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BBA – I N
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SEMESTER - II E
As per Revised CBCS Syllabus of D
Shivaji University (2019 -20)
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Dr. Varsha Rayanade T
M.Com., MBA, M.Phil ., PhD A
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 TABLE OF CONTENTS

1. Advanced Accountancy … …. 2

2. Financial Accounting Process … …. 20

3. Subsidiary Books … …. 50

4. Depreciation … …. 67

5. Final Accounts … …. 97

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 1 FINANCIAL ACCOUNTING

INTRODUCTION
Whenever your mother asks you to go to the nearby grocery store to buy from it items of daily use
like match box, candle stick, soap cake, coffee, spices etc. you need not pay for these items
immediately. When you buy these items, the store owner immediately opens the page of a note
book on which your father’s name is written. He records the value of items purchased. At the end
of the month, your father goes to him. He again opens the same page tells the total amount to be
paid and record when your father makes the payment. In a similar manner, he keeps the record of
other customers also. Whenever he gets commodities from supplier he records it and also records
the payment he makes to them. Similarly every business small or big, sole proprietor or a firm
keeps the record of the business transactions. Have you ever thought why do they keep record of
business transactions? If they do not keep the record how will they know how much, when and to
whom they have to make payments or from whom and how much and when they have to receive
payments or what they have earned after a particular period and so on. Recording of transactions
by a businessman in proper books and in a systematic manner is known as accounting. In this
lesson you will learn about it in detail.
History And Development of Accounting
Accountancy has its roots in the earliest history of civilization. With the rise of agriculture and
trade, people needed a way to keep track of their goods and of transactions. As per Indian
mythology Chitragupta is known to all of us, as the person responsible for maintaining accounts
in God’s court. Further, a book on Arthashasthra written by Kautilya who was a minister in
Chandra Gupta’s kingdom twenty three centuries ago mentions about the accounting practices in
India. It describes how accounting records have to be maintained.
Around 7500 B.C., Mesopotamians began using clay tokens to represent goods, such as animals,
tools, food items or units of grain. This helped owners keep track of their property. Instead of
counting heads of cattle or bushels of grain every time one was consumed or traded, people could
simply add or subtract tokens. Different shapes were used for different goods. Around 4000 B.C.,
the Sumerians began placing these tokens in sealed clay envelopes. Each token would be stamped
into the clay of the outside of the envelope, so the owner would know how many tokens were
inside, but the tokens themselves would be kept safe from tampering or loss. This practice of
pressing the tokens into the clay may have been the earliest genesis of writing. A few hundred
years later, more complex tokens began to be used. These tokens had special markings to denote
different units or types of goods. Starting around 3000 B.C., the Chinese developed the abacus, a
tool for counting and calculating.

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Throughout much of ancient history and the Middle Ages, accountancy remained a fairly simple
affair. The adoption of coinage meant that accounting now dealt with money rather than actual
goods, but single-entry bookkeeping, much like that used in modern check registers, was used to
keep track of money exchanged, where it went and who owed what. During and after the Crusades,
European trade markets opened up to Middle Eastern trade, and European merchants, especially
in Genoa and Venice, became increasingly wealthy. They needed a better way to keep track of
large amounts of money and complex transactions, and this led to the development of double-entry
bookkeeping. Double-entry bookkeeping means that each transaction is recorded at least twice, as
a debit from one account and a credit to another. In 1494, a Franciscan monk and mathematician
named Luca Pacioli published a math book titled "Summa de arithmetica, geometria, proportione
et proportionalita," which contained a description of double-entry accounting. As the book's
popularity grew, double-entry accounting began to sweep Europe, as merchants realized what a
valuable tool it gave them for keeping track of detailed financial information. For this
accomplishment, Luca Pacioli is often called the "Father of Accounting." Still, at this point in
history, accountancy was not yet a specific profession, but rather an extension of the clerical duties
of scribes, officials, bankers and merchants.
With the advent of the Industrial Revolution in the late eighteenth and early nineteenth centuries,
accounting developed further and came into its own as a profession. With the new complexity of
accounting and the increasing demand for accurate bookkeeping, people began to specialize in
accountancy, thus becoming the first professional public accountants. Some of the accounting
firms that are still in operation today were founded in the mid-nineteenth century. William Deloitte
opened his firm in 1845, and Samuel Price and Edwin Waterhouse opened their joint business in
1849.
Today, accounting is a business unto itself, with thousands of practitioners worldwide and a large
number of professional organizations and official guidelines to codify practices and requirements.
Particularly in the United States during the Great Depression, demands were made for better
standardization of accounting practices and a set code of professional guidelines. Today, the
Generally Accepted Accounting Principles, or GAAP, set forth the standards by which public
accountants must do business. Every country has a similar set of accounting guidelines.
Due to the complex nature of today's economic system, specialized branches of accounting have
developed. In addition to traditional financial accounting, there are other specialized branches such
as management accounting, cost accounting, Social Responsibility accounting. Professional
accountants are required for these fields, as they involve the need for a thorough and specific
understanding of business needs and accountancy practices.
Meaning and Definition
Accounting is the language of business that communicates the financial status of the business
to its owners, management, investors, creditors, financial institutions, government authorities,
etc. It is the system of recording, summarizing, and analyzing an economic entity's financial

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transactions for effective communication of the same. Thus the purpose of accounting is to
provide a means of recording, reporting, summarizing, and interpreting economic data. In order to
do this, an accounting system must be designed. A system design serves the needs of users of
accounting information. Once a system has been designed, reports can be issued and decisions
based upon these reports can be made for various departments. Since accounting is used by
everyone in one form or another, a good understanding of accounting principles is beneficial to
all. Thus, accounting is the analysis and interpretation of book –keeping records. It includes not
only the maintenance of accounting records but also preparation of financial and economic
information which involve the measurement of transactions and other events relating to the entity.
According to Smith and Ashburne, “Accounting is the science of recording and classifying
business transaction and events, primarily of financial character and the art of making significant
summaries, analysis and interpretation of those transactions and events and communicating the
results to persons who must make decisions or form judgement.”
The American Institute of Certified Public Accountants (AICPA) defines accounting as “The art
of recording, classifying, summarising, analysing and interpreting the business transactions
systematically and communicating business results to interested users is accounting.”
The American Accounting Association defines accounting as “The process of identifying,
measuring, recording and communicating the required information relating to the economic events
of an organisation to the interested users of such information.”
The Accounting Principles Board of the American Institute of Certified Public Accountants define
accounting as “The function to provide quantitative information, primarily of financial nature
about economic entities that is needed to be useful in making economic decisions.”
In order to appreciate the nature of accounting it is necessary to understand the following relevant
aspects of the definition of accounting:
Economic events: It is the occurring of the consequence to a business organisation which consists
of transactions that are measurable in monetary terms. Purchase of a Machinery, installing and
keeping it ready for manufacturing is an economic event which consists of a number of financial
transactions. These transactions are (a) buying the machine, (b) transporting the same, (c)
preparing the site for its installation and (d) incurring expenditure on installing the same.
Identification implies determining what transactions are to be recorded i.e. items of financial
character are to be recorded. For example, goods purchased for cash or on credit will be recorded.
Items of non-financial character such as changes in managerial policies, etc. are not recorded in
the books of accounts.
Measurement means quantification of business transactions into financial terms by using
monetary unit. If an event cannot be quantified in monetary terms, it is not considered fit for
recording in the books of the firm. That is why important items like appointment, signing of
contracts, etc. are not shown in the books of accounts.

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Recording: Having identified and measured the economic events in financial terms, these are
recorded in the books of accounts in monetary terms and date wise. The recording of the business
transactions is done in such a manner that the necessary financial information is summarized as
per well established accounting practice.
Communication: The economic events are identified, measured and recorded in such a manner
that the necessary relevant information is generated and communicated in a certain form to the
management and other internal and external users of information. The financial information is
regularly communicated through accounting reports.
Organisation: refers to a business enterprise whether for profit or not for profit motive.
Interested users of information: Many users need financial information to make important
decisions. These users can be investors, creditors, labour unions, Trade Associations, etc.
From the above definitions, it can be seen that accounting is identified with a system of recording
of business transactions that creates economic information about business enterprises to facilitate
decision making. The function of accounting is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic
decisions.
Is Accounting a Science or an art?
As can be seen from the above definitions, Smith and Ashburne state accounting to be a science
of recording and classifying business transaction and events; while American Institute of Certified
Public Accountants (AICPA) state accounting to an art of recording and classifying business
transaction. Thus giving rise to a debate as to whether Accounting is a Science or Art.
In simple words, Science establishes relationship of cause and effect, whereas Art is the application
of knowledge comprising of some accepted theories and rules.
Hence, Accounting is Science in the sense that it comprises of rules, principles, concepts,
conventions and standards. It is a Science of keeping the business records in a regular and most
systematic manner so as to know the business results with minimum trouble.
Accounting also is an Art of correctly recording the day to day business transaction in a set of
book; classifying in desired categories and summarizing the information for presentation in a
suitable manner to the concerned persons for their benefit.
Objectives of Accounting
The objectives of accounting can be summarized in the following manner:
1. To Keep Systematic Record: Accounting is done to keep a systematic record of financial
transactions and further classify and summarize them for preparation of financial statements.
In the absence of accounting there would have been terrific burden on human memory, which
in most cases would have been impossible to bear.

2. To Ascertain the Operational Profit or Loss: Accounting helps in ascertaining the net profit
earned or loss suffered on account of carrying the business in a particular period. Financial
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 Statement named Profit and loss account is prepared at the end of a period and if the amount
of revenue for the period is more than the expenditure incurred in earning that revenue there is
said to be a profit. And in case, the expenditure exceeds the revenue there is said to be loss for
that period.
3. To Ascertain the Financial Position of Business : Apart from knowing the profit and loss
during the period, it is important for an businessman to know the financial position of the
business i.e. where he stands – what he owes and what he owns. Financial Statement named
Balance Sheet is prepared as on that date to ascertain the financial position of the business.
4. To Provide Information to users: Other than the Owners, various other parties such as
investors, borrowers, creditors, Government authorities, etc are interested in the fate of
business. Accounting through reports and statements provides the necessary information to
them.
5. To Facilitate Rational Decision Making: nowadays accounting has assumed the task of
collection, analysis and reporting of information at the required point of time to the required
level of authority in order to facilitate rational decision making.
6. To Protect Business Property: accounting provides protection to business properties from
unjustified and unwarranted usage by providing information to the management or owners.
Thus the management / owners can ensure that their assets are not being kept idle or being
unnecessarily wasted.

Functions of Accounting
The functions of accounting can be summarized in the following manner:
1. Recording: business transactions of financial nature have to be properly and timely recorded
in the proper books of account.

2. Classifying: the recorded data of similar nature is analysed and classified in one place known
as the Ledger.
3. Summarising: the classified data is summarised to know the result of business operation and
its financial position by preparing Trial Balance, Income Statement and Balance Sheet.

4. Interpreting: the summarised data is analysed and interpreted for understanding and making
judgement about the operational results and financial position of the business.

5. Communicating: the interpreted data needs to be communicated to the various users such as
the Owners, Investors, Bankers, etc.

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Graphic Presentation of Stages of Accounting:

Financial Transactions

Recording

Journal Subsidiary books

a. Cash & bank book
b. Purchase book
c. Purchase return book
d. Sales book
e. Sales return book
f. Bills payable book
g. Bills receivable book
h. Journal Book

Classification

Ledgers

Summarizing

Balancing

Trading and Profit & Loss A/c

Balance Sheet

Users of Accounting
The users of Accounting Information can be broadly classified into two categories viz. External
Users and Internal Users. For each user or category mentioned, the business accountant is
responsible for supplying information in relation to each of the groups accordingly.
External Users:
The external users receive limited financial information from the company, such as general-
purpose financial statements; these statements have just enough information to inform the external
users about the company’s economic position. General-purpose statements are in the area of

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financial accounting, which is the type of accounting aimed at supplying information to users not
directly affiliated with the target company.
a. Those having economic transactions:
 Shareholders - For the shareholders, who have invested in the company, are keen to know
about the fate and prospects of the investment made by them.
 Creditors – information is needed by the creditors to ascertain if amounts owed to them will
be repaid in time and whether they should extend, maintain or restrict the credit facility given
by them.
 Bankers and Financial Institutions - information is needed by the bankers and Financial
Institutions to determine if their Principal amount along with the interest thereof shall be paid
as per the repayment schedule and to also assess whether they should extend, maintain or
restrict the credit facility given by them.
b. Others like:
 Consumers - A company’s consumers are interested in knowing whether or not the company
will be around long enough to maintain a continuing product or service supply to their client
base.
 Government and regulatory agencies - such as the Internal Revenue Service as well as other
tax services use the company’s financial reports to measure whether the company is properly
paying their taxes up to date.
 Auditors – check and monitor the process of accounting and preparation of financial
statements and reports that are being generated to ensure that they meet GAAP or General
Accounting Accepted Principles.
 Public – financial information is of the nature of a health examination report to the members
of public as it tells about the employment opportunities and general growth in an individual
concern and the economy as a whole.
 Potential shareholders – information is needed by them to judge the future prospects of
investing in the company and also to determine whether they should buy hold or sell shares.
Internal Users:
 Management - for the purpose of exercising control over all activities of the company, it is
important for the management to review the financial information regarding aspects such as
the solvency, liquidity, utilisation, profitability, return on investments, etc of the company.
The financial statements also enable the management to select proper course of action to be
taken for future based on the present analysis.
 Employees – the present and future of employees are tied up with the company’s fortunes,
hence they are keen to know about the progress of the company. They also need financial
statements to ascertain whether they are being paid fairly as compared to the industry
standards.
Book Keeping v/s Accounting
Earlier, no distinction was made between Book keeping and Accountancy. These two terms were
often used for one another as they complemented each other. However, with the increase in size,
nature and complexities of business certain problems/ issues came up which necessitated the
distinction between these two terminologies. Accounting and bookkeeping are both financial tools
used for the recording of business transactions. There are slight differences between accounting
and bookkeeping which are as stated below:

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 Book keeping Accounting
a Nature Is concerned with identifying financial Is concerned with summarizing the
transactions, measuring them in monetaryrecorded transactions, interpreting them &
terms; recording & classifying them communicating the results.
b Objective Aims at maintaining systematic records of
Aims at ascertaining income & financial
financial transactions position by maintain records of business
transactions
c Scope Is Limited to recording business Is quite wide as it consists of recording,
transactions only classifying, summarizing, interpreting
business transactions & communicating the
results
d Basis Vouchers & other supporting documents Book keeping works as the basis for
are necessary as evidence to record the accounting information
business transactions
e Level Elementary knowledge is sufficient Advanced & in depth knowledge required
f Relation- It is the first step to accounting Accounting begins where book keeping
ship ends

Branches of Accounting or Different types of Accounting

There are several branches/ types of accounting that range from maintaining records, auditing to
preparing income tax returns.
1. Financial Accounting: is concerned with recording and classifying business transactions and
preparation of periodic financial reports by using historical data of a business enterprise. The
basic purpose of these reports is to provide useful and timely information about an entity’s
financial position and its operating results to its owners, managers, investors, creditors and
government agencies. Financial accounting is also termed as “general purpose accounting”
because the information generated by it is published for the use of everyone connected with
the business enterprise.
2. Management Accounting: management accounting system uses historical as well as estimated
date to generate useful reports and information to be used by internal management for decision
making purpose. Unlike financial accounting the information generated by management
accounting is not published for external parties but it is used by managers to perform their core
functions such as evaluation of various products and departments in terms of profitability,
selection of best available alternatives and making other business decisions to achieve
organizational goals. This branch thus deals with the needs of the management rather than
strict compliance with generally accepted accounting principles. Managerial accounting
involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business
decisions, etc.
3. Cost Accounting: cost accounting is concerned with categorizing, tracing and collecting
manufacturing costs of a business enterprise. The cost data so collected is used by management
in planning and control. A well established cost accounting system is essential for every
business enterprise to have proper control over costs. Cost accounting is at times considered
as the subset of management accounting. Cost accounting refers to the recording, presentation
and analysis of manufacturing costs. Cost accounting is very useful in manufacturing
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 businesses since they have the most complicated costing process. Cost accountants also
analyze actual and standard costs to help managers determine future course of action regarding
company’s operation.
4. Public Accounting
5. Government Accounting: this branch of accounting is mainly concerned with the utilization
and allocation of public funds. It ensures all funds released for various purposes are utilized
accordingly and that each and every penny is accounted for. 9
6. Forensic Accounting: also known as legal accounting is the use of accounting in legal matters
such as investigation of frauds, court and litigation cases, claims and dispute resolution and
other areas related to legal matters. Some of the different kinds of forensic accounting are
Accounts and inventory manipulation, Bankruptcy, Falsification of accounts and financial
statements, etc.
7. Tax Accounting: tax accounting deals with tax related matters of a business enterprise. It helps
in following rules set by tax authorities and includes computation of taxable income and
presentation of financial or other information to tax authorities as required by tax laws and
regulations of a country.
8. Accounting Information Systems: Accounting Information Systems (AIS) involves the
development, installation, implementation and monitoring of accounting procedures and
systems used in the accounting process. It includes the employment of business forms,
accounting personnel direction and software management.
9. Fiduciary Accounting: this involves handling of accounts managed by a person entrusted with
the custody and management of property of or for the benefit of another person. Examples of
fiduciary accounting include trust accounting, estate accounting and receivership.
10. Project Accounting
11. Social Accounting
12. Auditing: external auditing refers to examination of financial statements by an independent
party with the purpose of expressing an opinion as to the fairness of presentation and
compliance with Generally accepted accounting practices (GAAP). Internal auditing focuses
on evaluating the adequacy of a company’s internal control structure by testing segregation of
duties, policies and procedures, degree of authorization and other control implemented by
management.
Accounting Principles
The dictionary meaning of the term “Principle” is a “fundamental truth implying uniformity of a
acceptance everywhere”. However, when applied to accounting, it gives a different meaning in
different context. Accounting principle is a guiding influence or an accepted rule of action or
conduct. It can be thus said that accounting principles are those rules of action or conduct which
are adopted by the accountants universally in recording accounting transactions. Different
professional bodies like the Australian Society of Accountants, The Institute of Chartered
Accountants in Australia, The Institute of Chartered Accountants in England and Wales, The
American Institute of Certified Public Accountants etc. have made recommendations on
accounting principles in the recent years.

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The Accounting Principles have been developed over the years from experience, reason, usage and
necessity. They are judged on their general acceptability rather than universal acceptability to the
users of financial statements. Hence they are called as generally accepted accounting principles.
These Accounting Principles can be broadly classified into two categories:
A. Accounting Concepts B. Accounting Conventions
Accounting Concepts:
These are the necessary assumptions or conditions upon which accounting is based. Accounting
concepts are developed to convey the same meaning to all people. Some of the important concepts
are given as follows:
1. Entity Concept: For the purpose of accounting the “business” is treated as a a separate entity
from the proprietor(s). This concept helps in keeping the private affairs of the proprietor away
from the business affairs. Thus if the Proprietor invests Rs.100,000 in the business, it is deemed
that the proprietor has given Rs.100,000 to the business and it is shown as a Liability in the
books of the business, as the business has to ultimately repay it to the proprietor. Similarly, if
the proprietor withdraws Rs.25,000 from the business it is charged to him. This concept is
applicable to all forms of business organisations. Even though in the eyes of law, a sole trader
and his business or the partners and their business are one and the same, for accounting
purposes they are regarded as separate entities.
2. Dual Aspect Concept: This is one of the basic concept of accounting. As per this concept,
every business transaction has a dual effect. For eg. If Mr. X starts business with cash of
Rs.50,000 there are two aspects of this transaction : “Asset Account” and “Capital Account”.
The business gets asset in the form of Cash of Rs.50,000 and on the other hand the business
owes Rs.50,000 to Mr. X as his capital. Thus for every transaction that has to be recorded in
the books of accounts there shall be two effects.
3. Going Concern Concept: It is assumed that the business concern will continue for a fairly
long time, unless and until it has entered into a state of liquidation. It as per this assumption
that the valuation of assets are made on the basis of their expected lives, rather than the market
values and depreciation charged accordingly.
4. Money Measurement Concept: In accounting everything is recorded in terms of money.
Events or transactions which cannot be expressed in terms of money are not recorded in the
books of accounts, even if they are important or useful for the business. Purchase or sale of
goods, payment of expenses and receipt of income are monetary transactions which can be
accounted, while the death of an executive, resignation of a manager are events which cannot
be expressed in money.
5. Cost Concept (Objectivity Concept): This concept does not recognise the realisable value,
the replacement value or the real worth of an asset. Thus as per this concept
a) an asset is ordinarily recorded at the price paid to acquire it i.e. at its cost &
b) this cost is the basis for all subsequent accounting for the asset.

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 For eg. If a plot of land is purchased for Rs.100,000 it is recorded in the books at Rs.100,000
and even if its market value at the time of preparation of final accounts is Rs.200,000 or
Rs.60,000 it will not be considered. Thus, the balance sheet on particular date does not
ordinarily indicate what the asset could be sold for.
The cost concept does not mean that the asset will be always be shown at cost. It only means
that cost becomes the basis for all subsequent accounting for the asset. Thus the assets recorded
at cost at the time of purchase may systematically be reduced by the process of depreciation.
This cost concept also implies that if nothing has been paid to acquire an asset, it cannot be
shown as an asset in the books of accounts. Cost concept thus brings objectivity in the
preparation and presentation of financial statements. It also implies that the figures shown in
the accounting records should be based on objective evidence and not subjective views of the
person.
6. Cost- attach Concept: This concept is also known as cost-merge concept. In order to produce
an article it is necessary to purchase raw material, process it and convert it into finished goods.
This calls for the services of other factors of production and therefore there are several other
costs like labour cost power and other overhead expenses. These costs have a capacity to merge
or attach when they are brought together. Thus the proportionate raw material costs, labour
costs and other overheads are added together to obtain product costs so as to increase the utility
of cost data.
7. Accounting Period Concept: Although the going concern concept stresses the continuing
nature of the business enterprise, it is customary to divide its life into chapters known as
“accounting periods”. An accounting period is the interval of time at the end of which the
income statement and financial position statement i.e. the Balance Sheet is prepared to know
the results and resources of the business. Although shorter periods are frequently adopted for
purpose of comparative studies, the normal accounting period is twelve months. This is
because though the life of the business is considered to be indefinite the measurement of
income and studying the financial position of the business after a very long period would not
help in taking timely corrective steps or to enable periodic distributions of income to
proprietors with reasonable safety. Therefore it is necessary to stop at regular intervals and see
back how the business is doing.
8. Accrual Concept: The accrual system is a method whereby revenue and expense are identified
with specific periods of time like a month, half year or a year. It implies recording of revenues
and expenses of a particular accounting period, whether they are received/ paid in cash or not.
Under the cash system of accounting, the revenues and expenses are recorded only if they are
actually received/ paid in cash irrespective of the accounting period to which they belong. But
under the accrual method, the revenues and expenses relating to that particular accounting
period only are considered.
9. Periodic Matching of Cost and Revenue Concept: This concept is based on the accounting
period concept. Making profit is the most important objective that keeps the proprietor engaged
in business activities. That is why most of the accountant’s time is spent in evolving techniques
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 for measuring the profit/ profitability of the concern. To ascertain the profit made during a
period, it is necessary to match “revenues” of the period with the “expenses” of that period.
Income earned by the business during the period can be measured only when the same is
compared with the expenditure incurred to earn that revenue. It therefore is immaterial when
the actual payment what was made for certain expense which was incurred during the said
period. As per this concept adjustments are required to be made for all outstanding expenses,
prepaid expenses, accrued income, etc.
10. Realisation Concept: According to this concept, profit should be accounted for only when it
is actually realised. Revenue is recognised only when sale is effected or services are rendered.
Sale is considered to be made when the property in goods passes to the buyer and he is legally
liable to pay. However, in order to recognise revenue, receipt of cash is not essential even
credit sale results in realisation as it creates a definite asset called “Account Receivable”.
11. Verifiable Object Evidence Concept: According to this concept all accounting transactions
should be evidenced and supported by objective documents. These documents include
invoices, contracts, correspondence, vouchers, bills, pass books, cheque books, etc. such
supporting documents provide the basis for making accounting entries and for verification by
the auditors later on.
Accounting Conventions:
Conventions are the customs or traditions guiding the preparation of accounting statements. They
are adapted to make the financial statements clear and meaningful.
1. Convention of Disclosure: This means that the accounts must be honestly prepared and they
must disclose all material information. The accounting reports should disclose full and fair
information to the proprietors, creditors, investors and others. The term ‘disclosure’ implies
that there must be sufficient disclosure of information which is of material interest to
proprietors, present and potential creditors and investors. This convention is specially
significant in case of big business like Joint Stock Company where there is divorce between
the owners and the managers. Therefore the Indian Companies Act, 1956 not only requires that
the accounts of the company must give a true and fair view of the state of affairs of the company
but it has also prescribed the contents and forms of profit and loss account and Balance Sheet.
2. Convention of Materiality: In the preparation of financial statements importance should be
given to important and significant details, while the immaterial and insignificant details can be
ignored. If this is not done, the accountants shall be over burdened with minute details. As per
the American Accounting Association, “an item should be regarded as material, if there is a
reason to believe that knowledge of it would influence the decision of informed investor.”
Therefore, keeping the convention of materiality in view, unimportant items are either left out
or merged with other items, while some items are shown as notes like contingent liabilities,
market value of investment, etc. Materiality is a relative term as an item may be material for
one concern but immaterial for another, or material for one year but immaterial for next year.

