FUNDAMENTALS OF ACCOUNTING

B.Com (Gen & CA)., I Semester Paper-IA

Lesson Writers
Dr.R.Jaya Prakash Reddy Dr.Ch.Suravinda
Reader, Dept. of Commerce Reader in Commerce
SGHR & MCMR College Hindu College
Guntur Guntur

Sri T.Nageswara Rao

Lecturer in Commerce
Hindu College,
Guntur

Editor
Prof. V.Chandrasekhara Rao,
M.Com., Ph.D.,
Dept. of Commerce and Business Administration
Acharya Nagarjuna University
Nagarjuna Nagar-522510

Director
Dr.Nagaraju Battu
M.H.R.M., M.B.A., L.L.M., M.A. (Psy), M.A., (Soc), M.Ed., M.Phil., Ph.D.
Centre for Distance Education
Acharya Nagarjuna University
Nagarjuna Nagar-522510

Phone No.0863-2346208, 0863-2346222, Cell No.9848477441

0863-2346259 (Study Material)
Website: www.anucde.info
e-mail: [email protected]
 B.Com (Gen & CA): Fundamentals of Accounting

First Edition: 2021

No. of Copies

(C) Acharya Nagarjuna University

This book is exclusively prepared for the use of students of M.Com Centre for
Distance Education, Acharya Nagarjuna University and this book is mean for limited
circulation only

Published by
Dr.Nagaraju Battu
Director
Centre for Distance Education
Acharya Nagarjuna University
Nagarjuna Nagar-522510

Printed at
 FOREWORD

Since its establishment in 1976, Acharya Nagarjuna University has been forging
ahead in the path of progress and dynamism, offering a variety of courses and
research contributions. I am extremely happy that by gaining ‘A’ grade from the
NAAC in the year 2016, Acharya Nagarjuna University is offering educational
opportunities at the UG, PG levels apart from research degrees to students
from over 443 affiliated colleges spread over the two districts of Guntur and
Prakasam.

The University has also started the Centre for Distance Education in
2003-04 with the aim of taking higher education to the door step of all the
sectors of the society. The centre will be a great help to those who cannot join in
colleges, those who cannot afford the exorbitant fees as regular students, and
even to housewives desirous of pursuing higher studies. Acharya Nagarjuna
University has started offering B.A., and B.Com courses at the Degree level and
M.A., M.Com., M.Sc., M.B.A., and L.L.M., courses at the PG level from the
academic year 2003-2004 onwards.

To facilitate easier understanding by students studying through the

distance mode, these self-instruction materials have been prepared by eminent
and experienced teachers. The lessons have been drafted with great care and
expertise in the stipulated time by these teachers. Constructive ideas and
scholarly suggestions are welcome from students and teachers involved
respectively. Such ideas will be incorporated for the greater efficacy of this
distance mode of education. For clarification of doubts and feedback, weekly
classes and contact classes will be arranged at the UG and PG levels
respectively.

It is my aim that students getting higher education through the Centre for
Distance Education should improve their qualification, have better employment
opportunities and in turn be part of country’s progress. It is my fond desire that
in the years to come, the Centre for Distance Education will go from strength to
strength in the form of new courses and by catering to larger number of people.
My congratulations to all the Directors, Academic Coordinators, Editors and
Lesson- writers of the Centre who have helped in these endeavours.

Prof. P. Raja Sekhar

Vice-Chancellor (FAC)
Acharya Nagarjuna University
 FUNDAMENTALS OF ACCOUNTING
CONTENTS
Pg. No

Lesson 1A : Accounting Introduction 1A.1-1A.9

Lesson 1B : Double Entry System 1B.1-1B.5

Lesson 2 : Journal 2.1-2.18

Lesson 3: Ledger 3.1-3.15

Lesson 4 : Subsidiary Book 4.1-4.19

Lesson 5 : Cash Book 5.1-5.21

Lesson 6 : Bank Reconciliation Statement 6.1-6.15

Lesson 7 : Trial Balance 7.1-7.16

Lesson 8 : Final Accounts : Trading Account & Profit & Loss Account 8.1-8.22

Lesson 9 : Final Accounts : Balance Sheet, Adjustments 9.1-9.25

Lesson 10: Final Accounts- Problems 10.1-10.20

 I YEAR B COM (GEN & CA) SEMESTER – I

Paper title: Fundamentals of Accounting

Paper number Maximum marks 70

Learning Outcomes:
At the end of the course, the student will able to
 Identify transactions and events that need to be recorded in the books of
accounts.
 Equip with the knowledge of accounting process and preparation of final
accounts of sole trader.
 Develop the skill of recording financial transactions and preparation of reports
in accordance with GAAP.
 Analyze the difference between cash book and pass book in terms of balance
and make reconciliation.
 Critically examine the balance sheets of a sole trader for different accounting
periods.
 Design new accounting formulas & principles for business organisations.

Syllabus:

Unit-I – Introduction
Need for Accounting – Definition – Objectives, – Accounting Concepts and
Conventions – GAAP - Accounting Cycle - Classification of Accounts and its Rules –
Book Keeping and Accounting - Double Entry Book-Keeping - Journalizing - Posting
to Ledgers, Balancing of Ledger Accounts (including Problems).

Unit-II: Subsidiary Books:

Types of Subsidiary Books - Cash Book, Three-column Cash Book- Petty Cash Book
(including Problems).

Unit-III: Trial Balance and Rectification of Errors:

Preparation of Trial balance - Errors – Meaning – Types of Errors

Unit-IV: Bank Reconciliation Statement:

Need for Bank Reconciliation - Reasons for Difference between Cash Book and Pass
Book Balances- Preparation of Bank Reconciliation Statement - Problems on both
Favourable and Unfavourable Balance (including Problems).

Unit -V: Final Accounts:

Preparation of Final Accounts: Trading account – Profit and Loss account – Balance
Sheet – Final Accounts with Adjustments (including Problems).
References:
1. Ranganatham G and Venkataramanaiah, Fundamentals of Accounting, S Chand
Publications
2. T.S.Reddy& A. Murthy, Financial Accounting, Margham Publications
3. S N Maheswari and SK Maheswari, Financial Accounting, Vikas Publications
4. R L Gupta & V K Gupta, Principles and Practice of Accounting, Sultan Chand &
Sons
5. S.P. Jain & K.L Narang, Accountancy-I, Kalyani Publishers
6. Tulasian, Accountancy -I, Tata McGraw Hill Co.
7. V.K.Goyal, Financial Accounting, Excel Books
8. K. Arunjothi, Fundamentals of Accounting; Maruthi Publications
9. Prof EChandraiah : Financial Accounting Seven Hills International Publishers

Suggested Co-Curricular Activities:

Bridge Course for Non-commerce Students
Practice of Terminology of Accounting
Quiz, Word Scramble
Co-operative learning
Seminar
Co-operative learning
Problem Solving Exercises
Matching, Mismatch
Creation of Trial Balance
Visit a firm (Individual and Group)
Survey on sole proprietorship and prepare final accounts of concern
Group Discussions on problems relating to topics covered in syllabus
Examinations (Scheduled and surprise tests)
Any similar activities with imaginative thinking beyond the prescribed syllabus
 Financial Accounting-I 1A.1 Accountig Introduction

LESSON - 1A

ACCOUNTING, INTRODUCTION
1A.0 Objectives : After going through this less on the student will know, what is Accountancy?
what is the need for recording the business transactions in the books ? What is the difference
between book keeping and Accountancy ? What are the things which should be bear in mind while
recording business transaction in the books.

Structure :
1.1 Introduction to Accountancy, Scope.
1.2 Definition.
1.3 Need for Accountancy
1.4 Accountancy Functions
1.5 Book keeping - Accounting
1.6 Objects of Accountancy
1.7 Advantages, limitations of Accountancy.
1.8 Accounting process.
1.9 Branches of Accounting.
1.10 Concepts of Accounting.
1.11 Conventions of Accounting.
1.12 Summary.
1.13 Self Assessment Questions.
1.14 Suggested Readings

1.1 Introduction to Accountancy - Scope

Accounting is as old as money itself. In the early days, the number of transactions to be
recorded were so small then each business man was able to record and check for himself all his
transactions. The modern system of accounting based on the principles of Double Entry system
owes its origin to luco pacio who first published the principles of Double Entry system in 1494 at
VENICE in Italy.
In the recent years large scale production, cut throat competition, widening of the market and
changes in the technology have brought remarkable changes in the field of accounting.
A business consists of a series of transactions. These business transactions are to be
identified, classified, recorded, summarised, analysed, interpreted and communicated to interested
parties so as to serve as a basis for decision marking. In fact, modern accounting serves as the
“eyes and ears” of the management.
The main purpose of accounting is to ascertain profit or loss during a specified period to
show financial condition of the business on a particular date and to have control over the firms
property. Such accounting records are required to be maintained to measure the income of the
business and communicate the information so it may be used by managers, owners and other
parties.
 ACHARYA NAGARJUNA UNIVERSITY 1A.2 CENTRE FOR DISTANCE EDUCATION

1.2 Definition :
Different people have defined Accountancy in deferent ways by going through these we can
understand the nature of Accountancy.
The American institute of certified public Accounting has defined financial accounting as “the
art of recording, classifying and summarising in a significant manner and in terms of money
transactions and events which in part, at least of a financial character and interpreting the results
there of ”
American Accounting Association defines accounting as “ the process of identifying, measuring
and communicating economic information to permit informed judgements and decisions by users
of the information”
Accountancy is the science of recording and classifying business transactions and events
primarily of a financial character and the art of making significant summaries, analysis and
interpretations of those transactions and events and communication of the results to persons who
must make decisions or form judgements (Smith & Ashbuns).

1.3 Need for Accounting :

It is not possible to any human being to remember all business transactions which have
taken place in business - that too, over a period of time say in an year. Even if some one does really
remember all the transactions, he would find it impossible to calculate the net effect of all such
transactions. Hence the need for accounting is raised.
What ever may be the size of organisation whether it is a sole trading concern, partnership or
joint stock company it would like to have information about
1. The nature and amount of expenditure,
2. The nature, source, cause and amount of earnings,
3. The amount and cause of losses, if any
4. The size of capital and causes for its increase or decrease,
5. The nature and value of assets possessed, and
6. The nature and value of liabilities.
Further, the business requires various types of information for both external and internal use.
For example information is required for filing sales tax, income tax and other tax returns and for
preparing statements for decisions to be taken by managers. The question is how to get this
information. A systematic accounting record is the only answer. Thus, the need for accounting
arises on account of practical needs and sometimes legal requirements.
1.4 Functions of Accounts :
1. Recording : Business transactions are analysed in such a way that it may be possible
to determine profit or loss made by the business and its financial condition of a specified
date. Business transactions may relate to the receipt and payment of cash, purchase
or sale of goods on credit, incurring an expense or receiving an income.
 Financial Accounting-I 1A.3 Accountig Introduction
2. Classification : Classification is the second function of accountancy.
The transactions recorded in journal should be classified and the transactions of one
nature should be Placed at one place which we call as ledger.
For example : All purchases of goods placed into purchases A/C, payment of salaries
to salaries A/C etc.
3. Summarising : The classified data should be summarised at least periodically, into a
significant form.
4. Analysing : The summarised financial statements profit and loss account, balance
sheet, statement of changes are analysed with the help of statistical tools such as
averages, percentages, ratio, rates etc.
5. Interpreting : The information in financial statements, are interpreted in terms of set
standards and conventions. Inter preting the results of accounting information involves
communicating and explaining the information to interested parties and decision makers
like owners, creditors, investors, government and management.
1.5 Book Keeping and Accounting :
It is necessary to distinguish between book - keeping and accounting Actually the two are
very closely related and there is no universally accepted line of discrimination. Generally book -
keeping involves the chronological recording of financial transactions in a systematic manner.
According to Northcott “book Keeping is an art of recording in books of accounts the monetary
aspect of commercial or financial transaction”
According to G.A. Lee the Accounting system has two branches : 1. The making of routine
records from day - to - day in the prescribed form and according to set rules of all events which
affect the financial state of the organisation and 2. The summarising of the information contained
in the records, its presentation in significant form to interested parties and its inter pretation as an
aid to decision-making by these parties. Branch 1. Is called book - keeping and branch 2. Is
accounting.
Book - keeping is the record making phase of accounting. The recording of transactions
tends to be routine, repetitive and mechanical. It is a part of accounting. Accounting includes, book
- keeping, preparation of financial statements, audits, cost studies, preparation of budgets, income
- tax and other taxation work, analysis and interpretation of accounting information; as an aid to
decision making.

1.6 Objects of Accounting :

According to American Accounting association the objectives of accounting are to provide
information for the following purposes.
1. Making decisions concerning the use or limited resources including identification of crucial
decision areas and determination of objectives and goals.

2. Effectively directing the controlling of an organisation’s human and materials resources.

3. Maintaining and reporting on the custodian-ship of resources.

4. Facilitating social Functions and control.

 ACHARYA NAGARJUNA UNIVERSITY 1A.4 CENTRE FOR DISTANCE EDUCATION

1.7 Advantages and limitations of Accounting :

The following are the advantages of a properly maintained accounting system
1. The operating results i.e.. profit or loss and the financial state of affairs of an organisation
can be known.
2. Any information required at any time can readily be had from the books of account.
3. With the help of financial statements an organization can evaluate its present performance
with that in the past, and compare it with that of other organisations
4. Accounts form the basis for the settlement of tax liability such as income tax, sales tax
etc.
5. In the events of the business being sold, the accounts are helpful in ascertaining the
value of the business.
6. Accounting is an aid to the management. It is possible to find out exact reasons for the
loss incurred or profit earned. The identification of reasons help the management in
taking necessary steps to avoid losses or to further increase profits.
7. The financial information provided by the accounting system is needed to help the
management in planning and controlling the activities with the help of budgets.
Limitations :
The following are the main limitations of accounting.
1. Accounting records only those transactions which can be measured in monetary terms.
2. Accounting transactions are recorded at cost in the books. The effect of price level
changes is not brought into the books, with the result that comparison of the various
years becomes difficult. For example the sale price of total assets in 2007 would be
much higher than in 1980 due to rising prices, fixed assets being shown to cost and not
at market price.
3. Accounting information may not be realist i.e. as accounting statements are prepared by
following basic concepts and conventions.
4. Accounting statements are influenced by the personal judgement of the accountant. The
method of depreciation, valuation of stock, treatment of deferred revenue expenditure is
decided by the accountant. Such judgement if based on integrity will definitely affect the
preparation of accounting statements.

1.8 Accounting process :

The accounting process begins when a financial transaction takes place. Transaction is
recorded first in a book called ‘Journal’ and later posted in separate accounts maintained for the
purpose in a ledger. At the end of the accounting year whether actual figures are entered accurately
or not in the accounts is tested by preparing a ‘trail balance’ with the help of this trial balance and
other information ‘final accounts’ are prepared to find out the financial result of the operations whether
profit or loss and the financial position, assets and liabilities. In the subsequent year the accounting
books are opened with the previous year’s closing balances. The process thus repeats itself like a
cycle.
 Financial Accounting-I 1A.5 Accountig Introduction

1.9 Branches of Accounting :

The accounting can be classified into the following categories.
1. Financial Accounting
2. Cost Accounting
3. Management Accounting
4. Inflation Accounting
5. Human resources Development Accounting

1.10. Concepts of Accounting :

Accounting is the language of business. To make the language convey the same meaning to
all people, accountants all over the world have developed certain rules, procedure and conventions.
Accounting concepts may be considered as basic assumptions or conditions upon which
the science of accounting is based. They are as follows.
1. Business Entity Concept : This concept implies that a business unit is separate and
distinct from the persons who supply capital to it. Accounting system gives the information about
business only. The entity concept regards the proprietor of the business as just a creditor having a
claim over the assets of the business. The accounting equation i.e, Assets = liabilities + capital is
an expression of the entity concept. In case this concept is not followed affairs of the business will
be mixed up with the private affairs of the proprietor and the true picture of the business will not be
available.
2. Going concern concept : According to this concept it is assumed that business entity
will go on for ever. Transactions are recorded in the books keeping inview the going concern
aspect of the business unit. This assumption provides much of the justification for recording fixed
assets at original cost without reference to their current realisable value. Similarly the going concern
concept supports the treatment of prepaid expenses as assets even though they may be unsaleable.
Prepaid expenses are made assets on the assumption that the business entity will continue in
future and the benefit of prepaid expenses will be utilised in future.
3. Money measurement concept : Money is the only practical unit of measurement that
can be employed to achieve homogenity of financial data. The advantage of expressing business
transactions in terms of money is that money serves a common denominator by means of which
heterogeneous facts about a business can be expressed in terms of numbers, i.e. money, which
are capable of additions and subtractions.

The money measurement concept restricts the scope of accounting because it is not
capable of recording transactions which cannot be expressed in terms of money. For example :
if there is a strike in the factory or the production manager is not in good terms with the sales
manager, as these can not be measured in money terms. Accounting therefore can not record
them. Similarly it does not take care of the effects of inflation because it assumes a stability of
the money measurement unit.
Cost Concept : All assets are recorded in the books at the price paid to acquire it. Its value
 ACHARYA NAGARJUNA UNIVERSITY 1A.6 CENTRE FOR DISTANCE EDUCATION
is systematically reduced by charging depreciation. The market value of an asset may change with
the passage of time but for accounting purpose it continues to be shown in the books at its book
value i.e. the cost at which it was purchased minus depreciation provided up to date. The cost
concept has the advantage of bringing objectivity in the accounts. Information given in the financial
statements is not influenced by the personal bias or judgement of those who furnish such statements.
Dual Aspect Concept :
This is the basic concept of accounting. According to this concept every financial transaction
involves a two - fold aspect. 1) Yielding of a benefit and 2) Giving of that benefit. For example, if a
business has acquired as asset, it must have given up some other asset such as cash. There
must be a double entry to have a complete record of each business transaction, an entry being
made in the receiving account and an entry of the same amount in the giving account. The receiving
account is termed as debtor and the giving account is called creditor. Thus every debit must have
a corresponding credit and vice versa and upon this dual aspect has been raised the whose
superstructure of Double Entry System of Accounting. The Accounting Equation is based on dual
aspect concept.
Assets = Liabilities + Capital
Accounting equation demonstrates the fact that for every debit there is an equivalent credit.
Accounting period Concept : Even though it is assumed that the business will continue for
a long period, almost indefinitely; the businessman cannot postpone the ascertainment of its profit
and financial position indefinitely. So it is reasonable to devide the life of the business into accounting
periods so as to be able to know the profit or loss of each such period and the financial position at
the end of such a period. Normally accounting period adopted is one year. However for internal
purposes accounts can be prepared even for shorter periods.
The principal of segregating capital expenditure from revenue expenditure is based on the
accounting period concept. The revenue expenditure for a particular period is transferred to the
P & L A/c of that period whereas capital expenditure is carried forward to the extent to which its
benefit extents in future accounting periods.
Realisation Concept : According to this concept, revenue is considered as being earned on
the date at which it is realised, Take into account realised profit but donot take into account unrealised
profit is the summary of this concept

1.11. Conventions of Accounting :

The terms conventions denotes customs or traditions which guide the accountant while
preparing the accounting statements the following are the important accounting conventions.
1. Convention of Consistency
2. Convention of full disclosure
3. Convention of conservation
4. Convention of Materiality.
Convention of Consistency : Accounting rules, practices and conventions should be
 Financial Accounting-I 1A.7 Accountig Introduction
continuously observed. The results of different years will be comparable only when accounting
rules are continuously adhered from year to year. For example the principle of “valuing stock at
cost or market price which ever is lower should be followed year after year to get comparable
results.
Convention of full Disclosure : According of this convention all accounting statements
should be honestly prepared and all significant information should be made. All information which is
of material interest to proprietors, creditors and investors should be disclosed in accounting
statements. The convention is becoming popular these days because most of big business units
are in the form of joint stock companies here ownership is diverse from management. The companies
Act 1956 makes simple provisions for the disclosure of essential information that there is no change
of any material information being left out.
Convention of conservatism : Conservatism means taking the gloomy view of a situation.
It compels the business man to take all precautions for risks of future. It says anticipate no profits
but provide for all possible losses. For ex. closing stock is valued at cost or market price whichever
is lower. If market price is higher than the cost the higher amount is ignored in accounts and closing
stock will be valued at cost which is lower than the market price and vice versa.
Thus the principle of conservation is inherent in the valuation of stock.
Convention of Materiality : Whether something should be disclosed or not in the financial
statements will depend on whether it is material or not Materiality depends on the amount involved
in the transaction. For ex. Minor expenditure of Rs 10 for the purchase of a waste basket may be
treated as an expense of the period rather than an asset.
The term materiality is a subjective term. The accountant should record an item as material
even though it is of small amount if its knowledge seems to influence the decision of the proprietors
or auditors or investors.
Parties interested in Accounting information :
Accounting information is useful to various parties. They are :
1. Owners : Owners assume the primary risk of business by investing their funds in it.
Naturally they are interested in obtaining information about the operations of their business how
much profit it earned and what is the position of their capital. They also use the accounting to
evaluate the managements performance and to compare their enterprise with others.
Managers : Accounting reports are important to manager for basing their decisions or for
evaluation, the result of their decisions or for controlling the activities of the business. In addition to
external financial statements managers need detailed internal reports, production wise, sales wise
etc. Accounting reports for managers are prepared much more frequency than external reports
and are usually available only for internal purposes.

Creditors and Bankers : Creditors and Bankers want to know the solvency of the concern
so as to satisfy themselves that their money will be safe and that they can expect repayment in
time.
Prospective Investors : Prospective investors who wants to invest their money in the firm
wants to make a careful analysis of the financial statements of that business so as to know how
safe and rewarding the proposed investments will be.
 ACHARYA NAGARJUNA UNIVERSITY 1A.8 CENTRE FOR DISTANCE EDUCATION
Employees : The employees of large organisation are interested in the results of their
organisation operations. They use the accounting data to know whether they are getting a fair
shape of the resources distributed by the organisation.
Governments : Numerous governmental agencies, both state and central are interesting in
the accounts of concerns for the purpose of collecting taxes, for exercising control, for granting
licenses or loans, for determining whether welfare measures and social security benefits to their
employees are observed or not etc.
Financial analysts : Many investment decisions are made on the advice of financial analysts
who are experts in analysing accounting reports.
Researchers : Financial statements are of immense use to research scholars who want to
make a study of financial operations.
Consumers : Consumers do too, are interested in knowing about the concern’s pricing
policy, quality of goods etc.

1.12. Summary :
Business is a bundle or a series of transactions. The effects of these transactions must be
brought into books of accounts and summarised so as to find out the result of the operations and
the financial state of affairs of the business. Accounting involves different types of work like identifying
the transactions, measures in terms of money, classifying according to their nature and recording
in the books of accounts. These recorded transactions are summarised periodically in the form of
financial statements, and analysing them with the help of statistical tools, Interpreting according to
conventions and communicating to the interested parties in the form of reports.

1.13. Self Assessment Questions

1. What are the functions of the Accountancy ?
2. Write about the Accounting concepts.
3. Comment on the following.
a) Realisation concept
b) Consistency and conservatism of Accounting.
4. What is the difference between Accounting and Book keeping ?
5. Discuss Money measurement concept and material concept as applied in Financial
Accounting.
6. What are different branches of accounting ?
7. Define Accounting state its functions and branches. How is it different from book -
keeping.
8. Explain accounting, principles briefly.
9. Limitations of Accounting.
 Financial Accounting-I 1A.9 Accountig Introduction
10. Define Accountancy.
11. Scope of Accounting.
12. What is accounting process ?
13. Write about the accounting conventions.

1.14 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

- Dr. Ch. Suravinda

 Financial Accounting - I 1B.1 Double Entry System

LESSON - 1 B

DOUBLE ENTRY SYSTEM

1. b.0. Objects :
By going through this lesson the student can know about Single entry system, Double
entry system, Accounts and its classification structure.

structure
1.b.1 Single entry system
1.b.2 Limitation of single entry
1.b.3 Double entry system.
1.b.4 Accounts & its classification
1.b.5 Advantages of Double entry system
1.b.6 Diffrence between single entry system and Double entry system.
1.b.7 Summary.
1.b.8 Questions.
1.b.9 Suggested Readings
Business transactions can be recorded in the books in two methods. 1. Single entry system.
2. Double entry system

1.b.1 Single entry system

Single entry means that it is a method of maintaining accounts which does not exactly follow
the principles of double entry system. It does not mean that there is one entry for each transaction.
But it simply means that principles of the double entry system are not being followed for all
transactions. Under this method usually the personal accounts of the debtors and creditors are
kept and impersonal accounts - real and nominal accounts may not be maintained in the books.
Single entry is not any particular system of accounting but rather, the double entry system in an
incomplete and disjointed form.

1.b.2. limitation of single entry system :

Following are the limitations of single entry.
1. It is not a scientific method of accounting because it does not record the two - fold aspect
of each transaction.
2. No trial balance can be prepared as it does not record the dual aspect of each transaction
so the arithmetical accuracy of the books cannot be checked.
3. In the absence of nominal accounts, trading and profit and loss account cannot be
prepared.
4. In the absence of real accounts, it is not possible to know the exact financial position of
the business on any particular day by preparing a balance sheet.
 Acharya Nagarjuna University 1B.2 Centre for Distance Education
5. Internal check is not possible so the possibility of Fraud or misappropriation is greater in
case of single entry than in the case of double entry system.
6. Accounts prepared on the basis of the single entry do not inspire confidence in out siders
owing to the lack of any test for their arithmetical accuracy. So, information obtained from
accounts maintained on the basis of the single entry will be taken with doubt.
7. It is difficult to ascertain the value of the business specially of goodwill if the propriter
wishes to sell his business.
Double Entry System :
We have seen earlier that every business transaction has two aspects i.e when we receive
something we give something else in return For example when we purchase goods for cash we
receive goods and give cash in return ; similarly in credit sale of goods, goods are given to the
customer and the customer becomes debtor for the amount of goods sold to him. This method of
writing every transaction in two accounts is known as double entry system of Accounting one
account is given debit while the other account is given credit with equal amount. Thus, on any date,
the total of all debits must be equal to the total of all credits because every debit has a corresponding
credit.
An account is a summarised record of transitions relating to particular person or thing. Accounts
are classified as personal Accounts and impersonal Accounts. Impersonal Accounts are further
classified as real Accounts and Nominal Accounts.
1. Personal Accounts : Accounts which relate to persons, both natural and artificial are called
personal Accounts. They show dealings with persons. A separate account is maintained for
each person. For example, Ganesh Account, Andhra Bank Account etc.
2. Real Accounts : Accounts which show dealing in assets or properties are called ‘Real
Account’. A separate account is kept for each property some examples are Machinery Account,
Furniture account, cash Account etc. They are called ‘real’ accounts and they represent
things of value owned by the business.
3. Nominal Accounts : Nominal Accounts record expenses, losses and incomes. Separate
accounts are maintained for each item of expenses or incomes. example, salaries, wages,
Rent etc. They are called ‘Nominal’ accounts because they are accounts only for names
sake.
Rules of the Double Entry system :
There are separate rules of the double entry system in respect of personal, real and nominal
accounts which are discussed below.
1. Personal Accounts :
As we have already seen these accounts record a business dealings with persons or firms.
The person receiving something is given credit. For example if Anil sells goods to Ajay on credit
Ajay Account will be given debit (in Anil books) as he is the receiver of goods and Anil’s Account will
be credited (in Ajay books) as he is the giver of goods. When Ajay makes the payment for these
goods Anil’s Account will be debited in Ajay’s books as he is the receiver of cash and Ajay’s Account
will be given credit in Anil’s books as he is the giver of cash. So the rule is Debit the receiver and
credit the giver.
 Financial Accounting - I 1B.3 Double Entry System
2. Real Accounts :
These are the accounts of assets. Asset entering the business is given debit and asset
leaving the business is given credit. For example, when goods are sold for cash, cash account will
be given debit as cash comes in and goods Account will be credited as goods go out. So the rule is
debit what comes in and credit what goes out.
3. Nominal accounts :
These accounts deal with expenses, incomes, profits and losses. Accounts of expenses
and losses are debited and accounts of incomes and gains are credited. For example, When
salary is paid to employee, salary Account will be debited as it is an expense and cash Account will
be credited as it goes out, similarly, when Interest is received, cash account will be debited as cash
is received and Interest Account will be credited as it is an income. Thus the rule is debit all expenses
and losses and credit all incomes and gains.

The rules of double entry system are shown in the following chart.
RULES OF DOUBLE ENTRY
Personal Accounts Real Accounts Nominal Accounts

Debit Credit Debit Credit Debit Credit

Receiver giver What comes What goes Expenses Incomes

in Out and losses and
gains
Analysis of Transaction :
To make a correct record of the transactions, each transaction must be analysed. The
following questions may be asked in this respect.
1. Which are the two accounts involved in the transaction to be recorded ?
2. Whether the two accounts involved in the transaction are personals, real or nominal ?
3. What rules of debit and credit are applicable to the accounts involved.
4. Which account should be debited or credited?
The above method will make the recording of transactions more simple and easy. The following
chart explains the procedure of analysing the transactions.

Analysis of Transactions :
 Acharya Nagarjuna University 1B.4 Centre for Distance Education

Transaction Two Accounts Classification Rule ofAccount Account

Involved of Accounts Debit Debited Credited
& Rs. Rs.
Credit

1. Started business Cash Real Debit What Cash

with Rs.1,00,000 capital personal comes in Capital
Credit the giver
2. Purchased Furniture Real Debit what come Furniture

Furniture for Cash Real in Credit what Cash

Rs 20,000 goes out
3. Paid Salaries Salaries Nominal Debit the expenses salary
Rs.3,000 Cash Real Credit what goes Cash
out
4. Commission Commission Normal Credit the incomes Commission
Received Rs.2,000 Cash Real Debit what Cash
comes in
5. Goods purchased goods Real Debit what goods
come in
Rs.20,000 cash Real Credit what
goes out cash
6. Sold goods to Rao Personal Debit the Rao
Rao receiver
Rs.10,000 goods Real credit goods
what goes out

Advantage of Double Entry system :

The following are the advantages of Double entry system.
1. It provides a complete record of every transaction.
2. It provides an arithmetical check on the records as the total of debit entries must be
equal to the total of credit entries.
3. The amount due to the concern and amount due by the concern to outsiders can be as
certain by the personal accounts.
4. With the help of nominal accounts profit and loss account can be prepared for ascertaining
the profit, or loss of the concern in a particular year.
5. With the help of real accounts, Balance sheet can be prepared for knowing the financial
state of affairs of the concern on the closing day of the year.

6. The scope for committing errors and frauds can be reduced to minimum level.
 Financial Accounting - I 1B.5 Double Entry System

Difference between single entry system and Double Entry system :

The following are the main differences.
Single entry Double entry
1. It is an incomplete and unscientific 1. It is a complete and scientific method of
method of recording business recording business transactions.
transactions.
2. Only personal accounts are prepared.
2. All accounts, personal real and nominal
accounts are prepared.
3. It is not a reliable system of accounting 3. It is a reliable system of accounting
4. Trial balance cannot be prepared for 4. Trial balance can be prepared
checking the arithmetical accuracy
5. Profit & loss account and balance sheet
can not be prepared under this system. 5. Profit & loss account and Balance sheet
can be prepared under this system.

1.b.7. Summary :
Business transactions can be recorded in the books in two methods. 1) Single entry, which
is an incomplete and unscientific method of accounting. 2) Double entry system is a systematic
way of recording business transactions. Total accounting system has classified into two groups,
one is personal accounts, other is imperson accounts which is again divided into real and nominal
accounts. There are three different principles to record transactions in these accounts.

1.b.8. Self Assessment Questions :

1. Write down Double entry system of book-keeping and its advantages.
2. How can you classify the accounts ? Write down the rules of debit and credit.
3. What is single entry system ? What are its limitations ?

1.B.9 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

- Dr. Ch. Suravinda

 Financial Accounting - I 2.1 Journal

LESSON - 2

JOURNAL
2.0 Objects : After going through this lesson the student can know how the business transactions
are recorded in the journal and how the journal prepared.

Structure :
2.1. Journal
2.2. Business transactions.
2.3. Journal Entry.
2.4. Method of writing a Journal entry
2.5. Advantages of Journal.
2.6. Illustrations
2.7. Summary
2.8. Questions
2.9. Exercises
2.10 Suggested Readings

2.1. Journal :
Business transactions are recorded at first in the Journal. A transaction may be defined as a
transfer of money, goods or services from one individual to an other. The term Journal is derived
from the French word ‘Jour’ which means a day. Journal therefore, means a daily record of business
transactions. Journal is a book of original entry because transaction is first written in the journal in
Chronological order as they occur, from which it is posted to the ledger at the end of a week,
fortnight or month. The process of recording in the ‘Journal’ is called ‘Journalising’ and the various
entries made in the journal is called ‘Journal Entries’.
If two or more transactions of the same nature occur on the same day then such transactions
can be entered in the journal in the form of a combined journal entry instead of making a separate
entry for each transaction. Such type of entry is known as a compound journal entry.

2.2. Business transactions :

Business transactions may be classified into two types 1. Cash transactions 2. Credit
transactions
Cash transactions : If purchase of goods, sale of goods, expenses paid, Income received
etc., are for cash then those transactions are known as cash transactions. In case of cash
transactions one of the account effected will be cash Account and the other account which should
be debited or credit will depends on the nature of the transaction for ex : Purchase of good from X
for cash in this transaction personal account i.e. ‘x’ should not be taken, one account is cash and
the other account is goods.
 Acharya Nagarjuna University 2.2 Centre for Distance Education

Credit transaction : If the payment is deferred for purchase of goods or sale of goods then
it is known as credit transaction. In a transaction, name of the supplier or customer is give and it
does not contain the word ‘for cash’ then it is a credit transaction. In case of credit transaction one
of the account effected is personal account and the other will be decided depending upon the
transaction. See the following examples. goods purchased from Moorthy. Furniture sold to Madhu
are credit transactions. If the transaction is goods purchased from Moorthy for cash then it is a
cash transaction.
2.3. Journal Entry :
As we have already seen that every transaction of business at first, entered in the journal in
the form of a journal Entry. The ruling of the journal is as follows.

