Paper - II Accountancy & Computers

53

3. Convention of Conservatism
According to this convention, we should be conservative or careful in
calculating profit. Profit should never be anticipated and exaggerated. But
losses should be anticipated and provided for. Profit should be calculated, net
of all the possible losses. It must be certain and minimum.
4. Convention of Materiality
Materiality means importance. Materiality of a transaction depends on the
amount of money it involves. According to the materiality convention the financial
statement should be presented only in round figures, say in rupees. Paise being
immaterial should be left out. This is applicable only to final statements, such as
the balance sheet.

Debiting and Crediting

The trade keep with him accounts of all those persons with whom he deals.
They are called personal accounts. The persons include individuals and institutions.
Personal accounts show, how much the trader owes to various persons or, they
owe to him.
Each account is vertically divided into two halfs. The left half is called the
debit side and is denoted by Dr. The right half is called the credit side and is
denoted by Cr. Amounts of transactions by which a person becomes debtor
are written in the debit side of his account. This is called Debiting the account.
Similarly amounts of transactions by which a person becomes creditor are written
in the credit side of his account. This is called Crediting the account.
Crediting the Account
If at any time the total of the debit side in an account is greater than the total
in its credit side, then the person concerned is a debtor to the trader. On the
other hand if the total of the credit side in an account is greater than its total in the
debit side, then the person concerned is a creditor to the trader.
When a person receives something he becomes debtor of the person, who
gives him the thing. On the other hand, when a person gives something he
become creditor of the person, to whom the thing is given. Therefore in any
transaction the personal account is debited, when the person receives
something and credited when the person gives something. In other words
personal accounts are debited, when they receive something and credited when
they give something.
Just as personal accounts the trader keeps separate accounts for each of
his assets, such as building, machinery or furniture. Accounts of assets are

60

Accounting & Taxation

personal account receiver is debited and giver is credited. Capital account is

the giver account. So it is credited.
2. On Jan. 4, goods worth Rs. 5,000 are purchased. The sellers name is
not given. So it is cash purchases. This transaction affects purchases account
and cash account. Purchases account and cash account, both are real accounts.
The real account is debited when things come in and credited when things go
out. By purchases goods came in and cash has gone out. So purchases account
is debited and cash account is credited.
3. On Jan. 6, furniture worth Rs. 3,000 is brought. The name of the
furniture seller is not given. So it is a cash transaction. It affects furniture account
and cash account. So it is entered in these two accounts. Furniture account and
cash account are both real accounts. The real account is debited when things
come in and credited, when things go out. Here furniture comes in and cash
goes out. So furniture account is debited and cash account is credited.
4. On Jan. 8, Rs. 200 are paid for rent. This transaction affects rent
account and cash account. So it is entered in these two accounts. Rent account
is nominal account. Nominal account is debited for expenses and credited for
income. Rs. 200 are expenses on rent. So the rent is debited. Cash account is
a real account. Rent account is debited, when things come in and credited when
thing go out. Here cash is gone out. So cash account is credited.
5. On Jan. 10, Rs 1,000 are deposited into bank. In other words cash is
removed from the cash account and paid into bank. This transaction affects
bank account and cash account. So it is entered into these two accounts. Bank
account is a personal account. In personal account receiver is debited and giver
is credited. Bank receives money. So its account is debited. Cash is gone out.
So cash account is credited.
6. On Jan. 15, goods worth Rs. 4,000 are purchsed from Ram. The
name of the seller is given and so this should be taken as a credit transaction. It
affects purchases account and Rams account. So it is entered in these two
accounts. Purchases account is a real account. Real account is debited when
things come in and credited when things go out. Goods came due to purchases.
So purchases account is debited. Rams account is a personal account. In
personal account receiver is debited and giver is credited. Ram gives the goods.
So Rams account is credited.
7. On Jan. 17, goods worth Rs. 2,000 are sold to Mohan. Here
purchasers name is given. So we should assume that it is credit sale. This

Paper - II Accountancy & Computers

Dr.
Date

71

SALARY ACCOUNT
Particulars

Amount Date

Particulars

Cr.
Amount

2012
Jan.4 To Cash

Dr.
Date

500

RENT ACCOUNT
Particulars

Amount Date

Particulars

Cr.
Amount

2012
Jan.5 To Cash

300

From the above entries it is clear that in ledger we open all those accounts,
which are mentioned in journal. Then we sort out the journal entries and post
them in their concerned accounts in the ledger.
Important points to be noted in Ledger posting:
1. All those accounts which are mentioned in journal should be opened in
ledger.
2. The accounts which are debited in journal are also debited in ledger. In
the same way the accounts, which are credited in journal are also credited in
ledger.
3. In the debit side of an account, the names of those accounts appear
which are its creditors. Word To is added to each account. It denotes that the
amount is payable to the account.
4. In the credit side of an account, the names of those accounts appear,
which are its debtors. Word By is added to each account. This denotes that
the amount is payable by the account.

72

Accounting & Taxation

Balancing of Accounts
At times to find, whether a particular account is a debtor or a creditor we
balance it. For this we total the debit and the credit side of the account separately
and find their difference. If the total of the debit side is more than the total of the
credit side then the difference is called the Debit balance. On the other hand
if the total of the credit side is more than the total of the debit side, the difference
is called the Credit balance.
After finding the balance in an account, we insert it in the lesser side of the
account, with the words Balance carried down (c/d). Then with this balance
we total the two sides of the account and they will be equal. This is called
Balancing of Account. After balancing the account the balance is again brought
down on the next date to the appropriate side of the account. In other words
we bring the debit balance to the debit side and the credit balance to the credit
side of the account, with the words Balance brought down (b/d).
The debit balance in a personal account shows that the person is a debtor
and the credit balance shows, that the person is a creditor.
Debit balance in a real account shows, the present value of the asset. In
real account there can be no credit balance. It is because an asset cannot have
minus value.
Debit balance in a nominal account shows, excess of expenses over income.
and credit balance excess of income over expenses.
Illustration : 2
From the following particulars prepare the accounts of Ram, Sham and
mohan and bring out their balances as Jan. 31- 2012
2012
Jan
,,
,,
,,
,,
,,
,,
,,
,,
,,

1
7
12
17
22
24
27
28
29
31

Sales to Ram
Sales to Sham
Purchases from Mohan
Sales to Mohan
Received from Sham
Payment to Sham
Received from Ram
Purchases from Ram
Received from Sham
Received from Mohan

......
......
......
......
......
......
......
......
......
......

Rs.
700
800
400
300
500
700
200
300
1,000
800

Paper - II Accountancy & Computers

Dr.
Date

95

CHALAPATI RAOS ACCOUNT

Particulars

Amount Date

Particulars

Jan.25 By Sales Return

,, 31 By Sales Return

Dr.
Date

Cr.
Amount

200
150

GIRIDHARS ACCOUNT
Particulars

Amount Date

Particulars

Jan.15 By Sales Return

Cr.
Amount

300

It should be noted , that the subsidiary books are written in different ways
to suit the particular needs. But the basic principles remain the same.

Exercises
1. What transactions are entered in purchases and purchases Return
Books?
2. What transactions are entered in Sales and Sales Return Books? How
are they posted?
3. What are Debit and Credit Notes? How are they numbered?
4. Enter the following transactions in the sales book and post them in ledger
account.
Rs.
......
Jan 1 Sales to Rama
......
800
......
,,
......
2 Sales to Satish
300
......
,,
......
3 Sales to Mohan
400
......
,,
......
4 Sales to Mohan
500
......
,,
......
5 Sales to Rama
200

Paper - II Accountancy & Computers

101

Two Column Cash Book

Two column cash book records not only receipts and payments of cash
but also the cash discount. So the two column cash book is also called Cash
Book with Cash and Discount columns.
Cash discount is a deduction made at the time of receipt or payment of
cash. Traders give this discount to each other, when cash is paid within a given
period. Cash discount encourages quick payment of cash. Cash discount is not
paid in cash. It is deducted from the amount receivable, when cash is received
and from the amount payable, when cash is paid. As such the cash discount can
be recorded along with the receipt or payment of cash. For this there are
separate discount columns in cash book. One on the debit and the other on the
credit side of the cash book.
When cash received cash discount is paid. So when the cash received is
debited in cash column, the discount paid is debited in the discount column.
Discount paid is an expense or loss to the business. So the discount paid is
debited in the discount column. When cash is paid, cash discount is received.
So when paid cash is credited in the cash column, the discount received is
credited in the discount column. Discount received is an income. So discount
received is credited in the discount column. The cash column in the two column
cash book are balanced like a ledger account. But the discount columns are
only totalled. The total debit in the discount shows the total discount paid and
the total credit, the total discount received.
Illustration : 2 Enter the following in two column cash book and balance it.
Rs.
2012
......
Feb 1 Cash balance
2,000
......
,,
Paid to Ramesh
780
......
,,
Discount received from him
20
......
,,
Purchases
1,000
......
,,
Sales
800
......
,,
Salaries Paid
400
......
,,
Received from Mohan
190
......
,,
Discount given to him
10
......
,,
Payment to Ram
390
......
,,
Discount received from him
10
......
,,
Received from Ramesh
980
......
,,
Discount given to him
20
......
,,
Paid to Mohan
200
......
,,
Received from Madan
190
......
,,
Discount given to him
10

Paper - II Accountancy & Computers

123

The Trial Balance can be prepared in two ways

(1)By taking the balances of each of the ledger accounts.
(2)By taking the debit and the credit totals of each of the ledger accounts.
Illustration : 01
Following balances are taken from the books of Mukesh Ambani as at
Dec. 31-2011. Prepare the Trial Balance.
Capital Rs. 25,000, Drawings Rs. 6,500, Cash Rs. 200, Bank balance Rs.
7,000, opening stock Rs. 10,000, Purchases Rs. 8,000, Sales Rs. 12,000,
Sales Return Rs. 500, Purchases Return Rs. 800, Bill Receivable Rs. 4,000,
Bills payable Rs. 3,000, Sundry Debtors Rs. 5,000, Sundry creditors Rs. 3,500,
Discount paid Rs. 600, Post and Telegraph Rs. 400, Advertisement Rs. 500,
Salary Rs. 1,200 Rent paid Rs. 400.
Although in the problem it is not stated that whether a balance is debit or
credit. But we know that balances in all the Assets and Expenses accounts are
always debit and the balances in all the liabilities and income accounts are always
credit. Whether an item is an asset, liability, income or an expense, should
always be decided from the traders point of view. All our difficulties in this
connection will end, if we consider, that we are the trader and, we are writing
our own accounts.
TRIAL BALANCE
(As at December, 2011)
Account
No.
1
2
3
4
5
6
7
8
9
10
11
12
13

Name of the Account

Capital
Drawings
Cash
Bank Balance
Opening stock
Purchases
Sales
Sales return
Purchases return
Bills receivable
Bills payable
Sundry Debtors
Sundry Creditors

Debit Amt. Credit Amt.

