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ACCOUNTING FOR ENTREPRENEURS

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UNIT -

Introduction Meaning of Accounting Definition Bookkeeping Objectives of Book Keeping Difference between Book Keeping and Accounting

Objectives of Accounting Branches of Accounting Advantages of Accounting Limitations of Accounting Users of Accounting Information Internal Users External Users

Basic Accounting Terms Accounting as a Science or an Art Role of Accounting MODEL QUESTIONS

Unit I Introduction

Accounting An

ACCOUNTING AN INTRODUCTION Introduction :

uman beings cant remember everything. They need a systematic system to record the transactions. Accounting gives us a systematic approach to record the transactions. Entrepreneurs keep their own accounts in the beginning. As the size of business enlarges, the entrepreneurs have to delegate the process of accounting. They have to hire professional accountants who keep systematic record of the accounts. Thus accounting is required to execute the process of this record keeping. It also helps the business in ascertaining its profitability and growth. . In modern days, accounting is considered as the process of keeping of different accounts in various books. An account has different denotations from different points of view. From banking point of view, an account is an arrangement with a bank to keep money there, take some out etc. In view of business records, an account means a written record of money that is owed to a business and of money that has been paid by it in the name of expense accounts, etc. These are the detailed records of all money received or paid by a business or a person. From the viewpoint of a shop or store, we speak of credit account. It means an arrangement with a shop or store or business to pay or be paid bills for goods or services at a later time. In the age of computers and internets an account means an arrangement that somebody has with a company that allows them to use the internet, send and receive messages by e-mail etc. This is called an Internet/E-mail Account. On the whole, accounts mean the heads of accounts required to be kept by business houses for recording these transactions and interpreting the results periodically. More exactly speaking, accounting in this book refers to Financial Accounting even though there are some other branches of accounting such as cost accounting and management accounting. However, financial accounting is considered to be the father of accounting systems because this is based on double entry principles which is scientific in approach. This system is fathered by Luca Pacoli.

Accou n ti n g An In trod u cti on Unit I Meaning of Accounting:

Accounting is the process of identifying, measuring, recording and communicating the economic events (business transactions) of an organization.

Definition :
Accounting has been defined by American Institute of Certified Public Accountants (AICPA) as under "Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, the transactions and events which are in part at least of a financial character, and interpreting the results thereof." The above definition can be analysed as under: i. ii. Accounting is the art of recording Accounting is the art of classifying iii. Accounting is the art of summarising the business transactions and events of financial characters in terms of money and nonfinancial and non-monetary transactions are excluded. iv. Interpreting the results, which may be calculation of profit or loss of the business for a period and determining the financial position for the same period.

Book Keeping :
Recording commences when a business transaction occurs and it has been quantified. Record of the transactions is made in order of occurrences. Recording is based on the following four fundamental questions:

Unit I Introduction
a) What to record b) When to record c) How to record d) Value at which to record

Accounting An

In order to get answer to the above stated questions, it is important that one should master over the techniques and practice of recording business transactions which is known as Book-keeping. In a nutshell, we can say that bookkeeping is an art of recording financial data regarding business transactions in a significant and orderly manner. According to J.R. Batliboi, Bookkeeping may be defined as the science as well as an art of recording business transactions under appropriate accounts. According to Northcott "Book-Keeping may be defined as an art of recording, books of accounts, the monetary aspects of commercial or financial transactions. In case of a business, it is important to know how much the businessman was owes to outsiders and how much outsiders owe to him; what are his expenses and what are his incomes; what amount of money he has invested and how much he has received; whether he has increased it or lost it? All this require systematic record keeping of all that happens on a day-to-day basis in business and analysing this information to and business decision making. In simple words, "Accounting" in organisational context, merely means "reckoning" or "recounting" the performances / operations in a summerised form in monetary terms. Thus, the process of accounting involves recording, classifying and summarizing of past events and transactions of financial nature, with a view of enabling the user of accounts to interpret the resulting summary. From the above discussion, we came to understand that Accounting has two important facts : a) Record keeping, classification and summarisation (which is called book-keeping) b) Interpreting results

Accou n ti n g An In trod u cti on Unit I

Under Financial Accounting, all monetary events are recognised as "transactions" and classified into various account heads. The "account" heads are then summarised under related and significant groups so that interpretation becomes possible. For example, when a trader procures an item, this event is recognised as a transaction. This transaction will be recorded under the account head 'purchases'. At the end of a specified period, all purchases and other costs associated with sales would be summarised into "cost of goods sold" figure. On comparing the cost of goods sold with sales, the difference can be interpreted as the profit or loss for the period. The above discussion helps us to understand that Accounting is broader, than bookkeeping and there is a difference between the two terms. This will made more clear in the following lines.

Objectives of Book-keeping :
Following are the objectives of book-keeping: 1. To have a permanent record of each business transaction and to show its financial effect on the business. 2. To determine the combined effect of all the transactions on the financial position.

Difference between Book Keeping and Accounting

Bookkeeping Bookkeeping accounting is a part of Accounting Accounting keeping includes book-

It is related to recording business transactions It is the basis of accounting. It includes journal, ledger, trial balance. It is the beginning part of an accounting process and is called the root Book-keeping does not require any special skill and knowledge. It can be done by machines also. It does not give complete picture of financial condition of

It is related to recording, classifying, summarizing business transactions and interpreting the results. It is the basis of business language. Accounting starts where bookkeeping ends and hence, it is called the fruit. It requires special skills and knowledge. It gives complete information about financial condition of the

Unit I Introduction
the business

Accounting An
business.

Accou n ti n g An In trod u cti on Unit I Objectives of accounting :

The following are the various objectives of accounting. 1. Maintenance of records of business. 2. Finding out the results of business activities during a period by preparing profit and loss account. 3. Knowing the financial position of the business as on a particular date by preparing the balance sheet. 4. Maintaining control over the assets. 5. Supplying information to the government agencies and tax authorities. 6. Deciding future plans in respect of cash by preparing cash budgets.

Branches of Accounting :
Accounting has the following branches: 1. 2. Financial Accounting : This is the branch of accounting which is related to preparation of profit and loss account and balance sheet. Cost Accounting : This is the branch of accounting which is related to finding out the cost of a product or job or service. Management Accounting : This is the branch of accounting which is related to supply information to the management for the purpose of planning, control and decision making.

3.

Advantages of Accounting :
1. 2. 3. 4. 5. 6. 7. Accounting replaces memory work because it provides complete and scientific record of business transactions. It helps in determining the profitability position and financial position of the business. Accounting records are used as evidence in the court of law Accounting helps in the evaluation of business to both the buyer and the seller. Accounting enables comparison of costs, profits, revenues, losses, expenses etc of the year with that of the previous years. Accounting statements like profit and loss account and balance sheet are useful in getting loans from banks. Accounting data help and guide the management in planning and decision making.

Unit I Introduction Limitations of Accounting :

1. 2. 3. 4.

Accounting An

5.

Non-monetary and non-financial events are ignored in financial accounting. Treatment of any one item may be made by more than one principles which leads to lack of uniformity in accounting procedures. Personal judgment influence financial accounting which may lead to lack of uniformity and accuracy of accounts. Financial accounting supplies information usually at the end of the year . Such information may not be of any use to the management if the management needs such information during the course of the year. Financial accounting shows financial position only but it does not disclose the realisable value of the business.

Users of Accounting Information :

Accounting information is needed by two sets of people : (i) Internal Users (ii) External Users i. Internal Users : People associated with management of the business are internal users. Accounting information comes to them automatically through reports and statements. They make analysis and interpretation of accounting data for drawing conclusions and making decisions. External Users : These are the people outside the business who make use of accounting information for various reasons. Such users are : i. Investors ii. Suppliers iii. Lenders iv. Share holders v. Customers vi. Govt. Agencies vii. Employees viii. Public

ii.

Basic Accounting Terms:

1. Assets : Assets are properties or resources owned by a business units which have money value and are useful for future operation of the business.

Accou n ti n g An In trod u cti on Unit I

Example : Land, Building, Furniture, Stock, Cash Good-will, Patents, Trademark, Copy right etc. 2. Liability : Amount payable at present by the business to the outsiders on account of past business activities is called a liability. Example : Creditors, Bills payable, Loan, Outstanding expenses, etc. Capital : It is the amount of money or money's worth invested in a business by its owner. Drawings : The amount of money or value of goods withdrawn by the proprietor for his personal use is called drawings. Transaction : It means exchange of goods or services for cash or on credit. Event : An even is a happening of consequence(s) to an entity. It may be an internal happening or external incident. Entry :Record of a transaction in journal or ledger is called entry. Entity : It refers to the business which is separately identified/recognized from its owner. Entrepreneur : He is a person who starts a business, bears all its risks and takes all its gains. He is also known as the owner or proprietor of the business. Net-worth : Net-worth is the excess of assets over liabilities. It is the claim of the owner against the assets of the firm. It is also known as owner's equity. Business : Business is doing any trade or commerce by investing capital with an object to make profit from sale of goods or services. Revenues : Revenues are the amount which a business earns by selling its products or services to the customers. Expenses : Expenses are the amount spent by a business in the process of obtaining revenues . It is an outflow of economic benefits resulting in decrease in equity. Loss : When expenses fail to produce any revenue, we call them losses. The excess of expenses over revenue is also called loss. Profit : It is the excess of revenue over the expenses during an accounting year. It increases owner's equity. Income : Income is the increase in the wealth of the firm during a given period of time. It includes profit also. It is an inflow of economic benefits resulting in increase in equity.

3. 4. 5. 6. 6. 7. 8.

9.

10. 11. 12.

13. 14. 15.

Unit I Introduction
16.

Accounting An

Closing stock : It is the value of unsold goods on hand at the end of the accounting year.

17.

18. 19.

20. 21. 22.

23.

24. 25.

26.

27.

Opening stock : The closing stock of the previous year which is available for sale at the beginning of the current year is called opening stock. Purchase : The total amount of goods procured by the business for cash or on credit for sale is called purchase. Sale : The total amount of cash received and/or receivable from customers by transferring ownership/handing over of goods or services is called sale. Debtors : The debtors are the persons from whom money is receivable for goods/services sold to them on credit. Creditors : They are the persons to whom money is payable on account of credit purchase of goods or services. Books of Accounts : These are the Registers, Journal, Ledger or any other books maintained in a business house for keeping accounts. Accounting : It is a body of knowledge of recording, documenting, classifying, analyzing, summarizing and interpreting the business transactions. Accountancy : The practice and art of the science of accounting is termed as accountancy . Equity : All claims against the assets of a firm are called equity. It is the total of outsiders equity (Liabilities) and owner's equity (Capital). It refers to the residual interest of owners in assets over liabilities. Account : It is a statement in "T" form in which all transactions relating to a particular item are presented. It is a summarized record of the relevant transactions at one place relating to a particular head. Debit : The left hand side of a "T" form account is called debit. It is shortly presented as "Dr" . This word is derived from the Latin word "Debeo" meaning "owed to me", the proprietor. Credit : The right hand side of a "T' form account is called credit . It is shortly presented as "Cr" . It is derived from the Latin word "Credo" meaning "trust or believe". Double entry : It is a system of book-keeping under which the twofold aspects of a transaction are recorded to get a complete picture.

28.

29.

Accou n ti n g An In trod u cti on Unit I

Two-fold aspects of a transaction means "When we receive something, we also give something".

10

Unit I Introduction

Accounting An

Example : If goods are purchased for Rs. 5000/It has two aspects : i. Business receives goods of Rs. 5000/ii. Business pays cash of Rs. 5000/In order to record the transaction, we have to record the above mentioned two aspects in the name of two accounts : i. Purchase A/C, ii. Cash A/C. One of the accounts will be debited and the other will be credited by the same amount. Thus double entry means every transaction will have a debit and a corresponding credit entry of equal amount. Depreciation : The value of fixed assets gradually reduces due to wear and tear, passage of time, obsolescence, etc. The monetary value of such reduction in the value of fixed assets is called depreciation. Outstanding expenses : These are the expenses which have become due for payment but is not paid during the accounting year. Example : Outstanding rent, outstanding wages outstanding salaries etc. This is a type of liability. Prepaid expenses : These are the expenses which have been paid in advance. The benefit of such expenses has not yet expired during the accounting year. These are also known as the unexpired expenses. Such accounts are treated as asset. Example : Prepaid rent or rent paid in advance, prepaid wages, etc. Accrued Income : Incomes earned but not received during the accounting year is known as accrued income. Example : Accrued interest, commission receivable, etc. Income received in advance : This is the income which is not yet due or earned but cash has been received against this income before it becomes due. This is a type of liability. Example : Commission received in advance, rent received in advance, etc. Invoice : At the time of credit sales or credit purchase of goods, a statement is sent along with it. It is called invoice. It contains details of the goods sold or purchased price, quantity, quality, terms of payment etc. Incase of seller, if is known as Outward Invoice. In case of buyer, it is known as Inward Invoice. Discount : It is an allowance off the bill value given by the seller to the buyer. It is of two types Trade discount and Cash discount.

30.

31.

32.

33.

34.

35.

36.

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Accou n ti n g An In trod u cti on Unit I

37. Trade Discount : It is an allowance off the list price allowed by the wholesaler to the retailer. This is a margin left for the retailer to accommodate his expenses and profit. Trade discount in not recorded in the books of accounts because it is not considered as a loss. This discount is an incentive to the buyer to purchase in huge quantity. Cash Discount : This is an allowance off the selling price allowed by the seller to the buyer. This discount is allowed to attract prompt payment from customers . This is a loss for the seller and hence it is shown in the books of accounts. Primary Book : This is the book in which the transactions are recorded primarily or originally. Subsidiary Book : This is the book in which the transactions of frequent nature are recorded. Principal Book : This is the book in which the transactions are recorded in a classified manner showing the net effects. This is also known as ledger. Systems of Accounting : There are three systems of accounting. i. Cash system ii. Mercantile system iii. Hybrid system i. Cash system : This is a system of accounting in which only cash transactions (received or paid) are recorded. No entry is made for the transactions in which payments or receipts are merely due. Mostly small businesses utilise this system of recording revenue and expenses. ii. Mercantile System : In this system of accounting, the credit transactions will be recorded . It means the transactions in which receipts or payments are due are recorded. iii. Mixed system : Under this system, both cash and mercantile systems are followed. Some records are kept under cash system and some others are kept under mercantile system. This system is followed by larger business units.

38.

42. 43. 44.

Accounting is a science or an art :

Science is a body of knowledge. Accounting is a science because it contains accounting principles, concepts and some rules. Again science establishes cause and effect relationship. But accounting does not always establish cause and effect relation-ship. So accounting is not a perfect science like physics, chemistry etc. However, it can be considered as a social science.

12

Unit I Introduction

Accounting An

An art is the practice and application of accepted theories, principles, rules etc. Accounting is an art because it is practiced on the basis of knowledge like accounting principles, concepts, conventions, assumptions and accounting standards. However, it can be concluded that accounting is both a science and an art.

Role of Accounting:
Accounting is a service activity and a support function in a business. Accounting has many important roles in one's personal as well as business life because accounting is not an end in itself, rather it is a means to an end. The following roles of accounting may be noted: a) It is an information system to many interested parties. b) It gives varieties of services to different users and has a support function in any business.

c) Accounting is the analyser, recorder and interpreter of financial

data and a good reporter of financial position and operating results in the form of statements. d) It is called the language of the business and communicates the performance and health of the enterprise. e) Accounting is a tool in decision making.

13

Accou n ti n g An In trod u cti on Unit I

MODEL QUESTIONS PART - A : SHORT QUESTIONS 1. Answer the following questions in two three sentences.
a) Who is considered as the Father of modern Accounting System? b) Why accounting is called the Language of Business? c) What do you mean by Book-keeping? d) Explain the meaning of Accounting? e) Define Accounting. f) Name the various branches of Accounting. g) Name any two users of accounting information. h) Is Accounting an information system? If yes, why? i) Accounting is considered as a science, why? j) Accounting is considered as an Art, why? k) Name the various systems of accounting? l) Write any two objectives of Accounting. m) Write any two objectives of Book keeping. n) Write any two functions of Accounting. o) Which accounting system is considered to be the father of other accounting systems? p) Is Accounting superior to book keeping? How? q) Write any two limitations of Accounting. r) Are accounting data helpful to management? How?

2. Give the meaning of the following terms : (Maximum 2 3 lines)

a) e) i) Assets Liability Capital m) Loss b) Drawin gs f)Transaction j)Entry n) Profit c)Entity g) Entrepreneu rs k) Net worth o) Income d) Business h) Expenses l) Revenue p) Books of Accounts

14

Unit I Introduction
q) Accounti ng r) Accountan cy

Accounting An
s) Double Entry t) Cash System of Accounting

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Accou n ti n g An In trod u cti on Unit I 3. Fill in the blanks.

a) b) c) d) e) Book keeping is a _____________ of accounting. Book keeping is the __________ of recording transactions. Accounting is a _________ science. Luca Pacioli is regarded as _________ of accounting. Under cash system of accounting, only _________ transactions are considered. f) Financial Accounting is related to preparation of ______ and _______. g) Cost Accounting is related to finding out _________. h) Supplying information to the management for decision making is done under ___________ accounting.

4. State whether the following statements are True or False.

a) b) c) d) Accounting is a physical science. Accounting and book-keeping are one and the same. Accounting records only transactions, but not events. Accounting records non-monetary aspects of transactions and events. e) Accounting starts where book-keeping ends. f) Accounting includes interpretation of results only. g) Cost accounting is the oldest of all branches of accounting. h) The object of book-keeping is to make a permanent record of each business transactions. i) Accounting is related to only identifying economic events, but not communicating their effects. j) The function of book-keeping is to measure changes in assets, liabilities and capital.

PART - B: SHORT QUESTIONS - (Answer within 3 - 5 sentences)

1. Answer the following questions briefly within 3 5 sentences.

a) b) c) d) Give the functions of accounting. Name the users of accounting information. Give the various systems of accounting. State any three limitations of accounting. Write any three objectives of Accounting.

e) 16

Unit I Introduction
f) g) h) i) j) k) l) m) n)

Accounting An

State any three distinctions between book-keeping and accounting. Mention the objectives of book-keeping. Explain accounting as a science. Explain accounting. Why investors make use of accounting information system? Give the utility of accounting information to employees. State how accounting data are useful to tenders, suppliers and creditors. How does accounting information serve customers? Show how accounting information are useful to governments.

PART - C : DESCRIPTIVE/SUBJECTIVE QUESTIONS 6. Explain the following questions.

a) Define Book-Keeping and Accounting . Distinguish between these two. b) What are the different systems of accounting. Clearly explain the Double entry system. c) Discuss the functions and objectives of Accounting in detail. d) Explain the various branches of accounting. e) Explain the importance of Accounting to various parties. f) Explain whether Accounting is a science or an art. g) Bring out the meaning of the following terms
a) Assets d) Business g) Revenue b) Capital e) Proprietor h) Loss c) Liability f) i) Equity Net worth

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UNIT - II
THEORY BASE OF ACCOUNTING
PRINCIPLES OF ACCOUNTING CONCEPTS OF ACCOUNTING
1. Going concern concept 2. Business entity concept 3. Money measurement concept 4. Cost concept 5. Accounting period concept 6. Dual aspect concept 7. Accrual concept 8. Realisation concept 9. Matching concept 10. Objectivity concept

CONVENTIONS
1. convention 2. 3. 4. Consistency convention Conservatism convention Materiality convention Full disclosure

ACCOUNTING STANDARDS

Theory Base of Accounting Unit II

THEORY BASE OF ACCOUNTING

A
ccounting is the language of business. Through this language, accounting information is communicated to various parties such as owner, government, creditors, workers etc. If accountants use different languages in communicating quantitative information then it will not be understandable to all the parties in the same sense. Hence to understand the same thing in the same sense by all the parties, accounting principles, concepts, and conventions are followed by accountants in preparing accounting statements. This brings about uniformity in understanding accounting which helps in the proper comparison of accounting data between two different periods or two different firms. This leads to the development of accounting principles, concepts and conventions.

Principles of Accounting:
The set of rules and practices followed in recording transactions and preparing financial statements are called accounting principles. These are a set of guidelines to be followed by the accounting professionals for preparing and reporting the financial information. Such principles are also known as Generally Accepted Accounting Principles or "GAPP". Further GAAP can be categorised into concepts, conventions, principles and accounting standards.

Concepts of Accounting :
The accounting concepts refer to the assumptions or ground rules upon which accounting is based. The useful concepts are discussed as under.

1.

Going concern concept :

Under this concept it is assumed that the business will have an indefinite life and will continue for a long period of time. The business will continue till the period it becomes in solvent. As per this concept, the business is not likely to be sold or liquidated in near future. So we are not interested to know the sales value of the assets at the end of the year . As such balance sheet is prepared by taking into account the cost price less depreciation, but not the sales price. Further, under this concept decision can be made about buying an asset or hiring an asset. For example, a contractor needs a building for his

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Unit II Accounting

Theory Base of

office at work site where the work will continue for six months. In this case, he will prefer hiring a building for a temporary period to construct a building of his own.

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Theory Base of Accounting Unit II 2. Business entity concept :

A business is an artificial entity distinct from its proprietor(s) . This concept is also known as separate entity concept which means that activities of the business are separated from its owner or other entities. The transactions of the proprietor are treated separate from the business. For example, when a person starts a business with cash, accounting considers that the business is receiving cash and that amount of money is payable by the business to the proprietor. Similarly, when the proprietor makes a drawing of cash from the business for his personal use, accounting considers that the business has paid cash and the proprietor is liable to the business to the extent of that accounting principle. Further, under this concept, the personal expenses or family expenses of the proprietor such as rent for his residential house, clothing, food, etc. must be separated from the business expenses. Thus, the personal expenses will not at all be recorded in the books of accounts. If this distinction is not maintained, the personal and business incomes and expenses will get mixed and it may create difficulty to know the true results (Profit or Loss) of the business.

3.

Money measurement concept :

This concept of accounting records only those facts and events which are expressible in monetary terms. The non-monetary transactions or factors such as efficiency of general manager, quality of the staff, quarrel between the production manager and sales manager etc. are not recorded in the books of accounts because these can not be quantified in monetary terms. Further, this concept implies that the legal currency of a country should be used for such measurement.

4.

Cost concept :

This concept maintains that the assets (Land and Building, Plant and Machinery etc.) and liabilities (Loans, Creditors etc.) should be shown at their cost price or acquisition value. For example, a business purchases a plot of land for Rs.50,000. The asset should be recorded in the books at Rs,50,000 but not at its market value which may be more than Rs.50,000/-. Thus, cost concept does not take into account the personal judgment or estimate. The accounts is kept free from bias.

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Unit II Accounting 5. Accounting period concept :

Theory Base of

It is assumed that business will continue for an indefinite period and it is reasonable to divide the life of the business into specific accounting periods. The business can only accept the period of twelve months or one year as the accounting period. All the business transactions taking place during this period, the profit or loss and the financial position at the end of this period are determined. Accounting period may be a period of twelve months from 1st January to 31st December or 1st April to 31st March or 1st October to 30th September or 1st July to 30th June. In case of Marwari communities, the accounting year ranges from one Diwali to another Diwali while some other business communities follow the Dussera to Dussera or Ganesh Puja to Ganesh Puja as their respective accounting years.

6.

Dual aspect concept :

This aspect is otherwise known as Accounting equivalence concept because there will be equality of source of funds and uses of funds always. This concept recognizes two aspects of accounting transactions . It is therefore necessary to recognize at least two accounts in recording a transaction. When a machinery is purchased, the two aspects involved in this transaction are (i) Machinery (coming in) and (ii) Cash (going out) . This dual aspect concept has developed double entry system of book keeping . This system states that for each and every debit, there must be a corresponding credit of equal amount in every transaction. In the above example Machinery A/c is debited and Cash A/c is credited by the same amount. This concept expresses the relationship among assets, liabilities and capital in the form of accounting equation which is given as under : Assets = Liabilities + Capital The above equation implies that a transaction must result in increase or decrease in assets, liabilities or capital. However, at any point of time, after recording the resultant changes in assets, liabilities and capital, we find that accounting equation still holds good.

7.

Accrual concept :

It suggests that incomes and expenses should be recognized as and when they are earned and incurred irrespective of whether the money is received or paid in that connection. Sometimes at the end of the year, some expenses are incurred but remain unpaid. These are called

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Theory Base of Accounting Unit II

outstanding or accrued expenses. Similarly some incomes are earned but is not yet received in cash by the end of the year. These are called accrued incomes. Accrual concept says that cash expenses and accrued expenses, cash incomes and accrued incomes are taken into account to find out the profit or loss during a period and also discloses the position in the statement to interested parties on the close of the accounting year.

Example :

Goods sold in cash Rs.1,000 and on credit Rs.500 Rent paid Rs.900 and rent unpaid Rs.100 Total income = Sales income received + Accrued incomes (Rs.1,000) (Rs.500) = Rs. 1,500 Total expenses = Rent paid (Rs.900) = Rs.1,000 + Rent outstanding (Rs.100)

As a result of the treatment made above, the Net Profit = Total Incomes - Total Expenses = Rs.1,500 - Rs.1,000 = Rs.500.

8.

Realisation concept :

This is also known as revenue recognition concept. Under this concept, revenue is said to be realized or earned only when it is received in cash or a promise to pay for it is received. Thus under realization concept, a sale or income with a very strong probability or expectation can not be recorded in the books of accounts only on the basis of such probability or expectation which may not get materialized in future. In general, revenue is recognized at the time of sale or at the performance of the service. The point / time at which the sale is made, depends upon the terms of the contracts between the buyer and the seller. But a sale is complete only when the goods are delivered by the seller and accepted by the buyer. To recognize a revenue, there is no need to wait until the cash is received. When revenue is recognized, it is included in the profit and loss account. As per realization concept, accountants refuse to record a sale unless it is realized or received in cash or a customer becomes legally liable to pay for it. Hence no profit or loss is said to have arisen on a sale which has not been realized.

Example : If goods costing Rs.15,000/- have a chance to be sold in the

market at Rs.20,000/- at higher than cost price, it will not be treated as an income because of this chance only. It will be treated as an income only when the goods are actually sold either in cash or on credit. Then only we

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Unit II Accounting

Theory Base of

can say that revenue is realized out of the sale and profit or loss on such sale shall be taken into consideration.

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Theory Base of Accounting Unit II 9. Matching concept :

Matching concept means comparison of revenue earned with expenses incurred (made) to earn that revenue during a period. This concept has developed the following equation which is vital to measure the financial results of a business. Net Income = Revenue - Expenses and losses The timing of incurring expenses and earning revenue does not always match. For Example, in case of a seasonal business, sales may take place only in four months in a year whereas fixed expenses like salaries, rent, etc. are incurred throughout the year.

10. Objectivity concept :

This concept is also known as verifiable objective evidence concept . This concept states that accounting date should be verifiable and free from any personal bias. In simple, we can say that accounting transactions must be recorded on the basis of documentary evidence like in voices, vouchers, circulars, correspondences, receipts, minute books etc. This helps the auditors to check or verify the correctness of transactions in the books of accounts on the basis of such documents. This will help the auditor to give his report whether profit or loss account and balance sheet show the true and fair picture of the business.

Conventions :
These are the traditions or customs or the rules or practices followed for preparing the accounting statement. The different conventions are presented in a simple manner as under :

1.

Full disclosure convention :

It is a good accounting practice to disclose all significant information or material fact fully and fairly while preparing accounting statements. The information or accounting data should have narrative explanation for correct understanding. However unnecessary explanations in the name of disclosure should be avoided . Disclosure convention requires to show the various assets along with a disclosure of their mode of valuation. Further it is required to show the various types of revenues and expenses separately for the purpose of disclosure. This will help to avoid confusion in accounting statements.

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Unit II Accounting 2. Consistency convention :

Theory Base of

This convention says that, the accounting practices should remain the same from one year to another year. Accountant should follow the same principles of recording and preparing the accounts for each and every year so that the data of accounting statement of one year can be compared with the same of the other years.

Example : If straight line method of depreciation is followed in one year,

it should be continuously followed in the future also. This helps proper comparison of accounting information in book value of assets. When a new practice is found more suitable in a changing circumstance, it can also be adopted but such a change and its effect must be stated separately in the form of an appendix. This will help the user of accounting information from being misled unnecessarily. He can be saved from drawing wrong conclusions on the basis of such statements with changes in accounting practices.

3.

Conservatism convention :

This convention is also known as convention of prudence. It states "anticipate no profits, but provide for all possible losses". This convention implies that the profit should not be over stated but all expected losses should be recognized and recorded. The implication of this convention is that all anticipated losses should be recognized and recorded but no unrealised gain should be recognized and recorded in the books of accounts. Thus, this convention gives due consideration to prospective losses but ignores all possible future profits. Efforts are to be made by accountants to show assets and incomes at the lowest likely values and losses and liabilities at the highest possible value.

Example :
i. Valuing closing stock at cost price or market price whichever is less. ii. Provision for doubtful debts (Anticipated loss) iii. Showing assets in balance sheet after deducting due depreciation.

4.

Materiality convention :

The terms materiality refers to the relative importance of an item. This convention requires that only important or material items should be focused while recording and presenting the financial information. The immaterial items or events should be ignored. An item or event should be considered to be material if it is relevant to the user of the financial statements. If the accountant records all material and immaterial facts in accounting, the records will be lengthy and over burdened with un

23

Theory Base of Accounting Unit II

necessary details. So the accountant should make a distinction between the material facts and immaterial facts and should record only the material facts. This will help in saving his time, reducing work load and making the accounting records more understandable. Materiality of items varies from industry to industry, firm to firm and company to company.

Example : Stationery items like pens, stapler,

paper etc may be shown as separate expenses by some firms where as some other firms may club all these items under the head 'office stationery'.

Accounting Standards:
Accounting bodies all over the world are striving to achieve a degree of uniformity in the accounting policies by prescribing certain accounting standards with respect to collection and presentation of accounting information. In India, recognizing the need to diversify the diverse accounting policies and practices prevalent in India. The Accounting Standards Board of the Institute of Chartered Accountants of India have framed and issued formally under the authority of Council of Chartered Accountants. In case a company does not confirm to the mandatory accounting standards the auditor will have to qualify his report justifying the reasons for deviations. The accounting standards presently issued are: Disclosure of accounting policies Valuation of inventory Changes in financial position Contingencies and events occurring after the balance sheet date Prior period and extraordinary items and changes in accounting policies Depreciation accounting Accounting for construction contracts Accounting for research and development Revenue recognition Accounting for foreign exchange transactions Accounting for government grants Accounting for investments Accounting for amalgamations

24

Unit II Accounting
Accounting for retirement benefits

Theory Base of

25

Theory Base of Accounting Unit II MODEL QUESTIONS PART A : VERY SHORT QUESTIONS 1. Answer the following questions in one or two sentences.
a) b) c) d) e) f) g) h) What do you mean by Accounting Principles? What is GAAP? What are the categories into which GAAP is classified? What do you mean by Accounting Concepts? What is Business Entity concept? What is Going Concern concept? What is Money Measurement concept? Under which concept, the non-monetary events or factors are ignored in accounting? i) What does the cost concept imply? j) Name the concept under which personal expenses and business expenses are treated as different? k) For which purpose, the world accounting bodies prescribe Accounting Standards? l) How does Institute of Chartered Accountants of India tackle the situation which diverse accounting policies that are followed in India? m) What do you mean by convention?

2.

Put a tick () against the correct alternative.

a) Recording of capital contributed by the owner as liability ensures the adherence of principle of i. ii. iii. iv. v. Double entry Going concern Separate entity Materiality Consistency

b) The basic concepts related to balance sheet are i. ii. iii. iv. Cost concept Business entity concept Accounting period concept Both (i) and (ii)

26

Unit II Accounting
v. All of the above

Theory Base of

c) The basic concepts related to P & L account are i. ii. iii. iv. v. Realization concept Matching concept Cost concept Both (i) and (ii) All of the above

d) As per the double entry concept i. ii. iii. iv. v. Assets + Liabilities = Capital Capital = Assets Liabilities Capital Liabilities = Assets Capital + Assets = Liabilities None of the above

e) Only the significant events which affect the business must be recorded as per principle of i. ii. iii. iv. v. f) Separate entity Accrual Materiality Going concern None of the above

P & L account is prepared for a period of one year by following i. ii. iii. iv. v. Consistency concept Conservatism concept Time period concept Cost concept None of the above

g) If the going concern concept is no longer valid, which of the following is true? i. ii. iii. iv. All prepaid assets would be completed written off immediately. Total contributed capital and retained earnings would remain unchanged. The allowance for uncollectable accounts would be eliminated. Intangible assets would continue to be carried at net amortized historical cost.

27

Theory Base of Accounting Unit II

v. Land held as an investment would be valued at its realizable value.

28

Unit II Accounting

Theory Base of

h) Under which of the following concepts are shareholders treated as creditors for the amount they paid on the shares they subscribed to? i. ii. iii. iv. v. Cost concept Duality concept Business entity concept Going concern concept Since the shareholders own the business, they are not treated as creditors i) The underlying accounting principle(s) amortization of intangible asset(s) is/are i. ii. iii. iv. v. j) i. ii. iii. iv. v. Cost concept Realization concept Matching concept Both (i) and (II) Both (iii) and (iv) necessitating

Which of the following practices is not in consonance with the convention of conservatism? Creating provision for Creating provision for Creating provision for Creating provision for None of the above bad debts discount on creditors discount on debtors tax.

k) The accounting measurement that is not consistent with the going concern concept is i. ii. iii. iv. v. l) i. ii. iii. iv. v. Historical cost Realization The transaction approach Liquidation value Continuity Recording of fixed assets at cost ensures adherence of Conservatism concept Going concern concept Cost concept Both (i) and (ii) Both (iii) and (iv)

29

Theory Base of Accounting Unit II

m) Basic principles of accounting relate to how assets, liabilities, revenues and expenses are to be identified, measured, recorded and reported. An item that is not a basic principle of accounting is i. ii. iii. iv. v. Materiality Historical cost Revenue recognition Matching Full disclosure n) Which of the following statement(s) is/are true? The entity concept of accounting is not applicable to sole trading concerns and partnership concerns. ii. Assets are to be shown in the balance sheet at the values realizable on liquidation. iii. Money measurement concept takes into account changes in the value of monetary unit. iv. What a creditor is paid, one asset is diminished and another asset is increased.
.

i.

(a) (b) (c) (d) (e)

Both (i) and (iii) above Both (i) and (ii) above Both (iii) and (iv) above Both (ii) and (iv) above None of the above statements is true

o) Omission of paise and showing the round figures in financial statements is based on i. ii. iii. iv. v. Conservatism concept Consistency concept Materiality concept Realization concept Cost concept p) A company purchased goods for Rs.5 lakhs and sold 9/10th of the value of goods for Rs.6 lakhs. Net expenses during the year were Rs.25,000/-. The company reported its net profit as Rs.75,000/- Which of the following concepts is violated by the company? i. ii. iii. iv. Realization Conservation Matching Accrual

30

Unit II Accounting
v. Materiality

Theory Base of

q) Accounting does not record non-financial transaction because of i. ii. iii. iv. v. r) Entity concept Accrual concept Cost concept Measurement concept Continuity concept Mr.Raj Sekhar, owner of M/s Sekhar Industries Ltd. owns a personal residence that cost Rs.6 lakhs, but has a market value of Rs.9 lakhs. During preparation of the financial statement for the business, the entire value of property was ignored and was not shown in the financial statements. The principle that was followed was The The The The The concept concept concept concept concept of of of of of the business entity the cost principle going concern principle duality principle realization principle

i. ii. iii. iv. v.

s) Provision for bad debt is made as per the i. ii. iii. iv. v. t) i. ii. iii. iv. v. Entity concept Conservatism concept Cost concept Going concern concept Time period concept Fixed assets and current assets are categorized as per concept of Separate entity Going concern Contingency Consistency Time period u) Capital is shown under liabilities because of the i. ii. iii. iv. v. Conservatism concept Accrual concept Entity concept Revenue recognition concept Marketing concept

31

Theory Base of Accounting Unit II

32

Unit II Accounting

Theory Base of

3. Mention whether the following statements are true or false.

a) Accounting records only those facts and events which are capable of being expressed in money. b) Business entity concept is not applicable to sole trading concern. c) Anticipate no profit and provide for all possible losses is the theme of accrual concept. d) All facts whether material or immaterial are recorded in accounting. e) Dual concept implies Capital + Liabilities = Assets f) Withdrawals by proprietor would reduce both assets and owners equity. g) Balance sheet is prepared on the basis of cost concept and accounting period concept. h) Excess of assets over liabilities represents capital. i) The aim of consistency convention is to facilitate comparison. j) Interest received on investments decreases owners equity. k) Revenue is said to be earned only when cash is received. l) Every expense increases owners equity. m) Going concern concept is not applicable to joint venture business. n) Assets must be equal to owners equity plus liabilities. o) Accounting year always starts from 1st January and ends on 31st December of every year. p) An increase in assets is not necessarily due to profits. q) Principles which have substantial support are known as generally accepted accounting principles. r) Personal transactions are distinguished from business transactions in accordance with accounting entity concept. s) Economic life of an enterprise is artificially dividend into periodic intervals in accordance with going concern concept. t) Assets are classified into current and fixed category according to accounting period concept. u) Revenues are matched with expenses according to matching principle. v) Relevance and reliability are two qualities that make accounting information useful. w) Accrual means recognition of revenue as it is earned and of costs as they are paid.

33

Theory Base of Accounting Unit II

x) Cost concept creates anamolies in inflationary situation. y) Unrealized profits must be considered in accounting. z) In accounting all transactions are recorded as having dual aspect.

4. Fill in the blanks:

a) Companies prepare financial statements at least yearly due to __________ assumption. b) Transaction of owner and business are separated due to _______ concept. c) __________ convention requires that the same accounting methods should be followed from year to year. d) Under ________ concept, it is assumed that the business will have an indefinite life. e) As per _________ concept, a business is treated as an artificial entity distinct from its proprietor. f) _________ concept recognizes two aspects of a transaction. g) _________ concept states that assets and liabilities should be recorded in the books at their cost price but not at realizable value. h) ________ concept says that accounting data should be verifiable and free from bias.

PART B : SHORT QUESTIONS (Answer in 3 5 sentences) 1. Give short answers to the following questions in three to four sentences each.
a) What is accounting equation? How does loss effects such an equation? b) Explain the principles of matching cost with revenue in determining business profit. c) Explain the significance of accrual concept of accounting. d) Write a short note on information revealed by a proper record of transactions of business. e) Discuss briefly any five of accounting concepts. f) Discuss any two accounting concepts and any two accounting conventions. g) Explain any four accounting concepts. h) What is matching principle? What is its use to a business concern? i) What is accounting period concept? What is its use? j) Explain conservatism convention with example.

34

Unit II Accounting
k) l) m) n) o) p)

Theory Base of

Explain accrual concept with example. Explain realization concept with suitable example. What is full disclosure convention? Give its utility. Give the meaning and utility of consistency convention. When should revenue be recognized? Why is Going concern assumption necessary?

2. State on which concepts and conventions the following statements are based.
a) Assets are recorded at the price paid at the time of purchase b) Profit or loss is determined at the end of each year. c) All expenses whether paid or not, all incomes whether received or not are to be taken in to account to find the profit and loss of given period. d) Calibre and quality of management is not disclosed in the Balance sheet directly. e) Accounting transactions must be supported by a documentary evidence.

PART - C : LONG TYPE QUESTIONS

1. Explain the terms 'Accounting Principles' 'Concepts' and 'conventions'. 2. What do you mean by Accounting concepts ? Briefly explain the various concepts used by the accountants while preparing accounting statements. 3. What is Accounting convention ? Explain clearly the conventions that are followed now-a-days. 4. Explain in detail the convention of Conservatism. Cite three examples where this principle is followed.

35

UNIT - III
ACCOUNTING EQUATION AND DOUBLE ENTRY BOOK-KEEPING
The Accounting Equation Double Entry Book-keeping Classification of Accounts Traditional Classification & Rules of Debit & Credit 1. Personal Account 2. Impersonal Account Real Accounts Nominal Accounts Advantages of Double Entry System Disadvantages of Double Entry System Accounting Cycle Accounting Procedure Journal Types of Journal Entries - Simple Entry - Compound Entry Examples of some Typical Transactions Advantages of Journal Limitations of Journal MODEL QUESTIONS

Accounting Equation & Double Entry Book-keeping Unit III

ACCOUNTING EQUATION AND DOUBLE ENTRY BOOK-KEEPING

The Accounting Equation:
In order to express the relationship among the three elements assets, liabilities and equity of the balance sheet we follow an equation which is known as Fundamental Accounting Equation. The equation can be written as follows: Assets (A) = Liabilities (L) + Equity (E) Eq. 1

The above equation has a unique feature in the sense that all business transactions will affect the equation in such a way that either the equality will be maintained or a new equality achieved. This is possible because of the operation of the double entry concept. Every business transaction can be explained in terms of its effect on the accounting equation. The increase in owners equity (E) can normally occur in the following situations: (a) there has been a fresh injection of funds by the owners (e.g. in terms of equity capital in case of a corporate entity). (b) There has arisen a surplus (excess of income over expenses). Infusion of funds by owners is an occasional feature and not a recurring phenomenon. Thus, if, for the sake of simplicity, we consider only situation (b) to be the cause for a change in owners equity, the equation (1) can be written as: A = L + E0 + (Y X) Eq. 2

Where, E0 is the equity at the beginning of an accounting period, Y is the income recognized in the same accounting period and X is the expenses recognized during that period. The operation of the accounting equation and the continuing equality of the two sides of the balance sheet can be explained with the help of the following examples.

