Accounting & Financial Management MCA 405A

UNIT – 1
Book – Keeping
Book – Keeping involves the chronological recording of financial transactions in a set of books
in a systematic manner.
Meaning of Accounting
Thus, book-keeping is an art of recording the business transactions in the books of
original entry and the ledges. Accountancy begins where Book-keeping ends.
Accountancy means the compilation of accounts in such a way that one is in a position to
know the state of affairs of the business. The work of an accountant is to analyze, interpret and
review the accounts and draw conclusion with a view to guide the management in chalking out
the future policy of the business.
Definition of Accounting:
Smith and Ashburne: “Accounting is a means of measuring and reporting the results of
economic activities.”
R.N. Anthony: “Accounting system is a means of collecting summarizing, analyzing and
reporting in monetary terms, the information about the business.
American Institute of Certified Public Accountants (AICPA): “The art of recording,
classifying and summarizing in a significant manner and in terms of money transactions and
events, which are in part at least, of a financial character and interpreting the results thereof.”
Branches of Accounting:
The important branches of accounting are:
1. Financial Accounting: The purpose of Accounting is to ascertain the financial results i.e.
profit or loass in the operations during a specific period. It is also aimed at knowing the financial
position, i.e. assets, liabilities and equity position at the end of the period. It also provides
otherrelevant information to the management as a basic for decision-making for planning and
controlling the operations of the business.
2. Cost Accounting: The purpose of this branch of accounting is to ascertain the cost of a
product / operation / project and the costs incurred for carrying out various activities. It also
assist the management in controlling the costs. The necessary data and information are
gatherr4ed form financial and other sources.
3. Management Accounting : Its aim to assist the management in taking correct policy
decision and to evaluate the impact of its decisions and actions. The data required for this
purpose are drawn accounting and cost-accounting.
4. Inflation Accounting : It is concerned with the adjustment in the values of assest and of
profit in light of changes in the price level. In a way it is concerned with the overcoming of
limitations that arise in financial statements on account of the cost assumption (i.e recording of
the assets at their historical or original cost) and the assumption of stable monetary unit.
5. Human Resource Accounting : It is a branch of accounting which seeks to report and
emphasize the importance of human resources in a company’s earning process and total assets. It
is concerned with the process of identifying and measuring data about human resources and
communicating this information to interested parties. In simple words, it is accounting for people
as organizational resources.

USERS OF ACCOUNTING INFORMATION

Different categories of users need different kinds of information for making decisions. The users
of accounting can be divided in two broad groups

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(1) Internal users

(2) External users.

Internal Users:
Managers : These are the persons who manage the business, i.e. management at he top, middle
and lower levels. Their requirements of information are different because they make different
types of decisions.
Accounting reports are important to managers for evaluating the results of their decisions. In
additions to external financial statements, managers need detailed internal reports either branch
division or department or product-wise. Accounting reports for managers are prepared much
more frequently than external reports.
Accounting information also helps the managers in appraising the performance of subordinates.
As such Accounting is termed as “ the eyes and ears of management.”
External Users :
1. Investors : Those who are interested in buying the shares of company are naturally
interested in the financial statements to know how safe the investment already made is and how
safe the proposed investments will be.
2. Creditors : Lenders are interested to know whether their load, principal and interest, will be
paid when due. Suppliers and other creditors are also interested to know the ability of the firm to
pay their dues in time.
3. Workers : In our country, workers are entitled to payment of bonus which depends on the
size of profit earned. Hence, they would like to be satisfied that he bonus being paid to them is
correct. This knowledge also helps them in conducting negotiations for wages.
4. Customers : They are also concerned with the stability and profitability of the enterprise.
They may be interested in knowing the financial strength of the company to rent it for further
decisions relating to purchase of goods.
5. Government: Governments all over the world are using financial statements for compiling
statistics concerning business which, in turn, helps in compiling national accounts. The financial
statements are useful for tax authorities for calculating taxes.
6. Public : The public at large interested in the functioning of the enterprises because it may
make a substantial contribution to the local economy in many ways including the number of
people employed and their patronage to local suppliers.
7. Researchers: The financial statements, being a mirror of business conditions, is of great
interest to scholars undertaking research in accounting theory as well as business affairs and
practices.
ADVANTAGES FROM ACCOUNTING
The role of accounting has changed from that of a mere record keeping during the 1st decade of
20th century of the present stage, which it is accepted as information system and decision making
activity. The following are the advantages of accounting.
1. Provides for systematic records: Since all the financial transactions are recorded in the
books, one need not rely on memory. Any information required is readily available from these
records.
2. Facilitates the preparation of financial statements: Profit and loss accountant and balance
sheet can be easily prepared with the help of the information in the records. This enables the
trader to know the net result of business operations (i.e. profit / loss) during the accounting
period and the financial position of the business at the end of the accounting period.