JOURNAL
Date Particulars L.F. Dr. Cr
Amount Amount
Rs Rs.
Year Name of the Account to
be debited Dr.
Month/Date To Name of the
Account credited
(Narration)
Column 1 (Date) The date of the transaction on which is takes place is written in this column.
The year is written only in the first entry appearing on each page.
Column 2. (Particulars) In this column, the name of the account to be debited is written first
with the word ‘Dr’. In the next line, the account to be credited is written preceded by the word “To”
leaving a few spaces away from the first line. Here we need not write the word ‘Cr’ because the
word ‘To’ itself will indicate that the account is credited. An explanation of the entry known as
“Narration” is also recorded below the line giving credit to the account.
Column 3 (L.F.) L.F. Stands for ledger folio which means page of the ledger. In this column
the page numbers on which the related account appears in the ledger is entered.
Column 4 (Dr. Amount) In the column, the amount to be debited against the ‘Dr’ account is
written
Column 5 (Cr. Amount) In this column the amount to be credited against the ‘Cr’ account is
written
2.4. Method of writing a Journal Entry :
1. Read the transaction carefully from the business entity point of view and determine the
two accounts that are affected by the transaction.
2. Find out the class to which each account relates i.e. whether it is a personal account or
a real account or a nominal account.
3. Now recollect the rules of debit and credit and apply the concerned rule to decide which
account is to be debited and which to be credited.
This can be clearly understood with the following table
Transactions Two Accounts Classification Rule of Explanation Account Account to
involved of Debit to be be credited
Accounts Credit Debited
Cash Real Debit what comes in cash entered the Cash A/c ---
Started business business
with Rs.1,00,000 Capital Personal Credit the giver Proprietor is giver of Capital A/c
cash
Purchased Machine Machine Real Debit what comes in Machine entered Machine A/c
for Rs.10,000 the business --- ---
Financial Accounting - I

Cash Real Credit what goes out Cash go out Cash A/c
of business -
goods purchased goods Real Debit what comes in goods entered Goods A/c --
from Vasu on the business
Credit Rs.5,000 Vasu Personal Credit the giver Vasu is giver Vasu A/c
of goods
Cash A/c
2.3

Sold goods Cash Real Debit what comes in Cash entered the ---
Rs.3,000 business
goods Real Credit what goes out goods go out of --- Goods A/c
business
Paid salaries Salaries Nominal Debit the expenses Salaries are expenses Salary A/c ---
to staff Rs.5,000 & losses
Cash Real Credit what goes out Cash goes out of --- Cash A/c
business
Journal

Commission Cash Real Debit what comes in Cash comes into the Cash A/c
Received business
Rs.1,000 Commission Nominal Credit the incomes Commission received Commission
& gains is an income A/c
Sold goods to Anil Personal Debit the receiver Anil is the receiver of Anil A/c ---
goods
Credit what goes out Goods go out of
 Acharya Nagarjuna University 2.4 Centre for Distance Education

2.5 Advantages of Journal :

1. Journal is a self explanatory book. It explains all the business transactions.

2. As all the business transactions are entered in the chronological order of their occurrence,
any transaction can be referred later easily if necessary.
3. In case of any conflict about a transaction, it act as a proof.
4. It acts as a base for the preparation of a ledger.
5. Through journal, the principle of double entry can be understood clearly with ease.
2.6. Illustrations :
Illustration I (Cash transactions)
Journalise the following transactions :
Rs.
Jan.1 Ajay started business with 2,00,000
Jan 2 Furniture purchased for 20,000
Jan 3 Purchased goods for 50,000
Jan 4 Sold goods for 30,000
Jan 5 Goods returned to supplier 500
Jan 6 Goods returned by customer 200
Jan 7 Salary paid 2,000
Jan 8 Commission received 1,000
Date Particulars L.F. Dr.
Cr.
Amount Amount
Rs. Rs.
Jan
Ist Cash Account Dr. 2,00,000
To Ajay’s capital Account 2,00,000
(Being Ajay contributed
Rs.2,00,000 as his capital)
2nd Furniture Account Dr. 20,000
To Cash Account 20,000
(Being Furniture purchased for business)
3rd Goods Account Dr 50,000
To Cash Account 50,000
(Being goods purchased for cash)
4th Cash Account Dr 30,000
To goods Account 30,000
(Being goods sold for cash)
 Financial Accounting - I 2.5 Journal
5th Supplier’s Account Dr 500
To Goods Account 500
(Being goods returned to supplier)
6th Goods Account Dr
To customer’s account
(Being goods received from customers).
7th Salaries Account Dr 2,000
To cash account 2,000
(Being salaries paid)
8th Cash account Dr 1,000
To Commission account 1,000
(Being commission received)
1. Illustration 2. (Credit transactions).
Rs.
Feb 1. Purchased Furniture from Pranav & Co. 10,000
Feb 2. Sold goods to Pavan 7,500
Feb 3. Bought typewriter from Godrej & Co. 10,000
Feb 4. Bought goods from Akhil 5,000
Feb 5. Sold goods to Nikhil on credit 12,000
Feb 6. Bought goods from Sai on Credit 15,000
Feb 7. Bought goods on account from Sobhan 8,000
Feb 8. Sold goods on account to Nagesh 6,500
Solution :
Date Particulars L.F. Dr. Cr.
Amount Amount
Rs. Rs.
Feb 1 Furniture Accounts Dr 10,000
To Pranav & Co 10,000
(Being Furniture purchased on credit)
Feb 2. Pavan Account Dr. 7,500
To goods account 7,500
(Being goods sold on credit)
Feb 3. Type writer Account Dr. 10,000
To Godrej & Co 10,000
(Being typewriter purchased on credit)
Feb 4. Goods Account Dr 5,000
To Akhil account 5,000
(Being goods purchased from
 Acharya Nagarjuna University 2.6 Centre for Distance Education

Akhil on credit)
Feb 5. Nikhil account Dr 12,000
To goods account 12,000
(Being goods sold on credit)
Feb 6 Goods Account Dr 15,000
To Sai account 15,000
(Being goods purchased
from Sai on credit)
Feb 7 Goods Account Dr 8,000
To Sobhan account 8,000
(Being goods purchased
from Sobhan on credit)
Feb 8 Nagesh account Dr 6,500
To goods account 6,500
(Being goods sold on
credit to Nagesh)
The student is advised to note the following points here,
1) When the name of the person is given in a transaction and when the word ‘cash’ does not
appear, it is implied that it is a credit transaction. e.g. purchased furniture from P.N. Rao & Company
Rs.5,000. At the same time when the name of the party does not appear it is always a cash
transaction even if the word ‘cash’ is not mentioned in the transaction e.g. goods purchased
Rs.10,000
In the illustrations given above ‘goods account’ is used while recording the dealings in ‘goods’
viz, purchases, sales, purchase returns and sale returns. In practice the ‘goods account’ is not
maintained. Goods is valued at Market Price or cost Price which ever is less. We will discuss this
principle later. Goods is devided into four accounts as, when we purchased goods, purchases
account, when we sold goods sale account, when we return goods purchase returns account,
when the customer return goods, sales returns account should be give affected instead of goods
account.

Illustration 3. (Expenses and Incomes)

Journalise the following transactions :
Rs.
Dec 1 Paid Salaries 10,000
Dec 2 Paid Rent to landlord Raghava 5,000
Dec 3 Paid commission 1,000
Dec 4 Received Rent 2,000
Dec 5 Received Commission 1,500
 Financial Accounting - I 2.7 Journal

Dec 6 Stationery purchased 1,000

Dec 7 Postage paid 100

Date Particulars L.F. Dr. Cr.

Amount Amount
Rs. Rs.
Dec 1 Salaries Account Dr 10,000
To Cash Account 10,000
(Being salaries paid)
Dec 2 Rent Account Dr 5,000
To cash account 5,000
(Being Rent paid)
Dec 3 Commission paid Account Dr 1,000
To cash account 1,000
(Being Commission paid)
Dec 4 Cash Account Dr 2,000
To Rent Account 2,000
(Being Rent Received)
Dec 5 Cash Account Dr 1,500
To Commission
Received Account 1,500
(Being Commission received)
Dec 6 Stationery Account Dr 1,000
To cash Account 1,000
(Being Stationery paid)
Dec 7 Postage Account Dr 100
To cash Account 100
(Being postage paid)

Here the student is advised to note that transactions relating to payments of expenses
and receipts of incomes are recorded through the ‘expense account’ or the ‘Income account’
concerned and not through the account of the person involves, since no debtor/Creditor
relationship is created. In the above example rent paid to Raghava.
In respect of certain items like rent, commission etc, where both payments and receipts
take place, two separate accounts may be maintained one for recording payments and the
other for receipts e.g. commission paid account and commission Received Account.
 Acharya Nagarjuna University 2.8 Centre for Distance Education
Illustration 4. (Transactions with the proprietor)
Enter the following transactions in the journal.
Rs.
1. Madhuri commenced business with a capital of 1,00,000
2. She withdraw for his personal use 5,000
3. She introduced additional capital 50,000
4. She took goods for personal use 1,000

Date Particulars L.F. Dr. Cr.

Amount Amount
Rs. Rs.
1. Cash Account Dr 1,00,000
To Capital Account 1,00,000
(Being the business started
with the capital of Rs.1,00,000)
2. Drawing Account Dr. 5,000
To cash Account 5,000
(Being cash withdrawn for
personal use).
3. Cash account Dr 50,000
To Capital Account 50,000
(Being additional capital introduced)
4. Drawings Account Dr 1,000
To Goods accounts 1,000
(Being goods withdrawn
for Personal use)

We have seen how different types of business transactions are recorded through the Journal
and shall now take up some comprehensive problems.
Illustration 5 :
Journalise the following transactions Rs.
Jan1 Mr. rao commenced business with 10,00,000
Jan 1 Purchased Furniture 50,000
Jan 1 Deposited into Bank 5,00,000
Jan 2 Purchased goods 50,000
Jan 2 Postage paid 1,000
Jan 2 Stationery purchased 2,000
 Financial
Jan 3 Accounting
Purchased- Igoods from Arun2.9 Journal
60,000
Jan 3 Sold goods 20,000
Jan 4 Commission paid 500
Jan 5 Cash withdrawn for personal use 10,000
Jan 6 Type writer purchased 5,000
Jan 7 Sold goods to Varun 70,000
Jan 8 Wages paid 10,000
Jan 9 Goods taken for personal use 2,000
Jan 10 goods returned to Arun 1,000
Jan 11 goods returned from Varun 1,500
Jan 12 Motor vehicle purchased from T.V.S. 50,000
Date Particulars L.F. Dr.
Cr.
Amount Amount
Rs. Rs.
Jan 1 Cash Account Dr 10,00,000
To Capital Account 10,00,000
(Being capital introduced
into business)
Jan 1 Furniture Account Dr 50,000
To Cash Account 50,000
(Being furniture purchased)
Jan 1 Bank Account Dr 5,00,000
To Cash Account 5,00,000
(Being cash deposited into Bank)
Jan 2 Purchases account Dr 50,000
To Cash Account 50,000
(Being postage paid)
Jan 2 Stationery Account Dr 2,000
To Cash Account 2,000
(Being stationery purchased)
Jan 2 Postage Account Dr 1,000
To Cash account 1,000
(Being postage paid)
Jan 3 Purchases Account Dr 60,000
To Arun Account 60,000
(Being goods purchased or credit)
Jan 3 Cash Account Dr 20,000
To Sales Account 20,000
(Being goods sold)
 Acharya Nagarjuna University 2.10 Centre for Distance Education

Jan 4 Commission Account Dr 500

To cash Account 500
(Being commission paid)
Jan 5 Drawings account Dr 10,000
To Cash Account 10,000
(Being cash withdrawn
for personal use)
Jan 6 Type writer account Dr 5,000
To Cash Account 5,000
(Being Type writer purchased)
Jan 7 Varun Account Dr 70,000
To Sales Account 70,000
(Being goods sold to Varun)
Jan 8 Wages Account Dr 10,000
To Cash Account 10,000
(Being wages paid)
Jan 9 Drawings Account Dr 2,000
To Purchases Account 2,000
(Being goods taken for
personal use)
Jan 10 Arun Account Dr 1,000
To Purchase returns A./c 1,000
(Being goods returned to Arun)
Jan 11 Sales Returns Account Dr 1,500
To Varun Account 1,500
(Being goods returned by Varun)
Jan 12 Motar Vehicle Account Dr 50,000
To T.V.S. & Co. 50,000
(Being Motar Vehicle
purchased on credit)

In a going concern the balances of the previous year, appearing in various accounts are
brought forward at the beginning of the new accounting year by means of a journal entry known as
opening entry to incorporate the previous balances in a new set of accounts. All the Assets
Accounts are debited and liabilities Accounts are credited. The difference between the assets and
liabilities is credited to capital account.
 Financial Accounting - I 2.11 Journal

Illustration 5 (Opening entry)

Pass the opening entry in the books a trader.
Jan 1. 2007
Debit balances : Cash Rs.80,000, Bank Balance 2,50,000
Stock Rs.2,00,000, Furniture Rs.14,000, Buildings Rs.5,00,000, Debtors Rs.40,000
Creditors Rs.50,000, Bill payable 40,000

Solution :
Date Particulars L.F. Dr. Cr.
Amount Amount
Rs. Rs.
Jan 1 Cash Account Dr 80,000
Bank Account Dr 2,50,000
Stock Account Dr 2,00,000
Furniture Account Dr 14,000
Buildings Account Dr 5,00,000
Debtors Account Dr 40,000
To Creditors Account 50,000
To Bills Payable Account 40,000
To Capital Account 9,94,000
(Balancing fig.)
(Being balances brought in from last year)

Illustration - 6
Journalise the following transactions in books of M/s Rohit & Co.
Jan, 1-2007
Assets : Furniture Rs.50,000, Machinery Rs. 1,00,000,
Stock Rs.40,000, Cash Rs.5,500 Bank Rs.75,000
Liabilities : Creditors Rs.80,000 Rs.
Jan 1 Purchased goods from Amit 45,000
Jan 3 Sold goods 15,000
Jan 5 Paid Creditors by Cheque 5,000
Jan 10 Deposited into Bank 28,000
Jan 13 Sold goods to Ramvilas 30,000
Jan 15 Paid for postage 1,000
Jan 16 Received cash from Debtors 5,000
Jan 17 Paid telephone charges 1,000
Jan18 Cash sales 15,000
Jan19 Purchased goods 20,000
Jan 20 Bought goods from Arun for cash 30,000
Jan 21 Goods returned to Amit 1,000
 Acharya Nagarjuna University 2.12 Centre for Distance Education
Jan 22 goods returned by Arun 500
Jan 23 Travelling expenses paid 1,000
Jan 24 Old Furniture sold (book value is Rs.6,000) 5,000
Jan 31 Paid Salaries 10,000
Wages 5,000
Rent 4,000

In the books of M/s. Rohit & Co

Journal
Date Particulars L.F. Dr. Cr.
Amount Amount
Rs. Rs.
2007
Jan 1 Furniture Account Dr 50,000
Machinery Account Dr 1,00,000
Stock Account Dr 40,000
Cash Account Dr 5,500
Bank Account Dr 75,000
Debtors Account Dr 30,000
To Creditors Account 80,000
To Capital Account 2,20,500
(Balancing figure)
(Being Assets and liabilities
brought forward from last year)

Jun 1 Purchases account Dr 45,000

To Amit Account 45,000
(Being goods purchased from Amit)
Jun 3 Cash Account Dr 15,000
To Sales Account 15,000
(Being goods sold for cash)
Jun 5 Creditors Account Dr 5,000
To Bank Account 5,000
Jun 10 Bank Account Dr 28,000
To Cash Account 28,000
(Being Cash deposited into Bank)
Jun 13 Ram vilas Account Dr 30,000
To Sales Account 30,000
(Being goods sold on Credit)
 Financial Accounting - I 2.13 Journal

Jun 15 Postage Account Dr 1,000

To Cash Account 1,000
(Being Postage paid)
Jun 16 Cash Account Dr 5,000
To Debtors Account 5,000
(Being cash received from Debtors)
Jun 17 Telephone charges Account Dr 1,000
To Cash Account 1,000
(Being Telephone Charges paid)
Jun 18 Cash Account Dr 15,000
To Sales Account 15,000
(Being Cash Sales)
Jun 19 Purchases Account Dr 20,000
To Cash Account 20,000
(Being goods purchased)
Jun 20 Purchases Account Dr 30,000
To Cash Account 30,000
(Being goods purchased for cash)
Jun 21 Amit Account Dr 1,0000
To purchase returns account 1,000
(Being goods returned to Amit)

June 22 Sales returns Account Dr 500

To Arun Account 500
(Being goods returned by Arun)
June 23 Travelling expenses Account Dr 1,000
To Cash Account 1,000
(Being Travelling exp. paid)
June 24 Cash Account Dr 5,000
Loss on sale of furniture A/c Dr 1,000
To Furniture Account 6,000
(Being old furniture sold
and loss incurred)
June 31 Salaries Account Dr 10,000
Wages Account Dr 5,000
Rent Account Dr 4,000
To Cash Account 19,000
(Being various expenses paid)
 Acharya Nagarjuna University 2.14 Centre for Distance Education

2.7 Summary :
Business transactions are at first written in a book called journal. Business transactions
are of two types 1) Cash transactions 2) Credit transactions. If the name of the person is
given and it does not contain the word ‘for cash’ then it is a credit transaction. At the same
time if the name of the person does not appear it is always a cash transaction. In a going
concern the balances of the previous year relating to assets and liabilities brought forward
into the current years books with a journal entry called opening entry.
2.8. Self Assessment Questions :
1. Write down the advantages of using a journal.
2. List out 10 Nominal accounts.
3. What are personal accounts.
4. Give the form of Journal.
5. What is narration ?
6. What are the steps to be taken for journalising.
7. What are the important points you have to bear in mind, while writing journal entries
?
2.9. Exercises :
1. Prepare a journal for the following transactions.
2007 Rs.
Jan 1 Introducted Capital 50,000
Jan 10 Bought goods for cash 18,000
Jan 12 Withdrew cash for personal use 5,000
Jan 15 Sold goods to Ram for cash 7,000
Jan 18 Goods taken for personal use 1,000
Jan 20 Paid Mohan his salary 2,000
2. Journalise the following transactions.
2007 Rs.
Jan 1 Rent Received 1,000
Jan 2 Purchased office furniture 2,000
Jan 3 Machinery installation expenses 600
Jan 4 Paid into Bank 1,500
3. Journalise the following transactions in the books of A.
2007 Rs.
Jan 1 Paid wages to Srinadh 3,000
Jan 2 A brought capital 1,00,000
 Financial
Jan 3 Accounting
Purchased - I Machinery 2.15 Journal
30,000
Jan 4 Paid into bank 70,000
Jan 5 Purchased furniture on credit from Z & Co 40,000
Jan 6 Paid cheque to Z 25,000
4. Journalise the following transactions in the books of Sateesh.
2007 Rs.
Sept. 1 Sateesh commenced business with 75.000
Sept 2 Deposited into Bank 30,000
Sept 5 Purchased furniture and paid by cheque 1,500
Sept 7 Goods purchased from Sri Vidya 20,000
Sept 9 Goods returned to Sri vidhya 400
Sept 13 Paid to Sri vidhya in full settlement 19,500
Sept 17 Goods sold to Prakash 500
Sept 20 Goods distributed by way of free samples 1,000
Sept 24 Commission received 250
Sept 30 Paid salaries 5,000
5. Journalise the following transactions in the books of Rajesh.
2007 Rs.
Mar 1 Started business with 10,000
Mar 2 Furniture purchased paid by cheque 2,000
Mar 3 Cash drawn from bank for personal use 500
Mar 4 Paid to Ram lal in full settlement of his
debt Rs.6,000/- 5,940
Mar 5 Paid for stationery 200
Mar 7 Paid salaries 2,000
6. Journalise the following transactions in the books of A.
2007 Rs.
Mar 2 Paid to Satish in full settlement of his
account Rs.3000 2,800
Mar 4 Cash Purchases 2,000
Mar 5 Cash Sales 5,000
Mar 7 Amount received from Aravind 7,000
Mar 8 Cash with drawn from bank for personal use1,000
Mar 9 Stationery purchased 500
Mar 10 Furniture purchased 5,000
Mar 11 Wages paid 700
Mar 12 Goods sold to Rajesh 2,500
Mar 13 Goods purchased from Akash 7,800
Mar 15 Goods returned to Akash 150
 Acharya Nagarjuna University 2.16 Centre for Distance Education
7. From the following information find out the opening capital and pass opening
entry.
Rs.
Cash in hand 1800
Stock 2,400
Bills payable 1,000
Plant and Machinery 1,000
Debtors 500
Creditors 800
Investments 2,000
Loan from X 1,500
8. Journalise the following transactions.
2007 Rs.
1 Interest paid on loan 750
2. Amount received from X whose
account was previously written off 5,000
3. Interest received 2,000
4. Purchases 1,200
5. goods sold to Sri Ram 1,200
6. goods purchased from Hari Ram 800
7. Sales to Y 550
8. goods purchased from Durga & Co for cash 750
9. Sales to Ram Saran 600
10. Purchases from Sai Ram 1,000
11. Cheque Received from Y and 500
allowed discount 50
9. Journalise the following transactions.
2007 Rs.
Jan 1 Commenced business with a capital 4,50,000
Jan 4 Opened current account in Bank 1,50,000
by cheque
Jan 10 Cash purchases 15,000
Jan 12 goods distributed by way of samples 5,000
Jan 15 goods purchased from X 20,000
Jan 20 Paid to X in full settlement 19,000
Jan 24 Commission received 2,500
Jan 25 Withdraw from bank for office use 5,000
Jan 26 Paid commission 500
Jan 27 Paid Rent 3,000
 Financial Accounting - I 2.17 Journal

Jan 31 Paid Salaries 2,500

10. Journalise the following transactions in the books of a Trader. on 1-4-2007.
Cash in hand Rs.8,000; Cash at Bank Rs.25,600/- Stock of goods Rs.20,000; Buildings
Rs.14,000. Debtors Rs.8,100, Creditors Rs.18,300. Mrs Loan Rs. 10,000.
2007 Rs.
Apr. 2 Purchased goods worth 5,000
Apr. 3 Received from debtors 2,646
Discount allowed 54
Apr. 4 Paid to Creditors 5,300
Apr. 5 Paid for Charity 100
Apr.6 Postage 200
Apr. 7 Stationery 250
11. Journalise the following transactions.
2007
Aprl 1 Bought machinery for Rs. 2,40,000
Aprl 2 Installed the above machine, charges paid
being Rs.3,100
Apr. 3 Withdrew cash from bank Rs.5,000 for office use.
Apr. 5 Paid salaries to staff Rs.1,700
Apr. 7 Sold goods to Shyam Rs.7,500
Apr.8 Shyam paid cash Rs.3,000 for partial settlement
12. Pass journal entries for the following transactions.
2007 Rs.
Sept. 1 Bought goods 10,000
Sept 2 Paid commission 200
Sept 3 Received from S, our debtor 390
in full settlement of his account of Rs400
Sept 4 Cheque issued to R, our creditor 3,100
Sept 5 Bank charges 20
Sept 6 Sold goods to Ramesh 2,500
Sept 7 Sold goods 1,000
Sept 8 Purchase returns from Ramesh 100
Sept 9 Purchased Furniture 5,000
Sept 10 Paid Postage 100
Sept 11 Stationery purchased 250
Sept 12 Cash received from Ramesh 2,400
 Acharya Nagarjuna University 2.18 Centre for Distance Education
Sept 13 Cash deposited into bank 5,000
Sept 15 goods taken for personal use 500
13. Give journal entries to record the following transactions.
2007 Rs.
June 1 Misra commenced business
with a capital of 2,50,000
June 1 Purchased a Motor car 1,00,000
June 2 Purchased from Amar 20,000
June 3 Sold goods 75,000
June 4 Returned goods to Amar 100
June 7 Sold goods to Badri 50,000
June 8 Badri returned 150
June 14 Purchased postage stamps 125
June 16 Paid for advertising 750
June 20 Paid office expenses 1,000
June 25 Draw cash for personal use 1,500
June 26 Cash sales 8,500
June 27 Paid insurance premium 2,900
June 30 Paid rent 6,000
June 30 Paid salaries 5,000
June 30 Electric charges 1,500
June 30 Telephone bill 2,300

2.10 SUGGESTED READINGS :

Financial Accoun tancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

- Dr. Ch. Suravinda

 Financial Accounting - I 3.1 Ledger

Lesson-3

LEDGER
3.0 Objectives :
After going through this lesson the student can know what is a ledger ?
How different Accounts are prepared in the ledger, and How the transactions are posted
into ledger Accounts from the journal and how they are balanced ? etc.

Structure :
3.1. Ledger - Introduction
3.2. Formet of Account
3.3. Posting the transactions from journal to ledger.
3.4. Balancing the ledger accounts.
3.5. Interpretation of Accounts.
3.6. Illustrations
3.7. Summary
3.8. Self Assessment Questions
3.9. Exercises

3.10 Suggested Readings

3.1. Introduction :
In the previous chapter we have seen how different transactions are recorded in the Journal.
Business transactions entered in the journal in chronological order of their occurance. The
transactions pertaining to a particular person, asset, expenses or income are recorded at different
places in the journal as they occur on different dates. Hence journal fails to bring the similar
transactions together at one place. To have a consolidated view of the similar transactions different
accounts are prepared in the ledger.
Defintion : A Ledger account may be defined as a summary statement of all the transactions
relating to a person, asset, expenses or income which have taken place during a given period of
time and shows their net effect.
Journal is maintained only to facilitate the passing of entries in the ledger, It cannot give
answers to the following questions.
1) What are the total sales to an individual ?
2) What are the total purchases from an individual ?
 Acharya Nagarjuna University 3.2 Centre for Distance Education
3) What is the amount of profit or loss made during a particular period ?

4) What is the financial position of the firm on a particular date ?

Ledger can give answers to these questions. So every entry recorded in the journal must be
posted into the ledger. For ex: all cash transactions are grouped together and are recorded at one
place under Cash Account in the ledger. The process of entering the transactions, which have
already been recorded in to the journal, in the ledger is technically called posting.

3.2. Form of the Ledger Account :

An account is a summarised record of transactions relating to a particular person or
thing. The ruling of an account is given below.
Name of Account
Dr Cr
Date Particulars F Amount Date Particulars F. Amount
To Name By Name of
of Debit Account
Credit
Account

Each account in the ledger is divided into two equal parts by a vertical line or the account is
in the form of letter ‘T’. The left hand side of the account is known as debit side and the right hand
side is called credit side. Each of the two sides is further divided into four columns for date,
particulars, folio and amount.
The columns of the ledger Account are explained below :
1. The date of each transaction is entered in the date column.
2. The particular column is meant for indicating the name of the account that has got the
other aspect of the transaction. Thus, we write on the debit side the name of the account
indiciated in the credit part of the journal entry with the word ‘To’ before it. On the credit
side the name of the account indicated in the debit part of the journal entry is written
with the word ‘By’ before it.
3. ‘F’ stands for ‘Folio’. The ‘Folio’ column is used for writing the page number of the
journal in which the transaction has been originally recorded.
4. The amount of the transaction is shown in the amount column. This can be understood
by the followng illustration.
 Financial Accounting - I 3.3 Ledger

Illustration I :
2007 April 1 goods sold for cash Rs.25,000.

Journal Entry
Date Particulars L.F. Dr. Cr.
Amount Amount
Rs. Rs.

2007 Cash Account Dr 25,000

Aprl To Sales Account 25,000
(Being goods sold for cash)

Posting is as follows :
Ledger
Dr Cash Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Apr. To Sales 25,000
Account

Dr Sales Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.

2007 By Cash Account 25,000

Apr.

From the above we see that while posting from the Journal, the Debit account is debited and
credit account is credited and the entry in each account indicates the account in which the
corresponding Credit and Debit appears.

3.4. Balancing of Ledger Account :

For the purpose of preparation of the final accounts various ledger accounts should be
balanced. Balance is the difference between the total debits and the total credits of an account.
After finding out the balance it is written on the side showing the smaller total so as to make the
totals of the two sides equal. This is called the ‘Balancing’ of an account. Balancing is done
periodically. It may be daily, weekly, fortnightly, monthly, Quarterly or yearly when it is required.
The procedure of balancing accounts is as follows :
1. Take the totals of the two side of the account concerned.
2. Ascertain the difference between the totals of two sides.
3. Enter the difference in the amout column of the side showing less total, writing against
 Acharya Nagarjuna University 3.4 Centre for Distance Education
the difference in the particulars column “ To Balance”, c/d means carried down, on the
debit side of the account and “By Balance c/d on the cedit side of the account. Now
both sides will have the same total.
4. Write the date of balancing in the date column.
5. After entering the balance in the relevant amount column, write the total of each side.
The total must be written on the same horizontal line. Draw one line above each total
and two lines below the total.
6. The balance thus, entered is known as the closing balance.
7. This closing balance is now brought down and written below the total on the side having
the bigger total by writing to Balance b/d or By Balance b/d.
8. Sometimes, the balance of an acount may be nil that means the totals of both sides are
the same. In such cases we will only enter the totals on both sides of the account.
3.5. Interpretation of ledger Accounts :
1. Personal accounts : These are more frequently balanced than others so as to know the
amounts owed and owing. when the account of a person shows a debit balance, it indicates
that he is a debtor. If the account of a person shows a credit balance, it means that he is a
creditor.
2. Real Accounts : Real accounts are normally balanced at the end of each accounting period
i.e; before preparing the final accounts. They generally show a debit balance and are Asset
accounts.
3. Nominal Accounts : When nominal accounts are balanced debit balances indicate expenses
or losses and credit balances indicates incomes and gains. At the end of the year each and
every nominal account is closed by transfering to profit and loss Account.

3.6.Illustration 2 :
Journalise the following transactions post them into the ledger and balance the accounts.
2007
Jan 1 Balu commenced business with cash 2,00,000
Jan 2 Parchased furniture for cash from R.C Broses 20,000
Jan 2 Purchased goods from Perumal 25,000
Jan 3 Sold goods for cash 15,000
Jan 4 Paid rent 5,000
Jan 6 Sold goods to Srinivas 10,000
Jan7 Srinivas returned goods 1,000
Jan 10 Bought goods from Dayakar 40,000
Jan 11 Returned goods to Dayakar 1,500
Jan 14 Paid for Stationery 2,500
Advertisement 3,000
Postage 500
 Financial Accounting - I 3.5 Ledger

Jan 17 Drew for personal use 2,000

Jan 20 Cash sales 10,000
Jan 21 Received from Srinivas 8,000
Jan 22 Paid to Dayakar 20,000
Jan 24 Sold goods to Sirisha 15,000
Jan 28 Cash sales 45,000
Jan 31 Paid salaries 12,000
Jan 31 Paid Municipal taxes 1,000
Jan 31 Goods taken for personal use 1,000
Jan 31 Paid for printing 1,500
Jan 31 Wages paid 3,000
Jan 31 Paid Electric Charges 2,200

Date Particulars L.F. Dr. Cr.