32

Unit III Entry Book-keeping

Accounting Equation & Double

Example 1 : The following is the position of assets and liabilities of M/s. Aditya Industries Ltd. As on 31st March, 1997. Assets Land & building Plant & machinery Furniture & fixture Inventory Debtors Cash & Bank balance Liabilities Equity Long term loan Short term loan Creditors Amount (Rs. in Lakhs) 120 235 35 90 40 25 545 345 140 25 35 545 The following are some of the transactions entered into by M/s.Shiva Ltd. during 1997-98. a) A land was purchased for Rs.5 lakhs in cash b) Rs.35 lakhs collected from debtors towards outstanding as on 31st March 1997 c) Rs.15 lakhs was paid towards repayment of an installment of long term loan d) Rs.20 lakhs paid to creditors Show the effect of the above transactions upon the accounting equation. Solution: The accounting equation (A=L+E) as on 31st March, 1997 stands as below: A = L + E or Rs.545 lakhs = Rs.200 lakhs + Rs.345 lakhs The above equation is affected by every transaction entered into during 1997-98. We shall show the effect of each transaction separately. (a) A piece of land purchased for Rs.5 lakhs in cash : Original position : A (Rs.545 lakhs) = L (Rs.200 lakhs) + E (Rs.345 lakhs) Revised position : A {Rs.545 lakhs + Rs.5 lakhs(land) Rs.5 lakhs (cash)} = L (Rs.200 lakhs) + E (Rs.345 lakhs) or A (Rs.545 lakhs) = L (Rs.200 lakhs) + E (Rs.345 lakhs)

33

Accounting Equation & Double Entry Book-keeping Unit III

34

Unit III Entry Book-keeping

(b)

Accounting Equation & Double

Collected Rs.35 lakhs from debtors outstanding as on 31st 1997: A{(Rs.545 lakhs + Rs.35 lakhs(Cash) Rs.35 lakhs(Debtors)} Or A(Rs.545 lakhs) = L (Rs.200 lakhs) + E (Rs.345 lakhs)

March

(c)

Repaid an installment of long term loan Rs.15 lakhs: A {(Rs.545 lakhs) Rs.15 lakhs (Cash)} = L{Rs.200 lakhs Rs.15 lakhs (long term loan)} + E (Rs.345 lakhs) or A (Rs.530 lakhs) = L (Rs.185 lakhs) + E (Rs.345 lakhs)

(d)

Paid Rs.20 lakhs to creditors: A{Rs.530 lakhs Rs.20 lakhs(Cash)} = L{(Rs.185 lakhs Rs.20 lakhs (Creditors) + E (Rs.345 lakhs) or A (Rs.510 lakhs) = L (Rs.165 lakhs) + E (Rs.345 lakhs)

Example 2: The Cola Drinks Ltd. is an incorporated company to carry on the business of selling soft drinks. Transactions of the above company for the month of January were as follows: Jan. 1 Issued equity shares of Rs.20 lakhs (cash received in full) Jan. 5 Purchased land for Rs.5,75 lakhs Jan. 8 Purchased a building for Rs.4.40 lakhs, paying Rs.1.40 lakhs in cash and the balance payable in three monthly instalments. Jan. 15 Purchased machinery worth Rs.2.20 lakhs Jan. 20 Purchased raw materials for making soft drinks worth Rs.5.75 lakhs, paying Rs.1.75 lakhs in cash and accepting a bill drawn by the supplier for the balance. Jan. 25 Purchased further machinery worth Rs.50,000/Jan. 31 Sold cold drinks worth Rs.50,000/-(consuming Rs.30,000/- of syrup Show the effects of the above transactions upon the accounting equation.

35

Accounting Equation & Double Entry Book-keeping

Cash Jan.1 Jan.5 Balance Jan. 8 Balance Jan. 15 Balance Jan. 20 Balance Jan. 25 Balance Jan. 31 (+) 20,00,000 (-) 5,75,000 14,25,000 (-) 1,40,000 12,85,000 (-) 2,20,000 10,65,000 (-) 1,75,000 (+) 5,75,000 8,90,000 5,75,000 (-) 50,000 8,40,000 (+) 50,000 5,75,000 (-) 30,000 (+) 5,75,000 5,75,000 5,75,000 5,75,000 5,75,000 5,75,000 (+) 4,40,000 4,40,000 AS S E TS Inventory Land LI ABI LI TI E S + Building Machinery = = = = (+) 3,00,000 = 3,00,000 3,00,000 Creditors

Unit III
EQUITY Bills Payable (+) 20,00,000 20,00,000 20,00,000 20,00,000 20,00,000 20,00,000 20,00,000 (+) 20,000 (50,000 -

(+) 2,20,000 = 4,40,000 2,20,000 = 4,40,000 4,40,000 = 2,20,000 = (+) 50,000 = 2,70,000 =

(+) 4,00,000 3,00,000 4,00,000 3,00,000 4,00,000

Balance

8,90,000

545,000

575,000

440,000

270,000 =

300,000

400,000

30,000) 2,020,000

36

Unit III Entry Book-keeping Double Entry Book-keeping

Accounting Equation & Double

Double entry is a system of book keeping which recognizes and records double aspects of every transaction. Accounting process starts with identifying the transactions to be recorded in the books of accounts. The recording of transactions and events follows a definite rule. The transactions are identified as two different accounts. They will be recorded with a debit and a corresponding credit of equal amounts. This work is done on the basis of some rules of debit and credit. Thus, double entry implies that while recording the transaction, the accountant has to follow the rule "to each and every debit there is a corresponding credit of equal amount" . This reminds us of the two notable characteristics of double entry systems. i.e. (i) each transaction is recorded in two accounts, and (ii) each account has two columns. In double entry system, two entries are made for each transaction one entry as a debit in one account and the other entry as a credit in another account. The two entries keep the accounting equation in balance so that Assets = Liabilities + Owner's equity To illustrate, consider a repair shop with a transaction involving repair service performed in July 14 for a cash payment of Rs.275/-. In a single entry system of book-keeping, the transaction would be recorded as follows:

Single Entry Example

Date July 14 Description Performed repair service Revenue (Rs.) 275 Expenses(Rs.)

In a double entry system, the transaction would be recorded as follows:

Double Entry Example

Date July 14 Cash Revenue Description Revenue (Rs.) 275 275 Expenses(Rs.)

In this system, double entries take the form of debits and credits, with debits in the left column and credits in the right. For each debit, there is an equal and opposite credit and the sum of all debits must equal the sum of all credits. This principle is useful for identifying errors in the transaction recording process.

37

Accounting Equation & Double Entry Book-keeping Unit III

Further, also the fundamental Accounting Equation as shown above is the basis of preparing Balance Sheet. This accounting equation model has been in use since 18th century. It essentially status that a business owes all of its assets to either creditors or owners. The assets of a business are its resources and the creditors and owners are the sources of those resources. Let's take another example to understand double entry. When we purchase machinery for cash, it has two aspects: i. ii. Machinery is received into the business. Cash is paid out of the business.

The above two aspects are recorded in the name of Machinery account and Cash account. One of these two accounts will be debited and the other will be credited on the basis of some rules. The rules of debit and credit applicable for recording a transaction vary on the basis of the classification of accounts.

Classification of Accounts :
1. Modern classification/Accounting Equation based classification of accounts. 2. Traditional classification of accounts.

Types of Accounts on the basis of Accounting Equations and Rules of Debit & Credit
On the basis of Accounting Equation, accounts are classified as : (I) Assets (II) Liability (III) Capital (IV) Expenses and (V) Incomes

The rules of debit and credit are given as under

I. Assets : II. Liability : III. Capital : IV. Expenses: V. Incomes : Increase in asset is debited Decrease in asset is credited Decrease in liability is debited Increase in liability is credited Decrease in capital is debited Increase in capital is credited Increase in expenses is credited Increase in income is credited

38

Unit III Entry Book-keeping

Accounting Equation & Double

Example : Transaction - Pankaj Purchased machinery for Rs.20,000/Two aspects or two accounts involved in the transaction, viz. (a) Machinery and (b) Cash Types of Accounts - Machinery account is an asset. Cash account is also another asset. Example : 1 Transaction - Pankaj Purchased machinery for Rs.20,000/Two aspects or two accounts involved in the transaction, viz. (a) Machinery and (b) Cash Types of Accounts - Machinery account is an asset. Cash account is also another asset. Effects : Rule : Asset 'Machinery' increased in the business. Asset 'Cash' decreased in the business. Machinery account is debited. Cash account is credited.

Example : 2 Transaction : Pankaj paid to creditors Rs.3,000/Two aspects : Effects : Rule : a. Creditor's accounts b. Cash account Creditor is a liability which decreases Cash is an asset which also decreases Creditor account is debited by Rs.3,000/Cash account is credited by Rs.3,000/Goti invested Rs.50,000/- in his business.

Example : 3
Transaction : Two Aspects : a. Cash account b. Gotis capital account Effects : Rules : Asset "Cash" increases in the business Gotis capital also increases Cash account is debited by Rs.50,000/Capital account is credited by Rs.50,000/-

39

Accounting Equation & Double Entry Book-keeping Unit III

Example : 4 Transaction : Two aspects : Effects : Rules: Example : 5 Transaction : Two Assets : Effects : Rules : Pankaj received interest on investment Rs.200/a. Cash account b. Interest account Cash is an asset in business which incases Interest is an income for business which also increases Cash account is debited by Rs.200/Interest account is credited by Rs.200/Ajay paid wages Rs.500/a. Wages account b. Cash account Wages is an expense which increases in the business Cash is an asset which decreases in the business Wages account is debited by Rs.500/Cash account is credited by Rs.500/-

Traditional classification of accounts and rules of Debit and Credit :

Accounts, in a traditional way, are classified as Personal and Impersonal Account. Impersonal Accounts are again classified as Real and Nominal.

1.

Personal Accounts :

The Accounts recording transactions relating to persons or firms or companies or institutions are called Personal Account. Examples : Rama's account, XYZ & Co's account, Nalco's account, Bank account, BJB college's account, Capital account, Drawings account, Debtor's account, Creditor's account, etc.

2.

Impersonal Accounts :

Accounts which are not personal such as machinery account, cash account, rent account, etc. are regarded as Impersonal Accounts. As mentioned earlier, the impersonal accounts may be classified into two categories i.e. (a) Real accounts and (b) Nominal accounts.

40

Unit III Entry Book-keeping

Accounting Equation & Double

(a)

Real accounts : These are the accounts recording transactions relating to real things or assets.

Examples : Cash, Stock, Furniture, Plant and Machinery, Land and Building, Good- will, etc. (b) Nominal accounts : These are the accounts which record transactions relating to the expenses or losses, and incomes or gains,

Examples: Rent, interest, salary, discount, wages, bad debts, etc. Rules of Debit and Credit: 1. Personal accounts : 2. Real Accounts : 3. Nominal Accounts : Debit the receiver Credit the giver Debit what comes in Credit what goes out Debit the expenses and losses Credit the incomes and gains

Let us take the same examples as already given and apply the rules of debit and credit on the basis of traditional classification of account. Example - 1 : Transaction : Two Aspects : Types of Accounts : Effects : Rules : Example - 2 : Transactions : Two Aspects : Types of Accounts : Dhaval paid to creditors Rs.3,000/a. Creditors account b. Cash account a. Creditor's account - Personal account b. Cash account - Real account Dhaval purchased machinery worth Rs.20,000/a. Machinery Account b. Cash Account a. Machinery - Real account b. Cash - Real account a. "Machinery" comes in to business b. "Cash" goes out of business a. Machinery account is debited by Rs.20,000/b. Cash account is credited by Rs.20,000/-

41

Accounting Equation & Double Entry Book-keeping Unit III

Effects : a. "Creditors" receive cash Rs.3,000/b. "Cash" goes out of the business Rs.3,000/a. Creditors account is debited by Rs.3,000/b. Cash account is credited by Rs.3,000/Dhaval invested Rs. 50,000/- in his business. a. Cash account b. Dhavalscapital account a. Cash account - Real account b. Dhaval's capital account - Personal account a. "Cash" comes in to the business. b. "Dhaval" is the giver of the "Cash". a. Cash account is Debited by Rs. 50,000/b. Dhaval's capital account is credited by Rs.50,000/Dhaval paid wages Rs.500/a. Wages account b. Cash account a. Wages account - Nominal account b. Cash account - Real account a. "Wages" is an expense for the firm b. "Cash" goes out of the firm a. Wages account is debited by Rs.500/b. Cash account is credited by Rs.500/Dhaval received interest on investment for

Rules : Example - 3: Transactions: Two Aspects : Types of Account : Effects : Rules : Example - 4: Transaction : Two Aspects : Types of account : Effects : Rules: Example - 5 : Transaction : Rs.200/Two Aspects : Types of account : Effects : Rules:

a. Cash account b. Interest account a. Cash account - Real Account b. Interest account - Nominal Account a. "Cash" comes in to the business b. "Interest" is gained by the business a. Cash account is debited by Rs.200/b. Interest account is credited by Rs.200/-

42

Unit III Entry Book-keeping

Accounting Equation & Double

The above rules of Debit and Credit can be presented in the form of analysis table as under : Let us take the same examples.

43

Accounting Equation & Double Entry Book-keeping

Sl. No. Transactions Names of Account s involved Traditional type of classificatio n P / R / N Effects Rule Dr./Cr. On basis of Accounti ng Equatio n

Unit III
Effect Rule Dr./Cr.

1.

2.

3.

Pankaj invested Rs.50,000/in his business Pankaj purchased Machinery for Rs.20,000 Pankaj paid to Creditors Rs.3,000/Pankaj paid wages Rs.200/Pankaj received interest on investment

Cash Pankaj s Capital Machin ery Cash Credito rs Cash Wages Cash Interest

Real Personal

Comes in Goes out Comes in Goes out Comes in Goes out Expens es goes out Comes in Gain

Dr. Cr.

Asset Capital

Increases Increases

Dr. Cr.

Real Real

Dr. Cr.

Asset Asset

Decrease s Decrease s Decrease s Decrease s Increases Decrease s Increases Increases

Dr. Cr.

Personal Real Nominal Real Nominal

Dr. Cr. Dr. Cr. Dr. Cr.

Liability Asset Expens es Asset Asset Income

Dr. Cr. Dr. Cr. Dr. Cr.

4. 5.

44

Unit III
Rs.200/-

Accounting Equation & Double Entry Book-keeping

45

Accounting Equation & Double Entry Book-keeping Unit III Advantages of Double Entry System
1. Scientific system - In comparison to single entry system and old Indian system of accounting, double entry system is considered more scientific. It gives expected results. Complete record - It is a complete system of recording the business transactions. Test of accuracy :- Double entry system ensures the accuracy of accounts through the technique of trial balance. It helps in accurate calculation of profit and loss in complex organisations. Determination of profit of loss - This system aims at ascertaining result of the business by preparing Profit & Loss Account and Balance Sheet. Various financial statements can be prepared from the accounts prepared under this system. Helpful for control - Double entry system includes preparation of various accounts. Such accounts supply useful/needful informations to the management for the purpose of better control. Comparison - Double entry records and financial statements of a year can be compared with the same of the other years. If any change is noticed, reason for such change may be taken for consideration. Decision making - Double entry system supplies various accounting data to the management to help them for better decision making. Easy detection of errors and frauds - This system removes the errors and frauds. If any error takes place, it can be detected easily through trial balance and some other techniques.

2. 3.

4.

5.

6.

7. 8.

Disadvantages of Double Entry System

1. Expensive - Under double entry system, a number of books of accounts are to be maintained. It involves both time and money. So it is a costlier method for small business. Lack of accuracy - Agreement of trial balance is only test of arithmetical accuracy, but not a conducive proof of accuracy. Difficulty to understand - An ordinary businessman may not be able to understand the complicacies of double entry system. Hence, he may not be able to record and process his transactions correctly under this system.

2. 3.

46

Unit III Entry Book-keeping Accounting cycle

Accounting Equation & Double

We understand that accounting function starts with the identifying and recoding of transactions and events and ends with the presentation of financial statements in a sequence. This sequence of activities in an accounting process is called "Accounting Cycle of Accounting Trail". Sequence of activities in accounting procedure can be presented in the form of steps as given below:

Steps in Accounting Cycle:

Identify the Transaction : Identify the event as a transaction and generate the source document Analyse the Transaction Determine the transaction amount, the accounts affected and the direction in which they are affected

Record in Primary books The transaction is recorded in journals as a debit and a credit Post to Secondary books or Post to Ledger: The journal entries are transferred to appropriate T-accounts in the Ledger Prepare Trial Balance: A trial balance is calculated to verify that the sum of the debits is equal to the sum of the credits Make adjusting entries: Adjusting entries are made for accrued and deferred items. The entries are journalized and posted to T-accounts in the ledger Prepare Adjusted Trial Balance A new Trial Balance is prepared after making the adjusting entries. Prepare Financial Statements: The Profit & Loss Account and Balance Sheet can be prepared on the basis of adjusted Trial Balance

47

Accounting Equation & Double Entry Book-keeping Unit III

The balances on various accounts as shown in the Balance Sheet are then transferred to new books of accounts for the next year to complete the cycle. Accounting Procedure - Journal Journal is the book of original entry. The transactions are recorded for the first time in the book in a chronological order i.e, in order of dates and occurrences. Since the transactions are recorded for the first time in this book, hence, it is called the book of original entry. The process of recording transactions in the journal is called Jouralising. Each transaction is separately recorded on the basis of some source documents. The source documents are briefly explained below: When a business transaction occurs, a document known as the source document captures the key data of the transaction. The source document describes the basic facts of the transaction such as its date, purpose, and amount. Some examples of source documents: - Cash receipts - Cancelled cheque - Invoice sent or received - Credit memo for a customer refund - Employee time sheet The source document is the initial input to the accounting process and serves as objective evidence of the transaction, serving as part of the audit trail should the firm need to prove that a transaction occurred. To facilitate referencing, each source document should have a unique identifier, usually a number or alphanumeric code. Pre-numbering of commonly used forms help to enforce numbering, to classify transactions and to identify and locate missing source documents. A welldesigned source document form can minimize errors and improve the efficiency of transaction recording. The source document may be created in either paper or electronic format. For example, automated accounting systems may generate the source document electronically or allow paper source documents to be scanned and converted into electronic images. Accounting software often provides onscreen entry forms for different types of transactions to capture the data and generate the source document.

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Unit III Entry Book-keeping

Accounting Equation & Double

The source document is an early document in accounting cycle. It provides the information required to analyse and classify the transaction and to create the journal entries. The transactions and events are to be recorded in a proforma given below: Proforma of Journal Date Particulars L.F. Amount (Rs.) Dr. Amount (Rs.) Cr.

In the above proforma, there are five columns which explains the steps in Journalising. 1. 2. Date : The first column contains the date of transactions with month and year in an orderly manner. Particulars : The second column is the column which contains particulars. The accounts to be debited and credited are written here along with the narration in the first line, account debited is indicated by the word "Dr" written to the right of the account. The account credited is written in the next line with the work "To" pre-fixed to it. Then a brief explanatory note is given within a bracket to explain the nature of the transaction. This is called 'narration'. L.F. : The third column stands for L.F or Ledger Folio. This indicates the page number of the ledger book which contains the relevant account against which the page number is given. This number is used for reference. "Dr" : The fourth column contains the amount to be debited. "Cr" : The fifth column contains the amount to be credited.

3.

4. 5.

Example : Journalise the following transactions of Pankaj for the month of March 2004. 2004 March 1st 3rd Pankaj started business with capital Pankaj purchased land for cash Rs. 1,00,000.00 35,000.00 23,000.00 4,000.00

12th He paid on completion of building constructed 14th Purchased furniture on cash

49

Accounting Equation & Double Entry Book-keeping Unit III

18th Purchased stock for cash 20th Purchased goods on credit 22th Sold goods 30th Paid salaries 31st Paid wages 31st Deposited into bank 18,000.00 3,000.00 57,000.00 2,000.00 15,000.00 40,000.00

Journals of Pankaj for the month ending on 31st March 2004

50

Unit III Entry Book-keeping

Accounting Equation & Double

51

Accounting Equation & Double Entry Book-keeping Unit III

Types of Journal Entries : There are two types of Journal Entries viz. 1. Simple Entry 2. Compound Entry 1. Simple Entry : In this entry there are only two accounts involved in the transaction. One account is debited and the other account is credited with the same account. Example : Transaction : Purchased goods for cash Rs. 5,000/- Journal Entry - (simple) Purchase Account Dr. Rs.5,000/To Cash Account Rs.5,000/(Being goods purchased)

2. Compound Entry : When the transaction involves more than two accounts then the record of such transaction is called compound entry. In a compound entry, there may be two or more accounts to be debited and only one account to be credited or vice-versa. Example - 1: Transaction (Compound) Received Rs.485/- from Satish in Rs.500/- due from him. Compound Journal Entry : Cash Account Discount Account To Satish Account Example - 2: Transaction : Purchased goods worthRs.500/- on cash and Rs.1,000/- on credit. Journal Entry : Purchases Account Dr. 1500.00 To Cash Account 500.00 To Creditor's Account 1,000.00 Dr. Dr. full and final settlement of claim of

Rs.485/Rs.15/Rs.500/-

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Unit III Entry Book-keeping

Accounting Equation & Double

Examples of some typical transactions : 1. Bad Debts : When the debtor is unable to pay the dues in full due to his insolvency, then unpaid portion is treated as bad debt. It is a loss for the business. In such a case, the following journal entry is made: Cash Account Dr. Bad Debt Account Dr. To Debtor's Account 2. Bad debt recovered : Sometimes the amount written off as bad debt in some past year may be received at present. The amount so received is called "Bad debt recovered". It is a gain for the business. This transaction is recorded by the following journal entry : Cash Account Dr. To Bad Debts Recovered Account 3. Drawings : The amount of goods or cash on both with-drawn by the proprietor for his personal use is called "Drawings". For this the following Journal entry is made: Drawings Account Dr. To Purchases Account To Cash Account 4. Loss by fire/theft : Goods lost by fire/theft Account Dr. To Purchases Account 5. Goods given as charity : Charity Account Dr. To Purchases Account 6. Goods distributed as free sample : Advertisement Account Dr. To Purchases Account 7. Depreciation provided on Fixed Asset : Journal Entry : Depreciation Account Dr. To Concerned Fixed Asset Account 8. Outstanding Expenses : Journal Entry: Concerned Expenses Account Dr. To Outstanding Expenses Account

53

Accounting Equation & Double Entry Book-keeping Unit III

Example - Rent outstanding Rs.500/Journal Entry : Rent Account Rs.500/To Outstanding Rent Account Rs. 500/9. Prepaid Expenses : Journal Entry : Prepaid Expenses Account Dr. To Concerned expenses account Example - Rent to the extent of Rs.200/- has been paid in advance Journal Entry: Prepaid Rent Account Dr. To Rent Account 10. Accrued Income : Journal Entry: Accrued Income Account Dr. To Concerned Income Account 11. Income Received in Advance: Journal Entry: Concerned Income Account Dr. To Income received in advance account Advantages of Journal : The following are the main advantages given by the use of journal. Journal is a chronological record of all transactions. It is a permanent record of the transactions in order of their occurrences. It replaces memory work. ii. The narration given in the journal helps to understand the transaction and the entry properly. iii. It reduces the possibility of error because the amounts debited and credited are written side by side which can be immediately compared. Limitations of Journal : i. ii. If all transactions are recorded in journal then the volume of journal may be voluminous. This may create difficulty in transferring accounts from journal to ledger. Journal will not help to ascertain daily cash balance because cash transactions are recorded in the journal along with other transactions. i.

54

Unit III Entry Book-keeping

Accounting Equation & Double

Record the following transactions in the Journal of Raj Medical Stores, who started business on 1st January 2002, with a capital of Rs. 20,000. Date 2000 Jan.2nd 9th 9th 20th 23th 25th 28th Particulars Amount (Rs.)

Deposited into bank Purchased computer from Jawahar and gave him cheque Paid installation charges of computer Purchased medicines from Naveen at the list price of Rs 2000/- at 10% trade discount Furniture costing Rs.500/- was used in furnishing the office Sold medicines to Naresh (List price Rs.1000/- at a trade discount of 5%) Naresh was declared insolvent and 60 paise in a rupee was received as final dividend from the official receiver Paid to Naveen through a cheque in full settlement Paid rent Rent outstanding

10,000.00 5,000.00 100.00

29th 30th

1,750.00 700.00 200.00

31st 31st

Depreciation provided on computer for one month @ 10% per annum Provide interest on capital for one month @ 5% P.a.

55

Accounting Equation & Double Entry Book-keeping Unit III SOLUTION : Journal of Raj Medicine Store for the month ending on 31st January 2002
Date Particu lars L.F . Dr. Am t oun (R s.) 2002 Jan . 1st 2n d. Cash Accou t Dr. n T Capital Accou t o n (Bein Bu g siness started) Ban Accou t Dr. k n T Cash Accou o nt (Bein Cash deposited in Bank) g M inery Accou Dr. ach nt T Ban Accou o k nt (Bein Pu g rchase of m in by ch e) ach ery equ M inery Accou Dr. ach nt T Cash Accou o nt (Bein installation charges paid) g Pu ases Accou t Dr. rch n T N een o av (Bein goods purch g ased @10% trade discoun t) Fu itu Accou Dr. rn re nt T Cash Accou o nt (Bein furn g iture pu rchased for office) N aresh Dr. T Sales Accou t o n (Bein credit sale to N g aresh @5% trade discoun t) Cash Accou t Dr. n Bad Debts A/c. Dr. T N o aresh Accou nt (Bein am t receiv as fin div g oun ed al iden from d official receiv of N er aresh ) N een Dr. av T Ban Accou o k nt T Discou t Accoun o n t (Bein ch e issu to N een an discoun g equ ed av d t receiv ed) R t Accou Dr. en nt T Cash Accou o nt T O tstandin rent Accoun o u g t (Bein ren paid an ren ou g t d t tstandin g) Depreciation Accoun Dr. t T Com o puter Accoun t (Bein depreciation prov g ided on com puter 5,100 x (10/100) x (5/100) x 1/1/12=42.50) Interest pm Capital Accou Dr. nt T Capital Accou t o n (Bein interest on capital prov g ided 20,000 x 5/100x 1/12 = 83.33) T otal 20,000 20,000 10,000 10,000 5,000 5,000 100 100 1,800 1,800 Cr. Am nt ou (R s.)

9th

9th

20th

23rd

500 500 950 950

25th

28th

570 380 950

29th

1,800 1,750 50

30th

900 700 200 42.50 42.50

31st

31st

83.33 83.33

42,125.83

42,125.83

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Unit III Entry Book-keeping

Accounting Equation & Double

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Accounting Equation & Double Entry Book-keeping Unit III

MODEL QUESTIONS PART - A: VERY SHORT QUESTIONS

1. Define the following terms: i) Double entry ii) Journal iii) Narration iv) Accounting Equation v) Accounting cycle vi) Ledger Folio vii) Journalising viii) Single Entry ix) Compound entry x) Personal account xi) Real Account xii) Nominal Account xiii) Bad debts xiv) Accrued income xv) Drawings xvi) Prepaid expenses 2. Tick mark () the alternative you consider to be correct: a. Which of the following is an example of personal account? a. Machinery b. Rent c. Cash d. Creditor e. Salary b. Payment received from debtor. a. b. c. d. e. Decreases the total assets Increases the total assets Results in no change in the total assets Increases the total liabilities Decreases he total liabilities.

c. Payment of salary is recorded by a. b. c. d. e. Debiting Debiting Debiting Debiting Debiting salary a/c, crediting cash a/c cash a/c, crediting salary a/c employee a/c, crediting cash a/c cash a/c, crediting employee a/c employee a/c, crediting salary a/c

d. Cash purchases a. Increases assets b. Results in no change in the total assets

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Unit III Entry Book-keeping

c. Decreases assets d. Increases liability e. Decreases liability.

Accounting Equation & Double

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Accounting Equation & Double Entry Book-keeping Unit III

e. Opening Capital 50,000 Closing Capital 52,000 Net profit 5,000 If the above figures are drawn from the books of a trader, then his drawings, if any, are a. b. c. d. e. Rs.5,000 Rs.3,000 Rs.1,000 Rs.6,000 Rs.2,000

f. Journal is a a. b. c. d. e. Book of original entry Classified summary of all transactions Permanent record Both (a) and (b) above None of the above.

g. Purchases of goods on credit from A is recorded as a. b. c. d. e. Debit Debit Debit Debit Debit Purchases A/c, Credit Cash A/c A A/c, Credit Purchases A/c Purchases A/c, Credit A A/c Stock A/c, Credit Purchases A/c A A/c, Credit Stock A/c

h. Goods returned from X is entered as a. b. c. d. e. i. Debit Debit Debit Debit Debit X A/c, Credit Purchase Returns A/c X a/c, Credit Cash A/c Sales return A/c, Credit X A/c X A/c, Credit Sales A/c Sales A/c, Credit Xs A/c

The total assets of the firm were Rs. 50,000, outside liabilities were Rs. 30,000, capital contributed by the owner is a. b. c. d. e. Rs. Rs. Rs. Rs. Rs. 50,000 30,000 20,000 10,000 80,000

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Unit III Entry Book-keeping

j. Opening Capital Closing Capital Net profit The trader has a. b. c. d. e.

Accounting Equation & Double

80,000 1,20,000 20,000

Drawings of Rs. 20,000 Brought additional capital of Rs.20,000 Brought additional capital of Rs.40,000 Drawings of Rs. 40,000 Both (a) and (c) above 50,000 1,00,000 20,000

k. Opening Balance of Debtors Closing Balance of Debtors Receipts from the Debtors

Credit sales made during the year are a. b. c. d. e. Rs. Rs. Rs. Rs. Rs. 50,000 70,000 80,000 1,50,000 1,70,000

l. When fixed assets are sold a. b. c. d. e. The total assets will increase The total liabilities will increase The total assets will decrease There is no change in the total assets The liabilities will decrease.

m. Withdrawal of goods from stock by the owner of the business for personal use should be recorded by a. b. c. d. e. Debiting Debiting Debiting Debiting Debiting stock account and crediting capital account capital account and crediting drawings account drawings account and crediting cash account drawings account and crediting stock account stock account and crediting drawings account

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Accounting Equation & Double Entry Book-keeping Unit III

n. Which of the following transactions would cause a change in owners equity? a. b. c. d. e. Repayment of a bank loan. Payment of dividends and unprofitable operations. Sale of land on credit for a price above cost. Purchase of assets and incurrence of liabilities. Both (b) and (c) above.

o. Goods returned by customers is entered by a. Debiting account b. Debiting c. Debiting account d. Debiting e. Debiting purchases account and crediting customers customers account and crediting sales account sales returns account and crediting customers customers account and crediting goods account purchases account and crediting sales account.

p. Withdrawals by proprietor would a. b. c. d. e. Reduce both assets and owners equity Reduce assets and increase liabilities Reduce owners equity and increase liabilities Have no affect on the balance sheet Reduce owners equity and increase assets.

q. Which of the following is true? a. The payment of a liability causes an increase in owners equity. b. The collection of an account receivable will cause total assets to increase. c. The accounting equation may be stated as: Assets+ Liabilities = Owners equity. d. The purchase of an asset such as office equipment, either for cash or on credit, does not change the owners equity. e. A balance sheet reports financial activities for a specific time period such as a year. r. Purchase of goods for cash from Rasheed is to be recorded by: a. Debiting purchases account and crediting Rasheed Account b. Debiting cash account and crediting Rasheed account c. Debiting purchases account and crediting cash account

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Unit III Entry Book-keeping

Accounting Equation & Double

d. Debiting Rasheed account and crediting cash account e. Debiting cash account and crediting purchases account. s. XYZ Ltd. paid wages of Rs. 8,000 for erection of machinery. The journal entry for the transaction is a. b. c. d. e. t. Debit Debit Debit Debit Debit wages and credit cash machinery and credit cash wages and credit erection charges machinery and credit erection charges wages and credit machinery account.

Which of the following transactions would cause a change in owners equity? a. b. c. d. e. Purchase of a machinery on credit. Sale of a furniture for a price above cost. Repayment of a bank loan. Cash collected from debtors. All the above situations.

u. The balance in the capital account of a business at the beginning of the year is Rs.1,10,000. During the year, the owner has introduced a further capital of Rs.50,000. If the balance in the capital account at the end of the year is Rs.1,85,000, the profit made by the business during the year is a. b. c. d. e. Rs.1,25,000 Rs.1,00,000 Rs.75,000 Rs. 50,000 Rs. 25,000

v. Which of the following transaction does not change the total assets figure? a. Sale of machinery for cash at a price less t6han the book value. b. Purchase of office equipment on credit. c. Borrowing money from a bank. d. Collection of an account receivable. e. None of the above. w. Purchase of goods on credit

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Accounting Equation & Double Entry Book-keeping Unit III

a. b. c. d. e. Increases liabilities Increases assets Increases both assets and liabilities Decreases assets Decreases liabilities.

x. Purchase of raw materials for cash a. b. c. d. e. Increases total assets Increases total liabilities Leaves total assets unchanged Increases total fixed assets Increases total current assets.

3. Compute the amount of missing figures : Assets a. b. c. 30,000 35,000 ? 18,000 ? 22,000 Liabilities ? 18,000 13,000 Capital

4. Indicate to which main accounts do the following belong: (a) Cash (b) Plant and Machinery (c) Capital (d) Bank (e) Discount paid (f) Rent received (g) Insurance Premium (i) Loss by theft (j) Charity (k) Advertisement (l) Unpaid rent (m) Prepaid Insurance (n) Commission received in advance. 5. What are the account affected by the following transaction : (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) Goods withdrawn by the proprietor. Goods returned to Hari, the supplier. A cheque received from cash sales deposited in the bank. Madhu, a customer became insolvent. The owner paid Life Insurance premium for the life of his children. Expenses incurred in bringing the goods purchased. A loan obtained from a friend of the trader. A chedit sale made to Zamir. Charges paid for the installation of a ceiling fan Goods lost by fire and half of the loss compensated by Fire Insurance Co.

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Unit III Entry Book-keeping

Accounting Equation & Double

(k) Money received in respect of a debt which was written off as bad debt earlier (l) Bought goods for the business by the proprietor from his own pocket (m) Paying fire insurance premium for the house where the owner is residing (n) Repairs expenses incurred for newly purchased second hand truck (o) Cheque of a customer dishonored (p) Payment of Income tax by the owner 6. Fill up the gaps : a. Wages paid to the labourers for installation of machinery will be debited to ________ A/c b. Goods taken away by the proprietor for personal use will be debited to _____ A/c. c. Loss due to fire when fully admitted by the Insurance Co. will6be debited to ____ A/c d. Goods distributed as charity will be credited to ____ A/c. e. Goods returned by the customer will be debited to _____ A/c f. Rent paid by the proprietor from his personal fund will be credited to ____ A/c. 7. Mention whether the followings are Debit or Credit. Write Dr. for Debit and Cr. for Credit. i. Increase in assets ii. Increase in liabilities iii. Increase in owners equity iv. Decrease in assets v. Decrease in owners equity vi. Decrease in capital vii. Decrease in liabilities viii. Increase in capital ix. Increase in drawings 8. What effects do the transactions given below have on the owners equity. Write Increase, if there is an increase, Decrease if there is a decrease and nil in case there is no effect.

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Accounting Equation & Double Entry Book-keeping Unit III

i. ii. The owner introduces business. capital of Rs.10,000/- in the

Purchases furniture on account for Rs.1,000/-

iii. Sells goods worth Rs.300/- for Rs.400/- in cash iv. Pays rent for his shop Rs.30/v. Withdraws Rs.100/- from his business vi. Deposit Rs.150/- with the bank vii. Pays Rs.100/- to the supplier for furniture viii. Goods worth Rs.80/- destroyed by fire 9. Indicate Increase (), Decrease () or No change (O) in the accompanying table as illustrated in the beginning. i. ii. Paid Salary A() = L(O) + O.E. () Sold goods for a profit in cash

iii. Sold goods for a loss in credit iv. Purchased a typewriter on credit v. Purchased goods in cash vi. Withdrew goods from the business vii. Paid the supplier of the typewriter 10. If Assets = Building + Stock + Debtors + Cash + Bank, Liability = Creditors + Bills Payable Owners Equity = Capital + Profit Loss Assets = Owners Equity = Capital + Profit Loss and Assets = Owners Equity + Liabilities, then find out the missing figures a. Building 8,000 Cash 3,000 Creditors 6,000 Capital 4,000 Profit ? b. Assets 40,000 Creditors 13,000 Profit 2,000 Capital 23,000

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Unit III Entry Book-keeping

Bills payable c. ?

Accounting Equation & Double

Owners Equity 20,000 Creditors 10,000 Bills Payable 8,000 Assets ?

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Accounting Equation & Double Entry Book-keeping Unit III

d. Building 20,000 Stock 10,000 Cash 8,000 Liabilities 15,000 Capital 25,000 Loss ? e. Stock 8,000 Building 12,000 Cash 5,000 Liabilities 10,000 Loss 2,000 Capital ? PART - B : Short Questions 1. 2. What is balance sheet equation ? What are the items that constitute the elements of this equation ? How many possible ways are there for the change of Assets, Liabilities and Owners equity. What are they ? State one example for each of them. Give example of at least one transaction for each of the following: i. ii. Increase in Asset and Increase in Liability Increase in Asset and Increase in Owners Equity.

3.

iii. Decrease in Asset and Increase in Owners Equity iv. Decrease in Asset and Decrease in Liability v. Decrease in Asset and Decrease in Capital vi. Decrease in Liability and Increase in Capital

4.(A) Ramesh started his business with a capital of Rs.1,00,00/-Purchased building for Rs.40,000/- and stock for Rs.30,000/-, Sold goods worth Rs.10,000/- at a profit of Rs.5,000/-. Goods worth Rs.500/- were destroyed by fire. Purchased goods from Shyam on credit for Rs.3,000/-. What is his present equity ?

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Unit III Entry Book-keeping

Accounting Equation & Double

(B) During the year Manoj had the following transactions i. Sold a machinery at a profit of Rs.3,000/ii. Purchased merchandise for Rs.10,000/- on credit from Manohar iii. Sold to Zahir for Rs.18,000/- and incurred a loss of Rs.2,000/ iv. He withdrew Rs.3,000/- from the business. If his present equity is Rs.50,000/-, what was his initial equity ?

(C) Kitu, a small businessman had an initial capital of Rs.5,000/- in the

form of cash and during the month he had the following transactions : i. ii. iii. iv. v. Purchased goods for Rs.1,800/- and a shop for Rs.1,200/Earned a profit of Rs.1,600/- from sales and incurred a loss of Rs.700/- due to theft. Acquired furniture of Rs.300/-. His expenses for the maintenance of the shop are Rs.80/-. What is his present capital ?

5. Answer the following questions. a) Define journal b) Why Journal is called a book of original entry? c) What is the rule of Real A/c for debit and credit? d) Distinguish between Journal and Journalising. e) Justify the name double entry book-keeping f) Give two advantages of Double entry system of bookkeeping. g) Why entries are Journal? recorded chronologically in a

h) Give the meaning of Ledger folio.

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Accounting Equation & Double Entry Book-keeping Unit III

i) j) Is narration essential for a Journal entry? Why? What is compound Journal entry? Give one example.

k) Explain the meaning of opening entry with one example. l) Explain the term Representative personal account

m) Debit expenses and losses. Credit incomes and gains, refers to which account. n) What is the rule for personal account? 6. Precisely answer the following questions within 3-5 sentences: a) Give the traditional classification of accounts. b) Explain double-entry c) State the Accounting Equation. d) Give the classification of accounts on the basis of accounting e) equation. f) What is Nominal Account? Give the rules of debit and credit. g) Give the advantages of double-entry book-keeping. h) Give three disadvantages of double-entry book-keeping. i) List the sequence of activities in accounting cycle. j) Explain Journal k) Give three advantages of Journal. l) Give three limitations of Journal. PART - C : LONG QUESTIONS (THEORY-BASED) 1. What is double entry book-keeping? Discuss the rules of debit and credit

2.