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3. Convention of Consistency: The comparison of one accounting period with the other is
possible only when the convention of consistency is followed. It means accounting from one
accounting period to another. For e.g., a company may adopt straight line method, written
down value method, or any other method of providing depreciation on fixed assets. But it is
expected that the company follows a particular method of depreciation consistently. Similarly
if stock is valued at cost or market price whichever is less, this principle should be followed
every year. Any change from one method to another would lead to inconsistency. However,
consistency does not mean non-flexibility.
4. Convention of Conservatism: This convention refers to the policy of ‘playing safe’. All
prospective losses are taken into consideration but not all prospective profits. In other words,
anticipate no profit but provide for all possible losses. This convention is criticised on the
ground that it goes against the concept of full disclosures and also against the concept of
matching cost and revenue. It encourages creation of secret reserves by making excess
provision for depreciation, bad and doubtful debts, etc. The income statement shows a lower
net income and the Balance sheet overstates the liabilities and understates the assets. The
convention of conservatism should be applied cautiously so that the results are not distorted.
Accounting Terms
 Accounting period: that time period, typically one year, to which financial statements are
related. Accounting policies: the specific accounting method and bases selected and followed
by a business enterprise (e.g. straight line or reducing balance method for depreciation).
 Accounting standards: Prescribed methods of accounting by the accounting standards or
financial reporting standards regulation body in your jurisdiction.
 Assets: These are tangible objects or intangible rights owned by the enterprise and carrying
probable future benefits. Tangible items are those which can be touched and their physical
presence can be noted/felt e.g. furniture, machine etc. Intangible rights are those rights which
one possesses but cannot see e.g. patent rights, copyrights, goodwill etc. Assets are purchased
for business use and are not for sale, they raise the profit earning capacity of the business
enterprise.
 Auditing: the independent examination of, and expression of an opinion on, the financial
statements of an enterprise by an appointed auditor in pursuance of that appointment and in
compliance with any relevant statutory obligation.
 Bad debts: debts known to be irrecoverable and therefore treated as losses by inclusion in the
Profit and Loss (P&L) Account as an expense.
 Business Entity: Business entity means a specific identifiable business enterprise like
Reliance Industries, LIC, State Bank of India, etc. An accounting system is always devised for
specific business entity (may be called an accounting entity). For accounting, it is assumed that
business has separate existence and its entity is different from that of its owner(s).
 Capital: It is the amount invested in an enterprise by its owners e.g. paid up share capital in a
corporate enterprise. It also refers to the interest of owners in the assets of an enterprise. It is
the claim against the assets of the business. Any amount contributed by the owner towards the
business unit is a liability for the business enterprise. This liability is also termed as capital
which may be brought in the form of cash or assets by the owner.
 Current Asset: these are assets which are expected to be converted into cash in the normal
course of business for e.g. Cash, Bank, Debtors, Stock, etc.
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 Current Liability: amounts due for payment within a period of one year are known as current
liability for e.g. Creditors, Bills Payable, Outstanding Provisions, etc.
 Depreciation: a measure of the wearing out, consumption or other loss of value whether
arising from use, passage of time or obsolescence through technology and market changes.
Depreciation should be allocated to accounting period so as charge a fair proportion to each
accounting period during the expected useful life of the asset.
 Dividend: a distribution of earnings to its shareholders by a company.
 Drawings: It is the amount of money or the value of goods which the proprietor takes away
from business for his/her household or private use.
 Expenses: Costs incurred by a business in the process of earning revenue are called expenses.
In general, expenses are measured by the cost of assets consumed or services used during the
accounting period. The common items of expenses are - Depreciation, Rent, Wages, Salaries,
Interest, Cost of Heating, Light and water and Telephone, etc.
 Financial Statement: a record containing the balance sheet and the income statement.
 Fixed assets: business assets which have a useful life extending over more than one year.
Examples are land and buildings, plant and machinery, vehicles.
 Income: the economic benefit derived in an accounting year is known as Income.
 Insolvency: the state of being unable to pay debts as they fall due. Also used to describe the
activities of practitioners in the fields of bankruptcy, receivership and liquidations.
 Liability: It is the financial obligation of an enterprise other than owners’ funds.
 Profit: It is the excess of revenue of a business over its costs. It may be gross profit or net
profit. Gross profit is the difference between sales revenue or the proceeds of goods sold and/or
services provided over its direct cost of the goods sold. Net profit is the profit made after
allowing for all types of expenses. There may be a net loss if the-expenses exceed the revenue.
 Purchases: This term is used for goods obtained by an company for resale or for producing
the finished products which are meant for sale. Goods purchased may be Cash Purchases or
Credit Purchases. Thus, Purchase of goods is the sum of cash purchases and credit purchases.
 Revenue: This is the amount generated by selling its products or providing services to
customers. Other items of revenue common to many businesses are - Commission, Interest,
Dividends, Royalties, and Rent received, etc. Revenue is also called Income.
 Sundry creditors: Creditors are persons who an amount has to be paid by an enterprise for
providing goods and services on credit.
 Sales: this term is used for goods sold or services provided to customers. Sales may be in cash
or in credit.
 Stock (Inventory): it is the tangible property held for sale in normal course of business or for
own consumption for production of finished goods. The term includes stock of raw material,
semi-finished goods, finished goods, etc.
 Sundry debtors: Persons who have to pay for goods sold or services rendered. It is also termed
as debtor, trade debtor, and accounts receivable.
 Transaction: It is an event which involves exchange of some value between two or more
entities. It can be purchase of stationery, receipt of money, payment to a supplier, incurring
expenses, etc. It can be a cash transaction or a credit transaction.

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Accounting Standards
Accounting Standards (AS) are basic policy documents that are meant to ensure transparency,
reliability, consistency and comparability of the financial statements. It is done by standardizing
accounting policies and principles as a result of which transactions of all the business entities will
be recorded in similar manner.
Accounting Standards are issued by an accounting body or a regulatory board or sometimes by the
government itself. In India the Indian Accounting Standards are issued by the Institute of Chartered
Accountants of India (ICAI).At the International level, International Accounting Standard Board
(IASB) has been created to formulate and publish, in the public interest, basic standards to be
observed in the presentation of audited accounts and financial statements and to promote their
worldwide acceptance and observance.
Definitions
The term “Accounting Standard” may be defined as written statements issued from time to time
by institutions of the accounting profession or institutions in which it has sufficient involvement
and which are established expressly for this purpose.
Bromwich defines “Accounting Standards” as uniform rules for financial reporting applicable
either to all or to certain class of entity promulgated by what is perceived of as predominantly an
element of the accounting community specially created for this purpose. Standard setters can be
seen as seeking to prescribe a preferred accounting treatment from the available set of methods for
treating one or more accounting problems. Other policy statements by the profession will be
referred to as recommendations.
Accounting Standards mainly deal with four major issues of accounting, namely
a. Recognition of financial events
b. Measurement of financial transactions
c. Presentation of financial statements in a fair manner
d. Disclosure requirements of companies to ensure stakeholders are not misinformed
Objectives of Accounting Standards
Accounting is generally considered as the language of business, as it communicates to others the
financial position of the company. And like every language has certain grammatical rules, the same
is true in this case as well. These rules in the case of accounting are the Accounting Standards. It
is the framework of rules and regulations for accounting and reporting in a country.
i. To improve the reliability of financial statements.
ii. To facilitate comparison.
iii. To include necessary disclosure requirement and valuation methods of various financial
transactions.
Benefits of Accounting Standards
i. Provides Uniformity in Accounting: accounting standards provides rules for standard
treatment and recording of transactions, due to which uniformity in accounting methods is
achieved.
ii. Improves Reliability of Financial Statements: a company has many stakeholders who rely on
the financial statements for information. Many stakeholders as well as potential investors
take their decisions on the basis of such financial statements. The Accounting Standards

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 ensure that these statements present a true and fair picture of the company’s financial
situation.
iii. Prevents Frauds and Accounting Manipulations: the Accounting Standards lay down the
accounting principles and methodologies that need to be followed, hence it prevents
management of an entity from misrepresenting any financial information.
iv. Assist Auditors: accounting policies, rules, regulations, etc. that need to be followed are
mentioned in written format in the Accounting Standards. Hence, the auditor can check
whether these policies are properly followed to ensure that the financial statements are true
and fair.
v. Comparability: as it is compulsory for all business entities to follow the same set of standards,
their financial accounts become comparable. The users of the financial statements can
analyze and compare the financial performance of different companies.
vi. Determining Managerial Accountability: the Accounting Standards help measure the
performance of an entity. It can help measure the management’s ability to increase
profitability, maintain the solvency of the firm and other such important financial duties of
the management.
Limitations of Accounting Standards
i. Difficulty between Choosing Alternatives: in case where there are alternatives available for
certain accounting treatment like valuation of stock or method of depreciation; the
Accounting Standards do not provide any guidelines to assist the management in taking
appropriate choice.
ii. Restricted Scope: Accounting Standards need to be framed within the parameters of law,
hence they cannot override such laws. This can at times limit the scope of Accounting
Standards to provide the best policies for the situation.
List of Accounting Standards (AS)
In India, Accounting Standards have been issued/amended by the Accounting Standards Board of
ICAI (Institute of Chartered Accountants of India) from time to time, in accordance with the
generally accepted accounting practices (GAAP).
Following is the list of Mandatory Accounting Standards:
1. AS 1 Disclosure of Accounting Policies: This Standard deals with the disclosure of significant
accounting policies which are followed in preparing and presenting financial statements.
2. AS 2 Valuation of Inventories: This Standard deals with the determination of value at which
inventories are carried in the financial statements, including the ascertainment of cost of
inventories and any write down thereof to net realizable value.
3. AS 3 Cash Flow Statements: This Standard deals with the provision of information about the
historical changes in cash and cash equivalents of an enterprise by means of a Cash Flow
Statement which classifies cash flows during the period from operating, investing and
financing activities.
4. AS 4 Contingencies and Events Occurring After Balance Sheet Date: This Standard deals
with the treat of contingencies and events occurring after the balance sheet date
5. AS 5 Net Profit or Loss for the period, Prior Period items and Changes in Accounting
Policies: This standard needs to be applied by an enterprise while presenting profit or loss from

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 activities in normal course of business, extraordinary items and prior period items. This also
includes changes in accounting estimates and changes in accounting policies.
6. AS 7 Construction Contracts: This Standard prescribes the accounting for construction
contracts in the financial statements of contractors.
7. AS 9 Revenue Recognition: This Standard deals with the recognition of revenue in Profit &
Loss a/c of an enterprise. Revenue recognition is concerned with the revenue arising in the
course of the ordinary activities of the enterprise such as sale of goods, rendering of services,
interest, royalties and dividends.
8. AS 10 Accounting for Fixed Assets: The objective of this Standard is to prescribe the
accounting treatment for property, plant and equipment (PPE).
9. AS 11 The Effects of Changes in Foreign Exchange Rates: This Standard lays down
principles in accounting for foreign currency transactions and foreign operations i.e., which
exchange rate to utilize and how to recognize the financial effect of exchange rate fluctuations.
10. AS 12 Accounting for Government Grants: This Standard deals with accounting for
Government grants. These grants may be in the form of subsidies, cash incentives, duty
drawbacks, etc.
11. AS 13 Accounting for Investments: This Standard deals with accounting for investments in
the financial statements of enterprises and related disclosure requirements.
12. AS 14 Accounting for Amalgamations: This Standard deals with accounting for
amalgamations and the treatment of resultant goodwill or reserves.
13. AS 15 Employee Benefits: The objective of this Standard is to prescribe the accounting
treatment and disclosure for employee benefits in the books of an employer except for
employee share based payments. It does not deal with accounting and reporting by employee
benefit
14. AS 16 Borrowing Costs: This Standard needs to be applied in accounting for borrowing costs.
It does not deal with the actual or imputed cost of owners’ equity, including preference share
capital not classified as a liability.
15. AS 17 Reporting of Financial Segments: The objective of this Standard is to establish
principles for reporting financial information for different types of segments, products, services
an enterprise produces and the different geographical areas in which it operates.
16. AS 18 Related Party Disclosures: This Standard needs to be applied in reporting related party
transactions between a reporting enterprise. This Standard applies to the financial statements
of each reporting enterprise and also to the consolidated financial statements presented by a
holding company.
17. AS 19 Leases: The objective of this Standard is to prescribe the appropriate accounting
policies and disclosures in relation to finance leases and operating leases.
18. AS 20 Earning Per Share: This Standard prescribes principles for the determination and
presentation of earning per share which will improve the comparison of performance among
different enterprises for the same accounting period and among different accounting periods
for the same enterprise.
19. AS 21 Consolidated Financial Statements: The objective of this Standard is to lay down
principles and procedures for preparation and presentation of consolidated financial
statements. Consolidated financial statements are predetermined to present financial

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 information about a parent and its subsidiaries as a single economic entity. This is done to
show the economic resources controlled by the entity as a whole, obligations of the group and
results the group achieves with its resources.
20. AS 22 Accounting for Taxes on Income: The objective of this Standard is to prescribe the
accounting treatment of taxes on income since the taxable income may be significantly
different from the income displayed in financial statements due to many reasons, posing
problems in matching of taxes against revenue for a period.
21. AS 23 Accounting for Investments in Associates: This Standard needs to be applied for
accounting for investments in associates in the preparation and presentation of consolidated
Financial Statements by an investor.
22. AS 24 Discontinuing Operations: the objective of this Standard is to establish principles for
reporting information about the discontinuing operations. This helps the users of the financial
statements to make an estimate of an enterprise’s cash flows, earnings-generating capacity and
financial position by segregating information about discontinuing operations and continuing
operations. This accounting standard applies to all discontinuing operations of an enterprise.
23. AS 25 Interim Financial Reporting: This Standard needs to be applied to an entity which is
required or elects to publish an interim financial report. The prime objective of this Standard
is to prescribe the minimum content of an interim financial report. This Standard also
prescribes the principles for recognition and measurement of financial statements for an
interim period.
24. AS 26 Intangible Assets: This Standard prescribes the accounting treatment for intangible
assets. Intangible assets refers to non-monetary assets which are identifiable without substance,
held for use in the production or supply of goods, services, administrative purpose and so on.
25. AS 27 Financial Reporting of Interest in Joint Ventures: The objective of this Standard is
to set out the principles and procedures for accounting for interests in joint ventures and
reporting of venture assets, liabilities, income and expenses in the financial statements of
ventures and investors.
26. AS 28 Impairment of Assets: The objective of this Standard is to prescribe the procedures
that an enterprise applies to ensure that its assets are carried at no more than their recoverable
amount. The asset can be reported as impaired if its carrying amount exceeds the amount to be
recovered through use of sale of the asset and it requires the business entities to recognize an
impairment loss in such cases.
27. AS 29 Provisions, Contingent Liabilities and Contingent Assets: The objective of this
Standard is to ensure that appropriate recognition criteria and measurement bases are applied
to provisions and contingent liabilities. This ensures that sufficient information is disclosed in
the notes to the financial statements which enable users to understand their nature, timing and
amount. The objective here is also to lay down appropriate accounting for contingent assets.

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 2

Process of Accounting
The different stages in the financial accounting process are summarised below:
1. Analysis of transactions from source documents
2. Classification of accounts
3. Journalising the transactions.
4. Ledger Posting.
5. Balancing of each ledger account.
6. Preparation of Trial Balance.
7. Recording of adjustment entries.
8. Posting of adjustment entries.
9. Recording of closing entries.
10. Preparation of financial statements.
1. Analysis of Transactions from Source Documents
Transactions: it is a type of event affecting the company which can be expressed in terms of
money that brings change in the financial position of the company. Transaction can be said to be
transfer of value between two or more business entities (parties). Every transaction has movement
of value from one party to the other. For e.g. when goods are sold for cash, there is transfer of
goods from seller to buyer and there is also transfer of cash from buyer to seller.
Classification of Transactions
a. External Transaction: a transaction that involves the business entity and a second party is
known as external transaction. For e.g. Goods purchased from Govind for Rs.5000 on credit.
b. Internal Transaction: a transaction which does not involve a second party is known as internal
transaction. For e.g. Depreciation charged on Plant and Machinery.
c. Credit Transaction: an external transaction not involving immediate payment/ receipt of cash
is known as credit transaction. For e.g. Goods sold to Keshav for Rs. 10000. In this case, the
transfer of goods shall be immediate however payment for the same shall be received from Keshav
on a later date. In case of credit transaction, the name of party is recorded to ascertain how much
amount is owed to or from him.
d. Cash Transaction: transaction that involves immediate cash or cheque payment or receipt is
called cash transaction. For e.g. Cash purchase of goods from Amit for Rs.10,000. In case of cash
transaction, name of the party is not recorded as the payment / receipt of amount is immediate and
there is no amount receivable or payable at a later date.
Determination of Cash or Credit Transaction
For identifying, whether the transaction is credit or cash a simple rule should be observed:
a. All transactions where the words “paid/received or cash” is mentioned are to be treated as cash
transactions. For e.g. Goods sold for cash, rent paid, etc.
b. Transactions wherein the personal name is mentioned are to be treated as credit transactions.
For e.g. Goods sold to Govind for Rs.5000, Purchased goods from Kiran for Rs.10,000.

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c. In case of transactions having both the name as well as the words “paid/received or cash” are
mentioned, then such transactions shall be treated as cash transactions. For eg. Cash purchase
of goods from Amit for Rs.10,000, Goods sold to Ashok for cash Rs.4000.
Source Documents
Source documents are documents related to external business activities which are the first input to
the accounting system. These source documents come in different forms to the accounts
department for processing and accounting. Source documents include the following:
i. Sales Invoice – prepared by a business entity for sales done by them.
ii. Purchase Bills/ Invoice – received by a business entity for purchases done by them.
iii. Credit Note – is prepared for goods returned by customers for any reason.
iv. Debit Note – is prepared when goods purchased by the business entity are returned back to the
supplier.
v. Debit Voucher – is prepared for authorisation of all payments (cash or cheque) / expenses being
incurred.
vi. Credit Voucher – is prepared for all receipts (cash or cheque) / income
2. Classification of Accounts
Accounts
An Account is a list of business transactions falling under the same description for a given period
of time. An account can be defined as a systematic and summarised record of transactions
pertaining to one person, property, income, expense, loss or gain. An account is given a suitable
heading which may be of the person, property or an expense or a gain and it is generally prepared
for one complete year.
Accounts are prepared and maintained in the Ledger. Separate Ledger Sheet or page is used for
each account. An account is always divided into two sides. The left side is known as the Debit side
while the right side is known as the Credit side. To debit an account means to enter the transactions
on the debit side and to credit an account means to enter the transactions on the credit side of a
ledger account.
Accounts are classified into two main groups viz., Personal account and Impersonal account.
Personal Accounts
These are accounts of individuals, firms, limited companies, local authorities, associations with
which the business organisation deals. From the view point of Law, “Person” are classified as (a)
natural or living persons and (b) legal or artificial persons. Legal person does not have life, body
or soul but law recognises it as a person because all business transactions are done by it in its own
name. For e.g. Bank of India’s A/c is a personal account as Bank of India is a financial institution,
and it is a legal person.
Impersonal Accounts
All accounts other than personal accounts are known as impersonal accounts. In other words, all
accounts which are not personal accounts are grouped under impersonal account. For e.g. Cash
A/c, Goods A/c, Furniture A/c, etc.
Impersonal accounts are further classified as (i) Real Account and (ii) Nominal Account.

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Real Account:
An account of property, or any thing owned and possessed by business is called Real Account.
These accounts represent the belongings of the business organisation. Real Accounts can further
be sub classified as (a) Tangible Real Accounts and (b) Intangible Real Accounts.

Tangible Real Accounts:

These accounts comprise of assets and properties which can be seen, felt, touched, measured,
purchased and sold. For eg., Cash, Building, Goods, etc.
Intangible Real Accounts:
These accounts comprise of assets and properties which cannot be seen, touched, felt but they
are capable of measurement in terms of money.
Nominal Accounts:
An account relating to business expense, income gain and loss is called Nominal Account. This
Account is also known as Fictitious Account because these accounts are unreal as they cannot be
seen or touched. This account does not denote any concrete thing, it is just an abstract concept
such as Rent A/c, Salaries A/c, Discount A/c, Interest A/c, Commission A/c, etc.
ACCOUNT

PERSONAL A/C IMPERSONAL A/C

REAL A/C NOMINAL A/C

Classification of some peculiar accounts :

PERSONAL A/C REAL A/C NOMINAL A/C
1 Capital A/c 1 Stock A/c 1 Interest A/c
2 Bank A/c’s 2 Cash A/c 2 Discount A/c
3 XYZ Partnership A/c 3 Goods A/c 3 Commission A/c
4 Loan A/c 4 Building A/c 4 Rent A/c
5 Debtors A/c 5 Goodwill A/c 5 Printing & Stationery
6 Creditors A/c 6 Investment A/c 6 Salaries & Wages
7 O/s Expense A/c 7 Tools A/c 7 Carriage Inward A/c
8 Prepaid expense A/c 8 Copyright A/c 8 Carriage Outward
9 Interest Receivable 9 Patent A/c 9 Octroi A/c
10 Employees P.F. A/c 10 Shares A/c 10 Royalty A/c
11 Deposit A/c 11 Debentures A/c 11 Bank Charges A/c
12 Drawing A/c 12 Machinery A/c 12 Bad debts A/c
13 Bank O/d A/c 13 Motor Vehicle A/c 13 Advertisement A/c
14 Co-op. Society A/c 14 Bills Receivable A/c 14 Audit Fees A/c
15 Claim outstanding 15 Furniture & Fix. A/c 15 Sales Tax A/c

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 16 Unexpired Insurance 16 Property A/c 16 Repairs A/c
17 Subscription Accrued 17 Livestock A/c 17 Dividend A/c
18 Party A/c’s 18 Typewriter A/c 18 Subscription A/c
19 Borrowings A/c 19 Computers A/c 19 Claim A/c
20 Govt. of India A/c 20 Govt. Securities A/c 20 Profit/ Loss on sale of
Assets A/c
Exercise : Classify the following accounts :
Sr. Account Type of Account