Rs.
Rs.
-

6,500
200
7,000
10,000
8,000
500
4,000
5,000
-

25,000
12,000
800
3,000
3,500

124

Accounting & Taxation

Account
No.
14
15
16
17
18

Name of the Account

Discount paid
Post & Telegraph
Advertisement
Salary
Rent

Debit Amt. Credit Amt.

Rs.
Rs.
-

600
400
400
1,200
400

44,300

44,300

Illustration : 2
Following Balances are taken from the Books of Tirumala Jewellers, at
Secunderabad, as at Dec. 31-2011
Cash Rs. 300, Bank Overdraft Rs. 23,000, Capital Rs. 20,000, Drawings
Rs. 12,000, Sales Rs. 1,42,000, Purchases Rs. 50,000, Opening Stock Rs.
84,000, Purchases Return Rs. 8,000, Sales Return Rs. 300, Salary Rs. 15,000,
Rent Rs. 28,000, Carriage Rs. 800, Advertisement Rs. 1,800, Debtors Rs.
5,000, Creditors Rs. 7,000, Sundry expenses Rs. 2,300. Prepare the Trial
Balance.
TRIAL BALANCE
(As at December, 2011)
Account
No.
1
2
3
4
5
6
7
8
9
10

Name of the Account

Cash
Bank
Capital
Drawings
Sales
Purchases
Opening stock
Purchases return
Sales Return
Salary

Debit Amt. Credit Amt.

Rs.
Rs.
-

300
12,000
50,000
84,000
300
15,000

23,000
20,000
1,42,000
8,000
-

Paper - II Accountancy & Computers

Account
No.

125

Name of the Account

11
12
13
14
15
16

Rent
Carriage
Advertisement
Debtors
Creditors
Sundry Expenses

17

Suspense Account

Total

Debit Amt. Credit Amt.

Rs.
Rs.
-

28,000
800
1,800
5,000
2,300

7,000
-

1,99,500
+500

2,00,000

2,00,000

2,00,000

We see that this Trial Balance does not agree. Its debit total is Rs. 1,99,500,
while the credit total is Rs. 2,00,000. The difference is Rs. 500, (2,00,0001,95,000). Rs. 500 are less on the debit side. So we have debited Rs. 500 to
suspense account. Then this debit balance of suspense account is included in
the trial balance. And thus the trial balance is agreed. When final accounts are
prepared the debit balance in suspense account is temporarily treated as an
asset. And the credit balance as a liability.
EXERCISES
1. What is a trial balance? Why it is prepared?
2. How is a trial balance prepared? Explain with example?
3. Why cash and bank column balances of the cash book are included in
the trial balance?
4. What do you mean by agreement of trial balance? What does it is show?
5. Prepare trial balance from the following balances.
Kumars capital Rs. 35,000, Kumars Drawings Rs. 3,000, Opening
Stock Rs. 40,000, Machines Rs. 4,000, Furniture Rs. 2,000, Sundry debtors
Rs. 15,000, Sundry creditors Rs. 18,000, Cash Rs. 1,2000, Bank balance Rs.
4,000, Purchases Rs. 12,000, Sales Rs. 20,500, Sales Return Rs. 1,000,
Insurance Rs. 400, Rent Rs. 450, Advertisement Rs. 250, Bills Receivable Rs.
4,000, Bills payable Rs. 14,600, Stationery Rs. 800.

126

Accounting & Taxation

6. From the following ledger balances in Madans book, prepare the Trial
balance.
Madans capital Rs. 20,000, Drawings Rs. 2,000, Sunday debtors Rs.
6,000, Sunday creditors Rs. 8,700, Bills payable Rs. 4,000, Bills receivable
Rs. 8,000, Furniture &Fitting Rs. 300, Opening Stock Rs. 8,000, Cash Rs.
300, Cash at bank Rs. 1,200, Rent Rs. 200, Sales Rs. 25,000, Purchases Rs.
15,000, Salary Rs. 8,000, Sales return Rs. 200, Purchases return Rs. 3,000,
Machines Rs, 5,000, Loose tools Rs. 4,800, Travelling expenses Rs. 1,500,
Discount given Rs. 300, Discount received Rs. 100
7. Taking following ledger balances, prepares the trial balances.
Capital Rs. 1,24,000, Drawings Rs. 6,000, Sunday creditors Rs. 43,000,
Bills payable Rs. 4,000, Sunday debtors Rs. 51,000, Bills receivable Rs. 5,000,
Loan advance to Mohan Rs. 10,000, Fixture and Fittings Rs, 4,500, Opening
stock Rs. 47,000, Cash Rs. 900, Cash at State Bank of India Rs. 12,500,
Overdraft with Andhra Bank Rs. 6,000, Purchases Rs. 50,000, Duty and
Clearing charges Rs. 3,500, Sales Rs. 28,000, Salary Rs. 9,500, Return from
customers Rs. 1,000, Return to creditors Rs. 1,100, Commission and travelling
expenses Rs. 4,700, Rent Rs. 2,000, Discount received Rs. 4,000, Trade expense
Rs. 2,500.
8. The following balances are extracted from the books of Anil as at
December, 31-2011. Prepare a Trial balance.
Cash Rs. 15,380, Capital Rs. 34,000, Furniture Rs. 640, Sunday debtors
Rs. 12,000, Sunday creditors Rs. 17,840, Rent Rs. 3,000, Salary Rs. 7,000,
General expenses Rs. 2,400, Bills payable Rs. 4,800, Bills Receivable Rs. 8,500,
Interest paid Rs. 600, Commission received Rs. 180, Sales Rs. 36,000,
Purchases Rs. 24,800, Bank overdraft Rs. 12,000, Stock Rs. 29,000, Machinery
Rs. 1,500.
9. Prepare the Trial Balance from the following balances taken from the
books of Venugopal.
Capital Rs. 27,000, Drawings Rs. 3,000, Purchases Rs. 12,000, Sales
Rs. 28,000, Sales Return Rs. 2,000, Purchases Return Rs. 580, Rent Rs. 3,000,
Wages and Salary Rs. 12,000, Cash Rs. 300, Cash at Bank Rs. 4,200, Creditors
Rs. 7,000, Debtors Rs. 20,880, General expenses Rs. 5,200.

UNIT

Final Accounts
Final accounts are accounts prepared at the close of Trading period. It is
usually made up of one year. These accounts reveal the results of trading activities.
Final accounts, includes trading account, profit and loss account and the balance
sheet. They are prepared from the balances of various accounts, given in the
trial balance.
Trading account reveals Gross Profit or Gross Loss, Profit and loss account,
reveals the net profit or net loss and balance sheet shows the financial position
of the business.
Before we proceed to prepare final accounts, it is necessary to know the
difference between the revenue expenditure and the capital expenditure.

Revenue Expenditure
Expenditure incurred to keep the business running is a revenue expenditure.
Its benefit or utility is temporary or limited to the trading period, in which it is
incurred. Expenses incurred in relation to salary, wages, fuel electricity are
revenue expenditures. Depreciation caused to any permanent property due to
its use or lapse of time or expense incurred to maintain it in a running condition
is also a revenue expenditure. Revenue expenditure does not increase the
permanent utility or value of business. Its usefulness is limited to trading period
in which it is incurred. Every year we have to incur the same expenses. So
revenue expenses are the expenses of the year in which they are incurred.
Capital Expenditure
Expenditure incurred to increase the long term utility or value of the business

128

Accounting & Taxation

is a capital expenditure. Expenses incurred on the purchase of Land, Building,

Machinery, Furniture etc., are capital expenditures. An unusual expenses on the
improvement of a permanent asset is also a capital expenditure, because it
increases the long term utility of the business. In the same way expense incurred
in the purchases of good will or a copy right is also a capital expenditure, because
it has a long time utility. Capital expenditure is not incurred for one year. Its
benefit or utility is permanent. So only that part of capital expenditure, which is
related to the particular year should be treated as a revenue expenditure and the
rest as capital expenditure. Capital expenditure is not incurred every year, as
the revenue expenditure.

Trading Account
Trading account shows the Gross Profit or the Gross Loss of the business.
Gross profit or Gross loss is the difference between the cost of the goods and its
sale proceeds, plus the value of closing or the unsold stock. Here the cost of the
goods included all direct expenses, connected with the purchase or the
manufacture of the goods.
Trading account is prepared just like any other account. It is debited with
items with the cost of the goods and credited with the sale proceed and the
value of the closing stock.
Items to be written on the debit side of the Trading Account
1. Opening Stock
This is the value of the balance of goods brought, from the previous year,
into the current year.
2. Purchases
This is the value of the goods purchased in the current year.
3. Purchases Return
This is the value of the goods returned to the sellers. Purchases return
reduce the value of goods purchased. So it is deducted from the purchases.
4. Carriage or Freight Inward
This includes all charges of bringing purchased goods to the business place.
They are transport charges and also loading and unloading charges. If in any
trial balance only carriage or freight is given then it should be treated as carriage
inward only.

Paper - II Accountancy & Computers

129

5. Import Duty and Excise Duty

Import duty increases the cost of the goods imported, and excise duty
increases the cost of the goods manufactured.
6. Marine and Factory Insurance
Marine Insurance is for the safety of the goods imported and factory
insurance is for the safety of the goods manufactured. These are also add to the
cost of the goods.
7. Clearing Charges
Goods, which come by ship or railway require complicated procedure,
before it is delivered to its owner. The expenses incurred to complete this
procedure are called, clearing charges. These are also a part of the cost of the
goods.
8. Factory Rent & Lighting
These are direct expenses for the manufacture of the goods. So they are
also added to the cost of the goods.
9. Fuel and Power
These are the expenses incurred to move machines for production. So
these expenses are also debited in the trading account, as cost of the goods.
10. Manufacturing Wages
Manufacturing wages or simply wages are paid for the production of the
goods. This is a part of the cost of the good manufactured. If in a trial balance
productive wages are separately given, then only the productive wages should
be debited in Trading account, as cost of the goods. If in a trial balance wages
and salaries are given together then it should not be included in the Trading
account as the cost of the goods. It is a general expense
11. Other Expenses
Apart from the above mentioned expenses all other expenses which are
considered as the direct cost of the goods, either purchased or manufactured
are debited into the trading account.
Items to be Written on the Credit Side of the Trading Account
1. Sales
It represents the amount realised or the sale proceeds from the sale of the
goods, during the year.