What is double entry system? Give its advantages and disadvantages. 3. What is Journal? Give its proforma and mention its merits and demerits.

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Accounting Equation & Double

4.
a. b. c. d. e. 5.

Prepare Balance Sheet by applying Accounting Equation for the following transactions Soma started business with a capital of Rs.40,000/Purchased merchandise for cash Rs.30,000/Deposited Rs.5,000/- with his banker Sold some goods worth Rs.4,000/- for Rs.4,500/Sold some goods worth Rs.1,800/- for Rs.1,500/-

Mr. Ram had a capital of Rs.25,000/-, creditors Rs.5,000/- cash Rs.10,000/-, stock Rs.5,000/-, and debtors Rs.15,000/-. The following transactions took place in the months of January, February and March, 2004. Record these transactions by way of Basic Accounting Equation and show the final Balance Sheet. a. b. c. d. e. Salary paid Rs.1,200/Received from debtors Rs. 8,000/Paid to his creditors Rs.2,000/Purchased stock Rs.1,000/Goods sold Rs.8,000/- whose cost price was Rs. 7,500/-.

6.

Record the following transactions of Kumr Ratan through Balance Sheet equation and show the final Balance Sheet. a. Started business with cash Rs. 15,000 and stock Rs. 9,000. b. Goods sold Rs. 3,000 whose cost price was Rs. 1,500. c. Purchased goods on credit Rs. 6,000. d. Withdrew Rs. 7,000 stock from the business for home consumption. e. Deposited in the bank Rs. 2,000.

7. Following is the Balance Sheet of Kamraj prepared as 3. Following is the Balance Sheet of Kamraj as on 31.12.90. Balance Sheet as on 31.12.90 Capital Profit Creditors Bills Payable 50,000 14,000 15,000 1,000 80,000 Cash Stock Debtors 20,000 25,000 35,000 _______ 80,000

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Accounting Equation & Double Entry Book-keeping Unit III

The following transactions took place during the month of Jan.2001. a. Goods purchased Rs.16,000/- in cash b. Goods purchased Rs.5,000/- in credit c. Goods of Rs.20,000/- sold in cash for Rs.30,000/ d. Paid the creditors Rs.5,000/e. Bills are discharged Show the Balance Sheet equations and Balance Sheet at the end. 7. Journalise the following transactions in the books of Maa Medical Stores for the month of Jan., 2005: 2005 Jan. 1. Started business with cash of Rs.15,000/2. Deposited Rs.5,000/- with the bank 7. Purchased goods and paid Rs.3,000/9. Purchased goods from Narayan Bros. for Rs.7,000/12. Sold goods to Karan for cash Rs.180/17. Purchased goods from Usha and payment made by cheque Rs.3,000/20. Withdrew Rs.600/- from the bank 23. Purchased a table fan for Rs.150/- by paying cheque 25. Cheque issued to Narayan Bros. of Rs.1,000/28. Goods worth Rs.180/- stolen away 8. Journalise the following transactions in the books of Mr. Akshay Das. 2001, Dec.2. Started business with cash Rs.60,000/10 Deposited Rs.20,000/- with the bank 12 Bought goods in cash Rs.45,000/15 Sold goods in cash Rs.30,000/Feb.1 Purchased a machine on credit Rs.12,000/2 Sold goods on credit to S.Kumars Rs.16,000/13Goods returned by S.Kumars Rs.2,000/- due to inferior quality 24 Purchased a typewriter for office Rs.6,000/-

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Unit III Entry Book-keeping

Accounting Equation & Double

9. Pass journal entries in the books of Jai & Brothers. Their transactions were: 2002, April 1. Purchased goods from A in cash Rs.13,000/and on credit Rs.70,000/7. Returned goods to A Rs.500/- as the goods were defective. 19. Sold goods on credit to B, Rs.15,555/- and received a bill from him. 21. Goods of Rs.333/- were destroyed by fire. 23. Insurance premium paid for the godown Rs.30/25. Salary paid to his employees Rs.300/31. Withdrew goods for personal use Rs.300/10. Pass Journal entries to record the following transactions of M/s. Bhubaneswar Druggist: 2004, June, 1 5 Deposited cash of Rs.50,000/- in bank Withdrew Rs.10,000/- from the bank for personal use. 9 Purchased goods from Sasmal & Sons Rs.17,000/-. 10 Purchased Furniture for use Rs.3,000/- in cash. Purchased furniture for resale Rs.16,000/Received interest on securities Rs.600/-. Paid Life Insurance premium on the life of owners wife Rs.200/-. 20 Cash sale made Rs.8,000/-. Allowed Trade discount 10% and cash discount 5% A customer named X became insolvent who owed Rs.300/- to the business.

12 18 20

29

11 Pass Journal entries in the books of Sila Medicine House: i. Started business with cash Rs.20,000/- and stock Rs.10,000/- and Building Rs.50,000/ii. Purchased good from Mira & Co. Rs.7,000/iii. Insurance premium paid by bank directly Rs.500/-

73

Accounting Equation & Double Entry Book-keeping Unit III

iv. Goods sold in cash Rs.20,000/v. Invested Rs.1,000/- on Govt. bond vi. Paid salary by cheque Rs.500/vii. Interest due to B.Jain & Co. Rs.100/vii. Rs.444/- recovered from Harish, a customer whose debt was written off earlier. 12. Pass necessary Journal entries in the books of M/s. Medicare to record the following transactions.

2004, July 30 Started business with the fund from his wife Rs.17,000/31 Goods purchased by cheque Rs.17,000/Aug. 12 Goods sold by cheque Rs.25,000/- and carriage on sale paid Rs.250/13 Paid carriage on goods purchased Rs.10/15 Paid rent Rs.1,000/-. Half of the premises is occupied by Mr. Tripathy for personal use. 19 Credit sales to Gita Rs.690/-. 21 Gita was declared insolvent and 50 paise in a rupee was realized from her. 13. S.Ghose had the following transactions. Journalise i. ii. iii. iv. v. vi. vii. Goods purchased from X in cash Rs.22,000/- and on credit Rs.2,000/-. Machinery purchased by cheque Rs.33,000/-. Freight, carriage and installation charges paid on that machinery Rs.300/-. Goods sold to Mr. Amit Malhotra in cash Rs.20,000/- and on credit Rs.5,000/Nothing was realised from Mr.Amit Malhotra as he became insolvent. Paid rent Rs.500/-, insurance premium Rs.200/- and interest Rs.100/-. Decided to use his old scooter for the business which was used for self, the value being Rs.8,000/-. Interest due from C.Das Rs.111/-.

74

Unit III Entry Book-keeping

Accounting Equation & Double

14.

M/s.Goti & Ravi had the following transactions in 19080. Pass Journal entries to record the transactions.

Jan., 1 Started business by paying cash Rs.60,000/- from his own pocket and by borrowing Rs.40,000/- from Mr. Z. 2 Purchased goods in cash for Rs.40,000/- and discount availed 5%. 11Sold goods to Y by cheque Rs.30,000/-. 13 Bought a machine from Asian Traders for Rs.7,000/-, payment to be made in 7 equal annual installments with interest @ 7% 1st installment paid in cash. 15 Purchase of goods on credit Rs.2,500/- from Jena & Sons. 18 Issued a cheque of Rs.2,450/- in favour of Jain & Sons towards full and final settlement. 26 Goods earlier sold to Mr.Malhotra for Rs.1,800/- became inferior in quality. 15. i. Enter the following transactions in the books of M/s.Chandi Medical Stores. Opening balance : Machinery Rs.1,00,000/-, Stock Rs.50,000/- , Cash at Bank Rs.5,000/-, Capital Rs.1,20,000/-, Creditors Rs.35,000/-. ii. Goods purchased in cash Rs. 14,000. iii. Goods sold in cash Rs. 24,000. iv. Credit purchase from G.Swain Rs. 5,000 v. Goods destroyed by fire Rs. 999. Insurance company paid full. vi. Paid for advertisement Rs. 250. vii. Creditors took Rs. 32,500 in full settlement. viii. Income Tax paid Rs, 2,222. 16. Pass journal entries in the books of Mrigendra Nahata to record the following transactions. i. ii. He introduced further capital Rs.40,000/Goods purchased Rs.40,000/-, paid Rs.20,000/- by cheque and rest by cash.

iii. Sold goods in cash Rs.50,000/-. iv. Goods destroyed by fire Rs.5,000/v. Credit sales to Amit Rs.1,800/-

75

Accounting Equation & Double Entry Book-keeping Unit III

vi. Goods returned by Amit Rs.180/vii. Paid carriage on purchase Rs.30/- and carriage on sales Rs. 20/viii. Used business product for home consumption whose cost is Rs.222/ix. Wear and tear of furniture Rs.697/x. Interest on capital charged Rs.555/xi. Received Rs.570/- on cash sales after allowing 5% discount xii. Paid Rs.846/- for discount cash purchase after availing 6%

76

Ledger IV

Unit -

UNIT - IV

LEDGER
Meaning :
Ledger is the principal book of account. It is the book which contains a number of accounts separately. It records the transactions of different dates in a classified manner at one place.

Definition :
Ledger is defined as "a book or register which contains, in a summarized and classified form, a permanent record of all transactions.

Need :
1. While journal lists transactions in chronological order, its format does not facilitate tracking individual account balances. The general ledger is used for this purpose. 2. The general ledger allows one to view activity and balance of any account at a glance. The different pages are allotted for containing different accounts. Ledger is called the main book because it supplies all information relating to various transactions in a summary form such as total sales through sales account, total purchases through purchases account, net position of cash through cash account, amount receivable from different persons through Debtors account, amount payable to different persons through creditors accounts etc.

Posting :
The general ledger is a collection of T-accounts to which debits and credits are transferred. The action of recording a debit or credit in the general ledger is referred to as posting. To understand the posting process, consider the journal entry in the following format.

General Journal Entry

77

Unit IV Ledger
D te a Mn , o th D te a A c u ts con Ac ut1 con Ac ut2 con L . .F Db e it xxxxx xxxxx C d re it

There are two ledger accounts affected by the above journal entry (Account 1 and Account 2). Each of these accounts is represented by a Taccount in the general ledger. To post the entry to the ledger, simply transfer the information to the T-accounts. Thus, the method of transferring an entry from Journal to Ledger is called posting. Posting is made at regular intervals i.e., weekly, monthly, and quarterly etc.

Form of Ledger : Specimen of a Ledger Account. Name of the Account Dr.

D a te P a r t ic u l a r s To ( n a m e o f t h e c o r r e s p o n d in g c r e d it A /c .) J .F A m o u n t D ta te (R s .) P a r t i c u la r s B y (N a m e o f c o r r e s p o n d in g d e b it A /c . ) J .F.

Cr.
A m ount ( R s .)

Ledger account is a T-shaped account which has two equal parts. The left hand side is called debit side and is marked by 'Dr.' written at left top corner. The right hand side is called credit side which is indicated by 'Cr.' written at right top corner. Each side is divided into four columns to represent Date, Particulars, Journal Folio number, and Amount respectively. Before each entry on the Debit side the word 'To' is written and before each entry on the Credit side, the word 'By' is written. The column marked J.F. records the page no of the Journal where from the concerned accounts are transferred to the Ledger. The amount column on each side records the amount by which a particular account is debited or credited. After all transactions relating to a particular account are transferred from Journal and posted in Ledger, the same account is balanced at the end of the period. Balancing of an account is made to close the account at the end of a period. For this, the following procedures are adopted :

78

Ledger IV

Unit -

The process of posting can be clearly understood from the following examples: Example : On 25th October 2003, Furniture amounting to Rs.25,000/purchased from Pankaj on credit. was

79

Unit IV Ledger

Journal Entry : Furniture Account Dr. 25,000/To Rama's Account 25,000/(Being credit purchase of Furniture)

LEDGER Furniture Account Dr.

D a te P a r t ic u la r s J .F A m o u n t D a te R s. P. 2 5 ,0 0 0 P a r t ic u la r sJ .F .

Cr.
A m o u n t R s. P.

2 0 0 3 O c t . 2T 5 , R a m a ' s A / c . o

Rama's Account Dr.

Date Particulars J.F Amount Rs. P. Date Particulars J.F.

Cr.
Amount Rs. P.

2003 By, Furniture A/C Oct 25

25,000/-

Illustration 1 : Pass Journal entries to record the following transactions during the quarter ending on 31.03.02 in the books of M/s. Ranka Medical Stores and post them into Ledger and balance the accounts. 2002 Jan. 1st 2nd 23rd 30th Stanted business with cash Deposited into bank Purchased goods from Ranbaxy Ltd. Rent paid Rent Outstanding 1,50,000.00 50,000.00 30,000.00 1,500.00 500.00

80

Ledger IV

Unit -

2002 Feb. 10th Purchased goods from Mahipal Medicals for cash Rs.50,000 on credit 17th Sold goods to Jitendra 2002 March 12th Paid to Ranbaxy Ltd. by Cheque Discount allowed by them 27th Received cash from Jitendra in full settlement 29,800.00 200.00 7,400.00 40,000.00 7,500.00

Journal of M/S Chhaya Medical Stores

Dt ae P ri uas atc l r LF .. D. r A on mu t ( s) R. 15 , 0 , 00 0 15 , 0 , 00 0 C. r A on mu t ( s) R.

20 02 J n1t a. s

C s AcD ah / r . T C p a Ac o a it l / ( e gc s ine t din B in a h v se bs es u in s ) B n AcD ak / r . T C s Ac o ah / ( e gc s d p s e in B in a h e o it d b n) ak P r h s sAcD uc a e / r . T Rn a yLd Ac o ab x t . / ( e gce it p r h s f o B in r d uc a e r m R n a yLd) ab x t . R n AcD et / r . T C s Ac o ah / T Ot t n in R n Ac o usa d g e t / ( e gR n p ida dr n B in e t a n e t u p id na ) P r h s sAcD uc a e / r . T C s Ac o ah / T Mh d vMd a Ac o a a e e ic l / ( e gg o sp r h s df r B in o d uc a e o c s a do ce it ah n n r d) H r hA D ais / r c . T S le Ac o as / ( e gce it s let H r h B in r d a o ais ) R n a yLd D ab x t . r . T B n Ac o ak / T D c u t Ac o is o n / ( e gc e u is u da d B in h q e s e n d c ut r c r e ) is o n e od d C s AcD ah / r . D c u t Ac D is o n / . r . T Hr hAc o ais / ( e gc s r c iv d& B in a h e e e d c ut a wd is o n llo e ) T TL OA

J n2d a. n

5, 0 00 0 5, 0 00 0

J n2 r a . 3d

3, 0 00 0 3, 0 00 0

J n3 t a . 0h

20 0 ,0 15 0 ,0 50 0

F b1 t e . 0h

9, 0 00 0 5, 0 00 0 4, 0 00 0

F b1 t e . 7h

75 0 ,0 75 0 ,0 3, 0 00 0 2, 0 98 0 20 0

Mr 1 t a. 2h

Mr 2 t a. 7h

74 0 ,0 10 0 75 0 ,0

36 , 0 , 70 0

36 , 0 , 70 0

81

Unit IV Ledger

82

Ledger IV

Unit -

Opening Entries And their posting

Closing balances of assets and liabilities of the previous year are brought into the new books in the beiginig of the current year. For this, a journal entry is to be made which is known as opening entry. The opening entry is : All Assets' Account Dr (Individually) To All liabilities' Account (Individually) To Capital Account

Posting : The Debit entries in the journal are transferred to the Debit
sides of their respective ledger accounts as "To balance b/d" in the particulars column. The credit entries in the Journal are transferred to the credit sides of their respective ledger accounts as "By balance b/d" in the particular column.

Example of an opening entry: 2002, Jan. 1

Cash A/C Dr Rs. 15,000/Bank A/C Dr Rs. 60,000/Stock A/C Dr Rs. 17,000/Furniture A/C Dr Rs. 18,000/To Creditors A/C Rs. 40,000/To Outstanding rent A/C Rs 2,000/To Capital A/C Rs. 68,000/(Being opening entry passed) The above opening entry may be posted in the ledger as under

LEDGER Cash A/C Bank A/C Stock A/C Furniture A/C Creditor's A/C Outstanding Rent A/C

83

Unit IV Ledger Capital A/C Significance of Various Balances of Ledger Accounts :

1. 2. Accounts having debit balances indicate assets, expenses or losses. Accounts having credit balances indicate liabilities, incomes, capital etc.

In Illustration - 1 given above, the accounts having debit balances are Cash, Bank, Purchases, Rent, Discount. In this case, Cash and Bank are assets. Purchases, Rent and Discount refer to expenses. The accounts showing credit balances are capital, outstanding rent, sales, discount and Mahipal Medical. In this case, Outstanding rent and Mahipal Medical's Accounts refer to Liabilities while Sales and Discount accounts refer to incomes. Capital account refers to the amount payable by the business to the proprietor. In case of personal accounts, the debit balance indicates amount receivable from that person. A credit balance of a personal account signifies amount payable to that person. In case of real accounts, the debit balance indicates an asset. It can not have a credit balance. In case of nominal accounts, the debit balance indicates expenses or losses. The credit balance of nominal account indicates income or gain.

84

Ledger IV

Unit -

MODEL QUESTIONS 1. Answer the following questions within five lines :

i. ii. Explain what is ledger account ? Define Ledger

iii. Why ledger is called the Principal Book? iv. Give the meaning of 'posting'. v. Give two important distinctions between 'Journal' and 'Ledger'.

vi. What is Folio number in a ledger account ? vii. Goods sold on credit to Mr. X @ Rs.500. Show ledger account. viii. What do you mean by Balance of an account ? ix. What is the purpose of balancing a personal account ? x. i. ii. iii. iv. Why Real accounts are balanced ? Credit sales to Mr. Nayak Rs.15,000. Credit purchase from him Rs.5,000. Cash received from him Rs.8,000. Goods returned by him Rs.1,000 (Ans. Receivable Rs.1,000)

2. a. Find out the amount receivable from or payable to Mr. Nayak.

b. From the following information find out the balance of furniture at the end by preparing Furniture A/c.
i. ii. Opening balance Rs.60,000/A part of the furniture was sold for Rs.15,000/lost by fire Rs.2,000 (Ans.

iii. A new furniture purchased for Rs.12,000/iv. Value of furniture Rs.55,000)

85

Unit IV Ledger

c. Balance the following accounts involved in the following transactions. i. ii. Salary paid Rs.1,200/Interest received Rs.300/-

PART C : LONG TYPE QUESTIONS (THEORY-BASED)

Explain the procedure of posting in detail with an imaginary example. Explain the objects and procedure of balancing various accounts Personal, Real and Nominal. -

Pass the following journal entries and post them into ledgers in respect of the transactions given below. i. ii. iii. iv. v. vi. Cash sales Rs.1,20,000/Credit sales to P Rs.40,000/Cash purchase Rs.80,000/Cash deposited into Bank Rs.10,000/Machinery purchased in cash Rs.15,000/Machinery sold in cash Rs.15,000/-

vii. Money withdrawn from the bank Rs.200/viii. Salary paid in cash Rs.80/ix. Insurance premium paid by cheque Rs.120/-

4. From the following information prepare journal entires and post them in to ledger in the books of Donex Limited. i. ii. iii. iv. v. vi. Started business with cash Rs.50,000/Purchased goods on credit from X Rs.20,000/Goods sold in cash Rs.30,000/-, discount allowed 5% Furniture prucahsed in cash Rs.20,000/-. Introduced additional capital Rs.4,000/-. Cash withdrawn Rs.3,000/- for personal use

86

Ledger IV
vii. Rent paid Rs.4,000/viii. Paid cash to X Rs.15,000/ix. Goods returned to X Rs.500/-.

Unit -

5. From the following transactions pass journal entries and post them into ledger accounts. i. ii. iii. iv. v. vi. Subash started business with cash Rs.20,000/- and a bank balance of Rs.30,000/-. Puchased goods from Sony & Co. for Rs.18,000/- and paid them cash Rs.8,000/- and the balance by cheque. Sold goods to Jyoti Traders Rs.14,000/-, received a cheque of Rs.13,788/- towards full settlement. Credit sales to Meenati Traders Rs.5,000/-. Rent Rs.3,000/- and Salary Rs.2,000/- paid in cash Paid Life insurance premium for his wife Rs.100/-.

vii. Goods worth Rs.7,000/- were lost by fire. Insurance company admitted the claim up to Rs.5,000/-. viii. Cash received from Insurance Company Rs.3,000/-.

87

Unit IV Ledger UNIT - V TRIAL BALANCE Meaning A trial balance is a list of balances of various accounts (both debit and credit) in the ledger. This statement is prepared after the Journal entries and ledger posting are completed. The arithmetical accuracy of ledger balances can be ascertained only after they have been put to test. A separate statement is prepared to test the accuracy of the ledger balances such a statement is called the trial balance - balances on trial. Trial balance is prepared at the end of the accounting period. It may also be prepared monthly, quarterly, half yearly or annually as and when needed. The total of debit balances and the total of credit balances should tally with each other. If they differ, then errors may be suspected and correctness of accounts and amounts need to be checked. A trial balance is not a part of the books of accounts. It is drawn as a separate statement and this becomes a source document for preparing financial statements, i.e. Profit & Loss A/c. and Balance Sheet. A trial balance consists of all the elements of financial statements - assets,liabilities,equity income and expense. Definition According to J. R. Batlibo, "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". Features i. ii. iii. iv. v. It is a list of ledger accounts with balances or totals. It is prepared usually at the end of a period. It can also be prepared at any time during such period. The trial balance is true for the date mentioned at the top. It may not be accurate for other periods excepting such date. It facilitates check and shows arithmetical accuracy of the books of accounts. The tallied trial balance tells that the ledger balances are properly drawn, i.e. there is no casting error.

88

Ledger IV Specimen of Trial Balance

Unit -

Trial balance of (Name of the Organisation/Company) as on 31st March 2002

The components of the trial balance as revealed in the above-given specimenm are summarised as below: i. ii. iii. iv. iv. v. A trial balance is prepared as on should be written at the top. a particular date which

In the first column, the names of the accounts are written. Column (3) (L.F.) is meant to record page number of the ledger. In column 4, the total of the debit side of the account concerned or the debit balance, if any, is entered. In column 5, the total of the credit side or the credit balance is written. The total of the two columns are entered at the end.

Objectives / Importance /Advantages of Trial balance 1. 2. 3. 4. 5. A trial balance is prepared to fulfill the following objectives: To check the arithmetical accuracy of the ledger accounts. To help in locating errors To provide a basis for preparing the financial statements To serve as a summary of each account To have an overview of the pera--- of the business.

89

Unit IV Ledger 6. To enable the business to apply control measures by preparing interim trial balances. Methods of preparing Trial Balance: There are four methods of preparing trial balance : i. ii. iii. iv. The Balances method The Totals method The Totals and Balances method The Totals method excepting closed accounts.

i. The Balances Method : Under this method, the debit or credit balance of each ledger account is shown in two different columns of the trial balance. Then the total is taken separately for the two different columns which must tally. This method is also known as net trial balance method. ii. The Totals Method : Accounts are separately shown in two different columns named "Dr. Total" and "Cr. Total" in this method. Then the total of both the columns are taken into account which must tally. This method is also known as gross trial balance. iii. The Totals and Balances Method : It is a mixture of the first two methods. Under this method, the total of each side of an account and balance of that account are shown separately in four different columns provided for recording "Dr. Total" "Cr. Total" and "Dr. Balance" "Cr. Balance". Lastly, the totaling of all the columns will be made. The total of the first two columns must tally similarly the total of the last two columns should also tally. The totals under totals method and the totals under balances method will be different from each other. iv. The Totals Method Excepting Closed Accounts : Under this method, the ledger accounts which do not have only balance are excluded. Only the totals of the account having either a Debit balance or Credit balance are presented in the arial balance in two different columns. Lastly, totaling of these two columns is made separately. Such totals must tally to indicate arithmetical accuracy of the books.

90

Ledger IV

Unit -

Taking the help of ledger accounts of illustration - 1 given in page no ., the different methods of preparing trial balance are given as under: Example - I : M/s. Chhaya Medical Stores Trial Balance as on 31s March 2002 (Following Balances Method)

91

Unit IV Ledger Example - II : M/S Chhaya Medical Stores Trial Balance as on 31st March 2002 (Following Totals Method)

92

Ledger IV Example - III : M/s. Chhaya Medical Stores Trial Balance as on 31st March 2002 (Following Totals & Balances Method)

Unit -

93

Unit IV Ledger Example - IV : M/s. Chhaya Medical Stores Trial Balance as on 31st March 2002 (Following Total Excepting Closed Accounts Method)

Limitations of Trial Balance : Trial balance shows arithmetical accuracy only, but it is not a conclusive proof of the accuracy of the books. Arithmetical accuracy is tested when there is agreement of trial balance or when the trial balance tallies. But in spite of agreement of Trial balance, some errors may still be there due to incorrect entries in the books of accounts or due to errors of principle or compensating errors. So, a more detailed study of the books is required to rectify the errors and then only trial balance (corrected) can be used as a basis to prepare financial statements. MODEL QUESTIONS PART - A : SHORT QUESTIONS 1. Answer the following questions within one-two sentences. a) Give the meaning of Trial Balance. b) Is Trial Balance a part of the books of accounts? c) When can a Trial Balance be prepared? d) What does the agreement of Trial Balance indicate? e) Write any two features of Trial Balance. f) Write any two importance of Trial Balance. g) What do you mean by closed accounts? h) Give the limitations of Trial balance.

94

Ledger IV i) j) Is trial balance an account or a statement ? Is there any necessity to prepare trial balance ?

Unit -

k) Trial Balance must always tally. Why? l) If a debit balance account is put under credit balance column what will be the effect on Trial Balance ?

m) A transaction has not been recorded at all. Will it affect trial balance ? n) If one aspect either debit or credit, is not recorded, what will be the effect on trial balance ? 2. Fill in the gaps. a) A trial balance is a ___________ of balances of various accounts. b) After the journal entries and ledger postings are completed, ________ is prepared. c) Trial balance tests ________ of ledger balances. d) In the trial balance, the total of ___________ of should be equal to the total of ___________. e) If the trial balance does not tally, then it indicates that there are _________ in accounts. f) Trial balance is a __________ of document for preparing financial statements. g) A trial balance is usually prepared at the ________ of the accounting period. h) Preparing interim trial balance is a _________ measure. 3. State whether the following items will affect the Trial Balance giving proper reasons.

95

Unit IV Ledger a. Furniture purchased for Rs.20,000 has been debited to Purchases A/c b. Credit purchase from Kuna Rs.450 has been correctly recorded in puchase book but Kunas A/c was credited with Rs. 540. c. Credit sales of Rs.1,000 to Harapriya has not been recorded at all. d. Cash A/c of Rs. 5,000 has been put on the credit column of the trial balance. e. Debit balance of machinery A/c Rs.15,000 has been entered in the debit column as Rs.1,500. f. Instead of debiting A's A/c by Rs.500 Bs A/c has been debited. g. Mohan A/c of Rs. 550 has been wrongly credited which should have been debited. h. Goods purchased from Lohia Rs. 5,000 has been recorded twice. i. Machine sold at Rs.5,600 has been credited to sales A/c as Rs.6,500. j. Credit sales to Budhadev Rs.10,000 has been recorded twice. k. Goods withdrawn by the proprietor worth Rs.333 for personal use has been debited to General expenses A/c. l. Goods returned to Bhitu Rs.100 has not been debited to Bitu's A/c but the other aspect is recorded correctly. PART - B : Short type questions (Answer within 3-5 sentences) 1. List the methods of preparing Trial Balance 2. Give three objectives of Trial Balance. 3. Give the points to be noted while preparing Trial Balance. 4. Give a proforma of a Trial Balance. 5. Give the limitations of Trial Balance. 6. Give the features of Trial Balance. 7. Explain Balances method of prepring trial balance.

96

Ledger IV

Unit -

PART - C: Long type questions (Theory-based) 1. What is Trial Balance ? Why it is prepared ? How it is prepared ? 2. Equalization of trial balance does not necessarily mean the absence of errors in account. Comment. Long type questions (Practical-based) 1. Journalise the following transactions, post them into Ledger and prepare Trial Balance. 1990 Jan. 1. Started Business with cash Rs.40,00 2. Paid in to the bank Rs.10,000 5. Goods purchased Rs.2,000 6. Furniture purchased Rs.2,000 8. Credit sale to Hari Rs.5,000 12. Credit puchase from Ram Rs.1,500 13. Cash sales Rs.16,000 15. Paid salary Rs.700 17. Paid rent Rs.50 19. Commission received Rs.100 22. Received a cheque from Hari Rs.4,000 25. Paid to Ram Rs.750 30. Withdrew Rs.150 for personal use (Ans.: Trial balance total Rs.61,850) 2. From the following balances prepare a Trial Balance in the books of Day & Night Medicine Stores. Cash Stock Capital Drawings Rs. 2800 11000 18800 2500 Creditors Purchase Salary discount (Dr) Rs. 10600 34000 2400 1400

97

Unit IV Ledger Buildings Furniture Debtors Bad debt Bills receivable Bank overdraft 1800 4000 12000 1200 1800 6000 Sales Loan from his wife Discount (Cr) Rent received Bills payable Loan to Munny 50600 5000 600 500 2000 3000

Ans. : (Trial Balance total Rs. 94,100) 3. Following balances were extracted from the books of Rohan.Prepare a trial balance. Balance Rs. Balance Rs. Capital 1,19,400 Drawings 11,500 Bills receivable 9500 Plant and machinery 28800 Debtors 62000 Wages 40,000 Loan A/c (Cr) 20,000 return inward 2,780 Purchases 2,56,590 Sales 3,56,430 Rent and Taxes 5,645 Commission(Cr) 5,642 Opening stock (1.1.83)89,680 Salary 11,000 Travelling Expenses 1800 Bank Charges 80 Insurance Premium 400 Cash 532 Repairs 3,370 Bank balance 18970 Interest and Discount (Dr)6,070 Bad debt 3620 Creditors 59,635 Furniture 8,770 Closing stock was valued Rs.1,29,860 on 31.12.83 (Trial balance total Rs.5,61,107) Hints : Closing stock is not taken in the trial balance. 4. Draw a trial balance in the books of M/s. Satyasai Medical Stores as on 31.12.84 from the following balances. Balance Rs. Capital 80,000 Machinery 20,000 Addition of machinery5000 Drawings 6000 Balance Purchases Return inward Debtors Furniture Rs. 82,000 2,000 20,600 5000

98

Ledger IV Opening stock 15000 Carriage outward 500 Printing and stationery 800 Creditors 10,000 Postage and telegram 800 Rent (Cr) 1200 Cash in hand 6400 Cash at bank 20000

Unit Freight & Duty 2000 Rent, rates & taxes 46000 Trade expenses 400 Sales 1,20,000 provisiton for bad debts 400 Discount (Cr) 800 Salary and wages 21,300

Ans. : (Trial balance total Rs. 2,12,400) 7. Redraft the following Trial Balance correctly. Trial Balance (Incorrect) Name of Accounts Cash Bank Capital Debtors Creditors Stock Loan to X Purchase Bills payable Building Bills receivable Salary Wages Prepaid expenses Outstanding expenses Depreciation Machinery Rent Godwill Bank loan Sales Debit Balance (Rs.) 3200 1800 21000 1000 13800 1100 5000 1200 800 910 300 5400 Credit Balance (Rs.) 480 520 10,000 900 540 600 2000 1500 22970

99

Unit IV Ledger Fuel and power Return inward Return outward 200 1100 1600 39,510 39,510

100

Ledger IV UNIT - VI

Unit -

ERRORS, THEIR LOCATION AND RECTIFICATION Meaning Errors are the innocent mistakes committed by the accounting staff while preparing the books of accounts. Such mistakes occur unknowingly or without any purpose. There are certain errors which will disturb the trial balance in the sense that trial balance will not agree. Thus some of these errors are detected by the trial balance while some others lie hidden or undisclosed by the trial balance. Thus on the basis of trial balance, errors can be categorised as : a. Errors not disclosed by trial balance Two-sided errors b. Errors disclosed by trial balance - One-sided errors A list of the above types of errors along with explanation for the same are provided below : a. Errors not disclosed by the trial balance: These are called double-sided error because they affect two different accounts. A trial balance would agree in spite of such errors. These errors are very difficult to detect because one will not be aware of such errors. Such errors are given as below : i. Errors of Omission: This type of error arises where a transaction is completely or partially omitted from record. However, a complete omission error is not disclosed by trial balance. Example : A credit sale may be omitted to be recorded in sales book. So the totaling of the two columns of the trial balance will be equal since no entry is made on both sides of accounts. ii. Errors of Commission : When amounts or accounts or both are wrongly entered into books, then it leads to error of commission. If wrong amount is posted on both sides of the accounts, the trial balance will agree. a brief

101

Unit IV Ledger Example : Paid office rent Rs.1000/- is posted to the office rent account Rs.100/- and cash account Rs.100/Again if posting is made to wrong account with correct amount, then also the trial balance will agree. Example : Goods sold for cash Rs.10,000/- but entry is made as Goods A/c debited with Rs.10,000/- and cash account credited with Rs.10,000/-. iii. Errors of Principle : If a certain principle of book keeping has not been followed while recording a transaction, it will not disturb the trial balance. Example : If furniture purchased on credit is recorded in purchases book, then also the trial balance will not be affected.. iv. Compensating Error : When errors in two or more accounts cancel out their mutual effects on trial balance, then they are called compensating errors. If there becomes an error of Rs.500/- in total of the debit and at the sametime if an error of Rs.500/- arises in the total of the credit in recording the transaction, the trial balance will agree causing an error of Rs.500/- in both the sides. v. Errors of Duplication : When an entry is recorded twice and posted twice, it will not affect trial balance. Example : Credit purchase from Pankaj Rs.500/- is recorded twice. As a result, Rams account is credited with a total (Rs.500/+ Rs.500/-). So the total credit is Rs.1000/-. Purchases account is debited twice (Rs.500/- + Rs.500/-). So the total debit is Rs.1000/-. As total Debit is equal to the total Credit, total balance will agree. B. Errors disclosed by trial balance : These errors are called one-sided because they affect only one account and lead to disagreement of trial balance. These errors are easy to detect and one can, within a short time, arrive at an agreed trial balance. In the age of advanced information technology the use of software packages for accounting may reduce the possibility of such errors. However, a brief discussion on such errors is made as under : i. Partial omission :

102

Ledger IV

Unit -

Where there is omission to post an entry from a subsidiary book, then it leads to error of partial omission. This causes disagreement of the trial balance. Example : A credit sale of Rs.1000/- to Mr X might be omitted to be posted in Mr Xs account. As a result, the total debit of Sundry debtors account will be reduced by Rs.1000/- and the total of the debit column of the trial balance will be less to the extend of Rs. 1000 in comparison with the total of the credit column. ii. Posting a wrong amount to a ledger account : A credit purchases of Rs.2000/- from Mr Y wrongly posted to his account as Rs.200/-. So there will be a shortage of Rs.1800/- in the credit column of the trial balance. iii. Posting an amount to the wrong side of the ledger account : For discount allowed, discount account is wrongly credited by Rs.100/-, instead of posting Rs.100/- to the debit side of the discount. Here, the trial balance would not agree. Another example may be cited that received Rs.280/- from Mr X and discount allowed Rs.20/- the wrong entry was made as follows : Cash A/c Dr. Rs.280/To Mr. Xs A/c Rs.300/To Discount A/c Rs.20/In the above entry, discount account has been credited by Rs. 20/- instead of being debited Rs.20/-. This causes a difference of Rs.40/- in trial balance. iv. Errors in addition or substraction : If there is an error in addition or substraction of the anounts the trial balance will not agree. v. Duplicate posting of an entry : The trial balance will not agree if an account is debited or credited more than once. Example : A payment of Rs.1000/- to a creditor posted twice to his account will make the debit column total increase by Rs.1000/- than the correct total. vi. Wrong totalling of subsidiary books : If the totalling of any subsidiary book is made wrongly and then posted in the trial balance, then the trial balance will not agree.

103

Unit IV Ledger Example : Purchase book is wrongly totalled Rs.2500/- instead of Rs.2050/-. So, the debit side of the trial balance shall exceed the credit side by Rs.450/-. vii. Omission of a balance of an account in the trial balance : The balance of sundry debtor's account may have been omitted to be shown in the trial balance. It will cause disagreement of trial balance. viii. Balance of an account wrongly entered in the trial balance : A balance account of Rs.525/- wrongly entered into trial balance on any side as Rs.552/- will cause disagreement of trial balance. ix. Miscellaneous errors affecting the trial balance : a. b. c. d. Casting errors Wrong carry forward of total from one page of a subsidiary book to another Posting error Wrong balancing

e. Wrong totalling of trial balance Detection or location of errors : The following steps prove useful in locating the errors when the trial balance does not tally. 1. Repeat and check the totals of the debit and credit columns of the trial balance. 2. Compare the name / title of the accounts in the trial balance with that of the ledger so as to detect any difference in amount or omission of an account. 3. Compare the trial balance of the current year with that of the previous year to check additions and deletions of any account and also verify whether there is a large difference in amount, which is neither expected nor explained. 4. Check the correctness of balances of individual accounts in the ledger. 5. Re-check the correctness of the posting in accounts from the books of original entry. 6. If the difference between the debit and credit columns is divisible by two, If any figure amounting to half of such

104

Ledger IV

Unit -

difference appers in trial balance. This type of mistake arises when an amount is placed in the wrong side causing double the difference. 7. If the difference is a multiple of 9 or divisible by 9, then the mistake could be due to transposition of figures. Example : If Rs.450/- is written as Rs.540/- then there is a difference of Rs.90/- which is divisible by 9. In this way, a difference in trial balance divisible by 9 helps in checking the errors for a transpose mistake. 8. If the amount of an error is a round figure i.e. 10,100, etc. then it may be due to wrong totalling. 9. If the mistake is not detected by taking any of the above mentioned steps, then a thorough checking of books of original entry is necessary. RECTIFICATION OF ERRORS Any error when located must be rectified. However, the rectification should not be made by overwriting or by striking off the wrong entry. This would destroy the authenticity of the books of account. Hence, the errors should always be corrected by making suitable entries called rectifying entries. For purposes of rectification the errors are divided into two categories : (i) one-sided errors, and (ii) two-sided errors. One-sided Errors : Certain errors affect only one side of an account, either the debit side or the credit side. Such errors are called onesided errors. Examples of one-sided errors are: i) Rs.100 received from Mr.Lal was posted to his account as Rs.10. It means Mr.Lals account has been credited with Rs.10 instead of Rs.100 and there is no mistake in the Cash Book. Thus, this error has affected only one side of an account. The Purchases Book is overcast by Rs.1,000. This will affect the debit side of Purchases Account where the total of the Purchases Book is posted, and no other account is affected.

ii)

105

Unit IV Ledger Two-sided Errors: Certain errors may affect two or more accounts. Such errors are called two-sided errors. Examples of two-sided errors are: A credit sale of Rs.1,080 to Rajesh was wrongly recorded in the Sales Book for Rs.1,800. This error will affect two accounts viz., Rajeshs Account and Sales Account. Rajeshs Account has been debited by Rs.1,800 instead of Rs.1,080. The Sales Account has also been credited by an additional amount of Rs.720 (Rs.1,800 Rs.1,080) because the Sales Book will show a higher total. A sale of Rs.500 made to Kamal has been posted on the debit side of Kishores Account. This error will affect two accounts viz., Kamals Account and Kishores Account. An entry of Rs.500 does not appear on the debit side of Kamals Account whereas Kishores Account has been wrongly debited with that amount. Process of rectification of errors: The following steps need to be taken one after another to rectify errors: When the Trial Balance does not tally it means there are errors in the books of account. Attempts are made to locate the errors and rectify them. One-sided errors which affect only one account are rectified by means of a suitable note on the relevant side in the concerned account. Two-sided errors, involving two or moreaccounts, are rectified by means of journal entries. If the Trial Balance does not tally even after the detected errors have been recrified, the difference is put against a Suspense Account to avoid delay in preparing the final accounts The Suspense Account is carried forward to the next accounting year and as and when the errors are located, they are rectified. When the Suspense Account is in existence, all errors are rectified by means of journal entries.