1 Amit’s Account
2 Audit fees
3 Bank of India
4 Building
5 Bank charges
6 Bank commission
7 Bad debts
8 Brokerage
9 Bills receivable
10 Cash
11 Capital
12 Carriage
13 Commission
14 Copyright
15 Creditor
16 Debtor
17 Discount
18 Dividend
19 Depreciation
20 Drawings
21 Debenture interest
22 Debentures
23 Deposits
24 Employees Provident Fund
25 Freight
26 Freehold Premises
27 Furniture and fixtures
28 Goodwill
29 Goods
30 Govt. of India
31 Interest
32 Investments
33 Insurance premium
34 Income Tax
35 Leasehold Land
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 36 Loan
37 Loose Tools
38 Loss on sale of asset
39 Livestock
40 Loss by fire
41 Machinery
42 Motor vehicles
43 Machinery Upkeep
(maintenance)
44 Octroi
45 Outstanding expenses
46 Printing and Stationery
47 Patent
48 Prepaid expenses
49 Packing charges
50 Profit on sale of asset
51 Royalty
52 Repairs
53 Stock
54 Salaries
55 Sales Tax
56 Shares
57 Tools
58 Trade expenses
59 Trade discount
60 Wages
3. Journalising the Transactions
Golden Rules of Accountancy or Rules of Journalisation:
Under the Double Entry System of Accounting both the aspects of the transaction are recorded.
Each transaction is recorded on the basis of the type of account that is affected and for each type
of account there is a general rule that is specified, which is known as the golden rules of
accountancy. Following are the rules for debiting and crediting accounts:
Personal Accounts: “DEBIT THE RECEIVER AND CREDIT THE GIVER”.
When a person receives anything in terms of money, goods, other assets or service from the
business he is called the receiver and his account is to be debited in the books of the business. If
the person gives anything in terms of money, goods, other assets or service to the business, he is
called the giver and his account is to be credited in the books of the business. For eg. Goods worth
Rs.5000 sold to Mr B. In this case Mr B is the receiver of the goods and his account is to be debited
in the books of business. Similarly, if Rs.10,000 cash is deposited in the bank account than bank
is the receiver of the benefit hence bank account is to be debited.
Real Accounts: “DEBIT WHAT COMES IN AND CREDIT WHAT GOES OUT”.
If any property or goods comes into the business then the account of that property or goods is to
be debited in the books of the business. If any property or goods go out of the business than the
account of that property or goods is to be credited in the books of the business. For eg. Goods sold
on cash for Rs.15,000. In this case Cash, an asset comes in the business, therefore cash account is
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to be debited in the books of the business. While goods, an asset of the business goes out of the
business due to sale, hence goods account is to be credited in the books of the business.
Nominal Accounts: “DEBIT EXPENSES AND LOSSES AND CREDIT GAINS AND
PROFITS”.
If the business incurs expenses to manage and run the business, account of that expense is to be
debited in the books of the business. When the business earns income by rendering services or
hiring business assets, account of that income is to be credited in the books of business. For eg.
Paid Rs.500 as freight charges. In this case Freight account being an expense is to be debited in
the books of the business. Similarly, if Rs.1000 is received by way of Bank Interest than this
income is to be credited in the books of the business.
Important Steps in Journalisation:
 Read and understand given business transaction carefully. The transaction given may either be
cash or credit transaction. In very few cases barter transaction may also be given.
 A business transaction in which person’s name is not given is called as cash transaction.
 If in a business transaction person’s name is not given and one of the following word is
accompanied then such business transactions are known as cash transactions. These words are
‘Cash’, ‘Bank’, ’Received’, ‘Paid’, ‘Earned’, ‘Spend’, ‘Deposited’, ‘Withdrawn’, ‘Borrowed’,
‘Lend’.
 If in a given business transaction with person’s name, none of the above mentioned words are
present then such business transaction is treated as credit transaction.
 In a Cash Transaction, out of the two accounts, one account is a cash account. In a purchase or
sale of goods or assets, second account is either goods or assets account i.e. real a/c. In case of
payment of expense or receipt of income the second account is a nominal a/c. Similarly in
borrowing or lending the second account is a personal a/c.
 In a Credit transaction, out of the two accounts one account is a personal a/c and the second is
the Real a/c.
 In a Barter transaction, both accounts involved are Real accounts, other than cash. It is because
in this transaction one kind of asset is directly exchanged with other kind of asset without use
of money.
Analysis of Transactions

Transaction 2 A/c’s Type of How each Rule A/c to be A/c to be

Involved A/c Aspect is Applicable Debited Credited
Affected
1 Started Cash Real Cash comes Debit what Cash A/c
Business with in. comes in
cash Rs.50,000 Capital Personal Proprietor Credit what Capital
is the giver goes out A/c

2 Purchased Goods Real Goods Debit what Goods A/c

goods for cash comes in comes in
Rs.10,000 Cash Real Cash goes Credit what Cash A/c
out goes out

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 3 Purchased Machinery Real Machinery Debit what Machinery
Machinery for comes in comes in A/c
Rs.15,000 Cash Real Cash goes Credit what Cash A/c
out goes out

4 Sold Goods for Cash Real Cash comes Debit what Cash A/c
Cash Rs.10,000 Goods Real in comes in
Goods go Credit what Goods
out goes out A/c

5 Sold Goods to ABC Personal ABC is the Debit the ABC A/c
ABC receiver receiver
Rs.25,000 Goods Real Goods go Credit what Goods
out goes out A/c

6 Deposited Bank Personal Bank is the Debit the Bank A/c

Rs.15,000 in receiver receiver
the Bank Cash Real Cash goes Credit what Cash A/c
out goes out

7 Paid office Rent Nominal Rent is an Debit Rent A/c

Rent Rs.5000 expense expenses
Cash Real Cash goes Credit what Cash A/c
out goes out

8 Paid Rs.500 as Brokerage Nominal Brokerage Debit Brokerage

Brokerage is an expenses A/c
Cash Real expense
Cash goes Credit what Cash A/c
out goes out

9 Received Cash Real Cash Debit what Cash A/c

Rs.1000 as Comes in comes in
Commission Commissi Nominal Commissio Credit Commis-
on n is income income -sion A/c

10 Withdrew from Drawing Real Proprietor Debit what Drawings

Bank Rs. 2500 is the comes in A/c
for Personal receiver
Use Bank Bank is the Credit what Bank A/c
Real
giver goes out

Journal
The word ‘Journal’ is derived from the French word, ‘Jour’ which means a day. Journal therefore
means a ‘daily record’. According to Eric L Kohler, “a Journal is the book of original entry in
which are recorded transactions not provided for in specialised journals”.
A journal is a book of ‘Original entry’ or ‘primary entry’. It is an important and main book of
accounts, in which the business transactions are systematically recorded. It is a book of daily
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record. Business transactions are first entered in journal and subsequently they are posted to
another account book viz. ledger. To journalise the transaction means to record the two fold effects
of a transaction.
Journal is a book of account in which all types of day to day business transactions are recorded in
chronological order (i.e. date wise). In journal business transactions are recorded systematically
and in summarised form of debit and credit. In earlier times, the size of business was small and
business transactions were few, so journal as one book of account was convenient. As time passed
business developed and day to day business transactions increased in numbers tremendously and
to avoid difficulties of carrying bulky journal from one place to another, the journal was divided
into number of parts. Each of those parts of journal are known as subsidiary books.
Specimen Format of Journal
In the Journal of M/s. ……….
Date Particulars L.F Debit Credit
Rs. Rs.
Year
Date Name of the Account Debited ..Dr.
To Name of the Account Credited
( Narration/ Explanation)

Significance and explanation of columns provided in the journal

Date Column: In this column, the date of the transaction is written. The year is written in the
beginning, therefore it is not necessary to write the year for each transaction. The month followed
by the date is to be written for every transaction.
Particulars Column: In this column the accounting entry is written in the summarised form of
debit and credit. The account to be debited is written on the first line just near the date column. On
the same line, the word “Dr” is written against the account to be debited. After that, on the second
line the account to be credited is written. The name of this account should be preceded with “To”
and while writing on the second line a little space should be left from the date column. On the third
line, a brief description of the transaction known as “narration” is written in brackets.
Ledger Folio Column: While recording the transactions nothing has to be written in this column.
The journal entries are required to be posted to the debit and credit of accounts in the ledger. At
that the time posting the page number of the ledger known as Ledger Folio where the entry is
posted is entered in this column. Usually, these page numbers are written in red ink to distinguish
them from the amounts.
Debit amount Column: In this column, the amount of transaction is written against the word “Dr”
in particular column on that line.
Credit amount Column: In this column, the amount of transaction is written against the name of
the account credited on that line.
Please Note:
1. Narration should be written in the particulars column, in between the date line and the folio
line. It should not cross these two lines on either side.

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2. A thin line should be drawn between each transaction immediately below the journal entry in
the particulars column.
3. At the end of each page of a journal the debit and credit column are to be totalled up and these
totals must be equal. These totals are carried forward to next page, in case the journal runs in
several pages.
4. Totals of amount columns are never posted in the ledger.
Important points to be remembered while passing Journal Entries:
1. Read the given business transaction, understand it and find out different accounts involved in
it.
2. As per nature and type of those accounts, apply rules of journalisation for giving debit and
credit effects to those accounts.
3. While writing the name of the person or real account or nominal account the word “Account”
should be added after the name of the account.
4. After journalising the transaction the two columns should be totalled. The total of the debit
column should be equal to the total of the credit column.
5. The term “Purchase Account” should be used when goods are purchased. The term “Sales
Account” should be used when goods are sold out. Goods returned to suppliers are called
Return outwards or Purchase returns. Goods returned by customers are called Return inwards
or Sales returns.
6. When it is not clearly stated in the problem whether the transaction is on cash basis or credit
basis, it should be considered on a cash basis when the name of the party is not given. When
the name of the party is given and there is no mention of cash paid/ received, it should be
considered as credit transaction.
7. Whenever expenses are paid in cash, the expense account concerned should be debited and the
cash account credited, the person’s account should not be debited.
8. Whenever income is received in cash, the income account concerned should be credited and
cash account should be debited, the person’s account should not be credited.
9. When goods are purchased for cash from a party, the accounts affected will be – Purchase
account and Cash account.
10. When goods are sold for cash to a party, the accounts affected will be –Cash account and Sales
account.
11. When goods are purchased on credit, the accounts affected will be – Purchase account and
Party’s account.
12. When goods are sold on credit, the accounts affected will be – Party’s account and Sales
account.
13. When assets are purchased from a party on credit, the Asset account should be debited. The
Purchase account should not be debited.
14. When assets are sold to a party, the Sales account is not affected. The Asset account concerned
is affected.
15. Whenever any amount is paid for repair of any asset, the asset account is not affected. The
account affected will be Repairs account and cash A/c.
16. The payment of any personal expenses of proprietor such as insurance premium, medical bill
club bill, etc. should be treated as drawings. Therefore, these amounts should be debited to
drawings account and not expense account.

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Types of Entry: The entries made in the journal may be of two types:
Simple Entry: In this type of entry, only two accounts are affected, of which one is debited
and the other credited.
Double Entry: In this type of entry, more than two accounts are affected. In a combined entry,
there may be:
a) Several accounts to be debited and one account to be credited.
b) One account to be debited and several accounts to be credited.
c) Several accounts to be debited and several accounts to be credited.
Example: Ramesh started business with cash Rs.25,000 goods worth Rs.50,000 and Machinery
worth Rs.100,000.
This is a combination of transactions. The following simple entries can be made:
1. He brings cash in business:
Cash A/c Dr. Rs. 25,000
To Capital A/c Rs. 25,000
2. He brings goods in business:
Goods A/c Dr. Rs. 50,000
To Capital A/c Rs. 50,000
3. He brings machinery in business:
Machinery A/c Dr. Rs.100,000
To Capital A/c Rs.100,000
In all the above transactions the capital account is credited. Hence, instead of making three separate
entries one combined can be passed as follows:
Cash A/c Dr. Rs. 25,000
Goods A/c Dr. Rs. 50,000
Machinery A/c Dr. Rs.100,000
To Capital A/c Rs.175,000
Entries of transactions relating to Discount:
An allowance in price given by the seller to the buyer is known as a discount. Discount may be of
two kinds:
1. Cash Discount 2. Trade Discount
1. Cash Discount: This is an allowance to the debtor, to recover the debts earlier. It is allowed to
induce the debtor to make the payment immediately or within the stipulated period. This discount
is given when payment is received and this discount is received when payment is made. The
advantage of giving this discount is that the cash flow is maintained in the business as funds are
not blocked. As a result of this the borrowing at higher interest rates are less, leading to cost saving.
Further the risk of losses due to bad debts are reduced.
Example
1. Received Rs. 7,500 from Mr.Y and allowed him a cash discount of Rs.250. The combined entry
shall be as under:
Cash A/c Dr. Rs. 7,500
Discount A/c Dr. Rs. 250
To Mr. Y’s A/c Rs. 7,750

2. Paid Rs. 9500 to Mr. Z in full settlement of his account for Rs.10,000.

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Dr. Varsha Rayanade
 Mr. Z’s A/c Dr. Rs. 10,000
To Cash A/c Rs. 9,500
To Discount A/c Rs. 500
2. Trade Discount: A trade discount is an allowance made by the wholesaler to the retailer to
enable the retailer to sell the goods at the listed price and earn a reasonable amount of margin. If
trade discount is earned on purchase of goods amount of trade discount is to be calculated on gross
purchase and is to be deducted from invoice price. No entry is to be passed for the same.

Example
Goods worth Rs.25,000 were sold to Mr. D less 10% trade discount. In this case Mr D has to pay
not Rs. 25,000 but only Rs.22,500 ( ie. Rs. 25,000 less Rs. 2500 trade discount) as he is allowed a
trade discount of 10%. In the Books of accounts trade discount does not appear in the books of
account as this amount is already deducted in the invoice. Therefore, irrespective of whether trade
discount is allowed or received, this will not appear in the books of accounts.

If both trade discount and cash discount are earned on purchase of goods, then first trade
discount is calculated and deducted from gross purchase and on the net purchase the cash
discount is calculated.
Example 1. Journalise the following transactions in the books of Mr. Varun
2010
Jan., 1 Mr. Varun Starts business with a capital of Rs. 500,000/- brought in cash.
2 He opens a Bank account by depositing an amount of Rs.250,000/-
4 Purchases goods worth Rs. 150,000/- from Sun Traders by cash
6 Credit Purchase of goods worth Rs.100,000/- from Trade Links.
7 Goods Sold to Bajaj for Rs. 80,000/- on credit
10 Sold Goods for cash Rs. 50,000/-
14 Returned Goods to Trade Links Rs.20,000/-
19 Goods amounting to Rs. 30,000/- sold to NM Traders
23 Received Cheque of Rs. 80,000/- from Bajaj
27 Goods returned by NM Traders Rs. 5000/-
31 Commission of Rs. 5000/- paid to Mehta
31 Makes payment of Rs. 80,000/- to Trade Links by cheque

Solution
In the Journal of Mr. Varun
Date Particulars L.F Debit Credit
Rs. Rs.
2010
Jan. 1 Cash A/c Dr 500,000
To Capital A/c 500,000
( Being Capital brought in by Mr. Varun)

2 Bank A/c Dr 250,000

To Cash A/c 250,000
(Being cash deposited in bank for opening
of Bank Account )

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Dr. Varsha Rayanade
 4 Purchase A/c Dr 150,000
To Cash A/c 150,000
(Being goods purchased for cash)

6 Purchase A/c Dr 100,000

To Trade Links A/c 100,000
(Being goods purchased on credit from
Trade Links)

7 Bajaj A/c Dr 80,000

To Sales A/c 80,000
( Being Goods sold to Bajaj on Credit )

10 Cash A/c Dr 50,000

To Sales A/c 50,000
( Being Goods sold for Cash )

14 Trade Links A/c Dr 20,000

To Purchase Returns A/c 20,000
(Being goods returned to Trade Links )

19 NM Traders A/c Dr 30,000

To Sales A/c 30,000
( Being Goods sold to NM Traders on
Credit )

23 Bank A/c Dr 80,000

To Bajaj A/c 80,000
( Being cheque received from Bajaj )

27 Sales Returns A/c Dr 5,000

To NM Traders A/c 5,000
(Being Goods returned by NM Traders )

31 Commission A/c Dr 5,000

To Cash A/c 5,000
(Being Commission paid to Mehta )

31 Trade Links A/c Dr 80,000

To Bank A/c 80,000
( Being amount paid to Trade links )

Example 2. Journalise the following transactions in the Journal of Ravi

2009
June, 10 Started business by bringing Rs. 50,000 in cash and Rs. 150,000 by cheque
June, 12 Received Rs.100,000 as loan from his father Jayesh
June, 15 Paid cheque of Rs. 50,000 towards deposit for Office taken on rent
June, 16 Purchased Goods worth Rs. 220,000 for trading from Rakesh

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Dr. Varsha Rayanade
June, 19 Sold goods to Jagdish for Cash Rs. 60,000
June, 22 Sold goods to Ramesh for Rs.35,000
June, 25 Withdrew Rs.5,000 for personal use
June, 26 Returned goods to Rakesh Rs. 50,000
June, 28 Purchased second hand Motorcyle for office use by paying cash of Rs.15,000
June, 30 Part Repayment of Loan taken from Jayesh Rs.5000
Solution
In the Journal of Ravi
Date Particulars L.F Debit Credit
Rs. Rs.
2009
June Cash A/c Dr 50,000
10 Bank A/c Dr 150,000
To Capital A/c 200,000
( Being Cash and Cheque brought in by
Ravi as Capital)

12 Cash A/c Dr 100,000

To Jayesh Loan A/c 100,000
(Being loan amount received from Jayesh)

15 Office Deposit A/c Dr 50,000

To Bank A/c 50,000
(Being amount paid for Office Deposit )

16 Purchase A/c Dr 220,000

To Rakesh A/c 220,000
(Being goods purchased from Rakesh on
credit )

19 Cash A/c Dr 60,000

To Sales A/c 60,000
( Being Goods sold for Cash )

22 Ramesh A/c Dr 35,000

To Sales A/c 35,000
(Being Goods sold to Ramesh on Credit )

25 Drawings A/c Dr 5,000

To Cash A/c 5,000
(Being amount withdrawn for personal
use)

26 Rakesh A/c Dr 50,000

To Purchase Returns A/c 50,000
( Being Goods returned to Rakesh )
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Dr. Varsha Rayanade
 28 Motor Cycle A/c Dr 15,000
To Cash A/c 15,000
(Being purchase of Motor Cycle for Office
use)

Jayesh Loan A/c Dr

30 To Cash A/c 5,000
(Being part loan amount repaid to Jayesh) 5,000
Example 3. Journalise the following transactions in the Journal of Rohan
Oct., 2009
3 Paid Rs. 4,000 to Advertisment in Newspaper
5 Received Commission of Rs. 30,000 from RK Enterprises
7 Purchased Goods from Sunderam Traders Rs. 180,000
7 Freight Paid Rs. 3000 to VRL Transport Co.
10 Salaries paid to Office staff Rs. 35,500
11 Sold Goods to Suman & Co for Rs. 200,000
14 Received Rs.60,000 from Raj Trading Co. and allowed him discount of Rs.5000
18 Paid an amount of Rs.1,200 towards purchase of Stationery
21 Interest received from Vasant Rs. 800
24 Purchased goods worth Rs.50,000 for cash less 20% trade discount and 5% cash
discount
27 Car Repair charges paid to mechanic Rs.2,000
30 Paid Sunderam Traders an amount of Rs.175,000 as full and final settlement of his
Purchase bill amount of Rs.180,000
Solution
In the Journal of Rohan
Date Particulars L.F Debit Credit
Rs. Rs.
Oct.09
3 Advertisement A/c Dr 4,000
To Cash A/c
( Being advertisement charges paid in 4,000
cash)

5 Cash A/c Dr 30,000

To Commission A/c 30,000
(Being commission received from RK
Enterprises)

7 Purchase A/c Dr 180,000

To Sunderam Traders A/c 180,000
(Being goods purchased from Sunderam
Traders on credit )
7 Freight A/c Dr
3,000
To Cash A/c
3,000
(Being freight amount paid in cash to VRL

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Dr. Varsha Rayanade
 10 Salary A/c Dr 35,500
To Cash A/c 35,500
(Being Salary paid in Cash to office staff)

11 Suman & Co. A/c Dr 200,000

To Sales A/c 200,000
(Being Goods sold to Suman & Co. on
Credit)

14 Cash A/c Dr 60,000

Discount A/c Dr 5,000
To Raj & Co. A/c 65,000
(Being receipt of cash from Raj & Co.
alongwith discount )

18 Stationery A/c Dr 1,200

To Cash A/c 1,200
( Being amount paid for Stationery )

21 Cash A/c Dr 800

To Interest A/c 800
(Being interest received from Vasant in
cash)

24 Purchase A/c Dr 40,000

To Cash A/c 38,000
To Discount A/c 2,000
(Being goods purchased for cash worth
Rs.50000 allowed 20% trade discount &
5% cash discount)

27 Repairs A/c Dr 2,000

To Cash A/c 2,000
(Being cash paid to mechanic for car repair
charges)

30 Sunderam Traders A/c Dr 180,000

To Cash A/c 175,000
To Discount A/c 5,000
( Being full & final amount paid to
Sunderam Traders alongwith discount )
Example 4. Journalise the following transactions in the Journal of Sachin
Aug., 2009
1 Furniture purchased for office Rs. 18,000 from Wood Craft
3 Sold Goods to Yuvraj for Rs.90,000
4 Paid office rent Rs.5,000
7 Salary Paid to Kishen Rs.10,000
9 Purchased goods worth Rs.75,000 from Rahim

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Dr. Varsha Rayanade
 13 Paid Telephone Bill of Rs.2,470
14 Interest received on Fixed Deposit Rs. 3,000 from State Bank of India
16 Sold Goods worth 35,000 by giving cash discount of Rs.1,000
19 Cheque received from Yuvraj Rs.50,000
21 Old scrap sold for Rs. 750
25 Purchased goods worth Rs. 45,000 from Kiran
29 Amount used by Sachin for his personal use Rs.12,000
Solution
In the Journal of Sachin
Date Particulars L.F Debit Credit
Rs. Rs.
Aug.09
1 Furniture A/c Dr 18,000
To Woodcraft A/c
( Being furniture purchased from 18,000
Woodcraft on credit)

3 Yuvraj A/c Dr 90,000

To Sales A/c 90,000
(Being goods sold to Yuvraj on credit )

4 Rent A/c Dr 5,000

To Cash A/c 5,000
(Being office rent paid in cash )

7 Salary A/c Dr 10,000

To Cash A/c 10,000
(Being Salary paid in cash to Kishen )

9 Purchase A/c Dr 75,000

To Rahim A/c 75,000
(Being Goods purchased from Rahim on
credit)

13 Telephone Expenses A/c Dr 2,470

To Cash A/c 2,470
(Being cash payment made for telephone
expenses incurred )

14 Bank A/c Dr 3000

To Interest on FD A/c 3,000
(Being FD interest received from State
Bank of India )

16 Cash A/c Dr 34,000

Discount A/c Dr 1,000
To Sales A/c 35,000
( Being goods sold with discount against
cash payment)

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Dr. Varsha Rayanade
 19 Bank A/c Dr 50,000
To Yuvraj A/c 50,000
(Being amount received from Yuvraj by
cheque )

21 Cash A/c Dr 750

To Scrap Sales A/c 750
(Being old scrap sold for cash)

25 Purchase A/c Dr 45,000

To Kiran A/c 45,000
(Being goods purchased from Kiran on
credit)

29 Drawing A/c Dr 12,000

To Cash A/c 12,000
(Being amount used by Sachin for personal
purpose )

Example 5. Journalise the following transactions in the books of CCD

April, 2008
1 CCD started business of computers with capital of Rs.200,000
3 Opened Bank Account with Central Bank by depositing Rs.50,000 in cash
5 Purchased Computers and accessories worth Rs.150,000 from Star Computers
7 Stationery purchased for Rs.2,500
11 Cheques Received of Rs.30,000 against Sale of Computer to Kiriti
15 Sold Computers to Modern Computers for Rs. 140,000
17 Cash paid to Star Computers Rs.50,000
18 Cheque of Rs.30,000 received from Kirti was dishonoured and returned by bank
20 Computers worth Rs.25,000 were returned by Modern Computers
23 Cash Received from Kirti Rs.30,000
26 Printer repair charges of Rs.5000 paid by cash
28 Issued cheque of Rs.25,000 to Star Computers
Solution
In the Journal of CCD
Date Particulars L.F Debit Credit
Rs. Rs.
Apr.08
1 Cash A/c Dr 200,000
To Capital A/c 200,000
(Being cash brought in business as capital)

3 Bank A/c Dr 50,000

To Cash A/c 50,000
(Being cash deposited in bank )

5 Purchase A/c Dr 150,000

To Star Computers A/c 150,000

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Dr. Varsha Rayanade
 (Being purchase of computers from Star
Computers on credit )

7 Stationery A/c Dr 2,500

To Cash A/c 2,500
(Being cash purchase of stationery )

11 Bank A/c Dr 30,000

To Sales A/c 30,000
(Being cheque received from Kirti towards
sale of computers )

15 Modern Computers A/c Dr 140,000

To Sales A/c 140,000
(Being Computers sold to Modern
Computers on Credit )

17 Star Computers A/c Dr 50,000

To Cash A/c 50,000
( Being amount paid to Star Computers)

18 Kirti A/c Dr 30,000

To Bank A/c 30,000
(Being cheque received from Kirti
dishonoured & returned back by bank)

20 Sales Returns A/c Dr 25,000

To Modern Computers A/c 25,000
( Being computers returned by Modern
Computers)

23 Cash A/c Dr 30,000

To Kirti A/c 30,000
( Being computers returned by Modern
Computers)

26 Repairs A/c Dr 5,000

To Cash A/c 5,000
(Being cash paid for repair of printer )

28 Star Computers A/c Dr 25,000

To Bank A/c 25,000
( Being amount paid to Star Computers by
cheque)

