. Designing Work: It includes the designing of the accounting system, basis for
identification and classification of financial transactions and events, forms, methods,
procedures, etc.
2. Recording Work: The financial transactions are identified, classified and recorded in
appropriate books of accounts according to the principles. This is “Book Keeping”. The
recording of transactions tends to be mechanical and repetitive.
3. Summarizing Work: The recorded transactions are summarized into significant form
according to generally accepted accounting principles. The work includes the preparation of
profit and loss account, balance sheet. This phase is called „preparation of final accounts‟
4. Analysis and Interpretation Work: The financial statements are analysed by using ratio
analysis, break-even analysis, funds flow and cash flow analysis.
5. Reporting Work: The summarized statements along with analysis and interpretation are
communicated to the interested parties or whoever has the right to receive them. For Ex.
Share holde₹ In addition, the accou8nting departments has to prepare and send regular
reports to assist themanagement in decision-making. This is ‘Reporting’.
6. Preparation of Budget: The management must be able to reasonably estimate the future
requirements and opportunities. As an aid to this process, the accountant has to prepare
budgets, like cash budget, capital budget, purchase budget, sales budget etc. this is
‘Budgeting’.
7. Taxation Work: The accountant has to prepare various statements and returns pertaining
to income- tax, sales tax, excise or customs duties etc., and file the returns with the authorities
concerned.
8. Auditing: It involves a critical review and verification of the books of accounts statements
and reports with a view to verifying their accuracy. This is ‘Auditing’.
USERS OF ACCOUNTING INFORMATION
1. Managers: These are the persons who manage the business, i.e. management at the top,
middle and lower levels. Their requirements of information are different because they make
different types of decisions. Accounting information also helps the managers in appraising
the performance of subordinates. As such, Accounting is termed as “the eyes and ears of
management.”

2. Investors: Those who are interested in buying the shares of company are naturally
interested in the financial statements to know how safe the investment already made is and
how safe the proposed investments will be.
3. Creditors: Lenders are interested to know whether their load, principal and interest, will
be paid whendue. Suppliers and other creditors are also interested to know the ability of the
firm to pay their dues in time.
4. Workers: In our country, workers are entitled to payment of bonus, which depends on
the size of profit earned. Hence, they would like to be satisfied that he bonus being paid to
them is correct. This knowledge also helps them in conducting negotiations for wages.
5. Customers: They are also concerned with the stability and profitability of the enterprise.
They may be interested in knowing the financial strength of the company to rent it for further
decisions relating to purchase of goods.
6. Government: Governments all over the world are using financial statements for compiling
statistics concerning business which, in turn, helps in compiling national accounts. The
financial statements are useful for tax authorities for calculating taxes.
7. Public : The public at large interested in the functioning of the enterprises because it may
make a substantial contribution to the local economy in many ways including the number of
people employed and their patronage to local supplie₹
8. Researchers: The financial statements, being a mirror of business conditions, is of great
interest to scholars undertaking research in accounting theory as well as business affairs and
practices.
ADVANTAGES OF ACCOUNTING
1. Provides for systematic records: Since all the financial transactions are recorded in the
books, one need not rely on memory. Any information required is readily available from
these records.
2. Facilitates the preparation of financial statements: Profit and loss accountant and
balance sheet can be easily prepared with the help of the information in the records. This
enables the trader to know thenet result of business operations (i.e. profit / loss) during
the accounting period and the financialposition of the business at the end of the accounting
period.
3. Provides control over assets: Book-keeping provides information regarding cash in had,
cash at bank,stock of goods, accounts receivables from various parties and the amounts
invested in various other assets. As the trader knows the values of the assets he will have
control over them.
4. Provides the required information: Interested parties such as owners, lenders, creditors
etc., get necessary information at frequent intervals.
5. Comparative study: One can compare the present performance of the organization with
that of its past. This enables the managers to draw useful conclusion and make proper
decisions.
6. Less Scope for fraud or theft: It is difficult to conceal fraud or theft etc., because of the
balancing of the books of accounts periodically. As the work is divided among many persons,
there will be check andcounter check.
7. Tax matters: Properly maintained book-keeping records will help in the settlement of all
tax matters with the tax authorities.
8. Ascertaining Value of Business: The accounting records will help in ascertaining the
correct value of the business. This helps in the event of sale or purchase of a business.
9. Documentary evidence: Accounting records can also be used as an evidence in the court
to substantiatethe claim of the business. These records are based on documentary proof.
Every entry is supported by authentic vouche₹ As such, Courts accept these records as
evidence.
10. Helpful to management: Accounting is useful to the management in various ways. It
enables the management to assess the achievement of its performance. The weakness of the
business can be identified and corrective measures can be applied to remove them with the
helps accounting.
LIMITATIONS OF ACCOUNTING