Rectification of One-sided Errors:

106

Ledger IV

Unit -

Generally errors are corrected by passing suitable journal entreis. You know passing a journal entry means debiting one account and crediting another. But in the case of one-sided error only one account is involved. So it cannot be corrected by passing journal entry. It is rectified by noting the correction on the appropriate side. Take the first example of one-sided error. Mr.Lals account was credited short by Rs.90. This will be corrected by an additional entry for Rs.90 on the credit side of his account as follows: Mr.Lals Account Dr. Cr.(Rs.) By difference in amount posted on In the second example of one-sided error, the Purchases Account is debited in excess by Rs.1,000. This will be corrected by crediting the Purchases Account with Rs.1,000. Purchases Account Dr. Cr.(Rs.) By Overcasting of Purchases Book for the month of .. 1000 The wrong total in the Purchases Book will be circled with red ink and the correct total entered above or below the circle. The person doing the rectification will also put his initials. Let us take a few more examples of one-sided errors and study how they will be rectified. 1. The Sales Returns Book for the month of June was undercast by Rs.10 : You know the periodical total of the Sales Returns Book is posted to the debit side of Sales 90 Received from him

107

Unit IV Ledger Returns Account. So, a mistake in totaling the Sales Returns Book will affect only the Sales Returns Account. It has been debited short by Rs.10. So this error can be corrected by an additional entry for Rs.10 on the debit side of Sales Returns Account as shown below.

108

Ledger IV Sales Returns Account Dr. Cr. Rs. To Undercasting of Sales Returns Book for the month of June 10

Unit -

2. A payment of Rs.1,000 towards interest was posted twice to Interest Account : You know when interest is paid it is recorded on the credit side of the Cash Book and posted on the debit side of Interest Account. The error lies in repeating the posting to Interest Account. Thus, it has affected only the Interest Account which now shows an excess debit of Rs.1,000. This will be corrected by crediting the Interest Account with Rs.1,000 as follows: Interest Account Dr. Cr. Rs. By Double posting from Cash Book On now, rectified 1,000 3. A receipt of Rs.200 towards commission was omitted to be posted: You know receipt of commission is recorded on the debit side of the Cash Book and posted on the credit side of the Commission Account. The error lies in omitting to post. Hence, it has not been credited by Rs.300. This error can be corrected by aking the posting now as shown below: Commission Account Dr. Cr. Rs.

109

Unit IV Ledger By Omission of posting from Cash Book.. 300 4. A credit sale of Rs.1,000 to Tiwari was posted to the credit side of his account: You know a credit sale is entered in the Sales Book and posted on the debit side of the custoers account from the Sales Book. This error relates to posting on wrong side of Tiwaris Account. His account should have been debited and not credited. To correct this error, we have not only to remove the wrong credit of Rs.1,000 from his account but also give a debit of Rs.1,000 to his account. Hence, the error can be rectified by debiting Tiwaris Account with double the amount i.e. Rs.2,000 as shown below:

110

Ledger IV Tiwaris Account Dr. Cr. Rs. To Posting of sales made to him on Credit side on .. now rectified Rectification of Two-sided Errors: 2,000

Unit -

You have learnt that one-sided errors are corrected by noting the correction on the appropriate side of the account affected by the error. They cannot be rectified by suitable journal entries because only one account was involved. But, the two-sided errors are mostly rectified by journal entries. It is because such errors affect two or more accounts and in most cases the debit and credit are equally affected. Take the case of first example of two-sided errors given earlier. A credit sale of Rs.1,080 to Anand was wrongly recorded in the Sales Book as Rs.1,800. The two accounts affected are : (i) Anands Account which shows an excess debit of Rs.720, and (ii) Sales Account which stands credited in excess by Rs.720. To rectify this error we must credit Anands Account with Rs.720 and debit the Sales Account with Rs.720. So, a journal entry can be passed as follows: Rs. Rs. Sales Account To Anand 720 (Being sales of Rs.1,080 to Anand Wrongly recorded in the Sales Book As Rs.1,800 now rectified) Dr. 720

Take the second example of two-sided errors given earlier. A sale of Rs.500 made to Kamal was posted to the debit side of Kishores Account. The two accounts affected are : (i) Kamals Account which has not been debited by Rs.500, and (ii) Kishores Account which has been wrongly debited with Rs.500. To recrify this error we have to debit Kamlas Account with Rs.500 and credit Kishores Account

111

Unit IV Ledger with Rs.500. So, journal entry for the rectification of this error will be as follows: Rs. Rs. Kamal To Kishore 500 (Being rectification of wrong debit to Kishore for sale made to Kamal) Now let us take a few more examples of two-sided errors and see how they will be rectified. 1. Sale of old machinery to Chakraborty for Rs.600 was wrongly entered in the Sales Book. You know the correct entry for this transaction would be as follows: Rs. Rs. Chakraborty Dr. 600 To Machinery Account 600 Chakraborty To Sales Account 600 Dr. 600 Dr. 500

Thus, debit to Chakrabortys Account is correctly given. But it has affected two other accounts : (i) Machinery Account which has not been credited, and (ii) Sales Account which has been wrongly credited. This can be rectified by debiting the Sales Account since it has been wrongly credited, and crediting the Machinery Account which has not been credited. Hence, a rectifying entry can be passed as follows: Rs. Rs. 600

Sales Account To Machinery Account 600 (Being rectification of wrong credit to

Dr.

112

Ledger IV Sales for the sale of old machinery)

Unit -

2. A credit sale of Rs.7,600 to Sharma was recorded in the Sales Book for Rs.6,700 : It means the entry in the Sales Book has been made with Rs.900 (Rs.7,600 Rs.6,700) short. So, this error has affected two accounts : (i) Sharmas Account which is having a short debit of Rs.900, and (ii) the Sales Account which is having a short credit of Rs.900. It can be rectified by debiting Sharmas Account and crediting Sales Account. The rectifying journal entry will be as follows: Rs. Rs. 900

Sharma To Sales Account 900 (Being rectification of a credit sale for Rs.7,600 wrongly recorded as Rs.6,700)

Dr.

3. A credit sale of Rs.2,000 to Sinha was wrongly passed through the Purchases Book: This should have been recorded in the Sales Book and the correct entry would have been: Rs. Sinha To Sales Account 2,000 Since it was wrongly passed through Purchases Book, the effective entry is: Rs. Rs. Purchases Account To Sinha 2,000 Dr. 2,000 Dr. Rs. 2,000

By comparing the above two entries, you will notice that:

113

Unit IV Ledger i) Sinhas Account which should have been debited with Rs.2,000, is actually credited with Rs.2,000. So, to rectify this error in his account, you have to debit Sinhas Account with double the amount Rs.2,000 to cancel the wrong credit and another Rs.2,000 to give the correct debit. Sales Account has not been credited with Rs.2,000. So, to rectify this error, the Sales Account should now be credited with Rs.2,000. Purchases Account has been wrongly debited with Rs.2,000. So, to rectify this error, the Purchases Account should be credited with Rs.2,000.

ii) iii)

After identifying the three accounts involved and nature of correction required in each account, you can easily make out the rectifying journal entry. This will be as follows: Rs. Rs. Sinha To Purchases Account 2,000 To Sales Account 2,000 (Being the rectification for a credit sale Wrongly passed through the Purchases Book) 4. Repairs to machinery amounting to Rs.400 was wrongly debited to Machinery Account: You know when routine repairs are made, such expenditure is debited to Repairs Account and not to the concerned assets account. So, in this case the debit should have gone to Repairs Account and not to Machinery Account. To rectify this error, we should now debit the Repairs Account and credit the Machinery Account. Thus, the rectification entry will be: Rs. Rs. Repairs Account Dr. 400 Dr. 4,000

114

Ledger IV To Machinery Account 400 (Being the rectification of wrong debit to Machinery Account for routine repairs)

Unit -

Examples : Some problems with solutions are illustrated below for better understanding on the rectification of errors. Illustration I Ex. 1 : The Sales Returns Book has been undercast by Rs.500. Solution: This error will be rectified by entering Rs.500 on the debit side of the Sales Returns Account by writing To Undercasting of Sales Returns Book for the month of , Rs.500. Ex. 2 : The total of the Bills Receivable Book amounting Rs.4,500 has been posted to the credit of Bills Receivable Account. Solution : This error will be rectified by entering an amount of Rs.9,000 on the debit side of Bills Receivable Account by writing To Wrong posting of the total of Bills Receivable Book on the opposite side .., Rs.9,000. Ex. 3 : While posting Purchases Book to the ledger, the personal account of Kumar has been credited with Rs.221 instead of Rs.212. Solution : Kumars Account has been credited with an excess amount of Rs.9 (Rs.221 Rs.212). This error will be rectified by debiting his account with Rs.9 by writing To Difference in amount posted from the Purchases Book on , Rs.9. Ex. 4 : Rs.10,000 paid for the purchase of a TV set for the proprietor is debited to General Expenses Account. Solution : The following journal entry is required for rectification: Rs. Rs. Drawings A/c Dr. 10,000

115

Unit IV Ledger To General Expenses A/c 10,000 (Being rectification of purchase of TV wrongly debited to General Expenses A/c) Ex. 5 : An amount of Rs.1,000 paid by Pran has been credited to the account of Praneet. Solution : The above error can be rectified by the help of following journal entry. Rs. Rs. Praneet A/c To Prans Account 1,000 (Being rectification of wrong credit to Praneet for the amount paid by Pan) Dr. 1,000

116

Ledger IV

Unit -

Ex. 6 : Goods sold to Inder for Rs.1,200 have been entered in the Purchases Book. Solution : The following journal entry is required for rectification: Rs. Rs. Inder To Purchases A/c 1,200 To Sales A/c 1,200 (Being rectifying entry for sale to Inder wrongly entered in the Purchases Book) Illustration II : How would you rectify the following errors: Ex. 1 : Rs.3,000 received from the sale of old machinery has been wrongly posted to Sales Account. Solution : The following journal entry is required for rectification. Rs. Rs. Sales A/c To Machinery A/c 3,000 (Being rectifying entry for sale of old machinery credited to Sales A/c) Dr. 3,000 Dr. 2,400

Ex. 2 : Rs.600 the cost of repairing the machinery has been wrongly charged to Machinery A/c. Solution : This error could be rectified by the following journal entry. Rs. Rs. Repairs A/c To Machinery A/c 600 Dr. 600

117

Unit IV Ledger (Being rectification of wrong debit to Machinery A/c instead of Repairs A/c) Ex. 3 : Goods purchased from Sanjay for Rs.500 has been wrongly debited to Furniture A/c. Solution : The following journal entry is required to rectify the mentioned error. Rs. Rs. Purchases A/c To Furniture A/c 500 (Being rectifying entry for purchases wrongly debited to Furniture A/c) Dr. 500

Ex. 4 : A sale of Rs.600 has been wrongly credited to the customers account. Solution : This error will be rectified by debiting the customers account with Rs.1,200 (double of Rs.600) by writing To Wrong posting from Sales Book on the credit side on Ex. 5 : A payment of Rs.460 on account of rent has been posted twice to the Rent Account. Solution : This error will be rectified by entering Rs.460 on the credit side of the Rent Account by writing By Double posting from Cash Book on ., Rs.460. Ex. 6 : An item of Rs.197 has been debited to a personal account as Rs.179. Solution : The personal A/c has been debited Rs.18 short (Rs.197 Rs.179). To rectify this error, the personal A/c will be debited with the difference by writing To Difference in amount posted on , Rs.18 SUSPENSE ACCOUNT AND RECTIFICATION

118

Ledger IV

Unit -

This method is used for rectifying the errors located before preparing the final accounts. After the corrections have been made, a revised Trial Balance is prepared which should normally tally. But, if it does not tally, it means there are still some errors which have not been detected. As considerable time and effort have already been spent in locating and rectifying the errors, it may not be possible to wait any longer because it will delay the preparation of final accounts. Hence, in such situation the usual practice is to place the difference, to Suspense Account and tally the Trial Balance for the time being. If the total of the debit column in the Trial Balance is more than the total of its credit column, the difference is placed to the credit .of Suspense Account and the Trial Balance will tally. Similarly, if the credit column total is more than the debit column total, the difference is placed to the debit of Suspense Account. The Suspense Account thus created is shown in the Balance Sheet and is carried forward to the next year Note that the Suspense Account is not the result of any transaction. It merely represents the net effect of errors which still remain undetected. Therefore, during the next accounting year, after the errors are located and rectified, the Suspense Account will get closed. Let us now understand how errors wilt be corrected during the next year. As for the two sided errors, there is no change in the method of rectification. These errors do not affect the agreement of Trial Balance and hence do not involve the Suspense Account. They are rectified by means of the journal entries as usual-This is not the case in respect of one-sided errors. When one-side errors were to be corrected before preparing the Trial Balance we did it by writing an appropriate note in the concerned account. But, when they are to be corrected during the next year i.e., after Suspense Account has been created, the rectification will be through an appropriate journal entry. The one-sided error usually affects only one account. So to pass a journal entry for rectification of such error, we shall now take Suspense. Account as the other account involved. For example, Rs. 580 received from Shyam were posted to his account as Rs. 850. It means Shyam's Account is to be debited with Rs, 270. You can now pass the following journal entry to rectify this error:

119

Unit IV Ledger Rs. Rs. 270

Shyam -... To Suspense Account 270 (Being rectification entry)

Dr.

Thus all errors, whether they are two-sided or one-sided will now be rectified by means of journal entries. Let us assume that a businessman could not tally his Trial Balance. The difference of Rs. 1 between the totals of the two columns was put against the Suspense Account on its debit side and the Trial Balance was made to tally temporarily. The Suspense Account was carried forward to the next accounting year. The following errors were then located: 1 2 An amount of Rs. 99 was omitted to be posted to the credit of a customer's' account from the Cash Book. The Sales Book was overcast by Rs. 100.

The first error involved the omission of posting to the credit of customers account. So, to rectify this error you will have to credit customer's account with Rs. 99. As the Suspense Account is in existence, the corresponding debit would be given to the Suspense Account. Thus, the journal entry will be: R s. Rs. Suspense A/c 99 To Customer's A/c 99 (Being the rectification of omission in posting) The second error refers to Sales Book being overcast-by Rs. 100. It means that the Sales Account has been credited with Rs. 100 in excess. To rectify this error, the Sales Account will have to be Dr.

120

Ledger IV

Unit -

debited with Rs. 100. The corresponding credit would be given to Suspense Account. The rectifying entry will be: Rs. Rs. Sales A/c Dr. 100 To Suspense A/c 100 (Being the rectification of overcasting in Sales Book) The Suspense Account, after posting the two rectification entries, would appear as follows: Suspense Account Dr. Cr. To Difference in Trial Balance To Customer's A/c Rs. 1 By Sales A/c 99 100 With the posting of the two rectification entries the Suspense Account got closedNote that the opening balance in Suspense Account simply shows the net effect of these errors. Sometimes, the balance of Suspense Account is not given. In that case it can be worked out after completing the posting of the rectification entries. Suppose in the above example the amount with which the Suspense Account was opened was not given. Leave the first line blank on both the debit and credit sides of the Suspense Account and post the rectification entries. The difference between the totals of two sides will be considered as the balance with which the 100 Rs. 100

121

Unit IV Ledger Suspense Account was opened. This is based on the assumption that there are no more errors remaining undetected. Look at Illustrations 3, 4 and 5 and study how errors are rectified when Suspense Account is in existence. Illustration 3 The Trial Balance of Siva did not tally. The credit side exceeded by Rs. 1,455. This amount was entered in the debit column against Suspense Account and the Trial Balance was made to tally. Later, the following errors were discovered. 1 2 3 4 5 Goods worth Rs. 1,250 were sold to Mahesh on credit. This was entered in the Sales Book but was not posted. Goods worth Rs. 313 were returned by Ahmed. The amount was credited to his account but was not recorded in the Returns Inwards Book. Manoj paid Rs. 670 but his account was wrongly credited with Rs. 607. An amount of Rs. 375 owed by Dinesh was omitted from the schedule of Sundry Debtors. The Sales Book was undercast by Rs. 420.

Rectify the errors and show the Suspense Account. Solution: JOURNAL 1 Mahesh Dr. To Suspense A/c (Being sales to Mahesh not posted) Returns Inwards A/c \ Dr. To Suspense A/c (Being goods returned not recorded in Returns Inwards Book though credited to personal account) Suspense A/c To ManoJ (Being Cash paid by Manoj underposted) Dr. Rs. 1,250 313 313 63 63 Rs. 1.250

122

Ledger IV 4 Sundry Debtors A/c Dr. To Suspense A/c (Being Dinesh's debit omitted from the list of Sundry Debtors) Suspense A/c Dr. To Sales A/c (Being rectification of overcasting in Sales Book) Suspense Account

Unit 375

375 420 420 Dr.

Cr. To Difference in Trial Balance To Manoj To Sales A/c

Rs. 1,455 By Mahesh 63 By Returns Inwards A/c 420 By Sundry Debtors A/c 1,938

Rs. 1,250 313 375 1,938

Illustration 4 Kishan, the accountant, found certain errors in the books. He transferred the difference in the Trial Balance to the credit of a Suspense Account. Subsequently, the following errors were discovered. Pass the necessary journal entries to rectify the errors and show the Suspense Account. 1 2 3 4 An amount of Rs. 300 paid as Commission was not posted to Commission Account. Rs. 3,400 paid towards rent was wrongly entered in the Rent A/c as Rs. 4,300. Discount Received column of the Cash Book was undercast by Rs. 100. Cash sales not posted to the Sales Account amounted to Rs. 1,000.

Solution:

123

Unit IV Ledger JOURNAL 1 Commission A/c To Suspense A/c (Being the omission of posting to commission A/c rectified) 2 Suspense A/c To Rent A/c (Being excess debit to Rent Account now rectified) 3 Suspense A/c To Discount Received A/c (Being rectification of undercasting in the discount received column of the Cash Book) 4 Suspense A/c To Sales A/c (Being the omission of posting to sales account now rectified) Suspense Account Dr. Cr. To Rent A/c To Discount Received A/c To Sales A/c Rs. 900 By Balance b/d 100 (balancing figure) 1,000 By Commission A/c 2,000 EFFECT OF RECTIFYING ENTRIES ON PROFITS You have seen that the creation of Suspense Account helps in tallying the Trial Balance and avoiding delay in the preparation of final accounts. The errors stilt remain to be detected and rectified. So, the Profit and Loss Account prepared from such Trial Balance is subject to the undetected errors. The profit thus arrived at may be less or more than the actual profits. Similarly, when the errors 300 2,000 Rs. 1,700 Dr. Rs. 300 Rs. 3,00

Dr.

900

900

Dr.

100

100

Dr.

1,000

1,000

124

Ledger IV

Unit -

are detected and rectified during the next year, the rectifying entries will have their effect on the profit of the next year. The profit is affected only if the errors involve accounts which usually appear in the Trading and Profit and Loss Account (nominal accounts) and not those which appear in the Balance Sheet (real and personal accounts). Let us understand it with the help of an example. Suppose Rs, 24,000 paid for salaries during 1986 was posted to the Salaries Account as Rs. 20,400. This error has resulted in short debit of Rs. 3,600 to Salaries Account and so the salaries charged to Profit and Loss Account are short by Rs. 3,600. This would overstate the profits of 1986. When this error will be detected in 1987 and the rectifying entry passed, Rs. 3,600 will be added to salaries of 1987 and so the profit of 1987 will be decreased by Rs. 3,600. Thus, both the errors and the rectifying entries affect the profit. The effect of rectifying entries will be the reverse of the effect of errors. The effect of errors and their rectification on the profits has been presented in a summarised form in Table 20.1. Table 20.1 Effect of Errors and Rectifying Entries on Profits Nature of Error in Nominal Accounts Excess debit Excess credit Shon debit Short credit Omission of debit Omission of credit Effect of Error on Profit reduces increases increases reduces increases reduces Effect of Rectifying Entry on Profit increases reduces reduces increases reduces increases

Look at Illustration 6, It shows rectifying entries and their effect on profits.

125

Unit IV Ledger Illustration 6 A businessman finds that he could tally his Trial Balance of 1986 only by opening a Suspense Account. During 1987, he discovered the following errors: 1 2 3 4 The Discount Allowed column of the Cash Book was overcast by Rs. 25. Sale of old machinery amounting to Rs. 550 had been credited to Sales A/c. A Sale of Rs. 780 to Ahmed had been debited to his account as Rs. 870. The total of Bill Payable Book amounting to Rs. 4,000 for the month of June was not posted into the ledger.

Rectify the above errors and prepare the Suspense A/c. Also explain the effect of rectifying errors on the profits of 1987. Solution: JOURNAL 1 Suspense A/c To Discount Allowed A/c (Being the rectifying entry for overcasting of discount allowed column) Dr. Rs. 25 Rs. 25 550

Sales A/c Dr. To Machinery A/c (Being the rectifying entry for sales of Machinery wrongly credited to Sales Account) Suspense A/e To Ahmed (Being rectifying entry for excess debit to Ahmed's Account) Dr.

550 90

90 4 Suspense A/c . Dr. To Bills Payable A/c (Being the rectifying entry for omission of posting of the total of Bills Payable Book) , 4,000

4,000

126

Ledger IV

Unit -

Suspense Account Dr. Cr. To Discount Allowed A/c To Ahmed To Bills Payable A/c Rs. 25 90 4,000 4,115 Effect on Net Profit of 1987 Rectifying Entry 1 Credit to Discount Allowed A/c 2 Debit to Saies A/c 3 No nominal account is involved 4 No nominal account is involved Net decrease in Profits Increases Decreas Rs. es Rs. 25 25 550 550 525 4.115 By Balance b/d (balancing figure) Rs. 4,115

In the above illustration you observed that errors were committed during 1986 and the rectifying entries were passed in the books of 19o7. This unnecessarily affected the profits of 1987. In order that the profits of the year in which rectifying entries are passed is not affected, a new account called Profit and Loss Adjustment Account is opened. Now, all amounts which are to be debited or credited to nominal accounts in the rectifying entries will be debited or credited to the Profit and Loss Adjustment Account. The balance of the Profit and Loss Adjustment Account is directly adjusted' in Capital. The current year's profit will thus remain unaffected. The rectifying entries 1 and 2 of Illustration 6 which involve debit and credit to nominal accounts can now be shown as follows:

127

Unit IV Ledger JOURNAL 1 Suspense A/c Dr. To Profit and Loss Adjustment A/c (Being the rectification of Overcastting the discount allowed column) Profit & Loss Adjustment A/c Dr. To Machinery A/c (Being the rectification for wrong credit given to Sales Account) Rs. 25 Rs. 25 550 550

The Profit and Loss Adjustment Account will be as follows: Profit and Loss Adjustment Account Dr. Cr. To Machinery A/c Rs. 550 By Suspense A/c By Capital A/c (Transfer) 550 Illustration - I: Show with reasons, whether the following items affect the trial balance or not. 1. Machinery purchased Rs.5,000/- in cash has been partly omitted but cash account correctly credited. 2. Debit balance of furniture account Rs.750/- is put in the credit side of the trial balance. 3. Salary paid Rs. 1700/- is recorded take in the books of original entry. 4. Building purchased Rs.70,000/- has been debited to purchases account. 5. Credit purchase from Ramesh Rs. 650/- is recorded as Rs. 560/-. 6. Goods withdrawn by the proprietor for personal use Rs. 500/- is not at all recorded. Rs. 25 525 550

128

Ledger IV

Unit -

Solution : 1. This error will affect the trial balane because the debit aspect i.e. Debiting machinery account has not been recorded. In this case, the total of debit column will be short by Rs.5,000/- . 2. Debit balance of Furniture account Rs.750/- has been put in the credit side. So the credit side of the trial balance will be more by Rs.1,500/- (Rs.750/- for under-debit + Rs.750/- for wrong credit.) 3. Salary paid Rs.1,700/- is recorded twice. It means salary account is debited Rs.1,400/- and cash account is debited Rs.3,400/-. Here, the amount of debit is equal to the amount of credit. So, it will not affect the trial balance. 4. When building is purchased, building account is to be debited. But in its place, purchases account is debited. This is an error of principle. However the amount of debit is same. So the trial balance will not be affected despite the error. 5. This is an error of wrong recording of both the aspects i.e debit and credit. Amount debited is Rs.560/- and amount credited is Rs.560/-. So this error will not affect the trial balance. 6. When goods are withdrawn by the propnictor for personal use, the correct journal entry is : Drawings A/c. Dr. 500 To Purchases A/c. 500 Since the transaction is not at all recorded, then there is neither a debit nor a credit of Rs.500/-. It is an error of complete omission. So this error will not affect the trial balance. Illustration II On 30.06.2003, a Trial Balance of Praveer Pharmaceuticals was prepared which did not tally because the total of debit column was Rs.55,650/- and the total of credit column was Rs.54,750/-.

129

Unit IV Ledger A careful examination of books of accounts revealed the following errors : i. ii. iii. iv. v. 'X' account was wrongly debited Rs.500/- in place of being credited. Purchase from Mr. X Rs.5,000/- was completely omitted form the reconds. Salary paid Rs.1,350/- is recorded twice. Sale of Machinery Rs.1,200/- has been credited to Sales account. Discount allowed to a customer Rs.100/- has not been posted to discount account. Give the totals of rectified trial balance.

Solution : Corrected trial balance of Praveer Pharmaceuticals as on 30.06.2003. Incorrect As per trial balance Debit Total Rs. 55,650 Credit Total Rs. 54,750 +500 +5,000 - 1350 -1200 ______ 57,700 -1,300

i. Xs account -500 ii. Purchases account +5000 Mr X account iii. Salary account cash account iv. Machinery account -1200 Sales account v. Discount account +100 ______ Correct Total 57,700

a. Why rectification of error is necessary ? b. What is a double sided error ? c. What is suspense account ?

130

Ledger IV d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s.

Unit -

Why suspense account is prepared? When suspense account will show a debit balance ? What is one-sideded error? What do you mean by errors? State the effects of errors on Trial Balance. Can all errors be revealed through preparation of Trial balance? Give any two errors which affect the Trial balance. What do you mean by two-sided errors? Name two types of errors which are twosided? What is error of omission? What is error of commission? What do you mean by errors of principle? Give the meaning of compensating errors. Wat is Errors of Duplication. What is the error of partial omission? Name any two miscellaneous errors which affect the Trial balance.

2. Write whether the following statements are 'True' or 'Flse'. a) b) c) d) e) f) Errors are intentional mistakes committed by accounts clerk. Two-sided errors affect the trial balance. Complete omission of transaction from the books of accounts is called Error of Omission. An item posted to the wrong side of an account will not affect the trial balance. Suspense Account is opened to rectify two-sided errors. An untallied trial balance will not affect the preparation of Final Accounts.

131

Unit IV Ledger g) Compensating errors are disclosed by the preparation of trial balance. h) Errors of principle do not cause disagreement in trial balance. i) Partial omission of a transaction leads to an error not disclosed by trial balance. j) Wrong casting of any subsidiary book affects the trial balance. k) Wrong balancing of an account will not affect the trial balance. l) "The total of sales book has not been posted to Sales Account" is a case of Error of Comssion. m) "Purchase of office furniture and debiting General Expenses A/c" is a case of Error of Principle. n) Errors of Commission do not allow the trial balance to agree. o) Preparation of Trial Balance helps in correction of errors of Principle. 3. Fill up the blanks : a. Excess debit of one account can be rectified by.. the same account. b. If total debit exceeds the total credit of a Trial Balance, suspense account will show.. balance. c. . error are corrected before preparing of Trial Balance without passing a journal entry. d. One sided errors are corrected after preparaion of trial balance through.. Account. e. Short credit of an account increases. side of trial balance. f. All errors relating to nominal accounts are passed through.. account if errors are rectified after preparationof final accounts. g. Balance of Profit and loss adjustment account is finally transferred to . Account. h. Commission as an expenditure will.. the profit. i. If an error has increased the profit, for correction P/L Adj. A/c will be.

132

Ledger IV j.

Unit -

An item is posted to the wrong side of an account. The error will be the amount.

k. The error which affects either the debit or the credit aspect is called.. error. PART - B : SHORT QUESTIONS : (Answer within 3-5 sentences) 1. Suspense account shows a credit balance of Rs. 150 Discount received form X Rs. 90 has not been posted to discount account. Show the suspense account. 2. Sales book has been carried forward to the next page as Rs. 56 instead of Rs. 65 correct ht error by passing journal entry. PART - C : LONG QUESTIONS (Theory-based) 1. What do you mean by error in the books of accounts. What are the reasons of such error. Point out the places where such error arises. 2. How will you rectify the errors before preparation of trial balance ? Explain with suitable examples. 3. Discuss what is suspense account. Explain with suitable examples how the errors are rectified through suspense account. 4. Discuss the procedure of rectifying the errors if they are detected after preparation of final accounts. LONG QUESTIONS (Practical-based) 1. Pass journal entries where ever necessary to correct the following errors: a. A sale of Rs. 310 to Karim was posted to Karan account. b. Credit sale to Harmohan Rs. 130 is omitted to be recorded. c. Purchases book I short by Rs. 510. d. Sales book is short by Rs. 150 e. Sales return from P is not recorded in the return book. f. Wage unpaid Rs. 350 is debited twice to wage account. g. Wage unpaid Rs. 570 is not recorded at all.

133

Unit IV Ledger 2. Prepare a suspense account and find out the difference in Trial Balance from the following errors : a. Rs.580/- spent on a annual white washing of a building has been charged to building account. b. Cash purchases Rs.1,000/- has been posted to sales account. c. Sales of Rs.250/- has been posted to purchase account. d. Credit purchase from Ram has not been posted to his account. 3. The under mentioned errors were disclosed in the books of Ram Rahim & Co. for the year ending 30th June 1991. Pass Journal entries to rectify the same. a. Goods amounting to Rs.3,000/- which has been returned by a customer, were taken to stock but no entry in this respect was made in the books. b. A purchase of goods from Mahanand amounting to Rs.6,000/- was wrongly passed through the Sales book. c. A sales return from Rakesh Rs.280/- was wrongly passed through the Sales book and from there wrongly posted to the credit of Rakesh as Rs.820/-. d. A credit sale of Rs.1,020/- to Leelaram was wrongly passed through purchase book. e. A bill receivable which was accepted by Kamruddin for Rs.1,500/- was sent to the banker for collection. This having been dishounoured and returned by the bank was debited to Bills receivable account. f. Rs.1,700/- paid to Mr. Waman against our acceptance was by mistake debited to M/S. Waman& Sons account. g. Rs.250/- received from Garib Chand as final dividend whose account had been written off as bad debt, was included in the list of creditors. 4. The suspense account of Mr. Litu shows a credit balance of Rs.242/-. Rectify the following errors and show the suspense account : a. Depreciation on Furniture Rs.5/- has not been posted to depreciation account.

134

Ledger IV

Unit -

b. Purchase of welding machine Rs.2,000/- is passed through Purchase book. c. Sale of old furniture Rs.500/- is credited to Sales account. d. Discount allowed to Mr. Z Rs.51/- is recorded as Rs.15/-. e. License fee Rs.80/- paid for the owners gun is charged to Miscellaneous account. f. Purchase of Rs.800/- is posted to Purchase account as Rs.600/-. g. Mr. X, a creditor whose account Rs.361/- is carried forward to the next page as Rs.136/- and posted to the debit of his account. 5. Pass journal entries to correct the following errors and show the suspense account. a. Rs.560/- paid to the workmen for making furniture has been charged to Wage account. b. A cheque of Rs.2,000/- received from Alpha which was dishonoured on maturity has been debited to Allowance account. c. Rs.15,000/- paid for the purchase of a car for the proprietor for personal use has been debited to car account. d. While carrying forward the total of Sales book to the next page the figure was changed from Rs.68,000/- to Rs.56,000/-. e. Cash paid to Remigton Rs.770/- was recorded in the next year. 6. Suspense account shows a debit balance of Rs.411/-. Rectify the following mistakes and prepare Suspense account. a. Total of Purchase book is excess by Rs.555/-. b. Total of Sales book is overcast Rs.666/-. c. Total of Inward book is overcast by Rs.777/-. d. Total of Outward book is under cast by Rs.888/-. e. Depreciation on Machinery Rs.33/- has not been posted to Machinery account. f. Credit sales to Hari Rs.999/- has been credited to his account. 7. (A) Rectify the following errors by passing the journal entries. a. Total of Purchases book is excess by Rs.555/-. b. Total of Sales book is over cast Rs.666/-.

135

Unit IV Ledger c. Total of Inward book is overcast by Rs.777/-. d. Total of Outward book is undercast by Rs.888/-. e. Depreciation on Machinery Rs.33/- has not been posted to Machinery account. f. Credit sales to Hari Rs.999/- has not been posted to Machinery account. (B) Rectify the following errors by passing the journal entries. a. Rs.900/- received from Shyam has been posted to Pradyumn account. b. Goods returned by Tinku Rs.39/- has been debited to his account. c. Repairs on second hand machinery Rs.379/- has been debited to repairs account. d. Rs.30/- paid for postage was omitted to be posted to postage account. e. Rs.697/- interest on overdraft has been credited to interest account. f. Bad debt recovered from Pintu Rs.276/- has been credited to his account. 8. Rectify the following errors and prepare suspense account. a. Rent paid to landlord Rs.786/- has been debited to Landlord account. b. Goods purchased for the personal use of the proprietor Rs.345/- has been debited to Purchase account. c. Goods sold to Nilima Rs.90,000/- has been recorded as Rs.9,000/-. d. Rs.485/- received from Satish in settlement of a claim of Rs.500/-, has been correctly debited to Cash A/c but not debited to Discount A/c. e. Repairs to machinery Rs.50/- has been debited to Machinery account. 9. The suspense account of Mr. Jack shows a debit balance of Rs.5,243/-. Rectify the following mistakes and show the suspense account. a. Rent received from Y Rs.90/- has been credited to his account. b. Salary paid to a watchman has been debited to the Personal account of the watchman Rs.300/-.

136

Ledger IV

Unit -

c. A bill of Rs.865/- received from Jadu has been credited to Bills payable account. d. Sales to P Rs.3,000/- has been debited to his account as Rs.30/-. e. A cash sales of Rs.86/- to X correctly recorded in the Cash book but has been credited to X account. f. Goods withdrawn by the proprietor for personal use Rs.543/- has not been debited to drawings account. 10. Rectify the following errors and show the suspense account. a. Discount received from T has been credited to his account Rs.91/-. However, discount account is recorded correctly. b. Discount allowed to a customer Rs.67/- has been credited to discount account as Rs.76/-. c. Summation of return Outward book is short by Rs.99/-. d. Sales return from Q has been posted to the debit of his account Rs.111/-. e. A customer could not pay Rs.50/-. Baddebt account is debited but his account has not been credited. 11. Correct the following errors by passing journal entry. a. Amount from a customer Rs.700/- is omitted to be included in the list of Sundry debtors. b. Rs.37/- received from Ram in respect of a debt which was written off as bad debt earlier has not been recorded at all. c. Rs.3000/- paid for custom duty for the purchase of machinery has been debited to Custom Duty account. d. Return Inward of Rs.51/- has been posted to the Outward account. e. Goods destroyed by fire Rs.761/- has not been recorded. 12. The following errors were discovered before preparation of Trial Balance. Correct the errors by passing journal entries wherever necessary. a. Debit side of cash book is short by Rs.87/-. b. A bill payable of Rs. 6500 has not been credited to Bills payable account. c. Rs.760/- paid to Bulu has been recorded twice. d. Cash received Rs.6500/- and discount allowed Rs.500/- has been recorded as discount Rs.65000/- and cash received Rs.500/-.

137

Unit IV Ledger 13. A book keeper failed to balance his Trial balance, the credit side exceeding the debit side by Rs.200/-. The amount was entered to a suspense account. Later, the following errors were discovered. Give journal entries to correct the errors and prepare Suspense account. a. Goods sold to Longman & Co. Rs.620/- were correctly entered in sales book but posted to the account as Rs. 260. b. Goods sold to Short & Co. Rs.75/- in cash correctly recorded in cash book put wrongly credited to Short & Co. account. c. A credited balance of Rs.735/- of Rent receivable A/c was shown as Rs.570/-. d. The total of Return outward book Rs.200/- was not posted in the Ledger. e. Goods worth Rs.100/- purchased from Board & Co. wrongly entered in the Sales book. The account of Board & Co. was correctly credited. 14. The Trial balance of a trader only balanced after inserting suspense item for which an account was opened in the ledger. On auditing the books of accounts, the following errors were located. Pass journal entries to correct the following errors. a. Rs.100/- received from A.Rustomji had been posted to B. Rustomji's account. b. Rs.20/- paid for postage was left off to be posted to that account. c. In casting sales book Rs.878/- had been carried forward as Rs.787/-. d. An invoice of Rs.15,020/- in respect of a motor car included an item Rs.20/- for road tax. The whole amount was debited to motor car account. e. An item of Rs.50/- for goods returned by Purushottam was debited to his account. f. Rs.500/- credited to partners drawing account for interest on capital was debited to Bank Interest Account.

138

Ledger IV

Unit -

g. In extracting the ledger balances an item Rs.100/- for goods sold in succeeding period and debited to partys account was by mistake included in the trial balance. 15. In order to close the books in time, an accountant places the differences in books to a Suspense account. Subsequently the following mistakes were located : a. Sales book was over cost by Rs.100/-. b. A sale of Rs.50/- to X was wrongly debited to Y. c. A debit of Rs.19/- to the General expenses account was taken as Rs.80/-. d. A bill for Rs.155/- accepted by a customer was passed through Bills payable book. e. Legal expenses, Rs.119/- was debited to the personal account of the Vakeel. f. Cash received from A. Soloman was debited to B. Solomons account, Rs.150/-. g. Total of Rs.1,235/- on page 5 of Purchase book was carried forward as Rs.1,325/- on page 6 of the said book. Pass journal entries to rectify the errors and prepare the suspense account. 16. A ledger keeper of Acharya & Co. could not agree the trial balance. He transferred an amount of Rs.296/- being excess of the debit side total to the Suspense account. The following errors were discovered after preparation of final accounts. a. Sales book was overcast by Rs.300/-. b. Purchase of furniture worth Rs.615/- was passed through the Purchase book. c. An amount of Rs.55/- received form M/s Shaha & Co. was posted to their account as Rs.550/-. d. Purchase returns book total on a folio was carried forward as Rs.221/- instead of Rs.112/-. e. A cash sales of Rs.1235/- though duly entered in the Cash book was posted to the Sales account as Rs.235/-. f. Rest of the different was due to a wrong total in the Salaries Account in the Ledger. Pass the necessary journal entries and prepard Suspense Account in the books of Acharya and co.

139

Unit IV Ledger 17. Show the journal entries to rectify the following errors and also show the Suspense A/c as it would appear in the ledger. a. Sales book was overcast by Rs.400/-. b. Purchase book was undercast by Rs.250/-. c. Return Inward register was overcast by Rs.100/-. d. A discount of Rs.50/- allowed to a customer, M/s Ramji & Co. was wrongly debited to their account. e. The total of receipt side of cash book on a particular page was Rs.1015/- but was wrongly carried forward to next page as Rs.1105/-. f. A cheque for Rs.2,535/- issued in favour of a supplier, Ghanshyam & Co. was debited to their account as Rs.2,355/-.

22. The Suspense account of Mr. Black and White shows a credit balance of Rs.60/- and accordingly final accounts were prepared. The following errors were discovered later on. Correct the mistakes by passing journal entries and show the Suspense account and profit and loss adjustment account. a. Interest paid to X Rs.70/- has not been posted to Interest account. b. Rs.2500/- spent on the construction of an additional building has been debited to Repairs account. c. Discount column of debit side Rs.75/- of the Cash book has been posted to the credit side. d. Closing stock was under valued by Rs.369/-. e. Unexpired insurance of Rs.57/- has not been taken into account while preparing final accounts. UNIT - VII SUBSIDIARY BOOKS

In foregoing chapters we learnt how different types of transactions are recorded in the journal and posted into ledger accounts. We recorded each and every transaction in one book i.e. Journal. If we

140

Ledger IV

Unit -

observe the transactions we may find that the business transactions are mostly similar and repetitive in nature. About 95% of the transactions relate to Purchases, Sales, Purchase returns, Sales returns, Cash receipts, Cash payments, Bills received, Bills accepted etc. It takes a lot of time and labour to record all these transactions in one book i.e., Journal and then to post them into ledger. We can save time and efforts by recording similar transactions in separate books and then posting each book into ledger account. Separate books can be opened to record separate classes of transactions depending on their frequency and repetitiveness. Thus, frequently occuring transactions are placed in separate journals and transactions of infrequent nature are placed in the original journal itself. These separate books which are specially maintained to record separate types of transactions are called subsidiary books Day Books or Special Purpose Books. The subsidiary books are the Day Books or Books of original entry because transactions are primarily and chronologically recorded in such books like Journal. Thus, these books can be called sub-Journals (subdivided Journals) or special Journals. The system under which such a sub-division of the journal is made, is called practical system of Book-keeping. Types of Subsidiary Books : The following are usually the subsidiary books maintained by the business under practical system of book keeping. i. Cash Book : It is a subsidiary book used to record all cash receipts, cash payments including receipts, payments through cheques.