130

Accounting & Taxation

2. Sales Return
It represents the value of the goods returned by our customers. Sales return
reduce the actual sales. So it is deducted from the sales.
3. Closing Stock
It is the value of the unsold goods at the end of the trading period. It is
credited into the trading account. Closing stock usually does not appear in the
trial balance. At the end of the trading period the unsold stock or closing stock
is valued. It is called Stock taking. Closing stock is valued at the cost price or
the market price, whichever is lower. It should not be valued at the selling price.
It should be noted that the closing stock of the current year, will be the opening
stock for the next year.
After debiting and crediting various items, the trading account is balanced
as any other account. Credit balance in the trading account shows the Gross
profit and debit balance the Gross loss. The Gross profit or the Gross loss of
the trading account is transferred to profit and loss account, to find the Net
Profit or Net Loss of the business. This will close the trading account.
PROFORMA OF TRADING ACCOUNT
Dr.

Trading Account of ....................... for the Year ending .................

Cr.
Particulars

Rs.

To Opening Stock

Rs.

To Carriage Inward

Rs.

Rs.

xxx
By Sales

To Purchases
Less Returns

Particulars

xxx
xx

xxx
xxx

To Wages

xx

To Freight & Cartage

xx

To Import / Excise Duty

xx

To Factory Expenses

xx

To Gross Profit C/d

xx
xxx

Less : Returns
By Closing Stock
By Goods destroyed
by fire
By Gross loss (Transfer to P&L A/c)

xxx
xx

xxx
xxx
xxx
xxx

xxx

Paper - II Accountancy & Computers

131

Illustration : 1
From the following Trial Balance of Ashok, prepare Trading account for
the year ended on December, 31-2011.
Name of the Account

Opening stock
Purchases
Purchases Return
Sales
Sales return
Carriage
Furniture
Sundry debtors
Advertisement
Sundry Creditors
Capital
Bills Receivable
Discount given
Discount received
Rent
Cash
Interest paid on capital
Interest
Trade Expenses
Clearing charges

Debit Amt. Credit Amt.

Rs.
Rs.
-

15,000
40,000
2,000
1,600
4,000
9,800
200
5,000

3,000
55,000
12,000
21,000
-

1,000
2,400
400
2,000
6,000
1,800
200

400
-

91,400

91,400

Closing stock : Rs. 20,000

It is clear the below illustration, that in the trading account, only those items
from the trial balance are taken, which help to find the Gross profit or Gross
loss. Apart from this closing stock, which is outside the trial balance is taken
into it. The items of the trial balance, which are not taken into trading account,
will be taken in profit and loss account or in the balance sheet. They will be
prepared later on.

132

Accounting & Taxation

ASHOKS TRADING ACCOUNT

(For the year ended on Dec. 31-2011)

Dr.
Particulars

To Opening Stock

Rs.

Particulars

15,000

By Sales
55,000
Less Returns -2,000

To Purchases 40,000
Less :Return

By Closing stock

-3000

To Carriage
To Clearing Charges
To Gross Profit Tranferred to P&L A/c.

Cr.
Rs.

53,000
20,000

37,000
1,600
200
19,200
73,000

73,000

Closing Entries in Relation to Trading Account

Trading account is prepared by transferring into it some of the ledger account
balances, given in the trial balance. For transferring the ledger balances in to
trading account, some journal entries are necessary. These entries are called
Closing Entries. It is because these entries close the ledger accounts, whose
balances are transferred to trading account.
The following are the closing entries in relation to the trading account.
1. Trading account is debited and the accounts whose debit balances are
transferred account are credited. This closes these accounts in the ledger.
2. The account whose credit balances are to be transferred to trading
account are debited and the Trading account is credited. This closes these
accounts in the ledger.
3. Closing stock is debited and trading account is credited. This opens the
closing stock account in the ledger. This entry is actually an adjusting entry. But
is made at the time, when the other accounts are closed. So it is included in the
closing entries.

Paper - II Accountancy & Computers

133

4. If there is Gross Profit, it is debited to Trading account and credited to

Profit and Loss account. This closes the trading account and opens the profit
and loss account.
5. If there is a Gross Loss it is debited to Profit and Loss account and
credited to trading account. This also closes the trading account and opens the
profit and loss account.
Date

Debit
L.F. Amount
Rs.

Particulars

Credit
Amount
Rs.

2011
Dec. 31 Trading Account
To Opening stock
To Purchases
To Carriage
To Clearing Charges
To Sales Return

Dr.
-

58,800
-

15,000
40,000
1,600
200
2,000

(Being transfer of various debit

balances to trading account)

,,

Sales
Purchase Return
To Trading A/c

Dr. Dr. - -

55,000
3,000
-

58,000

20,000
-

20,000

19,200
-

19,200

(Being Cash deposited in bank)

,,

Closing Stock
To Trading A/c

Dr. - -

(Closing stock brought into A/c)

,,

Trading A/c
To Cash A/c

Dr. -

(Being transfer of gross profit to

P&L A/c)

Profit and Loss Account

Profit and Loss account shows Net Profit or Net Loss incurred in the
business. In the first place it is credited with the Gross Profit or debited with the
Gross Loss, shown by the trading account. After this all those expenses shown

134

Accounting & Taxation

in the Trial balance but not debited to trading account are debited into it. Similarly
all those incomes shown in trial balance, but not credited to the trading account
are credited into it. Then the profit and loss account is balanced.
The credit balance in profit and loss account shows net profit and debit
balance net loss. This net profit or net loss is transferred to capital account.
Thus the profit and loss account is closed.
Items to be Debited to Profit and Loss Account
1. Salaries
It includes salaries paid to clerks and managerial staff. It is usual expense
of general nature. So it is debited to profit and loss account. But if salary is
directly connected with the production of goods, then it should be debited to
trading account.
2. Rent and Taxes
These includes rent of office, godown and municipal taxes, etc. These are
also usual and general business expenses and as such they are also debited to
profit and loss account. But if rent or taxes are directly connected with factory
or production, then they should be debited to trading account.
3. Printing and Stationery
The usual annual expense on printing and stationery is debited to profit and
loss account. But an unusual expense on printing and stationery should not be
debited to profit and loss account. It should be treated as an asset. And should
be included in balance sheet.
4. Advertisement Expenses
The usual amount spent on advertisement is also a business expense. It is
debited to profit and loss account. But an unusual expenditure on advertisement
is a capital expenditure. It is shown in the balance sheet as an asset.
5. Interest Paid
The trader invests in business his own capital as well as loan taken from the
outsiders. So the interest paid to outsiders as well as on his own capital is the
business expense. Interest on capital should be shown separately from the
interest paid to outsiders.
6. Discount Paid
Discount paid to customers is again an usual business expense. It is debited
to profit and loss account.

Paper - II Accountancy & Computers

135

7. Commission Paid
Commission given to others is a business expense. It is debited to profit
and loss account.
8. Repairs
Usual expense incurred on repairs of furniture, building, machinery etc., is
debited to profit and loss account. But unusual expense on this account is a
capital expenditure. It should not be debited to profit and loss account. It is
shown in the balance sheet as an asset.
9. Trade Expense
These are petty expenses connected with the business. They are generally
debited to profit and loss account. But if in the same trial balance, trade expenses
and also general expenses, Sunday expenses, or office expenses are given then
the trade expenses should be debited to trading account, and the other expenses
should be debited to profit and loss account.
10. Travelling Expenses
These are also business expenses. They are debited to profit and loss
account
11. Bad Debt
It is a common knowledge that some of the debtors do not pay their debts.
Such debt if unrecoverable is called Bad Debt. Bad debt is a business expense.
It is debited to profit and loss account.
12. Interest on Capital
Business and the owner are considered to be separate enttities, so whatever
amount a businessman has invested into his busienss, will be considered as loan
to the business, on which interest becomes payable by busienss to its owner. IT
is called as interest on capital.
13. Other Expenses
Apart from the expenses mentioned above, there may be some other
expenses incurred in business. All such expenses should be debited to profit
and loss account.

136

Accounting & Taxation

Items to be Credited to Profit and Loss Account

1. Rent received
If rent is received by sub-letting a building then it is an income. So this
should be credited to profit and loss account.
2. Interest received
Some times businessmen charge interest to others. This is an income. And
it should be credited to profit and loss account.
3. Discount received
Discount received from others is an income. So this should be credited to
profit and loss account.
4. Commission received
Commission received is also an income. So this should be credited to
profit and loss account.
5. Sundry Income
Any other business income regular or accidental should also be credited to
profit and loss account.
After debiting and crediting various items, the profit and loss account is
balanced as any other account. Its credit balance shows the net profit and debit
balance net loss. Net profit or Net loss is transferred to capital account. This
will close the profit and loss account.
Items not to be Debited to Profit and Loss Account
1. Drawings
These are the amounts drawn by the Proprietor for his personal use. They
are not business expenses. So they should be debited to profit and loss account.
They should be debited to capital account.
2. Income Tax
This tax is levied on the income of the proprietor. So this is not a business
expense. It is a personal expense of the trader. And so it should not be debited
to profit and loss account. It should be debited to capital account.
3. Life Insurance Premium
This is an expense on the life insurance policy of the trader. So this is not a
business expense. And it should not be debited to profit and loss account. It
should be debited to capital account.

Paper - II Accountancy & Computers

137

FORMAT OF PROFIT & LOSS ACCOUNT

Dr. Profit & Loss Account of .......... for the year ending ............... Cr
Particulars

Rs.

Particulars

Rs.

To Gross Loss b/d

xxx By Gross Profit b/d

xxx

To Salaries & Wages

xxx By Discount Received

xxx

To Rent, Rates and Taxes

xxx By Commission earned

xxx

To Fire Insurance Premium

xxx By Rent Earned

xxx

To Repairs and Maintenance

xxx By Interest earned

xxx

To Depreciation on Assets

xxx By Profit on sale of fxed assets xxx

xxx By income from investments
xxx

To Audit Fees
To Legal Charges

xxx By Net loss (transfer to capital) xxx

xxx

To Discount allowed

xxx

To Interest paid

xxx

To Carriage outward

xxx

To Freight outward

xxx

To Commission to salesman

xxx

To Travelling Expenses

xxx

To Entertainment Expenses

xxx

To Reserve for Bad debts

xxx

To Advertising and Publicity

xxx

To Bad debts

xxx

To Loss on goods destroyed

xxx

To Interest in Capital

xxx

To Interest on Loan

xxx

To Bank Charges

To loss on sale of Fixed Assets xxx

To Net Profit (transfer to capital)xxx
xxx

xxx

138

Accounting & Taxation

Illustration : 2
Prepare profit and loss account from the items given in the illustration 1.
Cr.
Dr.
Particulars

Rs.