Exercise 1 Mr.Nirmal has the following transactions in the month of June, 2007. Write Journal
Entries for these transactions.
June, 5 Commenced business with a capital of Rs. 75,000

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Dr. Varsha Rayanade
June, 7 Purchased goods from Jagdish for Rs.35,000
June, 8 Bought table and chairs for Rs. 12,000
June, 10 Sold goods worth Rs.28,000 to Kiran
June, 12 Returned goods to Jagdish Rs.4000
June, 16 Purchased Goods for cash Rs. 15,000
June, 19 Paid Rs.7000 for advertisement in paper
June, 21 Received Rs.21,000 towards sales of goods
June, 22 Paid an amount of Rs.30,000 to Jagdish against outstanding amount of Rs.31,000 as
full and final settlement of his dues
June, 24 Discount of Rs.1,500 given to Kiran for making Cash payment of Rs.26,500 against his
dues.
Exercise 2 Journalise the following transactions in the books of Patil & Sons
06.04.09 Received cheque of Rs.180,000 from Mr. Yadav as loan
08.04.09 Bought Computer for Rs. 30,000 from AB Computers
11.04.09 Additional Capital brought of Rs.250,000
14.04.09 Purchased Flat for Office use by making payment of Rs.50,000 by cheque and
Rs.100,000 in cash
17.04.09 Purchased air conditioner of Rs.25,000 for use at home
18.04.09 Received Commission of Rs.100,000 from RR Agency in cash
22.04.09 Made Cash Payment to AB Computers Rs.30,000
25.04.09 Interest of Rs.3,600 paid by cheque to Mr. Yadav
26.04.09 Withdrew Rs.10,000 from bank for personal use
29.04.09 Cash deposited in bank 50,000

Exercise 3 From the following transactions, pass Journal Entries in the books of Manish Traders.
Oct., ’09
4 Opened Bank Account by depositing Rs.50,000 in cash
6 Purchased Goods worth Rs.30,000 from AK Associates and paid half the amount in cash.
9 Sold Goods of Rs.62,000 to Kalyani and received cheque for the same
11 Sold old furniture for Rs.23,000
16 Cheque of Rs.16,500 received towards Interest on Loan given to Ashok
18 Electricity charges of Rs.1,100 paid by cheque
21 Expenses of Rs.1,600 incurred for repair of Computers
23 Kalyani returned back goods worth Rs.2000 and payment for the same was made by cash.
26 Rent of Rs.3,500 paid to Landlord by cash
27 Goods worth Rs. 40,000 were purchased for cash less 10% trade discount and 5% cash
discount.
29 Purchased Machinery for Rs. 125,000 from KK Enterprises
31 Withdrew Rs.20,000 from bank of which Rs.5000 were used for personal purpose
Exercise 4 Journalise the following transactions in the books of Reliable Co.
4th Sept. Withdrew Rs.20,000 for office use
7th Sept. Salary of Rs. 6,000 paid in cash for the month of August
10th Sept. Received an amount of Rs.74,000 from Ramnath (Debtor) by cheque
12th Sept. Purchased goods from Amol for Rs. 100,000
16th Sept. Commission of Rs. 3,000 paid to Sudhir in cash
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Dr. Varsha Rayanade
18th Sept. Donation of Rs. 500 given for Ganpati festival
23rd Sept. Goods worth Rs.60,000 were sold on cash basis for cash discount of 5%
26th Sept. Monthly Courier bill of Rs.850 paid by cheque
28th Sept. Goods worth Rs.5000 purchased from Amol were found to be defective, hence the same
were returned to them
30th Sept. Issued cheque of Rs.40,000 to Amol
Exercise 5 Journalise the following transactions in the books of Relax Traders
Mar., 05
1 Amount of Rs. 150,000 invested as Capital by Suraj ( Sole Proprietor)
2 Deposit of Rs. 25,000 given to Chandu for taking office on rent
5 Amount of Rs. 18,000 paid for purchase of office furniture
6 Goods worth Rs. 44,000 purchased for Rs. 40,000 by cash
11 Purchased Air Conditioner from Techno Engineers for Rs. 25,000
14 Loan taken from Bank of India Rs. 100,000
19 Goods sold to Rajat Traders for Rs. 26,000
22 Printing & Stationery Expense of Rs.12,000 incurred for preparation of company profile
27 Cash Sales of goods worth Rs.10,000 for Rs. 9,000
28 Incurred Office Repair Expenses of Rs.2,500
30 An amount of Rs.5000 was paid for hire of car used by the parents of the owner for their
visit to native place.
LEDGER
A Ledger is the principal book of accounts in which individual records of persons, properties,
expenses, incomes, gains and losses are kept in an systematic manner. It is an end point of entries
made in the journal or subsidiary books. Ledger facilitates posting of the transactions to respective
accounts. All entries made in the journal must be posted into the ledger. The Ledger may be in
form of a bound book or separate sheets which may be attached and maintained in a loose leaf
binder. Every ledger has an index, which is generally alphabetic. One page is allotted to each
alphabet. All the accounts commencing with that particular alphabet are indicated on that particular
page only. The page number on which that particular account appears is shown against the account
in the Index.
The term “Ledger” is derived from the Dutch word “Legger” which means to lie. Ledger therefore
means a book where the various accounts lie. Ledger can be defined as “a group of accounts is
known as ledger. The general ledger is the main book of accounts; it contains an account for each
asset, liability, proprietorship, revenue and expense account. The Ledger contains the same
information as the journal. However, in the journal each transaction is completely recorded as a
unit. The entire effect of a transaction is completely recorded in one place in the journal.
Periodically, the same information is posted to the Ledger where it is accumulated according to
individual items. The ledger where it is accumulated includes all the basic accounts needed for the
preparation of the financial statements”. The number of ledger accounts depends upon the number
of transactions.

The journal cannot provide information of the business transactions for eg. Information regarding
total amount receivable from Debtors, amount payable to Creditors, total expenditure on any
particular type of expense etc cannot be derived from the journal. In order to get such information,

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Dr. Varsha Rayanade
the ledger account has to be maintained. While transferring the transactions from the journal to the
ledger the transactions are classified, for each person, head of income, head of expense, asset, etc
separate accounts are opened in the ledger. Ledger therefore, helps to achieve the following
purposes:
1. All personal accounts would show how much money is payable to creditors and receivable
from Debtors.
2. The real accounts would show the value of assets and properties.
3. The nominal accounts would show the sources of income and the amount spend on various
heads of expenses.
Specimen Form of Ledger Account:
Name of the Account
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
Year To Name of Year By Name of
Month Account Month Account
Credited Debited
Each ledger account is divided into two sides, the left side is known as Debit side and the right
side is known as the credit side. The columns date, J.F., Amount appear on both sides of the ledger.
Each page of the ledger is serially numbered.
Running Balance form of Ledger Account

Date Particulars Folio Debit Credit Balance

Amount Amount
Rs. Rs. Rs.

This alternate form of ledger is generally adopted by commercial banks.

Ledger Posting
Once the transaction is analysed into debit and credit elements in the journal each debit or credit
element must be transferred to the respective ledger accounts. The process of transfer of entries
from journal to ledger account is called “Posting” or “Ledger Posting”. Posting may be made
immediately after the entry has been passed or at any convenient time.
Importance of Posting
Posting is very important as it furnishes the result of all the transactions relating to a particular
person or service. Only after posting one can understand the actual position of an account at a
glance.
Process of Posting
1. Date Column : Write the date of the transaction as recorded in the journal.
2. Particulars:
On Debit Side: Write Name of the credited Account in the Journal Entry after the word “To”.
On Credit Side: Write Name of the debited Account in the Journal Entry after the word “By”.
3. J.F. Column: Write the page number of the journal from where the entry is posted.

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Dr. Varsha Rayanade
4. Amount Column: Write the amount column in the debit column of the journal on the debit side
and the amount in the credit column of the journal on the credit side.
Illustration of Posting Process
In the Journal of CCD
Folio no. 3
Date Particulars L.F Debit Credit
Rs. Rs.
2008
April, Cash A/c Dr 7 100,000
6 To Capital A/c 18 100,000
( Being cash brought in business as
Capital )

Cash A/c Folio no. 7

Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2008
April, To Capital A/c 3 100,000
6

Capital A/c Folio no 18

Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2008 2008
April, April, 6 By Cash A/c 3 100,000
6

Important Steps while posting

1. Consider the Journal entry of the transaction.
2. In the ledger find out the first account named in the journal.
3. Write the date of the transaction in the date column.
4. On the debit side of the ledger write in the particulars column, the name of the account credited
with a prefix “To”.
5. Write the page number of the journal from which the posting has been done in the folio column.
6. Write the amount to be debited as per the journal in the amount column on the debit side of the
ledger.
7. Write in the folio column of the journal the page number of the ledger where the posting has
been done.
8. In the ledger find out the second account named in the journal.
9. Write the date of the transaction in the date column.
10. On the credit side of the ledger write in the particulars column, the name of the account debited
with a prefix “By”.
11. Write the page number of the journal from which the posting has been done in the folio column.
12. Write the amount to be credited as per the journal in the amount column on the credit side of
the ledger.

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13. Write in the folio column of the journal the page number of the ledger where the posting has
been done.
14. Opening balance of ledger should be shown as Balance brought down (b/d).
Ten Most Important points while preparing ledger accounts
1. A Separate account is to be opened in the ledger for every account entered in the journal.
2. All transactions relating to a particular account should be recorded in the account already
opened. No new account of the same name should be opened in the ledger.
3. The name of each account should be recorded in bold letters on the top of the ledger sheet at
the centre of each account.
4. The word “Dr” should be written at the left hand top corner of each account and the word “Cr”
should be written at the right hand top corner of each account.
5. Journal entries should be posted to the ledger in order of dates.
6. Every entry on the debit side of an account should begin with the word “To” and every entry
on the credit side of an account should begin with the word “By”.
7. The account which is to be debited in the journal should be posted on the debit side of the
respective ledger account, the account which is to be credited in the journal should be posted
on the credit side of the respective ledger account.
8. While posting on the debit side of a ledger account the account credited in the journal should
be written on the debit side in the particulars column and while posting on the credit side of a
ledger account the account debited in the journal should be written on the credit side in the
particulars column.
9. The page number of the journal from where posting is made should be entered in the J.F. column
against the entry.
10. Every ledger account should be balanced periodically as required by the business concern.
Balancing of Ledger Account
Balancing an account is finding the difference between the totals of its debit and credit sides. At
the end of certain period all accounts operated in the ledger are totalled and balanced. Steps
required for balancing the ledger account are as given below:
1. Find the total of the debit side.
2. Find the total of the credit side.
3. Find the ‘Balance’ i.e. the difference between the total of debit and credit side
4. Write the balance in the amount column of the side which is lighter or lesser. If the debit side
is lighter or lesser write “To Balance c/d” and if the credit side is lighter or lesser write “By
Balance c/d” in the particulars column.
5. Take the total of both sides, the total of debit side will now agree with the total of credit side
of an account. The total of both the sides should appear against each other on the same line.
6. Draw a single line before making the totals.
7. Draw a double line across the amount column after the totals are made.
8. Rewrite or bring down the balance on the opposite side of the account. That means “To Balance
c/d” is brought down on the credit side below the totals in the particular column as “By Balance
b/d” and “By Balance c/d” is brought down on the debit side of the account in the particulars
column below the total as “To Balance b/d”.
The basic purpose of balancing an account is to find out whether it has received more benefits than
it has given or given more benefits than it has received and thus determine the correct status of that
account. After balancing, some of the ledger accounts show debit balances and some of them show
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credit balances. If the total of the debit side of an account is more or heavier than the credit side of
that account it is said to have a debit balance. And if the total of the debit side of an account is less
or lighter than the credit side of that account it is said to have a credit balance. A debit balance of
a personal account means a debtor. A debit balance of a real account means an asset or property
and a debit balance of the nominal account means expense or loss. A credit balance of the personal
account or real account means a liability and credit balance of the nominal account means income
or gains.
The purpose of balancing ledger accounts vary according to the types of accounts:
1. Personal Accounts: These accounts are balanced for finding out whether a person is a debtor
or a creditor. A debit balance on a personal account indicates that the person is a debtor and
the credit balance on a personal account indicates that the person is a creditor. A zero balance
means that the account is closed. At the end of the year the total debtors and total creditors are
ascertained by balancing personal accounts.
2. Real Accounts:
a. Cash Account: The purpose of balancing this account is to find out the cash on hand. Cash
account will always have debit balance or no balance. It can never have credit balance, however
bank account may have credit balance.
b. Goods Account: The purpose of balancing this account is to find out total sales, total
purchases, total returns, etc. In case of goods account like sales account, Purchase return
account there will be credit balance while, the Purchase, Sales return account shall have a debit
balance.
c. Other Real Accounts: The purpose of balancing these accounts is to find out the value of
each property on a particular date. Real account generally have a debit balance which is the
value of property, a credit balance in this account shows profit earned on disposal of the
property.
3. Nominal Accounts: The purpose of balancing these accounts is to find out the total amount
spent on each type of expenditure and the total amount of income earned from various sources.
A debit balance in a Nominal account signifies a loss or an expense and credit balance in a
Nominal account signifies an income or gains.
Generally, the accounts are balanced at regular periodic intervals like a day, a week, a fortnight or
a month depending upon the account concerned. Balancing is an important step to finalising the
accounts as every account must be balanced on the last day of the accounting year i.e at the year
end. A list of all ledger account balances showing debit balances and a list of all ledger account
balances showing credit balances is called Trial Balance. The sum total of both the debit balances
and credit balances have to agree if the double entry principles are followed correctly.
Example 6. Journalise the following transactions of Kapil, post them to Ledger and balance
the same
Feb.,01 2008 Started business with cash Rs.80,000
Feb.,03 2008 Bought goods worth Rs. 55,000
Feb.,08 2008 Sold goods to Shriram Rs. 30,000
Feb.,09 2008 Goods sold for cash Rs.10,000
Feb.,14 2008 Shriram returned goods worth Rs.2,000
Feb., 20 2008 Received Rs.25,000 from Shriram
Feb., 25 2008 Sold goods worth Rs. 5000 to Karan on cash
Feb., 28 2008 Cash Purchase of goods Rs.15,000

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Solution
In the Journal of Kapil

Date Particulars L.F Debit Credit

Rs. Rs.
Feb.08
1 Cash A/c Dr 80,000
To Capital A/c 80,000
(Being cash brought in business as capital)

3 Purchase A/c Dr 55,000

To Cash A/c 55,000
(Being goods purchased on cash )

8 Shriram A/c Dr 30,000

To Sales A/c 30,000
(Being goods sold to Shriram on credit )

9 Cash A/c Dr 10,000

To Sales A/c 10,000
(Being goods sold on cash )

14 Sales Returns A/c Dr 2,000

To Shriram A/c 2,000
(Being goods returned by Shriram )

20 Cash A/c Dr 25,000

To Shriram A/c 25,000
( Being amount received from Shriram)

25 Cash A/c Dr 5,000

To Sales A/c 5,000
(Being goods sold to Karan on cash)

28 Purchase A/c Dr 15,000

To Cash A/c 15,000
( Being goods purchased on cash )

Ledger
Capital A/c
Dr. Cr
Date Particulars J.F Amount Date Particulars J.F Amount
2008 2008
Feb, 28 To Balance c/d 80,000 Feb,1 By Cash A/c 80,000
80,000 80,000
2008
Mar,1 By Balance b/d 80,000

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 Cash A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2008 2008
Feb, 1 To Capital A/c 80,000 Feb, 3 By Purchase A/c 55,000
9 To Sales A/c 10,000 28 By Purchase A/c 15,000
20 To Shriram A/c 25,000 28 By Balance c/d 50,000
25 To Sales A/c 5,000

120,000 120,000

2008
Mar,1 To Balance b/d 50,000
Purchase A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2008 2008
Feb, 3 To Cash A/c 55,000 Feb,28 By Balance c/d 70,000
28 To Cash A/c 15,000

70,000 70,000
2008
Mar,1 To Balance b/d 70,000

Sales A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2008 2008
Feb,28 To Balance c/d 45,000 Feb,8 By Shriram A/c 30,000
9 By Cash A/c 10,000
25 By Cash A/c 5,000
45,000
45,000
2008
Mar,1 By Balance b/d 45,000

Shriram A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2008 2008
Feb, 8 To Sales A/c 30,000 Feb,14 By Sales Return A/c 2,000
20 By Cash A/c 25,000
28 By Balance c/d 3,000

30,000 30,000
2008
Mar,1 To Balance b/d 3000

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 Sales Return A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2008 2008
Feb,14 To Shriram A/c 2,000 Feb, 28 By Balance c/d 2,000
2,000 2,000
2008
Mar,1 To Balance b/d 2,000

Example 7. Following Balances appear in the ledger of Mrs. Khanna on 1st May, 2009:
Debit Balances Rs Credit Balances Rs
Cash A/c 22,000 Capital A/c 50,000
Bank A/c 15,000 Sales A/c 62,000
Purchase A/c 48,000 Harish A/c 45,000
Rajiv A/c 31,000
Motor Cycle A/c 34,000
2nd May, ‘09 Sold Goods for cash Rs.14,000
4th May, ‘09 Amount deposited in Bank Rs. 10,000
8th May, ’09 Goods worth Rs.35,000 purchased from Harish
10th May, ’09 Issued cheque of Rs. 20,000 to Harish
11th May, ’09 Received Cheque from Rajiv Rs. 25,000
17th May, ’09 Goods sold to Rajiv for Rs. 40,000
19th May, ‘09 Cash withdrew Rs.5000 from Bank for office use
21st May, ’09 Sold old motorcycle for its book value of Rs.34,000
Journalise the above transaction and post them into ledger accounts and balance the same.
Solution
In the Journal of Mrs. Khanna
Date Particulars LF Debit Credit
Rs. Rs.
2009
May 02 Cash A/c Dr 14,000
To Sales A/c 14,000
(Being goods sold on cash)
May 04 Bank A/c Dr 10,000
To Cash A/c 10,000
( Being cash deposited in Bank )
May 08 Purchase A/c Dr 35,000
To Harish A/c 35,000
( Being goods purchased from Harish on credit )
May 10 Harish A/c Dr 20,000
To Bank A/c 20,000
( Being cheque paid to Harish )
May 11 Bank A/c Dr 25,000
To Rajiv A/c 25,000
( Being cheque received from Rajiv)
May 17 Rajiv A/c Dr 40,000
To Sales A/c 40,000
( Being goods sold to Rajiv on credit)
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 May 19 Cash A/c Dr 5,000
To Bank A/c 5,000
( Being cash withdrawn from bank )
May 21 Cash A/c Dr 34,000
To Motor Cycle A/c 34,000
(Being Cash received against sale of Motor Cycle

Ledger
Capital A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2009 2009
May To Balance c/d 50,000 May,1 By Balance b/d 50,000
31 50,000 50,000
2009
Jun,1 By Balance b/d 50,000

Cash A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2009 2009
May 1 To Balance b/d 22,000 May 4 By Bank A/c 10,000
2 To Sales A/c 14,000 31 By Balance c/d 65,000
19 To Bank A/c 5,000
21 To M. Cycle A/c 34,000
75,000 75,000
2009
Jun,1 To Balance b/d 65,000

Bank A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2009 2009
May 1 To Balance b/d 15,000 May 10 By Harish A/c 20,000
4 To Cash A/c 10,000 19 By Cash A/c 5,000
11 To Rajiv A/c 25,000 31 By Balance c/d 25,000

50,000 50,000
2009
Jun,1 To Balance b/d 25,000

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 Purchase A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2009 2009
May, 1 To Balance b/d 48,000 May,31 By Balance c/d 83,000
8 To Harish A/c 35,000

83,000 83,000
2009
Jun,1 To Balance b/d 83,000

Sales A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2009 2009
May,31 To Balance c/d 116,000 May,1 By Balance b/d 62,000
2 By Cash A/c 14,000
17 By Rajiv A/c 40,000
116,000 116,000
2009
Jun,1 By Balance b/d 116,000

Rajiv A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2009 2009
May, 1 To Balance b/d 31,000 May,11 By Bank A/c 25,000
17 To Sales A/c 40,000 31 By Balance c/d 46,000

71,000 71,000
2009
Jun,1 To Balance b/d 46,000

Harish A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2009 2009
May,10 To Bank A/c 20,000 May,1 By Balance b/d 45,000
May,31 To Balance c/d 60,000 8 By Purchase A/c 35,000

80,000 80,000
2009
Jun,1 By Balance b/d 60,000

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 Motor Cycle A/c
Dr. Cr.
Date Particulars J.F Amount Date Particulars J.F Amount
2009 2009
May, 1 To Balance b/d 34,000 May, By Cash A/c 34,000
21
34,000 34,000

Exercise 6. Journalise the following transactions, post them to Ledger and balance the same.
2008
April, 4 Sandeep started business by bringing in Rs.50,000 in cash and Rs.150,000 by cheque as capital.
April, 6 Purchased goods worth Rs.25,000 for cash from Shekhar
April, 7 Purchased goods worth Rs.50,000 from KG Enterprises at 5% trade discount
April, 10 Sold Goods to TK & Co. Worth Rs. 40,000 at 5% trade discount
April, 12 Cash Sale of goods worth Rs.25,000 at 5% cash discount
April, 15 Cash Purchase goods worth Rs.15,000 at 5% trade discount and 5% cash discount
April, 19 Cash Deposited in Bank Rs.10,000
April, 22 Received Cheque from TK & Co. for Rs.25,000
April, 24 Issued cheque of Rs. 40,000 to KG Enterprises
April, 27 Cheque of TK & Co. for Rs.25,000 returned by bank due to inadequate balance in their bank a/c.
April, 30 Bank debited an amount as Rs.100 as bank charges.

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 3

Journal is a main account book in which all types of day to day business transactions are recorded
systematically in chronological order. In earlier times the businessmen used only one Journal for
recording all the business transactions since the volume of business was small and the number of
transactions were few. However with the growth of business the number of transactions increased
tremendously and need was felt to have a better method of recording business transactions because
if all these business transactions were recorded in one journal, the journal would be bulky and
difficult to operate, handle and carry from one place to other place in the organisation. Further, it
would not be possible for many clerks to work on the same journal at one and the same time. Hence
it was decided to divide the whole journal into several subsidiary journals so that work can be
assigned to many people at one and the same time. In each such sub part of the journal one
particular type of business transactions is recorded.
Thus, to meet the modern business requirements the original journal is divided into the following
subsidiary books (sub – division of journal):
1. Purchase Book: To record credit purchase of goods only.
2. Sales Book: To record credit sales of goods only.
3. Purchase Return Book (Return Outward Book): To record all return of goods purchased by us
from suppliers i.e. Return outwards.
4. Sales Return Book (Return Inward Book):To record all return of goods sold by us to customers
i.e. Return inwards.
5. Cash Book: To record all cash and bank transactions.
6. Bills Receivable Book: To record all bills received by us.
7. Bills Payable Book: To record all bills accepted by us.
8. Journal Proper: To record all such transactions which cannot be entered in the above seven
books.
Advantages of Subsidiary books
1. It is easier and more convenient to handle and refer than one single voluminous Journal.
2. Many clerks can be employed at one and same time for writing the books of accounts.
3. The ledger clerk can do ledger posting at his convenience.
4. Lot of time and labour is saved as duplication of work is avoided.
5. More than one auditors can simultaneously audit the records.
6. Facilitates Effective internal check and control.
7. Subsidiary books provide easy referencing.
8. As the transactions are classified, it enables proper analysis of the transactions.
9. More details of business transactions can be recorded in subsidiary books.
Purchase book
This book is also known as Purchase Day Book. This book is used to record all purchase of goods
made on credit. Entries in this book are made on the basis of invoice (bill) received from Supplier
and certified by the Purchase department about the correctness of the quantity, quality and the net

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amount payable after trade discount. Generally, trade discount is shown in the purchase book,
however the same is not entered or posted to any ledger account. Further, no cash purchase or
purchase of any item other than the merchandise ( i.e. goods traded or manufactured) such as
assets are entered in the Purchase Book.
Format of Purchase Book
Date Particulars Invoice L.F Details Amount
No. Rs. Rs.

Entries in Purchase Book

a. Date column : date on which invoice is received is entered.
b. Particulars : name of the supplier along with brief description about the type of article
purchased is written in this column.
c. Invoice No. : serial number of supplier invoice / bill is written in this column.
d. L.F. : in this column the page number of the creditors account in Creditors Ledger
is mentioned.
e. Detail : in this column value of goods purchased and the amount of trade discount is
mentioned.
f. Amount : The actual net amount that is payable to creditor (supplier) is mentioned in
this column.