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3. Provides control over assets: Book-keeping provides information regarding cash in had,
cash at bank, stock of goods, accounts receivables from various parties and the amounts invested
in various other assets. As the trader knows the values of the assets he will have control over
them.
4. Provides the required information: Interested parties such as owners, lenders, creditors etc.,
get necessary information at frequent intervals.
5. Comparative study: One can compare the present performance of the organization with that
of its past. This enables the managers to draw useful conclusion and make proper decisions.
6. Less Scope for fraud or theft: It is difficult to conceal fraud or theft etc., because of the
balancing of the books of accounts periodically. As the work is divided among many persons,
there will be check and counter check.
7. Tax matters: Properly maintained book-keeping records will help in the settlement of all tax
matters with the tax authorities.
8. Ascertaining Value of Business: The accounting records will help in ascertaining the correct
value of the business. This helps in the event of sale or purchase of a business.
9. Documentary evidence: Accounting records can also be used as an evidence in the court to
substantiate the claim of the business. These records are based on documentary proof. Every
entry is supported by authentic vouchers. As such, Courts accept these records as evidence.
10. Helpful to management: Accounting is useful to the management in various ways. It
enables the management to asses the achievement of its performance. The weakness of the
business can be identified and corrective measures can be applied to remove them with the helps
accounting
LIMITATIONS OF ACCOUNTING

The following are the limitations of accounting.

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

Classification of Accounts
Thus, three classes of accounts are maintained for recording all business transactions. They are:
1.Personal accounts
2. Real accounts
3. Nominal accounts

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1.Personal Accounts: Accounts which are transactions with persons are called “Personal
Accounts” . A separate account is kept on the name of each person for recording the benefits
received from ,or given to the person in the course of dealings with him. E.g.: Krishna’s A/C,
Gopal’s A/C, SBI A/C, Nagarjuna Finanace Ltd.A/C, ObulReddy & Sons A/C , HMT Ltd. A/C,
Capital A/C, Drawings A/C etc.
Rule: “Debit----The Receiver
Credit---The Giver”
2.Real Accounts: The accounts relating to properties or assets are known as “Real Accounts”
.Every business needs assets such as machinery , furniture etc, for running its activities .A
separate account is maintained for each asset owned by the business . E.g.: cash A/C, furniture
A/C, building A/C, machinery A/C etc.
Rule: “Debit----What comes in
Credit---What goes out”
3.NominalAccounts: Accounts relating to expenses, losses, incomes and gains are known as
“Nominal Accounts”. A separate account is maintained for each item of expenses, losses,
income or gain. E.g.: Salaries A/C, stationery A/C, wages A/C, postage A/C, commission A/C,
interest A/C, purchases A/C, rent A/C, discount A/C, commission received A/C, interest received
A/C, rent received A/C, discount received A/C.
Rule: “Debit----All expenses and losses
Credit---All incomes and gains”

ACCOUNTING CONCEPTS
1. Business entity concept
This concept assumes that, for accounting purposes, the business enterprise and its
owners are two separate independent entities. Thus, the business and personal transactions of its
owner are separate. For example, when the owner invests money in the business, it is recorded as
liability of the business to the owner. Similarly, when the owner takes away from the business
cash/goods for his/her personal use, it is not treated as business expense. Thus, the accounting
records are made in the books of accounts from the point of view of the business unit and not the
person owning the business. This concept is the very basis of accounting.

2. Going Concern COncept

This concept states that a business firm will continue to carry on its activities for an
indefinite period of time. Simply stated, it means that every business entity has continuity of life.
Thus, it will not be dissolved in the near future. This is an important assumption of accounting,
as it provides a basis for showing the value of assets in the balance sheet.
3. Money Measurement Concept
This concept assumes that all business transactions must be in terms of money, that is in
the currency of a country. In our country such transactions are in terms of rupees. Thus, as per
the money measurement concept, transactions which can be expressed in terms of money are
recorded in the books of accounts. For example, sale of goods worth Rs.200000, purchase of raw
materials Rs.100000, Rent Paid Rs.10000 etc. are expressed in terms of money, and so they are
recorded in the books of accounts. But the transactions which cannot be expressed in monetary
terms are not recorded in the books of accounts.