1. Does not record all events: Only the transactions of a financial character will be recorded
under book-keeping. So it does not reveal a complete picture about the quality of human
resources, location advantage, business contacts etc.
2. Does not reflect current values: The data available under book-keeping is historical in
nature. So they do not reflect current values. For instance, we record the value of stock at cost
price or market price, whichever is less. In case of, building, machinery etc., we adopt
historical cost as the basis. In fact, the current values of buildings, plant and machinery may
be much more than what is recorded in the balance sheet.
3. Estimates based on Personal Judgment: The estimate used for determining the values of
various items may not be correct. For example, debtor are estimated in terms of collectability,
inventories are based on marketability, and fixed assets are based on useful working life.
These estimates are basedon personal judgment and hence sometimes may not be correct.
4. Inadequate information on costs and Profits: Book-keeping only provides information
about the overall profitability of the business. No information is given about the cost and
profitability of different activities of products or divisions.
ACCOUNTING PRINCIPLES

Accounting principles are the rules and regulations, which are followed by the accountants at
the time of recording the accounting transactions. They help in measuring, recording and
summarizing the transactions. These principles are termed as “Generally Accepted
Accounting Principles (GAAP)”.

Accounting Concepts:
1. Business Entity Concept: In this concept, “Business is treated as separate entity from the
proprietor”. All the Transactions recorded in the book of Business and not in the books of
proprietor. The proprietor is also treated as a creditor for the Business.
2. Going Concern Concept: This concept relates with the long life of Business. The
assumption is that business will continue to exist for unlimited period unless it is dissolved
due to some reasons or the other.
3. Money Measurement Concept: In this concept, “Only those transactions are recorded in
accounting which can be expressed in terms of money, those transactions which cannot be
expressed in terms of money are not recorded in the books of accounting”.
4. Cost Concept: Accounting to this concept, an asset is recorded at its cost in the books of
account ie. At the of amount of money spent on acquiring it. In balance sheet, the assets
appear at their Book Value every year.
5. Accounting Period Concept: Every Businessman wants to know the result of his
investment and efforts after a certain period. Usually one-year period is regarded as an ideal
for this purpose. This period is called as Accounting Period.
6. Dual Aspect Concept: According to this concept “Every business transactions has two
aspects”, one is the receiving benefit aspect another one is giving benefit aspect. The
receiving benefit aspect is termed as “DEBIT”, whereas the giving benefit aspect is termed as
“CREDIT”. Therefore, for every debit, there will be equal corresponding credit and vice
versa.
7. Matching Cost Concept: According to this concept “The expenses incurred during an
accounting period are matched with the income earned during the same period, e.g., if
revenue is recognized on all goods sold during a period, cost of those good sole should also
be charged to that period. This is done to ascertain the results of the business activities during
that period.
8. Realization Concept: According to this concept, revenue is recognized when it is earned
is made. Similarly, expenses are recognised when they are incurred. For ex: Sale is
considered to be made at the point when the property in goods passes to the buyer and he
becomes legally liable to pay.