Example: Prepare Purchase Book from the following purchase transactions of M/s. Chetak
& Co., who deal in sports and fitness equipment
Mar., 2 Purchased on credit from Sportcraft - 20 cricket bats @ Rs.500 each, 100 Tennis balls
@ Rs.25 each Less trade discount @ 10%
Mar., 9 Purchased on credit from Techique & Co. – 12 Tennis Rackets @ Rs.1000 each
Mar., 18 Purchased from Spoil Sports in cash – 10 Gloves @ Rs.250 each, 10 Pads @ Rs.500
each
Mar., 22 Purchased from Global sports on credit – 5 Treadmills @ Rs.20,000 each, less trade
discount @ 10%
Mar., 25 Purchased on credit from Sandeep Stationers – 12 Packets of A4 size paper @ Rs.150
each, 6 packets of Carbon Paper @ Rs. 50 each.
Mar., 29 Purchased from Sonam Computers on credit - 1 Laptop @ Rs. 27,000

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Solution
In the Books of Chetak & Co.
Purchase Book
Date Particulars Invoice No. L.F Details Amount
Rs. Rs.
Mar 2 Sportcraft
20 Cricket Bat @ Rs.500 each 10,000
100 Tennis Ball @ Rs.25 each 2,500

12,500
Less : Trade Discount @ 10% 1,250
11,250
Mar 9 Technique
12 Tennis Rackets @ Rs.1000
each 12,000
Mar 22 12,000
Global Sports
5 Tread Mills @ Rs.20,000 each 20,000
Less : Trade Discount @ 10% 2,000
18,000

41,250

These Amounts shall be posted to credit

Side of Supplier’s Individual Account
Total of this book is posted the
debit side of Purchase Account

Note: In the above problem, cash purchase made on March 18th is not recorded in the
Purchase Book. Similarly, credit purchase of stationery on March 22nd and Laptop (asset)
purchased on credit on March 29 is not recorded in the above purchase book.
Sales book
This book is also known as Sales Day Book. All credit sale of goods is recorded in this book.
Entries in this book are made on the basis of invoice (bill) prepared for every credit sale and issued
to the customers after checking about the correctness of the quantity, quality and the net amount
receivable after trade discount. Entry of trade discount is shown in the sales book, however the
same is not entered or posted to any ledger account. Further, no cash sale or sale of any item other
than those traded or manufactured by the firm are entered in the Sale Book.
Format of Sale Book
Date Particulars Invoice L.F Details Amount
No. Rs. Rs.

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Entries in Sale Book
a. Date column : date on which invoice is received is entered.
b. Particulars : name of the customer along with brief description of each type of article
sold are entered in this column
c. Invoice No. : serial number of sale invoice / bill is written in this column.
d. L.F. : in this column page number of the debtors account in Debtors Ledger is
mentioned.
e. Detail : in this column value of goods sold and the amount of trade discount is
mentioned.
f. Amount : the actual net amount receivable from debtors is mentioned here.

Example Prepare Sales Book from the following transactions of Surat Traders, wholesale
dealers in sarees
Date Bill no Particulars
Jan., 4 214 Sold on credit to Devika Sarees - 50 polyster sarees @ Rs.300 each, Less trade
discount @ 10%
Jan., 7 215 Sold on credit to Lifestyle – 20 silk sarees @ Rs.1000 each
Jan., 11 216 Sold to Gopi Sarees in cash – 50 Kota sarees @ Rs.200 each
Jan., 17 217 Sold on credit to La fabric – 30 silk sares @ Rs.1000 each, Less trade discount @
10%
Jan., 22 Sold on credit to CT & Co – 3 old air conditioners @ Rs. 5000 each
Solution
In the Books of Surat Traders
Sale Book
Date Particulars Invoice No. L.F Details Amount
Rs. Rs.
Jan 4 Devika Sarees 214
50 Polyster Sarees @ Rs.300 each 15,000
Less : Trade Discount @ 10% 1,500
13,500
Jan 7 Lifestyle
20 Silk Sarees @ Rs.1000 each 20,000
20,000
Jan 17 La Fabric
30 Silk Sarees @ Rs.1,000 each 30,000
Less : Trade Discount @ 10% 3,000 27,000

60,500

These Amounts shall be posted to debit

Side of Customer’s Individual Account
Total of this book is posted the
credit side of Sale Account
Note : In the above problem, cash sale made on Jan 11th is not recorded in the Sale Book. Similarly,
credit sale of Air conditioners on Jan 22nd is not recorded in the above sale book.

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Purchase Returns book

This book is also known as Return Outward Book as entries are made of goods send out to suppliers
from whom the same were purchased earlier. This book is used to record return of goods purchased
on credit due to reasons such as defective goods, excess or wrong supply of goods, etc. Generally
when such goods are returned to the supplier, a ‘Debit Note’ is prepared by the purchaser and send
along with the goods being returned; the supplier in return also prepares a ‘Credit Note’ for issuing
the same to the purchaser. Entries in this book are made on the basis of Debit Note prepared by
the purchaser or on the basis of Credit Note received from Supplier. Entries in Purchase Returns
book are similar to those in Purchase Book, however additionally reasons for the return needs to
be mentioned in the remark column
Format of Purchase Returns Book
Date Particulars Debit L.F Amount Remarks
Note Rs.
No.

Example From the transactions given below, prepare the Purchase Return Book of M/s. S.K.
Traders
Oct., 16 Returned to Sunny Associates - 4 Keyboards @ Rs.100 each, as they were defective
Oct., 19 Returned to Funky & Co. – 6 CD Roms @ Rs.1000 each as these were not ordered
Oct., 26 Returned to Monty Enterprises – 5 Monitors @ Rs.1800 each as they are not as per the
Purchase Order
Oct., 31 Returned to Compu Mart – 10 set of speakers @ Rs. 1200 each purchased in cash due to
poor quality of sound
Solution
In the Books of M/s. S.K. Traders
Purchase Return Book
Date Particulars Debit Note L.F Amount Remarks
No. Rs.
Oct. 16 Sunny Associates
4 Key Boards @ Rs.100 each 400 Defective
Pieces
Oct. 19 Funky & Co.
6 CD ROMs @ Rs.1000 each 6,000 Not Ordered

Oct. 26 Monty Enterprise Not as per

5 Monitors @ Rs.1800 each 9,000 purchase
order
15,400

These Amounts shall be posted to debit

Side of Supplier’s Individual Account
Total of this book is posted to the
credit side of Purchase Return Account
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Sale Returns book
This book is also known as Return Inward Book as entries are made of goods received back from
the customers to whom they were sold earlier. This book is used to record return of goods sold on
credit due to reasons such as defective goods, wrong quantity / quality of goods sold, etc. Generally
when such goods are returned by the customer, a ‘Credit Note’ is prepared in duplicate; the original
copy of which is send to customer and the duplicate copy is used for accounting; at times the
customer in return may also prepare a ‘Debit Note’ and send the same with the goods returned by
him to the seller. Entries in this book are made on the basis of Credit Note prepared by the seller
or on the basis of Debit Note received from Customer. Entries in Sale Returns book are similar to
those in Sale Book, however additionally reasons for the return needs to be mentioned in the
remark column
Format of Sale Returns Book

Date Particulars Credit Note L.F Amount Remarks

No. Rs.

Example From the transactions given below, prepare the Sale Return Book of M/s. Techno
Marketing Co.
Dec., 1 Returned by Vicky Traders – 200 Pen sets @ Rs.50 each, as they were not ordered
Dec.,12 Returned by Martin & Sons – 25 nos. defective Table Lamps @ Rs.200 each
Dec.,30 Returned by Sky Traders – 10 nos of ipods @ Rs. 250 each due to poor quality of sound

Solution
In the Books of M/s. Techno Marketing Co.
Sale Return Book

Date Particulars Credit L.F Amount Remarks

Note Rs.
No.
Dec. 1 Vicky Traders
200 Pen sets @ Rs.50 each 10,000 Not Ordered

Dec. 12 Martin & Sons

25 Table Lamps @ Rs.200 each 5,000 Defective
Pieces
Dec. 30 Sky Traders
10 Ipods @ Rs.250 each 2,500 Defective
Pieces
17,500

These Amounts shall be posted to credit

Side of Customer’s Individual Account
Total of this book is posted to the
debit side of Sale Return Account

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Cash book
Cash Book is meant to record all cash transactions – whatever be their nature. It is divided into
two sides – one the left hand side, for receipts of cash; and the other, the right hand side, for
payments. The left hand side is known as debit while the right hand side is known as credit.
Therefore, all cash receipts are debited and all cash payments credited.
Actually this Cash Book is maintained in the form of Ledger with narration and it is said to be
substitute for Cash account in the ledger, hence no separate cash account is opened and maintained
in the ledger. Cash in hand is an asset of the business and this account always shows debit balance
because cash in hand in any business at the most can be nil but it can never be negative i.e. credit
as one can spend cash only to the extend of cash available in hand.
Utility (Usefulness) of Cash Book
a. As all the cash transactions are recorded in the cash book, it helps to know the inflow of cash,
outflow of cash and the balance of cash in hand at any given point of time.
b. When Cash book is maintained, there is no need to pass journal entries and do the ledger
posting of cash transactions in the journal and ledger, like any other subsidiary book.
c. Once cash transactions are recorded in the cash book, corresponding ledger posting can be
done conveniently from the cash book itself.
d. Banking transactions can also be recorded in three column cash book, thereby helping in
knowing the bank balance at a glance at any given point of time.
e. Proper study and analysis of Cash book helps in preparing statements such as cash flow and is
useful for planning of funds.
f. Cash book is suitable for all types of business organisations for recording cash transactions.
Kinds of Cash Book
Following are the different kinds of cash book :
a. Single Column Cash Book – for recording cash transactions only.
b. Cash Book with Cash and Bank Column – for recording cash and bank transactions.
c. Cash Book with Cash, Bank and Discount Column – for recording cash and bank transactions
along with loss or gain on account of discount.
d. Petty Cash Book – for recording petty expenses and receipts.
Single Column Cash Book
This cash book is also called as simple cash book. This book is like a ledger account which has
two sides viz. the debit i.e. receipts side and the credit i.e. the payments side. Thus all cash receipts
are entered on the debit side of this cash book while all cash payments are entered on the credit
side of this cash book. The basis of recording or making entries in this book are the cash receipts
and cash vouchers. The cash book is balanced from time to time and the balance is carried forward.
As mentioned earlier, cash book shall always show debit balance only.

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Format of Single Column Cash Book
Cash Book
Dr. Cr.
Date Receipts Receipt. L.F Amount Date Payments Voucher L.F Amount
No. Rs. No. Rs.

Cash Book with Cash and Bank Column

This cash book is also called double column cash book. This book is similar to the Single or Simple
Cash Book, however in this book, there is an additional column on the debit side i.e. the receipt
side as well as on the credit side i.e. the payment side for recording bank transactions. This cash
book therefore provides detailed information related to all cash / bank receipts and cash/ bank
payments along with the exact position of cash in hand and of cash at bank on any particular date.
Format of Cash Book with Cash and Bank Column
Cash Book
Dr. Cr.
Date Receipts R. L.F Cash Bank Date Payments Vr L.F Cash Bank
No. Rs. Rs. No. Rs. Rs.

Cash Book with Cash, Bank and Discount Column

This cash book is also called triple column cash book. This book is similar to the Single or Simple
Cash Book, however in this book, there is an additional column on the debit side i.e. the receipt
side as well as on the credit side i.e. the payment side for recording bank transactions. This cash
book therefore provides detailed information related to all cash / bank receipts and cash/ bank
payments along with the exact position of cash in hand and of cash at bank on any particular date.

Format of Cash Book with Cash, Bank and Discount Column

Cash Book
Dr. Cr.
Date Receipt R. L Disc. Cash Bank Date Payment Vr L Disc. Cash Bank
No. F Allow Rs. Rs. No F Recd. Rs Rs.
Rs. Rs.

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Petty Cash Book with Cash
The word ‘petty’ has its origin from the French word ‘petit’ which means small. The person who
maintains this book is called the ‘petty cashier’. The petty cash book is used by many business
concerns to save the much valuable time of the senior official, who usually writes up the main cash
book, to prevent over burdening of the main cash book with so many petty items and to find out
readily and easily information about the more important transactions.
Columnar Petty Cash Book or analytical Petty Cash Book
In this cash book various items of petty cash payments are analysed and separate analytical
columns are provided for recording commonly occurring item of expenditure. The amount of cash
received from the chief cashier for meeting out the petty expenses is recorded on the debit side and
the actual cash payments towards various petty items are recorded on the credit side in the total as
well as analytical columns. The analytical column is provided for each usual head of expense like
postage & telegrams, printing & stationery, carriage & cartage, travelling expenses, entertainment
expenses, office expenses, sundry expenses, etc. Subsequently, the totals of these analytical
columns are posted to the respective ledger accounts which save labour used in posting each item
of payment separately in the ledger. The balancing of petty cash book is done in the total payments
column. When the debit side (Receipts) exceeds that of the credit side (in the totals column-
Payments), it represents the unspent balance of cash remaining with the petty cashier.
Format of Analytical Petty Cash Book
Petty Cash Book
Dr. Cr.
Cash C.B, Particulars Vr. Total Postage Stationery Staff Travelling Sundry
Recd Folio No. Payment Rs. Rs. Welfare Rs. Expns
Rs. Rs. Rs.

Example Enter the following transactions in a Single Column Cash Book and post the same
in the relevant ledger accounts.

1998 Rs.
July 1 Cash on hand 12,000
July 2 Goods purchased for cash 7,000
July 3 Paid Carriage Inwards 250
July 4 Cash Sales 6,000
July 5 Paid Salaries 4,000
July 6 Cash received from Shahid 8,000
July 10 Sale of old machinery 2,600
July 12 Cash Sales 3,500
July 14 Goods purchased from Karan & Co. on credit 5,600
July 16 Goods sold to Shekhar on credit 7,000
July 18 Stationery purchased 2,500
July 19 Lent to Rajesh 3,000
July 20 Received from Vimal 4,500
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Dr. Varsha Rayanade
July 22 Withdrawn from business for private use 2,000
July 23 Cash Sales 1,500
July 24 Paid for repairs 600
July 25 Paid Rent 2,250
July 31 Rajesh repaid his loan 3,000

Cash Book
Dr. Cr.
Date Receipts R L Amount Date Payments Vr L Amount
. F Rs. No F Rs.
N
o
1998 1998
July 1 To Bal. b/d 12,000 July 2 By Purchases a/c 7,000
July 4 To Sales A/c 6,000 July 3 By Carriage Inw.a/c 250
July 6 To Shahid A/c 8,000 July 5 By Salaries a/c 4,000
July 10 To Machinery A/c 2,600 July 18 By Stationery a/c 2,500
July 12 To Sales A/c 3,500 July 19 By Rajesh a/c 3,000
July 20 To Vimal A/c 4,500 July 22 By Drawings a/c 2,000
July 23 To Sales A/c 1,500 July 24 By Repairs a/c 600
July 31 To Rajesh A/c 3,000 July 25 By Rent a/c 2,250
July 31 By Balance c/d 19,500
41,100 41,100

Aug 1 To Bal. b/d 19,500

TRIAL BALANCE
As seen earlier, all business transactions are recorded in the Journal by debiting an account(s) and
crediting another account(s), whenever such transactions take place and they are subsequently
posted to respective ledger accounts. This process of Journalising and ledger posting is done
continuously for one accounting year and at the end of the accounting year, all ledger accounts
operated are closed, totaled and balanced thereby determining the balance – either debit or credit
in such ledger accounts. As the accounts are prepared under Double Entry System of Book-
Keeping, for every debit there has to be corresponding credit and vice versa. Hence, the total of all
debit amounts in the ledger (including cash and bank balance) should be equal to the total of all
credit amounts in the ledger at any date.
A Trial Balance may be defined as a statement of debit and credit balances extracted from the
various accounts in the ledger on a particular date, with a view to check the arithmetical accuracy
of the books of accounts. In other words, Trial Balance is an abstract or list of balances (either
debit or credit) in all ledger accounts as on a specified date. A Trial Balance may be prepared on
any date or at any time but it must be prepared at the close of accounting year.
OBJECTIVES OF TRIAL BALANCE
Some of the objectives of preparing Trial Balance are as mentioned below:

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a. Trial Balance helps in ascertaining the arithmetical accuracy of ledger accounts. The matching
of totals of Credit side with Debit side indicates the accuracy of accounts being prepared.
b. Trial Balance is useful for preparation of Final Accounts such as Trading A/c, Profit and Loss
A/c and Balance Sheet.
c. Trial Balance also helps in preparation of other Important Financial Statements.
d. Trial Balance assists in locating the errors committed while writing the books of account.
e. Trial Balance gives an abstract of each account opened and operated in the ledger.
f. With the help of Trial Balance position of any account prepared in the ledger can be reviewed
without referring to the ledger.
STEPS OR RULES FOR PREPARATION OF TRIAL BALANCE
Steps to be taken or Rules to be followed for preparing Trial Balance are as mentioned below:
i. Balance of Real Accounts: generally real accounts such as account of assets, properties or
belongings show debit balance. Hence, balance of all types of assets are to be recorded or
shown in the debit column of the trial balance e.g. Balance of Cash A/c, Bank A/c, Goods A/c,
Furniture A/c, Plant and Machinery A/c, Vehicle A/c, etc.
ii. Balance of Liabilities: Business liabilities such as Capital, Sundry Creditors, Bills Payable,
etc. generally show credit balance. Hence balances of these business liabilities are to be
recorded or shown in the credit column of the trial balance.
iii. Balance of Incomes and Gains: accounts of income and gains generally show credit balances.
Therefore, balance of account of account of income and gains are to be posted to credit side of
trial balance. For e.g. Balance of Rent received A/c, Commission received A/c, Discount
received A/c, Interest Received A/c, Sales A/c, etc.
iv. Balance of Expenses and Losses: accounts of expenses and losses generally show debit
balances. Therefore, balance of account of account of expenses and losses are to be posted to
debit side of trial balance. For e.g. Balance of Rent paid A/c, Commission paid A/c, Discount
given A/c, Bad debts A/c, Interest Paid A/c, Purchase A/c, etc.
v. Balance of Outstanding Expenses: outstanding means unpaid or yet to be paid. Therefore,
outstanding expenses is a liability of business and is always shows a credit balance and
accordingly it is to be recorded in the credit column of the trial balance. For e.g. Balance of
outstanding wages, outstanding rent, interest due but not paid, etc.
vi. Balance of Income Receivable: income due but not yet received is called income receivable
and is an asset of the business which like any other asset shows a debit balance. Hence, balance
of income receivable appearing the ledger is to be shown in the debit column of the trial
balance. For e.g. Interest due but not received, dividend receivable, rent due but not received,
etc.
vii. Prepaid Expenses: expenses which are paid before they are due for payment are called as
prepaid expenses. Such prepaid expenses are an asset of business and it always shows a debit
balance. Therefore, balance of prepaid expenses appearing the ledger is to be shown in the
debit column of the trial balance. For e.g. Prepaid Insurance, Prepaid Rent, Prepaid Rates and
Taxes, etc.
viii. Balance of Income received in Advance: income received before it is due for receipt is
called income received in advance, which is an liability of a business. Hence like any other
liability it shows credit balance and therefore the balance of income received in advance is to
be shown in the credit column of the trial balance. For e.g. Rent received in advance, Interest
received in advance, etc.
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ix. Balance of Reserves: balance of all types of reserves always show credit balance as they are
liability of a business. They are therefore recorded on the credit side of the trial balance. For
e.g. Balance of General Reserve a/c, Reserve for bad and doubtful debts a/c, provision for
taxation, provident fund, etc.
SPECIMEN FORM OF TRIAL BALANCE
The trial balance can be prepared in any one of the following two forms viz. (a) Journal Form and
(b) Ledger Form.
(a) Journal Form
Trial Balance as on ______________ 20__

Sr. Name of the Account L.F. Debit Credit

No. No. Balance Balance
Rs. Rs.

(b) Ledger Form

Trial Balance as on ______________ 20__
Sr. Name of the L.F. Debit Sr. Name of the L.F. Credit
No. Account No. Rs. No. Account No. Rs.

Example: Prepare Trial Balance of Sunshine Co. as at 31st March, 2019 from the following
information.

Sr. Name of Account Balance Sr. Name of Account Balance

Rs. Rs.
(a) Capital 200,000 (b) Stock 70,000
(c) Cash 180,000 (d) Debtors 300,000
(e) Creditors 100,000 (f) Bank Loan 150,000
(g) Sales 300,000 (h) Purchases 200,000

In the Books of Sunshine Co.

Trial Balance as on 31st March, 2019
Sr. Name of Account L.F. Debit Balance Credit Balance
Rs. Rs.
a. Capital 200,000
b. Stock 70,000
c. Cash 180,000
d. Debtors 300,000
e. Creditors 100,000
f. Bank Loan 150,000
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Dr. Varsha Rayanade
 g. Sales 300,000
h. Purchases 200,000
750,000 750,000

BANK RECONCILIATION STATEMENT

MEANING
Generally, a current account is opened by the businessman for business purpose, wherein he can
collect & deposit cheques received from parties & also make payments to suppliers/ creditors by
issuing cheques to them. The business maintains record of all his bank transactions by preparing
the Cash Book (with bank column) & ascertains the balance at bank at regular periodic intervals.
Similarly, the bank also maintains a record of the businessman’s account in its books which reflects
the amount deposited & withdrawn from the said bank account. The bank also provides a Bank
Statement or Pass book at regular intervals which shows all the transactions effected during a
particular period & the balance in the businessman’s account as on that date. Generally, as both
the books are related to one person and same transactions are recorded in both the books, the
balance of both the books should match i.e. the balance as per Pass Book should match to balance
at bank as per cash book. But many a times these two balances do not match hence, it becomes
necessary to reconcile them by preparing a statement which is called Bank Reconciliation
Statement.
A Bank Reconciliation Statement may be defined as a statement showing the items of differences
between the Cash Book balance and the Pass book balance, prepared on any day for reconciling
the two balances.
REASONS OR CAUSES FOR DIFFERENCES IN BALANCES
The main reasons or causes for difference in balance shown by pass book and balance shown by
cash book can broadly be classified as follows:
1. Time Gap: usually all business concerns make entries in their books of accounts immediately
after the transaction takes place, whereas entry of the same may be effected in the books of
bank on a later date due to the time gap for e.g. whenever a cheque is prepared & issued to a
party, entry of the same is made in the cash book of the business concern on the said day itself,
whereas the entry for the same shall be made by the bank only on the day when the said cheque
is presented to it for clearance. Similarly, whenever a cheque is deposited in bank, entry of the
same is made in the cash book of the business concern immediately, while the bank will make
entry of the same only after the said cheque is cleared & the proceeds for the same are received
by them.
2. Mistakes & Omissions: while recording the transactions at times, mistakes & omissions are
made by the bank or by the person writing the cash book in the business concern, as a result
balance of both the cash book & pass book do not match. For e.g. error in amount recorded
Rs.346 instead of Rs.364, entry made on the credit side instead of debit side, etc.
3. Nature of Transactions: some transactions are generated by bank, knowledge of which is
received by the business concern generally at the end of the month, such as bank charges
debited by the bank, interest credited by bank, etc. Hence, entries of these transactions are
reflected in the pass book immediately, while no entry is passed in the cash book of the business
concern till they are aware of it.
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NEED AND IMPORTANCE OF BANK RECONCILIATION STATEMENT
1. Bank Reconciliation Statement helps in verifying / confirming the correctness of entries made
by the bank.
2. Bank Reconciliation Statement helps to detect & rectify any mistakes in the cash book or pass
book.
3. Bank Reconciliation Statement helps in explaining & clarifying causes of disagreement
between the balance shown in the cash book & balance shown in the pass book.
4. Bank Reconciliation Statement acts as a check on the bank, as it is aware that the business
concerns is monitoring entries made by the bank in their accounts & hence the banks shall take
proper care by making entries.
5. Bank Reconciliation Statement prevents frauds in recording the banking transactions in the
books of the business concern.