141

Unit IV Ledger Purchases book : This is a subsidiary book used to record all credit purchase of merchandise or goods. However cash purchases and credit purchase of fixed assets are not recorded in this book. This book is also known as Purchase Journal or Purchase Day Book or Bought Book. iii. Sales Book : This is the subsidiary book which records all credit sales of merchandise or traded goods. Cash sales and credit sales of fixed assets are not recorded in this book. This book is also known as Sales Day Book or Sales Journal. iv. Purchase returns Book : This is the book in which goods returned to supplier are recorded. This book is also known as Returns Outward Book. v. Sales returns Book : This is the subsidiary book used to record sales returns from customers to whom the goods were sold on credit. This book is also known as Returns Inward Book vi. Bills receivable book : If the bills and promissory notes are received against credit sales, the seller may record them in a separate book which helps in getting the full information about the bills. Such a book is called "Bills Receivable Book". This book records bill accepted by customers. vii. Bills payable book : This is a subsidiary book which records all the bills accepted by the firm as a token of acknowledgement of debt payable to the supplier. Speaking in other words "Bills Payable Book" records bills raised by supplier. viii. Journal Proper : There are some transactions which can not be recorded in any of the above mentioned subsidiary books. Such transactions are journalized in the book which is called Journal Proper. Thus, Journal proper records all residual transactions. Advantages of Subsidiary books : Maintaining subsidiary books under the practical system of accounting results in the following advantages: 1. Economy in time and labour : Different accounting staff remain in charge of different subsidiary books to record different transactions, like credit sale, credit purchase, cash receipts and payments, etc. So, simultaneous recording of ii.

142

Ledger IV

Unit -

the transactions of various types is possible which ensures quickness in recording. This leads to saving of time and labour. 2. Minimisation of error: In this system, tracing out a mistake is easier. Location of errors is facilitated because of the existence of separate books. Steps can be taken to rectify the errors and minimise them. 3. Diversion of labour : Accounting work relating to different types of transactions are handled by different accounts personnel. So, there is diversion of labour which results in efficiency of staff. 4. Simplicity of recording: The proforma and contents of subsidiary books are self-explanatory. So, recording transactions in these books becomes more easy and simple. 5. Availability of information : There are separate books to record separate types of transactions. So, it is possible to find out all information relating to a particular class of transactions from one book only. These subsidiary books are discussed briefly in the following paragraphs. I. CASH BOOK Meaning : Cash book is a subsidiary book, which is used to record all transactions relating to cash receipts and payments. It also includes receipts and payments through cheques and bank drafts. Cash Book as both subsidiary book and principal book It is a book of original entry because all cash transactions are recorded in cash book in a chronological order. They are not journalized separately. It is also treated as a ledger account because all cash receipts are debited and all cash payments are

143

Unit IV Ledger credited as per double entry system. It is also balanced like cash account. Further, no separate cash account is maintained in the ledger or no separate posting of cash account in the ledger is required. Thus, cash book serves the purpose of both a subsidiary book and a ledger. The advantage of maintaining cash book is that cash balance at any point of time can be known by balancing cash book. Types of Cash book : There are four types of Cash books : a. Simple Cash Book/Single Column Cash book b. Double Column Cash book/Cash book with discount column c. Triple Column Cash book/Cash book with bank and discount columns d. Bank Cash book/Cash book with bank and discount columns. a) Simple Cash Book : This is a type of cash book which records only cash receipts and cash payments. This is prepared in the same manner as cash account is prepared. Proforma of Simple Cash Book Dr. Cr.

In the above proforma, the left hand side or debit side of the cash book records all cash receipts because cash account is debited when cash is received. The right hand side or the credit side records all cash payments because cash account is credited when cash is paid. This has been done as per the rules of double entry for real account (Debit what comes in and credit what goes out). It is called single column cash book because only one column is provided on each side of the cash book to record cash receipts and cash payments only. Posting of cash book is made in the following manner :

144

Ledger IV

Unit -

1. Items of the debit side of the cash book will be individually credited in the ledger each under a separate head of account excepting opening balances of cash or cash in hand. 2. Items of the credit side of the cash book will be individually debited in the ledger each under a separated head of account. Balancing of cash book is made at the end of a period in the same way as that of a cash account. Further it must be noted that the simple cash book will always have a debit balance because the total of the cash payments can never be more than the total of the cash receipts. Illustration: Day and Night Medical store had the following transactions during May 2003. Prepare cash book to record those transactions and post them into ledger. 2003 Rs. May 1 Cash in Hand 1,500 May 3 Sales on Cash 15,5000 May 4 Credit Sales to Pankaj 1,700 May 5 Paid rent 1,200 May 6 Paid wages 500 May 7 Received from Pankaj on account 1,000 May 8 Deposited into Bank 10,000 May 12 Purchased goods and payment made by cheque 2,000 May 21 Paid electricity charges 100 May 31Withdrew for personal use Solution : Books of Day and Night Medical store Cash book Dr. Cr. 500

145

Unit IV Ledger Note : 1. Transaction dated May 4 is a credit transaction and hence not recorded in cash book. However, it must be recorded in sales book which has not been shown here. Posting of credit sales has been made in ledger (Sales A/c). 2. Transaction on May 12 does not involve cash. So it is excluded from simple cash book. However, it may be considered as a cash transaction in case of triple column cash book to be discussed later on. LEDGER Sales Account Cr.

Dr.

Journals from page 77 of the PM65 file to be copied

Ramas Account Dr. Cr.

Rent Account Dr. Cr.

Wages Account Dr. Bank Account Cr.

146

Ledger IV Dr.

Unit Cr.

Electricity Account Dr. Cr.

Drawings Account Dr. b) Double Column Cash Book Meaning : It is a type of cash book used to record transactions relating to cash and discount. Two columns are provided on each side of the cash book to record the amount of cash and discount. Here discount refers to cash discount only. Proforma of Double Column Cash Book Dr. Cr. Cr.

In the above proforma, the left hand side or debit side records transactions of cash receipts and discount allowed. The right hand side or credit side records transactions of cash payments and discount received. Procedure of posting and balancing of Double Column Cash Book : 1. Posting of items on debit side and credit side of double column cash book and balancing of cash column is made in the same way as that of single column cash book.

147

Unit IV Ledger 2. Discount columns are not balanced but they are totalled separately and posted separately in the ledger. It may be remembered that Discount columns are memorandum columns. So, they are not balanced. In the Debit side or Receipt side, the Discount column represents discount allowed to debtors; and in the credit side or payment side, it represents discount received from creditors.The total of discount column on debit side is posted to the debit of discount account in the ledger, total of discount column on credit side is posted to the credit of discount account in the ledger.

Illustration - 11 Prepare Double column cash book of M/s. Capital Traders from the following transactions and prepare necessary ledger accounts for the same. 2004 June 1 June 5 Rs. Balance of cash in hand at the beginning 15,000.00 Purchased goods in cash valuing Rs.6,000/- at a Trade Discount of 10% and cash discount of 5% Sold goods to Raman enterprise on credit 2,000.00 Paid wages Received from Raman Enterprise in full settlement of account Cash sales to Mahesh subject to cash discount Rs.100/- to be allowed 700.00

June 10 June15 June 24

1,950.00

June 28

2,000.00

June 29

Cash purchases from Vikash Pharmaceutical subject to trade discount 20% and cash discount 8% 7,000.00

148

Ledger IV June 30

Unit -

Deposited into bank all cash in excess of 1,000.00

Solution : Books of Capital Traders Double Column Cash Book Dr.

Cr.

Note : 1. Transaction dated June 5 Actual Purchase = Rs 6,000 10% (T.D) = Rs. 5,400 Cash Discount = 5% of Rs. 5,400 = Rs. 270 Here only cash discount is shown and trade discount is not shown in books of accounts. Only calculation is made to arrive at the net amount of purhase. 2. Transaction dated June 24th full settlement of account involves discount allowed because amount received Rs. 1950 is less than amount due Rs. 2,000 from Raman enterprises. Thus cash discount = 2000 - 1950 = 50 3. Transaction dated June 30 Rs.1,000/- is to be kept as closing balance of cash which is to be written in credit side as By Balance c/d 1,000. The amount to be deposited into bank in excess of Rs.1,000/- is determined by balancing figure indicated in cash book as (Bal.Fig). LEDGER Raman Enterprises Account

149

Unit IV Ledger Dr. Cr.

Wages Account Dr. Bank Account Dr. Purchases Account Dr. Sales Account Dr. Cr. Cr. Cr. Cr.

150

Ledger IV Discount Account Dr.

Unit -

Cr.

c) Triple Column Cash Book Meaning : It is the cash book with three columns on each side to record transactions of Cash, Bank and Discount. In this cash book, an additional column i.e., Bank column is provided on each side to record transactions through cheques, bank drafts, deposits withdrawal of cash. This cash book is usually maintained by a trader which has a bank account and transactions are made through bank. There is no need to maintain a separate bank account in the ledger when triple column cash book is maintained. Proforma of Triple Column Cash Book Dr. Cr.

Procedure for posting and Balancing : 1. The debit side items are posted to the credit of their respective accounts in the ledger and the credit side items are posted to the debit of their respective accounts in the ledger. 2. Balancing of cash column is made in the same way as explained earlier. Cash column will always show a debit balance. Bank column is to be balanced like cash column but the bank column may show either a debit balance or a credit balance. Debit balance of bank indicates cash at bank where as credit balance of bank indicates overdraft.

151

Unit IV Ledger Treatment of discount column is made as that explained already in case of double column cash book. Transactions of special nature significant for preparation of triple column cash book : 1. Contra Entry 2. Cheque received and deposited into bank on the same day 3. Cheque received on one day but sent to bank on a later date 4. Cheque received and sent to bank but dishonored 5. Payment made by issuing cheque 6. Cheque received and transferred to some other party in settlement of a claim 7. Payment made by the bank directly to the suppliers 8. Payment made by bank as per standing instructions 9. Interest allowed by the bank 10. Bank charges and interest debited by the bank 11. Drawings from bank for personal use and official use 1. Contra Entry : In the three column cash book if the money is deposited in bank or money is with drawn from the bank, then in such cases the entries occur in both sides of cash book and no ledger is required. This is indicated by a contra sign (C) in ledger folio column of the cash book. 2. Cheque received and deposited in bank in the same day : For this transaction, there will be one entry in the receipt side of the bank column. 3. Cheque received on one day and sent to bank on a later date : On the date of receipt of the cheque, the amount is entered in the cash column of receipt side. On the date of sending the cheque to bank, it is recorded on both sides of cash book. It means, entries are made in the cash column of payment side and bank column of receipt side. 4.Cheque received and sent to bank but dishonoured : On the date of receipt, the amount is entered in the bank column of the receipt side. Similarly, on the date of dishonoured, the amount is entered in the bank column of the payment side.

152

Ledger IV

Unit -

5. Payment made by issuing cheque : This transaction is entered in the payment side under bank column. 6. Cheque received and transferred to other party in settlement of debt : On the date at receipt, the amount is entered in the cash column of receipt side. On the date of transfer, the amount is entered in the cash column of payment side. 7. Payment made by the bank directly to the supplier : The entry is made in the payment side under bank column. 8. Payment made by the bank as per standing instructions : Entry for the same is made in the payment side under bank column as By XXX A/c. 9. Intrest allowed by the Bank : The entry is made in the receipt side under bank column as To Interest A/c. 10. Bank charges and interest debited by bank : This entry is shown in the payment side under bank column as By Bank Charges and Interest A/c. 11. Drawings from bank for official and personal use : Amount withdrawn for office use is contra entry and hence shown on both sides of the cash book. If amount is withdrawn for personal use, then entry is made in the payment side under bank column as By Drawings A/c. Illustration - 12 Enter the following transactions in a cash book with discount, cash and bank column. 2003 Mar 1 Mar 2 Mar 3 Mar 4 Mar 5 Bapi commenced business with He paid into the bank Purchased goods Sold Goods Purchased goods from Jitu on credit Rs. 25,000 18,000 2,000 1,800 5,000

153

Unit IV Ledger Mar 6 Mar 7 Mar 8 Mar 9 Issued a cheque in favour of Jitu and was allowed a discount of 2% Sold goods to Mitra on credit Mitra sends cash Deposited cash into bank For office use For personal use Mar 16 Purchased four chairs and one table Payment made by cheque May 18 Received from Purna Discount allowed to him Triple Column Cash Book Dr. Journal entry to be inserted from page 74 of the file revisedproof20.7 Note : Transactions dated 5th and 7th March are credit transactions. Hence, they are to be shown separately in subsidiary books but not in the cash book. Illustration 13 Prepare a Triple column cash book from the following information : 2001 Sep 1 Sep 2 Sep 5 Rs. Opening balance of cash 1,200 and bank 5,200 Cash sales subject to cash discount of 1%4,000 Received a cheque from Surya Chemicals and deposited 2,000 Discount allowed to him 100 Deposited in the bank 1,500 4,900 100 6,000 500 5,500 1,000 500 1,800 3,000 150

Mar 10 Withdrew from bank :

Sep 7

154

Ledger IV Sep 7 Sep 9 Paid salaries by cheque 300 Received a cheque of from R.K. and Sons 5,000 Sep 10 Cheque received on 9th instant was deposited into bank Sep 12 Paid by cheque to Glaxo Industries in full settlement of credit purchase of Rs.5000/- 4,750 Sep 15 Bank notifies the cheque of surya chemical of 5th sep to be dishonored. Bank charges debited 15 Sep 17 A cheque is received from Oro Pharma was endorsed in favour of Dabur India Ltd on the same day in settlement of a debt 2,500 Sep 20 Dabur India Ltd returned us the cheque of Oro Pharma as it was dishonoured. The same was also returned to Oro Pharma Sep 25 Interest allowed by bank 57 Sep 30 Payment directly made to L.I.C as per standing instruction 500 Triple Column Cash Book Dr To be inserted from the file revised proof 20.7. pp 75 d) Bank Cash Book Meaning :

Unit -

Cr.

This is a type of cash book with bank and discount columns only in both sides of the same. This Cash Book is followed by firms which do not prefer transactions through cash. This is done with a view to reducing the chance of cash misappropriation by the accounting staff or cashier. This cash book is similar to triple column cash book without cash column on both sides. Only two columns i.e., Bank and Discount are provided. Before preparing Bank cash book, an assumption is made that all receipts and payments are made through bank and not by cash. Whenever only cash is received from any party, it is immediately deposited into bank. The question of cash payment does not arise because money

155

Unit IV Ledger is kept in the bank and payments are made out of bank by issue of cheques only. Thus, the debit side of bank cash book contains transactions regarding cheques in the bank column, the credit side contains transactions regarding issue of cheques and bank drafts in the bank column. Procedure of posting and Balancing : 1. Posting of different items of this cash book and discount columns is made in the same manner which has already been explained in case of double column and triple column cash books. 2. Only bank columns are to be balanced. A debit balance of bank column signifies cash at bank and a credit balance signifies overdraft. Illustration 14 Bayer India Ltd, a drugs manufacturing company followed the practice of transacting through bank. Prepare a Bank Cash Book to record the following transactions for the month of December 2003. 2003 Dec 1 Dec 4 Dec 9 Dec 10 Dec 14 Dec 15 Dec 17 Dec 23 Dec 24 Rs. Balanced of Bank 3,000 Cash Sales 2,250 Purchased chemicals worth 1,700 Received a cheque from 4,700 Ganjam Chemicals Paid Salaries 325 Rent paid 170 Issued cheque to creditors 1,230 Paid for advertisement 200 Received a cheque from debtor 1,110 (owing Rs.1,200) Discount allowed to him 90 Cash sales subject to cash discount of 5% 5,000 Issued a cheque in favour of Alkem Laboratries 750 Discount allowed by them 50 Books of Bayer India Ltd.

Dec 25 Dec 27

156

Ledger IV BANK CASH BOOK Dr To be inserted from Page no. 76 Cr.

Unit -

157

Unit IV Ledger e) PETTY CASH BOOK :

Meaning : It is a separate cash book maintained to record the day-today small expenses, items of small payments usually for cartage, postage, stationery, conveyance, coolie charges, etc. The person who maintains the petty cash book is called the petty cashier. Need of maintaining petty cash book : Need for petty cash book arises to avoid to following problems : 1. If all the small payments for conveyance, cartage, postage etc. are recorded by the main cashier in the main cash book, then the main cash book may become clumsy and cumbersome. The chance of clerical errors increases. The main cashier may be over burdened and cash book may become bulky if all cash transactions are entered in the main cash book.

2. 3.

Advantages of Petty Cash Book: Petty Cash Book has the following merits: i) ii) It saves time of the chief cashier. The burden of chief cashier is reduced. He can concentrate more on preparation of main cashbook to make it error-free and fraud-free. Analytical Petty Cash book helps in exercising control over small payments.

iii)

iv) Posting of Petty Cash book into ledger is easier as only the totals of different heads of expenses are considered. No details is necessary. Imprest system : 1. The petty cashier usually follows imprest system under which a fixed sum of money is given by the main cashier to him at the beginning of a period. This amount is called imprest money. 2. Out of this amount, he goes on making the small payments.

158

Ledger IV

Unit -

3. At the end of the period, he prepares vouchers for the amount spent and produces the same before the main cashier. 4. The main cashier reimburses him the amount paid by him as per vouchers after proper checking. Thereby the imprest amount in the beginning of the next period is restored. 5. The period for which the imprest amount is paid may be a week, or a month or a fortnight depending on the frequency of small payments. Proforma of petty cash book (Under Imprest System) Dr. Cr. Toi be inserted from Page 77

The Petty Cash book in the above proforma is also called Analytical Petty Cash Book because the credit side or payment side is analysed into various columns. Each column represents a head of expenditure. Explanation of the above proforma : 1. Petty cash book has ten numbers of columns for the amount paid in the payment side along with Total Amount column. The payment side is analysed into various columns on the basis of frequency of payments as to a particular expense. The payment for which no separate column exists are shown in the "Misc. Column". In the remarks column, the nature of payment is recorded. At the end of the period, all amount columns in the payment side shows the total amount spent which is to be paid by the main cashier. As the payment side is analysed into various columns, it is also called Analytical petty cash book. 2. The receipts side contains only one column to record the amount received at the beginning of cash period. 3. Columns for Date, Voucher No. and Particulars are common for both the receipt and payment side.

159

Unit IV Ledger

160

Ledger IV Procedure of Recording, Balancing and Posting :-

Unit -

1. Amount received from main cashier is shown in the receipt side under the column Amount Received. 2. Payments are recorded on the right hand side in various columns meant for the different types of payments. 3. Balancing of the petty cash book is made at the end of a period. This is done by deducting the total of the Total Amount column from the total of the Amount Received column. The balance represents petty cash in hand available with the petty cashier. 4. In the ledger, a petty cash account is opened which is debited for the amount given to petty cashier and credited with the total amount spent. The difference represents petty cash in hand, which is always a debit balance.

5. Separate account for each head of expenses is opened in

the ledger. These accounts are debited with the amount of respective periodical total as To Petty Cash A/c. Illustration : Petty cashier is paid Rs. 2,000 as imprest money on Monday, Jan 1 2002. During the 1st fort night his expenses were as under : 2002 Jan1 Voucher Particulars of payment Amount No. 1. Taxi fare for manger 125 2. Courier charges for the letters despatched 75 3. Stationery purchased 185 4. Cartage 45 5. Refreshment 95 6. Courier Charges 50 7. Cartage 35 8. Taxi fare 185 9. Refreshments 175

Jan4

161

Unit IV Ledger Jan11 10. Taxifare 150 11. Revenue Stamps purchased 50 12. Cartage 45 13. Refreshments 115

Jan15

Petty Cash Book Solution : Table to be inserted from page 79 Ledger Petty Cash Account Dr. Cr.

Tables to be inserterd from page 79

Conveyance Account Dr. Cr.

Stationery Account Dr. Cr.

162

Ledger IV Courier Charges Account Dr.

Unit -

Cr.

Cartage Account Dr. Cr.

Refreshments Account Dr. Cr.

Miscellaneous Expenses Account Dr. Tables to be inserted from page 80 Cr.

163

Unit IV Ledger MODEL QUESTIONS PART - A : Very Short Questions 1. Answer the following questions in a sentence or two. (a) What do you mean by Subsidiary Books? (b) On which basis, a separate book is opened? (c) In which book, transactions of infrequent nature are recorded? (d) Are Subsidiary books called the "Books of original entry"? Why? (e) What do you mean by "Day Books"? (f) What is sub-journal? (g) What is practical system of book-keeping? (h) What is Cash Book? (i) What is Simple Cash Book? (j) What is Bank Cash Book? (k) What is Double-Column Cash Book? (l) What is Triple-Column Cash Book? (m) Is cash book a book of prime entry? (n) What is Petty Cash Book? (o) What is Imprest system? (p) Why simple cash book shows a debit balance always? (q) Are the Discount columns balanced? 2. Fill up the blanks : i. Cash Book is a...........book. ii. Only.................. transactions are recorded in cash book. iii. While making entries in a cash book for cash the rule of........... account is followed.

164

Ledger IV

Unit -

iv. While recording discount in a cash book the rule of ............ account is followed. ii. Cash Book is a Journal as well as ...................... iii. Discount received is.....................in cash book. iv. When cash is deposited or withdrawn from the bank, the entry in the cash book is called ....................... v. For cheque received from A and deposited in the bank on the same day................ account will be debited and.............. account will be credited. vi. Cash book designed to record small expenses is called .............. vii. Petty Cash Book is also known as .................. 3. Mention whether true or false. i. ii. iii. iv. v. vi. vii. viii. ix. ix. Cash book is a journal as well as ledger. Discount on purchase is debited in a cash book. For cheque dishonoured, bank account is credited. When a customer pays direct in to the bank, bank account is debited. Bank account is debited for bank charges. For cheque deposited in the bank on the day other than the day of receipt contra entry is passed. Credit balance of bank column shows cash balance at bank. Cash column of a cash book may either show debit balance or credit balance. For contra entries, no posting is made. Discount columns are not balanced in a cash book.

PART - B : Short Questions (Answer within 3 - 5 sentences) 1. Write shortnotes on the followings : (Briefly answer the following) i. Contra entry ii. Balancing of Cash Book iii. Why Cash Book is a Journal as well as Ledger ? iv. What do you mean by Float ? ii. Why Petty Cash book is known as Analytical Petty Cash Book ? iii. Imprest system iv. Cash book without cash column

165

Unit IV Ledger v. Discount column

2. Give short answeres to the following: a) Advantages of Subsidiary books b) Advantages of Petty Cash book c) Name the types of Cash books d) Explain Bank Cash Book, e) How do you record "cheque sent to bank but dishonoured" PART - C : Long Type Questions (Theory-based) 1. Describe different types of cashbooks. Give a specimen for each of them. 2. What is Triple Column Cash Book? Mention the procedure of recording in it. 3. What is a Contra Entry? On which circumstances Contra entries are passed ? Give suitable example. 4. What is Petty Cash Book ? Why it is called Analytical petty cash book. Give a specimen of it. 5. a. Differentiate between : i. Trade discount and Cash discount. ii. Single column cash book and Double column cash book. iii. Double column cash book and Triple column cash book. b. Prepare a petty cash book with imaginary figures. c. Describe the procedure to record a Bank Cash Book. PROBLEMS ON SINGLE COLUMN CASH BOOK 6. Prepare a cash book from the following particulars for Mr.Ved Prakash To be inserted from page 82 7. (a) From the following transaction of Oberoi Brothers for the month of April, 2000, prepare a cash book and post them to their respective ledgers. To be inserted from page 82

166

Ledger IV

Unit -

(b) Point out the merits of a double column cash book over a single column cash book. (Ans: Cash balance Rs.3,060/) 8. (a) Prepare a single column cash book from the following information for Tulasi Medimart: 2001 April Rs. 1. Opening balance 2001 April 7,800 18. Rs. Paid rent for the shop 200

4. Cash sales to Madhu 12,300 7. Purchased furniture from Shyam in cash 10.

25. Withdrew for personal use 400

28. Opened a bank account 2,000 11,800 29. Received from Ram 1,200 30. 4,000 paid 300

Paid salary 700 Life insurance premium 15. Cash purchase from Hari

(b) While checking a cash book you find out that the cash column shows a credit balance. Comment. (Ans: Cash balance Rs.1,900/-) Problems on Double Column Cash Book 9.(a) From the following transactions of S.Kumar during the month of June, 2002, prepare a cash book with discount column and post the entries to ledgers : 2002 April Rs. 1. Cash in hand 2002 April 1,750 Rs. 24. Deposited in bank 300

167

Unit IV Ledger 2. Received from Kamal 1,28027. Withdrew for personal use 3. Received from Rupa for cash sales 4,750 28. Goods purchased from Bunty at 10% trade discount 150

2,800

7. Paid to Mony for Cash purchases 5,200 Availed discount 12. Paid rent Paid for electricity 120 Paid insurance prem 150

29. Sold goods to Aswini 2,000 800 30. Received for part payment 1,000

40031. Aswini became insolvent and 50 paise in a rupee was realized

b.

Explain how discount totals from a cash book are transferred to their ledgers with imaginary figures. (Ans: Cash balance Rs.2,960/-; Discount total Dr. Rs.270/-, Cr. Rs.800/-)

10. Following are the particulars available from the books of P. Lenka. Prepare a double column cash book with necessary ledger: Rs. Rs. 1. Cash balance (Opening)7,200 6. Received from Mr.D, Previously written off as baddebt 1,400 2. Received cheque from 7. Cash purchases, paid 3,000 Mr.M and encashed it12,500 Discount received 200 3. Received from Mr.P for cash sales 2,250 Allowed him discount 250 4. Paid for purchases 6,800 Discount received 400 5. Paid life insurance premium

8. Credit sale to Mr.E1,200 9. Paid rent 210 10. Mr.E became insolvent, received only 300 280

168

Ledger IV

Unit -

(Ans: Cash Rs.250/-, Cr.

balance

Rs.13,360/-; Discount Rs. 600/-)

total

Dr.

Problems on Triple Column Cash Book 11. From the following particulars of Arun Traders for the month of Dec. 1990, prepare a cash book showing columns for bank and discount Also show necessary ledgers. 1990 Dec. 1. Cash in hand Rs.4,050/and at bank Rs.7,800/2. Received a cheque of Rs.8,000/- from Rahim and sent it to bank for collection 4. Received on cash sales allowed Rs.250/of Rs.3,950/-, discount

7. Withdrew Rs.3,000/- from bank for office use 18. Paid for purchasing goods Rs.3,000/Discount received Rs.200/22. Purchases of Rs.1,000/-, payment made by cheque 24. Rahims cheque was dishonoured 28. Deposited Rs.5,000/- in the bank. 30. Withdrew Rs.500/- from the bank for personal use. 31. Paid Rs.1,950/- for purchasing goods Discount received Rs.250/(Ans: Cash bal. Rs. 1,050; Bank bal. Rs. 8,300; Discount Dr. Rs. 250; Cr. Rs. 450)

12. Prepare a triple column cash book from the following: to be inserted from page 84

169

Unit IV Ledger

(Ans: Cash balance Rs.1,000/-; Bank balance Rs.2,500/-; Discount Dr.Rs.250/-, Cr. Rs.610/-) 13. Prepare a three column cash book from the following transactions and post them to respective ledgers : Rs. Rs. Cash in hand 7,000 Issued cheque to Hari 13,400 Bank Balance (Dr.)1,00,000 & discount received 600 Cash sales 60,000 Withdrew cash for personal use 4,000 Rent paid by cheque 24,000 Received cheque from Shyam 10,000 Cash deposited in bank 60,000 Shyams cheque dishonoured Furniture purchased & issued cheque 6,000 Wages paid 100 Received cheque from Mohan after allowing discount of Rs.200 7,800 Goods purchased 4,000 Received interest on Withdrawn from bank for investment 3,000 office use 20,000 Paid salaries 4,800

170

Ledger IV

Unit -

(Ans: Cash bal. Rs.16,200/-; Bank bal. Rs.1,04,400/-; Discount Dr. Rs. 200/-, Cr. Rs.600/-) 14. Prepare a three transactions: Cash a bank 13,000 2. Paid in to bank 500 6. Bought goods by cheque for private expenses 50 column cash book from the following

Discount allowed

10

25. Withdrew from bank 1,300

20. Paid for private expenses 50 7. Bought furniture for cash 400 28 Paid for trade expenses 100 9. Received from Shyam 790 30. Paid rent in cash 50 Discount allowed 10 31. Paid in to bank 1,500 12. Drew from bank for 31. Received from Hari office use 400 Karan a cheque of 600 16. Cash sales 440 Discount allowed 20 (Ans: Cash balance Rs.490; Bank balance Rs.13,850; Discount Dr. Rs.30, Cr. Rs.10) 15. Prepare a triple column cash book from the following particulars : to be inserted from page 84

(Ans : Cash in hand Rs.10,708, Bank balance Rs.680; Discount Dr. Rs.200, Cr. Rs.300.) 16. Prepare a three column cash book from the following : 1990 Jan. Rs. 1990 Jan. 18. Rs.

1. Commenced business

Received a crossed

171

Unit IV Ledger with cash 2. Paid in to bank 200 10,000 8,000 22. 24. 27. drew cheque from B Discount 1,800 to to him bank

allowed Paid in

7. Purchased goods by 500 cheque 600 8. Paid rent 1,000 9. Purchased furniture by cheque 6,000 15. 15. 180 3,000 150

Paid for

wages office use

28. Cheque of B Dishonoured 30. Paid to X by cheque

Cash sales 650 Paid for office cleaning 100 Purchased from X 980 on account 10,000 31. Issued

31. cheque to 20 X

Discount received

(Ans: Cash in hand Rs.2,300; Bank overdraft Rs.2,660; Discount Dr. Rs.200; Discount Cr. Rs.220) 17. Enter the following transaction in the Cash Book with cash, discount and bank columns. 2004 June 1. Balance of cash in hand Rs.1,400/- and overdraft at bank Rs.5,000/4. Invested further capital of Rs.20,000/- out of which Rs.6,000/deposited in the bank. 5. Sold goods for cash Rs.13,000/6. Collected from last years debtors Rs.8,000/-, discount allowed them Rs.200/-. 10. Purchased goods for cash Rs.15,500/10. Paid Ram Vilas, our creditor, Rs.2,500/-, discount allowed Rs.65/-. 13. Commission paid to our agent Rs.1,530/-

172

Ledger IV 14. 14. 16. 17. 18. 19. 22. 24. 25. 29. 30. 30.

Unit -

Office furniture purchased from Keshab Rs.200/- in cash Electricity charges paid Rs.10/Drew cheque for personal use Rs.700/Cash sales Rs.2,500/Collection from Atal Rs.4,000/- and deposited in the bank next day. Withdrawal from bank for office use Rs.500/Withdrawal from bank through cheque for petty cash Rs.150/Dividend received by cheque Rs.50/- and deposited in the bank on the same day Commission received by cheque Rs.230/- and deposited in the bank on the same day Paid from the bank for salary of the office staff Rs.1,500/Deposited cash in the bank Rs.10,000/Rent paid Rs.50/-

(Ans. : Cash in hand Rs.9,610/-, at Bank Rs.12,430/-, Discount total Dr. Rs.200/- & Cr. Rs.65/-)

173

Unit IV Ledger Problems on Cash book without cah column 18. From the following particulars prepare a "Cash Book without Cash Column", with necessary ledger: to be inserted from page 85

Petty Cash

19. Prepare a tabular petty cash book from the following; the imprest is Rs.100/-. To be inserted from page 86

20. Prepare an anlytical Cash Book on imprest system from the following and post it into ledgers. 2004 June 1, The petty cashier received a cheque from the chief cashier and encashed it 500.00 1, Paid for postage 20.00 2, Paid for telephone charges 18.00 4. Paid for office stationeries 21.50 5. Entertained a customer by presenting him a gift purchased from the market 16.00 8. Paid for rickshaw 3.00 11. Entertained customers with cold drinks 4.50 16. Paid for coolie 5.00 21. Paid wages to clean the office room 8.00 28. Paid for postage 2.40 Telegram 6.00 Carriage on purchase 45.00 30. Entertainment expenses 8.00 (Ans: Petty cash balance Rs. 342.60)

174

Ledger IV II. Purchases Book: Meaning :

Unit -

This is a subsidiary book used to record all credit purchases of merchandise or goods. However, cash purchases and credit purchases of fixed assets are not recorded in this book. This book is also known as Purchase Journal or Purchase Day Book or Bought Book. Proforma of Purchases book and procedure of recording transactions Purchases Book of Mr. X To be inserted from page 86 Source of recording : In this book entries are made on the basis of Inward invoices received from suppliers with the new amount after deducting trade discount. Trade discount : It is the discount which is allowed if the customer purchases goods above a certain quantity or above a certain amount. The amount of the purchase made is always arrived at after deducting the trade discount, i.e,, only the net amount is considered. A separate entry for trade discount is not made in ledger accounts. A trade discount differs from cash discount on the following bases:

175

Unit IV Ledger Procedure of Recording : In the above proforma, there are six columns. 1. In this column, the date of the transaction is entered. 2. In this column, the particulars as to name of the supplier, quantity and rate of goods purchased on credit etc. are mentioned. 3. In the Invoice column, the number of the invoice is mentioned. This invoice is a source document for recording entries in the Purchases book. 4. The Ledger Folio column indicates the number of page of the ledger containing the concerned suppliers account. 5. The Details column shows the gross amount of purchase and a deduction of trade discount. 6. The Amount column shows the net amount of purchases and the total of this column is made at the end of the period. Posting in ledger : 1. The periodic total of purchases book is posted to the debit of Purchases account in the ledger. 2. Suppliers accounts are individually credited by the respective amount of purchases from them. Illustration 3 Record the following transactions in the purchases journal and post them into ledger of M/s. J.K.Stores. 2003 July 1st Purchased from ABC Enterprise 1000 kgs of mustard oil @ Rs.30/Kg th Purchased from Rahim Brothers 200 Kgs of sugar @ 2003 July 7 Rs.25/Kg . Trade discount allowed by the supplier is 10%. th 2003 July 14 Purchased from City Supplier machinery costing Rs.50,000/- on credit. 2003 July 15th Purchased from Nath & Co. furniture in cash Rs. 5,000/-

176

Ledger IV

Unit -

2003 July 28th Purchased from Hira Traders 500 Kg of Ghee @ Rs.35/Kg. with a trade discount of 5%. Solution: Purchases Book of M/S J.K. Stores for the month ending on 31 st July 2003.

Note : Transaction dated July 14 is related to fixed asset. So it has not been included in purchase book. Transaction July 15 is a cash transaction. So it is not shown here. LEDGER ABC Enterprises Account Dr To be inserted from page 87 Cr

Rahim Brothers Account Dr Cr

177

Unit IV Ledger To be inserted from page 87 Hira Traders Account Dr Cr

Purchases Account Dr Cr

III. SALES BOOK Meaning : This is the subsidiary book which records all credit sales of merchandise or traded goods. Cash sales and credit sale of fixed assets are not recorded in this book. This book is also known as Sales Day Book or Sales Journal. Proforma of Sales Book

Source of recording : In this book the entries are made on the basis of Outward Invoices sent to customers. Recording procedure : Similar to that of the Purchase book excepting the particulars column i.e., column (2) & (3). In this case, the particulars column will contain the names of customers to whom goods are sold on credit. In addition, the details of goods such as price, quantity, specification etc. will also be stated in this column. The 3rd column will contain the number of the outward invoice.

178

Ledger IV

Unit -

Posting :1. The accounts of the customers are debited individually with the respective amount of sales to them. 2. Sales account is credited with the periodical total of the Sales book. Illustration - 4 Record the following transactions in the sales books of M/s. G.B. Pharmaceuticals, a wholesaler for the month of January 2003 and post them in to ledger. 2003 Jan 1 2003 Jan 5 2003 Jan 8 2003 Jan 18 Nimulid 25% 2003 Jan 30 Sold to Mr. X crocin 10 Boxes @ Rs.200/Box, trade discount 20%. Sold old furniture to Mr. Y Rs.1500/SoldonCash"[email protected]/box. Sold to M/s. J.K. Medical Stores 20 strips of @ Rs.50/Strip and trade discount

Sold to M/s. Subas Medicals 2 boxes Roxid 500 @ Rs.500/box, 3 cartoon Dettol @ Rs. 250/Cartoon. Trade discount 10% in both the cases. Solution : Sales Books of M/S G.B. Pharmaceuticals For the month of January 2003

179

Unit IV Ledger

LEDGER Mr. Xs Account Dr M/S J.K. Medical Stores' Account Dr Cr Cr

180

Ledger IV M/S Subas Medical Account Dr.

Unit -

Cr.

Sales Account Dr. Cr.

Note : 1. The transaction of 5 th January is related to sale of fixed asset, so it is not included in Sales book. 2. The transaction of 8 th January is related to cash sale. Hence, it is also not included in Sales book. IV. Purchase Returns Book / Returns Outward Book

Meaning : It is a subsidiary book used to record goods returned to suppliers. This is the book in which goods returned to supplier are recorded. This book is also known as Returns Outward book. Source of recording : In this book, the entries are made on the basis of Debit notes issued to the suppliers. Debit Notes : When goods are returned to a supplier, a statement is sent to him alongwith the goods which contains particulars of the goods

181

Unit IV Ledger returned, their values and the reason(s) of such returns. It is known as Debit Note. The purpose of sending a debit note is to inform the supplier that his account has been debited for the goods return to him. Proforma of Purchase Returns Book

Recording Procedure : Recording entries in this book is similar to that of the Purchase books or Sales book. Posting in the Ledger : 1. Debit the account of the suppliers individually to whom goods have been returned with their respective amounts mentioned against each. 2. Credit the purchase returns account by with the periodical total of this book. Illustration 5 Record the following in the books of M/s. Vishal Brothers and post them into the ledger. 2001 May 16 Return of Mr. X Crocin 2 Boxes @ Rs.200/box. The original invoice was at 20% trade discount vide Debit Note No. V/1. 2001 May 21 Returned to M/s.J.K.Medical Stores 5 strips of Nemulid being defective in packing. The original invoice price was Rs.50/strip and trade discount 25% vide Debit Note No. V/2. Book of M/S Vishal Brothers Purchase Returns Book

182

Ledger IV LEDGER Mr. Xs Account Dr. Cr.

Unit -

M/s. J.K. Medical Stores Accounts Dr. Cr.

Purchase Returns Account Dr. Cr.

V. Sales Returns book / Returns Inward book Meaning : This is the subsidiary book used to record sales returns from customers to whom the goods were sold on credit. This book is also known as Returns Inward book. Sources of recording : Entries in this book are made on the basis of credit note issued to the customer / debtor. Credit Note : It is a statement prepared by the seller and sent to the customers. It contains quantity, specification and price etc. of the goods returned to the customer and accepted by the seller. The purpose of sending credit note to the customer is to intimate him that his account has been given due credit for goods returned by him. Proforma of Sales Returns book

183

Unit IV Ledger

Recording Procedure : Similar to that of Purchase returns book. Posting to the ledger : i. ii. Debit the Sales returns account with the periodical total of Sales returns book. Credit individually the account of each customer who returned the goods with the amount mentioned against his name.

Illustration - 6 Record the following transactions in the books of M/S. Shiv Medical Hall and post them into ledger. March 1, 2002 : Medicines returned by Muna Bhai, M.B.B.S, 5 boxes of Coldarin being not ordered for Rs.350/box and the original invoice price was @ 10% trade discount, vide Credit Note No. C/01.

March 18, 2002: Medicines returned by M/s Sridevi Medical 3 strips of Stopache @ Rs.10/ strip, 5 bottles of Savlon @ Rs.25/bottle, 4 packets of Neosporin @ Rs.30/- packet. The original invoice was at a trade discount of 20% vide Credit Note No. C/02. Solution : Sales Returns book of M/s. Shiva Medical Hall

LEDGER Muna Bhai, MBBS' Account

184

Ledger IV Dr.

Unit Cr.

185

Unit IV Ledger Sridevi Medical Stores' Account Dr. Cr.

Sales Returns Account Dr. Cr.

VI. Bills Receivable Book Meaning : If the bills and promissory notes are received against credit sales, the seller may record them in a separate book which helps in getting the full information about the bills. Such a book is called "Bills Receivable Book". This book records bill accepted by customers. Proforma of Bills Receivable Book

Posting : 1. Debit Bills Receivable Account with the periodical total of the bills receivable book. 2. Credit the accounts of the parties giving the bills individually with the respective amount of bills received from them. VII. Bills Payable Book

186

Ledger IV Meaning :

Unit -

This is a subsidiary book which records all the bills accepted by the firm as a token of acknowledgement of debt payable to the supplier. Speaking in other words bills payable book records bills raised by supplier. Proforma of Bills Payable Book

Posting : 1. Debit the accounts of creditors individually to whom the acceptances are given with the respective amount of bill. 2. Credit the Bills payable Account with the peridical total of bills payable book. Illustration - 7 Prepare the bills receivable book and bills payable book for the following transactions and post them into ledger in the books of a trader. March-1,2003 : Received a bill from Suresh Rs. 5000/- for 3 months . March-10,2003 : Accepted Harishs bill for Rs. 10,000/payable after 1.2 months. March-15,2003 : Drew on Rajaram a bill of exchange for Rs. 5,000/- due 3 months after date. March-25,2003 : Accepted the bill drawn Kalinga Pharmaceuticals Rs, 50,000/- payable 1 month after date. Bills Receivable Book

187

Unit IV Ledger

188

Ledger IV Bills Payable Book

Unit -

Posting of Bills Receivable Book and Bills Payable Book LEDGER Bills Receivable Acount Dr. Cr.