Accounting Conventions:
1. Full Disclosure: According to the convention, accounting reports should disclose fully and
fairly the information. They purport to represent. They should be prepared honestly and
sufficiently disclose information which is if material interest to proprietors, present and
potential creditors and investo₹ The companies ACT, 1956 makes it compulsory to provide
all the information in the prescribed form.
2. Materiality: Under this convention, the trader records important factor about the
commercial activities. In the form of financial statements if any unimportant information is
to be given for the sake of clarityit will be given as footnotes.
3. Consistency: It means that accounting method adopted should not be changed from year to
year. It means that there should be consistent in the methods or principles followed. Or else
the results of a year cannot be conveniently compared with that of another.
4. Conservatism: This convention warns the trader not to take unrealized income in to
account. That is why the practice of valuing stock at cost or market price, whichever is lower
is in vague. This is the policy of “playing safe”; it takes in to consideration all prospective
losses but leaves all prospective profits.
TERMINOLOGY USED FINANCIAL STATEMMENTS – FEW
IMPORTANT TERMS
1. Entity: - An entity is an economic unit, which performs economic activities. Ex: Tata
Steel, H.M.T. Ltd.
2. Business transaction: - A transaction is an exchange of goods or services for cash or
credit. It involvestransfer of money or money’s worth that brings about change in the
financial position of a business.
3. Trade debtors: - Trade debtors are the persons from whom the amount are due for goods
sold or servicesrendered on credit basis.
4. Trade creditors: - Trade creditors are those to whom the amounts are due for goods
purchased or servicesrendered on credit basis.
5. Goods: - Goods are those with which the business firm trades. They are meant for resale.
6. Assets: - Assets are those, which yield future economic benefits.
7. Current Assets: - current assets are those assets which are held in cash or which are likely
to be convertedinto cash during the financial year.
8. Fixed Assets: - Fixed assets are those assets which are not held for resale in normal course
of business.
9. Tangible Fixed Assets: - The assets that can be visible, seen and touched are called as “
Tangible FixedAssets”.
10. Intangible fixed assets: - The assets that cannot be visible, seen and touched are called as
“Intangible Fixed Assets”.
11. Liabilities: - The financial obligations of the firm are called liabilities.
12. Current Liabilities: - The liabilities, which fall due in a short period, are known as
“Current Liabilities”.
13. Long term liabilities: - The liabilities that fall due for payment in a relatively short
period are called aslong-term liabilities.
14. Purchases: - The total amount of goods obtained by an enterprise for resale either for
cash or credit.
15. Sales: - The amount for which goods are sold or services are rendered either for cash or
credit is called assales.
16. Expenditure: - The amount incurred in the process of acquiring goods, assets or services.
17. Revenue: - The amount charged for the goods sold or services rendered by an enterprise.
18. Capital: Capital is the amount invested by the owner/propietor in the firm. It is a liability
to the firm.
19. Drawings: cash or goods withdrawn by the proprietor from the Business for his personal
or Household is termed to as “drawing”.
20. Reserve: An amount set aside out of profits or other surplus and designed to meet
contingencies.
21. Account: A summarized statements of transactions relating to a particular person, thing,
Expense orincome.
22. Discount: There are two types of discounts..
Cash Discount: An allowable made to encourage frame payment or before the expiration of
the periodallowed for credit.
Trade Discount: A deduction from the gross or catalogue price allowed to traders who buys
them for resale.
CLASSIFICATION OF ACCOUNTS
All business transactions are classified into three categories:
1. Those relating to persons (Natural persons, artificial persons and representative persons)
2. Those relating to Real Things (things that can be seen, touched and felt)
3. Those relating to Nominal Things (things that CANNOT be seen, but only felt)
Thus, three classes of accounts are maintained for recording all business transactions. They
are: 1.Personal accounts 2. Real accounts 3. Nominal accounts
1. Personal Accounts: Accounts containing transactions with persons are called “Personal
Accounts”. In accounting, all the firms, institutions, companies, other organisations are
considered as artificial persons.
A separate account is kept on the name of each person, natural or artificial, for recording the
benefits received from, or given to the person in the course of dealings with him/her.
E.g.: Krishna‟s A/C, Gopal‟s A/C, SBI A/C, Nagarjuna Finanace Ltd.A/C, Obul Reddy &
Sons A/C ,HMT Ltd. A/C, Capital A/C, Drawings A/C etc.
2. Real Accounts: The accounts relating to properties or assets are known as “Real
Accounts” .Every business needs assets such as machinery , furniture etc, for running its
activities .A separate account is maintained for each asset owned by the business .
Eg: cash A/C, furniture A/C, building A/C, machinery A/C etc.