SPECIMEN FORMAT OF BANK RECONCILIATION STATEMENT

Bank Reconciliation Statement as on ________________
Particulars Rs. Rs.
Bank Balance as per Cash Book xxxx
Add : (1) xxx
(2) xxx
(3) xxx
------------------- xxx
Less : (1) xxx
(2) xxx
(3) xxx
------------------- Xxx
-------------------
Bank Balance as per Pass Book Xxxx

How to Prepare a Bank Reconciliation Statement:

To prepare the bank reconciliation statement, the following rules may be useful for the students:

1. Check the cash book receipts and payments against the bank statement.
2. Items not ticked on either side of the cash book will represent those which have not yet
passed through the bank statement.
3. Make a list of these items.
4. Items not ticked on either side of the bank statement will represent those which have not
yet been passed through the cash book.
5. Make a list of these items.
6. Adjust the cash book by recording therein those items which do not appear in it but which
are found in the bank statement, thus computing the correct balance of the cash book.
7. Prepare the bank reconciliation statement reconciling the bank statement balance with the
correct cash book balance in either of the following two ways:
(i) First method (Starting with the cash book balance)
(ii) Second method (Starting with the bank statement balance)

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First Method (Starting With the Cash Book Balance):
a. If the cash balance is a debit balance, deduct from it all cheques, drafts etc., paid into the bank
but not collected and credited by the bank and added to it all cheques drawn on the bank but
not yet presented for payment. The new balance will agree with bank statement.
b. If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts,
etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on
the bank but not yet presented for payment. The new balance will then agree with the balance
of the bank statement.

Second Method (Starting With the Bank Statement Balance):

a. If the bank statement balance is a debit balance (an overdraft), deduct from it all cheques,
drafts, etc., paid into bank but not collected and credited by the bank and add to it all cheques
drawn on the bank but not yet presented for payment. The new balance will then be agree with
the balance of the cash book.
b. If the bank statement balance is a credit balance (in favor of the depositor), add to it all cheques,
drafts, etc., paid into the bank but not collected and credited by the bank and deduct from it all
cheques drawn on the bank but not yet presented for payment. The new balance will agree with
the balance of the cash book.

Alternatively:

Cash book shows credit

Cash book shows debit
balance i.e., bank
balance i.e., bank statement
Information statement shows debit
shows credit balance
balance
CB to BS BS to CB CB to BS BS to CB
Cheques issued but not
Add Less Less Add
presented in the bank
Cheques paid into bank but
not collected and credited by Less Add Add Less
the bank
Credit, if any in the bank
Add Less Less Add
statement
Debit, if any in the bank
less Add Add Less
statement

Example 1:
On December 31 1991 the balance of the cash at bank as shown by the cash book of a trader was
Rs. 1,401 and the balance as shown by the bank statement was Rs. 2,253.
On checking the bank statement with the cash book it was found that a cheque for Rs. 116 paid in
on the 31st December was not credited until the 1st January, 1992 and the following cheques drawn
prior to 31 December, 1991 were not presented at the bank for payment until the 5th January 1992.
Rashid & Sons Rs.29, Bashir & Co. Rs.801, MA Jalil Rs.6, Khalid Bros., Rs.132.
Prepare a statement recording the two balances:

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Solution:
Bank Reconciliation Statement on 31st December 1991
Rs.
First Method:
Balance as per cash book - Dr. 1,401
Less cheques paid in but not collected 116

1,285
Add cheques drawn but not presented:
Rashid & Sons 29
Bashir & Co. 801
MA Jalil 6
Khalid Bros. 132 968

Balance as per bank statement - Cr. 2,253

Second Method:
Balance as per bank statement - Cr. 2,253
Less cheques drawn but not presented 968

1,285
Add cheques paid in but not collected 116

Balance as per cash book - Dr. 1,401

Example 2:
On 31st March, 1991 the bank statement showed the credit balance of Rs.10,500. Cheque
amounting to Rs.2,750 were deposited into the bank but only cheque of Rs.750 had not been
cleared up to 31st March. Cheques amounting to Rs.3,500 were issued, but cheque for Rs.1,200
had not been presented for payment in the bank up to 31st March. Bank had given the debit of
Rs.35 for sundry charges and also bank had received directly from customers Rs.800 and dividend
of Rs.130 up to 31st March. Find out the balance as per cash book.
Solution:
Bank Reconciliation Statement as on 31st March, 1991
Rs.
10,500
Balance as per bank statement – Cr.
Add cheques deposited but not credited 750

11,250
Less cheques issued but not presented 1,200

10,050
Add bank charges made by the bank 35

10,085
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Less omission in cash book (Rs800 + Rs130) 930

Balance as per cash book 9,155

Note: a. Charges made by the bank Rs35 have not been recorded in the cash book, therefore, the balance
in cash book is more. Add to bank statement balance also.

b.. Dividend and amount from customers received by the bank have not been recorded in the cash
book. Therefore, in the cash book there is no entry of Rs. 930 (800 + 130). Deduct from the bank
statement balance to adjust it according to cash book balance.

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 4

Introduction
Business Entities use fixed assets for the purpose of production and manufacturing of goods or
assist in in providing useful services during the course of production. Generally, these fixed assets
are used for a long period spread over number of successive accounting periods. With the passage
of time and wear and tear during utilization, the value of such fixed assets tend to decrease. Hence
the value of portion of fixed asset utilized for generating revenue needs to be recovered during a
particular accounting year to ascertain true income. The portion of cost of fixed asset allocated to
particular accounting year is called depreciation.
Meaning
In general words, depreciation is the reduction in the value of an asset due to usage, passage of
time, wear and tear, technological out dating or obsolescence, depletion, inadequacy, decay or
other such factors. It is common experience that whenever an asset is used it reduces in value. The
net result of depreciation is that sooner or letter, the asset becomes useless. So, it can be stated
that depreciation is that portion of the cost of an asset which is reduced from revenues for the
services of the asset in the operation of a business.
In accounting, depreciation is a term used to describe any method of attributing the historical or
purchase cost of an asset across its useful life, roughly corresponding to normal wear and tear. It
is mostly used when dealing with assets of a short, fixed service life, and which is an example of
applying the matching principle as per generally accepted accounting principles.
Depreciation is calculated on all depreciable assets which can be defined as those which have a
useful life for more than one accounting period but is limited and are held by an enterprise for use
in the production or supply of goods and services. Examples of depreciable assets are machines,
plants, furniture, buildings, computers, trucks, vans, equipment, etc. Moreover, depreciation is the
allocation of 'depreciable amount' which is the 'historical cost' or other amount substituted for
historical cost less estimated salvage value.
Depreciation has significant effect in determining and presenting the financial position and results
of operations of an enterprise. Depreciation is charged in each accounting period by reference to
the extent of the depreciable amount.
In this way, depreciation is an allocation of the cost of assets over their useful life. A systematic
procedure of for allocating the cost over the periods of its useful life in a rational manner is called
depreciation accounting.

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Concept
One of the basic objectives of financial accounting it to calculate the true profit or loss from the
operations of the enterprise for a particular period. As per matching principle of accountancy the
costs of the product must be matched with the revenues in each period.
This principle indicates that if any revenue is earned and recorded then all costs whether paid or
outstanding must also be recorded in books of accounts so that the profit and loss account could
give a true and fair view of the profits earned or loss suffered during the period and balance sheet
presents true and fair view of financial position of the business.
All fixed assets except the value of land decreases with the passage of time. The value of these
assets decrease each year. Such gradual reduction or decrease in the value of fixed assets for the
purpose of earning revenue is called depreciation. Depreciation is closely related with the
determination of profit or loss for the period. Unless depreciation is charged to the revenues, the
true income of the business cannot be ascertained properly. As such, depreciation is a revenue
expense. Fixed assets are also called as depreciable assets and the characteristics
of depreciable assets are as mentioned below:
 The expected life of these assets is more than one accounting period.
 These assets have a limited useful life.
 These assets are held by the business for the purpose of production of goods or giving services.
 These assets are not acquired for the purpose of sale in the ordinary course of business.
The cost of fixed asset indicates 'the price for the future service of the assets'. It is necessary to
spread its cost over a number of years during which benefit of the asset is received. When a fixed
asset is put to use then that part of its value which is lost or which cannot be recovered is known
as depreciation.
Thus, depreciation can be said to be the process of spreading the cost of fixed asset over the
different accounting periods which drive the benefit from their use. The cost of fixed assets
apportioned to a given period from part of the overall cost needs to be matched with the revenues
generated in that period. Hence, depreciation is of great significance in the concept of income
measurement. Depreciation also measures the service potential of the fixed assets period.
Definition
The term depreciation is derived from the Latin words ‘do’ meaning down and ‘pretium’ meaning
price. In common use it means putting down the value of an asset due to wear and tear, passage of
time, obsolescence, etc.
It is very difficult to give a single definition of the term depreciation because under different
situation this is handled differently and whatever seems to be correct in one situation may be
improper in another. But even then some definitions are worth mentioning.
Malchman and Slavin -“Depreciation refers to the process of estimating and recording the
periodic charges to expense due to expiration of the usefulness of a capital asset”

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J.N. Carter -“Depreciation is the gradual and permanent decrease in the value of an asset from
any cause”
J.R. Batiliboi - “Depreciation represents loss or diminution in the value of an asset consequent
upon wear and tear, obsolescence, effluxion of time, or fall in the market value.”
The Institute of Chartered Accountants of England and Wales - “Depreciation represents that part
of the cost of fixed asset to its owner which is not recoverable when the asset is finally put out of
use by him. Provision against this loss of capital is an integral cost of conducting the business
during the effective commercial life of the asset and is not dependent upon the amount of profit
earned.”
A.N. Agrawal - “Depreciation is a permanent, continuing and gradual shrinkage in the value of
a fixed asset.”
Spicer and Pegler - “Depreciation is the measure of the exhaustion of the effective life of an asset
from any cause during a given period.”
The Institute Of Chartered Accountants Of India - “Depreciation is a measure of the wearing out,
consumption or other loss of value of a depreciable asset arising from use effluxion of time or
obsolescence through technology and market changes.”
International Accounting Standards Committee - “Depreciation is the allocation of the
depreciable amount of an asset over its estimated useful life. Depreciation for the accounting
period is charged to income either directly or indirectly.”
The following terms from these definitions are important:
• Depreciable Assets: The assets whose lifetime can be estimated and useful during two or more
accounting periods in production or service activities of an organization can be called depreciable
assets.
• Useful life: Useful life is the time during which the asset is helpful in the normal business
activities of a firm. It can be less than the total life time of the asset. It can be exactly pre-
determined or it should be estimated on reasonable basis.
• Depreciable Amount: It is the cost of acquisition and installation of an asset after reducing any
realizable value at the end of the useful life.
• Effluxion of time: It is the passage of time irrespective of actual use of an asset as in the case of
leased assets.
• Obsolescence: It refers to an asset becoming out of date due to improved models or methods.
Characteristics of Depreciation
The depreciation charged on fixed assets has the following features:
 Depreciation is always a fall in the value of asset.
 The fall in value of asset is always gradual.
 The fall is of permanent character and it cannot be recouped afterwards.
 Depreciation is a continuous process and it does not matter whether the asset was put to use
during the period or not.

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 Depreciation is always on fixed assets and not on current or floating assets.
 Depreciation is the fall in the book value of the asset and not in market or exchange value.
 Depreciation is the result of the use of assets, passage of time and obsolescence.
Causes of Depreciation
The major causes of depreciation are as follows:
1. Wear and Tear: this term refers to a decline in the efficiency of asset due to its constant use.
When a asset loses its efficiency, its value goes down and depreciation arises. This is true in
case of all tangible assets like plant and machinery, building, furniture, tools and equipment,
etc.
2. Effusion of Time: the value of asset may decrease due to passage of time, even if it is not in
use. There are some intangible assets like copyright, patents, lease holdings, etc. which
decrease in value as time elapses.
3. Exhaustion/ Depletion: an asset may lose its value because of exhaustion. Some assets known
as wasting assets such as mines, quarries, oil-wells, etc. are perfect examples of exhaustion. At
some stage the mine, quarry or oil well will get completely exhausted/ depleted due to
continuous extraction,
4. Obsolescence: in spite of assets being in good condition, technological advancement at times
makes some assets outdated. Fax machines which were commonly used for communication
earlier have become obsolete after the advent of Internet.
5. Inadequacy: sometimes an asset may be put out of use despite the asset being in good condition,
due to change in change in business, discontinuation of certain products manufactured using
that asset. Inadequacy refers to termination of the assets use.
6. Accident: accident like loss by fire of an asset is other cause of depreciation which decrease
the value of asset.

Need for Providing Depreciation

The main reasons for providing depreciation on fixed assets are mentioned below:
1. To Know the True Profit or Loss: As per the matching principle of accounting, all expenses
incurred for earning revenue must be considered for the purpose of ascertaining true and actual
profit or loss of an business enterprise during any accounting year. Hence, according to this
principle, even though depreciation does not involve any payment, however the loss in the value
of fixed assets must also be acknowledged by debiting the same to Profit & Loss A/c to
determine the true profit or loss.
2. To Show True and Fair View of Financial Position: Financial Statements of any business
enterprise consists of ‘Income Statement’ i.e. Profit and Loss A/c and ‘Positional Statement’
i.e. Balance Sheet. It is necessary that these financial statements show true and fair view of
income and net worth of the business. Hence, if depreciation is not considered as an expenditure,
then the net profit as shown by the profit and loss account as well as the value of assets as shown
in the balance sheet would be overstated with the amount of depreciation. Thus, a true picture
of the financial position of the business cannot be drawn.
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3. To Provide Funds for Replacement of Assets: Depreciation results in neither inflow nor outflow
of cash, so the amount of depreciation charged to profit and loss account is retained in business
every year. Thus, depreciation becomes a source of fund, which can be utilized for the
replacement of assets after the useful life of asset. However, if no depreciation were to be
charged then the firm may face financial difficulties for replacement after the assets become
useless.
4. Restriction on Payment of Dividend: In the case of limited company, dividend is payable on net
profits. If the depreciation is not charged, then the net profits of the business enterprise would
be much more than the actual. The overstatement of the net profits will lead to payment of
higher dividends, which ultimately reduce the capital.
5. Reduction in Tax Liability: Depreciation is an allowable expense charged on the income of the
business enterprise. By charging depreciation, tax liability of the business can be reduced. If
depreciation is not charged on net profit then the net profit of the business enterprise would be
much more than the actual. Therefore, depreciation should be charged on the income so that the
profits of the business can be reduced to actual, which ultimately result in reduction of income
tax too.
6. Legal Obligation: In addition to tax regulations, it is necessary for certain types of business
organisations, such as limited companies, to charge depreciation before declaring any
dividends.
Basis of Charging Depreciation
Following are the important factors which should be considered for determining the amount of
depreciation.
1. Cost Of Assets: The cost of asset include the purchase price, less any trade discount plus all the
costs essential to bring the asset to a usable condition. In other word, the total cost of asset
includes amounts from purchase price to its installation.
2. Estimated Scrap Value: Scrap value refers to the value estimated to be realized after the expiry
of the useful working life of the asset. This is also known as residual value or salvage
value. Depreciation should be determined after deducting the estimated scrap value from the
cost of asset.
3. Estimated Useful Life: An asset cannot work forever. Every asset has a certain working and
useful life. The longer the working life, the amount of depreciation will be lower and vice -
verse. Therefore, the useful life of an asset is generally to be taken in terms of asset's expected
use. This estimated useful life of asset determines the rate or the amount of depreciation.
4. Legal Provisions: The amount of depreciation also depends upon the statutory and legal
provisions prescribing the admissible rate of depreciation on fixed assets.
Methods of Depreciation
Based on the study of behavior of assets over a period, formulas are developed for instantly
computing the amount of depreciation suffered by different forms of assets.

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Some of the prominent methods of depreciation are mentioned herein below. However, selection
of the method for charging depreciation, should be done carefully after considering the nature of
the asset and conditions under which it is being used.
1. Fixed Instalment i.e. Straight line Method
2. Diminishing Balance Method i.e. Written Down Value Method
3. Annuity Method
4. Depreciation Fund Method
5. Insurance Policy Method
6. Revaluation Method
7. Depletion Method
8. Machine Hour Rate Method

The two most common methods for providing depreciation are the Fixed Installment or Straight
Line Method (SLM) and Diminishing Balance or Written Down Value Method (WDV).
Fixed Installment i.e. Straight Line Method (SLM)
This is the oldest and simplest method of charging depreciation. In this method the life of the asset
is estimated and it is written off equally in all the years. Therefore, the amount of depreciation
remains same over the expected useful life of the asset. Hence this method is called ‘Fixed
Installment Method’.
The amount of depreciation to be charged does not get affected by efficiency or productivity of
the asset. In this method the basic assumption is that the asset is being used by the enterprise
equally during the expected useful life. If the allocated amount of depreciation is plotted on a
graph, during the useful life of the asset, the graph shall look like a straight line, hence it is known
as Straight line method of depreciation.
The life of the asset is estimated and it is written off equally in all the years. The amount of
depreciation is such that the book value of the asset is reduced to zero at the end of purposeful life
of the asset. The amount is calculated by dividing the cost of the asset less estimated scrap value
by the number of years the asset will be used.

Formula for computing depreciation

Advantages
 Simplicity: This method is simple and calculations are easier to understand.
 Consistency: It is a consistent method since amount of depreciation charged each year is equal.
Such procedure provides sound basis for comparison.
 The whole cost can be charged as depreciation: Under this method, the value of the asset
can be reduced to its estimated scrap value (if the asset has some residual value) or nil (if the
asset has no residual value). This is not possible under any other method.

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 Reasonable presentation: This method realistically matches cost and revenues, hence the
balance sheet shows reasonable and fair values of the assets.
 Recognition: This method is recognised by the Accounting Standard (AS)-6 issued by the
Institute of chartered Accountants of India and also by the Companies Act. 1956.
Disadvantages
 Illogical: It is well known that the efficiency of an asset falls and the expense on its repairs
and maintenance increases gradually with the passage of time. However, under this method the
amount of depreciation remains constant. Thus, the total charges (repairs and maintenance plus
depreciation) to profit and loss account increase in the later years.
 Improper presentation: Under this method, the book value is sometimes reduced to zero,
however, it may happen that the asset is being used in the enterprise. In that case balance sheet
does not show true and fair view of the enterprise.
 Unsuitability: This method becomes unsuitable for certain assets in which maintenance cost
is higher in later years like plant and machinery, land and buildings etc.
 Recognition: This method is not recognised by the Income Tax Act. 1961.
Suitability
This method is suitable where:
 The estimated useful life of an asset can be easily determined and the assets which give almost
equal utility in terms of productivity during the useful life of the asset like Trademark,
Copyright etc.
 The maintenance and repair cost of the assets are uniform for each accounting year during the
useful life of the asset like Furniture etc.
 The use of asset is consistent from period to period and therefore each period benefits equally
from the use of asset e.g. Furniture, leases, copyright, trademark, etc.
Diminishing Balance Method i.e. Written Down Value Method (WDV)
Under this method, depreciation is charged as a fixed percentage on the book value of the asset
every year. Instead of charging depreciation on the original cost, depreciation is charged on
reducing balance of every year (cost of the asset minus depreciation) i.e. depreciation is charged
as a fixed percentage on the diminishing (reducing) balance of the asset, hence this method of
depreciation is known as Diminishing (Reducing) balance method of depreciation. In this method
though the rate of depreciation remains fixed, the amount of depreciation declines as the book
value of the asset reduces every year.
Unlike the fixed instalment or straight line method of depreciation, the value of asset does not
reduce to zero in this method of depreciation. Some balance, though insignificant, remains in the
asset account till the end of asset life. This method is very useful for plant and machinery where
additions and extensions take place very often. This method will not be used for those assets whose
value is to be reduced to zero, i.e., patents, copyrights, etc.

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Formula for computing depreciation

Depreciation per annum = (Net Book Value - Residual Value) x Rate%

Advantages
 Equal burden on income statement: In the initial years, the depreciation charges are more
and repair expenses are less while in later years, depreciation charges are less and repair
expenses are more. Therefore, the total burden on profit and loss account remains
approximately the same throughout the life of the asset.
 Complying with matching principle: Under this method, higher amount of depreciation is
charged on the profit and loss account in the initial years when the machine is more efficient
giving higher production than the later years when machine becomes older and produces less.
 Logical approach: Written down value method is more logical method than the straight line
method because in the initial years cost of the machine is high so more amount on account of
depreciation is to be charged through profit and loss account. However, in the later years book
value of the asset reduces, so less amount of depreciation is to be charged on the profit and
loss account.
 Proper Record of Assets: as the assets will never be written off completely, the management
can keep proper record and track of all assets.
 Avoids Recalculation of Depreciation: All items including additions to assets are added
together and depreciated at the same rate. So no recalculation is necessary when additional
assets are purchased during the year.
 Recognition: The method is recognised by Accounting Standard (AS-6) and Companies Act.
1956 and is applicable for income tax purposes
Disadvantages
 Improper presentation: Under this method, the book value of the asset can never be written
down to zero. However, it may happen that some assets have zero value after some time.
Sometimes, to bring down the book value of the asset to the estimated scrap value some
adjustments are to be carried out in the last year.
 Complexity: Under this method, the amount of depreciation cannot be determined easily. Lot
of figure work is involved in this calculation.
 Unsuitability: This method is not suitable for those assets which give a uniform benefit
during their entire useful life. Further, in case of assets with short life span, the higher
depreciation charge in the earlier years has adverse impact on the net profit.
 Delay in Replacement of Assets: generally, it takes very long time to write off the assets
unless a very high rate of depreciation is applied. As a result these assets cannot be replaced
at the earliest.

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 Illogical: This method of depreciation is neither based on the use of the asset nor distributed
evenly throughout the useful life of the asset.
Suitability
This method is suitable where:
 Where the cost of maintenance and repairs are high in the later years as compared to the initial
years e.g. plant and machinery.
 Where the additions and repairs are higher in the later years e.g. land and buildings

Difference between Straight Line Method (SLM) and Written Down Value (WDV) method
of depreciation
1. Computation Method:
SLM – Depreciation is charged at a fixed rate on original cost of the asset.
WDV - Depreciation is charged at a fixed rate on original cost of the asset and on the written
down value (cost minus total depreciation) in the subsequent years.
2. Amount of Depreciation:
SLM - The amount of depreciation remains the same in all the years of useful life of the asset
WDV- The amount of depreciation goes on decreasing year after year
3. Effect on Profit and Loss account:
SLM - The total burden on the profit and loss account is more in the later years because the
repair charges increase while the amount of depreciation is same
WDV- The total burden on the profit and loss account is same in the early years as well as in
the later years as well as in the later years because of more depreciation and less repair costs in
the beginning and less depreciation and more repair costs in the later years.
4. Book Value of Asset:
SLM - The book value of the asset gets reduced to zero or equal to scrap value
WDV- The book value of the asset never gets reduced to zero
5. Calculation:
SLM - The calculation of rate of depreciation is easier in this method
WDV- In this method mathematical tables are required to calculate rate of depreciation
6. Recognition:
SLM - This method is not accepted by Income Tax Act in India
WDV- This method is recognised under Indian Income Tax Act
7. Suitability:
SLM - This method is suitable for assets having almost equal utility in terms of productivity
during the entire useful life of the asset and whose repair costs is less along with lower frequency
of obsolescence.

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 WDV- This method is suitable for assets having higher utility in the initial years and more repair
costs in the later years and whose frequency of obsolescence is higher.

Illustrations
1. On April 1, 2008, a firm bought a machine for Rs. 90,000 and spend Rs. 6,000 on its installation
and Rs. 4,000 on its carriage. It is decided to charge depreciation @ 10% on straight line method.
Books are closed on March 31, each year. Show Machinery Account for the year 2008-09 to 2010-
11.
Machinery A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2008-09 2008-09

Apr. 1 To Bank A/c 90,000 Mar.31 By Depreciation A/c 10,000

Apr. 1 To Cash A/c 6,000 Mar.31 By Balance c/d 90,000

Apr. 1 To Cash A/c 4,000

100,000 100,000
2009-10 2009-10

Apr. 1 To Balance b/d 90,000 Mar.31 By Depreciation A/c 10,000

Mar.31 By Balance c/d 80,000

90,000 90,000
2010-11 2010-11

Apr. 1 To Balance b/d 80,000 Mar.31 By Depreciation A/c 10,000

Mar.31 By Balance c/d 70,000

80,000 80,000

2. On the basis of information given in Illustration 1, show Machinery Account for the years 2008-
09 to 2010-11 if depreciation is charged @ 10% on diminishing balance method.