Amount Amount
Rs. Rs.
2007 Cash Account Dr 2,00,000
Jan 1 To capital Account 200,000
(Being Capital brought
into business)
Jan 2 Furniture Account Dr 20,000
To Cash Account 20,000
(Being furniture purchased
for cash)
Jan 2 Purchases Account Dr 25,000
To Perumal Account 25,000
(Being goods Purchased
on credit from perumal)
Jan 3 Cash Account Dr 15,000
To sales Account 15,000
(Being goods sold for cash)
Jan 4 Rent Account Dr 5,000
To cash Account 5,000
(Being rent paid)
2007 Srinivas Account Dr 10,000
Jan 6 To sales Account 10,000
(Being goods solds on Credit)
 Acharya Nagarjuna University 3.6 Centre for Distance Education

Jan 7 Sales Ruturns Account Dr 1000

To Srinivas Account 1000
(Being goods returned
by Srinivas)
Jan 10 Purchases Account Dr 40,000
To Dayakar Account 40,000
(Being goods Purchased
from Dakayar on cridit)
Jan 11 Dayakar Account Dr 1500
To Purchase returns Account 1500
(Being goods returned to Dayakar)
Jan 14 Stationery Account Dr 25,000
Advertisement Account Dr 3,000
Postage Account Dr 500
To cash Account 6,000
(Being expencses paid)

JOURNAL
Date Particulars L.F. Dr. Cr.
Amount Amount
Rs. Rs.
Jan 17 Drawings Account Dr 2000
To cash Account 2000
(Being Cash drawn for personal use)
Cash Account Dr 10,000
Jan 20 To sales Account 10,000
(Being Cash Sales)
Jan 21 Cash Account Dr 8000
To Srinivas Account 8000
(Being cash received
from Srinivas)
Jan 22 Dayakar Account Dr 20,000
To Cash Account 20,000
(Being Cash paid to Dayakar)
Jan 24 Sirisha Account Dr 45000
To Sales Account 15000
(Being goods Sold for Cash)
Jan 28 Cash Account Dr 45,000
To sales Account 45,000
(Being goods sold on credit)
 Financial Accounting - I 3.7 Ledger

Jan 31 Salaries Account Dr 12,000

To cash Account 12,000
(Being salaries paid)
Jan 31 Municipal taxes Account Dr 1000
To cash Account 1000
(Being Municipal taxes paid)
Jan 31 Drawings Account Dr 1000
To purchases Account 1000
(Being goods taken for
personal use)
2007 Printing Account Dr 1,500
Jan 31 Wages Account Dr 3,000
Electric Charges Account Dr 2,200
To cash Account 6,700
(Being various expenses Paid)

LEDGER
Dr. Cash Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan 1 To Capital A/c 2,00,000 Jan 2 By Furniture A/c 20,000
Jan 3 To Sales A/c 15,000 Jan 4 By Rent A/c 5,000
Jan 20 To Sales A/c 10,000 Jan14 By Stationery A/c 2,500
Jan 21 To SrinivasA/c 8,000 ” By Advertisement A/c 3,000
Jan 28 To Sales A/c 15,000 ” By Postage A/c 500
Jan 17 By Drawings A/c 2,000
Jan 22 By Dayakar A/c 20,000
Jan 31 By Salaries A/c 12,000
” By Municipal taxesA/c 1,000
” By Printing A/c 1,500
By Wages A/c 3,000
By Electric charges A/c
2,200
By Balance c/ld 1,75,300
2,48,000 2,48,000
Feb 1 To Balance bld 1,75,300
 Acharya Nagarjuna University 3.8 Centre for Distance Education

Dr. Capital A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan 1 By Cash A/c 2,00,000

Dr. Furniture A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan2 To Cash A/c 20,000

Dr. Purchases A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan2 To Perumal A/c 25,000 Jan 31 By Drawings 1,000
Jan 10 To Dayakar A/C 40,000 Jan 31 By Balance c/d 64,000

65,000 65,000
Fe 1 To Bal b/d 64,000

Dr. Perumal A/C Cr

Date Particulars F Amount Date Particulars F. Amount

Rs. Rs.
2007 2007
Jan 31 To Balance c/d 25,000 Jan 2 By Purchases A/c 25,000
25,000 25,000
Feb 1 By Balance b/d 25,000
 Financial Accounting - I 3.9 Ledger

Dr. Sales A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Balance c/d 95,000 Jan 3 By Cash A/c 15,000
Jan 6 By Srinivas A/c 10,000
Jan 20 By Cash A/c 10,000
Jan 24 By Sirisha A/c 15,000
Jan 28 By Cash A/c 45,000

95,000 95,000

Feb 1 By Balance b/d 95,000

Dr. Rent A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 4 To Cash A/c 5,000 Jan 31 By Balance c/d 5,000
5,000 5,000
Feb 1 To Balance b/d 5,000

Dr. Srinivas A/C Cr

Date Particulars F Amount Date Particulars F. Amount

Rs. Rs.
2007 2007
Jan 6 To Sales A/c 10,000 Jan 7 By Sales Returns 1,000
Jan 21 By Cash A/c 8,000
Jan 31 By Balance c/d 1,000
10,000 10,000
Feb 1 To Balance b/d 1,000
 Acharya Nagarjuna University 3.10 Centre for Distance Education

Dr. Sales Returns A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 7 To Srinivas 1,000 Jan 31 By Balance c/d 1,000
1,000 1,000
Jan 31 To Balance b/d 1,000

Dr. Dayakar A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 11 To Purchase 1,500 Jan 10 By Purchases 40,000
returns
Jan 22 To Cash A/c 20,000
Jan 31 To Balance c/d 18,500
40,000 40,000
Feb1 By Balance b/d 18,500

Dr. Purchase Returns A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Balance c/d 1,500 Jan 11 By Dayakar 1,500
1,500 1,500
Feb 1 By Balance b/d 1,500

Dr. Stationery A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 14 To Cash A/c 2,500 Jan 31 By Balance c/d 2,500
2,500 2,500
Feb 1 To Balance b/d 2,500
 Financial Accounting - I 3.11 Ledger

Dr. Advertisement A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 14 To Cash A.c 3,000 Jan 31 By Balance c/d 3,000
3,000 3,000
Feb 1 To Balance b/d 3,000

Dr. Postage A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 14 To Cash A/c 500 Jan 31 By Balnce c/d 500
500 500
Feb 1 To Balanceb/d 500

Dr. Drawings A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 17 To Cash A/c 2,000 Jan 31 By Balance c/d 3,000
Jan 31 To Purchases
a/c 1,000
3,000 3,000
Feb 1 To Balance b/d 3,000

Dr. Sirisha A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 24 To sales A/c 15,000 Jan 31 By Balnce c/d 15,000
15,000 15,000
Feb 1 To Balance b/d 15,000
 Acharya Nagarjuna University 3.12 Centre for Distance Education

Dr. Salaries A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Cash 12,000 Jan 31 By Balance c/d 12,000
12,000 12,000
Feb 1 To Balance b/d

Dr. Muncipal Taxes A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Cash 1,000 Jan 31 By Balnace c/d 1,000
1,000 1,000
Feb 1 To Balance b/d 1,000

Dr. Printing A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Cash A/c 1,500 Jan 31 By Balance c/d 1,500
1,500 1,500
Feb 1 To Balance b/d 1,500

Dr. Wages A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Cash A/c 3,000 Jan 31 By Balance c/d 3,000
3,000 3,000
Feb 1 To Balance b/d 3,000

Dr. Electric Charges A/C Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Cash A/c 2,200 Jan 31 By Balance c/d 2,200
2,200 2,200
Feb 1 To Balance b/d 2,200
 Financial Accounting - I 3.13 Ledger

3.7 Summary :
After journalising the transactions relating to a particular account are brought together and
recorded at one place in another book called the ‘ledger’ the process of entering the transactions in
the ledger is technically called posting. The two aspects of every transaction have to be posted to
the respective accounts in the ledger.

3.8. Questions :
1. What is a ledger ?
2. What is balance ?
3. Write a note on ledger posting with an example ?
4. Write the procedure followed for balancing an account with an example ?
5. Give form of the ledger Account.

3.9 Exercises :
1. Journalise the following transactions, post them into ledger ascertain the balances.
2007 Rs
Mar 1 Vishal started business with 80,000
Mar 4 Paid into Bank 25,000
Mar 7 Purchased goods for cash 10,000
Mar 9 Purchased goods from Ramana 8,000
Mar 11 goods sold for cash 16,000
Mar 14 goods returned to Ramana 500
Mar 19 Purchased furniture and paid by cheque 750
Mar 21 goods sold to Raja 1,000
Mar 23 goods returned by Raja 400
Mar 25 Paid wages 100
Mar 27 with drew from bank 2,000
Mar 28 Paid discount 1,000
Mar 31 Paid salaries 5,000
Mar 31 commission received 6,000
2. Journalise the following transactions, post them into the ledger and balance the
accounts.
2007 Rs
Jan 1 Saroja commence business with20,000
Jan 2 Purchased furniture for cash 4,000
Jan 2 Purchased goods for cash 1,800
Jan 4 Paid rent 1,500
Jan 6 Sold goods to 1,500
Jan 7 C retuned goods 175
 Acharya Nagarjuna University 3.14 Centre for Distance Education
Jan 10 Brought goods from D 5,000
Jan 11 Returned goods to D 200
Jan 14 Paid for advertising 350
Jan 15 Paid for stationery 150
Jan 17 Drew for personal use 500
Jan 20 cash sales 16,000
Jan 21 Received from C 525
Jan 23 Paid to B 3,000
Jan 24 Sold goods to E 3,500
Jan 28 Cash sales 2,000
Jan 31 Paid salaries 2,000
Jan 31 Paid Municipal taxes 300
3. Journalise the following transactions, post them into the ledger and balance the
accounts.
2007 Rs
Jan 1 Nageswara Rao commenced
business with cash 40,000
Jan 2 Purchased furniture for
Cash from A & Co 11,000
Jan 3 Sold goods for cash 6,000
Jan 4 Paid rent 3,000
Jan 4 Sold goods to C 12,500
Jan 7 C returned goods 100
Jan 10 Bought goods from D 17,500
Jan 11 Returned goods to D 150
Jan 14 Paid for Advertising 750
Jan 15 Paid for stationary 2,000
Jan 17 Drew for personal use 1,500
Jan 20 Cash sales 2,500
Jan 21 Received from C in full 12,000
settlement of his account
Jan 23 Paid to B 2,500
Jan 24 Sold goods to E 5,000
Jan 28 Cash sales 2,000
Jan 31 Paid salaries 2,000
Jan 31 Paid Municipal taxes 250
Jan 31 Paid printing charges 500
4. Give journal entries to record the following transactions.
2007 Rs
June1 Madhuri commenced business with cash 2,50,000
 Financial Accounting - I 3.15 Ledger
June1 Purchased a Motar truck 100,000
June2 Purchased goods from Gopal 30,000
June3 Sold goods 2,000
June4 Returned goods to Amar 1,000
June7 sold goods to chandra 3,500
June8 Chandra returned goods 150
June11 Cash purchases 6,000
June14 Purchased postage stamps 100
June16 Paid for advertising 1,000
June 20 Paid office expenses 400
June 25 Drew cash for personal use 2,000
June 26 Cash sales 1,800
June 27 Paid insurance premium 250
June 30 Paid rent 2,000
June 30 Paid salaries 7,000
3. Journlise the following transactions post them into the ledger and balance the
accounts.
2007 Rs.
Sep 1 Manohar started business with 2,50,000
Sep 1 Brought Machinery 1,00,000
Sep 2 Brought furniture from 15,000
Sep 3 Purchased goods 15,500
Sep 7 Paid wages 3,000
Sep 9 Brought packing materials 15,500
Sep 10 Cash sales 4,000
Sep 11 Credit sales to krishna 7,000
Sep 14 Paid wages 1,500
Sep 15 Purchased goods from Ram 15,000
Sep 16 Returned goods to Ram 250
Sep 20 Purchased stationery 1,000
Sep 21 Brought postage stamps 350
Sep 23 Paid for repairs 400
Sep 24 Paid miscellaneous expenses 250
Sep 27 Paid printing charges 300
Sep 30 Paid Salaries 7,500
Sep 30 Paid to X 8,000

3.10 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal
Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta
- Dr. Ch. Suravinda
 Financial Accounting - I 4.1 Subsidiary Books
LESSON - 4

SUBSIDIARY BOOKS
4.0. Objectives :
After going through the lesson the student can identify various types of subsidiary books,
Advantages of subsidiary books, recording of transactions in these books and their posting into the
ledger.

Structure :
4.1 Introduction
4.2 Advantages
4.3 Classification
4.4 Purchases book
4.5 Sales book
4.6 Purchase Returns book
4.7 Sales Returns book
4.8 Journal proper
4.9 Summary
4.10 Questions
4.11 Exercises
4.1. Subsidiary Books Introduction
It has already been explained in an earlier chapter that journal is the book of prime entry. It
means all business transactions are to be first recorded in the journal. In case of big business
concerns, where the number of transactions are large in number, it is very inconvenient and cause
delay in collecting any information required. To avoid the laborious task of recording transactions
first in the journal and later posting them into ledger, an other method of recording the transactions
in subsidiary books have been introduced which is also known as British system or practical system.

4.2. Advantages of subsidiary books :

The following are the advantages of subsidiary books :
1. Convenience : As stated above maintenance of one journal will make it quite bulky and
difficult to handle. Sub-division of journal will result in reducing the size of journal and make
it convenient to handle.
2. Division of labour : Sub division of journal helps in division of labour since different persons
can write different journals.
3. Classified information : Each journal provides information relating to a particular aspect of
the business. For example, purchases book gives information about the total credit purchases,
sales book gives information about the total credit sales etc.
4. It would make easier the job of posting in the ledger, as the posting can be made in the form
of totals once a month.
5. Additional information can be collected while maintaining a subsidiary book. For example,
sales book can collect the information relating to the sales of different areas or of different
sales man.
 Acharya Nagarjuna University 4.2 Centre for Distance Education
6. When the work is divided among the accounting staff and one person is required to do that
work again and again, he becomes specialist of that work and his efficiency also increases.
7. The existence of separate books helps location of errors, detection of frauds in case the trial
balance does not agree.
4.3. Classification of subsidiary books :
The classification of various subsidiary books and the types of transactions to be recorded in
these books are as follows
1. Cash book : This book deals with the transactions relating to the receipts and payments of
cash. It shows cash in hand and at Bank.
2. Purchases book : The book is meant for recording all transactions of credit purchases of
goods, It shows the total credit purchases of goods and materials made during a particular
period.
3. Sales Book : The book is maintained to record all credit sales made is and will show total
credit sales during a particular period.
4. Purchase returns book : This book is also known as returns outwards book. This book
records all returns of goods previously purchased and will show total purchase returns during
a particular period and also to a particular supplier.
5. Sales Returns book : It is also known as returns inwards book. This book is maintained to
record all sales returns made by the customers and will shows the total returns inwards
during a particular period.
6. Bill Receivable Book : This book is maintained to record all bills received from the customers
during a particular period. It will also tell the various dates on which payments are to be
received by the business.
7. Bills payable Books : This book records all acceptances made by the firm and will indicate
the various dates on which payments of various bills are to be made.
8. Journal proper : All these transactions which could not be recorded in any of the above
subsidiary books it will be recorded in this book.
A line chart of subsidiary books is as follow :
Subsidiary books

Cash Purchases Purchase Sales Sales Bills Bills Journal

Book Book returns Book Returns Receivable Payable
Book Book Book Book

Credit Credit Record

Purchases Sales of
transactions
not
recorded
elsewhere

Simple Cash Book Cash Book

Cash With with Bank and
Book discount column Discount column Petty Cash Book
 Financial Accounting - I 4.3 Subsidiary Books
In this lesson we will deal with all types of subsidiary books except cash book, which will be
dealt in the next lesson.

4.4.Purchases book :
This book is kept to record all credit purchases of goods for resale. Cash purchases of
goods are entered in the cash book so these are not entered in the purchases book. This book is
also known as invoice book. The ruling of purchases book is as follows
Purchases Book
Date Particulars Invoice L.F. Details
Amount
No. Rs. Rs.

In Date column, the date of the transaction is entered.

In particulars column the name of the party and particulars of the goods purchased are
written.
In details column particulars regarding trade discount is written. At this stage the student
must learn what is trade discount.
Trade Discount : Trade discount is the deduction allowed by the manufacturer to the whole
saler or by the wholesaler to the retailer on the value of list price of the goods to enable the seller
to make a profit by selling the goods at list price. There will be no entry for trade discount any where
in books as it is merely a means of calculating the net selling price of the goods.
Illustration 1;
Write up purchases Book from the following transactions and post them into the ledger.
2007 Rs.
June 1 Bought goods for cash 4,000
June 4 Purchased goods from Vinayak Rs.10,000
less 10% trade discount
June 11 Purchased goods from Siva & Co. 12,000
June 15 Purchased goods from Kesave for
Rs.25,000 less 5% trade discount
June 18 Purchased goods from Indira for cash 15,000
June 23 Purchased goods from Chandra 12,000
 Acharya Nagarjuna University 4.4 Centre for Distance Education
June 28 Bought goods from Amar subject
to a trade discount of 10% 35,000
June 30 Purchased goods 10,000
Purchases Book
Date Particulars L.F. Dr. Cr.
Details Amount
Rs. Rs.
June 4 Vinayak, goods purchased 10,000
Less : Trade discount @ 10% 1,000 9,000
June 11 Siva & Co, goods purchased 12,000
June 15 Kesav goods purchased 25,000
Less : Trade discount @ 5% 1,250 23,750
June 23 Chandra, goods purchased 12,000
June 28 Amar, goods purchased 35,000
Less : Traded discount @ 10% 3,500 31,500
Purchases account Dr 88,250

Ledger
Dr Vinayak Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
June 30 To Balance c/d 9,000 June 4 By purchases a/c. 9,000
9,000 9,000
July 1 By Balance b/d 9,000

Dr Siva Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
June 30 To Balanced c/d 12,000 June 11 By purchases a/c. 12,000
12,000 12,000
July 1 By Balance b/d 12,000
 Financial Accounting - I 4.5 Subsidiary Books

Dr Kesav Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
June 30 To Balanced c/d 23,750 June 15 By purchases a/c. 23,750
23,750 23,750

July 1 By Balance b/d 23,750

Dr Chandra Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
June 30 To Balanced c/d 12,000 June 23 By purchases a/c. 12,000
12,000 12,000
July 1 By Balance b/d 12,000

Dr Amar Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
June 30 To Balanced c/d 31,500 June 28 By purchases a/c . 31,500
31,500 31,500
July 1 By Balance b/d 31,500

Dr Purchases Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
June 30 To Cash A/c 4,000 June 30 By Balance c/d 1,29,250
To Cash A/c 15,000
To Chandra A/c 12,000
To Amar A/c 10,000
To Amount as per
purchase book 88,250
1,29,250 1,29,250
 Acharya Nagarjuna University 4.6 Centre for Distance Education

Dr Cash Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
June 1 By purchases A/c 4,000
June 18 By purhcases A/c 15,000
June 30 By purchases A/c 10,000

Note : Cash Account can not be balanced because the information regarding other items is not
available.

4.5. Sales books :

This book is used for recording only the credit sales of goods in which its business man deals.
This is also called as sales day book. The ruling of the sales book is as follows :
Sales book
Date Particulars Outward L.F. Details Amount
invoice Rs. Rs.
Number

Recording in the sales books :

The entries in the sales Journal are made in the following manner.
1. Date column : The date of credit sale is recorded.
2. Particulars column : The name and address of the customer to whom goods are sold
on credit are recorded.
3. Outword invoice number column : The number of outward invoice is to be entered in
this column.
4. L.F.:In L.F. column the page number of the customers account in the ledger is entered
5. Account column : In the amount column the amount actually receivable by the businss
man i.e. catalogue price minus trade discount should be entered.
Illustration 2
Enter the following transactions in the sales book of a trader and post into ledger.
2007
 Financial Accounting - I 4.7 Subsidiary Books

April 1 Sold good to Harsha & Co

for Rs.30,000. Trade discount @10%
April 3 Sold goods to Preethi & Co for cash Rs.50,000
April 5 Sold goods for Rs.15,000
April 8 Sold goods to Pranya for Rs.50,000
@ 10% trade discount
April 7 sold goods to Jagan for Rs.40,000 @ 7.5% trade discount
Sales Book
Date Particulars atward L.F. Details Amount
Invoice Rs. Rs.
No.
2007
April 1 Harsha & Co, sale of goods on credit 30,000
Less : Trade discount @ 10% 3,000 27,000
April 7 Pranya, sale of goods on credit 50,000
Less : Trade discount @ 10% 5,000 45,000
April 7 Jagan, Sale of goods on credit 40,000
Less : Trade discount @ 7.5% 3,000 37,000
Sales Account Cr 1,09,000

Ledger
Dr Harsha & Co Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
April 1 To Sales A/c 27,000

Dr
Pranya Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
April 7 To Sales A/c 45,000
 Acharya Nagarjuna University 4.8 Centre for Distance Education
Dr Jagan Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
April 7 To Sales A/c 37,000

Dr Sales Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
April 7 To Balance c/d 1,74,000 Aprl 3 By cash A/.c 50,000
Aprl 5 By cash A/c 15,000
Aprl 7 By sundries as
per sales book 109,000

1,74,000 1,74,000
Apr. 8 By Balance b/d 1,74,000

Dr Cash Account Cr
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Aprl 3 To Sales 50,000
Aprl 6 To Sales 15,000

4.6. Purchase returns Book :

The purchase returns book is used for recording the returns of goods to suppliers. It is also
used to record allowances for damages claimed in respect of goods purchased. In any business
it may become necessary to return the goods purchased, partly or fully. The reason may be that
the goods are defective, or damaged in transit. The business man may, therefore, return them to
the supplier.
When goods are returned to a supplier a statement called 'Debit Note' is sent to him. It
informs him that his account is debited to the extent of the value of goods returned.
The ruling of the purchase returns book is as follows.
 Financial Accounting - I 4.9 Subsidiary Books

Format of purchase Returns Book

Date Particulars Debit L.F. Details Amount
Note Rs.
Numbers

Recording in the purchase return book :

1. Date column : The day on which the goods are returned is entered in the Date column.
2. Particulars : The name and address of the supplier to whom goods are returned is entered
in the particulars column.
3. Debit Note number : The serial number of Debit Note is to be entered in this column.
4. L.F. column : The ledger page number of the supplier's account is entered in L.F. column.
5. Details column : Any information may be recorded.
6. Amount column : The net value of the goods returned is entered in this column.
4.7. Sales Returns Book :
The sales returns book is used for recording goods returned by the customers. This is also
called returns inward book as goods are coming in.
When a customer returns goods a credit note is prepared and sent to the customer. It has
the name and address of the customer, description of the goods received which are returned by
the customer etc. It informs the customer that his account is credited to the extent of the value of
goods returned to him. The credit note is the basis for recording in the sales returns book. Credit
notes are consecutively numbered and their copies filed.
The ruling of the sales returns book is as follows.
Sales Returns Book
Date Particulars Debit L.F. Details Amount
Note Rs.
Numbers

Recording in the sales returns books :

Date column : Enter the date of the credit note in the Date column.
Particulars : Name and address of the customer who has returned goods is entered in this
column.
 Acharya Nagarjuna University 4.10 Centre for Distance Education
Credit Notes Numbers : Credit note number in this column.
LF column : The ledger page number of the customer's in the L.F. column.
Amount column : Net value of goods returned is entered in this column.
Illustration 3 :
Enter the following transactions of Gopi Krishna & Co in proper books.
2007
Jan 1 Purchased on credit from Guntur digitals
Jan 12 Water heaters @ Rs.4,000 each
Jan 10 Ceiling Fans @ Rs1,000 each
Jan 15 Room coolers @ Rs.3,500 each
Trade discount @10%
Jan 5 Sold on credit to Ajay Enterprises
Jan 6 Water heater @ Rs. 5,000 each
Jan 5 Ceiling Fans @ Rs. 1,200 each
Jan 5 Room coolers @ Rs.4,000 each
Jan 7 Retruned to Guntur digitals 2 water heaters and 1 Room cooler as defective.
Jan 10 Ajay Enterprises returned 1 ceiling Fan
Jan 11 Returned the same to Guntur digitals.
Jan 14 Purchased from Vijay Electronics on credit 20 T.V. stabilizers
@ 1,500 each less 20% trade discount.
Jan 19 Sold to Mahaveer Electronics 10 stabilisers @ 600 less 10% discount
Jan 20 Sold one stabiliser @ Rs.600/-
Jan 22 Purchased on credit 20 Fans from Usha Enterprises
@ Rs.1,200 each less 20% discount.
Jan 26 Sold to Murthy & Sons on credit 15 Fans @ Rs.1,400 each less 10% discount.
Jan 30 Murthy & Sons returned one fan as defective which in turn
returned to Usha Enterprises.
Solution :
GOPI KRISHNA & CO BOOKS.
Dr. Purchases Book Cr.
Date Particulars L.F. Details Amount
Amount Rs.
Rs.
2007
Jan1 Guntur Digitals, goods purchased
12 water heaters @ Rs.4,000 each 48,000
10 ceiling Fans @ Rs.1,000 each 10,000
15 room coolers @ Rs.3,500 each 52,500
1,10,500
Less : Trade discount @ 10% 11,050 99,450
 Financial Accounting - I 4.11 Subsidiary Books

Date Particulars L.F. Details Amount

Amount Rs.
Rs.
Jan 14 Vijay Electronics good purchases
20 T.V. stabilizers @ 1,500 30,000
Less : Trade discount @ 20% 6,000 24,000
Jan 22 Usha Enterprises goods 24,000
20 Fans @ Rs.1,200 each 24,000
Less : Trade discount @ 20% 4,800 19,200
Jan 31 Total purchases acccount Dr 1,42,650

Dr. Sales Book Cr.

Date Particulars L.F. Details Amount
Amount Rs.
Rs.
2007
Jan 1 Ajay Enterprises, goods sold
6 water heaters @ Rs. 5,000 each 30,000
5 ceiling fans @ Rs.1,200 each 6,000
Room coolers @ Rs.4,000 each 20,000
56,000
Jan 19 Mahaveer Electronics, goods sold
10 stabilisers @ Rs.600 6000
Less : Trade discount @ 10% 600 5,400
Jan 26 Murthy & sons, good sold
15 Fans @ Rs.1,400 each 21,000
Less : Trade discount @ 10% 2100 18,900
Jan 31 Total sales Account Cr 80,300

Dr. Purchase Returns Book Cr.

Date Particulars L.F. Details Amount
Amount Rs.
Rs.
2007
Jan 7 Guntur Digitals
1 Room cooler @ Rs.3,500 each 3,500
Less : Trade discount @ 10% 350 3,150
Jan 11 Guntur Digitals
1 ceiling Fan @ Rs.1,000 each 1,000
Less : Trade discoung @ 10% 100 900
 Acharya Nagarjuna University 4.12 Centre for Distance Education

Jan 30 Usha Enterprises

1 Fan @ Rs.1200 each 1,200
Jan 31 Less : Trade discount @ 10% 120 1,080
Total purchse returns book cr. 5,230

Dr. Sales Return book Cr.

Date Particulars L.F. Details Amount
Amount Rs.
Rs.
2007
Jan 19 Ajay Enterprises
1 ceiling Fan @ Rs.1,200 1,200
Jan 30 Murthy & Sons
1 Fan @ Rs.1,400 1,400
Less : Trade discount @ 10% 140 1,260
Jan 31 Total sale return account Dr 2,460

Dr. Guntur Digital Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 7 To purchase
Return A/c 3,150 Jan 1 By Purchase A/c 99,450
Jan 11 To Purchase’s
Return A/c 900
Jan 31 To Balance c/d 95,400
99,450 99,450
Feb 1 By Balance b/d 95,400

Dr. Vijay Electronics Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
To Balance c/d 24,000 Jan 14 By purchase a/c 24,000
24,000 24,000
Feb 1 By Balance b/d 24,000
 Financial Accounting - I 4.13 Subsidiary Books

Dr. Usha Enterprises Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 30 To purchase 1,080 Jan 22 By Purchases A/c 19,200
Returns A/c
Jan 31 To Balance c/d 18,120
19,200 19,200
Feb 1 By Balanceb/d 18,120

Dr. Purchases Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Amount as Jun 31 By balance c/d 1,42,650
per purchase’s
book 1,42,650
1,42,650 1,42,650
Feb 1 To Balance b/d 1,42,650

Dr. Ajay Enterprises Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 1 To Sales A/c 56,000 Jan 10 By Sales returns a/c
1,200
Jan 31 By Balance c/d 54,800
56,000 56,000
Feb 1 To Balance b/d 54,899

Dr. Mahaveer Electronics Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 19 To Sales A/c 5,400 Jan 31 By Balancec/d 5,400

Feb 1 To Balance b/d 5,400 5,400

 Acharya Nagarjuna University 4.14 Centre for Distance Education

Dr. Murthy & Sons Account Cr

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 26 To Sales A/c 18,900 Jan 30 By Sales Returns 1,260
A/c
Jan 31 By Balance c/d 17,640
18,900 18,900
Feb 1 To Balance b/d 17,640

Dr. Sales Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Balance c/d 80,300 Jan 31 By amount as
per sales Book 80,300
80,300 80,300
Feb 1 By Balance c/d 80,300

Dr. Purchases Returns Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Balance c/d 5,230 Jan 31 By Amount as per
purchase returns
book 5,230
5,230 5,230
Feb 1 By Balance b/d 5,230

Dr. Sales Returns Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 31 To Amount as Jan 31 By Balance c/d 2,460
per sales returns
book 2,460
2,460 2,460
Feb1 To Balance b/d 2,460
 Financial Accounting - I 4.15 Subsidiary Books
In addition to these four books if in any concern, the number of transactions relating to bills
receivable and Bills payable are numerous in number then separate books for recording these
transactions can be opened in the books. The ruling for these books also the same.
4.8 Journal proper :
In addition to these subsidiary books, as in the case of the previous four books. The original
journal now called “Journal proper” is also used to record all other transactions which can not be
recorded in any of the afore said books. The Journal proper is similar to the journal in ruling and
form.
4.8.1 Types of transactions recorded in Journal Proper :
The following types of transactions are usually recorded through journal proper.
1. Opening entries.
2. Closing entries.
3. Adjustment entries.
4. Rectification entries.
5. Transfer entries.
6. Other entries.
4.9 Summary :
Journal is the book of prime entry in which all transactions are recorded. But when the
transactions are numerousm it is impossible to record all the transactions in one journal. Hence
the need for special journal for recording the transactions which are numerous in number araised.
These books are known as subsidiary books. Purchases book and sales books are meant for
recording only credit transactions of purchases and sales respectively.
All transactions which cannot be recorded in any of the special books are recorded in a
journal known as journal proper.
4.10. Questions :
1. What is the need for special journals ?
2. What do you understand by subsidiary books ?
3. What are the advantages of subsidiary books ?
4. What is a journal proper ?
5. Name various types of subsidiary books and explain the method of recording of
transactions there in along with the method of posting.
6. State the types of transactions that are recorded through the journal proper.
7. What is journal proper? Explain its uses in accountancy.
4.11. Exercises :
1. Record the following transactions in the purchases journal of M/s Soni & co and
show the ledger posting.
2007 Rs.
Jan 2 Purchased goods from Chinku 4,000
Jan 3 Brought goods from Reni 5,400
Jan 4 Purchased from Santi 3,500
 Acharya Nagarjuna University 4.16 Centre for Distance Education
Jan 5 Brought goods from chinku
with trade discount of 10% 2,000
Jan 6 Purchased from Sai goods
subject to a discount of 20% 5,000
Jan 7 Venugopal sold us goods 1,800
2. Enter the following transactions in the sales Book of Yashodara. Traders.
2007
Apr 1 Sold 200 quintals of super fine rice @ Rs 1700
per quintal to A.P.Rice dealers with 10% discount.
Apr 3 Sold 500 quintals of Coarse rice @ Rs 1500
per quintal to super price shop at a discount of 5%
Apr 5 Sold 750 quintals of fine rice at the rate of 1600
per quintal to Gayatri Rice store at 7.5% discount
3. Enter the following transactions of Narayana & Co in proper books.
2007
Mar 1 Purchased on Credit from Guntur digitals Ltd.
55 water heaters @ 3,500 each
35 Electric stoves @ 500 each.
50 Electric Irons @ 600 each.
Trade discount 20%
Mar 5 Sold on Credit to Joginder Singh & Sons.
45 water heaters @ 4000 each
30 Electric stoves @ 600 each.
42 Electric Irons @ 700 each.
Trade discount 10%
Mar 7 Returned to Guntur Digitals, water heater
and 1 Electric iron as defective
Mar 10 Joginder Singh & Sons returned two Electric
Irons as defective
Mar 11 Returned the same Irons to Guntur digitals
Mar 12 Purchased from V. Guard, 50 stabilisers @
Rs 750 each less 15% discount.
Mar 18 Sold to Raj Electricals 10 stabilisers
@ Rs 1000 each less 10% discount.
Mar 19 Sold two stabilisers for cash Rs 800 each
Mar 22 Purchased on credit 25 pedestal fans from Usha Co
@ 1500 each less 20% discount.
Mar 26 Sold Siri & Co 5 pedestal fans @ Rs 1750/- at
10% discount
 Financial Accounting - I 4.17 Subsidiary Books
4. Enter the following transactions in the proper books.
2007
Apr 1 Purchased on credit from Bombay dying 1000
meters of shifting cloth @ 125 per metre. 1000
meters of pant cloth @ 250 per metre.
Apr 5 Purchased on credit from DCM Ltd. . 5000
meters of curtain cloth @ Rs 100 per metre.
Apr 10 Purchased on credit from Vimal textiles 1000
sarees @ Rs 500 per sarees 2,500 Meters of dressing
material @ Rs 125/- Per metre.
Apr 15 Purchase on credit from Garden vareli 500 sarees
@ Rs 350/- each 3000 Meters of dressing material
@ Rs 100 per metre
Apr 20 Purchased for cash from NTC 1500 metres of linen
@ Rs 10 per metre.
Apr 25 Purchased furniture for office use Rs 1000.
Apr 30 Sold old type writer for Rs 750/-
5. From the following particulars prepare sales book.
2007
Apr 1 Sold on credit to sundar & Co 15 Tables @ Rs 2,500 each
Apr 3 Sold to Chandra & Co dining table with six chairs @ Rs 22,000
Apr 5 Sold to Vijaya Krishna Hotel 35 cots @ Rs 15,000 each
35 Tables @ Rs 700 each, 35 dressing tables @ Rs 3,000 each.
35 stools @ Rs 200 each
Apr 15 Sold for cash one book shelf @ Rs 5,500
Apr 25 Sold to Red cross society
40 iron cots @ Rs 1500 each
40 Mattresses @ Rs 500 each.
40 pillows @ Rs 100 each.
Apr 30 Sold to Guntur club.
1 sofa set @ Rs 1,30,000/-
1 coffee Table @ Rs 2,000/-
6. Vasudeva Rao gives the following information about his business. Record them in
the concerned subsidiary books and post them to ledger accounts.
2007
Mar 1 Purchased goods from Pragati & co at the list price
of Rs 50,000 less 10% trade discount.
Mar 5 Sold goods to Raja Rao for Rs 75,000 Less 5% trade discount.
Mar 8 Returned goods to pragati & co at list price Rs 500/-
Mar 10 Raja Rao returns us goods at the list price Rs 5,000/-
 Acharya Nagarjuna University 4.18 Centre for Distance Education
Mar 13 Purchased goods from Akhil at the catalogue price of Rs. 2,00,000
less 20% trade discount.
Mar15 Sold goods to Pranav at the catalogue price of Rs.50,000
50000 less 10% trade discount
Mar 18 Returned goods to Akhil at the list price Rs 2,000
Mar 20 Pranav returns us goods at the list price Rs 5,000
Mar 22 Purchased goods from Jahnavi at Rs 80,000
less 10% trade discount.
Mar 25 Sold goods to Pavan for Rs 25,000
Mar 27 Sold goods Madan for Rs 15,000
Mar 28 Purchased goods from Sarma at the catalogue
price Rs 7,500 less 10% discount.
Mar 29 Pavan returns us goods Rs 500.
Mar 30 Returned goods to sarma at the catalogue Price 750/-
7. From the following information find out the sales for the year.
1-7-2007 Balance of Debtors 1,00,000
Cash received from Debtors 9,50,000
Sales Returns 20,000
Bad debts 30,000
31-12-2007 Balance of Debtors 2,00,000
Cash sales 3,50,000
8. Following information is extracted from the books of M/s Radha Krishna & Co.
Who is hole sale cloth Merchant
2007
Jan 4 Sales to Veena & co
200 sarees @ Rs 450 each.
Jan 9 Sales to Kohinoor Bross for cash
150 sarees @ Rs 500 each
200 Blowse pieces @ Rs 35 each.
Dress Material.
450 Dresses @ Rs 850/- each.
Jan 16 Sales to Bhavani textiles.
450 sarees @ Rs 350 each.
Jan 30 Sold old Furniture to Lakshman Rs 1,000
Prepare sales book.
 Financial Accounting - I 4.19 Subsidiary Books

4.12 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

- Dr. Ch. Suravinda

 Financial Accounting - I 5.1 Cash Book

LESSON - 5

CASH BOOK
5.0. OBJECTIVES : In the previous chapter you learned how purchases book, purchase
Returns book, sales book and sales Returns book are prepared. In this lesson we will see How a
cash book is prepared and various types of cash book.