3. Nominal Accounts: Accounts relating to expenses, losses, incomes and gains are known
as “Nominal Accounts”. A separate account is maintained for each item of expenses, losses,
income or gain.
Eg: Salaries A/C, stationery A/C, wages A/C, postage A/C, commission A/C, interest A/C,
purchases A/C, rent A/C, discount A/C, commission received A/C, interest received A/C,
rent received A/C, discount received A/C

RULES OF DEBIT & CREDIT

Personal Account
Debit: The Receiver
Credit: The Giver

Real Account
Debit: What Comes in
Credit: What Goes Out

Nominal Accounts
Debit: All Expense & Losses
Credit: All Incomes & Gains
 ACCOUNTING EQUATION

The accounting equation represents the relationship between the assets, liabilities and
capital of every business and it is fundamental to the application of double entry
bookkeeping where every transaction has a dual effect on the financial statements. For each
transaction, the total debits equal the total credits. It can be expressed as further more:
Assets = Liabilities + Capital (means Equity for Company)

Where Assets means the Property Owned by the Business, Liability means the monetary
obligation of the business towards creditors of business and Capital means the amount of
money or money’s worth that is invested in business by its owner(s).
Example 1: Prepare the Accounting Equation on the basis of following:
1. Mr. Sanjay started business and introduced capital ₹ 1,00,000 in cash.
2. Purchased goods in cash ₹ 50,000.
3. Purchased from Bismillah Furnitures ₹ 20,000.
4. Sold goods costing ₹ 25,000 for ₹ 35,000.
5. Paid Bismillah Furnitures in cash.

Example 2: Prepare the Accounting Equation on the basis of following:

1. Issuing shares for cash or other assets ₹6000
2. Buying assets by borrowing money ₹10000
3. Selling assets for cash ₹ 900
4. Buying assets by paying cash ₹600 and by borrowing money 400.
5. Earning revenues ₹700
JOURNAL
The first step in accounting is the recording of all the transactions in the books of original
entry viz., Journal and then posting into ledgers.
The word Journal is derived from the Latin word ‘journ’ which means a ‘day’. Therefore,
journal means a ‘day Book’ in which day-to-day business transactions are recorded in
chronological order.
Journal is called as the book of original entry or first entry or prime entry. All the business
transactions are recorded first in this book before they are posted in the ledges. The journal is
a complete and chronological (in order of dates) record of business transactions. It is recorded
in a systematic manner. The process of recording a transaction in the journal is called
“JOURNALISING”. The entries made in the book are called “Journal Entries”.
The proforma of Journal is given below:

Date Particulars L.F Debit Amount Credit Amount

Journalize the following examples:

Example 1. Journalize the following transactions in the books of Mr. Ram
2015 Jan 1 Business started with Rs. 10,000

“ 2 Cash deposited in the bank Rs. 5,000

“ 5 Purchases Rs. 3,000
“ 8 Sales Rs. 4,000
“ 10 Cash drawn from the bank Rs. 1,000

Example 2. Journalize the following transactions in the books of Sri Laxmi & Co.
2015 Jan 1 Business started with Rs. 10,000 Cash and Furniture Rs. 5,000
“ 2 Goods purchased from Mr. Sathish Rs. 2,000
“ 5 Rent paid Rs. 1,000
“ 8 Goods sold to Mr. Ramya Rs. 4,000
“ 10 Goods sold and cheque received Rs. 1,000

Example 3. Enter the following transactions in Journal

2015 Jan 1 Purchased office furniture Rs. 2000 and paid through cheque.
“ 2 Cash sales Rs. 3000
“ 5 Wages paid Rs. 1000
“ 8 Telephone bill paid Rs. 500
“ 10 Cash sales Rs. 2000 and credit sales Rs. 2000 to Sunil.
Example 4. Journalize the following transactions.