Suresh Account Dr. Cr.

Rajarams Account Dr. Cr.

Bills Payable Account Dr. Cr.

189

Unit IV Ledger Harish's Account Dr. Cr.

Kalinga Pharmaceuticals Account VIII. Journal Proper Meaning : It is the book of orphan entries . It means if a transaction does not find a place in any of the seven subsidiary books as discussed earlier, the same will be recorded in journal proper. The following transactions are recorded in journal proper : 1. Opening entries 2. Adjusting entries 3. Rectifying entries 4. Closing entries 5. Entries for the dishonour of bills 6. Other entries 1. Opening entries : The closing balances of assets and liabilities of the last year are brought into books at the bigining of the current year. This is done by means of a journal entry and it is called opening entry. Opening entry is made in the journal proper or general journal. 2. Adjusting entries : Adjustment is necessary at the end of the year for giving effect to outstanding or prepaid expenses, accrued or unearned incomes, depreciation, intrest on capital etc.For this purpose, journal entries are to be made in journal proper. Such entries are known as Adjustment entries.

190

Ledger IV

Unit -

3. Rectifying entries : Sometimes, errors are found in the books of prime entry or ledger. Rectification of such errors is made by passing journal entry. This entry is known as rectifying entry. 4. Closing entries : In order to find out the profit or loss at the end of the year, the nominal accounts are to be transferred to profit and loss account to get them closed. This is done by means of journal entries, which are called closing entires. 5. Entries for dishonour of bills : When a bill of exchange is dishonoured, a journal entry for the same is made by both the holder of bill and the acceptor of bill in journal proper. 6. Other entries : Sometimes transactions of infrequent nature occur in the business. They need to be journalized. Such transations usually relate to the following : i. ii. iii. iv. Credit purchase of fixed asset. Credit sale of fixed asset. Bad debts written off. Accidental losses earthquake, etc. i.e. goods lost by fire,

Illustration: Enter the following transactions in proper subsidiary books of Dr. Reddys Laboratories for the month of January 2003 and post them into ledger. Also prepare a Trial Balance for the same.

191

Unit IV Ledger

192

Ledger IV Solution : Books of Dr. Reddys Laboratories Sales Book

Unit -

Purchases Book

Sales Returns Book

193

Unit IV Ledger Purchase Returns Book

LEDGER Ibrahims Account Dr. Cr.

Panacea Pharmaceuticals Account Dr. Cr.

194

Ledger IV Rajarams Account Dr.

Unit -

Cr.

Sales Account Dr. Cr.

Purchases Account Dr. Cr.

M/S Lab Chemicals Account Dr. Cr.

195

Unit IV Ledger Ganjam Chemicals Account Dr. Cr.

Sales returns Account Dr. Cr.

Purchase Returns Account Dr. Cr.

Trial Balanced of Dr. Reddys Laboratories as on 31st January 2003 Sl Name of Account No. 1. Ibrahim 2. Punacea Pharmaceuticals 3. Rajaram 4. Sales 5. Purchase 14,800.00 L.F Dr. Rs. P 4,500.00 5,500.00 4,750.00 15,500.00 Balances Cr. Rs. P

196

Ledger IV 6. M/s. Lab Chemicals 7. Ganjam Chemicals 8. Sales returns 9. Purchase return Total Illustration 9 : 30,300.00 750.00

Unit 7,800.00 6,000.00 1,000.00 30,300.00

The balances of Cipla Pharmaceuticals and Co. as on 1st Jan 2000 were as follows: Stock Rs.200/-, Cash Rs.600/-, Land and Building Rs.2,500/-, Furniture Rs.5,090/-, Debtors Rs.700/-, Creditor Rs.1,050/-, Bills Payable Rs.200/-, and Bank Rs. 70. His other transactions during January were as under : Jan 1: Purchased on credit from Lala Rs.1,000/Jan 2 : Credit sales to Kamila Rs.800/Jan 3: Purchased a building from Nazira on account Rs.7,000/Jan 4 : Kamila became insolvent and 50% of the debt is finally realized in cash Jan 18 : Goods lost by the theft Rs.200/Jan 25 : Purchased office furniture from Biswakarma Traders Rs.1,000/- and paid in cheque Rs.600/- as part payment Jan 30 : Cash sales Rs.400/- and Credit sales Rs.600/from Kohli Bros. Jan 31 : Debt against Kamila recovered. Enter the above transactions in General Journal of Mr. Ram Mohan JOURNAL Date Particulars Credit Amount In Rs. Rs. Stock A/c Cash A/c 2,000 600 in L.F. Amount Debit

197

Unit IV Ledger Land & Building A/c Furniture A/c Debtors A/c Bank A/c To Creditors A/c To Bills Payable A/c (Being opening entry to record assets & liabilities at the beginning of the year) Purchases Book Dr. 2,500 500 700 70 1,050 200

Cr.

MODEL QUESTIONS PART A : VERY SHORT QUESTIONS 1. Answer the following questions within a line or two. What is Purchases book ? Is opening of Purchases book necessary for recording cash purchases? Name the transactions which are not recorded in the Purchases book. Give the posting of Purchases book. What are the transactions that are recorded in journal Proper? Give two examples. In which book, bad debt written off is recorded? What is the use of a Credit Note.

198

Ledger IV

Unit -

Distinguish between Sub-Journal and Journal. Why trade discount is allowed ? Is it recorded in the books of account ? Give two advantages of Subsidiary Books. What is Invoice ? Where are the Rectification entries recorded? Why closing entries are made?

199

Unit IV Ledger 2. Full up the blanks : i. ii. Only credit sales of merchandise are recorded in book. Fixed assets purchased on cash are recorded in book. records only purchase

iii. Purchase Book of

iv. When customers return goods to the firm, it is recorded in book. v. Returens Outward book records goods returned to. vi. Bills on which payment will be made by the firm are recorded in the . book. vii. Adjusting entries are recorded in . book. viii. Credit sale of a building will be entered in .. book. ix. Purchase of a land in cash enters in . book. x. 3. Goods lost by fire will be entered in .. book.

Complete the following sentences choosing the appropriate statement given in each case i) In the Purchases Book the record is in respect of a) cash purchase of goods b) credit purchase of goods dealt in c) all purchases of goods iii) d) e) f) g) iv) The Sales Returns Book records the return of goods purchased return of anything purchased return of goods sold return of anything sold

The Sales Book h) is a part of the journal i) is a part of the ledger j) is a part of the balance sheet

200

Ledger IV v)

Unit -

The weekly or monthly total of the purchase book is k) posted to the debit of the Purchase Account l) posted to the debit of the Sales Account m) posted to the credit of the Purchases Account The total of the Sales Book is posted to n) the credit of the Sales Account o) credit of the Purchases Account p) credit of the Capital Account

vi)

PART B : SHORT ANSWER QUESTIONS 1. Answer the following questions maximum in 3-5 sentences. a) Give the proforma of Purchases book and mention the significance of each column. b) Give the recording procedure in the Sales Day Book. c) Explain Debit Note d) Explain Credit Note e) Give the Posting of Purchase Returns Book f) Give the meaning of Journal paper and name the entries made in it.

g) Explain the meaning of opening entry with example. h) Explain the meaning of Adjusting entries. PART C : LONG QUESTIONS (THEORY BASED) 1. Explain in detail the various types of subsidiary books usually maintained by a firm . Bring out the advantages of subsidiary books.

201

Unit IV Ledger LONG QUESTIONS (PRACTICAL BASED) 2. From the following transactions, prepare Sales Book and show necessary ledger accounts in the books of Nabin. i. ii. Sold goods to Nabin Rs.6,000/Allowed him trade discount 5%. Sold goods to Sabin Rs.10,000/-. iii. Goods sold to Ganesh in cash for Rs.12,000/iv. Sold goods to Kamaruddin Rs.3,500/-. Trade discount allowed 10%. Sold a machine to Rajani for Rs.3,000/- and received a cheque. (Sales book total Rs. 18,850) 3. From the following, transactions of the Lights & Energy Ltd, the wholesaler of electrical applicances, prepare a Sales book and post them into ledger : Supplied 8 doz. Tubelights to Buxi Electricals on credit @ Rs.240/- per dozen with 10% trade discount. Supplied to Sunrise : 400 metres wire @ Rs.0.30 per meter, 100 electric bulbs of 100W @ Rs.3.50 per bulb and 30 main-switches @ Rs.22/- each. The sale was at 10% Trade discount Sold to Rabi Electricals for cash : 40 Janata heaters @ Rs.85/- each at 10% cash discount. Supplied to Ravi Electricals on credit 20 Table Lamps @ Rs.50/- each. Trade discount allowed @ 10% Invoiced to Sounds and Music Centre on Credit : 10 sound boxes @ Rs.210/- each, 40 doz. Batteries @ Rs.40/per dozen and 10 sets of eliminators @ Rs.120/- per set Invoice was made at 10% trade discount. (Ans. Sales book total Rs.9,945/-). 4. From the following particulars of Zamin prepare a Purchase book and post them into ledgers : i. Purchased a machine from X Rs.60,000/-, discount availed 2%. ii. Purchased 60 cotton sarees from Y Rs.6,000/-, discount received 3% v.

202

Ledger IV

Unit -

iii. Purchased 500 dozens of towels @ Rs.96/- per dozen from Z Trade discount 5%. iv. Purchased 100 pant pieces from K for Rs.6,500/- and paid by cheque. v. Puchased a ceiling fan for his show room for Rs350/-. 5. From the following particulars prepare Returns Inward Book and Returns Outward Book : i. Returned to Balasore Sports Emporium 100 cricket bats @ Rs.30/- each and 500 cricket stumps @ Rs.2/- each. Discount availed originally at 5%. ii. Returned from Sports Club, Kamakshya Nagar, goods worth Rs.500/- due to bad quality. vi. Purchased 40 pieces of shirting @ Rs.45/- each from B. Discount received 10%. (Purchases book total Rs.53,040/-) iii. Returned to Cuttack Sporting House 50 tennis rackets @ Rs.60/- each. Discount availed 10%. iv. Goods returned from Sports International, Talcher, Rs.5,000/-. Discount allowed 8%. v. Goods returned from Amit Malhotra Bros., Bhubaneswar Rs.4,500/-. vi. Goods returned to Sports & Sports, Dhenkanal, Rs.3,200/-. Discount availed 5%. Ans. (Return Inwards book total Rs.14,100/- Return Outwards book total Rs.9,540/-) 6. From the following particulars prepare sales book. purchase book retuns inward Book, Returns outward book, Puchase Acount, Sales Account,l Returns Inward Account and Returns Outward account in the books of Mr. Natabar. i. Sold goods to Debadutta Rs.5,000/-, discount allowed 5%. ii. Sold goods to mandakini Rs.3,500/-. iii. Puchased form Subadutta Rs.6,000/-, discount allowed 8%. iv. Returned form Soudamini Rs.2,500/-, discount allowed 10%. v. Returned to Purnachandra Rs.1,800, discount availed originally 8%. vi. Purchased from Ashutosh Rs.2,100/-. vii. Sold a furniture to Arati Rs.1,800/- for cash.

203

Unit IV Ledger viii. Puchased a calculator from Raja for Rs.350/-, paid Rs.320/in full settlement. ix. Returned from Mandakini Rs.500/-. x. Returned to Sibadutta Rs.1,200/-. Ans. (Total Sales Bokk Rs.8,250, Purchases Book Rs.7,620 Ruturns Inward book Rs.2,750 & Return Outward book Rs.2,740) 7. From the following information prepare Bills Receivable book and Bills Payable book in the books of Mr. Rath. i. Received a bill from Jayanta for Rs.3,000/- payable after 3 months. ii. Accepted a bill from Priyanath Rs.1,000/- for 2 months. iii. Accepted a bill drawn by Goenka Rs.1,500/- payable after 3 months. iv. Drew a bill on Debashish for Rs.2,200/- for 1 month. v. Received another bill accepted by Jayanata for Rs.2,500/for 1 month. vi. Accepted a bill of Goenka for Rs.2,000/-. (Ans. Bills Receivable book total Rs.7,700/-, Bill Payable book total Rs.4,500/-) 8. From the following information prepare sales book, Purchase book, Returns inward book and returns outward book. Also open respective ledgers; i. Sold to Sony - 10 Philips radio sets @ Rs.800/- and 20 Murphy radio sets @ Rs.500/-. Allowed trade discount 10%. ii. Bought from Sony 50 coils of electric wire @ Rs.250/- per coil. Got a discount of 8 %. iii. Sold goods to Money for Rs.1,200/-. iv. Returned to Sony 10 coils of electric wire. v. Money returned goods Rs.450/-. vi. Cony returned one set of Murphy radio which was damaged in transit. vii. Sold to Tony 10 Usha ceiling fans @ Rs.400/- each with a discount of 5%. viii. Bought from Anthony 40 dozens of switches @ Rs.50/per dozen. Availed 10% trade discount. ix. Returned to Anthony 5 dozen switches.

204

Ledger IV x.

Unit -

Purchased furniture from Binny for Rs.1,500/- and availed a discount of 10%. (Ans : Total of Sales book Rs.21,200/- Purchases book Rs.13,300/Returns Inward book Rs.900/-, Return Outward book Rs.2,525/-). 9. The balances of Mr. Ram Mohan as on 1st Jan, 1998 were as follows stock Rs.2,000/- Cash Rs.600/- ; Land and building Rs.25,000/- ; Furniture Rs.500/- ; Debtors Rs.700/-; Creditors Rs.1,050/-; Bills payable Rs.200/- and Bank Rs.70/-. His transactions during January were as below : Jan 1 Purchased on credit form Lala Rs.1,000/2. Credit sales to Kamila Rs.800/3. Purchased a building form Nazira on account Rs.7,000/4. Kamila became insolvent and 50% of the debt is realized in cash. 18. Goods lost by theft Rs.200/-. 25. Purchased office furniture from Biswakarma Trades Rs.1,000/- and paid in cheque Rs.600/- as part payment. 30. Cash sales Rs.400/- and credit sales Rs.600/- to Kohli Bros. 31. Debt against Kamila recovered. Enter the above transactions in General Journal of Mr. Ram Mohan.

205

Unit IV Ledger FINAL ACCOUNTS Accounting cycle tells us the different stages and sequence of preparation of accounts in a systematic and orderly way which is shown in step wise manner as under : 1. Transactions are first recorded in Journal 2. Posting of various accounts are made in ledger from journal 3. The ledger accounts are balanced at the end of the accounting period. 4. Then a trial balance is taken out of such balances to test the arithmetical accuracy of books of accounts. 5. After preparing the trial balance, final accounts are prepared to achieve the objectives of accounting i.e. a. Finding out profit or loss b. Ascertaining financial position Thus, the final accounts are the financial statements prepared at the end of the year to determine the profit or loss and financial position of the business for that year. Final accounts include the following parts : i. ii. Trading and Profit & Loss account Balance sheet

The final accounts are prepared on the basis of trial balance which contains some accounts with debit balances and some there accounts with credit balances. The significance of such balances are : Debit balances : These balances represent assets, expenses or losses. The assets are to appear in the asset side of balance sheet. The expenses or losses are to appear on the debit side of trading and profit and loss account.

206

Ledger IV

Unit -

Credit balances :- These balances represent capital, liabilities, reserves, incomes and gains. The capital, liabilities and reserves are to appear in the liabilities side of the balance sheet. The incomes or gains are to appear in the credit side of trading and profit and loss account. i. Trading and Profit and Loss Account This account is prepared in two stages : Stage 1 : Trading account Stage 2 : Profit and Loss account These accounts are prepared usually by trading concerns, who involve in buying and selling of goods and services. Manufacturing units have to prepare manufacturing account to know the cost of goods produced, Trading and Profit & Loss account. Stage 1: Trading Account This is the account prepared at the end of the year to determine the gross profit of the business. Gross profit is the excess of sales over cost of goods sold. Gross Profit = Sales cost of goods sold Cost of goods sold = Opening stock + Net Purchases + Direct Expenses closing stock Net Purchases = Purchases - Purchase Returns Direct Expenses = Buying Expenses incurred directly to purchase goods Example: A purchases goods worth Rs.8,000 and paid for carriage Rs.200, octroi duty Rs.100 and wages Rs.30. Goods worth Rs.500 were returned due to poor quality. He had an opening stock of Rs.1,000. At the year end he sold goods for Rs.15,000 and his closing stock was Rs.300. Calculate gross profit.

207

Unit IV Ledger Solution: Amount (Rs.) Sales (Less) Cost of goods sold Opening stock (Add) Purchases less return (8,000 500) (Add) Direct expenses ( 200 + 100 + 30) (Less) Closing stock Gross profit 1,000 7,500 330 8,830 300 8,030 6,970 15,000

As the purpose of Trading account is to find out the gross profit or loss, all the above items are taken to the Trading account. Importance of the Trading Account: Trading account is the first part of the main account. In order to ascertain the exact position of the business, i.e. true gross profit/loss figure, it is necessary to prepare the Trading account. The following are the advantages of Trading account. a) Percentage of Turnover : The percentage of gross profit on turnover may be calculated easily, which may help in comparing the percentages of one year with those of the previous year. This percentage should not vary from year to year, and if there is a sudden variation, the responsible cause should be found out. This percentage is useful for checking the accuracy of the stock taking. b) Maintenance : If the gross profit is greater than its expectation, steps should be taken to maintain it in future. c) Ascertainment of Profit : Prices are fixed by adding a certain percentage of profit to its cost and trading account is prepared to ascertain the profit whether the same has been realized or not.

208

Ledger IV

Unit -

d) Equity : If the gross profit is less than expectations, an enquiry for it may be made and causes be found out. e) Loss : If there is gross loss shown by the training account, the business may be discontinued or the working conditions be improved so that amount of losses be reduced accordingly. It is important that the Trading account should be prepared on a uniform basis from year to year. The expenses which have been charged to trading account should continue to be charged in that account so that comparison may be made easier. The items that are generally recorded in Trading A/c are under: Procedure of recording: The following steps are to be followed while preparing a Trading A/c. Step I : (For all accounts Trading A/c shown on debit side of Trading To Opening Stock A/c A/c.) To Purchase A/c To Sales returns A/c Wages A/c To Manufacturing expenses A/c Step II : (For all accounts Sales A/c shown on credit side of Trading Purchases return A/c A/c) To Trading A/c Step III : (For bringing closing Closing stock A/c stock into books) To Trading A/c Step IV : (For closing Trading Trading A/c A/c) with the amount of gross To Profit and Loss A/c profit when credit side is more Or Profit and Loss A/c Dr. Dr. Dr. Dr. Dr.

Dr.

209

Unit IV Ledger With the amount of gross loss To Trading A/c when debit side is more The preparation of trading account takes into consideration the following items : i. ii. Opening Stock Purchases

iii. Purchase returns iv. Direct expenses v. Sales

vi. Sales returns vii. Closing stock These items are briefly explained below: i. Opening stock : It is the stock of goods at the beginning of the current year. The unsold stock or closing stock of the previous year is brought into the books at the beginning of the current year by opening entry. So it is called opening stock of the current year. Stock consists of the following : a. Raw materials b. Finished goods c. Work-in-progress Usually the trading concerns have stock of finished goods and manufacturing conerns have stock of raw materials, work-inprogress along with stock of finished goods. It appears in debit balance column of the trial balance and is transferred to debit side of Trading A/c. ii. Closing Stock : This is the stock of goods lying unsold at the end of the year. The valuation of the closing stock is made on the principle of cost price or market price whichever is less. Usually, closing stock does not appear in trial balance. However, closing stock may appear inside the trial balance when adjusted purchases or cost of goods sold is given inside the trial balance. In such a case, opening stock does not appear in

210

Ledger IV

Unit -

trial balance because it is merged with the amount of adjusted purchases or cost of goods sold. Adjusted purchases = Opening stock + Purchases closing stock. Cost of goods sold = Opening Stock + Net Purchases + Direct Expenses Closing stock. The above mentioned two items appear in the debit balance column of the trial balance. Since the amount of closing stock is deducted from these two items as shown in the above stated formulae, the total of the debit balance column is expected to be reduced by the amount of closing stock. But this will not allow the trial balance to tally. Thus, to avoid this problem, it is very much necessary to place the closing stock in the debit balance column of the trial balance. Where closing stock appears outside the trial balance it is to be shown in the creidt side of Trading Account as well as in the asset side of the Balance Sheet. Again if closing stock appears only inside the trial balance, then it is shown only in the Balance Sheet as an asset. iii. Purchases : Purchases include both cash and credit purchases of goods meant for resale. It does not include purchase of fixed assets, goods in transit and goods sent on consignment. Purchases appear in the debit column of trial balance. It is shown in the debit side of Trading A/c. iv. Purchase Returns : Sometimes, goods purchased may be returned to suppliers on account of any defect in goods, defect in packing, inferior in quality etc. This is termed as purchase returns. Purchase returns is deduted from total purchases to calulate net purchases which is shown in the trial balance. Purchase return appears on credit balance column of trial balance and is transferred to the credit side of the trading account or it is shown by way to deduct from purchases in the debit side of the Trading account. iv. Direct Expenses : These are the expenses incurred directly in connection with the purchase of goods or manufacturing of goods. Direct expenses include both buying expenses and manufacturing expenses. The different direct expenses are listed as under: a. Carriage inward or carriage on purchases b. Freight c. Cartage

211

Unit IV Ledger d. Wages (Both related to production and loading and unloading of goods purchased) e. Dock charges f. Customs duty g. Transit Insurance h. Octrio duty i. j. Fuel, Power, gas relating to production only. Factory expenses (Light, building rent, consumable stores, foremans salary etc.) Primary packing expenses, etc. depreciation,

k. Royalty on production. l. vi. Sales : For the purpose of trading account, sales include both cash and credit sale of goods. It does not include sale of fixed assets, goods sold on approval basis, goods sent on consignment and hire purchase etc. It appears in the credit balance column of trial balance.It is tansferred to credit side of trading account. vii. Sales returns : Some times the goods sold to customers are returned by them due to some reasons like poor quality, not being ordered for, defect in goods, etc. These are called "Sales returns". Sales returns appear on debit balance column of trial balance.It is either transferred to the debit side of trading account or deducted from total sales to arrive at net sale in the credit of trading account. is shown is deduction from sales some of the above stated in credit side of Trading A/c.From the above discussion, it is clear that some of the above stated items appear on the debit side of the trading account where as some others appear on the credit side. Debit side items : Opening stock, net purchases, carriage inward feight, octroi duty, wages, customs duty, dock charges, transit insurance, fuel, gas, water, etc. Credit side items : Net sales, closing stock. Proforma of Trading Account showing entries of usual items Trading account of For the year ending on.

212

Ledger IV To be inserted from page 103

Unit -

The preparation of the trading account is based on the following closing entries : I. Trading Account Dr. To Opening Stock To Purchases To Wages To Carriage and Cartage To Freight To Octroi (Being transfer of opening stock, purchases and direct expenses to trading account) II. Sale Account Dr. Closing stock Account Dr. To Trading Account (Being transfer of sales and closing stock to trading account) III. Trading Account Dr. To Profit and Loss Account (Being transfer of gross profit) In case of gross loss, the entry is Profit and Loss Account Dr. To Trading Account (Being transfer of gross loss to Trading Account) Example Prepare Trading Account of Bapuji Medical stores for the year ended 31st Dec 2004 from the following information. Opening stock Sales Returns inward Carriage inwards Rs.8,200.00 Rs.82,000.00 Rs.600.00 Rs.200.00

213

Unit IV Ledger Returns outwards Closing stock Wages Solution : Trading account of Bapuji Medical Stores for the year ended or 31st December 2004. Dr. Cr. Rs.300.00 Rs.10,000.00 Rs.500.00

PROFIT AND LOSS ACCOUNT After preparation of trading account, profit and loss account is prepared to know the net profit or net loss of the business for the accounting period. Net profit is the excess of gross profit over indirect expenses or operating expenses. When the operating expenses or indirect expenses exceed the gross profit, the difference is treated as net loss. Since net profit is the profit finally available as surplus of the business at the end of the year and the proprietor has the absolute claim on it, hence it is transferred to Capital Account in Balance

214

Ledger IV

Unit -

Sheet. Net profit is added to capital and net loss is deducted from capital. Indirect expenses are selected from debit balance column of trial balance. These are transferred to the debit side of Profit & Loss A/c. From the credit balance column of trial balance, some items of incomes or gains are selected and placed on the credit side of Profit & Loss A/c. The different items of indirect expenses are broadly categorized as under :1. Administrative expenses: Example : Salaries of office staff, Office building rent, Lighting, Stationery, Audit fees, Rates and taxes, etc. 2. Selling and distributing expenses : Example : Sales staff Salaries and Commission, Showroom rent, Advertising, Bad debts, Carriage inward/outward, Delivery van expenses etc. 3. Financing Expenses : Example : Interest on loan, Interest on capital, Discount allowed to customers etc. 4. Maintenance Expenses : Example : - Repairs and renewals, Depreciation, etc. 5. Miscellaneous Expenses and Losses : Example : Loss on sale of fixed assets, accidental losses, etc. The different items of miscellaneous gains are under: 1. 2. 3. 4. 5. 6. 7. 8. Profit on sale of fixed assets Sale of old newspapers Commission received and receivable Apprenticeship premium Discount received Rent from sub-letting Bad debts recovered Interest on drawings and investment given as

215

Unit IV Ledger There are certain items of expenses which are borne by the business and accounts representing such expenses are maintained in trial balance (Debit Column), but they are the personal expenses of the proprietor. Hence , they are not to be included in the profit and loss account, rather they should be deducted as items of drawings from the capital account in balance sheet. The examples of such expenses are : i. Income Tax ii. Life Insurance premium iii. Domestic expenses of the proprietor The preparation of profit and loss account is based on the following closing entries : i. Profit and Loss account Dr. To various accounts of indirect expenses (Being indirect expenses transferred to Profit & Loss A/c. and closed) ii. Accounts of Miscellaneous Incomes Dr. To Profit and Loss A/c. (Being miscellaneous Incomes transferred to Profit & Loss A/c. and closed) iii. a. Profit and Loss A/c. Dr. To Capital A/c. (Being not profit transferred to Capital A/C) b. Capital A/c. Dr. To Profit & Loss A/c. (Being transfer of net Loss) Proforma of Profit and Loss Account Profit and Loss A/c of . For the year ended on dt..

216

Ledger IV

Unit -

217

Unit IV Ledger Difference between trading A/c and Profit & Loss A/c The Trading A/c and Profit and Loss A/c can be differentiated on the basis of the following points. Base Nature of Profit Trading Account Profit & Loss A/c The balance of this The balance of this account is gross account shows the profit or loss net profit or net loss Direct expenses are Indirect expenses written in this are written in this account account Balance of Goods Are needed in this A/c., Purchases A/c, A/c Sales A/c etc. Trading essential preparing Loss A/c. A/c is Profit & Loss A/c is for essential to ascertain Profit & the net profit of the business

Nature of expenses

Need of Accounts

Necessity

Transfer of Balance

The balance of this The balance of this A/c is transferred to A/c. is transferred to Profit & Loss A/c Capital A/c Trading A/c is the name given to the first section of the combined trading and profit and loss A/c. Profit & Loss A/c is the name given to the second section of the combined A/c Trading A/c and Profit & Loss A/c.

Section

Illustration - I : Prepare Profit and Loss Account from the following balances extracted from the books of a trader for the year 2002. Gross profit Salaries Amount (Rs.) 1,85,000.00 20,000.00

218

Ledger IV Rent and rates Stationery Postage Insurance Repairs Depreciation Advertisement Discount (Dr) Salesmen's commission Bad debts Loss by fire Interest on Investments Profit on the sale on investments 5,000.00 1,000.00 500.00 2,000.00 1,500.00 5,000.00 5,000.00 500.00 5,000.00 2,000.00 2,000.00 2,500.00 2,000.00

Unit -

Solution : Profit and Loss Account of the trader for the year 2002 Dr. Cr.

219

Unit IV Ledger

Illustration - II : From the following trial balance of Bapuji Medical Store, prepare the Trading and Profit & Loss Account for the year ended 31st March 2002 Table to be inserted from page no.106 Closing Stock - Rs.10,000/Solution : Trading Account of Bapuji Medical Store for the year ending on 31 st March 2002

220

Ledger IV Dr. Table to be inserted from page 107 Cr.

Unit -

Profit and Loss Account Dr. -d o Cr.

221

Unit IV Ledger BALANCE SHEET Meaning : Balance sheet is a statement prepared at the end of the year to show the financial position of a business. It contains assets, liabilities and capital. Purposes : 1. Balance sheet is prepared to ascertain the financial position or health of the business on a given date. 2. Balance sheet shows the year end status of each of the assets and the various claims on these assets. Such claims are shown as capital and liabilities individually. Features : 1. Balance sheet is prepared as on a parrticular date which usually is the last day of the accountting year. 2. It shows the financial positon as on that date. 3. It shows what does the business own (assets or resources). It also shows what the firm owes to the outsiders (liabilities) and to the proprietor (capital). 4. Balance sheet has two sides as it is prepared in a T shape. However, the night hand side usually contains the assets and left hand side usually contains liabilities and capital. 5. It must be noted that balance sheet is a statement but not an account. Thus there is no debit side and credit side in it. 6. Balance sheet contains items of capital nature only. This includes real and personal accounts only. 7. The total of assets side should be equal to the total of liabilities and capital side.

222

Ledger IV Conventions of Preparing the Balance sheet :

Unit -

There are two conventions of preparing balance sheet, the American and English. According to American convention, assets are shown on the left hand side and the liabilities and owners equity on the right hand side. The English convention is just the opposite, i.e., Assets are shown on the right hand side and liabilities and capital are shown on the left hand side. In India, we usually follow the English convention which is given below. Proforma of Balance sheet

Balance sheet of M/s. As on 31st 20..

The items contained in the Assets side of Balance Sheet are grouped under the following heads : 1. Fixed Assets : These are the assets which have longer life and are not meant for resale. The benefit of these assets are available not only in the accounting period in which the cost is incurred but also over several years. These are the assets which are used for generating revenue for the business. Some examples of fixed assets are Good-will, Land and Building, Plant and Machinery, Furniture, Patents, Copy rights, Trade mark, etc. The fixed assets can be further grouped as under : i. Tangible Fixed Assets : These are the fixed assets which can be seen, touched, felt, and physically handled, e.g. Plant and Machinery, Furniture and fixture, Land and Building etc.

223

Unit IV Ledger ii. Intangible Fixed Assets : These are the fixed assets which cannot be seen or touched or handled physically, but can be felt only. These are invisibly existent. Some of these are Good-will, Patents, Copy right, Trade mark etc. Fixed assets are shown in the balance sheet on the basis of original cost less amount due for depreciation. 2. Current Assets : These are the assets which can be converted into cash within one accounting period. These assets are otherwise known as circulation assets because they go on changing their form within the operating cycle which is presented as under. Diagram of Accounting cycle to be inserted Provided below is a small list of familiarly used current assets i. Cash balance ii. Bank balance iii. Closing stock iv. Bills Receivable v. Prepaid expenses vi. Debtors vii. Sundry advances & Loans (strort items) viii. Accrued incomes Current assets can be categorized as Liquid assets and semiliquid assets. These current assets which can be promptly converted into cash are termed as liquid assets, e.g. cash, bank, Bills receivables, sundry debtors, sundry loans and advances (short-term) etc. Those current assets which can not be easily converted into cash are termed as less-liquid assets, e.g. closing stock, prepaid expenses, accrued incomes, etc. 3. Fictitious assets: These are the imaginary assets or worthless assets which are not supporte dby any physical resources. There are some items of losses of nominal account category which

224

Ledger IV

Unit -

show debit balances and hence treated as assets e.g. Profit & Loss A/c (Dr.) or Accumulated losses not yet written off, Discount on issue of shares not yet written off, preliminary expenses, etc. The items contained in the liabilities side on the Balance Sheet are grouped as under: 1. Capital : It is the owner's claims against the assets of the enterprise. It is the liabilty payable to the owner only when the business gets closed. Soit is treated as a fixed liability. 2. Long-term libalities: These are the liabilities which are repayable over a long period of the time usueally covering more than one accounting period e.g. Term loan, Debentures, etc. Short-term liabilities: These are the liabilities which are payable within one accounting period or during the term of the same accounting year in which such liabilities are incurred. Examples: Bills payable, Sundry creditors, Outstanding expenses, Incomes received in advance, Bank overdraft, short-term loans, etc. 4. Contingent liabilities: These are not actual liabilities at present but may become liabilities in future on the happenings of some contingent events. Examples: Discounted bill of exchange, unsettled claim of customers and workers, surety given by business for a loan, etc.

3.

Arrangement of Assets & Liabilities in the Balance Sheet: The order in which he assets and liabilities are to be presented in the Balance Sheet is known as Marshalling of assets and liabilities. This arrangement can be in the following two orders: i. ii. Order of liquidity (followed by proprietorship concerns) Order of permanance (followed by corporate concerns) i. The order of liquidity means that the assets which can be quickly converted into cash are shown first. The less

225

Unit IV Ledger liquid assets and fixed assets are respectively shown after that. As per the order of liquidity, the liabilities are shown in order of payment preference. Hence, the short-term liabilities are shown first followed by long-term liabilities and then capital. Balance Sheet (In order of liquidity) table to be inserted from page 109 ii. The order of permanence means the arrangement of assets in order of longevity. So, assets having longer life (fixed assets) are shown first and assets having short life (current assets) are shown next . Similarly in the liabilities side, fixed liability or capital is shown first followed by long-term liabilities and current liabilities respectively. The arrangement of assets and liabilities in order or permanence is just the reverse of the same in order of liquidity. Importance of Balance sheet : The importance or Balance sheet can be very well realized from its advantages which are stated as under : i. It shows the financial position of the business on the date of its preparation. ii. It helps to know the net worth of the business. iii. It helps in judging the short term and long term solvency position of a firm. iv. It helps to study ROI (return on investment) v. It gives an idea about the efficiency with which the assets of the business have been put to use. Limitations of Balance sheet : Despite its advantages, it also has the following limitations. i. Balance sheet contains assets which dont show their market value. ii. Assets and liabilities as shown in Balance Sheet does not take inflation into consideration. iii. Fictitious assets increase the total value of assets without being supported by any physical property of some worth. iv. Some intangible ssets like quality of human resources, localational advantages, etc. can not

226

Ledger IV

Unit be disclosed in Balance Sheet though they add to the revenue earning capacity.

Distinction between Balance Sheet and Trial Balance: The following table depicts the difference between a Balance Sheet and a Trial Balance. Sl.No. Base 1. Object Balance Sheet Its object is to disclose the financial position Balance sheet may provide information about profit. Only personal and real accounts are covered in balance sheet Balance sheet cannot be prepared without making adjustment It has two parts one for liability and the other for assets Trial Balance Its object is to establish the arithmetical accuracy of the books of account. It is not possible to get any information from trial balance All accounts are covered in a trial balance A trial balance can be prepared without making any adjustments It has four columns one for particular, one Journal Folio, third and fourth are meant for debit and credit account respectively. The balance of accounts are noted in the order in which they appear in the ledger It is a summary of ledger It is also recognized

2. 3.

Profit Accounts

4.

Adjustments

5.

Columns

6.

Order of Recording

The assets and liabilities are shown in a systematic order It is summary of whole of accounting work It is recognized by

7. 8.

Summary Evidence

227

Unit IV Ledger court as evidence 9. Relation Balance sheet is prepared on the basis of trial balance The words debit and credit are not used in balance sheet It is prepared after the preparation of Trading and Profit & Loss account A balance sheet is prepared at the end of Trading period Closing stock is shown in balance sheet on asset side The two sides of balance sheet contain headings as assets and liabilities as an evidence by the court of law Trial balance is prepared from the ledger The words debit and credit are used at the top of the amount column It is constructed prior to preparation of Trading and Profit & Loss account Trial balance may be prepared at any time, whenever desired Closing stock is not shown in trial balance The two columns of trial balance contain headings as Debit and Credit

10.

Debit and Credit Preparation

11.

12.

Period

13. 14.

Closing Stock Headings

Distinction between Balance Sheet and Profit & Loss Account: A Balance sheet differs from the Profit & Loss A/c. on the basis of the following points. Sl.No. 1 2 3 Points of Difference Nature Sides Object Balance Sheet It is a statement It has only two sides namely Assets and Liabilities It discloses the financial position of the business on a particular date Profit & Loss A/c It is an account It has also two sides viz. Debit and Credit It discloses the net trading result of the business for a certain period.

228

Ledger IV 4 5 Accounts included Items of Dr. and Cr. It includes only real and personal accounts It does not have Dr. and Cr. Side. However, on lefthand side Liabilities and Assets are written on the right hand side These terms are not used in a Balance sheet

Unit It includes balances of only nominal accounts On the left-hand side debit items and on the right-hand side credit items are written Entries of the account begin with To and By in case of Debit and Credit sides respectively

Use of To or By

229

Unit IV Ledger

Illustration : From the following balances of Tareni Druggist , prepare balance sheet as on 30th June 2004 Table from page 110

Closing stock Rs. 20,000/Balance Sheet of Tareni Druggist as on 30th June 2004 Table from page 110 Illustration on preparation of combined Trading and Profit & Loss A/c. The Trial Balance of Charak Medicals is presented below, prepare Final accounts from the same. CHARAK MEDICALS Trial Balance as on 31st March 2003 Table from page 111

Closing stock on 31.03.2003 was valued at Rs.2,100/-, shown as under:

230

Ledger IV Tabs & Caps - 100 Boxes @ Rs.5/- per box = Rs.500/Liquids - 400 Bottles @ Rs.4/-per bottle = Rs.1,600/Total = Rs.2,100/-

Unit -

Solution : Trading and Profit and Loss Account of Charak Medicals (for the year ending on 31st March 2003) Balance Sheet of Charak Madicals st March 2003) (as on 31 table from 112 CHARAK MEDICALS BALANCE SHEET AS ON 31st MARCH 2003 Manufacturing Account Meaning :This is an account prepared only by manufacturing or industrial concerns. In a business whose operations include manufacturing as well as trading or sale of the products, then it is required for the business to divide its trading account into two parts : The Manufacturing (or production) Account (before preparing Trading Account to show the cost of goods produced) ii. The Trading Account (to show the gross profit and loss on sale of goods. A manufacturing concern purchases materials, supplies tools and machines, engages workers and finally processes the raw matierls till they are converted into finished goods. Thus it becomes necessary on the part of a business house to prepare and design manufacturing account to show not only the total cost goods produced, but also the cost of each of the constituent elements which form the total cost. Accordingly the manufacturing account is prepared. i.

231

Unit IV Ledger Purpose : The purpose of preparing manufacturing account is to find the cost of production or manufacturing goods. Process of preparing manufacturing account : This account is debited to : i. ii. iii. The cost of raw-materials converted Productive wages All other expenses chargeable

It is credited by : i. Sale of scrap ii. Cost of production (Balancing figure) The usual items shown in a manufacturing account are as under : 1. The debit side contains a. Raw materials consumed i.e. Opening stock of raw materials (+) Purchase of raw materials (+) Purchase expenses (freight, customs duty, etc.) (-) Closing stock b. Manufacturing expenses like excise duty, wages, rent and light of factory premises, repairs to plant and machinery, depreciation of machinery, etc. Broadly speaking, all expenses which are incurred directly or indirectly upto the point of physical completion of the products under processing are debited to manufacturing account. The actual manufacturing cost inside the factory or workshop is taken into account. However, administration, selling distribution costs are excluded. c. Balance of work in progress or semifinished goods 2. The credit side contains : a. Sale of scrap or waste materials b. The balance in manufacturing account i.e. the difference between the debit side and credit side is the cost of goods

232

Ledger IV

Unit -

produced during the period which is transferred to trading account. After completing the preparation of manufacturing account the trading account is prepared at the next step. The trading account is debited with the following items : i. Opening stock of finished goods . ii. Cost of goods produced as transferred from the manufacturing Account. The Trading Account is credited by the following items : i. Sale of finished goods ii. Closing stock of finished goods. The difference between the two sides of trading account represents either gross profit or gross loss which is further transferred to profit and loss account. Profit & Loss Account is to be prepared in the usual manner as discussed already. It must be noted that the items which appear in Manufacturing Account will not reappear in Trading account or Profit & Loss account. Differences between Manufacturing account and Trading account The following are the differences between and Trading Account : Table no. 113 The Format of a Manufacturing Account : As discussed above, we see that the Manufacturing Account contains all the items of production cost which are debited to this account. Such items are Direct materials, Direct labour etc. During the process of manufacturing, all materials put in, may not be completed into finished goods. Hence, some balances (opening or closing) of work-in-progress or semi-finished goods may come to picture. So opening W.I.P & closing W.I.P must be adjusted at the time of preparation of manufacturing account of that year because this account is concerned with the production cost of finished goods during the year. However, manufacturing account usually appears with details given as under : manufacturing Account

233

Unit IV Ledger

Manufacturing Account for the year ended Dr. Page 114 Cr.