To Advertisement

200

To Discount given

1,000

To Rent

2,400

To Interest on Capital

2,000

To Interest

6,000

To Trade Expenses

1,800

Particulars

Rs.

By Gross Profit tansferred from

Trading account
19,200
By Discount received

400

To Net Profit Transferred

to Capital account 6,200
19,600

19,600

Closing Entries in relation to Profit and Loss Account

Profit and loss account is prepared by transferring various items of income
and expenditure into it, from the trial balance. To transfer these balances to
profit and loss account and to transfer the net profit or net loss to the capital
account, the following closing entries are required.
1. Profit and loss account is debited with various expenses which are not
debited to trading account; and the accounts of such expenses are credited.
This closes the accounts of such expenses in the ledger.
2. Accounts of various incomes are debited and the profit and loss account
is credited. This closes such income accounts in the ledger.
3. If there is net profit, it is debited to profit and loss account and credited
to capital account. This closes the profit and loss account. The profit is added
to capital. Thus the capital is increased.
4. If there is net loss, capital account is debited with it, and profit and loss
account is credited. This again closes the profit and loss account. The loss is
deducted from the capital. Thus the capital is reduced.
The following are the closing entries in relation to profit and loss account
given in illustration 02

Paper - II Accountancy & Computers

Date

139

Debit
L.F. Amount
Rs.

Particulars

Credit
Amount
Rs.

2011
Dec. 31

Profit & Loss Account Dr.

To Advertisement
To Discount given To Rent
To Interest on capital To Interest
To Trade Expenses -

13,400
-

200
1,000
2,400
2,000
6,000
1,800

(Closing entries for the accounts)

,,

Discount
To P&L A/c

Dr. - -

400
-

Profit & Loss Account Dr. To Cash A/c -

6,200
-

400

(Closing entry for Discount

received)

,,

6,200

(Transfer of Profit to Capital A/c)

It should be noted that trading account is only a part of profit and loss
account. We cannot prepare profit and loss account without preparing trading
account. For the sake of convenience we divide profit and loss account in two
parts. So that , the first Gross profit or Gross loss and then net profit net loss
could be found.
The total Gross profit shown in trading account should be equal to the
Gross profit ,which the trader added as a percentage on the cost of the goods.
So if we know the gross profit, we can check, whether the percentage or profit
added to cost is really achieved.
BALANCE SHEET
When the balance of various nominal accounts, given in the trial balance
are transferred to trading or profit and loss account, the remaining balances
represent real or personal accounts. These and the closing stock represent
various assets and liabilities. A list of these assets and liabilities are prepared at
the close of the trading period. This gives the complete view of the financial
position of the business. It is called the Balance Sheet.

140

Accounting & Taxation

Kinds of Assets
1. Fixed Assets
These are the assets of permanent nature, such as land, building, furniture,
machinery etc. These assets are not for sale. They are kept in business as an
assistance to it.
2. Floating Assets
These assets are not permanent in the business. They are kept to be
converted into cash. Such assets are stock of goods, bills receivable and debtors.
Floating assets remain in the business temporarily and their amounts constantly
increase or decrease. Cash in hand and cash at bank are also floating assets.
Floating assets are also called the current assets or circulating assets. They are
also called liquid assets, because they can be easily converted into cash. Cash
in hand and cash at bank are completely liquid assets.
3. Nominal or Fictitious Assets
These assets are also of permanent nature. They are not to be converted
into cash. They are meant to assist the business for a long time. But these assets
are not visible like building or furniture. Such assets are preliminary unusual
expenses and debit balance of profit and loss account.
4. Visible and Invisible Assets
Some times assets are divided as visible and invisible assets. Visible assets
are those assets which can be seen such as building, furniture etc. Invisible
assets are those assets which cannot be seen such as good will, and preliminary
expenses.
Kinds of Liabilities
1. Fixed Liabilities
Loans taken for a fixed period are fixed liabilities. It is because these are to
be paid back, after a fixed period, or when the business is closed.
2. Floating Liabilities
Floating liabilities are demand liabilities. These are to be paid as and when
they are demanded. Bank overdraft and creditors are floating liabilities. Their
amounts constantly change by payments and acceptances. Floating liabilities
are also called current liabilities.

Paper - II Accountancy & Computers

141

Arrangement or Marshalling of Assets and Liabilities in the Balance Sheet

In balance sheet the assets and liabilities are arranged in a particular order.
It is call Marshalling. The assets are generally listed on the right hand side and
the liabilities on the left hand side in a particular order.
PROFORMA BALANCE SHEET OF Sri....... as per Order permanence)
LIABILITIES
Capital

Rs. Rs.
xxx

ASSETS
Fixed Assets

Add : Additional Capital xx

(a) Intangible Fixed Assets

Add : Interest on Capital xx

Good will, Copy right,

patents, trade marks

Add : Net Profit

xxx xxx

Less : Drawings

xxx

Rs.

xxx

(b) Tangible Fixed Assets

Land & Buildings

xxx

Plant & Machinery

xxx

xxx

Leasehold Property

xxx

xxx xxx xxx

Loose Tools

xxx

Long Term Liabilities

Furniture & Fittings

xxx

Current Liabilities

Investments

xxx

Interest on
Drawing

xxx

Net Loss
Income Tax

Creditors

xxx

Current Assets :

Bills payable

xxx

Debtors

xxx

Bank overdraft

xxx

Bills Receivable

xxx

O/s. Expenses

xxx

Closing Stock

xxx

Income Recd. in Adv

xxx

Stores & Spare parts

xxx

Cash at Bank

xxx

Cash in Hand

xxx

Prepaid Expenses

xxx

Accured Incomes

xxx

xxx

xxx

142

Accounting & Taxation

Illustration : 3
Prepare balance sheet from the items given in the illustration 1 and the net
profit shown in illustration 2.
ASHOKS BALANCE SHEET
(As at Dec. 31 - 2011)
Dr.

Cr.
LIABILITIES

Rs.

Sundry Creditors

12,000

Cash

21,000

Net Profit

-6,200
27,200

39,200

ASSESTS

Cash
Sundry Debtors
Bills Receivable
Furniture
Closing stock

Rs.

400
9,800
5,000
4,000
20,000

39,200

The above balance sheet is prepared from the balances given in the trial
balance, illustration 1, and which are not transferred either to trading or to profit
and loss account. These balances represent the assets and the liabilities. Apart
from this, the closing stock given in the same illustration, outside the trial balance
is included among the assets. In the liabilities side we have added the net profit
to capital from the illustration 2, prepared from the same trial balance, it is because
the net profit belongs to the proprietor and it increases his capital. In this balance
sheet we have arranged the assets, according to liquidity and the liabilities
according to the urgency of payment.
Important Points to be Remembered in the Preparation of Balance Sheet
1. Balance sheet is prepared on a particular date. It represents the financial
position of the business, on that date. So it should be dated as, balance sheet as
at.
2. It is prepared along with the preparation of trading and profit and loss
account. So it is included amount the final accounts. In fact it is only a statement
of assets and liabilities.

Paper - II Accountancy & Computers

143

3. At any time the capital in the business is equal to the assets minus the
liabilities, other than the capital. So the total of liabilities and the capital must be
equal to the total assets of the business. In other words the totals of the two
sides of the balance sheet must be equal.
Illustration : 4
From the following trail balance prepare the trading and profit and loss
account : and the balance sheet to the year ended on December 31-2011
Name of the Account

Aruns Capital
Aruns Drawing
Freehold Premises
Plant & Machinery
Office furniture
Sundry Debtors
Sundry Creditors
Cash in hand
Cash at Bank
Bills Payable
Bills Receivable
Sales
Sales Return
Purchases
Stock on Jan-1 2011
Wages
Gas & Water
Rates, Taxes and Insurance
Office Salaries
Travelling Expenses
Office expenses
Discount allowed
Discount received
Bad Debt
Purchase Return

Closing stock is valued at 60,000

Debit Amt. Credit Amt.

Rs.
Rs.
-

15,000
20,000
25,000
8,000
1,30,000
1,200
10,000
15,600
1,000
80,000
25,000
12,000
1,800
2,000
22,000
2,500
1,200
1,100
1,500
-

1,50,000
50,000
42,000
1,30,000
800
2,100

3,74,900

3,74,900

144

Accounting & Taxation

TRADING AND PROFIT & LOSS ACCOUNT

(For the year ended on December 31-2011)
Dr.

Cr.
Particulars

Rs.

Particulars

To Opening Stock

12,000 Cash
Sundry Debtors
To Purchases 80,000
Bills Receivable
Less Return -2,100
Furniture
77,900 Closing stock
To Wages
12,000
To Gas & Water

Rs.

400
9,800
5,000
4,000
20,000

1,800

To Gross profit transferred

to P&L A/c
72,300
1,89,000
To Rates, Taxes and
Insurance
To Office Salaries

By Gross profit from

Trading account
22,000 By Discount Received
2,000

To Travelling Expenses

2,500

To Office Expenses

1,200

To Discount allowed

1,100

To Bad Debt

1,500

To Net Profit transfer

to Capital account

1,89,000

72,300
800

42,800
73,100

73,100

Paper - II Accountancy & Computers

145

BALANCE SHEET
(As at December 31-2011
Liabilities

Rs.

Sundry Creditors

50,000

Bills payable

42,000

Arun capital 1,50,000

Less:Drawing -15,000
Net profit

1,35,000
42,000
1,77,800
2,69,800

Assest

Cash at hand
Cash at Bank
Sundry Debtor
Bills Receivable
Office Furniture
Plant and Machinery
Freehold Premises
Closing stock

Rs.

1,200
10,000
1,30,000
15,600
8,000
25,000
20,000
60,000
2,69,800

It should be noted that trading and profit and loss accounts are part of the
same account. So they should be prepared be prepared together, as shown in
the above example.
It should be noted that each of the items given in trial balance will appear
only once in the trading or profit and loss account or in the balance sheet. No
item should appear at two places. But closing stock, which is given outside the
trial balance will appear at two places, once in the credit side of the trading
account and again in the balance sheet, as an asset.
If instead of trial balance, only the balances of various accounts are given,
then it is better to prepare first, the trial balance and then the final accounts. If
there is no agreement in trial balance, then its difference should be adjusted in
suspense account. In other words, if in the trial balance the total in the debit
side is less than the total in the credit side, then the difference should be debited
to suspense account. On the other hand if in the trial balance the total in the
credit side is less than the total in the debit side, then the difference should be
credited to suspense account. Now the suspense account should be included in
the trial balance. The trial balance with suspense account will automatically
agree. In the balance sheet, suspense account should be shown as an asset, if it
has a debit balance and as liability, if it has a credit balance.