Structure :
5.1 Introduction
5.2 Simple cash book
5.3 Two column cash book.
5.4 Cash discount.
5.5. Distinction between trade discount and cash discount.
5.5 Three columnar cash book.
5.6 Important points - while preparing three columnar cash book.
5.7 Petty cash
5.8 Imprest system
5.9 Summary
5.10 questions
5.11 Exercises.

5.1..Introduction :
The number of transactions relating to cash are usually large because most of the business
dealings ultimately resolve themselves into cash transactions, so it is necessary to keep a separate
book for cash transactions. In the cash book daily record of the transactions relating to receipts
and payment of cash are entered. It is a very important book of business due to following reasons.
1. Usually is any business concern the number of transactions relating to cash are more
in number.
2. with the proper maintance of cash book the scope for committing fraud or
misappropriation of cash can be reduced, and strict control is possible.
3. Timely collection of amounts from Debtors increase the financial position and the
chances of its prompt payment to creditor, which in turn increase the reputation of
business.
Cash book had a special character, that it acts dual role i, e. as a book of original entry as well
as a ledger. It is a subsidiary book because all cash transactions are first recorded in the cash book
and then posted to various accounts in the ledger. The recording of transactions in the cash book
takes the shape of a ledger Account. Receipts of cash are entered on the debit side and payment
of cash on the credit side, so there is no need of cash Account in the ledger.
 Acharya Nagarjuna University 5.2 Centre for Distance Education
The following are the types of cash Book.
1. Simple cash Book
2. Cash book with discount column.
3. Cash book with Bank and discount column.
4. Petty cash Book.

5.2 Simple Cash Book :

This types of cash book makes a record of all the receipts and payments of cash. All cash
received will be recorded on the debit side and payments on the credit side. The ruling of this type
of cash book is as follows.
SIMPLE CASH BOOK
Receipts Payments
Date Particulars R.N. L.F Amount Date Particulars V.N. L.F Amount
Rs. Rs.

When cash is received it is entered on the debit side of the cash Book in the amount coloum
along with the name of the party paying the cash in the particulars column. Receipt number with
which cash has been received by the cashier is written in the R.N. (Receipt No) column.. Similarly
cash paid is entered on the credit side of the cash book. Each payment must be supported by a
voucher and voucher number is entered in the V.N (voucher No.) column.
At regular periodic intervals, preferably daily, Cash Book should be balanced like other ledger
accounts and the balance shown by it should be equal to cash in hand. The cash Book always
shows a debit balance because, one cannot spend more than what he had.
Illustration 1 : Mr. Madan Mohan started business with Rs. 2,00,000 on 1st sep 2007. He
deposited Rs 50,000 in his bank account. His transactions during the month were as follows.
2007 Rs.
Sep. 2 Purchased table and chair for office use 25,000
Sep. 4 Sold goods for cash 10,000
Sep.5 Paid for Electric fittings. 2,000
Sep.6 Paid expenses 500
Sep.7 Paid wages 2,500
 Financial Accounting - I 5.3 Cash Book
Solution :
Prepare the cash Book of Mr. Madan Mohan

Mr. Madan Mohan Books.

Receipts Cash Book (SIMPLE) Payments

Date Particulars R.N. L.F Amount Date Particulars U.N. L.F Amount
Rs. Rs.
2007
Sep1 To Capital a/c 2,00,000 Sep 1 By Bank A/c 50,000
Sep 4 To Sales A/c 10,000 Sep 2 By Furniture A/c 25,000
Sept 5 By Electric
fittings A/c 2,000
Sep 6 By Expenses A/c 500
Sep 7 By Wages A/c 2,500
Sep 7 By Balance c/d 1,30,000
2,10,000 2,10,000
Sep 8 To bal b/d 1,30,000

5.3. Two Column Cash Book :

This cash book has an additional column for discount along with cash column on each side
of the cash Book. Discount column on the debit side represents cash discount allowed to customers
and the credit side indicates cash discount received from creditors, cash columns are balanced
but discount columns are not balanced but totalled.
At this juncture before we see how a two columnor cash book is prepared we have to know
what cash discount donates ?
Discounts are of two types 1. Trade discount 2. cash discount.
As we have already discussed that trade discount is the discount allowed by the supplier on
the catalogue price or listed price of a commodity. We have already learned the accounting treatment
regarding trade discount in the previous lesson. Now in the current lesson we will learn about cash
discount.
5.4. Cash Discount :
When a business concern sold goods on credit debitors arises similarly, when it purchased
goods on credit creditors arises to the concern. To encourage payments by debtors, the concern
makes an announcement that if they repay their dues within a particular date certain amount is
allowed as discount. This is known as discount allowed, which is a loss to the concern and debited.
Similarly our creditors also make the same announcement, to enjoy the amount of discount we pay
the amounts due within that date. This is known as discount received, which is a gain and credited.
Cash discount is the only discount appears in the books of accounts.
Now we will see how a two columnor cash book is prepared with an illustration.
 Acharya Nagarjuna University 5.4 Centre for Distance Education

5.5 Distinction between cash discount and trade discount :

The following are the differences between cash Discount and Trade discount.

Cash Discount Trade Discount

1. Cash discount is allowance made by the 1. Trade discount is an allowance made by
receiver of cash to the payer for prompt the manufacturer or whole salers to the
payment. retailers.
2. Cash discount is recorded in the books 2. Trade discount is not recorded in the
of debtor and creditor. books of either seller or buyer.
3. Cash discount is deducted from the 3. Trade discount is deducted from the
amount of debt or net invoice price. catalogue price.
4. Cash discount arise at the time of receipt 4. Trade discount appears at the time of
or payment i.e.. When cash is received purchase.
or paid.
5. The main object of cash discount is to 5. The main object of trade discount is to
induce the debtors to pay promptly with enable the retailer to sell the goods at
in the stipulated period of credit. catalogue or list price and to keep some
margin of profit.
6. Generally the cash discount percentage 6. Generally the Trade discount percentage
will be less. will he higher.

Illustration : 2
Enter the following transactions in a Two column cash Book and post them into the ledger.
2007 Rs
Jan 1 Cash is hand 20900
Jan 3 Purchased goods for cash 5300
Jan 5 Paid wages 2100
Jan 7 Withdrew from bank for expenses 9000
Jan 7 Paid to Jishnu 2900
Discount Allowed by him 100
Jan 10 Cash sales 5900
Jan 13 Received cash from Madhava on account 9400
Discount allowed to him 100
Jan 15 Purchased furniture from Achut 10,000
Jan 16 Paid for postage stamps 100
Jan 18 Additional capital introduced 5,000
Jan 21 Received cash from Venugopal 8,850
Discount allowed 150
Jan 24 Paid cash for travelling expenses 400
Jan 26 Amount deposited in bank 10,000
Jan 27 Cash paid to Bala Ram 4,550
Discount received 50
Jan 28 Goods sold to Vamsi 2,700
Jan 30 Paid salaries 4,500
 Financial Accounting - I 5.5 Cash Book
Jan 30 Cash purchases 4,800
Jan 30 Deposited into bank all cash in exceed of 4,000
Two column Cash Book
Receipts Payments
Dis-
Date Particulars R.N. L.F Amount Date Particulars R.N. L.F Dis- Amount
count count
Rs. Rs. Rs.
Rs.
2007 2007
Jan 1 To Bal b/d 20,900 Jan 3 By purhcases a/c 5,300
Jan 7 To Bank A/c 9,000 Jan 7 By Jishnu A/c 100 2,900
Jan 10 To Sales a/c 5,900 Jan 16 By Postage stamps 100
Jan 13 To Madhavaa/c 100 9,400 Jan 24 By Travelling exp. 400
Jan 18 To Capital a/c 5,000 Jan 26 By Bank 10,000
Jan 21 To Venugopal 150 8,850 Jan 27 By Bala Ram 50 4,550
Jan 30 By Salaries 4,500
Jan 30 By Purchases 4,800
Jan 30 By Bank 22,500
Jan 30 By Balance c/d 4,000
59,050 59.050
Feb 1 To bal b/d 4,000

Ledger Account
Dr. Bank Account Cr.
Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 26 To Cash A/c 10,000 Jan 7 By cash A/c 9,000
To Cash A/c 22,500

Dr. Sales Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan 10 By cash A/c 5,900
 Acharya Nagarjuna University 5.6 Centre for Distance Education

Dr. Madhava Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 By cash A/c 9,400
Jan 13 By Discount A/c 100

Dr. Capital Acount Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan 18 By cash A/c 5000

Dr. Venu gopal Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 By cash A/c 8850
Jan 21 By Discount A/c 150

Dr. Purchases Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan 3 To Cash A/c 5,300
Jan 30 To Cash A/c 4,800

Dr. Jishnu Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007 2007
Jan 7 To Cash A/c 2,900
To Discount 100

Dr. Postage stamps Accounts Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan 16 To Cash A/c 100
 Financial Accounting - I 5.7 Cash Book

Dr. Travelling expenses Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan 27 To Cash A/c 400

Dr. Bala Ram Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan 27 To Cash A/c 4,550
To Discount A/c 50

Dr. Salaries Account Cr.

Date Particulars F Amount Date Particulars F. Amount
Rs. Rs.
2007
Jan 27 To Cash A/c 4,500

5.6 Three Columnar Cash Book

Now - a- days most of the trade is carried through banks i.e, payments by cheque and receipt
with cheque. In such a case the cash book should have a bank column in addition to the cash and
discount columns to have a record of Bank Account in the cash book. This type of cash Book is
known as Three column cash Book
In case a business man has bank accounts with two or more banks. There will be two or
more bank colouns on each side of the cash book, depending upon the number of banks with
which he has bank accounts.
When a three coloumnor cash book is maintaied no separate account of cash or Bank Account
is required in the ledger. However. Separate Discount Accounts have to be opened in the ledger,
one for the discount allowed and the other for discount received.

Contra Entry :
As explained above a three columnar cash book contains columns both for cash and bank
transactions. An accounting transaction involves two accounts, and there may be a transaction
where cash account and bank Account are involved. Since there are no separate cash account
and Bank account in the ledger no posting will done from the cash Book. For example when cash
is paid into the bank, it should be debited to bank Account by entering the amount in the bank
column on the debit side of the cash Book as “To Cash” and credited to cash Account by entering
the amount in the cash column on the credit side of the Cash Book as “By Bank” to record the fact
of cash having gone out of the business As both the accounts are in the same book and both the
effects are given in the same book, letter ‘C’ is written in the L.F column against this entry on each
side of the cash book to indicate that the contra effect of this transaction is recorded on the opposite
side. Such type of entry appearing on both sides of the cash Book is known as contra Entry.
 Acharya Nagarjuna University 5.8 Centre for Distance Education
Similarly when cash is with drawn from the bank for office use the entry would be to debit
cash Account by entering the amount in the cash column on the receipts side of the cash Book as
“To Bank” and to credit the bank column as “by cash” As both accounts involved appear in the cash
Book. To indicate this as a contra transaction in L.F column, letter ‘C’ is written on both sides in the
L.F column.
5.5.1. Points which should be kept in view while preparing a three columnor cash Book:
The following are the points which should be kept in view while making accounting entries in
the cash Book.
1. Receipt of Cheques : If a cheque is received and immediately sent to the bank for
collection, it should be debited in the bank column, but it is sent to the bank for collection on a later
date, on the date of receipt it is treated as cash and debited in the cash column. When the cheque
is sent to bank for collection, contra entry will be recorded in the cash Book by giving debit to bank
column and by giving credit to the cash column.
In the absence of any specific instructions in the question the student should presume that
the cheque received from a party was sent to the Bank on the same day for collection.
2. Endorsement of cheques received: A cheque received by the business may not be
sent to the Bank for collection, but may be endorsed in favour of a creditor as it is a negotiable
instrument. In such a case the cheque received will be taken as a receipt of cash, similarly the
cheque endorsed, will be taken as payment of cash.
3. Dishonoured cheque : If a cheque sent to the bank for collection is dishonoured, it should
be credited in the bank column of the cash book to cancel the previous debit given to the bank
column when the cheque was deposited in the bank.
When a cheque endorsed to creditor dishonouerd no entry is passed in the cash Book because
for recording the dishonour. The entry is
Customer’s Account Dr
To creditors Account
It is passed through the Journal proper.
The recording of transactions in three-columnar cash book and from there posting into the
ledger will be clear with the help of the following illustration.
Illustration - 3
Enter the following transactions in a three column cash Book.
2007 Rs
Jan1 Cash in hand 8,550
Jan1 Balance at Bank 24,590
Jan3 Cash sales 17,500
Jan6 Received a cheque from Ram 1,500
Jan8 Paid into bank Ram cheque
Jan10 Paid to Dasaradh by cheque 19,800
Discount allowed by him 200
Jan12 Cash purchases 12,100
Solution :
Receipts Cash Book (Three columns)
Payments

Date Particulars LF. Discount Cash Bank Date Particulars LF. Discount Cash Bank
Rs. Rs. Rs. Rs. Rs. Rs.
2007 2007
Jan 1 To Bal b/d 8,550 24,590 Jan 8 By Bank a/c C 1,500
Jan 3 To Sales A/c 17,500 Jan 8 By Dasaradh a/c 200 19,800
Jan 6 To Ram a/c 1,500 Jan 12 By Purchses a/c 12,100
Financial Accounting - I

Jan 8 To Cash /c C 1,500 Jan 14 By cash a/c C 5000

Jan 14 To Bank a/c C 5,000 Jan 19 By Bank A/c C 14,900
Jan 15 To Anirudh a/c 100 14,900 Jan 21 By Stationery a/c 500
Jan18 To Sales a/c 8,500 Jan 23 By commission a/c 750

Jan19 To Cash a/c C 14,900 Jan 27 By Anirudh a/c 100

5.9

Jan25 To Pradeep a/c 2,000 Jan 29 By Drawings a/c 14,900

Jan31 To bal c/d 10,010 Jan 31 By Salaries a/c 4000

7,000
Jan 31 By Bank Charges &
Insurance 1550
1,550
Jan 31 By Balance c/d 26,950
100 55,950 53,000 300 55,950 53,000

Feb 1 To Balance c/d

Feb 1 To Balance c/d 26,950 10,010
Cash Book
 Acharya Nagarjuna University 5.10 Centre for Distance Education

Jan14 With draw from bank for

Office use 5,000
Jan15 Received cheque from Anirudh 14,900
Allowed discount 100
Jan18 Cash sales 8,500
Jan19 Paid into Bank the cheque received
from Anirudh.
Jan21 Cash paid for stationery 500
Jan23 Paid commission by cheque 750
Jan25 Received cheque from pradeep 2,000
and paid the same into Bank
Jan27 Anirudh’s cheque dishonoured
Jan29 Drew a cheque for personal use 4,000
Jan31 Paid salaries by cheque 7,000
Jan31 Bank charges & Insurance premium
debited in the pass Book. 1,500
Illustration - 4
Enter the following transactions in a cash Book with Discount and Bank columns assuming
that all payments are made by cheque and all receipts are immediately banked.
2007. Rs
Mar 1 Paid into Bank 50,000
Mar 3 Purchased goods 22,000
Mar 7 Sold goods for cash 11,000
Mar 9 purchased goods 24,000
Mar 10 sold goods to Raju on credit 5,000
Mar 13 purchased goods from Gopi on credit 5,800
Mar 14 paid electricity charges 750
Mar 15 Received from Raju in full settlement 4,800
Mar 16 paid office rent 2,500
Mar 17 with drawn from book for petty payments 500
Mar 18 paid to Gopi in full settlement of his A/c 5,700
Mar 19 sold goods 21,000
Mar 20 sold goods to Ramanujam 8,000
Mar 21 purchased goods from Abhinav on credit 28,000
Mar 24 Received cash from Ramanujam
in full settlement 7,850
Mar 25 paid to Abhinav on account in full settlement 27,800
Mar 26 paid salaries 15,000
 Financial Accounting - I 5.11 Cash Book

Solutions :
Cash Book with Discount And Bank Columns
Receipts Payments
Date Particulars L.F Discount Bank Date Particulars L.F Discount Bank
Rs. Rs. Rs. Rs.
2007 2007
Mar 1 To Cash A/c 50,000 Mar 3 By Purchases a/c 22,000
Mar 7 To Sales A/c 11,000 Mar 9 By Purchases A/c 24,000
Mar19 To Raju a/c 200 4,800 Mar14 By Electric chargesa/c 750
Mar24 To Sales A/c 21,000 Mar16 By Office Rent A/c 2,500
Mar28 To Ramanujam a/c 150 7,850 Mar17 By Petty Cash A/c 500
Jan 21 To Sales A/c 15,800 Mar18 By Gopi A/c 100 5,700
Mar 25 By Abhinav A/c 27,800
Mar 26 By Salaries A/c 15,000
Mar 27 By Drawings 1,500
Mar 29 By Purchases 3,000
Mar 31 By Telephone charges 2,300
Mar 31 By Balance c/d 10,400

350 1,15,450 350 1,15,450

Feb 1 To bal b/d 10,400

Mar 27 with drawn for personal use 1,500

Mar 28 sold goods for cash 15,800
Mar 29 purchased goods by cheque 3,000
Mar 31 paid telephone charges 2,300

5.6 Petty Cash Book :

In every business there are many payments which are of small amounts such as postage,
cartage, stationery, cleaning charges etc. It is undesirable to burden the main cash Book with
numerous small payments like the above so a separate book, called “petty cash Book is usually
maintained. The person maintaining the petty cash book is known as petty cashier. All small payments
to be made by cash are recorded in the petty cash book. The petty cashier works under the
supervision of the chief cashier, who advances money in the beginning of every month/ the month/
quarter to meet petty expenses. At the end of the month / Quarter, the petty cashier submits a
statement of account of the expenses incurred by him during the month / quarter and gets a fresh
advance.
 Acharya Nagarjuna University 5.12 Centre for Distance Education

The best method of recording petty cash payments is to enter them in a petty cash
Book maintained in a columnar from. In such a petty cash Book, a separate column for each head
of expenditure is provided. The advantage of a columnar petty cash Book is that it saves unnecessary
labour used in posting each item of petty cash payment separately in the ledger, only totals of
various coluns are to be posted in the ledger this book is also known as Analytical petty cash Book
because the various small cash payments get automatically analysed when they are entered in
their respective columns.

The petty cash book is Just like the cash Book. The amount received by the petty
cashier from the main cashier are entered on the debit side of the petty cash book and payments
on the credit side of the petty cash book every small payment is entered twice on the credit side -
one in the total payments column and second in one of the analytical amount column. The periodical
total of each column is posted to the expenses accounts concerned, while the total of payments
columns serves to find out the balance of cash with the petty cashier.

5.5.1 Imprest system of petty cash Book :

The petty cash Book is usually maintained on the basis of Imprest system. According
to this system, a fixed amount is advanced to the petty cashier. He submits his accounts at the end
of the period and the chief cashier after examining his accounts gives him a fresh advance equivalent
to the amount spent by him during the period. Thus, in the beginning of each period the petty
cashier has a fixed balance. The amount so advanced to him is termed as “Imprest”
The recording of transaction in a petty cash Book will be clear with the help of the
following Illustration.
Illustration - 5
Prepare columnar petty cash Book on imprest system from the following particulars
and post into the ledger.
2007 Rs
June 1 Received for petty
Cash payments 2000
June 2 Paid for postage 160
June5 Paid for stationery 100
June 8 paid for Advertisement 200
June 12 paid for wages 80
June 16 paid for carriage 60
June 20 paid for conveyance 88
June 25 paid for travelling expenses 320
June 27 paid for postage 100
June 28 wages to office cleaner 40
June 30 paid for telegrams 80
June 30 sent register
notice to land lord 15
Dr Petty Cash Book Cr
Amount Date Particulars Total Postage Printing Advertise Wages Carriage Travelling Misclenious
Rs. Rs Telgram Statonery ment

2007 2007
June 1 To Cash A/c
June 2 By Postage Ac160 160 160
June 5 By Stationery A/c 100 100
Financial Accounting - I

June 8 By Advertisement a/c 200 200

June 12 By Wages A/c 80 80

June 16 By Carriage A/c 60 60

5.13

June 20 By Conveyance 88 88
June 25 By Travelling exp. 320 320
June 27 By Potage A/c 100 100
June 28 By Wages A/c 40 40
June 30 By Telegrams A/c 80 80
June 30 By Postage A/c 15 15

1243 355 100 200 120 60 408

June30 By Balance 757
Cash Book

2000 2000
757 July 1 To Balance b/d
1243 To Bank
 Acharya Nagarjuna University 5.14 Centre for Distance Education

5.6 Summary :
In Any business concern the number of transactions in cash are more so it is necessary to
keep a separate book for cash transactions. Cash book plays dual role one as a subsidiary book
other as a ledger account. There are four types of cash book. Simple cash book is prepared with
cash column. In two columnor cash book a discount column is maintained along with cash column.
As most of the trade now - a - days is carried through banks a bank column is also maintained in
tree columnor cash book along with cash and discount columns. To record petty expenses a
separate petty cash book under Imprest system is prepared.

5.7 Questions :
1. Write down the types of cash book.
2. What is a contra entry ?
3. Write about the Imprest system of petty cash.
4. Explain cash discount.
5. Write down the distinction between cash discount and trade discount.

5.8 Exercises :
1. Prepare a cash book from the following information.
Rs.
Jan 1 Balance of cash 7,000
Jan 10 Bought goods on credit from Z 3,000
Jan 11 Bought goods for cash 2,500
Jan 15 sold goods for cash 4,700
Jan 17 paid salary 1,000
Jan 18 with draw for personal use 500
2. Prepare a single column cash book with the information given below.
2007 Rs
Jan 1 Balance of cash in hand 700
Jan 2 Received from cash sales 10,500
Jan 4 cash purchases 5,400
Jan 5 paid staff salaries 1,200
Jan 6 paid x, creditor 3,100
Jan 7 Received from debtor 1,500
3. Prepare cash book from the following transactions.
2007
Apr. 1 Started business with a capital 20,000
1 Purchased furniture 8,000
5 Cash purchases 4,000
6 Sold table 6,000
 Financial Accounting - I 5.15 Cash Book
8 Sold goods to Prasad 4,100
10 Paid wages 1,000
4. Prepare a three columnor cash book from the information given below.
2007 Rs
June 1. Introduced capital 9,000
June 1 Deposited into Bank Account 7,000
June 4 Bought furniture payment
made by cheque 5,000
June10 Bought stationery through cheque 1,000
June 15 Purchased goods through cheque 1,000
June 18 With drew Rs. 100 from bank for
office use.
June 20 sold goods on credit to suresh 1,500
June 22 Deposited into bank 500
June 25 Brought goods from Mahesh 1,000
June 26 sold goods, payment received
in cheque and deposited into Bank 1,500
June 27 paid to Mahesh in full suttlement 980
June 30 Received from subhash in full
settlement of his account 1,480
June 31 withdrew cash from Bank for Personal use 100
Ans : cash - Rs 3,080, Bank Rs 1,020
5. Prepare a cash book from the following information.
2006 Rs
December1 Cash in hand 3,000
Bank Balance 12,000
December 2. cash received from Ajay and a cheque
received 1,500
December 3. A cheque issued to Neeraj 450
in full settlement of 470
December 4 cheque received from Ajay deposited
into the bank
December 6 cash sales 6,000
December 8 purchased goods from Anil for cash 2,000
December 10 Cheque received from Ajay dishonoured
December 10 cash deposited into Bank 1,500
December 12 A cheque received from Sunil 2,100
in full settlement of Rs 2,200
December 13 cheque received from sunil is endorsed to
Vinod in full settlement of his account of 2,150
December 15 Bank charges debited in pass book 20
December 18 An advise received from the bank
states that :
 Acharya Nagarjuna University 5.16 Centre for Distance Education
a. Mrs. sobha has directly
deposited into bank 3,500
b. The bank has collected
interest on investments 250
c. As per standing instructions
the bank has paid insurance premium 300
December20 paid for stationery 100
December 23 Received a cheque from Imran on account 10,000
December 26 Paid salaries 2,000
December 29 cash withdrawn for office use 1,000
Ans :- cash Rs 4,900 Bank Rs. 25,480
6. Prepare three column cash book of suresh from the following information on 1st Jan 2007
suresh had Rs 900 in hand and Rs 13,000 at bank.
2007 Rs
Jan 2. Received cheque from Arun
in fulsettlement of debt Rs 1300 1,240
Jan 3 cash sales 500
Jan 3 paid for advertisement by cheque 700
Jan 4 Paid salaries and wages 870
Jan 4 Amount with drawn from bank for office use 1,200
Jan 5 Drawn cash for domestic use by 400
suresh from bank
Jan 6 issued cheque in favour of Rao & sons 2,000
Discount allowed 40
Jan 7 Received cheque from Mahata Bros 1,600
discount allowed 40
Jan 18 sale of Machinery Payment Received
by cheque 5,000
Jan 20 Bank returns cheque of Mehata Bros
dishonoured
Jan 25 New Machinery Purchased and cheque issued20,000
Jan 26 Paid installation expenses in cash 1,000
Jan 28 Bank charges as per pass book 20
Ans :- cash Rs 730. Bank O.D Rs. 5080
7. Enter the following transaction in a cash book
2007 Rs
Jan 1 Cash in hand 5,374
Balance at bank 15,490
Jan 3 cash sales 6,400
Jan 5 paid into bank 7,000
 Financial Accounting - I 5.17 Cash Book
Jan 6 Received a cheque from Satyam 700
Jan 8 Paid into bank satyam’s cheque.
Jan 10 Paid to Anurag by cheque on account 980
discount allowed by him 20
Jan 12 cash purchases 2,500
Jan 14 with drew from bank for office use 5,000
Jan 15 Received cheque from lakshman 950
allowed discount 50
Jan 16 cash sales 7,500
Jan 19 paid into bank lakshman’s cheque and cash 4,000
Jan 21 cash paid for stationery 120
Jan 23 paid commission to Rakesh 500
Jan 25 Received cheque from Mohan 1,000
and paid the same into bank
Jan 27 Lakshman’s cheque dishoured
Jan 29 Drew a cheque for personal use 800
Jan 31 paid salaries by cheque 1,500
and by cash 500
Jan 31 Bank charges Rs 20 and Insurance premium
Rs 520 as shown in pass Book.
Ans : Cash Rs 8654 Bank Rs. 19,370
8. Enter the following transactions in three columnor cash book.
2007 Rs
March 1. cash in hand 600
March 1 Bank balance 3,000
March 3 cash deposited into bank 2,000
March 5 cheque received from Narayan in full settlement
of his bebt Rs 530/- 500
March 8 Purchased goods from Narendra 1,000
at 5% Trade discount
paid half in cash and the other in cheque.
March 15. Narayan’s cheque dishonoured
and returned.
March 20 Cash with drawn from Bank
For office use 300
For personal use 200
March 25 office rent paid 500
March 27 Bank charges in pass book 10
March 29 salaries paid through cheque 500
 Acharya Nagarjuna University 5.18 Centre for Distance Education
March 30 Amount received from satyam
in cash 500
through cheque 1,000
Discount allowed 50.
March 31 Amount paid to Ramachandra Rs 475
in full settlement of Rs 500.
Ans: cash Rs 250 Bank o.D. Rs 1485

9. Enter the following transactions in three columnor cash book.

2007 Rs
June 1 cash in Hand 5,000
Balance at Bank 2,000
June 2 cash sales 2,000
June 4 Amount paid to Anil by cheque 800
June 5 cash purchases 1,100
June 6 cash received from customer 2,000
June 7 Amount with drawn from Bank
for personal use 500.
Ans : Bal cash Rs 6,900/- Bank Rs 1700/-
10. From the following information prepare a three columnor cash book.
2007 Rs
Mar 1 cash balance 55,000
Bank balance 35,000
Mar 2 purchased goods paid by cheque 10,000
Mar 3 Business expenses paid 1,000
Mar 4 Cheque received from Naresh 30,000
deposited the same into bank
Mar 5 Amount paid to kumar in full
settlement of Rs 2,100 2,000
Mar 6 sold goods to vijay 5,000
Mar 10 cheque received from Naresh dishonoured.
Mar 12 cheque received from vijay 5,000
Mar 14 cash withdrawn from Bank for 5,000
personal expences 5,000
Mar 20 cash with drawn from bank for office use 6,000
Mar 24 cash sales 10,000
Mar 25 Deposited into bank 15,000
Mar 26 Amount received from Rekesh
in full settlement of his 5,900
account of Rs 6,000
 Financial Accounting - I 5.19 Cash Book
Mar 31 Due to insolvency of a customer
Who due Rs 8000 only 50% received
Ans : cash Rs. 62,900 Bank Rs. 34,000
11. Enter the following transactions in three columnor cash book.
2007 Rs
Jan 1 cash balance 15,000
Bank balance 50,000
Jan 2 cash sales 40,000
Jan 5 Furniture purchased and paid
by cheque 8,000
Jan 6 Rent paid by cheque 5,000
Jan 7 cash deposited into bank 40,000
Jan 8 Interest on capital received 4,000
Jan 9 Salaries paid 5,000
Jan 10 cash received from vishnu 15,000
Discount allowed 500
Jan 12 cheque received from Anjan
deposited into bank 8,000
Jan 13 Anjan’s cheque dishonoured.
Jan 14 credit purchases from Gopi 6,000
Jan 18 cash with drawn for office use 12,000
Jan 20 cheque issued to Gopi 5,800
Discount received 200
Jan 24 cash drawn from bank for personal use 4,000
Ans : cash 37000 Bank : 59,200
petty cash :
12. Enter the following transactions in petty cash book.
2007 Rs
March 1 Amount received from cashier 200-00
March 2. Printing charges 15-00
March 4 Postage 8-00
March 6 stationery 10-00
March 10 carriage 15-00
March 15 Postage 18-00
March 20 Travelling expenses 20-00
March 25 Telegram 12-00
March 31 cool drinks 40-00
Ans :- Bal 62-00
 Acharya Nagarjuna University 5.20 Centre for Distance Education
13. Prepare the petty cash book for the following transactions and balance.
2007
Nov 1 Advanced to petty cashier by cheque 100-00
Nov 2 Paid carriage 4-00
Nov 3 paid for stationery 15-00
Nov 4 paid for postage stamps 10-00
Nov 5 Purchased letter pads for office use 5-00
Nov 6 Paid for carriage 6-00
Nov 7 gave telegram to Mumbai 11-00
Ans : Bal Rs 49.
14. Prepare the petty cash book under the imprest system.
2007 Rs
Feb 1 cash received from cashier 100-00
Feb 2 cortage 6-00
Feb 3 Postage 2-25
Feb 4 stationery 3-00
Feb 4 Printing 11-25
Feb 4 stamps 2-00
Feb 4 Refreshments to customers 5-75
Feb 5 cleaning wages 4-00
Feb 5 Repairs to type writer 15-00
Feb 6 cortage 1-75
Feb 6 postage 4-75
Feb 6 travelling expenses 1-25
Feb 6 Entertainment 2-50
Ans:- Bal Rs. 39.25
15. M/s vimal Bros maintaining their petty cash under imprest system. Every monday cashier
provides Rs 150 to petty cashier for meeting petty expenses. The expenses for one week
were as follows.
2007 Rs
Jan 1 Amount received from cashier 150-00
Jan 2 Travelling expenses 8-00
Jan 2 postage stamps purchased 22-00
Jan 3 stationery 19-00
Jan 3 office expenses 6-00
Jan 4 Tea, coffee 21-00
Jan 4 carriage 10-00
Jan 5 Advance to Raj, clerk 10-00
Jan 5 Tiffins 12-00
 Financial Accounting - I 5.21 Cash Book
Jan 6 Riksha
prepare petty cash under imprest system.
Ans : Bal : Rs 24.
16. Prepare a petty cash under the imprest system from the following particulars,
2007 Rs.
Dec 1 Balance with petty cashier. 800
Dec 2 Railway charges 90
Dec 2 Telegram 95
Dec 2 stationery 100
Dec 5 carriage 120
Dec 5 stationery 55
Dec 5 Postage stamps 100
Dec 7 Repairs 200
Dec 7 Travelling expences 150
Dec 8 casual wages 50
Dec 9 Electric Repairs paid 45
Dec 10 Tiffins 50
Dec 12 S.T.D charges 80
Dec 15 speed post 75

SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

- Dr. Ch. Suravinda

 Financial Accounting - I 6.1 Bank Reconciliation Statement
LESSON - 6

BANK RECONCILIATION STATEMENT

6.0. OBJECTIVES : After going though this lesson the student can know the causes
of difference between the balance of cash book and pass book, the need for reconciliation and the
preparation of bank reconciliation statement.
Structure :
6.1. Introduction
6.2. Need for Bank Reconciliation
6.3. Reasons for the difference
6.4. Procedure for preparation of Bank Reconciliation statement
6.5. Bank overdraft.
6.6. Summary
6.7. Questions
6.8. Exercises
6.1. Introduction :
A Business unit have to make many receipts and payment every day. The business man
can relieve himself from this bothering of cash receipts and payments by opening a current account
in the bank. After opening of current account with the bank, a pass book is given to the business
man, which makes a record of the transactions with the bank. This pass book is written by the
bank. On the other hand the business man who opens a current Account with the bank also writes
his transactions with the bank either in a bank account opened in the ledger or in bank column of
his cash book.
The balance of the bank account should be equal to the balance shown by the pass book,
But some times these two balances do not agree. This disagrement may arise because of a
mistake or time-lag between the entries made by the bank in its own account books or the entries
made by a trader in his books. To reconcile these different balance shown by the cash book and
pass book, a statement known as Bank reconciliation statement is prepared.
6.2. Need for Bank Reconciliation Statement
The bank column of the cash book usually shows a debit balance representing the amount
held in deposit with the bank, the banker also records these transactions with his customers in his
ledger considered from his point of view. The pass Book is a copy of the customer’s account as it
appears in the banker’s ledger. It usually shows a credit balance representing the amount belonging
to the customer with the banker. The cash Book usually shows a debit balance and the pass book
shows a credit balance. Both these books should show the same amount as their balance. However,
they usually show different amounts as their balances. This difference in the balances arises on
account of the fact that the transactions are either first recorded by the business man in the cash
book or by the banker later, the other party records them. The fact that transactions do not get
recorded simultaneously in both the books is the main reason for the difference in these balances.
The interval in the recording of the transactions, in these two books is called ‘time - lag’. The
business man compares his cash Book with the pass Book periodically say, once in a month. The
balance shown by these two books should be one and the same. But it is usually not so because
some of the entries might not have been recorded or incorrectly recorded in any of the two books.
 Acharya Nagarjuna University 6.2 Centre for Distance Education
Therefore it is necessary to prepare a statement known as bank Reconciliation statement to
reconciling the two balances shown by the cash Book and the pass book on a particular date. The
other important purpose of the preparation of this statement is to know the exact balance with the
bank.
6.3. Reasons for the difference in Two Balances :
The reasons for the difference in the balances shown by the two books may be as follows.
1. Cheques issued but not yet presented for payment : As soon as a cheque is issued it
is entered but the bank makes no entry for the cheque until it is actually presented for payment.
This means that if the cheque is not presented for payment upto the date of the preparation of the
Bank Reconciliations statement the balance as per Pass Book will be higher than the balance
shown by the Cash Book by the amount of cheque not presented for payment.
2. Cheques paid into bank but not yet collected by the Bank : As soon as cheques are
received they are entered on the debit side of the cash book, increases the balance at the bank but
the bank does not give credit for the cheque deposited until it is cleared and collected.
3. Bank Charges and Interest debited in the pass Book : If there is an overdraft the bank
will charge interest for the overdrawn amount. As a result the balance as per pass Book is reduced
by the amount of bank charges and interest, where as balance as per Cash Book remains same
due to lack of information of these charges upto the date of the preparation of the Bank Reconciliation
statement. Similarly in case of Bank charges also the banker debits the pass book of the customer
at first and the business man comes to know this fact only when he receives the Pass Book from
the bank duly filled up.
4. Interest, Rent and dividend collected by the Bank on behalf of customer : On the
instructions of the customer the bank may collect Interest, rent on property or dividend on
investments. After collection of this income the bank will give the credit to the businessman so as
a result the balance as per pass book increases where as there may be no entry in the cash book
due to lack of this information. The cash book balance remains unchanged as there is no entry in
the cash book.
5. Insurance premium, subscriptions to periodicals and other payments made by the bank
on behalf of the client on the standing instructions of the customer, the bankers make certain
payments like Insurance premium and other payments when they fall due and reduce his balance.
But balance as per cash Book will remain same because of the omission of the entry in the cash
book for payments made by the bank.
6. Cheques omitted to be banked : some times a cheque received by the businessman
may be entered immediately in the cash book but may be ommitted to send the same to the bank
for collection. As a resulte of this the cash book balance increases and the balance as per pass
book remains same without change because no cheque is received for collection.
7. Cheques, bills of exchange dishonoured : When a cheque or bills of exange
dishonoured, this fact is first recorded in the pass book, reduces the balance as per pass book.
Business will make the entry only after receiving the instruction from the bank. In this time-lag the
cash book shows higher balance than the pass book.
8. Direct payment into Bank : some times the customers of businessman may make
payments direct into his account with the banker. The banker credit his pass book which result in
an increase in the balance. As this information is not received the cash book balance remains
unchanged.
 Financial Accounting - I 6.3 Bank Reconciliation Statement
9. Wrong debit or credit given in the pass Book or the cash book may also result the
disagreement of the two balances.
6.4. Procedure for preparation of Bank Reconciliation statement :
Before preparation of the Bank reconciliation statement the student should first note the fact
that if the balance of one book increased or Decreased the balance as per other book remains
uncharged or constant.
1. Tick off all the items in the pass book with entries in the bank column of the cash book
and make a list of unticked items both in cash book and pass book. These unticked
items are responsible for the difference in the balances shown by the cash book and
the pass book.
2. Take balance as per cash book or pass book as the starting point.
3. Decide which item unticked is added or diducted from the base.
4. Do all the adjustments accordingly if you started with cash book you will get the balance
as per pass book or vice versa.
5. For deciding which items of unticked, is added to or deducted from the starting point,
the following formula will help the student.
Add Add
Increase - constant - Decrease
less less
Note : if one book increased or decreased the other bock remain constant.
This can be understood by the following Illustration.
Illustration 1:
Cash Book (Bank columns only)
Date Particulars Amount Date Particulars Amount
Rs. Rs.
2007 2007
Jan 1 To cash A/c 10,000 3 By Rent A/c (Ravi) 350 3
Jan 3 To Suresh A/c 600 3 Jan 2 By Krishna A/c 900 3
Jan 5 To Bhuvana A/c 700 3 Jan 13 By cash A/c 600 3
Jan 5 To cash A/c 1000 3 Jan 13 By drawing A/c 900 3
Jan 25 To Kiran A/c 750 3 Jan 25 By Mohan A/c 850 3
Jan 29 To Prasad A.c 500 Jan 29 By Rama Rao A/c 780
Jan 30 To Cash A/c 2000 3 Jan 29 By Bal cld 12670 3
To Suresh A.c 1500
17,050 17,050
 Acharya Nagarjuna University 6.4 Centre for Distance Education
Pass Book
Date Particulars Dr. Cr. Dr. Balance
Rs. Rs. Rs Rs
2007
Jan 1 By cash - 1000 3 Cr 10,000
Jan 3 To Ravi 350 3 - Cr 9650
Jan 5 By suresh - 600 3 Cr 10250
Jan 8 To Krishna 900 3 - Cr 9350
Jan 11 By Bhuvana - 700 3 Cr 10050
Jan 13 To cash 600 3 1000 3 Cr 11050
Jan 17 To self 900 3 - Cr 10450
Jan 27 To Mohan 850 3 - Cr 9,550
Jan 30 By Kiran - 750 3 Cr 8,700
Jan 30 By cash - 2000 3 Cr 11,450
Jan 30 To Insurance premium 250 - Cr 11,200
Jan 31 To Bank Charges 15 - Cr 11185
Jan 31 To Interest - 550 Cr 11735

In the above illustration the unticked, items are the reasons for variation between the balances
of cash book and pass book. Now we will pick those, items.
1. The cheques deposited on 29th received from prasad for Rs 500 and on 30th received
from Suresh for Rs 1500 are not collected by bank.
2. Cheque issued to Rama Rao for Rs 780 on 29th has not presented for payment in the
bank
3. Insurance premium paid Rs 250 appearing in pass Book only.
4. Bank charges Debited in pass book Rs 15.
5. Interest credited in pass book Rs 550.
Now you decide which items should be added and which should be deducted by using the
formula given. Start with either of the balance, cash book or pass book for example we started with
cash book. The student, here is always advised to remember that, with one transaction, if one book
increases or decreases the other book remain constant.
Item Cashbook Passbook Amount Effect
Rs. Add/Less
1. Cheque issued but not
collected Increase Constant 2000 Less
2. Cheque issued but not
presented for payment Decrease Constant 780 Add
3. Insurance premium
Debited in pass book Constant Decrease 250 Less
4. Bank charges Debited
in passbook Constant Decrease 15 less
Interest credited in
pass book Constant Increase 550 Add
 Financial Accounting - I 6.5 Bank Reconciliation Statement
Once we decided which item is added and which one is deducted from the starting balance
to find the other book balance we can proceed to prepare a bank Reconciliation statement
as follows:
Bank Reconciliation statement as on 31.1.2007.
Particulars Amount Amount
Rs Rs
1. Balance As per cash book 12,670
Add
1. Cheque issued but not presented 780
for payment
2. Interest collected and credited
in the pass book. 550 1,330
14,000
less
1. Cheques deposited but not collected 2,000
2. Insurance premium Debited in
pass book 250
3. Bank charges Debited in pass book 15 2,265
Balance as per pass Book 11,735
The same illustration can be worked out by taking the pass book balance, as follows.
Add Add
Increase - constant - Decrease
less less
If we take the balance as per pass book
Item Cashbook Passbook Amount Effect
Rs. Add/Less
1. Cheques deposited
but not collected Constant Increase 2000 Add
2. Cheque issued
but not pres-
enteed for Constant Decrease 780 Less
payment
3. Insurance Premium
debited in Decrease Constant 250 Add
pass book
4. Bank charges
Debited in
Pass book Decrease Constant 15 Add
5. Interest Credited
in pass book Increase Constant 550 less
 Acharya Nagarjuna University 6.6 Centre for Distance Education

Bank Reconciliation statement on 31- 1 - 2007

Particulars Amount Amount
Rs Rs
Balance as per pass book. 11,735
Add
1. Cheques deposited but not collected 2,000
2. Insurance premium paid by Bank 250
3. Bank charges Debited in pass book 15 2,265
Less 14,000
4. Cheques issued but not
presented for payment 780
5. Interest credited in pass book 550 1,330
Balance as per cash Book 12670

Illustration - 2
From the following particulars prepare a Bank Reconciliation statement showing the balance
as per cash book on 31 Dec 2006. The following cheque were paid into Bank in December, 2006
but were credited by the bank in January, 2007;
Chinna Rs 7,000. Madhu Rs 8,000 Vasu Rs 6,000.
The following cheques were issued by the firm in December 2006 but were presented for
payment in January 2007.
Pranav Rs.1,500 Pavan Rs 1,450
The following charges were made by the bank which were not recorded in the cash book;
Bank charges Rs. 120
Collection charges Rs. 115
The following payments made by the bank direct as per standing instructions were not entered
in the cash book Insurance premium Rs 2,350 subscription for magazine Rs 275

A cheque for Rs 3,500 which was received from a customer was entered in the bank column
of cash book in December 2006, but was to be banked in December 2006. A bill for Rs.31,000 was
retired by the bank under rebate of Rs 320 but the full amount of the bill was credited in the bank
column of the cash book.
The bank balance as per pass Book was Rs. 35,800 on 31-12-2006
 Financial Accounting - I 6.7 Bank Reconciliation Statement

Solution :
Bank Reconciliation statement as on 31-12-06
Particulars Amount Amount
Rs Rs
Balance as per pass Book 35,800
Add
1. Cheques paid into Bank not yet
collected
Chinna 7,000
Madhu 8,000
Vasu 6,000 21,000
2. Bank charges recorded in the
pass book
Bank charges 120
Collection charges 115 235
3. Payment made by the bank
as per standing instructions.
Insurance premium 2,350
subscriptions 275 2,625
4. Cheque entered in cash Book
but omitted to be banked 3,500
63,160
Less
5. Cheques issued but not presented
for payment
Pranav 1,500
Pavan 1,450
2,950
6. Rebate allowed for a bill but not entered
in cash book 320 3,270
Balance as per cash book 59,890

The student is adviced to do the problem by starting with the balance of cash book.
6.5.Bank Overdraft :
Sometimes cash book may show a credit balance or pass Book a debit balance. It indicates
the amount overdrawn. This means that the trader owes this amount to the bank i.e; he has drawn
more amount than his balance in the bank such a balance is technically known as bank overdraft.
The overdraft balance is also referred to as the unfavourable balance.
 Acharya Nagarjuna University 6.8 Centre for Distance Education
The method of analysis or the preparation of Reconciliation statement is the same as in the
case of favourable balance. However the student is expected to note the difference in the effect of
a given item of discrepancy, if the balance is an unfavourable or overdraft balance. For ex: In case
of favourable balance, cheques issued reduce the cash balance, But when the balance is an
unfavourable balance the effect of the cheque issued will further increase the overdraft balance.
here you have to note that the effect of the cause of disagreement will be exactly opposite because
of the unfavourable nature of the starting balance.
Illustration 3 :
On 30th June 2007, the pass Book of Mr. Anil kumar showed an overdraft balance of Rs
80,000 prepare a Bank Reconciliation statement using the following information.
1. Out of the two cheques issued to Ajay Kumar on 25th June 2007, one for Rs 10,000
and another for Rs. 25,000. The cheque for Rs 25,000. was cashed on 5 - 7 - 2007.
2. A wrong credit for Rs 500 relating to some other account was found in the pass book.
3. Out of the three cheques deposited in the bank for collection on 22 - 6 - 2007, for
Rs. 30,000 Rs 40,000 and Rs 50,000 respectectively, the cheque for Rs 40,000 alone
was collected by 30 - 6 - 07.
4. There is a debit of Rs 1,600 for interest and Rs 300 for bank charges in the pass book
which have not been entered in the cash book.
5. The pass Book showed that bank had collected Rs 3,000 as interest on securities but
there was no entry in the cash book for interest.
6. A Bill receivable for Rs 10,000, discounted with the bank in May, was dishonoured on
28th June, 2007 and was debited in the pass Book.
Solution : Bank reconciliation statement as on 30 - 6 - 2007.
Particulars Amount Amount
Rs Rs
Bank overdraft balance as per
the pass book 80,000
Add
1. Cheques issued but not
presented for payment 25,000
2. Wrong credit in the pass book 500
3. Interest on securities collected
by the bank 3,000 28,500
1,08,500
Less
4. Cheques paid in but not yet cleared 80,000
5. Interest on O.D, and bank charges
debited in the pass book. 1,900
6. Dishonoured bill debited in the
pass book only 10,000 9,19,000
Overdraft Balance as per cash book 16,600
 Financial Accounting - I 6.9 Bank Reconciliation Statement

Illustration 4 :
On 31st December 2006 the cash book of Mr. Akhil showed a credit balance of Rs.50,000
with the state Bank of India. Before this date cheques worth Rs.39,600 were issued but of them
cheques worth Rs.7,500 were only presented at the bank for payment. a cheque for Rs.4,500
received from a customer was entered in the Bank column of the cash book in December 2006,
but it was not paid into Bank. In December cheques worth Rs.10,500, were deposited in the bank
but cheques amountig to Rs.9,000 only were credited in the Pass Book. The total of a page on the
receipts side of the cash book Rs.26,260s was carried to the next page as 22,620. A cheque for
Rs.24,000 which was received from a customer was paid into the bank on 26th of December, but
it was not entered in the Cash Book. The pass book is debited with Rs.200 for bank charges,
Rs.600 for interest on overdraft and Rs.570 for insurance premium paid. Interest on investments
credited in Pass Book Rs.3,000. These items not yet posted in cash book.
Prepare the Bank Reconcilation statement.
Solution :
Particulars Amount Amount
Rs Rs
Bank overdraft balance as per
the Cash book 50,000
Add
1. Cheques debited in the Cash Book
but omitted to be paid into Bank 4,500
2. Cheque deposited but not cleared 1,500
3. Bank charges debited in the Pass Book only 200
4. Interest on O.D. debited in the
Pass book only 600
5. Insurance premium directly paid
by the bank but not yet entered in the 570 7,370
Cash Book 57,370

Less
6. Cheques issued but not yet presented 32,100
7. Short carry foreward of the total on
the receipts side of the Cash Book 3,640
8. Cheques paid into the bank but not
recorded in the Cash Book 24,000
9. Interest on investments credited in the
Pass book only 3,000 62,740
Bank balance as per Pass Book 5,370
(Favourable)

Illustration 3:
The Bank Pass Book of Siva Rao showed a credit balance of Rs.24,000 on 31-12-2006.
While the bank column of his Cash Book showed a different balance. You are required to prepare
the Bank Reconcilation statement.
1. If the cheques amounting to Rs.12,900 deposited in the bank upto 31-12-06 a cheque of
Rs.3,200 received from Papa Rao was collected by the bank on 3-1-2007.
 Acharya Nagarjuna University 6.10 Centre for Distance Education
2. Cheque of Rs.5,000 issued to Raj & Co was wrongly entered twic in the cash book.
3. Cheques issued during the month amounted to Rs.16,000 of which cheques for Rs.6000
were not presented to the bank upto 31-12-06.
4. The Pass Book showed a credit of Rs.200 as interest for which there was no entry in the Cas
Book.
5. The Pass Book also showed a payment of Rs.1,675 as life insurance Premium for which no
entry was made in the Cash Book.
Solution :
Bank Reconciliation statement as on 31-12-06
Particulars Amount Amount
Rs Rs
Balance as per the Pass book 24,000
Add
1. Cheque deposited but not credited
in the Pass Book 3,200
2. Amount of Insurance Premium debited
by the bank but not entered in the cash Book 1,675
3. Error in respect of carry forward in the
Cash Book 540
4. Dishonoured cheque debited in the Pass
Book but no entry made in the Cash Book 840 6255
30,255
Less
5. Cheque issued but recorded twice
in the cash book 5,000
6. Cheques issued but not presented
for payment 6,000
7. Interest credited in the pass book
and not entered in the Cash Book 200
8. Direct deposit in bank by a customer
but not recorded in the Cash Book 20,800
9. Excess amount recorded in the
Cash book 29,700
10. Error in respect of casting in the
Cash Book 2,000 63,700
Over draft as per Pass Book 33,555

6.6 Summary :
The cash book maintained by the business man and the pass book maintained by the banker
may not show identical balances on any given date. This is mainly due to time - lag i.e, gap in the
recording of the transactions in the books. It can also be due to errors in any one or both the books.
As these two books show two different balance, it is necessary to compare them periodically and
identify the causes of disagreement. After identifying the causes of dis - agreement the effect of
each cause of disagreement on the known balance must be determined and these should be
added or deducted in a bank Reconciliation statement.
 Financial Accounting - I 6.11 Bank Reconciliation Statement

6.7. Questions
1. What is bank reconciliation statement.
2. What are the causes of disagreement between the cash book and the pass book
balances?
3. How is a bank reconciliation statement prepared.
4. What is the procedure for finding out the points of disagreement by comparing the cash
book with the pass book
5. Explain the procedure for preparing the bank reconciliation statement.

6.8 Exercises :
1. From the following particulars prepare a Bank Reconciliation statement.
a. Bank Reconciliation statement.
1. Balance as per cash book Rs 10,000 (Cr)
2. Cheque received from a customer for Rs 500 entered the cash book but not
banked.
3. There is a wrong debit in the pass book to the extend of Rs 2,000.
Ans : O.D Balance Rs 10,700
2 From the following particulars prepare a Bank reconciliation statement as on 31-3-
2007.
1. Balance as per cash book Rs 25,000
2. Cheques issued but not presented for payment Rs 6,000
3. Dividend Credited in the pass book only Rs 500
4. Cheques deposited into bank but not collected Rs 8,000
5. Bank charges debited in pass book Rs 200
6. Cheque deposited in the bank dishonoured but this was not recorded in cash book
Rs 2000
7. Interest collected and credited in the pass book by the banker.
3. From the following particulars prepare a Bank reconciliation statement as on 31-3-
2007.
1. O.D Balance as per pass book Rs 12,000
2. Out of the total cheques of Rs 7,000 issued on 28th April, only Rs 3000 cheques paid
upto Apr. 30.
3. Out of the cheques deposited Rs 3,500 only cheques of Rs 500 credited in the
pass book.
4. Information regarding the debit of interest on over draft of Rs 500 not received.
5. One debtor directly paid into bank an amount of Rs 400 and there is an other
credit of Rs 600 in the pass book for interest on investments collected by the
bank.
6. On the standing instructions bank paid insurance premium of Rs 1200, not entered
in the cash book.
 Acharya Nagarjuna University 6.12 Centre for Distance Education
7. The bank column of the cash book on the credit - side under cast by Rs 1000
4. Mr. Gopi Nadh cash book is showing a bank balance of Rs 8,500 from the following
information prepare a bank reconciliation statement.
1. Cheques deposited into bank Rs 1000 but not collected.
2. Interest collected and credited in the pass book only Rs. 400.
3. Out of the cheques issued totalling Rs 5,100 in March, cheques with of Rs 1200 paid in
April.
4. On the standing instructions bank paid Rs 600 for insurance premium, not entered in
the cash book.
5. One customer deposited in the bank directly Rs 150.
6. Bank charges debited in the pass book Rs 50.
7. A cheque deposited in the bank dishonoured Rs 400/- information not received.
5. On 31-1-2007 the pass book of Rama Rao showed a debit balance of Rs 4,100 prepare
a bank reconciliation statement with the following information.
1. Out of the cheques issued for Rs 15,600 only Rs 4,600 was paid.
2. A wrong debit of Rs 800 has been given by the Bank in pass book.
3. There is a credit of Rs 200 in pass book only.
4. A cheque for Rs 1000 returned dishonored and were debited in pass book only.
5. Interest and bank charges Rs 100 were not recorded in cash book.
6. Interest and bank charges Rs 100 were not recorded in cash book.
7. A cheque of Rs 500 debited in the cash book ommitted to be banked.
8. A wrong credit has been given by the banker for Rs 500 in the pass book.
6. From the following particulars prepare a bank reconciliation statement.
1. Over draft as per pass book 13,800
2. Interest on overdraft not entered in cash book 240
3. Bank charges debited in the pass book 60
4. Cheques drawn but not cashed by the customers 2,,300
5. Cheques paid into bank but not cleared 4,340
6. A bill receivable discounted with bank,
dishonoured, debited in the pass book 1,000
7. On 30th June 2007 the pass book of Mr. Kotesh showed an overdraft balance of Rs
30,000 prepare a bank reconciliation statement using the following information.
1. Out of the cheques issued to Siva on 26 June 2007, one for Rs 1000 and another for
Rs 2500 the cheque for Rs 2,500 was cashed on 5th July 2007
2. A wrong credit for Rs 250 relating to some other account was found in the pass book
3. Out of three cheques deposited into bank for collection on 22nd June 2007 for Rs 3,500
Rs 4000 and Rs 5000 respectively, the cheque for Rs 4000 alone was collected by
J u n e
30th 2007.
4. There is a debite of Rs 800 for interest and Rs 150 for bank charges in the pass book
which have not been entered in the cash book.
 Financial Accounting - I 6.13 Bank Reconciliation Statement
5. The pass book showed that bank had collected Rs 6000 as interest on govt securities.
But there was no entry in the cash book for interest.
6. A bills receivable for Rs 5000 discounted with the bank in the month of May was
dishonored on 26 June 1997 and was debited in pass book.
8. From the following information given below, find out the bank balance as per pass
book of Suresh as on 31st Dec 2007.
1. Bank balance as per cash book on 31-12-2002 was Rs 5000
2. Out of cheques issued for Rs 22,000 before 31st Dec for Rs.750 seens to have been
n o t
presented for payment.
3. Cheque for Rs 2,500 received from a customer though recorded in cash book but not
sent to bank
4. Cheque for Rs 500 though issued to suppliers was not recorded in cash book.
5. Total of a folio of cash book Rs 8,760 was carried as Rs 7,860
6. Insurance premium Rs 2,500 paid by the bank was not recorded in cash book.
9. From the following information prepare a Bank Reconciliation statement as on 31-3-
2007 of Sirish & co.
1. Bank overdraft as per cash book Rs 2,40,900
2. A customer of the firm who received a cash discount of 2% on this account of Rs 200
paid the company a cheque on 19th March. The bank coloun of the cash book.
3. Interest debited by the bank on 29th March 2007 but no advice received Rs 27,870.
4. Cheque issued before 31st March 2007 but not yet presented to bank for Rs 66,000.
5. Transport subsidy received from government directly by the bank but no advice to the
company Rs 42,500
6. Draft deposited in the bank but not collected till 31st March 2007, Rs 13,500.
7. Bills for collection credited by the bank Rs 83,600 were not communicated to the
company till April 1, 2007
8. Amount wrongly debited to the company’s account by the bank for which no details
are available Rs 7,400.
9. Bankers have made a mistake in balancing by showing over drawn balance in excess
b y
Rs 1000 on 31-3-2007 This was rectified on 4-4-2007.
10. From the following particulars, ascertain the bank balance as per cash book of
Saraswathi as on 31st March 2007.
1. Credit balance as per pass book as on 31 - 3 - 2007 Rs 2,500
2. Bank charges of Rs 60 had not been entered in the cash book.
3. Out of the cheque of Rs 3,500 paid into the bank a cheque of Rs 3,500 was not yet
credited by the banker.
4. Out of the cheques issued for Rs 4,500 cheques of Rs 3,800 only were presented for
payment.
5. A dividend of Rs 400 was collected by the banker directly but not entered in the cash
book
6. A cheque of Rs 600 had been dishonoured but no entry was made in the cash book.
 Acharya Nagarjuna University 6.14 Centre for Distance Education
11. From the following particulars ascertain the bank balance as per bank pass book of
Rama Seshaiah as on 31 - 12- 2007.
1. Bank over draft as per cash book on 31-12-07 Rs 6,000
2. Interest on overdraft for six months endings 31-12-2007 Rs 200 is debited in the pass
book
3. Cheques issued but not cashed before 31-12-07 amounted to Rs 1,500.
4. Cheques deposited into bank but not cleared and credited before 31-12-07 amounted
t o
Rs 2,500
5. Interest on investments collected by bank pass book amounted to Rs 1,800,
6. Bills receivable discounted with bank was dishonoured, and bank had debited Rs 1050
including Rs 50 for bank charges.
7. The bank coloun cash book receipts side was over cast by Rs 1,000
8. Bank had wrongly debited his account with Rs 500
12. From the following particulars of M/s Mamata & co show the bank balance as per
cash book as on 31-9-2007.
1. On 30-9-07 bank balance as per pass book was Rs 7,850.
2. Out of cheques paid into bank for Rs 7,500 cheques for Rs 5,000 yet to be collected
3. Cheques issued in favour of Mr. Sadasiva a supplier for Rs 2,000 are yet to be presented.
4. A cheque from Kishore for Rs 3,750 deposited in bank on 15th sep, was omitted to be
recorded in cash book.
5. A cheque issued to Mr. Kedar for Rs 4,500 was wrongly recorded as Rs 4,050 in cash
book.
6. An amount of Rs 1,500 pertaining to M/s Madan & co was wrongly credited our account
by the banker.
13. Prepare the Bank reconciliation statement as on 30-6-2007 from the following
particulars.
1. Debit balance as per pass book on 31 - 6- 07 Rs 15,000
2. A cheque of Rs 200 was deposited on 25-6-2007 but was not recorded in cash book.
3. Cheque of Rs 17,000 were issued but of these Rs 10,000 worth were presented before
30-6-07.
4. Cheques received on 20-6-07 Rs 2,000 were not sent to bank but noted in cash book.
5. Cheques worth Rs 10000 were sent to bank for collection. Of these Rs 2,000 were
credited on 8-7-07 Remaining cheques were credited before 30-6-07.
6. Bank paid Rs 300 on behalf of Customer to Trade Association. This was to recorded in
cash book.
7. Interest on overdraft Rs 800 was not entered in cash book.
8. Bank expenses Rs.100 were recorded twice in cash book and another bank charges
f o r
Rs. 35 was not recorded in the cash book.
9. Cash book credit side Bank column was under cast by Rs 1,000
 Financial Accounting - I 6.15 Bank Reconciliation Statement
14. The pass book of a trader is showing a debit balance of Rs 12300 on 31-1-2007 From
the following information prepare a bank reconciliation statement.
1. Cheques amounting to Rs 4,680 was drawn on 25th January out of which cheques for
Rs 3,300 were cashed up to 31st January.
2. A wrong debit of Rs 240 has been given by Bank in pass book
3. A cheque for Rs 60 was credited in pass book but was not recorded in cash book.
4. Cheques amounting to Rs. 6,300 were deposited for collection, But cheques for
Rs. 2,200 have been credited in pass book at 5th Feb 2007.
5. A cheque for Rs 300 returned dishonoured and were debited in pass book.
6. Interest and bank charges amounted to Rs 30 were not accounted in cash book.
7. A cheque received entered in cash book but not sent to Bank for collection Rs 150.
15. On 31-8-2007 pass book of Anupama Showed a credit balance of Rs 37,400 in Account
No. 1 which did not agree with his cash book, On scrutiny the following discrepancies
were located.
1. Three cheques totalling Rs 15200 were deposited into her account of which only those
for Rs 9,800 were credited before 31st August.
2. Anupama has issued two cheques of Rs 1,200 and RS 1,400 only the first cheque was
presented for payment before 31st August.
3. The banker paid electricity bill of Rs 750, Telephone bill of Rs 900 as per the standing
instructions of Anupama.
4. Pass book shows entries of Rs 50 towards charges and Rs 75 towards interest.
5. A cheque issued for Rs 300 against A/c No. 1 has wrongly entered in A/c No. II by the
banker.
6. The pass book has no entry for the cheque of Ram Prasad for Rs. 270 as it has been
dishonoured.
7. Payments side bank column has been under cast by Rs 20.
Prepare bank Reconciliation statement as on 31-8-2007.

SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

Dr. Ch. Suravinda

 Financial Accounting 7.1 Trial Balance

Lesson 7
Trial Balance
7.0 Objective:
After going through this lesson you will be able to understand the following:
1. Method of preparing Trial Balance
2. Advantages of Trial Balance
3. Errors of Trial Balance

Structure:
7.1: Trial Balance – Meaning
7.2: Method of preparing Trial Balance
7.2.1: Totals Method
7.2.2: Balances Method
7.3: Factors to be considered while preparing Trial Balance
7.4: Advantages of Trial Balance
7.5: Errors in Trial Balance
7.5.1: Disclosed errors
7.5.2: Undisclosed errors
7.6: Ascertaining errors
7.7: Illustrations
7.8: Try yourself
7.9: Summary
7.10: Glossary =
7.11: Self Assessment Questions

7.1: Trial Balance – Meaning:

You have learnt preparation of subsidiary books and preparation of ledger accounts in the
previous lessons. While writing the transactions in double entry system, you have observed that
there is one debit item and its equal credit item. Without debit there is no credit and with out credit
there is no debit. For example, when the totals of sales book are credited to sales account, we
debit debtors account. These entire debits amount will be equal to the credit of sales account.
Similarly, when a transaction is written for total receipts, it will be debited to cashbook with the
equal amount. When entries are recorded in ledger, the debit balances of ledger will be equal to
credit balances. However, due to some errors knowingly or unknowingly lead to difference in the
balances.
Businessman, by the end of the year prepares final accounts and ascertains gross profit,
net profit and firm financial position based on the balances of the ledger. If the balances in the
 Acharya Nagarjuna University 7.2 Centre for Distance Education
ledger are not accurate, the final accounts become erroneous. The decisions taken based on
these accounts are not dependable. That is why businessman tries for accuracy of accounts.
Trial Balance is a device useful for such preparation. This is not an account. It is a statement
consisting of balances of ledger. The accuracy of the ledger can also be proved from this.
7.2: Methods of preparing Trial Balance:
Trial Balance can be prepared in two ways. They are totals method and balances
method. Let us discuss about them.
7.2.1: Totals Method:
Under this method all accounts of the ledger are shown under different heads. Under the
head “Trial Balance”, there are three columns Viz., particulars, debit totals and credit totals. If the
debit and credit totals are equal, the trial balance is said to be correct.
7.2.2: Balances Method:
Under this method only balances of ledger are taken. In any account when debit balances
are more than credit balances only the difference is taken as debit balance. In this way the
balances of various accounts are shown as debit and credit under the head Trial Balance. If the
credit and debit balances are same, the trial balance is said to be correct.
The following example can be observed to understand the above two methods.
Illustration:
Trial Balance

Name of the Account

Totals Balances
Debit Credit Debit Credit
Rs. Rs. Rs. Rs.

Cash in hand 3,305 2,680 625

Cash at bank 8,100 5,650 2,450
Capital account 44,770 44,770
Drawings account 350 350
Stock 35,100 35,100
Furniture 4,530 400 4,130
Purchases 1,350 1,350
Sales 2,000 2,000
 Financial Accounting 7.3 Trial Balance
Sundaram 4,000 1,000 3,000
Prakash 2,000 3,500 1,500
Ganesh 1,100 450 650
Wages and salaries 600 600
Interest account 75 75
Discount account 100 160 60

60,610 60,610 48,330 48,330

7.3: Factors to be considered while preparing Trial Balance:

The following are the factors to be considered while preparing Trial Balance.
1. If all personal accounts are to be shown in the trial balance, the list of accounts becomes
big. Therefore, it is better to show only two accounts, one debtors account and the other
creditors account.
2. Though the debit and credit amounts are entered properly, sometimes there arises some
difference. This may be due to non-entry of capital or stock.
3. Even after the entry of capital and stock, there may be difference in totals. In such case
that difference shall be transferred to ‘Suspense Account’. If the debit side of the trial
balance is higher, then the suspense account shows credit balance. Contrary, if the credit
side of the trial balance is higher, then the suspense account shows debit balance. The
debit balance of the suspense account shall be shown on the assets side and the credit
balance of the suspense account shall be shown on the liabilities side. Then only the
balances in the balance sheet tally. After the errors in ledger are rectified, the suspense
account will be closed.
4. Normally, closing stock appears in adjustments than in trial balance. If it is given in the
trial balance means, it is to be assumed that the trading account was already prepared. In
such case gross profit or loss appears in the trial balance.
5. It is to be remembered that different accounts show the balances in the following way
while preparing trial balance.
a) All expenses (salaries, wages, interest paid, rent, commission, discount paid,
transport, insurance premium etc) —— Debit balances.
b) All assets (plant, machinery, cash, debtors, furniture, goodwill, patents, fixtures,
campuses etc.) —— Debit balances.
c) Bad debts, drawings, opening stock —— Debit balances.
d) All incomes (discount received, commission, rent etc) —— Credit balances.
 Acharya Nagarjuna University 7.4 Centre for Distance Education
e) All liabilities (creditors, bills payable, overdraft, loan taken etc) — - Credit balances.
f) Capital, reserve for bad and doubtful debts —— Credit balances.