234

Ledger IV i.

Unit -

Indirect materials : These are the materials which do not form a part of the finished product but are necessary for production. For example, consumable materials like cotton waste, lubricating oil grease etc, maintenance materials Indirect labour : It is the amount of wages paid to workers not directly engaged in manufacturing of the product. For example, wages of foreman, time-keeper, supervisor, security man etc. are treated as indirect labour.

ii.

iii. Indirect Expenses : These are the expenses other than direct expenses and cannot be identified with the product. For example, in a factory the rent, rates, taxes, insurance, lighting, heating, depreciation etc are treated as indirect expenses. iv. Direct materials : These are the raw materials consumed in the process of manufacture and are easily traced out in the product. For example, chemicals in drugs manufacturing, timber in furniture making, cloth in dress making etc.are direct materials. v. Direct Labour : This is the amount of productive wages which is directly associated with manufacturing activities. For example, carpenters wages in furniture making is direct labour.

vi. Direct Expenses : This includes miscellaneous expenses which are directly identified with the production of the commodity. A common example of this type of expenditure is the cost of the special design or the cost of special freight. vii. Scrap : These are the materials which are remnants of materials used in manufacturing and has a resale value. Illustration : From the following information, prepare the Manufacturing Account and Trading Account of Noble Pharmaceuticals etc. for the year ended 31st December 2004. Table from 115

235

Unit IV Ledger Solution : Manufacturing Account of Noble Pharmaceuticals for the year ended 31st December 2004 Table from115 Illustration : On 31st December 2004, the following balances appear in the books of Parke-Davis & Co with reference to its product named Benadryl (Parke-Davis & Co is assumed to be the manufacturer of Benadryl only) Table from 116 Closing stock of Raw-materials (item-wise) as on 31st December 2004 was as follows : Diphen hydramine-hydrochloride 70,000 Ammonium Chloride 50,000 Sodium citrate 35,000 Menthol, Ethanol etc. 7,000 1,62,000 Closing stock of processed bottles (semi-finished) Closing stock of finished goods Purchase Invoice includes the following purchases (net value) shown after 15% trade Discount) Diphen Hydramine Hydrochloride Ammonium chloride Sodium citrate Menthol Ethanel Ethanel contents Total 78,000 1,81,000

3,50,000 2,75,000 1,00,000 50,000 45,000 30,000 8,50,000

236

Ledger IV

Unit -

Prepare the manufacturing Trading & profit and loss Account for the year ending on 31st December 2004 from the above mentioned information. Manufacturing Account of Parke Davis & Co. for the year ended 31st December 2004 Table 117 Trading and Profit & Loss Account of Parke Davis & Co. for the year ended 31st December 2004 table 117 Balance Sheet of Parke Davis & Co. as on 31st December 2004 table 117 FINAL ACCOUNTS WITH ADJUSTMENTS When transactions take place, they are first recorded in the journal. Then the concerned accounts in the journal are transferred and posted into ledger. The balances of different accounts in the ledger are then presented in Trial Balance for the purpose of testing the arithmetical accuracy of the accounting records. Thus, we find trial balance contains the summary of the entries for the transactions which have already been routed through accounting sequences. So these transactions are considered already adjusted. But there are also some transactions or events which may have not been passed through accounting sequences till the end of the accounting period. Hence, accounts involved in such transactions are not found in Trial Balance and hence unadjusted. Thus it becomes necessary to adjust such transactions in order to

237

Unit IV Ledger find out the true profit or loss because an unadjusted trial balance cannot lead to preparation of a correct profit and loss account. From the discussions made above, we understand that adjustment of unadjusted transactions by the end of the accounting year has to be made by passing various adjustment entries for ascertaining the correct results of operation. The various unadjusted items are outstanding expenses, pre-paid expenses, accrued incomes, unearned income, depreciation, closing stock, etc and their adjustments are explained as below: i. Outstanding Expenses : At the end of the period, some expenses have not been actually paid, which are known as out standing expenses. These expenses have been incurred but they have not been paid. If proper adjustments are not made, the profit and loss account shall not reveal the true position of the concern. Therefore, the necessary adjustment in respect of unpaid expenses shall be made as under : Outstanding Expenses A/c. To Expenses A/c. ii. Accrued incomes :All income which has been earned but not actually received is called accrued income. The accrued interest shall be adjusted in the books by opening a new account known as Accrued Interest Account. The adjustment entry shall be passed as under : Accrued Income A/c. To Income A/c. The accrued income account is a personal account and will appear as an asset in the Balance Sheet. The income account, being a nominal account, will be closed by transferring it to the credit of Profit & Loss Account. On the first day of the next year, a reverse entry shall be made as under : Income A/c. To Accrued Income A/c. Dr. Dr. Dr.

238

Ledger IV iii. Unearned Income : -

Unit -

During a trading period, the income which has been received, the whole of which may not belong to that period but to the subsequent period and such income in known as unearned income. This income is adjusted in the books by opening an account known as Unearned Income Account. The adjusting entry shall be as under : Income Account Dr. To Unearned Income A/c. The unearned income account is a personal account and it will appear as a liability in Balance Sheet. The income account being a nominal account will be transferred to the credit of Profit and Loss Account. On the first day of the next year, reverse entry shall be passed and unearned income account will be debited and income account credited. iv. Prepaid Expenses : There are certain expenses such as fire insurance premium, which are paid in full during a trading period, but the full benefit of which is not received in that year and a portion of that is utilized in subsequent year. Such expenses are known as prepaid expenses. The adjustment entries are made by opening a Prepaid Expenses A/c.. The adjustment entry is made as under: Prepaid Expenses A/c. To Expenses A/c. The prepaid expenses account is a personal account and shall appear as asset in the Balance Sheet. The expenses account, being a nominal account shall be transferred to the credit of Profit and Loss Account or these expenses are shown as a deduction from the respective expenses on the debit side of profit and loss account. On 1st day of the next year, reverse entry shall be made, thereby expenses account will be debited and prepaid expenses account credited. v. Closing Stock : All goods purchased during the year may not have been sold out at the end of the year. Thus, the part of the goods which Dr.

239

Unit IV Ledger remain unsold at the end of the accounting year, is known as closing stock. Closing stock is valued at market price or cost price whichever is less. Adjusting entry for closing stock : a. For Manufacturing and Trading Concerns : Stock of materials lying unused at the end of the period are counted physically and cost thereof ascertained from orginal records. The market price of the closing stock is also ascertained and the valuation of the same is made on the basis of the principle Cost or Market Price whichever is lower". After the value of the closing stock is ascertained a Closing stock account is opened and debited by crediting the Manufacturing account. Work started but not completed at the end of the accounting period are physically verified and cost ascertained thorugh technical estimates or by keeping adequate cost records. This is known as work-in-progress and its cost is debited to this account and manufacturing account is credited. Closing stock of finished products are also physically verified. The values are determined on the basis of cost or market value whichever is lower and debit given to closing stock of Finished Goods Account and Credit to Trading A/c. b. For Trading Concerns : For concerns who are engaged only on trading the goods, the closing stock is physically verified, cost ascertained from original records, valuation made on the basis of cost or market price whichever is lower and entries passed by debiting Closing Stock Account and crediting the Trading Account. The Closing stock so introduced into the books is carried forward as Opening Stock in the next period. The Opening Stock therefore appears in the Trial Balance itself but Closing Stock is the result of adjustment entries. Thus at the commencement of the period there will appear debit balances for Opening Stock of materials, work-in-progress and Finished Goods. Adjusting entry : Closing stock A/c. Dr. To Trading A/c.

240

Ledger IV

Unit -

Closing stock will be shown in Balance Sheet as an asset. Again also closing stock will be shown in the credit side of Trading Account. vi. Closing stock of stationery : For closing stock of stationery we debit the stock of stationery A/C (to be shown on the assets side of the Balance sheet) and credit the stationery A/C. If opening stock and purchase of stationery are separately given in the trial Balance and there is an adjustment for closing stock of stationery, we show the opening stock of stationery in the profit & loss A/C, and the closing stock of stationery again on the assets side of the balance sheet. vii. Interest on Capital : For interest on capital we debit the Interest on Capital A/c. (to be shown on the debit side of Profit & Loss A/c.) and credit the Capital A/c. (to be shown as an addition to capital in the balance sheet) viii. Drawings and Interest on drawings : Drawings refere to the amount personally drawn by the owner from business. This may be done regularly or at irregular interval. The amount drawn is debited to the Drawings A/c. and credit is given to Cash/Bank A/c. The balance of the Drawings account is carried over as a debit balance or it is generally deducted from the Capital A/c. in the Balance Sheet, the entry being Capital A/c. is debited and Drawings A/c. credited. If interest on capital is allowed, it is but natural that interest on drawings should be charged from the owner as drawings reduce capital. Interest on drawings at prescribed rate is calculated and is treated as follows : a. Debit Drawing A/c. and Credit Interest on Drawing A/c. b. Debit Interest on Drawing A/c. and credit Profit and Loss A/c. with the amount of interest calculated. This amount increases the Drawings A/c. which is deducted from capital and also this amount is treated as a gain and hence Profit and Loss A/c. is credited. ix. Bad Debts :

241

Unit IV Ledger Dues on credit sales realizable from some debtors sometimes become irrecoverable. The amount that is irrecoverable is known as Bad Debt. Nominal account styled as Bad Debts Account is opened and debited with the irrecoverable amount by crediting the Personal Accounts of the Debtors who are unable to pay. The Bad Debts Account is finally closed to Profit and Loss Account (debit Profit and Loss Account and credit Bad debts account). x. Provision for Bad and Doubtful Debts :Even after all the irrecoverable debts have been adjusted, it may be found that there are a number of overdue amounts the recovery of which is doubtful. Provision is to be made for such doubtful debts from current profits. This is generally done by debiting an appropriate amount to the Profit and Loss A/C and crediting an account styled as Provision for Doubtful Debts A/c.. In the Balance Sheet this provision A/C is shown as a deducation from the balance lying outstanding with debtors. Example : Prepare ledger A/cs in the following cases : 1. Bad debts in trial balance Rs.1,200. Bad debts reserve Rs.1,500 and Sundry debtors Rs.24,000. Increase the debts reserve to 5% on debtors. 2. Bad debts in trial balance Rs.200. Bad debts reserve Rs.1,500, and debtors Rs. 14,000. Create a Bad debts reserve of 5% on debtors. 3. Bad debts in trial balance Rs.500, Bad debts reserve Rs.1,500 and debtors Rs.200/- will be further bad out total debtors of Rs48,200/-. Create 5% reserve for bad debts on remaining debtors. 4. Bad debts in trial balance Rs. 1,200, bad debts reserve Rs. 1,500 and debtors Rs.48,000. Increase the bad debts reserve by Rs.2,200. Solution : LEDGER (1) Bad Debts A/c.

242

Ledger IV

Unit -

Bad Debts Reserve A/c.

2. Bad Debts A/c.

Bad Debts Reserve A/C

Profit & Loss A/c.

Balance Sheet 3. Bad Debts A/c. Bad Debts Reserve A/c.

243

Unit IV Ledger

Profit & Loss A/c. Balance Sheet

3. Bad Debts A/c.

Bad Debts Reserve A/c.

Profit & Loss A/c. Balance Sheet xi. Provision for Discount on Debtors and Creditors : The amount lying due from the Debtors may be subject to Cash Discount allowed to them for prompt payment. If this be so, the amount exhibited by the Debtors balance will not be realisable. The probable amount of discount has to be set off against this balance by debiting Profit and Loss Account and crediting a Provision for Discount" on Debtors balances (after the provision for doubtful debts deducted from the Gross Debtors) in the Balance Sheet. Similarly discounts receivable from creditors for prompt payment of their bills will be set creditors balances in the liabilities side of the Balance Sheet. xii. Depreciation : The fixed assets are used for carrying out the business and such assets usually have a longer and useful life. It is therefore necessary to find out the proportionate cost of usage off the

244

Ledger IV

Unit -

assets every year. There are several methods for computing the proportionate cost and the amount so computed is known as depreciation. An account styled as depreciation is opened in the general ledger and the amount debited to the account by giving the corresponding credit to the relevant asset account. The depreciation account is finally closed by transferring the amount to Profit and Loss Account. In the Balance Sheet, the assets is shown at Original Cost less the amount of depreciation written off till date. xiii. Stock lost by fire : Sometimes stock of goods (viz. raw materials, semi-finished and finished goods) are destroyed by fire in the store/godown. If these have not been insured, then it is a total loss and this loss is to be calculated on the basis of their original cost less the salvage value if any. The accounting treatment for this loss is to debit the Loss of stock by fire account and credit the Trading A/C. The Trading A/C is credited because unless this is done the calculation of Gross Profit would not be correct. If the stock had not been destroyed, they would have been in the Closing Stock and the Gross Profit would have been higher. If however the stock destroyed was insured with a Fire Insurance Company, the treatment will be as follows : a. If the whole loss can be recovered from the Insurance Company : Debit the Insurance Co A/c. Credit the Loss by fire A/c. b. If the loss can be partly recovered from the insurance Company : Debit Insurance Co. A/c (with the amount to be recovered) Debit Profit and loss A/c. (with the amount not recoverable) Credit the Trading A/c. c. If nothing is recoverable from the Insurance Co, the Loss of stock by fire A/c. is entirely transferred to Profit and Loss A/c as loss. Whenever goods are issued to the proprietor for his personal use, the amount should be debited (at cost) to the Drawings

xiv.Goods issued to the Proprietor for his personal use etc :

245

Unit IV Ledger A/c. of the Proprietor and Trading A/c. is credited. Similarly, goods given away as charity or distributed as free samples to prospective customers, the amount (at cost) is debited to the nominal account concerned and credited to the Trading A/c. xv. Adjusted Sales and Purchases : Sometimes a Trial Balance is prepared after making necessary adjustments in the value of Sales and Purchases, i.e. the sales figure appears after the deduction of sales returns and the purchases figure appear after the addition of opening stock and the deduction of purchases returns and closing stock. In that event, adjusted sales appears in the Trading A/c. and there is no need for the deduction of Sales Returns. Similarly, adjusted purchases appear in the debit side of the Trading A/C without the opening stock and also there is no need to show the closing stock in the credit side of the Trading A/c. xvi. Goods sold but not despatched : Sometimes goods are sold towards the close of the accounting period and they are not dispatched on the date of taking stock. Hence to avoid this complicacy, such goods should not be included in the Closing Stock. xvii. Managerial Remuneration : Sometimes the managers are remunerated on the basis of fixed salary plus a percentage of commission on the net profits. This practice is adopted with a view to motivate the manager to work hard and increase the sales and profits. A two-way process can be adopted, as given below, at the time of calculating the remuneration of a manager. a. Commission on net profits before charging such commission b. Commission on net profits after charging such commission Before charging such commission : This is very simple and the student is required merely to calculate the profit before charging the commission to the Profit and Loss A/c. For example, if before charging commission @ 5% on net profits, the profits are Rs.20,000/-, 5% on Rs.20,000/- comes to Rs.1,000/-. So

246

Ledger IV

Unit -

Rs.1,000/- is debited to the Profit and Loss A/c. and net profits remains at Rs. 19,000/- i.e. Rs.20,000/- - Rs.1,000/-. After charging such commission : In such a case the calculation will be made with the help of the following formulae : Commission payable = ( Percentage of commission 100 Thus, if available profit is Rs.20,000/-. Commission payable will be (5% being the rate of commission). 5/100 x 20000 = 1000 So Rs.1,000/- is charged to Profit & Loss A/c. and the net profit remains at Rs.20000/- i.e. (Rs.21,000/- Rs.1,000/-). Mark that the amount of Rs.1,000/- towards commission payable is just 5% of the net profit of Rs.20,000/-. xvii. Hidden adjustments : There may be certain items in the trail Balance which may automatically require adjustment in the Trading and Profit and Loss A/c. although specially no adjustment is given relating to such items. For example, in the Trial Balance you find the following items : Dr. Bank Loan at 6% Interest on loan 600 Cr. 20,000

From the above it is clear that Bank Loan @ 6% interest is Rs.20,000/- and on this amount interest is payable in full. This interest comes to Rs.1,200/-, but only Rs.600/- has been paid. So another Rs.600/- is payable. This is done by passing an entry debiting Interest on loan A/c. and crediting the Bank Loan A/c. This Interest on Loan A/c. increases by Rs.600/- and Bank Loan A/c. increases by Rs. 600/- for interest which is shown in the liabilities side of the Balance Sheet. xviii. Income Tax : Income tax paid by the proprietor on his own income (on net profit credited to his capital A/C) is to be treated as his private expenditure and can not be debited to the Profit and Loss A/c. If

247

Unit IV Ledger this tax is paid by the business, it should be debited to Drawings A/c. of the proprietor. Sales tax paid, however, is business expenditure and should be debited to the Profit and Loss A/c. While preparing Final Accounts for examination purpose, it is advisable to show the adjustments in the form of a table as shown below in the Working Note part of your solution.

Tabular Presentation of Adjustments in Final Accounts (A specimen) table from 124

248

Ledger IV MODEL QUESTIONS PART A : VERY SHORT QUESTIONS 1. sentences.

Unit -

Explain the following terms in one/two

i) Gross Profit, ii) Net Profit, iii) Closing Stock, iv) Direct expenses, v) Indirect expenses, vi) Balance Sheet, vii) Fixed Asset, viii) Tangible Asset, ix) Current Asset, x) Intangible Asset, xi) Liabilities, xii) Current liabilities, xiii) Fixed liabilities, xiv) Contingent liability xv) Bad Debts, xvi) Adjusted purchases, xvii) Manufacturing Account 2. Answer the following : a. What is final account ? b. Why final accounts are prepared ? c. Why balance sheet is called position statement ? d. Why Trading and Profit & Loss A/c is called income statement ? e. Both sides of a Balance Sheet must always tally. Why ? f. Define Fixed assets. g. What do you mean by the term liquidity? h. Distinguish between Trial Balance and Balance sheet. i. What are the orders followed while arranging the assets and liabilities of a business. j. Give the meaning of adjusted purchases. Distinguish between Gross profit and Net profit. 3. State whether the following statements are true or false. a. Final accounts are prepared form trial balance. b. Trading and profit and loss account depicts the financial status of a business at the end of the year. c. Balance sheet is otherwise known as income statement.

249

Unit IV Ledger d. Trading account is prepared to find out the cost of goods sold and gross profit. e. All direct expenses are taken to profit and loss account. f. Balance sheet always balances. g. Life insurance premium paid on the life of the owner is debited to profit and loss account. h. Balance sheet contains only personal and real accounts. i. Manufacturing account is prepared to know the cost of goods produced. 4. Fill up the blanks : a. Profit and loss account is a ..... account. b. All indirect expenses are taken to..... account. c. Bad debt recovered is transferred to the ..... side of the Profit and Loss account. d. What a firm owes is called the ...... of the firm. e. Royalty paid on production is charged to.... account. PART B : SHORT QUESTIONS (Answer within 3-5 sentences) 1. Answer the following questions in 3-5 sentences each. a) From the following figures find out (i) Cost of goods sold, and (ii) Gross Profit : Opening stock Rs.20,000, Net Purchases Rs.1,90,000, Direct expenses Rs.30,000, Closing stock Rs.40,000 and Sales Rs.2,80,000 b) Ascertain the cost of goods sold from the following figures: Opening stock Rs.8,500, Purchases Rs.30,700, Direct expenses Rs.4,800, Indirect expenses Rs.5,200 and Closing stock Rs.9,000 c) Purchase Rs.40,000/-, Sales Rs.55,000/-, Frieght and carriage on Purchase Rs.4,000/-. Calculate Gross Profit. d) Purchase of Rs.27,000/- is to be transferred to Trading account. Pass the closing entry.

250

Ledger IV

Unit -

e) Loss due to fire Rs.25,000/- out of which Insurance Co. admitted a claim of Rs.17,000/-. How much will be charged to Profit and Loss account? f) Purchases Rs.15,000/-, Opening stock Rs.7,000/-, Closing stock Rs.3,000/-. What is cost of goods sold ? 2. Write short notes on : (Answer within 3 5 sentences) a. Current asset b. Fixed asset c. Liquid asset 4. Give short answers : a) Give the purpose of Balance Sheet. b) Give three features of Balance sheet. c) Give the arrangement of assets and liabilities in the Balance sheet. d) Classify the assets e) Classify liabilities f) Give the importance of Balance sheet g) Distinguish between Manufacturing A/c. from Trading A/c. h) How managers commission is calculated? i) Give the treatment of stock lost by fire d. e. f. Contingent liability Cost of goods sold Fictitious assets.

PART C : LONG TYPE QUESTIONS (Theory-based) 1. What is Trading Account ? How it is prepared ? Give the closing entries that will be passed while preparing Trading Account. 2. Why Profit and Loss Account is prepared ? Give the closing entries necessary to prepare Profit and Loss Account. 3. What is Balance Sheet ? Give a specimen of it. Distinguish between Balance sheet and Trial Balance.

251

Unit IV Ledger LONG QUESTIONS (Practical-based) 4. Prepare Trading Account from the following information. Opening stock Purchases Returns inward Sales Rs. 2,590 21,340 580 45,145 Closing Stock Wages Carriage inward Returns outward Rs. 3,172 1,830 520 290

5. Prepare Trading account of Highway Drugs Store from the following information : Rs. Rs. Stock (1.1.2004) 7,150 Depreciation 4,000 Purchases 40,180 Octroi kury 2,009 Sales 92,510 Stock (31.12.2004) 6,145 Purchase return 1,180 Insurance 125 Wages and salary 4,250 Carriage in 810 6. From the following figures prepare Profit and Loss Account : Gross profit 4,200 Salary Advertisement Commission (Cr.) Discount (Dr.) Carriage outward Rs. 12,200 1,230 310 1,180 145 212 Rs. Rent Printing and stationery 280 Interest on loan received 140 Insurance 240 Capital 12,000 Depreciation 400

7. From the following balances taken from the books of Jay Medicals. Prepare Trading and Profit and Loss Account for the year ending 30th June,2003 and a Balance Sheet as on 30th June 2003. Balance Stock (1.7.2002) Purchases Sales Rs. 3,100 42,300 80,000 Balance Rs. Carriage on sales 290 Discount (Dr.) 540 Depreciation of furniture 240

252

Ledger IV Return inward 1,170 Wages 580 Carriage on purchase 320 Interest (Cr.) 140 Drawings 2,890 Cash 2,155 Advertisement 2,400 Motor van 14,000 Trade debtors 18,000

Unit Furniture 2,160 Salary 1,200 Capital 20,000 Land ad building 10,500 Printing and stationery 1,800 Creditors 4,000 Bills payable 1,505 Bad debt 1,000

Stock on 30th June 2003 was valued at Rs.2,950/-. Hint: If depreciation appears as a balance, it is taken only in Profit & Loss A/c. and no depreciation is deducted from the asset concerned in the Balance Sheet. 8. From the following balances extracted from the books of Deepak Medicine Store. Prepare Trading and Profit and Loss account for the year ending 31st December, 1999 and also Balance Sheet as on 31st December 1990. Balance Rs. Balance Wages 3,000 Depreciation Discount (Dr.) 450 Purchase returns Carriage in 240 Sales return Debtors 17,100 Drawings Creditors 14,500 Capital Discount (Cr.) 4,000 Bills payable Furniture 4,000 Bill receivable Stock (1st Jan. 90) 16,000 Cash in hand Purchases 40,000 Cash at bank Sales 80,000 Building Salaries 4,000 Bad debt Fire insurance premium 1,500 Advertisement Carriage outward 1,340 Commission (Cr.) Rs. 3,150 5,000 4,500 5,000 55,000 3,800 2,800 1,720 8,500 55,000 2,000 1,000 4,000

Closing Stock was valued at Rs.12,500 9. The Trial Balance of Chatterjee on 31.12.99 revealed the following balances :

253

Unit IV Ledger Debit Balances Rs. Debit Balance cont. Rs. Plant and Machinery 80,000 Carriage outwards 1,200 Purchases 68,000 Rent, retes & taxes 2,000 Sales returns 1,00 Advertisements 2,000 Opening stock 30,000 Cash at Bank 6,900 Bank charges 75 Credit balances Discount allowed 350 Capital 1,00,000 Sundry debtors 45,000 Sales 1,27,000 Salaries 6,800 Purchase returns 1,275 Wages 10,000 Discount received 800 Carriage inwards 750 Sundry creditors 25,000 Stock on 31.12.99 was valued at Rs.3,500. Prepare Trading and Profit and Loss account for the year ended 31.12.99 and Balance Sheet as on that date.

254

Ledger IV

Unit -

10. From the following Trial Balance of Mr. Roxy prepare Trading and Profit and Loss Account and Balance Sheet as on 31st Dec.2001. Debit Balances Rs. Debit Balances cont. Rs. st Jan 2001)13,500 Stationery Stock (1 1,400 Purchases 65,900 Sales return 1,200 Wages 4,800 Carriage on purchases 100 Salary 2,500 Carriage on sales 60 Fire Insurance premium 1,200 Good will 8,000 Bad debt 800 Discount 500 Sundry Debtors 23,000 Credit Balances Furniture 2,000 Sales 88,900 Depreciation on furniture 200 Purchases returns 1,700 Bills receivable 1,300 Sundry Creditors 8,000 Drawings 5,000 Bills payable 1,500 Building 22,000 Capital 45,000 Cash 1,200 Discount 460 Rent 900 Closing stock on 31st Dec 2001 was valued at Rs.13,500/(Ans: G.P. Rs. 18,600; N.P. Rs. 11,500; B/S Total Rs. 61,000) 11. From the following Trial Balance of Mr. Sapan Sen, prepare the Final Accounts fo the year ending 31st March 1994. Dr. Rs. Cr. Rs. Purchase 1,49,000 Salaries 4,000 Creditors 12,000 Debtors 24,000 Capital 1,00,000 Drawings 16,000 Sales 2,17,000 Purchase return 1,600 Sales return 6,000 Rent 1,800 Discount 400 Interest 3,000

255

Unit IV Ledger 1,400 460 2,000 7,000 30,000 1,240 2,000 400 1,200 1,700 35,000 50,000 3,33,600 3,33,600 12. From the following Trial Balance of Mr. Raja. Prepare Trading and Profit and Loss Account for the year 1999 and Balance Sheet as on 31st Dec. 1999. Debit Balances Rs. Debit Balances cont. Rs. Cash in hand 1,500 Loan to Ravi 12,000 Drawings 3,000 bad debts 1,500 Machinery 3,500 Other direct expenses 450 Buildings 20,000 Furniture 2,100 Goodwill 2,000 Advertisement 1,240 Cartage on sale 300 Insurance premium 1,000 Credit Balances cont. Rs. Sundry creditors 6,790 Rent from sub letting 200 Sales 50,000 Stationery Postage Furniture Wages Machinery Carriage Fuel Factory Insurance Bad debts Bills receivable Closing stock Building

Stock (Opening) 3,500 Purchases 25,000 Sales return 3,500 Salaries 1,200 Prepaid expenses 1,600 Wages 9,750 Rent 1,650 Discount 2,500 Octroi duties 150 Cartage on purchase 200 Sundry debtors 12,000 Bill Receivable 1,800 Credit Balances Capital Bills payable Commission Rs. 40,000 450 1,000

256

Ledger IV

Unit -

Purchase return 2,000 Interest received from Ravi 600 Income received in adv. 400 Closing stock was valued at Rs.2,100/-

Hints : Pre-paid expenses and Income received in advance will be shown only in the Balance sheet as asset and liability respectively. 13.Prepare the Trading and Profit and Loss Account for the year ending 31st Dec. 1990 and Balance sheet as on 31.12.90 from the following trial balance of M/s.Dabur Stores. Trial Balance as on 31st December 1990 Dr. Rs. Cr. Rs. Capital 18,500 Bills payable 2,700 Liability for other expenses 1,600 Provision for doubtful debt 1,000 Creditors 14,600 Debtors 10,000 Building 12,000 Plant 4,000 Furniture 2,500 Misc. Exp. 1,200 Drawing 2,100 Opening stock 2,700 Purchases 24,600 Freight and duty 100 Wages 1,200 Addition to Building 1.3.90)1,000 Advertising 750 Investment 150 Insurance 100 Salaries 4,000 Carriage in 400 Carriage out 250 Printing 150

257

Unit IV Ledger Telephone Cash in hand Return in Return out Bad debt Sundry expenses Loss on sale of plant Sales account 140 60 400 450 400 100 68,950 600 29,950 38,950

Closing stock was valued at Rs.2,300/14. From the following trial balance of Mr. X prepare final accounts. Rs. Purchases 48,640 Wages 8,480 Charity 1,290 Salary 1,800 Loan to Y 9,000 Building 12,000 Cash in hand 450 Trade debtors 3,560 Drawings 2,170 Life insurance premium600 (paid for Mrs. X) Fire insurance premium 180 Bills receivable Closing stock Incoem tax Capital Sales Bank overdraft Creditors Outstanding wages Interest on B.O.D. Goodwill Furniture and fixture Return inwards Rs. 230 2,300 1,800 20,000 70,260 3,000 2,000 280 1,380 2,000 1,500 160

Hints : 1. If closing stock appears in the Trial Balance, then it is not credited to Trading Account. It appears only in Balance Sheet and it is not credited to Trading Account. It appears only in Balance sheet as an asset. Here closing stock has already been adjusted with purchases.

258

Ledger IV

Unit -

2. Income tax and life insurance premium (paid for Mrs. X) are to be treated as drawings of Mr. X.

259

Unit IV Ledger 15. From the following balance of Emami Chemicals, prepare Manufacturing, Trading and Profit and loss Account for the year ended 30th June, 1994 and Balance sheet as on 30th June, 1994. Rs. Rs.

Opening stock Purchase returns 12,540 Raw materials 10,000 Sales 2,50,000 Work in progress 15,000 Creditors 20,460 Finished goods 20,000 Power and Fuel 12,000 Manufacturing wages43,500 Depreciation : Lighting: Factory 8,000 Factory 2,400 Office 3,000 Office 1,800 Salary 42,000 Bills payable 12,000 Capital 1,00,000 Bank overdraft 25,000 Printing & Stationeries3,600 Advertisement 18,00 Plant and Machinery 80,000 Sales returns 12,450 Rent 12,000 Debtors 18,000 (Factory occupied 40% of Bad debt 3,100 the total floor area) Cash in hand 7,400 Goodwill 10,000 Cash at bank 3,500 Clearing charges 2,580 Octroi duty 2,400 Purchases 89,270 Closing stock as on 30.06.91: Raw materials Work-in-progress Finished goods 8,000 10,000 18,000

260

Ledger IV SECTION II PART A : VERY SHORT QUESTIONS 1. State whether the following statements are true of false.

Unit -

a. Outstanding expenses appearing in the trial balance are shown on the debit side of profit and loss account. b. Closing stock is valued at cost price or market price which ever is lower. c. Goods withdrawn by the proprietor for personal use will be debited to purchases account. d. Provision for discount on debtors is charged to profit and loss account. e. Prepaid expenses appearing in the trial balance sheet. f. Income received in advance is the liability of a firm.

2. What adjusting entries will you pass for the following. a. Closing stock b. Prepaid expenses c. Accrued incomes d. Salary outstanding e. Depreciation f. Interest on capital 3. Pass journal entries for the following ; a. Salary paid Rs.1,300/- out of which Rs.100/- is paid for the coming year. b. Interest received Rs.600/- out of which Rs.50/- is in respect of coming yer. c. Wages paid Rs.500/- and Rs.100/- is still to be paid d. Commission received Rs.300/- and Rs.100/- is accrued for the current year. e. Goods costing Rs.600/- are lost by fire against which no insurance is done. f. Goods costing Rs.200/- have been distributed as free samples.

261

Unit IV Ledger g. Goods worth Rs.500/- have been lost due to fire and an insurance claim of Rs.300/- has been settled. h. Depreciation @10% is to be provided on office furniture costing Rs.5,000/-. i. j. Provision for doubtful debt is to be maintained @ 10% on sundry debtors which stood at Rs.10,000/-. A bad debt of Rs.200/- is to be written off.

4. Pass adjusting entries and closing entries for the following: a. Salary Rs.100/- was paid last year for the current year. b. Wages paid Rs.50/- this year was for the last year. c. A commission of Rs.100/- received during this year was accrued last year. d. Current year's interest amounting to Rs.50/- was received last year in advance. 5. Pass journal entries during the year 1990. a. Rent prepaid on 31st Dec. 1989 for an amount of Rs.80/towards rent was paid during 1990 - Rs.500/-, out of which Rs.60/- is for 1991. b. Wages prepaid on 31st Dec.1989 amounted to Rs.30/-, Wages paid during 1990 Rs.600/- and Rs.100/- is outstanding for 1990. c. Salary outstanding on 31st Dec. 1989 amounted to Rs.300/Salary paid during the year 1990 Rs.600/-, out of which Rs.50/- is paid in advance for 1991. d. Repairs outstanding on 31st December 1989 amounted to Rs.100/-. Repairs paid during 1990 Rs.600 out of which Rs. 50 is paid in advance for 1991. e. Interest accrued on 31st Dec.1989 was Rs.300/-. Interest received during 1990 Rs.1,000/- and out of this Rs.100/- is for the year 1991.

262

Ledger IV f.

Unit -

Commission received in advance on 31st Dec. 1989 Rs.500/-. Commission received during 1990 amounted to Rs.1200/- and Rs.100/- still accrued for 1990.

g. The storekeeper reported the closing stock at Rs.5,000/- as on 31.12.90. 6. a. Calculate 5% provision for discount on debtors from the following: Debtors stood at the end before adjustment of bad debt Rs.10,000/-. Bad debt occurred amounting to Rs.1,000/-.10% provision for doubtful debt on debtors is to be maintained. b. Calculate 3% provision for discount on creditors which stood at Rs.6,000/- keeping in mind that an inward invoice of Rs.1,000/has not yet been recorded. SECTION III 1. Bad debt written off during 1990 was Rs.400/-. On 31.12.90 sundry debtors stood at Rs.10,000/-. Make a provision of 5% on debtors for doubtful debt. Show jounal entries and provision for doubtful debt A/c. (Ans. : Provision for doubtful debt account balance - Rs.500/-) 2. From the following Trial Balance (Extract) of Subhas as on 31.12.99, pass journal entries and prepare necessary ledger accounts. Also show the Profit & Loss account and Balance Sheet. Dr. Rs. Bad debt 400 Debtors 12,000 Provision for bad debt Cr. Rs. 500

Make a provision of 5% for bad debt on Debtors.

263

Unit IV Ledger 3. From the following information pass journal entries and necessary accounts in the books of Parida Traders. Trial balance (Extract) as on 31.12.99 Bad debt Debtors Bad debt reserve Dr. (Rs.) 300 15,000 Cr. (Rs.) 800

Further bad debt amounted to Rs.200/- and you are required to increase the reserve to 6% on debtors. 4. From the following information pass journal entries and necessary ledger accounts in the books of Gupta traders. Trial balance (extract) as on 31.12.90 Dr. Rs. Cr. Rs. Bad debt 1,400 Debtors 10,200 Reserve for d/d 1,000 Further bad debt amounted to Rs.200/- and reserve for doubtful debt is to be maintained at 3% on debtors. 5. On January 1, 1973, M/s Pankaj and Gopal had a bad debt st provisionof Rs.800/-. On 31 December 1973 the total debts amounted to Rs.20,000/-, out of which Rs.500/- were bad and had to be written off. The firm wants to maintain the bad debt provision at 5% of the debtors. On 31st Dec. 1974 the total debts amounted to Rs. 8,400 out of which Rs.400/- had to be written off as bad debts. The provision is to be maintained at 5% of the debtors. Show the Bad debt A/c. and Bad debt provision A/c. for 1973 and 1974.)

264

Ledger IV 6. Following figures P.Sashisekhar: are available from the

Unit -

books

of

Rs. Provision for doubtful debt on 1.1.1987 800 Provision for discount on debtors on 1.1.1987 430 Provision for discount on creditors on 1.1.1987 550 Closing stock was valued at Rs.4,600/-. Depreciate Building at 10% and provide Rs.130/- for unpaid salary. Rent prepaid was Rs.20/-. 8. From the following balances as found from the books of K.Jagdish, prepare final accounts : Rs. Capital Creditors Bill payable Sales Debtors Salaries Discount (Dr.) Building Loan from X 18,000 4,360 1,266 39,091 1,943 2,000 500 11,890 6,000 Postage Bad debt Interest (Dr.) Insurance Machinery Opening stock Purchases Wages Fixtures and fittings Rs. 136 144 648 209 5,000 4,973 31,046 2,150 8,078

Closing stock was valued at Rs.3,000/-, market price being Rs.3,500/-. Interest was outstanding Rs.120/- and wages paid in advance Rs.40/-. Depreciate building by 10%. 9. Prepare Trading, Profit and Loss Account and Balance Sheet of Ram Ratan from the following balances found as on 31st December 2004. Rs. Rs. Capital 7,200 Cash in hand 800 Machinery 1,400 Sales return 200 Salaries 1,200 Stock on Jan. 1 2,000 General Exp. 400 Drawings 800

265

Unit IV Ledger Sales 16,400 Wages 2,000 Purchases 8,000 Cartage-in 100 Rent 1,000 Cartage-out 4000 Purchase return 100 Advertising 400 Debtors 6,000 Creditors 1,000 Closing stock was valued at Rs.3,600/-. Bad debt amounted to Rs.500/-. Create 5% reserve for doubtful debt. Charge 5% interest on capital. Depreciate fixed assets by 10%. 10. From the following balances taken from the books of M/s. Arogyam prepare Trading, Profit and Loss Account for the year ended 30th June 1999 and Balance Sheet as on 30.06.1999. Rs. Rs. Stock (1.7.98) 3,100 Bad debt 1,000 Purchases 42,300 Carriage out 190 Sales 70,000 Discount (Dr.) 540 Returns in 1,170 Dep. on furniture 240 Wages 580 Furniture 2,160 Carriage in 320 Salary 1,200 Interest (Cr.) 140 Capital 20,000 Drawing 3,890 Land and building 10,500 Cash 2,155 Printing & stationery 1,800 Advertisement 2,400 Creditors 4,000 Motor van 14,000 Bill payable 1,505 Trade debtors 8,000 Stock on 30th June, 99 was valued at Rs.2,800/-. Further bad debt amounted to Rs.600/-. Provide 5% Reserve for doubtful debt on Debtors. Interest Rs.40/- was received in advance. Charge 6% interest on drawings. 11. From the following balances of Mr.G.Nayak prepare Final Accounts for the year ended 31st March 2001: Debit Balances Rs. Debit balances cont. Rs.