146

Accounting & Taxation

DIFFERENCE BETWEEN TRIAL BALANCE AND BALANCE

SHEET
Trial Balance

Balance Sheet

1. It is prepared to check the accuracy

of Books of account.

1. It is prepared to reveal the financial

position of the business.

2. It can be prepared at any time or,

when the final accounts are made.

2. It also can be prepared at any time.

But it is generally prepared at the
end of the trading period.

3. It is prepared before final accounts

are prepared. It is a preparation to
final accounts.

3. It is the last stage of final

accounts. It is the end and result
of Accounting.

4. It includes all ledger balances. From

which the trading and profit and
loss accounts; and the balance
sheet are prepared.

4. It includes only real and personal

account balances representing
asset and liabilities. These are
taken from the Trial balance.

5. It supplies the raw-material, from

which the final accounts are
prepared

5. It is the final structure ofAccounting

prepared from the raw material
supplied by Trial balance.

EXERCISES
1. What are the final accounts? Why and how they are prepared?
2. Explain the difference, between the revenue and capital expenditure.
3. What are usual items debited and credited to trading account?
4. What is closing stock? How it is valued?
5. What are the closing entries?
6. Give imaginary closing entries for the trading account.
7. Give imaginary closing entries for the profit and loss account.
8. What are the usual items debited and credited to profit and loss account?
9. What is balance sheet? How it is prepared?
10. What are fixed and floating assets, and liabilities?

Paper - II Accountancy & Computers

147

11. What are the important points to be remembered in connection, with

the balance sheet.
12. From the following Trial balance and closing stock, prepare the final
accounts.
Dr.
DEBIT BALANCES

Cr.
Rs.

Opening stock
1,20,000
Drawings
15,000
Purchases
2,05,000
Carriage on Purchases 12,500
Sales Return
1,800
Buildings
16,000
Machines
30,000
Wages
11,800
Travelling Expenses
4,000
Salary
15,800
Discount
1,200
Sundry Debtors
24,200
Bills Receivable
12,000
Trade Expenses
8,200
Commission
3,000
Interest
13,000
Printing & Stationery
2,600
4,96,100

CREDIT BALANCE

Capital
Purchases Return
Sales
Discount
Sundry Creditor
Bills Payable

1,25,100
2,000
3,00,000
3,000
58,000
8,000

4,96,100

The closing stock was of Rs. 1,28,800

13. Following are the balances taken from the books of Sanjay. Prepare
final accounts.
Capital. Rs. 35,000, Drawing Rs. 11,000, Opening stock Rs. 30,000,
Purchases Rs. 75,000, Purchases Return Rs. 1,300, Sales Rs. 1,25,000, Sales
Return Rs. 2,700. Trade expenses Rs. 725. Wages Rs. 3,400. Salary
Rs. 5.800. Travelling Expenses Rs. 750. Advertisement Rs. 600, Rent Rates
and Taxes Rs. 800. Discount given Rs. 320, Interest paid Rs. 215, Building
Rs. 8,000, Machines Rs. 1000, fixture and fittings Rs. 5,000, Sundry debtor

148

Accounting & Taxation

Rs. 40,000. Sundry Creditors Rs. 25,000. Cash in hand Rs. 800. Bank overdraft
Rs. 8,200. Tools Rs. 9,000
The closing stock was valued at Rs. 50,000.
14. Following balances are taken from the books of Mohan. Prepare
Tradingand Profit & Loss Account and Balance sheet for the year ended on
Dec - 31 - 2011.

Building
42,800
Machinery
18,000
Purchases
1,51,000
Opening stock
1,00,050
Salary
18,000
Wages
40,000
Drawing
50,000
Import Duty
15,000
Carriage Inward
4,500
Insurance
2,800
Advertisement
8,000
Interest
6,800
Debtors
1,10,000
Discount
12,800
Sales return
3,000
Post and Telegraphs
4,200
Commission
3,700
Bank Balance
9,200
Cash in Hand
1,250
6,01,100
The Closing stock is of Rs. 2,00,500

Sales
Capital
Creditor
Bills Payable

3,00,000
2,00,000
80,100
21,000

6,01,100

Paper - II Accountancy & Computers

149

FINAL ACCOUNTS WITH ADJUSTMENTS

Adjustment is the process of adjusting outstanding and prepaid expenses
and incomes, depreciation of assets, bad debt, interest on capital and drawings
etc., into the final accounts.
The aim of adjustments is to include in, all the expenses and incomes related
to the trading period and exclude all the final accounts. All adjustments are
unrecorded items and they do not appear in the trial balance. So before final
accounts are prepared these items should be adjusted and recorded, each in
two different accounts. the adjustments are made through journal entries
Adjusting entries. The following are the usual adjustments.
1. Outstanding Expenses
These are the expenses, whose benefit is received in the current year, but
their payment is yet to be made. So outstanding expenses should be included in
the expenses of the current year, although they are unpaid. For this various
expenses account, where the payment is outstanding are debited and outstanding
expenses account is credited. Suppose at the time of preparing final accounts
Rs. 500 for salary and Rs. 200 for rent are outstanding. The adjustment entry
for the will beWhen this journal entry is posted to ledger accounts, Rs. 500 will be added
as expenses to salary account and Rs. 200 to the rent account. The outstanding
expenses account will show a credit balance of Rs. 700. It represents a liability
for the services received but unpaid.
2. Prepaid Expenses
These are the payments made in the current year, but their benefits is yet to
be received. In other words these are not current years expenses, although the
money is paid for them. These are advance payments. So the prepaid expenses
should be excluded, from the current year expenses although they are paid. For
this various expenses accounts, where the expenses are prepaid must be credited
and prepaid expenses account should be debited. Suppose at the time of preparing
final account Rs. 300 are prepaid in insurance account and Rs. 100 in wages
account. The adjusting entry for this will be When this journal entry is posted to ledger account Rs. 300 are reduced
from the expenses in insurance account and Rs. 100 in wages account. The
prepaid expenses account will show a debit balance of Rs. 400. It represents
an asset being advance payment.

150

Accounting & Taxation

3. Outstanding Income
This is an income for which service is rendered in the current year, but the
money is not yet received. So this is the income of the current year, although,
the money will be received in the coming year. So such income should be
included in the years income. For this various income accounts, where such
income is outstanding should be credited and outstanding income account should
be debited. Suppose at the time of preparing final accounts, commission Rs.
100 and interest Rs. 200 are outstanding income. The adjusting entry for this
will be When this journal entry is posted to ledger accounts, Rs. 100 is added as
income in commission and Rs. 200 in interest account. The outstanding income
account will show a debit balance of Rs. 300. It represents an asset, being
outstanding income. Outstanding income is also known as Accrued income or
Income earned but not received.
4. Income received in Advance
This is an amount, received in advance, with a promise to render service in
future. Such amount cannot be the income of the current year. So at the time of
preparing final accounts, income received in advance should be deducted from
the current years income. For this various income accounts, where the income
is received in advance are debited and income received in advance is credited.
Income received in advance is also called. Unearned income. Suppose at the
time of preparing final accounts commission Rs. 50 and rent Rs. 100 are income
received in advance. The adjusting entry for this will be When this journal entry is posted to ledger accounts Rs. 50 are reduced as
income in commission account and Rs. 100 in rent account. The income received
in advance account will show a credit balance. It is a liability for income received
in advance.
5. Depreciation
Decrease in the value of permanent assets due to their use is called
Depreciation. Business assets such as furniture, machines and building
depreciate in value every year, because of their use. Depreciation is a business
expense. So when final accounts are prepared depreciation account is debited
and connected asset account is credited. Suppose at the time of preparing final
accounts the depreciation in machinery is Rs. 500 and in furniture Rs. 200. The
adjusting entry for this will be -

Paper - II Accountancy & Computers

151

When this journal entry is posted in ledger accounts the depreciation account
shows a debit balance of Rs. 700, as depreciation expense. The machinery
account is credited by Rs. 500 and furniture account by Rs. 200. This reduces
the required value of the assets due to depreciation.
6. Bad Debt
Generally in every business there are some debtors, who do not pay their
debts. Such debts are called Bad debts. Bad debt is a business expense. It
is taken into account. When final accounts are prepared. For this bad debt
account is debited and the personal accounts of the defaulters are credited.
Their accounts are closed. Suppose Rs. 500 are due from Rakesh and Rs. 300
from Mohan. And there is no hope of recovering the amounts from them. The
adjusting entry for this will be When this journal entry is posted to ledger accounts the bad debt account
will show a debit balance Rs. 800 as an expense. Rakeshs and Mohans account,
will show no balance. Their debit balances are written off.
7. Reserve for Doubtful Debt (R.D.D)
Even after bad debt is written off, there remains some debt, whose recovery
is doubtful. Such debt is called doubtful. The possible loss from doubtful debtors
of the current year is a business expenses for the current year, although it is yet
to be incurred. So such possible loss is also taken into account, when final
accounts are prepared. For this first bad debt is deducted from the total debt
and then some percentage is calculated on the balance, as the required R.D.D.
This required reserve is debited to profit and loss account and credited to an
account called Reserve for Doubtful Debt account or Provision for Bad Debt.
Suppose at the time of preparing final accounts the total debtors are Rs. 50,000
and out of it Rs. 2,000 are bad debt. So the remaining debt is (50,00020,000)=48,000. Now if we want 5 percent R.D.D. its amount will be 2,400.
For this adjusting entry will be When this journal entry is posted. Profit and loss account will include Rs.
2,400 as an expense. Reserve for doubtful debt, account will show a credit
balance of Rs. 2,400. The credit balance of reserve for doubtful debt account
is a liability relating to doubtful debtors. This liability is deducted from the debtors
in the balance sheet, to show the net amount receivable from the debtors.
If there is already a reserve for doubtful debt, in the books of a account,
then the bad debt should be debited to it, instead to profit and loss account.
This is because the reserve for doubtful debt if maintained to cover the risk of