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4. Accounting Period Concept

All the transactions are recorded in the books of accounts on the assumption that profits
on these transactions are to be ascertained for a specified period. This is known as accounting
period concept. Thus, this concept requires that a balance sheet and profit and loss account
should be prepared at regular intervals. This is necessary for different purposes like, calculation
of profit, ascertaining financial position, tax computation etc.
5. Cost Concept
Accounting cost concept states that all assets are recorded in the books of accounts at
their purchase price, which includes cost of acquisition, transportation and installation and not at
its market price. It means that fixed assets like building, plant and machinery, furniture, etc are
recorded in the books of accounts at a price paid for them.
6. Dual Aspect Concept
Dual aspect is the foundation or basic principle of accounting. It provides the very basis
of recording business transactions in the books of accounts. This concept assumes that every
transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides.
Therefore, the transaction should be recorded at two places. It means, both the aspects of the
transaction must be recorded in the books of accounts
7. Accrual Concept
The meaning of accrual is something that becomes due especially an amount of money
that is yet to be paid or received at the end of the accounting period. It means that revenues are
recognised when they become receivable. Though cash is received or not received and the
expenses are recognised when they become payable though cash is paid or not paid. Both
transactions will be recorded in the accounting period to which they relate. Therefore, the accrual
concept makes a distinction between the accrual receipt of cash and the right to receive cash as
regards revenue and actual payment of cash and obligation to pay cash as regards expenses.
8. Matching Concept
The matching concept states that the revenue and the expenses incurred to earn the
revenues must belong to the same accounting period. So once the revenue is realised, the next
step is to allocate it to the relevant accounting period. This can be done with the help of accrual
concept.
9. Objective Evidence Concept
According to this concept all accounting transactions should be evidenced and supported by
objective documents. The documents include invoices, receipts, cash memos,etc…. Accounting
records are unbiased. They are not affected by the personal judgment in recording these events.
Objectivity ensures dependability of all accounting records.
10. Historical Record Concept
The accountant shows only those transactions which have actually taken place and not those
which may take place in future. All transactions in accounting are to be recorded in the books in
chronological order. This means preparation of historical record for all transactions.

JOURNAL
Journal is a book in which transactions are recorded in the order in which they occur that
is the transactions are recorded in chronological order. It is called book of “Prime entry /
Original entry”, because all the business transactions are first entered into it. An entry made into
the journal is called as ‘Journal Entry’ and the process of recording is called “Journalizing”.

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Importance of Journal Entry

1. A journal is a record of all transactions arranged in chronological order and also a
representation of debit and credit balances of the account.
2. It also narrates the description of each transaction for clear understanding of the manager.
3. It also records the source document of the transaction which is basis of any record.
4. Journal entry keeps the record of each and every transaction of the firm.
5. It serves as the basis for the preparation of any other accounts.
Format of Journal

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

Date Column: This column records the date on which the transaction is entered
Particulars : This column records the two steps of a transaction. First it records the accounts to
be debited and then the accounts to be credited. It also records the narration ( a brief explanation
about the transactions)
L.F (Ledger Folio) :this column records the ledger page number containing relevant accounts
Debit Column: this column records the amount to be debited
Credit Column: this column records the amounts to be credited.

Problem
Journalise the following transactions with narration
1/3/2002 Suresh bought capital into business 20,000
3/3/2002 purchased furniture for cash 4,000
5/3/2002 purchase of Goods 15,000
10/3/2002 purchase of goods from naveen 10,000
15/3/2001 Sold goods to ashok 8,000
20/3/2002 cash sales 10,000
22/3/2002 cash paid to naveen 10,000
31/3/2002 Salaries paid 2,000
Solution:
Date Particulars L. Debit (Rs) Credit (Rs)
F
1/3/2002 Cash A/c Dr 20,000
To Suresh Capital A/c 20,000
(Being Commencement of Business)

3/3/2002 Furniture A/C Dr 4000

To Cash A/C 4000
(Being Furniture Purchased for cash)

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5/3/2002 Purchases A/C Dr 15,000

To Cash A/C 15,000
(Being Purchased goods for cash)

10/3/200 Purchases A/C Dr 10,000

2 To Naveen A/C 10,000
(Being goods purchased from Naveen)

Ashok A/C Dr 8,000

15/3/200 To Sales A/C 8,000
2 (Being Goods sold to Ashok on credit)

Cash A/C Dr 10,000

To Sales A/C 10,000
20/3/200 (Being goods sold on cash)
2
Naveen A/C Dr 10,000
To Ashok A/C 10,000
(Being cash paid to Naveen )
22/3/200
2 Salaries A/C Dr 2000
To Cash A/C 2000
( Being Salaries Paid)