266

Ledger IV Cash Purchases Returns Furniture Electricity Postage Drawing Trvelling exp. Discount Bad debt 1,000 42,500 2,000 3,200 350 200 4,000 1,000 250 500 Printing Sundry debtors Investment Building Credit balances Capital Sales returns sundry creditors Provision of D/D

Unit 2,500 35,000 4,000 10,000 40,000 54,200 3,000 20,000 700

Transportation-inward 900

Plant and machinery 7,500

Salaries and wages 3,000

Closing stock was Rs.1,800/-. Goods worth Rs.600/- were gutted by fire. Further bad debt amounted to Rs.300/-. Create a reserve for bad and doubtful debts at 5%. 12. Following are the balances of Agrawal Stores on 31st Dec. 1998. Prepare Trading, Profit & Loss A/c. and Balance Sheet. Cash in hand Wages Purchase Sales Returns inward Free hold land Machinery Patent Salaries General exp. Rs. 270 1,315 23,340 49,390 340 5,000 10,000 3,750 7,500 1,500 Fuel and power Carriage on sales Carriage inward Stock, 1st Jan. 98 Building Drawings Capital Sundry debtors Creditors Bad debt Rs. 2,365 1,600 1,020 2,880 16,000 2,625 35,000 7,500 3,150 485

Stock on 31st Dec. 98 was Rs.3,200/-. Goods worth Rs.500/were destroyed by fire for which the claim was settled at

267

Unit IV Ledger Rs.400/-. Rs.1,000/- spent of extension of the building was debited to wages account. Further bad debt amounted to Rs.500/-. A reserve of 5% on debtors is to be set aside for doubtful debt. Depreciate building at 10%. (Ans: G.P Rs.23,080/-, N.P. Rs.9,045/-, B/S Rs.44,570/-) 13. From the following balances extracted from the books of Dhanwantari Pharmacy, prepare Trading and Profit and Loss Account for the year and Balances Sheet as on 31st Dec. 2000. Debit Balances Rs. Land and building 22,000 Adjusted purchases 36,000 Closing stock 8,000 Drawings 2,000 Carriage inward 1,000 Cash in hand 600 6% Loan to K 10,000 Sundry exp. 900 Bills receivable 5,000 Sundry debtors 6,000 Bad debt 800 Debit balances cont. Rs. Salaries 2,400 Rent and taxes 1,200 Wages 1,600 Postage & Stationery 200 Credit balances Sundry creditors 7,600 Bank overdraft 10,000 Bills payable 3,100 Return outward 2,200 Sales 50,000 Capital 24,800

Postage and stationery in hand on 31st Dec. 2000 was Rs.50/-. Further bad debt was estimated at Rs.300/-. Create reserve for doubtful debt 10% on debtors. Goods worth Rs.200/- were distributed as free samples. 14. The following is the trial balance of Mr. A. as on 31.12.99. Prepare Trading and Profit and Loss Account and Balance Sheet. Debit Balances Rs. Opening stock 8,000 Purchases 1,26,000 Wages 56,500 Salaries 16,000 Carriage inwards 3,050 Rent and rates 5,200 Insurance 1,320 Debit balances cont. Rs. Furniture 3,350 general expenses 2,600 Cash in hand 1,930 Bad debts 1,020 Credit Balances Sales 2,20,000 Capital 1,45,600

268

Ledger IV Machinery Buildings Debtors 52,000 67,000 44,000 Creditors Bank overdraft

Unit 20,000 15,000

Adjustments : 1. Closing stock Rs.20,000/-. 2. Depreciate machinery at 10% p.a. 3. Reserve 5% for bad and doubtful debt on debtors. 4. Provide discount on debtors and creditors at 2%. 5. Rent unpaid Rs.400/- and Insurance prepaid Rs.120/-. 15. From the following Trial balance, prepare the final accounts for the year ended 31.12.2004 on behalf of Sudha Medicals. Rs. Drawings Office salaries 14,500 19,860 Purchases returns Sales Rs. Proprietors capital 2,80,000 4,290 5,72,140 780 19,710 5,000 3,980 2,190 62,840 6,660 22,730 2,940

Machinery and Plant 1,28,400 Purchases Sales returns Advertisement Factory fuel Office lighting Carriage inwards 2,92,620 3,210 32,760 4,280 280 4,310

Stock on 1st Jan. '0472,940 Mortgage loan (Cr.) 85,000 Discount A/c. (Cr.) Sundry Creditors Office furniture Machinery repairs Bad debts Sundry Debtors Cash at bank Office exp.

Manufacturing wages 1,23,140 Factory Rates and Ins. 2,220

Royalties (Direct charge) 4,710

Freehold factory 1,27,500 Bills receivable Interest (Dr.) 17,860 4,280

Office rent and taxes 2,710 Cash in hand

Before preparing the final account, the following adjustments must be made :

269

Unit IV Ledger a. Provide depreciation on machinery and plant at 10% and office furniture at 5%. b. The stock in hand at the end of the year was valued at Rs. 87,210. c. Outstanding liabilities advertisement Rs. 920. for wages Rs. 3,210 and

d. Make a reserve of 5% of Sundry debtors. 16. The following is the Trial Balance extracted from the books of Susruta Medical Hall as on 31.12.2003. Rs. Sundry debtors General trade exp Factory rent Purchases Carriage Sales return 30,000 6,000 1,250 50,000 2,500 1,500 Sales Sundry Creditors Interest received Prov. For bad debts Capital A/c. Freehold premises Balances at Bank Stock on 1.1.2003 Discount allowed Rates, Rs. 1,25,000 5,000 600 900 1,000 95,000 30,000 1,500 1,050 25,000 1,100

Manufacturing wages 10,000Discount received Fixtures and fittings 2,000

Horses and vehicles 10,000 Cash balance Travelling expenses 3,000 Office salaries Drawings 600 Adjustments : 1. 2. 3. 11,000 12,000

taxes and insurance 1,000

Plant and machinery 30,000 Purchase returns

Stock in hand on 31.12.2003 amounted to Rs.37,500/Allow interest on capital at 6% per annum. Write off depreciation at 10% on plant and machinery horses and vehicles and fixtures and fittings.

270

Ledger IV 4.

Unit -

Increase the provision for Bad debts by Rs.500 Prepare Trading and Profit and Loss A/c for the year ended 31.12.2003 and a Balance Sheet as on that date.

17. Following are the balances of Laxmi Traders. Prepare Trading and Profit and Loss Account for the year ended 31st March, 2005 and also the Balances Sheet as on that date. Rs. Rs. Stock (1.4.04) 3,200 Debtors 4,500 Purchases 48,000 Creditors 7,000 Sales return 560 Prov. For doubtful debt 400 Wages 1,500 Purchases returns 1,100 Salary 2,200 Sales 70,000 Machinery 6,000 Discount (Cr.) 450 Land & Building 14,000 Delivery van 8,000 Carriage inward 430 Office furniture 1,800 Carriage on sales 260 Dep. of office furniture 200 Insurance premium 300 Bad debt 300 Drawings 4,200 Adjustments : 1. 2. 3. 4. 5. Closing stock on 31st March, '05 was valued at Rs. 2,800. Provide a further bad debt of Rs. 400 and create provision of 10% for Doubtful debt of Debtors. Depreciate Land and Building at 5% delivery van at 10% and Machinery at 10% per annum. There is an amount of Rs.300/- for wages outstanding. A machine costing Rs.2,000/- was purchased on 1.1.05. N.P. Rs.14,740/-; B/S Total

(Ans: G.P. Rs.19,910/-; Rs.34,340/-) Hints :

1. As capital is not given in the question, the trial balance is to be

271

Unit IV Ledger prepared and the balancing figure will be capital i.e. Rs.16,500/-. 2. Calculation of depreciation on machinery Rs. Old machinery 4,000 Add additions during the year on 1.1.2003 2,0006,000 Less Depreciation : Depreciation of old machinery @ 10% 400 Depreciation of the new machinery For 3 months @ 10% 50450 5,500 18. From the following Trial Balance of Mr. Lalu Advani, prepare final accounts for the year ended on 31.12.04 with the help of the given adjustments. Debit balances Rs. Debit balances Cont. Rs. Adjusted purchases 58,000 Drawings 5,000 Debtors 17,500 Bill receivable 2,300 Buildings 15,000 Cash in hand 2,350 Plant 32,000 Cash at bank 2,100 Goodwill 4,000 Discount 2,500 Stock (31.Dec.04) 3,500 Credit balances Salary 2,400 Sales 1,00,000 Wages 4,800 Creditors 12,000 Ins. Prem. on purchases 600Capital 40,000 Carriage inward 1,400 Dividend 1,800 Carriage outwards 1,600 Discount 2,200 Bad debt 2,750 Rent 1,200 Bills payable 600 Adjustment : 1. 2. Depreciate plant @ 10% and building @ 5%. Write off goodwill by 10%.

2. Provide a further bad debt of Rs. 1,500 and create provision for bad debt @ 5% on Sundry debtors. 4. Wages outstanding amounts to Rs. 1,200.

272

Ledger IV 5. Allow interest on capital @ 5% per annum. N.P. Rs.21,300/-;

Unit -

(Ans: G.P. Rs.34,000/-; Rs.72,100/-) Hints: 1.

B/S

Total

It is a case of adjusted purchases and closing stock appears in the trial balance. Hence closing stock will appear in the balance sheet only.

3. Insurance premium on purchases is a direct expense. So it will be debited to trading account. 19. From the following balances prepare, Trading and Profit and Loss Account for the year ended 30th September, 1984 and Balance Sheet as on that date. Balances Rs. As Drawings 1,055 Plant and machinery 2,880 Sundry creditors 5,918 6% Loan account (Cr.) 2,000 Sales Return 278 Commission received 563 Salaries 1,100 Bank charges 8 Cash 53 Reparis and renewals 337 Bad debt 362 Fixture and fittings 877 Interest and discount (Dr.)607 35,l643

Balances Rs. As capital 11,940 Bills receivable 1,000 Sundry debtors 6,200 (including B for dish. Bills for Rs.) 100 Wages 4,000 Puchases 25,659 Rent and taxes 564 st Oct. 1983)8,967 Stock (1 Travelling exp 180 Ins. (including premium of Rs.30 paid up to 31.03.8540 Bank 1,897 Sales Adjustments : 1. 2. 3.

Stock on 30th Sept. 1984 was Rs.12,896/-. Write off half of Bs dishonoured bill. Depreciate Plant and Machinery by 5% and Fixture and fittings by 10%.

273

Unit IV Ledger 4. 5. Interest on loan for 2 months has been paid in advance. The Manager is entitled to a commission of 5% of the net profit before charging such commission. (Ans: G.P. Rs.9l,635/-; N.P. Rs.6,415/-; B/S Rs.25,556/-) 20. The Following items appeared in the Trial Balance of a shop as on 30th June 1984. Rs. Rs. Opening stock 36,000 Miscellaneous income 566 Sundry Creditors 11,000 Capital Account 80,000 Sundry debtors 28,000 Commission (Cr.) 2,500 Bill receivable 16,000 Reserve for doubtful debt850 Carriage on purchases 1,200 Purchases 77,000 Wages 13,500 Plant 50,000 Salaries 9,900 Sales 1,59,050 Bills payable 6,500 Furniture 9,600 Telephone expenses 900 Sundry expenses 900 Repairs 450 Cash 17,016 Prepare Trading account, Profit and Loss Account and Balance Sheet of the shop after taking into consideration the following : 1. Closing stock was valued at Rs. 51,324. 2. Unpaid expenses : Rs. Salary 1,600 Wages 2,100 Rent 4,200 3. Write off Rs.400/- on Debtors as bad debts and increase the balance of the Reserve for doubtful debt to 2.5% on Debtors. 4. Write off 10% on plant and 7.5% on furniture as depreciation. 5. Managers comission is to be paid at 4% on net profit after charging such commission.

21. From the following balances found from the books of Mr. K prepare Final Accounts :

274

Ledger IV Rs. Land and Building 6,000 Plant and machinery 5,000 Motor van 3,100 Sundry assets 2,300 Cash in hand 100 Cash at bank 1,200 Drawings 1,350 Capital 7,900 Investments 450 Opening stock 1,200 Wages 2,000 Managers commission100 Purchases 14,200 Audit fees 300

Unit Rs. Sales 34,000 Creditors 4,000 Debtors 4,300 Salaries 2,100 Dep. on machinery 200 Telegrams 130 Carriage out 220 Rent (Dr.) 450 Repairs 300 Bad debt 100 Interest (Cr.) 150 Commission (Cr.) 50 Return outward 100 Bank charges 1,100

Adjustments : i. Stock at the end was valued at Rs.2,100/-. ii. A fire occurred in the godown and goods costing Rs.400/were lost by fire for which no insurance was done. iii. Further bad debt amount to Rs.400/-. Provide 10% reserve for doubtful debt on debtors. iv. Included in purchases an almirah for office of Rs.300/-. v. Goods distributed for free samples worth Rs.150/-. 22. Following trial balance was extracted from the books of Mr. Rajib. Prepare final accounts for the year ending 31st Dec. 1989. Debit Balances Machinery Furniture Drawings Cash Opening stock Rs. 4,000 1,000 250 160 1,120 Debit balances cont. Rs. Salaries Dep. on furniture Bad debt Legal charges General expenses 1,450 100 400 150 100

275

Unit IV Ledger Bills receivable Rent Repairs Insurance Stationery Wages Carriage inward Carriage outward 120 550 450 700 200 1,100 400 600 Investments Purchases Debtors Credit balances Interest Capital Creditors Sales 350 4,000 4,050 19,080 1,120 10,160 2,500

Factory, power & light 1,050 Reserve for doubtful debt 200

Additional information : 1. Closing stock was valued at Rs.2,600/-. 2. Machinery is to be depreciated at 10%. 3. Carry forward unimpaired insurance Rs.50/-. 4. Interest on drawings Rs.20/-. 5. Rs.100/- paid for machinery erection was debited to wages account. (Ans: G.P. Rs.7,950/-; N.P. Rs.3,460/-; B/S Rs.11,240/-)

276

Ledger IV

Unit -

23. From the following trial balance and adjustments of Mr. Sharma, prepare final accounts. Debit Balances Rs. Drawings 900 Cash 440 Rent and rates 1,140 Plant and machinery 6,200 Tools and equipments 970 Building 9,000 Debtors 13,000 Returns inward 215 Carriage inward 62 Debit balances cont. Rs. Bills receivable 500 Purchases 30,000 Investment 3,000 Goodwill 2,000 Wages 798 Credit balances Capital 15,000 Return outward 300 6% Loan from Y 3,200 2,000 45,000 2,000 1000

Salaries 8,600 Creditors 13,000 Opening stock 1,465 Bills payable 6% Loan to X 2,000 Sales Furniture 210 Rent Interest 100 Interest Adjustments : 1. Rent receivable amounted to Rs.90/-.

2. Closing stock (cost price) Rs.2,300/- (Market value Rs.2,500/-). 3. Depreciate plant and machinery by 10% and building by 5%. 4. Tools and equipments were valued at Rs.900/- at the end of the year. 5. The manager was to get commission @ 10% on net profit before charging such commission. 24. Following are the balances found from the books of Mr. A on 30. 6. 1988. Prepare final accounts : Rs. Cash at bank 1,525 Purchases Rs. 18,500

277

Unit IV Ledger Freight inwards Carriage outwards Sales Capital Returns outward Creditors Insurance Debtors Stock (30.6.88) Income tax Adjustments : 1. Depreciate plant and machinery by 15% and land and building by 5%. 2. Insurance premium expires on 31.12.88. 3. Write off further bad debt Rs. 100 and create 5% provision for doubtful debt on debtors. 4. A piece of office furniture costing Rs. 400 sold for Rs. 450 has been included in sales. 25. Following are the balances found from the books of Man Mohan as on 31.3.1999 Considering the adjustments give below, prepare final accounts. Debit Balances Stock on 1.4.89 Purchases Drawings Octroi duty Machinery Sales return Rs. 1,600 72,500 4,200 1.190 12,000 500 Debit balances cont. Rs. Cash in hand Wages Bad debt Debtors Insurance Credit balances Creditors 8,200 310 2,200 300 6,000 1,200 1,400 250 32,480 14,500 500 10,600 900 4,600 2,085 900 Trade expenses Return inward 2,270 150

Plant and machinery 11,600 Prov. for doubtful debt 1,500 Discount (Cr.) Wages Salaries Land and building Furniture Bad debt 1,000 2,550 3,850 7,000 2,500 500

Free hold property 48,000

278

Ledger IV Loan to A Salaries Furniture Motor Van Adjustments: 1. Closing stock was valued at Rs.4,200/-. 3,000 3,400 6,000 12,000 Sales Capital

Unit 1,38,000 27,000

Reserve for bad debt 1,200

2. Satish, a customer who owed Rs.420/- became insolvent. 3. Sales include goods sent to customers for approval Rs.520/-. Sales are made at cost plus 30%. 4. Goods costing Rs.400/were taken by owner and Rs.1,200/- distributed for free samples. 5. The motor van which depreciates 20% p.a was used half of times for personal purposes of the owner. 26. Following are the balances available for the books of a trader. Prepare final accounts. Rs. Opening stock Purchases Wages Sales return Salary Bad debt Advertising 1,600 45,000 2,100 340 2,400 320 400 Bills payable Creditors Capital Sales De3btors Bills receivable Patents Cash in hand Rs. Provision for doubtful debt300 340 3,500 1,600 60,000 4,000 450 1,000 2,000 980

Land and building 18,000 Dept. on furniture 400

Furniture and fittings 1,600 Goodwill

Additional information :

279

Unit IV Ledger 1. Closing stock at cost price is Rs.2300/- but the market value is Rs.2000/-. 2. Goods costing Rs.300/- is consumed by owner for self. 3. Bad debt amounted to Rs.200/-. Provide 10% for doubtful debt and 5% for discount on debtors. (Ans: G.P. Rs.13,260/-; N.P. Rs.9,289/-; B/S Rs.29,279/-) Hints : Prepare trial balance. It shows a suspense A/c of Rs.450/(Cr.). Put it on the liability side of the B/s. 27. From the following balance prepared from the books of Mr. Rajani Kanta, prepare Trading, P/L. A/c account and balance sheet. Debit Balances Opening stock Purchases Returns Wages & Salaries Plant Patents Goodwill Office furniture Advertisment Bills receivable Building Bad debt Adjustment : 1. Closing stock Rs.150/Rs. 100 1,110 30 120 440 150 200 140 35 40 2,000 45 Debit balances cont. Rs. Debtors Drawings Rates and taxes Cash Credit balances Sundry creditors Bills payable Prov. for doubtful debt Capital Sales Returns 425 80 40 2,500 2,100 30 310 400 35 20

280

Ledger IV

Unit -

2. Further bad debt amounted to Rs.10/- and create 10% for reserve for doubtful debt on debtors. 3. Write off patents by 10% and goodwill by 20% 4. Purchases include private purchase of owner Rs.80/-. (Ans. G.P. Rs.1,000/-; N.P. Rs.830/-; B/S Rs.3,355/-) 28. Prepare Trading and Profit & Loss Account and Balance Sheet for the year ending 30th June, 1990 in the book of Universal Traders. Debit Balances Wages Salary Insurance premium (Up to 31.12.90) Debtors Building 5% Loan to A (on 1.1.88) Goodwill Sales return Carriage inward Carriage outward Stock (30.06.90) Adjustments : 1. The traders usually charge 5% interest on capital. 2,000 1,200 300 400 2,800 12,000 10,000 5,000 Rs. 8,000 6,000 600 Debit balances cont. Rs. 1,200 1,600 500 800 500 100 79,900 20,000 700 1,000 1,000 10,000 Cash Prepaid wages Bad debt Credit balances Salary outstanding Interest from A Sales Capital Sundry creditors Bills payable Bank overdraft

Adjusted purchases 60,800 Rent

Reserve for bad debt

281

Unit IV Ledger 2. Depreciate building at 5% p.a. 3. Tansfer 5% of the net profit to Reserve fund (Ans: G.P. Rs.96,000/-; N.P. Rs.332/-; B/S Rs.33,850/-) 29. From the following Trial Balance, prepare Trading and Profit & Loss Account for the year ending 30.06.1990 and Balance Sheet as on that date. Debit Balances Stock (1.7.1989) Purchases Drawings Carriage inwards Carriage outwards Wages Salary Rent Bad debt Debtors Rs. 2,400 63,000 4,000 1,800 1,200 1,650 2,100 1,800 240 6,000 Debit Balances cont. Rs. Cash in hand Bill receivable Credit balance Rent outstanding Reserve for bad debt Creditors Bills payable Capital Sales 600 400 5,000 480 15,000 76,760 450 500 1,100

Plant and machinery 12,000 Trading expenses

Additional information : 1. Closing stock was valued at Rs.1800/2. There was a further bad debt of Rs.60/-. 3. Create 8% Reserve for bad debt on debtors 4. Sujit, the works manager is to be given a commission of 5% of net profit after charging commission of Ranjit, the General Manager and his own. 5. Ranjit, the General Manager is to be given a commission of 10% on net profit after charging commission of Sujit and his own.

282

Ledger IV

Unit -

30. From the following Trial Balance and other particulars, prepare final account for the year ending 31st Dec. 1990. Debit Balances Drawings Bank balance Motor vehicles Debtors Purchases Opening stock Bad debt Repairs Adjustments: 1. Stock in hand as on 31st Dec.1990 Rs.2,80,000/2. Sundry creditors include a claim for damages of Rs.20,000/made last year. This was settled during this year at Rs.15,400/3. Provision for bad debt is to be reduced by Rs.1,500/- for the coming year. 4. Stock of stationery in hand on 31.12.90 Rs.2,000/(Ans: G.P. Rs.5,71,000/-; N.P. Rs.2,67,100/-; B/s Rs.16,97,500/-) 31. From the following particulars, prepare final accounts in the books of Mr. Kash for the year ending 30.06.1999. Debit Balances Sundry debtors Cahs in hand Rs. 52,000 2,392 Debit balances cont. Rs. Creditors Furniture 22,000 3,500 Rs. 1,01,000 1,75,000 1,48,000 2,96,000 24,00,000 2,40,000 11,400 47,600 Debit balances cont. Rs. Wages and salaries2,29,000 Other expenses Rent and rates P/L account General reserve 99,000 16,000 1,24,000 1,80,000 31,60,000 10,00,000 2,32,000 Administration exp.1,31,400

Printing & Stationery 6,600 Credit balances

Reserve for bad debt 5,000 Capital Creditors

Freehold premises8,00,000 Sales

283

Unit IV Ledger Motor car Sales (paid on 1.4.99) General expenses Wages Fuel and power Drawings Adjustments : 1. Work manager is to be paid 2% of the gross profit. 2. Loose tools were valued at Rs.5,000/- at the end of the year. 3. Sales book was overcast by Rs.2,000/4. Wages outstanding Rs.2,000/- thought included in wages account but was not included in the Trial Balance. 5. Bills receivable dishonoured Rs.500/6. Provide 5% on debtors for doubtful debt (Ans : G.P. Rs.96,760/-; N.P. Rs.75,792/-; B/S Rs.1,25,667/-) 2,680 28,600 20,000 9,630 22,000 2,92,000 Purchases Sales return Bills receivable Machinery Cash at bank Carriage Capital Bank overdraft 1,40,000 2,600 4,000 24,000 2,200 2,040 20,000 13,570.

Insurance premium 1,400

284

Ledger IV UNIT - IX CAPITAL AND REVENUE In business, we incur expenditure on two types of items:

Unit -

(i) routine items like stationery, postage, repairs, salaries etc. where the benefit is available for short period; and (ii) fixed assets like machineries, building, furniture etc. whose benefit is available over a number of years. In accounting sense, the first category of expenditure is called Revenue expenditure and the second one is called as Capital expenditure. All revenue expenditure and revenue receipts are taken to Trading and Profit and Loss Account. Profit can be found out by deducting the total revenue expenditure from the total revenue receipts of a period. All capital expenditure and capital receipts are taken to the Balance sheet. So if a revenue item is treated as capital item or vice-versa, it will affect the profit or loss of a period and also the Balance Sheet will not exhibit the true financial position. If a revenue expenditure is treated as capital expenditure, profit will be more. In the reverse case, profit will be less. If a revenue receipt is treated as capital receipt, profit will be less and in the reverse case, profit will be more. So it is worthwhile to make a clear distinction between revenue and capital item. Revenue Expenditure : When the expenditure is incurred in one accounting year but the benefit of this expenditure is consumed during that year it is termed as revenue expenditure. These expenses are usually recurring in nature. Characteristics : 1. The expenses must be incurred in day-to-day conduct of business. 2. The expenditure must have incurred in one accounting year. 3. The whole benefit of such expenditure must have been consumed in the same year.

285

Unit IV Ledger 4. These expenses are usually but not necessarily recurring in nature. 5. The purpose of such expenditure is to keep the business going and to keep the fixed assets in running condition. Examples : The following are some of the examples of revenue expenditure: 1. Expenditure incurred in purchasing goods for resale 2. Expenditure incurred in the production of goods such as cost of raw materials, labour and other expenses 3. Expenditure incurred to keep the assets in running condition i.e. normal repairs and renewals of plant and machinery etc. 4. Depreciation on fixed assets, loss on sale of fixed assets and losses of all categories. 5. Expenditure incurred in day-to-day administration of the business such as salary, rent, insurance, telephone, stationery and printing, interest on loan and other trade expenses. 6. Expenditure incurred in selling and distribution such as salary and commission to salesman, free samples and gifts, maintenance of vehicles etc. Accounting Treatment : All items of revenue expenditure will go to the debit side of Trading and Profit and Loss Account. Capital Expenditure : This expenditure is incurred in one accounting year. The benefit of this is to be derived in coming several years. This is called Capital Expenditure. These expenses are usually non-recurring in nature. Characteristics : 1. The expenditure must have been incurred in the current accounting year. 2. The full benefit of such expenditure is not exhausted in that year. That means the benefit of such expenditure will be derivable for some more years in future.

286

Ledger IV

Unit -

3. The purpose of incurring such expenditure is to increase the earning capacity of the business. 4. These expenditures are usually non-recurring in nature. Examples : Some examples of capital expenditure are given below : 1. Expenditure incurred in acquiring fixed assets such as land, building, plant, furniture and fixture, goodwill, patent, office equipments, copy right, etc. 2. Expenditure incurred on installation of fixed assets, such as wages on installation of machinery, cost of installing fan, air cooler, development cost of mines, legal expenses paid on acquiring fixed assets, repairs to second hand machinery etc. 3. Any addition, alteration or extension to fixed assets which increases the life and earning capacity of the business such as cost of increasing the sitting capacity of a cinema hall, cost of replacing petrol driven vehicle by a diesel driven vehicle etc. 4. Cost of experiments ultimately resulting in acquisition of patent. Accounting Treatment : Unconsumed portion of the capital expenditure will appear in the asset side of the Balance Sheet. The part of the expenditure which is consumed in the current year is treated as revenue expenditure and charged to Profit and Loss Account.

Distinction between Revenue expenditure and Capital Expenditure TABLE 145

Deferred Revenue Expenditure:

287

Unit IV Ledger Sometimes, certain expenditure which is normally treated as revenue may be unusually heavy. Its benefit is likely to be available in more than one year. It is considered appropriate to spread this expenditure over a number of accounting years. Hence, it is capitalised and only a portion of it is treated as revenue and is charged to Profit & Loss Account of the current year. The balance is shown as an asset which will be written off during the coming years. Such an expenditure is called Deferred Revenue Expenditure because the charge to Profit & Loss Account is deferred to future years. Characteristics: 1. The expenditure is revenue in nature because it is essential for carrying on the business. 2. It involves huge amount. 3. The benefit of such expenditure will be derived for coming years. 4. These expenditures do not help to increase the earning capacity of a business. Examples : The examples of such expenditure are heavy advertisement, preliminary expenses, discount on issue of shares and debentures, brokerage on issue of shares and debentures, exceptional repairs, cost of research and development, cost of removing the business to a better site etc. Accounting Treatment : These expenses involve huge amount. So if total expenditure is charged to the year of occurrence it will wipe out all or a major portion of the profit. Moreover, as the benefit of such expenditure will accrue for some coming years it is rather reasonable to apportion the total expenditure over some years suitably. So a part of such expenditure is taken to profit and loss account and the balance is shown on the asset side of the Balance sheet.

288

Ledger IV

Unit -

For example, Rs.16,000/- is spent on advertisement this year and it is expected that the benefit will accrue for 10 years. So Rs.1,600 /(16,000/10) will be charged to the profit and loss account this year and Rs. 14,400 (16,000 1,600) will be shown on the Balance sheet as an asset. Illustration - I : Answer with proper reasons whether the following expenditure are revenue or capital. i. ii. Goods worth Rs.2,00,000/- acquired to sell them at a higher price. Rent and telephone charges paid Rs.250/-

iii. Wages paid for the installation of machinery Rs.50/iv. Purchase of patent right Rs.14,000/v. Expenditure on repairs of furniture Rs.300/vi. Repair charges incurred on a second hand machinery Rs.555/vii. The seating capacity of a cinema hall increased by 15 seats. Expenditure in this connection is Rs.1,500/viii. Cost of white washing of the building Rs.88/Solution : i. It is a revenue expenditure because the purpose of such expenditure is to keep the business going. Moreover, the benefit of such expenditure is consumed in one accounting year i.e. goods purchased are usually sold in that year. These are revenue expenditures because these are necessary for day to day administration. Rent and telephone charges of one year are paid in that year i.e. the benefit of such expenditure is consumed in one year.

ii.

iii. As wage is paid in connection with the acquisition of a fixed asset, it is a capital expenditure. iv. The purpose of such purchase is acquisition of fixed asset.So it is a revenue expenditure.

289

Unit IV Ledger v. The purpose of such repairs is to keep the asset in running condition. So it is a revenue expenditure.

vi. Here the expenditure is in connection with the acquisition of a fixed asset. So it is a capital expenditure. vii. It is a capital expenditure because such expenditure increases the earning capacity of the business. If the number of seats increases it will bring more return. viii. White washing does not increase the earning capacity of the business. It is necessary to maintain the building. So it is a revenue expenditure. Illustration - II State whether the following items are revenue, capital or deferred revenue with reasons and also state how these items will be treated in accounts. i. ii. Lawyers fee paid Rs.150/- while acquiring a fixed asset New tyre purchased for an old car Rs.1,000/-

iii. Expenditure on advertisement Rs.14,000/-. The benefit of such expenditure will arise for 10 years. iv. Repairs to factory shed Rs.777/v. Depreciation on machinery Rs.200/vi. The petrol engine of a car is replaced by a diesel engine for Rs.12,000/-. vii. Wages paid Rs.2,000/viii. Depreciated value of machine is Rs.8,000/-. The machine is sold for Rs.3,000/-. Solution : i. Any expenditure incurred while acquiring a fixed asset is capital expenditure. It is added to the cost of the asset and shown in the Balance sheet. Purchase of a new tyre does not enhance the earning capacity of the car, hence it is a revenue expenditure.It will be charged to debit side of Profit and Loss Account.

ii.

290

Ledger IV

Unit -

iii. It is a deferred revenue expenditure. It is a revenue item because advertisement is necessary for every business. As the amount involved is large it is better to spread the total expenditure over some years, i.e.; 10 years. Here Rs.1,400/- (1/10 x 14,000) will be shown in the profit and loss account and the balance Rs.12,600/- will be shown in the Balance Sheet as asset. iv. This is necessary for the up-keepment of the factory shed, hence a revenue expenditure. Rs.777/- will be charged to debit side of profit and loss account. v. This represents and used portion of the asset in one year. So it is a revenue expenditure. Rs.200/- will be shown on the debit side of profit and loss account.

vi. The purpose of such replacement is to reduce the cost which willincrease profit. So expenditure on replacement of a petrol engine by a diesel one is a capital expenditure. This will be shown in the Balance Sheet as an asset. vii. The expenditure is necessary in connection with production and the benefit of such expenditure is consumed in the year of occurrence. So it is a revenue expenditure. Rs.2,000/- will be shown on the debit side of Trading Account. viii. Loss on sale of machinery is a revenue expenditure. All losses are treated as revenue items and are charged to Profit and Loss Account in the year of loss. Loss on sale = Depreciated value Sales value = Rs.5000/Rs.5,000/- will be shown in the debit side of Profit and Loss account. Illustration III Mention whether the following items are revenue or capital in nature with proper reason. i. Cost of repairing factory Rs.30,000/-. 8000 3000 =

291

Unit IV Ledger ii. Rs.15,000/- is spent on transferring the business to a better site.

iii. Rs.300/- spent on the replacement of worn out part of a machine. iv. Remodelling and decoration of a cinema hall Rs.2,000/which does not increase the seating capacity. v. Compensation paid to an employee Rs.10,000/- for the retrenchment.

vi. Expenditure on removal of stock from old godown to the new Rs.3,000/-. vii. Expenditure on research and development Rs. 5,000. Solution : i. It is a revenue item because it is a necessity. But as the sum involved is large it should be treated as deferred revenue expenditure which will be written of to profit and loss account for some years. This is a case of deferred revenue expenditure. It is a revenue item because this expenditure is necessary for carrying the business. But as the sum involved is large it is better to treat it as deferred revenue expenditure.

ii.

iii. It is a revenue expenditure as it is necessary to keep the machine running. iv. It is a revenue expenditure because it does not result in increase in earning capacity. v. Compensation for the loss of service is paid in lieu of salary. So it is a revenue item. But is better to treat it as deferred item if the amount involved is large.

vi. It is a revenue expenditure as it is necessary to transfer the stock to carry on business. vii. Now-a-days due to keen competition research on new products has become a necessity. It is a revenue expenditure. Moreover as the research result is uncertain it is better to treat it as revenue expenditure (conservative principal). However, if there is a reasonable degree of

292

Ledger IV

Unit -

certainty regarding the success it will be wise to spread the research cost over the expected period of benefit, by treating it as deferred revenue expenditure. Revenue Receipt : These are the amount received during the ordinary and regular course of business. Examples : Examples of such receipts are : Money obtained from sale of goods, interest on investment, interest on deposits , discount received, rental of building, dividend, commission, profit on sale of fixed assets etc. These receipts are usually but not necessarily recurring in nature. Accounting Treatment : All revenue receipts are treated as incomes and taken to the credit side of the Trading and Profit and Loss account. Capital Receipt : When money which is received not in ordinary or regular course of a business is called capital receipts. Examples : Examples of such receipts are Capital contributed by the owner, money from issue of shares in case of company, money obtained from issue of debenture, money from sale of fixed assets (but the profit on sale will be treated as revenue receipts), money from sale of investment etc. These receipts are usually non-recurring in nature. Accounting Treatment : All capital receipts will go to the Balance Sheet because they either increase a liability or reduce an asset and do not affect the Profit and Loss account. Revenue Profits: These are the profits which are earned in the normal or ordinary course of business. Examples: Profits from regular sale of goods, income from investments, etc.

293

Unit IV Ledger Accounting Treatment: Revenue profits are credited to Profit and Loss account. Capital Profits: These are the profits which are not earned in the course of regular trading. Examples: Sale of fixed assets at profit, shares issued at premium, etc. Accounting Treatment: Capital profits are transferred to capital reserve and shown in Balance Sheet. Revenue Losses: These are the losses that arise during the normal course of business. Accounting Treatment: This is charged to Profit and Loss Account of the year in which such loss arises. Capital Loss: These are the losses which arise on account of (i) selling some fixed assets at loss or (ii) on issue of shares at a discount. Accounting Treatment: Capital losses are at first set off against capital profits. However, if amount of capital loss is heavy and capital profits are not available for writing it off, then the same is spread over a number of years. It will be charged to Profit & Loss Account in instalments. Illustration IV : State whether the following are revenue receipts or capital receipts. i. Rs.1,00,000/- received on issue of shares ii. Rs.2,50,000/- received on sale of goods iii. Discount received Rs.550/-

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iv. Depreciated value of a machine was Rs.6,000/- and it was sold for Rs.5,000/-. v. Investment sold for Rs.15,000/-, profit on sale is Rs.2,000/vi. Money received from sale of building Rs.50,000/vii. Interest received on fixed deposits Rs.250/Solution : i. It is a capital receipt as the money is received not in ordinary course of business. Shares are issued to raise capital and it occurs very rarely. It is a revenue, receipt as the money is received in ordinary course of business. Every year goods are purchased and sold. So the money is received in usual course of business.

ii.

iii. Discount is received at the time of purchase of goods. As purchase is a usual business activity, discount on such purchases is revenue receipt. iv. Rs.5,000/- is a capital receipt because the receipt has arisen from the sale of a machine. Rs.1,000/- (6,000 5,000) is the loss on sale of machine and is treated as revenue expenditure. v. Investment is sold for Rs.15,000/-. Profit on sale i.e., Rs. 2,000/- is a revenue receipt and the balance i.e. Rs.13,000/is a capital receipt.

vi. Money received from sale of fixed assets are capital receipts. So Rs.50,000/- received from the sale of a building is a capital receipt. vii. Interest on fixed deposits Rs.250/- is a revenue receipt.

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Unit IV Ledger MODEL QUESTIONS PART A : VERY SHORT QUESTIONS 1. Answer the following questions in one/two sentences. a) What is Capital Expenditure? b) What is Revenue Expenditure? c) Give two examples of Capital Expenditure. d) Give two examples of Revenue expenditure. e) Give any two characteristics of Revenue expenditure. f) Give the accounting treatment of revenue expenditure.

g) Give two characteristics of capital expenditure. h) Give the accounting treatment of capital expenditure. i) j) What is Deferred Revenue Expenditure? Give any two characteristics of deferred revenue expenditure. Give the accounting treatment of deferred revenue expenditure

k) Give examples of deferred revenue expenditure. l)

m) What is Revenue Receipt? n) What is Capital Receipt? o) What is Capital Profit? p) What is Revenue Profit? 2. State whether the following are true or false a. Any expenditure, the benefit of which is consumed in the current year is a capital expenditure. b. Money received from sale of goods is a revenue receipt.

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Ledger IV c.

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Wages on erection of machinery is a capital expenditure.

d. Any expenditure whose benefit will be received from some coming years is revenue in nature. e. Loss on sale of machinery is a capital item. f. Carriage on purchase of machinery is a revenue item. g. Any expenditure incurred for the maintenance of an asset is termed as revenue expenditure. 3. Choose the correct alternative from the following and complete the answer. a. An expenditure is a revenue expenditure because : i. ii. the sum involved is small It benefits the current year.

iii. the benefit of such expenditure will occur for some years to come. b. An expenditure is a capital expenditure because. i. ii. The sum involved is big. It will benefit for more than one year.

iii. It benefits the current year only. c. Classification in to revenue and capital is necessary : i. ii. For the preparation of final accounts. For the preparation of trial balance.

iii. For other reasons. d. Amount paid for goodwill is a : i. ii. Capital expenditure. Revenue expenditure.

iii. Deferred revenue expenditure. 4. State with reasons whether the following items are revenue expenditure or capital expenditure or deferred revenue expenditure.

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Unit IV Ledger i. ii. iii. iv. v. vi. vii. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. Rs. 50,000 is incurred for the purchase of a machinery. Expenditure on carriage is Rs.20/-. Goods worth Rs.1,20,000/- are purchased for resale Salary paid Rs.16,000/Paid for advertisement Rs.10,000/-, the benefit for which is likely to arise for 5 years. Paid for goodwill Rs.7,000/Heavy legal expenses incurred to defend a suit Depreciation on machinery Rs.1,200 spent on the repairs of machines Rs.2,500 spent on the overhaul of machines purchased second-hand White-washing expenses. Paper purchased for use as stationery Advertising campaign to launch a new product Renovation of the cinema hall Brokerage paid in connection with purchase of land Expenses incurred to get the managers office airconditioned Loss of investment Expenses to move the stock of goods from one place to another.

viii.Building purchased for resale

5. Mention with reasons whether the following are capital items, revenue items or deferred revenue items. i. Heavy repairs Rs.15,000/ii. Money received on sale of a building iii. Labour charges on installing a machinery iv. Annual repairs on plant and machinery v. Cost of promotional expenses vi. Building sold for Rs.30,000/-

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6. How you will treat the following items in final accounts : i. ii. Expenditure incurred on printing, stationery and telephone Rs.150/Annual white washing of building Rs.5000/-

iii. Renovation charge of a cinema hall Rs.8,000/- which has increased the sitting capacity iv. Advertisement expenditure Rs.8,000/- the benefit of which will arise for 4 years v. Discount received Rs.666/vi. Money received on sale of machinery is Rs.12,000/- whose written down value was Rs.15,000/-. vii. Investment sold for Rs.5,000/- whose cost price was Rs.4,500/viii. Goods destroyed by fire Rs.2,500/-

7. State whether the following are capital or revenue items. i. ii. Rs.2,000/- spent on redecoration of a cinema hall which did not increase the sitting capacity. Rs.5,000/- spent on transferring the business to a better site

iii. Rs.6,000/- spent on removing and reinstallation of plant and machinery. iv. A petrol driven car was exchanged for a diesel driven car for Rs.25,000/-. v. Compensation of Rs.20,000/- paid to an employee for loss of his employment. Paid interest on loan Rs.1,000/-

vi. Rs.5,000/- received from issue of shares and debenture vii.

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Unit IV Ledger PART B : SHORT QUESTIONS (Answer in 3-5 sentences) 1. Answer the following questions within 5 lines : a. Why a distinction is made between capital and revenue items ? b. Why an expenditure even though revenue in nature is treated as deferred revenue expenditure ? c. How the revenue items are treated in accounts ? d. Give the treatment of capital items. e. What is revenue expenditure ? f. Explain the meaning of capital expenditure. treatment of deferred revenue g. Give the accounting expenditure.

h. Distinguish between revenue expenditure and capital expenditure. i. Distinguish between revenue receipts and capital receipts.

2. Distinguish between (a) Capital receipts and Revenue receipts, (b) Capital profits and revenue profits and (c) Capital loss and Revenue loss. PART C : LONG QUESTIONS (Theory-based) 1. How would you determine whether a particular expenditure is capital or revenue? Give five examples. 2. What is deferred revenue expenditure? Give four examples.

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