7.4: Advantages of Trial Balance:

The following are the advantages of preparing Trial Balance.
1. By preparing trial balance after preparation of ledger accounts helps in testing the accuracy
of the accounting.
2. As there are many transactions in business firms, there are chances for mistakes. Trial
balance acts as an index in identifying such mistakes. When the totals of debits and
credits are not equal we can say that there is a mistake in the trial balance.
3. For preparation of final accounts at the end of the year and to ascertain gross profit, net
profit and financial position, trial balance helps as a first step.
However, it is to be remembered that even though there are equal in balances in the trial
balance, we cannot come to the conclusion that there are no mistakes. Trial balance
cannot identify all errors. They will be discussed later.
7.5: Errors in Trial Balance:
After writing entries from transactions, recording in ledger, and showing debit and credit
balances in the trial balances, there occur some errors due to mistake or recklessness. We can
say that the trial balance is erroneous if the balances are not tallied. But sometimes, trial balance
may be wrong in spite of equal debit and credit balances. These errors can be divided into two
categories viz., disclosed errors and undisclosed errors.
7.5.1: Disclosed Errors:
When the following errors take place, the trial balance balances disagree. They are
explained as follows:
a) Wrong totaling or casting of the subsidiary books: If there are wrong totals in subsidiary
books, trial balance will disclose. For example, if the total of the sales book is under cast
by Rs.500, the sales account is credited with Rs.500 less. The personal accounts of
customers are debited properly relating to their purchases. In such situation, credits will
be more than debits by Rs.500. Similarly, any error of wrong totaling in any subsidiary
book will be disclosed by the trial balance.
b) Posting a wrong amount to ledger account: When ledger is recorded with a wrong
amount, the trial balance will disclose the error. For example, if a supplier sends Rs. 750
worth of goods, this amount needs to be recorded in purchases book. However, it may be
recorded as Rs. 570. In such situations, credits are less than debits by Rs. 180 (750-570).
This leads to difference in the trial balance.
c) Posting an amount on the wrong side of a ledger account: If the totals of accounts
are recorded one side instead of the other, it also leads to imbalance in the trial balance.
For example, if goods of Rs.300 are returned to the supplier, it is to be recorded in sales
 Financial Accounting 7.5 Trial Balance
returns book. Similarly, the same amount should be debited to the seller account. But, if
his account is credited with Rs.300, the credit side of the account will increase by Rs.600
(300+300).
d) Omission of an amount from ledger accounts: When the amounts to be posted in
ledger accounts are not posted, there occurs difference in balance. For example, if we
pay cash to the supplier, the supplier’s account should be debited and the cash account
should be credited. But my mistake, only one of the two is recorded there comes difference.
e) Omission of an amount from the trial balance: When the balances of accounts are
posted in trial balance and any one-account balance is misses, the trial balance will not
agree.

7.5.2: Undisclosed Errors:

If the above-mentioned errors are not there, the totals of the trial balance equal. However,
when the totals of the trial balance are equal, it cannot be said that it is error free. Trial balance
cannot disclose some errors. These are serious errors than the above. The following are the
errors not disclosed by trial balance.
a) Omission of an entry altogether from subsidiary books: these errors occur when the
transactions are ignored completely in the subsidiary books. For example, if we receive
back Rs. 200 worth of goods from the customer, and not recorded in the sales returns
book, then the customer account is also not credited. The sales returns account is also
not debited. In result, this amount will be excluded from totals. Thus, trial balance will not
show any difference though there is an error.
b) Writing the wrong amount in the subsidiary books: when the wrong totals are recorded
in the subsidiary book, and based on this error entries are posted, trial balance cannot
identify the error. For example, an invoice of Rs.860 is recorded as Rs.680 in sales book;
the totals of trial balance will not differ, though there is an error of Rs.180 of both credit
and debit sides.
c) Posting to a wrong head: When transactions are not recorded in correct accounts,
these errors occur. For example, a sale of Rs.650 sold to Indra & co., and written in the
name of Chandra& co., the totals of trial balance do not differ.
d) Errors of principles: If transactions are written against the principles of accounting, these
errors occur. The following are such errors:
1. Treating expenditure as asset: In certain situations, expenditure is treated as
asset. For example, repairs of machinery if debited to machinery account instead
of repairs account, the trial balance do not show any difference as amount is debited
in one or the other account.
2. Treating asset as expenditure: Some times, the purchase of assets also will be
shown as expenditure. For example, furniture worth Rs. 3,500 purchased for office
work, may be debited to office expenditure account instead of furniture (asset)
account.
 Acharya Nagarjuna University 7.6 Centre for Distance Education
3. Treating of income as liability and liability as income: These errors may also
happen often. For example, a commission of Rs. 2000 earned may wrongly be
credited to the person or the organization that has given the commission instead
of crediting to commission account. Similarly, a loan taken may wrongly be credited
to sales account instead of personal account.
4. Compensating errors: Sometimes the errors on debit side may compensate
errors on credit side. Because of this, trial balance looks correct. For example, an
excess debit of Rs.150 to purchases account, excess debit of Rs.100 to sales
account and an excess debit of Rs. 50 to sales returns account do not affect the
trial balance.

7.6: Ascertaining of Errors:

It is the duty of an accountant to rectify the errors when the totals of the trial balance are
not tallied. To ascertain the errors quickly, the following measures are required.
a) The debit and credit side totals of trial balance are to be ascertained first. When one
account is shown instead of different accounts like sundry debtors and sundry creditors,
they are to be totaled again.
b) Care is to be taken to see that the balances of all accounts including cash and bank
balances should be included in the trial balance.
c) The correct difference in trial balance is to be ascertained. Any account carries such
amount balance may be verified. Similarly, half the amount accounts, double the amount
accounts need to be verified.
d) Sufficient care should be taken while ascertaining the balances of various accounts.
e) It is necessary to verify the subsidiary accounts once again. Particularly, when
1,10,100,1000 like mistakes are happened.
f) When there is abnormal difference in trial balance, it is to be compared with previous year
trial balance. For example, if sales account is far higher than that of the previous year,
that account needs to be verified.
g) It is to be checked that all amounts are posted in trial balance.
h) Even at this stage, the difference is not identified; all accounts are to be verified. For this
purpose, it is better to look into the totals of subsidiary books first. Then, they are to be
observed whether all the aspects are recorded. Further, they are to be looked into whether
they are opened with correct balances.

7.7: Illustrations:
1. Prepare trial balance from the following account balances.
Narayanamurthy Capital Account 21,500
 Financial Accounting 7.7 Trial Balance

Narayanamurthy Drawings Account 2,500

Opening stock 25,500
Debtors 23,500
Loan to Sundar 5,000
Bills receivable 3,000
Bills payable 4,450
Creditors 12,000
Cash at office 400
Tools and fixtures 6,250
Bank overdraft 3,000
Cash at bank 2,250
Import duty 1,750
Purchases 20,000
Salaries 1,250
Sales 56,500
Wages 5,500
Purchases returns 300
Sales returns 250
Commission 350
Stationery 500
Business expenses 850
Rent account 500
Discount received 2,000
Bad debts 400

Solution:
Trial Balance
Debit Balances Credit Balances
Rs. Rs.
Narayanamurthy Drawings a/c 2,500 Narayanamurthy Capital a/c 21,500
Opening stock 25,500 Bills payable 4,450
Debtors 23,500 Creditors 12,000
Loan to Sundar 5,000 Bank overdraft 3,000
Bills receivable 3,000 Sales 12,000
 Acharya Nagarjuna University 7.8 Centre for Distance Education
Cash at office 400 Purchases returns 300
Tools and fixtures 6,250 Discount received 2,000
Cash at bank 2,250
Import duty 1,750
Purchases 20,000
Salaries 1,250
Wages 5,500
Sales returns 250
Commission 350
Stationery 500
Business expenses 850
Rent account 500
Bad debts 400
99,750 99,750

2. Some inexperienced people prepare the following trial balance. Prepare it proper way.
Debit balances Credit balances
Rs. Rs.
Cash in hand 375 Opening stock 8,500
Cash at bank 9,100 Bills payable 8,00
Discount given 600 Debtors 19,000
Sales 27,500 Bills receivable 850
Furniture 750 Creditors 22,500
Machinery 10,000 Purchases returns 475
Carriage inwards 650 Purchases 15,000
Insurance 400 Office salaries 4,150
Stationery & Printing 350 Sales returns 500
Taxes 550
Mukundam Capital 20,500
Mukundam Drawings 1,000
71,775 71,775
 Financial Accounting 7.9 Trial Balance
Solution:
Trial Balance
Debit balances Credit balances
Rs. Rs.
Cash in hand 375 Sales 27,500
Cash at bank 9,100 Mukundam Capital 20,500
Discount given 600 Bills payable 800
Furniture 750 Creditors 22,500
Machinery 10,000 Purchases returns 475
Carriage inwards 650
Insurance 400
Stationery & Printing 350
Taxes 550
Mukundam Drawing 1,000
Opening stock 8,500
Debtors 19,000
Bills receivable 850
Purchases 15,000
Office salaries 4,150
Sales returns 500
71,775 71,775

3. Prepare trial balance for the year ending 31st December 2007 from the following ledgers of
Chatterji.
Rs. Rs.
Plant and machinery 80,000 Salaries 6,800
Purchases 68,000 Wages 10,000
Purchases returns 1,275 Discount received 800
Sales returns 1,000 Sundry Creditors 25,000
Opening stock 30,000 Freight – Purchases 750
 Acharya Nagarjuna University 7.10 Centre for Distance Education

Capital account 1,00,000 Freight – Sales 1,200

Discount given 350 Rent, rates and taxes 2,000
Bank charges 75 Advertisements 2,000
Sundry debtors 45,000 Cash at bank 6,900
Sales 1,27,000

Solution:
Trial balance of Chatterji as on 31st December 2007
Debit balances Credit balances
Rs. Rs.
Plant and machinery 80,000 Capital account 1,00,000
Purchases 68,000 Sales 1,27,000
Sales returns 1,000 Purchases returns 1,275
Opening stock 30,000 Discount received 800
Discount given 350 Sundry creditors 25,000
Bank charges 75
Sundry debtors 45,000
Salaries 6,800
Wages 10,000
Freight – Purchases 750
Freight – Sales 1,200
Rents, rates and taxes 2,000
Advertisements 2,000
Cash at bank 6,900
2,54,075 2,54,075
4. Prepare trial balance from the books of Gupta as on 31st December 2007.
Rs. Rs.
Capital 8,794 Furniture 250
Opening stock as on 1-1-2007 8,560 Cash in hand 5
 Financial Accounting 7.11 Trial Balance
Discount (Cr) 35 Sundry creditors 845
Wages 3,000 Rates and taxes 30
Advertising 470 Printing and stationery 50
Plant and machinery 2,000 Sundry debtors 1,800
Sales 36,000 Drawings 1,250
Water and energy 70 General expenses 123
Purchases returns 190 Insurance 42
Office rent 150
Purchases 26,270
Bills receivable 200
Cash at bank 666

Solution:
Trial balance of Gupta as on 31st December 2007
Debit balances Credit balances
Rs. Rs.
Opening stock 8,560 Capital 8,794
Wages 3,000 Discount (Cr) 35
Advertising 470 Sales 36,000
Plant and machinery 2,000 Purchases returns 190
Water and energy 70 Sundry creditors 845
Office rent 150 Suspense account 1,072
Purchases 26,270 (Dif. In trial balance)
Bills receivable 200
Cash at bank 666
Furniture 250
Cash in hand 5
Sundry debtors 1,800
Rates and taxes 30
 Acharya Nagarjuna University 7.12 Centre for Distance Education
Printing and stationery 50
Drawings 1,250
General expenses 123
Insurance 42
46,936 46,936

5. From the following particulars prepare Trial balance of Pradeep as on 31st December 2007.
Rs. Rs.
Pradeep capital 1,19,400 Sales 3,56,530
Pradeep drawings 10,550 Sales returns 2,780
Sundry creditors 59,630 Salaries 11,000
6% loan (credit) 20,000 Rent and taxes 5,620

Cash in hand 3,030 Interest and discount 5,870

Cash at bank 18,970 Traveling expenses 1,880
Sundry debtors 62,000 Repairs 3,370
Bills receivable 9,500 Insurance 400
Provision for doubtful debts 2,500 Bad debts 3,620
Furniture 8,970 Commission received 5,640
Plant and machinery 28,800
Stock as on 1-1-2007 89,780
Purchases 2,56,590
Productive wages 40,970

Solution:
Pradeep Trial balance as on 31st December 2007
Debit balances Credit balances
Rs. Rs.
Pradeep drawings 10,550 Pradeep capital 1,19,400
 Financial Accounting 7.13 Trial Balance

Cash in hand 3,030 Sundry creditors 59,630

Cash at bank 18,970 6% loan (credit) 20,000
Sundry creditors 62,000 Provision for doubtful debts 2,500
Bills receivable 9,500 Sales 3,56,530
Furniture 8,970 Commission received 5,640
Stock on 1-1-2007 89,780
Purchases 2,56,590
Productive wages 40,970
Sales returns 2,780
Salaries 11,000
Rent and taxes 5,620
Interest and discount 5,870
Traveling expenses 1,880
Repairs 3,370

Insurance 400
Bad debts 3,620
5,63,700 5,63,700
7.8: Try yourself:
1. The following balances are taken from Nagabhushanam books. Prepare trial balance as on
31st December 2007.
Rs. Rs.
Nagabhushanam Capital 15,000 Sales returns 1,000
Nagabhushanam Drawings 2,500 Discounts given 800
Furniture 1,300 Discounts received 1,000
Bank overdraft 2,100 Taxes and insurance 1,000
Creditors 6,650 General expenses 2,000
Business premises 10,000 Salaries 4,500
Opening stock 11,000 Commission paid 1,100
 Acharya Nagarjuna University 7.14 Centre for Distance Education
Debtors 9,000 Carriage inwards 900
Rent received 500 Reserve for bad&doubtful debts 250
Purchases 55,000 Bad debts 400
(Total of trial balance: Rs. 1,00,500)
2. The following are the balances taken from Raghupathi as on 30th September 2007. Prepare
trial balance from these particulars.
Rs. Rs.
Raghupathi capital 59,700 Cash at bank 11,665
Drawings 5,275 Cash in hand 295
Bills receivable 4,750 Insurance 200
Machinery 14,400 Traveling expenses 910
Debtors 31,000 Salaries and wages 5,500
8% Loan (Cr) 10,000 Stock as on 1-10-2006 44,840
Fixtures and Fittings 4,485 Rent and taxes 2,810
Creditors 28,815 Commission received 2,820
Bad debts 1,810 Sales 1,78,215
Discount 2,935 Purchases 1,28,295
Repairs 1,285 Productive wages 20,485
Purchases returns 1,390
(Total of trial balance: Rs. 2,80,940)
3. Prepare trial balance from the following balances.
Rs. Rs.
Opening stock 18,600 Discount given 1,500
Coal and coke 2,000 Loans 5,000
Productive wages 11,000 Debtors 16,000
Purchases 80,000 Creditors 4,000
Sales 1,20,000 Profit & loss A/A(Cr) 4,000
Carriage outwards 1,500 Lease asset 6,500
Repairs 1,000 Machinery 8,000
Loose tools 1,300 Patents 1,000
 Financial Accounting 7.15 Trial Balance
Capital 40,000 Discount received 600
Lighting charges 1,800 Goodwill 15,000
Office salaries 2,600 Cash at bank 5,100
Office furniture 500 Cash in hand 200
(Total of trial balance: Rs. 1,73,600)
4. The following are the balances of Niranjan as on 31st December 2007. Based on these prepare
trial balance.
Rs. Rs.
Sundry debtors 60,000 Capital 2,00,000
Sales 2,50,000 Drawings 35,000
Sundry creditors 10,000 Opening stock 50,000
General trading expenses 12,000 Sales returns 3,000
Factory rent 2,000 Plant and machinery 60,000
Interest received 1,200 Motor vehicles 20,000
Purchases returns 2,000 Bank balance 23,000
Productive wages 20,000 Loan on Pledge (Dr) 20,000
Purchases 1,00,000 Cash balance 100
Discount received 1,800 Traveling expenses 6,000
Provision for bad debts 2,000 Discount given 2,000
Furniture 5,000 Office salaries 22,000
Carriage inwards 5,500 Rates, taxes and insurance 1,200
(Total of trial balance:Rs. 4,67,000)
5. The following are the balances of Sudhakar as on 31st December 2007. Prepare trial balance
as on that date.
Rs. Rs.
Land and buildings 26,000 Carriage inwards 1,700
Sundry debtors 40,500 Discount given 1,400
Sundry creditors 45,000 Discount received 1,100
Plant and machinery 20,000 Reserve for doubtful debts 1,000
Purchases 35,000 Factory expenses 3,400
 Acharya Nagarjuna University 7.16 Centre for Distance Education
Sales 1,23,400 Patent rights 2,000
Opening stock 23,500 Capital 45,000
Wages 27,000 Drawings 6,100
Factory rent and taxes 2,500 Cash at bank 4,000
Salaries 6,800 Cash in hand 250
Advertising 3,000
Office rent and insurance 4,000
General expenses 6,800
(Total of trial balance: Rs. 2,15,500)

7.9: Summary:
According to double entry system for every debit there will be equal credit. When accounts
are written according to this principle, debit balances equal to credit balances.
For preparation of final accounts and to know the accuracy of account balances trial balance
is prepared. It is not an account. It is a statement consisting of balances of ledger.
The credit and debit of trial balance should be equal. Nominal expenses, assets, debtors
are shown on debit side and incomes, creditors; liabilities are shown on credit side.
7.10: Glossary:
Trial balance: It is a statement consisting of accounting balances prepared by the business man
by the end of the year to know the accuracy of accounts.
Suspense account: It is a temporary account opened to transfer the difference in the trial balance
if any.
Totals method of trial balance: A statement prepared based on the debit and credit balances of
each account. Debit balances are shown on debit side and credit balances on credit side.
Balances method of trial balance: A statement prepared based on the balance of each account.
Only the net balance will be shown in the trial balance.

7.11: Self Assessment Questions:

1. Why a trial balance? And how is it prepared?
2. What are the errors disclosed by trial balance?
3. What are the errors not disclosed by trial balance?
- Dr.R.Jayaprakash Reddy.
Lesson - 8

FINAL ACCOUNTS
TRADING ACCOUNT & PROFIT & LOSS ACCOUNT

OBJECTIVES:
Through the study of this Lesson, you are able to understand

What are the objectives of preparing Final Accounts?

What are the various stages in the preparation of Final Accounts?

What is the treatment of Capital and Revenue items?

How the Trading Account is prepared?

How the Manufacturing Account is prepared?

How the Profit & Loss Account is prepared?

STRUCTURE :
8.1. Introduction
8.2. Objectives
8.3. Various stages in the preparation of Final Accounts
8.4. Capital & Revenue items
8.5. Trading Account
8.6. Manufacuting Account
8.7. Profit & Loss Account
8.8. Summary
8.9. Questions
8.10.Exercises

8.1. INTRODUCTION :
The main objectives of any business is earning Profit. If the businessman is able to know
the Profit / Loss of the business in one financial year; then he will be able to take the appropriate
decisions about the operation of business in future, expansion of business etc. Generally the
businessman will prepare various statements at the end of the every half year or every year to
 Centre for Distance Education 8.2 Acharya Nagarjuna University
findout Profit or Loss, Assets and Liabilites of the business firm. These statements are called Final
Accounts. Preparation of Final Accounts is the last stage in the process of Accounting. Final Accounts
are prepared with the help of Journal Entries and Ledger Balances.

8.2. OBJECTIVES OF FINAL ACCOUNTS:

There are two objectives in the preparation of Final Accounts
a) to findout the Profit or Loss of the business for a particular period
b) to findout the true financial position of the business firm on a particular date i.e., to find
out the total value of assets, total value of liabilities and the amount of Capital invested
in the firm etc.

8.3. STAGES IN THE PREPARATION OF FINAL ACCOUNTS :

There are 3 stages in the preparation of Final Accounts. They are
a) Preparation of Trading Account for the year ended -----
b) Preparation of Profit & Loss Account for the year ended -----
c) Preparation of Balance Sheet as on -----
The Trading Account and Profit & Loss Accounts are prepared to achieve the first objective
i.e., to find out the Profit & Loss of the business for a particular period. Balance Sheet is prepared
to achieve the second Objective i.e., to find out the true financial position of the business on a
particular date.

8.4. CAPITAL AND REVENUE ITEMS:

Business transactions can be devided into two broad categories.
1) Capital items 2) Revenue items.
The Capital items can be subdivided into two categories viz. Revenue Expenditure and
Revenue Income. All the Revenue items must be entered in the Trading Account and Profit & Loss
Account and all the Capital itmes must be entered in the Balance Sheet.
8.4.1. Capital Expenditure :
The amount paid for the purchase of Fixed Assets is called Capital Expenditure. The
expenditure incured for the development and constructive changes for the increase of earning
capacity is called as Capital Expenditure. For Example:- Purchase of Plant & machinery, their
carriage, installation expenses etc.
8.4.2. Revenue Expenditure:
The day today expenses incured in the regular course of business are called Revenue
Expenses. The expenditure paid for smooth conduct of the business and to maintain the Assets
with the same capacity is called Revenue Expenditure. For Ex:- Office Expenses, Selling &
Distribution Expenses etc.
 FINANCIAL ACCOUNTING -I 8.3 Final Accounts.....
8.4.3. Capital Incomes:
The Profits or the incomes earned on the non-trading transactions are called capital incomes
or capital profits. For Ex:- Amount received on the sale of fixed asset, premium received when the
shares are issued at premium, Profit received when the assets are insured at excess value.
8.4.4. Revenue Incomes:
The amounts received in the day today business transactions are called Revenue Incomes.
These incomes will be received every year which means these are recurring incomes.
For Ex:- Sale of goods, Commission received, Interest received, Discount received etc.,
8.4.5. Differences between Capital Expenditure and Revenue Expenditure:

S.No Revenue Expenditure S.No Capital Expenditure

1. Recurring expenses are called 1. Non recurring expenses are called

Revenue expenses Capital expenses

2. When the purchase is meant for 2. When the purchase is meant for
sales it is treated as revenue using it in the Business, it is
expenditure treated as capital expenditure.
3. Expenses incured to maintain 3. Expenses incured to increase the
the existing capacity of the earing capacity of the asset is
asset is called Revenue called capital expenditure.
expenditure
4. The Benefit of the Revenue 4. The benefit of the capital
expenditure will be limited to expenditure will extend for long
one year time i.e. for more than one year.
 Centre for Distance Education 8.4 Acharya Nagarjuna University
8.4.6. Difference between Capital Receipts and Revenue Receipts:-

8.4.7. Treatment of Capital and Revenue items in Final Accounts:

Revenue Expenses must be debited to the Trading Account and Profit & Loss Account and
Revenue Incomes must be credited to the Trading Account and Profit & Loss Account. Capital
Receipts must be shown on the Liabilities side of the Balance Sheet and Capital Payments or
Capital Expenditure must be shown on the Assets side of the Balance Sheet.
8.4.8. Classification of Firms:
The business firm can be devided into two categories for the purpose of preparation of
Final Accounts.
i) Trading firms,
ii) Manufacturing firms
i Trading firms:- The business firm purchasing the finished goods and selling them
with profit are called trading firms. These firms does not involve in manufacturing the
goods. The Final Accounts of these firms will be consisting of
a) Trading Account,
b) Profit & Loss Account,
c) Balance Sheet.
 FINANCIAL ACCOUNTING -I 8.5 Final Accounts.....
ii Manufacturing firms:- The firm purchasing the raw-material converting them into finished
goods with manufacturing process and selling them with Profit are called Manufacturing
firms. The Final Accounts of these firm consisting of -
a) Manufacturing Account,
b) Trading Account,
c) Profit & Loss Account &
d) Balance Sheet.

8.5. TRADING ACCOUNT:

The Account prepared to findout the Profit or loss on the purchase and sale of the goods is
called Trading Account. The Profit ascertained in the Trading Account is called Gross Profit. If there
is loss in this Account, it is called Gross Loss. The Proforma of the Trading Account will be as
under:

Dr Trading Account of Mr. X for the year ended 31-03-2007. Cr

Particulars Amount Particulars Amount
Rs. Rs.
To Opening stock xxx By sales xxx
To Purchases xxx Less sales returun xxx xxx
Less purchase Returns xxx xxx By Closing stock xxx
To Carriage inwards xxx
To Wages xxx
To Fuel xxx
To Freight & duty xxx
To Import duties xxx
To dock expenses xxx
To Marine insurance xxx
To Duty & Clearing charges xxx
To consumable stores xxx
To octroi xxx
To Royalty xxx
To gross profit balance c/d xxx
( Transfer to P&L Account )
___ ___
xxx xxx
 Centre for Distance Education 8.6 Acharya Nagarjuna University
8.5.1 Items to be debited to Trading Account:-
The details of the items to be debited to Trading Account were:-
1) Opening Stock:- It is the balance of Stock in the beginning of the year. In the case of
manufacturing firms, the opening stock includes three items viz., Raw-material, work-
in-progress and Finished goods.
2) Purchases:- The net amount of goods purchased during the year must be debited
to Trading Account. Purchase Returns must be deducted from Purchases to find out
Net Purchases.
3) Direct Expenses:- The expenses incurred for the purchase of goods and making
them ready for sale are called Direct Expenses. They can be devided as follows.
a) Expenses for the purchase of goods:- For Ex:- Carriage inwards, Cartage,
Freight, Duty, Octroi, Local Taxes, Import Duties, Clearing Charges, Unloading
Charges, Dock Charges, Railway Charges etc.
b) Expenses for manufacture of goods:- For Ex:- Gas, Water, Fuel, Power,
Factory Lighting, Stores, Royalty, Factory Insurance, Factory Expenses, Factory
Rent, Manufactureing Expenses etc.
c) Wages:- The remuneration paid to the workers for participating in the Production
is called wages. The term ‘Wages & Salaries’ shall be debited to Trading Account
and the term ‘Salaries & Wages’ shall be debited to Profit & Loss Account.

8.5.2. Items to be Credited to Trading Account:-

1) Sales:- The net amount of goods sold during the year must be credited to Trading
Account. Sales Returns must be deducted from Sales to findout the net amount of
Sales.
2) Closing Stock:- This item is generally given in Adjustments but not in Trial Balance. It is
the balance of stock at the end of the year. Closing Stock must be valued at Cost or
Market Value which ever is less.
3) Loss of Stock:- The loss or goods by fire or any other reason must be credited to
Trading Account.
8.5.3. Closing Entries to be passed in the preparation of Trading Account:-
The following entries shall be passed for the preparation of Trading Account. The various
accounts transfered to Trading Account will be closed with these entries.
FINANCIAL ACCOUNTING -I 8.7 Final Accounts.....
1) Trading Account Dr. xxx
To Opening Stock xxx
To Purchases xxx
To Direct Expenses xxx
(Being the Opening Stock, Purchases & all
Direct Expenses transfered to Trading Account)

2) Sales A/c Dr. xxx

Closing Stock Account Dr. xxx
To Trading Account xxx
(Being the Sales and Closing Stock transfered)

3) Purchase Returns Account Dr. xxx

To Purchases Account xxx
(Being the returns transfered to Purchases Account)

4) Sales Account Dr. xxx

To Sales Returns Account xxx
(Being the returns transfered to Sales Account)

5) Trading Account Dr. xxx

To Profit & Loss Account xxx
(Being the Gross profit transfered to Profit & Loss Acc.)

6) Profit & Loss Account Dr. xxx

To Trading Account xxx
(Being the loss transfered to Profit & Loss Account
 Centre for Distance Education 8.8 Acharya Nagarjuna University
8.5.4. Advantages of Trading Account:-
1) Gross Profit or Gross Loss can be ascertained.
2) Changes in the Direct Expenses can be observed
3) Cost of groods sold can be calculated through the Trading Account.
4) By comparing the Opening and Closing Balances, it can be observed that whether
the purchases are made properly or not.
5) The improvement or development of the firm can be observed by comparing the
Sales of current year with the Standard Sales or with the Sales of last year.
Example-1:-
From the following data prepare Trading Account of Mr X for the year ended 31-03-2007.
Stock on 01-04-06 Rs.18000/-, Purchases Rs.90000/-, Purchase Returns Rs.6000/- Sales
Rs.153000/-, Sales Returns Rs.9000/-, Carriage inwards Rs.3000/-, Freight Rs.1500, Cartage
Rs.1500/-, Duty and Clearing Charges Rs.1200/-, Stock on 31-03-2007 Rs.21000/-
Solution:-
Dr Trading Account of Mr. X for the year ended 31-03-2007 Cr
Particulars Amount Particulars Amount
Rs. Rs.
To opening stock 18,000 By sales 1,53,000
To purchases 90,000 Less sales returun 9,000 1,44,000
Less purchase Returns 6,000 84,000 By Closing stock 21,000
To carriage inwards 3,000
To Freight 1,500
To Cartage 1,500
To Duty & crearing charges 1,200
To gross profit balance c/d 55,800
________ _______
1,65,000 1,65,000

Example-2:-
From the following particulars of Mr. Y prepare Trading Account for the year ended
31-03-2007
 FINANCIAL ACCOUNTING -I 8.9 Final Accounts.....
Opening stock on (01-04-06) Fuel 750
Raw material 12,000 Factory Rent 3,000
Work in progress 30,000 Factory lighting 1,500
finished goods 21,000 Sales 1,20,000
Purchases 6,000 Sales Returns 3,000
carriage inwards 3,000 Closing stock on 31.03.07
wages 3,000 Raw material 12,300
clearing charges
marine insurance 3,000 Work in - progress 14,700
coal & coke 1,500 Finished goods 27,000
Power 750

Solution:
Dr. Trading Account of Mr. Y for he year ended 31-03-2007 Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Opening stock on (01-04-06) By sales 1,20,000
Raw material 12,000 Less returns 3,000 1,17,000
Work in progress 30,000 By closing stock
Finished goods 21,000 Raw material 12,300
To Purchases 54,000 Work - in - progress 14,700
To carriage inwards 6,000 Finished goods 27,000
To wages 3,000
To clearing charges 3,000
To marine insurance 3,000
To coal & coke 1,500
To Power 750
To Fuel 750
To Factory Rent 3,000
To Factory lighting 1,500
To Gross profit. Balance C/d 31,500
________ _______
1,71,000 1,71,000
 Centre for Distance Education 8.10 Acharya Nagarjuna University
8.6. MANUFACTURING ACCOUNT :

The manufacturing firms will compute the Cost of Production by preparing Manufacturing
Account. These firms will prepare the Manufacturing Account along with the Trading Account and
Profit & Loss Account. The Cost of Production will be calculated through Manufacturing Account
and it will be transferred to Trading Account to findout the Gross Profit or Gross Loss. The Proforma
of the Manufaturin Account is given here under.
Dr Manufacturing Account of X for the year ended 31-03-2007 Cr
Rs. Rs.
To Opening stock on (01-04-06) By closing stock
Raw material xxx Raw material xxx
Work in progress xxx Work - in - progress xxx
To Purchases of Material xxx By cost of production - xxx
Less Returns xxx xxx ( Transfer to trading account )
To productive wages xxx
To Power xxx
To Heating & lighting xxx
To Factory Rent & Insurance xxx
To coal & coke xxx
To repairs to plant xxx
To Depreciation on Machinery xxx
___ ___
xxx xxx
Dr Trading Account of Mr X for the year ended 31-03-2007 Cr
Rs. Rs.
To Opening Balance of finished goods xxx By sales ( finished goods ) xxx
To purchase of finished goods xxx Less Returns xxx xxx
To Cost of production ( Transfer xxx By finsihed goods (closing balance) xxx
from manufacturing account )
To Gross profit xxx
___ ___
xxx xxx
 FINANCIAL ACCOUNTING -I 8.8 Final Accounts.....
Example- 3:-
From the following particulars prepare Manufacturing Account and Trading account of Mr
Balu for the Year ended 31. 03,07.
Rs. Rs.
Raw material on 01.04.06 6,000 Material returned 100
on 31.03.07 5,800 Repairs to plant 800
Consumable stores 1,700 Repairs to factory buildings 500
Motive power 3,000 finished goods on 01.04.06 6,000
Work in progress on 01.04.06 8,000 on 31.03.07 7,000
on 31.03.07 10,000 Depreciatoin on Factory builidings 2,000
on plant & machinery 3,000
Factory Rent & Rates 1,600 Factory lighting 400
Factory Insurance 500 Productive wages 21,000
Other Direct expenses 1,300 Carriage in words 600
Sales 82,000 Purchases 23,000