31/3/200
2

LEDGER
Ledger is the principal book that contains all the accounts to which the transactions
recorded in the books of original entry are transferred. It is called as the “Book of Final Entry”,
as it is the destination into which all the transactions taken place in a business are recorded.
Format
Dr Name of the Account
Cr
Date Particulars J.F Amount Date Particulars J.F Amount

Advantages
1. A ledger provides complete information about all accounts in one book

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2. It facilitates to ascertain the main items of revenues, expenses and know what are the
assets and liabilities and their values.
3. It facilitates in the preparation of final accounts

Problem
Journalize the following transactions and also prepare ledger accounts
1/1/2003 madhu commenced business with Rs.15,000
2/1/2003 paid cash into bank Rs.10,000
3/1/2003 purchased goods from Arun for Rs.2,000
4/1/2003 Returned goods to Arun for Rs.200
5/1/2003 paid to Arun in full settlement of account Rs.1700
7/1/2003 received interest from the bank Rs.750
9/1/2003 sold goods for cash Rs. 7000
12/1/2003 sold goods of Ramesh for Rs.4000
15/1/2003 Received goods worth Rs.100 from Ramesh with a complaint about
damage
16/1/2003 paid salaries Rs.400
17/1/2003 Entertainment expenses Rs.50
20/1/2003 Received a cheque from Ramesh Rs.500
25/1/2003 issued a cheque for Rs.100 towards rent to landlord

Solution
Journalization
Date Particulars L.F Debit Credit
1/1/2003 Cash A/C Dr 15,000
To Madhu’s Capital A/C 15,000
(Being business started with cash)
2/1/2003 Bank A/C Dr 10,000
To Cash A/C 10,000
(Being Cash deposited into bank)
3/1/2003 Purchases A/C Dr 2,000
To Arun A/C 2,000
(Being goods purchased from Arun on credit)
4/1/2003 Arun A/C 200
Dr 200
To Purchase returns A/C
5/1/2003 (Being goods returned by Arun) 1800
Arun A/C 1700
Dr 100
To Cash A/C

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7/1/2003 To Discount 750

(Being the payment in full settlement) 750
Cash A/C Dr
9/1/2003 To interest from bank 7,000
(Being interest received from bank) 7,000
Cash A/C Dr
12/1/2003 To Sales A/C 4,000
(Being goods sold for cash) 4,000
Ramesh A/C Dr
15/1/2003 To Sales A/C 100
(Being goods of ramesh sold) 100
Sales Returns A/C Dr
16/1/2003 To Ramesh A/C 400
(Being goods returned by Ramesh received) 400
Salaries A/C Dr
17/1/2003 To Cash A/C 50
(Being Salaries paid) 50
Entertainment A/C Dr
20/1/2003 To Cash A/C 500
(Being entertainment expenses paid) 500
Cash A/C Dr
25/1/2003 To Ramesh A/C 1,000
( Being Cheque received from ramesh) 1,000
Rent A/C Dr
To Cash A/C
(Being Rent paid)
Preparation of Ledgers
Dr Cash A/C Cr
Date Particulars J.F Amount Date Particulars J.F Amount
1/3/200 To Madhu A/C 15,000 2/1/2003 By Bank 10,000
3 To Interest A/C 750 5/1/2003 By Arun 1,700
7/1/200 To Sales A/C 7,000 6/1/2003 By salary 400
3 By entertainment
9/1/200 A/C 50
3 By Balance c/d 10,600
22,750 22,750
1/2/200 To Balance b/d 10,600
3

Dr Madhu Account Cr
Date Particulars J.F Amount Date Particulars J.F Amount
31/1/2003 To balance c/d 15,000 1/1/2003 By cash A/c 15,000

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15,000 15,000
1/2/2003 By Balance b/d 15,000

Dr Interest From Bank Account Cr

Date Particulars J.F Amount Date Particulars J.F Amount
31/3/2003 To Balance c/d 750 7/1/2003 By Cash Account 750

750 750
1/2/2003 By Balance b/d 750

Dr Discount Account Cr
Date Particulars J.F Amount Date Particulars J.F Amount
31/1/2003 To Balance c/d 100 5/1/2003 By Arun Account 100

100 100
1/2/2003 By Balance b/d 100

Dr Sales Account Cr
Date Particulars J.F Amount Date Particulars J.F Amount
31/1/200 To Balance c/d 11,000 9/1/2003 By Cash Account 7,000
3 12/1/200 By Ramesh
3 Account 4,000