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 Machinery A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2008-09 2008-09

Apr. 1 To Bank A/c 90,000 Mar.31 By Depreciation A/c 10,000

Apr. 1 To Cash A/c 6,000 Mar.31 By Balance c/d 90,000

Apr. 1 To Cash A/c 4,000

100,000 100,000
2009-10 2009-10

Apr. 1 To Balance b/d 90,000 Mar.31 By Depreciation A/c 9,000

Mar.31 By Balance c/d 81,000

90,000 90,000
2010-11 2010-11

Apr. 1 To Balance b/d 81,000 Mar.31 By Depreciation A/c 8,100

Mar.31 By Balance c/d 72,900

81,000 81,000

3. Sunil Enterprises purchased machinery worth Rs.95000 on 1 st April, 2000 and

spent Rs.5000 on its erection. They purchased additional machinery on 30th Sept.,
2001 for a sum of Rs.20000.Assuming that the rate of depreciation is 10% show
machinery account for 4 years under straight line method of depreciation.
Machinery A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2000-01 2000-01

Apr. 1 To Bank A/c 95,000 Mar.31 By Depreciation A/c 10,000

Apr. 1 To Cash A/c 5,000 Mar.31 By Balance c/d 90,000

100,000 100,000
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 2001-02 2001-02

Apr. 1 To Balance b/d 90,000 Mar.31 By Depreciation A/c 11,000

Sept. 30 To Bank A/c 20,000 Mar.31 By Balance c/d 99,000

110,000 110,000
2002-03 2002-03

Apr. 1 To Balance b/d 99,000 Mar.31 By Depreciation A/c 12,000

Mar.31 By Balance c/d 87,000

99,000 99,000
2003-04 2003-04

Apr. 1 To Balance b/d 87,000 Mar.31 By Depreciation A/c 12,000

Mar.31 By Balance c/d 75,000

87,000 87,000

Working Note:
* Calculation of Depreciation for 2001-02
Depreciation @10% on cost of Machine purchased on 1st April, 2000 = Rs.10,000
Depreciation @10% on cost of Machine purchased on 30th Sept.,2001 = Rs. 1,000
Rs.20,000 x 10 x 6 ________
100 12 Rs.11,000

4. On the basis of information given in Illustration 3, show Machinery Account for the years 2000-
01 to 2003-04 if depreciation is charged @ 10% on diminishing balance method.

Machinery A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2000-01 2000-01

Apr. 1 To Bank A/c 95,000 Mar.31 By Depreciation A/c 10,000

Apr. 1 To Cash A/c 5,000 Mar.31 By Balance c/d 90,000

100,000 100,000

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 2001-02 2001-02

Apr. 1 To Balance b/d 90,000 Mar.31 By Depreciation A/c 10,000

Sept. 30 To Bank A/c 20,000 Mar.31 By Balance c/d 100,000

110,000 110,000
2002-03 2002-03

Apr. 1 To Balance b/d 100,000 Mar.31 By Depreciation A/c 10,000

Mar.31 By Balance c/d 90,000

100,000 100,000
2003-04 2003-04

Apr. 1 To Balance b/d 90,000 Mar.31 By Depreciation A/c 9,000

Mar.31 By Balance c/d 81,000

90,000 90,000

Working Note:
* Calculation of Depreciation for 2001-02
Depreciation @10% on WDV of Machine purchased on 1st April, 2000 = Rs. 9,000
Depreciation @10% on cost of Machine purchased on 30th Sept.,2001 = Rs. 1,000
Rs.20,000 x 10 x 6 ________
100 12 Rs.10,000
5. JK Industries bought heavy duty machinery for its production process on 1st July, 2012 at basic
price of Rs.500,000. On the same day the company also incurred additional expenses such as
Sales Tax - @ 28% Rs. 140,000, Transportation - Rs.20,000 and Installation charges - Rs.
15,000. It is the policy of the company to depreciate machinery over a period of 10 years. The
estimated residual value of the machinery was Rs.75,000. Depreciation is charged as per
Straight Line Method. The company closes its books of accounts on 31st March, every year.
You are required to calculate the annual depreciation amount and prepare machinery account
for financial years 2012-13, 2013-14, 2014-15 and 2015-16.
Machinery A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2012-13 2012-13

Jul. 1 To Bank A/c 500,000 Mar.31 By Depreciation A/c 45,000

Jul. 1 To Bank A/c 140,000 Mar.31 By Balance c/d 630,000

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 Jul. 1 To Bank A/c 20,000

Jul. 1 To Cash A/c 15,000

675,000 675,000
2013-14 2013-14

Apr. 1 To Balance b/d 630,000 Mar.31 By Depreciation A/c 60,000

Mar.31 By Balance c/d 570,000

630,000 630,000
2014-15 2014-15

Apr. 1 To Balance b/d 570,000 Mar.31 By Depreciation A/c 60,000

Mar.31 By Balance c/d 510,000

570,000 570,000
2015-16 2015-16

Apr. 1 To Balance b/d 510,000 Mar.31 By Depreciation A/c 60,000

Mar.31 By Balance c/d 450,000

510,000 510,000

Working Note:
* Calculation of Amount of Depreciation per annum:
Basic cost of Machinery - Rs.500,000
Sales Tax - Rs.140,000
Transportation - Rs. 20,000
Installation Charges - Rs. 15,000
----------------
Total Cost of Machinery Rs.675,000
=========
Estimated Life of Machinery - 10 years
Residual Value of Machinery - Rs.75,000
Depreciation Amount = (Cost of Machinery) 675,000 – (Residual Value) 75,000
(Estimated Life of Machinery) 10
i.e. 600,000= Rs. 60,000 per annum
10
Profit/ Loss on Sale/ Disposal of Depreciable Assets
When a depreciable asset (i.e. asset which depreciates) is sold during the year, depreciation is
charged on it for the period it has been used in the sale year. The book value of asset after providing

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such depreciation is used for calculating the profit or loss on the sale of that asset. In case the sale
proceeds exceeds the computed value of asset than it is considered as profit on sale of asset and in
case of deficit, it is termed as loss on sale of asset. The profit or loss on sale of asset is transferred
to profit and loss account.
Illustrations
6. On April, 1, 2008 Prakash & Sons bought furniture costing Rs.60,000. On July, 1, 2010.
Furniture was sold for Rs.30,000. Prepare Furniture Account assuming depreciation was
charged on Straight Line Method @ 10% per annum on March 31 each year.
Furniture A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2008-09 2008-09

Apr. 1 To Bank A/c 60,000 Mar.31 By Depreciation A/c 6,000

Mar.31 By Balance c/d 54,000

60,000 60,000
2009-10 2009-10

Apr. 1 To Balance b/d 54,000 Mar.31 By Depreciation A/c 6,000

Mar.31 By Balance c/d 48,000

54,000 54,000
2010-11 2010-11

Apr. 1 To Balance b/d 48,000 July, 1 By Bank A/c 30,000

July, 1 By Depreciation A/c 1,500
July, 1 By Profit & Loss A/c 16,500

48,000 48,000

Working Note:
* Depreciation is charged for only 3 months.
# Loss on sale of Furniture is debited to P& L A/c
Book Value as on 1.4.10 = Rs.48000
Less Depreciation (3months) = Rs. 1500
------------
Book Value as on 1.7.10 = Rs.46500
Less Sale Proceeds = Rs.30000
------------
Loss on Sale of Furniture = Rs.16500

7. On the basis of information given in Illustration 5, prepare Furniture Account assuming

depreciation was charged @ 15% per annum on reducing instalment method.
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 Furniture A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2008-09 2008-09

Apr. 1 To Bank A/c 60,000 Mar.31 By Depreciation A/c 9,000

Mar.31 By Balance c/d 51,000

60,000 60,000
2009-10 2009-10

Apr. 1 To Balance b/d 51,000 Mar.31 By Depreciation A/c 7,650

Mar.31 By Balance c/d 43,350

51,000 51,000
2010-11 2010-11

Apr. 1 To Balance b/d 43,350 July, 1 By Bank A/c 30,000

July, 1 By Depreciation A/c 1,626
July, 1 By Profit & Loss A/c 11,724

43,350 43,350

Working Note:
* Depreciation is charged for only 3 months.
# Loss on sale of Furniture is debited to P& L A/c
Book Value as on 1.4.10 = Rs.43350
Less Depreciation (3months) = Rs. 1626
------------
Book Value as on 1.7.10 = Rs.41724
Less Sale Proceeds = Rs.30000
------------
Loss on Sale of Furniture = Rs.11724

8. ABC Engineering Works on 1st January, 2010 purchased machinery for Rs. 58,200 and spent
Rs.1800 on its erection. On July, 1, 2010 another machinery costing Rs.20,000 was purchased.
On 1st July, 2011 the machinery purchased on 1st January, 2010 had to be sold for Rs. 38,600
as the same became obsolete and on the same date fresh machinery was purchased for
Rs.40,000. Depreciation was charged annually on 31st December @ 10% per annum on written
down value. Prepare machinery account.

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 Machinery A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2010 2010

Jan. 1 To Bank A/c 58,200 Dec.31 By Depreciation A/c 7,000

Jan. 1 To Cash A/c 1,800 Dec.31 By Balance c/d 73,000

Jan. 1 To Bank A/c 20,000

80,000 80,000
2011 2011

Jan. 1 To Balance b/d 73,000 July, 1 By Depreciation A/c 2,700

July, 1 To Bank A/c 40,000 ( machine sold)

July, 1 By Bank A/c 38,600

July, 1By Profit & Loss A/c 12,700

( Loss on sale )
Dec.31 By Depreciation A/c 3,900

Dec.31 By Balance c/d 55,100

113,000 113,000

Working Note:
Book Value, Depreciation of Machinery & Loss on Sale of Machinery
Machine 1 Machine 2 Machine 3
Cost of Machinery 60,000 20,000 40,000
Depreciation for 2010 6,000 1,000 -
WDV 54,000 19,000
Depreciation for 2011 2,700 1,900 2,000
WDV 51,300 17,100 38,000
Sale Proceeds 38,600
Loss on Sale 12,700

9. Ravindra Trading Co. purchased machinery worth Rs. 36,000 on 1.4. 2010 and spent Rs.4000
towards installation charges. The company depreciated the machinery at the rate of 10% p.a.
on original cost. On 1.10.2012 the company sold out part of the machinery for Rs.3200 the
original cost of the said machinery as on 1.4.2010 was Rs.6000. On 1.10.2012 the company

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 purchased new machinery for Rs.10,000. Prepare machinery account and depreciation account
for the financial year 2010-11, 2011-12 and 2012-13.
Machinery A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2010-11 2010-11

Apr. 1 To Bank A/c 36,000 Mar.31 By Depreciation A/c 4,000

Apr. 1 To Bank A/c 4,000 Mar.31 By Balance c/d 36,000

40,000 40,000
2011-12 2011-12

Apr. 1 To Balance b/d 36,000 Mar.31 By Depreciation A/c 4,000

Mar.31 By Balance c/d 32,000

36,000 36,000
2012-13 2012-13

Apr. 1 To Balance b/d 32,000 Oct.1 By Depreciation A/c 300

Oct.1 To Bank A/c 10,000 (machinery sold)

Oct.1 By Bank A/c 3,200
Oct.1 By Profit & Loss A/c 1,300
(Loss on sale)
Mar.31 By Depreciation A/c 3,900
Mar.31 By Balance c/d 33,300

42,000 42,000

Working Note:
Book Value, Depreciation of Machinery & Loss on Sale of Machinery
Machine 1 Machine 2 Machine 3 Total Machinery
1.4.10 New Machinery 34,000 6,000 40,000
Depreciation 2010-11 3,400 600 4,000
Book Value 30,600 5,400 36,000
Depreciation 2011-12 3,400 600 4,000
Book Value 27,200 4,800 32,000
1.10.12 Depreciation 300 300
Machine 1 Machine 2 Machine 3 Total Machinery
Sale Proceeds 3,200 3,200
Loss on Sale 1,300 1,300
1.10.12 New Machine 10,000 10,000
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 Depreciation 2012-13 3,400 500 3,900
Book Value 23,800 9,500 33,300

9. Modern Industries, Pune bought furniture worth Rs. 80,000 on 1.4. 2011. Further, additional
furniture worth Rs.60,000 was purchased on 1.10.2011. The company charged depreciation@
15% p.a. on reducing balance method. On 1.10.2013 the company sold out furniture for
Rs.60,000 which was purchased on 1.4.2011. Show the furniture account and depreciation
account for the years 2011-12, 2012-13, 2013-14 assuming that the financial year closes on
31st March every year.
Furniture A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2011-12 2011-12

Apr. 1 To Bank A/c 80,000 Mar.31 By Depreciation A/c 16,500

Oct.1 To Bank A/c 60,000 Mar.31 By Balance c/d 123,500

140,000 140,000
2012-13 2012-13

Apr. 1 To Balance b/d 123,500 Mar.31 By Depreciation A/c 18,525

Mar.31 By Balance c/d 104,975

123,500 123,500
2013-14 2013-14

Apr. 1 To Balance b/d 104,975 Oct.1 By Depreciation A/c 4,335

To Profit & Loss
Oct.1 A/c 6,535 (Furniture Sold)

(Profit on Sale) Oct.1 By Bank A/c 60,000

Mar.31 By Depreciation A/c 7,076

Mar.31 By Balance c/d 40,099

111,510 111,510

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 Depreciation A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2011- 2011-
12 12

Mar.31 To Furniture A/c 16,500 Mar.31 By Profit & Loss A/c 16,500

16,500 16,500
2012- 2012-
13 13

Mar.31 To Furniture A/c 18,525 Mar.31 By Profit & Loss A/c 18,525

18,525 18,525
2013- 2013-
14 14

Oct.1 To Furniture A/c 4,335 Mar.31 By Profit & Loss A/c 11,411

Mar.31 To Furniture A/c 7,076

11,411 11,411

Working Note:
Computation of Profit/ Loss on Sale of Furniture
Rupees
Cost of Furniture Sold 80,000
Depreciation 2011-12 12,000
WDV 68,000
Depreciation 2012-13 10,200
WDV 57,800
Depreciation till 1.10.13 4,335
Book Value 53,465
Sale Proceeds 60,000
Profit on Sale 6,535

11. SRC Roadways are owners of fleet and are engaged in transportation business. The details of
vehicles purchased and sold by them during the financial years 2013-14 to 2017-18 are as
given below:
1.07.13 - Purchased Vehicle (Tata - Model 407) for Rs.500,000.
1.01.14 - Purchased Vehicle (Tata - Model 609) for Rs.750,000.

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 1.04.15 -Purchased Vehicle (Eicher- Model Pro 1049) for Rs. 700,000
1.10.16 - Sold Vehicle (Tata -Model 609) purchased on 1.01.14 for Rs.600,000
1.10.16 - Purchased Vehicle (Leyland - Model Dost) for Rs.400,000.
1.01.18- Sold Vehicle (Eicher- Model Pro 1049) purchased on 1.04.15 for Rs.500,000
1.01.18- Sold Vehicle (Leyland- Model Dost) purchased on 1.10.16 for Rs.325,000.
The company provides depreciation on vehicles @ 10% p.a. on straight line method. Prepare
Vehicle Account for the financial years 2013-14 to 2017-18.
Vehicles A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2013-14 2013-14

Jul. 1 To Bank A/c 500,000 Mar.31 By Depreciation A/c 56,250

Jan.1 To Bank A/c 750,000 Mar.31 By Balance c/d 1,193,750

1,250,000 1,250,000
2014-15 2014-15

Apr. 1 To Balance b/d 1,193,750 Mar.31 By Depreciation A/c 125,000

Mar.31 By Balance c/d 1,068,750

1,193,750 1,193,750
2015-16 2015-16

Apr. 1 To Balance b/d 1,068,750 Mar.31 By Depreciation A/c 195,000

Apr. 1 To Bank A/c 700,000 Mar.31 By Balance c/d 1,573,750

1,768,750 1,768,750
2016-17 2016-17

Apr. 1 To Balance b/d 1,573,750 Oct.1 By Depreciation A/c 37,500

To Profit & Loss
Oct.1 A/c 56,250 ( Vehicle Sold)

( Profit on Sale) Oct.1 By Bank A/c 600,000

Oct.1 To Bank A/c 400,000 Mar.31 By Depreciation A/c 140,000

Mar.31 By Balance c/d 1,252,500

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 2,030,000 2,030,000
2017-18 2017-18

Apr. 1 To Balance b/d 1,252,500 Jan.1 By Depreciation A/c 82,500

( Vehicle Sold)

Jan.1 By Bank A/c 825,000

Jan.1 By Profit & Loss A/c 32,500

(Loss on Sale)

Mar.31 By Depreciation A/c 50,000

Mar.31 By Balance c/d 262,500

1,252,500 1,252,500

Working Notes:
Book Value, Depreciation of Vehicle, Profit & Loss on Sale of Vehicle

Year Particulars Vehicle 1 Vehicle 2 Vehicle 3 Vehicle 4

Vehicle Purchased 500,000 750,000

2013-14 Depreciation 37,500 18,750
Book Value 462,500 731,250

Depreciation 50,000 75,000

2014-15 Book Value 412,500 656,250

Vehicle Purchased 700,000

Depreciation 50,000 75,000 70,000
2015-16
Book Value 362,500 581,250 630,000

Depreciation – Vehicle
Sold 37,500
Book Value of Sold
Vehicle 543,750
Sale Proceeds 600,000
Profit on Sale 56,250
Vehicle Purchased 400,000
2016-17
Depreciation 50,000 70,000 20,000
Book Value 312,500 560,000 380,000

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 Depreciation – Vehicle
Sold 52,500 30,000
Book Value of Sold
Vehicle 507,500 350,000
2017-18
Sale Proceeds 500,000 325,000
Loss on Sale 7,500 25,000
Depreciation 50,000
Book Value 262,500

Change in Method of Depreciation

Generally, the method of depreciation adopted should be used consistently from period to period.
A change in method of depreciation should be made only if it is required by the statute or for
compliance with the accounting standard or if it is considered that such a change is necessary for
making the accounts presentation more appropriate and fair.
While making change in method of depreciation, it is necessary to recalculate the depreciation as
per the new method from the date of the asset coming into use. The deficiency or surplus arising
from the re-computation of depreciation from retrospective effect should be debit or credited to
profit and loss account of the year in which the method of depreciation is changed.
Illustrations
12. Sheetal Enterprises purchased two machineries on January 1, 2009. The cost of first machinery
was Rs.52,380 and an additional of Rs.1620 was incurred towards its erection. The cost of
second machinery was Rs.19,000. On July, 1 2010 the first machinery purchased was disposed
off for Rs.28,600 as it had become obsolete. New machinery costing Rs.40,000 was purchased
on the same date. The company provided depreciation annually on 31st December at the rate
of 10% p.a. on written down value. However, in 2011 the company changed the method of
providing depreciation and adopted the method of providing 5% depreciation p.a. on the
original cost of the machinery with retrospective effect.
Prepare Machinery account for three years i.e. 2009, 2010 and 2011.
Machinery A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2009 2009

Jan.1 To Bank A/c 52,380 Dec.31 By Depreciation A/c 7,300

Jan.1 To Cash A/c 1,620 Dec.31 By Balance c/d 65,700

Jan.1 To Bank A/c 19,000

73,000 73,000
2010 2010

Jan.1 To Balance b/d 65,700 July.1 By Depreciation A/c 2,430

July.1 To Bank A/c 40,000 ( Machinery Sold)

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 July.1 By Bank A/c 28,600

July.1 By Profit & Loss A/c 17,570

( Loss on Sale)

Dec.31 By Depreciation A/c 3,710

Dec.31 By Balance c/d 53,390

105,700 105,700
2011 2011

Jan.1 To Balance b/d 53,390 Dec.31 By Depreciation A/c 2,950

To Profit & Loss
Jan.1 A/c 2,710 Dec.31 By Balance c/d 53,150
(Excess
depreciation
written back)

56,100 56,100

Working Notes:
Computation of Depreciation & Book Value of Machinery
Machinery 1 Machinery 2 Machinery 3
Cost 54,000 19,000 40,000
Depreciation – 2009 5,400 1,900
WDV 48,600 17,100
Depreciation – 2010 2,430 1,710 2,000
WDV 46,170 15,390 38,000
Sale proceeds 28,600
Loss on Sale 17,570

Computation of Difference in Depreciation & Book Value of Machinery

Machinery 2 Machinery 3
Cost 19,000 40,000
Depreciation – 2009 950
WDV 18,050
Depreciation – 2010 950 1,000
WDV 17,100 39,000

Book Value of Machinery under SLM (17,100 + 39,000) = Rs.56,100

Book Value of Machinery as per WDV = Rs.53,390
Excess Depreciation to be written back = Rs. 2,710

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13. The book value of Plant and Machinery on 1-1-2014 was Rs. 2,00,000. New machinery for Rs.
10,000 was purchased on 1-10-2014 and for Rs. 20,000 on 1-7-2015. On 1-4-2016, a
machinery whose book value had been Rs. 30,000 on 1-1-2014 was sold for Rs. 16,000.
Depreciation had been charged at 10% p.a. since 2014 on straight line method. It was decided
in 2006 that depreciation at the rate of 20% p.a. on diminishing balance method should be
charged with retrospective effect since 1-1-2014. Show Plant and Machinery Account up to
31-12-2016. Give detailed workings.

Plant & Machinery A/c

Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2014 2014

Jan.1 To Balance b/d 200,000 Dec.31 By Depreciation A/c 20,250

Oct.1 To Cash A/c 10,000 Dec.31 By Balance c/d 189,750

210,000 210,000
2015 2015

Jan.1 To Balance b/d 189,750 Dec.31 By Depreciation A/c 22,000

July.1 To Bank A/c 20,000 Dec.31 By Balance c/d 187,750

209,750 209,750
2016 2016

Jan.1 To Balance b/d 187,750 Apr.1 By Depreciation A/c 750

(machinery sold)

Apr.1 By Bank A/c 16,000

Apr.1 By Profit & Loss A/c 7,250

(Loss on Sale)

Dec.31 By Depreciation A/c 29,350

(Deficit in
depreciation
debited )

Dec.31 By Depreciation A/c 26,880

Dec.31 By Balance c/d 107,520

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 187,750 187,750

Working Notes:
(i) Calculation of loss on machine sold Rs.
Cost of the machine 30,000
Depreciation for 2014 and 2015 @ 3000 6,000
Depreciation for 3 months in 2016 750
Book value on 1-4-2016 23,250
Sale Proceeds 16,000
Loss on Sale 7,250
(ii) Calculation of Additional Depreciation
Depreciation on all machines except, one sold on 1 April, 2016 (i.e., Rs.30,000) as shown below
:
Straight Line Diminishing
Method (10%) Balance Method (20%)
Rs. Rs.
Depreciation for 2014 17,250 34,500
(on Rs. 1,70,000 for one year
on Rs. 10,000 for 3 Months)
Depreciation for 2015 19,000
(on Rs. 1,80,000 for one year and on
Rs. 20,000 for 6 months)
(On Rs. 1,45,500 (1,80,000 – 34,500)
for one year and on Rs. 20,000 for
6 months @ 20% p.a.) 31,100
--------- ---------
Total Depreciation 36,250 65,600
Additional depreciation required – (Rs. 65,600 – Rs. 36,250) = Rs. 29,350
Depreciation for 2016 :
Written down value of machines in use = 1,34,400
(1, 80,000 – 34,500 + 20,000 – 31,100)
Depreciation for 2006 : 20% on Rs. 1,34,400 = Rs. 26,880

14 DK Ltd. Purchased some machines as follows: (a) On 1/7/2009 Company purchased a Plant at
cost Rs.85,000 and freight incurred Rs. 5,000 and erection charges Rs.10,000. (b) On 1/4/2010
Company purchased another Plant at cost Rs. 150,000. (3) On 1/10/2010 Company purchased
another new plant at cost Rs. 20,000 and freight incurred Rs.3,000 and erection charges
Rs.2,000. (d) On 1/7/2011 other new Plant purchased at cost Rs. 70,000 and erection charges
Rs. 5,000 incurred.
Company follows Straight Line Method of depreciation at 10% p.a. However, from 2011
onwards the Company decided to change its method of depreciation from Straight Line
Method to Written Down Value at 15% p.a with retrospective effect. In 2011 on April 1st.
1/4th of plant purchased on 1/7/09 was sold away for Rs. 13,150. Show Plant a/c up to Dec.
31st 2011.