2015 Jan 1 Salaries paid Rs. 2000

“ 2 Paid for advertisement Rs. 3000
“ 5 Purchased a car for office use Rs. 100000
“ 8 Paid insurance premium Rs. 500
“ 10 Returned goods to Suresh Rs. 100

Example 5. Journalize the following transactions.

2015 Jan 1 Goods returned from Ram Rs. 200

“ 2 Cash withdrawn for personal use Rs. 3000
“ 5 Loan borrowed from SBH Rs. 100000
“ 8 Interest received Rs. 500
“ 10 Discount paid Rs. 100

SUBDIVISION OF JOURNAL
Small businesses record all transactions in a single journal but large companies record their
transactions indifferent journals according to their nature. The journal is sub-divided into
eight parts. They are;
1. Purchase book (where all credit purchases are recorded)
2. Sales book (where all credit sales are recorded)
3. Purchase returns book (where the particulars of goods returned to suppliers are recorded)
4. Sales returns book (where the particulars of goods returned from customers are recorded)
5. Bills receivable book (where the details of bills received are recorded)
6. Bills payable book (where the details of bills payable are recorded)
7. Cash book (where all the cash transaction are recorded)
8. Proper journal (where the transactions that are not recorded in the above books are
recorded)
CASH BOOK WITH CASH, BANK & DISCOUNT COLUMNS
1. Record the following transactions in the three columnar (cash, Bank, Discount columns)
cash book.Example 1. Prepare a three columnar cash book.
2015 Jan 1 Manmohan started a business with cash balance of Rs. 10,000 and paid into
bank Rs. 8,000
Jan. 3 Bought office furniture by cheque Rs. 30005 Sold goods for cash Rs. 1000
Jan. 8 Anand paid Rs. 600 and was allowed a discount of Rs.60
Jan.12 A cheque received from Mani for Rs. 690 and allowed him a discount of Rs. 10; the
cheque was deposited into bank.
Jan. 18 Cash withdrawn from bank for office use Rs. 1000
Jan. 20 Drew cash for personal use Rs. 100; Salaries paid Rs. 500.
Jan. 24 Received a cheque for sales Rs. 1200

Example 2.
2015 Jan 1 ABC firms has cash in hand Rs. 4,000 and balance at bank Rs. 5,000.
2 Deposited cash Rs. 3,500 into bank.
8 Bought goods worth Rs. 8000 from Ram.10 Sold goods worth Rs. 15000 for
cash.
12 Sold goods to Suresh for Rs. 500015 Paid Rs. 2000 to Ram on account
18 Withdrew Rs. 1000 from bank for personal use
20 Settled Ram account; he allows a discount of Rs. 20023 Suresh paid Rs. 4900
in full settlement of account
25 Withdrew Rs. 2000 from bank for office use.
Prepare a three columnar cashbook.
LEDGER

All the transactions in a journal are recorded in a chronological order. After a certain period,
if we want to know whether a particular account is showing a debit or credit balance it
becomes very difficult. Therefore, the ledger is designed to accommodate the various
accounts maintained by the trader. It contains the final or permanent record of all the
transactions in duly classified form. “A ledger is a book which contains various accounts.”
The process of transferring entries from journal to ledger is called “POSTING”.
Proforma for Ledger Account