11,000 11,000
1/2/2003 By Balance b/d 11,000
Dr Ramesh Account Cr
Date Particulars J.F Amount Date Particulars J.F Amount
12/1/200 To Sales A/c 4,000 15/1/200 By Sales Returns
3 3 A/c 100
By cash A/c 500
12/1/200 By Balance c/d 3,400
3
31/1/200
3
4,000 4,000
1/2/2003 To Balance c/d 3,400

Dr Purchase Returns Account Cr

Date Particulars J.F Amount Date Particulars J.F Amount
31/1/2003 To Balance c/d 200 By Arun A/C 200

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200 200
By Balance b/d 200

Dr Bank Account Cr
Date Particulars J.F Amount Date Particulars J.F Amount
2/1/2003 To cash A/C 10,000 25/1/200 By Rent 1,000
20/1/200 To Ramesh A/C 500 3 By Balance c/d 9,500
3

10,500 10,500
1/2/2003 To Balance b/d 9,500

Dr Rent Account Cr
Date Particulars J.F Amount Date Particulars J.F Amount
25/1/200 To Bank A/C 1,000 31/1/200 By Balance c/d 1,000
3 3
1,000 1,000
1/2/2003 By Balance b/d 1,000

Dr Salaries Account Cr
Date Particulars J.F Amount Date Particulars J.F Amount
16/1/200 To Cash A/C 400 31/1/200 By Balance c/d 400
3 3
400 400
1/2/2003 By Balance b/d 400

Dr Entertainment Account Cr
Date Particulars J.F Amount Date Particulars J.F Amount
17/1/200 To Cash A/c 50 31/1/200 By Balance c/d 50
3 3
50 50
1/2/2003 To Balance b/d 50

Dr Purchases Account Cr
Date Particulars J.F Amount Date Particulars J.F Amount
3/1/200 To Arun A/C 2,000 31/1/200 By Balance c/d 2,000
3 3
2,000 2,000
1/2/200 To Balance b/d 2,000
3

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Dr Sales Returns Account Cr

Date Particulars J.F Amount Date Particulars J.F Amount
15/1/200 To Ramesh A/C 100 31/1/200 By Balance c/d 100
3 3
100 100
1/2/2003 To Balance b/d 100

Trial Balance
It is a financial statement containing debit & credit balances of various accounts taken out
from the ledger books as on particular date. It is prepared to verify the arithmetical accuracy
whether the total of debit column and credit column are equal or not.
When all the ledger accounts are balanced the account which is showing debit balance
will be entered on debit side of trial balance and account which is showing credit balance will e
entered on the credit side of trial balance. The total of debit side must be equal to the total of
credit side.
Characteristics of Trial Balance
1. It is a statement prepared in a tabular form
2. Trail balance is a statement of closing balance but it is not an account
3. It is prepared to verify the arithematical accuracy
4. Preparation of trial balance leads to the preparation of final accounts.

Format
Particulars Debit (Rs) Credit(Rs)

For preparing Trail balance, first of all, it should be understood which are the accounts that goes
under debit and credit balance.
Accounts Showing Debit Balances
Debtors Account
Asset Accounts such plant, Furniture, etc….
Expenses Account such as rent paid
Losses Account such as goods destroyed in fire accident.
Purchases Account
Sales Returns Account
Drawings Account
Accounts Showing the Credit Balances
Creditors Account
Liabilities Account

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Incomes Account
Gains Account
Profits Account
Loan Account
Bank Overdraft Account
Sales Account
Purchase Returns Account
Reserves & Funds such as genereal reserve & Reserve fund.

Problem
Prepare Trial Balance from the following Ledger balances
Capital – 64,000; Sales – 1,74,000; Purchases – 1,54,000; carriage inwards – 1300; purchase
returns – 2000; carriage outwards – 1800; sales returns – 4000; furniture – 600; business
premises – 24,000; motor van – 3000; opening stock – 32,000; debtors – 26,000; creditors –
8700.

Solution
Particulars Debit (Rs) Credit (Rs)
Purchases 1,54,000
Capital 64,000
Carriage inwards 1300
Sales 1,74,000
Sales Returns 4000
Furniture 600
Business Premises 24,000
Motor Van 3,000
Opening Stock 32,000
Debtors 26,000
Drawings 2,000
Carriage outwards 1800
Purchase returns 2,000
Creditors 8700
2,48,700 2,48,700

FINAL ACCOUNTS
The process of preparing final accounts of sole proprietor is of two stages:
(a)Trading and Profit & Loss Account
(b) Balance Sheet

Preparation of Trading and Profit & Loss Account

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Trading and Profit & Loss account shows the gross profit (gross loss) and Net profit (or
net loss) respectively for the given accounting period. Trading and Profit & Loss account consist
of two parts: (a) Trading Account
(b) Profit & Loss Account