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 Plant A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2009 2009

July.1 To Bank A/c 85,000 Dec.31 By Depreciation A/c 5,000

July.1 To Bank A/c 5,000 Dec.31 By Balance c/d 95,000

July.1 To Cash A/c 10,000

100,000 100,000
2010 2010

Jan.1 To Balance b/d 95,000 Dec.31 By Depreciation A/c 21,875

Apr.1 To Bank A/c 150,000 Dec.31 By Balance c/d 248,125

Oct.1 To Bank A/c 20,000

Oct.1 To Cash A/c 3,000

Oct.1 To Cash A/c 2,000

270,000 270,000
2011 2011

Jan.1 To Balance b/d 248,125 Apr.1 By Depreciation A/c 625

July.1 To Bank A/c 70,000 (machinery sold)

July.1 To Cash A/c 5,000 Apr.1 By Bank A/c 13,150

Apr.1 By Profit & Loss A/c 7,475

(Loss on Sale)

Dec.31 By Depreciation A/c 8,219

(Deficit in
depreciation
debited )

Dec.31 By Depreciation A/c 38,048

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 Dec.31 By Balance c/d 255,608

323,125 323,125

Working Notes:
(i) Calculation of loss on machine sold Rs.
Cost of the machine 25,000
Depreciation for 2009 ( 6 months) 1,250
Depreciation for 2010 2,500
Depreciation for 2011 ( 3 months) 625
Book value on 1-4-2011 20,625
Sale Proceeds 13,150
Loss on Sale 7,475
(ii) Calculation of Additional Depreciation
Depreciation on all machines except, one sold on 1 April, 2011 (i.e., Rs., 25,000) is shown below
:
Straight Line Diminishing
Method (10%) Balance Method (20%)
Rs. Rs.
Depreciation for 2009 ( 6 months) 3,750 5,625
Depreciation for 2010 21,875
(on Rs. 75,000 for one year
on Rs. 150,000 for 9 Months and
on Rs.25,000 for 3 Months)
(on Rs. 69,375 ( 75,000 – 5625)
for one year; on Rs. 150,000 for
9 months and on Rs.25,000 for
3 months @ 15% p.a.) 28,219
--------- ----------
Total Depreciation 25,625 33,844

Additional Depreciation required – (Rs. 33,844 – Rs. 25,625) = Rs. 8,219

Depreciation for 2011:
Written down value of machines in use = 2,16,156
( 75,000 – 5,625 + 150,000+25000 – 28,219)
Depreciation for 2011 : 15% on Rs. 2,16,156 = Rs. 32,423 + 15% on Rs.75,000
(for 6 months)= Rs.5,625 i.e. Rs. 38,048
15 On 1st April, 2010 A Ltd purchased two machines I & II costing Rs.25000 each and provided
depreciation @ 10% p.a. on straight line basis. At the end of 2014, the company decided to
change the method of depreciation from straight line method to written down value method
retrospectively, the rate of depreciation remaining the same. Prepare machinery account up
to 31st March, 2014.

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 Machinery A/c
Dr. Cr.
Date Particulars JF Rupees Date Particulars JF Rupees
2010-11 2010-11

Apr.1 To Bank A/c 50,000 Mar.31 By Depreciation A/c 5,000

Mar.31 By Balance c/d 45,000

50,000 50,000
2011-12 2011-12

Apr.1 To Balance b/d 45,000 Mar.31 By Depreciation A/c 5,000

Mar.31 By Balance c/d 40,000

45,000 45,000
2012-13 2012-13

Apr.1 To Balance b/d 40,000 Mar.31 By Depreciation A/c 5,000

Mar.31 By Balance c/d 35,000

40,000 40,000
2013-14 2013-14

Apr.1 To Balance b/d 35,000 Mar.31 By Depreciation A/c 3,645

To Profit & Loss
Mar.31 A/c 1,450 Mar.31 By Balance c/d 32,805
(Excess
Depreciation
written back)

36,450 36,450

Working Notes:
Depreciation as per Straight method:
Rs. 50,000 @10% = Rs.5,000 x 3 years = Rs.15,000
Book Value of Machinery as on 1.4.13 = Rs.50,000 – Rs.15,000 = Rs.35,000
Depreciation as per Written Down method:
Cost as on 1.4.2010 50,000
Depreciation. 5,000
WDV as on 1.4.2011 45,000
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Depreciation. 4,500
WDV as on 1.4.2012 40,500
Depreciation. 4,050
WDV as on 1.4.2013 36,450
Depreciation as per Written Down method = Rs.13,550
Difference in depreciation) = Rs.15,000 – Rs.13,550 = Rs. 1450
As per Straight Line Method, Depreciation is charged more, hence the excess amount of
depreciation of Rs.1450 has to be written back to Profit & Loss A/c.
Depreciation for 2013-14
WDV as on 1.4.2013 36,450
Depreciation for 2013-14 3,645
WDV as on 1.4.2014 32,805

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 5

Final Accounts
The final accounts comprises of group of three different accounts viz. Trading account, profit and
loss account and balance sheet. This group of three accounts is known as final accounts as it
provides the final results of the business done in the accounting year. Final accounts generally
refer to two important accounting statements prepared by business unit at the end of the financial
year and those accounting statements are (i) Income Statement and (ii) statement of financial
position. Income statement means and includes trading account and profit and loss account and
statement of financial position means and includes Balance Sheet.
Preparation of trading account and profit and loss account gives result of the business operations
done in the entire financial year. Balance Sheet shows the financial position of assets and liabilities
of the business as on particular date.
Objectives of Final Accounts
a. To ascertain gross profit or gross loss and net profit or net loss as a result of business done in
the accounting year.
b. To check the arithmetical accuracy of business transactions and to detect fraud.
c. To know the financial position of the business i.e. total assets owned by the business and total
liability payable by the business
d. To ascertain the tax liability that is payable to the Government.
Trading Account
Trading account is part of final accounts which is prepared on the basis of direct expenses and
direct income of business to ascertain gross result of the business done in the accounting year.
Preparation of trading account is the first step in preparation of final accounts. Trading account
comprises of only such expenses that have direct connection to production or trading such as
purchase of raw material/ goods, power and fuel, wages, etc. and direct income such as Sale of
goods. The trading account thus shows the gross result of trading or business activities carried out
in a particular accounting year. It is prepared with the basic objective of ascertaining the gross
profit or gross loss done as a result of manufacturing of goods or services or trading of goods.
On the debit side of the trading account opening stock, purchases and direct expenses are recorded
while on the credit side sales, direct income and closing stock are recorded. The debit balance of
this account indicates gross loss whereas credit balance indicates gross profit. The result shown by
this trading account i.e. gross profit of gross loss is carried forward to profit and loss account.

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Dr. Varsha Rayanade
Specimen of Trading Account

Name of the Proprietor or its firm

Trading Account for the year ended _________

Particulars Amount Particulars Amount

Rs. Rs.
To Opening Stock XXX By Sales XXX
Less: Sales Returns/ xx
Return inward -------- XXX
To Purchases XXX By Drawings A/c X
Less: Purchase returns/ xx ( goods taken by proprietor for
Return Outwards --------- XX personal use)
To Carriage Inward X By Goods Lost by fire or theft X
To Wages X By Advertisement (free samples of X
To Freight X Goods for sales promotion)
To Power & Fuel X By Closing Stock X
To Royalties X By Gross Loss c/f ( Balancing figure) Xx
To Octroi X
To Custom Duty X
To Factory Lighting X
To Factory Rent X
To Manufacturing expenses X
To Gross Profit c/f (Balancing fig.) Xx
XXXX XXXX

Profit and Loss Account

The profit and loss account which is part of the final accounts is prepared on the basis of indirect
expenses and indirect income of the business to ascertain the net result of the business done in the
accounting year. After preparation of trading account profit and loss account is prepared by only
considering only indirect expenses such as salaries, rent, stationery, travelling, conveyance, etc.
indirect incomes such as interest on deposits, dividends received, discount received, etc.

Indirect expenses are recorded on debit side of profit and loss account and indirect income are
shown on the credit side of profit and loss account. Indirect business expenses are classified as (i)
Office / Administrative expenses (ii) Selling Expenses and (iii) Distribution expenses. Debit
balance of profit and loss account indicates net loss and credit balance of profit and loss account
indicates net profit earned by the business in the accounting year. Net profit / Net loss is carried
forward to Balance Sheet wherein it is added (in case of net profit)/ deducted (in case of net loss)
from the Capital account of the Sole proprietor.

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Dr. Varsha Rayanade
Specimen Profit and Loss Account

Name of the Proprietor or its firm

Profit and Loss Account for the year ended _________

Particulars Amount Particulars Amount

Rs. Rs.
To Gross Loss b/d By Gross Profit b/d
To Salaries By Rent ( received)
To Rent By Discount (received)
To General Office Expenses By Interest (earned)
To Printing and Stationery By Commission (received)
To Sundry Expenses By Income from Investments
To Postage & Telegram By Dividends (received)
To Telephone Expenses By Misc. receipts
To Travelling Expenses By Net Loss c/f
To Conveyance
To Advertisement
To Interest on Loan
To Interest on Capita;
To Depreciation
To Bad debts
To Repairs and maintenance
To Bank Charges
To Legal fees
To Audit Fees
To Packing Charges
To Loss on Sale of Assets
To Discount (allowed/ given)
To Commission (paid/ given)
To Carriage Outward
To Freight Outward
To Insurance
To Staff Welfare
To Entertainment
To Sales Promotion Expenses
To Reserve for Doubtful Debts
To Net Profit c/f

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Balance Sheet
After preparation of Trading account and Profit and Loss account, the Balance Sheet prepared.
The balance sheet is an accounting statement which shows financial position of all assets and
liabilities of the business as on particular date. On the left side of this statement liabilities of various
types are systematically recorded and on the right hand side all type of assets are systematically
recorded. Business liabilities include short term liabilities such as sundry creditors, bank overdraft,
bills payable, outstanding expenses, etc. and long term liabilities include capital, bank loan, etc.
Business assets are classified as fixed assets, tangible assets, intangible assets, current assets, etc.
Specimen Balance Sheet
Name of the Proprietor or its firm
Balance Sheet as at _________
Liabilities Rs. Assets Rs.
Capital XXX Land & Building X
Less: Drawings X Plant & Machinery X
Add: Interest on Capital X Furniture & Fixtures X
Add: Net Profit /Less: N. Loss X Motor Car X
-------- XXX Investments X
Secured Loan X Goodwill X
Unsecured Loan X Patents X
Sundry Creditors X Loose Tools X
Bank Overdraft X Bills Receivable X
Bills Payable X Sundry Debtors X
Outstanding Expenses X Closing Stock X
Income received in advance X Prepaid Expenses X
Income receivable X
Cash in Hand X
Cash at Bank X
Loans and Advances X
XXXX XXXX

Adjustments /Additional Information

Additional information provided after completion of trial balance for preparation of final accounts
are known as adjustments. To get clear view and real results of business done in the accounting
year, some related other information which are not disclosed in the trial balance are required to be
considered while preparing final accounts. Proper accounting treatment needs to be given to these
adjustment items in the final accounts. For every adjustment item, double effect needs to be given
in the final accounts. For e.g. in case of outstanding salary – the first effect is that it will be added
to Salary account at the debit side of Profit and Loss account and its second effect will be that it
shall be shown separately on the liability side of the Balance sheet.
Preparation of Final Accounts from Trial Balance
Steps involved in preparation of final accounts from trial balance in case of sole proprietor business
is as follows:
Step 1: Tick mark all those accounts in the given trial which are mentioned in the additional
information that need adjustment entries to be passed.
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Step 2: Post all direct expenses and direct income from the given trial balance to the Trading
Account. Take care that amounts of those accounts which are tick marked and need
adjustment are written in inner column as well as adequate space is provided for making
the adjustment entry.
Similarly, post all indirect expenses and indirect income from the given trial balance to
the profit and loss account. In this case also, amounts of those accounts which are tick
marked and need adjustment are written in inner column as well as adequate space is
provided in the profit & loss account for making the adjustment entry.
Further, all assets and liability items from the given trial balance should be posted to the
Balance sheet and amount of only those items which are not tick marked in trial balance
should be written in outer column. While amounts of those accounts which are tick
marked and need adjustment are written in inner column as well as adequate space is
provided in the balance sheet for making the adjustment entry.
Step 3: Adjust each additional information one by one in the final accounts by giving proper effect
keeping in mind the concept of double entry. After giving effect to all the adjustments,
balance the trading account first and ascertain the gross profit or loss.
Step 4: The result of trading account i.e. gross profit or loss should be transferred to profit and
loss account and then the profit and loss account needs to be balanced to ascertain the net
result in the form of Net Profit or Net Loss earned during the accounting year.
Step 5: The net profit or net loss as determined by the profit and loss account should be transferred
to the Capital account of the sole proprietor. In case of net profit the same shall be added
to his Capital while in came of net loss the same will be deducted from his capital
account. Finally, the total of asset side of balance sheet should match with the total of
liability side of balance sheet then only it can be said that the balance sheet is tallied and
Final accounts of the business are completed.

Mechanism involved in preparation of final accounts when trial balance with additional
information is given:

Expense
enses Trading and
Income Profit & Loss
Trial A/c
Additional Information
Balance
Liabilities
Balance Sheet
Assets

Some important additional information along with adjustment entries in final

accounts are given below:
Sr. Additional Information 1st Effect 2nd Effect
1 Closing Stock Trading A/c - Credit Side Balance Sheet –Asset Side
Shown Separately Shown separately under
current asset

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 2 Outstanding Expenses P& L A/c – Debit Side Balance Sheet – Liability side
Add to the concern Expense
Shown separately under
current liabilities
3 Prepaid Expenses P& L A/c – Debit Side Balance Sheet –Asset Side
Deduct from the concern Shown separately under
Expense current asset
4 Depreciation P& L A/c – Debit Side Balance Sheet –Asset Side
Shown Separately Deduct from concern fixed
asset
5 Bad Debts P& L A/c – Debit Side Balance Sheet –Asset Side
Shown Separately Deduct from Debtors
6 Interest on Capital P& L A/c – Debit Side Balance Sheet – Liability side
Shown Separately Added to Capital / Current A/c
7 Interest on Drawings P& L A/c – Credit Side Balance Sheet – Liability side
Shown Separately Deducted from Capital /
Current A/c
8 Loss of Goods Trading A/c – Credit Side P& L A/c – Debit Side
Shown Separately or Shown Separately
Deduct from Purchase A/c
9 Accrued Income (Income P& L A/c – Credit Side Balance Sheet –Asset Side
due but not received) Add to the concern income Shown separately under
current asset
10 Income received in P& L A/c – Credit Side Balance Sheet – Liability side
advance Deduct from the concern Shown separately under
income current liabilities
Example
From the following particulars, prepare Trading Account for the year ended 31st March, 2018
Opening Stock 17,000 Carriage Inward 150
Purchases 20,000 Power & Fuel 200
Sales 30,000 Freight 120
Purchase Returns 2,000 Closing Stock 25,000
Sales Returns 1,000 Wages 600

Trading Account for the year ended 31st March, 2018

Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 17,000 By Sales 30,000
Less: Sales Returns 1,000
--------- 29,000
To Purchases 20,000 By Closing Stock 25,000
Less : Purchase returns 2,000
--------- 18,000
To Carriage Inward 150
To Wages 600
To Power & Fuel 200
To Freight 120
To Gross Profit c/f 17,930
54,000 54,000

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Example
From the following particulars, prepare Trading and Profit and Loss Account for the year ended
31st March, 2018
Opening Stock 25,000 Interest received 400
Purchases 40,000 Commission allowed 150
Wages 5,000 Commission received 280
Carriage Inward 125 Depreciation 600
Freight 70 Purchase returns 150
Salaries 2,500 Sales returns 200
Rent Paid 650 Power & Fuel 85
Postage & Telegram 80 Sales 75,000
Discount Allowed 70 Printing & Stationery 125
Discount received 120 Royalty 600
Sundry Expenses 540 Closing Stock 20,000
Solution
Trading and Profit & Loss Account for the year ended 31st March, 2018

Particulars Amount Particulars Amount

Rs. Rs.
To Opening Stock 25,000 By Sales 75,000
Less: Sales Returns 200
--------- 74,800
To Purchases 40,000 By Closing Stock 20,000
Less : Purchase returns 150
--------- 39,850
To Carriage Inward 125
To Wages 5,000
To Freight 70
To Fuel & Power 85
To Royalty 600
To Gross Profit c/f 24,070
94,800 94,800
To Salaries 2,500 By Gross Profit b/d 24,070
To Rent 650 By Interest (received) 400
To Sundry Expenses 540 By Commission (recd.) 280
To Postage & Telegram 80 By Discount (received) 120
To Discount (allowed) 70
To Commission (allowed) 150
To Printing & Stationery 125
To Depreciation 600
To Net Profit 20,155

24,870 24,870

Example
From the following trial balance prepare trading and profit and loss account for the year ending
31st March, 2017 and a balance sheet as on date after taking into consideration the following
adjustments.
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 Trial Balance as on 31st March, 2017
Debit Balance Rs. Credit Balance Rs.
Opening Stock 20,000 Bills Payable 10,000
Debtors 28,000 Return outwards 2,500
Purchases 40,000 Sundry Creditors 21,500
Wages 8,500 Sales 70,000
Salaries 2,700 R.D.D ( Reserve for doubtful debts) 400
Office Expenses 2,445 Capital 90,000
Insurance 1,300 10% Loan ( taken on 1.10.16) 3,000
Plant & Machinery 30,000 Commission 1,000
Rent 1,800 Discount 500
Travelling Expenses 1,400 Rent 700
Return Inwards 3,500
Land & Building 44,800
Bills Receivable 4,000
Bank Balance 6,655
Furniture 2,400
Sundry Expenses 800
Bad debts 600
Advertisement 700
199,600 199,600
Adjustments: (1) Closing Stock valued at Rs.15,000 (2) Outstanding wages – Rs.500 and
outstanding salary – Rs. 300 (3) Prepaid insurance Rs.300 (4) Depreciate plant and machinery at
10% , Land & Building at 15% and furniture at 5% (5) Provide Rs.500 for further bad debts and
maintain reserve for bad and doubt debts at 5% (6) Provide 5% interest on capital.
Solution
Trading and Profit & Loss Account for the year ended 31st March, 2017
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock 20,000 By Sales 70,000
Less: Return Inward 3,500
---------- 66,500
To Purchases 40,000 By ClosingStock 15,000
Less: Return Outward 2,500
--------- 37,500
To Wages 8,500
Add: Outstanding wages 500
---------- 9,000
To Gross Profit c/f 15,000
81,500 81,500
To Salaries 2,700 By Gross Profit b/d 15,000
Add: O/s. Salaries 300
---------- 3,000
To Office Expenses 2,445 By Commission 1,000
To Insurance 1,300 By Discount 500
Less: Prepaid 300
---------- 1,000

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 To Depreciation: By Rent 700
Plant & Machinery 3,000 By Net Loss 10,510
Land & Building 6,720
Furniture 120
To Rent 1,800
To Travelling 1,400
To Sundry Expenses 800
To Advertisement 700
To Bad debts 600
Add: additional bad debt 500
--------- 1,100
To R.D.D. (new reserve) 1,375
Less: Old reserve 400
---------- 975
To Interest on loan 150
To Interest on Capital 4,500

27,710 27,710

Working notes: (i) RDD new reserve – 5% of Rs.27,500 ( Debtors Rs. 28,000 – fresh bad debts Rs. 500
= Rs.27,500) (ii) Interest on loan @ 10% - Loan Rs.3,000 taken on 1.10.16 ( i.e. for 6 months)

Balance Sheet as on 31st March, 2017

Liabilities Rs. Assets Rs.
Capital 90,000 Plant & Machinery 30,000
Add: Interest on capital 4,500 Less : Depreciation 3,000
Less: Net Loss 10,510 ----------- 27,000
----------- 83,990
To Sundry Creditors 21,500 Land & Building 44,800
Less: Depreciation 6,720
----------- 38,080
To Bills Payable 10,000 Furniture 2,400
Less : Depreciation 120
----------- 2,280
To Loan 3,000 Sundry Debtors 28,000
Add: Interest for 6 mths 150 Less: Bad debts 500
----------- 3,150 Less: New Reserve 1375
----------- 26,125
To Outstanding Wages 500 Bank Balance 6,655
To Outstanding Salary 300 Bills Receivable 4,000
Closing Stock 15,000
Prepaid Insurance 300

119,440 119,440

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The accounts of preparing final accounts of partnership firm is similar to Sole Trader / Proprietor.
However, in partnership firm there are two or more partners, separate capital account of each
partner has to be maintained. Generally, while starting the firm every partner contributes in cash
or kind as funds to run the business. The amount of contribution by each partner may not be equal
but shall be as mutually agreed by all partners. The amount of such contribution represents the
capital of the partners and the sum total of the same denotes the capital of the firm. There are two
type of methods for maintaining capital accounts of partnership firm viz. Fixed Capital and
Fluctuating Capital.

Fixed Capital
This method of maintaining capital accounts of partnership firm is adopted when the partners wish
to keep their capital at the original figure year after year. The amount of capital thus is fixed
throughout the period of partnership unless partners agree to make any amendment by way of
addition or withdrawal of funds. Under fixed capital method of accounting, a separate current
account of each partner is opened. All transactions related to the partners are accounted through
this current account. The current account is credited with share of profits, interest on capital, salary
or remuneration, etc. While the current account is debited with drawings, interest on drawings,
share of loss, etc. The current account of the partners may show credit or debit balance. Credit
balance in current account is the amount due to the partner and hence it is shown on the liability
side below capital account in the balance sheet. In case the current account shows debit balance it
is considered as overdrawn amount that is due from the partner and hence shown on the asset side
of the balance sheet under current assets.

Fluctuating Capital
Fluctuating capital is the one in which the capital account of the partners changes from year to
year. There is only one account for each partner and all entries relating to the partner such as
introduction of capital, salary, share of profit/ loss, drawings, interest on capital, interest on
drawings, etc. Hence, the balance of the capital account keeps changing i.e. fluctuating every year.
In the absence of contract to the contrary, capital accounts of the partners shall be fluctuating.

Preparation of Final Accounts from Trial Balance

Steps involved in preparation of final accounts from trial balance in case of partnership business
is as follows:
Step 1: Prepare Trading and P & L A/c as in case of sole proprietorship concern excluding
expenses and incomes related to partners only. Transfer the balancing figure to partner’s
Capital A/c in profit/loss sharing ratio.
Step 2: Adjust each additional information one by one in the final accounts by giving proper effect
keeping in mind the concept of double entry.
Step 3: Prepare partner’s Capital A/c by posting all the expenses and incomes related to partners
and also transfer the balancing figure of Trading and P & L A/c to partner’s Capital A/c
in profit/loss sharing ratio.
Example
A and B started business on 1st Jan., 2015. A contributed Rs.50,000 and B contributed Rs.
40,000 towards capital. On 30th June, 2015 B made further contribution of Rs.10,000

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towards his capital. During the year, drawings during the year were Rs.4000 and drawings
of B were Rs.5000. The partners were entitled to interest on capital @ Rs.6% however, no
interest was charged on drawings. An amount of Rs.500 p.m. was paid to B as salary. The
partnership firm earned profit of Rs.32,000 before charging salary and interest on capital.
You are requested to show Profit and Loss Appropriation Account and the Partners Capital
accounts under Fixed capital method and Fluctuating capital method.
Profit and Loss Appropriation A/c
for the year ended 31st Dec., 2015

Rs. Rs.
To Interest on Capital: By Net Profit 32,000
A ( 6% - Rs.50000 - 1 yr) 3000
B ( 6% - Rs.40000 - 1 yr) 2400
B ( 6% - Rs.10000 - 6 mth) 300
----------- 5,700
To Partner's Salary A/c 6,000
To Net Profit A/c:
A 10150
B 10150
----------- 20,300
32,000 32,000

When Capitals are Fixed:

Partner's Capital A/c
Dr. Cr.
Date Particulars A B Date Particulars A B
2015 2015
Dec., 31 To Balance c/f 50,000 50,000 Jan. 1 By Cash A/c 50,000 40,000
June, 30 By Cash A/c 10,000

50,000 50,000 50,000 50,000

Partner's Current A/c

Dr. Cr.
Date Particulars A B Date Particulars A B
2015 2015
Dec., 31 To Drawings A/c 4,000 5,000 Dec., 31 By Interest A/c 3,000 2,700
Dec., 31 To Balance c/f 9,150 13,850 Dec., 31 By Salary A/c 6,000
Dec., 31 By Net Profit A/c 10,150 10,150

13,150 18,850 13,150 18,850

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When Capitals are Fluctuating:
Partner's Capital A/c
Dr. Cr.
Date Particulars A B Date Particulars A B
2015 2015
Dec., 31 To Drawings A/c 4,000 5,000 Jan. 1 By Cash A/c 50,000 40,000
Dec., 31 To Balance c/f 59,150 63,850 June, 30 By Cash A/c 10,000
Dec., 31 By Interest A/c 3,000 2,700
Dec., 31 By Salary A/c 6,000
Dec., 31 By Net Profit A/c 10,150 10,150

63,150 68,850 63,150 68,850

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