Date Particulars JF Amount Date Particulars JF amount

To By

Posting is the process of entering in the ledger, the entries given in the journal. Posting into
ledger is done periodically, may be weekly or fortnightly as per the convenience of the
business. The following are the guidelines for posting transactions in the ledger.
1. After the completion of Journal entries, posting is to be made in the ledger.
2. A separate account is to be opened for each item of Journal. Further, for each new item
added in journal a new account is to be opened in Ledger.
3. For each account, there must be a name. This should be written in the top of the table. At
the end of the name, the word “Account” is to be added. The entry is to be posted on the
debit side (Left side) of the account is prefixed with “TO”. The entry is to be posted on the
Credit side (Right side) of the account is prefixed with “BY”.
4. After the posting of last entry for the given period is done, the Accountant should make the
totals of both the sides of Ledger same/equal. This is called as Tallying. After tallying both
the sides, the difference amount, called as the closing balance, should be carried forward to
the next period of time. Closing Balance of one time period becomes the Opening Balance
of the next time period.
Example:
Enter the following transactions in journal and post them into ledger:
2017 Jan. 1 Mr. Ramesh started business with cash Rs.100,000.
2 He purchased furniture for Rs.20,000.
3 He purchased goods for Rs.60,000
5 He sold goods for cash Rs.80,000
6 He paid salaries Rs.10,000

TRIAL BALANCE
According to double entry system every debit has corresponding credit. All the debit balances
are equal tocredit balances. If they do not agree, it is to be understood that some mistakes are
committed somewhere. Trial Balance is a statement in which debit and credit balances of all
ledger accounts are shown to list the arithmetical accuracy of the books of accounts.
Features of trial balance
 It is not an account.
 It contains debit and credit balances of accounts.
 It helps in preparation of final accounts.
 Totals of both debit and credit side of a trial balance are always equal.
Format of the trial balance

Debit Credit
Particulars Particulars
Amount Amount

Balances of all Assets, Expenses, Balances of all liabilities,

Losses xxxx Incomes, Profits, Gains, xxxx
Reserves

Prepare the Trial Balances for the following examples:

Example 1. Prepare a trial balance as on 31-12-2023 from the below information.
Particulars Rs Particulars Rs
Sundry debtors 32000 Bills payable 7500
Stock 22000 Purchases 218870
Cash in hand 35 Cash at bank 1545
Plant and machinery 17500 Sundry creditors 10650
Trade expenses 1075 Sales 234500
Salaries 2225 Carriage outward 400
Rent 900 Discounts Dr 1100
Capital 79500 Premises 34500
Example 2. Make a trial balance from the below balances of accounts.
Particulars Rs Particulars Rs
Capital 100000 Machinery 30000
Stock 16000 Wages 50000
Carriage inward 500 Salaries 5000
Factory rent 2400 Repairs 400
Fuel and power 2500 Buildings 40000
Sundry debtors 20000 Sales 203600
Purchases 122000 Creditors 12500
Returns outwards 2000 Returns inwards 3600
Drawings 2000 Discount allowed 750
Discount received 250 Office expenses 1000
Manufacturing expenses 600 Bills payable 3000
Bills receivable 5000 Cash in hand 2400
Cash at bank 15400 Office rent 1800
 FINAL ACCOUNTS

In every business, the owner is interested in knowing whether the business has resulted in
profit or loss and what the financial position of the business is at a given time. In brief, he
wants to know (i) The profitability of the business and (ii) The soundness of the business.
The trader can ascertain this by preparing the final accounts. The final accounts are prepared
from the trial balance. Hence, the trial balance is said to be the link between the ledger
accounts and the final accounts. The final accounts of a firm can be divided into two stages.
The first stage is preparing the Trading and Profit & Loss account and the second stage is
preparing the Balance Sheet.
TRADING ACCOUNT
The first step in the preparation of final accounts is the preparation of Trading Account. The
main purpose of preparing the trading account is to ascertain Gross Profit Or Gross Loss as a
result of buying/producing and selling the goods.
PROFIT AND LOSS ACCOUNT:
The businessman will also be interested in knowing his net income or net profit of the
business activities.Net profit represents the excess of gross profit plus the other revenue
incomes over administrative, sales, Financial and other expenses. The debit side of profit and
loss account shows the expenses and the credit side the incomes. If the total of the credit side
is more, it will be the net profit. If the debit side is more, it will be net loss.
Format of Trading and Profit & Loss A/C of ……….for the year ending ……………..