Trading Account
Trading Account shows the gross profit or gross loss for the end of given accounting
period. Gross Profit or Gross Loss is the excess of sales revenue over the cost of goods sold.
Gross Profit = Net Sales – Cost of Goods Sold
If the cost of goods sold is more than the sales revenue it results in gross loss.
Format of Trading Account
Dr Trading Account for the year ending ………………………………………….
Cr
Particulars Amount Amount Particulars Amount Amount
To Opening Stock XXX By Sales XXX
To Purchases XXX Less: Sales Returns XXX XXX
Less: Purchase Returns XXX XXX
To Wages XXX By Closing Stock XXX
To Carriage Inwards XXX
To Salaries XXX
To Fuel and Power XXX
To Direct Expenses XXX
To Gross Profit XXX
Transferred to P&L
A/C
XXX XXX
Significance
Trading Account is one of the crucial account which helps to evaluate the financial
position of business. Trading account helps to:
1. To calculate Gross Profit or Gross Loss of a business
2. To find out weak areas of business by comparing purchases sales and stocks of current
year with previous year.
3. To ascertain the ratio of gross profit & Sales
4. To measure the performance of sales
5. To make an analysis through the percentage of various expenses to gross profit

Profit & Loss Account

It shows the net profit or net loss for the end of given accounting period. From the gross
profit or loss transferred from trading account, deduct all expenses relating to office, selling and
distribution departments and all non operating incomes such as commission or rent received,
interest received,etc…………
Format

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Dr Profit & Loss account for the year ending …………………….. Cr

Particulars Amount Amount Particulars Amount Amount
To Salaries XXX By Gross Profit (P&L XXX
To Rent XXX A/C) XXX
To Insurance XXX By Discount received XXX
To Carriage Outwards XXX By Commission
To Telephone XXX Received XXX
To Depreciation By profit on sale of fixed XXX
To Bad debts written off XXX assets XXX
To Advertising XXX By Interest Received
To interest on loan XXX By Rent Earned XXX
To Discount Allowed XXX By Income from XXX
To Audit Fees XXX Investments XXX
To Entertainment By Sale of Scrap
Expenses XXX By Net Loss
To Net Profit transferred XXX
to Capital account
XXX
XXX XXX
Profit & Loss Account considers only revenue expenditure such as those incurred in :
1. Maintaining the capital asset
2. Running business from time to time
3. Selling & Distributing the goods of the business they deals in
Balance Sheet
It is a statement of assets and liabilities of a business as on a given date. It shows a true
and fair view of financial position of a business on a given date.
Balance sheet is a statement ( it is not account. Hence it does not have debit and credit sides). It
has two sides: Assets and liabilities side.
1. A balance sheet is prepared at a particular point of time and not for a particular period.
2. It is a summary of balances of those ledger accounts which have not been closed by
transfer to Trading and Profit & Loss account.
3. A balance sheet shows the nature and value of assets and the nature and amount of
liabilities at a given date.
Format
Balance Sheet of Mr……….. as at …………..
Liabilities Amount Amount Assets Amount Amount
Capital XXX Fixed Assets:
Add: Net Profit (or) Good Will XXX
Less: Net Loss XXX Land XXX
Building XXX
XXX Plant & Machinery XXX
Less: Drawings XXX XXX Less: Depreciation XXX XXX
Furniture & Fixtures XXX
Loan XXX Investments XXX

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Income Received in Current Assets:

advance XXX Closing Stock XXX
Sundry Creditors XXX Accrued Income XXX
Outstanding Expenses XXX Prepaid Expenses XXX
Bills Payable XXX Sundry Debtors XXX
Bank Overdraft XXX Bills Receivables XXX
Cash at Bank XXX
Cash in Hand XXX
XXX XXX

Problem
From the following trail balance and adjustments of swaraj Emporium, prepare Trading and
Profit & Loss Account for the year ending 31/3/2012 and the balance sheet as on that date
Particulars Debit(Rs) Credit (Rs)
Sundry Debtors 64,000
Opening Stock 44,000
Cash in Hand 70
Plant & Machinery 35,000
Sundry Creditors 21,300
Trade Expenses 2150
Sales 2,69,000
Salaries 4450
Carriage outwards 800
Rent 1800
Bills Payable 15,000
Purchases 2,37,740
Discounts 2,200
Business Premises 69,000
Capital 1,59,000
Cash at Bank 3090
4,64,300 4,64,300