152

Accounting & Taxation

bad debt. It was credited by debiting the profit and loss account the previous
year.
It should be noted that, each year the amount required as reserve for doubtful
debt, is debited to profit and loss account and credited to reserve for doubtful
debt account.
If in any year, there is any amount is reserve for doubtful debt account, then
the excess amount should be debited to reserve for doubtful debt account and
credited to profit and loss account.
8. Reserve for Discount on Debtors
If the current years debtors pay their debt before time, we pay them cash
discount. This possible loss of discount is current years expense. So when
final accounts are prepared a reserve is credited for it. It is called Reserve for
discount on debtors. For this profit and loss account is debited and Reserve
for Discount on Debtors account is credited. The reserve for discount on
debtors is a liability. It is shown in the balance sheet as a deduction from the
Sunday debtors. If there is already a reserve for discount on debtors then the
cash discount paid during the year should be debited to it and not to the profit
and loss account. In short its entries are made on the same line as that of
reserve for doubtful debt.
9. Reserve for Discount on Creditors
Just like reserve for discount on debtors, some people create reserve for
discount on creditors. Reserve for discount on creditors is a possible income to
us, in the from of discount, when we pay cash to our creditors. The reserve for
discount on creditors is also estimated like reserve for discount on debtors. The
amount thus estimated is debited to reserve for discount on creditors account,
and credited to profit and loss account. The reserve for discount on creditors is
an asset. It is shown in balance sheet as a deduction from the Sunday creditors.
It there is already a reserve for discount on creditors then the cash discount
received during the year should be credited it. It should not be credited to profit
and loss account. The entries relating to reserve for discount on creditors are
made in the reverse direction to the entries, in relation to reserve for discount on
debtors.
10. Interest on Capital
The Proprietor, who invests his money in business as capital, expects apart
from profit some interest on it. So interest is calculated on capital at a certain
rate and treated as business expense. It is an expense to business and income

Paper - II Accountancy & Computers

153

to the proprietor in the form of interest. So at the time of preparing final accounts,
the interest on capital is debited to profit and loss account and credited to the
capital account. This increases the proprietors capital in the business.
11. Interest on Drawings
Drawings are the amounts taken out of business by the proprietor for his
personal use. If the proprietor receives interest of this capital in business, he
must also pay interest to the business on his drawings. The interest on drawings
is an income to business as interest received, and expense to the proprietor as
interest paid. So at the time of preparing final accounts, interest on drawings is
debited to the capital account, and credited to the profit and loss account.
12. Closing Stock
It is the value of unsold goods, at the end of the trading period. At the time
of preparing final accounts closing stock is valued by Stock Closing. The
closing stock does not appear in the trial balance. As such at the time of preparing
final accounts closing stock account, is debited and trading account is credited.
The closing stock is also shown as an asset in the balance sheet.
Sometimes at the time of preparing final accounts closing stock is adjusted
with the purchases account. It is done by debiting closing stock account and
crediting to purchases account. In this case closing stock will appear in the trial
balance. Then it is not adjustment. So it should be only included in the balance
sheet , as an asset. It should not be credited to trading account.

154

Accounting & Taxation

Illustration : Problem of Final accounts with adjustments

Name of the Account

Furniture & Fittings

Motor Vehicle
Building
Capital
Bad debt
Sundry Debtors
Drawings
Sundry Creditors
Stock on 1-1-1987
Purchases
Sales
Bank overdraft
Purchases Return
Sales Return
Advertisement
Interest
Commission
Cash
Taxes & Insurance
General Expenses
Salaries
Travelling Expenses

Debit Amt. Credit Amt.

Rs.
Rs.
-

500
10,000
25,000
400
10,000
2,000
25,000
45,000
2,000
200
800
4,200
1,500
3,200
9,000
5,400

40,000
15,000
75,000
8,000
5,000
1,200
-

1,44,200

1,44,200

Following adjustments are necessary:

1. The closing stock on 31-dec-2011 was worth Rs. 20,000
2. Calculate deprecition on building at 5 %, on furniture & fittings at 10
percent and on Motor Vehicle at 20 percent.
3. Rs. 250 interest on bank overdraft, Rs. 1,200 Salary and texes
Rs.200 were outstanding.
4. Rs. 100 were received in advance as comission.
5. 5 Percent Reserve on debtors for doubtful debt is necessary

Paper - II Accountancy & Computers

155

TRADING AND P&L A/c of |Mohan for year ended 31-2011

Particulars
Rs.
To Opening Stock
25,000
To Purchases 45,000
Less :Return -5000
40,000
To Gross Profit transferred to Profit & Loss
Account
28,000

Particulars
By Sales
75,000
Less Returns -2,000
By Closing stock

73,000
20,000

By Gross Profit

93,000
28,000

93,000
To Bed debt
400
To R.D.D.
500
To advertisement
200
To interest
800
Add outstanding
interest on overdraft
+250
--------- 1,050
To taxes and
Insurance
1,500
Add outstanding tax
+200
---------- 1,700
To General Expenses
3,200
To Salary
9,000
Outstanding +1,200
--------10,200
To travelling expenses
5,400
To Depreciation:On Building 1,250
On Furniture
& Fittings
+50
On Motor
Vehicle
+2,000
--------3,300
To Net Profit transferred
to capital account
3,150
29,100

Rs.

By Commission
Less Commission received
in advance

1,200

-100
------- 1,100

29,100

156

Accounting & Taxation

MOHANS BALANCE SHEET (As on Dec - 31 -2011 )

LIABILITIES

Rs.

Sundry Creditors
Bank Overdraft
Capital
40,000
Add Profit
+3,150
43,150
Less Drawing----- 2,000
------Outstanding expenses: Int. on overdraft
250
Salary
+1,200
Taxes
+ 200
-------Commission received in
advance

ASSESTS

15,000 Cash
8,000 Sundry Debtors
Less R.D.D.
Furniture and
Fittings
41,150 Depreciation
Motor Vehicle
Depreciation
1,650 Building
Depreciation
100

Rs.
4,200

10,000
- 500
---------

9,500

500
-50
-------10,000
-2,000
-------10,000
-1,250
--------

450

8,000

23,750

Closing

20,000
65,900

65,900
EXERCISE
1. Prepare the Final accounts from the following balances :
Drawings

4,000

Purchases

22,000

Machinery & Plant

41,200

Sales Return

1,500

Bills Receivable

5,000

Salaries

10,000

Trade Expenses

2,000

Debtors

15,000

Opening Stock

40,000

Advertisements
Post & Telegrams

Rent

2,000

500

Travelling Expense

1,200

420

Cash

3,180

Sales

88,000

Capital

30,000

Creditors

20,000

Bills Payable

10,000

Among the debtors Rs. 800 is a bad debt, Closing sto ck Rs. 20,000

Paper - II Accountancy & Computers

157

2. The following balances are taken from the books of Shashibhushan for
the year ended on December, 31-2011. Prepare the final accounts.
Cash in Hand

1,000

Capital

1,00,000

Machinery & Plant

Sales

60,000
2,00,000

Purchases

12,000

Furniture and Fitting

Bills Payable

22,000

R.D.D.

Opening Stock

35,000

Bills Receivables

20,000

Debtors

50,000

Rent & Taxes

10,000

Creditors

24,000

Salary

20,000

Wages

16,000

15,000
1,000

The following adjustments are necessary :

(a). Rs. 200 for rent and takes, Rs. 300 for wages and Rs. 4,000 for salary
are outstanding (b) Closing stock is of Rs. 40,000. (c) Depreciate Plant and
MAchinery at 5 percent, (d) Calculate 10 percent depreciation on furniture and
fittings. (e) The reserve for Doubtful debts should be 2.5 percent on debtors.

3. Prepare Trading and Profit & Loss Account and Balance sheet from
the following particulars. Journal entries are not necessary for adjustments.
TRIAL BALANCE AS ON 31st December, 2011
Particulars

Purchases
Discount
Wages
Salaries
Travelling expenses
Carriage Inwards
Insurance

Debit Amt. Credit Amt.

Rs.
Rs.
-

16,000
1,300
6,500
2,000
500
275
150

158

Accounting & Taxation

3. From the following balances taken from the books of Kumar, Prepare
final accounts for the year ended on Dec-31-2011.
Kumars Capital
Kumars Drawing
Furniture & Fittings
Sales Return
Discount Given
Discount Received
Bank Overdraft
Creditors
Business Premises
Stock on 1-1-2011
Debtors

30,000
5,000
2,600
2,000
1,600
2,000
4,200
13,300
20,000
22,0000
18,000

Rent Received
1,000
Purchases
1,10,000
Sales
1,50,000
Taxes & Insurances
2,000
General Expenses
4,000
Salary
9,000
Commission Paid
2,200
Carraige
1,800
Reserve for doubtful debts 500
Bad debt
800

Adjustments : On December 2011, the value of remaining stock was

Rs.20,000. Depreciate business premises by Rs. 3,000 and furniture and fitting
by Rs. 260. Arrange 5% reserve for doubtful debts on debtors. Calculate 15%
interest on Capital. Rs. 600 was outstanding for salary and Rs. 700 are prepaid
on insurance.

UNIT

Basic Fundamentals of Computers

Introduction
It is a device capable of processing data. It accepts data in the form of
binary that device can understand. It can perform arithmetic and logical operations
on data. It can store data, instruction and result and can provide information on
an output device in user desired format.

Characteristics of Computer
The word computer comes from the word compute which means to
calculate. So a computer is normally considered to be a calculating device that
can perform arithmetical operation at enormous speed.
(i) Speed : A computer is a very fast device. While, talking about the
speed of computer we do not talk in terms of seconds or even milliseconds
(10-3). Our units of speed are the microseconds (10-6), the nanosecond (10-9),
and even the picoseconds (10-12). A power full computer is capable of performing
about 3 to six million simple arithmetical operation per second.
(ii) Accuracy: - The accuracy of a computer is consistently high. And the
degree of accuracy of a particular computer depends up on its design.
(iii) Diligence: - Unlike human being a computer is free from tiredness,
lack of concentration etc. And hence can works for hours together without
creating any errors.

160

Accounting & Taxation

(iv) Versatility : It is one of the most wonderful things about the computer.
One moment it is preparing the result of particular examination, the next moment
it is busy preparing electricity bill, and in between it may be helping the office
secretary to trace an important letter in seconds. All that is requiring changing its
talent is to slip-in a new program into it.
(v) Power of Remembering: - A computer can store and recall any amount
of information because of its secondary storage capability.