Sales Returnes 2,200

Solution:
Dr Manufacturing Account of Balu for the year ended 31-03-2007 Cr
Particulars Amount Particulars Amount
Rs. Rs.
To Opening stock By closing stock
Raw material 6,000 Raw material 5,800
Work in progress 8,000 Work in progress 10,000
To Purchase of Material 23,000 By cost of production - C/D
Less Returnes 100 22,900 ( Transfer to trading A/c) 57,500
To carriage in words 600
To wages 21,000
To Consumable stores 1,700
To Motive power 3,000
To Factory Rent & Rates 1,600
 Centre for Distance Education 8.12 Acharya Nagarjuna University
To Factory Insurance 500
To Direct expenses 1,300
To Repairs to plant 800
To Repairs to factory buildings 500
To Depreciatoin on Factory builidings2,000
on plant 3,000
To Factory lighting 400
______ ______
73,300 73,300
Dr Trading Account of Balu for the year ended 31-03-2007 Cr
Rs. Rs.
To Opening stock (finished goods) 6,000 By sales 82,000
To Cost of production B/D 57,500 Less Returns 2,200 79,800
( Transfer to Trading A/c) By closing stock of finsished goods 7,000
To Gross profit Balance C/d 23,300
______ ______
86,800 86,800

8.7. PROFIT & LOSS ACCOUNT :

Profit & Loss Account is prepared to find out the Net Profit or Net Loss during a particular
business period. This account will be started with the Gross Profit and all the expenses and losses
given in the Trial Balance will be debited (except those debited to Trading Account) and all the
Incomes and Profits given in the Trial Balance will be credited. The proforma of Profit & Loss
Account will be as under.
Dr Profit & Loss Account of Mr. X for the year ended 31-03-2007 Cr
Rs. Rs.
To salaries & wages xxx By Gross Profit xxx
To Rent & Taxes xxx By Rent received xxx
To Lighting xxx By commission received xxx
To Insurance xxx By Discount received xxx
To printing & stationary xxx By interest received xxx
To Postage & Telegrams xxx By interest on investments xxx
To Telephone xxx By interest on Drawings xxx
 FINANCIAL ACCOUNTING -I 8.13 Final Accounts.....
To legal expenses xxx By interest on Bank deposits xxx
To Audit fees xxx By dividends received xxx
To Selling & Distribution expenses xxx By profits on sale of assets xxx
To Gowdown expenses xxx By Bad debts recovred xxx
To Packing expenses xxx By Apprentice premium xxx
To Advertising xxx By reserve for discount on creditors xxx
To Commission on sales xxx
To Baddebts xxx
To Discounts allowed xxx
To Delivery van expenses xxx
To Travelling expenses xxx
To Carriage outwards xxx
To Samples xxx
To Interest on capital xxx
To Interest on loans xxx
To Depreciation on Assets xxx
To Repairs on Assets xxx
To Net profits
( transfer to capital account ) xxx
___ ___
xxx xxx
8.7.1. Closing entries to be passed for the transfer of expenses and incomes to Profit &
Loss Account:-
a) For the transfer of all indirect expenses and losses to Profit & Loss Account:-
Profit & Loss Account Dr. xxx
To Administrative expenses xxx
To Selling and Distribution Expenses xxx
To Financial Expenses xxx
To Operating Expenses xxx
To Provisions & Reserves xxx
 Centre for Distance Education 8.14 Acharya Nagarjuna University

b) For the transfer of various incomes and profits to P&L Account

Discount received Account Dr. xxx
Interest received Account Dr. xxx
Commission received Account Dr. xxx
Dividends received Account Dr. xxx
Apprentice Premium Account Dr. xxx
To P&L Account xxx

c) For the transfer of Net Profit to Capital Account

Profit & Loss Account Dr. xxx
To Capital Account xxx

d) For the transfer of Net Loss to Capital Account

Capital Account Dr. xxx
To Profit & Loss Account xxx
Example-4:
From the following particulars, prepare Profit & Loss Account for the year ended 31-03-
2007.
Rs. Rs.
Salaries 3,000 Audit fees 600
Carriage outwards 1,000 Baddebts 400
Printing & Stationery 1,500 Commssion received 500
Discount allowed 750 Rent, rates, insurance 500
Postage 250 General expenses 400

Repairs 400 Gross Profit 8,000

 FINANCIAL ACCOUNTING -I 8.15 Final Accounts.....
Solution:
Dr. Profit & Loss Account of --- for the year ended 31-03-2007 Cr
Rs. Rs.
To Salaries 3,000 By Gross profit 8,000
To Carriage outwards 1,000 By Commssion received 500
To Printing & Stationery 1,500 By Rent received 500
To Discount allowed 750
To Postage 250
To Repairs 400
To Audit fees 600
To Baddebts 400
To Rent, rates, insurance 500
To General expenses 400
To Net Profit
( Transfer to captial A/c) 3,200
______ ______
12,000 12,000

Example 5 :
From the following particulars, prepare Trading and Profit & Loss Accunt for the year ended
31-03-2007

Rs. Rs.
Stock on 1-4-06 50000 Purchases 500000
Purchase Returns 50000 Sales 1000000
Sales Retunrs 50000 Direct Wages 20000
Indirect Wages 10000 Carriage in wards 5000
Carriage out wards 10000 Distribution expenses 5000
Office Rent 20000 Repairs 10000
Duty 5000 Coal & Gas 15000
Office Lighting 10000 Closing Stock 150000
 Centre for Distance Education 8.16 Acharya Nagarjuna University
Solution:
Dr Trading & Profit & Loss Account of --- for the year ending 31-03-07 Cr
Rs. Rs.
To Opening stock 50,000 By sales 10,00,000
To Purchases 5,00,000 less Returns 50,000 9,50,000
Less Returns 50,000 4,50,000 By closing stock 1,50,000
To Direct wages 20,000
To Carriage in wards 5,000
To Duty 5,000
To Coal and Gas 15,000
To Gross profit
( Transfer to P&L Ac) 5,55,000
________ ________
8,00,000 8,00,000
To Indirect Wages 10,000 By Gross profit 5,55,000
To Carriage out wards 10,000
To Distribution expenses 5,000
To Office Rent 20,000
To Repairs 10,000
To Office Lighting 10,000
To Net Profit

( Transfer to captial A/c) 4,90,000

_______ _______
5,55,000 5,55,000

8.8. ADVANTAGES OF PROFIT & LOSS ACCOUNT :

1) Net result of the business firm can be ascertained by the preparation of Profit & Loss
Account.
2) The percentages of various expenses on Sales can be ascertained by the preparation
of this account. These percentages can be compared with the last year’s percentages
and the firm’s control on expenses can be analysed.
 FINANCIAL ACCOUNTING -I 8.17 Final Accounts.....
3) The efficiency of the firm can be ascertained by comparing the actual expenses with
the Standard expenses.
4) The development of the firm in future can be estimated by finding out the net profit.
5) Preparation of Profit & Loss account facilitates the creation of Reserves and provisions
to meet the Contingent Liabilities.

8.9. SUMMARY:
Every businessman prepares Final Accounts at the end of the year to findout the Profit or
Loss of the business. Trading and P&L Accounts are prepared to find out the profitability of the firm.
When the profitability is good, It can be said that there is chance for improvement of the business.

8.10. QUESTIONS:
a) Short Answer questions:-
1) What are the main objectives of Final Accounts?
2) What are the various stages in the preparation of Final Accounts?
3) What is necessity of recognising the difference between the Capital and Revenue
items?
4) Explain the Capital & revenue items?
5) State the differences between Capital Expenditure & Revenue Expenditure?
6) State the differences between Capital Receipts & Revenue Receipts?
7) What is meant by Trading Account? Why it is prepared?
8) State the Advantages of Trading Account.
9) State the various items in Trading Account.
10) Prepare the ‘Format’ of the Trading Account.
8) Write the closing entries for the various items in Trading Account.
12) What is meant by Production Account/ Manufacturing Account? Show the Formats
of the Manufacturing Account and Trading Account which are prepared by
manufacturing firms.
13) What is meant by Profit & Loss Account? Why it is prepared?
14) What is the necessity of Profit & Loss Account?
15) Explain the various items in the Profit & Loss Account?
16) Prepare the Format of Profit & Loss Account.
17) Write the closing entries for the various items in Profit & Loss Account.
 Centre for Distance Education 8.18 Acharya Nagarjuna University
b) Essay Questions:-
1) What is meant by Capital Expenditure? Explain the differences between the Capital
Expenditure & Revenue Expenditure.
2) What is meant by Trading Account? Prepare the Trading Account of a business
firm with assumed figures.
3) Why the Profit & Loss account is prepared? What is its importance?
4) Why the Manufacturing Account is prepared in Manufacturing firms? Prepare the
Format of Manufacturing Account.

8.8. EXERCISES :
1) From the following particulars prepare Trading Account for the year ended 31-03-2007
Rs. Rs.
Opening Stock 1-4-06 10000 Net Purchases 52400
Manufacturing Wages 8000 Clearing Charges 648
Import Duties 3000 Freight 210
Net Sales 74900 Factory Rent & Taxes 1640
Factory Insurance 640 Carriage inwards 167
Octroi and Dock Expenses 164 Closing Stock 31-3-07 13000
(GP Rs.8031)
2) From the following information prepare Trading Account and find out Gross Profit
Rs. Rs.
Opening Stock 5570 Sales Returns 524
Purchases 13816 Carriage inwards 1400
Sales 15284 Import duties 252
Purchase Returns 390 Closing Stock 8880
(GP Rs.2992)
3) From the following particulars, prepare Trading Account for the year ending 31-03-2007
Rs. Rs.
Purchases 85000 Wages 10000
Manufacturing Expenses 3900 Opening Stock 20000
Carriage inwards 200 Sales Returns 100
FINANCIAL ACCOUNTING -I 8.19 Final Accounts.....
Sales 135000 Purchase Returns 400
Freight & Duty 10000 Consumable Stores 400
Power 600 Closing Stock 24000
(GP Rs.29200)
4) From the following data prepare Trading Account and give necessary journal entry.
Rs. Rs.
Purchases 6500 Lighting 50
Sale 8850 Stores Expenditure 150
Purchase Returns 100 Stock on 1-4-06 500
Clearing charges 50 Stock 31-3-07 1250
Cartage 50 Wages 800
Fuel & Power 250 Sales Returns 100
Discount allowed 100
(GP Rs.4750)
5) From the following particulars prepare production Account for the year ended
31-03-2007
Rs. Rs.
Opening Stock; Material 6000 Wages of Workers 40000
Work-in-progress 8000 Lighting & Gas(Factory) 4000
Finished Goods 16000 Carriage in wards 2000
Closing Stock: Material 2000 Special plant rent 4000
Work-in-progress 10000 Rent of the factory 8000
Finished goods 8000 Repairs to Plant 4000
Supervisor Salary 16000 Repairs to Factory 2000
Wages 2000 Salaries of staff working 6000
Worke managers salary 12000 Royalty on Production 4000
Purchase of Material 80000
(Ans: Cost of Production = 180000)
 Centre for Distance Education 8.20 Acharya Nagarjuna University
6) From the following particulars, prepare Profit & Loss Account for the year ended 31-
03-2007
Rs. Rs.
Salaries 3000 Printing & Stationery 1500
Carriage outwards 1000 Commission received 1000
Discount allowed 500 Rent received 500
Commission Paid 1500 Insurance Premium 1000
Bad debts 1000 Office Electricity charges 500
Repairs 1000 Gross Profit 24000
Advertisements 1000 Audit Fees 500
General Expenses 1000 Postage 1000
(Ans: N.P. Rs.8500)
7) From the following ledger balances of Gopal, prepare Profit & Loss Account for the year
ended 31-03-2007
Rs. Rs.
Rent Paid 6000 Bad debts 1000
Salaries 8000 Printing & Stationery 1500
Commission Paid 2000 Office Insruance 1000
Discount allowed 2000 Postage 500
Advertisements 2000 Repairs 500
Telephone charges 1000 Interest received 3500
Interest on loans 3000 Gross Profit 40% on Sales 200000
(Ans: NP: 55000)
8) From the following ledger balances, of Mr. Suresh, prepare Trading and Profit & Loss
Account for the year ended 31-03-2007.

Rs. Rs.
Opening Stock 41730 Wages 12270
Sales 207830 Discounts 8240
Purchases 127330 Discounts received 7630
 FINANCIAL ACCOUNTING -I 8.21 Final Accounts.....
Carriage 4780 General Expenses 13380
Baddebts 2250 Taxes 1880
Closing Stock 44200
(Ans: GP Rs.65920; NP Rs.47800)
9) From the following ledger balances of Devanand, prepare Trading and Profit & Loss
Account for the year ending 31-03-2007
Rs. Rs.
Wages 33000 Sales Returns 1500
Carriage 2250 Carriage outwards 750
Purchases 120000 Opening Stock 27000
Commission 3750 Duty etc. 1800
Salaries 27000 Discount allowed 6000
Printing & Stationery 750 Rent, Taxes, Insurance 9000
Trade Expenses 2700 Coal, Oil etc. 1200
Factory expenses 6750 Sales 225000
Interest received 4500 Discount received 9000
Purchase returns 3000 Closing Stock 500
(Ans: GP: Rs.35000, Net Loss: Rs.1450)
10) From the following ledger balances, prepare Trading and Profit & Loss Account
Rs. Rs.
Sales 16000 Sales returns 800
Purchases 12500 Purchase returns 700
Carriage inwards 425 Opening Stock 6400
Wages 375 Closing Stock 3225
Salaries 2800 Rent 1800
Advertisements 300 Insurance 240
Commission received 800 Discount allowed 85
(Ans: GP:545; Net Loss:5000)
Centre for Distance Education 8.22 Acharya Nagarjuna University
8) Prepare Trading and Profit & Loss Account
Rs. Rs.
Stock on 1st Jan. 5000 Purchases 195000
Wages 14000 Insurance 5500
Carriage in 4000 Commission (Dr) 4000
Interest on Capital 3500 Stationery 2250
Returns inwards 6500 Commission (Cr) 2000
Returns outwards 2500 Trade Expenses 1000
Rent & Taxes 5500 Carriage out 7250
Sales 250000 Stock in 31st Dec. 125000
(Ans: GP:153000, NP:126000)

T. Nageswara Rao
Vice - Principal
Hindu College, Guntur.
Lesson - 9

FINAL ACCOUNTS
BALANCE SHEET, ADJUSTMENTS
OBJECTIVES:
By the Study of this chapter, you will be able to understand the:

Importance of Balance Sheet

Objectives of Balance Sheet

Method of Preparation of Balance Sheet

STRUCTURE:
9.1. Introduction
9.2. Definition
9.3. Objectives of Balance Sheet
9.4. Proforma of Balance Sheet
9.5. Differences between Trial Balance & Balance Sheet
9.6. Differences between P&L Account & Balance Sheet
9.7. Adjustments
9.8. Summary
9.9. Examples
9.10. Questions
9.11. Exercises

9.1. INTRODUCTION:
Balance Sheet is the third and last step in the Final Accounts. Balance Sheet is prepared to
find out the true financial position of a business on a particular date. It is not an account but only a
statement.

9.2. DEFINITION OF BALANCE SHEET :

“Balance Sheet is a Statement prepared with the help of Assets and Liabilites to find out the
true financial position of the business on a particular date”.
 Centre for Distance Education 9.2 Acharya Nagarjuna University
9.3. OBJECTIVES OF BALANCE SHEET:
a) to know about all the Assets and the nature of these assets of the business firm.
b) to know about all the Liabilities payable and their nature.
c) to know about he Capital of the firm.

9.4. PROFORMA OF BALANCE SHEET :

Balance Sheet must be prepared in a systematic and Standard method. All the Liabilities
will be shown on one side and the Assets on the other side of the Balance Sheet in a systamatic
method. Balance Sheet can be prepared in two methods.
1) Order of Liquidity
2) Order of Permanance.
1. Order of Liquidity : The format of the Balance Sheet in this method will be as under.
Balance sheet of Sri Ram as on 31 - 03-07
Liabilities Amount Assets Amount
Rs. Rs.
Current Liabilities : Current Assets :
Out standing expenses xxx Cash in hand xxx
Incomes received in Advance xxx Cash at bank xxx
Bills payable xxx Short term investments xxx
Bank over draft xxx Debtors xxx
Creditors xxx Incomes receivable xxx
Loans : Prepaid expenses xxx
Long term loan xxx Closing stock xxx
Short term loan xxx Fixed Assets
Reserves & Surplus : Furniture & Fixtures xxx
General Reserves xxx Vehicles xxx
Special Reserves xxx Plant & Machinery xxx
Capital Land & Building xxx
Capital xxx Free hold property xxx
Add Net profit xxx Lease hold property xxx
Add Further capital xxx Intangible Assets
Add Interest on capital xxx Patents xxx
xxx
Less Drawings xxx Trade Marks xxx
Interest xxx xxx xxx Copy Rights xxx
Good will xxx
___ ___
xxx xxx
 FINANCIAL ACCOUNTING -I 9.3 Final Accounts.....

2. Order of Permanance : It is an opposite method to the above model. The format of the
Balance sheet in this method will be as under.

Balance sheet of Sri Ram as on 31 - 03-07

Liabilities Amount Assets Amount
Rs. Rs.
Capital xxx Intangible Assets :
Add Net profit xxx Good will xxx
Add Further capital xxx Copy Rights xxx
Add Interest on capital xxx Trade Marks xxx
xxx
Less Drawings xxx Patents xxx
Interest xxx xxx xxx Fixed Assets
Reserves & Surplus Lease hold property xxx
General Reserves xxx Free hold xxx
Special Reserves xxx Land & Buildings xxx
Loans Plant & Machinery xxx
Long term loan xxx Furniture & Fittings xxx
Short term loan xxx Vehicles xxx
Current Liabilities : Current Assets :
Creditors xxx Closing stock xxx
Bank O D xxx Incomes receivable xxx
Bills payable xxx Prepaid expenses xxx
Incomes received in Advance xxx Debtors xxx
Out standing expenses xxx Bills Receivable xxx
Cash in hand xxx
Cash at Bank xxx
___ ___
xxx xxx
 Centre for Distance Education 9.4 Acharya Nagarjuna University
9.5 DIFFERENCES BETWEEN TRIAL BALANCE & BALANCE SHEET:

S.No Trial Balance S.No Balance Sheet

1. Trial Balance is prepared to find 1. Balance sheet is prepared to findout

out the arithmatic accurancy of the the financial porision of a business.
ledger accounts

2. The ledger balances of all types 2. Personal accounts and real

of accounts personal real and accounts only will be entered in
nominal accounts will be the balance sheet.
entered in the trial balance
3. Trial Balance does not reveal 3. Profit or loss will be adjusted to
the profit or less. the capital in the Balance sheet.
4. Opeining stock will be posted in 4. Closing stock will be posted in
Trial Balance the Balance sheet
5. It is prepared before the 5. Balance sheet is prepared after
preparation of Trading & Profit the preparation of Trading &
& loss account Profit & loss account
6. Adjustments Viz : Out standing 6. All the adjustments are made in
expenses prepaid expenses the Balance sheet
etc. are not entered in the trial
balance
 FINANCIAL ACCOUNTING -I 9.5 Final Accounts.....

9.6 DIFFERENCES BETWEEN PROIFT & LOSS ACCOUNT AND

BALANCE SHEET:

S.No Balance Sheet S.No P& L Account

1. It is only a statment 1. It is an account

9.7 ADJUSTMENTS
2. It is prepared to find out the : 2. It is prepared to find out the profit
financial position of the or loss of the business.
The transactions given outside the Trial Balance are called adjustments. The items given in
business
the Trial Balance must be entered only once in Final Accounts. Bu the items given outside the Trial
Balance (Adjustments)
3. The balances must be entered
of personal and 3. Thetwice in FinalofAccounts
balances Nominalafter the writing the adjustment
entry; Adjustments are generally made for the following items.
Real accounts will be shown in accounts only will be entered in
this account
1) Closing Stock:- this account
4. Balance sheet will reveal
Adjustment the
Entry:- 4. P&L Account will reveal the
ability of the firm to discharge profitability and return on capital
Closing Stock Account Dr. xxx
the liabilities and will reveal the of the firm.
liquidity of the firm To Trading Account xxx
5. Liabilities will be posted on the 5. It is also devided into two parts.
left hand side and Assets will The left hand side is called. "
be posted on the Right hand Debit side" and the right side is
side of the Balance sheet called "credit side ".
6. It is prepared on a particular 6. It is prepared for the year ending.
date
 Centre for Distance Education 9.6 Acharya Nagarjuna University
Accounting Treatment:-
1) It must be credited to Trading Account
2) It must be shown as an Asset in the Balance sheet
When the Closing Stock is given in Trial Balance- it must be shown as an Asset in
the Balance Sheet only.
2) Outstanding Expenses:-
For Ex:- Outstanding Salaries, Rent, Wages etc.,
Adjustment Entry:-
Expenses Account Dr. xxx
To Outstanding Expenses Account xxx
Accounting treatment:-
1) It must be added to the respective item on the debit side of the Profit & Loss
Account.
2) It must be shown as Liability in the Balance Sheet
When it is given in Trial Balance - it must be shown as a liability in the Balance
Sheet only
3) Prepaid Expenses:- For example : Prepaid Insurance, Taxes, Rents etc.,
Adjustment Entry:-
Prepaid Rent A/c. Dr. xxx
To Rent A/c. xxx
Accounting Treatment:-
1) It must be deducted from the respective item on the debit side of the Profit & Loss
Account.
2) It must be shown as an Asset in the Balance Sheet.
When it is given in Trial Balance - It must be shown as an Asset in the Balance
Sheet only.
 FINANCIAL ACCOUNTING -I 9.7 Final Accounts.....

4) Incomes Receivable:- For Ex :- Rent receivable, Interest receivable etc.

Adjustment entry:-
Incomes receivable Acc. Dr. xxx
To Incomes Account xxx
Accounting Treatment:-
1) It must be added to the respective item on the credit side of the Profit & Loss
Account
2) It must be shown as Asset in the Balance Sheet
When it is given in Trial Balance - It must be shown as an Asset in the Balance
Sheet.
5) Incomes Received in Advance:- For Ex : Rent received in Advance, Interest received in
Advance etc.
Adjustment entry:-
Incomes Account Dr. xxx
To Incomes received in advance xxx
Accounting Treatment:-
1) It must be deducted from the respective item on the Credit side of the Profit &
Loss Account.
2) It must be shown as Liability in the Balance Sheet.
When it is given in Trial Balance - it must be shown as Liability in the Balance
Sheet.
6) Depreciation on Fixed Assets:- For Ex:- on Machinery, Furniture etc.
Adjustment entry:-
Depreciaton Account Dr. xxx
To Fixed Asset Account xxx
Accounting treatment:-
1) It must de debited to P&L account
2) It must be deducted from the value of respective asset on the assets side of the Balance
sheet
When it is given in Trial Balance - it must be debited to P & L Account.
 Centre for Distance Education 9.8 Acharya Nagarjuna University
7) Interest on Capital:-
Adjustment Entry:-
Interest on Capital Acc. Dr. xxx
To Capital Acc. xxx
Accounting Treatment:-
1) It must be debited to the Profit & Loss Account
2) It must be added to the Capital on the Liabilites side by the Balance Sheet.
When it is given in Trial Balance - It must be debited to the P & L Account.
8) Interest on Drawings :
Adjustment Entry:-
Drawings Acc Dr. xxx
To Interest on Drawings Ac. xxx
Accounting Treatment:-
1) It must be credited to Profit & Loss Account
2) It must be deducted from the Capital on the Liabilities side of the Balance Sheet.
When it is given in Trial Balance - it must be credited to the P & L Account.
9) Interest on Loans :
Adjustment Entry:-
Interest on Loans Acc. Dr. xxx
To Loans Acc. xxx
Accounting Treatment:-
1) It must be debited to P & L Account
2) It must be shown as Liability in the Balance Sheet.
When it is given in Trial Balance - it must be debited to P & L Account.
10) Baddebts :
Adjustment Entry:-
Bad debts Acc. Dr. xxx
To Debtors Acc. xxx
 FINANCIAL ACCOUNTING -I 9.9 Final Accounts.....

Accounting Treatment:-
1) It must be debited to P & L Account
2) It must be deducted from Debtors in the Balance sheet.
When it is given in Trial Balance - it must be debited to P & L Account.
When it is given both in Trial Balance & in Adjustments:-
1) Both amounts must be debited to P & L Account
2) Amount given in Adjustments only must be deducted from Debtors in the
Balance Sheet.
11) Reserve for Baddebts or Reserve for Bad & doubtful debts:-
Adjustment Entry:-
Profit & Loss Acc. Dr. xxx
To Reserve for Baddebts Acc. xxx
Accountng Treatment:-
When it is given as an Adjustment:-
1) It must be debited to P & L Account
2) It must be deducted from Debtors in the Balance Sheet
When it is given only in Trial Balance - it must be deducted from Debtors in the
Balance Sheet.
When it is given both in Trial Balance and as an Adjustment
1) Both the amounts must be compared - when Adjustment amount is more than
Trial Balance amount - the difference amount must be debited to P & L Account.
When the Adjustment amount is less than the Trial Balance amount - the difference
amount must be credited to P & L Account.
2) The amount given in Adjustments only must be deducted from Debtors in the
Balance Sheet.
9) Reserve for Discount on Debtors:-
Adjustment Entry:-
P&L Acc. Dr. xxx
To Reserve for Discount on Debtors Acc. xxx
Accounting Treatment:- The same procedure must be followed which was followed
in the case Reserve for Baddebts as above.
 Centre for Distance Education 9.10 Acharya Nagarjuna University
13) Reserve for Discont on Creditors:-
Adjustment Entry:-
Reserve for Discount on Credition Acc. Dr. xxx
To P & L Account xxx
Accounting Treatment:-
1) It must be credited to P&L Account
2) It must be deducted from Credition in the Balance Sheet.
When it is given in Trial Balance - it must be deducted from Creditors in Balance
Sheet.
When it is given both in Trial Balance and as an Adjustment:-
1) Both the amounts must be compared - when the Adjustment amount is
more than the Trial Balance amount - the difference amount must be
credited to P & L Account.
When the Adjustment amount is less than the Trial Balance amount - the difference
amount must be debited to P & L Account.
2) The amount given in Adjustments only must be deducted from Creditors
in the Balance Sheet.
14) Loss of Goods in Fire:-
a) When such goods were not insured:-
Adjustment Entry:- P & L Account Dr. xxx
To Trading Acc. xxx
Accountng Treatment:-
1) It must be credited to Trading Account
2) It must be debited to P & L Account.
b) When such goods were Insured and when the Insurance Company agreed to pay the
total amount of loss as compensation:-
Adjustment Entry:-
Insurance Company Account Dr. xxx
To Trading Account xxx
 FINANCIAL ACCOUNTING -I 9.11 Final Accounts.....

Accounting Treatment:-
1) It must be credited to Trading Account.
2) It must be shown as an Asset in the Balance sheet.
c) When the Insurance Company agreed to pay a part of the loss as compensation:-
Adjustment Entry:-
Insurance Company Account Dr. xxx
P&L Account Dr. xxx
To Trading Account xxx
Accounting Treatment:-
1) Total amount of goods destroyed must be credited to Trading Account.
2) Net loss (Total loss-Insurance claim) must be debited to P&L Acc.
3) Insurance claim agreed by the Insurance Company must be shown as
asset in the Balance Sheet.
15) Goods used for Office Purpose:-
Adjustment Entry:-
P&L Account Dr. xxx
To Purchases Account xxx
Accounting treatment:-
1) It must be deducted from Purchases in the Trading Account.
2) It must be debited to P&L Account.
16) Goods used for Personal Purpose:-
Adjustment Entry:-
Drawing Account Dr. xxx
To Purchases Account xxx
Accounting Treatment:-
1) it must be deducted from Purchases in the Trading Account.
2) It must be deducted from Capital in the Balance Sheet.
 Centre for Distance Education 9.9 Acharya Nagarjuna University
17) Providing Reserve Fund:-
Adjustment Entry
P & L Account Dr. xxx
To Reserve Fund Account xxx
Accounting Treatment:-
1) It must be debited to P&L Account.
2) It must be shown on the Liabilities side of the Balance Sheet.
18) Manager’s Commission on the basis of Profits:-
Adjustment Entry:-
P & L Account Dr. xxx
To Outstanding Commission to Manager Acc. xxx
Accounting Treatment:-
1) It must be debited to P&L Account
2) It must be shown as Liability
The Calculation of Manager’s Commission is 2 types.
1) Commission as a percentage on NP ‘BEFORE’ charing such
Commission = NP x % of Commission/100
2) Commission as a percentage on NP ‘AFTER’ charging such
Commission = NP x % Commission/ 100 + % of Commission
19) Goods Purchased, included inthe Closing Stock, but not entered in the Books of
Account:-
Adjustment Entry:-
Purchases Account Dr. xxx
To Creditors Account xxx
Accounting Treatment:-
1) It must be added to Purchases in the Trading Acc.
2) It must be added to Creditors in the Balance Sheet.
 FINANCIAL ACCOUNTING -I 9.13 Final Accounts.....

20) Sale of Assets but recorded as goods sold:-

Adjustment Entry:-
Sales Account Dr. xxx
To Asset Account xxx
Accounting Treatment:-
1) It must be deducted from Sales in the Trading Account
2) It must be deducted from Asset in the Balance Sheet
21) Wages paid for erection of Machinery but recorded as Wages:-
Adjustment Entry:-
Machinery Account Dr. xxx
To Wages Accounts xxx
Accounting Treatment:-
1) It must be deducted from Wages in the Trading Account
2) It must be added to Machinery in the Balance Sheet.
22) Goods sold but not recorded as Sales:-
Adjustment Entry:-
Debtors Account Dr. xxx
To Sales Account xxx
Accounting Treatment:-
1) It must be added to Sales in the Trading Account
2) It must be added to Debtors inthe Balance Sheet.

9.8. SUMMARY:
Balance Sheet will reveal the true financial position of the business on a particular date and
Final Accounts must be prepared after making the adjustments.
 Centre for Distance Education 9.14 Acharya Nagarjuna University
9.9. EXAMPLES:
Example 1 :
The Net profit of Suma Industries for the year ended 31-03-07 was Rs. 26938 From the
following Ledger Balances, prepare Balance sheet as on that date.
Rs. Rs.
Cash in Hand 7200 Creditors 9472
Cash at Bank 18,654 Drawings 4,800
Plant & machinery 17,000 Capital 30,000
Debtors 11,356 Bills Payable 5,600
Stock on 31-03-07 13,000
Solution :
Balance Sheet of Suma Industries as on 31.03.07
Liabilities Amount Assets Amount
Rs. Rs.
Capital 30,000 Plant & machinery 17,000
Add N.P 26,938 Closing Stock 13,000
56,938 Debtors 11,356
Less Drawings 4,800 52,138 Bank 18,654
Creditors 9,472 Cash 7200
Bills Payable 5,600
______ ______
67,210 67,210

Example 2 :
From the following particulars, prepare Balance sheet under order of Liquidity mehtod and
order of permanance method as on 31-03-07.
Rs. Rs.
Capital 10,000 Drawings 3,000
Net Profit of current year 15,000 Closing stock 6,000
Mortgage loan 7,500 Bills payable 2,500
Bills Receivable 4,000 Good will 6,000
Debtors 9,000 Creditors 3,000
Plant & machinery 20,000 Investments 9,000
Cash in hand 1,000 Cash at bank 3,000
Land & Buildings 17,000
 FINANCIAL ACCOUNTING -I 9.15 Final Accounts.....

Solution :
Order of Liquidty
Balance Sheet of .............. as on 31.03.07
Liabilities Amount Assets Amount
Rs. Rs.
Bills payable 2,500 Cash in hand 1,000
Creditors 3,000 Cash at Bank 3,000
Mortgage loan 7,500 Bills Receivable 4,000
Capital 50,000 Debtors 9,000
Add N.P 15,000 Closing stock 6,000
65,000 Investments 9,000
Less Drawings 3,000 62,000 Plant & Machinery 20,000
Land & Buildings 17,000
Good will 6,000
______ ______
75,000 75,000
Order of Permanace

Rs. Rs.
Capital 50,000 Good will 6,000
Add N.P 15,000 Land & Buildings 17,000
65,000 Plant & Machinery 20,000
Less Drawings 3,000 62,000 Closing stock 6,000
Mortgage loan 7,500 Investments 9,000
Creditors 3,000 Debtors 9,000
Bills payable 2,500 Bills Receivable 4,000
Cash at Bank 3,000
Cash in hand 1,000
______ ______
75,000 75,000
 Centre for Distance Education 9.16 Acharya Nagarjuna University
Example 3:
The Trial Balance of Chandra Sekhar on 31-03-07 was as under.
Rs. Rs.
Land & buildings 27,500
Plant & Machinery 13,320
Opening stock 41,730
Purchases & sales 1,27,330 2,07,830
Carriage 4,780
Bad Debts 2,250
Wages 9,270
Debtors, Creditors 54,450 24,290
Discounts 8,240 7,630
Furniture 1,920
Capital & Drawings 18,550 1,06,590
General Expenses 13,380
Bank 18,740
Taxes 1,880
_______ _______
3,46,340 3,46,340

Stock on 31-03-07 Rs. 44200. Prepare final Accounts.

 FINANCIAL ACCOUNTING -I 9.17 Final Accounts.....