Adjustments:
1. The closing stock was valued at Rs.24,900
2. Rent was unpaid to the extent of Rs.170
3. Outstanding trade expenses were Rs.300
4. Write off for bad debts Rs.800
5. Provide 5% for doubtful debts
6. Depreciate plant & Machinery @10% per annum
7. Business premises are to be depreciated by 2% per annum
Solution

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Trading Account for the year ending 31.03.2012

Particulars Amount Amount Particulars Amoun Amount
t
To Opening Stock 44,000 By Sales 2,69,000
To Purchases 2,37,740 By Closing Stock 24,900
To Gross Profit c/d 12,160

2,93,900 2,93,900

Profit & Loss account for the year ending 31.03.2012

Particulars Amount Amount Particulars Amoun Amount
t
To Salaries 4,450 By Gross Profit C/d 12,160
To trade Expenses 2150 BY Net Loss transferred 8550
Add: Outstanding 300 2450 to capital account
To carriage outwards 800
To rent 1800
Add: outstanding 170 1970
To Bad Debts 000
Add: Further Bad debts 800
Add: Provision @5% 3160 3960
To Depreciation on plant
@10% 3500
Business Premises @2% 1380 4,880
20,710 20,710

Balance Sheet as on 31.03.2012

Liabilities Amount Amount Assets Amoun Amount
t
Capital 1,59,000 Plant and Machinery 35,000
Less: Net Loss 8550 1,50,450 Less: Depreciation 3500 31,500
Sundry Creditors 21,300 Business Premises 69,000
Bills Payables 15,000 Less: Depreciation 1380 67,620
Outstanding Expenses Stock 24,900
Rent 170 Sundry Debtors 64,000
Trading expenses 300 470 Less: Bad debts 800
63,200
Less: new provision 3160 60,040
Cash at Bank 3090
Cash in Hand 70
1,87,220 1,87,220

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SUBSIDIARY BOOKS
Subsidiary books are books of original entry. In the normal course of business, a majority of
transactions are either relate to sales, purchases or cash. So we record transactions of the same or
similar nature in one place, i.e. the subsidiary book. And we record these transactions in
chronological order.
The following are the advantages of writing transactions in several subsidiary books.
1. It enables classification of transactions and division of work. Different persons can write
different types of transactions in different subsidiary books, at the same time.
2. It enables us to post total amounts in several ledger accounts, instead of writing them
separately. This saves time and labour.
3. It helps in the checking of ledger postings. The errors in ledger posting can be quickly
detected by referring to a particular subsidiary book.
4. It removes the need of writing in journal the debit and the credit side of each transaction and
the writing of narration.

Types of Subsidiary Books

1. Cash Book: This book records all cash transactions whenever cash is received or paid.
2. Purchases Book: This book records all credit purchases of goods.
3. Purchases Return Book: This book records transactions, in which goods purchased on credit
are returned.
4. Sales Book: This book records credit sale of goods.
5. Sales Return Book: This book records transactions in which goods sold on credit are
returned.
6. Bill Receivable Book: This book records the bills of exchange, whose amounts are receivable.
7. Bills Payable Book: This book records the bills of exchange, whose amounts are payable.
8. Journal Proper: This book records all those transactions for which there no separate
subsidiary books. In other words in journal proper we record, residual transactions.

Purchase Book
Purchases Book is a subsidiary book in which only credit purchases of goods are
recorded. When we purchase goods on credit the seller gives us a statement of sales called the
‘invoice’. The invoice contains particulars of goods, such as quantity, quality, rate, discount and
total net amount payable etc. For the purchaser it is an inward invoice because it comes in. The
purchaser gives a separate number to each inward invoice and files them in the order of their
receipt for future reference. So there is no need to write detail description or purchases, in the
purchases book.
Purchase Book Format

Name of the Supplier and Invoice

 Date L.F. Amount (₹) Remarks
details of purchases ref.

Purchases Return Book

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Purchases Return book is also a subsidiary book. In this book we record the return of
goods, purchased by us on credit. The goods can be returned on various grounds. For example it
may not be according to the sample, it may be spoiled, or it may be in excess of the quantity
demanded. When goods are returned a statement of the goods returned is sent to the seller. This
statement is called “Debit Note”. Debit note contains the description of the goods returned, the
reasons for its return and in this connection amount debited to the seller’s account.
Purchase Return Book

Debit Note
 Date Particulars L.F. Details Totals Remarks
No.

Sales Book
Sales book is also a subsidiary book. Only goods sold on credit are entered into it. When
we sell goods we give its invoice to the purchaser. For us it is an “outward invoice”. We make
out copies of each of the outward invoices and file them, for future reference. So in sales book
there is no need to write full particulars of the goods sold.