History of Computer
Computer history starts with the development of device called Abacus, by
the Chinese around 600 BC. It was used for systematic calculation of arithmetic
expressions, and it is interesting to note that; it is still used in far eastern countries
like India, China etc. Although there were number of improvements in calculating
devices, but no conceptual changes were made until the end of 18th century.
During the first decade of 19th century Charles Babbage (Mathematic professor
of Cambridge University) developed two devices called differential and analytical
engines. These devices had a provision for imputing data, performing arithmetic
and logical operations on data, and storing and printing result. These devices
cause a base for modern digital computers. So Charles Babbage is known as
the father of modern digital computers.
In 1940s professors Presper J Eckert and John Mauchly of Moore School
of engineering (Pennsylvania University USA) developed the first successful
electronic computers called ENIAC (Electronic Numerical Integrator and
Calculator). The computers developed after ENIAC are classified into five
computer generations.
Mile Stones in Computer History
(1) Abacus - 600BC by the Chinese.
(2) Cardboard Multiplication Calculator - in early 17th century by the
John Napier.
(3) Napiers Bone Upgraded version of Cardboard Multiplication
Calculator in 1890.
(4) Mechanical Adding Machine by Balaise Pascal in 1642.
(5) Calculator for Multiplication Borron Gottfried Wilhelm Von Leibniz
(German Mathematician) in 1671.
(6) Key Board Machine in 1880.

Paper - II Accountancy & Computers

161

(7) Punched Card Herman Hollerith in 1860.

(8) Difference Engine Charles Babbage in 1822.
(9) Analytical Engine Charles Babbage in 1842.
(10) Mark I Howard AAiken of Harward University America in
Collaboration with IBM (International Business Machine) during the
Period 1937-44.
(11) ABC Atanasoff -Berry Computer 1930-42.
(12) ENIAC - by J. Eckert and John Mouchly.
(13) EDVAC (Electronic Discrete Variable Automatic Calculator) by
Dr. John Von Neumann 1946-52.
(14) EDSAC (Electronic Delay Storage Automatic Calculator) by Prof.
Maurice Wilkes. 1947-49.
(15) Manchester Mark I by prof. MHA Newman 1948.
(16) UNIAC (Universal Automatic Computer) by IBM in1951.
(1stcommercial computer)
(17) 701 Series Machine by IBM 1952.
(18) IBM 650 1953.

Classification of Computers
The computers are classified into various types depends on their purpose,
operation and size.
In general computers are classified into major categories based on.
(a) According to the purpose of the computer.
(b) According to the operation of computer.
(c) According to the size of computer.
(a) Classification as per purpose of the computer
1. General purpose computers.
2. Special purpose computer.

162

Accounting & Taxation

1. General Purpose Computers : These computers are theoretically

used for any type of applications. These computers can be used in solving a
business Problem and also used to solve mathematical equation with same
accuracy and consistency. Most of the computer now are general purpose digital
computers. All the P.Cs, which have become household affair.
2. Special Purpose Computers : These digital computer are designed,
made and used for any specific job. These are usually used for those purposes
which are critical and need great accuracy and response like Satellite launching,
weather forecasting etc.
(b) According to the operational principle of computers, they are
categorized as analog, digital and hybrid computers.
Analog Computers: These are almost extinct today. These are different
from a digital computer because an analog computer can perform several
mathematical operations simultaneously. It uses continuous variables for
mathematical operations and utilizes mechanical or electrical energy.
Digital Computers: They use digital circuits and are designed to operate
on two states, namely bits 0 and 1. They are analogous to states ON and OFF.
Data on these computers is represented as a series of 0s and 1s. Digital computers
are suitable for complex computation and have higher processing speeds. They
are programmable. Digital computers are either general purpose computers or
special purpose ones. General purpose computers, as their name suggests, are
designed for specific types of data processing while general purpose computers
are meant for general use.
Hybrid Computers: These computers are a combination of both digital
and analog computers. In this type of computers, the digital segments perform
process control by conversion of analog signals to digital ones.
(c) According to the sizes of the computers ,the computers are classified
as follows.
Supercomputers: The highly calculation-intensive tasks can be effectively
performed by means of supercomputers. Quantum physics, mechanics, weather
forecasting, molecular theory are best studied by means of supercomputers.
Their ability of parallel processing and their well-designed memory hierarchy
give the supercomputers, large transaction processing powers.
Ex. PARAM developed in India.
Servers: They are computers designed to provide services to client
machines in a computer network. They have larger storage capacities and

Paper - II Accountancy & Computers

163

powerful processors. Running on them are programs that serve client requests
and allocate resources like memory and time to client machines. Usually they
are very large in size, as they have large processors and many hard drives. They
are designed to be fail-safe and resistant to crash.
Mainframe Computers: Large organizations use mainframes for highly
critical applications such as bulk data processing and ERP. Most of the mainframe
computers have capacities to host multiple operating systems and operate as a
number of virtual machines. They can substitute for several small servers.
Wearable Computers: A record-setting step in the evolution of computers
was the creation of wearable computers. These computers can be worn on the
body and are often used in the study of behavior modeling and human health.
Military and health professionals have incorporated wearable computers into
their daily routine, as a part of such studies. When the users hands and sensory
organs are engaged in other activities, wearable computers are of great help in
tracking human actions. Wearable computers do not have to be turned on and
off and remain in operation without user intervention
Minicomputers: In terms of size and processing capacity, minicomputers
lie in between mainframes and microcomputers. Minicomputers are also called
mid-range systems or workstations. The term began to be popularly used in the
1960s to refer to relatively smaller third generation computers. They took up
the space that would be needed for a refrigerator or two and used transistor and
core memory technologies. The 12-bit PDP-8 minicomputer of the Digital
Equipment Corporation was the first successful minicomputer.
Microcomputers: A computer with a microprocessor and its central
processing unit is known as a microcomputer. They do not occupy space as
much as mainframes do. When supplemented with a keyboard and a mouse,
microcomputers can be called personal computers. A monitor, a keyboard and
other similar input-output devices, computer memory in the form of RAM and a
power supply unit come packaged in a microcomputer. These computers can fit
on desks or tables and prove to be the best choice for single-user tasks.
Desktops: A desktop is intended to be used on a single location. The
spare parts of a desktop computer are readily available at relatively lower costs.
Power consumption is not as critical as that in laptops. Desktops are widely
popular for daily use in the workplace and households.
Laptops: Similar in operation to desktops, laptop computers are miniaturized
and optimized for mobile use. Laptops run on a single battery or an external
adapter that charges the computer batteries. They are enabled with an inbuilt
keyboard, touch pad acting as a mouse and a liquid crystal display. Their

164

Accounting & Taxation

portability and capacity to operate on battery power have proven to be of great

help to mobile users.
Notebooks: They fall in the category of laptops, but are inexpensive and
relatively smaller in size. They had a smaller feature set and lesser capacities in
comparison to regular laptops, at the time they came into the market. But with
passing time, notebooks too began featuring almost everything that notebooks
had. By the end of 2008, notebooks had begun to overtake notebooks in terms
of market share and sales.
Personal Digital Assistants (PDAs): It is a handheld computer and
popularly known as a palmtop. It has a touch screen and a memory card for
storage of data. PDAs can also be used as portable audio players, web browsers
and smart phones. Most of them can access the Internet by means of Bluetooth
or Wi-Fi communication.
Tablet Computers: Tablets are mobile computers that are very handy to
use. They use the touch screen technology. Tablets come with an onscreen
keyboard or use a stylus or a digital pen. Apples iPad redefined the class of
tablet computers.

Input-output Devices
Generally, we give data and program to the computer. So what we give to
the Computer is known as input. Through which device we give the input is
called input device.
Generally we get information from the computer, So what we get from the
computer is called output.
Through which device we get output is called output device.
Input devices
An input device presents data to the processing unit in a machine-readable
form. Although the keyboard is a common input device for a small computer, a
system may also support various other input devices such as Optical Character
Recognition (OCR), Magnetic Ink Character Recognition (MICR), mark
sense reader, etc.
Key board
The keyboard is very much like a standard typewriter keyboard with a few
additional keys. The basic QWERTY layout of characters is maintained to make
it easy for the trained typist to use the system. The additional keys are included

Paper - II Accountancy & Computers

165

to perform certain special functions such as loading a program, edition a text,

etc. These are known as function keys that vary in number from system to
system.
Optical Character Recognition
Often abbreviated as OCR, optical character recognition involves reading
text from paper and translating the images into a form that the computer can
manipulate. An OCR system enables you to take a book or a magazine article
and feed it directly into an electronic computer file.
Magnetic Ink Character Recognition (MICR)
An MICR can identify characters printed with a special ink that contain
particles of magnetic material. This device particularly finds applications in banking
industry. Since the MICR system can recognise only certain character styles,
the characters have to be accurately formed.
Optical Mark Recognition (OMR)
Optical mark recognition, also called mark sense reader, is a technology
where an OMR device senses the presence or absence of a mark, such as
pencil mark.
OMR is widely used in tests such as aptitude tests.
Bar Code Reader
These devices are generally available in super markets, bookshops, etc.
Bar-code readers are photoelectric scanners that read the bar codes or vertical
zebra striped marks, printed on product containers. Supermarkets use a bar
code system called the Universal Product Code (UPC). The bar code identifies
the product to the supermarkets computer which has a description and the
latest price of the product. The computer automatically tells the Point of Sales
(POS) terminal what the price is.
Digitizing Tablet
This is an input device that enables you to enter drawings and sketches into
a computer. A digitizing tablet consists of an electronic tablet and a cursor or
pen. A cursor (also called a puck) is similar to a mouse, except that it has a
window with cross hairs for pinpoint placement, and it can have as many as 16
buttons. A pen (also called a stylus) looks like a simple ballpoint pen but uses an
electronic head instead of ink. The tablet contains electronic field that enables it
to detect movement of the cursor or pen and translate the movements into digital

166

Accounting & Taxation

signals that it sends to the computer. Digitizing tables are also called digitizers,
graphics tables, touch tables or simply tables.
Scanner
Scanner is an input device that can read text or illustrations printed on
paper and translate the information into a form that the computer can use. A
scanner works by digitizing an image - dividing it into a grid of boxes and
representing each box with either a zero or a one, depending on whether the
box is filled in. The resulting matrix of bits, called a bit map, can then be stored
in a file, displayed on a screen and manipulated by programs. Optical scanners
do not distinguish text from illustrations, they represent all images as bit maps.
Therefore, you cannot directly edit text that has been scanned. To edit text read
by an optical scanner, you need an optical character recognition (OCR) system
to translate the image into ASCII characters. Most optical scanners sold today
come with OCR packages.
Mouse
Mouse is a device that controls the movement of the cursor or pointer on a
display screen. It is a small object you can roll along a hard and flat surface. As
you move the mouse, the pointer on the display screen moves in the same direction.
Mouse contains at least one button and sometimes as many as three, which
have different functions depending on what program is running.
Light Pen
Light pen is an input device that utilizes a light-sensitive detector to
selectobjects on a display screen.
Speech input devices
Speech or voice input devices convert a persons speech into digital form.
These input devices, when combined with appropriate software, form voice
recognition systems. These systems enable users to operate microcomputers
using voice commands.
Output Devices
Output devices receive information from the CPU and present it to the user
in the desired form. Output devices include display screen, loudspeakers,
printers, plotters, etc.