Particulars Amount Particulars Amount

To Opening stock xxxx By Sales xxxx
To Purchases xxxx Less: Returns xxxx xxxx
Less: Returns xxxx xxxx By Closing stock xxxx
To Carriage inwards xxxx By Gross loss (c/d) xxxx
To Freight, cartage xxxx
To Customs duty xxxx
To Clearing charges xxxx
To Octroi xxxx
To Wages xxxx
To Gas, water, coal, light xxxx
To Factory rent xxxx
To Works manager salary xxxx
To Factory supervision xxxx
To consumable stores xxxx
To Plant depreciation xxxx
To Gross profit (c/d) xxxx
xxxx xxxx
To Gross loss(b/d) xxxx By Gross profit(b/d) xxxx
To Salaries xxxx By Discount received xxxx
To Rent, Taxes xxxx By Interest received xxxx
To Insurance xxxx By Dividend received xxxx
To Printing stationery xxxx By Rent received xxxx
To Advertisement xxxx By Commission received xxxx
To Carriage outward xxxx By Net loss (c/d) xxxx
To Bad debts xxxx xxxx
To Repairs xxxx xxxx
To Depreciation xxxx xxxx
To Discount allowed xxxx xxxx
To Commission allowed xxxx xxxx
To Interest paid xxxx xxxx
To Provision for doubtful debts xxxx xxxx
To Postage xxxx xxxx
To General expenses xxxx xxxx
To Net profit (c/d) xxxx xxxx
xxxx xxxx
BALANCE SHEET:
The second point of final accounts is the preparation of balance sheet. It is prepared often in
the trading and profit & loss accounts have been compiled and closed. A balance sheet may
be considered as a statement of the financial position of the concern at a given date. A
balance sheet is an item wise list of assets, liabilities and proprietorship of a business at a
certain state. Balance Sheet of…….…... as on ……………

Capital & Liabilities Amount Assets Amount

Capital xxxx Land and buildings xxxx
Add: Net profit xxxx Furniture xxxx
xxxx Plant and machinery xxxx
Less: Drawings xxxx xxxx Land xxxx
Loans xxxx Vehicles xxxx
Bank Over Draft xxxx Debtors xxxx
Bills payable xxxx Investments xxxx
Creditors xxxx Bills receivables xxxx
Outstanding expenses xxxx Goodwill xxxx
Incomes received in advance xxxx Patents xxxx
All reserves xxxx Copyright xxxx
Trade marks xxxx
Prepaid expenses xxxx
Incomes receivables xxxx
Securities xxxx
Closing stock xxxx
 Cash in hand xxxx
Cash at bank xxxx
xxxx xxxx

IMPORTANT ADJUSTMENTS:
Information about the Adjustment entries will be given after the Trial Balance. These
adjustment entries will have effect twice or more times in the preparation of Final Accounts.
The following are the treatment of some common adjustment entries:

1. Outstanding expenses
i. Add to respective expense account in Trading & Profit & Loss account
ii. Show as a liability in Balance Sheet
Note:- If it is given only in trial balance, show as a liability in the Balance Sheet
2. Prepaid expenses
i. Deduct from the respective expenses account in Trading and PROFIT & LOSS
account
ii. Show as an asset in Balance Sheet
Note:- If it is given only in trial balance, show only as an asset in Balance Sheet
3. Accrued incomes or incomes receivables
i. Add to the respective income A/C in Profit & Loss Account
ii. Show as an asset in Balance Sheet
Note:- If it is only given in trial balance, show as an asset in BALANCE SHEET
4. Incomes received in advance
i. Deduct from the respective income A/C in PROFIT & LOSS Account
ii. Show as a liability in BALANCE SHEET
Note:- It is given only in trial balance, show as a liability in BALANCE SHEET
5. Closing stock
i. Show on the credit side of trading A/C
ii. Show as an asset in BALANCE SHEET
Note:- If it is given only in trial balance, show as an asset in BALANCE SHEET
6. Interest on capital
i. Show on the debit side of PROFIT & LOSS A/C
ii. Add to capital in BALANCE SHEET
Note:- If it is given only in trial balance, show as expense only in PROFIT & LOSS A/C
7. Depreciation
i. Show on the debit side of PROFIT & LOSS A/C
ii. Deduct from respective asset in BALANCE SHEET
Note:- If it is given only in trial balance, show only on the debit side of PROFIT & LOSS
A/C)
8. Bad debts ( when given only in adjustments)
i. Show on the debit side of PROFIT & LOSS A/C
ii. Deduct from debtors in BALANCE SHEET
Note: Bad debts (when given only in trial balance, Show on the debit side of PROFIT &
LOSS A/C only.
Example 1: From the following trial balance and additional information of Mr. Arun,
prepare his final accounts for the year ending 31-03-2015
Particulars Rs Particulars Rs
Building 280000 Capital 250000
Furniture 60000 Sales 265000
Opening stock 25000 Bank loan 100000
Advertising 5000 Commission 6000
Salaries 14000 Creditors 8000
Wages 3000
Purchases 190000
Discount 4000
Bad debts 2000
Interest on loan 6000
Returns inwards 10000
Debtors 30000

629000 629000
Adjustments: 1. Stock on 31-3-2015 was Rs. 35000. 2. Wages outstanding Rs. 1000.
Example 2: From the following data and additional information of Mr. Kiran, prepare
his final accounts for the year ending 31-3-2015.
PARTICULARS Rs. PARTICULARS Rs.
Building 70000 Carriage inwards 1291
Furniture 1640 Establishment expenses 2135
Debtors 15600 Carriage outwards 800
Creditors 18852 Insurance 783
Stock 15040 Interest (Cr) 340
Cash in hand 988 Bad debts 613
Cash at bank 24534 Audit fee 400
Bills receivables 5844 General expenses 3050
Purchases 85522 Discount (Dr) 945
Sales 121850 Investments 8922
Capital 92000 Returns inwards 285
Bills payable 6250 Rent 900

Adjustments:
1. Stock on 31-3-2015 was Rs. 35000.
2. Prepaid insurance Rs. 100.
3. Depreciation on furniture Rs. 10%
4. Interest accrued but not received Rs. 100
Example 3: From the following trial balance and additional information,prepare final
accounts for the year ending 31-12-2014.
Particulars Rs Particulars Rs
Sundry debtors 64000 Discount received 9000
Stock (1-1-2014) 44000 Bank over draft 15000
Cash in hand 3160 Long term loan 25300
Wages 35000 Sales 365000
Trade expenses 2150 Capital 150000
Gas, water, power 4450
Sales returns 800
Bank charges 1800
Purchases 237740
Advertisements 2200
Premises 160000
Drawings 9000

564300 564300

Adjustments:
1. Bank charges outstanding Rs.150,
2. Write off bad debts Rs. 500
3. Provide 5% for doubtful debts.
 Example 4: From the following data prepare final accounts for the year ending 31-12-
2014.
Particulars Rs Rs
Drawings and capital 12000 80000
Opening stock 12000
Investments 30600
Stationery 12000
Carriage 3000
Returns 6000 2600
Purchases and sales 120000 160000
Loans 2400 10000
Debtors and creditors 60000 25000
Discount allowed 2200
Freight in 10400
Freight out 6000
Charity 28000
Reserve for doubtful debts 2000
Bills payables 25000
304600 304600
Adjustments:
1. Closing stock Rs. 20000
2. Appreciate investment by 10%
3. Maintain reserve for doubtful debts at the rate of 5%
4. Provide 5% as interest on capital
IMPORTANT QUESTIONS - UNIT IV
1. Explain accounting concepts. 2. Explain debit and credit principles.
3. What is financial accounting? Explain the advantages of financial accounting?
4. Explain the Conventions of Accounting 5. Explain the functions of accountant.
6. Trial Balance numerical problems 7. Final Accounts numerical problems