Name of the Seller and Invoice

 Date L.F. Amount (₹) Remarks
details of Sales ref.

Sales Return Book

Sales return is also a subsidiary book. We record in it goods returned by the customers
purchased by them on credit. When we accept the returned goods from the customer we send
him a credit note. Credit note contains the particulars of the goods accepted by us, and the
amount in this connection credited in the customer’s account. We make out copies of each of the
credit notes we send. They are numbered and filed for future reference.

Outward
 Date Particulars L.F. Details Totals Remarks
invoice

Sales Return Book

Bills Receivable Book

We record all the acceptance of the bills in our favor in the Bills receivable book. We need to post
the total of bills receivable book to the Bills receivable A/c. Also, we need to post the individual
accounts of the customers.
Bills Receivable Book Format
Name
No. Daye Name Name How
From of Due Amount
of of of the of the Date of bill L.F. disposed
whom accepto date of bill
bills receipt receiver drawer off
r

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Bills Payable Book

We record all the acceptance of the bills that we issue in favor of others in the Bills payable book.
We need to post the total of bills payable book to the Bills payable A/c. Also, we need to post the
individual accounts of the suppliers.
Bills payable Book Format

Name Name Where Amount of

No. of Daye of To Date of Due
of of the payabl Term L.F. bill how
bills acceptance whom bill date
drawer payee e disposed of

                     
Journal Proper
It includes transactions relating to credit purchase and sale of assets, depreciation, outstanding and
pre-paid expenses, accrued and unearned income, opening and closing entries, adjustment entries
and rectification entries.
Cash Book

A cash book is like a subsidiary book. It is a special book that will record only one type
of transactions – cash transactions. In an organization thousands of cash transactions occur in a
year and journalizing them all is tedious work. And so companies maintain cash books.
Cash book is a book of original entry in which transactions relating only to cash receipts and
payments are recorded in detail. When cash is received it is entered on the debit or left hand side.
Similarly, when cash is paid out the same is recorded on the credit or right hand side of the cash
book.

Kinds of Cash Book

1. Simple Cash Books (or) Single Column Cash Book
This is also known as a Single Column Cash Book. This cash book will only record cash
transactions. The cash coming in (receipts) will be on the left and the cash payments will be on
the right. And since we will record all cash transactions here there is no need for a
cash ledger account.
Now since there is only one column we do not record bank transactions in this cash book. Any
discounts given will also not feature here. We will record bank and discount transactions in their
separate ledger accounts.
Cash books are balanced quite frequently. In fact, most companies balance their cash book daily.
One important point to remember is that the cash book can never have a credit balance. Cash
books only show a debit balance.
Format
Dr. Single Column Cash Book Cr
Payment
Date Receipts L.F Amount Date s L.F Amount

               

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2. Two Column Cash Books

Here instead of one column, we have an additional column for discounts. So along with the cash
transactions, we will also record the discounts in the same cash book. So both discounts received
and the discount that is given is recorded here. If any organization is in a general practice of
giving or receiving discounts this is the preferable option.
Discount is a nominal account – so the discount is given (loss) is on the debit side and discount
received (profit) is on the credit side. At the end of the period, we balance both columns and
transfer the closing balances.
Format
Dr Two Column Cash Book Cr
Receipt Discoun Payment
Date s L.F t Cash Date s L.F Discount Cash

                   

3. Three Column Cash Books

This cash book has the cash, the discount and additionally the bank columns in it. Since the
development of banking most firms, these days prefer to deal in cheques or other such bills of
exchange. And so having a bank column in your cash book makes things concise and simpler to
understand.
So when you receive a cheque and you deposit it in the bank the same day you make the entry in
the bank column (the debit side in this case). But say you send the cheque later (not the same
day) then this will be a contra entry. A contra entry is transactions that happen between a cash
account and a bank account. Ultimately your Cash & Bank balance remains the same, the money
just moves around.
Format
Dr Three Column Cash Book Cr
Receipt Discoun L.
Date s L.F t Cash Bank Date Payments F Discount Cash Bank

                       

4. Petty Cash Book

In a firm, there are usually cash transactions happening in all the departments. These we will
record in one of the above formats of cash books. But there are many cash transactions
happening for very small amounts. Sometimes there are dozens of such transactions that occur in
just one day. These are known as petty transactions. Examples are expenses for postage,
stationery, traveling, food bills, etc.
So since the number of such transactions tends to be very high we maintain a separate cash book
for them – the petty cash book. Such a cash book is maintained by the petty cashier (who in most
cases also handles the petty cash).

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