Paper - II Accountancy & Computers

167

Display Screen
When a program is keyed in, the screen (which is similar to a television
screen) displays the characters. The user can read the program line by line and
make corrections before it is stored or printed on a printer. It is also possible to
bring to the screen a portion of the program stored in the external storage for
editing. Screen sizes differ from system to system. The standard size is 24 lines
by 80 characters. Most systems have provision for scrolling. This facilitates the
user to move the text vertically or horizontally on the screens thus bringing to the
screen the hidden text. Thus the user can scan through the entire file either to
review or to select a particular portion. The cursor on the screen is controlled
by the cursor keys on the keyboard,
Printer
Printer is a device that prints text or illustrations on paper and in many
cases on transparencies and other media. There are many different types of
printers. In terms of the technology utilized, printer fall into the following categories.
(i) Ink-jet Printer
Ink-jet printers work by spraying ionized ink on a sheet of paper. Magnetized
plates in the inks path direct the ink onto the paper in the desired shapes. Inkjet
printers are capable of producing high quality print approaching to that produced
by laser printers. A typical ink-jet printer provides a resolution of 300 dots per
inch, although some newer models offer higher resolutions.
In general, the price of ink-jet printers is lower than that of laser printers.
However, they are also considerably slower. Another drawback of ink-jet
printers is that they require a special type of ink that is apt to smudge on inexpensive
copier paper.
Because ink-jet printers require smaller mechanical parts than laser printers,
they are specially popular as portable printers. In addition, colour ink-jet printers
provide an inexpensive way to print full-colour documents.
(ii) Laser Printer
Laser Printer utilizes a laser beam to produce an image on a drum. The light
of the laser alters the electrical charge on the drum wherever it hits. The drum is
then rolled through a reservoir of toner, which is picked up by the charged
portions of the drum. Finally, the toner is transferred to the paper through a
combination of heat and pressure. This is also the way copy machines work.

168

Accounting & Taxation

Because an entire page is transmitted to a drum before the toner is applied,

laser printers are sometimes called page printers. There are two other types of
page printers that fall under the category of laser printers even though they do
not use lasers at all. One uses an array of LEDs to expose the drum, and the
other uses LCDs. Once the drum is charged, however, they both operate like a
real laser printer.
One of the chief characteristics of laser printers is their resolution - how
many dots per inch (dpi) they lay down. The available resolutions range from
300 dpi at the low end to 1,200 dpi at the high end. By comparison, offset
printing usually prints at 1,200 or 2,400 dpi. Some laser printers achieve higher
resolutions with special techniques known generally as resolution enhancement.
In addition to text, laser printers are very adept at printing graphics.
However, you need significant amounts of memory in the printer to print highresolution graphics. To print a full-page graphic at 300 dpi, for example, you
need at least 1 MB (megabyte) of printer RAM. For a 600-dpi graphic, you
need at least 4 MB RAM.
The speed of laser printers ranges from about 4 to 20 pages of text per
minute (ppm). A typical rate of 6 ppm is equivalent to about 40 characters per
second (cps).
(iii) Line Printer
Line printers are high-speed printers capable of printing an entire line at
one time. A fast line printer can print as many as 3,000 lines per minute. The
disadvantages of line printers are that they can print only one font, they cannot
print graphics, the print quality is low, and they are very noisy.
(iv) Thermal printer
Thermal printers are printers that produce images by pushing electrically
heated pins against special heat-sensitive paper. Thermal printers are inexpensive
and are used in most calculators and many fax machines. They produce lowquality print, and the paper tends to curl and fade after a few weeks or months.
Plotter
Plotter is a device that draws pictures on paper based on commands from
a computer. Plotters differ from printers in that they draw lines using a pen. As a
result, they can produce continuous lines, whereas printers can only simulate
lines by printing a closely spaced series of dots. Multicolour plotters use differentcoloured pens to draw different colours.

Paper - II Accountancy & Computers

169

In general, plotters are considerably more expensive than printers. They

are used in engineering applications where precision is mandatory.
Sound Cards & Speakers
An expansion board that enables a computer to manipulate and output
sounds. Sound cards are necessary for nearly all CD-ROMs and have become
commonplace on modern personal computers. Sound cards enable the computer
to output sound through speakers connected to the board, to record sound
input from a microphone connected to the computer, and manipulate sound
stored on a disk.
Nearly all sound cards support MIDI, a standard for representing music
electronically. In addition, most sound cards are Sound Blaster-compatible, which
means that they can process commands written for a Sound Blaster card, the de
facto standard for PC sound.
3D-Audio
3D audio is a technique for giving more depth to traditional stereo sound.
Typically, 3D sound, or 3D audio, is produced by placing a device in a
room with stereo speakers. The device dynamically analyses the sound coming
from the speakers and sends feedback to the sound system so that it can readjust
the sound to give the impression that the speakers are further apart.
3D audio devices are particularly popular for improving computer audio
where the speakers tend to be small and close together. There are a number of
3D audio devices that can be attached to a computers sound card.

Operating System
Operating system(OS) is to operate the computer. The operating system is
a collection of programs that control the operation of all hardware and other
resources in the computer system.
The basic functions of the Operating system are
1. Assigning processors for performing tasks.
2. Allocating and managing memory, and other storage area
3. Command interpretation
4. Handling job transactions.
5. Maintains internal clock

170

Accounting & Taxation

6. Scheduling of various tasks.

7. Establishing and enforcing priorities for different jobs.
8. Co-ordinating and managing peripheral devices.
9. Input-output management
10. Establishing data security and integrity.
Operating System Concepts
User programs interact with operating system using set of extended
instructions. These instructions are called system calls. These system calls are
used to create, delete and use various software objects that are manages by the
Operating systems. The following are common in any Operating system.
1. Process
2. Files
3. System Calls
4. The shell
5. Booting Process i. Boot Strap Loader
i. Check Programs
ii. Monitor Program
iii. Basic input/output System(BIOS) Program
iv. Utility Programs
v. File Maintenance Programs
Types of Operating systems
Operating systems are basically capable to do all functions but the way of
processing or approach of the systems may vary from one Operating systems to
another. The following basic types of operating systems are
1. Batch Processing Systems
2. Interactive Operating systems
3. Multi-Programming Operating Systems
4. Multi-Processing Operating Systems
5. Multitasking systems

Paper - II Accountancy & Computers

171

6. Multi-user Operating systems

7. Virtual storage systems
Windows 7 is the latest version of a series of Operating Systems that
Microsoft has produced for use on personal computers. It is the follow-up to
the Windows Vista Operating System which was released in 2006. An operating
system allows your computer to manage software and perform essential tasks.
It is also a Graphical User Interface (GUI) that allows you to visually interact
with your computers functions in a logical, fun and easy way.
Features of Windows
Multitasking
Multitasking allows the user to activate and accomplish more than one task
at a time. For example, work on a document file in MSWORD programs, while
copying file from other computer available in the network, and also can listen
songs through Windows Media Player. With Windows 7 environment, the user
can do more than one task a time.
File system
File system means creating, copying, moving, saving, opening, finding,
renaming ,deleting of files or folders.
Working with files and folders
A file is an item that contains informationfor example, text or images or
music. When opened, a file can look very much like a text document or a picture
that you might find on someones desk or in a filing cabinet. On your computer,
files are represented with icons;(icon is a small picture that represents file, folder,
program or other object or function) this makes it easy to recognize a type of file
by looking at its icon.
A folder is a container you can use to store files in. If you had thousands
of paper files on your desk, it would be nearly impossible to find any particular
file when you needed it. Thats why people often store paper files in folders
inside a filing cabinet. On your computer, folders work the same way. Here are
some typical folder icons:
Folders can also store other folders. A folder within a folder is usually
called a subfolder. You can create any number of subfolders, and each can hold
any number of files and additional subfolders.

172

Accounting & Taxation

Microsoft Word
A word processor enables you to create a document, store it electronically
on a disk, display it on a screen, modify it by entering commands and characters
from the keyboard, and print it on a printer.
The great advantage of word processing over using a typewriter is that you
can make changes without retyping the entire document. If you make a typing
mistake, you simply back up the course and correct your mistake. If you want
to delete a paragraph, you simply remove it, without leaving a trace. It is equally
easy to insert a word, sentence, or paragraph in the middle of a document.
Word processors also make it easy to move sections of text from one place to
another within a document, or between documents. When you have made all
the changes you want, you can send the file to a printer to get a hardcopy.

Microsoft Excel
When ever if we want to enter some matter in the tabular form such row
wise and column wise details, the work sheet is very much applicable because
it includes automatic recalculations of all formulae , several built in functions,
formatting work sheet.etc. It gives professional look of data in the work sheet
and also can show in the form of graphs.
A worksheet is a single spreadsheet page and a workbook is a collection
of all the worksheets in a single file. A workbook contains worksheets, in the
same way that a book contains pages. A workbook consists of one or more
worksheets.
After opening a work book it contains default 3 work sheets. We may
change the no of work sheets and also can rename the work sheets. There is a
facility to know The maximum no of rows (ctrl + down arrow ) and maximum
no of columns (ctrl + right arrow ) in excel 2007 .
When we starts to enter a formula , automatically shows the formulae
matching the first character of the formula which we are trying to enter. So it is
very easy to enter the formula and the arguments of that formula.
While working on a work sheet , if you make any mistake , you can use the
undo command in the quick access toolbar to undo the last action.
We can also find a particular word in the work sheet and also can be
replaced by another word by using find and replace. If there is any spelling
mistake, we can correct it by using spell check.

Paper - II Accountancy & Computers

173

Short Answer Type Questions

1. What is a Computer?
2. What are the types computers based on purpose?
3. What are the types computers based on operation?
4. Define input and output device.
5. Write the names of two input and two output devices.
6. What is a scanner ?

Long Answer Type Questions

1. What are the characteristics features of Computer ?
2. List out any five input and output devices in detail.
3. What is operating system ? List different types of operating system.