Solution :
Trading & Profit and Loss Account of Chandra Sekhar for the Year ended 31-03-07

Dr Cr
Rs. Rs.
To Opening stock 41,730 By Sales 2,07,830
To Purchases 1,27,330 By closing stock 44,200
To Carriage 4,780
To Wages 9,270
To Gross ( profit transfer 65,920 _______
to P&L Account ) 2,52,030 2,52,030
To General Expenses 13,380 By G.P 65,920
To Taxes 1,880 By Discount received 7,630
To Discounts (allowed) 8,240
To Bad debts 2,250
To Net profit(Transfer to capital A/c.)47,800
______ ______
73,550 73,550
Balance Sheet of Chandra Sekhar as on 31.03.07

Rs. Rs.
Capital 1.06,590 Land & Buildings 27,500
Add N.P 47,800 Plant & Machinery 13,320
1,54,390 Furniturs 1,920
Less Drawings 18,550 1,35,840 Closing stock 44,200
Creditors 24,290 Debtors 54,450
Cash at Bank 18,740
________ ________
1,60,130 1,60,130

Example 4 :
From the following Trial Balance, Prepare final accounts.
Centre for Distance Education 9.18 Acharya Nagarjuna University
Rs. Rs.
Capital & Drawings of Srinivas 50,000 4,00,000
Land & Buildings 27,500
Lease hold land 2,50,000
Free hold premises 2,00,000
Good will 70,000
Trade marks 1,30,000
Plant & Machinery 1,50,000
Fixtures & Fittings 20,000
Opening stock 1,80,000
Bills Receivable & Bills Payable 40,000 60,000
Debtors & Creditors 1,60,000 2,40,000
Purchases & Sales 8,00,000 15,00,000
Returns 10,000 20,000
Carriage in 15,000
Carriage out 5,000
Freight & Duty 9,000
Productive wages 2,20,000
Coal, gas & Water 8,000
Factory Expenses 45,000
Salaries 1,80,000
Rent, Taxes and Insurance 60,000
Commission 25,000
Discounts 40,000 60,000
Interest 30,000
Stationery 5,000
Trade expenses 18,000
Cash in hand 7,000
Bank O.D. 3,90,000
________ ________
27,00,000 27,00,000
 FINANCIAL ACCOUNTING -I 9.19 Final Accounts.....

Solution :
Trading & Profit and Loss Account of Srinivas for the Year ended 3103-07

Dr. Cr
Rs. Rs.
To Opening stock 1,80,000 By Sales 15,00,000
To Purchases 8,00,000 Less Returns 10,000 14,90,000
Less Returns 20,000 7,80,000
To Carriage in 15,000
Freight & Duty 9,000
To Productive wages 2,20,000
To Coal, gas & Water 8,000
To Factory Expenses 45,000
To Gross ( profit transfer 2,30,000 _______
to P& L Account ) 14,90,000 14,90,000
To Carriage out 5,000 By G.P 2,30,000
To Salaries 1,80,000 By interest 30,000
To Rent, Taxes and Insurance 60,000 By Discount 60,000
To Commission 25,000 By Net loss(Transfer to Capital Ac)13,000
To Discounts 40,000
To Stationery 5,000
To Trade expenses 18,000
________ ________
3,33,000 3,33,000
 Centre for Distance Education 9.20 Acharya Nagarjuna University
Balance Sheet of Srinivas as on 31.03.07

Rs. Rs.
Capital 4,00,000 Good will 70,000
Less Net loss 13000 Free hold premises 2,00,000
Less Drawings50000 63,000 3,37,000 Lease hold premises 2,50,000
Bank O.D 3,90,000 Trade Marks 1,30,000
Creditors 2,40,000 Plant & Machinery 1,50,000
Bills payable 60,000 Fixtures & Fittings 20,000
Bills Receivable 40,000
Debtors 1,60,000
Cash 7,000
________ ________
10,27,000 10,27,000

Example 5 :
The following Balance sheet is prepared by an inexperienced accountant. Prepare the correct
Balance sheet.

Liabilities Rs. Rs.

Plant Machinery 1-4-06 24,000 Capital 30,000
Debtors 49,200 Add interest 1,500 31,500
Less Reserve 2,460 46,740 Creditors 58,800
Drawings 3,600 Depreciation on plant 1,200
Repair to Machinery 280 Reserve for bad debts 2,100
Stock on 1.4.06 6,800 Profit 21,600
Stock on 31.03.07 24,000 30,800 Bills payable 600
Cash 2,520 Balance 4,980
Buildings 9,840
_______ _______
1,20,780 1,20,780
 FINANCIAL ACCOUNTING -I 9.21 Final Accounts.....

Solution :
Balance sheet of ............. as on 31.03.07
Liabilities Rs. Assets Rs.
Capital 30,000 Buildings 9,840
Add interest 1,500 Plant Machinery (24000-900) 22,800
Add N.P 21,600 Closing Stock 24,000
53,100 Debtors 49,200
Less Drawings 3,600 49,500 Less RBD 2,460 46,740
Creditors 58,800 Cash 2,520
Bills payable 600
_______ _______
1,08,900 1,08,900

9.10. QUESTIONS:
a) Short Answer & Essay questions:-
1. What is meant by Balance Sheet ? What are the Objectives in the preparation of
Balance sheet ?
2. Prepare a Model Balance sheet under order of Liquidity and order of permanance
with assumed figures.
3. What are the differences between Trial Balance and Balance sheet ?
4. What are the differences between P& L Account and Balance sheet ?

9.11. EXERCISES:
1. From the following ledger balances taken from the Trial Balance of Venkatesh, prepare Final
accounts for the year 2007.
Credit Balances : Capital Rs. 360000, Creditors Rs. 87,200 ; Bills Payable Rs. 25270 ; Sales
Rs.789,820 ; Loans Rs. 1,20,000.
Debit Balances : Debtors Rs. 38850 ; Salaries Rs. 40,000 ; Discount Rs. 10,000; Postage
Rs.2,730 ; Bad Debts Rs. 2,870 ; Interest Rs. 9,950 ; Insurance Rs. 4,170 ; Machinery
Rs.1,00,000 ; Opening stock Rs. 99,450 ; Purchases Rs. 6,20,920 ; Wages Rs. 43,000 ; Bulidings
Rs. 2,37,800 ; Fixtures Fittings Rs. 1,69,550.
(Ans ; G.P. 26,450 ; Net Loss Rs. 46,270 ; B. S : Rs. 5,46,200 )
 Centre for Distance Education 9.22 Acharya Nagarjuna University
2. From the following Trial Balance on 31.9.07 Prepare Balance sheet
Rs. Rs.
Cash in hand 36,000
Bank O.D 30,000
Capital 3,25,000
Land & buildings 1,00,000
Closing stock 60,000
Furniture 9,500
Good will 47,500
Bills Receivable, Bills Payable 35,000 40,000
Car 40,000
Prepaid Advertisments 5,000
Debtors, Creditors 1,50,000 70,000
P&L Ac. 5,000
Loan from Ram 30,000
Drawings 25,000
_______ _______
5,00,000 5,00,000

(Ans ; Total of B. S : Rs. 4,75,000 )

 FINANCIAL ACCOUNTING -I 9.23 Final Accounts.....

3. The trial balance of Mr. Ram Babu on 31.03.07 was as under. Prepare final accounts.
Rs. Rs.
Capital 2,25,000
Cash in hand 25,000
Stock on 1.04.06
Finished Goods 35,000
Work in progress 70,000
Raw Material 30,000
Purchase of Raw material 7,05,000
Machinery 2,25,000
Sales 9,62,250
Carriage in 7,500
Carriage out 4,500
Rent 13,500
Discount 1,050
Office fire insurance 2,100
Sundry Debtors & Creditors 1,59,000 51,000
Reserve for Bad debts 600
Printing & stationery 7,800
Other Expenses 8,400
Advertisments 45,000
Drawings 18,000
Office salaries 54,000
Furniture & Fittings 60,000
Factory power & Fuel 22,500
Productive wages 2,000
Cash in hand 6,000
Cash at bank 37,500
________ ________
15,38,850 15,38,850
 Centre for Distance Education 9.24 Acharya Nagarjuna University
Stock on 31. 03.07 Rs.
Finished Goods 50,000
Raw Material 10,000
Work in progress 55,000
(Ans ; G.P. 5,05,250 ; Net Profit Rs. 3,74,500 ; B. S: Rs. 6,32,500 )
4. From the following Trial Balance of Raghava prepare Trading and P&L Account and Balance
Sheet on 31.03.07.

Rs. Rs.

Cash in hand 25,000 Capital 8,00,000

Plant & Machinery 1,97,200 Creditors 5,41,600

Direct wages 3,49.650 Loan 1,00,000

Salaries 1,59,650 Purchase Returns 31,400

Furniture 94,800 Sales 24,68,500

Carriage 19,800

Carriage out 21,500

Free hold property 2,50,000

Manufacturing expenses 94,550

Insurance & Taxes 41,750

Good will 3,00,000

General expenses 81,420

Fuel & Power 9,760

Factory lighting 9,860

Distribution Expenses 24,730

Stock on 01.04.06 3,41,700

Horses & carts 51,650

Purchases 9,71,650

Sales Returns 37,700

Discount 9,280

Bad debts 14,850

Interest & Bank charges 4,950

FINANCIAL ACCOUNTING -I 9.25 Final Accounts.....

Cash in hand 69,300

Cash at Bank 1,450

________ ________
39,41,500 39,41,500

(Ans ; G.P. 6,62,230 ; Net Profit Rs. 3,04,100 ; B. S : Rs. 17,45,700 )

T. Nageswara Rao
Vice - Principal
Hindu College, Guntur.
Lesson - 10

FINAL ACCOUNTS - PROBLEMS

OBJECTIVES:
By the study of this chapter, you will be able to solve the Final Accounts with adjustments.

STRUCTURE :
10.1. Examples.
10.2. Exercises

10.1. EXAMPLES :
1. From the following Trial Balance of Mr Balu prepare Trading & P&L A/C for the year ending
31.3.07 and Balance sheat as on that data.
Rs. Rs.
Plant & Machinery 40,000 Capital 1,00,000
Debtors 24,000 Creditors 12,000
Drawings 10,000 Returns out wards 5,000
Purchases 1,05,000 Sales 2,00,000
Wages 50,000 Bills payable 5,000
Bank 10,000
Repairs 500
Stock on 01.04.06 20,000
Rent 4,000
Manufacturing Expenses 8,000
Trade expenses 7,000
Baddebts 2,000
Carriage out 1,500
Returns inwards 4,000
Cash in hand 36,000
_______ _______
3,20,000 3,20,000
 Centre for Distance Education 10.2 Acharya Nagarjuna University
Adjustments :
1) Closing stock Rs. 14,500
2) Depreciate plant & Machinery by Rs. 4,000
3) Interest on capital 5%
4) Outstanding Repairs Rs. 400/-
Solution:-
Dr Trading & P&L A/C of Mr. Balu for the year ended 31-03-2007 Cr
Particulars Amount Particulars Amount
Rs. Rs.
To opening stock 20,000 By sales 2,00,000
To purchases 1,05,000 Less sales returns 4,000 1,96,000
Less Returns 5,000 1,00,000 By Closing stock 14,500
To wages 50,000
To Manufacturing Exp. 8,000
To Gross Profit 32,500
________ _______
2,10,500 2,10,500
To Repairs 500 By G.P 32,500
Add outstanding 400 900
To Rent 4,000
To Trade expenses 7,000
To Baddebts 2,000
To Carriage out 1,500
To Depreciation on plant 4,000
To Interest on capital 100000x5/100 5,000
To Net Profit - Transfer to cap. A/C 8,100
______ ______
32,500 32,500
 FINANCIAL ACCOUNTING -I 10.3 Final Accounts.....
Balance Sheet of Mr. Balu as on 31-03-2007
Rs. Rs.
Capital 1,00,000 Plant & Machinery (40,000-4,000) 36,000
Add interest on Cap. 5,000 Closing stock 14,500
Add N.P 8,100 Debtors 24,000
1,10,100 Bank 10,000
Less Drawings 10,000 1,03,100 Cash 36,000
Creditors 12,000
Bills payable 5,000
Outstanding Repairs 400
________ _______
1,20,500 1,20,500

Example 2. The Trial Balance of Siva on 31.12.07 was as under. Prepare Final Accounts
Rs. Rs.
Drawings 7,000 Capital 85,000
Buildings 23,000 Purchase Returns 3,800
Stock on 1.1.2007 29,000 Sales 2,38,000
Purchases 2,07,000 Apprentice premimum 1,000
Sales Returnes 5,000 Commission 600
General Expenses 8,000 Bank O.D 2,800
Rent & Taxes 6,400 Creditors 20,000
Baddebts 3,400 Bills payable 2,000
Debtors 64,000
Interset on O.D 400
_______ _______
3,53,200 3,53,200

Adjustments :
1) Stock on 31.12.07 Rs. 29,000/-
2) Out standing Rent Rs. 500/- ; Prepaid Taxes Rs. 350/-
3) Apprentice premium to be adjusted over 5 years
4) Depreciate Buildings by 10%
5) Interest on capital 5% and interest on Drawings 3%
6) Commission received in advance Rs. 500/-
 Centre for Distance Education 10.4 Acharya Nagarjuna University
Solution:-
Dr Trading & P&L AC of Siva for the year ended 31-12-2007 Cr
Rs. Rs.
To opening stock 29,000 By sales 2,32,000
To purchases 2.07,000 Less Sales returns 5,000 2,33,000
Less Returns 3,800 2,03,200 By Closing stock 29,000
To Gross Profit Transfer to AC 29,800
_______ _______
2,62,000 2,62,000
To General Exp. 8,000 By G.P 29,800
To Rent & Taxes 6,400 By Apprentice premium 1,000
Less Prepaid taxes 350 Less Received in advance 800 200
6,050 By Commission 600
Add outstanding Rent 500 6,550 Less Recieved in Advance 500 100
To Baddebts 3,400 By interest on Drawings 7000x3/100 210
To interest on O.D 400
To Deperciation Buildings 2,300
To interestion Cap 4,250
To Net profit (Transfer to Cap. Ac) 5,410
______ ______
30,310 30,310
Balance Sheet of Siva as on 31-03-2007
Rs. Rs.
Capital 85,000 Buildings (23,000-2,300) 20,200
Add interest on Cap. 4,250 Closing stock 29,000
Add N.P 5,410 Debtors 64,000
Less Drawings 7,000 94,660 Prepaid Taxes 350
Interest 210 7,210 87,450
Creditors 20,000
Bank O.D 2,800
 FINANCIAL ACCOUNTING -I 10.5 Final Accounts.....
Bills payable 2,000
Apprentice premium
recived in Advance 800
Commission 500
Outstanding Rent 500
________ _______
1,14,050 1,14,050
3. From the following Trial Balance of ' Kranthi ' on 31.03.07 prepare final accounts
Rs. Rs.
Purchases 1,65,625 Sales 2,56,650
Sales returns 4,250 Purchase Returns 3,120
Sundry Debtors 40,200 Reserve for Baddebts 5,200
Stock on 01.04.06 26,725 Sundry crdeitors 25,526
wages 20,107 Bills payable 8,950
Salaries 8,575 Interest on investments 825
Furniture 6,575 Capital 28,000
Patents 4,500 Out standing wages 2,019
Postage, stationary , Insurance 3,226 Out standing Rent 750
Lighting 350
Trade expenses 2,314
Rent & Taxes 3,517
Baddebts 525
5% prakash loan (on 1.12.06) 3,000
Investments 11,500
Prepaid insurance 524
Cash in hand 5,752
Bills Receivable 17,070
Drawings 6,000
Depreciation on Furniture 675
_______ _______
3,31,040 3,31,040

Adjustments :
1) Stock on 31.12.07 Rs. 10,520/-
 Centre for Distance Education 10.6 Acharya Nagarjuna University
2) A fire occured in March 2007 and goods of Rs. 1000 were destroyed and the insurance
company agreed to pay Rs. 700/- as compensation.
3) Bills Receivable dishonoured Rs. 650/- but no entry is passed for dishonour.
4) Depreciate patents by 25%
5) Write off Rs. 850 from debtors as baddebts and provide Reserve for Baddebts @ 5%
6) Goods purschased on credit Rs. 5000/- is included in closing stock but no entry is passed.
Solution:-
Dr. Trading & P&L A/C of Kranthi for the year ended 31-03-07 Cr.
Rs. Rs.
To opening stock 26,725 By sales 2,56,650
To purchases 1,65,625 Less returun 4,250 2,52,400
Add additional purchases5,000 By Closing stock 10,520
1,70,625 By Loss due to fire 1,000
Less Returnes 3,120 1,67,505
To wages 20,107
To Gross profit 49,553
_______ _______
2,63,920 2,63,920
To Salaries 8,575 By G.P 49,553
To Postage, stationary, insurance 3,226 By interest on loan of prakash
To Lighting 350 3000 x 5/100 x 4/12 50
To Trade exp. 2,314 By R.B.D. ( 5200 -2000) 3,200
To Rent & Taxes 3,517 By intereston investments 825
To Baddebts (525+850) 1,375
To Depreciation on Furniture 675
To Loss due to fire (1000-700) 300
To Depreciation on Patents
4500 x 25/100 1,125
To net profit ( Transfer to capital ac)32,171
______ ______
53,628 53,628
 FINANCIAL ACCOUNTING -I 10.7 Final Accounts.....
Balance Sheet of Kranthi as on 31-03-2007
Rs. Rs.
Capital 28,000 Furniture 6,575
Add N.P 32,171 Patents ( 4500 - 1125) 3,375
60,171 Investments 11,500
Less Drawings 6,000 54,171 5% prakash loan Ac 3,000
Creditors (25,526 +5000) 30,526 Interest receivable on loan 50
Bills payable 8,950 Insurance claim due 700
Outstanding wages 2,019 Closing stock 10,520
Rent 750 Debtors 40,200
Add Bills Dishonoured 650
40,850
Less Baddebts 850
40,000
Less R.B.D. 5% 2,000 38,000
Bills Receivable 17,070
Less Bills dishonoured 650 16,420
Cash 5,752
Prepaid Insurance 524
______ ______
96,416 96,416
4. From the following Ledger Balance of ' Prakash ' prepare final accounts
Centre for Distance Education 10.8 Acharya Nagarjuna University
Rs. Rs.
Stock on 01.04.06 96,000 Wages 28,000
Salaries 4,000 Drawings 6,500
Capital 50,000 Bills payable 5,000
Carriage 5,000 Interest on over draft 200
Purchases 1,20,000 Bills Receivable 6,000
Rent 2,000 Plant & Machinery 20,000
Travelling Expenses 5,000 Repairs to Machinery 1,600
Cash in hand 5,600 Office expenses 5,000
IncomeTax 500 Bank loan 14,000
Baddebts 5,000 Sales 2,50,000
Discount on purchases 4,000 Creditors 23,300
Purchase Returns 1,500 Cash at Bank 1,800
Buildings 5,000 Sales Returns 1,000

Debtors 35,000

Adjustments :
1) Stock on 31.03.07 Rs. 35,000/-
2) Bad debts Rs. 3,000/-
3) Provision for Bad debts 5%
4) Goods drawn for house hold purpose Rs. 3,000/-
5) Goods of Rs. 1000/- were given away as free samples
6) Erection charges of Machinery Rs. 1,000 were included in wages account
7) Depreciation on plant & Machinery 10%
8) Interest on capital 5%
9) Outstanding wages Rs. 1500/-, salaries Rs. 450, Rent Rs. 400/-
 FINANCIAL ACCOUNTING -I 10.9 Final Accounts.....
Solution:-
Dr. Trading & P&L AC of Prakash for the year ended 31-03-07 Cr.
Rs. Rs.
To opening stock 96,000 By sales 2,50,000
To purchases 1,20,000 Less returuns 1,000 2,49,000
Less Returns 1500 By Closing stock 35,000
Less Drawings 3000
Less Free samples1000 5,500 1,14,500
To wages 28,000
Add out standing 1,500
29,500
Less Erection charges
of Machine 1,000 28,500
To carriage 5,000
To Gross profit
( Transfer to P&L AC) 40,000
_______ _______
2,84,000 2,84,000
To Salaries 2,000 By G.P 40,000
Add outstanding 450 4,450 By Discount on purchases 4,000
To intereston O.D 200
To Rent 2,000
Add out standing 400 2,400
To Depreciation on P&M
21,000x10/100 2,100
To Travelling expenses 5,000
To Repairs 1,600
To office expenses 5,000
To Baddebts (5000+3000) 8,000
To Advertisements- free samples 1,000
To interest on capital 50,000x5/100 2,500
To R.B.D. (32,000 x5/100) 1,600
To net profit (Transfer to capital A/C)10,150
______ ______
44,000 44,000
 Centre for Distance Education 10.10 Acharya Nagarjuna University
Balance Sheet of Prakash as on 31-03-2007
Rs. Rs.
Capital 50,000 Buildings 5,000
Add N.P 10,150 Plant & Machinery 20,000
Add interest on capital 2,500 Add erection charges 1,000
62,650 21,000
Less Drawings 6,500 Less Depreciation 2,100 18,900
Less Drawings
of goods 3,000 Closing stock 35,000
Less Income tax 500 10,000 52,650 Bills Receivable 600
Bank loan 14,000 Debtors 35,000
Creditors 23,300 Less Baddebts 3,000
Bills payable 5,000 32,000
Out standing Expenses Less R.B.D. 5% 1,600 30,400
Wages 1,500 Bank 1,800
Salaries 450 Cash 5,600
Rent 400
______ ______
97,300 97,300
5. The trial Balance of Sri. Govind on 31-03-08 was as under. Prepare Trading and P&L account
and Balance sheet.
FINANCIAL ACCOUNTING -I 10.11 Final Accounts.....
Dr Cr
Rs. Rs.
Capital & Drawings 6,000 40,000
Plant & Machinery 15,000
Furniture & Fixtures 2,000
Patent Rights ( for 10 years from 1.4.07) 10,000
Stock on 1.4.07 10,000
Purchases & sales 42,500 66,000
Salaries 3,700
Wages 7,500
Debtors & Creditors 10,200 6,000
Loan from syam ( @ 6% on 1.10.07) 5,000
Postage & Telegrames 250
Loose tools 500
Rent, Rates & Taxes 1,800
Baddebts written off 200
Discount 300
Trade expenses 100
Interest on the loan of syam 75
Insurance 400
Travelling Expenses 250
Legal expenses 150
Cash in hand 1,525
Cash at bank 5,150
_______ _______
1,17,300 1,17,300
Adjustments :
1) Stock on 31.03.08 Rs. 10,600/- and loose tools Rs. 350/-
2) New machine purchased on 1.1.2008 for Rs. 1,500 but no entry is passed in the books of
account. Expenses for erection of the machine Rs. 500/- were included in wages.
3) Depreciate plant by 20% and Furniture by 10% P.A.
4) Write off Rs. 200/- as Baddebts and provide 5% for Baddebts and 2% for Discount on
Debtors.
5) Manager shall be given a commission of 5% on N.P. before charging such commission.
 Centre for Distance Education 10.12 Acharya Nagarjuna University
6) Fire occured in the godown on 25.03.08 and goods of Rs. 2500 were destroyed. The
insurance company agreed the claim in full.
7) Unexpired insurance Rs. 200/-
Solution:-
Dr Trading & P&L A/C of Sri Govind for the year ended 31-03-08 Cr.
Rs. Rs.
To opening stock 10,000 By sales 66,000
To purchases 42,500 By closing stock 10,600
To wages 7,500 By loss due to fire 2,500
less erection charges
of Machine 500 7,000
To G.P 22,600
______ ______
82,100 82,100
To Salaries 3,700 By G.P 22,600
To Postage & Telegrams 250 By Discount 300
To Rent, Rates & Taxes 1,800
To Bad debts (200+200) 400
To Trade Expenses 100
To interest on loan 75
Add out standing 75 150
To insurance 400
Less un expired 200 200
To Travelling 250
To legal expenses 150
To depreciation :
Loose tools ( 500-350) 150
Furniture 200
Plant 3,100
Patents 1,000
To R.B.D 500
To Reserve for discount on debtors 190
To N.P(before charging commission)
Balance C/D 10,760
______ ______
22,900 22,900
 FINANCIAL ACCOUNTING -I 10.10 Final Accounts.....
To Manager's commission By Bal B/D 10,760
10,760x5/100 538
To Net profit (Transfer to capital A/C)10,222
______ ______
10,760 10,760
Balance Sheet of Sri Govind as on 31-03-2007
Rs. Rs.
Capital 40,000 Plant (15000+1500+500-3100) 10,900
Add N.P 10,222 on 15,000 = Rs. 3,000)
50,222 on 2,000 for 3 months 100)
Less Drawings 6,000 44,222 3,100
Syam's Loan 5,000 Furnuiture (2,000-200) 1,800
Sundry creditors 6,000 Patents ( 10,000-1,000) 9,000
Out standing Expenses Insurance claim due 2,500
Manager's commission 538 Closing stock 10,600
For machinery 1,500 Loose tools 350
Interest on loan 75 Unexpired insurance 200
Debtors 10,200
Less Baddebts 200
10,000
Less R.B.D. 500
9,500
Less Reserve for discount 190 9,310
Bank 5,150
Cash 1,525
______ ______
57,335 57,335
6. The following Trial Balance relate to Suresh. Prepare final accounts
Centre for Distance Education 10.14 Acharya Nagarjuna University
Debit Balances Rs. Credit Balances Rs.
Drawings 3,000 Capital 28,000
Debtors 20,100 Creditos 10,401
Interestan loans 300 Mortgage loan 9,500
Cash in hand 2,050 Reser for Doubtful debts 710
Stock on 1.1.07 6,839 Sales 1,10,243
Motor vehicles 10,000 Purchase returns 1,346
Bank 3,555 Discount 540
Land & Buildings 12,000 Bills payable 2,614
Baddebts 525 Rent received 250
Purchases 66,458
Sales Returnes 7,821
carriage out 2,404
carriage in 2,929
Salaries 9,097
Rent, Rates, insurance 2,891
Advertisments 3,264
General Expenses 3,489

Bills Receivable 6,882

Adjustments :
1) Depreciation on Land & Buildings 2 1/2 % on Motor vehicles 20%
2) Interest on loan is not paid for 6 monts @ 6%
3) Goods costing Rs. 500 were sent on Sale or Return basis at Rs. 600 on 31.12.07 but
recorded as sales in the books of account.
4) Outstanding salaries Rs. 750/- and Rates Rs. 350/-
5) Prepaid Insurance Rs. 150/-
6) Provide 5% on Debtors for Bad & Doutful debts
7) Manager shall be given a commission of 5% on N.P, after charging such commission.
8) Stock on 31.12.07 Rs. 6,250/-
 FINANCIAL ACCOUNTING -I 10.15 Final Accounts.....
Solution:-
Dr. Trading & P&L AC of Suresh for the year ended 31-12-07 Cr.
Rs. Rs.
To opening stock 6,839 By sales 1,10,243
To purchases 66,458 Less returun 7821
Less Returns 1,346 65,112 Less goods
To Carriage in 2,929 on sale or return 600 8,421 1,01,822
To Gross profit (Transfer to By closing stock (6250+500) 6,750
P & L AC ) 33692
_______ _______
1,08,572 1,08,572
To Salaries 9,097 By G.P 33,692
Add out standing 750 9,847 By Discount 540
To interest on loan 585 By Rent 250
To Carriage out 2,404
To Rent,Rates,Insurances2,891
Add outstanding Rates 350
3,241
Less Prepaid insurance 150 3,091
To Advertisements 3,264
To Gen. Expenses 3,489
To Baddebts 525
To R.B.D. ( 975 - 710) 265
To Dep. Land & Buildings 300
Motor vehicles 2,000
To Balance C/D 8,712
______ ______
34,482 34,482
To Manager's commission By Bal. B/D 8,712
8712 x 10/110 792
To net profit (Transfer to capital A/C) 7,920
_____ _____
8,712 8,712
 Centre for Distance Education 10.16 Acharya Nagarjuna University
Balance Sheet of Suresh as on 31-03-2007
Rs. Rs.
Capital 28,000 Land & Buildings (12000-300) 11,700
Add N.P 7,920 Motor Vehicles ( 10000 - 2000) 8,000
35,920 Closing stock 6,750
Less Drawings 3,000 32,920 Detbors 20,100
Mortgage loan 9,500 Less goods on sale
or Return 600
19,500
Bills payable 2,614 Less R.B.D 975 18,525
Creditors 10,401 Bill Recivable 6,882
Out standing Expenses Cash at bank 3,555
Salaries 750 Cash in hand 2,050
Rates 350 Prepaid insurance 150
Interest on loan 285
Manager commission 792
______ ______
57,612 57,612

10.2. EXERCISES :
1. From the following ledger balances of " Kapil Dev " prepare final accounts.
Rs. Rs.
Capital 1,00,000 Cash in hand 1,200
Purchases 1,20,000 Bills payable 22,000
Stock on 1-4-07 35,000 Debtors 50,000
Creditors 24,000 Plant & Machinery 60,000
Furniture 15,000 Sales 2,00,200
Bills Receivable 20,000 Rent & Taxes 10,000
Wages 16,000 Reserve for Baddebts 1,000

Salaries 20,000

Adjustments :
1) Stock on 31.03.08 Rs. 40,000.
 FINANCIAL ACCOUNTING -I 10.17 Final Accounts.....
2) Outstanding Rent Rs. 2,000, wages Rs. 3,000 ; Salaries Rs. 4000/-
3) Depreciation 10% on Furniture ; 5% on Plant & Machinery
4) Increase the Reserve for Baddebts to 2 1/2 %
( Ans : G.P. Rs. 66,200 ; N.P. Rs. 24,450/- ; B.S. Rs. 1,80,450/- )
2. The Trial Balance of 'Gavaskar ' was as under on 31-03-08
Dr Cr
Rs. Rs.
Purchases 3,10,000
Opening stock 50,000
Cash 2,100
Bank 12,000
Drawings 4,000
Rent & Taxes 5,000
Salaries 32,000
Postage & Telegrams 11,500
Salesmans commission 35,000
Insurance 9,000
Advertisements 17,000
Furniture 22,000
Printing & Stationary 3,000
Motor car 48,000
Baddebts 2,000
Cash discount 4,000
General expenses 15,000
Carriage in 10,000
Carriage out 22,000
Debtors 1,00,000
Sales 4,15,000
Capital 2,88,600
Creditors 10,000
_______ _______
7,10,600 7,10,600
 Centre for Distance Education 10.18 Acharya Nagarjuna University
Adjustments :
1) Stock on 31.03.08 Rs. 1,45,000/-
2) Goods of Rs. 5000 were with drawn by him for personal use.
3) Baddebts Rs. 5,000/-
4) Reserve for baddebts 5 %
5) Depreciation 10% on Furniture and 20 % on Car
Prepare final accounts.
( Ans : G.P. Rs. 34,000 ; N.P. Rs. 3,200/- ; Balance Sheet Rs. 87,200/- )
3. From the following Trial Balance of ' Kalyan ' prepare Final accounts for 2007
Dr Cr
Rs. Rs.
Plant & Machinery 80,000
Purchases & sales 1,25,000 2,30,000
Debtors & creditors 50,000 40,000
Opening stock 25,000
Salaries 16,000
Resere for Baddebts 750
Capital 50,000
Bills Receivable & Payable 20,000 9,250
Rent & Taxes 5,500
Furniture 2,500
Bank loan 20,000
Interest on loan 600
Discount 650 1,200
Wages 14,850
Cash 11,100
_______ _______
3,51,200 3,51,200
Adjustments :
1) Closing Stock Rs. 45,000/-
 FINANCIAL ACCOUNTING -I 10.19 Final Accounts.....
2) Out standing liabilities : Rent Rs. 500/- ; Interest Rs. 1,400 ; Wages Rs. 150.
3) Depreciation : 5% on Plant & Machinery ; 10% on Furniture.
4) Increase the R.B.D. on Debtors to 2 1/2 %
5) provide a reserve for discount on creditors at 1 %.
( Ans : G.P. Rs. 1,10,000 ; N.P. Rs. 82,200/- ; Balance sheet Rs. 2,03,100/- )
4. From the following Trial Balance of ' Sachin ' on 31.03.08 prepare final accounts.
Dr Cr
Rs. Rs.
Bills receivable and Bills payable 4,000 3,250
Debtors & Creditors 60,000 10,000
Plant & Machinery 70,000
Purchases, Sales 80,000 2,00,000
Free hold premises 48,000
Capital 1,00,000
Salaries 10,000
Wages 12,500
Postage & stationary 800
Carriage in 650
Carriage out 750
Bad debts 1,000
Reserve for Baddebts 450
Office, general expenses 1,500
Cash in hand and at Bank 6,500
Insurance 1,000
Opening stock 20,000
_______ _______
3,16,700 3,16,700
Adjustments :
1) Interest on capital 5%
2) Reserve for Baddebts 2%
3) Closing stock Rs. 30,000
 Centre for Distance Education 10.20 Acharya Nagarjuna University
4) Depreciate machinery by 5%
5) Prepaid insurance Rs. 400
6) Outstanding wages Rs. 1,000/-
( Ans : G.P. Rs. 1,16,850; N.P. Rs. 91,950/- ; Balance sheet Rs. 2,14,200/- )
5. Prepare Final Accounts of Mr. Babu for the year 2007
Rs. Rs.
Capital 20,000 Machinery 2,500
Drawings 3,500 Furniture 600
Buildings 10,000 Opening stock 12,500
Purchases 75,000 Sales 1,25,000
Reserve for Discount on Debtors 200 9% loan 5,000
Salaries 4,400 wages 8,100
Outstanding wages 600 Outstanding Rent 2,750
Trade expenses 1,250 Carriage in 2,500
Carriage outwards 750 Sales Returnes 5,000
Freight & duty 15,000 Debtors 10,000
Creditors 7,500 Reserve for Baddebts 700
Interest paid 375 Sundry expenses 1,115
Incomes receivable 400 Bad debts 300
Cash & Bank 3,000 Depreciation on Machinery 350

Bills payable 390

Adjustments :
1) Closing Stock Rs. 14,000.
2) Provide 5% reserve on Debtors for baddebts.
3) Reserve for Discount on debtors 2 1/2%
4) Depreciation on Buildings 2 1/2 %
( Ans : G.P. Rs. 20,900 ; N.P. Rs. 9,447/- ; B.S. Rs. 39,512/- )
T. Nageswara Rao
Vice - Principal
Hindu College, Guntur.